To be published as HC 1 000

House of COMMONS








Evidence heard in Public Questions 76 - 156



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Oral Evidence

Taken before the Work and Pensions Committee

on Monday 4 March 2013

Members present:

Dame Anne Begg (Chair)

Sheila Gilmore

Glenda Jackson

Jane Ellison

Graham Evans

Nigel Mills

Anne Marie Morris

Teresa Pearce


Examination of Witnesses

Witnesses: Otto Thoresen, Director General, Association of British Insurers, and Joanne Segars, Chief Executive, National Association of Pension Funds, gave evidence.

Q76Chair: Can I welcome you here this afternoon? Thanks very much for coming before us. It does not seem that long since we were in a committee room very similar to this one-it might have been this one-hearing evidence on our inquiry into governance. We have not managed to finish our report on that, but we will do so fairly soon. Can I start with some questions on the ending of contracting out, because that is the meat of what is in the Government’s proposed Bill? A number of private pension companies believe that the ending of contracting out will lead to reductions in private sector pension benefits and potentially the full closure of DB schemes. Do you share the concern that this could be the end of DB schemes as we know them?

Joanne Segars: We do not share those concerns. The NAPF have been in discussions with the Department for Work and Pensions over the last several years to make sure there is an understanding of the implications of ending contracting out. If we have a single-tier state pension, there is nothing left to contract out of so clearly it has to go. The issue is: how can we implement the ending of contracting out properly, efficiently and in a way that does not add increased burdens on already hard-pressed scheme sponsors working hard to keep defined benefit pension schemes afloat, as we have discussed before at this Committee.

We have been pleased to see a number of issues included in the Bill. The first is the time scale given to employers over which they can implement the ending of contracting out and they can effectively contract back in. We think it is about right that there is that long, five-year period. The second is the ability of employers to use the override. We have some issues around the way in which that might be implemented and could potentially be extended. We think those two things together will help ensure that employers do not face very significant cost increases and they can manage contracting out. If we can allow employers and scheme sponsors to do that, I am hopeful that we will not see the end of defined benefit pension schemes. It might happen for other reasons, but I am hopeful that the introduction of the state pension will not be one of them.

Q77Chair: Are those all the things by way of mitigation that need to be put in place, or does anything else need to be done as well?

Joanne Segars: There are ways in which the statutory override could be extended. For example, we have some issues around protected persons, the way in which the statutory override could be extended there and the way in which it might apply to multi-employer schemes, for example. Broadly, the package is one that has been supported by my members at the NAPF, but it does rely on our being able to get right the detail of the ending of contracting out, so we will be working very closely with DWP as the secondary legislation is implemented.

Q78Chair: Do the ABI think it is the end of DB schemes?

Otto Thoresen: No. I would agree with Joanne on most of that. It is more her territory than mine. Unless it is handled well, it may be one of those things that might just tip somebody over a line in terms of a decision, but it is only at the margin. There is a need to have good oversight over any new flexibility brought in to make this easier to deal with so it does not get used for outcomes that have unintended consequences, but I do not see this in itself as something that will trigger a huge further decline in DB.

Q79Chair: With the ending of contracting out, do you think that gives an urgency to the Minister’s defined ambition proposals, which still seem a bit sketchy at the moment?

Joanne Segars: There is certainly a case for fleshing out or defining what the defined ambition is and bringing together these changes on the ending of contracting out. We have always said there is a good case for running those two things in parallel. If employers are making significant changes to their schemes, as they will have to do to contract back in, it makes good sense to give employers the flexibility, if they want to go down the defined ambition route, particularly as concerns core DB as we call it, to be able to do that at the same time. It seems unlikely that employers would want to go through the significant change and cost of contracting back in, and a further significant change and cost in shifting to some kind of DB-based defined ambition scheme.

Q80Chair: Private sector employers are going to be given the right to amend the terms of DB pension schemes to enable them to recoup their additional national insurance liabilities arising from the ending of contracting out without trustee consent. I understand that has been called the statutory override. Joanne, I understand that your organisation believes it is important for the Government to consult on the detail of the statutory override, because particular contractual arrangements with some companies may mean that some employers will be exempt from the override, or they may incur additional costs in changing contractual arrangements. Can you explain why some employers might be affected in this way? What would you like to see in the wording of the final Bill to take account of your concerns?

Joanne Segars: We are just gathering information from our members on this issue. As you rightly identify, it is one of the most contentious issues for our members. There are a number of ways in which we want further clarification on this and ways in which certain employers could find themselves outside the scope. For example, if you are in a multiemployer scheme you could find yourself unable to use the statutory override because the override is an employer override, not at scheme level; and we have the issue of those employees who previously were in the public sector but are now protected as a result of privatisation. We are looking there in particular for further clarification. We are gathering information from our members at the moment and with the Department we will be working up some proposed wording.

Q81Chair: Do you suspect there might be some resistance to this among trustees?

Joanne Segars: A very careful balancing act will be needed to strike the right balance between employers and trustees. It is in no one’s interests for employers just to ride roughshod over trustees. Trustees are there to serve the best interests of the members and beneficiaries, but we need to make sure that there can be a balance because, at the end of the day, if employers are faced with very significant costs they may say, "We will just close the scheme." It is right that employers and trustees can move forward on the basis of shared understanding, so the earlier we can see some clarification on these issues the better.

Q82Chair: Is statutory override an issue for you?

Otto Thoresen: Not really. Our business is mainly around the defined contribution space, not the defined benefit space, so this is one for Joanne, not for me.

Q83Nigel Mills: Joanne, the estimated start date for this is April 2017. Is that date reasonable for your members? Will that give them time to make all the changes they need to make?

Joanne Segars: We favour 2017 as a start date. That is slightly later than initially was perhaps thought of in any case. Of course, employers have got five years to implement the contracting-back-in phase, and that is the critical timeline for them. For them, the extended period after 2017 to contract back in, working through the valuation cycles and not having to implement a special valuation, is what is critical, so the fact that we have that long phasein period for contracting back in is what we have been after, so it is manageable in terms of time.

Q84Nigel Mills: Is the main downside to that special valuation just cost?

Joanne Segars: The cost can be quite significant. If you are a large employer the cost could be £300,000 once you have done the valuation, taken legal advice, communicated any benefit changes to your employees and so on. The costs are not trivial. Going through an actuarial valuation is quite a significant exercise for an employer of any size, so it is partly also about the administrative burdens that fall on employers as well.

Q85Nigel Mills: Would you not expect most schemes to have wanted to go through that as early as they can? Presumably, until you contract back in, you are just wearing the costs of increased contributions until you sort it all out.

Joanne Segars: Once the legislation is finalised, before 2017 some employers may well want to go through that stage. It is therefore important that we do see clarification around statutory override coming forward as soon as possible so that employers who do want to make the change can do so.

Q86Nigel Mills: Do you think many employers will generously decide to take the costs of this on the chin and not pass them on to employees, or do you expect most to pass most of the cost straight through?

Joanne Segars: Some employers may well decide to take those costs on the chin, as you have described it, but it will vary from employer to employer. At the moment we are discussing that with our members, but most of them appear to want to use the statutory override.

Q87Nigel Mills: You have no idea how many of your members might want to be generous in this situation.

Joanne Segars: Not at this stage; we are still gathering information on that.

Q88Nigel Mills: Can I ask you about the consultation process? Employers will be required to consult on the changes they want to make, but clearly they are allowed to make the changes at the end of the day. Do you think that consultation process will be a very expensive and burdensome process? Is it something that can easily be managed by your members?

Joanne Segars: Our members are used to consulting on a range of changes, and we have seen defined benefit pension schemes make a number of changes to their benefits over the last several years, so employers are used to going through that process. Again, it is not a trivial exercise. I remember that when we changed the benefits in our own scheme at the NAPF, which is a tiny scheme in comparison, the costs can be quite significant. None the less, we think it is right that that statutory consultation process is used.

Q89Nigel Mills: Presumably, the two extremes in this consultation are, first, "We will pass on an increased contribution level, but you will keep the same benefit", and, second, there is no increased contribution by the employee member, but presumably there is a reduced pension entitlement at the end. Are you expecting that consultation to be offering people a chance to give a view on what they would prefer in that range, or will it just be, "Here’s our plan. Do you like it?"

Joanne Segars: It will vary from employer to employer. Many employers will give a central, "This is what we are proposing. Might you have any other ideas or proposals? If so, please provide them." Some might offer a choice. It is a consultation, not a negotiation. Some might offer a choice, but others may just say, "This is what we are proposing. What do you think?"

Q90Nigel Mills: But you are not saying there is a best practice that consultation should be offering some kind of range. At this stage it is just too early for that.

Joanne Segars: It will vary from employer to employer. Because this is a change driven by statutory legislation and the Government, it is not the usual run of employers making changes because of other more internally-driven factors. This is an external driver for this particular change. Employers might feel that they have less room for manoeuvre.

Q91Sheila Gilmore: I have a specific question on protected persons who were in previously nationalised industries that were privatised. There is a current consultation on that. I do not know whether you want to comment on that.

Joanne Segars: Again, we are pleased that the Government are consulting on this. It is a particularly sensitive issue for many of our members who do have protected persons among their membership. That does mean that the rules cannot be overridden; they are very often in the primary privatisation legislation. Unless those employers can use the statutory override they will face significant additional costs, because they will not be able to adjust benefits. As we have looked into this issue with our members, we have found that for some employers because of mergers and acquisitions the number of protected persons within their scheme is relatively few. Apart from anything else, lots of the protected persons have retired since privatisation. For them, they could face the quite tricky issue of having to have a two-tier scheme because of this change to primary legislation where they can change the benefits and use the statutory override for non-protected persons, but for the small number of protected persons within their scheme they cannot use it. They will have quite an odd situation unless they can use the statutory override. Because this is a change being driven by the primary legislation and by Government policy we think that the override should apply to protected persons in this case.

Q92Anne Marie Morris: Joanne, clearly one of the key objectives of the reform, together with auto-enrolment, is to encourage people to save. The NAPF cite survey findings from 2011, which effectively conclude that if individuals knew they would get £140 they would be prepared to pay £60 a month more. How robust is that evidence?

Joanne Segars: It was an omnibus survey of the general population. I suppose the answer is that it is as robust as any omnibus survey of the general population. They were asking people about their intentions. We know well enough from our experience that the proof of the pudding is in the eating, not the survey, but it is clear that if we say to people, "This is the floor of benefits you will get. The foundation you will get from the state is £144 a week in today’s money", it is much easier for people to make an assessment about whether or not they can live on that amount; if not, how much more they might need to save. The survey that we and others have done shows quite compellingly that, if there is a simple, single, clear number people will get from the state that they do know about, it is much easier for them to make some assessment about how much more they need to save, or whether they need to save more. It is one of those things we can tell perhaps in 2018 or 2020, but I would be pretty confident that more people will save, and save more, as a result of the single-tier state pension. This is the second wave of surveys we have done asking this particular question and on both people have said they would save more as a result of the single-tier state pension.

Q93Anne Marie Morris: From what you have said, that works only if people go from understanding what they are getting to understanding what the shortfall then will be, compared with what they are currently living on, and also being able to make a valid assessment as to how much they will need to live at that age when hopefully they will have paid off their mortgage, and so on. To what extent is that dependent upon that extra piece of information being available? I am also conscious that there are individuals who are concerned about the cost of living now, and unless that message and the figures are really clear there is a sense that, "I’ve got the money now and I may as well spend it, because I’m on the breadline and am still worried about whether or not I can go out for a meal on Saturday night."

Otto Thoresen: This is certainly territory where I can add a little to complement what Joanne has been saying. To answer the first question, I completely agree with her in terms of what she said about simplicity giving a foundation on which you can build. When you look internationally, a large part of the issue about where the savings culture does and does not exists is about the understanding individuals have of what the state will be able to provide, and how that fits in with other sources of income they will have. In preparing for this Committee and trying to remind myself, the complexities of how the current system works were quite a shock to me. I had forgotten just how complicated it is. Therefore, for people not to understand the system and the marginal impact that beginning to make provision themselves is going to have on the ultimate outcome is clearly a massive fog that gets in the way of the decision to do something.

Financial education and capability is another important part of this. We have heard developments around the curriculum and bringing financial education into schools. That is very positive. I think that pension reform, the workplace savings that will be created around that and the focus on pensions are an opportunity also to do education in the work place. The Money Advice Service could be better used to strengthen it, and we might get into communication later. All of that will help, but I agree that it is one thing to give people more certainty and clarity about what the state provision will be, but it is another for them to start to get their head round what it is they are going to need from whatever alternative sources they will be able to get their hands on. Issues around care and related items come into this too.

Joanne Segars: The single-tier state pension is not a reform taking place in a vacuum; it is taking place at the same time as we are introducing autoenrolment. We believe that the two things together complement each other. The idea of a single-tier state pension and being automatically enrolled, and the power of inertia to get people saving for old age, should be quite compelling in increasing the amount of retirement saving in the country.

Anne Marie Morris: That is helpful.

Q94Sheila Gilmore: We have heard a lot about the assertion that because the current system is so complicated everything has to be changed. Interestingly, a journalist in my local newspaper has published an article saying she has just woken up to the question of pensions. She said that it was quite easy to get information about the state pension. She found it very difficult to get information from her private pension provider, so are we over-exaggerating this in order to make the case for the single pension? Are there other issues that stop people saving, particularly when they are younger, which may be even more powerful than that?

Joanne Segars: I do not think either of us would suggest that having a single-tier state pension is a silver bullet that will solve all the ills of chronic under-saving for old age, but I would argue that it is one of the factors that will help people save more regularly and potentially save more, because it is very difficult. If you stop 100 people on the street outside this building and ask them how much they will get from their state pension, at the moment most of them would not know. If we can say to people, "Here is the single amount; this is what you will get; this is the deal from the state", it becomes easier for people to know how much more they have got to target. Do we as the private pension sector need to do a better job in communicating with people? Absolutely. That is work we have been putting our heads together on, and we talked about that with the Select Committee earlier this year. We absolutely accept that we need to do more where that is concerned, but a single-tier state pension will make a big difference to very many people.

Otto Thoresen: I completely accept the point about private sector communication having to be improved significantly, too.

Q95Sheila Gilmore: There are other issues that hold people back. Is there a danger of over-selling this as the answer to pension saving? I doubt whether people in their 20s and 30s have in the front of their mind, "Oh, I don’t know how much I will be getting when I am 67, and that is why I won’t save now." Surely, it is more about having a student loan to pay off or a mortgage to finance.

Otto Thoresen: I agree. Simplification of the state pension is a necessary condition, but it is clearly not sufficient. As an industry we still have not moved on to the discussion about how you have to adapt the way we offer solutions to engage people in their 20s and 30s and whether they should even be saving into pension vehicles at that age anyway. There is a discussion to be had around that. I know from my own experience talking to family members in that area that they will not come even close to it, but, as you come to your late 30s, 40s and 50s and are trying to firm up on what your 60s and 70s will look like, the clarity this can bring is really important.

Joanne Segars: And for employers too, if they are able to say, "I am offering a pension scheme. It is a really good deal. If you join my pension scheme it is worth it; it will not be means-tested away", which may not be a fear for somebody in their 20s, or even 30s, but certainly for the older ages-whether or not it happens is another matter-there can be the spectre of losing money they have saved.

Q96Sheila Gilmore: It is not means-tested away.

Joanne Segars: I am using shorthand.

Q97Sheila Gilmore: You do not lose anything because of that. You may feel that, relative to somebody else, they are getting something without having saved. It is not quite the same.

Joanne Segars: I am using shorthand to describe the situation, but the fear that saving will not pay them is something that can put off a lot of people. If you did have a simple message, neither of us is saying it is the only answer but it is certainly part of the answer and part of the solution.

Q98Graham Evans: The overall mantra is that it pays to work and to save, which is the point you are making, but in my experience the fear, uncertainty and doubt of people wanting to save for a pension is the point you have just made; they feel, "If I do invest in it, will I get my return or be penalised in other ways?" If you have a DB scheme, like the public sector DB, you know exactly where you are going to come from. Currently, 13% are still open. Do you see that ever changing in terms of the private sector?

Joanne Segars: The 13% comes from the most recent NAPF annual survey showing that only 13% of private sector schemes are open to new members. I do not think we will see a huge upswing in the number of employers starting to open new defined benefit pension schemes. It rather goes back to the question about defined ambition and how you might be able to introduce, at the same time employers are making changes to their defined benefit pension schemes as a result of ending contracting out, a new type of defined benefit arrangement based much more on defined ambition and risk sharing, which, if it does not encourage employers to open new defined benefit pension schemes, may be enough to dissuade employers, 13% of whom already have defined benefit pension schemes, from closing them. It may ensure that the 1.6 million employees who are still in defined benefit pension schemes are able to stay in them.

Q99Anne Marie Morris: To follow up what Sheila said about means-tested benefit and the concern that that erodes the value of private savings, is there anything specific that could be put into the pension legislation that would help here? How are we going to encourage those on the very lowest incomes to be incentivised to save without thinking, "But if I haven’t, I’ll be sorted out because of a means-tested benefit"?

Joanne Segars: The data show in a quite compelling fashion that the single-tier state pension, plus the introduction of auto-enrolment, does reduce very significantly the number of people who will be on means-tested benefits, in particular housing benefit and council tax benefit, as a result of these changes. But in a sense part of the answer comes from autoenrolment and the way that will bring people into pension saving, so probably the private sector pension legislation and the auto-enrolment legislation rather than state pension legislation might help there.

Q100Anne Marie Morris: In effect you are saying that it will be such a small number. I guess the answer is that, provided they know they will not be bailed out by means-testing because if they do all these things they will not be at that level, it is not an issue.

Joanne Segars: Already in the auto-enrolment legislation there is a cut-off below which you are not auto-enrolled. One of the benefits of the single tier is that it is redistributive; it does help those who have been currently disadvantaged by the state pension system, so it will give them a much greater floor of state benefits than might otherwise be the case. We also know that, sadly, many people who are entitled to means-tested benefits simply do not claim them. This will help to overcome both those issues.

Q101Anne Marie Morris: Otto, do you have anything to add?

Otto Thoresen: As I was listening to Joanne I was struck by the fact that one tends to answer these sorts of questions in terms of the immediate effects-what is going to happen in 2017 and how it affects people-or you switch to the horizon and think, "In 50 years’ time when this system has become well established and auto-enrolment has been running for a long time, what will the world feel like?" In reality, the challenges will be around the transition because, as we move through the next 10 years or so, there will not be many people who have significantly benefited from auto-enrolment because it will still be in its very early stages. That is the point where there is probably a bigger proportion of people who might find themselves impacted on the margin than there will be eventually. Eventually, you get to the point where this is far less of an issue, but in the short term we will have to be very careful about how this pans out and how the impact is felt. When one looks at the transition, that is where those who may be badly affected have the spotlight on them, too. We believe very strongly that this is an important and very positive piece of legislation being brought through, but dealing with the consequences for people affected, who are quite close to retirement and are effectively at the margin, is the trick one has to try to pull off to get the better outcome.

Chair: But there will be losers, and Glenda has a question about that.

Q102Glenda Jackson: That brings me very nicely to my first question, which is essentially that some groups will not benefit from the new system; that is, many people who will reach state pension age before the implementation date, and higher earners who will not be able to build up higher entitlement. Should anything be done to mitigate the impact on either of these groups? Within these groups there are also gender imbalances as we know.

Otto Thoresen: My initial response is that the direction of travel of the legislation and simplification piece is really important for the medium term and long term and is a very positive thing. As you start to look at those affected, there is probably a hierarchy of those where we need to think what we can do for them. The ones I would be most concerned about would be those who are lower earners who probably do not have other means to support them in retirement and have fewer options and choices and, within those, those who might find themselves particularly disadvantaged. There is the obvious example of the gender difference and the coming together of two or three different pieces of legislative change at once to create a perfect storm for people affected. I do not have the answers in terms of what we should be doing, but, if we can get the macro-policy agreed and agree that the direction of travel is right and that broadly there are a number of groups who perhaps require special attention, then seeing what can be done for those to manage the transition is very worthwhile. The trouble is that there are many different specifics one would have to look at almost case by case, not in terms of individuals but groups, but it must be worth looking at whether more can be done for those than currently is planned. I would be arguing that there is something more to be done there.

Q103Glenda Jackson: As far as you are concerned, there need to be transitional arrangements for the specific groups when they have been defined, in a sense.

Otto Thoresen: Yes. Clearly, there is a cost issue in all of this. What has been aimed at here is a balance that can be struck to allow the thing to proceed to the simpler world we want to get to. Subject to the constraints within which we are operating as a society, more thought should be given to the transitional arrangements.

Joanne Segars: I would agree with that. Some of the transitional arrangements probably do reflect where we are economically, for example the fact that we are now moving to a 35year minimum contribution period and so on. Ideally, we would have preferred it to be 30 years, but we recognise that 35 years is perhaps the reality of where we are.

Q104Glenda Jackson: And changes in the age for qualifying for a state pension.

Joanne Segars: Indeed. I would agree with Otto that if we can introduce some transitional arrangements we should, but we need to remember that there are many more gainers than losers from this policy.

Q105Glenda Jackson: For the potential losers, if there are not transitional arrangements all their lives they have paid in to what they expected to be a state pension that they would receive when they retired at an age that has now changed. There is going to be a certain amount of automatic animosity to these changes, is there not? If we are looking at the long-term benefits of this, surely it behoves us all to examine how those people can be properly taken care of and not feel they have been cheated, which is something I am already getting on a constituency basis.

Joanne Segars: We have heard comments to that effect as well at the NAPF, and I am sure the ABI has too. I suppose the answer is that it reflects the complexity of where we have come from, the simpler state we want to move to and the transitional arrangements in doing that, but also the economic environment that we face. If we can find some transitional arrangements we should do that.

Q106Glenda Jackson: Because the other part of the policy is to encourage saving, isn’t it?

Joanne Segars: Yes.

Glenda Jackson: If it is going to fall at the first hurdle because people believe they have saved and do not see anything out of it, it is holed below the water line. Can we just touch on high earners who may not be able to build up higher contributions? Should there be transitional arrangements for them too?

Joanne Segars: Many of the higher earners have been described as notional losers. If you assume that nothing else will change between now and when they retire, many of them would lose out, but state pensions have been subject to quite significant change over the last five to 10 years, as you have described. I do not think we can assume that things would stay the same, so many of those people have been described as notional losers in that sense.

Q107Glenda Jackson: So you think they have already taken care of that themselves.

Joanne Segars: Many of them will have private pensions, and over their lifetime 90% will be better off as a result of this change than would otherwise be the case.

Q108Glenda Jackson: To come on to communications, the ABI have said that effective communication of the changes is absolutely essential; otherwise, the clarity and simplicity of the new system could be undermined. Do you have specific concerns on this? What are the elements on which an effective DWP communication strategy should concentrate?

Otto Thoresen: There are probably two aspects to this. The easier aspect to deal with is, if you like, the endgame in terms of the way we can take advantage of the simplicity we will eventually get to so that people understand the state component of the retirement provision.

Q109Glenda Jackson: That is the long-term goal.

Otto Thoresen: That is the long-term piece.

Q110Glenda Jackson: But it is going to be difficult when it is introduced.

Otto Thoresen: Absolutely. In the shorter term it is finding a way to explain what look like quite well thought through approaches to ensuring you are no worse off and whatever you have built up already, the whole foundation concept on which you build, is there: "If this is higher than this, you get that." That approach is still quite difficult for people to stay with. It gets complicated quite quickly as you work through the permutations.
Finding a way to make that understandable to people so they can trust it is probably the hardest thing in the current environment, because for most of the things people believe in, there are questions about whether they can really trust them. It is far broader than financial services; it is everywhere.

Q111Glenda Jackson: I was about to say it rests on the fact that people have lost their trust.

Otto Thoresen: In this thing basically you have to make it as straightforward as possible for people to take their own journey through this and say, "I can see that if this applies, that applies and that applies, this is something which will deliver what it says it will deliver." In pensions generally, despite what was said earlier, I still think most people find the language impenetrable, even when we try to make it accessible. That will be one of the biggest challenges. For me, it is the transitional piece that is the test, because if we can get the messages right there the longer-term communication should be easier. The fact is that we have got easier components to build with in the longer term and auto-enrolment is coming alongside it, so it is getting through this period.

Q112Glenda Jackson: But there are already difficulties in the existing system as it has been announced, aren’t there? I have already spoken about the gender imbalance. There are 434,000 women, and within that another smaller group, who regard themselves as being unfairly treated here. Correct me if I am wrong, but essentially you think that the bulk of the communication strategy should be concentrating on when it is introduced and the long-term effects, which we all see are beneficial, should be allowed to take their own course.

Otto Thoresen: It will be relatively easier and a lot more effective if we have managed to get through this period of transition. In the answers we both gave to the previous question there is the issue of fairness. Everybody accepts that decisions have to be made and balances struck, but it is about sensing that we have gone through a process that made those knowingly and, if there was something seen to be unfair, it was given consideration and dealt with. To me, that is as much about communication as the DWP’s communication to citizens.

Q113Glenda Jackson: But should this communication process be driven and carried out exclusively by the DWP, or does the industry have some responsibility in this area?

Joanne Segars: It is a collective exercise in which we need to be engaged. Employers and pension providers will have a role to play. Going back to the earlier discussion about the ending of contracting out and the way employers will change their scheme benefits, we need to make sure that Government communication about the changes to the state pension is dovetailed with those changes that come into force in employer schemes as a result of schemes contracting back in, and any benefit changes resulting from that. As Otto said, there has to be a very carefully managed communications exercise to make sure we can get over these transitional issues, because that is the most complex. Ultimately, we are going to a much simpler system but to get there is incredibly complex, as we have been discussing, so to explain some of those complexities in a way that is clear and simple involves all of us. It would be a good thing for the Government to sit down at an early stage with representatives from the ABI, the insurance industry, the occupational pension sector, employer groups, trade unions and consumer groups to see how collectively they can co-ordinate the communications exercise. Part of the misinformation we have at the moment-clearly, there are people who will be losers-is because that communication exercise has not been as well co-ordinated as perhaps it could have been. The earlier we can sort out the communication exercise the better.

Q114Glenda Jackson: But, surely, the clarity of the message will be dependent on the clarity of the legislation. At the moment, as we know, a great deal of the legislation is going to be left to regulation, and heaven only knows what will be in there. Should the Government, quite deliberately, concentrate on how the message is going to be delivered to those who will then spread it out? You mentioned employers, the industry and so on, but, surely, it is absolutely vital that Government know what the possible hurdles will be before they start telling you all how to spread the message.

Joanne Segars: That is certainly true, but the earlier we can sit down to think about how collectively we will produce this message and can use different parts of the industry-employers, trade unions and consumer sectors-to disseminate information, the better. If we wait until the ink is dry on the secondary legislation, we will face a big discussion. We simply will not have the time. That is why I would prefer to start that process earlier rather than later.

Otto Thoresen: You are right. There are so many pieces one is trying to balance to get the optimum outcome. You may think that adding in the communicability of it is the last thing we need, but it has to be in there. How will the narrative develop around this? Will it be seen to be fair and worth being part of? That is an important piece. As Joanne says, if we can get involved early enough, we can bring the shared knowledge across the industry to what is already there in the DWP. My sense is that DWP absolutely understand that. On this and other areas we have had discussions over the years and recently about how we can make this work better and what the industry has to add. That has always been part of that.

Glenda Jackson: If you do not mind my saying so, they have been a bit slow off the mark in the improvements area. It is one thing knowing that a message has to be delivered; it is quite another thing to decide what that message is and how it is going to be delivered. I go back to my central point. There seem to be two messages here: one is when it comes in and the big bang, although it is not a big bang because there will still be people outside it; and the other is the long-term policy, which can probably take care of itself. The initial introduction is going to be absolutely central to all of us taking this on board as the only way we can go, which in truth it is.

Q115Chair: To go back to the statutory override, when we were asking questions about that we were looking at it very much from the employer’s perspective. The statutory override will be there to protect the employer from additional cost. What or who will protect individual employees or members from facing extra costs if the employer just decides to pass it on through the statutory override against the best interests of the employees or indeed the wishes of the trustees?

Joanne Segars: Part of the purpose of the consultation process we talked about earlier is to ensure that a fair balance is struck. That is why employers will be keen to talk to trustees as that process unfolds and we see further detail, and we are pleased that the Government are consulting on the issue.

Q116Chair: The trustees are there specifically to protect the interests of the members, and it is the trustees who are being overridden to protect the employer. One can understand the logic of that, but if the employer asks for something that goes too far the other way and is to the detriment of individual members, who can step in at that stage? It cannot be the trustees; they have just been overridden. Will there be an external body they can appeal to? Whom can they appeal to?

Joanne Segars: I suppose one thing we will need to see is what will be the role of the Pensions Regulator in this area. DWP have shown that about 90% of people will benefit over the period of their retirement as a result of these changes. Even taking into account any increased national insurance contributions, 90% of people will benefit through their retirement as a result of these changes. Of course, employers are able to offset only their costs; they cannot reduce benefits any further than would offset their own costs.

Q117Chair: In its written evidence the ABI expressed concerns about the way in which the Department plans to calculate the rebatederived amount. Trying to work out exactly how all this works has been keeping me up every night, but the rebate-derived amount is how much people will inherit, or how much will be set for their single-tier pension. You have concerns about how that will be calculated. Can you explain what the specific concerns are, and what should be in the Bill to address that?

Otto Thoresen: The basic point is very simple. This is where somebody has contracted out from the additional state pension and their rebate has gone into their personal pension effectively to create a replacement at retirement. The point we are making is that when those rebates were set, assumptions were made about the future economic outlook, what kind of investment returns would be reasonable to expect and what annuity rates might be like at retirement. That was how the rebate was set. It was effectively based on a set of assumptions. The expectation would be that you would get the equivalent in terms of pension to the pension you were effectively giving up. Given the way the last 10 to 15 years have turned out, and annuity rates have turned out, the assumptions have not proven to be anything like the reality. Our point is that, when the detailed legislation is being put together, one should focus on the rebate rather than the additional state pension that has been given up. The one thing that is factually there is the amount of money these people have been given to invest in their personal pension to replace whatever they have given up. We want to look at that as the basis for calculating what should go into the assessment.

Q118Chair: Does there need to be anything on the face of the Bill for that, or will it be done through regulation?

Otto Thoresen: A huge amount of this is likely to end up in the detail, but we were just making the point that we think there is an issue of fairness for the people who made that decision to try to make sure they get as fair an outcome as possible. If that is the lens through which you look at it, it is more likely to be a fair outcome for them.

Q119Chair: Is there anything else that you think should be on the face of the Bill that is not? Obviously, a huge amount will go into regulations, but is there anything you have spotted that you think would be far better in primary legislation, or indeed the opposite; is there something in the Bill that you think should be in regulations instead?

Joanne Segars: Our view is that the balance is about right between what is in the primary and what will go into secondary. Perhaps one of the lessons we have learned from the auto-enrolment experience is that there is an awful lot in primary, and now as schemes go through the process of autoenrolment we are discovering some wrinkles which clearly require primary legislation to change them, so the more that can be in secondary that we can perhaps change as we go through and learn from experience the better.

Q120Nigel Mills: I want to go back to the rebate-derived amount calculations. Mr Thoresen, I understood you to be suggesting that people who contracted out might end up worse off than if they had not contracted out because of private pension returns being lower than the second pension. Presumably, that is a greater issue if you have contracted out into a defined contribution scheme than if you are in a defined benefit scheme, where you have probably done far better. Wouldn’t your idea of looking at the amount of rebate rather than pension due really favour people in a defined benefit scheme quite a lot over defined contribution in that situation?

Otto Thoresen: The view we were taking was that there is the potential here for people effectively to lose out twice if they did go into a defined contribution scheme and their experience was not what the rebate had assumed would happen, and we did not want them to be more disadvantaged than they needed to be. You are right that, if you are contracted out into a DB scheme, you will be in a different situation. It is for those who contracted out into defined contribution schemes that we are raising the concern. Our point is that it is one worth looking at to try to make sure that, however the final legislation is drawn, that point is taken into account.

Q121Nigel Mills: When in your evidence you said you thought that the rebates were too low, that is aimed mainly at people in a defined contribution scheme, not those in a defined benefit scheme. Do you think the rebates are still too low in that situation, or are they much better?

Otto Thoresen: Too low in the defined benefit situation?

Nigel Mills: Yes.

Otto Thoresen: I do not know.

Joanne Segars: The value of the rebates has fallen so they do not entirely offset the pension that has been given up. We have seen that, actuarially, rebates have not been set neutrally as between the pension that has been given up through S2P, as it now is, versus the contracted-out rebates that employers and individuals get.

Q122Chair: This is pre-legislative scrutiny. Is there anything about which we have not asked a question that you think should be on the Bill and has been missed out in terms of making this work?

Joanne Segars: No. The key, as you have said, is what appears in secondary legislation. I am sure that will keep us occupied for many months to come.

Chair: A concern is that secondary legislation is not subject to prelegislative scrutiny. My colleagues have asked all their questions. Thank you very much for coming along this afternoon.

Examination of Witnesses

Witnesses: Neil Carberry, Director for Employment and Skills, Confederation of British Industry, and Malcolm Small, Senior Adviser, Pension Policy, Institute of Directors, gave evidence.

Q123Chair: Thank you very much for coming along this afternoon. Can I get you to do what I forgot to ask the previous set of witnesses to do, which is to introduce yourselves for the record?

Neil Carberry: I am Neil Carberry, Director of Employment and Skills at the CBI.

Malcolm Small: I am Malcolm Small, Senior Adviser on Pensions Policy at the Institute of Directors, and Director of Policy at the Tax Incentivised Savings Association.

Chair: I know that you heard some of the previous session, so you might recognise some of the questions we are about to ask. We will do them in a different order, beginning with communications.

Q124Jane Ellison: We have had quite a few witness sessions so far. You can imagine that the emphasis on communication has been great. At this stage we are particularly interested in anything around communication that you think might need to be on the face of the Bill, but also your general view, especially as members of the Bill team are here, about how you think the changes can be effectively communicated and what role you think your organisations have, but also specifically whether you think there should be anything on the face of the Bill about a statutory requirement to communicate.

Malcolm Small: We have had recent experience of communication with employers through the automatic enrolment policy. We have seen that the Department for Work and Pensions communication exercise around the new employer duties has recently raised awareness quite substantially among employer target groups. We do think effective communication is very important and does work when we get it all together. As earlier commentators have said, there is a role for all stakeholders in this, which would include organisations such as CBI and IoD. I would be less sure about whether it needs to be in primary legislation. The legislation we have before us now is very much enabling, and if we wanted to put anything in there it would be about empowering the Department or others to communicate effectively.

Neil Carberry: There is already a requirement for consultation in anything that forms a substantive change to workplace pension provision, and that is echoed in the proposals brought forward by the Department where they impact on the workplace specifically. I do not think there needs to be a lot more than that in primary legislation. I speak as a veteran of the 2008 Act. The experience then was that we put rather too much into primary legislation which reduced some of the flexibility the Department had at later points to make decisions which were not foreseeable at the time of legislation, but, as we moved towards the rollout of autoenrolment, in practice it became common sense. There is a case with these major programmes to allow some flexibility for the Department in deciding how it takes forward the communication challenge, albeit clearly such a substantive change as this, which changes the thing that underpins the whole pension system, will require a concerted communications campaign from Government but also organisations like our own.

Q125Jane Ellison: That was to be my question. You see employers as having a very significant role in disseminating information.

Neil Carberry: To the extent these changes impact on the provision of workplace schemes, yes. We were very clear in our written evidence and other statements we have made that one of the reasons we think the changes in the Bill have merit is that they make employers’ communication with employees about pensions saving simpler and more effective, because it is easier for employees to understand what they will be due from the state. Despite the well-intentioned efforts of DWP under several Governments, the current system makes it quite difficult for employees to understand their state pension rights.

Q126Anne Marie Morris: One of the ideas behind this was to try to encourage individuals to save, as we all live longer. Do you think that the new single-tier pension, combined with auto-enrolment, will deliver that; and, if so, why?

Malcolm Small: I think the jury is still out on this. We are at the very early stages of automatic enrolment, but the IoD, as an organisation, has always argued for a flat rate basic state pension that gives a clear platform to save. We were also concerned that the previous system of meanstested retirement income benefits would provide an effective disincentive for many modest earners to save, because they would be saving pound for pound to deny themselves the means-tested benefits they would otherwise have got in retirement had they done nothing. I think that argument has been debated, and we have a clear answer on that. We very much welcome the move to a flat-rate basic state pension as providing a clear platform to save. I do not think we can say, at least not yet, that that translates into lots of people staying automatically enrolled and saving adequately for retirement in and of itself, but it is certainly very welcome from the point of view of providing the statement, "This is what you will get from Government, and if you want more than that at retirement, go save."

Neil Carberry: As Malcolm says, this is a very long game. We are just starting to see the initial numbers out of the larger companies who have been auto–enrolling since October. They are on the good end of what we might have expected in terms of people not opting out. That is clearly very positive. However, the key driver for people to opt out will be a sense that it is not in their financial interest, and the single biggest factor in people making that decision will be the issue of meanstested benefit. Therefore, some form of resolution of that has to be to the benefit of long-term saving and the Bill offers quite a coherent solution.

Q127Anne Marie Morris: Are you satisfied with what is in the Bill in terms of the means-tested piece, or do you think there is a nirvana to be reached where we do not have means-tested benefits and the pension is at such a level that it would not be necessary anyway?

Malcolm Small: In some of the supporting papers on this I was interested to see that we were expecting this not merely to be cost neutral, which everybody always accepted would be the case, but, depending on local factors that you have discussed earlier, there would appear to be potentially immediate and quite substantial long–term savings to the Treasury in this. Within the IoD we have probably always argued for a universal flat rate basic state pension and we are going to have quite a cliff edge effect as we get to implementation, where somebody retiring at the state pension age of 66, or whatever, on 31 March is under a completely different regime from people who retire on 1 April. This could cause some intergenerational tensions. There are also issues around people who have retired overseas. We know that those already with the basic state pension today will see this as an increasing injustice. As we emerge from the discussion process other issues will come out that we need to resolve from the point of view of fairness. There is an issue starting to emerge about women born between 1952 and 1953, so the process adopted here is good. We have enabling primary legislation which then buys us, the stakeholders, time to work through with DWP to ensure the secondary is as robust and fair as it possibly can be.

Neil Carberry: I would agree with that. Any change to an age-related benefit like this will always give rise to some cliff edges. The critical thing is to spend the time working through the plans to make sure they are minimised as far as possible. We should not fall into the trap of making the best the enemy of the good here. This is a pretty good plan and it deals with most of the issues, and by comparison with where we are today it is quite a substantial step forward.

Q128Anne Marie Morris: I am pleased to hear that. Is there any single thing that you think could be added to the Bill that would encourage saving? Is there any particular change?

Malcolm Small: We need to look at the encouragement of savings throughout all life stages and for all needs. We have tended to focus on savings policy as relating to pensions. There is a wider policy consideration there. At the end of the day, savings and pension policy is a function of employment policy, because how much money people have in their pockets is a driver of what they feel they can afford to put aside for pensions, or any other savings.

Q129Anne Marie Morris: That is helpful.

Neil Carberry: I would agree with that.

Q130Anne Marie Morris: It looks like the self-employed at the end of the day will be beneficiaries of this particular reform. Do you think the self-employed should expect their NICs to increase in return for the state pension gain?

Malcolm Small: The Institute of Directors has a lot of self-employed members. Clearly, nobody wants to see their national insurance go up in relation to their day-to-day existence. That having been said, even the most reluctant of our self-employed members would recognise that, given the improvements we are going to get going forward, it is possibly only fair that everybody should be asked to do their little extra bit. But I note there are also proposals around for easements for the self-employed so they will be able to buy extra pension in 2017 at the rates applying today. We think that is sensible, and we would very much welcome that as an easement for the self-employed.

Neil Carberry: We have corporate rather than self-employed members.

Chair: Then you can tell us the right answer.

Neil Carberry: Malcolm has hit the nail on the head, which is the importance of having a deal that looks fair for self-employed people in particular, because bringing more self-employed people into the system initially is preferable to bringing them in via a means-tested route if they then fall into hardship in retirement, so it is a shock. In some ways there is a long-term gain to both Government and the self-employed person.

Q131Anne Marie Morris: Do you think there should be something specific in the Bill that clarifies the position for the selfemployed? At the moment we can understand it reading what is there, but it is not underscored. Do you think it should be, or is that unhelpful?

Malcolm Small: It is one of those "have regard to" issues. In framing regulations it should be suggested that Ministers and others should have regard to the best interests of core stakeholders, including the selfemployed. It may be appropriate to mention the self-employed there. While we are on the selfemployed, although quite a number of our members are self-employed, our self-employed members today are Neil’s future corporate members.

Anne Marie Morris: That is helpful.

Chair: Some things that will affect all your members are the ending of contracting out and statutory override.

Q132Nigel Mills: Mr Carberry, a few minutes ago you seemed to give a broad welcome for this change, but in your written evidence there is a bit of a caveat, especially as regards the contracting out measures, for employers not to be too adversely affected. Can you expand on that and tell us whether you feel that the statutory override addresses your concerns?

Neil Carberry: The caveat we set out is that this is a social policy change. We are supportive of the direction of travel and the abolition of contracting out, a humane demise of which is broadly something my members would welcome, not least because the value of the rebate has been whittled away over a number of years so it is not very reminiscent of the actual value of the benefit on the other side of the contract. But contracting out is that; it is a contract, and therefore in the change we ought to be able to abolish both sides of the contract; that is, as NI for employers and members of defined benefit schemes go up that cost should be offset by the ability to reduce pension accrual by the value of the previous pension provided in lieu of S2P. That should be done in a very controlled way. I like the way the Bill structures this idea. The one thing that is not yet there, and we would like to be there, is that it should be applicable to all contracted-out members of defined benefit schemes in the private sector, so we would like to see it extended to those affected by protected persons legislation as well.

Q133Nigel Mills: We will come back to that in a second. That takes away the pain for the employer to a certain extent, but the individual gets to carry the increased NI, presumably a reduced private pension, in the hope that the increased single state pension will make up for that. Is that how you understand the humane killing of contracting out?

Neil Carberry: There are two points. One is that, if you do not do this, the little number in the bottom right-hand corner of payslips, which people care quite a lot about, goes down, because their contributions stay at the rate they were and their NI goes up. I am not sure a policy that reduces takehome pay in the current economic environment is necessarily a good idea. The change does alter where employees’ capital is; they end up receiving a little more in the bottom righthand corner of the payslip and paying a little less into the pension, and ultimately receiving a little less in the pension, which in most cases is made up by the new flat rate pension. For the employer it should be costneutral as well, i.e. the employer pays more employer NI, in return for which it pays a little less in contributions to the scheme. I say "a little less". For some of our larger members we are talking here about £60 million per year, so it is quite a significant amount of money.

Q134Nigel Mills: When we get round to consultations by employers on how they will deal with this change, what you are expecting is that as the way forward your members will choose reduced pension benefit rather than increased contribution levels.

Neil Carberry: People will make a decision based on their own circumstances, but certainly the discussions I have had suggest that in defined benefit schemes people will look to reduce pension benefit to offset the loss of GNP.

Q135Nigel Mills: Presumably, you are happy that your members will not try to get any extra gain out of this by reducing benefits by more than the NI cost increases.

Neil Carberry: The Bill should make clear the right way to deal with that. Current plans are very clear about actuarial signoff, and clearly the regulator needs to be able to enforce against gaming of the system. The other point we have made from the beginning is that any power like this has to be strictly time-limited to the period of introduction of the new state pension.

Q136Nigel Mills: Presumably, you do not think that either the cost of this or the burdens of the consultation and changes in the valuations will finish off defined benefit schemes in the private sector for good.

Neil Carberry: It is debatable whether they have been finished off for good already, but those who continue to soldier on in defined benefit in the private sector tend to be either insistent investors who have a model that is very committed to defined benefit or those who are committed to defined benefit by statute, for instance some of the energy companies. The costs of this alone will not finish off schemes.

Malcolm Small: I agree with that. An awful lot of change is going on across the piece in pensions at the moment, with automatic enrolment adding significant cost to employers’ employment bills, so anything which adds a further layer of cost will be unwelcome. That having been said, the sense I get from our membership who run DB schemes is that roughly two thirds say they will carry the cost rather than alter the benefits. One might be pleasantly surprised at the outturn.

Q137Nigel Mills: You are thinking that they will take the impact of contracting out on the chin.

Malcolm Small: They might. What they are saying to us on automatic enrolment is quite optimistic. They will just carry it from profit. Our membership base is more SME, typically those with 60 to 250 employees, and entrepreneurs. They are saying in recent research on autoenrolment, "We’re just going to take this on the chin."

Q138Nigel Mills: The sense from Mr Carberry was that he thought most of his members would not be very keen to take it on the chin.

Neil Carberry: We are talking here about quite a substantial difference in scale.

Malcolm Small: I can fully understand Neil’s members having a different view.

Q139Sheila Gilmore: Would it be relatively easy either for your organisations or the DWP, or both, to produce examples that would show people in much more concrete terms what all that balancing means? You were talking about increased national insurance for the employee and a higher state pension balanced by potential higher pension contributions, or lower pension contributions and reduced pensions. That is all very abstract. Would it be very difficult to give people examples of how that would work?

Neil Carberry: No. We could let the Committee have a note with some worked examples, if that would be helpful.

Q140Sheila Gilmore: It would be helpful to see in that concrete form how they might in practical terms balance each other out rather than that they should balance each other out.

Neil Carberry: I can let the Committee have a note after this session.

Malcolm Small: If there is to be some kind of immediate exchequer dividend, we ought to focus on helping employers and employees meet this change in the national insurance situation, perhaps as well as women in the 19521953 cohort and overseas pensioners. If there are releases of money in the short to medium term we should ensure they are deployed to the benefit and help of employers and employees.

Q141Chair: How onerous do you think will be the requirement to consult employees on any changes to the scheme?

Neil Carberry: I think that employers running defined benefit schemes in particular are pretty used to consulting scheme members on changes. As Malcolm was saying earlier, there have been a significant number of changes over the years, both legislatively and employerinspired. Most of the structures are in place in larger companies to do this, so I do not anticipate it being a significant burden.

Chair: We turn to protected persons.

Q142Sheila Gilmore: We touched on this before. This is the specific group of people who were in formerly nationalised industries that became privatised. They have a particular protection that is being consulted on. What is your view on that?

Neil Carberry: Our very clear view is that those employees should not be treated differently from other employees in defined benefit schemes. It is quite easy to write off this group by saying that it is 20 years since privatisation so there cannot be many of them. In some of the larger schemes we are still talking about tens of thousands of people.

Q143Sheila Gilmore: Who are still not retired.

Neil Carberry: Yes. The nature of some of these schemes is that people tend to join them as apprentices fairly early, at 16 or 18, and therefore many workers are now only about 50, 51 or 52 but have protected person status. It is right to ask the question 20 years on whether that protection, which is not going to be afforded to other members of defined benefit schemes, should also be afforded to this group. For the same reason as I set out in my answer previously, our view is that we should extend the override to be available to these schemes as well.

Q144Sheila Gilmore: Do you have any estimate of the likely costs involved if that were not done or have you not got to that?

Neil Carberry: For the largest employers, it is up to about £60 million per annum.

Malcolm Small: This also highlights the continuing gulf between public sector pensions and private sector DB. The treatment being proposed here is different for public sector DBs from that proposed for private sector DBs. Every time you build in one of these differences of treatment, life becomes more difficult. You are getting a diversity of treatment, and it continues to emphasise the way DB is just going out of the private sector, whereas it is maintained in the public sector.

Q145Sheila Gilmore: Some of the commentary about private sector employees generally suggests it could cost them as much as 10% of their salary to make up the shortfall in their future pensions as a result of these reforms. There has been some discussion here that there may be some dividends to the public, and Malcolm touched on that. I think you were saying that maybe some of that should be spent on helping employees. Do you want to develop that a bit more?

Malcolm Small: I do not think the amount is absolutely clear yet, but our understanding in dealing with the Department for Work and Pensions and HM Treasury is that this exercise was always intended to be cost-neutral, at least in the short term, rather than produce a dividend. I am not clear in my mind today where that dividend comes from, or how much it is, but we need to work with Departments to say quietly, "Okay, how much of a dividend is there, if there is a dividend at all, in the short, medium and long game?" We can all see that in the long game there is a clear Treasury dividend with the cost of state pensions coming down by about 8.6% to 8.1% over time. We completely understand and support that. We have to keep state pensions affordable, but if there are to be short-term dividends we need to be thinking about how we better support both employers and employees through the transition process. I am not quite sure about 10% as a figure. That does not empirically feel right. I think it will be considerably lower than that. The message has to be that we all need to be putting more into our pensions than we have been historically and move up towards 15% of total salary contributions over time, much as they have now in Australia.

Q146Graham Evans: Private sector pensions are about there.

Malcolm Small: Yes. The target in my mind is that you need 15% per annum of total basic pay going into it.

Graham Evans: But very few in the public sector pay anywhere near that amount.

Teresa Pearce: The police do.

Malcolm Small: Defined benefit pensions typically require a funding rate in the private sector of anywhere between 20% and 30%, so I would imagine that is very much the case in the public sector. Some of the figures I have seen from GAD and others suggest that the assumptions about the amount of salary you need to put from the public sector into unfunded public sector pension promises are, from the outside, artificially low.

Q147Sheila Gilmore: When you refer to 15%, is that purely from the employee?

Malcolm Small: No; it is the aggregated contribution. The conventional wisdom is that you need to put that in year in year out all the time you are employed into a DC scheme to stand a fighting chance of getting a 50% replacement rate in retirement. That is a fighting chance, not a certainty.

Q148Teresa Pearce: You have touched on public sector pensions. With the changes private sector employers can pass the costs on to their employees, but the public sector employer cannot do that. Do you think that is fair?

Malcolm Small: There has to be a debate around that. We have a difference in treatment here which has the potential to be invidious. We have to sit down and scratch our heads a bit to figure out where the fairness angle in this is, but essentially, if you are a private sector employee in a DB scheme going forward, you might well have your benefits cut, whereas ultimately in the public sector you will not have your benefits cut. You will be paying a bit more NI, but you will not face the prospect of an absolute cut in your funding.

Q149Teresa Pearce: The additional cost to the public sector employer is quite large.

Malcolm Small: And has to be carried by the taxpayer.

Q150Teresa Pearce: At the same time, you are saying that, if there are savings, the state should be able to help employers in the additional costs, but, surely, if the state has this additional cost already there will not be savings to the state overall. It is circular.

Malcolm Small: It is, potentially, circular and we need to break into the circle and understand more about our options. All we can do at this stage-I am sure Neil would say the same-is identify it as an area of concern and we need to do more work on it.

Q151Teresa Pearce: A lot of the conversation we have had today has been about employers’ and employees’ national insurance contributions. Given that the direction of travel for this and other Governments has been to amalgamate tax and national insurance into one payment, do you think that will complicate this, or make it more difficult to understand?

Neil Carberry: The abolition of contracting out would be a necessity in doing that ultimately. You referred to employers passing costs on to employees. What is actually happening here is that the Government are raising taxes on both employees and employers. Our proposal in terms of override merely allows both sides of that relationship to draw the additional tax money that they are being charged by the Treasury out of their pension saving. Getting rid of contracting out removes one of the few remaining bits of national insurance where there is a variable rate for employees, so arguably this change moves forward the agenda of amalgamation and makes it easier.

Q152Teresa Pearce: The Office of Tax Simplification is looking at amalgamating PAYE and NI into just one payment out of salary. Given that part of the coalition’s push is to raise the threshold at which you pay tax and yet is looking to abolish national insurance, surely it is going to be quite complicated to achieve that in working out what goes into your pension and what does not, and also trying to look at whether somebody has sufficient years’ contributions. Do you think anyone has looked at the way that overlaps?

Neil Carberry: The way I read this Bill is that it is being brought forward independent of that debate. That debate has a long way to run yet.

Q153Teresa Pearce: It will make a major difference. It is very popular to raise the threshold of tax, but for national insurance it is a completely different threshold; it is very complicated. If we are looking at simplification, maybe we need to consider how the Bill will work with that, if it is to happen going forward.

Malcolm Small: We think the UK tax and pension system, whether private or public in this case, is so arcanely complex that it is difficult for users to grapple with. We would very much welcome any kind of simplification we can get in the UK tax and pension system. We think there is room for radical reform. I know we have to go in small steps, but today the system is so complex that anything we can do to help people understand what it is they have to pay in a single place, and what they will receive from the state by way of a pension in a single place, is welcome. These are things for all stakeholders. There has been a fair degree of consensus built around the idea of a basic state pension. It is a good debate to have, and we welcome the opportunity to give evidence here. We are now into implementation, and it is really important to get that right. We are delighted at the way the Department for Work and Pensions and others are working with industry to understand and work through the issues.

Q154Chair: You may have spotted that Teresa also serves on the Treasury Select Committee. Malcolm, you just referred to getting it right. Do you think this piece of legislation will establish a sensible and understandable state pension system and the pension system for the future?

Malcolm Small: It will help. We will still have a legacy system of pensions and savings credit rolling into the future to a point where it is used by a tiny fraction of people but will still exist. Maintaining that architecture will involve cost. In an ideal world-maybe it is not affordable-we would have liked to have moved to something based on a residence test of 15 years or whatever that is available to all so everybody is on the same platform and we do not have the costs of maintaining the old architecture. Maybe that is not achievable; maybe it is if there is a short-term exchequer dividend, or we can work in such ways to provide one, but that is a debate for down the track. In terms of looking at this Bill today, is it providing the right architecture? I think it is. Is it enabling? I think it is. Are there issues that we need to address within it? We have heard some of those this afternoon. It is not a perfect place to be, but probably in making a change of this kind we have to accept that somewhere along the track some people will of necessity lose out. Our trick in working with the Department is to minimise that number of people and make it as fair as we can in implementation.

Q155Chair: Neil, does this create a better pension system overall?

Neil Carberry: Yes, it does. It creates a simpler pension system where people have greater clarity earlier in their working lives, and therefore a greater understanding of the necessity to save and at what stage they need to save. We are dealing with a group of employees who are now facing fundamentally different challenges from those of a generation ago. If we think about someone coming into the workplace in the next couple of years, with university fees, higher housing deposits, probably having children later because of that and then pension saving, some clarity about what the state will provide will help people make decisions that work for them. On the business side, a lot of my members are thinking about what a more flexible workplace savings offer will be to cover retirement saving and help people save, for instance for housing deposits.

Q156Chair: Is there anything that needs to be clarified or put on the face of the Bill that is not already there?

Malcolm Small: There is not much to add. My reading of the Bill is that it is enabling; it is subject to some tinkering at the edges. We talked about some of the communication issues earlier. There may be arguments around that, but, reading it as a Bill right now, I see it as facilitating and enabling, and the meat of the discussion is in the secondary legislation.

Neil Carberry: I would agree.

Chair: Thank you very much for coming along this afternoon, and this will go forward in writing a report.

Prepared 7th March 2013