Pensions Bill

moved Amendment No. 2: 2: Clause 1, page 1, line 12, at end insert ““, and ( ) who is not an exempt jobholder for the purposes of that employment”” The noble Lord said: My Lords, I declare my interest as a partner in the national commercial law firm, Beachcroft LLP, and also my longstanding connection with the insurance industry, culminating in my presidency this year of the Chartered Insurance Institute. I also welcome such a consensual approach to the issue we are debating: the House’s spontaneous reaction to the news that the Minister will be more closely involved in the development of this policy should not go unremarked. The Minister, with his normal modesty, referred to it. It reflects a genuine belief that he has taken a tremendous amount of time and trouble with noble Lords, particularly those on the Front Benches, who have sought to preserve and strengthen the consensual approach to this scheme. I endorse the remarks of my noble friend Lady Noakes in that respect. Although this is a highly technical Bill, I hope that I can explain this group of amendments in a simple and straightforward manner. The rationale behind personal accounts is very much to develop and provide a good quality of pension provision for those who do not currently have access to a workplace pension. I believe that that objective is shared by everyone. However, ““good quality”” had not been defined until the introduction of this Bill, and even now that definition remains somewhat illusive and mercurial. That point will take me to the heart of this group of amendments. The decision by Ministers to allow some existing schemes to become qualifying ones is widely welcomed. However, I have tabled these amendments to draw attention to a serious concern that the proposed criteria for judging the quality—and therefore the qualification or non-qualification—of existing pensions would be unworkable for many schemes. During the recess, I spent some time sitting down with a number of people who will have to implement the procedures we are debating, and I have been made aware that some aspects of what is proposed would threaten to undermine much good quality existing provision, which would have serious negative consequences for those customers with valuable benefits such as guarantees. It is sensible to set up a simple quality test regarding contribution levels to ensure that people are not disadvantaged by being auto-enrolled into a qualifying scheme if it pays a level of contributions that is lower than personal accounts. However, I ask the Minister to take account of the fact that that does not relate to the age and complexity of the whole range of UK pension provision. Contribution rates are one useful measure of the quality of a pension scheme, but they are not necessarily the only measure, and quite often they are not the best measure. By focusing on contribution levels alone, this legislation may force people out of pension schemes with potentially valuable benefits by using an arbitrary and inflexible definition of what constitutes a good quality scheme. These additional benefits may take the form of guaranteed income levels in retirement, protected rights or additional insurance, which are hard to compare with a straightforward contribution level. We know that British business is already overburdened with regulations and red tape, and the Government’s proposals could make the situation worse unless a step or two is taken in line with these amendments. The dirigisme that I have described could poison the well of existing good quality provision and dramatically reduce diversity in the marketplace. Of course, that is not the intention of Ministers, but they will be as aware as I am of the law of unintended consequences. One provider has told me that it estimates that pension contracts covering many hundreds of thousands will be unable to change to the basis imposed by personal accounts and will be unable to accept fluctuating payments. Should the contribution requirements remain unaltered, employers will have no alternative but to shut such schemes down and move employees to a qualifying scheme or personal accounts. People with additional benefits would be particularly hard hit, as they would miss out on the guarantees and returns that they rightly anticipated and expected to be the bedrock of their plans for a secure retirement. The Bill lacks an acknowledgement of the need to treat existing members of existing schemes differently from new members of new or existing schemes. This goes back to first principles because such people are by definition outside the target market of personal accounts, which is those without access to current pensions, and they should not need to be auto-enrolled as they are already members and, in many cases, actively applied to join a scheme on its existing basis. Of course, they are not pension experts as a result of that, but the Bill must find some way of recognising historic decisions made by many people to go into that type of pension scheme. There is nothing in the Bill’s fundamental policy objectives to suggest that we should be seeking retrospectively to fit pension contracts going back decades into the new framework imposed by personal accounts. The amendments tabled in my name allow existing members of existing schemes to be exempt from auto-enrolment into qualifying schemes. They empower employers and employees to make considered judgments about the value of their pension provisions, enabling them to decide which scheme best suits their needs without unnecessary coercion or complexity. That could be their current scheme, which may not accept fluctuating contributions or have a total contribution of 8 per cent, but which may offer guarantees and a higher employer contribution, or a simpler new scheme aligned with the structure of personal accounts. Existing members must be allowed to have a clear and honest choice before being auto-enrolled in a qualifying scheme. Otherwise they may be steamrollered into making a decision that they later regret because they lose benefits—they will be unable to access those benefits once they have left the scheme. The detail of the amendments would effectively replicate a more streamlined sequence of events, which would occur should what is described as the exempt job holder opt out of personal accounts to stay in their current scheme. It avoids members opting out of both their existing scheme and a qualifying scheme. Of course, members must be given protection against unscrupulous employers—the Minister kindly gave me an opportunity to talk to him about existing provision—so, as he will see, I have included in the amendments additional safeguards which would kick in if the basis of their current provision stops or reduces. In conclusion, I feel strongly that additional administration and the requirement to make unpredictable additional top-ups may encourage some employers just to stop their scheme and move to a qualifying or personal account scheme to avoid the burden of liability. The ideal solution is one which allows employers to say in advance that X per cent contribution of their chosen salary definition is going to comply. Money purchase schemes work on the basis of delivering a target income on retirement. These may be particularly affected by the contribution requirement. They have an expectation that overall the scheme will deliver a percentage of final earnings or an end benefit in monetary terms. Generally, they work on a set level of contribution for the life of the member, not just month by month. Changes in the benefit basis would be made by means of the employer buying additional levels of benefit in a separate contract and/or paying large single premiums at intervals. Such a scheme would clearly be non-qualifying under the current criteria, yet it may well provide a benefit in excess of that expected from a qualifying scheme. I have seen some schemes which are based on a guaranteed end result rate of annuity, for example, paying £1 income for every £9 saved. To put this in context, if that existing scheme were lost to the member, each £1 income would now cost nearly £15 on the open market, an increase of nearly two-thirds. For these schemes, the contribution may be level or fluctuating, but the overall return is likely to be considerably greater than the level of retirement income that could be achieved with the same level of contributions in a qualifying scheme without those guarantees. Many of those contracts are historic schemes, no longer sold. I am definitely open to the argument that the changes I am suggesting might be transitional, with sunset clauses attached. I am very much in the hands of the House on that. Certain schemes may be exempted from auto-enrolment until, say, 2020. Natural staff turnover and retirement levels within that sort of a window would make it likely that many of the issues that I have outlined to the House would be marginal and can be addressed in coming years, once the new system of personal accounts and qualifying schemes has been able to bed down. I hope that the Minister will think carefully now that people are beginning to focus on how the whole scheme will be implemented and recognise that there are some anomalies here that I do not think that the Government or the House had contemplated when we went through the Bill in detail in Committee. I just want to limit the upheaval for members, employers and providers for those schemes not considered part of the original target for personal accounts, but ensure in time that all employers will have access to schemes that the Pensions Bill will make the norm. Any action by the Government now that causes further damage and instability within the pensions industry would be especially unhelpful. I therefore propose the amendments to give the necessary protection to the embedded value of a number of the UK's major financial institutions. Changes are needed to enable individual citizens and pension providers alike to plan ahead with confidence, rebalancing their portfolios over a longer transition without causing unnecessary damage to the legitimate interests of individual members of pension schemes. I look forward to the Minister’s response. I beg to move.