Pensions Bill

My Lords, I am grateful to the noble Lord for raising this matter and for giving us the chance to discuss the important issue of the penalty regime. As is common with other penalty regimes, we have set the maximum penalty ceilings in the Bill, with details of the regime to be set in regulations. We will make regulations following further analysis of levels in existing regimes and consultation with stakeholders. We are considering a range of options which include scaling the level of penalties to employer size, as well as other approaches. This work includes, importantly, establishing that the processes for setting penalty levels are workable in practice. The amendments to Clauses 39 and 40 propose to limit the total amount of a fixed or escalating penalty dependent on the size of the employer by turnover. The notion of scaling maximum penalties by employer turnover, as suggested in the amendments, presents a number of challenges. It could lead to significant operational difficulties because the Pensions Regulator would require additional financial information about an employer before a penalty notice could be issued. For some employers the regulator may obtain this information from Companies House. However, smaller, micro-employers may not be registered with Companies House—they may not be corporates—therefore the regulator would have to contact them directly. This would create a burden on such businesses, as they would be required to provide the financial information. It could also impede the imposition of a penalty, therefore slowing the processes of ensuring employers meet their obligations. As the noble Lord acknowledged, we have already set the ceiling for fixed penalties at £50,000, in line with the regulator’s current limit. An additional cap at 10 per cent would be inconsistent with the regulator’s existing regime. We see any ceiling on an escalating penalty as potentially problematic. The essence of an escalating penalty is that its value directly reflects how long an employer continues not to comply. Capping the level to which it may rise could significantly limit its impact and incentives for employers to comply. It might be helpful if I gave two hypothetical examples of how much money non-compliant employers could withhold to illustrate that having a large maximum penalty is necessary for the success of the reforms. A medium-sized employer with 100 employees each earning an average of £20,000 per annum would save approximately £45,000 annually by avoiding paying the 3 per cent employer contribution. A large employer with 6,000 employees earning an average of £24,000 per annum would save approximately £9,400 per day by avoiding paying the 3 per cent employer contribution. These examples show that for the maximum penalties to be perceived as meaningful it is necessary for them to be as drafted. As I say, the essence of an escalating penalty is that its value directly reflects how long an employer continues not to comply. Capping the level to which an escalating penalty may rise could have a significant impact on the escalating penalties and incentives for employers to comply. I reiterate that we are exploring options to ensure that penalty levels are proportionate. This detail will be set out in regulations and we will consult fully employer groups and other interested parties. The draft regulations will be published for consultation in due course and we will welcome further input at that point. Reference was made to how escalating penalties differ from those provided for by HMRC. HMRC can impose a daily penalty of up to £60 for the late return of income tax self-assessment papers. The Bill sets a daily limit of £10,000 per day. However, as we explained, the actual daily penalties will be set out in regulations. While the principle of the deterrent is the same, the level of penalty needed is completely different. I hope that that explanation has persuaded the noble Lord to withdraw his amendment. There is still work in progress and we need to have meaningful consultation to ensure that, within the maximums that are set down here, we come up with a regime which does the job and is proportionate.