Personal Accounts Delivery Authority Winding Up Order 2010

My Lords, the Committee will now consider the draft Occupational and Personal Pension Schemes (Automatic Enrolment) Regulations 2010, laid on 27 January, the draft National Employment Savings Trust Order 2010, and the draft Personal Accounts Delivery Authority Winding Up Order 2010, which were both laid on 12 January. I am satisfied that these instruments are compatible with the European Convention on Human Rights. This House provides irrefutable evidence that we are all getting older. By that I mean, of course, that life expectancy is increasing and that more and more people are able to lead full lives and make an active contribution at an age when, not so very long ago, they might have expected to have been put out to pasture. But increasing longevity brings its own challenges; millions of people are not saving enough to generate the retirement income they either want or expect. Nearly half of working-age employees are not making any private pension savings at all. That is why the Government embarked on the workplace pension reform programme and why we are debating the secondary legislation that makes detailed provision in support of these landmark reforms. It is some time since this House discussed the provisions now enshrined in the Pensions Act 2008. Over the past 18 months our policy has developed and been refined, in large part because of extensive engagement with stakeholders. We, alongside our delivery partners—PADA and the Pensions Regulator—have made significant progress and our programme of work has evolved as we focused more on the practicalities of implementation. We have already brought forward two sets of regulations that begin the process of making these reforms a reality: the Employers’ Duties (Registration and Compliance) Regulations, which cover the compliance regime and the employers’ registration obligations to the Pensions Regulator; and the Employers’ Duties (Implementation) Regulations, which prescribe the arrangements for the staged implementation of the employer duty and the phasing of contributions. The latter regulations set the timeframe within which these reforms will be put into operation. We propose bringing employers into the duty by size from October 2012, beginning with the largest employers and ending with the smallest, with all employers brought in by September 2016. This is a longer period than originally envisaged. We went out to consult on an approach whereby employers would be brought in over three years, reflecting the need to deliver the reforms in an operationally achievable and safe way. Following careful consideration, we made a further adjustment to the implementation plan to ensure support for individuals who are new to saving and provide support to the newest and smallest businesses in adjusting to the costs. That means that employers will now be brought in over four years. Our implementation plan also phases in minimum contribution requirements over time to help employers and individuals gradually adjust to the additional costs. Employers using defined contribution schemes will be required to pay contributions of 1 per cent until staging is complete, 2 per cent for a further year and 3 per cent thereafter. Increased access to workplace pension saving is crucial to tackling undersaving. By introducing a new duty on employers automatically to enrol their workers into a workplace pension scheme and to pay a minimum contribution towards their pension saving, we are extending access to workers in every employment sector. The automatic enrolment regulations set out the practical detail that will make the reforms work. They specify what employers must do and prescribe the information flows between the employer, the pension scheme and the worker. We want these regulations to be as simple and flexible as possible and to minimise burdens on employers. That is why we have consulted extensively throughout the past year. Drawing widely on expertise from the pensions industry, employers, business and consumer representatives, and across the political spectrum, we have tested and refined our proposals. We have listened carefully and responded positively to concerns. This useful engagement has resulted in a range of changes that will ensure that these regulations will work in practice. Joining arrangements are simpler and should minimise burdens on business, timescales have been extended and information requirements cut back, the refund process has been aligned with payroll cycles, and employers will be able to hold on to contributions until the end of the opt-out period. Stakeholders tell us that these draft regulations now reflect a more straightforward and common-sense approach, which is essential if the new rules are to operate in the real world of pension provision. The Pensions Act 2008 established who should be automatically enrolled by setting age and earning thresholds. The regulations define pay reference periods. This is the device that will enable employers to identify jobholders with earnings above the threshold which trigger automatic enrolment, and then to calculate pension contributions. We have also provided mechanisms that will help employers manage the process more easily. The regulations enable employers to avoid accidentally enrolling jobholders with annual earnings under the threshold but who occasionally have pay spikes. They provide for the postponement of automatic enrolment, although to protect workers’ interests, especially those on short-term contracts of three months or less, employers may only postpone automatically enrolling an individual once in any one year. Automatic enrolment is compulsory. Pension saving is not, so we have prescribed automatic enrolment joining and opt-out periods—now one month—and opt-out rights. Importantly, we have also defined the rules and time limits for refunds, so that any contributions paid by, or on behalf of, a jobholder who opts out, will be refunded. This process has been designed to align with payroll cycles and existing business practices. In particular, it ensures that money does not need to flow into a scheme only to flow back almost immediately. These processes address concerns expressed about cash flows, in particular by small businesses, and ensure that automatic enrolment works in even the most dynamic employment sectors. An individual’s decision to opt out may be the right one at that time but circumstances change. We want these reforms to change behaviours and attitudes towards saving for a pension, and to do this well beyond the initial automatic enrolment stages. For this reason, we require employers to run re-enrolment exercises every three years. Further, the regulations also prescribe what an individual must do, should they decide voluntarily to opt in, either because they are not eligible for automatic enrolment, or because they want to opt in before the employer’s re-enrolment date. These arrangements mirror automatic enrolment to ensure a universal process. We have recognised that the employer is best placed to give key pieces of factual information about automatic enrolment to jobholders—for example, the date of enrolment, the details of the scheme, and the value of contributions to be paid to the scheme. The regulations set out the minimum information jobholders will need to reduce burdens on employers. When the time comes for employers to start automatically enrolling their workers, they will need a scheme into which to do this. Employers may use only schemes which meet the qualifying criteria to comply with the duty. We have therefore defined the characteristics of a qualifying scheme, and set minimum quality standards for money purchase, defined benefit, hybrid and non-UK pension schemes. To make the joining arrangements simple, we have made them the same, whatever type of pension product the employer uses. However, many employers, particularly those with a smaller workforce, find it difficult to provide a workplace pension for their workers at a reasonable cost. These reforms aim to correct that situation, and that is why the Government are creating the National Employment Saving Trust, previously known as personal accounts. NEST will be a new low-cost pension scheme which will form one of the options available to employers to enable them to meet their new duty. The scheme has been welcomed by the pension industry, which recognises that the existing market cannot meet the needs of all employers and all workers. The NEST order, which is broadly equivalent to a trust deed, establishes the NEST scheme as if it were set up under trust. This order is supported by the scheme rules. We consulted on the draft order and rules last year and responses were positive. There was broad agreement that the order and rules contain the right measures, and we responded to comments by developing the drafts to increase clarity and understanding. NEST will be a defined contribution occupational pension scheme, and will be broadly subject to the same statutory and regulatory regime as any other scheme of its type. We have, however, included some specific features that recognise the unique role and scale of NEST. We want NEST to focus on those employers and workers not effectively provided for in the existing market. To achieve this, NEST will operate with an annual limit on contributions and a ban on transfers into the scheme. These measures, which will be subject to review in 2017, will ensure that NEST focuses on complementing existing pension provision. To ensure that every employer and employee has access to an appropriate low-cost scheme, the NEST corporation will have a public service obligation to accept any employer that wishes to use it, and—once an employer is participating in NEST—to accept any worker enrolled by that employer. In addition, it will not be able to set different charge levels for providing the same service to different members. Workers who move jobs frequently can find it hard to keep up their pension savings. However, membership of NEST will be for the individual’s working life. Members will still be able to save in the scheme if they move jobs, become self-employed or even move out of the labour market altogether. Occupational pension schemes are normally required to have member-nominated trustees, and usually have trustees nominated by the sponsoring employer. However, NEST will have millions of members and hundreds of thousands of participating employers, making this approach unwieldy and unworkable. Instead, NEST will have two panels, one to represent members and one to represent employers. The job of the panels will be to ensure that the trustees take account of the views of members and their employers in the operation of the scheme. The members’ panel will also allow members to have a say in selecting trustee members who will operate the scheme on their behalf once it is up and running. All employers will be able to use NEST, and will need information to understand the nature of the scheme in order to decide whether it is right for them and their employees. The NEST corporation will therefore take steps to increase awareness and understanding of the scheme among employers and individuals who wish to use it. The order gives the Secretary of State the power to set lower or upper limits on charges. This is to ensure that NEST strikes the right balance between the competing policy ambitions of being self-financing over the longer-term and delivering low charges for members. The order also specifies that the NEST corporation must provide information to the Secretary of State. This will enable the Government to assess whether the reform programme is meeting our objectives—for example, by assessing the contribution NEST has made to increasing pension savings among its target membership. In addition, the order covers areas that you would expect to see in the trust deed of any pension scheme: it provides powers to allow the trustee to make investments on behalf of members, to make rules for the scheme and to charge members for the costs of running the scheme. It also includes provisions relating to the liabilities of the trustee, the payment of benefits to members and pension sharing on divorce. The features set out in the order are fundamental to our policy intentions for NEST. Therefore, the NEST corporation will not be able to change them: the order can be changed only by Parliament. Setting up NEST is an unprecedented delivery challenge. We estimate that NEST will have between 3 million and 6 million members, and hundreds of thousands of participating employers. To ensure that we get the delivery right, NEST will be launched with a limited number of volunteer employers in spring 2011. This will provide an opportunity to test operations before the automatic enrolment duty comes into force, so that any initial teething problems can be resolved in a controlled environment. To meet this timetable, the NEST corporation will be established on 5 July. This will allow the trustee to finalise the design and operation of the scheme before it comes into being. In particular, only the trustee can decide the investment strategy and set the statement of investment principles. Noble Lords will be aware that we have appointed Lawrence Churchill as chair-designate of the corporation, and are running an exercise to recruit other trustee members. We expect them to be recruited by Easter, enabling them to take up their appointments in July. With the NEST corporation established and in place, the right course of action is to hand over the remaining implementation and operation of the scheme to the new corporation, and to wind up PADA. The PADA winding-up order makes provision to dissolve PADA on 5 July 2010 and to transfer its property, rights and liabilities to the NEST corporation. This will enable a smooth handover between the two organisations and provide continuity, in order to minimise delivery risks. Automatic enrolment will create a presumption to save, so that planning for retirement becomes the norm. NEST will ensure that those who do not currently have access to a suitable low-cost pension have the opportunity to save towards a decent income in retirement. These are ambitions, landmark reforms that will help to deal with the demographic change of an ageing society. I am grateful to noble Lords for their forbearance during what has been a lengthy introduction. I commend the order to the Committee.