We move to the final group of amendments and, as I mentioned earlier, we urge the House to agree with their lordships in all of them. For reasons that I shall explain, we do not accept Opposition amendment (a) to Lords amendment 9.
I shall run through the categories of amendment before us. I shall deal at the end with the charges and disclosure amendments, where there appears to be the remaining lack of agreement. I apologise in advance for the fact that it might take me a moment or two to work my way through the amendments as some of them are quite technical, but at this stage in our proceedings it is important not simply to nod these measures through. In some cases quite substantive changes were made in another place—welcome changes, we believe, but they are ones to which this House should give proper scrutiny.
I shall begin with amendments 5 and 6 and then 4, which relate to automatic enrolment. It is worth putting on the record that automatic enrolment is already a huge success story, with 3.2 million people now enrolled. I had the pleasure last week of visiting Upton Park to meet someone who I am told is the three millionth person to be automatically enrolled. I have my doubts, but one never knows. I have to declare in some sort of register somewhere that I was given a West Ham shirt with the squad number 3 million on the back, which may be my transfer fee—I do not know. We have certainly reached an important stage in the process. It is one of the almost unsung success stories of this coalition Government to implement automatic enrolment in an effective way, to see more than 3 million brought in and to have very high levels of staying in—of the order of 90%—which means that getting on for 3 million people are now in workplace pensions who were not in such pensions just a couple of years ago. All the signs are that this will continue to be a success.
But ongoing success is dependent on being able to learn as we go and to make changes where necessary, and amendments 5 and 6 are tabled in that spirit and relate to defined benefit schemes. In general, DB schemes are high-quality pension schemes provided by employers who take pensions seriously, and we would not want employers to feel that they could not use a DB pension scheme for auto-enrolment because of some technicality or because in some way we provided a higher hurdle for a DB pension scheme to be used for automatic enrolment than for a defined contribution scheme. Amendments 5 and 6 allow for simpler alternative quality requirements for employers providing good quality DB schemes.
The amendments will allow DB schemes to meet either the existing test for money purchase schemes, or a test based on the cost of future accruals. More work has to be done on adding the detail in regulations, and we look forward to working with our stakeholders on that. The simpler tests will help those employers providing good schemes to meet their automatic enrolment duties. This is important because of the end of contracting out. Contracting out itself had a set of standards that schemes that wanted to contract out had to meet, and once contracting out has gone and those standards have gone we can use the opportunity to set simpler equality requirements for employers wanting to use DB schemes. I hope that that will be welcomed by the House.
Also in the context of making automatic enrolment work, amendment 4 relates to the power to ensure that employers do not have to enrol individuals for whom it
makes no sense. We tabled a clause at the beginning of the process that would give us the power to exclude a small group of people where it would not make any sense for employers to have a legal duty automatically to enrol them. For example, employers said to us that they had employees who were high earners or who had exhausted their lifetime tax limits and had some protected or enhanced status who were asking not to be put into a pension scheme because that could jeopardise their tax status, and having been auto-enrolled they would have to opt out straight away. That would be a waste of employers’ and employees’ time. If they failed to opt out, they could lose valuable tax protection, which would create unnecessary bureaucracy for the employer and hassle for the employee, and we do not want to do any of that when it comes to auto-enrolment.
We always envisaged that we would exclude tightly defined and limited categories of employees from the auto-enrolment duty. Following consultation, we have now indicated specifically which groups of people those are. I have mentioned those with tax protection status and another would be those on the brink of retirement or leaving. Someone might have said that they were about to leave the company, but the legal requirements on automatic enrolment or re-enrolment meant that the firm had to put them in the pension scheme, perhaps days before they left. Clearly, we do not want to bring automatic enrolment into disrepute. We do not want firms to be required to do things that are not common sense, that have a cost to the firm, perhaps create hassle for the individual and are unnecessary, and we always envisaged that the exceptions would be limited in scope.
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When we first discussed the provisions, the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East (Gregg McClymont) got very excited about the Beecroft report and he called this the Beecroft clause and thought that we would use it to drive a coach and horses through auto-enrolment, exclude small firms and all the rest of it. We assured him that that was not our intention, but I sense that he did not believe us. In another place, we have chosen to make it clear, through amendment 4, that this power cannot be used to exclude an employer on the basis of size, whether that is the number of employees, turnover, VAT liability or whatever. It was never our intention to exclude these people. Faced with the ongoing, almost universal cynicism of the Opposition, we thought it best, for the avoidance of doubt, to put that in the Bill.
The hon. Gentleman sought such an amendment earlier in our proceedings, but we chose to do this in a cleaner and more precise way, simply so that people can be confident that the Government believe that automatic enrolment is—dare I use the phrase?—for the many, not the few. The process continues right down to firms that employ one person. Just because not many others work with someone, does not mean that they do not need to have a decent pension. We do not think that anyone should be excluded.
We accept that there are costs and burdens to small firms undertaking automatic enrolment, but we believe that the best way to address those is through amelioration measures of the sort that we have taken rather than by excluding them. For example, the National Employment Savings Trust is there to enable small firms to have
somewhere to go to that has a public service duty to take their business, that has been designed with smaller firms in mind—obviously it is a significant provider at the larger end of the market—and designed to be easy to engage with for people who do not speak pensions, so it is jargon-free.
We have taken a number of other measures to ameliorate the position for smaller firms. For example, we have changed the phasing of the roll-out of auto enrolment so that those that employ 50 or fewer will, in general, not have to auto-enrol until at least June 2015, or, in some case, a good while after that. We have introduced a waiting period of up to three months, which again will help smaller firms. Crucially—I know the Opposition have objected to this—we have raised the trigger threshold to £10,000 a year from April 2014, which will mean a small firm employing perhaps one person on £7,000, £8,000 or £9,000 a year will not have to go through automatic enrolment. We believe that all of those measures are better ways of helping smaller firms than simply some sort of blanket exclusion. Therefore, amendment 4 makes it clear that that is not the way that we propose to proceed.
I will come back to the amendments on charges, because I think that that is the area of principal difference, and deal now with the other amendments in the group where there might be greater agreement. Amendments 28 and 29 relate to automatic transfers and what happens when somebody leaves a firm, leaving behind a small pension pot. We envisage that any pension pot of less than £10,000 left behind would fit our definition of a small pot. Their lordships debated whether our proposed model of automatic transfers, where the pension pot by default follows people as they change job, was the right model, or whether an alternative aggregator model—a home of lost pots model—would be a better bet. There was a high-quality debate where arguments were carefully made on both sides, and their lordships, by a large margin, with considerable Cross-Bench support, backed the Government’s position on this measure. So we will move ahead with our proposals for pot follows member, but we have to get the framework right to ensure greater consolidation. The Bill will provide that framework. Pot follows member will reduce the number of people with five or more dormant pension pots from one in four under the current system to one in 30. Our focus now is to work with employers, providers and consumer groups to deliver a safe and secure system.
It is clear that we should try to use the existing infrastructure where possible, including the existing PAYE system. As I told the House at oral questions on 24 February, we are working with our colleagues at HMRC on that. In addition to expenditure incurred by the DWP, amendment 29 extends the provision to allow any specific costs incurred by HMRC to be met from the general levy, which is the levy on pension schemes. If we go down that route, which incurs costs—we are finalising it at the moment, so this is an enabling power—HMRC will be able to recover them.
One of the attractions of going down that route is that if HMRC already holds data on the jobs that people have had, for example in the previous 12 months, and could also hold matching data on the pension schemes of which people were a member, it would be ideal to look at existing data sources. However, we have to do a full cost-benefit analysis internally. For example,
a new pension scheme might be able to look at the member’s previous employers over the past 12 months and at other pension schemes of which they were a member. The new scheme could then contact those schemes, check for stranded pots and pull them across by default, unless the member objected, and the costs could be recovered from the general levy under Lords amendment 29.
Lords amendment 28 is a technical change designed to clarify that the automatic transfer provisions can apply to those who are not yet in receipt of their pension but are eligible to have access to their benefits—that is, those who are over the age of 55.
The next set of amendments relates to the Pension Protection Fund compensation cap, which we introduced during the course of our proceedings in this House. We said at the time that it would be necessary to complete the primary legislative framework in the House of Lords, and that is what we have done. Lords amendments 32 to 34 provide further detail on how pensionable service, for the purposes of the cap, is to be determined in specific circumstances, such as when a person is a member of two separate but connected schemes.
I will explain why that is important. The change we have made to the Pension Protection Fund cap is designed to help people who have given long service. The cap prevents people from getting very high levels of Pension Protection Fund compensation and is designed to exclude in particular some of the high earners who might have been involved in decisions about the future of a company. It also captures people who are not gratuitously rich, but who have built up a substantial pension, perhaps through working for one employer for their entire working life. We do not think that the cap was ever meant for such people, so we have provided that, beyond 20 years, it should be increased at a rate of 3% per additional year. The definition of the length of pensionable service is important, which is why Lords amendments 32 to 34, which tidy that up, are necessary.
Lords amendments 37 and 38 deal with the application of a cap during the assessment period and wind up. They provide for the valuation of scheme liabilities if the scheme is in assessment when legislation is commenced. The valuation will continue to be based on the current cap, although members of such schemes will be paid using the new cap during the assessment period. The amendments also provide for schemes winding up when the legislation is commenced. They will allocate assets based on the current cap.
Lords amendments 35, 36 and 38 clarify details such as the transitional provision to be made for those who share compensation following divorce. The policy for people with a pension in their own right and a pension based on a pension-sharing order is that each is kept separate and capped separately. This is to the benefit of members. The Pension Protection Fund has been applying the current cap in this way.
Finally on the PPF cap, Lords amendments 10 and 17 deal with the change to the application of the existing cap on compensation from two sources of pension and bring legislation in line with policy and practice. The current legislation assumes that the cap is applied after the amounts are added together. Amendments 10 and 17 amend the legislation so that it reflects current practice, and this will apply retrospectively. As I have said, that is to the benefit of members.
Lords amendments 11, 15, 16 and 18—relate to the Public Service Pensions Act 2013. In layperson’s language, the amendments allow consolidation of schemes without loss of transitional protection. The 2013 Act reforms public service pension schemes and provides for transitional protection from that reform for members of public service pensions who were less than 10 years from their normal retirement age in April 2012. The Act also stipulates that, for the larger public service schemes, the individual needs to have been a member prior to that date in order to be eligible for that protection.
Lords amendments 11, 15, 16 and 18 create exceptions to that rule to allow members of smaller public service schemes to be transferred into a larger scheme without losing their transitional protection. The Government’s intention is to seek to make administrative and management savings by consolidating smaller schemes into larger ones. The amendments mean that that can happen with no impact on members’ benefits.
Finally, the substantive set of amendments are those led by Lords amendment 9 which relate to charging. Obviously, this is a contentious issue. We believe that their lordships have improved the Bill and we will urge the House to accept their amendments.
Making automatic enrolment work is not just about the employer duty; it is about ensuring that people are enrolled into high-quality schemes. I want to be absolutely clear, because no doubt there will be a lot of hand-wringing from the Labour party on this issue. When the previous Government put in place part of the necessary legislative framework for automatic enrolment, they put in place no quality standards at all for auto-enrolment schemes, bar the requirement to have a default fund—just to have one; there was nothing about charges or quality—and a minimum employer and employee combined contribution. It is pretty shocking that the previous Government thought it was good enough to put 10 million people on workplace pension schemes with no consumer protection at all. When hon. Members hear what the Labour shadow spokesman—the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East—has to say about this issue, they will imagine that Labour has somehow been riding to the rescue of the consumer. However, they should remember that when the legislation was first passed it was done with no regard, as far as I can see, for the position of consumers. There was no action on charges, no action on small pots or, to be frank, no action on anything.
The coalition Government are committed to ensuring that schemes provide good value for money and are well governed. Lords amendment 9, therefore, deals with the transparency of costs and charges, which we believe is vital for good scheme governance. We already have powers to require disclosure under the Pension Schemes Act 1993. However, for the avoidance of doubt, amendment 9 places a duty on the Secretary of State and the Financial Conduct Authority—I will come back to that, because it is an important point—to require the disclosure of costs and charges. The charges to be disclosed will be set out in regulations, and rightly so.
On amendment (a), the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East wants to put in primary legislation a shopping list of the charges he can think of. I think the House will immediately see the flaw in that. The hon. Gentleman would be the first to say that the financial services industry has been known to be
creative—if we ban something, it will do something else—so what is the point of putting in primary legislation a list of the charges he can think of, saying that they should be disclosed and then adding, “and anything else”, on the end? Clearly, there could be a new category of charge at any point and we do not want to be governed by having to pass a new Act of Parliament every time there is a new charge on which we want to take action. We think that the charges to be disclosed should be set out in regulations because that approach gives the Government maximum flexibility to respond to a fast-moving market. That is why we do not agree with amendment (a).
Under Lords amendment 9, the duty is placed on both the Secretary of State and the FCA, which reflects the dual regulation of pensions and means that the FCA will consult on how and what to disclose, but not if costs should be disclosed. One of the many problems with the Opposition’s amendment (a) is that it would remove that duty from the FCA. I do not know whether that is accidental or deliberate. The amendment would leave the power solely with the Secretary of State, but with none of the sanctions available to the FCA. Just to be clear, amendment (a) would take the duty to consult on how and what to disclose away from the FCA and give it to the Secretary of State, but the Secretary of State does not have the powers that the FCA has. To be frank, that is a muddle. I know the Opposition will vote for their amendment because they tabled it and they want to make a point and tweet about it, but the substance of the amendment, even in terms of what the Opposition want to achieve, is deeply flawed, because it would take a duty away from a body that has a power and give it to the Secretary of State, who does not have that power.