My Lords, I shall speak to Amendments 38ZA, 39, 45, 46, 47 and 50. The amendments in this group pose three propositions: the first is not to give the power to employers; the second is to give it only to employers with trustee consent; and then there is the amendment that I propose, which would give the power to employers only if it was subject to an explicit requirement to consult with the trustees.
Quite clearly, abolishing contracting out means abolishing DB schemes. The national insurance rebates to both employees and employers currently run at 1.4% and 3.4% on a band of earnings, so they are not insignificant amounts of money. The Bill will give this statutory override to the employers effectively to recoup that loss of their NI rebate by a choice of one of two options: increasing the employees’ contributions or reducing the value of the future benefits to be accrued. Not all employers need this statutory override to make that adjustment. It is quite clear that the closures and benefit changes of the past 10 years are evidence enough of that. However, there will be some schemes where employers cannot do that without trustee consent.
The Government are clearly seeking to provide an override where that trustee consent is required so that employers can proceed without it.
If one looks at the impact assessment, it is quite clear that there is now a green light as a consequence of this clause for employers to recoup the loss of their NI rebates through an increase in employees’ contributions. The assumption made in the impact assessment is that all employees active in DB schemes, who are impacted by this, will bear the cost of increased employer’s national insurance contributions.
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The raison d’être that the Government give in the impact assessment is that they believe that the,
“loss of the rebate on its own should not, in general, trigger scheme closures: however, it should be recognised that the loss of the rebate”—
that is, the NI rebate—
“may be taken as a reason for some sponsors to close their DB scheme”.
I confess to articulating that view myself some years ago; it may well have been a factor in deciding what route one takes, and at what speed, to a flat-rate pension scheme. However, I am not persuaded by that argument any more. The compelling arguments that employers mobilise for closure of DB schemes are, first, that they simply do not want to bear the risks and the costs any more and, secondly, that they simply do not want to meet the impact of volatility and deficits in the funding of the scheme on their company balance sheets. Even with the continuation of the contracted-out rebate, we have seen private sector contracted-out DB active membership declining from nearly 6 million in 1980 to an expected 950,000 by 2016. I am therefore not sure that I accept the raison d’être. I am not going to pursue that point but I mention it because I think it is a vain hope that this override will address some of those issues.
The focus of my amendment is on strengthening the protections to be put in place to protect against the inappropriate exercising of this new employer power. It is a substantial power, and the protections and controls on exercising it are limited. I should perhaps have declared at the beginning, as is recorded in the register of interests, that I am a trustee of two large schemes, so obviously my thinking is partly influenced by anecdotal experience and sharing experience with other people.
My group of amendments would strengthen the protections for private sector scheme members in respect of two issues: first, the involvement of trustees through the consultation in the process when an employer exercises this power, so that it is explicit what the duty is on the employer in relation to consulting the trustee; and, secondly, being clearer as to the value of what it is the employer has the right to recoup from scheme members. That clearly has lots of ambiguity in it and it is not clear what exactly it is that this statutory override will allow the employer to recoup.
Taking first the involvement of the trustees, and I hope that Members of the Committee will indulge me a little if I go on, Amendment 39 would provide for
the employer’s use of this power to be subject to consultation with the trustees. I know that it is the Government’s intention to remove any requirement for agreement with the trustees—that is the driver of the amendment—but there is no explicit provision in the Bill for any consultation with the trustees. In Schedule 14 there is some limit on the employer’s power in Clause 2—for example, the employer cannot increase the amount of the annual employee contributions by more than the employer’s annual increase in national insurance contributions as a result of the abolition of contracting out. However, certain key definitions, such as exactly what amount the employer is entitled to recoup, are to be set out in regulations. Unless I have missed something and the Minister corrects me, I think that it is still proposed that they are going to be negative regulations. Even if they are positive regulations, my argument still stands.
The Delegated Powers and Regulatory Reform Committee has also expressed concerns about the strength of the protections afforded to members. It said that, in effect, there is a protection but its substance is unclear. We have not yet heard the Minister’s arguments on the Government’s Amendment 48 but, through that, we are seeing further elaboration on the employer’s power whereby, for example, if an increase in employee contributions would trigger an increase in the employer’s contribution, further amendments can be made to the scheme to prevent the employer’s contributions increasing. Similarly, if reducing future benefits would lead to a decrease in employees’ contributions, this power can be used to ensure that those contributions are not decreased. This expansion of the employer’s power introduces more complexity, particularly in a multi-employer shared cost scheme—for example, the railways pension scheme—which I suspect is part of the driver behind the Government’s amendment.
We are seeing what seems like a simple principle—that is, that employers should be able to recoup their lost NI rebate from their employees—resulting in ever-increasing complexity as employers, actuaries and pension lawyers start to identify the problems in implementing such a principle. In the face of such complexity, it should be absolutely and unequivocally clear in the Bill that trustees have the right to be consulted. Even if the Government do not want to concede to trustees that they have to concur with or agree to the change, it is nonsense not to make it explicit that there is a right of consultation. If the Government are concerned that consultation with trustees could delay the single tier implementation timetable of April 2016, they should set consultation time limits in regulations. That is not without precedent. Trustees can be held to time limits on consultation. The bringing forward of the implementation date is not of itself a reason for removing an explicit requirement to consult with the trustees.
A statutory override will be very difficult to operate in multi-employer schemes as there is more than one employer. They will have different views on if, when and how they want to exercise the override. Depending on how many employers and how many variations on a principle are exercised, the trustees could potentially be faced with a bedlam of a situation. Again, there is no explicit requirement in the Bill to consult on these
measures. Statutory overrides are not mechanisms to be used lightly. Later I may well argue the merits of statutory mechanisms regarding legacy schemes, and I do not want to walk into a trap, but they are not mechanisms to be used lightly in the area of pensions and they certainly should not be used without care.
I turn to the second issue that my amendments embrace, which is what employers have the right to recoup from scheme members. Schedule 14 leaves to regulation the definition of,
“the annual increase in an employer’s national insurance contributions in respect of the relevant members”
of a scheme, which is what the employer is being given the power to recoup. That will be a pretty important definition. Defining something, however, is not necessarily the same as establishing its value. What I want to establish very clearly is that the regulation will address how you determine the value of what the employer is entitled to recoup. My Amendments 45 and 46 would explicitly provide for the regulations to address the value of what the employers can seek to recoup.
Depending on the definition, private sector active members of defined benefit pension schemes could be contributing significantly for access to the single-tier state pension, given the 1.4% increase in their own employee’s NI on the relevant band of earnings and the cost of the employer’s 3.4% increase. If I have got the figures wrong I apologise but, on a quick arithmetical check, for someone earning £40,000 per annum that could amount to around £1,500 a year, with no tax relief on the employee element of the NI increase because, clearly, the treatment of private pension contributions is different from NI.
If an employer seeks a reduction in the value of future benefits, it is important to ensure that the reduction is not greater over time than the real net cost to the employer of the loss of the NI rebate. Depending on the approach that the employer takes, that is not an uncomplex issue to assess—what is the value of the reduction over time, as against what it is that the employer is seeking to recoup?
Is it, for example, the Government’s intention that what the employer can recoup is permanently crystallised in terms of the value of their lost NI rebate in 2016, or will it reflect that the band of earnings to which the rebate applied would have become narrower under the existing arrangements anyway? So, if you freeze its value in 2016 terms, it is arguable that you are giving the employer an advantage because the value of the rebate two, three or four years later may well have reduced as a result of what was happening to the earnings-related element under the current arrangements.
When it comes to the value of what an employer can recoup, myriad questions are prompted, but I will put just a few to the Minister. Is it the gross or the net value of the increase in the employer’s NI contributions? Where salary substitution is operating, and furthermore where an employer is taking a share of the employee’s NI savings, how will it work? What will happen in shared cost schemes if the employer reduces future benefits? How will the regulations work in schemes that are integrated with the state system where, for example, only pay above the level of the lower earnings limits counts as pensionable pay, resulting in significantly
different accrual rates, depending on salary level? Add a shared cost arrangement and you have the potential for real equality-proofing problems in how this principle is applied.
Schedule 14 provides for an actuary to certify that the employer’s proposed use of this power complies with the regulations. This is the Government’s way of dealing with any employers trying to overmilk the statutory power. However, actuaries often differ on their assumptions—and this is quite a big issue at the moment, particularly over actuarial valuations. Anyone who has been involved in them knows that things like assumptions on discount rates and on inflation rates can make significant differences when setting the value of something. Just giving the employer the right to select the actuary who countersigns, authorises or concurs that the employer’s amendment fits the regulation is not fair.
My Amendment 50 would provide for the actuary acting for the employer and the actuary acting for the trustees to agree, not on the employer’s proposed amendment itself—I am not seeking to do that; I am establishing a right of consultation—but for them to agree that the amendment met the regulatory requirement. Why should the actuaries of both employer and trustees not have to agree that the amendment meets the regulatory requirements that are set out as a consequence of this clause?
The Government are going to be under considerable pressure to release details of these regulations so that employers can start to prepare for 2016. Most of the consultation is with the employers, so it is really important that that level of protection where both actuaries have to concur that a change deduced under this statutory override meets the regulations should be in the Bill. There is an even greater defence for my argument. The majority of private sector active members contracted out of DB schemes are concentrated into the biggest schemes. Of the 1.6 million active members in schemes, 1.2 million are in schemes with more than 5,000 active members. This means that the total membership of the scheme will be much bigger because there are 5,000 active members. These regulations will be drafted under pressure from an influential group of employers so it is important that, if the Bill is to provide a statutory override, there should be a clear provision for consultation with the trustees. There should also be clarity as to the value of what it is that an employer can recoup, and for the scheme and the employer’s actuary to agree—not the amendment itself necessarily, but that the amendment or the proposed change meets the regulations.
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