Pensions Bill

Public Bill Committee, 24 January 2008.

Written Evidence to be reported to the House.

Nicholas Winterton (Conservative, Macclesfield)

First, I would like to say that the Minister for Pensions Reform, the hon. and learned Member for North Warwickshire (Mr. O'Brien) sadly cannot be here this morning, though I understand he intends to be here this afternoon, because of a family bereavement. I am sure all members of the Committee will join me in extending to him our sympathy for the loss that he and his family have sustained.

Clause 8

James Plaskitt (Labour, Warwick and Leamington)

I beg to move amendment No. 123, in clause 8, page 5, line 2, at end insert—

‘( ) for all workers to whom section [Workers without qualifying earnings] applies to be given information about the effect of that section in relation to them;’.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss the following amendments:

Government amendments No. 124 to 134

New clause 8—Workers without qualifying earnings

‘(1) This section applies to a worker—

(a) to whom paragraphs (a) and (b) of section 1(1) apply (working in Great Britain and aged between 16 and 75),

(b) to whom paragraph (c) of section 1(1) does not apply (qualifying earnings), and

(c) who is not an active member of a pension scheme that satisfies the requirements of this section.

(2) The worker may by notice require the employer to arrange for the worker to become an active member of a pension scheme that satisfies the requirements of this section.

(3) The Secretary of State may by regulations make provision—

(a) about the form and content of the notice;

(b) about the arrangements that the employer is required to make;

(c) for determining the date with effect from which the worker is (subject to compliance with any requirements of the scheme rules) to become an active member under the arrangements.

(4) Subsections (5) and (6) apply where a worker becomes an active member of a pension scheme in pursuance of a notice under this section and, within the period of 12 months beginning with the day on which that notice was given—

(a) ceases to be an active member of that scheme because of any action or omission by the worker, and

(b) gives the employer a further notice under this section.

(5) The further notice does not have effect to require the employer to arrange for the worker to become an active member of a pension scheme.

(6) But any arrangements the employer makes for the worker to become, within that period, an active member of a pension scheme that satisfies the requirements of this section must be made in accordance with regulations under this section.

(7) A pension scheme satisfies the requirements of this section if—

(a) it is an occupational pension scheme or a personal pension scheme,

(b) it is registered under Chapter 2 of Part 4 of the Finance Act 2004 (c. 12), and

(c) in the case of a personal pension scheme, there are, in relation to the worker concerned, direct payment arrangements (within the meaning of section 111A of the Pension Schemes Act 1993 (c. 48)) between the worker and the employer.’.

James Plaskitt (Labour, Warwick and Leamington)

Sir Nicholas, we appreciate the kind comments you made about my hon. and learned friend. I will do my best to substitute for him for these clauses.

This group of amendments to clause 8 seeks to insert a new clause and to make associated consequential amendments. The new clause facilitates voluntary pension saving, to workers without qualifying earnings, which means those earning below £5,035 for the 2006-07 earnings terms. We always intended that this group of workers would have a gateway of access to workplace saving and this clause provides that necessary access.

However, these workers’ circumstances are not the same as jobholders’ because they do not have qualifying earnings. Therefore, minimum employer contributions would not arise. Any employer contributions would be voluntary. It would be wrong to automatically enrol workers in this group in pension saving by offering them an employer contribution, as they are likely to have high replacement rates from state provision alone. Some workers in this group, however, may want to save and it may be in their interest to do so—for example if they have previously saved, but have decided for whatever reason to reduce the number of hours they work in the run-up to their retirement, or those combining part-time work with childcare.

In those cases, we want to facilitate easy access to pension savings if these people feel it is appropriate for them. While we would not compel employers to make pension contributions for this group of workers, many employers might volunteer to do so, and indeed some already do. Employers might already offer these workers access to the same schemes as they offer other jobholders, and we want to ensure that these workers have access to pension schemes. In these circumstances, this clause requires employers to enrol these workers into a pension scheme with the same core of requirements that apply to qualifying schemes for other jobholders.

That said, we remain mindful of the potential burdens on business, which is why we would not require employers to enrol a worker more frequently than once every 12 months. The new clause also provides that the process by which a worker becomes an active member of such a pension scheme will be established by regulation. Alongside the new clause are a number of consequential amendments, including amendments to clause 8, to ensure that requirements on the provision of information, deduction of contributions, and compliance apply equally to this group of people.

Andrew Selous (Conservative, South West Bedfordshire)

Thank you, Sir Nicholas. Let me welcome you back to the Chair and immediately express my hon. Friends’ sympathy and condolences to the Minister. His is a sad loss and I am sure the whole Committee would share these sentiments.

I am pleased to see this series of Government amendments to the Bill. They are a useful addition and we support enabling workers earning less than £5,035 with any one employer to contribute to personal accounts. I note that the Minister said that the employer will have the option to pay voluntary contributions and that some employers currently do that. In a competitive marketplace, employers may need to consider that in order to get the people they want to work for them. So the addition is absolutely excellent. Concern has been expressed that lower-paid workers would be losing out and this gives them at least the option to joint the personal accounts scheme. Let us hope that many of them will choose to do so and will then receive the full contribution from their employers to which they will be entitled as and when, hopefully, they go on to earn more than £5,035.

I would be grateful if the Minister addressed one question. The explanatory note to amendment No. 123 talks about the provision of information to workers without qualifying earnings. We are debating the area of information in advance of the Thoresen review and are therefore somewhat in the dark, but I presume that that information will need to be slightly different, given that the employer’s contribution will not be there as of right and that that may therefore affect the considerations of lower-paid employees as to whether they have personal accounts. Will part of the generic financial advice that jobholders receive relate specifically to workers earning less than the lower qualifying earnings limit?

Paul Rowen (Liberal Democrat, Rochdale)

I associate myself with the remarks made by you and others, Sir Nicholas, about the Minister’s bereavement.

I also welcome new clause 8 and the amendments that follow from it. It is important that all workers are given the option of entering into a pension savings scheme, and the clause and the amendments do that. That option is welcome in view of the discussion on Tuesday about workers who may have multiple jobs and do not exceed the £5,035 threshold on each individual job but for whom nevertheless there may be considerable advantages in being able to enrol. Like the hon. Member for South-West Bedfordshire I have questions about Government amendment No. 123 on the sort of information that will be made available and I hope that the Minister can clarify when it will be made available. The type of information will clearly be different and possibly much more complicated than that which would be available for someone earning above the threshold. There needs to be some sort of provision to ensure that a proper assessment can be provided for people in multiple employment because the obvious corollary to that could be that they might automatically not take advantage of the benefits of the scheme because the long-term benefits are not clear. I hope that that can be clarified.

I understand why the employer’s contribution is not mandatory, but I hope that once the scheme is in operation we will try to encourage as many employers as possible to make a contribution. In terms of good employment practice and encouraging people. If people want to reduce their hours because they are bringing up a family or have reached an age at which they want to scale down their working commitment, it would be good practice on the part of the employer to make a contribution. I hope the Minister will clarify his position on that, but I welcome the proposals that this new clause and the accompanying amendments deliver.

James Plaskitt (Labour, Warwick and Leamington)

I am grateful to the hon. Member for South-West Bedfordshire and the hon. Member for Rochdale for expressing their support for this Government amendment. There are 1.7 million people in the category we are thinking about, and this opportunity will be very important for many of them. Those people will want a scheme in place to take this up. It is right that this degree of extra flexibility be put into the provision.

Our questions relate to the information side of this. I do not want to anticipate the next group of amendments, which focus more specifically on the issue of information supplied. Suffice it to say that the Bill retains considerable flexibility about the provision of information to jobholders. I do not accept the hon. Member for Rochdale’s suggestion that the circumstances that will pertain to this group are necessarily much more complex. Employers will have a role in providing information to that group. At the very least, employers will need to provide information about the scheme in which they have enrolled the jobholder and the jobholder’s right to opt out.

However, the information to be supplied at this point is fairly basic, and I do not think we will depart substantially from the information that will be supplied to workers who are not in this particular category. After all, the emphasis, here, is on schemes that are simple, and sets of choices for individuals that are also simple. We will have the opportunity to go into this issue in more detail in the next section of the debate.

Paul Rowen (Liberal Democrat, Rochdale)

I beg to move amendment No. 83, in clause 8, page 5, line 7, leave out paragraph (c) and insert—

‘(c) that every jobholder shall be entitled to one-to-one generic advice either by phone or in person;

(d) that the advice shall be publicly funded; and

(e) that the advice shall be independent’.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss amendment

No. 85, in clause 8, page 5, line 7, at end add—

‘(3) The funding for information provided under subsection (1) must be equivalent in value to no less than 0.05% of all money saved through the personal accounts scheme.’.

Paul Rowen (Liberal Democrat, Rochdale)

As the Minister said, these amendments give us an opportunity to discuss issues regarding the types of information that should be made available. Amendment No. 83 stipulates three things. First, that every employee should be entitled to a one to one session with an adviser, by phone or in person, and we believe it is important that each person is able to choose whether their session is conducted by phone or in person. Secondly, we believe it is very important that this be publicly funded, and some of the evidence that has been presented supports that view. Thirdly, it should be independent. Amendment No. 85 sets some limits as to what that advice should cost. We have suggested that it should be no less than 0.05 per cent. of all the money saved through a personal account scheme. I will explain that later.

We all know that personal accounts are beneficial for the vast majority of people but, for a clear number of them, saving through a personal account may not be the right option. It is important for the individuals concerned to make an informed decision about whether they would be financially better off by saving through the personal accounts system, a decision which is all the more essential when we consider that people will be automatically enrolled unless they decide to opt out. Various factors need to be taken into account when deciding whether to opt out. There are obviously some clear principles, and we can develop some generic advice; nevertheless, there are going to be huge variations as to whether a particular person can benefit.

A large number of factors, which affect the suitability of personal accounts, need to be taken into account. For example, in the last sitting we discussed the age factor. We tabled a probing amendment, which the Minister dealt with, about whether 50 was an appropriate age. Clearly, there was an issue there, but there are others: current and projected earnings, for example; multiple jobs, and how those vary over time, which we have mentioned; time taken off work or planned time off; the possibility for additional overtime; the level of employer contributions available—particularly, as we have already said, for someone who is earning less than the threshold, where that contribution could make a big difference—and whether putting that into a personal account is worthwhile; the tax treatment; and the levels of other savings and of indebtedness that a particular person might have.

In my view, it is important that advice be given to people who may have debts from other activities that they have engaged in. Clearing that debt really ought to be a priority for them, before they start saving. A generic package, which does not allow for some sort of advice, does not allow that sort of discussion. We already know about the level of indebtedness that has risen alarmingly in the past few years; so, for many people, dealing with credit cards and paying off such high-interest debts ought to be a much greater priority than they are being given.

We believe that the scheme should be publicly funded. A range of stakeholders that have written to the Committee made that clear. The CBI, for example, said that employers must not be responsible for providing advice on savings. Advice is for the delivery authority and the Government to give. Which? Said that there is a need for advice both on the initial decision to opt out or not and on the ongoing decisions. The TUC said the same, so it is important that that advice be publicly funded. The mandatory employer contribution will already put a huge strain on employers. We believe that it is important to work with everyone to make the scheme work. It must be publicly funded.

The information that is provided must be independent. We know that, in the past, advice on second pensions may have been mis-advice. Later clauses in the Bill deal with this. It is very important for the integrity of the scheme that advice is clearly independent and is seen to be independent, so that employers can concentrate on the other issues they will have to deal with in setting up and broadening the scheme for a group of employees that, in the past, has not had access to a pension saving scheme.

We also believe, however, that the Government must be kept at arm’s length from this advice. While they may well have to fund it, they should not be involved in the details. The Government obviously have an incentive to play down potential problems, such as mass means-testing, in order to boost the numbers. An amendment that my hon. Friend the Member for Inverness, Nairn, Badenoch and Strathspey moved on Tuesday requested some sort of assessment of how contributions affect people’s benefits and whether there is a cut-off point beyond which it would clearly not be beneficial for certain individuals to enter the scheme. We need to ensure, therefore, that members of the public have easy access to information when deciding whether to opt out—or opt in, if they do not automatically meet the threshold—and at stages throughout their working lives, because circumstances do change.

Amendment No. 85 deals with funding. According to the Government’s impact assessment, the average annual contributions to personal accounts by employees, employers and the Government will be around £15 billion a year, and 0.05 per cent. of that is £7.5 million. To put that in perspective, the citizens advice bureau’s budget last year was £43 million. It has 27,000 people working for it at the moment, but 20,000 of them are volunteers. When the Government set up the financial inclusion fund, they gave the CAB an additional £10 million, enabling it to employ nearly 400 specialised debt advisers. Clearly, £7.5 million is not a huge sum. It will not deliver hours of advice for workers, but it is clearly important that we set a minimum level of advice.

If we are talking about personal accounts leading to another 6 million to 9 million people saving in a workplace pension scheme for the first time, that is only about £1 spent on advice for each new saver. I accept that is a ballpark figure. Circumstances will change; some people will not need the advice provided; they may well have their own arrangements in place. Others—and sadly there are a large number of people whose earnings fluctuate and whose employment patterns are not regular—will need to make more use of that advice.

Given present levels of personal indebtedness, it is very important that the option be there. It is not just a straightforward question about what someone will save over a period of time. For many people there are other priorities concerning their own level of personal indebtedness. We believe that this independent advice, which allows for a face-to-face meeting, will be much better and will enable a discussion to take place. It is very important for the success of this scheme that that source of independent advice is provided and I hope the Minister sees fit to accept the points we are making in our amendments.

Andrew Selous (Conservative, South West Bedfordshire)

I am sure that all members of the Committee share the wish of the hon. Member for Rochdale that we get this whole aspect of information right. He is right that this is a crucial area in terms of getting personal accounts off to a good start. I noticed during his speech that, like many of us, he used the words “information” and “advice” almost interchangeably. He was not alone in that. I have been looking back at the evidence from our session on 17 January, when the Minister for Pensions Reform, the hon. and learned Member for North Warwickshire, spoke about the important distinction between information and advice. He went on to say:

“although it is not always easy to make it in practice.”—[Official Report, Pensions Public Bill Committee, 17 January 2008; c. 117.]

So here we have a Government Minister recognising the difficulty of this aspect.

I note that Otto Thoresen himself has described generic advice as—to quote a briefing from Age Concern—

“providing information and guidance to people, better equipping them with the tools to make informed decisions.”

I would be interested to hear what the Minister has to say about the distinction between information and advice.

Paul Rowen (Liberal Democrat, Rochdale)

Does the hon. Gentleman accept that, in the context of what I was trying to do, where I was talking about people who might have credit card debts or other indebtedness, for them it is not just a simple question of what they can save. Some sort of advice has got to be given. They would still make the decision, but they would have to balance priorities. They need to have the point made to them that it might be best to sort their debts out first before starting to save.

Andrew Selous (Conservative, South West Bedfordshire)

I completely agree with the hon. Gentleman, and I intend to mention some categories of people who would generally not be well advised to take out personal accounts. But I do think it is important that we define any legal difference between information and advice, given that we are just now coming out of the whole mess of the 140,000 people who have had to go to court in this country and in Europe to sort out what happened to their pension savings, given that they believed they were relying on assurances in Government leaflets.

So there is a question of liability. None of us wants to be in a position in years to come where we will have to set up another type of financial assistance scheme to deal with people who have set up personal accounts when they should not have done so. The hon. Member for Rochdale is right that there are some people who should be paying off debts, particularly if they are debts on which they are paying extortionate rates of interest. This is unfortunately the situation that many people find themselves in, whether through credit card debt or debt from various finance houses or other dodgy organisations that seem to advertise continuously on daytime television—particularly offers to take all people’s debts and put them in one place.

I have had a stream of constituents in unbelievable financial difficulties because they thought they could consolidate all their debts in one place and it would make it easier. They were paying unbelievably high rates of interest—literally more than 100 per cent. in some cases. The hon. Gentleman for Rochdale is right that those people should be advised above all else to get rid of that debt before they take up a personal accounts scheme.

Age Concern, in its briefing to the Committee, also went on to say:

“For example a personal account is unlikely to be suitable for a single person who is a tenant, is approaching 65, and has never paid into a private pension.”

There will be various categories of people for whom personal accounts are not the right way to proceed with their finances.

There are concerns that simple generic advice will not satisfactorily apply to millions of auto-enrolled employees. It is interesting that financial advice that is given at the moment to people who are taking up pension schemes has to take account of every aspect of a person’s financial affairs, including, crucially, any possible future entitlement that they might have to means-tested benefits. I would be grateful if the Minister gave some indication of the likely shape of the advice. I am particularly interested in whether it will be themed into addressing different groups of workers, perhaps in relation to different income scales or different sets of circumstances. Will it have worked examples, showing that most people will be better off but that people in some categories should think seriously about whether it makes sense for them? Will there perhaps be a flowchart to take people easily through the advice?

Many people are put off by reams and reams of text in long paragraphs and are not able to work their way easily through it. The advice has to be easy to understand, clear and simple. One of the reasons that many people are not involved with pensions in the first place is because they are incredibly complicated. The need for simplicity has been a hallmark of the debate so far. Although we are debating the issue in advance of the Thoresen review, it is important that we try to tease out from the Minister as much Government thinking on the subject as we can. I look forward to, and would be grateful for, what the Minister has to say.

James Plaskitt (Labour, Warwick and Leamington)

I appreciate the contributions of the hon. Members for Rochdale and for South-West Bedfordshire. Before I turn in general to the amendment let me respond to some of the points that have come up.

As the hon. Member for South-West Bedfordshire rightly pointed out, the hon. Member for Rochdale slid imperceptibly between information and advice in moving the amendment. It is a minefield as we know, and it is important to establish with as much clarity as possible the distinctions between the two. Not only did he slide rather too easily from one to the other, he also widened the area of consideration on information and advice beyond pension decisions and spread it right out into the issues of personal finances in general, people dealing with their debts and other financial decisions. It is asking too much of the information system that will accompany the introduction of personal accounts to expect it also to be the means by which comprehensive financial advice is given. Not that that is not required—it is—and not that it does not exist; it does already exist in other areas, and I would not want to try to replicate within this field of information the things that he rightly sees as being necessary.

The hon. Member for Rochdale rightly said that some people are struggling with debt. The hon. Member for South-West Bedfordshire said the same. We know that, but the appropriate way to deal with it is through programmes such as the financial inclusion projects that the Government have under way, part of which is state funding; for which the hon. Member for Rochdale was calling. The placement of independent financial advisers in citizens advice bureaux is precisely the sort of help that his constituents need, so the Government are putting resources into that provision. That is a more appropriate place to be locating general financial advice, as opposed to the specific area of pensions.

Another thing to do, which also picks up a point of the hon. Member for South-West Bedfordshire, is to address the issue of unaffordable credit. The way to address that problem is through the funding now going into expanding the provision of affordable credit. Growth fund investments are being made in almost all parts of the country; by expanding credit unions, for example, we are putting in place affordable credit to replace the 100 per cent. interest—and, worse, 1,000 per cent.—deals that some people are suffering from.

Andrew Selous (Conservative, South West Bedfordshire)

I take the Minister’s point that we cannot expect generic financial advice for people on the entire multiplicity of financial issues that they will face in their lives. However, the hon. Member for Rochdale has a point. People will not decide in a vacuum whether to go into personal accounts. Would the Minister envisage—without committing him in any way—that it might be appropriate for the advice to say something like, “If you have high debts, you may wish to consider this issue before proceeding with personal accounts”? That would not be too specific, but would flag up an area as one where the person concerned should perhaps speak to the citizens advice bureau or some other person who can give competent advice.

James Plaskitt (Labour, Warwick and Leamington)

I understand why he wants to press me, but he will anticipate what I am going to say. Otto Thoresen is looking at those questions. It is sensible to await his recommendations. The hon. Gentleman has seen interim reports, and clearly the Thoresen review will address such issues. We ought to see what recommendations come out and then work with the delivery authority—the Personal Accounts Delivery Authority—to build the appropriate mechanisms and ensure that they are in place before personal accounts are launched and before auto-enrolment starts. We must ensure that the right bits of information are given, the right advice is available and the right pointers are there for people to find the required advice. We also have to bear in mind, as we have said repeatedly, the burden on employers. We have covered that already.

During the hon. Member for Rochdale’s contribution, he asked me what information is to be provided. To help him, I will explain what constitutes information in that respect and what information we would expect to see included at the point of auto-enrolment. Information included would be, for example: the conditions of eligibility; the relevant joining processes; how contributions, tax relief and benefits are calculated; the arrangements for making additional contributions; survivor benefits under the scheme; transfer rights; periods of notice to terminate membership; what benefits are payable under the scheme; annual illustrations of benefits at retirement; and procedures for disputes. Those are clearly matters of information; they certainly do not stray into the area of advice. Those are simple points of information, which people will need to understand the implications of the schemes that they have been enrolled into.

Paul Rowen (Liberal Democrat, Rochdale)

I was clear about the need for advice and not just information. Notwithstanding the Thoresen review, does the Minister not accept that people do not make decisions in a vacuum? Part of the problem in the past with pensions was that all the benefits were explained up front and no information was given about how they affect individuals. For many people at the lower end of the scale, some of whom I deal with as constituents, that is often the problem. There is a multiplicity of agencies and whatnot providing benefits advice, and I believe that can complement what the Government are doing through their financial inclusion scheme. I want to see them dovetail together. If they do not, we will have a separate institution providing advice which will not fit in with that provided by the CAB. That is why we say it should be publicly funded. I want to see that sort of joined-up thinking to ensure people get that sort of advice. It is advice that is needed, in my view, and not just information.

James Plaskitt (Labour, Warwick and Leamington)

I understand exactly where the hon. Gentleman is coming from. However, I do not think it appropriate to place all these duties on the information given about personal accounts. That would overburden it. One of the reasons we have in the past seen undersaving towards pensions, which is what we are trying to address, is that there has been an element of fear, driven by complexity and by some accidents in recent history that have coloured perceptions.

The point of this reform is not only to engage people with it via auto-enrolment, but to put in place schemes that are simple, to try to remove this legacy of fear about pensions. It is therefore important to keep the schemes simple, and not to attach to the process of being automatically enrolled a whole bundle of information and—as the hon. Gentleman would have it—advice, which can appear complex and difficult to understand. That might regenerate exactly the sort of fear that has led to people not taking up pensions, especially in the income bracket we are looking at. The hon. Gentleman needs to consider these things in balance. I will turn now to some of the more substantive points that have come up, and deal with the other points he has made about funding these arrangements.

Clause 8 recognises that individuals will need access to relevant and accurate information when they are automatically enrolled, as in any other circumstances when they are making decisions about their retirement. It requires us to specify in regulations the information that must be given to jobholders about the employer’s duty and how it will affect them. I have given some indication as to what that might be. In particular, it requires that prescribed information be provided about automatic enrolment, the benefits under the scheme and the right to opt out. Some of this information will come from schemes and be borne by scheme membership charges.

We do not believe that people will need one-to-one guidance as the hon. Gentleman suggests. As a result of the employer contribution most people will benefit from auto-enrolment and therefore enjoy a better income in retirement. We already produce information on retirement planning alongside a number of other organisations—such as the CAB, the Pensions Advisory Service and the Financial Services Authority—which provide a professional and trusted service. As I have indicated, the Thoresen review and the Government's action plan on financial capability will add to the services on offer. We will work with these and other organisations to ensure that a coherent and consistent range of good-quality information and help is available to those who are making decisions about their retirement.

Let me now turn specifically to amendment No. 83. The hon. Gentleman suggested that all those auto-enrolled should be entitled to publicly-funded, independent, one-to-one generic advice. Of course, some individuals may wish to seek guidance. That is the case in any financial decision. And that is why we have asked Otto Thoresen to consider how a national generic financial advice service should be provided to answer queries across the whole range of personal finance issues. However, we do not agree that one-to-one advice will be needed on this particular issue by most people. There is no legal requirement at present for individuals to receive one-to-one advice before they join a workplace pension scheme.

There is no legal requirement at present for individuals to receive one-to-one advice before they join a workplace pension scheme. Furthermore, given that the aim of our reform is to increase pension saving, I have strong reservations about building a heavyweight process around automatic enrolment, which might only serve to send the wrong message to people and encourage them to opt out without good reason.

Giving people legal entitlement to one-to-one advice will suggest that we, the Government, consider that such advice is needed. That in turn will give the impression that automatic enrolment is something risky and complex. That is precisely not the impression we want to give. We all agree that, for most people, automatic enrolment is a beneficial opportunity that ought to be welcomed. We need to avoid at all costs encouraging people who would benefit from it to opt out.

We plan to work with all the existing services, and with those like Thoresen, who are developing further provisions in this area, so that all the information that people need will be available and easily accessible. Inserting rigid—and inappropriate—requirements into primary legislation is not the way to deal with the issue. I have concerns also about his suggestion to write 0.05 per cent. into the Bill as a means to achieve the public funding that he wants. I heard his explanation of where he obtained this figure, but even after he told us where it came from, he was quickly thereafter talking about “ballparks”, which suggests that there is not anything terribly scientific about it. Yet he wants to write it on the face of the Bill. I do not think it would be appropriate to put into statute a figure that has a little bit of a “wet finger in the air” sense about it. It could risk putting into statute obligations to raise money from these sources which might not be necessary and could therefore be wasted.

In addition, this amendment would leak the costs of providing information on the overall reforms to the funds in just one qualifying scheme. It is difficult to see how that could be appropriate. However, I can assure the Committee that we take the issue of the provision of information very seriously. We see the information strategy as an absolutely central plank of these reforms.

Andrew Selous (Conservative, South West Bedfordshire)

I would be grateful if, before we conclude our debate on clause 8, the Minister said something about two areas. The first is liability: will people be able to sue if they think they have done the wrong thing through being auto-enrolled on the basis of this advice? We do not want a repeat of the financial assistance scheme difficulties. Secondly, what about the position of those large employers who would be happy to give some information in this area? Are they going to be prevented from doing so? I fully accept that most employers would want to be a mile away from having to give any advice in this area, but some of the bigger employers might actually want to. What is his position about that?

James Plaskitt (Labour, Warwick and Leamington)

On the issue of liability, there is quite a clear distinction here. That is going to arise when the product is sold. Clearly, we are not talking about that in terms of automatically enrolling people. I do not believe that issue arises. As for the point about larger employers wanting to give information, a lot of information is already given. We are not trying to proscribe or limit the information employers might want to offer. What is important is that when the schemes are ready to be introduced—from 2012—we will have established clearly what information needs to be given to employees who are automatically enrolled. I read out the types of information that will be included and that information needs to be standard across the piece. I am sure that if employers want to add additional information they will not be restricted in doing so. The general atmosphere around the provision of information and advice will be clarified once we respond to the Thoresen review.

Andrew Selous (Conservative, South West Bedfordshire)

The Minister said that liability arises when a product is sold. Where those 140,000 people were automatically joined into occupational pension schemes that then collapsed the Government found themselves in court and lost twice, in the High Court in this country and in the European Court. It is not absolutely clear to me how we will ensure that that does not happen again as a result of the Bill.

James Plaskitt (Labour, Warwick and Leamington)

I have done my best to make it clear. I think that there is a distinction; we are not talking about the same thing. Automatic enrolment into pension schemes that must meet the minimum specification laid down as a result of the legislation is a substantively different process to that to which the hon. Gentleman refers. I hope that I have been able to deal with—no, I have not, I will give way once more.

Paul Rowen (Liberal Democrat, Rochdale)

I have listened carefully to the exchange that has just taken place. The Minister has not addressed the issue of independence and some of his remarks have concerned me a little. “Independent” in our amendment specifically refers to advice and I, like the hon. Member for South-West Bedfordshire, get a little concerned when it does not seem that there will be a clear distinction regarding types of advice, that we will not have the word “independent”. Maybe the advice will be generic and clear and perhaps that will be addressed once Thoresen reports. If employers can give additional advice there is a risk of repeating the problems of the past with regard to second pension schemes and we do not want that to happen.

James Plaskitt (Labour, Warwick and Leamington)

We have already established, and I have tried to make it clear, that an employer giving advice would probably do so through an independent financial adviser, who would assume liability. Most employers do not give advice; they give information. No Government can safeguard against liabilities and that is why it is important that we get the information right, that we do not rush into making decisions about it, and that we take on board the report that we are awaiting from Thoresen. I hope that I have now managed to deal with the points. The debate has been useful and I hope that in the light of what we have said the hon. Member will feel able to withdraw his amendment.

Nicholas Winterton (Conservative, Macclesfield)

Before I call the hon. Member for Rochdale I have to remind the Committee that I am obliged to adjourn in two minutes’ time, at 10.25 am.

Paul Rowen (Liberal Democrat, Rochdale)

I will not detain the Committee. I appreciate what the Minister said and I am happy to withdraw the amendment. It was important to have the debate and express some of our concerns. We will return to the issue once Thoresen reports and will perhaps have further debates on Report. I beg to ask leave to withdraw the amendment.

Nicholas Winterton (Conservative, Macclesfield)

We are a bare quorum, but we are a quorum. May I advise the Government Whip that I have to be able to see seven members of the Committee?

Depending on how long the Committee wishes to deliberate, I will probably seek a short suspension after three hours, which I think would be relatively sensible. I am not sure how we might be interrupted by Divisions in the House. We will have to take that as things arise.

Clause 9

Andrew Selous (Conservative, South West Bedfordshire)

I beg to move amendment No. 136, in clause 9, page 5, line 10, after ‘Regulator’, insert ‘or HM Revenue and Customs’.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss amendment No. 88, in clause 14, page 7, line 10, at end add—

‘(3) Every employer must register their qualifying pension scheme with the regulator.’.

Andrew Selous (Conservative, South West Bedfordshire)

Amendment No. 136 was tabled in the same spirit that informed some of our earlier debates around pay-as-you-earn: trying to simplify things for employers, and making the administration of personal accounts as small a burden as possible for employers.

I fully accept that the pensions regulator will need access to information about personal account schemes that are set up by employers up and down the country. The purpose of this amendment is to determine whether there is a less burdensome way for employers to get that information to the pensions regulator. The assumption underlying the amendment is that there is, or could be, an information gateway between Her Majesty’s Customs and Revenue and the regulator. Can the Minister confirm that?

The Minister for Pensions Reform (Mr. Mike O'Brien) indicated assent.

Andrew Selous (Conservative, South West Bedfordshire)

The Minister is helpfully nodding at me, so I will assume that that is the case or that it could easily be the case, although I do not wish to pre-empt anything that he might say when he replies.

Putting that to one side for a moment, the Minister may well be aware that Sir David Varney conducted a review into integrated government in late 2006. The proposal that information could be routed through HMRC to the pensions regulator was exactly the type of recommendation that he had in mind when he wrote that report. The amendment would make life a lot easier.

We should not lose sight of the extra regulatory burden, in terms of both cost and time, that will be put on employers, especially smaller ones. We all agree that this is something that should be done and that the cost is worth while for the result that we all hope to see: many millions more people with a decent pension income in retirement. It is important, however, that we do not inflict any unnecessary burdens on the economy, which is set for a slightly more problematic year.

That is the purpose behind this amendment, which arises from a recommendation made by the Institute of Chartered Accountants in England and Wales. The institute’s members audit employers up and down the country and are very familiar with processes of transferring information. They are also well aware of the needs of employers and businesses. I hope that what I am proposing—even if not in the exact form of words used in amendment No. 136—will find favour with the Minister.

Paul Rowen (Liberal Democrat, Rochdale)

I support the comments made by the hon. Member for South-West Bedfordshire about the inclusion of HMRC. We all want to ensure that information is collected and made available as simply and straightforwardly as possible without being a burden to employers, especially small employers.

I want to speak primarily to amendment No. 88, which has been suggested by the TUC. I hope that it will find favour with the Government. It would ensure that all pension schemes were properly registered with the pensions regulator. Although the vast majority of employers will run excellent schemes that benefit their employees, it is a sad fact—as we have seen in relation to people with second pensions—that there has been some mis-selling and people have lost out. A very tiny proportion of employers might seek to have a scheme that does not meet the best objectives of the Bill. All we are asking is that each scheme is properly registered with the regulator.

There will obviously have to be a change to the way in which the regulator operates. I know there has been some discussion about whether the regulator or HMRC should have that role. The Government have taken the view that it should be the pensions regulator, and that body will need beefing up and to change. The amendment just seeks to ensure that registration is one of the first things to happen to a scheme. Therefore, the compliance mechanism that the pensions regulator will introduce would ensure that all employers, not just the best ones, would meet the standards that we expect.

Mike O'Brien (Labour, North Warwickshire)

May I confirm to the hon. Member for South-West Bedfordshire that I have the agreement of HMRC and its Ministers to share the required information, particularly on the numbers of people who are employers? To carry out the exercise, we will need to know who are employers and who has a pension scheme. As a result, we will know who has not registered as having a pension scheme and whether they are an employer who has not registered. That is a crucial piece of information.

This will work by the employer registering with the regulator on the internet to say that they have a pension scheme and what it is. That should be a fairly straightforward way of giving the information. They will not need to register with HMRC, just with the regulator. Most of them will be able to do it on the internet, but if they do not have that facility, other facilities will be available. They will be able to ensure that the information is provided. HMRC will be able to say who is registered as an employer and we can then compare the data. That sort of information exchange can be carried out fairly straightforwardly.

I very much appreciated the straightforward way in which the hon. Gentleman spoke to amendment No. 136. The amendment would make HMRC responsible for collecting the information from employers, while the responsibility for delivering the rest of the compliance regime would rest with the pensions regulator. Involving two bodies in the compliance regime would result in not reduced costs, but increased costs and additional IT system requirements, because the two organisations would need to be equipped to work with employers on different aspects of the compliance regime. It could also result in an increased burden for employers, who might have to deal with both HMRC and the pensions regulator in relation to the new duties. We would rather keep the obligation on employers to deal with HMRC as they have always done, while dealing with the pensions regulator in relation to the new duties. Employers would know that on pensions they were to deal with the pensions regulator. That is fairly straightforward.

In practice, most employers running pension schemes should have to do very little other than to inform the regulator that they have a self-certified pension scheme. That would be one that takes them outside the requirement for registration for personal accounts, or one involving an alternative kind of pension scheme. The system should be fairly straightforward for the employer.

I understand that amendment No. 88 has been sponsored by the TUC. While we all have a great deal of respect for the TUC, I think that here it is just clarifying the requirement that every employer must register their qualifying pension scheme with the regulator. We intend that in any event, but we would rather achieve it through regulations, and have the obligations set out for employers in regulations. That would be the better way of dealing with this.

Given the reassurance that we intend to have a fairly easy way for employers to register their pension scheme with the regulator, I hope that that the hon. Member for South-West Bedfordshire will withdraw the amendment.

Andrew Selous (Conservative, South West Bedfordshire)

I am reassured by what the Minister says, and I do not intend to press amendment No. 136 to a Division.

It was never our intention that there should be two bodies with which employers had to deal in respect of personal accounts. The Minister has given the Committee an assurance on the sharing of information between the two bodies, and I am satisfied that that will reduce the burden on employers. I beg to ask to ask leave to withdraw the amendment.

Andrew Selous (Conservative, South West Bedfordshire)

As we are dealing with clause 9, I think that it would be apposite to ask the Minister to say a little about the provision of resources for the pensions regulator. Obviously, the body will have to deal with a vastly increased number of pension schemes and will be responsible for a very different landscape. How will the pensions regulator be geared up to deal with that, and how will it be financed and resourced?

Mike O'Brien (Labour, North Warwickshire)

We took the view that the pensions regulator—TPR—was the best organisation to carry out this work. It has a very good reputation with the pensions industry and is broadly supported. However, it does a different job from the one that we are now asking it to do, so the hon. Gentleman is right to press me on how it will carry out its duties.

We are in discussions with TPR about the new budget that it will require. It has been allocated the role relatively recently, and it is scoping what it will need. The way in which it will develop its procedures will be, to some extent, dependent on the outcome of the Bill. Assuming it passes broadly intact, the regulator will be in a position to look at what extra facilities and staff it needs. Then, during the course of this year and probably into next year, we will be doing detailed work on its budget. The straight answer is that some of this is still to be decided.

We are, however, very conscious that we are asking TPR to carry out a different role. It has an excellent reputation for what it currently does, and we expect that to carry over to the new work. The role will not be highly burdensome. It is not anticipated that TPR will interfere with the work of employers or cause lots of regulatory problems for them. There will be a simple model whereby TPR will deal with specific complaints and cases in which it is clear that someone is registered as an employer with HMRC, but not with TPR. TPR will then aim to find out whether that was an oversight by the employer, who will be asked to register. No penalty for late registration is envisaged. If the employer still failed to register, they would be given reminders, and then some of the penalties would be brought into effect.

In terms of the organisation of TPR, we will need a basic structure to get the information and an administrative structure to ensure that contact with employers can be established in cases in which people are not registered as having a scheme. We also need to be able to take action, if that should become necessary. I am sorry that I cannot give much more detail, but the hon. Gentleman will understand that we are still in the business of trying to establish the scope of the work that TPR will do.

Paul Rowen (Liberal Democrat, Rochdale)

I am grateful for the Minister’s comments. It is important that the Bill goes through, and then we can work towards setting up the system. He spoke about problems with non-compliance, and clearly the regulator has a very different role now from the one that it will have. We might be dealing with a whole battery of different types of employers who have not previously had contact with the pensions regulator. Has he considered what additional powers the regulator might need to carry out that particular function?

Mike O'Brien (Labour, North Warwickshire)

TPR will need new powers, some of which are flagged up in the Bill. The detail of the administrative steps that TPR will be able to take to deal with recalcitrant employers will be developed, in regulations, in due course. We will have opportunities later in our proceedings to consider some of the issues.

The aim is to ensure that TPR is satisfied that it will have sufficient powers to carry out its duties and to deal with recalcitrant employers who simply refuse to register or to provide a pension scheme. It should have access to the appropriate penalties, or be able to bring into effect procedures that will result in those penalties. Hopefully, employers will see that there is a fairly straightforward system under which we know who the employers are and who is registered, and we then identify those who have failed to register, tell them that they need to do so, and, if they do not, draw up sanctions to deal with that. The regime is fairly straightforward but, as the hon. Gentleman says, we will need to put in place the capacity for the administrative steps and penalties that will be necessary for those who fail to comply.

Nicholas Winterton (Conservative, Macclesfield)

Before we move on, may bring some reassurance and relief to the Government Whip? I have inquired about the size of quorums. Although seven is appropriate for a full-sized Public Bill Committee, the quorum can also be a third of the members of a Committee. I have done my arithmetic again and, for this Committee, I must be able to see six Members. I think that I have been able to afford some consolation and relief to the Government Whip.

Clause 10

Mike O'Brien (Labour, North Warwickshire)

I beg to move Government amendment No. 138, in clause 10, page 5, line 28, leave out subsection (2).

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss the following: Government new clause 12—Transitional periods for money purchase and personal pension schemes .

Government new clause 13—Transitional period for defined benefits and hybrid schemes.

Mike O'Brien (Labour, North Warwickshire)

Clause 10(2) has been drafted to give effect to the Government’s policy of enabling employers to phase in the requirements of employers’ duties so that they can better manage the additional costs that the reforms will bring. Consultation with small employers demonstrated that there was keen support for the phasing of the requirements. In particular, the Federation of Small Businesses—I note that its member is in his place in Committee Room—responded positively by saying that it welcomed the phasing in of the contribution.

However, the clause as drafted did not give employers certainty about the phasing arrangements that they would need so that they could start planning how they would discharge their duties. We have thus tabled one amendment and two new clauses to give employers a greater degree of certainty about the phasing arrangements for their qualifying schemes.

Amendment No. 138 proposes removing the broad power that would allow the Secretary of State to set out regulations on how employers’ duties would be phased in over a transitional period. The amendment will facilitate the introduction of the two new clauses, which set out the phasing arrangements for employers operating qualifying schemes.

New clause 12 will improve on clause 10(2) by giving employers that operate qualifying money purchase schemes the certainty that they need to plan how to manage any additional costs associated with their new duties. The phasing arrangements, which have been welcomed by employers’ representatives, involve a three-stage increase in the minimum contributions required of money purchase schemes. Essentially, with a direct contribution or money purchase scheme, the system is phased in over three years, with a percentage increase in each year. New clause 12 establishes that contributions in the first phase must be at least 2 per cent. of qualifying earnings, with at least 1 per cent. coming from employers. That will rise to 5 per cent. in the second phase, of which the employer must pay at least 2 per cent. Finally, the contributions will reach their permanent level of 8 per cent., including a 3 per cent. contribution by the employer. This will mean that employers will be able to meet the additional contribution costs in a series of steps—they will be given time to phase in the change.

New clause 13 sets out our intention to allow employers using the other main kinds of pension scheme—defined benefit and hybrid schemes—to be able to adjust gradually to the costs of the reforms. Existing legislation requires that defined benefit and hybrid schemes maintain appropriate funding for their liabilities. So, in effect, the scheme in new clause 12 of phasing in the amounts that employers would have to pay would not be able to work because the obligation on employers would be to maintain the appropriate funding level for their liabilities. However, employers must not reduce the contributions that they are committed to pay. Any provision that allowed employers to phase in contributions would interfere with the existing rules of the schemes and open up risks of under-funding. As such, it is not possible for employers with defined benefit or hybrid schemes to pay reduced contributions in the same way as new clause 12 will allow employers using money purchase schemes to do.

For those reasons, new clause 13 sets out an alternative approach. Employers offering final salary or hybrid schemes will be permitted to delay automatic enrolment into such a scheme for those jobholders who are eligible to join, but have not yet chosen to do so. They must automatically enrol those jobholders by the end of the transitional phasing scheme. Those who are currently in employment and have chosen, despite this being available to them, not to join a defined benefit or hybrid scheme would thus not have to be enrolled until the end of the transitional period. They would have already made their judgment: they could have joined, but decided not to. However, all other jobholders—new workers and those who were previously ineligible to join the defined benefit or hybrid scheme—must be automatically enrolled in the usual way at the start of the phasing period. There will therefore be a three-year phasing period before which an employer would have to sign up existing employees who had decided not to join the pension scheme.

I hope the Committee will feel that, particularly with regard to defined benefit and hybrid schemes, we have sought to give some flexibility. It is not possible to do the same for the employers in relation to DB schemes as it is in relation to DC schemes, but we have tried to provide some degree of flexibility to allow a certain degree of phasing in. We are also conscious that, as part of the process of automatically enrolling employees, we want all new workers enrolled and to ensure that those who were previously ineligible to join a pension scheme were able to join one. I hope that hon. Members will be able to agree to both amendment No. 138 and new clauses 12 and 13.

Andrew Selous (Conservative, South West Bedfordshire)

The Government amendment and new clauses are certainly sensible. We all agree about where we want to get to, but the Minister is right that getting there in one go might be too difficult for some employers.

In business, one cannot just lift prices significantly in one go. Sometimes these things must be done over time. We all expect employers to put in the money and to cope with this, but we must be sensitive to the competitive business environment in which they are operating, both in the UK and internationally. I am happy that the pleas of the Federation of Small Businesses have been listened to in that regard. These objectives are sensible, and we are happy to have them in the Bill.

Clause 11

Andrew Selous (Conservative, South West Bedfordshire)

I beg to move amendment No. 17, in clause 11, page 6, line 4, leave out ‘wages, commission, bonuses and overtime’ and insert ‘and wages’.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss the following: Amendment No. 18, in clause 11, page 6, line 11, leave out paragraph (f).

Amendment No. 19, in clause 11, page 6, line 11, at end add—

‘(4) For the purposes of scheme contributions by and on behalf of members of a qualifying scheme other than that established by Chapter 4 of this Act, subsections 11(1) to (3) may be disregarded if contributions are calculated and made in relation to the individual’s basic earnings.’.

Andrew Selous (Conservative, South West Bedfordshire)

Clause 11 is very important, and sets out the band in which wages will be subject to the personal account scheme. At the moment, the vast majority of pension schemes use total basic earnings when they calculate contributions. This is not true in all cases, but certainly in the vast majority of cases. In my former life, my pension was calculated on my basic salary, rather than on any additional payments that I was fortunate enough to be paid from time to time.

I understand the concern, raised by the TUC and others, that there may be some employers—unscrupulous or otherwise—who will seek to avoid paying the correct amount into personal accounts by transferring what would ordinarily be paid as salary into commission, bonuses and overtime. I am aware of that, and I would be sympathetic to anything the Government could do to stop employers doing so, in a way tantamount to deliberate manipulation of normal commercial practice, with the aim of not paying the appropriate contributions into personal accounts. Does the Minister know of any evidence of that sort of avoidance happening now? Are employers paying remunerations that would ordinarily be part of salary or wages as commission bonuses or overtime?

How does the Government currently treat bonuses paid to civil servants and other public sector workers? The whole area of bonuses in the public sector is somewhat new to me, but one reads from time to time of significant bonuses paid to civil servants—not always civil servants who have done an amazing job. There are one or two examples of people being given bonuses when that, perhaps, was not justified, but I am sure that in the vast majority of cases it is richly justified. What happens in relation to public sector pension schemes where this is current practice?

There is a worry that clause 11, as drafted, may lead to some form of levelling down, for the following reason. The administrators of current pension schemes generally supply the information on the schemes’ members in relation to the basic salary that those individual employees receive. As I read clause 11, it looks like there is going to be an onus on the administrators of current pension schemes to get in touch with employers and find out the exact amount of commission, bonuses and overtime paid to each employee. Administrators of current pension schemes will not ordinarily have that information.

The requirements of clause 11 will place significant additional burdens on employers who have to provide the information, information that is likely to change from month to month because employees and employers cannot say in advance exactly how much overtime will be worked. Pension scheme providers do not hold that level of detail on earnings and so the employer will need to perform the check. If that results in employers getting bogged down in the monthly bureaucracy of having to provide a pension administrator with that level of detail on the overtime of every employee, which they currently do not have to do, some employers might decide that it causes too much difficulty and will perhaps level down from their current scheme.

A further complication is that administrators of current pension schemes need to know whether their scheme meets the quality requirements in clauses 18 to 24, which we will debate shortly. How will they be able to tell whether their scheme meets those quality requirements if they do not have to hand that level of detail on overtime, bonuses and commission that individual employees might be receiving month by month? It will be complicated, and it will be difficult for them to know whether existing schemes meet the quality requirements that the Government have quite properly put in the Bill. I understand exactly why commission, bonuses and overtime are included here, and I am mindful of the need to prevent employers deliberately manipulating the way in which they pay their workers to avoid contributions that they should be making—the Government would be right to ensure that those contributions were made. However, there are a number of technical and practical difficulties on which we need some assurances from the Minister. If he is not able to give full reassurance now I would be grateful if he would take the issue away to consider at greater length.

Paul Rowen (Liberal Democrat, Rochdale)

The Government, in drafting clause 11, have been mindful of some of the concerns. We have all talked about wanting to ensure that we develop a quality scheme that is simple and easy to administer. As the hon. Member for South-West Bedfordshire said, that has the potential to be a bit of a minefield, which could present some difficulties. Nevertheless, the safeguard is important for employees, so that the less scrupulous employer will not see if there is a way of saving money. Those companies that do not have schemes at the moment will be introducing a scheme and will have to pay the 3 per cent. employer’s contribution. If they can switch some of what someone earns into bonuses or not count overtime as actual earnings—predominantly affecting those on low pay—that will enable them to get below the £5,035 threshold, resulting in less of an employer’s contribution.

The Government have got it right by making sure that the clause is in the Bill. Nevertheless, I would be interested, as the hon. Gentleman said, in how they would intend to operate it. Clearly we want an easy-to-use system, which does not impose too great a regulatory burden on employers, but the safeguard is important. I support the clause as currently written.

James Plaskitt (Labour, Warwick and Leamington)

I am grateful to the hon. Member for South-West Bedfordshire for his amendments, allowing us to look at the clause in more detail.

The clause defines qualifying earnings by establishing an earnings band, and by setting the range of pay components for the purposes of calculating those qualifying earnings. Qualifying earnings, in conjunction with the minimum 8 per cent. overall level of contributions for money-purchase saving, as set out in clause 18—which we will come to—establish the new minimum level for pension saving and underpin the whole package of reform. Together, they should enable a median earner with solid state entitlement—a good number of years—to achieve a retirement income at a replacement rate of around 45 per cent. Those arrangements, including the minimum employer contribution of 3 per cent., only work if the calculation is based on the full value of gross earnings, as was pointed out by the Pensions Commission in its report of 2005.

Pension contributions need to reflect the full value of underlying earnings if workers are to stand a real chance of saving for an adequate income in retirement. However, both amendments Nos. 17 and 19 would reduce the range of pay components that need to be taken into account when calculating the minimum level pension contributions due to a worker. On average, commission, overtime and bonus payments make up around 8 per cent. of the earnings of those jobholders who will be eligible for automatic enrolment. If pensionable earnings became limited to basic pay, as would be the affect of applying the amendments, the overall value of pension saving would fall. We estimate that the reduction in savings could be around £900 million a year at a steady state, once the impact of the phased introduction of the employer duty has passed through the system. That would mean that people who save throughout their working lives will fall below the replacement rate that they are otherwise expecting to achieve.

That is a core problem with the hon. Gentleman’s amendment. Although he said that he supported the obvious intention to deal with any potential unscrupulous practice by which employers might seek to prevent payment from qualifying for their contributions to the scheme. In a sense the hon. Gentleman is trying to have it both ways, by watering down the protection, which would potentially open up the opportunity for unscrupulous employers. I think that we have the balance right and that the affect of the amendment would be to unbalance it in ways that I am sure he would not wish.

Some workers rely on commission and overtime payments. To exclude such pay components would reduce the benefit of the reforms for such workers. For example, commission payments often form a significant proportion of the overall income of those people who work in retail, telesales and parts of the motor industry.

Amendment No. 18 would prevent the Government from being able to react to any pay practices that developed simply as an attempt to avoid pension contributions. The hon. Gentleman asked if I thought that that practice was widespread at the moment, but there is no evidence to suggest that it is. It is important, when legislating in this way, to anticipate possible developments and to choke off those that would be undesirable. The amendment would open up a loophole that could be used for unscrupulous avoidance by enabling employers to reclassify their workers’ earnings, thereby reducing the contributions that the employer was required to pay.

The core pay components set out in the Bill already cover the majority of workers’ earnings, so any additions to the list are unlikely to have much impact for most employers. Nevertheless, we want to be able to consider additions such as allowances that relate to the skills that workers have, or to the working patterns that they adopt, such as data processing and shift allowances.

I want to reassure the hon. Gentleman and other hon. Members that we appreciate that many employers with existing schemes tend to define pensionable pay using fewer pay components—here I come to his point about the possible burden. We shall, therefore, provide guidance to help employers to work out whether their arrangements meet the minimum requirements. We could perhaps base that on look-up tables and other simple tests, which should address the point that he rightly raised about the potential for difficulties in computation. However, I should add an important point: no employer will be required to change their definition of pensionable pay because qualification relies on the value of contributions paid, not the basis on which they are calculated.

At present, the median employer contribution for workers in defined contribution schemes is 7 per cent. That provides those employers with considerable head room in the test. We therefore fully expect many existing arrangements to qualify, even if, for example, they do not take account of overtime as part of the pension calculation, because that could easily be offset by a higher employer contribution than the minimum 3 per cent. We plan to provide, I am pleased to say, a plain English guide for employers and schemes to assist them when applying the tests. That might involve simple illustrations of how the earnings band or higher contributions could be offset against a different definition of pensionable pay. There will be plenty of scope for further discussion as part of the normal regulation-making process.

In addition, qualifying earnings form part of the definition of jobholder. Tinkering with the definition of qualifying earnings would have an impact on the eligibility for automatic enrolment, and might mean that some people would miss out on workplace pension saving.

I think that I have addressed all the points made by the hon. Gentleman and I hope that he will now feel free to withdraw the amendment.

Andrew Selous (Conservative, South West Bedfordshire)

I am definitely reassured by what the Minister says. Perhaps I should have said earlier that the amendment was probing.

We have had a useful debate because there are concerns among current scheme providers about some of the computation difficulties that the Minister spoke about. I am glad that he is seized of the salience of these issues for those providers. He said that there could be £900 million less in contributions if the amendment were accepted—I would certainly not want that, and that was not my intention. I would, however, say that if the Minister was not on to the computation difficulties and was not able to do something about them, there would be a real possibility of levelling down from existing good provision above the level of personal accounts. There could have been a reduction had those computation difficulties not been taken into account.

I am reassured by what the Minister said about the guidance and leaflets, and especially reassured that they will be in plain English, which is something of which we are all in favour. I therefore beg to ask leave to withdraw the amendment.

Clause 12

Andrew Selous (Conservative, South West Bedfordshire)

I beg to move amendment No. 20, in clause 12, page 6, line 15, leave out subsection (2).

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss the following amendments: No. 86, in clause 12, page 6, line 15, leave out from first ‘in’ to end of line 16 and insert ‘the value of the amounts in—

(a) section 11(1)(a) are to be assessed in a way that the Secretary of State finds appropriate and which has been approved by resolution of both Houses of Parliament; and

(b) section 11(1)(b) are to be in line with earnings’.

No. 21, in clause 12, page 6, line 17, leave out ‘may in particular’ and insert ‘shall’.

No. 73, in clause 12, page 6, line 17, leave out subsection (3).

No. 74, in clause 12, page 6, line 21, leave out subsection (4).

No. 75, in clause 12, page 6, line 24, at end add—

‘(4A) If the average earnings index (including bonuses) for the whole economy for September of a year is higher than the index for the previous September, the Secretary of State shall as soon as practicable make an order in relation to each amount mentioned in section 11(1)(a) and (b), increasing each amount, if the new index is higher, by the same percentage as the amount of the increase of the index.’.

Andrew Selous (Conservative, South West Bedfordshire)

We move on to another important clause, which covers the review of the qualifying earnings band, which we have just agreed should be in the Bill by agreeing to clause 11. Of course, the two figures—£5,035 for the lower limit and £33,540 for the upper limit—will not maintain their value due to the ravages of inflation, so it is quite right that they should be increased over time. Clause 12, however, gives the Secretary of State almost complete carte-blanche to decide how the two bands will be increased, so we seek greater clarity on how the uprating will be undertaken. There is a precedent because the Employment Relations Act 2004 sets down a formula through which statutory redundancy pay is uprated. I look forward to hearing the Minister’s intentions for reviewing the qualifying earnings band in the years to come.

Paul Rowen (Liberal Democrat, Rochdale)

I wish to speak about amendment No. 86 in particular. The purpose of amendments Nos. 20 and 86 is to probe the Government as to what methods they intend to use to ensure that the values of the earnings limits are maintained. I know that the EEF would like to see the qualifying band uprated in line with earnings, rather than leaving it to the Secretary of State, as the Bill proposes. That is not necessarily our view; we believe that the Secretary of State should have discretion.

Amendment No. 86 would, however, ensure that whatever discretion the Secretary of State used on uprating, the limits would be reported to the House. That would be an important safeguard to ensure that savings and the amounts paid keep their value. I am not saying that a future Secretary of State—whoever that might be—would not ensure that they would maintain their value, but we believe there should be a mechanism to ensure that Members are able to respond to the proposals put forward by the Secretary of State. I look forward to hearing how Ministers will ensure that Members are kept informed of the rates proposed each year.

James Plaskitt (Labour, Warwick and Leamington)

The reforms have been structured to enable a median earner with solid state entitlement to achieve a replacement rate in retirement of around 45 per cent., in line with the Pensions Commission’s recommendations.

The limits of the qualifying earnings band—the lower limit of £5,035 and the higher limit of £33,540, in terms of 2006-07 earnings—have been set in conjunction with the default minimum contribution rate for defined contribution pension saving: 8 per cent. Having established a relationship between working-life income and income in retirement, it is important to establish a mechanism to maintain that, as the hon. Gentlemen said. That is right, and it is the exact purpose of the clause.

We plan to review the limits of the qualifying earnings band once a year to determine whether they have maintained their value, as the Bill says. Our expectation is that future changes to the limits of the qualifying earnings band will follow changes in the general level of earnings. Tracking earnings is important for two reasons: first, to ensure that the value of contributions going into money purchase schemes remains stable in relation to earnings, which will help to maintain the balance between working-life income and income in retirement; and, secondly, to avoid enrolling even higher numbers of workers with low earnings for whom state provision will already offer high income replacement rates.

Pension reform involves making policy for the long term, however. Average earnings might not always be the only, or the most suitable, measure with which the Government should assess whether the limits of the qualifying earnings band have maintained their value. In the absence of complete foresight, which no Government can have, we have taken the prudent step of retaining some flexibility over the measures that the Government must consider when assessing whether the limits of the qualifying earnings band have maintained their value.

All the amendments would, in various ways, reduce that flexibility by removing elements of the Secretary of State’s discretion in uprating the lower and upper limits of the earnings band. Amendments Nos. 20 and 73 would remove the discretionary ability to uprate the earnings band limits using a more appropriate measure than earnings, should the need arise. Amendment No. 86 would require an assessment of the change in the value of the band limits to take place by two separate methods: an approach approved by Parliament for the lower limit, and using average earnings for the upper limit. Amendment No. 21 would make it mandatory to carry out a review of the qualifying earnings band in line with rises in average earnings only, and amendment No. 74 would remove the Secretary of State’s discretionary ability to change the limits of the qualifying earnings band, even when he judged that their value had not been maintained. Amendment No. 75 would make it mandatory to review and revise the qualifying earnings band limit in line with rises in average earnings.

In all of their various ways, the amendments would curb the discretion of the Secretary of State and reduce flexibility in the system. It is clear that the real test of whether the bands have retained their value, in terms of ultimate income in retirement, is value vis-Ã -vis earnings. It would not be sensible to be over-prescriptive about which measure of earnings could be used, although it is perfectly clear which ones are used at present in respect of other benefits that are earnings uprated. Given that the provision will be in the Bill and that it is conceivable that, due to statistical developments or changes in future Government policy, the way of measuring earnings might change and new indices might evolve, it would not be wise at this time to prescribe with great specificity the index that should be used. We are establishing the principle that the value is maintained in relation to earnings, and the appropriate earnings index will be used.

It is also important to leave open the possibility—this is not inconceivable—that earnings in any given year might not be the right measure by which to assess value. There have been periods in which prices have risen faster than earnings. We want to leave the possibility open because the important thing, as the Bill says, is to maintain the value of those bands. The objective is to ensure decent levels of income in retirement and to maintain the balance of income obtained through work and income derived in retirement as a result of that work. That is the reason why the clause is drafted in such a way, and why we would not want to see it restricted in any way. Given that, I hope that the hon. Member for South-West Bedfordshire will withdraw the amendment.

Andrew Selous (Conservative, South West Bedfordshire)

This was put down as a probing amendment, just something to get down on the record as to the Minister’s intentions. I listened carefully to what he said and I am reassured that he has made the commitment to maintain the value of both figures specified on the face of the Bill in relation to earnings. That is a useful reassurance that can be reviewed in years to come by Members of this House, should anything else be done by a Government at any future time. So, having heard the Minister’s comments, I beg to ask leave to withdraw the amendment.

Clause 13

Andrew Selous (Conservative, South West Bedfordshire)

I beg to move amendment No. 22, in clause 13, page 6, line 27, leave out from beginning to ‘twelve’ in line 28.

This amendment seeks to elucidate from the Minister the Government’s intentions relating to pay reference periods. The wording on the face of the Bill in clause 13 is quite open, and given the understandable concerns that employers have about how they are going to make the calculations relating to these payments, it would be useful to hear that the Government intended to make their pay reference periods as simple and straightforward as possible so as not to add to their administrative burdens in any way.

I hope for the vast majority of employers it will be quite clear and simple: either their financial year or the tax year. But I wish to be reassured by the Minister that the Government do not intend to impose on employers any strange or unusual periods that would cause them any difficulties.

James Plaskitt (Labour, Warwick and Leamington)

The hon. Member for South-West Bedfordshire seeks my reassurance on this in respect of simplicity and I hope I will be able to give that to him. Clause 13, an important clause in the Bill, enables Government to set the period, or range of periods, during which qualifying earnings are to be assessed for the purpose of calculating contributions to workplace pension saving. Many headline figures associated with these reforms are expressed in annual amounts: the limits to the qualifying earnings bands, for example. That is why the clause provides for a default pay reference period of 12 months, so that those annual limits make sense.

However, as set out in clause 11(2), the annual limits of the earnings bands are to be varied on a pro rata basis when qualifying earnings are being assessed for a pay reference period that is more or less than 12 months. Therefore, in line with the preference of employer lobby groups, especially the CBI and the Engineering Employers Federation, we have included the flexibility to establish an array of pay reference periods, so that the assessment of qualifying earnings and the calculation of contributions for the purposes of workplace pension saving may be aligned with the range of pay periods used by employers today, which in some instances are weekly or monthly. In essence, we are asking employers to do what they are already doing. That is the common-sense approach.

If an employer pays its workers monthly, that is the period it should use for the purposes of calculating pension contributions. The amendment, however, would remove that flexibility by locking employers into a pay reference period of 12 months—only 12 months—which would delay the point at which some jobholders qualified to be automatically enrolled. The flexibility to be able to prescribe pay reference periods as a week or a month is important for another crucial reason: it simplifies the administration for employers by making the calculation and collection of contributions to pension saving part of those companies’ normal pay cycles. Clearly, forcing companies into administering that out of line with their ordinary pay cycle would be an added burden. We will work with stakeholders to ensure that the linkage between pay reference periods is tailored to achieve the best fit for employers.

The measure brings forward the point of automatic enrolment, to the first pay period for most workers, enabling them to save as they go and to take advantage of compound investment returns. It avoids the need for larger periodic or reconciliation payments, which would affect affordability at the individual level and might deter people from saving. Finally, and importantly, it enables temporary workers, who move frequently between employers, to be able to take advantage of workplace pension saving with an employer contribution, even if the total earnings with that employer fall below the default annual threshold—in other words, if they earn £3,000 for three months’ work.

I hope that I have demonstrated the importance of retaining the flexibility. The measure fits with employers’ current practices and best serves the interests of the people that we anticipate will come into the schemes. With those reassurances, I hope that the hon. Gentleman will feel able to withdraw his amendment.

Andrew Selous (Conservative, South West Bedfordshire)

Yes, I am reassured by the Minister, particularly about the intention behind clause 13 to mirror the pay periods already being used by employers. If the clause has been worded in that way at the behest of the CBI and the Engineering Employers Federation and others, I am doubly reassured by what I have heard. I beg to ask leave to withdraw the amendment.

Clause 14

Andrew Selous (Conservative, South West Bedfordshire)

I beg to move amendment No. 2, in clause 14, page 7, line 9, leave out paragraph (c).

This is another probing amendment, to find out a little more about the current usage of average salary benefits. Many of us are familiar with final salary schemes. I am aware that there has been a significant demise in such schemes for various reasons in recent years, but I am not aware how widely average salary benefit schemes are being used. Therefore, I am seeking some elucidation from the Minister on that point and, in particular, on the likely impact—on the possible payments received on retirement—for personal account holders of average salary benefits being used.

Mike O'Brien (Labour, North Warwickshire)

In answer to the hon. Gentleman’s question, there are 9.6 million people active in occupational schemes, of whom 8.5 million are in defined-benefit schemes, and 1.1 million are in defined-contribution schemes. Around 200,000 people are in defined benefit schemes where pension benefits are based on a fraction of the individual’s average earnings across their career. These earnings are generally uprated in line with prices. This seems to be a probing amendment. Let me set out what we are seeking to do.

Clause 14 is the first of a series of clauses that set out the minimum standards for schemes to be used under the employer duties. This clause introduces the concept of qualification. Qualifying schemes must be occupational personal person schemes, tax registered under the Finance Act 2004, and must meet the relevant quality criteria in relation to a jobholder who joins the scheme. It is crucial to ensure that there is a statutory duty for schemes offered by employers to provide suitable contributions or benefits to those who join them. This amendment would remove a key element of the protection required to safeguard the quality of qualifying and automatic-enrolment schemes.

Clause 14(2) gives the Secretary of State the ability to disqualify, through regulations, certain schemes that would otherwise meet the quality requirement. That would allow regulations to disqualify schemes that require prohibitively high member contributions—ones where the employer will contribute so much, but the member must contribute a very large amount—and those which levy excessive administrative charges. It would also allow regulations to disqualify career-average schemes of a certain type, as set out in paragraph (c).

I can reassure the ACA, and others who have raised the issue, that we will allow career-average schemes to discharge employer duties. We are aware that career-average schemes are becoming increasingly popular, and provide a compromise for employers who want to retain defined-benefit provision, but do not want to do so through final salary schemes. Many career average schemes provide generous benefits to members and help employers control the cost of pension provision. We want to support and encourage such schemes.

It is our intention, however, to apply these regulations to career average schemes that do not appropriately revalue the earnings on which the pension is based. We have designed the quality requirements for defined benefit schemes to be as easy as possible for employers to apply. The intention is that this can be done by assessing the value of the benefits payable at a particular point in time. Some schemes may meet the quality requirement based on the value of benefits at that time, but those may not maintain their value over time to retirement without revaluation of earnings. I am sure Members will agree that, given the risk that such schemes would lose their value over time, they should not qualify to accept members under the statutory duty established by the Bill.

We are providing reassurance that we have the ability to prevent employers using schemes that are not of the sort that Parliament intends: poor schemes that will give poor value, or schemes that are intentionally created to discourage people from joining them. That is the aim of the powers we are taking in the Bill to bring forward regulations. I hope on that basis that the hon. Gentleman will feel able to withdraw his amendment.

Andrew Selous (Conservative, South West Bedfordshire)

Certainly. I am grateful to the Minister for setting out some of the figures that describe the different types of pension saving that are going on at present. I am also grateful to him for what he said about the capacity of this clause to deal with schemes with extortionate costs, and schemes which would require an overly high employee contribution. With that, I beg to ask leave to withdraw the amendment.

Clause 15

Andrew Selous (Conservative, South West Bedfordshire)

I beg to move amendment No. 3, in clause 15, page 7, line 22, leave out ‘or to provide any information’.

We are going so fast that maybe the Committee will not have to listen to me for as long as it thought it would have to at the start of the proceedings.

The purpose of the amendment is to check that the wording in subsection (2)(b) would not prevent an employer or a personal account scheme from finding out from an employee their date of birth and national insurance number and any other relevant information that they might need to put them into the scheme. As subsection (2)(b) is worded, it would seem that the employee, bizarrely perhaps, might be able to refuse to give such information. I am sure that I am probably wrong and that the Minister will leap to show me some other part of the Bill where it states that employees can be required to give basic information about who they are, their date of birth and so on. If they could refuse to give that information it would obviously cause complications and I therefore seek the Minister’s reassurance.

Mike O'Brien (Labour, North Warwickshire)

An employer would be able to obtain from an employee by reason of employment the sort of information that the hon. Gentleman described. The basic information about who the person is, where they live, and what their national insurance number and date of birth are is the sort of basic information that in any event ought to be in the possession of most employers. They would get that information and they would have that information.

What we seek to do, however, is to prevent a situation arising where the employer would be able to say, “Before I can automatically enrol you and get you involved in my pension scheme, you have got to give me a vast array of very detailed information about your background”. Some employees might not wish to give that information and it might be utterly irrelevant to the particular scheme. It is possible that some schemes might be created to help employers who do not wish to operate in a bona fide way with automatic enrolment.

Almost all employers would approach this in a straightforward and bona fide way. However, if there were any suggestion that employers required from an employee information that they already had, or would normally have for the purposes of employment, merely for the purposes of joining a pension scheme, we would want to ensure that they would not be able to require that additional information. I hope that with that reassurance, and the reassurance that the employer would be able to ask reasonable questions in a normal way but not be able to use requests for information to frustrate pension membership, the hon. Gentleman will feel able withdraw his amendment.

Andrew Selous (Conservative, South West Bedfordshire)

Yes, I am certainly reassured by what I have heard from the Minister about what an employer is able to find out from an employee under normal employment law. The Minister is right to make sure that an unscrupulous employer could not ask for excessive information, which would be difficult or impossible to provide, in order to keep an employee out of the scheme. I beg to ask leave to withdraw the amendment.

Clause 16

Andrew Selous (Conservative, South West Bedfordshire)

I beg to move amendment No. 4, in clause 16, page 7, line 33, leave out paragraph (c).

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss amendment No. 5, in clause 17, page 7, line 40, at end add—

‘(c) is prescribed or is of a prescribed description and that has its main administration elsewhere than in an EEA State.

Andrew Selous (Conservative, South West Bedfordshire)

The purpose of the amendments is to seek clarification from the Minister about the differences between personal pension schemes and occupational pension schemes in the three different jurisdictions mentioned here, namely, the United Kingdom, the European Economic Area and outside the European Economic Area.

There is obviously a difference in categorisation between occupational and personal pension schemes. For example, what happens about personal pension schemes that are outside the European Economic Area is not clear. I am sure that international pension law is probably even more complicated than United Kingdom pension law but, given that we are bringing in such a significant Bill, it is important to be clear about what happens in the different jurisdictions, not least because more and more people are working internationally. There is a big increase of workers migrating to and from different countries. I would be grateful for any further elucidation that the Minister could give about the two amendments.

Mike O'Brien (Labour, North Warwickshire)

I am grateful to the hon. Gentleman for the constructive way in which he has put the questions. He is right that more people than ever before are working internationally, travelling abroad and coming to work in this country. Both clauses 16 and 17 set out the definition of occupational and personal pension schemes. He has noted the difference between these two clauses, namely, that we take a power to specify occupational schemes based outside the EEA, but he will not that we do not do the same for personal pensions. We believe that there are sound reasons for the distinction, which I will now explain.

A key requirement of all qualifying schemes, occupational and personal, is that they must be appropriately regulated. Occupational pension schemes based in the UK are regulated through domestic law, which implements the European directive on the activities and supervision of institutions for occupational retirement provision—IORP. Schemes administered within the European Economic Area, the EEA, are also regulated under the same directive, providing assurance that scheme standards and regulation are comparable to those in the UK. However, for schemes based outside the EEA there is no universal regulation that we can use as a basis for ensuring that schemes are suitable to be used for the purposes of the employer duty. Far from international law being complicated, to some extent it is non-existent or not particularly existent. There are some provisions and agreements, but of a limited nature.

So, we will have to consider the circumstances where people sign up to a foreign-based scheme—perhaps a scheme based in the United States or elsewhere, for a worker who has come over here or a worker working for an American company. We will look at those on a more individualised basis to ensure that any scheme that is used as a pension scheme is able to be used for the purposes of the employer duty and is therefore appropriately regulated.

Andrew Selous (Conservative, South West Bedfordshire)

Just to put a specific example to the Minister, if an American came to this country with a 401(k) scheme—a personal pension scheme in the United States—that was a good scheme with a high level of contribution, what would be the effect if he were then working for a UK employer?

Mike O'Brien (Labour, North Warwickshire)

I do not want to give carte blanche to all 401(k) schemes. We would look at the particular scheme to identify whether it would comply with the nature of our pension schemes. I know a bit about those schemes, and I would have thought that, in most cases, they probably would. Let me not give a ministerial imprimatur to all those schemes. I will just say, in broader terms, that that is the sort of scheme we want to be able to allow. Assuming it is properly regulated by US domestic authorities, it would probably—I use that word advisedly—comply with the requirements, particularly if the employee coming here from the US was satisfied that that was the sort of scheme he wished to use and maintain, and was returning there. That would probably be fine.

I would advise a little caution, however, if a UK-based company decided that it was going to use foreign-based pension products for their domestic employees. We would want to look at that with some care, and ensure that the specific pension scheme fully complied. I suspect that operators of 401(k) schemes would not allow themselves to be put in that position. It may well be that in other countries there are schemes, probably privately run, which would be in the market for taking on pension provision here. If they were in the EEA, we would know how they are regulated. If they were outside the EEA, we would want to be able to say that certain schemes are appropriate and others are not. We are proceeding on that basis. The amendment would interfere with that. However, given the way the hon. Gentleman put his point across, I do not think I need to spend time in rebuttal: I needed only to explain the purpose of the way in which we are addressing the various schemes.

Andrew Selous (Conservative, South West Bedfordshire)

I think these exchanges are proving of use to the many people who will look at them in Hansard tomorrow and in the weeks to come. We are in an increasingly global economy. Many workers can expect to spend part of their careers working elsewhere, and there are many foreign workers coming in and out of this country. These are the sorts of practical issues we need to be quite clear about in order to give guidance to employers and employees alike as to what the new regime is likely to allow and not allow. Having heard the Minister’s reasonable explanation, I beg to ask leave to withdraw the amendment.