Pensions Bill [Lords]

Public Bill Committee, 12 July 2011.

Clause 4 - Automatic re-enrolment where employer interrupts scheme membership

Steve Webb (Liberal Democrat, Thornbury and Yate)

I beg to move amendment 1, in clause 4, page 4, line 9, leave out ‘within the prescribed period’ and insert

‘with effect from—

(a) the day after the cessation referred to in paragraph (a) or (b) of subsection (1), or

(b) a day within the prescribed period (if a period is prescribed)’.

Graham Brady (Conservative, Altrincham and Sale West)

With this it will be convenient to discuss Government amendments 2, 3, 4, 5, 6, 7, 8

Steve Webb (Liberal Democrat, Thornbury and Yate)

Good morning, Mr Brady. We now move on to the part of the Bill that deals with automatic enrolment into workplace pensions. I must say that one of the proudest achievements of the coalition Government is that 2012 will actually happen next year. There has been much speculation that there will be delay and that things might not happen at all, but we were determined to press ahead with auto-enrolment and in the words of the report, which will become our gospel for the morning, “We were determined to make auto-enrolment work”. Ring-bound copies of the report are in the room for hon. Members, who have not yet had the chance to study it in detail. The purpose of the clauses that we shall be dealing with today is to get the nitty-gritty of auto-enrolment right and to refine the detail, but to stick to the principle that has all-party support that, if we want to do something about pension saving and workplace pension saving, overcoming the inertia of choosing a pension, making sure that we have an employer contribution, automatically enrolling people and leaving them free to opt out is a better way to do so.

Clause 4 deals with a technical problem under the Pensions Act 2008 that brought in auto-enrolment, while Government amendments 1 to 5 to clause 4 and Government amendments 6 to 8 that relate to other clauses will tidy up some of the detail. I wrote to all members of the Committee as well as to you, Mr Brady, on 30 June with details of what the technical amendments will do but, for the record, I shall just sum that up. To explain Governments amendments 1 to 8, I shall have to explain the purpose of the clause so I shall deal with that all in one go and not return to the clause itself.

Clause 4 covers the situation when someone has been auto-enrolled into a workplace pension and then the person’s membership of a qualifying scheme ceases. For example, if the employer cuts their contributions below the minimum level, that scheme would cease to count for auto-enrolment purposes. The question is then what would happen to the employee, and we are keen to make sure that there is no discontinuity in their membership of a qualifying scheme so the Bill places a duty on firms to make sure that people stay in a scheme. As currently worded, before we drafted clause 4, there was a danger that, unless people actively consented to going back into a scheme, it would not happen. Indeed, the effect of the law as previously drafted was to make employers non-compliant whatever they did and, on balance, we consider that that is not a good place for the law to be.

The clause is designed to overcome such a position and to make sure that people are re-enrolled with immediate effect if they cease to be members of the qualifying scheme. The clause, as amended by amendments 1 to 8, will also cover a range of subsidiary issues. For example, someone under the qualifying age for auto-enrolment—a 21-year-old—could be a member of a scheme and, if the scheme closes, we still want them back in the new scheme. That would not have happened as the legislation was originally drafted, and the amendments tackle that.

I shall run through the amendments succinctly. The technical amendments will amend sections 2, 5, 6 and 54 of the 2008 Act to maintain the policy intent. This is not about new policy, but about making the legislation do what it was always intended to do. Taken together, they have the following five purposes: first, they will ensure that, in continuity of scheme membership cases—as I have just described—re-enrolment must take effect from the day after the day on which the jobholder ceases to be an active member of a qualifying scheme; if the scheme ceases to be a qualifying one or if a period were prescribed within that period.

Secondly, the amendments will ensure that there is an automatic re-enrolment obligation in respect of all jobholders, not only those between 22 years and state pension age—the matter to which I have just referred. Thirdly, they will remove the unnecessary reference to a pension scheme ceasing to be a qualifying scheme under section 6(4), as that is dealt with elsewhere and, fourthly, amendments 1, 6 and 8 will correct various technical errors and cross-references. Amendment 7 is a minor technical amendment, which will repeal section 5(5) of the 2008 Act because the postponement provisions are being repealed under the Bill. As I have said, Government amendment 1 is technical and designed to restore the original policy intent.

Clause 5 - Earnings trigger for automatic enrolment and re-enrolment

Rachel Reeves (Labour, Leeds West)

I beg to move amendment 28, in clause 5, page 4, line 30, leave out ‘£7,475’ and insert

‘the primary threshold for national insurance purposes.’.

Graham Brady (Conservative, Altrincham and Sale West)

With this it will be convenient to discuss the following: amendment 37, in clause 5, page 5, line 19, at end add—

‘(7C) The Secretary of State must report to both Houses of Parliament within one year of the commencement of the Universal Credit as set out in the Welfare Reform Act 2011 the trends relating to part-time work that may have emerged.’.

Amendment 31, in clause 8, page 7, line 24, at beginning insert ‘Subject to subsections (2A),’.

Amendment 32, in clause 8, page 7, line 24, at beginning insert ‘Subject to subsections (2B),’.

Amendment 33, in clause 8, page 7, line 27, at end insert—

‘(2A) An order made under subsection (2) must not increase the amount in section 3(1)(c) by more than—

(a) the general level of earnings; or

(b) in percentage terms by more than the percentage increase in the lower earnings limit for national insurance purposes.’.

Amendment 34, in clause 8, page 7, line 27, at end insert—

‘(2B) An order made under subsection (2) must be accompanied by a full impact assessment, specifying—

(a) which factors have been taken into account, why they were considered relevant and the extent to which those factors have been taken into account;

(b) where factors listed in subsection (4) were not considered relevant, and why;

(c) the impact of the number of individuals benefiting from automatic enrolment.’.

Rachel Reeves (Labour, Leeds West)

It is a pleasure to serve under your chairmanship this morning, Mr Brady.

The legislation for automatic enrolment is a proud achievement of the last Labour Government. It will ensure that 7 million more people are saving for a pension than were previously doing so. The purpose of automatic enrolment is to extend pension coverage to those on lower and middle incomes and further to reduce pensioner poverty, which was reduced by 1.1 million under the last Labour Government.

Automatic enrolment was one of the key recommendations of the report of the Turner commission, which concluded that an automatic enrolment scheme, supported by what has now become the National Employment Savings Trust, would

“overcome the barriers to rational decision-making, cost-efficiency and the declining employer provision which undermine a purely voluntary system, while leaving individuals ultimately free to make their own decisions in the light of their own preferences and circumstances.”

Automatic enrolment will make a huge difference to the retirement income of future generations. In New Zealand, there is a similar automatic enrolment programme called the KiwiSaver, which now has 1.6 million members. Some 45% of its members said that they would not have signed up if it had not been automatic, and 38% said that they would not otherwise be saving.

As the Minister has already said, when this Government came to power, they instigated the Johnson review into automatic enrolment, and this part of the Bill is based on its recommendations. I am relieved that the review and the Government’s response in the form of the Bill will not fundamentally dismantle the consensus achieved by the Pensions Commission. As the Minister has said, automatic enrolment is going ahead in line with the previous Government’s timetable. The age bands remain the same, NEST has been maintained and small businesses, as well as medium and large businesses, are included, which I welcome.

Nevertheless, we have specific concerns about the proposals being watered down, which I am not alone in fearing. In its submission to the “Making automatic enrolment work” consultation last year, the National Association of Pension Funds stated:

“the Turner Commission’s analysis and recommendations still hold true today. In fact, the evidence shows that the need for NEST and auto-enrolment is stronger than ever, and that the reforms should not be delayed or watered down.”

My amendment seeks to reverse one way in which automatic enrolment is being watered down.

Currently, anyone who earns above the bottom of the band of earnings on which contributions must be paid would be automatically enrolled. What we call the trigger is the same as the contributions threshold. The Bill proposes to raise the trigger point at which people are automatically enrolled and to make it equal to the income tax personal allowance threshold, which is £7,475 in 2011 prices. That change will impact mainly on part-time working women, of whom 600,000 will no longer be opted in because of the reforms.

There is also a serious question about where the trigger will go. If the Government continue with their plan to increase the basic personal allowance to £10,000, that will further increase the numbers excluded from automatic enrolment. Indeed, when he appeared in front of the Work and Pensions Committee, the Minister said that if the automatic enrolment threshold were raised to £10,000 in line with the PAYE threshold, 1.5 million people would drop out of automatic enrolment. Does he still stand by that number, and is it his intention to increase automatic enrolment in line with the PAYE threshold? If it is, does that not seriously undermine the intention of automatic enrolment, which was to encourage people who were not previously saving for a pension—those on more modest incomes—to start to save?

The whole point of automatic enrolment and of NEST was to nudge people into a pension scheme, including precisely those low-paid and part-time workers who would otherwise not join. That is why we want it. Amendments 31 to 34 seek to insulate the threshold from other policy imperatives of future Governments, in which thresholds can be moved for a variety of reasons. Raising the entry threshold ultimately to £10,000, which is half of average earnings for women, will mean that those most in need of saving for a pension will in effect be excluded from this and from employer contributions that come with automatic enrolment. A woman on half of average female earnings will have no pension at all, and a woman on average earnings would have only half of her earnings covered by NEST if the automatic enrolment threshold were increased to £10,000.

The National Association of Pension Funds stated:

“Increasing the threshold to £10,000 would exclude 17% of all employees. It would disproportionately exclude women, with 27% of female employees earning less than £10,000, and part-time workers, with 58% of part-time jobs earning less than £10,000. Whilst we accept that the current £5,035 threshold should not necessarily be set in stone, we have not seen any evidence that any savings from increasing the threshold would be worth the disadvantages.”

That is not the only problem. As the gap between the contribution and the enrolment threshold grows, there is a danger that a cliff-edge effect will develop. As the TUC put it, the newly auto-enrolled may opt out when they see a noticeable chunk of their earnings disappear in pension contributions, if people are not automatically enrolled until after three months.

Let us explore in more detail the arguments for raising the threshold. First, the question of whether it pays to save and whether people on low earnings benefit from saving. Throughout the debate on pension reform we have discussed whether some people will not benefit from saving, because of the interaction between small pensions and means-tested benefits. Age UK does not believe that justifies the exclusion of up to 600,000 mainly female employees, and I agree. It argues that the same applies to current pension provision and that people already feel they are penalised by having saved. Although admittedly they sometimes do not understand how the benefits system works, it nevertheless influences their current savings behaviour.

Age UK goes on to argue that saving is normally worth while. It estimates that 95% of people modelled in a recent Department for Work and Pensions report were better off in retirement from having saved, and that for more than 95% the return was greater than contributions made even after inflation had been taken into account. A large majority received more than twice as much as they put in, after inflation. This research and work by the Pensions Policy Institute highlights some people who may be at risk of not benefiting from saving, but it is not always easy to identify individuals at risk early on in life when they begin to contribute via automatic enrolment.

The argument about low earners is also based on a fundamental assumption that undermines it: the low earners will remain low earners. Age UK believes that people earning at the bottom of the threshold at present might build up only a small pot, which I will come on to shortly, but that is not to say that they will be low earners throughout their working lives. The small pot that they build up while at the bottom of the threshold may form the basis of much larger savings as they earn more in future. If automatic enrolment is to encourage saving among everyone, it cannot miss that point.

Age UK also states:

“Even when…pension saving does little to improve someone’s overall income, compared to relying on means-tested benefits, we know that in reality many do not claim their full entitlements”.

There was much talk in the other place and in the Johnson review about the replacement rates for low earners. Both of those preceded the Green Paper on the flat-rate pension, which is designed to provide the same pension for everyone. That calls into question the debate on means-tested benefits and replacement rates altogether. I understand that the flat-rate pension will be operational before the 2017 review date for automatic enrolment. Does the Minister think that the debate has moved on as a result of the Green Paper? Will he take this opportunity to clarify the Government’s thinking on pays to save, given the future of state pensions as set out in the Green Paper? If the flat-rate pension goes ahead, will the Minister reconsider the automatic enrolment threshold, as it would change arguments about for whom it pays to save and whether that money will be means-tested away from people?

Beyond “pay to save” is the question of small pots that can arise from saving at a relatively low level. People are worried that those on the lowest level of earnings might end up with only small pots of money, but that is one of the very reasons why NEST was created. It is not right to exclude people from the opportunity of automatic enrolment simply because they are below the trigger, even though they are in the band of earnings that the report acknowledges should be building pension pots. Indeed, Age UK has argued that many people who end up with very small pension pots will be able to take them as cash. People with less than a total of £18,000 in pensions can take the whole amount as cash under trivial commutation rules.

Even if that is not the case, anyone in NEST or an occupational scheme can take small amounts under £2,000 as cash. People with earnings of £7,000 a year will benefit from total contributions and tax relief of £157 a year, and people with £10,000 will benefit from £297 a year of tax relief. Unless their investment returns are very high, their contributions increase, they have saved for a long time, or they have other savings, they will probably be able to take their savings in cash, and the cash sum may well be below the capital disregard of £10,000 for means-tested benefits.

Modest amounts of pension savings might give an invaluable start to retirement by providing a cash cushion or allowing people at the beginning of their retirement to clear debts. To put it in context, the wealth and assets survey shows that median non-mortgage borrowing at age 55 to 64 is £2,200, with a mean of £6,900. Collectively, those reasons are simply not the basis for excluding 600,000 people, largely women, from the groundbreaking steps that would have seen them automatically enrolled into a pension, often for the first time.

Steve Webb (Liberal Democrat, Thornbury and Yate)

The 600,000 figure that the hon. Lady quotes is the difference between the uprated £5,035 and the £7,475 in the Bill. She does not propose that we go back to £5,035; she proposes a lower earnings limit to the primary threshold for national insurance. To help the Committee’s assessment of the amendment, can she tell us her understanding of that figure for this year?

Rachel Reeves (Labour, Leeds West)

I am not sure whether the Minister asks what the national insurance—[ Interruption. ] It is about £5,700. That is the how the NI threshold has been increased in line with inflation; it would have gone up in line with the NI limit.

There is a wider question of how the pay-as-you-earn threshold will go up in future and whether the level at which people are automatically enrolled will go up in line with it. I believe that three ways are being considered in the Bill to increase the automatic enrolment threshold in future. That is key, because although some people have accepted the increase in the PAYE threshold to the current level, if it goes up to £10,000, and if the automatic enrolment threshold mirrors that and goes up accordingly, 1.5 million people—not 600,000—will be excluded. The amendments in the group raise two concerns. First, the increase in line with the PAYE threshold, and secondly, what will happen to the automatic enrolment threshold?

Steve Webb (Liberal Democrat, Thornbury and Yate)

The hon. Lady is absolutely right. The threshold was £5,700 last year, but, because of the 1% national insurance increase that was due to come through this year, the Government made a substantial increase in the primary threshold for 2011-12. It is now £7,225, which is about £250 short of what we are proposing. Does that change her arguments at all?

Rachel Reeves (Labour, Leeds West)

But the PAYE threshold goes up next year as well, to more than £8,000. Both are going up. It would be simpler—many agree with this—to keep the threshold for automatic enrolment in line with the NI threshold. That was originally recommended by the Turner report. Also, there is an issue of how we go forward on this. While I do not think that there are plans substantially to increase the NI threshold, there are plans in the pipeline to increase the PAYE threshold and move it further away from the NI threshold. I want some clarification on which of the different proposals on increasing the automatic enrolment threshold the Government are minded to pursue, because it makes a huge difference. In the answers that I have received to parliamentary questions to the Department for Work and Pensions, the Government’s estimates suggest a difference of some £500,000.

I am sure that the Minister will also no doubt tell us that people can enrol voluntarily if their earnings are between the contribution threshold and the PAYE trigger threshold, which will ultimately be raised to £10,000. Automatic enrolment exists because voluntary self-enrolment has not worked for most people on modest and middle incomes. The whole purpose of automatic enrolment is to challenge the inertia that has undermined our pensions system for decades.

In any case, there is the question of the persistency of savings. They might be small pots to start with, but if people save persistently and build up a habit of saving—even those on low incomes—for a period of time, that builds up a pot that may not be insignificant at the time of retirement. The Personal Accounts Delivery Authority has stressed the importance of the persistence of pensions savings. Its discussion paper on investing contributions states that

“persistency in contributions has more of an influence than investment performance in ensuring that member returns are maximised at retirement.”

In that respect, a higher threshold would exacerbate, rather than alleviate, the effects of means-testing.

That brings me on to the final amendment of the grouping, which was tabled by my hon. Friend the Member for Erith and Thamesmead and raises the important issue of mini-jobs. The amendment makes an important contribution to this wider debate, particularly on the differences between the pay-to-save element and the small pots element. The Government are making substantial changes to welfare and pensions. The amendment recognises the extent of those changes and the interactions between them. Automatic enrolment is a major step forward in the delivery of the Turner Commission proposals. The universal credit is another significant change on welfare policy.

It is important, under these circumstances, that we keep the effects of policies under review. The Pensions Act 2008 legislated for a review of automatic enrolment in 2017. Taken with the other changes to the 2008 Act, including those we are debating today, hon. Members would surely agree that we need to ensure that trends are properly monitored and dealt with effectively. No doubt hon. Members will refer to the 2017 review. In other areas, however, it has been indicated that the review process will be ongoing. Indeed, the Government have started to look at the relationship between occupational and work-based pensions. The Johnson review recommended a wholesale consideration of transfers into NEST, wholly separate from the 2017 review. That is an area where automatic enrolment, if implemented properly, stands to improve in particular the pensions savings of people who work in a series of small jobs. For that reason, my hon. Friend’s amendment is an important part of this debate on how the areas of pension and welfare policy interact.

Teresa Pearce (Labour, Erith and Thamesmead)

Auto-enrolment and NEST are very good things. I see that as a sea change in the way that ordinary working people view pensions. My daughter lived in Sydney for a number of years, and my granddaughter was born there. I had the good fortune of going to visit. If someone goes into any bar in Sydney and asks any ordinary plumber or person who works in a shop about their “super”, they can tell that someone about how much it is, what it is worth and how it is accessed. Those people know all those facts. If someone asked the same question to the same people, but in the UK, they would find that people do not have a “super” and would think it to be absolutely mad. They would ask, “How will we manage in old age? What will happen? How can we possibly plan for our future?” The Bill is part of changing attitudes in the UK.

Like the Government members of the Select Committee on Work and Pensions, I was lucky enough to visit NEST. I was pretty impressed by the way it was taking the matter forward. We raised many queries, and I think Government Members would confirm that it answered them comprehensively and that it was an impressive visit. However, I have some concerns. My main concern is about the attitudes of the wider pensions industry. I believe that it has a desire to see NEST restricted, because it is looking after its own industry. Some of the restrictions on NEST are unwelcome. Without pre-empting the review in 2017, once it is over, and once NEST has been bedded down and people are more used to it, does the Minister hope that there will be some relaxation of the current restrictions on NEST to widen it? I hope that NEST will be a success, and if that is the case, I would hope to see the removal of some of those restrictions and see it rolled out further.

My second concern is that employers, particularly those who do not currently offer pensions to their employees, will resist the scheme. I will come on to my specific problems about that in a moment. My third concern is that the Bill is based on existing working patterns. When the Welfare Reform Bill is passed and universal credit is introduced, people’s working patterns may change significantly.

Regarding the effect on women, historically, women have faced disadvantages in occupational pension schemes compared with men. Women are less likely to be at work and have access to occupational pension schemes. When they are in work, they often have lower rates of pay or work fewer hours, and so are less able to contribute to a pension. Women still do the majority of unpaid caring, which means that they are more likely to have a break in their career and less likely to have the necessary number of qualifying years. In order to balance their many caring responsibilities, women are more likely to work part time, which means that they are less likely to be able to afford to pay into a pension scheme. I believe that the Minister himself once said that when it came to pensions, it is as if women are an afterthought. I am hopeful that with auto-enrolment and NEST, women will be central to the new legislation.

As I said, auto-enrolment is a good thing. One of my concerns is about the earnings trigger and what constitutes earnings. I have a few questions for the Minister. First, how will we be able to monitor who is an employee and who is a worker for pensions purposes? There was some debate about a qualifying person last week, but I am still not fully clear about that. European law refers to a worker, which means that a worker can access employment rights, even though they might not be classed as an employee. I would like some clarification on that.

I also want clarification on people who are engaged long term by an employer through an agency, because if the agency has an overarching contract with the individual, am I correct in thinking that the agency will be responsible for auto-enrolment? If the person does not have an overarching contract with the agency, will there be anything in what I view as anti-avoidance legislation to stop employers ceasing an agency contract at two and a half months, having a week off and then starting it again, because that would go against the very spirit of what we are trying to do?

On what qualifying earnings should be, I am concerned about the hospitality industry, in which many people are on a zero hours contracts. Most of their income is from a tips and gratuities tronc system, which would not necessarily be earnings from the employer, even though it might make up a large proportion of their income. Has any work been done on how that industry will be affected? That industry has a lot of casualisation, short-term working and part-time hours, and those working hard and for long hours in that industry would not be able to access the provision.

There has been much talk about the plans to combine national insurance and PAYE. Will that have any effect on the threshold for NEST? We are considering the Bill as things are in the world. We have heard much about universal credit giving flexibility to people to take what has been coined a mini-job. At the moment, if people take a mini-job, they lose their jobseeker’s allowance, but in future they will be able to take one for even an hour, half a day or a day a week. We cannot possibly tell how successful that will be, but I tabled my amendment because I want the Minister to agree to hold a review once universal credit has come in to see whether working patterns have substantially changed and, if they have, whether the Bill should be amended.

Lilian Greenwood (Labour, Nottingham South)

Does my hon. Friend share my concern that, while there may be a growth in mini-jobs in the future, many women already have a patchwork of mini-jobs that make up their total earnings? They might have a job for 10 hours a week with one employer and for 10 hours a week with another, so they fall into the category of those for whom saving is important, from the point of view of the replacement rate, but they cannot be enrolled by either employer because they are below the threshold, and that will be even more likely with the increased threshold.

Teresa Pearce (Labour, Erith and Thamesmead)

I agree. As I have said, one of my concerns is about how employers might resist. Will there be anything in the Bill or the guidance to stop an employer of a team of cleaners in schools from saying that the cleaners have a separate employment contract for each school, so that they would be under the threshold in each contract? I am interested to hear what the Minister has to say about that sort of detail.

Lilian Greenwood (Labour, Nottingham South)

Even if employers do not seek to avoid enrolling their employees into pension schemes, can my hon. Friend, like me, imagine someone being employed by a private contractor or even, in the future, by a voluntary organisation as a cleaner in a school and has another job at the school for another employer? For example, it is common for someone to have jobs as a cleaner and as a midday supervisor, but they might have two separate contracts and the contracts might conceivably be with separate employers, in which case their total earnings would take them over the limit, but they would not have the right to be auto-enrolled.

Teresa Pearce (Labour, Erith and Thamesmead)

Yes, that is one of my concerns. As I have said, the attitude of the pension industry is restricting what we would like to do, which is a shame. The pensions industry fears that NEST will become a huge and major player, and naturally it is protecting its position. The Bill therefore does not go as far as to link separate jobs together where there is a link. Under national insurance legislation, there is an ability to link employments where there is a link between the employers. I am not sure that that is the case here.

My main concerns are the attitude of the pensions industry and that employers may resist this. I have no doubt that large employers will not resist, but there are some small employers who already feel overwhelmed with red tape and will find ways to resist this. The Government need to lead the way on this, for the sake of this generation and future generations, to ensure that people are provided for in their retirement.

One of my concerns is about how people will understand where their earnings threshold is, for example if someone has linked employment, particularly at a school. If someone works as a midday supervisor, then as a dinner lady and then at an after-school club, those may be three separate employments, but that person will feel that they work for the school. Does the Minister have a view on that? When the 2017 review comes in, will he be looking to amend any aspects of the Bill?

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I welcome the opportunity to make a brief contribution to this debate on an important issue. On Second Reading, I outlined a number of concerns about auto-enrolment. I was particularly concerned that if the Bill passed without amendment, it could reduce the number of people eligible to be auto-enrolled in a pension scheme, thereby limiting the coverage of the scheme and disproportionately excluding women.

I want to focus on a couple of the points that my hon. Friends have raised this morning. No one disagrees with the principle of ensuring that people plan for their pensionable years. We should be doing everything we possibly can to save, however small those amounts might be. One of my worries, which has already been outlined on the earnings threshold, is whether we are in danger of sending mixed messages. On the one hand, we are saying to people that it is important that they put something away for their later years in a pension scheme, but at the same time we are saying that if it is too small an amount, that is not worthwhile or valuable.

I understand the issues about costs and ensuring that the public purse does not have to spend money unnecessarily. There is also a danger that it sends people a mixed message that they can expect to be in low-paid or part-time work throughout their life and that that is not as valuable. The problem with legislation is that it looks fine on paper until we try to fit people’s lives into it. We have had good examples from my hon. Friend the Member for Erith and Thamesmead on the reality of life for many people.

I have come to loathe the term “mini-job”. These are part-time jobs; they are not mini-jobs. They should not be dressed up in any other way. The reality of life for many women trying to put together a number of hours that equate to full-time employment, to give them a decent standard of living, means that the state’s responsibility should be to support them. Through that, we can ensure that when they are able to put those packages together, we make it possible for them to be involved in the pensions scheme in an appropriate way to build something for the future.

The other important issue is that the issue of pensions and other welfare benefits is inextricable. Nothing gets people more annoyed than when they have saved for their pension and their occupational pension puts them just over the limit for welfare benefits. They believe that other people who have not saved are not held to account in any way. Those things are important and are why we must ensure that as many people as possible have the opportunity to participate in these schemes.

Rachel Reeves (Labour, Leeds West)

I agree with all the points that my hon. Friend has made. Does she agree that it is not only about enabling them to participate and contribute to their pension for retirement, but that unless they are automatically enrolled they will also miss out on tax relief and employer contributions into their retirement income?

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

My hon. Friend makes a valid point that I had intended to come on to, so I will do that now. There is a lot of talk about the responsibilities of the individual employee, which of course is important, but the state and indeed employers also have some responsibility. It would not be correct if the earnings threshold was set in such a way that people lost out—exactly as my hon. Friend suggests—on the other benefits that might be available, or if employers had a perverse incentive not to do the right thing by their employees.

There are other situations. My hon. Friend the Member for Erith and Thamesmead talked about the person who is a dinner lady or a supervisor in a school, or who has a range of jobs. That situation can be further complicated by not just a zero-hours contract, but term-time contracts. Where does that leave people? What about seasonal employment? Some people have a mixture of different types of employment, perhaps in the public sector and perhaps topping that up on a seasonal basis when they have the opportunity. Hairdressers are often cited as an example. Increasingly in the hospitality and service sector, people’s employment status can be quite uncertain. Are they an employee for the whole of the time or are they self-employed for part of the time? There is also the position of agency workers to consider and a whole range of issues around that.

I hope the Minister will be able to answer the points raised this morning, particularly on the number of people who would be affected if the threshold went up to £10,000. Are the figures that the Government have looked at robust? Have they looked at them in light of the concerns that were raised on Second Reading?

Rachel Reeves (Labour, Leeds West)

My hon. Friend talks about the 600,000 people who will miss out on automatic enrolment, or 1.5 million if the threshold goes up to £10,000. Does she agree that it is not just about the number of people, but the types of people who will be excluded? In the Turner report, the point of automatic enrolment was to bring into pensions the people who currently save least for their retirement and who most need to put something aside. The proposal would exclude not only 600,000 or potentially 1.5 million people, but the people whom automatic enrolment was originally intended to benefit.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

Again, my hon. Friend makes a valid point. That is why I raised such concerns on Second Reading. The way in which the Bill was constructed had unintended consequences. The people who most needed to be involved in pension schemes and saving early for their retirement would be the ones who would potentially lose out. As I said earlier, we ought to give a message to people that from commencement of their working lives, they should be involved in planning for their retirement.

My hon. Friend the Member for Erith and Thamesmead gave us the example of Australia, where planning for retirement is almost accepted as part of the culture. From my own family and from other people who have recently entered the world of work for the first time, I know that sometimes the last thing on young people’s minds is what will happen 40 or 50 years down the line. We have to change the culture so that people see planning for retirement as their responsibility, but they should also be able to expect their employers and the state to do the right thing by them.

Rachel Reeves (Labour, Leeds West)

I am sorry to keep intervening on my hon. Friend, but everything that she says makes me think of new points. Does she think there is a risk that if people are not automatically enrolled, they will assume that enrolling themselves voluntarily will not be a good thing for them? If they are not automatically enrolled by their employer—or the Government, as they may see it—they may assume that pension saving is not something that is appropriate for them, and so will decide to remain opted-out, even though opting in could lead to a higher pension income and could also get the very important employer contribution. While automatic enrolment sends out a signal and nudges people into saving, it may also send out a signal that saving is not appropriate if someone is excluded because of the increase in the threshold, even though, in many cases, it could be the right thing to do.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I am glad to have had the chance to give my hon. Friend the opportunity to make such a point, because she has highlighted the nub of the matter. We can have the legislation on one hand and the realities of people’s lives in the other. Let us consider people who are trying to make ends meet, trying to hold down two or three part-time jobs and who have a whole range of other things going on in their life, such as child care responsibility or caring for elderly relatives. If they do not have an easy way to get their financial affairs in order and, as my hon. Friend suggested, can be nudged into doing the right thing, everything else going on in their life might take over.

People might feel that such a system is not for them and that it is too complicated. We are going through the minutiae of the Bill, and I wonder how I could explain in a couple of paragraphs to some of my constituents who will be better off and who will be worse off, and what they ought to be doing in the future. If we cannot explain such matters in ways that will make it easy for people to be involved, we have a problem with the Bill.

I appreciate that the purpose of the Committee’s examination of the Bill is to consider issues in more detail. Can the Minister say a little more about the figures and deal with the issues that have been raised not only by me but by others, about the message the Bill is sending out and the earnings thresholds, particularly for those with several part-time jobs and who are in non-traditional forms of employment?

Lilian Greenwood (Labour, Nottingham South)

I draw attention to those people who might be excluded if the earnings threshold increases significantly. As my hon. Friend said, there is a tendency for part-time workers to work 16 hours a week or more because they fall into the category in which they can claim working tax credits. If people were working part-time, they might be earning just below £7,475. I saw on the internet this morning details of a team assistant working for bingo, a care worker, a customer sales adviser working in the retail sector, a housing assistant working in the national health service, people working in admin, catering, domestic jobs and as porters, and people on local government scale 1, such as cleaners. If such people worked part time, their salaries would perhaps fall £1,000 below that level, and those are the type of people who will be excluded from auto-enrolment.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

My hon. Friend makes a valid point. As for the people to whom she referred, particularly those in the public sector, if some of them were on a scale that paid them a living wage, it would certainly make their life somewhat easier. Indeed, they might hear so many comments that they also believe that the public sector has gold-plated pensions and that they do not have to do much more than turn up for work in order to be looked after. However, many people are involved in several part-time posts. As has been outlined, many of them will be working, for example, in the education sector.

Stephen Lloyd (Liberal Democrat, Eastbourne)

I have been reading details in the Johnson report about the scope of individuals. In its research, it makes it clear that, for people on the lower incomes, actually saving for retirement could be counter-productive because they have a limited amount to spend and their retirement pension income will be similar to what it would be on the low income. Is the hon. Lady saying that Johnson’s premise is incorrect?

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I am not suggesting what is correct or what is incorrect. I am hoping that the Minister can respond to such points. I understand the position whereby, if people are on a low income and have a limited amount of money coming in, it might seem better for them to spend the money, for example, on buying a new pair of shoes for their children rather than investing it in the pension pot. My point is that the state has some responsibility to ensure that we have a pensions scheme that allows people to save without putting them under so much pressure to meet their day-to-day expenses that they decide that saving for a pension is not for them.

Rachel Reeves (Labour, Leeds West)

Does my hon. Friend agree with me, and with Age UK’s assessment that 95% of people modelled in a recent Department for Work and Pensions report were better off in retirement from having saved, and for more than 95% the return was greater than the contributions made, even after inflation had been taken out? According to DWP numbers and Age UK work, 95% of people would be better off by saving.

Lord Turner and the Pensions Commission recommended linking the automatic enrolment threshold to the national insurance threshold. It would not make sense to be automatically enrolled at the pound-one stage, but when people start paying national insurance we can reasonably assume that they are better off. Of course, however, everyone would have the option to opt out if they thought that was the right thing to do in their circumstances.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

Once again, my hon. Friend makes valid and important points. People can opt out if they choose, but it is important to provide every encouragement for them to opt in. The scheme should ensure that people are better off if they save throughout their working years, and it should support them however small their earnings and complex their working arrangements. Again, I hope that the Minister will discuss those matters in his summing up and will deal with the point that the hon. Member for Eastbourne made about those in low-paid employment.

Sheila Gilmore (Labour, Edinburgh East)

I shall touch on a few issues that have been raised. Saving for pensions, and proper pension provision, is a long-term undertaking. Over the years, we have not always addressed pensions as consistently and thoroughly as we might, which is, perhaps, one of the regrettable effects of political life and of not having a benevolent dictatorship. As new Governments come in, they have a tendency to start fiddling with arrangements—withdrawing this, changing that. Sometimes they do that with the best of intentions, but one of the effects of such changes—the Minister spoke about this powerfully in another sitting—is variation in the pension provision that people end up with. People who still have the graduated pension, which preceded the state-earnings-related pension, which preceded what is now called the second state pension, will know that the situation has kept changing, which has made it difficult for them.

It is important to encourage people to save for as long as possible, but doing so requires at least some level of benevolent dictatorship. Hon. Members might remember that old advert for chocolate, with a young person who did not care and became progressively more anxious—[Interruption.] What it had to do with chocolate I cannot quite remember. Perhaps it was not about chocolate; perhaps it was actually about pensions. However, its point was that often when we are 22—or whenever we become eligible for enrolment—a pension is the last thing on our mind; it is the most boring thing of all. Gradually, however, we begin to think about it and then we may wish that we had contributed, even though doing so might not have built up a huge amount of money.

Rachel Reeves (Labour, Leeds West)

I thank my hon. Friend for her interesting contribution so far. Her reference to chocolate reminds us that we have missed our elevenses this morning because we have been debating pensions.

My hon. Friend rightly said that early on, people do not start contributing to a pension, but later, they recognise that they should have done so. Does she agree that that is the virtue of automatic enrolment, because even if someone does nothing else, they will start contributing to a pension? When they are in their 40s or 50s and start actively engaging in pension provision, they will find, if they were automatically enrolled and had been contributing for the past 20 or 30 years, that they have built up a big pile of money. Also, even when someone first starts in the labour market or takes time out to bring up a family, if they are persistently saving, even while on a low income, they can accumulate a pension pot that they would not have done if they were not automatically enrolled.

Sheila Gilmore (Labour, Edinburgh East)

That is very much the point that I was trying to make. In a sense, people have to be encouraged, and more than encouraged, to make that kind of provision. In the end, it is both cheaper for them and potentially less onerous on the state in picking up the lack of provision. From that point of view, the sooner that people can be auto-enrolled, the better. Although I understand some of the arguments that are sometimes made, that we are almost being kind to people in not forcing them to be auto-enrolled, it may end up being false kindness. By saying, “You would be better off buying that pair of shoes rather than saving,” we may inculcate the wrong attitude in many ways, which people will regret it later, and we will not be doing them any favours in the long term.

The Johnson report said that women in particular would be affected if the threshold was raised from the original proposals or raised in line with income tax thresholds. It also said that if there was a disproportionate effect, which it saw, people would be concerned about that, unless they were persuaded that they would not benefit from saving. The report continued to address the question of whether that was the case and whether people would not benefit from saving.

If a long-term low earner were to remain below that level throughout their working life, they would get an extremely high replacement rate from the basic state pension and any other small state pensions they would have accrued. On that basis, they would receive a higher replacement rate, which is all right. What we are talking about are people who may have a replacement rate as high as 90% of their low earnings, but who still are on low earnings and who will be poor in retirement. Just because people have a higher replacement rate, it does not mean that we do not want to enhance their income at a time in their lives when they may incur additional costs, perhaps in the type of housing or assistance that they need.

Also, many may become single during retirement. That is a problem that many women have had over the years. In the past, women were often encouraged to rely on the support of their partner. They would go into retirement and share their partner’s pension, and therefore they would be all right and would not need to save. I presume that that is the origin of the fact that married women were able to opt out of national insurance. That was another piece of benevolence that was ultimately repealed. Some people at the time were not too pleased with it because they suddenly had to pay national insurance when they previously had not had to, or when they had only paid the very small stamp. When the change took place, some people asked why the state was telling them what to do and said that they had less income. However, even in recent years, women have reached retirement age and discovered that they did not have good pension cover because they had been on the small stamp; indeed, some were able to go on doing it until quite late because they had the option. They get to retirement and think, “Hang on. That was not quite such a big gift,” and complain about it.

Rachel Reeves (Labour, Leeds West)

Does my hon. Friend share my concern that the people who will miss out most from the increase in the earnings threshold, if it rises to the PAYE threshold and goes up further in line with the Government’s intentions for the PAYE threshold, are the women she is speaking about, who already have both lower state and occupational pensions? Given that they are already under-served by pension arrangements, is she disappointed that they do not stand to gain more from automatic enrolment under the Bill?

Sheila Gilmore (Labour, Edinburgh East)

I agree with my hon. Friend’s points. It is incumbent on us to look at which groups will be particularly affected by such proposals. If women have consistently been in low-paid employment, their need for good pension provision is greater, either because they have always been on their own and will have to provide for themselves or because there is still a differential in the life expectancy of men and women, as we have discussed. That can be seen as a benefit to women and it is sometimes said that, as women get their pension for longer, they are more fortunate, but equally, a powerful reason why many retired women are poor is that they do not have adequate pension provision of their own after the loss of their partner.

Stephen Lloyd (Liberal Democrat, Eastbourne)

I am slightly puzzled, because I buy the narrative and the argument, and I agree with everything that the hon. Lady is saying, except that, taking out the emotion, it does not concur with Johnson, who said:

“This means that many people on very low earnings will build up very small pots indeed, potentially damaging the credibility of the reforms…This will avoid automatically enrolling those not earning enough to pay income tax, which will ensure that the very tiny levels of pension contribution possible under the current proposals are avoided”.

If we remove the emotion and deal with the facts, according to Johnson, it would be counter-productive not to increase the thresholds, but the hon. Lady obviously disagrees fundamentally with what Johnson said.

Sheila Gilmore (Labour, Edinburgh East)

I disagree with the conclusion, but not necessarily with all the points that were made. I disagree that it is okay if someone who has been on a consistently low income ends up with a high replacement rate, because it will be a high replacement rate on a very low income, and anything that can be done to enhance that is important.

The other powerful argument about whether it is worth having small pots of money is to do with what happens about means-testing. Making a small amount of savings and having a small pension will not contribute to people’s well-being in retirement, because that will simply be cut off against some other provision. If the Minister’s proposals on the flat-rate pension are approved over the next few years—obviously, we still have to see a great deal of the detail and no doubt the consultation is being assessed, but I am sure that the Minister hopes to legislate on them in this Parliament—some concerns about means-testing might cease to have an impact.

Rachel Reeves (Labour, Leeds West)

Does my hon. Friend agree that it is unfortunate that the Government have frozen the savings element of the pension credit, which reduces people’s incentives to save? Does she, however, welcome the proposals for a flat-rate pension and, if that is introduced in this Parliament and comes into force before the review of automatic enrolment in 2017, will it make sense to look again at the earnings threshold?

Sheila Gilmore (Labour, Edinburgh East)

Freezing the credit was the wrong decision. It affects pensioners now. Part of the problem with the proposals for a flat-rate pension is that people who are already in retirement will not benefit from it, even when the new scheme comes in. That is where a lot of the campaigning groups have severe concerns that many people will still have 10, 20 or maybe even 30 years in retirement, not benefiting from the new scheme and therefore still being affected by all the issues around means-testing. Therefore freezing the pension credit affects pensioners now and if it continues will affect pensioners into the future, who will not have the benefit of the flat-rate pension if it comes into effect.

I look forward to understanding how the flat-rate pension proposal can be introduced without additional cost. If it can be, it will indeed be a good thing. I do not think any of us could oppose reducing the quantity of means-testing. The relationship of that to the present discussion is that if there is a flat-rate pension at the level suggested of around £140 per week, having additional savings—even if they are small—will no longer be the handicap that has been suggested.

Lilian Greenwood (Labour, Nottingham South)

Is it not the case that the Johnson review actually concludes that it is very difficult to work out who should and should not be auto-enrolled? In fact it says that

“it is very hard to distinguish any clearly identifiable group or cut-off where one might say that those below this cut-off should not be saving and those above should be”.

It goes on to say that the world is not a simple place, and continues:

“Many or most very low earners are women, who live in households with others with higher earnings and/or receive working tax credits. These may well be exactly the people who should be automatically enrolled.”

Does the hon. Lady share my view that the preference should be to automatically enrol more people who then are free to opt out rather than having it the other way around with fewer people auto-enrolled who are less likely to take up the option of opting in?

Sheila Gilmore (Labour, Edinburgh East)

Yes, I think that is indeed the case. We should err on the side of people being included rather than excluded. In these situations, relying on people opting in is not particularly attractive. Auto-enrolment was chosen for the very reason that, sadly, people do not always look after their best interests and they do not necessarily opt in. That was my criticism, which I voiced previously, of what happened with the state earnings-related pension scheme during the last Conservative Government. People were given freedom to opt out of SERPS and a lot of people did opt out to their detriment. Freedom is not always as desirable as it might sound on the surface.

The other reason for allowing people to build up small amounts of pension at times when they are earning is that earnings are not static. The Johnson report says clearly that the model of somebody who remains on low earnings from age 22 to retirement will be extremely unusual, and that periods of very low earnings are likely to be followed by periods when people earn more. That is the pattern, certainly of a lot of women’s working lives, and it may be of men’s working lives in the future as well. On leaving education, they enter employment, work full time—and may do so for a considerable number of years—then when children are young they may choose to work fewer hours because of the difficulty of child care or because they are making a positive choice that that is what they want to do in that period of their life. They might return to full-time work when children are older, and they might have to return to part-time work again at a later date, particularly if they end up caring for elderly relatives and can no longer sustain that with full-time work. It is an up and down earnings pattern. In those down periods, if people can continue to be covered by this kind of pension saving, then the total amount they are able to benefit from ultimately would be beneficial.

One argument that is frequently raised is that this is not worth while, because people will lose out on receiving other elements. However, organisations such as Age UK have pointed out that it could be particularly beneficial with low amounts, because it is being made easier for people to take some of their small pension savings, whether through NEST or otherwise.

Although currently, as we have already discussed, there is a means-testing element in relation to capital, if someone has below £10,000 in capital they will still receive some of the means-tested pension top-up. Therefore, it would be beneficial to them to have a cash sum of £5,000, £6,000 or £7,000. They could continue to save, or use that money to make the kind of adaptation that many constituents of mine would like to make to their houses, such as replacing the bath with a shower if they expect their mobility to decrease. That is the kind of adaptation that will make their lives better and with which they will often not get help from the state because they do not meet the required level of substantial or critical need. They are expected to find that money themselves, and people who do not have any kind of nest-egg—as it used to be called—will have considerable difficulty in doing that.

If it is possible to have small pension savings which can be commuted to cash relatively easily, and which will not necessarily interfere with receiving means-tested pension credit—even assuming that the mean-tested pension credit continues in its present form—it is a very positive benefit, not least because to be involved continuously, or for as long as possible, encourages people to see this as an important part of their life.

I was struck by what my hon. Friend the Member for Erith and Thamesmead said about the attitudes of people in Australia. My Australian sister-in-law also talks about that, and it had bypassed me that they really do consider their superannuation arrangements to be an important part of their lives. Over the years we have struggled to encourage people to save, and we need to read across all our different governmental policies. I was at a seminar yesterday for the all-party group, where various caring groups were looking at the Dilnot report. We are struggling with how we provide care for people in older age, and with the lack of savings which often makes it very difficult for people to make provision.

As my hon. Friend the Member for Erith and Thamesmead said, we must also look at the proposals that are coming forward to encourage people to do these mini-jobs, as they have been referred to. Those of us who were involved with the Welfare Reform Bill will have heard mini-jobs referred to endlessly. I share my hon. Friend’s aversion to this new concept, which seems to make low-paid work sound fun, trendy and exciting, like a mini skirt or a Mini car. The reality is that a lot of people will be doing some pretty poorly paid jobs, and I am concerned that although people will have some element of work in their lives, they will be stuck on a treadmill of low-paid jobs over a long period.

Lilian Greenwood (Labour, Nottingham South)

Does my hon. Friend share my concern about what might happen? The importance of saving and developing a culture of saving is vital. If people come into the workplace on a so-called mini-job, or working for a low number of hours that might be below the threshold, would there not be a temptation—as they increase their hours, their earnings go above the threshold and they are auto-enrolled—to choose not to pay into a pension? It is better that people pay into their pension from day one. As their earnings or hours increase, they would see the benefit of a higher total salary and continue to make provision for a pension.

Sheila Gilmore (Labour, Edinburgh East)

That is a powerful point because it again illustrates the changeability in people’s working lives. We do not want to create cliff edges or anything that can almost discourage people from increasing their hours and therefore their earnings. I know that the Department is very concerned about that because of the benefits reforms that are being introduced. It is said that one advantage of universal credit is that it will take away some of the rather artificial points at which people make decisions such as, “Do I work fewer or more than 16 hours? Is it worth my working that extra hour, because it will not actually benefit me?” I do not know whether that will be the outcome, but the intent of the universal credit is to smooth things out and remove such situations. We do not want to have people saying, “If I do that, I will have to start contributing to a pension, and I do not want to do that because it will make my position worse.”

Chris Evans (Labour, Islwyn)

Does my hon. Friend believe that a lot of the problems come down to a lack of independent pension advice? If someone goes to a bank, it is likely to try to sell them the best product it can. If they go to an independent financial adviser, the adviser will do the same thing. They will think about the sale rather than the needs of the person in front of them. If the Government are seriously interested in improving the advice out there, they could come up with an independent vehicle or a helpline that people could ring to talk about pensions.

Sheila Gilmore (Labour, Edinburgh East)

I thank my hon. Friend for his intervention. Obviously, good advice is important, particularly for people on low incomes. The advantage of the system that the previous legislation set up was to create a default position for people who do not have other forms of coverage through their employment. The future of this could be extremely important. I want to see NEST being built up. At the moment, there are issues about the way in which it is structured and whether people will be able to add bits of pension that they have earned elsewhere, so that they can secure their position and take transfers in and out.

Another matter related to the question of threshold is the issue of people having more than one job. The higher the threshold, the more likely there are to be people who miss out, although their total earnings and hours of work will actually be quite considerable. It is not unusual for people to have more than one part-time job. Such work has become more common because it suits the needs of employers, partly because of the nature of the work. Caring jobs often require people to do a certain number of hours, perhaps helping somebody in the morning or evening. People often do such work for different employers. Some people work for an agency as a care assistant for part of their week, but also take on work for an individual, because that is the work that is available. There will be more such work if people have personal budgets for care, so people will be working far more for an individual than for an organisation.

Shops like flexible working as well, because it allows them to take people on for the busy times and not have someone there all day. It is understandable, from a business point of view, that they might want to do that. As shop hours have increased, the amount of part-time work has increased too. It can be useful for the individual, because it allows them to fit things around their life. It is useful for the employer too, but it might mean that people will end up in a position where they are not auto-enrolled in any of their employments, or are perhaps auto-enrolled in only one of their employments. The higher the threshold, the more likely it is that that situation arises. That is why I support the amendment, which is asking for a report on part-time work.

If this increases—we have talked so much about seeing it increase—we have to be sure that there are not groups, which may be predominantly, but not exclusively, women, that are missing out on auto-enrolment, which we have all agreed is an important improvement in pension provision in this country.

Malcolm Wicks (Labour, Croydon North)

Good morning, Mr Brady. I am pleased that I am here this morning, partly because we are teasing out the issue on the importance of savings, not least for those on very low incomes, and the reality of that. I look forward to the Minister’s response. I am also pleased to be here this morning, because for the first time in 25 years I have heard the word elevenses, which the shadow Minister used. It conjured up an image, from long before the age of the Mini car and—if I may say so—the mini skirt, of “Mrs Dale’s Diary”, John Major’s warm beer, digestive biscuits and all the rest. It is a credit to how we teach social history in our primary schools that the shadow Minister has recalled that word. No elevenses for us, however, as we continue this important debate.

Forgive me for briefly sketching out the context, but here we are, arguing about how we can tackle the national deficit—we can argue about its causes, and we do not always agree—but we are also worried that many of our constituents are building up great debts through so-called credit cards and the rest. It is not unreasonable to place this discussion on how we encourage savings of different kinds, which in this case are pension savings, in that wider context. Most of us are on the side that it is reasonable to encourage those savings.

I am bound to say that one attempt to boost savings culture was the child trust funds, which unfortunately and ironically have been one of the major victims of the deficit reduction programmes. There must be an irony there that we attack a savings scheme because we are so concerned about the deficit. We can reflect on that irony at another stage.

I also draw in evidence the excellent work of our credit unions, which give many of our poorer constituents a way of borrowing far away from the loan sharks that bedevil many of our housing estates. I mention that because—although many people join credit unions because of the opportunity to borrow, not least in the run-up to Christmas—however low someone’s income, they have to save as well, even if it is only a pound or two a month. That reminds us that the credit unions are an example of the institutions that are so important at the moment, because they instil that culture of saving. Someone may be on a very low income and be hard pressed on how to buy shoes and the kiddie’s clothes, but they have to save on a regular basis. That is relevant to what we are discussing.

I recognise, however—hence my eagerness to hear the Minister’s response—that we are having a debate on both the principles, which my colleagues have set out well, and the realities. The hon. Member for Eastbourne asked my colleagues some useful questions. That is what we are trying to tease out. The Committee is in favour of auto-enrolment and NEST, and we are here, looking at some of the details of them. It is great privilege for the Minister to be able to come here today to give his own analysis of how he is going to implement those two major Labour Government policies—because they are indeed Labour Government policies. Unfortunately, because of the deficit and the way in which this Government are tackling it, he often has to become an apologist for cutting people’s pension entitlement by changing the index linking, and so on. Here, however, he has an opportunity to push forward the two great social reforms.

On auto-enrolment, I want to reflect on my experience in the Minister’s seat, when we were developing proposals for what became the Pension Protection Fund and, later, the financial assistance scheme. This was in the era—I say “era”, but this was only in the middle of the last decade—when we were confronting an issue. Companies were going bust, and people who had been building up their pension savings all their working lives were suddenly in danger of getting, not nothing—that would be an exaggeration—but only perhaps 30% or so of what they thought their pension entitlement was. It was one of the great scandals of the age. Ian McCartney—now Sir Ian McCartney; it sounds strange to say that—grasped the nettle and urged the then-Government to implement some kind of pension protection.

I met some workers in the steel industry and, if I may say so, the metal-bashing industry, who were nearing the end of their working life; hence the urgency of pension protection for them. They told me that when they joined the company and were told at 15 or 16 that they had been signed up into the company pension scheme, they took it for granted. A lot of them said to me, “If I had a choice at the time, I probably would have said no, because I would have preferred the extra quid or so to spend in more pleasant ways. But thank goodness we were signed up, almost without being asked, into the company pension scheme.” Now, facing retirement, that was a protection for them. That convinced me that some paternalism in how we sign people up to company pension schemes is important. The theme that we are discussing is placing the principle that everyone should be encouraged to save for their pension against the reality of whether that should apply to people on low incomes.

Can the Minister give us an overall analysis of how he thinks that relates to our means-tested pension credit system? I know that he is interested in that. What are his concerns? If we enable more people on low incomes to sign up to company pension schemes or NEST, how would that impact on entitlements to pension credit in the future? I know that he has grand proposals to reform the whole thing. Nevertheless, those proposals are not legislation at the moment and may not occur in reality. His reflections on the relationship between low-income people building up occupational pension rights and our current means-tested system would be helpful.

Notwithstanding the important questions asked by the hon. Member for Eastbourne, I am still on the side of saying that unless there are really good reasons why we should exclude groups, the bias should by and large be towards including groups. One of the reasons I say that is because if we are talking about people in their 20s, 30s or 40s who are on low incomes, would it not be profoundly pessimistic of us as a society and an economy to say, “Those people are always going to be in low-income jobs. There is no dynamism. Despite all the wonderful things that we say about skills, training and education and giving people second and third chances, and the need for all of us to become reskilled several times in our careers, the people on x thousand pounds a year will always be on x thousand pounds a year”? That would be a huge betrayal of everything that we have all said about the need to enable people to move further up the career ladder. For that kind of reason, I am rather in favour of people—even those on the most modest incomes—being signed up to occupational pension schemes, which give them a foundation as, we hope, with better skills and education, their careers move forward.

Stephen Lloyd (Liberal Democrat, Eastbourne)

I understand and appreciate the right hon. Gentleman’s direction of travel, but why does he think there is such a difference between £5,500 and £7,500? I understand the morality behind his argument, but if we take it to its logical conclusion, surely at £5,500—or if the Labour Government had still been in control—many hundreds of thousands of people would still be penalised. Why, therefore, do we not go to £0, which would present a new range of issues and challenges?

Malcolm Wicks (Labour, Croydon North)

That is a perfectly reasonable question. I have listened to my colleagues’ arguments, which I tend to support, and I am genuinely interested to hear what the Minister has to say about them. In principle, I have always been attracted to that idea, but administratively it might be difficult. Ideally, even the student or young person taking a summer holiday job should start to contribute, as should his employer, to a pension that can build up. We have a very flexible labour market with few jobs for life—although there are more than people say—and people have different kinds of jobs. We must therefore have pension arrangements that are sufficiently flexible and fast on their feet to enable people to build up rights.

Just as we encourage our children to save—although the Government no longer do—even if it is only a few pennies a week, so should we encourage people to get into a pension savings habit. We should introduce a proper communications system, such as that in Australia, which I witnessed myself. Such a system enables people to know how their pensions are building up. We must do much more to communicate to people how their pot is building, the options available to them and so on. If we have that system, the sooner we get people into a savings culture through pensions, the better.

I have another question for the Minister. I think we all support auto-enrolment when the individual can opt out, but how will we protect workers against unscrupulous employers? Such employers might come along and simply say on day one, or after how ever many months have passed before the Government allow them to auto-enrol, “Actually, son, you don’t really want to be in this scheme. It’s going to cost you money. You’d have more fun down the pub with that money. Sign this form so that you can opt out.” Perhaps much work has gone into protecting workers from that situation and I have missed it, so I should be grateful for the Minister’s response. There might well be unscrupulous employers who say, “You don’t want to be part of this—it’s ridiculous, it’s wasting your money. You’re only 18,” or “You’re only 22; old age is a long way away. Sign this and all this nonsense won’t affect you.” I would be interested to hear the Minister’s observation on that matter.

Generally, we have had a good discussion. I look forward to hearing the Minister’s rationale for excluding people, including those—I will not call them people in mini-jobs, because we cannot say that and I understand the reasons why—in very part-time jobs. In the Committee’s discussions last week, as part of my arguments about the importance of social class, I quoted the experience of one of my constituents. I referred to her as Jill Brown, but that is not her real name. I shall quote briefly again from her letter to me. She wrote:

“I am almost 57 years old, a single mum and earn a feeble £7,000 a year, propped up by working tax credit as I work 24 hours cleaning courtesy of three part-time jobs. I get up at 6 am, work two jobs before noon and then walk another mile to my third job from 4 pm to 6.15 pm.”

I stress that she does three part-time jobs, and it is important that people in such situations are not excluded from the very radical proposals to improve our pensions, which I of course support.

Graham Brady (Conservative, Altrincham and Sale West)

Before I call the Minister to respond, it might be helpful for the Committee to know that I think we have had a wide-ranging debate on this group of amendments, and I am minded not to allow a clause stand part debate. I call Steve Webb.

Steve Webb (Liberal Democrat, Thornbury and Yate)

Thank you for being characteristically generous this morning, Mr Brady. In responding on the amendments, I hope to deal as well with the substance of the clause.

We have been told that the reforms are Labour ones, but also that they have many problems. For the last hour or so, we have heard that they do not work well for people with multiple jobs or if there are unscrupulous employers. We have heard a whole list of real problems with the system that were either not addressed when the Labour party designed it or that have since been addressed. It is interesting to hear one of my predecessors’ anxiety about people with multiple jobs, as the previous Government decided not to do anything about them—I wonder why; I know why, and I will come on to that.

The whole debate has been founded on one misconception and one blind spot. The blind spot was the staggering omission in almost all the speeches by Opposition Members, particularly the shadow Minister’s, of any assessment of the burden on the employer who has to administer auto-enrolment. The shadow Minister probably has the script of what she said, and if she can find a single reference to that in her whole contribution, I want her to read it out again, because there has to be a trade-off.

We are requiring more than 1 million employers, many of whom have no pension system at all, to bring people into workplace pensions. We are doing that for the good reason that we think workplace pensions are important, but that has to be proportionate. The problem with simply saying that if we raise the threshold, we exclude people—with absolutely no reference to the impact on the firms involved—is that every time we keep the threshold down, we are incurring costs on employers, particularly smaller firms that are more likely to employ people in the lower earnings bands, to introduce contributions that will sometimes be of pathetically small amounts.

The Committee should understand that we are proposing a trigger for people being auto-enrolled, which will be a figure that is lower than the start of the earnings band, so that once someone is above the threshold a worthwhile sum of money will be paid in. However, amendment 28 would realign those figures at the same number, which means that if someone earns £1 above the threshold, 8p will go in—3p from the firm, 1p from the taxpayer and 4p from the employee. We would be requiring Britain’s small businesses to choose a scheme and to put 3p into someone’s pension, which would bring the entire scheme into ridicule and disrepute.

If the nation’s small employers rose up as one and said, “We are coming out of recession and times are tough—you want us to take people on, but now you are making us choose a pension and make contributions, all for the sake of pennies,” we would be laughed out of court. People would think it was an absurdity, but that is what amendment 28 would do.

Sheila Gilmore (Labour, Edinburgh East)

There are two aspects of what the Minister is saying. First, the onus of choosing a scheme is surely not so great since the employer can use the NEST scheme. One reason for setting that up was that it was acknowledged that many small employers would find it difficult to set up their own scheme, and such a scheme has been very much lacking in the past. Secondly, many small employers will have people who are just above the threshold, and employers will therefore still have the burden of setting up and operating a system, so why is including those other people so much greater a burden?

Steve Webb (Liberal Democrat, Thornbury and Yate)

On the first point, NEST is available, and we will flag it when we communicate with employers. They will still have to make a decision and the Forum of Private Business, for example, is anxious about that choice. We are trying our best to make that decision as easy as possible, but some employers are worried that they might be sued if they make the wrong choice. If we are putting a duty on firms and trying to make that duty proportionate, we cannot expect them to enrol people for contributions of pennies. I find it incredible that the legislation we have inherited includes no concept of a minimum amount, but that is the case.

The hon. Member for Leeds West also said that when people earn above the threshold, the process will have to be in place. However, as the Bill stands, if the one employee of a one-employee firm is earning £6,000 a year, auto-enrolment will not be necessary. I will now come on to the figure, because I intervened on the hon. Lady to give her a gentle steer that her amendment was based on a misconception. She quite rightly said that last year the primary threshold, which is what amendment 28 proposes to insert in the Bill, was £5,715. However, since then it has gone up dramatically—not only by normal indexation but by £1,500. If we took amendment 28 at face value, therefore, we would be substituting £7,225 for the £7,475 in the Bill; so we have been having an hour-long debate about 250 quid. That is the difference between what the hon. Lady is proposing and what we are proposing in the Bill—although I accept the point that over time the amounts might diverge. The hon. Member for Nottingham South then intervened and read out some jobs which, if done part-time, might fall below our £7,475 threshold. However, if they were £1,000 or so below—the figure she quoted—they would all be below her threshold as well, because the primary threshold is much higher than she thinks. So the whole of the past hour has been based on a false premise.

When the legislation was introduced, the uprated version of that old £5,000 was well below the tax threshold, but something dramatic changed this year, which means that a lot of the figures quoted by the hon. Lady—her 1.5 million, her 800,000—are wrong because, compared with what is presumably the default position of the policy under amendment 28, far fewer people are excluded by the Bill than she suggested.

Rachel Reeves (Labour, Leeds West)

Will the Minister therefore update us on the differences between the new national insurance threshold and the PAYE threshold, including what proportion of those affected are women, and between the new NI threshold and the £10,000 that is the Government objective for the PAYE threshold, again including the proportion of women?

Steve Webb (Liberal Democrat, Thornbury and Yate)

I thought the hon. Lady might ask me that. The system includes many different thresholds. The old £5,035 which is in the Act—the primary threshold—is now £7,225. The Bill uses the income tax threshold, which is £7,475. Going from the £5,035 to £7,475, we get the 600,000 number that she has been quoting. However, out of that 600,000, more than 500,000 are taken out by her amendment, so the difference between her number and our number is about 70,000 this year. I accept that that will grow as the threshold goes up. If the tax threshold were to go up to £8,105 next year, we are talking about getting on for another 100,000. If we go up to £10,000—remember that that is nominal—the Johnson review said 1.4 million, but we have just knocked out about 500,000 because she wants to go to £7,225, so we are down to 0.9 million. However, that is based on £10,000 today, not on £10,000 by the end of the Parliament, which is the coalition agreement commitment, so those are all overstatements of the impact.

The hon. Lady is absolutely right that there are more women than men in those bands—that is clearly true—so the measure will have more impact on women than men. I do not dispute that for a second, but the proportions of women and men are pretty much the same—the extra thousands do not radically change the proportion. If we look at the move from £5,035 to the tax threshold, 78% of the people excluded are women; if we move up to the new tax threshold next year, it is 76%; and if we move up to £10,000, it is 77%. So the principle—the fact—that there are more women low-paid workers is given, so the policy has greater effect on women than men.

Intriguingly however, if we take the Labour party approach, less money would be required from many lowish-paid workers under auto-enrolment than we will require, because Labour wants to apply contributions only above the £7,225 number, whereas we want to apply them back down to something like the lower earnings limit—a number of about £5,000 that has not yet been determined. In other words, once people are above the trigger, they will pay on the band of earnings down to the floor, whereas the Labour party position is that once people are above the trigger they pay on the marginal penny. So people who are above the trigger—on, say, £8,000 in 2011-12—will put more money into their pensions under our proposals than under the amendment. We have heard so much about how important it is for low-paid workers to save, but £8,000 or £9,000 is not well paid, and many of them would put less in under her proposal than under ours. That is the fundamental problem with the amendment.

There was a suggestion that with our proposal there will be a cliff edge, but it will be relatively modest. If an earnings band starts at, say, £5,000 and the trigger is £8,000, the band would be applied to the £3,000, and 8%, when it is all fully in, is £240, or £5 a week. That is split between the employee and the employer, so it is a couple of pounds a week. That is a step, and we think it should be a step to get people in, but it is not the massive cliff edge that has been suggested.

Malcolm Wicks (Labour, Croydon North)

Before the Minister moves on, will he explain what, under his proposals, thresholds and so on, the smallest contribution would be that a worker might have to pay either weekly or monthly?

Steve Webb (Liberal Democrat, Thornbury and Yate)

Let us suppose that auto-enrolment starts in 2012, and we use the income tax threshold of 2012-13, which the Chancellor announced will be £8,105. A decision has not been made, but if we used the earnings band down to the lower earnings limit of £5,500, the band would apply on around £2,600. As the right hon. Gentleman knows, 8% of that is about £200. That is the sort of combined amount that would be going in. In pension terms, £200 is small, but worth having, as we have heard, but that is not the penny or 2p that would follow from amendment 28. It is certainly a small amount, because a large amount would create a cliff edge, so there is a trade-off.

One point about the Johnson review, which has been widely talked about, is that it looks at all the pieces of the jigsaw, and suggests a trade-off on earnings, on waiting periods, and on size of firms. The review tries to achieve a balance, and to take all the measures together instead of taking one out and changing it. For example, I said that I was worried about the burden on firms, but we have not excluded micro-employers, which we were pressed to do. Some people said that we should exclude them, but we said no, we must have everyone in because we do not want to exclude another 1 million people just because they do not work with someone else. However, we recognise the burden on small firms, so we raised the threshold and introduced the waiting period. It is important to see all the different elements as part of a whole, instead of picking apart individual bits and unbalancing them. The impact on employers is significant, and the change helps with that.

Rachel Reeves (Labour, Leeds West)

The Johnson review considered that, but so did the Turner report before it. In fact, Lord Turner was head of the CBI at the time. Those different perspectives—the trade union perspective and the employer’s perspective—were considered in the review, which recommended that automatic enrolment should start at the national insurance limit, not at the PAYE limit. Does the Minister think that Lord Turner got that wrong?

In addition, people may enrol at a lower earnings level, even if they are not automatically enrolled. Will that make a mockery of the system?

Steve Webb (Liberal Democrat, Thornbury and Yate)

The hon. Lady raises a series of points. Clearly, Lord Turner was making judgments in a very different economic world. It was pre-crash, and since then we have acquired new evidence on longevity, as we have discussed. The situation on annuity rates is very different, and the coverage of private pensions has changed. One reason for setting up the review last summer was that the world has moved on. We are post-crash, and coverage of workplace defined-benefit schemes has declined. The situation is different, and the point that I made at the start about the primary threshold being much closer to the tax threshold was not the case when Turner wrote his report. If it had been, he might have come up with different answers.

The hon. Lady says that people may opt in, but there is a world of difference. The fact that they may opt in is crucial. For example, people who have had higher-paid jobs in the past but now have a lower-paid job may be excluded by the threshold. However, because they have connections to pensions and are aware of them—they may have a NEST, for example—they are more likely to think about that issue. Such people are not excluded by our Bill; they can opt in. There is a world of difference between an engaged employee opting in and a reluctant employer being forced to enrol people for trivial amounts of money. It is good that people can opt in, and it will provide a measure of reassurance for those in whose interest it is to be auto-enrolled, even if they happen to be below the threshold.

Rachel Reeves (Labour, Leeds West)

The Minister says that things have changed since the Turner report. As he knows, three people sat on the Pensions Commission: Lord Turner, John Hills and Baroness Drake. Has the Minister consulted any of those people about the changes in the Bill? Do they think that it is the right way forward and have any reservations been expressed?

Steve Webb (Liberal Democrat, Thornbury and Yate)

Since the election, I have discussed pension reform—including some of these measures—with Baroness Drake and John Hills, although not with Lord Turner who, as the hon. Lady will understand, has one or two other things on his plate. The hon. Lady will know the views of Baroness Drake, who is a Member of the other House and speaks on behalf of the Labour party in another place. I have the greatest respect for Baroness Drake and her expertise in these matters, but unsurprisingly her emphasis—perhaps reflecting a trade union background, I do not know—falls more on the side of the individual consumer and I understand that.

These issues need balance, but we did not hear anything about the other side of the balance from the hon. Lady, and there was nothing about the burden on the firm that has to administer these matters. The Government have introduced a three-year moratorium on regulation for all small firms because of the crucial importance of those small firms to recovery from the recession. To design an amendment that, if it did what she intended it to do, would put a lot of burden on small firms, seems to miss an important part of the debate.

Lilian Greenwood (Labour, Nottingham South)

The previous Government tried to recognise the impact on small firms by phasing auto-enrolment and starting it earlier for large companies while allowing it to take place much later for small companies, particularly in view of the economic circumstances. By the time that many small businesses become eligible to participate in the scheme, hopefully we will have seen some sort of recovery.

Steve Webb (Liberal Democrat, Thornbury and Yate)

I hope the hon. Lady is right and that in a few years, by the time smaller firms are phased in, we will be in a much better place. But a burden is a burden is a burden. There will still be a cost for the smallest firms and some sectors will still struggle. We should not put costs on those firms for no obvious benefit. Many employers will recognise the value of workplace saving, even if they have not got around to organising it for their employees, and they will take part in auto-enrolment with good grace. However, we will lose the good will that is a crucial part of the system if people are seen to be doing something futile by putting pennies into pensions. I have not heard during any intervention a sensible response to the fact that if the Bill is amended in the way suggested, people will be putting pennies into pensions. That will create a great deal of hostility to the reforms.

The context of the reforms and where people get their information from is important, and the point about “Is it worth my while saving?” is crucial. If we do not reform the state pension in the way we have discussed, there is a danger that people will perceive that their savings are simply replacing the means-tested benefits that they would otherwise have received—that returns to the point raised by the right hon. Member for Croydon North.

We have heard the detailed and thorough statistical work carried out by the Department, which suggested that 95% of people would get back more than they put in although not necessarily more than what they and their employer put in. If at the time of auto-enrolment, stories in the press say, “Don’t touch this thing with a bargepole if you are on a low wage; you will lose your means-tested benefits,” the people whom we most want to benefit from the policy and about whom Labour Members are most concerned, will not save. That will fatally undermine the whole project.

We have been asked how this policy interacts with our Green Paper reforms, and that is why our state pension reforms are so important. The hon. Member for Leeds West asked how that proposition might affect this conversation, and it does so profoundly. It would greatly reward saving which, as we have heard, we want to do. The other thing that it does is to greatly increase replacement rates for low earners. Replacement rates matter a lot because, if we are to go to the trouble of auto-enrolling people on a low wage, there must be a point to it. If we are auto-enrolling people on £7,000 a year, and paying them a pension of £7,000 a year, why are we going through all that to take a bit off their £7,000 now to add a bit on to their £7,000 so that they have more money in retirement than they have in work? That seems a strange thing to do. Therefore, the single-tier proposition that we ought to enrol from a slightly higher threshold, not a lower one, is complementary and reinforces the Bill.

The hon. Member for Erith and Thamesmead cited the Australian example. She is right. I recently met Senator Sherry. He told me that he comes over each year and meets a different Minister each time, which I was not wholly reassured by. As the hon. Lady says, he is in charge of the “super”, and it has been a great success. She will be well aware that it is more than auto-enrolment in Australia. It is compulsory pension saving, but it illustrates the difference that can be made from such a system and, indeed, the popularity of pension saving when it is done well. We have gone for soft compulsion, recognising that, for some people, pension saving is not the right decision. We have mentioned that today. There may be a set of people for whom it is not the right decision, and that is why we have left them the freedom to opt out.

The hon. Lady asked about the 2017 review, which will be conducted by my successor but five, I suspect. I do not want to pre-empt that, but she has tabled new clause 7 about NESTs and transfers, so I shall not deviate too far down that track. Clearly, the Johnson review considered that those limits should go in 2017, and we might revert to that issue when we discuss the new clause. The hon. Lady asked several practical questions about agency workers and so on, and the crucial matter is the employment relationship: whether they are employed by the agency or the people whom they are to work with. It is the employer who has the auto-enrolment duty.

There was some pressure on us to exclude agency workers, but we said, “No, those are classic people. They might do lots of different jobs, but never get a pension.” It is important to include them, but clearly there will be enforcement issues. The right hon. Member for Croydon North asked about unscrupulous employers, and I just want to say, as it will be relevant to all our debates, that the Pensions Regulator will issue a contract to pay for enforcement. The enforcement and compliance regime is designed to be fundamentally carrot, supportive, encouraging and to make it easy for firms, but it will have powers to penalise and fine if things go wrong.

I had a meeting with the Pensions Regulator yesterday when we discussed the contract for the compliance regime. It is something that we take seriously, and we want to make it as easy as possible for firms to do the right thing, but we know that there will be a minority that do not. We therefore have the powers to act and to fine, and to take other steps. In response to the right hon. Gentleman’s specific question about the firm that says to the employees, “Sign this, and we don’t have to bother about it,” he will know that that is not how it works. The auto-enrolment relationship is between the individual and the pension provider, and the opt-out has to go from the individual to the pension provider, not the firm that provides a measure of insulation. We cannot prevent such conversations from happening, although it is an offence to induce people on the opt-out issue. Firms are not meant to put undue pressure on individuals, but we will have a compliance regime.

Malcolm Wicks (Labour, Croydon North)

I understand that, and I agree that insulation is helpful. Nevertheless, such a conversation could still take place between the unscrupulous employer and people joining the company. Will the Minister explain how the Pensions Regulator, which has many other responsibilities, will police the matter, for example, if it were shown statistically that 80% of new entrants were not joining the scheme? Would the Pensions Regulator have that data? Would it be able to intervene?

Steve Webb (Liberal Democrat, Thornbury and Yate)

The regulator will be monitoring compliance. That will be a huge task, because many such firms will be micro-employers and do not have employees in workplace pensions. There will be the ability for the aggrieved individual to contact the regulator and the agencies in respect of the enforcement, and to say, “Hang on a minute, I’ve just been lent on”. The individual can report it. The auto-enrolment process has to happen. That is the duty and the regulator will know if that has not happened because they will be logging the auto-enrolment. If someone opts out, that might be genuine. The regulator will not be able to tell between genuine opting out and leant-on opting out. That is where, inevitably, an individual who feels aggrieved will be able to report it. If they do report it, it will be taken seriously and there are statutory penalties where improper processes have gone on.

Malcolm Wicks (Labour, Croydon North)

I am sorry to push this, but this is a good policy that I do not want to fall foul of unscrupulous employers. Will the regulator or NEST or someone be required to publish regular data to show what proportion of the employees of the firms involved have auto-enrolled, so that we can monitor this?

Steve Webb (Liberal Democrat, Thornbury and Yate)

The way it works is that employers have to register with the regulator. The regulator can compare the data that it is getting on auto-enrolment with PAYE data. That is the cross-check that is available. Inevitably, a risk-based regulator, which was what the previous Government created, will focus its resources on cases where opt-out rates look suspiciously high. That will not cover the one-person firm. In that case, it will inevitably rely on the individual complaining. If there are firms of a reasonable size who show up as having disproportionate numbers of opt-outs—for example, for their industry or for their size—the regulator and the contractor to the regulator, who will deal with some of this, will be able to take action on a risk-based basis.

We do not want to create massive burdens of reporting, but we will certainly be reporting back to the House on the progress of auto-enrolment. I can write with further details of exactly what we will report and how much the regulator will report. We will keep people informed as to how auto-enrolment is working. I am sure that there will be a lot of interest in that.

A number of hon. Members raised the issue of multiple jobs. It is an important point, which, as has been said, may become more important. Amendment 37, which was tabled by the hon. Member for Erith and Thamesmead, would require the Secretary of State to report to Parliament on trends related to part-time work within one year of the commencement of the universal credit, but universal credit is being rolled out. After the first year it will apply to only a limited number of people. Even the most optimistic of us think that it is too soon to report on a major shift in part-time work from the partial roll-out of universal credit. She raises an important issue, however, on the place of part-time work.

It is worth not overstating the issue of multiple jobs. I asked for some figures on how many people have multiple jobs and would have a problem with not being auto-enrolled as a result, if we use the £7,475 threshold, which is a tough test. At first glance, it looks like a big number. Some 540,000 people have more than one job and fall within the age bands for auto-enrolment, but of those 350,000 are above the £7,475 threshold in one of the jobs. They will be auto-enrolled—not on all their earnings in all their jobs, but within that multiple employment there will be one substantive employment, so they will be getting into pension saving and will be aware of it. There are 80,000 for whom both their jobs are over the £7,475 threshold. Perhaps that includes the constituent of the right hon. Member for Croydon North. There are another 60,000 who, even if their two wages were added together, would not get over the threshold. I hesitate to call them mini-jobs, but hon. Members know the territory we are in. They are very small jobs.

Taking out those categories that are less of an issue, because they are either auto-enrolled anyway or earn too little, there are 60,000. Those 60,000 people clearly matter, but if we set up a complex system to deal with those people who, if we could add their two jobs together would be auto-enrolled, but when they are taken separately are not auto-enrolled, that would be quite a challenge. For example, if someone does cleaning for two people, and the two jobs together would get them over the threshold, whereas separately they would not, what would we say? Would we say that the two employers have to each nominate a scheme to auto-enrol into, which would have to be the same one? Would the contributions be split? The overall amount would be tiny because it would be half of the threshold. As soon as we start thinking about how we might do it, we start to realise why the previous Government did not do anything about it.

Rachel Reeves (Labour, Leeds West)

I recognise that the issue is not a simple one to fix, and I am not proposing that there is an easy way to deal with it. As well as the people whom the Minister just said would miss out, does he recognise that if a person had two jobs that paid £8,000 each, the person would automatically be enrolled, but only on the band of earnings between just over £5,000 and £8,000? However, if that person was in one job earning £16,000, they would be auto-enrolled into a much larger band of earnings. I know that there is no easy fix, but is the Minister concerned that with the growth of part-time work, and as more people work in such ways, the issue is likely to become bigger in the future? Will his Department look at that to try to ensure that those people are not missing out on the pension contributions that they would be entitled to if they were in just one job?

Steve Webb (Liberal Democrat, Thornbury and Yate)

The hon. Lady is right. The problem would be bigger if we chose the threshold in amendment 28, which is £7,000-odd. The situation would be even more acute. However, she is right. If we have a band of earnings and a floor and we split it across multiple jobs, that would be a band that does not get pension contributions. For reasons that we have discussed, we are interested in part-time work and lower-paid jobs. Partly in response to her request for a report, regular annual statistics on part-time work are published. We will certainly continue to monitor those trends and look at the interaction with universal credit, which we have discussed. We will certainly be mindful of the points that she raised. However, returning to my previous point, working out how we might combine the two is quite a challenge. It is not obvious that the administrative structure that has to be in place to make that happen is proportionate to the scale of the problem.

A few other issues were raised in the debate. The hon. Member for Kilmarnock and Loudoun said that we should always encourage people to save, no matter how small the amounts. I am not sure that I agree entirely with her. I greatly value savings and I take her point, and I agree entirely with her point about retirees thinking, “What was the point of saving?” That is part of the point of the pension reforms that we are looking at. However, there is a set of people for whom saving is not the right decision, which is why we have stopped short of full compulsion. We must leave people with the freedom to opt out. Earlier on, it was said that the danger with auto-enrolment would be that if we raised the threshold, we might send a signal that we do not think people should save. However, the converse is true. If we auto-enrol, we are sending out a signal that on balance, it is right to save. The danger is that if we do that for people on very low incomes, who will get a big replacement rate anyway, they may stay in through inertia or through the wrong choices, when it is not in their best interests to do so.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I understand what the Minister is saying. I have heard him say a couple of times that it would not be the right decision for some. Will he encapsulate in just a couple of sentences an example that I could give to my constituents of who those people might be?

Steve Webb (Liberal Democrat, Thornbury and Yate)

If we follow the Bill, we are talking about auto-enrolling at about £7,500 in this year’s prices. Let us suppose that we introduce the £140 pension, which is £7,000 a year. Just to deviate slightly, we have discussed how small pots can turn into capital for a home extension, and that is clearly true. However, the amount of money that people would be putting in at such income levels would be tiny. The question is whether it would be in the interests of a hard-pressed, low-waged mum, for example, to add a couple of pounds a week of private pension to her £140 pension, or whether she needs the money now. Clearly, that would be her choice. An opt-out means that it would be her choice. However, we are enrolling her.

I have turned slightly to arguing about amendment 28, but clause 5 will take us from £5,000 to £7,500 in rough terms, and that is the major point. The argument between £7,200 and £7,400 is neither here nor there. With a threshold of £5,000, we might say to a mum who is on £5,000 a year, “We are putting you into a pension because it’s really important that you save. You are on £100 a week; when you retire you will be on £140 a week, but we think it is important that you should be on £99 a week now so that you can be on £141 when you retire.” I am not convinced that that arithmetic works.

Malcolm Wicks (Labour, Croydon North)

I made this point earlier: the Minister is presenting a static and gloomy view of society, is he not? Basically, he is saying that the single mum who is earning tuppence-ha’penny is always going to be poor and on a low income, and that she is on a dismal escalator towards getting means-tested top-ups in old age. Yet his own Government at least pay lip service to the idea of training and skills enhancement—to the role of the jobcentre in getting people into better work. Surely he should be more optimistic about the capacity even of people on low incomes to progress, or has he totally abandoned the idea of social mobility?

Steve Webb (Liberal Democrat, Thornbury and Yate)

As I mentioned, I think I have done my bit for social mobility with the Wicks family already. Socially mobile people who move up the income scale will be auto-enrolled—the second they go over the threshold, they are in. All we are doing in the measure is taking out of auto-enrolment people who would be putting in tiny amounts of money. If someone has a brief spell on a low wage before training, universal credit, the Work programme and all the rest of it get them on to a damned good job, most of their lives they will putting good sums in and will get a good pension. The fact that they did not put a few pence into a pension when we excluded them for a year will make practically no difference to their living standard in retirement.

In the depressing scenario that people are persistently on a low income throughout their lives, the replacement rate is very high without auto-enrolment. If they generally have a decent wage but have a spell of low wages, that low-wage period will make very little difference to their final pension outcome. In fact, the situation is much more positive than the right hon. Gentleman suggests.

The hon. Member for Leeds West asked about the £10,000 and so on. The Johnson review weighed up the issues. On page 155 it recommended that, as in the Bill, the annual earnings threshold be aligned with the threshold for paying tax. I reiterate that it would be an awful lot simpler for employers and firms to combine the threshold for auto-enrolment with the threshold for running PAYE, but although it is attractive to do so, the Bill does not provide for that. We choose the number, but we leave ourselves the flexibility, which the hon. Lady’s amendment does not have, to decide each year what the right number will be.

It might be that £10,000 is an option. Interestingly, Johnson et al said:

“In particular, we consider aligning the threshold at which a jobholder is automatically enrolled with the income tax threshold to be consistent with the Government’s stated aspiration to increase the tax thresholds to £10,000 in nominal terms”.

In other words, although Johnson knew that we were considering £10,000 in nominal terms at the end of the Parliament, he did not think that the arguments for the thresholds that he was choosing and the arguments for not going too far were undermined by our plan; he thought that those matters were consistent. However, we have not taken a decision on the figure. We have said that we will have flexibility, as is apparent in subsequent clauses, to look each year at things such as part-time work, the national insurance thresholds and the tax thresholds and make a judgment. There is a strong argument for using the tax threshold, but we will consider the evidence and the impact before doing so.

The whole point of the clause is that enrolling at £5,000 uprated is too low. It would bring in people who probably should not be saving and people who would be putting in tiny amounts of money. At least for now, alignment with the tax threshold gives employers simplicity and removes some very heavy burdens on firms who employ low-paid people. It does not have a major effect on most people’s long-term pension incomes, because people who earn more later in life will be auto-enrolled anyway. We believe that it strikes the right balance, so I urge the hon. Member for Leeds West not to press the amendment to a vote.

Rachel Reeves (Labour, Leeds West)

I have enjoyed this morning’s debate and the contributions that hon. Members have brought to it. The key point about automatic enrolment has been emphasised by many hon. Members this morning: it nudges people into saving for their retirement and they do not get such a nudge under the current system. However, as my hon. Friend the Member for Kilmarnock and Loudoun and other hon. Members said, the measure also sends a message to those who are not automatically enrolled. The nudge to them is that pensions are not right or suitable for them, so many of them will choose not to opt in, even if it might be in their interests to do so in the long run.

The Minister has talked about the burden on businesses, and small businesses in particular. I believe that Lord Turner and his commissioners looked at those issues as well. In their range of measures—the increases in the state pension age, the earnings link for pensions, and automatic enrolment—they found a balance between burdening businesses, which no one wants to do, and ensuring that people get the pension income in retirement that they need in order to make choices on how to achieve a decent standard of living. The UK is not the only country to embark on automatic enrolment; as I mentioned earlier, in New Zealand there is the KiwiSaver, and although they go further than us in Australia, their superannuation scheme brings people into the pension system on a much wider range of earnings. We also have examples in this country where people are already automatically enrolled into pensions. The Tesco scheme, for example, automatically enrols workers.

As hon. Members have mentioned this morning, we in the Opposition want to achieve the maximum benefit from automatic enrolment. We believe that the maximum benefit will come from automatic enrolment at the national insurance threshold. We also believe that starting automatic enrolment at a lower level of earnings instils in people a habit of saving and leads to the persistence of savings. The Minister did not mention the habit of saving in his speech, but evidence from the KiwiSaver shows the importance of that. My hon. Friend the Member for Erith and Thamesmead talked about the habit in the Australian system, and my right hon. Friend the Member for Croydon North talked about the savings culture that is so important.

Members also spoke about the importance of the persistence of savings. My hon. Friend the Member for Edinburgh East talked about the nudge into saving, even before people fully engage with pensions, and how that persistence can pay back in later years. My hon. Friend the Member for Kilmarnock and Loudoun talked about the importance of saving over a number of years, and how those small pots of money can all add up in the end to a substantial retirement income which can make a huge difference to people who do not currently have those savings to rely on. My right hon. Friend the Member for Croydon North talked about the importance of credit unions in building up a culture of saving, and the importance of the persistence of saving, even if it is just £1 or £2 a month. It may not seem like much, but £1 or £2, or even a few pennies a month, over the period of a working life from say, 18 to 66, can turn into a chunk of money that gives people real options in retirement that they would not have had if they had not saved small amounts, month in, month out.

My hon. Friend the Member for Edinburgh East also talked about the importance of tax relief and employer contribution that people would miss out on if they were not automatically enrolled. Not only would people not be contributing themselves, but they would miss out on that 4% of income that would have been saved towards retirement through tax relief and employer contribution. Again, this can make a big difference to pension savings. It is not just that the individual is not putting something aside, but by not automatically enrolling this group of people into workplace pensions, they are also being excluded from the benefits of tax relief and employer contributions.

My right hon. Friend the Member for Croydon North sums it up well when he says that the bias should be towards including, not excluding. He made a point about the dynamism of the labour market, whereby people move from lower-paid jobs and part-time work to higher-paid and full-time work. He also talked about some of the radical reforms in the state pension, which would make the bias towards inclusion even stronger, if a flat-rate pension were to be introduced at some point in the future.

I wrote in my notes that I would talk next about mini-jobs, but in order not to offend my hon. Friend the Member for Kilmarnock and Loudoun, I will rephrase it as part-time jobs. There was much talk about that this morning; my hon. Friend the Member for Nottingham South spoke about the number of people doing part-time jobs today, and gave some examples that she found just this morning of people who would miss out on automatic enrolment because of the increase in the threshold.

Steve Webb (Liberal Democrat, Thornbury and Yate)

I am not sure whether the hon. Lady was listening to what I said. All the jobs that the hon. Member for Nottingham South read out would be excluded by the threshold in amendment 28. Does she not accept that?

Rachel Reeves (Labour, Leeds West)

There is clearly a difference between our threshold and—[ Interruption. ] Well, there is clearly a difference. In amendments 31 to 34, there is a much bigger difference of £2,000 or more as the threshold rises to £10,000. Does the Minister not agree that if the threshold rises to £10,000, the difference would exceed £2,000? He says from a sedentary position that he does not, but if the Government’s proposals to raise the PAYE threshold to £10,000 proceed, the difference between the national insurance threshold and the PAYE threshold will rise to more than £2,000. The Minister said that about 900,000 people would be affected, 78% of whom are women. That is a huge difference in the number of people who would benefit from automatic enrolment. Under Labour’s plans, about 7 million would benefit; under the Government’s plans, about 1 million fewer will benefit if the threshold rises to £10,000, as the Bill provides for.

My hon. Friend the Member for Erith and Thamesmead discussed how the problem is likely to grow over time as more people work in part-time jobs. Although that might benefit their incomes, more people will lose out on the benefits of automatic enrolment. If the Government’s ambitions in the Welfare Reform Bill for more people to do part-time work materialise, even more people will miss out who would benefit from automatic enrolment in a pension scheme. My right hon. Friend the Member for Croydon North discussed his constituent, “Jill Brown”, who did several different jobs during the course of a day. People such as Jill Brown will not benefit from automatic enrolment.

Although I recognise, as my earlier question to the Minister stressed, that there is no easy fix on some of the issues, I hope that he will go away and consider them in conjunction with the Welfare Reform Bill to ensure that the people who could benefit from saving for a pension do so, even if the solutions are not always straightforward or easy. If we do not find solutions, more people who have earned average or slightly below-average incomes throughout their lives will find that they were not automatically enrolled because they did more than one job, and will miss out on a decent pension in retirement. That is an important and growing issue.

Other hon. Friends mentioned temporary and agency workers and asked who is responsible for them. I welcomed the Minister’s comments on the role of the Pensions Regulator in compliance. As my right hon. Friend the Member for Croydon North said, there are unscrupulous employers, and it is important that people are not hoodwinked into thinking that opting out of automatic enrolment is the right thing to do, even if they are tempted in the short run and their employer encourages them to do so. It will be interesting to see over time what statistics and reports the Minister’s Department publishes on the success of automatic enrolment. It would also be useful to see levels of automatic enrolment by income band and size of firm, so that we can establish whether there are issues that we need to face.

Other hon. Members mentioned the flat-rate pension. It was good to hear a lone voice from the Government Benches; the hon. Member for Eastbourne spoke about paying to save. Although I might not agree with him on everything—I believe that for the vast majority of people, it does pay to save—I welcome the fact that he is engaging in the debate and is willing to consider the issues.

As hon. Members, including my right hon. Friend the Member for Croydon North have said, the interactions between the flat-rate pension that the Minister is keen to pursue and automatic enrolment are important because the issues of paying to save are likely to be much less important if the flat-rate pension is introduced. If that flat-rate pension is introduced before the 2017 review into automatic enrolment and NEST, I hope that the Minister will at least look at the issue of the earnings threshold before then. Some hon. Members have made the point about savings being taken away in terms of being means-tested away. Those issues will disappear with a flat-rate pension.

To conclude, the Turner review delivered a consensus around the national insurance threshold. I am disappointed that the Government are watering down some of the provisions of automatic enrolment because, as my right hon. Friend the Member for Croydon North said, I believe that the bias should be towards including not excluding people and opting people into pensions to help them build up the pensions they need to secure a decent standard of living in retirement.

Teresa Pearce (Labour, Erith and Thamesmead)

I am reassured by some of what the Minister has said. One of things that concern me is that he talks about the burden on employers. I would say that employers are part of society and that there is a difference between a burden and a responsibility. Employers have a responsibility towards the people they employ because it is by employing people that they make their profits and further their business. I differ with the Minister on that because I see the matter as a responsibility rather than a burden. I asked a specific question, which was a little bit niche, about the hospitality industry and whether there will be special guidance for that, because much of people’s earnings in that sector is made up of tips and gratuities, rather than earnings from their salaries. I would be grateful if the Minister could consider that. If he cannot respond now, perhaps he will write to me on that issue.

I am somewhat reassured and I take the point that it would not be possible to ask for a report within a year because of the roll-out. That is something I obviously had not considered. However, there is a principle involved in looking at part-time earnings again because they will change. Although I also do not like the term mini-job, it is used a lot. How people currently work will fundamentally change under the universal credit and we need to bear that in mind. I have been somewhat reassured, so I am happy not to press my amendment to the vote.

Clause 6 - Postponement or disapplication of automatic enrolment

Rachel Reeves (Labour, Leeds West)

I beg to move amendment 36, in clause 6, page 6, line 14, at end insert—

‘(5A) An employer may only give an employee one notice under this section.’.

Katy Clark (Labour, North Ayrshire and Arran)

With this it will be convenient to discuss the following: amendment 29, in clause 6, page 6, line 15, leave out ‘three’ and insert ‘one’.

Amendment 30, in clause 6, page 6, line 16, at end insert—

‘, except in the case of notices given under subsections (1) and (3), it cannot be longer than three months from the day on which the worker begins to be employed by E.’.

Rachel Reeves (Labour, Leeds West)

I look forward to serving under your chairmanship this afternoon, Ms Clark.

The amendments would undo the watering down of automatic enrolment contained in the Bill, and we question the decision to include a three-month waiting period. Amendment 29 would specifically reduce the proposed automatic waiting period before an employee is automatically enrolled from three months to one month. The Opposition have also tabled an amendment to eliminate the waiting period altogether, which will no doubt not have escaped the Minister’s attention, and that remains our preference. However, as a considered compromise, it is surely more appropriate for the delay to be limited to one month, first to limit the amount of people affected at any one time, and the extent to which they are affected over the course of their career, and, secondly, to reduce the risk of increasing opt-out rates. The Turner report is clear:

“The aim…is to use the power of inertia…to encourage individuals, and their employers through the matching contribution, to make at least minimum pension provision, while leaving individuals ultimately free to opt-out if they wish.”

Of the report’s options for the mechanics of automatic enrolment, the preferred one is for employees to have the first four weeks of a new job in which to opt out and, if they do wish to join, payments would commence only in the second month. Amendment 29 is therefore a compromise, which is in keeping with the all-important consensus that Lord Turner and his colleagues on the Pensions Commission came to.

In our earlier debate, I flagged the success of the KiwiSaver scheme in New Zealand; under it, pension contributions are deducted from a new employee’s very first pay cheque. As the Johnson review states, there have been strong and consistent calls from employers to introduce waiting periods. Employer groups have supported the introduction of waiting periods principally to reduce the administrative cost of enrolling people who are with the employer only for a short period, and to allow probationary periods to pass. Such groups believe that waiting periods would help employers to adjust the additional cost of the employer duties, minimising the need for refunds. However, the Johnson review also estimated that, compared with the status quo of no waiting period, at any one time an estimated 0.5 million fewer individuals would be automatically enrolled into pension saving and

“those that are automatically enrolled will not have contributed to a pension for the initial three months…they spend with any employer during their working life which will reduce their overall savings pot, unless they have opted in.”

My estimate is that, by having a three-month rather than a one-month waiting period, around 330,000 people would miss out on pension saving. That estimate is based on extrapolating from the 0.5 million who miss out if they wait for three months rather than paying from day one. I hope that the Minister can confirm whether that is roughly the number of people who will miss out.

The same argument applies to a one-month waiting period but, of course, the actual amount lost would be far less. Take people on average earnings of £25,000 a year. A three-month waiting period rather than a one-month waiting period would cost them around £260 in lost pension savings every time they changed jobs. If we estimate that people have 11 jobs during their lifetime, we are looking at a loss in pension income of some £3,000.

I want to further highlight the effects of this policy in two ways—first, its effects at the time of enrolment and, secondly, its effects over the course of an average career. On the first point, there is a concern from the Government that this amendment would counter the intention of the overall policy. Automatic enrolment exploits the inertia that people experience on pension savings. While we may be fully engaged in the subject, many people who could benefit from pension savings are sadly not. The default position of being automatically enrolled is intended to make savings the norm on an individual and collective level. Introducing a possible cliff edge after three months threatens to undermine that aim. Someone who works for three months before being automatically enrolled, unless they have opted in, will see their income drop in the first month that they are enrolled in the pension scheme. That is an incentive to opt out, compared with someone whose take-home pay remains constant throughout their employment period.

Habits do form and spending patterns are established. A person on an average income of £25,000 a year would see a drop of £70 in their monthly income once automatic enrolment kicks in. The drop would be much more noticeable after a three-month waiting period compared with a one-month waiting period. The impact assessment states:

“It is possible that waiting periods will increase opt-out rates. Individuals subject to a waiting period will receive a ‘full’ wage for some period, and will therefore be more acutely aware of the cost of contributing to a pension when they are eventually enrolled.”

It is also, in the worst case, an incentive for those employers with a three-month waiting period to get rid of their staff just before pension contributions kick in. That is why the legislation for temporary and agency workers is so important. Can the Minister clarify what regulation or enforcement he will put in place to deal with those concerns?

The second important issue that relates to these amendments is the effect on an average employee over the course of their career. The Johnson review shows that on average an individual has 11 different labour market interactions during their lifetime. If every employer were to opt for a waiting period, individuals would accumulate something approaching two years less savings over their career than would be the case under our amendment.

Lilian Greenwood (Labour, Nottingham South)

I wonder whether, in looking at the number of employments that someone has over their working life, we are in danger of looking backwards, which the Minister advised us against last week, and finding that people on average had 11 employments. If we look forwards, people might be expected to have more than 11 employments. That number may rise in the future and we should think about that in our consideration of the amendment.

Rachel Reeves (Labour, Leeds West)

My hon. Friend makes a very good point. I know we have spent a lot of time last week talking about our mums, dads, husbands, wives and sisters—although we should not remind my hon. Friend the Member for Erith and Thamesmead that she talked about her sister—but if I think about the working patterns of our parents and our grandparents, compared with mine, I have already had more jobs than my mother had during the course of her working life. Although I was not going to mention the point, it is true that looking forward we can probably expect people to have more labour market interactions during their working lives than people have had in the past.

Coming back to the issue of part-time jobs, which I phrase carefully, if people are more likely to mix and match between caring, part-time work, full-time work and part-time study to ensure that they have the skills needed for a modern workplace, they will have more interactions with the labour market over time.

On the different labour market interactions that I mentioned, 11 is the historical number, but we should be looking to the future. There is a risk of losing three months every time somebody changes their job. At the moment, 11 times three means missing out on 33 months of contributions. If the number of interactions goes up to 14 times, there will potentially be 42 months of missing pension contributions. That is a point worth making, and I urge the Minister and his Department to keep such trends in mind when considering the waiting period and the impact on the pension pots that people could expect to build up. Perhaps the Minister will come back to those points later.

Under the Government’s proposal, a person on average earnings with an average number of labour market interactions—11—would lose out to the tune of £3,200. Someone whose work pattern is a perpetual cycle of short-term seasonal work could miss out to a much greater extent. The review tells us that about 25% of individuals already have 14 or more employments during their working life. The review also identifies an impact on different ethnic groups. A greater proportion of non-white groups is employed for less than six months, with 8% of white people having been in work for less than six months compared with 14% of non-white individuals having been employed for less than six months.

The review found that young people are likely to move jobs relatively frequently, while those starting a job at age 30 to 34 are likely to stay with the employer for longer. Some 24% of 22-year-olds have been in work for less than six months. For a programme that should be about recognising and encouraging persistency in savings and the formation of habit, it is worrying. If young people move jobs frequently and are never automatically enrolled in the first few years of their working lives, they will not build up the habit, which is such a crucial part of automatic enrolment and nudge theory.

There are clearly some groups on whom the Government’s proposal has a detrimental impact. When this part of the Bill was debated in the other place, the noble Baroness Hollis talked about her research, which is worth repeating. She said:

“My previous research shows that the pattern of job turnover is different for men and women: men have more turnover in their earlier years and settle in their 40s or 50s, while women have a higher job turnover than most men by virtue of being much more frequently in and out of the labour market and more likely to re-enter into a different job… Interestingly, 26 per cent of the population on this model have between 12 and 15 jobs in their working lifetime, which would mean, on average for them…a loss of five years’ pension contributions. Furthermore, 15% have 16 jobs or more—up to 23—

the Johnson review suggested up to 23 for some people—

—which would be an average of something like eight years’ loss of pension contributions.”—[Official Report, House of Lords, 3 March 2011; Vol. 725, c. GC210.]

As my hon. Friend the Member for Nottingham South said, it is likely that the number of labour market interactions will increase over time. It will be interesting to hear the Minister’s view on that.

Age UK has highlighted the impact on particular groups. It emphasised that among employers that traditionally use short-term staff—for example, call centres —there is a real risk that those who move from job to job will remain under-pensioned if the optional waiting period is taken by their employers. Reducing the waiting period from three months to one month would make a huge difference for people who have staying power, but none the less a rapid job turnover for whatever reason, and for people who move from job to job more frequently than others, either because of choice or necessity.

There may be a cycle between self-employment and employment. Take, for example, hairdressers, as mentioned by my hon. Friend the Member for Nottingham South earlier. Their conditions of employment are often rather obscure, whether they are self-employed or even if they work in a salon. None the less, the waiting period of three months can represent, over a lifetime, a significant loss of working contributions, matched by the employer, into a pension.

Steve Webb (Liberal Democrat, Thornbury and Yate)

The hon. Lady is again raising the issue, which we discussed this morning, about people becoming self-employed or being required to become self-employed to avoid the auto-enrolment burden. Does that not reinforce our case for making it easier for employers to engage with auto-enrolment? If we cut the waiting period and reduce the threshold, more firms will find it to be more of a hassle, and they will be more likely to press people to become self-employed. Some will miss out on auto-enrolment altogether.

Rachel Reeves (Labour, Leeds West)

The aim should be to ensure that employers stick with both the letter and the spirit of automatic enrolment. Returning to the Turner report, on considering the evidence, it recommends that in the first four weeks, an employee should say whether they want to opt out, and automatic enrolment should go ahead in the second month. That would get the compromise right. The first month, in which people are making decisions, is the time for an employee to say whether they want to opt out. We would get the balance right by allowing the employer that month to do the paperwork. After working somewhere for a month, I think people deserve a pension contribution, which is in many ways deferred income.

The recommendation would also ensure that people who move jobs frequently, or just the average number of times—11 times—are building up a pension pot throughout their working life, rather than having three years in which they are not making pension contributions and so are missing out on £3,000 or so on of pension income that they would have got if they were automatically enrolled from day one or after one month.

I understand the concerns of businesses, which feel that the administrative burden would be great in sectors where there is a high staff turnover. For all the reasons that I have raised, I believe that the benefits to individuals and society outweigh the cost. The National Employment Savings Trust was designed to provide a simple and low-cost pension vehicle for all businesses, in particular to fill a gap in the market for pension provision for small and medium-sized enterprises. A company that offers a decent pension scheme, however small, should be more attractive to employees, create better engagement and reduce staff turnover. From what I have seen of NEST, I know that it is doing huge work to make its compliance processes—it is not even paperwork, because almost all of it is done on the internet—as simple as possible for employers to reduce the administrative burden that some businesses have complained about. It is for those reasons that I ask the Minister to reflect on whether he can make any movement back towards the original consensus to automatically enrol people earlier and enable them to build up their pension earlier on in their employment.

My hon. Friend the Member for Erith and Thamesmead tabled amendment 36, which has rightly been grouped with the other amendments, and I shall speak to it briefly. Amendment 36 would provide that the employer may give only one notice period to employees. My hon. Friend was responding to the concern that the operation of a three-month waiting period might have an impact on employees who stay with an employer, but whose earnings fluctuate. Let us take the case of someone whose hours are not fixed, such as the hairdresser whom we considered earlier. In the first two months of employment, they might earn enough to pass the threshold to be automatically enrolled, but in the third month, they might not. Would there be a risk that their automatic enrolment is perpetually deferred? I ask the Minister to clarify the position in response to the amendment, which is worthy of consideration. The hairdresser would represent the direct target of the automatic enrolment reforms, which is someone who does not tend to have much pension provision, but who could benefit greatly in later life if they did so.

The removal of the waiting period remains our preference, but the amendment seeks to find a compromise that would reduce the proposed waiting period from three months to one month. That would limit the number of people affected at any one time, limit the extent to which they are affected over their working lives by lost pension provision and reduce the risk of increasing opt-out rates.

I should be grateful if the Minister set out in more detail the research that lies behind the view that opt-out rates will not fall, because I am yet to be convinced. Can he elaborate on whether his Department undertook any assessment of alternative waiting periods of less than three months, such as one month as we recommend, or two months?

The Bill makes another amendment to the changes in the Pensions Act 2008, which were forged through the consensus of the Turner commission. The measure threatens to limit the scope of automatic enrolment and to undermine the purpose of the Act, which was to get people saving—persistently saving—throughout their careers. The settlement reached in the 2008 Act was appropriate, and subsequent changes to longevity mean that we need those provisions more than ever. We must not unravel the consensus.

Amendment 29 therefore aims to reduce the proposed waiting period to one month. The change would reduce the number of people being left out of automatic enrolment who are therefore also missing out on employer contributions and tax relief towards their retirement income. I hope that the Minister will consider the amendment and respond to my specific questions.

Teresa Pearce (Labour, Erith and Thamesmead)

In discussing the amendments, it is important to keep in mind what we are trying to achieve, which is a total change of attitude to pensions, not only among employees, but among employers. It is as well to remember that employers and their organisations have supported a three-month waiting period, mainly, I believe, because of concerns about administration and red tape.

In addition, we must keep in mind that over the years employers resisted many changes that we now think were for the better: they resisted changes to the national minimum wage, to equal pay and to health and safety. It is natural for anyone in business to resist particular changes that they believe will stop them carrying out their work, will reduce their profits or will take up a lot of their time. It is therefore difficult to walk the line between changing people’s attitudes and creating a total sea change in how people view pensions, and trying to implement a measure with minimum disruption.

The amendment aims to ensure that the three-month waiting period is not abused by unscrupulous employers. Many employers are concerned about their staff and want the best practices in their businesses. They want a level playing field, so they want to ensure that employers who do not play by the rules are brought to book. For the sake of employees and employers who are going with the spirit of the Bill, we must be clear where the problems might lie.

My concerns are about seasonal workers and people in high-churn jobs, for whom the three-month cliff edge will be ever present. In addition, there might be a disincentive to employ older people. We had much debate last week about older women working for longer. The measures may well provide an incentive for employers to take on people who are under 22 so that they do not have to comply with the provisions in the Bill, which creates another worry for older women.

We must balance what is workable for employers and what is right for society. Most employers will comply, and as the measures are rolled out, the larger, more compliant employers will face the system first. That is the fair and right way to go, because it will show small and medium-sized employers that the system can work. We hope that any wrinkles or problems will be ironed out with the larger employers so that when the measure gets down to the small baker shop or hairdressers, lessons will have been learned and things will be easier.

I have a few questions for the Minister, because I seek reassurance that employers will not be able to manipulate the system easily. As I have said, I am concerned about people being employed only if they are under 22, which would disadvantage older women, who are expected to work for longer now. Will the Pensions Regulator be doing spot checks on employers? When employers open a pension scheme, is it at that point they become known to the regulator? If employers do not open a pension scheme, will they not be known and therefore not be able to be reviewed or policed? From reading the Bill, I am not sure how such matters will work.

As with the national minimum wage, there is the ability for employees to own up and complain if they are not receiving it. Will employees have the same ability to complain about an employer who is bullying them or not allowing them to access the pension scheme? Although there is a three-month waiting period, people are allowed to enrol from day one if they so wish. When an offer of employment is made, will it include information about the pension scheme and the fact that people can access it from day one? Can that be covered by legislation or guidelines? I am not sure how it would work, but if people do not know the facts, obviously they cannot access the scheme. It is up to the employer to inform people proactively.

My hon. Friend the Member for Leeds West, the shadow Minister, mentioned bogus self-employment. I hear what the Minister said about that, but bogus self-employment has been quite rife in several professions, such as the construction industry and IT. It results not only in people being unable to access their pensions, but in a loss to national insurance contributions and other employment rights. With a change in legislation, whether or not the onus is put on to employers, other drivers might push them to recommend that people become consultants not employees. I am interested to know whether there will be links with HMRC to investigate matters if an employer’s workforce decreases unexpectedly or if, all of a sudden, 80 of the 100 employees become freelance consultants. Will HMRC assist the regulator to make sure that sort of thing does not happen?

To return to what I said earlier, we have to think what we are trying to achieve. It is huge. It is a complete change in the thinking towards pensions. Given that trust in financial services and pensions is pretty low, now is not the best time to be introducing such measures but it is better late than never. Hopefully, it will mean that my children’s generation will automatically view pensions as part of their earnings and what everyone does rather than something that is only for people who are wealthy and can put extra money away. It should be part of people’s daily planning.

Before I entered the House, I worked for PricewaterhouseCoopers on tax investigations. My area of expertise was in employment, remuneration and pay-as-you-earn. Given what some employers would do to make sure that they pay the least tax in respect of their employees, nothing would ever surprise me. The measure will be regarded by many employers as a tax that they have to pay for employees. I therefore hope that the Minister has listened to my questions in the spirit in which they were intended. I hope that my worries are unfounded, but they are sincere concerns and have also been expressed by many trade unionists who are worried that the measure will be an extra reason why employers will put pressure on them. I look forward to the Minister’s response.

Sheila Gilmore (Labour, Edinburgh East)

It is a pleasure to be in Committee under your chairmanship, Ms Clark. I do not want to add a lot to what has been said, but I have thought about the points made this morning about the burden on employers, and that should not be entirely ignored. It then occurred to me that even the smallest of employers—for example, someone who needs a carer—will have to take on direct payments and deal with tax, national insurance and many other matters from day one, and rightly so, because that employee needs protection. I am a little sceptical about direct payments, because of particular difficulties and issues that my constituents have had, but even the smallest of employers, for example the employer of one person, will have to operate PAYE.

Rachel Reeves (Labour, Leeds West)

My hon. Friend makes the important point that on day one of employment, the employer starts to pay the person’s salary and national insurance. Many people view a pension as deferred pay, so does she think that it is right that an employer should also start paying into the employee’s pension—the deferred pay for retirement—at the earliest opportunity?

Sheila Gilmore (Labour, Edinburgh East)

I agree with my hon. Friend. Theoretically, those two matters are clearly linked. I was considering the practicalities, and the point that has been made is that such enrolment would create too great a burden and that, in needing to balance such burdens, we should not do it.

In the course of all the debate on welfare reform and universal credit, the Department has been confident that it will be possible to receive real-time information about people’s earnings, and also possibly about their hours of work, although that will depend on how the regulations are finally drawn up. We have been assured that one big advantage of universal credit over how tax credits have worked in the past is that problems—there have been issues of people being overpaid, and finding it very difficult to make repayments—will be avoided, because real-time information will be available from employers of apparently any size.

When we have asked about how easily that will work in practice, we have been assured that there should be no problems and that the Department was not concerned about its feasibility, so that the plans are operable. That means that employers will not only be operating current systems for deducting and remitting national insurance and tax, but also be supplying real-time information to Her Majesty’s Revenue and Customs, which will pass it on to the Department for Work and Pensions so that people’s benefits can be calculated and regularly recalculated. Some employers will regard that as a burden. If that really is feasible and practical, I wonder why it would be such a burden for people to be included in the scheme immediately.

In relation to time limits, the burden is less applicable than it is in relation to the threshold. Unless employees move on very quickly, which probably only a minority of them would, they will—provided that they meet the earnings threshold—be covered in due course. All the mechanisms to operate the system will therefore have to be put into place, whether that is from month one, two, three or four. On that basis, I hope that we will hear less of the argument about such enrolment being a burden on employers, in relation to its administration and practicalities, because there will be the same amount of work whether the employee is covered from the first month or from the fourth.

Unless an employer has very few employees, the chances are that they will be operating the scheme for some employees and not for others. If they have three or four employees, some might be covered by it because they will have been employed for the relevant length of time. I hope that those arguments about the practicality and the burden on employers will not now be repeated.

On a completely different matter, I have some information for the Committee. I referred to various adverts for chocolates and pensions this morning—I have not completely lost my marbles—and I have tracked down the chocolate advert, which was for Fry’s Five Boys chocolate. I am convinced that there was a similar advert about pensions, although which advert inspired which I do not know. I have not tracked the pensions advert down on the internet, but I would be interested if anyone can remember it. It was about the way that the poor man’s facial expression changed as he went from being a carefree youth who did not care about pensions, to a very worried man on the point of retirement. I would be interested in tracking that advert down; I know I remember it and it is not in my imagination.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

It is a pleasure to serve again under your chairpersonship—if that is a word—Ms Clark. I admit to feel slightly nervous about standing up after my hon. Friend’s discussion of Five Boy’s chocolate. I have not heard of that since my childhood, and I am sure that today, such a description—or such a chocolate bar—would be deemed completely politically incorrect. It would have to be “five child chocolate” or something similar. I should probably move on.

This morning the Minister took Labour Members to task for not looking at some of the impacts of burdens on businesses and so on. As I reflected during the break since this morning’s sitting, there was a lack of Government Members jumping up and seeking to speak in support of businesses. In the interest of ensuring that we properly scrutinise the proposals as people would expect, I would like to reflect on some of the concerns raised by small businesses.

I am one of the few members of my family who does not run a small business—my family also includes the ubiquitous hairdresser who has been mentioned at various stages of our discussions. We have heard representations from business organisations that are concerned about the delay before people are auto-enrolled. I understand some of the concerns felt by businesses—particularly very small businesses—about the regulations, and that they may want time to get people on to the payroll. As my hon. Friends have suggested, the minute a business puts an employee on the payroll it has to start paying wages and national insurance. Would it be such a disproportionate burden also to have to deal with pensions? I accept, however, some of the points made by businesses. They feel that the last thing they need in the first few weeks of employing a new member of staff is more red tape.

Rachel Reeves (Labour, Leeds West)

One of the concerns expressed by larger businesses when the Government commissioned their “Making automatic enrolment work” review was that if smaller businesses are not included in the automatic enrolment, there will not be a level playing field. Those smaller businesses would have a smaller cost base as they would not have to pay into a pension. A similar argument could be made about the waiting period. An employer that changes its work force regularly will never have to pay into pensions, while an employer with a stable work force that pays into pensions would have a higher cost base. That might be another reason why automatic enrolment from day one or month two would be better.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I thank my hon. Friend for that intervention and I will come on to the issue of businesses that change their work force regularly. Her point is important, and as I know from my constituency, small businesses play a huge role in providing employment in local areas and we should not put unnecessary burdens in their way. On the other hand, however, it is important to recognise that people who work in those businesses keep them going and contribute to the local economy.

Andrew Bingham (Conservative, High Peak)

Will the hon. Lady give way?

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I will give way. It is good to see that Government Members now wish to participate.

Andrew Bingham (Conservative, High Peak)

I am listening to the hon. Lady talk about small businesses. She must concede that small business men today are under great pressure, work extremely hard, and value their staff. Giving them three months will allow them to evaluate staff and to decide whether they can work together. To throw an extra burden on them immediately would discourage them from employing people. Having run a small business for 20-odd years, I speak with a reasonable amount of authority. The hon. Lady is being disingenuous about small business men, although I agree that they are the country’s engine room, and drive the country forward. We should bear their present troubles and strife in mind.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

With respect to the hon. Gentleman, I was trying to be fair, and to put on the record some of the issues that small businesses have raised. I have not heard much about that from Government Members, but I will come to that. The Forum of Private Business has raised with Members on both sides of the House its worry about liability, and how to comply with the regulations that it believes the Government will introduce. It is aware that pensions are complex financial products, and that many small businesses will find it difficult to distinguish between what it describes as the good and the bad offerings. It is worried about the effect on small employers of auto-enrolment into pension schemes, and would like more support from payroll experts, and to have access to accountants and others who are familiar with the products. It wants help as the scheme is introduced because of its impact on businesses.

The forum believes that employees are unlikely to be happy at what they may see as lower take-home pay because money is paid into a pension scheme. It wants the Government to introduce an incentive package for employers to recompense them for their time and increased liability. It will be interesting to hear the Minister’s response to those points, which I have made simply to show the range of issues. Many small businesses are the life blood of local communities, and most of them understand their responsibilities to their employees.

It is important to scrutinise whether the three-month period is right, or whether one month would allow people the opportunity to deal with the issues that have been outlined, and to get people enrolled as quickly as possible. My hon. Friend the shadow Minister described situations that could become unintended incentives for opting out, and that would not be helpful. We heard some of that debate this morning on the thresholds.

I want to put on the record the fact that there is concern that some people would risk taking a short-term gain instead of planning for the future. We heard this morning about various situations, and if one has a family, current pressures may outweigh planning for the future. We do not want the cliff edge that my hon. Friend described. I hope that the Minister will reassure us on that. I may be accused of being cynical, but I live and work in the real world and regularly have to help people on fixed-term contracts and agency staff with employment-related issues. There may be a perverse incentive for employers who may see fit to get rid of staff within the three-month waiting period just before pension contributions kick in.

Lilian Greenwood (Labour, Nottingham South)

There may be employers who would lay staff off during the three-month period, but is there not also a danger that employers of staff whose hours and earnings fluctuate could deliberately ensure that an employee’s earnings fell below the trigger level in the third month, so that the waiting period would have to start again? Even if they continued to employ such staff, they could act in that disingenuous way.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I understand my hon. Friend’s point, and it is one concern that has been raised particularly by those involved in the trade unions, as well as others. I hesitate to use the word unscrupulous, but there might well be employers who seek to do that, because they would feel that it somehow absolved them from responsibility.

Andrew Bingham (Conservative, High Peak)

I find it unbelievable that the hon. Lady actually said that a small business man would get rid of an employee just before the three months only to avoid the auto-enrolment. I find it interesting what people call small businesses because my experience is perhaps on the smaller scale of micro-businesses, but if I had a member of staff who, after two months and 29 days, was good and could do everything that the business required, I would certainly not consider getting rid of such a person to avoid auto-enrolment. To be frank, I know small business men who would be quite offended by that remark.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I hear what the hon. Gentleman says but, if he had listened carefully, I was not specifically referring to small businesses in that context. I also made it very clear that I have had to deal with situations in which there are employers who, under existing employment legislation, have used the lengths of people’s contracts to get rid of employees at a point before which they would become liable for further employment rights or further burdens. I am sorry if he is upset, but there are situations in which employees suffer as a result. I simply want to ensure that the issues are raised and debated, and that we have some assurances from the Minister.

Hywel Williams (Plaid Cymru, Arfon)

Perhaps I should declare an interest. Before I was elected, I ran a small business—a one-person business, but I was employing people on short-term contracts to do various teaching jobs. Everyone on the Committee would agree that small businesses try their best to adhere to the highest standards and, to retain staff, I was certainly adhering to those standards when I was involved. However, the problem is that the bad practices might drive out good, and we need to ensure that the systems that we set up do not allow that to happen, in as foolproof a way as can be managed.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I thank the hon. Gentleman for his intervention, and he perhaps put the case more eloquently than I did in outlining exactly what my concerns would be. If there are loopholes or any opportunities for bad practice to thrive, we should deal with them in discussion of the Bill.

Marcus Jones (Conservative, Nuneaton)

The hon. Lady is being extremely generous in taking interventions. Is she advocating that we bind our businesses with even more red tape and regulation, stifling them instead of persuading them that now is the right time to take on additional employees? She seems to be forming her argument in a way that says to businesses: “We will burden you with more regulation and red tape, and you might want to think twice before you take on additional staff.”

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I thank the hon. Gentleman for his intervention. I hope that he understands that I am pointing out what businesses themselves have said. Irrespective of the period of time for auto-enrolment that we are discussing, which they are concerned about, some businesses see it as a burden whether the period is three months or one month. We must dispel some of the myths and explain why auto-enrolment is the right thing to do. We clearly still have a job of work to do there, which the Minister I am sure will deal with in his summing up.

Marcus Jones (Conservative, Nuneaton)

Will the hon. Lady give way?

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I would like to finish my point, if I may. Surely the purpose of our debate is to tease out and discuss the difference between three months and one month, and the best option to ensure that we meet the principles of the Bill, which is to ensure that as many people as possible are collected in to plan for the future via auto-enrolment.

Rachel Reeves (Labour, Leeds West)

I thank my hon. Friend for giving way and for her generosity in the number of interventions that she has taken.

Surely the point is to get the balance right—the balance between not regulating businesses to stop them taking on more employees, coupled with the importance of getting more people automatically enrolled. The figures that I quoted earlier suggest that about 330,000 people at any one time will miss out on automatic enrolment if we have a three-month rather than a one-month waiting period. When Lord Turner did his report—I do not think that his objective was to stifle businesses with regulations—he recommended that an employee could opt out in the first four weeks, but then in the second month when they receive the salary, they would be automatically enrolled. He thought that that was the right balance for regulating business and for ensuring that as many people as possible started contributing to a pension.

I am sure we all have examples of small businesses that we have worked for, or run, or that we know in our constituencies. I agree with Government Members that the vast majority of businesses, large and small, want to do the right thing by their employees, including paying into a pension for them. We can all agree on that point, but we must find the right balance between making sure as many people as possible benefit from automatic enrolment and making it as simple as possible, as I think the creation of NEST does, for employers to automatically enrol people into an appropriate scheme.

Katy Clark (Labour, North Ayrshire and Arran)

May I remind hon. Members that interventions should be brief?

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I thank my hon. Friend for that intervention. Once again, she has outlined her view very clearly. It is important that we get the balance right. The purpose of this debate is to tease out the issues the better to understand them from the perspectives of businesses and potential employees. It is important that we have the opportunity to do that. I favour a situation in which people are auto-enrolled as quickly as possible. That is important. I have concerns, which I raised on Second Reading, in relation to call centres, for example. I did not produce such concerns from nowhere. Age UK raised concerns about employers such as call centres that have traditionally used short-term staff because of turnover. People may be employed for a few months at a time, and then perhaps find that they have a number of short-term contracts throughout the year, none of which would be enough in this scenario to allow them to be auto-enrolled. People in certain professions or jobs could spend years without being able to benefit from having pension contributions paid. I have real concerns about that.

I listened with interest to the figures for the number of jobs that people are likely to have in their working lifetime—between 12 and 15. We have already discussed people who work in multiple part-time jobs. Many of them would have undertaken those 12 to 15 jobs very early on in their working life. Given the current situation, it is not too much to ask that we try to get them enrolled into the pension scheme as quickly as possible.

I want to reassure those who perhaps think that I have been criticising small businesses. As I outlined at the beginning, I come from a family that runs small businesses, so nothing could be further from the truth. I know exactly the contribution that they make. I know that people feel it is very important to have a system that is workable and straightforward. However, on balance, I believe that if auto-enrolment can be done after three months, it can be done after one month. That gives employees greater protection and also fulfils the principles of the Bill, which we all—hopefully—support.

Chris Evans (Labour, Islwyn)

It is a delight to serve under your chairmanship this afternoon, Ms Clark.

I come to the amendment from both sides of the fence. I was a former trade union official and my father was a bookmaker who employed a small number of people. The major tension in the amendment and in auto-enrolment is that we have to temper the rights of the employee with the rights of the small business man. I do not think that anyone here today has talked about larger businesses that already have pension schemes in place and will therefore not have to worry about the whys and wherefores of auto-enrolment. They will, more or less, be there.

We have not, however, looked at the issue of stakeholder pensions in our discussion of the amendment. I remember, when I was a financial adviser, many companies had stakeholder pensions, where the only members of those stakeholder pensions were the managing director and the executive. It was not set up properly. When a customer came to see me, they would say, “There is a pension scheme in the company’s name, but I don’t know how to join it.” I would say, “Who do you talk to?” and they would say, “I don’t know.” That issue needs to be looked at when we discuss auto-enrolment.

This is a massive project, on which I support the Government. I take the point that we should not burden small business men with more regulation and red tape, because I know that from when my father worked in the betting industry. There is no industry with more regulation than the betting industry, where operators have to buy licences and so on. I admire any small business man or entrepreneur who wants to go out there and set up their own business, because of the amount of hurdles that they have to overcome in accountancy and the regulatory burden they have to meet. I want to hear from the Minister what help we are giving them to ensure that the auto-enrolment system works properly for them.

Andrew Bingham (Conservative, High Peak)

I can recommend that the hon. Gentleman visits NEST, because the Work and Pensions Committee has been to NEST. I agree with a lot of what he is saying and I am not sure who that concerns more: him or me. NEST looks like a nice, simple package that will not burden small businesses. I was as concerned as he was on that point.

Chris Evans (Labour, Islwyn)

I thank the hon. Gentleman for that useful intervention. It reflects my major concern on this and the whole Bill. As I have said before, I sold pensions for a long time. They are complicated to explain and to understand. If there is a simple solution, that is a good thing.

Government Members might say that trade union officials are dinosaurs, but I must be a very young dinosaur, because I am 34 at the weekend.

Hywel Williams (Plaid Cymru, Arfon)

Halfway to your pension.

Chris Evans (Labour, Islwyn)

Yes. I will probably end up like the man in the chocolate advert, full of ideas then a couple of years later bitter and twisted. Let us hope not. Where was I? I have lost my train of thought.

Chloe Smith (Conservative, Norwich North)

Your dad’s life story.

Chris Evans (Labour, Islwyn)

Yes. My dad’s life story. I gave my mother’s life story last time, didn’t I? I am working my way through the family. Tell you what, I was born in—I am sorry Miss Clark, I am being very frivolous. Please accept my apologies.

We have to temper the rights of the employer with the rights of the employee. Three months is a little bit too long, and I would argue that one month is right. The world of work is changing. People will not stay in the same job that they had when they were 16. I will indulge the Committee with more examples from my family. My grandfather started in the pits at 14 and was carried off at 72, because he did not want to stop working. That is probably the type of person the Government do not like. He was in the same job all his life.

We now have a more prosaic employment record, which we see a lot in the IT industry. My brother-in-law is an IT consultant and he was moved on from a company to become a self-employed consultant, so he is not eligible for auto-enrolment, as the Minister said. How do we ensure that companies do not encourage employees to become self-employed to avoid auto-enrolment? That is an important point and I see that problem in many industries. We have tabled an amendment that proposes no waiting period from day one, but we need some sort of compromise. I hope that the Minister will consider reducing the period from three months when he sums up or that he will discuss the matter beyond Committee stage.

Lilian Greenwood (Labour, Nottingham South)

I am not sure that my hon. Friends have touched on the small matter of the impact of waiting periods on opt-out rates. If someone comes into a job and is auto-enrolled after three months, they will have had three pay packets and will therefore know the size of their take-home pay. If they are auto-enrolled in month three, when their pension contribution comes out in month four, it will be far more obvious.

I note that the Johnson review said that it had limited evidence to help us understand the effect of waiting periods on opt-out rates. It says that the example from the US does not raise a concern, but such a view is obviously based on scant evidence. What might the Minister do to review opt-out rates? Will there be a review of the waiting period when auto-enrolment is in place?

Rachel Reeves (Labour, Leeds West)

In New Zealand, people are opted in to schemes after one month. After automatic enrolment is rolled out, and if the Government go with the three-month period, it might be useful if they compare opt-out rates in New Zealand with those in the UK. I share my hon. Friend’s concern that spending patterns become established after three months, and people will notice the drop in their income when 4% of it is diverted into a pension. People might not notice that drop so much after one month, because their spending patterns might be less entrenched.

Lilian Greenwood (Labour, Nottingham South)

My hon. Friend is absolutely right that we must find something to measure opt-out rates against so that we know what they might be and how they might differ if there were a shorter waiting period.

My hon. Friend the Member for Erith and Thamesmead touched on another issue. I am sure that the Minister will say that employees have the option to opt in even before the waiting period of three months is over. However, my concern is whether employees will be given sufficient information to enable them to exercise the right to opt in. Will the Minister explain what the Government intend to do to ensure that employers give employees such information, so that they can exercise their right and understand what it means?

Steve Webb (Liberal Democrat, Thornbury and Yate)

A number of important points have been raised about the waiting period and there are some serious concerns about the trade-offs. Should we have a waiting period at all? If so, how long should it be? The Johnson review, as I indicated, tried to achieve a series of trade-offs and strike a balance between reducing the burdens on business while protecting the interests of consumers. The Government came under huge pressure to exclude micro-employers. We came very close to taking a million people out of auto-enrolment, but it was precisely because we could say, “We recognise the pressure on micro-employers, so we’ve provided a waiting period. We’ve provided an increase in the threshold and we’ve made various other easements,” that we were able to keep those million people in scope. That was the nature of the trade-off, and each time we try and unpick a bit of it, we risk undermining it.

The hon. Member for Leeds West is fond of talking about consensus, but we have managed to keep people together for the project, including employers, at a time when the economy is not in a good state, by recognising some of the burdens. The hon. Member for Islwyn asked what we are going to do for small firms, yet this morning he voted against a measure designed to help such firms by raising the threshold. I assume that he is about to support another amendment that helps small firms, but the difficulty is that he cannot on the one hand say, “Let’s help small firms,” and on the other, oppose all our measures that do so.

Chris Evans (Labour, Islwyn)

Why is the Minister picking on me?

Steve Webb (Liberal Democrat, Thornbury and Yate)

I thought the hon. Gentleman was the robust side of the room.

It is important to paint a picture of the auto-enrolment world, which will be very different from the current one, and that will slightly change how we think about these matters. That world will have a different culture and a different process. Every job in which people earn above the threshold and are above a certain age, will be an auto-enrolment job. That will be part of the process when people start a job. An employer might choose to use the voluntary waiting period. We must remember that the process is not mandatory. Employers can auto-enrol from day one if they want to. If it works for them, that is fine. To assume that it is 11 jobs times three months, times the average wage and so on will overstate the scale of such matters, firstly because people who auto-enrol do not, on average, earn the average wage, but quite a bit less, and for various other reasons. As people go from job to job in the auto-enrolment world, they will be going from a job with an auto-enrolled pension to another job with an auto-enrolled pension, to another one. While people may not be clued up in their first job, after 11 job moves—the average, and we have discussed possibly more—pensions will become much more part of the conversation on day one. It will become much more part of the portfolio that people build up.

People who work for a series of small firms will often have a NEST pension, and I was delighted about the positive response that members of the Select Committee received when they visited NEST. I have visited it myself and was impressed by its work, specifically to assist small businesses. If NEST is the scheme that many small firms choose, people who move from one small firm to another will go with a NEST pension. The NEST corporation will have been in contact with them and people will have been thinking about it. It will not be a situation when they say, “Pensions. Oh, what is that?” Such people will have a relationship with the pension provider, potentially a continuous one despite changing jobs, which means that there is not likely to be 11 lots of three months.

Chris Evans (Labour, Islwyn)

I hope that the Minister is right, but he is being optimistic. As I said earlier, when I was selling pensions, people accepted that they were a member of the company pension scheme. When the hon. Gentleman refers to people having a relationship with the pension provider, he is talking about a sophisticated relationship that does not exist at the moment. How do we get from a to b; from the point at which people are just looking at a job advert that refers to being part of the company pension scheme to asking the employer what the pension scheme is about?

Steve Webb (Liberal Democrat, Thornbury and Yate)

The hon. Gentleman is right. We are not at that point yet, and nearly 10 million people do not have pensions. That is where NEST, in particular, and other providers come in. I am slightly darting about, but the hon. Member for Kilmarnock and Loudoun said that small firms were anxious about choice. The regulator will inform them of the scheme called NEST. Firms will be told that the Government have made sure that there is a provider that provides decent value for money, satisfies the requirements of the regulator in respect of the quality of the scheme and has been designed with them in mind.

We believe that, as a result of the majority of small firms not finding the market viable and the big commercial providers not finding it profitable, large numbers of people who work for small firms will find themselves with a NEST pension. The whole mindset of NEST and part of the reasoning for the caps and so on to be focused on that target market is that it has been designed with small firms and people who would rather be making widgets than filling in pension paperwork in mind. The idea is that it is for companies and providers who do not currently run pensions, as well as for employees who have never been in pensions.

Language and trying to get rid of jargon is being looked at hard, as is the interface between the individual and the scheme. I keep promising everyone that there will be a NEST iPhone app and an Android app, whatever that is. We are talking about young people, in particular. Nearly one quarter of those who should be enrolled are in the twenties, so we must think of new ways in which to introduce such things. I absolutely agree with the hon. Gentleman. NEST has not opened its doors for business yet but, by the time the scheme is in operation on a serious scale, it will have done. The cultural shift will not happen on day one, but over a lifetime of, say, 11 job moves, we will be moving into a period when people will be more engaged and the providers will be working much harder to communicate.

Marcus Jones (Conservative, Nuneaton)

In relation to pension provision, apart from those in the public sector and the people in the larger blue-chip companies, the level of take-up of either a personal pension or a company pension is absolutely shocking. I am sure that the Minister will agree. However, he is saying that these provisions will change the whole culture and create a society where people look to provide for their future and their retirement.

Steve Webb (Liberal Democrat, Thornbury and Yate)

My hon. Friend is quite right. Clearly, the public sector and big firms that run high-quality defined-benefit pensions on the whole have pretty good membership rates. However, unless you have auto-enrolment, take-up rates can be poor. I assume that hon. Members who are new to the House know that their parliamentary staff are entitled to 10% free—in the sense that the staff do not have to pay—contributions to the Portcullis pension scheme, but many staff do not take it up, even when it does not cost MPs anything to do it. That is free money. Whether it is because of awareness or barriers, or because the staff do not think that they will be here for long, there are huge barriers to getting people into that pension scheme. As he rightly says, the evidence from around the world, as cited earlier, shows that auto-enrolment completely transforms engagement and take-up rates. We get people in and then we have to work hard to engage them, but we get them in, as he rightly says.

What we have heard about amendment 29, regarding one month or three months, hardly addresses the issue of seasonal, casual and short-term workers. A season on average lasts three months. If we have a one-month cut-off, lots of seasonal workers will be auto-enrolled. The administrative cost of auto-enrolment is principally the one-off cost in choosing a scheme, getting people in and building up the relationship with the provider. The month-by-month process is relatively straightforward. If a company has to do that repeatedly for large numbers of short-term, casual and seasonal workers, there will be a considerable cost for particular employers, such as retailers. Sainsbury’s has said that it thinks that the three-month waiting period is a huge bonus, because it takes on a lot of summer and Christmas staff, who might work for six or eight weeks and are not lasting employees of the firm. If we accepted the amendment, we would put a huge administrative cost and a significant burden on the nation’s employers, while creating negligible benefit for individuals’ pensions, as six weeks of Christmas money will not earn much pension.

Rachel Reeves (Labour, Leeds West)

I would dispute the idea that such staff are not employees in a meaningful sense. If someone works somewhere for six weeks and they put in their effort and hours and are contributing, they are an employee, and they deserve some contribution to their future pension. Are they not the sort of people whom we need to capture through automatic enrolment? Let us say that someone works in a café on a beach front for three months in the summer, picks fruits and vegetables in the autumn and then does another job in the post office over the Christmas period when it is busy. People who move from job to job and do not stay anywhere longer than three months will not be able to build up a pension. Does the Minister think that that is the right way forward? Will that not mean that people who work hard, but do not work anywhere longer than three months, do not have the pension that they need in retirement?

Steve Webb (Liberal Democrat, Thornbury and Yate)

The working patterns described by the hon. Lady happen, but they are often associated with particular periods in someone’s life, the classic one being a student who does a vacation job. Under-22s are not covered by auto-enrolment. The idea that people do a whole series of three-month jobs through their working life is not what happens. There will be odd cases and odd periods when that is the case. People can opt in—I will return to the point about how they will know about that—so no one will be deprived of anything if they want it, although they will have to be aware of it.

The crucial point of the regulations on the implementation of the waiting period is that to benefit from the three-month waiting period, a firm has to notify an employee immediately that they are about to go into a waiting period, and that during that period, the employee has the right to opt in. An employer cannot create a waiting period unless they tell their employee at the start of it about the right to opt in. That is how people will know.

Lilian Greenwood (Labour, Nottingham South)

Will the waiting period also apply when someone hits the age of 22 and becomes eligible for auto-enrolment? They may have worked for the employer for a long period, and are not a seasonal or casual worker. Would it make sense in that instance to enforce a waiting period?

Steve Webb (Liberal Democrat, Thornbury and Yate)

The hon. Lady is the first person to refer to amendment 30, which refers to whether someone is already working for a firm. I do not think that the hon. Member for Leeds West mentioned that in her remarks. Let us say that there is a staging date for an employer who decides to apply a waiting period for the whole work force. Some people might not be eligible for auto-enrolment, for example a 21-year-old or someone under the wage threshold. If, as under one of the amendments in the group, we cannot have a second waiting period, then at the exact moment that someone turned 22 or passed the wage threshold, we would have to have auto-enrolment on that day, which might be in the middle of the month. Employers doing a monthly payroll or something like that would have to enrol the person two or two and a half weeks in, which means that they must deal with 23 31sts of the amount that month, for example, with the additional amount the next month.

The point of the provision is that it is an easement. The waiting period does not have to be three months; it can be up to three months but could be a lot less if the employer wants it to be. The reason for it, however, is to fit in with payroll cycles and to give employers flexibility, rather than pre-empting every possible combination of circumstance and devising complicated rules to foresee what might happen. We want a broad easement and the flexibility to get that balance right.

Rachel Reeves (Labour, Leeds West)

The Minister talks about the cost of automatically enrolling people. Obviously, there is the cost of paying into the pension but, given what has been said about the simplicity of NEST, does he have an estimate of the administrative cost of automatically enrolling someone in a pension scheme?

Also, the Minister says that people are likely to be more engaged with pensions in the future, with the roll-out of automatic enrolment and NEST. Does he have any estimate of what proportion of that 500,000 who would not be automatically enrolled would enrol voluntarily?

Steve Webb (Liberal Democrat, Thornbury and Yate)

The figure that the hon. Lady has for less than three months is 500,000. To answer one of her other questions, she asked what the equivalent figure would be for one month. Not surprisingly, it is just under a third, so we estimate that about 150,000 would be covered under her amendment 36.

On the numbers of those who would opt in, no, we do not have an estimate, as it will change over time for the reasons I gave. At the start, all this would be new and people would not really be thinking about NEST when starting a new job. However, on their second and third job moves, that would start to change. Many people would take their pension with them, they would start to think about it and they would get the letter saying that they could opt in if they wanted. Initially, it might take a while for it to be taken up, but it will start to happen.

Harriett Baldwin (Conservative, West Worcestershire)

On amendment 36, can the Minister clarify whether employees who had opted in for a period but took maternity leave would then be subject to the waiting period on returning to work, if statutory maternity pay took them below the threshold ?

Steve Webb (Liberal Democrat, Thornbury and Yate)

I am very glad that my hon. Friend asked me that—I will reflect and give a more detailed response in a second.

I am backing up my questions, so I will return to the cost of auto-enrolment. I do not have the exact figure to hand but we have produced an impact assessment which includes the cost to business, which I am sure that the hon. Member for Leeds West has seen. We estimate the cost of auto-enrolment for individual firms, varying it according to size. As one might expect, we found that for the giant employers with HR departments the cost per head is pretty straightforward. For the small firms, it is much more of a hassle, with the start-up cost that I described, although we hope that the ongoing cost will be relatively modest, especially as NEST and so on will be mainly online. From memory, I think that we are talking about several hundred pounds, but I will check that figure.

Going back to the big picture, under amendment 36 we are being invited to give employers a maximum waiting period of one month. What has not emerged in the discussion is that the existing legislation—the 2008 Act passed under the previous Government—includes a three-month period called a postponement period, but it only applies to what are called quality schemes. The previous Government therefore thought, “Actually, we will let people wait for three months, if we think that they have a really good scheme.” The Bill’s waiting period replaces the postponement period so, if we do nothing, there will be three-month waiting periods called postponement periods, but they will be much less flexible than what we are proposing, because the three-month postponement period does not allow people to opt in. Whereas we propose a waiting period during which people have the chance to opt in, the legislation we inherited deprives people of the chance to contribute at all during that period. What we propose is more beneficial and flexible. It would enable the employer to stagger auto-enrolment over a three-month period—which cannot be done with a postponement period—or make it coincide with pay periods. That is not a new idea; three months of waiting is already in the legislation, but we are making it more flexible and available across the board.

The answer to the question asked by my hon. Friend the Member for West Worcestershire about maternity pay is obvious to her, I imagine, if not to me. Statutory maternity pay is included in earnings as part of a total amount. If occupational maternity pay were to stop and a person ended up on statutory maternity pay, they could drop out of the system if they went below a certain threshold, but when their earnings went back up they would go straight back in. That is key to my hon. Friend’s question, and I thank her for raising the issue.

The key point is that each year there will be 2 million enrolments. Of those, 190,000 will be for workers who will leave within three months. If we do not make this change, nearly one in 10 enrolments will be for people who will be gone before three months have passed. The Labour party perhaps slightly understates the importance of buy-in by employers. At the end of this morning’s sitting, the hon. Member for Erith and Thamesmead said that employers have duties to pay tax and national insurance, and that it is part of their civic corporate responsibility to do stuff. That is true up to a point, but I would emphasise the issue of proportionality. It is fair to ask employers to do things, and in answer to the hon. Member for Kilmarnock and Loudoun, we are not planning to reimburse small firms for the cost of implementing the scheme. We think that auto-enrolment is part of employing someone, just like national insurance and tax, but we will try to minimise the cost. NEST has been specifically designed for small firms, and the Pensions Regulator has been working with software companies and will publish guidance to make it easier to set up schemes.

The Department has engaged with a range of stakeholders that represent small businesses, including the Institute of Chartered Accountants, and I have had meetings with small business groups. Rather than incur a heavy cost for the taxpayer, we are trying to minimise the cost. As the hon. Lady said, we recognise that it is part of an employer’s responsibility to participate in auto-enrolment, but we want to make it easy and flexible, which is where the three-month period comes in.

Hywel Williams (Plaid Cymru, Arfon)

I have had a niggling concern throughout this debate about particular industries, one of which—the tourism industry—is over-represented in my constituency. Short-term, sequential employment of less than three months is fairly common and indeed might constitute the majority of some of my constituents’ records. That has implications for both employers and employees. Will the Minister address that issue, and tell the Committee what notice the Government have taken of the difficulties faced by that particular industry?

Steve Webb (Liberal Democrat, Thornbury and Yate)

I guess that in Wales the summer may last for less than three months—I have spent many holidays in Wales over recent years. I would ask what the hon. Gentleman’s constituents do over a 12-month period. Provided that they have some sort of employment that lasts more than three months, they will be auto-enrolled. If it is true that some people spend their entire lives doing jobs that last only three months, they will not get auto-enrolled unless they opt in. That is the point. If I know that my life is a whole series of three-month jobs, the point will come at which I will start opting in as pensions become more important. That is the trade-off.

Rachel Reeves (Labour, Leeds West)

Does the Department have any information about the average pension savings for people who have permanent jobs compared with those who do part-time work? That might give us a better idea about whether there is an issue about part-time workers opting into pension schemes at the moment.

Steve Webb (Liberal Democrat, Thornbury and Yate)

The hon. Lady asks about part-time work. Obviously, we are not talking about part-time work, but about temporary work. [ Interruption. ] She meant temporary work. One dilemma is that we do not have much longitudinal data. It is fairly clear that, at a point in time, pension scheme membership and contribution rates are very poor for temporary workers, but the question is whether people spend their lives as temporary workers or only have a period of doing so. We do not have a tremendous amount of data about what someone who is a temporary worker at 25 does at 35 or 45.

The hon. Member for Erith and Thamesmead asked me whether, because of auto-enrolment, firms will employ 21-year-olds rather than older women. Those aged 21 have the annoying habit of becoming 22-year-olds, so that would be quite a short-term strategy. In addition, not many 21-year-olds are perfect substitutes for her sister or others of a certain age. People often ask, “Why do you want people to work longer—aren’t you depriving all the teenagers of jobs?” However, there is very clear evidence that the contrary is true: making the most of the experience and skills of older workers benefits young people as well, and such crude substitution does not usually occur. If one thinks about why one takes someone on, the attractions of employing someone who would not have to be auto-enrolled for a year or two are a marginal consideration relative to the skills and experience of an older worker.

On how the regulator will know about an employer who is not complying, the staging process for auto-enrolment is based on PAYE records, so the regulator will know who is running a PAYE system and, based on that, if the employee does not report back with a matching scheme satisfying the duties, the regulator will see that the employer is non-compliant. It is not the case that if the employer does nothing, nobody will know about it; they will have to comply with the duty.

On spot checks, the regulator is currently working through the compliance regime, which will be risk-based. The regulator will not turn up on spec at a one-person firm in the middle of nowhere; the regime will be proportionate. However, individuals will be able to report grievances, as they can about the minimum wage and other matters. If someone is deprived of their rights or is unhappy, they can report that, but the regulator cannot be in 1 million places at once.

The hon. Member for Kilmarnock and Loudoun raised the issue about the choice of schemes. We have tried to strike a balance. We recognise that if we had put in an auto-enrolment duty and had not created NEST, we would have been asking the impossible. We would have told small firms to enrol their workers into a scheme, but the small firms might not have been able to find a scheme to take them. NEST will do that, as it has a public service duty and cannot turn any firm away, for which it receives a state subsidy. We have guaranteed that there will be a source, but firms are free to go elsewhere. The smallest businesses will often just not be attractive to commercial providers, in that it would not be worth the hassle of taking pension contributions from one or two lower-paid workers. On the whole, firms will find that NEST is easy, accessible and attractive, and although firms are free to go elsewhere, in practice they may not have much choice.

The hon. Member for Islwyn raised the issue of firms encouraging people to become self-employed. That is an important issue not only for auto-enrolment, but for national insurance and tax, and we are in conversation about it with our colleagues at HMRC. If 80% of a firm’s work force suddenly become self-employed, HMRC has a strong interest in that because it would lose shedloads of employer national insurance, so there is already a communality of interest between HMRC and us. At the margin, the existing incentives to make someone self-employed are the 12%-odd of employer national insurance and other factors, which are already substantial incentives compared with the 3% cost of auto-enrolment.

We will be doing ongoing research through the roll-out of auto-enrolment. We will monitor and research who opts in and who stays out, and compliance. A huge amount of monitoring, reporting and researching will be done because we want to get auto-enrolment right. If we identify any abuse of waiting periods, we have powers to take further action. The key is that we will be keeping a close eye on these things.

The crucial factor, which balances the new duty on firms, is the optional three-month period, during which people will have the chance to opt in. Although that period does not have to be used, it will give employers extra flexibility right at the start of an employment, when they perhaps need it the most. On balance, we think that is the right trade-off. On that basis, I encourage the Committee to reject the amendments and to agree to clause 6.

Teresa Pearce (Labour, Erith and Thamesmead)

I would like to thank the Minister for some of the reassurance that he has given me, particularly when he referred to easement, and I am setting great store by 2017, when I hope some things may have improved along the lines that I want. Perhaps when we come to new clause 7, some of my other worries will be allayed, but in the light of the reassurance that we have had, I would not want to press the amendment to a vote.

Rachel Reeves (Labour, Leeds West)

We have had an extremely interesting debate this afternoon. First, the hon. Member for Edinburgh East told us that she had remembered that it was Fry’s five boys in the chocolate advert. She is still trying to remember what the similar pension advert was, but we have an hour and a half left this afternoon, and if she cannot remember by then, we will be enlightened on Thursday. We had our first consensus in the Committee on what a great job NEST is doing, and for that reason alone our sitting this afternoon will be memorable.

This afternoon’s debate has been about whether the balance of the waiting period is right. The Government propose three months, and we propose one month. We have had an intelligent and interesting debate about which period is right. Lord Turner suggested that employees should be enrolled automatically after four weeks, and Age UK suggest that they should be enrolled automatically on day one. The Government want three months, but the argument in the Johnson report, which has been heavily referred to this afternoon, seems to be finely balanced. This debate is important because the arguments are not clear-cut.

We have heard various arguments this afternoon. The first was that people have an average of 11 labour market interactions, but my hon. Friend the Member for Nottingham South said that that figure comes from the past, and that the number of such interactions is likely to increase in future rather than decrease. My hon. Friend the Member for Islwyn mentioned similar issues, and how he expects them to increase. My hon. Friend the Member for Erith and Thamesmead talked about part-time and seasonal workers, and the hon. Member for Arfon also touched on that. Those issues came up many times, including in the Minister’s response.

Although they are different from part-time and seasonal workers, the hon. Member for West Worcestershire mentioned women who take maternity leave, and how they will be treated under automatic enrolment. When responding to the issue of seasonal and temporary workers, the Minister said that he was not aware of comprehensive evidence, but he thought that what there was showed that temporary workers are less likely to be in a pension scheme. My argument is that such workers in particular will miss out if there is a three-month waiting period, but they are employees and making a meaningful contribution in their jobs.

My hon. Friend the Member for Edinburgh East said that employers pay national insurance and wages from day one of employment, and suggested that they should also contribute to a pension from day one. Many people see that as deferred income. My hon. Friend the Member for Nottingham South talked about opt-out rates, and said that if someone experiences a certain salary for three months and it falls by 4% in month four, the opt-out rate is likely to increase. He asked the Minister to keep a close eye on the trend to ensure that the three-month waiting period does not result in a higher opt-out rate. We all know that when we get our take-home pay, we tend to spend it and have nothing left at the end of the month. For many of our constituents, it is not even to the end of the month. We know that spending patterns become entrenched and that habits form. If someone sees a drop in income on the day that they are automatically enrolled, my hon. Friend and I believe that opt-out rates are likely to be higher.

Lilian Greenwood (Labour, Nottingham South)

While the minimum reduction in take-home pay would be 4% once one is auto-enrolled, can my hon. Friend confirm that that is always the case, or could it be more than that, because in some employer schemes the employee contribution is higher than 4%?

Rachel Reeves (Labour, Leeds West)

Yes, my hon. Friend is right. The minimum amount is 4%, but it could in reality be higher. The Minister is right to say that people can opt in in the three-month period, but the question that people have posed is, would they? Automatic enrolment has many values, one of which is to build on people’s inertia and nudge them into doing what is right for their long-term interests. Without that nudge, it is unlikely that many of them would voluntarily enrol before their enrolment was automatic, although I hope that they would.

I have put the case for the workers and why I believe that it is right for them to be automatically enrolled earlier. My hon. Friends the Member for Kilmarnock and Loudoun and for Islwyn, and the hon. Members for Nuneaton and for High Peak have also made important points about not burdening employers with regulations and red tape. Many members of the Committee have said that during these difficult economic times when we need small businesses to be the engine of growth, this might not be the time to burden them with additional regulation. However, we also know—the Minister has confirmed it—that smaller businesses will not be automatically enrolling employees until much further down the roll-out process during 2016 and 2017. We all hope that the economy is in much better shape by then. The staging approach, with big businesses automatically enrolling their employees first, is the right one.

I asked the Minister specific questions about the costs for businesses. He suggested that the up-front costs for administration purposes were in the region of hundreds of pounds, but he was not sure of the exact numbers. It would be useful if the Committee could see those numbers at a later stage, so that we are aware of the additional cost. All members of the Committee have emphasised that auto-enrolment is much less of a burden on small businesses because of the creation of NEST. The hon. Member for High Peak talked about his visit to NEST in south London and how he had been reassured that small businesses will not be burdened with the regulation and red tape that he had initially feared. That is good news for all of us, particularly for small businesses that will be automatically enrolling employees into their schemes.

We have had some heated debates, but the consensus is that small, medium and large businesses value their staff and want to do the right thing. Of course, we all have examples—from our constituencies and surgeries—of people who are treated badly by employers of all sizes. That is important. The Minister talked about the pressure that he came under to exclude micro-employers. It is right that there is a level playing field for small businesses, micro-businesses and medium and large businesses, but there should be a level playing field in terms of turnover of staff as well. That is one of the reasons why I would opt for an earlier automatic enrolment date, as my hon. Friends the Member for Kilmarnock and Loudoun and for Edinburgh East have also emphasised.

Today’s debate has been about balance. It has not been about whether automatic enrolment is the right thing. It has not been about whether the automatic enrolment period should be extended to six months, nine months or a year. It has been looking at whether it should be one month or three months and where the balance is to be found. It is a narrow window, but it affects some 350,000 people at any one time, according to the Minister.

When New Zealand looked at this and introduced the KiwiSaver, they decided to have automatic enrolment after a month. Lord Turner and his colleagues on the Pensions Commission also determined that people should be automatically enrolled after a month. My hon. Friend the Member for Islwyn said that the world of work is changing. We all know that people are likely to have more, rather than fewer, jobs in the future. That is why a compromise of its being one month before people are automatically enrolled is more appropriate to the changing world of work, to ensure that more people are brought into pension saving, particularly those who most stand to benefit from it—those who change jobs more frequently and those who work for smaller businesses. One month is a compromise that strikes the balance between employers and employees in a fairer and right way. I beg to ask leave to withdraw the amendment.

Clause 7 - Timing of automatic re-enrolment

Steve Webb (Liberal Democrat, Thornbury and Yate)

This clause need not detain us too long. It is about the timing of automatic re-enrolment, which the Committee will know was originally proposed to be after three years, with the facility for a firm to delay by three months beyond that. The clause simply allows the firm to allow re-enrolment three months before that, at 2 years and 9 months. That is a straightforward easement. Given the conversations we have had, that will increase pension saving. The essential point of this is flexibility. That is a small but welcome change.

Clause 8 - Timing of automatic re-enrolment

Steve Webb (Liberal Democrat, Thornbury and Yate)

Clause 8 relates to the way in which the earnings trigger and the qualifying earnings band are reviewed each year. The Committee will recall that we have now made a distinction between the threshold at which someone is auto-enrolled and the band of earnings on which the auto-enrolment duties form. In our conception, they are now two different numbers and the clause relates to the basis on which the two are set.

The 2008 Act introduced earnings-related uprating of what was then a single threshold. We have obviously deviated those two numbers from each other so we now have two numbers to set. However, the previous Bill locked in rises in that threshold to average earnings—in fact, the average earnings basis used to update the additional state pension. One of the issues that our auto-enrolment review advised us was that we needed a bit more flexibility to move away from the lock in earnings, so the clause replaces the earnings-related uprating power under section 14 of the 2008 Act with the power of the Secretary of State to review. He can and, indeed, should have regard to several factors when he undertakes the review, such as the level of prices, the level of earnings, the level of the basic state pension, tax and national insurance thresholds, and other relevant factors.

It is important to have flexibility. We need to keep the thresholds up to date and relevant. The employer duty starts next year. We could not reliably calculate all the figures we need now, and clearly the financial landscape changes. The basis on which tax allowances are set, national insurance thresholds are set and pensions are set are constantly moving feasts and if we tie the auto-enrolment thresholds to a single feature of the system that is doing something else, there is a danger that we will have the wrong number—the number that does not best serve our purposes.

The Johnson review suggested that the trigger should be in line with the PAYE tax threshold. We argued that there was a good reason for that, but that the lower limit of qualifying earnings should link to the primary threshold for national insurance and that the upper limit should rise in line with average earnings. Although we welcome those recommendations and recognise that there is a lot of sense in them, we do not want to be bound by them rigidly from one year to the next. The clause therefore provides that we review the thresholds annually to ensure that the right group is auto-enrolled. The Committee will see, however, that the clause also provides a power for an annual debate on the measures, which will be subject to affirmative procedure. The Secretary of State will review the threshold rates, having regard to the factors in the clause and other relevant factors, and he will bring to the House recommendations, which must then be debated.

Lilian Greenwood (Labour, Nottingham South)

Is the Minister concerned that the possibility for allowing a rate other than either the PAYE limit or the national earnings lower limit introduces an element of complexity? How do employers feel about that? How will the Minister ensure that employers are aware of the level if it is different from the other two that I referred to?

Steve Webb (Liberal Democrat, Thornbury and Yate)

The figures that the hon. Lady mentions are on the list of factors that the Secretary of State must have regard to. He must also have regard to other relevant factors, one of which is risk of confusion by having different thresholds. The irony is that we are putting right in the Bill precisely what she refers to. The £5,035 uprated figure is not the same as anything in the system, so we are taking out a number that does not match anything. The figures in the Bill match—certainly, the £7,475 matches the PAYE threshold—and the Secretary of State will be mindful of that.

The Secretary of State’s decision will be taken well ahead of the start of the relevant financial year and there will be a communication strategy, because firms will have a duty to follow the measure, just as they have a duty to apply national insurance and tax above particular thresholds. There will be a process for notifying employers of thresholds of this sort. We have indicated the general principles that will apply in the clause, but we want to keep flexibility in place. The clause gives us annual flexibility within a framework rather than the rigid provision in the 2008 Act, so it is a better and more flexible approach.

Rachel Reeves (Labour, Leeds West)

I have a couple of questions that build on what my hon. Friend the Member for Nottingham South said. The Minister has discussed the different ways in which the trigger can be changed in line with prices, earnings, tax and national insurance thresholds, and state pensions. What notice period will people receive? How far ahead of time will they know what the thresholds are? Perhaps I should know this, but will the Minister confirm whether the provisions relate both to the threshold at which people are automatically enrolled and the earnings on which it falls?

Most importantly, we discussed today how the threshold for automatic enrolment will be linked—certainly in the next time period—to the PAYE threshold. I have reservations about that, which were expressed in my earlier amendment, especially if the PAYE threshold increases, as relates to the amendment on which we have just voted. The advantage of the link is that at least it is not complicated—although neither was our proposal to link both to the national insurance threshold. Will the Minister elaborate on how he and the Secretary of State will decide how to increase the trigger and qualifying earnings band? Can he give some certainty about administrative ease and fairness so that we know that the level at which people are automatically enrolled will not rocket?

Steve Webb (Liberal Democrat, Thornbury and Yate)

I shall take the hon. Lady’s questions in order. On the notice period, the uprating will be done in January for April, which is the usual process of uprating for the following year. Most payrolls use payroll software, which all the figures will go into. The Pensions Regulator will issue guidance to those employers who must comply with the duty, and he will ensure that they know what the figure is. I stress that employers are used to getting new numbers at the start of a new financial year for all sorts of reasons; this will be another number—or not, as the case may be.

The clause covers both the review of the earnings trigger and the qualifying earnings band. The hon. Lady asked whether we could go mad and jack up the figures by huge amounts and exclude many people. All we know at present about the tax allowance is the rate that the Chancellor announced for 2012; we do not know anything beyond that and I cannot pre-empt what he will announce. However, there is a coalition agreement commitment to head towards a tax threshold of £10,000. The Johnson review specifically states that he does not think that a nominal tax allowance of £10,000 by the end of the Parliament—not today, it is important to stress that—is out of the spirit of the sorts of thresholds that he considered to strike the right balance between not excluding too many people and keeping down the burden on firms.

Rachel Reeves (Labour, Leeds West)

An increase from £8,000 to £10,000 for the PAYE threshold is an increase of 25%, which is a big leap compared with what we expect to happen to average earnings over the period of this Parliament. They are pretty stagnant at the moment and I do not expect them to go up by any more than, say, 10%.

Steve Webb (Liberal Democrat, Thornbury and Yate)

I make no apology for a significant increase in the tax-free threshold—that is the basis on which I stood for election. The hon. Lady is right; it will have a significant impact, but we should bear in mind that we are talking about nominal, not real earnings. The lower earnings limit, or the primary threshold which I think she wanted to use, would be linked to nominal average earnings over three or four years, and who knows by how much they will increase—it could easily be by 4% or 5% a year for three or four years. [ Interruption. ] Well, if inflation is about 4% at the moment, and real earnings growth returns and headline inflation comes down, I would have thought that nominal average earnings growth in that territory is not implausible. We can argue 3.5% or 4% or whatever, but my point is that it is wrong to compare £10,000 with current figures. The nominal increase is of about 20% over another three years or so. Yes, it will go up the income scale—that is the point of the income tax policy, to take people out of income tax.

We are not proposing to stick rigidly to that in clause 8 but we are instead giving ourselves the power to do an annual review. To answer the hon. Lady’s question, therefore, each year we will look at the relevant premises of the system and at what would be a threshold that strikes the right balance between burdens on business and excluding people who we might want to keep enrolled. If for tax, national insurance or pensions policy reasons, the thresholds do something, we would not be bound, as we were previously, only to index the number we first thought of—that is the flexibility we have in the clause and which I think the House wants. However, an impact assessment will be done to inform the affirmative resolution debate, so there is plenty of scope for scrutiny and assessment, which is only right and proper, because the decision is important.

Harriett Baldwin (Conservative, West Worcestershire)

The Minister is renowned for coughing loudly about the practice that employers have of offering cash buy-outs from small pension pots in the run-up to Christmas and such things. Does he anticipate that the annual review could include transfers into NEST of small pension pots?

Steve Webb (Liberal Democrat, Thornbury and Yate)

We do not envisage an annual review of that specific issue—clause 8 concerns an annual review of thresholds—but we have a statutory duty, once NEST is rolled out and everyone has been auto-enrolled, to get going by 2017 on a review of issues such as transfers.

To encourage my hon. Friend, we have already, earlier this year, called for evidence about the regulatory difference between defined-contribution, contract-based and trust-based pensions, and one of the issues arising is that of transfers and small pots. In response, we have decided that in the autumn we will produce a document setting out some vision thinking on options for transfers. The issue she raised is important, and we are very much seized of its urgency and are not kicking it into the long grass.

Clearly, although I am straying on to a probable later debate, we do not want to unsettle the architecture of auto-enrolment just as we are about to implement it. We could tweak 1,001 things, but one of the pleas we have heard from employers, the industry and, to some extent, consumers is, “Please stop fiddling with it—get it in, get it up and running, and then see how it’s going,” which is what we will do. I commend clause 8 to the Committee.

Clause 9 - Rounded figures for earnings trigger and qualifying earnings band

Steve Webb (Liberal Democrat, Thornbury and Yate)

I hope that the clause is not the most contentious in the Bill. It is about rounding—the legal provisions for rounding the figures for the earnings trigger and the qualifying earnings band. Although the figures that we have been quoting are annual figures and sound nice and round, when they are divided by 12 or by 52 they stop being round, and the clause contains interesting but relatively uncontentious powers about whether such figures should be rounded up or down, or to the nearest 10p. Essentially, section 13 of the Pensions Act 2008 established the principle that pro rata weekly or monthly figures may be applied instead of the annual rate, and clause 5 introduces the same principle for the auto-enrolment earnings trigger. As I am sure is apparent to the Committee, clause 9 will insert a new section into the 2008 Act to allow those pro rata figures to be rounded up or down. That means that when new rates are set to match PAYE or national insurance contributions thresholds, we can match them exactly if we so wish. The clause is uncontentious and I commend it to the Committee.

Clause 10 - Certification that alternative to quality requirement is satisfied

Steve Webb (Liberal Democrat, Thornbury and Yate)

I beg to move amendment 9, in clause 10, page 8, line 25, leave out subsection (2) and insert—

‘(2) For the heading substitute “Certification that quality requirement or alternative requirement is satisfied”.

Katy Clark (Labour, North Ayrshire and Arran)

With this it will be convenient to discuss Government new clause 2—Certification for non-UK schemes.

Steve Webb (Liberal Democrat, Thornbury and Yate)

The issue of certification is important and substantive, so I will explain what it is, why the provisions in the clause make certification easier and why we have gone a step further in amendment 9 and new clause 2 in response to the debates in the House of Lords.

This is the first time I have been a Minister in a Committee, and I am amused because I did not realise that Ministers are given a paper stating that the amendment will be “Moved by: Steve Webb”, that my “Party” is “Liberal Democrat” and that at the top is the word, “Accept”. I am greatly heartened that I am being advised to accept the amendment—I will listen to the debate and then decide.

What is certification all about? The idea is that firms have to auto-enrol a set of workers, but what do they auto-enrol them into? They have to auto-enrol them into a scheme that is good enough. It does not have to be perfect; it has to be good enough. The 2008 Act envisaged certain quality thresholds for schemes that satisfy auto-enrolment quality standards. The problem with the 2008 Act is that it is quite rigid, which is a recurrent theme. A firm might have a pretty decent scheme, but if it did not exactly fit with what the Government thought it should look like, the firm would fail the pretty decent scheme test—as it is known in the trade. The employer would then have to amend the scheme to fit the Government’s framework or think, “Blow this for a game of soldiers—I will shut my scheme and do the bare minimum.” We want to avoid the situation of firms that are running schemes that are good enough feeling moved to close them or to level down.

The idea of certification and the reforms in the clause is that we will allow different sorts of schemes to pass the good enough test. We are proposing a range of thresholds to allow schemes to be certified as good enough, and there are three variants. First, if a firm provides 9% of basic pay, its scheme is good enough. Auto-enrolment is based on one definition of pay—on earnings in the band above the £5,000-odd threshold—but many pensions are based on another definition of pay, such as basic pay, which can create problems in that basic pay might be very different from total pay, because of overtime and bonuses. We do not want an employer who is running a basically decent scheme to have to shut it or amend it because of those differences in definition. Therefore, in response to a lot of consultation, tier 1 of the certification test, which we will be introduced in regulations, states that if at least 9% of basic pay is put in, including at least 4% from the employer, the firm will have a tick as being good enough.

Secondly, if the firm contributes at least 8% of basic pay, including a 3% employer contribution, that will also be good enough. Thirdly, if the firm contributes at least 7% of total earnings—basic pay plus bonuses, overtime and so on—including 3% from the employer, that will again be good enough. That is different from the 8% of band earnings, which is the bit above the uprated £5,000 or whatever the threshold finally is. As I said, the certification test is to give firms that run schemes that are good enough but do not exactly fit our blueprint a tick in the box, so that they can get on with running those pension schemes and making widgets.

Clearly, some people in some firms will get less money put into their pension because we have made that easement. For some individuals, 8% of band earnings will be more than what is allowed under the certification rules, and the question is whether we are disadvantaging too many people. We did not design the thresholds and come up with numbers off the back of a fag packet; they were based on studying basic pay, total pay and what firms were putting in, and making a careful analysis of that. We always intended for the vast majority of workers to do better—or as well—in these tests as they would have done in the original tests.

There was a debate on this issue at some length in another place, which we welcomed and found helpful. It was suggested that reassurance was needed that the new certification tests will not water down the protection received by workers. We therefore tabled amendment 9 and the linked new clause, which will ensure that over 90% of employees, based on survey data, will do better or as well in each of these tests as they would have done in the original tests. We have looked at the annual survey of hours and earnings for private sector firms, and applied the two tests—the original 8% of band earnings test and the different tiered tests. With the tier 1 test, we found that 95% of employee jobs will get as much money or more; with the tier 2 test, that was true for 91% of employee jobs. It must also be true for the tier 3 test because that involves 7% of total earnings. Any individual to whom that tier applies will save at least as much as they would have done had contributions been calculated using qualifying earnings.

Rachel Reeves (Labour, Leeds West)

I applaud the work done by the Minister and the evidence that he has cited. He gives the percentages of those who are likely to be better off, and I am pleased with those numbers. Does the evidence suggest that those who will not be better off belong to a particular group? Will it be those right at the top, for example, or those right at the bottom? I have worked for firms where people on lower incomes have a lower proportion of their income paid into a pension by both employer and employee. Is there a risk of that happening?

It is good that schemes that pay in from pound one are not invalid under this scheme because they do not fit specifically into the banded earnings. From his conversations with employers, can the Minister tell us what proportion of businesses will pay in from pound one? Will most wish to do that, or will they prefer to use banded earnings?

Steve Webb (Liberal Democrat, Thornbury and Yate)

The answer will be different for each of the tiers. Some involve payment from pound one, and some take differential account of overtime. To clarify, tier 1 involves 9% of basic pay and tier 2 involves 8% of basic pay. There is, however, a second condition that I forgot to read out a minute ago and the record will look a bit bizarre. As I was reading it, I thought, “How can that provision be as good as the other one?”, but the second requirement for tier 2 is that basic pay must be at least 85% of total pay. We do not want manipulation or a situation in which somebody reduces basic pay to nothing and pays everybody in bonuses—or does the opposite—and thereby gets round the rules. That is why we have the different tiers.

One problem with private sector occupational DC schemes at the moment is that many would fail the tests under discussion. These tests are not watered down. For tier 1, we think that around 50% of private sector DC schemes would pass and 50% would fail. It is not a weak test and requires a certain amount. We think that about 25% of private sector schemes would pass either tier 2 or tier 3 tests.

In terms of the people who do not get as much, we do not have strong evidence either way, but it will be different for each scheme according to whether account is taken of total pay, basic pay or whatever. In terms of how many schemes use contributions from pound one, my anecdotal impression is that it is quite common for schemes to be based on that. We think that people might use certification to have a scheme, which could be NEST, from the first pound so that some of the matters that we discussed earlier about when people fluctuate above and below thresholds will not be an issue for the firm, because it will just pay 7% or whatever it is every month. It will not have to worry about whether someone is above or below the threshold, or about re-enrolling, waiting periods and so on. It will just say, “Blow this, we’ll just put 7% in every month.” That will be possible because of certification, but if it had to be 8% of band earnings, it might not have that flexibility.

Rachel Reeves (Labour, Leeds West)

I thank the Minister for his detailed response. I would expect the majority of employers who currently contribute to a pension scheme to pay from pound one. That is certainly my experience from talking to employers, and it would be good to think that they might do so under automatic enrolment. I realise that there might not be any quantitative analysis as we do not yet have automatic enrolment, but having talked to NEST, I wonder whether the Minister’s understanding is that many employers who do not currently have schemes might consider automatically enrolling from pound one.

Steve Webb (Liberal Democrat, Thornbury and Yate)

The short answer is that we have not had a significant amount of feedback to that effect, but as we discussed a moment ago, it might be attractive. Although it might be slightly more expensive to pay 7% from pound one or whatever, it might make life a lot simpler for firms, and that is partly the point of the exercise.

I might stop there. Although I could speak about the clause, I want to focus on the amendments, which are in response to discussion in the other place, and seek to provide the reassurance that we will regulate to provide easements, but that we will check annually against the data for the survey of hours and earnings to ensure that we are meeting the 90% threshold all the time.

Rachel Reeves (Labour, Leeds West)

When the Minister is reporting back to Parliament on the success of automatic enrolment, it would useful to see what the proportion of paying in is from pound one, the lower earnings limit, or some other limit. That will say a lot about how much employers have engaged with it, and, as the Minister said, the burden on business could be reduced if fewer people are moving in and out of NEST, especially if there are high set-up costs for moving someone into NEST and then perhaps taking them out.

Steve Webb (Liberal Democrat, Thornbury and Yate)

It is certainly the case that if an employer is using certification easements to get clearance from the regulator that they are compliant, we will have statistical data on that, and I am sure that we can make such data available as appropriate.

On reflection, I have ranged fairly freely over the clause, but in summary the key thing that it will do when it is amended, as we hope it will be shortly by amendment 9 and new clause 2, is to give us the power to introduce a certification test for employers for money purchase schemes, personal pension schemes, and the money purchase equivalent element of hybrid schemes, and it requires the Secretary of State periodically to review operation of the test. I have described the test and the easements, and our proposed amendment. Let me make it clear what the test is.

The Secretary of State will be satisfied before publishing regulations that no more than 10% of individuals will receive contributions less than the statutory minimum. The key point of clause 10 is that it allows employers to continue to calculate their pension contributions on their scheme definition instead of switching to band earnings, and the alternative tests broadly replicate the minimum quality requirements for money purchase and personal pension schemes, and the money purchase element of hybrids. We are trying to protect individuals but give flexibility to employers. I hope that the Committee accepts that the clause takes us in the right direction, and that amendment 9 will provide the reassurance that has been sought by hon. Members, and in another place.

Clause 11 - Transitional period for defined benefits and hybrid schemes to be optional

Steve Webb (Liberal Democrat, Thornbury and Yate)

Clause 11 is a technical amendment to section 30 of the Pensions Act 2008 and will correct flaws in the drafting. What is quite reassuring to know is that the Bill has no flaws in its drafting whatsoever and that there is no chance that my successor but three will be back here to amend our amendments. However, in 2008, mistakes were made, and I will forgive the people responsible.

As section 30 stands, it compels all employers using defined benefit or hybrid schemes to defer enrolment until the end of the transitional period in 2016. Clause 11 will make deferral a choice for the employer. The crucial point here is that section 30 makes that compulsory. While it remains an option for firms, we want to give firms a choice, so that if they have that particular sort of scheme, they can auto-enrol sooner. That will be a welcome flexibility, and it was always the original policy intent.

Clause 12 - Arrangements where transitional conditions cease to be satisfied

Steve Webb (Liberal Democrat, Thornbury and Yate)

We go back to the good old section 30 of the Pensions Act 2008, which I am afraid needs amending. We apologise for having to do that again.

As we have just discussed, section 30 allows employers using defined benefits and hybrid schemes to delay automatic enrolment of relevant job holders. It provides that where certain conditions cease to be satisfied during the transitional period, the employer must ensure that the jobholder is enrolled into an alternative scheme. However, as drafted, the section allows employers to use a DB, hybrid or money purchase scheme as the alternative scheme, but does not allow employers to use a workplace personal pension scheme. That was not the policy intention, and clause 12 will correct the error.

Clause 13 - Power of managers to modify by resolution

Steve Webb (Liberal Democrat, Thornbury and Yate)

The clause relates to the difference, in the defined-contribution world, between trust-based schemes, which have trustees, as the name suggests, and contract-based ones, which have managers.

Section 32 of the Pensions Act 2008 provides that trustees in a trust-based scheme may, by resolution and with the employer’s consent, make certain changes to their schemes. That modification power was introduced to allow employers to make improvements, where the powers in the trust deed and rules are limited, to their money purchase schemes and certain hybrids, by increasing contributions, the basis on which they are calculated or their frequency. That power makes it easier for trustees and employers to comply with automatic enrolment requirements.

Clause 13 is a technical amendment that will correct the drafting of section 32. The clause will extend the modification power to scheme managers. The modification power will apply to schemes with managers as well as those with trustees; in other words, to contract-based defined-contribution pensions and not just trust-based ones. It will make it easier for employers with certain trust schemes to comply with their auto-enrolment duties. Without clause 13, employers offering certain trust-based schemes administered by a manager might find it difficult to modify their scheme if the trust deed and the rules were restrictive—to be absolutely clear, there was a power for a trust-based scheme administered by trustees to make amendment, but not trust-based schemes administered by a manager. That was never the policy intent, and clause 13 therefore deals with that. I commend it to the Committee.

Clause 14 - No indemnification for civil penalties

Steve Webb (Liberal Democrat, Thornbury and Yate)

I am sure the Committee is enjoying this bit. Clause 14 does not correct a technical drafting error: it closes a loophole, which is another thing we regularly do in legislation. Section 256 of the Pensions Act 2004—it must have been a real corker of an Act: I forget how many clauses the Bill runs to, but we do not have 256 clauses —prohibits a trustee or manager of an occupational or personal pension scheme from taking money from the scheme to pay for a fine as a result of a conviction or penalty, and rightly so.

Clause 14 also prevents trustees or managers from being reimbursed from the scheme for payment, and this includes indemnity insurance. Sections 40 and 41 of the Pensions Act 2008 introduced fixed and escalating penalties in preparation for auto-enrolment. Section 256 prohibition should have been extended to cover the 2008 Act penalties, but was not. Clause 14 closes that loophole and extends section 256 of the Pensions Act 2004 so that it covers fixed and escalating penalties introduced by sections 40 and 41 of the Pensions Act 2008. The effect of the new clause is to prohibit pension scheme trustees or managers from paying penalties that they are personally liable for out of scheme funds, and as a result reducing members’ benefits.

I will talk about why such prohibition is needed. For automatic enrolment to work, the Pensions Regulator must be able to take effective enforcement action against trustees and managers where necessary. As a last resort, penalty notices could be issued, and the deterrent effect of penalty notices is nullified if recipients simply take the money out of the scheme. The thinking behind that prohibition is fairly clear. I can reassure the Committee that there have not been any prosecutions under section 256, and that is how we want to keep it. However, we want to ensure that we have a deterrent effect and therefore clause 14 corrects that omission in the auto-enrolment world. I commend clause 14 to the Committee.

New Clause 1 - Test scheme standard for schemes that produce sum of money for provision of benefits

Steve Webb (Liberal Democrat, Thornbury and Yate)

I beg to move, That the clause be read a Second time.

I will explain what new clause 1 does. I hope that members of the Committee will have had the letter that I sent explaining the Government amendments and that they will be familiar with the material.

Sections 21 and 23 of the Pensions Act 2008 set out the quality requirements for defined-benefits schemes used by employers to discharge their enrolment duties. Quality requirements are based on a test of overall scheme quality, which requires employers to compare the pensions from their scheme against a benchmark or model scheme. For some schemes this will be against a test scheme. Certain defined-benefits schemes, in which a member accrues an entitlement to a sum of money to be used to secure a pension within the scheme or purchase an annuity, have been inappropriately classified as hybrid schemes when compared to the benchmark test scheme. This erroneous categorisation means that those schemes are being regulated in a way that is inconsistent with the definition of hybrid scheme in the legislation. As a result, the existing regulations could be outside the scope of the Secretary of State’s powers, and we do not want that. That is ultra vires, as it says in my notes.

New clause 1 is essentially minor and technical. It amends sections 22 and 23 of the Pensions Act 2008 by including a reference to such schemes and introducing a regulation-making power that will enable the Secretary of State to provide for the detailed requirements for a test scheme for such schemes. The introduction of a new equivalent test scheme will allow the test scheme to operate as a straightforward benchmark for employers to use for their previously mis-classified defined-benefits schemes.

I shall clarify the effect of the new clause. The quality requirements have been set at a level that balances promoting individual responsibility for saving towards retirement with ensuring that workplace pensions remain affordable for employers. The new clause will correct an error by ensuring that a certain type of defined-benefits scheme, incorrectly classified as hybrid, can be treated as a defined-benefits scheme and meet the test scheme standard for defined-benefits schemes. It does that by inserting a regulation-making power under section 23, which enables the Secretary of State to prescribe further features of the test scheme under regulations. I stress that the reclassification does not alter the quality requirements for those schemes, except that the quality requirement is now provided for under the legislation relating to defined-benefits schemes rather than the legislation relating to hybrid schemes. I commend new clause 1 to the Committee.

New Clause 2 - Certification for non-UK schemes

New Clause 4 - Power to exempt certain cross-border employment from enrolment duty

Steve Webb (Liberal Democrat, Thornbury and Yate)

I beg to move, That the clause be read a Second time.

The Committee will be aware that we tabled the new clause relatively recently to give us the powers to deal with what may be a problem relating to some of the international aspects of pensions. If Committee members consider that we been discussing technical minutiae, I have to tell them that once we start to debate people who work in one country, contribute in another, earn in another and are employed in another, matters become very difficult. We want to ensure that, in a world of auto-enrolment, we essentially make it as straightforward as possible. Obviously, we have discussed the issue with NEST, but it will be an issue for employers and for other providers.

What is the issue? There is a potential for tension between the regulations under the Pensions Act 2004 that implement the cross-border provisions of IORP—the EU institutions for occupational retirement provision directive—into domestic law and the subsequent duties under the 2008 Act on employers to automatically enrol UK workers into a workplace pension scheme. So there is a potential conflict between IORP—which we talk about a lot in the pensions world, sadly—and the 2008 Act, which provides a duty on UK firms to employ UK workers.

The 2004 Act and the cross-border regulations require the trustees and occupational pension scheme to go through an approvals procedure before they can offer pension services to an employer of a worker who is subject to the social and labour laws of another European economic area state. Once approved, the scheme must comply with those laws. It can be complex and costly for trustees to comply with the cross-border provisions, and schemes may refuse to admit workers who trigger the application of those provisions. A scheme may say, “No, we are not going to let you into ours because we would have to provide benefits that are to do with the labour laws and the minimum standards of another state, and that is too much hassle. We’re not going to do it.”

The purpose of new clause 4 is to provide a regulation-making power. It would enable the Secretary of State to provide that the automatic enrolment duties under the 2008 Act do not apply in the case of a person’s employment of workers who trigger the application of the cross-border provisions. Those regulations, if we chose to make them—at this stage we want to give ourselves the power to make them, so that we can do more work and examine the scale of the problem—could be made at any time, if necessary, before the onset of the employer duties in October 2012. New clause 4 would provide the Secretary of State with that regulation-making power. Without such a power, some employers may find it impossible to comply with the employer duty.

We are still assessing the character and scale of the problem. It affects a small number of cases—potentially, however, 30,000 to 35,000 people. If we put an employer in an impossible position, that has got to be a bad thing, even if it “only” affects 30,000 to 35,000 people. Those people may trigger cross-border activity. It may include people who are seconded to work in another country, but who do not acquire rights as a qualifying person, or individuals who may already be in a pension scheme. It will affect less than 0.5% of people who will be automatically enrolled.

The problem is that the process can be complex and costly for trustees to comply with cross-border requirements, and as I said, schemes may refuse to admit workers who trigger the application of those provisions. Approval to operate across borders can take a number of months. Statutory requirements are for the regulator to submit an application to the host state within three months of obtaining the necessary documentation. Host states must respond within two months of receipt of the application.

As the Committee can see, this is a complicated set of areas. We are seeking, through new clause 4, to give ourselves the potential to regulate to exclude these people from the auto-enrolment duty.

Lilian Greenwood (Labour, Nottingham South)

I completely understand why the Minister is bringing forward a new clause to prevent a duty being placed on employers that they find impossible to comply with. Will he set out the implications for those employees who are affected and what it means for their ability to save towards a pension if, for example, they are working outside their EU country of origin?

Steve Webb (Liberal Democrat, Thornbury and Yate)

Just to be clear on something that I just said, I want to ensure that the record is absolutely right.

On the hon. Lady’s question, the folk that we are talking about will on the whole be higher-paid, pensioned workers. They will not be folk earning £9,000 in part-time, low-paid jobs, who we need to worry about. We do not glibly dismiss the pension position of 30,000 people, but it may well be that they are precisely the sort of people who can sort their own pension arrangements out. We do not want to require firms to enrol them in schemes that are inconsistent with other legal requirements. That is the point I am trying to make.

If we do not put new clause 4 into the Bill, it is technically possible for an employer to have a legal obligation to automatically enrol a jobholder—that is the term in the 2008 Act—but because that person is also a qualifying person, to be unable to find a scheme willing or able to provide a work-based pension to that person, because of all those cross-border duties. We could require an employer to put someone into a pension, but the employer could be unable to find a pension to put them into. We do not want to put employers in that position. We could be talking about some 30,000 to 35,000 people, but as I have indicated, some of those people could already be in a pension scheme, so the real number involved is likely to be lower.

The possible ambiguity in what I said related to the position of secondees. To make the situation absolutely clear, the 30,000 to 35,000 people includes those who are seconded, but those are exempted. So that is the worst-case scenario. For the avoidance of doubt, I want to make that clear.

The EU has recognised that there are significant barriers in enabling schemes to operate effectively across borders.

Rachel Reeves (Labour, Leeds West)

So if a construction worker employed by a UK company went to work in Germany for two months but was still paid in sterling and still living in the UK permanently, would they be affected by these changes?

Steve Webb (Liberal Democrat, Thornbury and Yate)

I will come back to the hon. Lady’s point in a second. The currency in which someone is paid is not particularly germane, but the question would be whether they count as a jobholder—a UK worker—under the 2008 Act and also as a qualifying person for whom the obligation to match the labour laws of another member state arose. A construction worker would be unlikely to qualify for German employment rights and will therefore be regarded as a UK worker. That is not the sort of example that we have in mind, but I am grateful for the hon. Lady’s question.

As I said, the recent EU green paper consulted on ways in which the IORP directive could be amended to simplify some of the conditions for cross-border activity, and we expect the Commission to publish a review of IORP towards the end of 2011, which may provide an indication of the Commission’s long-term thinking on cross-border activity. In the meantime, we cannot sit and wait to hear what the EU will do—we need to take powers in the Bill to ensure that we do not put employers in an impossible position. I therefore commend new clause 4 to the Committee.

New Clause 6 - Fees and charges

Teresa Pearce (Labour, Erith and Thamesmead)

I beg to move, That the clause be read a Second time.

Katy Clark (Labour, North Ayrshire and Arran)

With this it will be convenient to discuss new clause 10—UK personal pension schemes: additional protection—

‘(1) The Pensions Act 2008 is amended as follows.

(2) In section 26(4)(b), at end insert “, ensuring they are protected to the same level as stakeholder terms and conditions.”’.

Teresa Pearce (Labour, Erith and Thamesmead)

I tabled new clauses 6 and 10 because they deal with fees and charges and protection of pensions and pension schemes. My aim is to ensure that any scheme to which an employee is automatically enrolled is fit for purpose and of a high quality. Employers can choose from a range of schemes, including NEST. As we have heard today, those of us who have visited NEST are quite impressed—it is easy to run, easy to access and value for money—but there is nothing to stop an employer choosing an inappropriate pension scheme, unsuitable for their employees.

New clause 6 is designed to provoke a debate on the charging structure for workplace pension schemes. Consumer groups such as Which? are particularly concerned about the increase in charges levied by some insurance companies for people who change jobs. Which? research has found that some companies are charging 0.5% to 0.7% in annual management charges to active members but, once the person leaves, the charges can then double to 1.2% to 1.5%. Many people move jobs from time to time, and around 60% of people who start contributing to group personal pensions have stopped contributions after four years. A substantial proportion of people will end up paying higher charges, far exceeding the charges that they would be paying were they involved in NEST. Such high charges could have a big impact on the pension received by the consumer, and would be counterproductive to what we are trying to achieve, which is renewed confidence in pension schemes. Insurance companies that operate the practice call it an active member discount, but a more appropriate name would be a deferred member penalty. Whether the change needed is regulatory or legislative, the Government need to address the fact that no one seems to be looking after the interests of past employees, or deferred members. Varying annual management charges through the introduction of extra charges for deferred members is a transfer penalty, penalising people who switch from job to job.

Rachel Reeves (Labour, Leeds West)

I thank my hon. Friend for tabling the two new clauses. She talks about the extra charges levied on people who leave a job. Given that more people are doing part-time work or working in temporary jobs, which we have been discussing today, once automatic enrolment is rolled out, is her expectation that even more deferred members, if not in NEST, will potentially incur such surcharges?

Teresa Pearce (Labour, Erith and Thamesmead)

That is my concern. We have two ends of the spectrum: NEST, as far as we can see, which will be well run, value for money and easy to understand; and the top-end company pension schemes. The problem might lie in between.

I am also concerned about the Financial Services Authority’s proposals to allow employers to negotiate consultancy charges with their advisers, to be deducted from the employee pension pots. There should be more highly specified quality requirements, or employers must receive better advice where advisers are required to benchmark the charges against those in NEST to ensure that the workplace personal pension provides good value for money.

During the House of Lords Committee stage, Lord Freud stated that

“if the research shows that charging levels are creeping up, we have the power under the Pensions Act 2008 to regulate to set a charge cap for qualifying schemes and auto-enrolment schemes.”—[Official Report, House of Lords, 3 March 2011; Vol. 725, c. GC249.]

Research by Which? on deferred member penalties demonstrated that charges are already high in comparison with NEST, and I would like to know precisely at what point the Government might step in. Will the Minister clarify the governance and regulation around these issues, so that we can work together to find a solution that is best for employees and supports employers?

On new clause 10, it is important that automatic enrolment increases access to good value pension schemes for all employees. As we have heard during our discussions, too many employees have no pension cover at all. There must be no reduction in consumer protection, and the experience of stakeholder pensions shows that the best way of ensuring that is through product regulation. Consumer groups such as Which? have pointed out that most consumers find pension charges difficult to understand and would find it difficult to know whether their pension scheme offers a good deal. The new clause would require all qualifying schemes to meet existing stakeholder standards. That would help ensure that all pensions sold to employers as qualifying schemes would meet certain basic standards, including a charge cap of 1.5% a year for the first 10 years and 1% thereafter. There would also be restrictions on transfer penalties to avoid pension companies using hidden or complex charging structures to lock employees into poor value pensions.

The introduction of stakeholder pensions was successful in preventing the mis-selling of poor value pensions and charges were brought down. One impressive thing about NEST is its ability to talk in plain English. Its leaflets and the information that will go out to employees mentions high risk rather than high return. People might think that high return sounds like a good thing, but they may actually be looking at a high risk. NEST will not use the words “low risk” when describing pension funds because, as it says, no investment is completely low risk or has no risk. Instead of low risk, NEST will talk about low return, and the use of language that is clear and readily understood is a welcome initiative.

No members of the Committee, and especially the Minister, would want a situation in which pensions are mis-sold. Often, however, mis-selling takes many years to come to light. Bearing in mind the resistance that business has to further regulation, will the Minister assure the Committee that there will be sufficient regulation to ensure that inappropriate pensions are not sold in the first place, rather than regulations being introduced after the event?

Rachel Reeves (Labour, Leeds West)

The new clauses are important and raise the issue of the charging structure for workplace personal pensions. I thank my hon. Friend the Member for Erith and Thamesmead for tabling them. The new clauses seek to ensure that the scheme into which an employee is automatically enrolled is fit for purpose and high quality. Employers can choose from a range of schemes including NEST, but there is nothing to stop a disengaged employer from choosing an inappropriate pension scheme that is unsuitable for their employees. The new clauses seek to address that risk.

Some groups are concerned that without some form of regulation, the programme of automatic enrolment could be undermined. The Royal Society of Arts recently stated that

“the view that less regulation is required, is deeply dangerous for the success of pension auto-enrolment. Further, the view that action can be taken if it seems pensions are mis-sold, forgets that if these pensions are found to have been mis-sold, this will result in individuals withdrawing from pension provision. But much of the mis-selling may not come to light, because, as with endowments, it can take many years, if ever, for such mis-selling to become apparent. If we know what constitutes an inappropriate pension, this should be regulated against before it is sold, not after the mischief has taken place.”

Therefore, new clauses 6 and 10 seek to introduce some form of regulation to make automatic enrolment work for both employees and employers, who have to choose the pension scheme that they will automatically enrol their employees into.

The starting point, as it has been for all other amendments, is the Turner report. It recommended on page 306 that auto-enrolment into a defined contribution scheme should be permitted only if

“the combined employer and employee contribution exceeds the combined level in the NPSS”,

which is the precursor to NEST,

“(taking into account the level of charges)”.

The Committee consensus is that NEST is doing a good job and is a suitable pension scheme, particularly for small businesses. NEST fees have been set at 0.3%, although with a 1.8% contribution levy at the start to cover costs, levelling out to 0.48% overall, which will decrease in 20 years once the loan has been paid off. The 0.48% level is comparable to the 0.4% to 0.6% annual management charges that can be expected, excluding commission. However, there are some serious worries about how other schemes will be regulated and the fees that they will be allowed to charge.

The Government have said that a majority of defined contribution pensions have charges of less than 1%. But that has been disputed by the RSA, which said that

“we know of no reliable source to back up the government statement that a majority of DC pension schemes have charges of less than 1%. Default funds typically have charges of 0.4 to 0.6%. These figures have been provided to the DWP by pension providers in qualitative studies, they have not been evidenced, and in any case refer to current large employers, not to those small employers who will typically be affected by auto-enrolment.”

That is because they do not currently have pension schemes. The report continues:

“The most comprehensive attempt to work out pensions costs, amongst smaller funds, such as those to whom auto-enrolment will apply, is a quantitative study for the DWP, which reveals an average cost of 1.53%. This means that, over a pension lifetime, an average saver is losing 40% of their possible pension on fees. Many are losing much more. The study also reveals that existing employers do not understand pensions charges. Many for example do not realise that the costs are charged on the outstanding balance, rather than the contribution made”.

The report also repeatedly demonstrated that small changes in charges can seem, at face value, insignificant, but,

“over the lifetime of their pension, a 1% charge will reduce the potential pension payout by 25%. A 2% charge will reduce it by 50%”,

if it is on the full balance. The report continues:

“Further there are hidden charges, beyond those declared, which even sophisticated purchasers find it difficult to untangle.”

More generally, fees and charges are central to trust and predictability, which are important in long-term financial planning, and therefore particularly for pensions. The fact that someone who has saved throughout their employment stands to lose a potentially substantial proportion of their income as a result of hidden fees and charges erodes trust in savings. It also damages the predictability of retirement income, and therefore erodes the likelihood of getting people into the habit of saving and to trust that those savings will result in a decent pension income in retirement. Predictability and trust must play a part in ensuring that people have adequate pensions savings.

In the world of the stakeholder pension, there are some safeguards for the employee about the level of fees and charges that can be expected. Those safeguards do not, however, carry across to the automatic enrolment schemes outside of NEST. New clause 10 explores the possibility of encouraging the employer to take safeguards into account when choosing a scheme. It is important to consider the proposal, because automatic enrolment changes the nature of employers who are providing a pension. Neither the employers nor the employees are necessarily sophisticated consumers. Many of them will have little experience of pensions, yet they are being asked to make big decisions that might result in accusations of mis-selling later down the line.

Even larger employer schemes have been involved in mis-selling scandals that have eroded trust and confidence in savings. Many employers will make a positive contribution and will search for the best options for their employees because they recognise the value of giving them proper and decent workplace pensions. However, small businesses are worried about the regulatory burden. Limited capacity might frustrate the best intentions and some employers might not act in their employees’ best interests. The biggest concern, however, is the information available to employers and the regulation of the schemes that they have the opportunity of choosing.

Many of the reforms are designed to allow for the practicalities of a small business, which is welcome, and they are supported by employer groups. When the measure was mooted and then presented in the Bill, it became clear that employers were not necessarily in the best position from which to protect their employees from hidden fees and charges. We must ensure that protection applies in relation to the level of fees and charges that an employee can expect. Again, drawing on the evidence of the RSA, studies have revealed an average cost of 1.53% in smaller funds, which equates to up to 40% of the possible pension value over its lifetime being consumed in fees and charges. Clearly, when neither employer nor employee understands pension charges, dangers to the consumer are increased. If people find that their savings are whittled away by excessive charges because of the options selected by their employer, the very aims of automatic enrolment might be threatened.

I thank my hon. Friend the Member for Erith and Thamesmead for tabling new clause 6, which addresses particular concern about the increase in charges levied by some companies when people change jobs. The new clause calls for employers to be required to take into account the level of such fees and charges when deciding their contributions level. My hon. Friend referred to Which?research, which has found that some companies charge an annual management fee of between 0.5% and 0.7% for active members. When a member leaves, however, the charges might double to between 1.2% and 1.5%. According to Which?, given that 60% of people who start contributing to group personal pensions stop doing so after four years, mainly due to job changes, a substantial proportion of people might end up paying those higher charges, which would far exceed the charges that they would have been paid in to NEST, which applies no higher charges for non-active members.

Such high charges might have a big impact on the pension received by consumers, which might have reduced at their retirement by approximately 25%. The insurance companies that operate the practice call it an active member discount, but Which?, my hon. Friend and I agree that the more appropriate title would be a deferred member penalty. Does the Minister accept that whether the change is regulatory or legislative change, the Financial Services Authority and the Government must address the genuine concern that no one is looking after the interests of past employees or deferred members? Does he accept that such extra charges are currently penalising people who regularly switch employer?

There is also serious concern about the FSA’s proposals to allow employers to negotiate consultancy charges with their advisers, which would be deducted from their employees’ pension pots. There is a clear risk that excessive deductions might be negotiated with the employer to the detriment of the employee—the future retiree. The FSA has confirmed that it has no problem with deductions being made of up to 35% of the first year’s group personal pension contributions. Does the Minister agree that either there must be more highly specified quality requirements, or employers must receive better advice, with advisers being required to benchmark charges against those in NEST, which are much lower, to ensure that the workplace personal pension provides good value for money?

During the debate in the other place, the Minister with responsibility for welfare reform said that

“if the research shows that charging levels are creeping up, we have the power under the Pensions Act 2008 to regulate to set a…cap for qualifying schemes and auto-enrolment schemes.”—[Official Report, House of Lords, 3 March 2011; Vol. 725, c. GC249.]

In the light of those comments, will the Minister explain what steps he is taking to research the level of charges and fees in qualifying schemes and auto-enrolment schemes? Will they be actively monitored and, if necessary, acted on in advance of the review in 2017? Will the Minister explain at what point he would deem it necessary and appropriate for the Government to regulate under the 2008 Act if excessive charges are applied by automatic enrolment schemes outside NEST?

The new clauses would be important to ensuring the success of auto-enrolment, and I welcome our discussion on Thursday. I hope that the Minister agrees that if we want automatic enrolment to succeed, we must also ensure that the scheme into which an employee is automatically enrolled is fit for purpose, of high quality and transparent. We must also ensure that it is not exposed to excessive fees or charges that might erode the value of the pension and undermine trust in pensions. That will be important if automatic enrolment is to work and to carry the confidence of both the people who are most likely to benefit from it and the employers, who have to make important decisions for their employees without always having the necessary expertise and experience that larger firms have.

Steve Webb (Liberal Democrat, Thornbury and Yate)

The issue of charges is very important. It has been raised very helpfully, and I want to respond constructively.

However, I want to apologise to the Committee that during the scramble of the last seven or eight clauses, I moved Government amendment 9 to clause 10, but because I spoke about clause 10, I did not correctly describe new clause 2, which we were also discussing. I had already written to the Committee to explain what it does, but I want to read into the record that the purpose of new clause 2 is to give employers offering pension schemes, such as money purchase ones, where the scheme has its main administration in a member state of the European economic area, the option of self-certifying that their scheme meets the relevant quality requirement. To clarify, the purpose of the new clause, about which I had already written to the Committee, is to give the small number of schemes in the EEA the power to self-certify. I apologise for any confusion that I may have created. I am sure that other members of the Committee had spotted my mistake, and I wanted to correct the record.