COMMITTEE FOR SOCIAL DEVELOPMENT
OFFICIAL REPORT
(Hansard)
Pensions (No2) Bill
2 October 2008
Members present for all or part of the proceedings:
Mr David Simpson (Chairperson)
Mr David Hilditch (Deputy Chairperson)
Mr Mickey Brady
Ms Ní Chuilín
Ms Anna Lo
Mr Fra McCann
Miss Michelle McIlveen
Mr Alban Maginness
Witnesses:
Mr John O’Neill )
Mr Gerry McCann ) Department for Social Development
Mr Seamus Cassidy )
The Chairperson (Mr Simpson):
I welcome John O’Neill, director of social security policy and legislation division, and Gerry McCann and Seamus Cassidy who are also from the division. Given that the Committee must attend a reception at 12.30 pm, we are pushed for time, so please begin your presentation.
Mr John O’Neill (Department for Social Development):
It seems a long time ago; however, in October 2007, I briefed the Committee on the Pensions Bill, which was the first part of the comprehensive reform programme. That Bill was mainly concerned with providing a fairer and more generous state pension system. Earlier this year, the Bill came before the Assembly and is now on the statute book as The Pensions Act ( Northern Ireland) 2008.
[Inaudible due to mobile phone interference.]…enabling and encouraging more people to build up private pension income to supplement that received from the state. The Bill that will come before the Assembly later this year represents the second part of the pension reform package. It is a consequence of the work of the Independent Pensions Commission, which was established in 2002 to consider the long-term challenges faced by the pensions system. The commission identified three central challenges: increased life expectancy; inequality in state pension provision, and the decline in voluntary private retirement saving.
The commission concluded that, although there was no crisis, the current system would deliver increasingly inadequate returns in the future. In addition, it was clear that a new balance needed to be struck between the state, employers and individuals and that bold action was needed to provide security in retirement for tomorrow’s pensioners.
As a result of the changes introduced by the Pensions Act ( Northern Ireland) 2008, it will be easier for future pensioners to build up entitlement to a full basic state pension. In particular, that will benefit women and carers. Nevertheless, the Independent Pensions Commission concluded that preventing under-saving is essential if generations of pensioners are to avoid facing disappointment in retirement. Furthermore, a failure to take action now could lead to future pressure to increase the level of state pensions, which would place an additional financial burden on the working population.
Increased life expectancy and lower birth rates are resulting in older age groups becoming an increasingly larger proportion of the population. It is now estimated that there are more pensioners than teenagers in the population. The projected growth in the number of pensioners, compared to those of working age, will make costs prohibitive.
The Committee for Social Development and the Assembly have already agreed to the establishment of a personal accounts scheme, which will operate in Northern Ireland and Great Britain under the terms of the Westminster Bill.
The new Bill will propose several measures aimed at making saving easier and more attractive; extending provision to those who are not currently covered by the market; strengthening existing provision, and improving confidence in private pensions.
There are a number of proposals, including: a duty on employers, from 2012, to automatically enrol jobholders into a qualifying workplace pension scheme; broadening the remit of the Personal Accounts Delivery Authority (PADA) to enable it to oversee the establishment of the personal accounts scheme; a proportionate compliance regime for the new employer duties; strengthening existing workplace pension provision by reducing burdens imposed by rules governing private pensions; measures to improve confidence in private pensions; further simplification of the state pension system in order to give people a better understanding of the pension that they are accruing and to support them in planning for retirement, and disclosure of information about state pension credit recipients in order to assist energy providers tackle fuel poverty.
Bearing in mind the constraints, I shall say a little about each of those proposals. From 2012, all eligible workers will be automatically enrolled into a qualifying workplace pension scheme, and a personal account will be one of the options. Automatic enrolment will help to overcome barriers to saving such as inertia, but individuals will still be allowed to opt out.
The reforms will create important rights for workers and obligations for employers as regards compliance. The Pensions Regulator will have overall responsibility for enforcing employer compliance and HM Revenue and Customs will have an important role in providing the information needed to identify employers. There will be a graduated approach to enforcement, from initial reminders to notices and penalties, with rights of appeal at each stage of the formal sanctioning process.
New employment rights will protect individuals from being encouraged, or forced, to opt out of pension saving and from unfair treatment if they decide not to opt out. There will be a prohibition on screening out job applicants who might wish to join a pension scheme; protection against workers being induced to opt out of pension saving, and rights not to suffer unfair dismissal or detriment on grounds of relating to pension saving choices.
The Personal Accounts Delivery Authority, which was established by the Pensions Act 2007 to advise on the design of the personal accounts scheme, will act on a UK-wide basis, and that is consistent with other public bodies in the pensions field, such as the Pensions Regulator and the Pension Protection Fund.
The Pensions Act ( Northern Ireland) 2008 made provision for the authority’s initial functions in relation to Northern Ireland. The new Bill will set the scope of the authority’s enhanced activities, allowing it to continue to advise on policy, undertake the detailed implementation work that is necessary to establish the scheme and support the Pensions Regulator to establish the processes that are necessary to maximise compliance with the new employer duties.
In addition, the Bill will strengthen existing workplace provision by simplifying the rules governing private pensions. It will further simplify the state pension system, giving people a better understanding of entitlements and making entitlement planning easier.
Specifically, the Bill will deal with the abolition of safeguarded rights — that is, pension rights derived from the contracting-out rebate — thus removing an unnecessary layer of complexity for scheme administrators and providing individuals with more choice regarding the transfer of their rights following a divorce or dissolution of a civil partnership.
With effect from January 2009, the cap applying to revaluation of a deferred pension will be reduced from 5% to 2·5% and will apply only to rights accrued after that date. That will bring the revaluation of deferred rights more closely in line with the revaluation of pensions and payment. The removal of the requirement for employers to designate a stakeholder pension scheme will help to limit the impact of pension reform on employers.
The consolidation of additional state pension built up under previous schemes into one single payment will help contributors to see the value of their total additional state pension. The indefinite extension of the state pension credit assessed income period for those over the age 74 will reduce the level of intrusion that is normally associated with an income-related benefit and will introduce a significant easement for the most elderly and vulnerable pensioners. From April 2009, an approved accrual point will be introduced. That will address unintended results of budget changes, which would mean that high-paid earners would earn higher additional pension than intended.
The Bill will also include measures aimed at improving confidence in private pensions. In the Pension Protection Fund, compensation will be shared in the event of a divorce or dissolution of a civil partnership in the same way as with pensions. There will be several changes to the Pension Protection Fund legislation to clarify some provisions, remove some minor unnecessary administrative burdens and remove anomalies. The Bill will also include arrangements for interest to be charged for late payment of various levies.
The Bill will also introduce amendments clarifying the Pensions Regulator’s powers and strengthening his anti-avoidance powers, which will enable him to identify the best value-for-money approach to the delivery of the compliance regime. The Bill will also include several other minor provisions, such as the correction in a defect in the requirements for increasing pensions and payments to members of public service pension schemes, a disclosure of information relating to state pension credit recipients and a range of technical provisions. That is as brief a summary as I can make of what is quite a complex Bill.
The Chairperson:
Thank you very much. Before I take questions, I remind members — which I should have done at the beginning of the meeting — that the equality impact assessment consultation for the Bill is underway and will conclude on 16 October. The Department has stated that it will provide the Committee with copies of the responses. The equivalent GB legislation is expected to go for Royal Assent in October or November. It is anticipated that the Minister will be seeking the Committee’s agreement to introduce the new Bill using accelerated passage. Members must be aware of all of that.
Thank you, John, for that presentation. What impact would automatic enrolment in a pension scheme have on the take-home pay for low-paid employees? What are the additional costs for employers in providing the scheme?
Mr J O’Neill:
There is always a difficulty with pension provision as it involves asking people who are earning money to meet their daily requirements to contribute also to various schemes, such as a pension scheme. There is a level below which it is probably not suitable to ask people to contribute, because contributing to a pension scheme would take so much out of their weekly income that it would not be viable. Therefore, the personal accounts scheme is aimed at people at certain income levels. Those with a much higher income level are probably already in pension schemes — workplace schemes, personal, or stakeholder pensions.
The scheme is aimed at the people in a certain earnings group who have a relatively low provision for private pension. It is not particularly aimed at the public sector in Northern Ireland because of the large public sector employment here and the fact that many people in the Civil Service or local government are already in schemes. This scheme is aimed more at people in small or medium-sized enterprises who have a relatively low level of provision.
There will be a limit on the contributions that people will be asked to pay into the scheme. Employees will make a 3% contribution, there will be a contribution from the employer and there will be a contribution from Government through tax relief.
The Chairperson:
What contribution will the employer make?
Mr Gerry McCann (Department for Social Development):
The employee’s contribution will actually be 4% and the employer’s will be 3%.
The Chairperson:
Employers have raised concern about that, because we have hit a recession that may last for three or four years. Although the scheme will not come into effect until 2012, it will soon be upon us. Therefore, there are issues and concerns about the scheme.
Mr J O’Neill:
Pensions are the product of long-term saving — the pensions that people receive when they retire are the result of 20, 30 or 40 years of saving. Therefore, pensions are designed to deal with fluctuations in the market. The pension pot for people who retire this year will not be based on events in the stock market over the past two weeks or two months. Instead, it will be based on saving over a long period. The scheme is designed to deal with fluctuations in the market.
Employers must offer access to the schemes. Although some employers may have their own pension schemes, many small and medium-sized businesses do not. Therefore, employers will simply have to offer access to the new scheme, which will be run by PADA. That means that the employer only has to arrange for the payment of the contributions, because the administration of the scheme is left to PADA. If employers have their own pension schemes, they will be involved in establishing trustees, etc.
Ms Ní Chuilín:
Will accelerated passage occur after the results of an equality impact assessment are available? Although the new scheme is essentially good, I think that it is good for someone on a middle-class wage. Will low-paid workers have to automatically contribute to the scheme?
Mr J O’Neill:
The position is that if the Minister decides that the Bill should receive accelerated passage, she has to come to the Committee and explain her reasons. The Westminster Bill will not receive Royal Assent until November, so the Minister will not be coming to the Committee with legislation until November at the earliest. As the equality impact assessment period ends in October, its results will be available to the Committee before November.
The Chairperson:
The other issue regarding the EQIA is that it will have to be completed before it goes to the Executive.
Mr J O’Neill:
Yes, the issue will have been dealt with. The scheme will cover those who earn between £5,000 and £33,000 per year. Therefore, anyone with an income below £5,000 will not have to contribute, although they can if they want to. People can start early in the scheme and contribute a low amount and increase their contribution over years.
Ms Ní Chuilín:
Without sounding facetious, I do not know many people who earn £5,000 a year.
Mr J O’Neill:
There are part-time workers who may earn that amount.
Ms Ní Chuilín:
So, you are talking about part-time workers who are single, such as students or teenagers?
Mr J O’Neill:
Contribution to the scheme will be voluntary for part-time workers who earn below £5,000. There are people who work part time and would earn that amount and could be covered by a pension scheme.
The Chairperson:
Those workers can opt out.
Mr G McCann:
That is the point — the scheme is voluntary.
Ms Ní Chuilín:
Regardless of the £5,000 threshold, contributing to the scheme is almost not an option for low-paid workers.
Mr G McCann:
We accept that there are people for whom the scheme is not suitable.
Ms Ní Chuilín:
Therefore, there will be equality impacts on people, depending on their income. If contributions are voluntary for people earning low wages, they may have to choose between buying oil and paying into a pension. That almost rules people out of the scheme.
Mr J O’Neill:
For those who earn a certain amount, most of their disposable income will be spent on their daily and weekly requirements, so there will be little money left over to contribute to a pension scheme. Some people may be in that position at the beginning of their working life and will move on; others may start in job but have to take on caring responsibilities. Therefore, the scheme must be flexible to deal with all of those variations. The difficulty at present is that, because people have to make a concerted effort to enter a pension scheme, many do not.
With automatic enrolment, people enter the system but can leave at that stage. Some people will enter at a relatively low level and increase their contributions over the years. However, they make the decision to opt in or opt out. At the moment, the question may never arise as to whether they enter a scheme. Given the increase in life expectancy and so on; in future, fewer workers will be paying into the pension scheme. Therefore, there is an incentive to have some people in retirement getting their income from a state pension scheme and other sources, too. The earlier an individual starts to provide income from other sources, the more additional income they will have at retirement age.
Ms Lo:
Any measure that simplifies the system is welcome. Pension schemes are a minefield, and advice and support to employers and employees would be a major step. How will PADA manage that?
Mr J O’Neill:
Some bodies already exist. For instance, The Pensions Advisory Service (TPAS) advises on occupational pension schemes. Furthermore, many trade unions advise their members on pension arrangements, and financial advisers are available to outline the relative merits of stakeholder pensions, personal pensions and — in the future — the PADA scheme. A multiplicity of advice is available.
Ms Lo:
Are those services free of charge?
Mr J O’Neill:
The Pension Advisory Service’s occupational pension advice is free.
Mr G McCann:
Financial advisers charge, but TPAS provides a free service.
Ms Lo:
The voluntary sector should also be encouraged to provide information and advice.
Mr J O’Neill:
PADA will incorporate an information-giving service. Between now and 2012, it will conduct a comprehensive publicity programme to advise people of the new scheme and provide advice about pensions.
Mr Brady:
You said that a pension requires long-term consideration. Individuals who opt out because of low income may struggle to opt in again because of financial constraints. At the moment, pensioners who have never worked and who qualify for pension credits are, therefore, no worse off. However, it seems that, in the future, we will have a universal benefit that will, perhaps, preclude income support and pension credit. In 20 or 30 years, people at the end of their working lives will not benefit from the existing safeguards. Although a long-term strategy is in place, it will, as it progresses, exclude more and more people. I am unsure whether that matter has been addressed. Much of the Bill is positive, but — as Carál mentioned — low-paid workers may never be able to opt in because of financial constraints. What will happen to those individuals at the end of their working lives?
Mr J O’Neill:
The difficulty is that there will be people who, because of low incomes or caring responsibilities, will depend largely on state pensions and other benefits after retirement. The larger that number, the more it burdens those who finance the system through National Insurance contributions and taxation. Therefore, the safety net is designed for that group of people. We must encourage those people who can make provision for additional income during their working life to do so. That will allow the limited resources available after retirement to go to those groups who have been unable to make such provision. Unless we encourage more people to save, the cost of maintaining that level of support to people after retirement will become prohibitive.
Mr Brady:
In 1948, when supplementary benefit was introduced —
Ms Ní Chuilín:
Mickey remembers it well. [Laughter.]
Mr Brady:
It was introduced as a safety net. However, as time passed, many people fell through that safety net. Although I accept your point about the need to encourage people to provide for the future, an element in society will still be vulnerable.
Ultimately, some provision must be made. If benefits continue, the likelihood is that income support and other pension credit will be consumed into one universal type of benefit.
Mr J O’Neill:
The state pension credit replacement threshold is very high for low earners, and private saving is not an option at the moment.
Mr G McCann:
As the member said, saving is not a good option for people if they have to find a balance in order to purchase oil, etc.
Mr Brady:
It is probably not the best time to encourage people to save.
Mr G McCann:
The problem is that we did not plan for that when we started the process.
Mr J O’Neill:
Depending on which economist one believes, the credit crunch could last two or three years, and a different situation will exist afterwards. It must be remembered that there were four workers to every pensioner in 1948. That figure is now 2·4, and is going down towards two workers for every pensioner. If present demographic trends continue, there will soon be under two workers maintaining every pensioner. No economy could sustain that.
Mr Brady:
During Mrs Thatcher’s reign, she put the National Insurance fund into the red for the first time in its history, by taking money out to encourage private pension schemes.
The Chairperson:
OK. Gentlemen, thank you very much for coming and for your briefing this morning.