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Session 2001- 02
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Delegated Legislation Committee Debates

Occupational Pension Schemes (Minimum Funding Requirement and Miscellaneous Amendments) Regulations 2002

First Standing Committee

on Delegated Legislation

Tuesday 14 May 2002

[Miss Ann Widdecombe in the Chair]

Occupational Pension Schemes (Minimum Funding Requirement and
Miscellaneous Amendments) Regulations 2002

4.30 pm

Mr. Tim Boswell (Daventry): I beg to move,

    That the Committee has considered the Occupational Pension Schemes (Minimum Funding Requirement and Miscellaneous Amendments) Regulations 2002 (S.I. 2002 No. 380).

May I say how much all members of the Committee will enjoy sitting under your tutelage this afternoon, Miss Widdecombe? I also welcome the Minister and the hon. Member for Northavon (Mr. Webb). We seem to have become a permanent threesome in Committee, coming together for the avoidance of doubt and in the pursuit of truth.

The Opposition are anxious that these complicated regulations should be briefly debated. We enjoyed hearing the Minister's explanations. However, if I were a real swine, as I sometimes affect without succeeding, I would ask her to explain in detail the exact meaning of every phrase, jot and tittle. As none of us would want to sit an examination on the details, I shall refrain from that tactic. Instead, I shall discuss what the regulations do and to some extent—though remaining in order—the context in which they are made.

Opposition Members hope, as must hon. Members of all parties, that the regulations lead to further reforms, which need to take place as soon as practically possible to assist the pensions industry. The regulations amend the minimum financial requirement and other related regulatory matters in connection with pensions. Our praying against the statutory instrument does not mean that we do not want them to be implemented; we welcome this broadly relaxing set of regulations. I hope that that relaxes the Minister and other Labour Members.

I believe in giving credit where it is due. My contacts in the Engineering Employers Federation, with whom I have dealt on a number of industrial relations matters over the years, refer positively to the regulations, saying that MFR interim reforms are a ''shot in the arm'' for defined-benefit schemes. They say that the reforms respond to most of their wishes for the interim consultation order and that they are pleased with them.

Indeed, they are not the only ones to be pleased with the reforms, which contain much flexibility. We are broadly pleased, too. For example, in so far as I have been able to analyse the words of the instrument, regulation 2(8) extends from one to three years the period of restoration required after a serious shortfall in the funding. There is also a more general provision about building up to avoid funding shortfalls. Another

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example of something that pleases us is the systematic change providing that an actuary is not required to sign off the position on the day—to complete the spreadsheet at some late hour of the night—but has seven days' grace to fill the spreadsheet and sign it. That is another sensible move.

I have two further comments of substance to make. First, if the Government are serious about investigating why pensions are a closed book to most employees, employers, trade unions and many policy makers, they need only take these regulations away for the weekend and try to understand them.

The second point—the Minister and her officials may want to reflect on this for the future—is that the Joint Committee on Statutory Instruments also found itself in difficulty, even with the help of the Department's explanatory note. Mark 1, which appears in the regulations, is a very inferior version of mark 2, which appears in the response to the JCSI specific request. There is a moral in that, because if Ministers want us to be able to debate such issues intelligently, we need better guidance. I should add, to show that there is no recrimination, that what I have described as mark 2—the memorandum sent to the JCSI—is much better and makes the whole issue much easier to follow.

Having got the pleasantries out of the way, I emphasise that the issue is in no sense trivial, and it coincides with widespread and growing public concern about pension provision. Anything that helps, as the regulations do, is broadly to be welcomed, but although they are necessary, they are not sufficient. In fairness, I do not suppose that the Minister will claim that they are.

I could refer to the Conservative Government's provision for pensions, and I am aware that these relaxing regulations stem from the Pensions Act 1995, which was introduced by the Conservatives, but I hope that we will not have a silly partisan spat. To consider the present Government's position, the 1998 Green Paper included the commendable aspiration to reverse the proportions of state to funded pensions from 60:40 to 40:60. There is nothing wrong with that aspiration, but the difficulty—this is why the regulations are necessary, although much more is required—is that the trend has been reversed, notably in the closure of final-salary schemes and their replacement by defined-contribution or money-purchase schemes.

The matter was discussed at some length and with a degree of heat at the conference held last week by the National Association of Pension Funds, as the Minister and the hon. Member for Northavon, who addressed the conference, will be aware. In perfect fairness to everyone, the switch that I have already described is not by itself the problem—nor need it necessarily lead to a problem. The difficulty is in what else is happening. There appears to be a growing propensity among employers to pull out of the business of providing contributions themselves. In addition, there is a probable diminution in the employee contribution, all of which is accompanied by a greater risk on the employee. All the signals are at stop simultaneously.

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The underlying cause of the shift in provision from final-salary or defined-benefit schemes to defined-contribution or money-purchase schemes—the different terms have slightly different overtones, but people tend to use them interchangeably—is complex. There is not a single cause and the changes are not all in the power of the Government. First, although I am sure that no one in Committee would complain about it, there is greater longevity throughout the western world, and if people are living longer, even if they are not retiring early—the other part of the equation—the viability of their pension fund is likely to be strained because they will have to be paid for longer.

Secondly, if pensions are funded, they depend on the performance of the stock market or other assets. That has been a hiccup for the past two years and has undoubtedly caused some of our present concerns. Thirdly—I blame the Government for this; indeed, I debated it in this very Room during consideration of the Finance Bill in 1997—the Chancellor of the Exchequer has raided the assets available to pension funds through the advance corporation tax mechanism. That cost an estimated £5 billion a year.

Finally, there is the burden of excess regulation—we are all in the business of fighting that. The regulations represent an interim relaxation in the minimum funding requirement, and a move—eventually—to specific scheme-funding standards has been announced. Those are broadly welcome improvements. It would be helpful if the Minister could, today, give us some indication of the time scale for that more substantial shift. I have received specific briefing from an industrial company that would like the process if possible to be accelerated into 2003 rather than 2004. In effect, it is asking for the Government to get on with it.

However, when considering regulations in general—the MFR alongside other requirements—the Committee should not overlook the fact that they have grown up with the best intentions, but might not have had the intended results. They have often arisen in response to specific problems that have since changed in character. There is a growing acceptance that regulation is part of the problem. To take one example—one might describe it loosely as the snapshot view of the acceptability or adequacy of pensions—if the MFR is to be relaxed and, in due course, reformed, that is welcome. However, another snapshot applies if the picture includes financial reporting standard 17, although I appreciate that that is not within the Government's direct competence.

In some of the briefing to which I have referred, there is a suggestion that the final provision of FRS 17 will have an impact on shortfall provision that is two to three times greater than that of the MFR, such is the intensity of the turbulence caused by shifts in the stock market. That would then be a balance-sheet event that would have to be reported—it would affect the solvency of schemes and the action that the Government had to take on them. Even if we do some good this afternoon, there is more potential for difficulty ahead.

While considering these complex abbreviations and concepts, I should like to mention the guaranteed

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minimum pension and how that is calculated. I have recently received verbal representations suggesting that the way in which the rules operate at the moment makes calculation, or getting calculations out of the Department, extremely difficult, and contemplation of transfer schemes unattractive. People cannot be taken into new pension schemes because they cannot be ''got out'' of their old ones. The submission that I have received states:

    ''Companies are closing their final salary pension schemes primarily because they are in deficit and are therefore increasingly costly to fund, but also because of over-regulation''.

It continues:

    ''The rules make pension provision unattractive: they should aim to make it attractive. Simplification is needed quickly.''

I mention that to the Minister, not in anger or to be churlish about the improvements that she announces today, but because we must all recognise the scale of the problem. Increasingly, we are doing so.

Since the storm clouds began to gather in the autumn, the Government have sat back or refrained from action and told us to rely on reports that are expected in the next month or two. The first, from Alan Pickering, was originally intended as a regulatory review. That was extremely important, but the scope of its interpretation seems to have expanded somewhat. There were more reports from Ron Sandler and the Inland Revenue, and all of them seemed to come out more or less simultaneously. Only today, we have read in the press that there is to be a fourth review—this time in relation to the Occupational Pensions Regulatory Authority and its function in the allocation of assets.


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