 House of Commons |
Session 2007 - 08 Publications on the internet General Committee Debates Pensions |
Pensions Bill |
The Committee consisted of the following Members:Mark Hutton, Committee
Clerk
† attended the
Committee
Public Bill CommitteeThursday 21 February 2008(Morning)[Sir Nicholas Winterton in the Chair]Pensions Bill9.30
am
The
Chairman:
I welcome members of the Committee to what I
sense might be our penultimate sitting. I hope that they will note that
new clause 16 has been withdrawn. I call Mr. Nigel
Waterson.
New Clause 5Provision
for conditional
indexation
‘(1) Schedule
[Provision for conditionally indexed arrangements etc]
which—
(a) amends
section 84 and Schedule 3 of the Pension Schemes Act 1993 (Basis of
Revaluation);
(b) amends
section 51 of the Pensions Act 1995 (annual increase in rate of
pension);
(c) amends section 67
of the Pensions Act 1995 (restriction on powers to alter
schemes);
(d) amends schedule 7
to the Pension Schemes Act 2004 (pension compensation provision);
and
(e) makes provisions for
consequential amendments for the operation of conditional indexation in
relation to a scheme that satisfies prescribed
conditions,
has
effect.
(2) The amendments made
by Schedule [Provision for conditionally indexed arrangements etc] do
not apply in relation to any scheme or arrangement in existence prior
to the coming into force of this
section.
(3) In this section
conditional indexation relates to benefits provided by conditional
indexed scheme,
which—
(a) was
established after the coming into force of this
section;
(b) is not a money
purchase scheme as defined by section 181(1) of the Pension Schemes Act
of 1993;
(c) Provides that
indexation of pensions both in deferment and in payment may be modified
in accordance with prescribed requirements;
and
(d) complies with such
other requirements as may be
prescribed.’.—[Mr.
Waterson.]
Brought
up, and read the First
time.
The
Chairman:
With this it will be convenient to discuss new
schedule 1—‘Provision for conditional indexed
arrangements
etc
—
Part
1
Basis
of Revaluation
1 The Pension Schemes
Act 1993 (c.48) (Basis of Revaluation) is amended as
follows—
In section 84 after subsection (3) there is
added—
“(3A) If
any benefit as is mentioned in paragraph (a) of section 83(1) is a
conditional indexation benefit that benefit shall be revalued using the
conditional indexation
method”.
In Schedule 3
(Methods of Revaluation Accrued Pension Benefit) after paragraph 4
there is
added—
“(4A) The
conditional indexation method is to revalue the benefits which have
accrued to the member in respect of the pre-pension period in such
manner as may be
prescribed”.
Part
2
Annual
Increase in Rate of Pension
2 The
Pensions Act 1995 (c.26) (Annual Increase in Rate of Pension) is
amended as
follows—
After section
51(1)(iii) there is added “(iv) which is not a conditionally
indexed scheme which complies with such requirements in relation to
increases in the rate of a pension as may be
prescribed”.
Part
3
Restriction
on Powers to Alter Schemes
3 Section
67 of the Pensions Act 1995 (c.26) (Restriction to Alter Schemes), is
amended as
follows—
After section
67(3)(b) there is added “(c) for a prescibed purpose relating to
the operation of a conditionally indexed
scheme”.
Part
4
Pensions
Compensation Provisions
4 Schedule 7
to the Pensions Act 2004 (c.35) (Pensions Compensation Provisions) is
amended as
follows—
After paragraph
2 to the Schedule there is added “2A This Schedule shall be
modified in relation to a conditionally indexed scheme in such manner
as may be
prescribed.”.’.
Mr.
Waterson:
Thank you, Sir Nicholas. Whenever you summon
someone to speak, I always expect a roll of drums as well. I welcome
you to the Chair for what you rightly sense might well be our last day
in Committee, after which all the guns will fall silent—at least
for a short time. We are now skiing off piste and exploring those
things that should have been in the Bill, and our proceedings are all
the more interesting for
that.
I take no credit
for the draftsmanship involved in new clause 5 and new schedule 1,
which is the work of the Association of Consulting Actuaries,
particularly Mr. Ian Farr and his colleagues, and the
Association of Pension Lawyers. I wish to make a small point on the
drafting to spike the Minister’s guns if, as I suspect, he
raises technical issues in that respect. If the principle of our
proposals is accepted, it is always up to him to take them away and
perfect them. That is not up to us. Opposition Members are not in the
business of winning draftsmanship contests—we do not have the
facilities. However, if the general principle of our proposal is
accepted, as it should and must be, we can make
progress.
Why have we
tabled the new clause and the new schedule? We agree with the
actuaries, who obviously have their fingers on the pulse of remaining
defined benefit schemes, that there has not only been a massive shift
away from DB schemes in this country, but that there will be a further
acceleration of that process for
two reasons. The Minister is fond of saying—and accurately
so—that the move away from DB schemes started as a gentle
downward course in the late 1960s. However, what we have seen,
particularly since 1997, is a massive acceleration in that process. One
thing on which we can all agree is that, in the world of pensions, if
people are in a DB scheme, they are receiving the Rolls-Royce treatment
and will end up with a relatively comfortable retirement, not least
because, on average, contributions to defined contribution schemes are
about half those to DB
schemes.
It should be
a policy aim of whoever is in government to maintain and protect DB
schemes. That was the stated aim of the Pensions Act 2004, but that
seemed to have the opposite effect by piling more cost and bureaucracy
on to those who still run DB schemes. I have mentioned two risks, and
we have discussed one exhaustively in Committee: the risk to existing
provision of bringing in personal accounts. We have tried all ways in
which to safeguard existing provision because, on the whole, that is
significantly more generous in respect of the employer contribution
than the 3 per cent. envisaged in personal accounts. The year
2012—if it be that year, although I do not want to re-open that
one—will be the moment when employers will focus their minds on
whether to stay in the DB
game.
We have also
touched on the consultation document produced by the Pensions
Regulator, which is a more recent development that has taken place in
the past few days. I made a brave attempt to read it last night, but
one has to be a certain sort of person to catch all its nuances. It is
very much actuary speak. It talks principally about the assumptions of
those who run schemes—the trustees, essentially—about
their members’ longevity. It contains much about what is rather
depressingly called the “continuous mortality
investigation”, which I think—but I am open to
correction—is a process run by the actuarial profession that
constantly reviews the levels of longevity in the country. It is, of
course, good news that we are all living longer and, hopefully,
healthier lives. I would never agree with those who go on about the
demographic time bomb as though it were some horrible development not
to be welcomed. Of course that is to be welcomed, but it has massive
implications for pension
funds.
There are all
sorts of fascinating tables in the document, which you might wish to
browse at your leisure Sir Nicholas, but although I searched high and
low, it does not seem to come up with a figure as the new benchmark for
male life expectancy, whether that be 87, 87-point-something or 89
years. However, some people estimate that if that sort of level were
applied across the board to all pension funds, it could add an extra
£75 billion or so in liabilities to pensioners. If that is the
figure, that is the figure. If it is the necessary consequence of those
life expectancy figures being accepted, there is no point
arguing.
I think that
it is fair to say that at almost every juncture in recent decades when
the Government Actuary, or actuaries generally, have focused on
projecting longevity, they have almost always understated it. That
process might, of course, change with things like obesity and diabetes
coming to the fore, but that is a matter for the future. That is
another
major risk in terms of the attitude of sponsoring employers to stay in
DB schemes when they start to do their sums based on what is, of
course, a consultation document. However, it is clear from some of the
press briefing of the past few days that that is where the regulator
wants to end up in terms of across the board longevity
projections.
Before I
get into the detail of the new clause and new schedule, I want to talk
about the general issue of simplification or deregulation, which the
Government, to their credit, have partly embraced as a necessary aspect
of promoting and retaining a large number of DB schemes. There are
measures in the Bill that we enthusiastically support that are on the
same agenda, following the deregulation working group’s report.
More can be done, and one of the main things is conditional indexation.
At the end of the day, the Government can have no reasonable objection
to the principle behind it. It happens in other countries—I can
explain in detail what happens in Holland—and seems to be a
useful tool for maintaining DB scheme membership at a relatively high
level.
What harm can
conditional indexation do? If not a single sponsoring company embraces
the idea, and if, instead of moving straight from DB to
DC—shifting all the risk from the employer to the employee,
which we do not want to encourage—there is a third way, if I can
use that expression, of conditional indexation, why not use it?
Pensioners will be better off. What do the Government have to fear? The
choice is between having a Rolls-Royce DB scheme and perhaps a Volvo or
a Jaguar one. If people stick their heads in the sand—I am not
suggesting that the Minister will do that—they could end up with
no such pension scheme at all and fall back on to the personal accounts
scheme. That scheme, although it has merits, does not have many for
those who have no personal pension savings, but can be in a scheme
where the employer contribution might be 10, 12 or 14 per
cent.
So, what harm
can it do? I make this offer to the Minister: if not a single
sponsoring company takes advantage of this possibility, I will buy him
a slap-up dinner in the restaurant of his choice. I cannot see any
downside to these proposals—[
Interruption.
]
I note that the Minister is pondering my
offer.
The essence of
new clause 5 is to end the ban on employers being able to offer new
conditionally indexed pension schemes. It seems to me, the ACA and
others that in around 2012, many employers will feel that they have no
credible alternative but to move to DC pension provision and, if their
existing scheme is still open to new members, or even existing members,
to close it altogether and switch to DC, or simply move to personal
accounts.
The
actuaries have carried out work on the decline in membership of DB
schemes. They
say:
“Since
1995, the number of employee members of open, private sector defined
benefit schemes has declined from 5 million to just 900,000
now.”
That is a massive
decline. They also refer to the latest National Association of Pension
Funds survey, which was published at the end of 2007, that said that
only 40 per cent. of employers with open defined benefit schemes were
prepared to say they expected no changes in the next five years.
Fifteen per cent. are already expected to switch to pure DC, and 22 per
cent. are
expected to modify their scheme while retaining some DB provision. The
ACA’s 2007 pensions trend survey found that 68 per cent. of
employers expected further levelling down of provision in the period
ahead and that 76 per cent. thought that more “good”
schemes would
close.
It is a bit
like the issue of compulsory annuitisation. Nobody else around the
world seems to do this. The mandatory indexation of both deferred
pensions and pensions in payment in defined benefit schemes is unique
to the United Kingdom. No other legislature in the world has placed
such an onerous obligation on private sector firms to take on such an
open-ended commitment on costs and liabilities. While I cannot claim to
have made an exhaustive survey of European practices, I see the country
that comes nearest is the Republic of Ireland, which requires
indexation of deferred pensions only, and Germany, which requires it
for pensions in payment only.
It is also clear that since the
CBI gave oral evidence to the Committee, it has reviewed its position
and now supports the new clause and new schedule. It set that out in
its e-mail to the Committee of 6 February. That endorses the backing
already given to the measures by the NAPF, the Society of Pension
Consultants, and the Association of British Insurers. All the big
players in the pensions field support this proposition, which makes it
more difficult for Ministers to resist it, although I am sure that they
will have a shot at
that.
We, as
legislators, will be held responsible when a process speeds up again
whereby 100 per cent. of all risks fall on not employers, but ordinary
employees. What is the point of conditional indexation? New
conditionally indexed schemes offer to many mid-sized and larger
employers that are prepared to share risks with their employees a
pension arrangement that will not only attract and retain employees,
but cap employers’ future costs. I do not think the ACA suggests
that that would be particularly appropriate for smaller employers. The
sobering thing that many major employers talk about is what is
stretching into the distance: this ever-increasing escalator of
liabilities based on year-on-year indexation. The ACA gave both written
and oral evidence to the Committee. Of course, the Association of
Pension Lawyers has looked at the legal issues in great detail, so I
will not go too deeply into that. I am sure that it has made, or will
make available, whatever thoughts it has on the technical side of
things to officials.
9.45
am
It also seems
that conditional indexation schemes would offer employees a far less
volatile pension benefit than pure DC. Pensions would perhaps be based
on career average earnings linked to service, save on occasions when
scheme funding falls into deficit, with the condition that pension
benefits will be indexed in line with a scheme-specific
index—typically, inflation up to a 2.5 per cent. a year cap.
Restoring indexation would be the first priority when a scheme returns
to service. I will speak in a moment about the experience of Holland
regarding the extent to which employers actually make use of the
availability of conditional indexation.
Conditional indexation would not
apply to the benefits offered by existing types of DB schemes. For the
sake of simplicity, these amendments would apply only to new
conditionally indexed arrangements that were set up after the Bill had
become law. The provisions in no way interfere with existing types of
risk-sharing arrangements or, indeed, with types that might be
identified in the future. The Minister’s approach might be to
say that we have to look at this in the round, that there are various
sorts of risk-sharing and that we should look at all of them together
and have a review—in tune with the current Prime
Minister’s attitude to issues—but I do not think a review
will do anything except put off the evil day. Why not do this, and
then, if other ideas seem good, put them in as
well?
I suspect that
the Minister will argue that more time is needed to study the issue,
but it has not suddenly popped up. This proposal has been floating
around for a long time, and the ACA and the APL have made themselves
available for detailed discussions with Ministers and officials. It is
certainly an issue that the industry has been talking about for quite a
long time. The ACA’s pensions trend survey over the last two
years, to which I referred, has found that more than 70 per cent. of
employers support the promotion of new risk-sharing schemes. I gather
that next month a new survey conducted by HSBC and the Pensions
Management Institute is to be published, and this survey—I have
had a sneak preview—will show that more than 60 per cent. of
employers favour arrangements whereby they can carry some or all of
investment longevity and pensions inflation risk. I think we need to
listen to that kind of evidence when it comes
up.
I mentioned the
ACA’s evidence to the Committee. Mr. Farr said
openly:
“Conditional
indexation—what we have proposed—is not a panacea. We and
all the national pensions bodies that support this believe that it
could stop the dramatic shift from defined benefit to defined
contribution schemes that we have seen over the past 10 to 12
years.”
He describes
conditional indexation
as
“a genuine middle way
between defined benefit and defined contribution; it has been well
tried and tested in the Netherlands; it requires only small changes to
the law; and it could be implemented quickly.”
——[Official Report, Pensions Public Bill
Committee, 17 January 2008; c. 82,
Q106.]
I agree with all of that,
and the NAPF supports this. In its memorandum, it
said:
“The NAPF
believe the Government should have considered more closely the option
to introduce conditional indexation...The NAPF believes the
Government should go further so that, for future accruals only,
conditional indexation is granted depending on the current funding
position of the
scheme.”
It was
made clear in November that the members of the occupational pension
schemes joint working group, which involves the ABI, the ACA, the APL,
the IMA, the NAPF and the Society of Pension Consultants, all took the
view, talking specifically about conditional indexation, that
risk-sharing
“would be a
welcome step in the right direction to extending possible designs for
risk sharing
schemes.”
The CBI has now
changed its position. In its most recent briefing, Neil Carberry, its
head of pensions and employment policy, said:
“At our oral evidence
session, the CBI indicated that while our members were in no way
against the proposal for conditional indexation set out in new clause
5, they were more concerned by other issues...These issues should
be a key part of the reform programme, and conditional indexation is
certainly not a panacea. However, the introduction of such schemes will
enable a minority of firms to choose to retain defined benefit style
pensions where they might not otherwise have done so. This would be a
valuable development. Following further consultation, therefore, CBI
members feel that the inclusion of new clause 5 in this Bill would be
beneficial as a way of presenting firms with another option for
offering a high quality pension
scheme.”
Finally,
I quote the latest briefing from the
TUC:
“We regard
a government-led review of risk-sharing approaches to be an urgent
priority.”
It also says
that it believes
“that
opportunities should be explored for occupational pension arrangements
which genuinely share the risk between employer and members, where the
only alternative is closure of
DB.”
I find that very
encouraging.
Without
showing my slides, as it were, I will take the Committee through my
recent trip to Holland.
Mr.
Waterson:
Good, I thought so. I will try to be
brief—it was a brief trip. It seemed to me that if the
Government were not taking much interest in what was happening in
Holland, perhaps the official Opposition should. I have described
Holland as, in pensions terms, not just a different country, but a
different planet. The official figure is that 95 per cent. of all
employees there belong to DB schemes, which is absolutely
phenomenal.
Let me
take a chunk out of the Minister’s speech for him: there are
differences between the two countries, although there are many
significant similarities. Holland has big sectoral schemes covering
whole sectors of the economy, and there are a lot of legislative and
other pressures for existing smaller schemes to keep merging and
getting bigger, so it has enormous economies of scale. It is very much
in the European social model, regarding the involvement of the trade
unions as part of how those large pension schemes are run. They have
different funding rules—they do not have the privilege of having
a pension protection fund, for example—and they have a different
approach to funding. So, there are differences, and I am sure that the
Minister will come up with others with his own researchers.
First, let me put on record my
thanks to Watson Wyatt. Its Dutch office was extremely helpful in
putting the trip together and giving me a lot of the background.
According to Watson Wyatt, only 5 per cent. of all pension liabilities
in Holland are in DC, rather than DB, and I have already said that 95
per cent. of people are in DB schemes. About 10 years ago, things began
to change. Like every other developed economy, Holland began to
recognise the intense and growing burden that was being placed on
pension schemes by various factors. It became the consensus that
indexation must be conditional. Dutch law makes no requirements of any
indexation in pension schemes. Incidentally, there is no auto-enrolment
as such, but the vast majority of people join in any event.
I had a useful meeting with
several bodies, including sectoral funds, the Ministry of Social
Affairs and Employment, and so on. I went to see the employers’
organisation, which explained that there was a tradition of these
matters being dealt with as a social partnership between unions and
employers. Again, it emphasised the lack of movement towards DC. The
Dutch association of industry-wide pension funds—I will not try
to pronounce its name in Dutch—was in many ways the most
interesting body. About 75 per cent. of all workers in Holland are in
one of the industry-wide massive pension funds, which they describe as
a matter of their culture. What I thought was really interesting, which
may allay some of the natural concerns of trade unions in this country
and Labour Committee members, is the extent to which conditional
indexation is taken advantage
of.
The Dutch
association of industry-wide pension funds produced some interesting
figures that it had only recently collated. It asked all its members
about indexation in the years 2002 to 2006 when, as in every other part
of the world, pension funds were under a lot of pressure. It discovered
that the average pension paid by one of its members was indexed by 10.7
per cent. between those years, while price inflation was 10.9 per cent.
The indexation almost exactly mirrored inflation rate. The association
says:
“Some
pension funds gave extra indexation in the years 2005 and 2006 to catch
up the shortcoming of indexation in the years 2002-2004. In 2007 and
2008 more and more pension funds start giving extra
indexations.”
That is
relevant and interesting because in Holland it seems that the mere
existence of conditional indexation is enough for employers to continue
in the DB system. It is almost like a “Break glass in
emergency” notice: it is there on the wall. If employers want
to—if things are really tough—they can stop indexing
their pensions. However, many have simply carried on indexing at the
rate of inflation and others have, perhaps, indexed at 1 per cent. a
year or something. In just about every other case, in any major scheme
where employers have cut down the indexation, they have made it up
retrospectively. The fears of some people, particularly those in this
country’s trade union movement, that members would miss out in
the long run might be
misplaced.
I apologise
for going into such detail, but this is an important issue. If the
Minister and the Government will not accept our proposals, we will
certainly pencil them in for a pensions Bill in 2009 or
2010.
On Monday, the
Financial Times published an interesting article by Pauline
Skypala, the editor of “FTfm”, in which she tackles this
issue. That shows how salient it has now become. She
wrote:
“Only 31
per cent. of UK private sector DB schemes remain open to new
entrants”
and mentioned
developments in accounting standards, life expectancy assumptions and
all the extra pressures on the continued survival of the DB schemes.
She
continued:
“The
UK's unusual strictness on DB pension benefit indexation is underlined
by a new book from the Organisation for Economic Co-operation and
Development (Protecting Pensions: policy analysis and examples from
OECD countries). This notes that a requirement to index benefits is
rare in OECD
countries...The OECD is worried about the gradual disappearance of
DB schemes in the US and UK in
particular”.
She cited
Denmark, Iceland and the
Netherlands
“as examples
of countries with risk-sharing schemes that have proved resilient in
recent adverse market
conditions”.
She also
mentioned the proposals and the ACA’s lobbying on the subject,
and concluded by
saying:
“The
ACA is not asking for indexation on existing schemes to be axed, but
only for new schemes to take a different approach. It deserves
immediate
consideration.”
That is
what brings us here today. I want to stress that the proposal that I am
talking about is for new schemes so that at the moment when employers
are thinking of moving from DB to DC, another option will be available.
They might choose not to take it, for various reasons, but they should
have the
option.
Mr.
John Greenway (Ryedale) (Con): I do not want to detain the
Committee unduly. I congratulate my hon. Friend on his lucid and
compelling summary of the case for conditional indexation. The Minister
will know that I spoke strongly in favour of that on Second Reading. I
will not repeat anything that my hon. Friend said—it is all on
the record—because I simply want to support strongly what he
said.
I am slightly
concerned for my hon. Friend’s wallet because the argument is so
compelling that even if this Minister does not feel obliged to accept
the proposal today, a Government Minister in another place might feel
compelled to do so. My hon. Friend may well find that his slap-up
dinner offer is taken up, despite the fact that the measure may be
implemented in another
place.
10
am
To take this
matter seriously, I want to make two extremely serious points in
support of my hon. Friend. First, we must get away from the problem
that we face at the moment: with defined benefit schemes, all the risk
lies with the employer, whereas with defined contribution schemes, it
lies with the employee. We must find some middle ground and this is
undoubtedly one way in which we can achieve that. The issue is urgent.
The Government can rightly claim that there has been some stemming of
the haemorrhage of defined benefit schemes. Despite that, very few
employees in the private sector are being rolled into defined benefit
pension schemes, even in firms where such a scheme exists for other
employees. My hon. Friend’s point that this measure is for new
employees and does not affect existing entitlements is a compelling
argument for why we need to do something.
My second point is
that we should listen to the actuaries. This week we are concentrating
on what has gone wrong at Northern Rock and what should be done about
it. I am in no doubt that if the board of Northern Rock had listened
more carefully to the actuaries, and had stress tested the business
plan to the point of what would happen if all the available credit in
the banking sector dried up, that business plan would have been
different. I am convinced that the actuaries will privately be saying,
“We told you so, but nobody would listen,” about the
debacle at Northern Rock.
In this instance, the actuaries
are right. They have acted by bringing forward the
proposal—through my hon. Friend’s new clause, to which I
have put my name—and asked the Committee to debate the matter
today. I suspect that in further proceedings on the Bill, we will see
that they might be slightly ahead of opinion elsewhere.
The most encouraging thing that
my hon. Friend has said has been about the reaction of organisations
that, even during the public evidence session in the Boothroyd Room,
were perhaps a little lukewarm, or even cool, on the proposal, but are
now beginning to see the sense of the argument. That is all to the
good, and it adds to the importance of us receiving a more positive
response from the Minister today. Again, I congratulate my hon.
Friend—if he had not tabled the new clause, I would have done
so. The argument stands on record as compelling. We must do something
about this issue.
Paul
Rowen (Rochdale) (LD): May I echo what the hon. Member for
Ryedale said about the hon. Member for Eastbourne’s proposal?
The exposition of the arguments made by the hon. Member for Eastbourne
for conditional indexation was very
compelling.
We started
our consideration of the Bill with evidence sessions and, as the hon.
Member for Ryedale said, it is clear that the idea of such sessions and
of having a dialogue with stakeholders has developed. In this case, it
has proved its worth in that organisations that were initially lukewarm
about conditional indexation have now accepted that it has a role to
play.
We are all here
for one purpose and one purpose only: to ensure that people’s
pension provision is improved and developed. We have spent a lot of the
time talking about personal accounts and expressed some concerns about
what might happen if employers decide to switch from their own
contributory pension schemes to personal accounts. We know that there
has been move away from defined benefit to defined contribution
schemes. Here we have an opportunity to provide an alternative that
guarantees to employees a better form of pension than they could get.
We are not prescribing a route, or saying that that is what must be
followed, but providing an
option.
As the hon.
Member for Eastbourne said, it is important that the new clause would
affect new members, not existing members. It would allow a company to
look at the way in which its pension scheme was developing and the
associated risks, and, if necessary, enable it to share some of that
risk. It would be far preferable for there to be some risk sharing, if
that resulted in people getting a better income in retirement, rather
than a straightforward choice between one scheme or another, which is
the situation at the
moment.
This excellent
new clause considerably enhances the scope of what we are seeking to do
in the Bill. So far, the Ministers have listened and been prepared to
make amendments, when necessary, in the light of our discussions. I
hope that the Minister will accept new clause 5 and realise the
benefits that it offers to the community that we all seek to
serve.
The
Minister for Pensions Reform (Mr. Mike
O'Brien):
It is a pleasure to welcome you back to the
Chair, Sir Nicholas.
I do not disagree a great deal
with the general argument put forward by the Opposition spokespeople
and the hon. Member for Ryedale, but I disagree with the new clause and
the suggestion that we should legislate now, rather than having proper
discussion and consultation before we start to
legislate.
We are
interested in conditional indexation and risk sharing. We welcome the
work of the ACA and I extend my thanks to Ian Farr for attending the
oral evidence session and raising what we all recognise as an issue
with some potential. We need to identify precisely the extent and
nature of that potential. However, because the issue is both important
and complex, I am not prepared to rush through legislation for
conditionally indexed schemes until we and stakeholders have had time
to consider all the issues fully and to consult properly. We should
bear in mind that Lord Turner said in his report that our pension
system was possibly the most complex in the world. We need to be sure
that we carefully consider any measure that would increase that
complexity, which the new clause clearly
would.
On a recent
visit to the Netherlands, for example, one of my officials was told by
a Dutch representative that the intricacy of the new conditional
indexation system means that schemes are understood by fewer members
than ever before—they have become more complex. One of our aims
throughout the programme of reform has been to encourage people to take
personal responsibility for saving for retirement. Adding complexity to
occupational pension schemes would not sit well with that aim. If
people are to take personal responsibility, it is important that they
understand the scheme in which they are saving. Conditional indexation
and risk sharing add to complexity, but they might be a necessary
complexity. We need to look at the way in which we take the issue
forward.
I do not
disagree with the generality of the argument. I merely say that we
should look at the issue with more care and consideration, rather than
rushing through legislation now. First, we do not know enough about the
impact of the proposals. At such a delicate time for defined benefit
schemes, it would be irresponsible not to take a bit more time to
assess and to be clear about the impact on existing provision and the
potential impact on the members of such
schemes.
As the hon.
Member for Ryedale rightly pointed out, the move away from DB schemes
has steadied recently. That has given us some time. I hope that the
deregulatory proposals in the Bill will continue to produce that
steadying so that employers know that there may be changes in the
future that will help them. We are further looking at more deregulatory
measures, but we are also putting forward in this Bill deregulatory
measures that will be of assistance to them.
As David Yeandle, of the
Engineering Employers Federation acknowledged in his oral evidence to
us, there is limited interest among employers for risk sharing. There
is not an enormous demand for conditional indexation. A number of other
witnesses commented that more work should be done, and that any changes
were probably not for this Bill. Jeannie Drake, who was also a member
of the Pensions Commission, said:
“My immediate point on
the conditional indexing is that it should be looked at rather than put
in the current Bill.”——[Official Report,
Pensions Public Bill Committee, 17 January 2008; c. 110,
Q135.]
We do not want
to add another layer of legislation if it might do little in practice
to encourage continuing defined benefit provision. I take the point
that in Holland, where there is a different culture in relation to
pensions savings, they have not used conditional indexation very much.
However, it is there as a fall-back position, if they should need it. I
take that point, but that does not mean that our different culture
might not result in employers taking a different approach. We just do
not know what might happen, and I think that we need to find out a
little more.
As the
Government have always made clear, we are serious about encouraging
good quality provision by removing unnecessary burdens. That was why we
brought forward the deregulatory review. I realise that when the hon.
Member for Eastbourne tabled the new clause and new schedule, he did so
with the assistance of outside organisations, so I shall not comment
too much on the drafting. There are some problems with it, but I take
his point that it is not his job to get the drafting right. We are
happy to do that, so I will not make that point. However, this clause
would not be ideal if we were going to do implement such a proposal,
and I am suggesting is that we should not do that just
yet.
I am also
concerned that the references citing the Netherlands as some sort of
ideal example are not terribly helpful, especially given that the
Financial Times last week highlighted the case of claims that
were made in the Netherlands that a particular major international
company, which is also very active here, had not been increasing its
contributions to the appropriate level to target the payment of
indexation genuinely. Although the board of that company denies any
wrongdoing, the matter is now being taken forward in court. I make no
comment about the accuracy of the claims and I use the example only to
point out that this is not some sort of failsafe way to avoid
controversy on employers’ contributions. On the contrary, it
seems to be very controversial indeed.
Similarly, the proposals before
us involve complex legislative changes to a number of different
requirements. When I spoke to Ian Farr, he seemed to suggest that these
changes could be brought about through limited amendments to our
legislation. I am very sceptical about that. I actually think that we
would be creating a new area of shared risk if we decided to go ahead
in that way. That could well produce a whole series of legal
complexities. This is an area of law that can be subject to quite a lot
of litigation. Unless we get measures right and give them full and
proper consideration, we are going to end up with rushed legislation
that has not been properly consulted
on.
I suspect that we
will need not just a few tweaks to our legislation, but quite a careful
setting out of a new area of risk sharing for pensions, which might be
quite a complex area of law. In addition to the provisions tabled,
there will need to be changes to a wide range of other measures
relating to employer debt, scheme funding, surplus transfer values and
disclosure. The impact of all the other changes that would be
consequential on making this change would also need
to be given careful consideration. This is not the kind of radical
legislative change that ought to be left to secondary legislation, so I
do not accept that we can just put forward something broad and leave it
all to secondary legislation. Such a measure would be quite complex and
could be subject to litigation, so it would be better to include it in
primary legislation.
10.15 am
I want to make it clear that I
have listened to the ACA, the CBI, the NAPF, the EEF and others and
that I value their important contributions, so I hope that the
Committee will lend its support to a full consideration of the various
approaches to risk sharing. I have asked my officials to undertake a
detailed analysis of it.
I can also announce that we aim
to issue a full consultation paper in June. We plan to allow 12 weeks
for thoughtful and full responses to the issues. It is important that
the issues are given full and proper consultation, and we will report
on the consultation in the autumn. We can then take informed decisions
that, I hope, will be built on a consensus after proper consultation.
If we need to make primary legislative changes—we probably
will—we will have to find a timetable to do so, perhaps in a
fourth-Session Bill, subject, of course, to the will of the
House.
I want to put
on record my commitment to the process, because I see clearly the
potential of risk sharing. However, we do not want to introduce
something without a detailed consideration of the issues and a full
understanding of the impact of the changes on scheme members. I
therefore urge the Committee to lend its support to the consultation
that I have outlined, in order to support perhaps the idea, but not
this particular new clause.
Mr.
Waterson:
There we have it: another
review—marvellous. I feel that all my efforts have brought
forward a mouse, and although I do not want to blacken our last jolly
day in Committee, I must disagree with the Minister. If the Government
have not given detailed consideration to those matters, it is not
because they have not had the opportunity; they have simply chosen not
to. If the review—the Minister said it would start in June, but
I do not know when it will finish—is to be anything like the
Lewin-Sweeney affair, we will be better off without it, because, with
no personal criticism of Messrs. Lewis and Sweeney, they were just
doomed to disagree on all the big issues, and they duly did. Their
report, as I have already said, was very timid, and the Government
built a new layer of timidity on top of it.
My offer of a slap-up dinner is
non-transferable. Despite my hon. Friend the Member for Ryedale trying
to add a new clause to it, it does not apply to a Minister in the
Lords. I shall not press the new clause to a Division, but we will
return to it on Report. More importantly, judging from the reaction so
far of some of their lordships, and having heard the hon. Member for
Rochdale speak for the Liberal Democrats, it sounds like a Minister in
the Lords would have a claim on that offer of dinner, but I want to
make it clear that they do not, so it would be far better for the
Minister for Pensions Reform to concede the point now.
I am delighted that the Minister
welcomes the work of the ACA and the APL—he is right to do so.
However, it is a bit churlish to say that the idea has some potential,
and then to lecture us about rushed legislation. There is no rush. Many
serious-minded individuals have considered the issues closely. The only
problem is that the Department for Work and Pensions has
not—yet. I am talking about the NAPF, the SPC, the ACA, the APL,
the CBI and any other acronym or set of initials that one can think of.
All those people are lined up on my side of the argument; it is the
Government who have been slow to catch on.
Mr.
O'Brien:
May I assure the hon. Gentleman that the DWP has
given full and due consideration to the issue? Before he claims that
all the people whom he cited are lined up on his side of the argument,
he should consult them, because he will find that they will welcome the
announcement that I shall hold a full and proper consultation on the
issue with those very people.
Mr.
Waterson:
I am sure that, faute de mieux, they will
welcome a consultation, but they would much prefer some action, as
indeed would we. We intend to press the matter—in future
debates, if not today.
The Minister suggested that the
issue was much more complex than our new clause and new schedule
suggest, but the Association of Pension Lawyers just does not
agree—it is as simple as that. The Department must focus on the
matter because DB schemes are in the last chance saloon and there is no
point messing about with further consultations when we could be getting
on with things.
The
Minister suggested that Holland was not the garden of Eden, and I am
the first to accept that. Of course there may be problems in the Dutch
system, but it is staggering how much more advanced it is in the
penetration of DB schemes in the work force. I have conceded that there
are structural reasons for that, and I am delighted that his officials
have followed my well-trodden path over there to talk to some people. I
assume that, if they spoke to the same people as I did, those people
will have said the same things that they did to me, and I have taken
the Committee through their views. Surely there must be something that
we can learn from a system that has a 95 per cent. penetration of DB
membership. Surely whatever they are doing is working and, frankly,
whatever we are doing here is not working. That is a matter for not
just today, but another day. I beg to ask leave to withdraw the
motion.
Motion and
clause, by leave,
withdrawn.
|
| |
| ©Parliamentary copyright 2008 | Prepared 22 February 2008 |