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Lord Eatwell: I wonder whether the Minister can clarify his position. When replying to the noble Earl he said that it was terribly important that suitable protection against inflation should be provided. With respect to AVCs, he is saying that that is voluntary and that inflation protection should perhaps not be provided in that case. But, surely, if the requirement to provide at least a minimum degree of indexation were written into law the cost of all AVCs (whether within a company or taken out individually) would be included in the cost of the plan. Consequently, by the noble Earl's amendment we would achieve exactly the objective which the Minister says that he holds.

3.45 p.m.

Lord Mackay of Ardbrecknish: We are going round in a circle now. All that I can do is to repeat in other words what I have already said because the noble Lord's argument is the same as that which the two previous speakers put to me. I have underlined the point, with which I am sure we all agree, that indexation is being required for all occupational pension schemes which have tax-approved status. We are looking at FSAVCs, as they are called. They are voluntary top-ups which people decide to make over and above the indexed benefits of the scheme. So there is that considerable difference. We do not want to do anything that makes such voluntary decisions more expensive or leads to the returns not being so great. That is why we have excluded them from the index-linked provision.

The Earl of Buckinghamshire: I thank the Minister for his kind words about my presence in your Lordships' Chamber. However, I find his arguments against doing what I suggest in relation to free-standing additional voluntary contributions completely circular. If you are going to do that for additional voluntary contributions,

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where a member has totally free choice as to whether to invest in them, the same argument applies to free-standing additional voluntary contributions. I wonder what on earth the reason is for that different treatment. Perhaps I shall find out at a later stage.

In the event, however, I should like to thank the noble Lord, Lord Eatwell, for his support. We share rugby football as an interest, as I note from Dod's Parliamentary Companion, and we now share an interest in free-standing additional voluntary contribution schemes. I thank also my noble friend Lord Clanwilliam. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

The Earl of Lindsey and Abingdon moved Amendment No. 145D:


Page 24, line 25, at end insert (", being the R.P.I. or 7 per cent. whichever is the lesser").

The noble Earl said: I propose to speak to Amendments Nos. 145D, 145E, 145F and 145G. The purpose of the amendments is to clarify the annual increase under an occupational pension scheme. The present wording of subsections (1) (b), (2) (b) and 4(b) refers to an annual increase of,


    "at least the appropriate percentage",

which is specified in another Act. I believe that by incorporating the wording of my amendments we arrive at a more realistic and clearer understanding of what is intended. As stated in the minority Goode Report, it should be borne in mind that wages have risen on average by 9 per cent. and prices by 7 per cent. per annum between 1955 and today. Therefore, I think that providing 7 per cent. is reasonable and affordable. I should like to quote the words of leading actuaries, Bacon & Woodrow, who state:


    "if inflation were eliminated, rendering increases to pensioners and deferred pensioners unnecessary, this would have the same effect on costs as the provision of increases to counteract inflation".

I beg to move.

Lord Eatwell: I shall speak to the amendments tabled by the noble Earl and refer also to Amendments Nos. 145G and 145M. The amendments relate to the problem of defining limited price indexation and providing suitable protection for pensioners against inflation.

I shall speak first to Amendment No. 145G which, in effect, places the number 10 where the noble Earl places the number seven. In some cases the choice of number for the minimum increase in indexation that must be provided if the RPI reaches that level is something of an arbitrary exercise. It is important to ensure that reasonable protection for pensioners is provided in circumstances in which the rate of inflation can oscillate widely over relatively short periods of time, even when a government pursue a strongly anti-inflationary policy. For example, if we take the current figure of 5 per cent. for limited price indexation and look at the record since 1987, between 1987 and 1993 the real value of a pension which was increased only by the 5 per cent. required rate would have fallen by nearly 10 per cent. That is in the past six years alone.

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If the required limited price indexation rate were increased to 10, the value of the pension would have been preserved over that period. It is also true that there have been periods, such as under the Chancellorship of the noble and learned Lord, Lord Howe, when inflation reached 20 per cent. In those circumstances, even with the figure of 10, the value of a pension would be eroded. Nonetheless, given the need for reasonable actuarial calculations, it would not be unreasonable to increase the figure to 10 and provide for pensioners that degree of protection.

It might be argued that increasing the figure from five to 10 would lead to a significant increase in the cost of schemes. However, I am advised by actuaries—I must say that, having thumbed through my copy of Teach yourself to be an Actuary, I still have to rely heavily on professional advice; the mysteries of that so-called science seem to verge between astronomy and astrology—that such a change would lead to little increase in cost because the actuarial assumptions associated with schemes which are funded predominantly through equities are that when there is an increase in inflation there would be an increase in the scheme's assets as well as its liabilities.

Broadly, I am advised that the proposals I make in Amendment No. 145G would not add significantly, if at all, to the cost of schemes. It seems that that would be a way in which we could offer greater security to pensioners; and that, after all, is the purpose of the entire Bill.

I shall turn now to Amendment No. 145M. Under the current regulations for limited price indexation, we have a rather more pernicious bias against the pensioner than even this little debate we are having about five, seven or 10. What happens at the moment in respect to pensions that are being paid is that the ceiling on limited price indexation applies year by year. It does not apply to the average rate of inflation over the period in which the pension has been accumulated and is to be paid. The significance of that is serious.

Let us suppose, for example, that in one year there was 20 per cent. inflation—the 1981 experience of the noble and learned Lord, Lord Howe—pensions would then be uprated by 5 per cent. If in the following four or five years there was no inflation, pensions would not be uprated. So the entire increase over the period would just be the 5 per cent. There would no way of recovering the loss of the 15 per cent. which was suffered in the one year of high inflation. If, on the other hand, we could institute the evaluation procedure which is used currently for preserved pensions in deferment and apply it to pensions which are being paid, then because the LPI would be referred to an average over a number of years, those very serious losses which could be sustained from just one year's inflation—an oil price rise or a commodity price rise which would mean that no government could possibly control the rate of inflation in just that one year—the inflationary effects upon pensioners of that burst of inflation would be protected up to the LPI rate, averaged over the appropriate years.

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So I believe that taking the two amendments together—with all due respect to the noble Earl, taking the figure of 10 in Amendment No. 145G—and extending averaging from pensions in deferment to pensions in payment, that would give a much more significant protection against the erosion of the real value of pensions than exists at the moment. I turn again to the cost. With respect to the issue of averaging, once again the arguments I presented previously apply: given the typical actuarial assumptions which are made with respect to funds which, as in the UK, are predominantly equity-based, the cost of introducing this significant increase in protection for pensions would be insignificant.

Lord Dean of Harptree: With all these amendments, I believe that Members in all parts of the Committee will agree that we are trying to strike the right balance between encouraging occupational schemes to develop and providing adequate security for the members of schemes. In my judgment the amendments go too far in the direction of discouraging the development of occupational pension schemes. They are too onerous, particularly when one compares them with the existing statutory obligation which is indexation up to 3 per cent. of an element of the pension.

The amendments suggest indexation, in one case of up to 7 per cent. and in another of up to 10 per cent. on pensions accruing after 1997. We had a similar argument on Tuesday when I suggested to the Committee that one of the factors we have to bear in mind is that, whereas in previous years many final salary schemes were being set up, there is now a tendency for those to be substituted by money purchase schemes. That suggests strongly that there is a warning light that the conditions for setting up and improving occupational schemes are not as favourable as was once the case.

I remember in reply to that point that the noble Baroness, Lady Hollis, thought that if money purchase schemes became more common they would give less security to members of the schemes. I agree with that. She considered that the conditions should be more onerous. With respect to the noble Baroness, I draw the opposite conclusion. I believe that there is a warning light; that if we make conditions too onerous there will be a risk that the highly satisfactory development in occupational pension schemes during the past 20 or 30 years will diminish.

The Committee will remember that 20 or 30 years ago we talked about occupational pension schemes being overfunded. Indeed, at that time the superannuation funds office had to be extremely vigilant to ensure that the Revenue was not defrauded by overfunding. We have not heard much about overfunding in recent years. Again, that is an example of the less favourable climate in which occupational schemes must now operate.

There are many reasons for that and I do not wish to bore the Committee by going into them at length. One reason is that many more schemes have reached a state of maturity and a growing number of pensions are being paid. The ratio of pensioners to contributors is going against the contributors. That is happening in the

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country as a whole and it is a factor that the Government must take into account in deciding at what age pensions should be paid. Furthermore, we must take into account the fact that employers must make good any shortfall that emerges in the pension scheme.

For those reasons, I believe that a jump from the existing indexation requirement to those suggested in either amendment would be a jump too far.

4 p.m.

The Earl of Buckinghamshire: I agree with the noble Lord, Lord Eatwell, that his actuarial advice is good and that the real long-term cost of the provisions would not increase the long-term cost of a pension fund. However, the implications will run through into the minimum solvency area. There are few insurers in the market to buy out deferred annuities. They will make an assumption that in order to buy out limited price indexation they are using a rate of 5 per cent. as their assumption in the purchase price.

If we move the rate of inflation up to, say, 7 per cent. or 10 per cent., they would probably consider that they too must move up their assumptions of limited price indexation in order to mirror the promise that the noble Lord is trying to put into the Bill. That will automatically drive up the cost of buying out deferred annuities; and that will have an immediate impact back onto minimum solvency. For those reasons primarily, I suggest that the amendments relating to that area should not be accepted.

The second matter that I wish to deal with is averaging, which is an extremely interesting concept. I can understand why it is being brought forward. I have recently taken over the running of a scheme which contains such a provision; the rate is 5 per cent. or, if inflation is lower, the average of that period. That is a curious way of looking at the matter from the other side—lower than 5 per cent. The problem the company has is with the administration of that averaging. I shall be interested to hear what the Minister has to say about that. I suspect that when we look at the totality of the pensioners we have to look after, averaging may be administratively complex to put into place. I may be wrong and no doubt someone will tell me that for every administrative problem there is a solution. But on that basis I suggest caution in that area.


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