Previous Section Back to Table of Contents Lords Hansard Home Page

Lord Monkswell moved Amendment No. 81:

Before Clause 32, insert the following new clause:

("Payments to members of scheme

. At the end of paragraph 3(3) of Schedule 22 to the Income and Corporation Taxes Act 1988 there shall be inserted
"( ) Making payments to members of the scheme.").

The noble Lord said: My Lords, in moving this amendment, I should also like to speak to Amendment No. 165 on the Marshalled List. Perhaps I may read that into the record. It would amend Clause 69. It reads as follows:

    "Page 42, line 46, at end insert ('and/or to the members of the scheme.')".

This is our second time around this course. We cantered round it at Committee stage. I read very closely the remarks that the Minister made during that debate. I also thank him for the letter that he sent to me, and to a number of other noble Lords, in which he referred to the situation. I quote:

    "Another issue raised in this context was that of protecting scheme members' interests when there is a surplus in a scheme that is being wound up. The treatment of that surplus, including provisions for the protection of scheme members' interests, is dealt with under clauses 68 or 69".

I have to say that I am not happy with the response, having read in Hansard the Minister's remarks in Committee and the comments that he makes in his letter. Perhaps I may try to explain why I am not happy. Before I do so, I should probably apologise to the House for not explaining adequately my reasons for tabling this amendment at the Committee stage. I can quite understand why the Minister and other Members may not have felt that it was all that important.

In Committee, I referred to the unfairness of the situation whereby employers reacted to circumstances that resulted in a surplus in the pension fund assets, generally speaking from a rise in the Stock Market and the investments that the pension fund had made. However, it is rather worse than that. It is not just a situation where an accidental surplus is created and therefore a decision arrives on the desk of the powers-that-be to ask what is to be done with the surplus. I am thinking of a situation in which the employers, through acts that they commit, generate a

13 Mar 1995 : Column 659

surplus, effectively by reducing the advantages of employees. There may be other ways, but in general there are two particular ways in which they may do that.

First, they may do it by winding up established pension schemes and effectively constituting a new pension scheme. Usually that will come about when two companies merge. The argument will be: "We are all in the same company now and we should all be in the same pension scheme. So let us wind up the two old ones and have a new one". Because of the circumstances, that may provide a surplus. The other way is where, by a deliberate act, the employer creates redundancies and makes employees redundant.

One effect of creating redundancies is that it reduces the liabilities of the scheme, but does not necessarily affect the assets of the scheme. There could be a combination of both those acts—the winding up and the redundancies—which would be deleterious to the employees. They are either out of a job or end up in a pension scheme which is probably not quite so good as the one that they were in before.

As the law currently stands, the employer can effectively get his hands on the surplus assets that he has generated by making things worse for the employees. There could be an argument that that is totally unfair and that any surplus assets generated in that way should automatically go to the disadvantaged employee. But, obviously, it would be very difficult to determine whether it was the hand of the employer making things worse for the employee which generated the surplus.

I suggest that there is a way around the problem. There is capacity for fund surpluses to be disbursed to employees in the same way that at the moment there is capacity for surpluses to be disbursed to the employer. The result would be that, if there were a final surplus available after the benefits had been raised, and probably after pension fund contribution holidays had been determined for employers and employees, it would be for negotiation between the employer and employees as to how it should be disbursed. It would then not be seen as only available to the employer. There would be a negotiating situation.

The reason for trying to create that situation is that it would be a signal to what I would describe as, generally speaking, anti-social employers—though they might not be breaking the law, they sail very close to it—that they should not engage in action which is deleterious to the employees and from which they sought to gain some advantages. On that basis, I beg to move.

Lord Mackay of Ardbrecknish: My Lords, when the noble Lord, Lord Monkswell, spoke to a similar amendment in Committee, he expressed disappointment that I used financial arguments in response. I am sorry to tell him that I intend to use those arguments again tonight because, as I am again sorry to tell him, they remain equally as valid tonight as they were the first time that I used them.

The Income and Corporation Taxes Act 1988 provides trustees with a range of options to use a surplus to improve members' existing benefits or to provide new ones; so members can benefit when an employer is eligible to seek a payment from surplus assets.

13 Mar 1995 : Column 660

I recognise that the noble Lord, Lord Monkswell, wants members to receive payments on the same basis as employers when a scheme winds up in surplus. However, I believe that his amendment is misconceived. Clause 69 already provides that a payment can be released to the employer only after members have had their pensions increased to the maximum permitted under Inland Revenue limits. Those Inland Revenue limits are as follows, for example, in the case of retirement: the maximum benefit that an approved scheme may pay is a pension of one-thirtieth of final salary for each year of service up to 20 years, which—if my arithmetic is right—means two-thirds; and a lump sum of 2.25 times that amount. Those limits are there to protect the Exchequer costs of tax relief which are given to approved pension schemes.

In the circumstances envisaged by Clause 69, the members' benefits have therefore been fully secured, indexed and enhanced to Inland Revenue limits. Members would get more than their legitimate pension expectations. The employer, who has borne the investment and other risks of the scheme, is entitled to benefit as well. The only way that he can do so is by having access to any residual assets. I can see no justification for suggesting that members should be able to share in that particular benefit, given the other gains that they would already have had.

The noble Lord suggested that employers could create a surplus by winding up an old scheme or creating redundancies. I must point out that in neither case can the employer reduce the accrued rights of any scheme member. That, I think, is what the noble Lord suggested might happen but I do not believe that he is right. I do not think he is right in that regard.

As I said, the legislation as framed, in case of wind-up, already gives considerable benefits to the employee, pension scheme member or whoever it may be. It gives them considerable benefits as the first bite of the cherry. The employer can only receive surplus benefit after those obligations to the employee have been met. To go further, as the noble Lord suggests, would be going beyond the existing tax-approved arrangements, which are substantial—they cost the taxpayer around £7 billion a year—and employers may consider that it is perhaps tilting the balance a little unfairly in the direction of the employee. After all, during all the years of the scheme the employer has paid his share of the contributions—of course the employee has paid also—and has had to stand behind the scheme. It is a bit of a quid pro quo. The employer must give a guarantee all the time the scheme is running and, if there is a surplus and after the interests of the employees have been properly dealt with, it seems right that an employer should gain some advantage to offset the risks he has taken during the years of the scheme.

9.15 p.m.

Lord Monkswell: My Lords, I thank the Minister for that response. I am intrigued by one of his arguments, and I shall come back to that in a moment. The scenario I envisaged was one in which there would be a good pension scheme that was already paying the maximum benefits allowed under the Inland Revenue rules. I

13 Mar 1995 : Column 661

accept the Minister's point that there is a need to protect the Exchequer and to place limits on the tax reliefs available for pension schemes. But perhaps I can try to explain to the Minister the mechanisms that I believe work to generate the surplus.

One may have a situation where an employee is made redundant. He worked for 20 or 30 years for a company and has another five, 10 or 15 to go before he receives his pension. Effectively, therefore, he is a deferred pensioner. I accept that the situation is rather different now, following the 1990 Act; nevertheless the mechanism still works. The current rules require that, as inflation progresses, the benefits accruing to the deferred member increase accordingly up to a limit of 5 per cent. Obviously, if the fund is well invested, an increase at least in line with inflation and probably a bit more can be expected. But what is the situation if inflation rises above 5 per cent.? Effectively the benefits for the deferred member are capped at 5 per cent.; but the scheme assets would be expected to generate income in excess of that 5 per cent. if inflation was running at 7 or 10 per cent. That is where the scheme surpluses build up.

Effectively one makes an employee redundant and reduces his situation; his money is frozen in a pension scheme and at the end of the day the employer receives the benefit. That is the crucial problem. I am concerned with the Minister's argument that the company, having invested in the pension scheme, should, if there is a surplus, retain that surplus as a reward for its investment in the scheme. That is a dangerous argument. I hope that the Minister did not intend the meaning he seemed to convey—that it is OK for companies to invest in pension schemes, which have tax beneficial regimes, with a view to recouping some reward for that investment at a later time. I am sure that that was not the Minister's intention but it appeared to be the meaning of what he said. Given that interpretation, perhaps the Minister would care to address the situation.

Next Section Back to Table of Contents Lords Hansard Home Page