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Lord Mackay of Ardbrecknish: My Lords, I am grateful to the noble Baroness for giving way. In the half decade of flexible retirement that I mentioned, the pensioner starts off with a full retirement pension. That would not be the case in the flexible decade of the noble Baroness.

Baroness Hollis of Heigham: My Lords, I entirely accept that. It is the same pot of money being redistributed over a lifetime in different proportions according to which point one wishes to take it. Actuarially it ought to be neutral whether one takes it at 65 or 62; it is the same pot of money spread over. People make that choice. The difference between us is that the Minister will make the choice for us. The Labour Party position is that people should be able to make their own informed choice as to whether they take a lower sum earlier or a larger sum later according to their circumstances.

Why should the Minister tell people what to do? Why does he know best what most suits the 2 million to 3 million families who approach retirement each year? How can he know? Their health, their family circumstances, the type of job they do, the age differential between spouses, the income and affluence they already enjoy will all inform their choice. Why, when we see around us a world of work becoming increasingly flexible and uncertain, will the Minister not only not seek to smooth that situation at the point of pensions, but will produce a harsh rigidity of his own which takes no account of people's choice?

The position that the Minister is adopting—this is not a personal comment because the Minister is not an arrogant man—is one of supreme and lofty arrogance: that the Minister, and behind him the Treasury, knows best when people should retire from work and be eligible to draw pensions, even though the world of work is changing around them. I find it sad that not one word of what the Minister said tonight engages with the real world outside of working pensioners. But, as the

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Minister so percipiently diagnosed, we shall not be seeking to press the amendment to a vote tonight. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Baroness Gould of Potternewton moved Amendment No. 192:

Page 113, line 12, leave out ("2000") and insert ("2010").

The noble Baroness said: In moving Amendment No. 192, I shall speak also to Amendment No. 193. These amendments are minimal and therefore I shall be brief. However, they are important to the people they affect.

The purpose of the amendments is to introduce a transition period of 10 years with a reduction in survivors' entitlement to the additional pension on the death of the spouse. Under the current proposal, if a man dies on 5th April 2000, his widow will receive a 100 per cent. entitlement to the additional pension. But if he dies one day later, that entitlement is cut in half.

To phase in the reduction over a 10-year period between 5th April 2000 and 6th April 2010 would remove the huge difference in entitlement caused by the delay of death by one day. It could be as much as £3,000 per annum, and would certainly have the effect of driving women into claiming income support with the extra cost to the Government that that would involve.

We consider that at a time of great stress the knowledge that an exact date of death will make such a large difference to an entitlement will place an additional emotional strain on the family of a terminally ill person. It is insensitive as well as being unfair. Reluctantly we are willing to accept the cutting entitlement. But to help alleviate possible suffering we would argue that it should be phased in in small steps over a 10-year period. The cost of phasing it in in that way will be relatively small. The full reduction will only be delayed; it will occur and will result in savings.

We hope that the Government will feel able to accept the delay and, in the name of compassion, accept the spirit of the amendment and draft a mechanism to enable it to happen. I beg to move.

Lord Mackay of Ardbrecknish: My Lords, as the noble Baroness explained, these amendments seek to introduce a phased reduction in the amount of additional pension which a person inherits on the death of their spouse. As the legislation stands the amount of additional pension inherited by a surviving spouse is one half where the death occurs on or after 6th April 2000. Under the amendment the amount inherited reduces from 100 per cent. in steps of 5 per cent. per year to reach 50 per cent. in the year 2010.

The reduction in the amount of additional pension which is inheritable from April 2000 was introduced by the Social Security Act 1986. The change had two purposes. It was part of the package of measures designed to bring spiralling expenditure on the state earnings related pension scheme under control. And it was designed to bring state provision into line with occupational pension scheme provision.

As noble Lords will be aware, the state earnings-related pension scheme offers a second tier pension to those who are not members of an

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occupational or personal pension scheme either by choice or circumstance. The provision of full survivors' benefits, as opposed to the half which is the norm in occupational schemes, is the main area of disparity between state and private pension provision. I am sure that noble Lords will agree that an alignment of survivors' benefits is quite justified.

This reduction and alignment in the amount of additional pension which can be inherited will not come as a surprise. As I said earlier, it was announced and legislated for in 1986. I am sure that noble Lords will agree that 14 years is a more than adequate lead-in period. To ask, as the noble Baroness does, for a further 10 years of phasing seems to be stretching this issue out just that little too long. Of course we accepted in 1986, and we have accepted since, that this is a sudden drop—and without phasing of course it is a sudden drop—but 14 years seems to us more than enough notice to give people who may be affected when the year 2000 comes. With that explanation of where the Government stands, I hope that the noble Baroness will withdraw her amendment.

Baroness Gould of Potternewton: My Lords, I thank the Minister for his reply. I take the point about alignment, but that takes no account of the reduced earnings opportunities of women who do not always have the occupational pension scheme or private pension scheme that many men have. That has been ignored. There is also the question of awareness of the change. My understanding is that there is little awareness of it and that this measure is still going to come as a great shock to many people when it happens.

There is no doubt that a change of this magnitude from one day to the next will lead to considerable unfairness and stress on the families involved. I regret that the Minister has not had the compassion to make this minor but important concession. With regret I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 193 to 195 not moved.]

Clause 120 [New requirements for contracted-out schemes, other than money purchase schemes]:

The Earl of Buckinghamshire moved Amendment No. 196:

Page 71, line 9, after ("subsection") insert ("(2A) or").

The noble Earl said: My Lords, with the leave of the House, in moving this amendment, I shall speak to Amendments Nos. 198 and 202. The purpose of this group of amendments is to enable those contracted out schemes which wish to do so to have the opportunity to continue to use the guaranteed minimum pension test for periods of pensionable service after 1997 instead of being required to pass the new requisite benefits test.

The Bill proposes that the present guaranteed minimum test should cease to apply for periods of pensionable service after April 1997, and that schemes should only be able to contract out if they pass the new requisite benefits test outlined in Clause 120. One of the difficulties of which noble Lords will be aware with this proposal is that it would give rise to difficulties for

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scheme administrators who would need to run two systems side by side for at least 40 years after April 1997 until no scheme members were left in active employment who had periods of pensionable service before that date. Another difficulty is that the resulting complexities will make it even harder than is at present the case for an existing member to comprehend exactly how his benefits are to be calculated.

If the new requisite benefits test was a straightforward simple test, these problems might not matter too much. However, it is clear from the description of the reference scheme in the Bill and the consultation documents which have been issued, that it is likely to be far from straightforward. For example, it would include salary definitions that will not necessarily conform to those used by the scheme. Some schemes might therefore find that they could not be certain of passing the requisite benefits test in respect of all their members; for example, those with high earnings but low basic pay. They may therefore need to build in the requisite benefits as a minimum test applied to each individual member in much the same way as the guaranteed minimum pension but, of course, using the new method of calculation prescribed for the reference scheme. One method of calculation would apply to pre-1977 benefits and another to post-1977 benefits for each member.

If the use of the guaranteed minimum pension test were to continue to be permitted for post-1977 service, as I propose, a modification would be needed in connection with the pension increases which schemes would have to provide on guaranteed minimum pensions accruing after April 1977. My amendment provides for those increases to be at 5 per cent. instead of 3 per cent. if the increase in the cost of living exceeds 5 per cent. In my view, that change is unlikely to cause great administrative problems to contracted out schemes since it is, in principle, the same kind of change as they had to cope with in 1988 when contracted-out schemes were required to start to provide increases on the guaranteed minimum pension at the 3 per cent. level.

Finally, my amendments provide that the anti-franking provisions should not apply to guaranteed minimum pensions accruing after April 1977. These provisions are of labyrinthine complexity and I believe that few people understand them fully. They do not sit easily with the concepts underlying contracting out, which have taken a broader brush approach. I hope that my proposal that the anti-franking provisions should be faded out will be acceptable.

In conclusion, my amendments would open up an important opportunity for schemes to avoid administrative complexity, help to prevent the position from becoming even harder for the member to understand and reduce the danger of contracting back into SERPS with its likely adverse financial impact. I beg to move.

9.45 p.m.

Lord Mackay of Ardbrecknish: My Lords, I find this a complicated group of amendments. Perhaps it would help the House and my noble friend if I were to pick my way carefully through them. I almost feel like

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saying that if anybody does not understand this explanation, I shall read it again slowly. As I have said, this is a complex matter.

Amendment No. 196 affects subsection (3) of Clause 120 which introduces new subsections (2A) and (2B) into Section 9 of the Pension Schemes Act 1993. The effect of this amendment is to amend Section 9(2) of the Pension Schemes Act so that, after the principal appointed day, contracted-out salary-related schemes can choose whether to contract out either on the current GMP basis or through the new scheme-based quality test.

Amendments Nos. 198 and 202 appear to be based on the assumption that Amendment No. 196 will be accepted and that contracting out via the GMP system would continue to be an option for the future.

Perhaps I may address first the principal amendment, Amendment No. 196, and explain why we are not prepared to agree to it. I shall then say something about the other two amendments. Many employers have criticised the current system for its complexity, a criticism which was repeated in the PLRC report and by the deregulation task force.

Giving contracted-out salary-related schemes a choice in the method of contracting-out would complicate future arrangements. Employers opting to retain the GMP system would not benefit from the simpler administration introduced through the new contracting-out test. Of course, it would be for individual employers to decide, but, frankly, I would be amazed if many employers were to decide to continue to operate them.

We discussed yesterday the difficulties which the Barber ruling has created for GMPs. GMPs are linked to the state pension age and SERPS, hence they are unequal. Unequal GMPs make it very awkward for pension schemes to achieve equal treatment in their schemes. Our proposed new contracting-out arrangements, under which GMPs are to be abolished and replaced for the future by a test of overall scheme quality, will make it easier for schemes to achieve equal treatment. Schemes will be free to do so in a way which best suits them within the limitations imposed by existing European law.

My noble friend's amendment also has implications for contracted-out rebate. In future the rebate will be based on the value of SERPS forgone rather than the cost of providing a GMP. Therefore, this amendment by itself would result in employers and employees who chose to contract out on the GMP basis being over-compensated for contracting out of SERPS. The only workable solution would be to have two rebates, one based on the cost of GMPs and the other based on the value of SERPS forgone. I do not believe that anyone would welcome a complication of that kind.

Such dual arrangements would also have serious implications for the operational effectiveness of the contributions agency, adding to government costs of administration. This would inevitably complicate the requirements placed on schemes and employers; for example, in transfers between different types of pension provision.

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The Government have listened carefully to all the criticisms of the complexity of the current contracting-out arrangements, in particular following the Barber ruling. We consulted widely on proposals for change and the overwhelming preference was for the abolition of the GMP and its replacement by an overall test of scheme quality. The Government have listened and acted, and I am somewhat surprised that there seems now to be a view, though I doubt widely shared, that GMPs are not so bad after all.

I turn to Amendment No. 198, which would come into play if Amendment No. 196 were agreed. It would remove the protection of the anti-franking provisions in respect of any guaranteed minimum pensions which accrued after the principal appointed day. It will not be possible for benefits accrued under the proposed new contracting-out arrangements to be franked. The pension will be considered as one element rather than being split into two separate components. But it is still our intention that the anti-franking requirements should apply in respect of GMPs which have already accrued.

I cannot recommend this amendment to the House for two reasons. First, if GMPs were to continue we would not wish to see a reduction in the degree of protection given to early leavers by removing the anti-franking requirements. Secondly, and more fundamentally, if GMPs were not to continue, the amendment would have no effect whatever.

Finally, I turn to Amendment No. 202. If GMPs were to continue to accrue after the new arrangements come into force, my noble friend would of course be right to want to ensure that those future GMPs would be indexed by the retail prices index up to a maximum of 5 per cent. in line with the requirement on occupational pensions generally.

However, my noble friend's amendment is worded in such a way that it applies both to past and future GMP accruals. The amendment therefore has the potential to add significantly to employers' costs. This is because the contracting-out rebate paid in respect of past GMP accruals assumed a rate of indexation of the GMP up to a maximum of 3 per cent., not 5 per cent. We believe that the present arrangements for increasing GMPs are about right. They strike the appropriate balance between what is affordable and protection against inflation.

My noble friend may be anxious about how different indexation rates would impact on the contracting-out rebate for salary-related schemes and may believe that, if pre-1997 GMP accruals were not to be subject to the same degree of inflation-proofing, considerable difficulties would arise in setting that rebate at the appropriate rate. I believe that I can assure him on that score. The contracting-out rebate is set, usually for a period of five years, following a review of contracting-out terms by the Government Actuary. Under present arrangements, the rebate is based on the cost to schemes of providing GMPs. Currently it assumes that schemes are required to index the GMP by the RPI up to 3 per cent. The cost of meeting that future liability is therefore taken into account when setting the current rebate. If, however, subsequently, the contracting-out terms were altered retrospectively by

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requiring schemes to index the GMP up to a maximum of 5 per cent., schemes would have been inadequately compensated for this additional liability.

I am sorry for speaking at length on complicated arrangements. However, their complication makes it difficult to speak briefly. I hope that I have explained the position and the reason why we cannot accept the amendment. I have also explained why, as always, we are trying to get the right balance between the employers and the potential pensioners.

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