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Lord Freeman : The noble Baroness, Lady Castle, knows more about pension schemes than most noble Lords. Therefore, when she proposes an amendment one has to look carefully at the intention. If the intention is to ensure that stakeholder pensions are clearly not money purchase schemes--they must, therefore, be defined benefit--they will need an underwriter. If the underwriter is not to be the state, it must be an employer. Therefore, I find myself in agreement with the noble Baroness.
However, we already have a system of occupational pension schemes which for many employers provide defined benefit schemes, where the employer makes a contribution and the pension received is dependent upon the years of employment and, typically, the final salary. Therefore, the effect of the amendment is to wreck the stakeholder pension scheme, if that is designed, as I would hope it will be, as an alternative, and in some cases a supplementary mechanism by which individuals can top up their pension contributions.
Therefore, I am not persuaded by what the noble Baroness, Lady Castle, has said. The effect of her amendment would be to deny a mechanism to those earning between, say, £10,000 and £20,000 during their working lives to continue making contributions to a stakeholder pension scheme, which I support, but it would be a top-up mechanism to occupational pension schemes that already exist. The working life of such people may move from employment to self-employment to unemployment and back to employment, where there may not be an occupational pension scheme or perhaps to later employment where there may be one.
Lord Higgins: I agree entirely with the noble Baroness, Lady Castle, that there is far more to be said for final salary schemes than for money purchase schemes. Equally, I agree with her that it is a shame that the trend has been away from final salary schemes to defined contribution schemes.
The problem I have with the amendment--sympathetic though I am for the reason that I have just mentioned--is that the crucial difference between the two is who carries the risk. In regard to a final salary scheme, at the end of the day the employer carries the risk and, if necessary, has to make additional employer contributions in order to top up the scheme and to cover the provisions that the actuaries say are necessary to maintain the final salary guarantee.
Lord Higgins: That is so. I would not dissent from that view. The noble Lord is absolutely right. It cuts both ways. There are many decided cases on who owns funds and, even today, that matter is not clear. On that point we go off on a different tack.
If the noble Baroness were to say that they ought to be final salary schemes, it is difficult to see who in the context of a stakeholder pension will carry the risk. There will not be an employer standing behind the stakeholder pension scheme unless--perhaps this is a consideration--we take the kind of example mentioned earlier of a trade union scheme.
Clause 1(4) provides that stakeholder pension schemes must, with exceptions to be prescribed, offer money purchase benefits. Amendment No. 5 would remove the requirement that stakeholder pension schemes should be provided on this basis. Amendment No. 6 goes further by specifying that pension schemes must not offer money purchase benefits.
I do not want to repeat the discussion we had earlier in explaining why we are introducing stakeholder pensions. But as many Members of the Committee have said, we are adding to the current framework where there are gaps in provision. The current framework includes salary-related schemes, which are excellent for many. It includes personal pensions, which are also suitable for many, and it will include the state second pension to help those who cannot afford to save towards their retirement.
Stakeholder pensions will address a significant gap in the pensions market. For a large number of people they will provide affordable, funded pension provision for the first time, so that they can see their own "pot" of money grow and look forward to a secure income in retirement. We believe that the most effective way to promote financial security in retirement for most people is to encourage provision of funded pensions and personal savings.
For many of the reasons cited by Members of the Committee tonight, we believe that money purchase schemes are the most suitable arrangements for stakeholder pensions. I join with everyone else who has said that where the conditions are appropriate, a final salary scheme--that is, a defined benefit scheme rather than a defined contributions scheme--is the best scheme going. But it benefits those who are in long-term work with the same employer, especially men, and especially those on ascending salaries; that is, the better off. In other words, it particularly privileges the more middle-class occupations, which are dominated more by men than by women.
Let us be clear. That is the group that defined final salary schemes benefit. We need only to look at the structure of the occupational schemes to see who is in them. There are considerably more men--85 per cent of men compared to 75 per cent of women--in occupational pension schemes with those levels of benefit. So it belongs to a society where men could reasonably predict a long-term job with a long-term employer. For those people--and I have been a beneficiary of a final salary scheme--it is very nice; the Civil Service, the university world, teachers and so forth. But that is unlikely to be the case for many people.
For somebody who is mobile and moving from job to job--perhaps in information technology and moving within a couple of years between employers--they are not the answer. Defined salary schemes have relatively low
The noble Lord, Lord Higgins, was right when jousting with my noble friend that behind a final salary scheme stands the employer to make good the pension promise; to underwrite the deficit and perhaps to take advantage of pension holidays. But there is no such person behind a money purchase or stakeholder scheme. Money purchase schemes are simpler, more flexible and will embrace those groups within our labour market that are currently ill served by the pension provision on offer. To do as my noble friend suggests would take stakeholder pensions effectively beyond the reach of precisely those people for whom they are designed and we would be wasting our time.
Money purchase schemes also enable each member to have their own easily identifiable "pot" of money. That has a number of advantages. It is a concept of saving with which people are familiar. Scheme charges will be easier to understand and compare. Transfer of funds will be more straightforward.
One of the factors which currently discourages many people from starting a pension is the complexity of existing arrangements. We believe that providing benefits on any basis other than money purchase will inevitably be more complex and therefore less attractive to people who are thinking about moving into pensions for the first time. However, the Government recognise that pensions are a rapidly developing field and that suitable new arrangements may be developed in future. So the power to prescribe exceptions gives us the flexibility to allow other forms of arrangement, provided they still satisfy the other conditions for stakeholder pension scheme status. We would want to ensure that such schemes would remain secure, flexible and offer value for money. We propose to consider this issue further at a later stage in our programme of further consultation on the detail of stakeholder pension schemes. It is to allow headspace for alternative arrangements which offer the same benefits but which are not yet in the market-place that we include those phrases in the Bill.
In the light of that explanation--I doubt that I have satisfied my noble friends--I hope that the noble Lord will feel able to withdraw his amendment.
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