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The Parliamentary Under-Secretary of State, Ministry of Defence (Lord Bach): My Lords, my right honourable friend the Secretary of State for Defence has today published in another place a Written Statement which sets out in some detail our progress in tailoring the UK presence in Iraq to suit the emerging strategic environment. I have today answered a Written Question in this House to the same effect.
We shall continue to review our force levels to ensure that we maintain an appropriate presence for as long as necessary. The noble Lord will appreciate that at this early stage there is no way of telling accurately how long that might be.
Lord Brooke of Sutton Mandeville: My Lords, I thank the Minister for his Answer. Inevitably, the detail is contained in places other than this Chamber. Therefore, it is a little difficult to ask an immediate supplementary question, but can the noble Lord add
Lord Bach: My Lords, I can tell the noble Lord that we have so far brought home more than 25,000 UK servicemen and women, following the end of decisive combat operations in Iraq. They have been taking some well-earned leave, following which they will be available for further taskings. So we currently retain about 17,000 UK servicemen and women deployed in the Gulf region, in a continuing effort to fulfil our responsibilities towards the Iraqi people. We shall continue to withdraw assets and personnel from the region where possible; but, equally, we shall maintain an appropriate military presence for as long as possible.
As for training the Iraqi army, or a new army, Paul Bremmer, the United States civil administrator, last month set out his plans for the establishment of a new, non-political, Iraqi corps. The United Kingdom is supporting that process.
Lord Redesdale: My Lords, has there been any difficulty in calling up further members of the Territorial Army? From talking to members of the Territorial Army, it appears that there is a fear that large numbers of them will be called to serve in the Gulf for an extended period. Are the Government undertaking any research into whether that will cause difficulties as regards obtaining those reserve forces? I know that he is not in his place at present, but perhaps I may welcome back to the House the noble Earl, Lord Attlee, whom, I believe, is at present on leave from the Gulf.
Lord Bach: My Lords, we certainly share with the noble Lord his welcome to the noble Earl, Lord Attlee, to the House and thank him for what he has done as a reservist, as so many other reservists have done for their country.
Lord Bach: My Lords, as for the noble Lord's question, two Written Statements have been made setting out the requirement for the call-out of about 2,700 additional reservists to support on-going operations in Iraq. We have demobilised more than 1,700 reservists who have returned from operations in Iraq. As for the new call out, 850 reservists have already been accepted into service. We know of no difficulty at this stage.
Lord Vivian: My Lords, can the Minister tell us how many multinational brigades will be deployed with 19 Mechanised Brigade as part of 3rd Division when it takes over from 1st Division in July? Which countries will provide the most forces to man those multinational brigades? Perhaps, before I sit down, the House would also accept my welcome for the return of my noble friend Lord Attlee.
Lord Bach: My Lords, we agree that training an Iraqi police force is critical. Indeed, what we have managed to do up to now in Basra represents a very good start. The noble Lord may have recently seen on television, as I did, a superintendent from the UK police, who is there to train and assist, being interviewed about that. In our area of operations, 5,500 police are already back at work.
Lord Roberts of Conwy: My Lords, can we expect some contribution towards the maintenance and upkeep of a peace-keeping force from those countries that are likely to benefit commercially from the new-found peace in Iraq?
Lord Bach: My Lords, I fear that I cannot assist the noble Lord on that question. We take our obligations seriously. We are lucky enough to be a prosperous, peaceful country. We know that we have obligations to other parts of the world, not least Iraq.
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Hollis of Heigham): My Lords, with the leave of the House, I shall now repeat a Statement made in another place by my right honourable friend the Secretary of State for Work and Pensions. The Statement is as follows:
"Our proposals build on the historic strength of the United Kingdom's voluntary systemthe partnership between government, individuals and employerswhich has seen pensioner incomes rise faster than average earnings during the past 20 years, but which now faces real challenges as people are living longer at a time when birth rates are falling. Although the UK is well placed, compared to other countries, to deal with that, more still needs to be done. People need to be able to plan for their
"We will make further announcements in due course on: the suite of Sandler products; a better deal for those who take their state pension later; and the proposals outlined in the tax simplification review. But today I want to focus on occupational pensions. They are under pressure now and we need to take early action.
"So I am setting out a balanced package of reform that better focuses regulation on the things about which people are most worried, so that we can cut burdens on business and increase member confidence in pensions. We will strengthen the protection of pension rights that people have built up, to ensure that rights promised will be rights delivered. Getting that balance right means taking a tough look at areas where regulation has grown out of all proportion. It also means taking action to deal with the demands of an increasingly dynamic economy, in which companies are taken over and people move between jobs more frequently.
"In February we tackled the challenge of two-tier workforces, to extend protection of pension rights to new starts working in many previously public enterprises. But it must be wrong that solely because of a takeover, workers in any private company have their rights scrapped. That is why I can announce that we are extending that same TUPE protection of pensions to private sector transfers.
"We will insist that where pension rights have been established the new employer will need to match employee contributions, up to 6 per cent, into a stakeholder pension or offer an equivalent alternative. That is a fair adjustment. It builds confidence in pensions and reflects company best practice.
"I am clear that in a voluntary system such protection of rights must be balanced with measures that make it easier for companies to set up and run good schemes for their employees. As I have stressed before:
'Pensions simplification has to be at the heart of any strategy to encourage greater pension provision'.
"We will replace the minimum funding requirement with scheme-specific funding arrangements. We will simplify and consolidate legislation in key areas to make it easier to administer pension schemes. Taking account of consultation responses, we will go further than we
"I am also advancing a raft of specific simplification measures, such as streamlining the requirements on member-nominated trustees and improving dispute procedures, ending the requirement to offer AVCs, and less bureaucratic reporting arrangements.
"I have received submissionsfrom the Pickering review and from othersthat we should abolish compulsory inflation indexation because the requirements are too onerous and expensive. While they make some important points about knock-on effects of costs putting schemes at risk, I do not believe that we should do away with indexation.
"However, guaranteed indexation of five per cent was proposed in 1995 when market long-term expectations of inflation were at five per cent. Today, because of the stable macro-economic framework the Government have put in place, inflation has been driven down to average just 2.4 per cent over the year since 1997. That means we are effectively forcing purchase of full inflation cover, something which may be disproportionately expensive. I therefore propose that the cap on mandatory indexation will now be set at 2.5 per cent, giving schemes and their members more flexibility to agree together on the form of pension that suits them bestand easing funding pressures.
"There will be no effect on the value of today's pensioners' rights. It is a measure for future accruals only, to give more freedom to design schemes in the most sensible way. We will keep survivors' benefitsto make any change there would have a bad effect on women's pension prospects in particular. But with increased flexibility we need to make sure that employees' rights are protected without employers winding up their schemes as a result. So I can announce today that we will set up a new, proactive pensions regulator to focus on tackling fraud, bad governance and poor administration. It will adopt a proportionate approachmaking sure that members are protected, while reducing burdens on well-run schemes.
"Pensions are a voluntary partnership and it is for workers and employers to decide what type of scheme suits them best. We have seen welcome examples in recent months of employers and trade unions deciding together how best to ensure continuing high quality provision. We set out in the Green Paper a proposal to require employers to consult scheme members before making changes. I can now confirm that, working with the Secretary of State for Trade and Industry, I will be taking this into effect to strengthen partnership in pensions.
"We will therefore strengthen member protection where solvent employers decide to wind up their pension scheme. I have placed in the House draft regulations to apply to schemes that are winding up from today. So, as from now trustees will have the power to make solvent employers who choose to wind up their schemes buy out members' accrued rights in full. This will greatly increase security for members of solvent schemes.
"But there is one further issue we must tackle. Sometimes, when firms go bust, the money is not there to meet pension commitments. Recent cases have shown the terrible injustice when this happens and I believe that the public are right to demand action. We should not accept that just because a firm goes out of business workers can find that a pension they have saved for all their working life is worth next to nothing. Our Green Paper set out options for sharing out assets more fairly. Today I can announce that we will change the priority order to give greater weight to those who have been in the scheme longest. We will lay draft regulations shortly. I hope that the honourable Members for Havant and Northavon will welcome the cross-party agreement on this point.
"But we need to go further. Ever since I started looking at this I have asked, if people expect their holiday or motor insurance to be covered if a firm goes bust, then why not cover for something as important as a pension? We are therefore going to legislate to set up a pensions protection fund. This fund will take over the schemes of insolvent companies to ensure not only that pensions in payment are protected but that those still working can be sure of getting 90 per cent of what they were promised. It will be paid for by a fixed-rate levy and an additional risk-related premium which, together with a salary cap, will minimise perverse incentives and moral hazard. The pension protection fund will be a non-government body. It will meet its obligations through the power to set and vary the level of charge without recourse to public funds. Taken with the other measures this is a big extension of pension security, for the first time guaranteeing protection if a company scheme goes bust.
"To conclude, I have always said that my aim is to build a wide and deep consensus in this country that embraces employers, employees and pensioners. This is a balanced package to reduce the costs and complexity of regulation, making it easier for employers to run schemes while in return making sure pensions promised are pensions delivered. Many of the proposals will require legislation which the Government will bring forward as soon as
The Statement is clearly important. The reality is that there is a crisis in pensions provision, both in the state and in the private sector. The Government have remained remarkably complacent on the issue. They have published their Green Paper, but not provided time, either in this House or another place, for it to be debated. The reality is this: having moved the pensions Minister into a Labour Party job, he has still not been replaced after two months. That reflects the general attitude of the Government to the importance of the issues. None the less the Statement is welcome in a number of respects, even though its central provision is, in a sense, a council of despair because it is insuring for failure.
The crisis is due to some extent to measures beyond the Government's control. However, the crisis is significantly due to measures that the Government have themselves takenmost notoriously the raid on the ACT pensions fundwhich have generated a general crisis of confidence in pensions and savings. The savings ratio has halved since this Government came to office.
However, I begin by welcoming the proposal to change from the minimum funding requirement to a scheme-specific situation. I welcome the scheme for making it easier for companies to adapt to changed circumstances without closing or winding up a schemesomething which noble Lords on these Benches have been advocating. I add a particular welcome to the proposals not to force company schemes to introduce AVC arrangements. I have spent many hours trying to sort out problems relating to Equitable Lifemany AVCs were in Equitable Lifeand was unbelievably frustrated by the fact that trustees cannot give advice to those who were affected without incurring criminal charges.
We shall examine with care the proposal for a new pro-active pensions regulator. Regarding the proposals on winding up, I shall deal, first, with those on solvent companies where the Government are proposing that trustees will have powers to buy out accrued pension rights in full. Clearly, there has been abuse in this area. We shall need to examine the proposals in detail when the legislation is brought forward, but my initial feeling is that that is also welcome. Looking overall at the Statement's proposals, can the noble Baroness tell us whether she thinks that they will accelerate or slow down the closure of final salary schemes to new members?
The central part of the Government's proposals has two sections. On the one hand, we have the proposal for an insurance scheme for occupational pensions, and, on the other, the proposal on inflation. The Government are seeking to ameliorate the crisis that has arisen, to a significant extent, as a result of their own policies.
It is proposed that there should be an insurance scheme, but one that will incur costs to pensioners. A number of important issues arise in that respect. First, there is the risk of moral hazardthe question of whether an insurance scheme exists. Trustees and companies will be rather more inclined to take risks than would otherwise be the case. Secondly, there is the question of whether costs will tend to fall on prudent and well-managed schemes to cover the failures of less well-managed schemes.
The proposal is strange in one respect. There is to be a levy at a fixed rate with a risk premium and a salary cap. I do not understand what is meant by those expressions. At all events, in plain, simple terms, it is the equivalent of a tax. But it will then go into a fund. The problem is that we cannot be assuredcertainly, the American experience does not reassure usthat the scheme will remain solvent. The Government use the word "guarantee" although it is linked with insurance, but there can only be a guarantee if the Government stand behind the scheme at the end of the day. To the extent that the contributions are effectively a tax, I am not entirely clear why the scheme has been designed in such a way that it is effectively an independent, free-standing organisation without government backing. There are real problems with that side of the proposals. As I said, the Government are insuring for the fact that companies may fail against a background in which the situation has deteriorated so much in recent years that such a scheme is now felt to be necessary.
There is another side to the coin. In order to reduce the costs to companies providing this insurance, and bearing in mind the difficulties that I have already outlined, it is proposed to reduce the present inflation protection afforded to many people in company schemes. At present, it is either the rate of inflation or a maximum of 5 per cent, whichever is the lower. The Government propose to get rid of the 5 per cent limit on the extraordinary argument that we can be reassured that, as inflation is now down to 2.5 per cent, we need not worry about it going up to 5 per cent. That protection is being removed. If the Government were to guarantee that inflation will never go over 2.5 per cent, there would be no loss to individuals. I do not
In order to balance the insurance scheme, the Government are reducing the benefits that many pensioners enjoy at present. That is unsatisfactory. Incidentally, the Statement is wrong when it says that at present companies are effectively forced to purchase a full inflation cover; that is not so. They are forced to cover it up to 5 per cent in making their calculations as to what the contribution should be.
In making his Statement in another place the Secretary of State said that he hoped we could move towards consensus. I have indicated that there are a number of areas that we can welcome, but there are others that will require extremely careful consideration. The noble Baroness and I, after three or four different pensions Bills of one sort or another, have always sought to improve them and reach consensus. If legislation is introduced in the autumn and appears first in the other place, I do not doubt that the Government will, again, have a heavy programme. They will not scrutinise it properly in the same way as happened with the previous pensions Bill, and we shall be left to clear up the mess.
None the less, these are important proposals. At least, finally, the Government have recognised that there is a crisis in pension provision. These measures deal only with the private rather than the public sector. Much more needs to be done about state pensions, as virtually every interest group in the country has said. This is an important issue. We look forward to debating it further with the Government.
Lord Oakeshott of Seagrove Bay: My Lords, I start with a welcome for five of the announcements we have just heardextending TUPE protection to private sector transfers; replacing the MFR with scheme-specific arrangements; setting up a new, more active pensions regulator; restricting solvent employer wind-ups; and, most important, changing the priority order to protect long-serving employees when a pension fund winds up. All those changes make good sense and show the value of cross-party agreement.
I focus today on the proposed new pensions protection fund and declare my interest as a pension fund investment manager since 1976. I regret to have to say that this do-it-yourself scheme is a cruel deception. As usual in the big questions in pensions policy, the Government are sticking thin plaster over a gaping wound. Pensioners in defaulting schemes will get not a penny from the Government, nor are the Government prepared to act as a guarantor of last resort as they do in the Pool Re scheme, which covers buildings against terrorist attack.
In the worst pensions funding crisis in British history, this scheme just reshuffles pension funds' existing resources and forces solvent funds of employers who have faced up to their responsibilities to bail out the laggards that companies have been
Our Government have chosen to follow that crumbling American model, with one crucial difference. In America everyone knows that the government stand behind the FPBGC. It has the right to borrow from the Treasury. The chairman is the Secretary of Labor and the other two directors are the Secretaries of Commerce and the Treasury. The President of the United States appoints its advisory committee of nine members.
If the Government really mean business, why are Andrew Smith, Patricia Hewitt and Gordon Brown not prepared to be directors of a similar British fund? The pensions Minister could hardly be chairman. There would have been no board meeting for the past two months. New biographical details would have been sent out more often than annual reports.
The problem with the scheme is who decides which funds have to pay the risk-based extra premiums and how much. What will it cost? Who will insure the insurers? How will its funds be managed? The comparison that the Government make with holidays and car insurance is nonsensical. If a travel firm or a motor insurer goes bust, it is easy to assess the loss. One can buy one's holiday or insurance policy somewhere else next year. Pensions are an enormous, long-term commitment. Any insurance scheme must involve considerable systemic risks and a completely different scale of problem in fixing premiums.
Will the Government also confirm, after their evasive answer to my written Question last week, that the £1.4 million ceiling for tax relief will apply equally to everyone in the public as well as the private sectors? The rules must be the same for all, no matter how mighty their office.
Baroness Hollis of Heigham: My Lords, I am sure that it was disguised, but I suspect that the noble Lord, Lord Oakeshott, welcomes this Statement, along with the noble Lord, Lord Higgins. I turn first to the points made by the noble Lord, Lord Higgins. I cannot resist challenging one political point. As part of his opening peroration, he said that we were ensuring failure. No, we are ensuring confidence in saving for retirement so that people are willing to save more or work longer. Those are our objectives and, by any honest, honourable and objective test, this action plan will address those two objectives. That is what stands behind our concerns.
The noble Lord, Lord Higgins, made some specific points. He asked whether I believed that our proposals would accelerate or slow down the closure of DB schemes to new members. It is a difficult line to draw because, as he will respect, we are striking a balance because pension promise is voluntary. On the one hand, we want greater protection for members who have forgone their savings. On the other hand, given that the employer is required to stand behind the promise, we want to ensure that such burdens of regulation are not so onerous that we encourage employers to vote with their feet. That is a dilemma we all understand and share.
I hope that, especially with regard to points I shall go on to make, we have made it sufficiently attractive that nothing we are currently doing should encourage employers to close DB schemes. I hope that many more will continue to keep them open. However, if they offer defined contribution schemes to their members, that can be a satisfactory alternative if, and only if, the employer's contribution remains at roughly the same level as would have gone into DB schemes. The noble Lord, Lord Higgins, knows as well as I and other noble Lords that the problem is not so much the move from DB to DC schemes but that when it happens, employer's contributions halve from an average of 12 per cent to 6 per cent. That is why they have often proved to be a relatively poor deal for employees.
The noble Lord asked about the merger of two schemes, which he has also asked me about in a private context. My understanding is that the answer depends upon the terms of the arrangement of bringing the two schemes together operated by trustees, but I need to take further advice. If he would like to give me the details, I shall give him a more full reply and also place it in the Library. My understanding is that it depends on the terms and conditions of the trustees' arrangements when the two schemes came together.
The noble Lords, Lord Higgins and Lord Oakeshott, then developed their arguments about insurance, the pension protection scheme, and questions of risk and moral hazard. As the noble Lord, Lord Higgins, identified, the pension protection fund will have two elements, basically a per capita element on schemes funded by employers and a risk levy associated with a degree of underfunding so that those companies most at risk of defaulting make a proportionately higher contribution to the pensions protection fund. That is right. At the end of the day, insurance is inevitably pooled risk. We should all accept that when one chooses an insurance scheme, there will be occasions on which good funds are cross-subsidising poorer funds.
None the less, the experience in the United States is positive. Despite the suggestion of the noble Lord, Lord Oakeshott, it is not the case that the American Government stand behind the scheme in the sense of making good any funding deficit. The American scheme is 90 per cent funded and has approximately 25 billion dollars' worth of assets even after a fairly difficult stock market and recent experience of companies defaulting. That shows it is reasonably healthy.
The question behind the one asked, which, in all integrity, I put back to both noble Lords, is that if they are calling for the Government to underwrite the scheme, they are basically saying that taxpayers should underwrite pension promises that are a private arrangement between employers and employees. The implication of that is twofold. First, one would probably increase the risk of moral hazard because instead of pension schemes being policed by their peers, so to speak, they would know that a bad scheme winding up and possibly going into default was able to draw upon the Government. There is no government money apart from that provided by taxpayers, which brings me to the second implication of what the noble Lords are saying.
Taxpayers who may not be in occupational pension schemesthey may be self-employed and have access to no such schemewould be asked to cross-subsidise those who are in schemes that, even after winding up, are relatively attractive to their own situation. I am not sure that, on reflection, that is a form of redistribution that noble Lords, especially on the Liberal Democrat Benches, really want to sign up to. I hope that that reflection occurs.
The noble Lord, Lord Higgins, pressed me about the limited RPI and price indexation. He is quite right. What we are doing is reducing our estimate of the inflation that companies need to make to provide against indexation from 5 per cent to 2.5 per cent. I am sure that he will know that, since 1997, the average rate of inflation has been about 2.4 per cent., below the 2.5 per cent we are talking about, and that all the Treasury and European forecasts suggest that it may fall even lower. Having said that, the noble Lord may be less aware of this statistic: our research suggests that the RPI alignment of 5 per cent is costing providers of DB schemes 23 per cent of their costs. By reducing the figure to 2.5 per cent, we will reduce that 23 per cent by
I am sure that the noble Lord, Lord Higgins, would be the first to complain if, as a result of the package that we are putting before your Lordships today, the cost to business grew exponentially. As a result, we believe that most people would be willing to trade a modest reduction in indexation against a huge leap forward in security, which is what I hope our propositions today, when delivered in legislation, will guarantee.
Lord Marsh: My Lords, noble Lords on these Benches have a particular problem. We had no advance notice of any Statement. However, that is a problem that we should pursue through the usual channels, rather than now.
We are dealing with a major and complex issue, especially as regards the Government's Statementwhich, if I may say so, was delivered at a pretty fast pace. In my view, it is impossible to treat it seriously and discuss it properly in as quick a time as this. I query the extent to which the Minister appeared not to be drawing the line on the key issue; namely, that pension schemes of the type that we are discussing belong to those who contribute to them, both employers and employees. They do not belong to successive governments.
Does the Minister agree that this particular pension problem is the result of a combination of factors over a long period of time that began to emerge under the previous government, who did nothing about the problem? Does the Minister further agree that the strength of pension funds does not depend upon the fluctuations in share prices when we start to talk about what has recently happened to the market; it is overwhelmingly dependent upon income stream? The present Government destroyed that stream when they decided to raid the funds to the tune of £5 billion a year, which presumably means to date about £30 billion in total. That turned yesterday's problem into today's crisis.
The one point I makeand I shall sit down after this, because it is not possible to reply to the Statement, as it was too difficult to absorbis that it is crucial that governments, of both sides, do not walk away with the idea that they carry no blame whatsoever for the present situation, about which they had a great deal of warning.
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