§ 11.38 a.m.
§ The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Hollis of Heigham)
My Lords, I beg to move that this Bill be now read a second time.
Most people can expect 20 to 25 years of retirement, and life expectancy grows around a year every decade. Today a quarter of all women will probably live to 93. If those years are to be rich and fulfilling, while in work we need to plan how much to save and when to retire. That means that our pensions, the main vehicle of our retirement income, must be reliable—because they will be relied on.
Between 1979 and 1997 average pensioner incomes grew by 64 per cent in real terms under all governments compared with 36 per cent growth of real average earnings—nearly twice as much. However, while the incomes of the richest fifth of pensioner couples grew by 80 per cent, that of the poorest fifth grew by only 34 per cent, lagging behind the growth in real earnings.
Since 1997, as a Government we have done much for those poorer pensioners who inevitably depend on state pensions. Increases in the basic state pension, the introduction of state second pension and the wraparound of pension credit have all helped to ensure that, compared with the 1997 situation, in 2004–05 the poorest third of pensioner households will be on average £1,750 better off a year in real terms—or an extra £33 a week.
However, our levers for those pensioners with higher incomes and private pensions, even though they may be far short of full prosperity, are less direct. The combination of falling stock markets and falling employer contributions with which to meet increased longevity has destabilised the final salary pension promise. The task of the state is—by encouragement, regulation and reward—to secure the framework of occupational pensions, especially final salary schemes.
In spring 2002, the then Secretary of State for Social Security asked Alan Pickering to look at how the administration of occupational pension schemes could be simplified. Ron Sandler was jointly commissioned by the Chancellor of the Exchequer and the Secretary of State to review retail savings in the same period. A quinquennial review of the Occupational Pensions Regulatory Authority (OPRA) and a National Audit Office value-for-money study into how OPRA worked also took place during 2002.
The outcomes of all those separate reviews show that major themes for pension reform were emerging—reflected in the series of Green and White Papers published by the Government and informed by some 800 responses to its consultation exercise—culminating in today's Bill, which I would now, with your Lordships' permission, like briefly to describe.
Our aim of increased security begins with the replacement, in Part 1, of OPRA with a new non-departmental public body—the pensions regulator. The new regulator will focus on protecting the benefits 384 of members of work-based pension schemes, concentrating its effort on schemes where it assesses that there is a high risk of fraud, bad governance or poor administration. It is risk focused.
The pensions regulator will inherit OPRA's current powers as well as having a range of new or increased powers that will assist in fulfilling its objective of protecting member's benefits. New powers will include issuing notices that require schemes to take specific action to remedy identified problems within a specified timescale. Failure to comply with such a notice may result in civil penalty.
In addition, the new regulator will also have the ability to freeze a scheme for up to six months in certain circumstances—which is an important new power—thus protecting members' benefits and scheme assets while investigations take place.
There will be an extension to the existing whistle-blowing responsibilities. Currently, that duty applies only to auditors and actuaries. The statutory whistle-blowing obligations will expand to include trustees, fund managers, employers, scheme administrators and independent financial advisers. A separate determinations panel appointed by the regulator would help to ensure that procedures are fair.
Many of the new regulatory functions will be exercisable only by the determinations panel, which is, so to speak, the judicial arm of the regulator. The panel will have power to impose fines for specified acts or omissions. There will be one significant government amendment to Part 1. As I speak, I hope to indicate where the Government will be coming back with amendments, and I am confident that we will lay them in good time.
There will be one significant government amendment to Part 1, which would ensure that the regulator has the necessary powers to combat the practice of pensions' liberation. There will also be amendments to ensure the proper functioning of the regulator's duty to protect the pension protection fund from abuse.
Part 2 of the Bill will establish a brand new compensation scheme called the pension protection fund, which will be run by an independent board to strengthen member security by protecting the pension promise. It will provide compensation in two areas. First, the PPF will ensure that where a company with a defined benefit (DB) pension scheme becomes insolvent and its pension fund is not sufficiently funded—if it is sufficiently funded, there will obviously be a buy-out into annuities—members can be reassured that they will still receive the core of the benefits to which they are entitled.
That will be achieved by providing compensation covering 100 per cent of the original pension promise, subject to PPF rules, for people who have reached the scheme's pension age and to those who are already receiving either survivor's benefits or their own pension on the grounds of ill health. People below that age will receive 90 per cent, subject to PPF rules, up to a maximum capped level of £25,000.
385 Secondly, the PPF board will also take over the existing responsibilities of the Pensions Compensation Board and can compensate members of both DB and defined contribution (DC) schemes in cases of fraud and misappropriation.
The PPF will be funded by a levy that will be split into three parts. The first part will be the pension protection levy, of which one element will be based on scheme factors, such as the number of members and the balance between active and retired members. The other element will be based on risk factors that are linked to the level of underfunding and other risk factors. In order to reassure levy payers that costs will be minimised for good employers with well funded schemes, the risk-based element will constitute at least 50 per cent of the total charge and will be introduced in due course.
The second part will be the administration levy that will cover the set-up and ongoing costs of the PPF and the PPF ombudsman who will deal with appeals. Finally, the fraud compensation levy will, as now, cover and be paid for by both defined benefit and defined contribution schemes if and when a case of fraud occurs. Since 1997, I think that there have been only three such cases, which suggests that some of the procedures that were set up by the 1995 Act have worked effectively.
The PPF has been designed so that government funding is not required. The fund can, within reason, control its own income through the levy and its own liabilities to ensure that it has enough funds to pay out compensation and reassure its members that they are sufficiently protected. In order to strengthen the level of support that is provided to certain groups, ensure the smooth running of the fund and to clarify the governance arrangements, some additional amendments on the PPF will be tabled and debated in due course.
Those amendments will ensure that the PPF makes effective provision for certain groups, such as divorcees and those with short periods of service. They will also enable the PPF to take account of insurance contracts that are taken out by schemes in an individual's name and will align the priority order on scheme wind-up with the PPF provisions. An amendment will require the board to verify notices that are issued by an insolvency practitioner. Further amendments will mean that the costs of the PPF ombudsman are funded from the levy on eligible pension schemes rather than from a grant in aid and will give the Council on Tribunals oversight of appropriate PPF appeals. There will also be some minor technical and consequential amendments to this and other parts of the Bill, and minor amendments to align with tax changes and the European directive on occupational pensions.
Part 3 will introduce new scheme funding requirements that will replace the minimum funding requirement (MFR) for defined benefit pension schemes. As your Lordships will know, the MFR was introduced by the 1995 Act. It was a one-size-fits-all arrangement. With your Lordships' agreement, we will be replacing that with a scheme-specific approach.
386 This is a widely welcomed deregulatory reform, which has been developed through extensive consultation with the pensions industry, employers, the actuarial profession and representatives of consumer groups. As I say, there will be scheme-specific funding, which has been almost universally welcomed.
Under the new arrangements, trustees will be required to ensure that an appropriate funding strategy is in place to provide for the benefits promised by the scheme and to put a recovery plan in place where a valuation shows that there is a shortfall. To help trustees fulfil their new responsibilities, the regulator will issue a code of practice to give them practical guidance on their duties and responsibilities in relation to the funding of their schemes.
§ Baroness Hollis of Heigham
My Lords, no. But whether trustees have behaved prudently and reasonably in the light of that guidance will be taken into account.
Part 4 deals with the Government's Informed Choice agenda. It is the individual's own responsibility, where possible supported by their employer, to determine the level of income in retirement they want over and above the foundation provided by the Government through the basic state pension, state second pension and the pension credit. Many people, in changing jobs through their lives, may end up with several different sources of quite modest pension incomes which they must somehow integrate in order to understand what they can expect to receive in retirement, and whether during their 40s and 50s they need to make good a shortfall that perhaps they had not expected.
The Government are working in partnership with pension providers and employers to offer people combined pension forecasts. This Bill contains reserve powers to make it a statutory requirement for pension providers to offer combined pension forecasts if significant numbers remain outside the voluntary scheme.
In addition to pension forecasts, the Government are developing a retirement planning tool, to be made available on the Internet, to empower people to put tailored information about the financial outlook for their retirement into their own hands. I have seen a model of the tool and I invite noble Lords to look at it themselves at an appropriate time. I think that it will be a very effective and valuable aid.
The Government believe that employers who make little or no contribution to their employees' pensions, and who have low levels of scheme membership, should ensure that their employees have access to the information and advice they need in order to plan for retirement. The Bill includes a clause to introduce this obligation. Its use will be informed by a pilot study to evaluate the most effective ways of delivering pensions information and advice to employees through the workplace. The findings of that study will be published during the summer of 2005.
387 Part 5 applies the simplicity, security and choice agenda to the Pensions Act 1995. This is how we are trying to simplify matters and, as a result, encourage employers to continue to support the defined benefit agenda.
On indexation, it was clear that the degree of inflation protection and hence the costs and liabilities that this imposed on schemes had become disproportionate. In effect, we were forcing everyone providing a pension to buy a high level of inflation insurance, which was becoming so expensive that some providers were choosing to pull out of pension provision altogether. Reduction of the mandatory indexation cap for defined benefit schemes reduces this burden going forward—and we must remember that people are trying to plan for not just two years ahead, but for 20 or 30 years—and help such schemes in paying for the pension protection fund levy.
For defined contribution schemes we have accepted that a reduction in indexation would in fact increase complexity by adding an additional regime to the rules already governing the purchase of annuities. We therefore intend, as a result of guidance given to us, to correct this. If noble Lords are comfortable with this, and I would welcome views on the issue, the Government will take the opportunity further to simplify pension rules by introducing an amendment in Committee to reduce post-1997 indexation requirements for defined contribution schemes altogether. The member will then have the choice of turning their pension pot into an annuity, whether they do or do not buy an inflation-proofed annuity.
The Bill will also drive forward a range of other simplification measures to enable schemes to restructure historic patterns of benefit provision providing suitable protection is offered. The Bill will streamline the requirements on member-nominated trustees, on dispute resolution procedures and reporting arrangements, in particular in relation to late payments, and remove the requirement for schemes to provide additional voluntary contributions. The point of this is that when that provision was introduced in 1987 or 1988, someone could not run a personal pension alongside an occupational pension, and therefore AVCs were offered. Now that it can be done, it is no longer necessary for this to be a mandatory provision by employers.
On member-nominated trustees, we have accepted that our simplified requirements would nevertheless be better balanced by giving pensioners as well as active scheme members a statutory role in the member-nominated trustee processes. We shall introduce an amendment to that effect in Committee.
On security, Part 5 includes provisions to provide TUPE-style protection—transfer of undertakings—of occupational pensions where a transfer of employment takes place, and for employers to consult their employees about major prospective changes to pension entitlement. It also seeks to improve the governance and hence the security of pension schemes 388 through basic requirements to ensure that trustees are properly conversant with and knowledgeable about their powers, responsibilities and duties. I am sure that noble Lords will agree that all these are important safeguards.
Finally, on measures to increase choice in Part 5, I am pleased to draw the attention of noble Lords to Clause 253. This will enable the many employees, in particular young people, who join an employer's pension scheme but leave before their rights have vested—most schemes vest rights only after two years—to choose between a refund of their own contributions in cash, which is all they can do now, or for the first time receive a cash equivalent of all their acquired rights which they can transfer into a pension of their own choosing. That means that they will be able to take with them the virtue of the contracted-out rights and the employer's contribution. The difference between that and the existing system can be 300 per cent. Instead of taking £800, a young person may take £2,500 with them.
Also on choice, which is particularly important for young people moving between jobs, and for women who may have very different pension and work cycles by virtue of their caring responsibilities, I should point out that our intended amendment to remove indexation from defined contribution pensions will provide greater choice to members of such schemes when they come to purchase an annuity.
Part 5 also contains measures to mesh pensions legislation in with the radical simplification of tax rules in the Finance Bill.
Part 6 gives the detail of the new financial assistance scheme that has already been widely welcomed, helping to resolve what I would call the Allied Steel and Wire problem, with which I am sure noble Lords are familiar. The Government have made available £400 million of public money to provide assistance to those people who have lost their pensions due to their defined benefit schemes being wound up underfunded. The Government are talking to industry about the contribution it may wish to make, as well as discussing the best ways of administering the scheme. Further details of the financial assistance scheme, including who will be eligible and the level of assistance to be provided, will be developed through consultation with stakeholders. I shall not be able to give noble Lords much information on those today, but they will include pension scheme trustees, trades unions and key business representatives.
Part 7 deals with the cross-border provisions of the European Union Directive on the Activities and Supervision of Institutions for Occupational Retirement Provision. The directive puts in place regulatory mechanisms to support the operation of pan or cross-European occupational pension schemes. Crucially, it leaves member states free to determine the structure of their pension systems in accordance with the principle of subsidiarity. This is an extremely technical and complex area, and we may need to ensure by amendment that the occupational scheme covering employees in the northern and southern Irish 389 bodies established under the Good Friday agreement is adequately covered. We are still taking advice on this.
Part 8 includes measures that will further support our aim of increasing choice about when people retire and encouraging those who wish to do so to work on into later life.
That brings me to the state pension section of the Bill. The proposals will improve the reward for those who delay claiming their state pension by bringing forward the increase in the rate at which state pension increments build up and removing the current time limits on deferral. These changes were due to come into effect in 2010, but we will be implementing them from April 2005.
We acknowledge that increments to the pension even at this enhanced rate will not suit everyone, in particular those who may feel that they cannot necessarily look forward to a long life in retirement. Some people might prefer to get the gains from deferral straightaway in the form of a lump sum, in particular if they are moving into retirement without much in the way of capital or savings. So we will also introduce an entirely new alternative to the higher weekly pension that comes from deferring the drawing of the state pension in the form of a lump sum payment consisting of the pension given up while deferring, plus a rate of interest. This interest rate, set at 2 per cent above the Bank of England base rate, is, we believe, a very fair return. For example, it would mean that for a couple, he may decide to take increments while she decides to take the lump sum. Such choices will be available.
To conclude, the key issue is whether, in the view of noble Lords and those of industry, employers, pensioners and employees, the Bill answers the right questions as well as getting the answers right. The key question is: will the Bill encourage both employers and employees to invest more in their pensions to protect against poverty or a lack of adequate income in old age?
This leads to further questions. For employees, will the Bill secure greater stability of schemes; greater confidence in the pension promise; greater willingness—this is key—to forgo current income for future needs? It can do that only if there is confidence in the security of their deferral and the sharing of their income over a lifetime with both the scheme specific funding, on the one hand, and the pension protection fund, on the other, in place.
For employers, will the Bill not compromise the ability of the employer to remain solvent as an employer as well as guardian and co-provider of the pension promise?
In the process, has the Bill got the balance right between intervention, regulation and protection from scheme insolvency and the need of the pension regulator to focus on risk and the need for schemes to have greater flexibility in meeting their own commitments?
390 As to cost, is the "who pays/who gains" equation reasonable and equitable between employers and employees; between pensioners, deferred pensioners and employees; and between stakeholders, genders and generations? I believe so. The consultation process suggests that this view is widely shared. I commend the Bill to the House.
§ Moved, That the Bill be now read a second time.—(Baroness Hollis of Heigham.)
§ 12.1 p.m.
§ Lord Higgins
My Lords, this is clearly an important piece of legislation. It is as important as it is complicated, which makes it very important indeed. This is reflected in the list of distinguished and expert speakers today, many of whom have great experience not only in government and ministerial office but in the practical world of pensions operations. The practical application of the Bill is the most important aspect we will need to consider and there have been many representations from outside bodies on the proposals before us today.
In her opening remarks, the Minister referred to the provenance of the Bill in terms of White Papers, Green Papers, more White Papers, outside consultations and so on, which are all listed in the Explanatory Notes. But, despite that, when the Bill came to the House of Commons there were hundreds of amendments. The Engineering Employers Federation has pointed out what happened in the Commons. When the Bill was published it comprised 235 pages with 248 clauses and 12 schedules; when it completed its Committee stage it had grown to 280 pages with 282 clauses and 13 schedules; now the Bill comprises 316 pages, in two volumes, with 310 clauses and 13 schedules—all of this against a background of a programming Motion agreed at the beginning of the proceedings. Although it was later extended to some extent, against that background, the ability of the Opposition—or, indeed, the Commons as a whole—to give the Bill adequate scrutiny has clearly been diminished. It is an extraordinary situation.
I am afraid that yet again—as has been the case on previous pensions Bills—your Lordships' House will have the responsibility of clearing up what the Commons have, to a large extent, been prevented from doing on a Bill which was clearly inadequately presented and drafted in the first place. This gives one grave cause for concern; it has gone from an unfortunate lapse occasionally to become a very nasty habit. We shall need to pay very careful attention to these measures.
We on this side are clearly in favour of protecting the pension rights of individuals. However, we and outside bodies have very serious reservations about the proposals. In opening the debate, the noble Baroness made some general remarks about the present situation—but we are in a pensions crisis. It is, of course, to some extent, the result of the ageing population, the falling stock markets and the annuity rates, which are not divorced from general government or the Chancellor's policies. But, while saying that 391 there had been destabilisation of the final salary pensions promise, the noble Baroness totally failed to mention the most important factor—that is, the effect of the Chancellor's action on advanced corporation tax.
The noble Baroness referred to the savings ratio, which has halved under the present Government. The ABI, for example, estimates that there is now a £27 billion a year saving gap. This will not be significantly affected by the Bill. The dreadful decline that we have seen in the number of defined benefit schemes and the conversion to defined contributions schemes will quite clearly be accelerated rather than retarded by the effects of the Bill.
I shall deal first with the question of the regulator. From my own experience, I feel that OPRA did a remarkably good job. But, at all events, we are going to have a new regulator. However, as has been pointed out by the National Association of Pension Funds, in addition to the regulator those operating pension schemes will have to contend, if that is the right word, with the FSA, three ombudsmen and three government departments.
The new regulator will have draconian powers and the extent to which that could complicate matters for those administering pension schemes may well offset any improvements in the simplification that is likely to result otherwise from the Bill. We are faced with a new regulator and the noble Baroness has suggested that there are yet further amendments to come in regard to some aspects of his work.
Certainly very considerable doubts have been expressed by the CBI and others about the effects of Clauses 35 and 39 and the operation of the anti-avoidance schemes and so on. Clearly we are in favour of effective anti-avoidance schemes but there are dangerous implications in the complex proposals in these clauses.
The regulator will not be able to prevent employers becoming insolvent. There was a great deal of confusion in the other place and, perhaps, to some extent, in the Minister's remarks. We are concerned about two separate risks: one is that the employer is insolvent; the other is that the pension scheme is underfunded. We need to be clear about this aspect and I shall deal with it in detail in a moment. Before doing so, however, I should like to deal very rapidly with some other aspects of the Bill.
The noble Baroness placed great stress on Part 4, which concerns financial planning for retirement. I am fairly sceptical about any forecasts given to individuals as to what they are likely to receive in retirement. Certainly those who very prudently, they thought, invested with Equitable Life will find that what they receive will not turn out to be in line with the forecasts they have been given.
Similarly, there will be a need, for example, to make assumptions about what is happening to the state pension. We on this side of the House have made our position very clear so far as that is concerned. Obviously a forecast would have to take into account 392 the assumptions that one party as against another makes on state pension provision. I am sceptical about these clauses but no doubt we can debate them in detail.
I welcome the scheme's specific proposals and the elimination of MFR, which has not worked effectively, but we need to be very careful as to exactly what method is used to calculate the scheme's specific proposals. Again, we can deal with that.
Thirdly, as to the proposals on LPI and the cap at 2.5 per cent rather than 5 per cent, I doubt whether there is a case for it at all. The reduction in the cap has somehow been presented as a benefit. It is certainly not a benefit as far as pensioners are concerned, but somehow that is the way it has been spun. I find that a very strange situation.
I turn now to the central part of the Bill—the pension protection fund. Many bodies in this House and elsewhere have stressed the moral hazard of this aspect and the danger that perfectly sound schemes may have to pay for the effects of unsound schemes going bust. As I said earlier, it is important to stress that there are two separate risks—the insolvency of the company as against the underfunding of the scheme.
What is proposed is not a guarantee. Indeed, the possible benefits are capped. I shall not go into the details, as the noble Baroness spelt them out. There are varying opinions on whether the level of proposed payout from the fund is too high or too low. The Association of Consulting Actuaries believes it to be too high. This will depend on the level of the levy. At all events, what are being protected are the accrued benefits only, not the pension which employees in a company expected to receive when they retired, before the employer went bust.
I understand that the fund will set the levy. But there is a great concern that this should be risk-based rather than flat-rate. I believe that to be extremely important, because otherwise perfectly sound schemes would pay a premium for something from which they are not at risk. Again, the moral hazard argument arises. The CBI has rightly stressed that this will be an addition to business costs. The National Association of Pension Funds says that this will be a non-democratic body to raise a tax from a constituency which has yet to be defined. This gives us considerable cause for concern.
The noble Baroness was a little confused on this point, but as I understand it, the principles of the levy, apart from the administration costs, are that the risk will need to take into account the risk of the employer going bust and the extent to which particular schemes are underfunded. That will not be a very easy thing to do. I am not clear what the implications would be if the fund suddenly announced that such and such a company was at a high risk of going bust. These are not simple matters.
There are further concerns that the fund will run out of money before it starts. It is significant that the amount that the Government apparently envisage it costing—about £300 million a year—is less than the 393 amount they are proposing to pay out to schemes which have already failed, at a cost of £400 million a year.
As the United States has found out, there are real dangers. The Pension Benefit Guaranty Corporation is at present something like 11 billion dollars in deficit. The Government, having underwritten the position of those, alas, who have found that their pension schemes have already failed recently, are not proposing to underwrite the fund itself. There seems to be a slight inconsistency in those two positions. We are clearly heading for a very difficult transitional period as we switch from the present proposal the Government have suddenly come up with to the longer-term proposals in the Bill.
It seems probable that the fund will become a massive conglomerate of funds which have failed and have become, in the rather euphemistic words of the Bill, eligible funds. If various funds and companies fail, the fund's managers will have the enormous task of dealing with administering a very complex fund particularly with regard to payouts. As I understand it, the payouts with regard to survivor benefits, and so on, will depend on the rules of the scheme which has been taken over. The fund may end up with dozens or even hundreds of these over a period of time, so it will be paying out benefits in a multitude of different ways. Perhaps the noble Baroness will confirm whether that is the case.
As the fund will have to administer the assets it takes over, it surely ought to have the same degree of transparency as exists with an ordinary scheme. That is, it should be obliged to set out its investment principles and the allocation of assets. The latter will need to change with time, but I should have thought that there was a case for putting on the face of the Bill the fund's investment principles—obviously amendable by regulation if necessary. This will be a very complicated matter.
There are many other issues I have not dealt with, such as the position of trustees, in which, having served as chairman of a board of trustees of a fairly large fund for some years, I am extremely interested. Furthermore, the anti-avoidance provisions may be excessively onerous. The Bill does not deal as well as it could with solvent companies which renege on their pension promises, and we will need to consider that as well.
To a large extent, the Bill has become necessary as a result of what has happened to the pensions industry since 1997. I do not think that it would have been necessary to introduce such a Bill in 1997. It clearly is necessary now and I believe that we will have to work very hard to make sure that it is practical and workable. We on this side of the House will do our best to achieve that.
§ 12.17 p.m.
§ Lord Oakeshott of Seagrove Bay
My Lords, today's debate is the overture to an opera of many acts which will inevitably, in light of our starting date, have very long intervals. Day after day in the other place, as the 394 noble Lord, Lord Higgins, pointed out, Members struggled to digest a demanding diet of new government clauses and amendments. I had hoped that we would be spared much more of this from the Government in this House. My noble friend Lady Barker has weighed the Bill carefully. The two volumes and the Explanatory Notes come to 1.48 kilograms—three and a half pounds, in old money. It really is about time the Government tried to cut down on obesity in their Bills.
Some of the proceedings in the other place inevitably smacked more of pre-legislative scrutiny than proper, detailed parliamentary consideration of a complex Bill, offering properly worked-out solutions to Britain's pension crisis. No other issue in Britain combines such economic, political and social significance, and on no other issue, despite the impression the Minister tried to give, is there such widespread acceptance by all sides of industry, independent experts and stakeholders—as new Labour loves to call them—that current government policies have failed and we need a radical change of course.
I declare my interest as a pension fund investment manager for the past 28 years. We have already, in this House, displayed remarkable consensus, apart from the Government, in the debate initiated by the noble Lord, Lord Fowler, in March. Today I intend to focus not on what is wrong in government pensions policy—I only have 15 minutes—but on how this House can improve this well intentioned but muddled Bill. Let me start with a warm and genuine welcome for the good intentions.
We welcome the new proactive pensions regulator—a tiger with teeth, we hope, when things start to go wrong, instead of a box-ticker limited to fining funds for technical infringements or putting returns in a few days late. We welcome, too, the cornerstone of the Bill, the new pension protection fund. Workers and pensioners are, rightly incensed to find their hard-earned contributions effectively stolen from them if companies go bust with deep troughs in their funds, indulge in fancy financial engineering to shuffle off pension liabilities in subsidiaries or move businesses offshore, leaving pension black holes in Britain.
We all agree on the problems, but we on these Benches will do our utmost in the weeks and months ahead to improve and strengthen the Government's proposals for the PPF. We must put far more flesh on the bones of what is really only a skeleton in the Bill. As for the "son of PPF", the £400 million financial assistance scheme, so-called, knocked up between the Prime Minister and the Chancellor of the Exchequer on the back of the note from their Chief Whip warning them that the Government faced imminent defeat in the House of Commons, that is not even a skeleton in this Bill. It is more a twinkle in the Government's eye. They really must give the House a proper account of how that £400 million in the next 20 years will operate, who it will cover and what it will cost, if we are to do our job of scrutiny properly.
395 Britain is split into two nations on pensions: in public pension land, if I can call it that, 5 million employees enjoy full protection against investment risk, inflation risk and insolvency risk from a guarantor safer than the Bank of England—the British Government, with unlimited recourse to the British taxpayer. The other 19 million people at work are barely covered by a ragged patchwork quilt of mean and means-tested state pensions, leaving women worst off, and a fast unravelling web of private pensions covering ever fewer people with ever poorer benefits.
We see a classic case of the Government's schizophrenia on pensions in Schedule 5 of the Bill, setting up the PPF. Paragraph 27 states that the chair and staff of the PPF will be eligible for a Government-backed pension for which the,Board must pay to the Minister for the Civil Service … such sums as he may determine".So private sector schemes struggling to meet their pension commitments and pay their levy to the PPF will also have to sign a whole book of blank cheques to the Minister for the Civil Service to charge whatever he likes for giving government-guaranteed index-linked pensions to the board and staff of the PPF. Other public bodies, such as the FSA, do not grant Civil Service-type pensions, so why should the PPF?
French restaurants used to have a sign outside, saying "Le patron mange ici", but the PPF will not taste its own basic cooking if the Government get their way. The sky is the limit on index-linking on the PPF boardroom menu.
Following the initial period, the Bill provides for a transitional period during which the implementation of the risk-based element of the levy may not be applied. As the PPF is essentially operating as an insurer of the benefits to be provided in the event that a scheme is wound up with an insolvent employer, it is essential—and here I stand shoulder to shoulder with the noble Lord, Lord Higgins—that the levy charged by each scheme reflects properly the risk involved. A well funded scheme supported by a strong employer should not be charged the same levy as a similarly funded scheme with a weak employer.
In fixing PPF premium rates the two key factors are the scheme funding level and the risk of employer insolvency. The real risks to the PPF will be heavily concentrated in schemes where weak employers run underfunded schemes, and the premium paid must reflect that joint risk fairly as soon as possible. Any other policy would be a poll tax on pension funds, penalising responsible employers and prudent trustees.
We will propose, therefore, that, after the initial period, the risk-based element of the levy should contribute at least 80 per cent of the total. The risk-based element is, as set out in the Bill, a function of the scheme position, in particular the shortfall between its assets and liabilities to which the PPF is exposed—the "sum at risk"—and the employer's position—that is, the likelihood of insolvency.
396 The essential ingredient in calculating the sum is that it should be determined on a consistent and objective basis across all schemes. That is not a mere technical matter to be left to the yet-to-be appointed board of the PPF. It is fundamental to fair operation of the scheme, and Parliament must make two things crystal clear in the Bill: when the risk-based levy will be in full operation, and the basic principle that the risk-based levy must be calculated on the joint risk of scheme underfunding and employer insolvency. Parliament is compelling all DB pension funds to pay this levy and Parliament must therefore set its main parameters.
To make it easiest to move rapidly to a mainly risk-based levy, the PPF board should provide the basis for a broad-brush assessment of the sum at risk for each scheme to be introduced at an early stage. We appreciate that it will not be possible for a precise assessment to be made immediately, but there are funding calculations made for all relevant schemes which would provide a starting point. For all its faults, the MFR provides that. That could lead to a much fairer interim solution than the poll tax solution, and would help the transition to the final goal of a scheme-specific risk levy. Responsible employers with properly funded schemes are not prepared to wait until 2008 or 2009 to move to a proper risk-based levy, particularly as there will be an extra element of moral hazard in letting underfunded schemes choose whether to wait for a triennial valuation or do it immediately.
No insurance company would last five minutes if it let its bad risks pay a flat-rate premium and its good risks pay the correct risk-based premium. This nonsense policy for the first few years will not wash for the PPF either. Waiting for the best here really would be the enemy of the good and waiting up to five years for the perfect solution would be grossly unfair in the mean time. The National Association of Pension Funds assures me that an interim approach along the lines that I have outlined would attract the support of most pensions schemes that are exposed to the PPF levy. One of the main problems of the Bill, as the noble Lord, Lord Higgins, said, is that it delegates too much power to the board of the PPF, which is a non-elected public body.
The second key question on the PPF is whether the Government, who appoint the chairman and the board in the first instance, and in practice pull most of the PPF's strings, can wash their hands of all responsibility if the PPF gets into serious trouble. We recognise that there are interim solutions in the Bill, such as suspending indexation. But is anyone seriously suggesting that the Government, having invested so much parliamentary time and political capital in setting up the PPF and going one step further by establishing the financial assistance scheme would stand idly by if the PPF could not meet its 90 per cent and 100 per cent obligations up to a cap, as set out in the Bill? Of course not; so why do they not come clean and admit that they would, if they had to, act as a lender of last resort on a clearly defined and limited basis?
397 There are precedents; the Bill provides one, as the Exchequer is to lend the PPF enough to cover its startup costs before the levy is charged. Well established now for many years is the Pool Re arrangement for insurance of commercial buildings against terrorist attack, whereby the Treasury explicitly stands behind commercial insurance companies and unconditionally guarantees their obligations. I have raised that point before in the House and not had an answer, so can the Minister either explain why the Pool Re principle cannot be applied to the PPF or, alternatively, undertake to procure a proper answer from the Treasury?
Business and industry are also concerned about the complex provisions introduced late in the other place, designed to make directors and investment groups liable for pension fund shortfalls. A fine balance has to be struck, between on the one hand, too lenient a line that enables directors to walk away from their obligations or parent companies to shuffle off their subsidiaries and, on the other hand, too tough a regime that makes company rescues impossible or stifles venture capital investment—a great favour of Gordon Brown's, noble Lords will recall—or management buy-ins or buy-outs at troubled companies. We must protect pensioners properly without making the market in struggling companies seize up. We shall take some convincing that the Bill has got the balance right so far.
My noble friend Lady Barker will cover the vital topics of fair treatment for women, survivors and state pension issues in so far as they feature in the Bill. State pensions are the black hole at its heart. So long as long-term state pension policy in this country is founded—let us be fair to the Minister and the Government, quite openly and honestly—on means-tested benefits for the majority, it really will be gross mis-selling to try to persuade millions of our fellow citizens to save privately for a pension. This Bill is not the place for that battle of principle, which will be fought between the three main parties at the general election, when pensions will be right up there with health, education and the economy at the top of voters' concerns. As we prepare for the long hard slog of work on the Bill, I find it difficult to banish the haunting fear that without radical reform of state pensions we will, like Nero, merely be fiddling while Rome burns.
§ 12.30 p.m.
§ Baroness Dean of Thornton-le-Fylde
My Lords, I very much welcome the Pensions Bill. It is a complex Bill that will take a lot of time in debate. There will probably be quite a number of amendments to it. At the heart of what it must achieve is to bring back some of the confidence in occupational pensions that has been lost over the past few years. It is a long Bill, but anyone involved in pensions knows that there is no such thing as a small, neat, few-clause Bill that deals with pensions. I notice that the noble Lord, Lord Oakeshott of Seagrove Bay, is agreeing with me. After chiding the Government for the 1.4, I think, kilos, it is interesting to listen to the noble Lord chide the Government about the length and complexity of the 398 Bill—and then go on to complain that Part 6 has only one clause and ask for more. That is actually the heart of many of the debates that we will have; we would like simplicity but I do not think that it is possible to have it.
With the exception of fraud and Part 8, the Bill deals mainly with defined benefit schemes. It would be a shame if we lost sight of the fact that the number of people in the UK participating in occupational pension schemes and benefiting from them has grown over the past 20 years. They have been a huge success, with the exception of the past few years. Many people today are enjoying a quality of retirement that my father's generation never enjoyed. There is consensus in the country that we want to rebuild confidence in occupational and personal pension schemes so that people can look forward to retirement with confidence. When I was a union officer, members never queried how their money in their company pension scheme was being handled because they had confidence in it. It was probably misplaced, but they had confidence that the pension scheme would be okay in the end.
The 1995 Bill was brought about by the huge-scale fraud by Robert Maxwell. This Bill has been brought about for a different reason: to try to rebuild confidence. I noticed that the noble Lord, Lord Higgins, rightly received quite an accolade of approval from his own Back Benches when he appeared to lament the shift from defined benefit to defined contribution pension schemes, which cannot be retrieved. I see that the noble Lord is nodding in agreement. Let us cast our minds back to the previous administration. People were paid money to encourage them to take out personal pensions and to pull out of their occupational pensions.
Let us look at the matter in the round. Much of what we have today is a result of the decisions that we all supported in the past; for example, pension holidays for employers. Many of us know of employers who have not paid pension contributions for employees for a number of years. That cannot be right. Under the pension legislation, many employers take surpluses out of the pension scheme. So there are a number of reasons why we are in the state that we are in, among them the shortcomings of the Act.
I welcome the one-clause Part 6 of the Bill. Well, it is currently one clause, but it will probably be several clauses when it leaves this House. It deals with financial assistance for members of certain pension schemes; that is, those people who, today as we debate the Bill, do not know where their retirement income is coming from and are worried about it. I have seen people in the Maxwell scheme who were worried to death about how they were going to make ends meet when they retired.
But there is a bigger impact; they felt complete failures in the eyes of their families. They had promised them that they would be financially okay when they retired and they had to turn to their families for financial support, a situation which we hoped had gone out of the window. I thank the Government for 399 introducing the clause. It may have been hurried and it may not be perfect, but let us hope that it will be near to perfect when it leaves this Chamber. I look forward to the debate on this clause.
I also welcome the creation of a pension regulator. It is a much more pragmatic, flexible and better approach. The noble Lord, Lord Oakeshott, or the noble Lord, Lord Higgins, said that OPRA was not the failure that many people said it was and I pay tribute to the work that OPRA has done. The problem is that the ballgame has changed. The whole environment has changed and OPRA has not kept up with it. So I welcome the new regulator. I also welcome the regulator's ability to take an incremental approach to sanctions on pension schemes.
I know that there is a lot of dissention about the flat payment in the pension protection fund. Like most people, I believe that a substantial part of it should be risk-assessed, but we must start where we start. We must build up a no claims bonus for a company within the scheme. The shorter the flat-rate period can be, the better. Having said that, it must be flat rate from the beginning. Many of us can name pension schemes that, a few years ago, we would have said were solid—I almost said "as the Bank of England"—which ran into serious trouble and have deficits today.
The provision for financial planning for retirement has long been needed. It is welcome. I must declare my bias on this. My noble friend the Minister referred to employers who do not provide pensions or who perhaps have a small take-up in the company. My view is that if we do not get this right, at the end of the day compulsion is the only answer. We must find a way of dealing with this, otherwise compulsion will be forced upon us by the instability of pension schemes.
Among the enormous amount of briefing I have had, the CBI wrote regarding Clauses 233 to 238. It considers that a legal requirement for training is unnecessary and would undermine the willingness of member-nominated trustees to serve. If that statement is true, I agree with it. But I have read the Bill and it does not mention legal qualifications. It refers to "knowledge and understanding". I agree with that requirement and with training. It is absolutely essential, but an insufficient number of trustees receive it. Indeed, trustees worth their salt would insist on having it. I would not be a trustee without it. But if someone is going to be told that he must have legally assessed qualifications, then employees will not be willing to come forward. Will the Minister clarify that?
Part 8 deals with state pensions. There are changes that must be welcomed in view of the changing world of work; for example, people having to defer retirement. The ability to defer pension and be encouraged to do so by a small bonus is most welcome. People can then convert a lump sum of their pension.
However, I am disappointed that the Bill does not recognise the role of part-timers. They form a growing proportion of the labour market, yet the Bill does not take that into account. More significantly, a number of people hold several jobs and their cumulative income 400 would be above the lower limit, yet they still cannot be part of a pension scheme. I want us to examine that issue in Committee. It particularly affects women but, with the changing nature of work, it will affect an increasing number of men, too.
The Bill does not mention annuities. Noble Lords who have heard me speak in other debates about pensions will know that I do not accept the Government's current policy. If we do not address the issue of annuities, it will revisit us. It is already an issue. It is an insufficient argument to say that it does not affect many people and that the only people it affects are those with big pots of money in their personal pension schemes. That is changing because of the change from defined benefit pension schemes. The annuities issue could have had a place in the Bill. It does not have one, which is a great disappointment and I think that the Government will live to regret it.
I was a sorry case as I was always interested in pensions even when I was a young woman. Years ago, a glazed look would come over the eyes of members I was proud to represent, but not today. Today, people know that their pension is, perhaps after their home, the biggest investment in their life. More importantly, if one cannot afford one's home, one can downgrade. If something goes wrong with one's pension, it affects the rest of one's life after retirement. As my noble friend the Minister said, we are living longer and are therefore more dependent on the assuredness that our pension will be there when we need it.
I therefore welcome the Bill and the forthcoming debate. I rather suspect that the Minister is in for a hard time on some aspects of it. I just hope that the House is able to give it a good passage and sign off on a measure that we can all ultimately accept.
§ 12.40 p.m.
§ Lord Fowler
My Lords, it is a great pleasure to follow the noble Baroness, who made an important speech. It will come as no surprise to her to hear that I strongly agreed with her final comments on annuities.
On a day when there are European elections and important local elections—and we very probably stand on the brink of a major electoral scandal—I suppose that it is fanciful to think that our deliberations on pensions are going to get many column inches in the press tomorrow. That is a pity because more and more people are understanding the scale of the pensions problems that we face in this country. I think that that is how the Bill should be judged. The Minister touched on that point but then moved away from it rather rapidly. We will come to the Committee stage, but the question now—at Second Reading, on the issue of principle—is how the Bill faces up to the problems that we unquestionably face.
No one can complain that the Bill is too short. It has more than 300 pages of closely printed script and we are still counting. Judging from what the Minister said, we are going to be counting quite substantially. It would be unworthy of me to say that I can find nothing in the Bill with which to agree. In Clause 283, on 401 page 213, I found a set of proposals that I welcome. As it happens, they deal not with paying the state pension but with deferring it.
Many of us have long argued for flexibility in retirement—I advocated that in my Green Paper on pensions back in 1985—and a decade of retirement between 60 and 70. However, making that a reality involves creating some incentive to work on. I think we can agree that the present incentive is not great. The figures which I have indicate that currently only 2 per cent of pensioners defer their pension and the average length of deferral is two years. Some research suggests that many of those who defer do so by accident, not as a deliberate policy.
I therefore welcome the increase in increments and the concept of the lump sum that one can get in occupational pension schemes. In Committee, I think that we will have to examine whether that incentive is enough and whether it could not be a tax-free lump sum. Even now one calculation suggests that a retired man will have to live to 81 to find that beneficial. However, that point is for Committee. Nevertheless, I welcome the direction of policy. I also welcome the movement on the ASW type of situation where pension holders were deprived of their rightful expectations. That was the theme of the debate we had on 24 March which I led and where I think there were calls from round the Chamber for a change in that policy.
I can therefore certainly welcome parts of the Bill. However, that is not actually the acid test. The acid test is basically this. When the Government introduced the Bill, they said it was designed to restore confidence, to encourage employers to increase their occupational provision and to encourage individuals to increase their private pension saving. What we need to do at Second Reading is to measure whether they have succeeded in doing that. My concern, basically, is that they have not.
The context of the Bill is, as my noble friend Lord Higgins said, the current pensions crisis. However one measures the position, no one can be satisfied with what has happened over the past six or seven years to occupational pensions; it has been a dire period. We have seen public confidence in pensions fall. We have seen the number of people in private pension schemes reduce. We have seen an increase in the number of pension schemes wound up and a steep rise in the number of final salary schemes closed to new entrants. According to the Association of British Insurers, 36 per cent of the total working population are not saving enough for their retirement, and of that 36 per cent, four-fifths are not saving anything at all.
So the real challenge is to face the prospect that under present policies hundreds and thousands of people will face a bleak and money-pinching retirement. Surely that is something that on all sides of the House we wish to avoid.
I am not suggesting to the Minister that everything that has gone wrong can be blamed on the Government. That would be absurd. They cannot be blamed for the fall in the world stock market. But I 402 think it disingenuous of the Minister to miss out the fact that the £5 billion a year pension tax has had an impact on pension provision in this country; it clearly has. It was introduced at exactly the wrong time. The public have understood it, but when encouragement and practical incentives were needed they were given precisely the wrong thing.
Probably the most important measure the Government are introducing in the Bill is the pension protection fund. Although I say that they are introducing it, it is being paid for by the pension schemes. So although I see the force of what is being proposed, there seems to be a range of practical issues and practical questions about how it will work. The noble Lord, Lord Oakeshott, referred to a range of those.
There is a difficult balance. We all want to protect the pension holder, but we do not want to add to the cost of the schemes to such an extent that it acts as a deterrent for new schemes being formed and a further encouragement for the closure of existing schemes. We do not want unfairly to penalise good, well funded schemes, and we have to be clear what kind of guarantee we are giving to pension holders. At the moment, I think that the public understand—because this is the way that it has been spun—that there is an absolute guarantee here. But it is not an absolute guarantee. The only way that the scheme could be that is for the Government to stand behind it.
I say in parenthesis—and in a sense I echo the remarks of the noble Lord, Lord Oakeshott—that I really do wonder whether, in the real world, any government would be able to maintain a position in which they were not standing behind a scheme of this kind. So we will need to examine that carefully in Committee.
Basically, I am saying that irrespective of any examination in Committee, this measure is not going to have a great impact on persuading men and women to save more for their retirement. It is going to have little if any impact on persuading those without any pension to start saving. Yet those are the urgent issues, and those are the issues that have been ignored in the Bill. My own belief is that at least two measures could be taken.
The first—mentioned by the noble Baroness, Lady Dean—is to end the rule that anyone with a personal pension must take an annuity at the age of 75. I think annuity rates have halved since 1990. The position has changed. The public know and understand that the position has changed. This age rule, in my view, acts as a great disincentive to saving when we should be about providing incentives. I will not delay the House with all the arguments on this, but I should like to give notice that I certainly wish to return to the issue in Committee.
My second proposal is more controversial, although I was encouraged in our last debate by the support I received from two of my noble friends. I am coming firmly to the view that the only way that we can increase pension saving is if we have some form of compulsory private scheme to which employers and 403 employees are required to contribute. When I mentioned that in our March debate, the Minister suggested, rather unkindly I thought, that we never thought anything along those lines in government. As it happens that is not true. My 1985 Green Paper, approved by the whole of the Cabinet, proposed just that, along with the abolition of the state earnings related pension scheme—which the Government have now done.
In other words, my proposition was that the state should be responsible for paying as good a basic state pension as possible, and the private sector should provide the second pension. I regret that that was considered too radical at the time on the part of most members of my party and certainly on the part of the party opposite. However, in my view it is the way forward because the sad fact is that even when companies provide defined contribution schemes, often employees do not take them up, even when there is a matching contribution from the employer on offer.
I know that arguments will be put against compulsory pension contributions, but we should consider the alternative. The alternative is that not only will many, many people remain uncovered, but state provision will go up, not down. I remind the House that the aim of both parties is that that should not happen. Back in 1998 the Government set out their first pensions Green Paper. They said then:State spending will increase but income from private pensions will increase even more as stakeholder pension schemes become established and occupational pension schemes are strengthened and supported".They went on to say that the state share, therefore, would go down and private pension provision would go up. I say to the Government that there is absolutely no sign whatever of that happening; in fact, quite the opposite is taking place. Stakeholder pensions have not been a success and occupational pension schemes have not been strengthened. On the present policies of this Government I do not believe that they will achieve 60 per cent of pension income from private schemes.
Finally, there is basically a pensions double whammy. On one side there is inadequate income for retired people; on the other side there is a diminution in personal saving and an increase in state spending. It is an unhappy picture but that is the pensions crisis that we face in this country. Although this Bill does one or two useful things, frankly I do not believe that it remotely matches up to the size of the challenge that this country faces.
§ 12.52 p.m.
§ Baroness Greengross
My Lords, I, too, welcome the Bill. I share many of the reservations outlined by noble Lords but the Bill is very welcome, especially the measures that should help, as the noble Baroness, Lady Dean, said, to restore confidence in our occupational pension schemes, of which for many years we in this country have been very proud, and which, as we all know, have suffered very much, particularly over the past few years.
404 Indeed, some of the problems that are now faced by today's pensioners result from the practice on the part of some employers at the time of large pension fund surpluses to use those surpluses to get rid of older workers by paying them off. Now those workers are suffering because the money was not enough to ensure a decent level of income in retirement. Therefore, many of the problems that older people face today are the result of problems that arose in the past which were not adequately dealt with.
I welcome the pension protection fund and a more proactive regulator. Those measures are long overdue. Indeed, when I was still involved with Age Concern in 1995, when the Pensions Bill was before Parliament, the former chair of the all-party parliamentary group on pensioners, the Tory MP, Sir Andrew Bowden, lobbied his own party very hard indeed to strengthen pension fund boards to make them more independent and more representative. This is a matter about which all parties in the House feel strongly. I welcome the pension protection fund and I welcome very much the proposed compensation scheme for those affected by occupational scheme collapses although, as has rightly been said, much detail needs to be clarified.
I stated in a Written Question last March that we still have very little information on people affected by scheme collapses. I hope that we shall have more such information in future. I suggest that the available money should be skewed more towards people who are closest to retirement along the lines set out in my Written Question. Like others who have eloquently stated the position, I am very concerned by the moral hazard question; that is, badly run companies deliberately under funding their pension schemes knowing that the pension protection fund will step in. There is a risk that that could happen.
I believe that the noble Lord, Lord Fowler, hinted at the plight of those who work in a company that is taken over by another company which may replace a reasonably good scheme with one that is not of the same standard. Many such details will need to be examined carefully, particularly anything that could derail the pension protection fund and harm good schemes, whether direct contribution or direct benefit schemes. That forms part of the detailed analysis to which we shall need to subject the Bill in Committee.
Like others I, too, should have liked to see more provisions with regard to annuities. I share the view of the noble Baroness, Lady Dean, that that matter desperately needs to be addressed. I have felt for many years that some kind of compulsory saving is necessary and needs to be introduced in this country. I do not think there is any other way of ensuring that people save sufficient money for their retirement, particularly given people's greater longevity and the need to plan for a much longer period of life, perhaps not in full-time employment as we know it but with a totally new work pattern.
405 I should have liked to see more provision with regard to reform of the state pension to make any contributions that are made count, for example, by abolishing the 25 per cent rule. I should have liked to see more proposals to help older women although the Government's commitment to look at that matter in more detail is very welcome. Despite the measures that have been outlined on more flexibility regarding the lump sum at retirement, which will be of help, I share many of the reservations expressed by the noble Baroness, Lady Dean, in that regard. We really do need to look seriously at certain issues regarding women.
I welcome the greater incentives to defer the state pension. In the future I should like to see much more radical measures with regard to state pensions so that any contributions that are made count. I have much sympathy with those who call for a really radical look at the way in which we organise state pensions and benefits.
Some of those points have been made today. We need an all-party consensus on the matter. As a long-term policy will need to be adopted, we shall probably need a Royal Commission, or something like it—although I am never very fond of advocating such a step—to consider pensions across the board. We need to consider the issue of pensions that are based on residency or citizenship and to see whether we cannot tackle once and for all the uprating issue for overseas pensioners—people who work here all their lives and then join their families overseas on retirement. Many of those pensioners feel very aggrieved by their situation. Perhaps it is only by considering pensions overall that we can meet the needs of so many of our citizens now and in the future.
§ 12.59 p.m.
§ Lord Freeman
My Lords, I declare an interest as chairman of the trustees of a large industrial defined benefit scheme.
I should like to begin by thanking the Minister's officials in the Department for Work and Pensions and in the Minister's own office for the very helpful way in which they have begun to brief noble Lords. It is very refreshing and much to be welcomed when that happens. I think that Sir Winston Churchill once said—or is thought to have said—that it was important for politicians not to let the facts get in the way of decisions. I think that it is important that we have the facts, and we look to the officials to maintain the excellent start that they have made.
I shall not repeat anything that has been said by my noble friends Lord Higgins and Lord Fowler, and I agree very much with what they said. However, I shall concentrate briefly on four points of principle that, so far, either have not been raised or need underlining further. First, there is the regulator. I think that your Lordships will agree that the regulator must be well informed, must make speedy decisions and be efficient. I agree with what the noble Baroness, Lady Dean of Thornton-le-Fylde, said about the work done by the Occupational Pensions Regulatory Authority. 406 It was limited by the original legislation but has helped measurably to keep trustees and pension schemes on their toes. However, the new regulator is to be welcomed. It will be proactive and will be involved not in the day-to-day minutiae of schemes but in considering risk and protecting pensioners.
Under the Bill, the regulator will have important powers. For example, the regulator will, presumably, have prime responsibility for drawing up codes of practice for the training of trustees; for the investment management of the funds, or at least the policy for investment; and for the assessment of employer/company risk and employer solvency. I am not convinced that, in this complex field, sufficient thought has been given to the advice that would be available to the regulator. I hope that the Minister will comment briefly on that; I shall certainly table amendments in Committee. The regulator should have a small advisory committee that is unpaid but has the specific job, based on advice from the actuarial profession, employers, trade unions and, certainly, the trustees, of keeping in regular contact with the regulator and advise on some of the complexities that the regulator will face. I also hope that cross-reference will be made to the Financial Reporting Council and to the new powers under the Companies (Audit, Investigations and Community Enterprise) Bill, which is proceeding slowly through your Lordships' House, so that proper advice on the solvency of employers can be given.
I am disappointed that the Better Regulation Task Force was consulted only informally in the preparation of the Bill. In future, it should be asked to give a formal opinion at the draft stage of a Bill, as it is sometimes too late to make amendments, once the Bill begins its progress through Parliament.
The second point that I wish to raise concerns the Government's belief—I think that it is wrong—that the proposals are cost-neutral. The recommendations and observations of the regulatory impact assessment, to which I am sure we will return in Committee, are wrong. The Minister has said that the costs, which are certain for schemes and, therefore, for the sponsoring employers who underwrite defined benefit schemes, are of the order of £300 million per annum. The Government have said that there are two off-setting savings, but they are based on false or misleading assumptions. I shall not go into detail, as there is not time, but there are two key components of those savings.
First, the Government say that the reduction of the inflation indexation limit—the cap—from 5 per cent to 2.5 per cent will yield savings of £370 million per annum. I cannot find the basis of that calculation in the impact assessment, but there is an inherent contradiction in it. The Chancellor of the Exchequer has set his inflation target at about 2.5 per cent, and I wonder whether the Minister has spoken to the Chancellor. If the cap is reduced from 5 per cent to the point at which the Government believe that inflation will be, there is no saving. At 2.5 per cent, the cap will be at the assumed inflation rate.
407 I also believe that the other assumption is wrong. The argument is that the abolition of the minimum funding requirement will yield savings of £100 million per annum. Again, the argument is a little obscure, but it is based on the assumption that trustees will move assets from gilts and fixed-income securities into equities. Asset allocation has not been based on the impact of the minimum funding requirement; it is based on a number of actuarial assumptions, but not the MFR.
I am sure that we will come back to those issues in Committee. It is not a cost-neutral initiative. I agree with my noble friend Lord Fowler that, because there will be an extra burden of £300 million per annum, it will mean a further shift away from defined benefit schemes or, at least, the truncation of the benefits of being in a defined benefit scheme—for example, accrual rates and so on.
Thirdly, there is the issue of the information and advice given to employees. I rather liked the draft retirement planner that the Minister's office provided. I am sure that we will examine it in Committee. It is a new web-based mechanism by which individuals can check what their anticipated retirement pension will be 10, 20 or 30 years ahead. However, I agree with the noble Baronesses, Lady Dean of Thornton-le-Fylde and Lady Greengross, and my noble friend Lord Fowler that some form of compulsion will be required sooner or later. It is one thing to provide help and advice; it is another to ensure that people in their 30s and 40s provide enough for an expected comfortable retirement such as that of their father or even their grandfathers. If we do not do something soon, we will look back in 10 years' time and regret not introducing legislation. To use the phrase used by the noble Lord, Lord Oakeshott of Seagrove Bay, Rome is burning now: total provision by employers and employees is falling fairly significantly. That will have a dramatic effect on the pensions of our children and of the younger generation in 20 or 30 years' time.
My final point concerns the funding of the pension protection fund. So far, the Government have worked on the assumption that it is the responsibility of the schemes and, therefore, of the employer to fund the schemes. My noble friend Lord Higgins raised an important issue when he said that that was inconsistent with the position for the pre-PPF assistance scheme, with £400 million being provided by the Government over a number of years. If the Government have accepted that some social responsibility to do something about those who have lost their pension rests on their shoulders, why should not that also imply some form of contribution to the PPF by the Chancellor, either as a lender or provider of last resort or by sharing in some proportion in the total cost?
I look forward to Committee. I hope that the Committee stage will be taken on the Floor of the House, not consigned elsewhere. It is an important issue—one of the most important facing Parliament—and the arguments should be exposed on the Floor of the House.
§ 1.9 p.m.
§ Baroness Turner of Camden
My Lords, I too welcome the Bill. It is an immense document and comes just when we had hoped that pension provision and the legislation on which it is based would be simplified. However, legislation that amends existing law and builds on previous structures is bound to be complex.
There is to be a new regulator. That must be the third since Barbara Castle introduced SERPS. For 17 years, I was a member of the Occupational Pensions Board, which was followed by OPRA. The new regulator will have more powers than either of its predecessors. I well remember the Maxwell scandal, which occurred when I was a member of the OPB. We were criticised for that, but in fact we had no power to deal with it. Now OPRA has not had the power to prevent the catastrophe that has hit many employees who were members of schemes where the employer has become insolvent. The new regulator plus the other provisions in the Bill are meant to deal with that.
I am a fan of final salary pension schemes; they were one of the successes of the previous century. Employees fortunate enough to have been members of such schemes have in the main been able to enjoy a relatively comfortable retirement. Now it looks as though the era of defined benefit schemes may be coming to an end, at least in the private sector. Many employers are closing them to new entrants and offering, if anything at all, membership of defined contribution (money purchase) schemes, where the employee bears the risk himself or herself and has no certainty about the eventual outcome. Employers give a number of reasons for that change of policy—mainly, of course, financial.
During the good days of high investment returns, many employers took contribution holidays. Although there were protests at the time, auditors assured us that benefits were safe. Then there was Treasury action over ACT, which led to large sums being removed from pension funds to the benefit of the Inland Revenue. Finally, low and uncertain investment returns. Unions claim, with some justice, that employers who benefited from high investment returns and took contribution holidays ought now to be prepared to maintain final salary schemes.
Meanwhile, we have had the ASW scandal, with more than 60,000 employees from that company and others facing an impoverished future, losing what they have contributed. Something clearly had to be done about that; hence this Bill, one of the main provisions of which is the establishment of the pension protection fund (PPF). The fund has been widely supported, not only by unions but also by many employers. The Engineering Employers' Federation, for example, says that it should provide greater security for pension scheme members and could help to rebuild employee confidence in occupational schemes. It would help, I believe, to prevent a further decline in the number of defined benefit schemes. A board will be responsible for setting the funding levy, overseeing investment strategy and running the PPF itself. The scheme will 409 cover defined benefit and hybrid schemes, where the employer is insolvent and there is not enough in the fund to buy the PPF level of benefits.
There has been some criticism, some of which was voiced today, but, generally speaking, the whole concept has met with approval. No doubt, we will have the opportunity in Committee to discuss some of the criticisms, some of which are valid.
Most concern has been voiced, however, about the fact that the original Bill had no provision for retrospection, so employees of ASW and other firms still had no redress. The Government have now indicated that a scheme will be introduced to provide some compensation for those employees. They propose that £400 million be provided over 20 years, but members of the Pensions Action Group believe that that is not enough, since it would produce pensions of just £6 a week for the 60,000 workers. The campaign for the scheme has been supported by the TUC, the general-secretary of which has welcomed the decision to set up the fund. But he says that the task is now to ensure that each individual who has lost out gets a fair deal from the funds available.
There are a number of issues arising from other parts of the Bill, to which my noble friend the Minister will, I am sure, be able to respond. The new regulator has very wide powers. There will also be a tribunal to deal with complaints. It will inherit some of OPRA's powers but have some objectives that OPRA did not have. The key one is to reduce the risk of claims on the PPF. It is also to provide education, advice and guidance, and must take account of the interests of members. It will publish codes of practice. There will be an ombudsman and a deputy ombudsman. I would be interested to know how that new apparatus relates to what currently exists.
As the Minister knows, I have for many years been a member of the council of the Occupational Pensions Advisory Service (OPAS). It was established originally as a charity, with a nationwide network of advisers able to deal with pension queries and complaints. The advisers were, and still are, all volunteers but professionally qualified. It has been very successful and eventually received government funding, which came to it via the OPB and then via OPRA. It provides a valuable sifting service before cases go to the ombudsman. I believe that there have been discussions with OPAS officials about its future, and I would welcome whatever the Minister can tell us about that today.
Then there is the matter of pension fund trustees. I understand that the Bill provides for at least one third to be member-nominated. Attempts have been made in the other place to increase the proportion to one half; I am very sorry that that was not successful. I have always been very much in favour of member-nominated trustees. In my experience, many become very committed to their schemes. They have the advantage also that they know their companies well. Unions have for many years provided training for trustees. There is now a new requirement in the Bill for trustees to be conversant with, or have knowledge and 410 understanding of, a very wide range of issues. The regulator is expected to produce a code of practice. No penalties are specified but the regulator apparently has power to create them.
I am a little concerned, however, that if there is too much regulation—too many requirements imposed on trustees—people who might be suitable might not be willing to come forward. Many of the problems encountered recently in occupational pension provision have been the fault not of lay trustees but of company managements. It would be a great pity if lay trustees felt they were being discouraged and became unwilling to serve in that capacity. There is a trustees' code of practice group, consisting of lay trustees of a number of large schemes, which has devised a code of practice that has had government support. It would be a good idea if such people could be consulted; I am sure that it would be helpful to all.
Another aspect that concerns me, which has been mentioned on several occasions in debate, is the proposal to reduce the cost-of-living cap, which currently stands at 5 per cent per annum. For the future, it is suggested, it will be reduced to 2.5 per cent. It is true that we have lived through a period of low inflation, but we cannot be certain that that will continue. If it does not, and 2.5 per cent is the maximum that future pensioners can expect, many will face a substantial lowering of standards. Since we are all apparently living longer, some elderly pensioners will be liable to lose out. It is not necessary, and, if it is a way of off-setting the costs of the PPF, it is not acceptable either. I urge the Government to think again about that.
Then there is the matter of what happens in mergers and takeovers. Employees currently have a form of protection under what have become known as the TUPE regulations. The Government quite rightly want to ensure that protection exists in relation to pensions. However, the protection on offer is of a minimum level, with the employee entitled to either a stakeholder or other form of money purchase pension. A member of a final salary scheme is therefore likely to lose out quite substantially. It is necessary that at least comparable provision should be made available in such cases.
The Bill concentrates on defined benefit—that is to say, final salary—schemes, and rightly so, since the main objective is the establishment of the PPF. However, it might be appropriate to say something about stakeholder pensions. I am sure that the Government would agree that take-up has been disappointing. That is because all the employer has to do is to provide access for a provider of such a scheme. No contribution is necessary from the employer. Take-up improves dramatically when the employer makes a contribution. Compulsion is often mentioned as a way of ensuring that individuals make provision for themselves—the noble Lord, Lord Freeman, has just mentioned that. Is it not about time that we started looking at a measure of compulsion as far as employers are concerned, and perhaps not only about stakeholder provision but across the board? If there is 411 widespread concern about retirement provision, why should not employers be asked to bear at least a part of the burden?
The issue of compulsion is being raised by the unions; after all, pensions have always been regarded as deferred pay. It is not uncommon for employees to stay with a company, even when they could get better pay elsewhere, if the employer provides a good pension scheme.
A good pension structure must be built on good state provision. All that many people can expect is what the state pension scheme provides. The value of the basic state pension has declined, and under present policies it is not likely to increase. I understand that some people have been able to benefit from the pension credit; that is to be welcomed. But it depends on a system of means testing, which means that some people who are entitled to it will simply not get it. Moreover, means-tested benefits are expensive to administer. I still believe, as do many others, that the foundation of pension provision should be a good basic state pension linked to the wages index.
The tax system can be utilised to make sure that if there is what the Government would regard as overprovision because of additional income from other sources, appropriate deductions are made. I do not expect the Minister to agree with me, but she will surely know that what I have just enunciated is a widely held view. Meanwhile, there is much to welcome in the Bill; no doubt we shall have the opportunity to explore it further in Committee.
§ 1.20 p.m.
§ Viscount Trenchard
My Lords, I am grateful to the Minister for introducing the debate. I greatly appreciated the briefing pack provided by her officials, as did my noble friend Lord Freeman.
As this is the first time that I have spoken since the passage of the House of Lords Act four and a half years ago, perhaps I may also say how delighted and honoured I am to have received a new Writ of Summons.
§ Baroness Hollis of Heigham
My Lords, I ask your Lordships a question: is one allowed to be a maiden twice over?
§ Viscount Trenchard
My Lords, I also inquired whether I would be required to make a second maiden speech, but happily was assured that I am the same person who was here before. Although the Writ of Summons that I have received is identical to the Writ of Summons that I was previously in receipt of, I am told that this one now empowers me to attend the House, while the power of my previous Writ was somehow terminated. Anyway, I am delighted and honoured to be back here. I hope to be able to use my experience in financial services to make a contribution to the business of the House.
Although I am currently retained as a consultant by Prudential Financial Incorporated of the United States, I must confess that I have not worked in the 412 pensions area. My understanding of pension schemes and their regulation has developed somewhat from rather a low base over the past few days, but I still have a lot to learn.
I should also declare an interest as a member of two defined benefit pension schemes, both operated by companies that have since been taken over by foreign financial institutions. Although I do not believe that the frequency of communications I receive from the trustees or from the administrators of those pension funds is adequate or acceptable, I feel fortunate and happy that, as far as I am aware, neither has commenced a winding-up process—or at least neither has commenced a winding-up process prior to the cut-off date of 11 June 2003 announced in another place by Mr Andrew Smith as part of the long overdue regulation making it mandatory for solvent employers to make up any deficiency in or underfunding of their pension schemes.
I was surprised to learn that solvent employers had an option to honour their pension promises or not to do so. I had assumed that the risk of not receiving an expected pension from a defined benefit scheme depended on the solvency of the employer or its successor, not on the willingness of the employer to stand by its promises.
As has been explained, the Bill provides for a PPF to be set up, which is intended, inter alia, to provide compensation to members of underfunded defined benefit pension schemes maintained by insolvent companies. The Government have also acknowledged that, for some, the PPF has come too late and have therefore decided to make available £400 million of public money to provide assistance over 20 years to members of underfunded pension schemes being wound up.
The Government have, somewhat optimistically in my view, said that they will be talking to industry about what level of contribution companies may wish to make to the scheme. However, it is not at all clear which pension schemes may qualify for inclusion in the financial assistance scheme and to what extent members may benefit. Would it not also seem illogical that assistance under the scheme should be restricted to those operated by insolvent companies? That would surely be unfair and discriminatory unless the Government separately resolve to require solvent companies whose schemes are not yet wound up, but which were not caught by the 11 June 2003 cut-off date, to make good the deficit and buy out the accrued benefits for their members in full. That would not be retrospective legislation; it would simply be requiring companies to honour their obligations to their employees and not merely to the level required by the minimum funding requirement. I do not believe that companies would have any legitimate grievance should the Government make such a move.
The noble Baroness, Lady Dean, reminded the House that many companies took pensions holidays for many years. Some of those companies got it wrong and it is not unreasonable that they should now make good their mistakes.
413 My honourable friend David Willetts rightly questioned in another place on 19 May whether £400 million would be enough. I feel rather in agreement with Frank Field who said that of course £400 million is not enough. Mr Field also questioned why the taxpayer should have to fund this when a levy could be applied to the £13 billion pool of unclaimed assets, some of which have been lying idle for 100 years or more. I also agree with him that it is unrealistic to expect companies, already robbed of £5 billion a year in extra taxation through the abolition of the advanced corporation tax credits, voluntarily to offer contributions to keep another company's scheme going.
Perhaps it would be wise to consider further how serious is the risk that the provision of public money, and money eventually made available through levies raised by the pension protection fund, will in effect encourage companies to pay less attention than they should to their obligations to ensure that their schemes are fully funded and capable of meeting their pension obligations in full. Further, the £25,000 cap will greatly reduce the relevance of the PPF to many senior managers who will have influence in determining whether or not to retain a company's scheme.
It appears that there is very little in the Bill to encourage increased savings and improved funding of pensions schemes. I would hope the Government will consider the introduction of a pension contribution tax credit, such as has been proposed by the Association of British Insurers. Such a measure would undoubtedly encourage employers to make pension contributions. That is the key to ensuring a higher level of contributions by employers themselves.
As my noble friend Lord Higgins rightly explained, a great deal is still unclear as to how the PPF will operate. Will it contract out its assets under management to fund managers, or will it recruit experienced individuals? How will it select appropriate fund managers? The funding arrangements for the PPF also clearly need scrutiny. There is no clear timetable for the switch from a scheme-based levy to a risk-based levy. Especially in the initial period, companies with well funded schemes will greatly resent being forced to subsidise companies with poorly funded schemes. That will surely encourage more companies to wind up their defined benefit schemes. The Minister said that at least 50 per cent of schemes will eventually be risk-based, but if a substantial number remains scheme-based this problem will surely still remain.
There are many other matters covered by the Bill which need improvement and clarification. Other noble Lords have mentioned many of those. I hope that the noble Baroness and her colleagues in government will have an open mind and that your Lordships' House will ensure that a much better and more effective Bill returns to another place than the Bill which has arrived here.
§ 1.29 p.m.
§ Lord MacGregor of Pulham Market
My Lords, I declare two interests, one as a non-executive director of a life and pension company, and the other as a trustee of a pension fund. Like my noble friends Lord Higgins and Lord Fowler, I would like to start briefly with what is not in the Bill. I must reinforce that it does not deal with the biggest issues facing us on pensions. We know from earlier debates that there has been a huge decline since 1997 in Britain's present, and especially prospective, pension position, stretching out for years to come. We have to accept that the stampede away from direct benefit schemes will continue. Indeed, some of the measures in the Bill, however well intentioned, will accelerate that.
There is nothing on the two key issues. There are no proposals at all to encourage more people to save and to encourage employers to provide better funded DC schemes more widely; I think that the noble Lord, Lord Fowler, had me in mind as one of those in the previous debate who was moving to the position of compulsion for occupational pension schemes. Nor is there anything about the black hole of underfunding in so many current occupational pension fund schemes. The Minister does not like the fact of the £5 billion ACT to be constantly reiterated, and she does not think that it has anything to do with where we are now. However, the plain fact is that, every year, £5 billion that previously went into pension funds is not now doing so. That is a major contribution to the underfunding. I hope that we will keep coming back to that.
I do not want to make too much of the point about the massive size of the Bill. If one of the Government's key objectives for pensions is simplification, they have a very funny way of going about it. Many outside who have to deal with the Bill will feel that, given its length, a huge number of regulations will follow. It will be very important to give sufficient time for consultation with all the outside interests. I also hope that there will be sufficient time for this House to look at those regulations in due course.
Outside consultation on the Bill has been made more difficult by the many late additions in the other place, and I want to reiterate the point made by the noble Lord, Lord Oakeshott, about Clauses 35 to 46. They have wide implications with which many employers outside the pension industry, and probably within it, simply have not caught up yet. We will have to spend a good deal of time looking at that in Committee. Even given that many of the main provisions are welcomed and supported in principle, there is a responsibility on this House to try to improve the Bill and probe on many points of concern. I too express my thanks especially to the Minister, but also to her officials, for the way in which she has been so open about the details so far. That will greatly help in our discussions in Committee.
I welcome the pensions regulator in principle, and I also welcome very strongly the independent pensions regulator tribunal. The Select Committee of which I have been a member stressed the need for a tribunal in 415 its recent report, and I am delighted to see it in the Bill. Will the appeal to the tribunal be only on fact or law? Will it also be on the substance of the case and the decision of the determination panel, as our Select Committee certainly thought that it ought to be?
There are a number of issues that we will obviously want to explore in Committee, many of which have been raised already in relation to the regulator. However, I shall mention one or two. I am very conscious that, increasingly on mergers or acquisitions, pensions are a major issue in a merger itself—not only as protection for the employees, but for much wider reasons. Will the regulator be able to examine or intervene on pension issues while such negotiations are going through?
I come back to Clauses 35 to 46, and especially Clause 39. As I read them at the moment—I have not had time to study them fully—I have several concerns. One is the danger that, as often in things that we do, we will discourage good people from taking on the role of directors or senior managers if the responsibilities, liabilities and penalties become too great. I echo the point made by the noble Baroness, Lady Turner. There is a similar problem in relation to trustees of pension funds. The pressures, requirements and potential liabilities are increasing greatly, as is the need for knowledge and training. I think that we have to be very conscious of that. One conclusion is that trustees will have to be paid, or we will not attract them in exactly the way in which an earlier Mynor's report recommended.
Another area in Clauses 35 to 46 is the risk of the discouragement of merger and acquisition activity, venture capital operations, rescue and restructuring companies, and inward investment. We will have to look very carefully at whether Clauses 35 to 46 inadvertently have much bigger and widespread implications for industry as a whole. I am delighted and welcome the fact that the emphasis of the regulator is on key risks, with light touches on everything else. As with all regulators, a light touch converts in time to much heavier and more frequent touching. I hope that we will look at how we can avoid that in Committee.
On the pension protection fund and the moral hazard issue, which is clearly a major topic for us, I recognise that the Government have tried to take into account the potential burden on sound companies and schemes. The question that we have to ask is whether that is enough. I was pleased to hear the Minister say that that was one of the questions on balances and costs that she wanted the Committee to examine. Clearly there are two areas to it. So far as companies are concerned, we have to ask whether we have to fix the timetable to the move to risk-based schemes so that companies know where they stand, and to ensure that the timetable does not slip. There is very clearly a temptation for that to happen. The other question raised by the noble Lord, Lord Oakeshott, is clearly important. Is 50 per cent for risk-based schemes 416 sufficient? I go much closer to between an 80 per cent and 100 per cent move to risk-based schemes. That is another area that we will have to examine.
There are issues that I think that the Minister was inviting us to explore on beneficiaries, too. Will the benefits be too substantial? Is it right that there be 100 per cent compensation for some, given that the compensation schemes in existence now have a limit of 90 per cent? Is there a case for saying that there should be not only benefit limits of 90 per cent for all, but a cap on all benefits as there is going to be a cap on some? Other issues arise from that.
It is interesting and noticeable that, as the Bill stands, the Government are more generous on benefits when they are asking others to fund them than they are when they are funding them themselves. The classic example is the financial assistance scheme, where the Government will offer very meagre benefits because they are funding them. That raises the question voiced by others of the Government being the guarantor of last resort in some way on the PPF. Given the American experience, I am tempted to think that that would be necessary.
There are many other questions on the PPF, but there is not time to explore them now. In Part 3 on scheme funding, I have one major problem, which is about what the term "technical provisions" means. The whole actuarial profession, the funding of pension schemes and everything surrounding such issues are a moving quicksand, if one can have such a thing. We have FRS 17, realistic balance sheets and all sorts of changes taking place in that profession. We need to hear a lot more from the Government in Committee on how such change is intended to be carried through.
It is a very interesting idea to have a retirement financial planning tool. I am grateful to the Minister for saying that we can look at it, and I look forward to doing so. If it is to cover all the objectives as I understand them, I cannot for the life of me see how it can be done for £10 million in set-up costs; it will be much more complex than that. There is a more important issue. Will the Government be held liable for any gross miscalculations? I make that point because, in endowment mis-selling, a lot of complaints have been made about the original projections, which followed rules set down by the predecessor of the FSA. The interesting question is this: if it is thought to be mis-selling and if the Government make mistakes in their calculations for people's projections for retirement, will they be held liable for them?
Let us be frank: we all know exactly what happened on the financial assistance scheme. I have a number of quotations from the Committee in the other place that I do not have time to read out, which indicate why the Government could not possibly go down the route which they have now taken. The reference to assistance is plainly a euphemism for compensation. We know that well and we know exactly why, because there is a read-across to Equitable Life and all sorts of other cases.
We need to ask about some serious issues on that, in relation not only to how much money is coming through, but also to industry contributing. I do not 417 think that any industry will contribute. Why should it? The decision is for the Government; it is nothing to do with industry and it is retrospective. I suspect that the Government will get nothing from that. If they try to compel employers to contribute, that would be monstrous.
I very much support the objectives about state pensions, because they reflect the economy's need and the lifestyles that we all have now in that they encourage many more people to go on working. However, I am not sure whether a great incentive is being provided; we will have to explore that in Committee. I could say other things about that, but, given the time, I want to conclude on a different point. One matter that will be very tricky is whether the lump sum is taken into account in relation to pension credit and other issues of that sort. My suspicion is that the only answer for the Government will be to go to something like £21,000 overall so that we do not have to consider all sorts of problems about precedents, ring fencing, and so on.
In my final point I return to the fact that the Bill does not face up to the real issues. On many arguments, there is now a clear case for saying that the state pension age needs to be raised. There will have to be a long movement ahead before the final decision is implemented; there will have to be a transitional stage. The sooner we face up to that and have the courage to do so, the better.
§ 1.40 p.m.
§ Lord Borrie
My Lords, first, I welcome the reincarnation of the noble Viscount, Lord Trenchard. I recall sparring with him in the 1990s on the Competition Bill, for example, and am glad that we had the pleasure of hearing him today and will, no doubt, on many other occasions.
We all know that there are huge gaps in living standards among the elderly. The poorest are overwhelmingly dependent on state benefits and the better-off receive the bulk of their income from occupational and private pensions. I regret to say at the beginning of my speech that I disagree with my noble friend Lady Turner of Camden, because the Government have been right to concentrate state help on the poorest among the elderly by way of pension credit. Despite powerful criticism from people such as the much respected and vociferous Lady Castle of Blackburn, when she was still with us, Government policy has been more socially just by concentrating help on the poorest, rather than by giving an across the board increase in the basic state pension for everyone. That would have involved a hugely expensive total outlay, including to the better off, each of whose income would only have been minimally enhanced.
For better off and future pensioners, whose main income comes from private sources, the Government have had to take account of the fall in public confidence in private pension provision, which they have in the Bill. Too many workers have found that their employers are no longer supporting final salary occupation pension schemes and have closed such 418 schemes to new members. Even during the passage of the Bill in the other place some 60,000 workers have recently lost some or all of their pensions when their employers' schemes collapsed.
In the other place MPs from all sides expressed concern at that existing problem. They could not expect and it would not have been right, I am sure noble Lords will agree, to have sought to make retrospective the pension protection fund that the Bill introduces. How can one make a protection fund—an insurance scheme—retrospective? But the Government have reacted positively with a financial support scheme, about which there are many questions to be asked, as others have said. None the less Clause 274 is an indication of the Government's realisation that something must be done for those who have already had that misfortune happen to them in the course of their working life. That has put a blight on their prospects in terms of what will be available to them when they retire.
The central part of the Bill creates a pensions protection fund to deal with future cases where bankrupt companies are no longer in a position to pay out retirement pensions. In principle, all sides of the House would agree that that must be the right course, but it is important to recall the underlying reasons why pension funds have so often been in financial difficulties in recent years. They include major falls in the stock market, the introduction of the new accounting standard FRS 17, the minimum finding requirement under the Pensions Act 1995, reluctance of people to save adequately for retirement on a voluntary basis and, of course, increased longevity—although none of us, especially in this House, would wish to regret that.
The world today is so different from the forecasts of the Beveridge report of some 60 years ago. The pension protection board, which will be set up by the Bill, will control its own income through what will in due course—that is a vital point—be to some extent a risk related levy. Compensation will comprise 100 per cent pension benefits for those already over pension age and 90 per cent for others, with a cap of £25,000 a year. But that cap is equivalent to the pension expected by those on a final eligible salary of some £40,000 to £60,000 a year. To have a cap at all is to put a limit on the burden placed on good employer schemes and recognises the reasons why so many schemes have been in financial difficulty in recent years.
How much will the levy be? According to the Bill's regulatory impact assessment, it is £300 million a year, presumably passed on to employees in higher contributions. Is that an underestimate and will it be yet another factor that discourages employers from providing final salary pension schemes? The Government say that the levy and the existence of the pension protection fund will make it easier to recruit, retain and provide staff with a greater incentive to save, but that is all a matter of perception for employers and employees. The Government have a great task to perform, because if employers think—even if they do so wrongly—that the fund and the levy are overburdensome, it will discourage employers 419 from providing defined benefit schemes. It is most important—and I agree with some noble Lords who have spoken—that the risk-based element of the levy or premium is introduced as soon as possible and is perceived to be imminent, whatever date is chosen, because employers with well managed schemes will strongly resent underwriting their weaker brethren.
Your Lordships will wish to probe all the details of the proposals but as a matter of general principle, despite the problems of the cross subsidy and moral hazard, it is difficult to see any alternative—and no one on the other side has suggested one—to something like this insurance and protection scheme if the risks of insolvency and underfunding are to be adequately covered. The reliability of having the insurance of a pension—or the "reliability of your pension" if you are mid-career, to repeat a phrase used by the Minister—is most important.
From my earlier incarnation as head of the Office of Fair Trading, I fear that I am something of a regulation buff and have supported the Government's recent efforts to improve regulation in, for example, the Utilities Act 2000 and the Communications Act 2003. My only connection with pension regulation was as a non-executive director of the Mirror Group, which I hesitate to mention, but in the post-Maxwell era. A brilliant rescue effort was undertaken by one of my fellow directors, the executive director and former editor of the Times, Charles Wilson. When he was managing director of the Mirror Group he worked hard to ensure that pensioners who had been robbed by Maxwell were able to recover most of their money. The later report by the eminent lawyer, Sir Roy Goode, proposed a regulatory body to help to avoid the misappropriation of pension funds in future, and, of course, the 1995 Act created the regulatory authority.
Reviews in recent years have suggested that the regulator needs to be more proactive and to become involved before the damage is done, focusing, as the department has said, on protecting the benefits of pension scheme members against fraud and maladministration. I am not sure that I like the title "pensions regulator" to replace the OPRA. In a sense, it is a welcome simplification, but anyone outside the Westminster village may be somewhat misled into thinking that it is a one-man band. In fact, the pensions regulator is, as is customary nowadays with regulatory bodies, a corporate body with a chairman, a chief executive and at least five other members, and so on.
I do not think that the Government have explained entirely why this recent development, which is so popular in modern corporate governance in the private sector, should necessarily be read across into the public sector so that, every time we have a regulator or a regulatory authority, we have to have the full assembly of executive and non-executive personalities, and so on.
But one thing of which I am sure (I say this, in particular, to the noble Lord, Lord Higgins, who took a rather different view in his opening speech) is that the new wide range of powers—the repertoire of powers to 420 cover improvement notices and freezing orders—seem to be very useful alternatives to what I might call the "nuclear option" of winding up a pension scheme. They will be useful weapons, enabling the regulator to be proportionate, if I may use a fashionable word, and to adopt action for the occasion which is appropriate to the situation. I say to the noble Lord, Lord Higgins, that that, to my mind, is not a set of draconian regulations; it is a set of proportionate regulations.
It is commonplace to say that people are not saving enough to ensure a reasonably comfortable retirement. Related to that question is whether it is desirable for people to be able to postpone the age at which they retire. To that extent, I share the point that has just been made by the noble Lord, Lord MacGregor, concerning the age at which the state retirement pension should be paid. The Government may need, at some stage, to seize the opportunity to deal with that matter.
As the noble Lord, Lord MacGregor, indicated, certain worries would be attached to Part 4 of the Bill, which concerns forecasts, if it involved some kind of government responsibility for the forecasts and illustrations and if those turned out to be incorrect. However, on the basis of encouraging people to save and to understand their position according to what they are doing at present, it must be a most useful proposition.
At the next general election, the majority of voters will be either retired or within five years of retirement. No subject is more relevant to the electorate than pensions, and this Bill is one strand of government strategy that we should support.
§ 1.53 p.m.
§ Lord Hodgson of Astley Abbotts
My Lords, I begin by declaring two direct interests. I am a trustee of two final salary pension schemes and chairman of the trustees of one of them. They are both now closed to new entrants. The noble Baroness, Lady Turner, made a powerful plea for the importance of final salary pension schemes. My central concern relating to the Bill is that I can see no reason why I and my fellow trustees would seek to reopen either of those schemes or to provide ways for new people to join them.
As I read the Bill, I also came to realise that I have another potential interest to declare. It is not a relevant interest at present but one that will certainly become relevant if and when the Bill is enacted.
I am the non-executive chairman of a struggling listed UK engineering company. It is but a shadow of its former self, given the decline of the UK's manufacturing base over which this Government have so cheerfully presided. With a group of investors, we have been endeavouring to turn the company round and, to date, we have had some success. But, in relation to our current UK activities, we have a large pension fund which arises from our history. If what I understand is true about this Bill—in particular, Clauses 35 to 46—then I am concerned on two levels: first, what it means for the future of the company and its remaining staff; and, secondly, and perhaps more 421 selfishly, what it means for directors who have, in good faith, invested and worked hard first to preserve and then, it is hoped, to make prosper a UK-based enterprise.
By happy chance, this debate is to be followed by the Second Reading of the Armed Forces (Pensions and Compensation) Bill. It updates the pension arrangements for our Armed Forces and, indeed, replaces some pieces of legislation that are more than 100 years old. That will give us a chance to look in a little more detail at how the Government think about their own employees.
Therefore, I must ask the Minister whether she and her officials are aware of the proposals in the Armed Forces (Pensions and Compensation) Bill. In short, they run contrary to nearly every provision which the Government proposed in the White Paper, Security, simplicity and choice, and which are enacted in the legislation before us today. There is no provision for independent trustees; there is no requirement to provide information about the scheme and the members of it; there is no requirement to consult members on proposed changes; and it is described as a non-contributory scheme when, by any fair measure of the word, it is not; and so on.
Therefore, when the noble Baroness comes to propose the measures in the Bill, which will weigh quite heavily on the private sector, I hope that she will forgive me if I ask whether she expects government departments to live by the same standards, or is this another case of "Do as we say; don't do as we do"?
Issues of pension policy are particularly challenging, for a number of special reasons: the language and terminology of pension provision is inevitably technical and, as such, is unlikely to commend itself to the casual reader; the outcome of any particular policy is hard to predict because of the length of time involved and the impact of unforeseen and unpredictable factors; and, finally, changes made, although perhaps only of marginal cost in the short run, can, because of the inexorable pressure of compound interest, be extremely expensive in the longer term.
All governments are sensitive about their image. This Government have shown themselves to be even more sensitive than most, particularly about their short-term image. That is a dangerous weakness when it comes to pension policy, which does not respond well to quick fixes. My noble friend Lord MacGregor referred to the Chancellor's raid on pension funds, which the Prime Minister, playing to the gallery, felt that the stock market was high enough to sustain. That has done untold damage to pension provision. And, of course, stock markets are now below the levels which existed when this Government took office in 1997 and the Prime Minister did his bit of grandstanding.
The noble Baroness, Lady Dean, and my noble friend Lord Fowler referred to the decision to leave unchanged the requirement to purchase annuities at fixed ages. In an era of low interest rates, that has imposed a high degree of inflexibility on individual pensioners and pensions.
422 The recent announcement about a £400 million fund to compensate workers whose pension funds have failed represents another wrench on the wheel in an attempt to spin out of trouble. While £400 million is a not inconsiderable sum in itself, it must be pointed out that it is less than 10 per cent of the sum which the Chancellor is extracting from pension funds each year as a result of tax changes. More significantly, it is a minuscule sum when measured against the total assets or liabilities of UK pension funds. There must be a real danger that the Government will have aroused public expectations about what can be delivered or what is to be expected—expectations which may have to be disappointed when, as I believe will inevitably happen, the sum involved becomes vastly bigger. Therefore, if there has been a decline in public confidence about the value and role of pension funds, the Government are far from blameless.
I should like to ask the noble Baroness about some specific issues, first, on the powers of the regulator in relation to a UK-based company whose parent is based overseas. I have had correspondence, particularly from a pensioner who worked for Joseph Lucas, a Birmingham-based, long-established engineering company, supplying the automobile and aerospace industries. The company has been taken over by a US company, which the pensioner believes is hard-nosed—one might say predatory—in its reputation. He has concerns about the drawing of assets out of the United Kingdom. I would be interested to hear from the noble Baroness the powers of the regulator in respect of controlling the departure of assets from the United Kingdom, or the powers to require restitution if assets are so removed.
Secondly, I return to the provisions of Clauses 35 to 46 and ask for some preliminary thoughts about how the Minister believes they will work in practice. In particular, what is the relative weight to be placed on the financial weakness of the employing company, as against the financial weakness of the scheme? What limits does she expect there to be on the regulator's powers to make levies on the employer and how do the Government expect the regulator to define "fully funded" in relation to a pension scheme?
Thirdly, can the Minister explain whether the regulator will be under any pressure to give answers on the adequacy of pension funding in due time? It is interesting that Mr Philip Green's bid for Marks & Spencer has as one of its prime pre-conditions satisfaction on the adequacy of funding of the Marks & Spencer's pension scheme. Without some pressure on the regulator to give answers to those kinds of questions, corporate acquisition and/or investment activity will be severely curtailed. Equally importantly, when a company is in financial difficulty, speed is of the essence. The regulator needs to be prepared to answer quickly if rescues are to be achieved.
My final question relates to trustees. The Minister referred to the streamlining of the process for trustees. Does she really believe that with these new responsibilities, sufficient numbers of men and women will be prepared to come forward to serve as trustees 423 of pension funds, or are we moving inexorably towards the emergence of professional trustees? If so, is that a good idea in the view of the Minister?
To conclude, there is general agreement that we need to encourage individuals to save for their old age and to encourage employers to help people in that by providing good pension schemes. As I have already said, I see nothing in the Bill that will encourage employers to do that. I see it more as another, and maybe the final, nail in the coffin of final salary pension schemes.
During the briefing on the Bill, which the noble Baroness so kindly arranged for us and for which I and other noble Lords were extremely grateful, she discussed the Bill in terms of carts and horses. It may be that the Government have designed a shiny new cart. No doubt we can discuss and explore that in Committee, but unfortunately, in my view, they have shot the horse that was to pull it.
§ 2.3 p.m.
§ Lord Lea of Crondall
My Lords, it is a pleasure to follow the characteristically expert contribution from the noble Lord, Lord Hodgson of Astley Abbotts. The courteous way in which he made his points was characteristic of the debate. I hope that that augurs well for the Committee stage. It is even more courteous and informal in Grand Committee than in the Chamber, but where the Committee stage takes place will be decided later.
I begin by echoing the remarks of my noble friend Lady Dean of Thornton-le-Fylde. In the Bill we are guaranteeing people's quality of life in retirement. It is rather striking that whichever way one looks at the crystal ball, the prospects 10 or 20 years ahead do not appear to be as rosy as the retirement experience of our colleagues in this generation. That is not a matter for this Bill, although I believe it will be for another Bill after the general election. At that stage the point picked up by the noble Lords, Lord Fowler and Lord Freeman, about compulsion—we may disagree about what we mean by that—is the way that matters will go.
Before I turn to the Bill, I want to make a point about why that is the way that we should go. Increasingly, the buy-now pay-later culture in which we live makes the idea of looking ahead 20, 30, 40 years more difficult than it was, even if it had not been for the classic phrase of John Maynard Keynes that in the long run we are all dead. That may be so, but the fact is that we want a guaranteed living standard in our retirement. A noble Lord opposite—it may have been the noble Lord, Lord Higgins, and he will correct me if I am wrong—said that of course one cannot have totally reliable forecasts, but with a final salary pension scheme one can forecast what a pension will be. It is important to point out that people want a quality of life in retirement that comes from that type of guarantee; and if they want to know that they will receive 62.1 per cent, or whatever, of their final salary, they need to be in one of those schemes.
424 The real question is how we can get back to that system. Far from allowing them to decline—it is not yet a stampede—we should reverse the trend. That is a fairly unfashionable thing to say today. I do not criticise the statistical projection of the noble Lord. Lord Freeman, that in 20 or 30 years' time there will be no such schemes open to new members and that they will all be finished. I believe that is what he said in a debate in March. On the logic of wanting quality of life in retirement, we should reverse that trend. That is the challenge.
Against that background, some noble Lords opposite have suggested that the Bill will make the matter worse. We shall have to look at that for a moment. I do not believe that the Bill can be seen in isolation from the other points that I have just made. However, one point is obvious: the move from DB to DC schemes. They are normally associated with a halving of the contributions by employers—it is a wage cut. There is also a cut in the worker's contribution when he moves from DB to DC—I am talking in averages—but the bigger cut is in the contribution from the employer.
We are all fiddling while Rome burns, if that is the right metaphor. We must not cry crocodile tears about that and say it is all the fault of Gordon Brown when this is a trend that has been going on for some time.
I want to mention the work of the commission chaired by Adair Turner, which I believe will bring out an extremely important interim report in September—even on present forecasts. I think we can make one other forecast today—the noble Lord, Lord Higgins, may be able to help us with it—that the Bill will probably still be under consideration in September. I suggest that that is a forecast on which one can put money.
These days, people do not expect to have multiple choice decisions about retirement planning, which has been highlighted and epitomised by the argument about the pension protection fund and the extra scheme for Allied Steel and Wire and such like.
It would be a helpful step forward if the Opposition, having willed the end, willed the means. From Michael Howard downwards—if that is the right expression—it has supported the pension protection fund in principle and the "why did we not get on with it quicker?" idea. If the Opposition is in favour of the fund and the levy, it should decide what sort of improving amendments—if that is the name of the game—it can put forward. Otherwise, it is hard to see how that is consistent with support for the principle.
The trade unions are very satisfied with the success of the campaign, with which many of us were associated, to get the retrospective funding. There may be some misunderstandings about the £400 million, given that there can be money and funds in some of those companies. If the £400 million is divided by 60,000—which I think has been mentioned—and 20 years, you get a sum that is clearly not very satisfactory. All the related financial arithmetic will have to be brought out into the open. But I do not think that we will be able to dot every "i", cross every 425 "t" and name every number in this Bill. That is just a hit of rhetoric if some noble Lords are seriously suggesting that we can. However, before we reach Clause 274 we have time to look at the financial assistance scheme.
In helping people to look at their responsibilities for making better provision for retirement, which the noble Lord, Lord Freeman, among others, has advocated, the philosophy in the Bill is assisted considerably by some of the later parts. As a former trade union official, together with my noble friends Lady Dean of Thornton-le-Fylde and Lady Turner of Camden, I believe that if it is difficult for people to find agents to trust in this matter, if we did not have trade unions already we would have to invent them.
Trade unions—surprise, surprise—are trusted by their members regarding pensions. They may not always be able to deliver, but I do not think that I would be contradicted by anyone in this Chamber when I say that the trade unions are trusted a damned sight more than any independent financial adviser. I shall not give a generic word about the current reputation of independent financial advisers. I hope that I have made the case for trade union involvement in the protection fund and so forth.
Finally, an important development is the initiative of the Citizens Advice Bureau, which I think was announced in May. It is to conduct some pilots around the country in which it will co-operate with independent financial advisers to see how they can walk this difficult tightrope—the words "moral hazard" spring to mind—of giving independent financial advice through the Citizens Advice Bureau. We are desperately short of people who are trusted in the community. That initiative must also be welcomed. I look forward to the Bill progressing through Committee stage and on to the statute book as soon as possible.
§ 2.14 p.m.
§ Lord Hunt of Wirral
My Lords, first, I declare my interest as senior partner of Beachcroft Wansbroughs and chairman of Beachcroft Wansbroughs Consulting. I thank the noble Lord, Lord Lea of Crondall, for his kind words about the speeches made by a number of my noble friends. However, I must take issue with him on his description of independent financial advisers because the Association of Independent Financial Advisers, led by its very able director-general, Paul Smee, has done much to raise, and has sought to raise even higher, the standards followed by independent financial advisers. Of course, in a world that is as complicated as it is now, that has become very difficult, as has been pointed out in the debate.
My plea is to espouse the cause of simplicity, particularly as regards occupational pensions. We are all concerned to protect the vulnerable in society. However wealthy an individual may be, it is a moment of vulnerability to commit to a pension arrangement that will require an organisation to be in existence several decades hence in order to pay that pension out, 426 especially in the world described by the noble Lord, Lord Lea of Crondall; the "buy now/pay later" environment. For the less well off that is of particularly critical importance to their welfare in later years. Yet the reality of modern mixed economies is that businesses operating in dynamic markets do not last for decades.
However, the solution does not lie in accumulating various forms of protection to deal with each new difficulty as it arises. That is the long road to complexity which, in itself, brings problems of its own. It frustrates pension take-up and can result in the very detriment that the rules are trying to cure.
In that context, the Inland Revenue's substantial proposals for simplification of the taxation of pensions contained in the Finance Bill currently before another place are to be welcomed. I should point out that it will be an opportunity missed if this Pensions Bill does not secure a similar balance between effectiveness and the benefits of simplicity.
So far, it is not easy to see that the mass of pensions rules for occupational schemes is being improved. We will not have the new pensions regulator until next April and we have yet to see the codes of practice on how to run a pension scheme. It must be a goal to ensure that those will be simpler and easier to understand than the rules of the current regulator, OPRA.
Limited price indexation (LPI) is another area where needless complexity is evident, as several speakers have already pointed out. In creating the pension protection fund, the Government propose to create a new cost for all employers. It is a superficially attractive proposal by the Government to propose an offset to that by reducing to 2.5 per cent the LPI ceiling for benefits that were built up after April 2005. But consider the administrative burden that that will create and the increase in the complexity which consumers will have to master.
In future, retiring defined benefit scheme members may find that they have built up three tranches of pension all gaining LPI, but at different rates. Those benefits built up before 1997 will increase at whatever rate the trustees choose. Those built up after 1997 will increase by price inflation subject to a cap of 5 per cent. Those built up after 2005 will increase by price inflation subject to a cap of 2.5 per cent.
But this is relatively straightforward when compared with the LPI for money purchase arrangements. The Pensions Act 1995 also requires that members of defined contribution occupational schemes must use funds built up after 1997 to buy a pension, again subject to LPI at 5 per cent, And these too would be subject to the proposed 2.5 per cent cap from next April. However, this means that the scheme member would have to buy two different types of pension with his fund, one from amounts built up during the period 1997 to 2005, attracting index linking up to a ceiling of 5 per cent, and one from amounts built up after 2005, attracting index linking subject to a ceiling of 2.5 per cent.
427 Sadly, the complexity does not end there. If the scheme member is contracted out, protected rights have set rules on increases to pensions. In consequence, this person is likely to have multiple tranches of pension, each one subject to different rules.
I understand from the Minister that the Government are aware of the complexity of their proposals, and we have heard that amendments are to be introduced in this House to deal with it. I suggest, however, that rather than complicate LPI for money purchase schemes they should do away with LPI completely. This would be a helpful development, but a brave and courageous one. I could see the Minister flinch as I said the word "courageous". It would match the boldness of the Inland Revenue.
Clearly, there will be some who would find the terminology worrying and confusing. For example, removing something called "protected rights" has the appearance of an important protection being taken away, but viewed from the consumer perspective, it would actually look rather different. An indexed annuity simply comes into payment at a lower base. Removing LPI from all types of money purchase pensions would mean that members would have the freedom to choose the most appropriate annuity for them in particular, whether it is level or indexed.
This freedom will reduce significantly the number of separate pension tranches. It will make it much easier for members to understand their benefits at the outset, during their working lifetime and when they come to choose to take their benefits. By demystifying pensions saving at every opportunity, the Government will encourage people to save for their own retirement. So I think it is high time that the Government really adopted a practical approach to dealing with the pensions crisis, and simplification is a central plank of being practical.
I look forward to seeing the Government's proposals on LPI and I commend to them the clear objective that simpler policy options will nearly always be better for consumers than complicated ones.
As we have heard in the debate, there are many other concerns about the Bill. John Harris, chief executive of the Society of Turnaround Professionals, has expressed concern that the new provisions will impose large, uncertain and unprecedented liabilities on directors and shareholders who have done no wrong. Many share in the general concern that the pension protection fund must be implemented in such a way that it does not deter valuable turnaround business by imposing unsustainable personal liabilities on turnaround executives.
These concerns are also shared by R3, which represents licensed insolvency practitioners who take formal insolvency appointments over insolvent companies. It, too, is very concerned that the Bill as drafted could expose administrators to a contribution liability as a result of a strategy to achieve a successful administration. It is ironic that only 18 months ago this Government passed the Enterprise Act, which introduced new measures designed to encourage and 428 promote the rescue of troubled companies with viable businesses. There is now a real risk that this Bill will undermine those measures by strongly discouraging such rescues.
As the noble Lord, Lord Oakeshott of Seagrove Bay, pointed out earlier, this would undermine the policies of the Chancellor himself. So while there is obviously a need for robust anti-avoidance measures to ensure that the PPF helps only those for whom it is intended, this must be carefully balanced to ensure that desirable business rescues are not blocked.
I understand that last week the Occupational Pension Schemes Joint Working Group put this point forcefully to the Minister's senior officials. I do hope that the Minister will have had a full report and will move quickly, as of course many of the anti-avoidance measures in the Bill were added at a very late stage and the noble Baroness and her colleagues will not have had time properly to consider these problems. I hope that she will have an answer for us in this debate.
§ 2.25 p.m.
§ Baroness Barker
My Lords, this has been a fascinating debate. As the noble Baroness, Lady Dean of Thornton-le-Fylde, put it so eloquently, there was a time when people's eyes glazed over when the subject of pensions arose, but now it is a subject of deep interest. Moreover, we have had a demonstration of why this House is so necessary when considering matters of this kind, such has been the range of expertise among the speakers today. The noble Baroness, Lady Dean, went on to take issue with some of our comments about the length and complexity of the Bill. Perhaps more than anyone else the noble Lord, Lord Higgins, having worked through the pension credits legislation, will be the first to agree with me that the length of a Bill is absolutely no measure of its complexity. That legislation was very short, but managed to give the Financial Services Act a run for its money.
Our problem with this Bill is not so much its length, rather it is the key areas in which it should be explicit, but remains silent. I shall concentrate my comments on a number of those areas. I do so because there is only one fundamental question that noble Lords have to answer: what does this Bill add up to in practice? At the moment, it is extremely hard to tell. Will it be, in the words of Malcolm Wicks in another place,something which will come to be seen as one of the most important developments of social policy"?Or is it just a patchwork of reforms and regulations that will amend some of the deficiencies of the 1995 Act and which may mean that some people have a marginally better income in retirement than they might otherwise have done?
In the presence of the noble Lord, Lord Lea of Crondall, I shall make one prediction with absolute confidence. For the next year and a half, your Lordships' House will devote an inordinate amount of time to studying the regulations and orders which will emanate from this Bill, and I believe that we will be right to spend as much time as we possibly can on going through them.
429 The noble Lord, Lord Fowler, as he has done a number of times in your Lordships' House, set the political context for this Bill. He is absolutely right to say that the political importance of pensions has grown dramatically over the past few years. It is interesting to note that shortly noble Lords are to be joined by Mr Philip Gould. Every pollster knows that since 1995 the issue of pensions has shot up the list of concerns of electors in a quite remarkable way. The noble Lord, Lord Fowler, and others have pointed out quite rightly that there is growing knowledge about pensions on the part of the public, but there is too an even more swiftly growing concern about the lack of knowledge people have about pensions.
To that end, I want to follow on directly from many of the points just made by the noble Lord, Lord Hunt of Wirral, about the necessity for simplification and clarity. There is agreement across the House that situations like Allied Steel and Wire are unacceptable, that we have to do what we can in this House to reverse the current situation. Some companies deem it acceptable to walk away from the obligations they have to their pensioners over 30 and 40 years, leaving those people with nothing. However, there is disagreement about the extent to which this Bill will in reality protect those pensioners, as well as the extent to which it will enable the other 19 million private and occupational pension holders referred to by my noble friend Lord Oakeshott over the coming 50 or 60 years.
Other speakers in the debate have questioned many aspects of the pension protection fund, which is unsurprising given the amount of confusion during the extremely lengthy debates on it in another place. As the noble Lord, Lord Higgins, rightly pointed out, even the Minister himself was unclear: is it an insurance scheme, a pension fund or something which at times he simply could not describe? It is important that the basis of the scheme is clarified before we go any further in our deliberations, not only to enable the pensions industry to take some satisfaction from it but in order that there is an absolute certainty which can work its way down to individual pensioners.
Our reading of the Bill is that the PPF is a pooled-fund insurance scheme; that it will be started with the remaining assets and liabilities of those pension schemes that have fared worst of all; that it is expected to continue with unspecified investment powers and, ultimately, without the backing of the Government—although I believe that my noble friend Lord Oakeshott was right to question the extent to which that would happen in reality.
That is not a good start in life for any fund, quite frankly. For this one, in particular, there is a need to ensure that it is set up from the beginning on a sustainable basis. We on these Benches will bring forward amendments to ensure that matters such as the analysis of risk—not only for pension funds but also for employers—are included. We shall seek to limit the transitional period in order that that moral hazard is minimised.
Much of the comment from the pensions industry has focused on the cost of the PPF. It is extremely important to determine the cost because the viability 430 of the fund is crucial. But it is also necessary to establish beyond any doubt exactly what will be the benefits to individuals. There have been differing views about the cost to business of the proposal that those who have retired will receive 100 per cent and that those who have not yet reached retirement age will receive 90 per cent. However, there is a more fundamental question than that: 90 per cent of what? It is still not clear.
Can the Minister confirm that, contrary to what some people have understood, the PPF will not replicate entirely the provisions of the scheme to which a person belonged—for example, that it will pay survivor pensions only to spouses, and do so to a maximum of 50 per cent, even if under the scheme from which the person came unmarried or same sex partners received survivor benefits? If I am correct, does not the Minister agree that the scheme will soon face challenges on the grounds of equal treatment?
I am extremely concerned that there should be clarity from the outset about what the scheme will do. The impression given when it was announced in the House was that some people would have their Rolls-Royce defined benefit pensions replaced. I rather suspect a number of people will find that they get something a little more like a clapped-out Ford Cortina.
We on these Benches have consistently said that reform of the state pension is essential. We have referred to the need to raise the level of the basic state pension and to ensure that older pensioners receive greater support. Simplification of the state pension will provide a crucial underpinning of the Bill. It is only with simplification of the state pension that employers and pensioners can begin to have a hope of understanding what their income in retirement might be.
We have a number of misgivings about some aspects of the Bill that deal with this issue—and here I part company slightly with both the noble Baroness, Lady Dean of Thornton-le-Fylde, and the noble Lord, Lord Fowler—because we believe that the proposals on the deferral of the state pension have been rather overestimated. The introduction of a lump sum in return for deferment was heralded by Ministers in another place as,a new opportunity for low and moderate earners to earn a lump sum for retirement".Moreover, it is stated that this would be "a choice of reward" for people in that deferral would enable them to receive a higher percentage weekly pension. But the reality is that poor people cannot afford to defer their state pension; they need it to live on.
It is not clear from the Bill what the effect of deferral will be on a person's entitlement to pension credit. It is not clear from the Government's statement whether or not it will apply to all pensioners. The Government state that they want to make sure that the lump sum is ignored where "most" people claim pension credit, housing benefit and council tax benefit. They have not said that there will be an overall disregard. That crucial matter of detail needs to be addressed.
431 Deferral is a gamble. One gambles that one will be alive to receive the pension at the end of the period of deferral. I do not agree with those who say that the whole area of pensions is really a form of expert gambling; nor do I believe that any of your Lordships would wish to kid people that there is some kind of magical certainty. We want to ensure that people make informed choices. It is therefore important that we should make clear exactly what will happen to people if they do defer and what will happen if they die—particularly if they are not married—in the interim.
As to combined pension forecasting, we, too, have a number of reservations. The Government are already way, way behind in their estimates for provision of combined pension forecasts. Nearly six years ago the Government predicted that more than 700 employers and pension providers would take part in such a service. To date, only two pension providers and 64 employers have participated in the scheme.
One of the most crucial aspects is that there should be a reliable means of giving people the best estimate of what their income will be. The Minister helpfully circulated a hard copy of the proposed web-based retirement planner. I realise that the programme is not yet finished and that it is not yet live, but even at this stage there is a glaring omission—the pension credit is not mentioned anywhere at all. Given that, over time, 50 to 80 per cent of all pensioners will be in receipt of pension credit, that is a huge omission.
It is on details such as this about the interface between state and private pensions that an overall policy of increasing the age at which the basic state pension is paid, and supporting employers in maintaining older people in employment, will rest or fall. It is the nitty gritty, but it is important.
As we are debating this issue today, I should like to ask the Minister this question. In a recent survey, one in four people expressed the hope that they would retire to Spain. Can the Minister say whether the calculations will be done in euros or in sterling?
There are other elements of the Bill to which we give a cautious welcome. We are very pleased with some of the proposals on providing information and advice to employees. However, we think that the Government's rigidity in relation to member-nominated trustees is too limiting. We think that the proposal to have only one means that in any scheme a choice between having a member-nominated trustee who is a member of staff and who is not retired, or having someone who is retired, will have to be made. It would be rather difficult for a person in either of those two categories to adequately represent the interests of the others.
Many noble Lords have referred to the financial assistance scheme. I should like to ask the Minister two questions. First, how did the Government arrive at the figure of £400 million?Is it a political calculation that £20 million per annum over 20 years is all that the Treasury is willing to stand? Or is it a DWP actuarially-based calculation that the average compensation payment of £340 is adequate to make up the losses of those people who have lost defined benefit 432 pensions? Furthermore, did the calculation take into account that while some of the beneficiaries of the assistance scheme have already retired and are facing a very bleak retirement, some of them are only in their twenties? I think that will make a huge difference to the way in which the assistance scheme will work.
I agree with others that the question of annuities will not go away. It has been ducked in the Bill. We need to go back and look at it again—and we need to do so now, well before the forthcoming debate on compulsion, which, if I am right, will come after the general election.
We are all agreed on the scale of the pensions crisis. We are all agreed about the need to encourage employers and employees to have faith in the pensions system and to increase their contributions. We are all agreed that one of the major factors which is a bar to employers and to individuals is the lack of knowledge and certainty, as well as the lack of ability to figure out what the financial position for individuals will be in the future.
We would be unrealistic if we thought that we could magically provide people with accurate predictions of the financial position either in macro terms or at the individual level. But there is one thing, above all, that we must do. We must preserve as far as possible the reputation of Parliament and the Government as the honest broker—perhaps the only honest broker left in the pensions field.
The worst thing would be to overspin or oversell the measures in the Bill. I think we are all agreed that they make a valid contribution to a difficult problem. With detailed study and consideration on a non-partisan basis, the measures could be made a great deal better by the time the Bill leaves your Lordships' House.
§ 2.41 p.m.
§ Lord Skelmersdale
My Lords, I begin by agreeing with the noble Baroness, Lady Barker, not about sex or the pensions gamble, but in congratulating all noble Lords who have spoken in this debate on what is, without doubt, the major Bill of the Session and, arguably, the decade. The expertise exhibited in this debate, usually technically based, goes to show why we will always need a House of Lords or some other appointed advisory body to the government of the day.
I referred to technically based expertise. Nothing was more technical than the comments of my noble friend Lord Hunt on his findings on the LPI; they were so technical that it will take me about three weeks—well into the Committee stage—to understand them, complete with a cold towel around my head.
I should like to single out my noble friend Lord Trenchard—whom I have come to think of as my noble friend Lord re-Trenchard—and his current working experience in the financial sector. It is sometimes a great relief to have people in this Chamber who have careers at which they are still actively working.
433 Perhaps I should congratulate the noble Baroness, Lady Hollis, who did her best to summarise the Bill. Quite clearly, someone in her department must have at least a Masters degree in the art of précis.
The amount of money a person has to live on in retirement is probably the most fundamental worry of the population as a whole. It used to be something that exercised people's minds only in the last 10 to 15 years of their working life. Today, however, I find young people of my children's age beginning to worry, and they are keen, once they are settled into a job, to join the firm's—or, in some cases, the charity's—pension scheme. They now have a different worry. They read the newspapers and see stories of schemes not paying out as promised, with some of them going into gross deficit. That is what the Bill is all about.
I referred to people having settled down in a job, and I said this advisedly. Although the portability of pensions has been the law in this area for many years, introduced, if memory serves me right, by my noble friend Lord Fowler, employees cannot take less than two years' pension entitlement with them when they transfer to a new job. That is one subject not covered in this massive Bill, nor is the desperately needed reform of state pensions, barring a minor bit of fiddling with the age extension. You are currently able to get an enhanced state pension when you retire at least one year after normal retirement age. This is more generous than heretofore and of course we all welcome it. However, for the first time ever, if you extend your working life and continue to pay into the state pension scheme, you will be eligible for a lump sum instead.
I have to admit that I am agnostic about this proposal. A state pension has always been there to support you at a basic weekly level in your declining years. Today's workforce pays for today's pensioners. Surely the noble Baroness, Lady Dean, can see that people are living longer and that the birth rate is declining. From the Treasury's point of view, it is a good thing not to pay enhanced weekly pensions, as it no doubt is from the contributors' point of view, too. But for the pensioners, it is a temptation to spend on one last binge. It does not provide a more comfortable living to the end of your life. The thoughtful, or healthy, pensioner would be mad, I believe, to take it up.
The Bill does not tackle the state pensions crisis, which has been caused, to a great extent, by the Government. I was brought up in the days of Flanders and Swann. At one point in one of their shows they discuss the signs of the zodiac. Michael Flanders turns to Donald Swann and asks him his star sign: "Oh, Pisces are you? Two fish swimming in opposite directions". That is exactly how I would describe the Government's policy on state, personal and occupational pensions.
To put flesh on a remark made by my noble friend Lord Higgins with which the Minister indicated profound disagreement, on the one hand the Government, in the shape of the Treasury, are encouraging people to save for their retirement; on the other, they have come up with the minimum income 434 guarantee or, in this case, the pensioner guarantee—a means-tested top-up for pensioners. Means-testing, by definition, is a disincentive to saving. If that is not Piscean, I do not know what is. Yet nothing in the Bill even attempts to sort out the problem.
Occupational and personal pensions policy is equally Piscean. In the heady days of the 1980s, the pensions industry, thanks to a bubbling stock exchange and, indeed, prior contributions by employers, was awash with money, so much so that many firms were able to take pensions holidays. The noble Baroness, Lady Turner, my old sparring partner, referred to that. Not so now, when many schemes are underfunded, and new final salary schemes are as rare as hens' teeth.
Nor does the Bill encourage schemes to be reopened, as my noble friend Lord Hodgson pointed out, due mainly to a period of declining stock market values. The FTSE 100 has gone from the high 6,000s to the low to mid-4,000s. Of course, the Minister will say that this is a cyclical phenomenon, and so, to an extent, it is. But the Government have done their part to keep the Stock Exchange depressed. Probably the worst and most damaging of their stealth taxes is the Chancellor's decision to milk the pensions industry of between £4 billion to £5 billion a year for the past six years. That is at least £25 million that the industry no longer has to invest, which would have been done mainly on the Stock Exchange. So over and above cyclical factors, there is the extra depression of the Stock Exchange. On the one hand, there is extra money for public services and, on the other, there is a limitation to the portfolios of the pension funds. This is their members' money—members who have votes at national and local elections, and who will, thanks to medical science, be needing the funds more and more, as the noble Lord, Lord Borrie, reminded us, as they will be living longer and longer. Again, I find this Piscean.
Then there is the much mentioned anomaly of 75 year-olds having to take out an annuity by law. Contrast that with the new state pension lump sum. Like my noble friend Lord Freeman, I am extremely grateful to the Minister for providing not only the copious notes on clauses, about which I was so rude when she introduced her first Government Bill, but the additional briefing for Peers, which I assume many of your Lordships have seen. I am afraid that I have not yet assimilated volume 2, which appeared on my desk only this morning. However, Section 2 of volume 1 is a rundown of the current situation for holders of pensions. I zeroed in immediately on the first sentence, which says that,57 per cent of all employees of working age are currently contributing to a non-state pension".That, to me, is a rather meaningless statistic It means, first, that 43 per cent are not so contributing and, secondly, there is no indication of what it really means. How many actual employees are we talking about? It goes on to say that,98 per cent of private sector employers with 20 or more employees provide some form of pension provision435 That sounds marvellous until one realises that some form of pension provision incorporates the good, the bad and the ugly. Not only that, but it quietly ignores the many thousands of small companies that make up the vast bulk of the economy. Some, like my own, with four permanent employees, have indeed got pension schemes; but how many of them have not? After all, they are not compulsory—and many of the comments made by noble Lords have been about compulsion.
Even before my noble friend Lord Fowler first referred to the matter, I had in my notes the question pondering whether the time had come whether we should be thinking about the matter very hard indeed. I accept that it is much more radical than the ABI's suggestion for encouraging employer contributions. I wonder, too, in the light of the concluding remarks of my noble friend Lord Hunt, whether it is rather hard for him to stomach. Certainly it would take a lot of working out.
The noble Lord, Lord Lea of Crondall, believes that after the next election there will be just such a Bill. However, I believe that any government who introduced it would have difficulty rebutting the charge that it was yet another stealth tax. The only way in which to avoid that would be to have a reduction in state contributions to the state scheme. In the current scenario that is not very likely.
The first 100 clauses and four schedules and Part 2 are really there just because of the bad and the ugly. The brief for Peers explains the differences between IT and OPRA, which the noble Baroness, Lady Greengross, described as a proactive regulator. I certainly accept the need for that, but we shall need to investigate in Committee its modus operandi. On the face of it, the regulator has powers that are so draconian as to put them somewhere between those of the Inland Revenue and Customs and Excise. No wonder we need a tribunal!
I would add that it is essential for all public bodies involved in pensions to sing from the same hymn sheet. I refer in particular to the Inland Revenue, the FSA, the new regulator, the PPF and the multitude of ombudsmen in this area. We do not want a repeat of the horrific story in a recent copy of the Financial Times, which started:Hundreds of wealthy investors are set to lose millions of pounds after misleading advice from government institutions led them to breach investment rules".I accept that some of that is journalistic hype; none the less, the fact remains that the rules are not always known by all the official bodies involved.
In its current form, the action permitted by the regulator will be the nail in the coffin of final salary schemes—a point made by many noble Lords. Of course, I welcome the PPF and the last minute addition of the financial assistance scheme. Cynics such as me believe that we would not be discussing the Bill now had it not incorporated the latter. Details are as yet very vague, and I look forward to investigating it and establishing how the PPF will cope with having to run what appears to be a myriad of expired pension 436 schemes, all of which will probably have different scheme rules and members' rights. How will the regulator's colleagues cope, and how will we know that they are to be competent?
My copy of the Bill is littered with comments such as those. I anticipate that those three subjects alone will take more than three days in Committee. As the noble Baroness, Lady Dean, said, it will be days and days more before we are finished with the Bill.
For example, like my noble friend Lord MacGregor, we have serious reservations about the financial assistance or compensation scheme, which the Government introduced on Report. It is fine in theory, but what about the practice? Since the Government introduced the scheme, innumerable questions have surfaced, such as that asked by the noble Lord, Lord Oakeshott. How was the figure of £400 million reached? Is there scope for the extension of that sum, should it be needed? How will it be divided between 60,000 pensioners over a 20-year period? My noble friend Lord Trenchard is right: what basis is there for the mention of "contributions from industry", and how will that by encouraged and structured? Why are solvent wind-ups excluded? Clause 274 is open-ended and dangerously undetailed; we shall certainly table amendments to probe those issues.
Our second concern is with the PPF itself. We welcome the fact that there will be some form of protection and compensation for those who lose their pensions through no fault of their own. The Government have been aware of the problem of the lack of security to people in the private sector to find benefit pension schemes for a very long time. But the PPF that they have proposed have several areas that are a cause of concern for employers and employees. It is not by any stretch of the imagination an assurance that an employee will be guaranteed a full pension.
To start with, there is the cap on non-pensioners of 90 per cent, as well as caps on other amounts; there is a lack of detail about how money will actually be distributed; there are concerns about fiddling with indexation with the reduction from 5 per cent to 2.5 per cent; and, lastly, there is the reserve power for the Secretary of State to cut benefits anyway. There is likely to be less money available under the PPF than the Government imply, and the Government are not prepared to underwrite the scheme if it proves under-funded or in crisis. As my noble friend Lord MacGregor said, that is inconsistent when the primary duty of government is to provide the basic floor of insurance for the citizen. In Committee, we shall certainly press the Government to justify some of those important areas.
Thirdly, and in conjunction with the previous point, there is serious concern about the flat-rate levy and the transition to risk-based payments. We have all had considerable representations from organisations which insist that the levy must be risk-based from day one, irrespective of the demands of the triennial cycle which has been used to justify a delay until perhaps 2009 for all contributors to be on a risk-based levy.
437 My fourth point deals with the anti-avoidance provisions introduced during proceedings in another place. Clearly there is merit in have provisions for anti-avoidance, but there have been frantic representations from the CBI, NAPF and the venture capital industry about the potentially disastrous effects of Clause 35 and the dumping of liability. This is something which has not yet been scrutinised and I am sure that we shall consider the matter very carefully.
Time is getting on, and I have covered just a few of our principal concerns. There are many more which have cropped up during today's debate and which I do not have time now to mention in detail but which include the new requirements for trustees. I agree with those noble Lords who fear that the provisions will seriously deter individuals from becoming trustees.
I finish by reiterating that our primary concern with the Bill is that it does nothing to encourage employers to set up or continue their occupational pensions schemes. In a recent survey of their members, the Association of Consulting Actuaries reported that a majority of firms feel the measures in the Bill will decrease occupational pension scheme coverage; fewer than one in 10 firms feels that the measures will improve pension coverage; close to nine out of 10 firms say the Bill's measures will either add to costs or make no difference. Those who have to work with the new provisions in the Bill for pensions have no confidence in the fact that the new proposals for pensions will be workable.
All that I can say is that the Government have delivered a less than watertight Bill on the sensitive issue of pensions. We owe it to everyone to do all that we can in Committee and on Report to rectify that situation and work to improve the Bill as much as possible.
§ 3 p.m.
§ Baroness Hollis of Heigham
My Lords, I reckon that about 150 queries have been raised in the course of the debate. By definition, I can reply to about 10 or 12 of them, so, as usual, I shall write to noble Lords about the queries that I am not able to address today due to the pressure of time.
I open by endorsing the comments of my noble friend Lady Dean about the importance of pensions and by picking up a point made by the noble Lord, Lord Hunt, that we can see pensions as being an expert gamble or an issue of trust. What we are trying to do in the Bill is to turn it from the first into the second. I agree with all noble Lords who said that the test of the adequacy of the Bill is the degree to which it addresses the issues present on the pensions scene.
I do not want to repeat what was said by many noble Lords about the dimensions of the current pension situation. The fall of the stock market—or I should say its volatility, as it has risen a little—and its concurrence with the fall in long-term interest rates has had a depressing effect. This is a rare event that has not happened since the inter-war years. There is also the rise in longevity. I also wish to endorse the points made 438 by my noble friends Lady Turner and Lady Greengross about the long-term impact of the contributions holiday from 1987 onwards. It has accounted for something around 30 per cent of the current deficit in pension funding and actuaries now tell us that it was probably unnecessary in terms of the 105 per cent cap. It was used to prop up corporate returns.
I shall be very brief on the final issue before turning to the particulars of the Bill. The Benches opposite insisted that what the noble Lord, Lord MacGregor, called "the £5 billion ACT raid" contributed to the pension scenario that we now face. It was not £5 billion, it was probably £3.5 billion and it was not ACT, which is a form of payments on account, but was payable tax dividends. We all know that pension funds pay no tax. Until 1997, they were gaining a 25 per cent additional payment, or tax credit, to reflect the fact that companies already paid corporation tax.
That meant that there was pressure on companies to increase their dividends, which might not be prudent, to gain the "freebie" of a payable tax credit. It also meant that by reducing corporation tax by £3.5 billion, the lowest in Europe, which the Chancellor did, companies were in a much healthier position to pay dividends, which is more appropriate. But in any case, pension funds are not taxpayers and I do not see why there should be an additional notional tax paid refund on top when pensions are already heavily tax privileged on the way in and on the way out compared to all other forms of savings, which are not only taxed, but are also often double taxed, as with building society accounts.
Therefore, I simply do not accept the description of the role of ACT. I quite understand that pension funds would like a 25 per cent freebie on top of paying no tax at all. However, if one does not accept that that is legitimate, except in so far as it artificially enhances the value of funds, I hope noble Lords will agree that reducing corporation tax and strengthening companies is a much healthier way to grow dividends for the future.
I turn to today's debate. The contributions were made in three parts, rather like Gaul. The first were the sections of speeches that welcomed contributions in the Bill. I regret to say that that will comprise the shortest part of my speech this afternoon. The second included issues that aroused disquiet—for example, PPF, focus on business, trustees and some smaller points which I shall mention if I have time for them. Finally, I shall comment in response to some of the wider issues raised by your Lordships about what is missing from the Bill. I shall deal with what was welcomed; then with what seems to have aroused particular disquiet to see whether I can address some of the concerns; and then make some broader comments on what is missing from the Bill.
Those elements that were welcomed included scheme-specific funding. I am pleased, as it has been widely welcomed across the industry. A pension regulator with teeth was pretty much welcomed. There were some questions about its structure, based on the 439 Higgs report of last year, and whether it will have an advisory committee. It will certainly need professional advice and will expect to make use of the expert risk panels that currently exist. In the briefing pack, there is information about parliamentary control and annual reports to Parliament. Some questions were raised about investment strategy. We expect it to be in the public domain but I do not think that it is appropriate for Parliament to control investment strategy any more than we would now expect the Chancellor of the Exchequer to take back control of interest rate policy from the Bank of England. There are plenty of accounting devices from the determinations panel to the independent tribunal, which will bring the pension regulator into proper control. The regulator has been welcomed, particularly by my noble friends Lady Dean and Lord Borrie. OPRA did good work but it needs strengthening and it is the first to recognise that. The additional weapons that the pension regulator will have and its capacity to assess risk will secure the position of funds before they come to topple-over point of possibly going into PPF.
There was quite a lot of welcome for state pension deferrals and the alternative of the lump sum. The noble Baroness, Lady Barker, asked who would benefit from it. Our current information on deferrals is that most people who take deferrals are not the wealthy who can afford to carry on but tend to be women who, because of the discrepancy in retirement ages, tend to carry on working for a couple of years longer than basic state pension age in order to make their retirements coincide with those of their husbands, whose retirement age is later. These patterns of behaviour may change with lump sums and the like but, so far, it is certainly clear that deferral and the lump sums will be very largely appreciated by the lower paid and often by women.
In his comments, the noble Lord, Lord Hunt, welcomed our proposal to reduce indexation on DC schemes. He asked me to be brave and bold. My opening speech included the comment that we will remove indexation from money purchase arrangements back to 1997 by an amendment in Committee. We actually believe that by amendment or regulation we may be able to go further and remove all indexation of protected rights of money purchase schemes back to the beginning of personal pensions in 1988. I think that the equivalent of bouquets are being thrown in the direction if not of me, of the Box. I hope that that will be a significant simplification on the one hand and an increase in choice for those turning money purchase pots into annuities on the other. I hope that I can live up to the outline here. That is an important announcement and I am happy to make it today.
Pension forecasting and informed choice was also welcomed, as was CETV, about which the noble Lord, Lord Skelmersdale, was concerned. Clause 253 will show that people who have them can go for immediate vesting instead of having, as now, to wait for two years. This is of importance to mobile people and to women.
440 Those were the matters that were welcomed. We now come to the much more substantial section about which there was disquiet in your Lordships' House today. The three matters that I want to address in particular are the PPF; the burdens on business issue, that is the costs issue which brings up LPI; and some of the issues on trustees raised, in particular, by my noble friends. Those are the big issues, although there were some smaller ones.
I was asked whether PPF was a pension scheme or an insurance scheme. It is a compensation scheme. In response to the question of the noble Baroness, Lady Barker, about what it will cover, it will, broadly speaking, produce up to 100 per cent for existing pensions and 90 per cent for deferred pensions of the benefits that have accrued in the schemes of which people were originally members. As the noble Lord, Lord Higgins, will recognise, that situation is no different from any other deferred pension when moving jobs and leaving behind rights.
There was a lot of concern about the risk-related levy. I entirely accept that it is important in order not to produce the problem of the last man standing. I accept that it will be technically complicated and that it will have to be built with consent. That is why there is the roll-out period. We are trying to get it right and get it fast and there is obviously tension between those two objectives.
However, we expect that, after year one, we will be able to go into the risk-related roll out. Companies will be able to bring themselves into the risk-related levy earlier than the usual revaluation, if they so wish. We will not be setting down the formula, but our expectation is that at the point of "maturity" of the roll-out process the PPF could be shaping its levy so that 80 per cent of it is risk related and 20 per cent is flat rate, which is almost opposite to the position in the United States.
That brings me to a point on the United States to which there are a couple of cross-references—
§ Lord Higgins
My Lords, before the noble Baroness leaves the point she was just on, I just wanted to say that much of the risk on roll-out involves the company becoming insolvent. That does not need to be delayed over a long period. The other aspect of it is based on the valuation of the assets. However, many pension schemes, including the one with which I was involved, do evaluations other than in the three-year period. So there is no real reason why it needs to be staggered over such a long time.
§ Baroness Hollis of Heigham
My Lords, I am perfectly happy to take this away and see whether we can expedite it. However, in consultation with the industry, we believe that people are most comfortable with this timetable. I nevertheless take the point: if we can expedite it, we should.
§ Lord Oakeshott of Seagrove Bay
My Lords, the noble Baroness mentioned consultation with the 441 industry. That is certainly not what the National Association of Pension Funds believes. I think that that is very important.
§ Baroness Hollis of Heigham
My Lords, whatever the National Association of Pension Funds believes is important, but whether its belief is correct is another matter. The point that I am making, as noble Lords will see in their briefing packs, is that sophisticated companies that have the sort of assessments to which the noble Lord, Lord Higgins, refers can bring themselves into the valuation procedure ahead of the triannual valuations. Therefore, companies are not forced to remain towards the end of the period; they can bring themselves forward if they wish. That option is available to them.
I should like to make one point on the USA comparison that has been made and the possibility that that presages bad news. The fact is that in the United States the levy is set by Congress. The levy has not been increased since 1991, not even to deal with inflation—despite inflation and market instability. It is also worth emphasising that the 10 largest claims in the United States amounted to two thirds of the liability. Five of those were steel, four were airline companies and the other was Polaroid. The situation is not the same as that in the UK.
I was pressed by the noble Lord, Lord Oakeshott, and, I think, the noble Lord, Lord Freeman, on whether the Government should stand behind the PPF, and to say what sort of scheme it is if the Government will not stand as its guarantor. We are seeking to ensure that marginal companies are not encouraged to enter into what we would all accept is moral hazard behaviour because they know that the Government will stand as guarantor. I believe that there is a similarity to the case of asbestos. If companies knew that the Government would pick up the bill for every asbestos claim, what inducement would they have to improve their health and safety practices in relation to asbestos? That is the point. If we want companies to produce the best possible standards, they themselves will have to act as their own moral policemen across the industry. If the Government picked up the bill, we could be sure that individual companies would not. That is not the way in which to go forward with a pension protection fund.
The noble Baroness, Lady Greengross, asked about the moral hazard of bad companies. We have tried to build out that hazard. I do not think that I have the time to go into the detail, but, basically, for companies to come under the scheme, they will have to be insolvent and the scheme will have to be underfunded. If the company is insolvent but the scheme is funded, it will be able to buy full annuities. Those are the tests. Without them, too many companies would seek to come within the PPF as a better buy purchase. That is exactly the sort of moral hazard we cannot afford to sustain.
On the adequacy of funding, I do not think we should confuse the nature of assets for funding with cash flow. The scheme will bring in assets from companies that are folding, however limited those 442 assets may be. It will also have the levy and, ultimately, the power to raise loans. That £300 million a year will be over the lifetime of the fund, in contrast to the financial assistance scheme, which is £400 million over 20 years.
My noble friend Lord Borrie very effectively addressed most of the points on the financial assistance scheme. We could not have made the PPF retrospective; that would not have been fair. If one had gone for unclaimed assets—one of those siren calls—one would have had to raid privately owned assets, which would have been questionable. I also do not think that it would have been accepted as an additional levy on industry across the board.
I believe, therefore, that members of those defaulting schemes have nowhere else in these particular circumstances to go for compensation. Compensation it will not be; but assistance, at least, it will be. The Government have no legal liability, but we do accept a moral argument here about decency. That is why we have tried to assist as we are doing. I shall have to ask the House to indulge me until I can provide further details. We will be publishing our best statistics as soon as we can.
The second big concern was on the cost-savings ratio and, in particular, whether the amount of savings generated by the reduction in LPI would be sufficient to cover the costs of things such as the levy. I realise that time is pressing, but perhaps I should spend a moment on this issue.
At present, although we expect inflation to run at 2.5 per cent, with a tolerance over time of about 1.5 per cent on either side, companies nevertheless have to hedge against the possibility of paying up to 5 per cent indexation each year. The GAD has calculated that this will reduce the cost of indexation from about 23 per cent of total contributions to 19 per cent of total contributions—the 4 per cent, multiplied by the £12 billion of employers' contribution, brings us down to £480 million, and 75 per cent take-up of that is £370 million. That is how we reach the sum which the RIA says industry should be saved. Within that, industry can offset the cost of what are, I think, the quite modest charges on the pension protection fund. We expect the average levy to be about £20 per member—not a sum that I would think would determine the solvency or otherwise of schemes.
My noble friend Lady Turner asked about the downside for people denied as a result of price indexation. It is true that over time the total loss for men and women in the schemes may be about 2 per cent over the course of their retirement.
The first big issue was about the pension protection fund and the second about costs and savings, in particular the costings behind the LPI reductions and the way in which they generated the savings necessary for the fund. I think the third issue is the absolutely legitimate views and concerns about the role of trustees and whether they will be overburdened. That issue was raised by my noble friends and by the noble Lords, Lord Hodgson and Lord MacGregor, and other noble Lords. There are three points. First, 443 trustees already need knowledge and understanding, and the best trustees are already compliant. I have full figures showing that about 80 per cent of companies and 95 per cent of mixed schemes already send their trustees for training. That already happens; whether that is enough training is another matter, but it is happening.
Secondly, the provisions say "relevant knowledge and understanding". We do not expect people to be legally qualified, but we do expect trustees in future to have a good basic understanding of the major issues including funding and investment.
Thirdly, the regulator's approach will be educative, not punitive, with a code of practice offering advice on how trustees can attain the relevant knowledge and understanding. I have put some relevant information in the pack and I am happy to send noble Lords additional information about the sort of trustee training we would expect companies to ensure they receive to discharge their duties. The issue of when a trustee should be paid, raised by the noble Lord, Lord MacGregor, is open to the individual funds to determine as they consider appropriate. We would not wish to legislate at this point on the subject.
Moving from those three big issues, I was pressed by several noble Lords on the Benches opposite—the noble Lord, Lord Hodgson, I think, and the noble Lords, Lord Higgins and Lord MacGregor—on Clauses 35, 36 and 39 and the CBI's concerns that the moral hazard provisions are too widely drawn.
It may be worth my putting a few remarks on the record which I hope will be of some assurance. The CBI supports the proposals in principle. The clauses have to be wide to ensure that the regulator can effectively tackle avoidance, but the regulator will be able to act only where avoidance was the primary motive for a decision. The regulator will be able to issue a contribution notice under Clause 35 only where an act or failure to act was deliberate and designed to avoid pensions liabilities.
The regulator will be able to issue financial support directions only in prescribed circumstances. Those involved in business transactions, corporate restructuring or investments will be able to seek confirmation in advance that the regulator will not impose a contribution notice on them. Officials are working with industry to provide examples of how these new powers will work and how they will be exercised. I hope that the noble Lord, Lord MacGregor, and others who have raised this issue will take some comfort from that.
My noble friend Lady Turner asked about OPRA. I have no reason to think that that body will not continue. It is a valuable body and I hope that it will continue. Points were raised about TUPE by one noble Lord. It might be better if I write to the noble Lord on that point. The noble Lord, Lord Freeman, referred to the Better Regulation Task Force. That body was consulted during the consultation on the Green Paper. However, I hope that the noble Lord will work with us if we need to improve the matter further.
444 The noble Lord, Lord MacGregor, asked whether we could raise the issue of mis-selling on the retirement planner. We do not seek to give financial advice but information from which people will be able to make their own deductions. However, I take the "fair cop" point about pension credit; that was well made. I shall find out why that is not included. The noble Lord, Lord MacGregor, also referred to the plain English technical provisions. The term "technical provisions" is used in the EU directive. It requires schemes to have appropriate assets to cover technical provisions and to put a recovery plan in place. We understand that to mean the amount of assets a scheme needs to hold now on the basis of the actuarial method and assumptions used in order to pay its accrued pension commitments as they fall due in the future. In calculating this amount the scheme actuary will be required to use assumptions about factors such as future investment returns and life expectancy that have been chosen prudently. If we can enlarge on that in correspondence which I shall circulate to your Lordships, I am happy to do so. Given the time that is available to me, that seems to be the most helpful thing I can say.
The noble Lord, Lord Hodgson, asked about the Armed Forces Bill. So far as I understand it, the Armed Forces pension fund is unfunded. Unfunded schemes do not come within the remit of this Bill. Therefore, his concerns should not be raised in this context.
Various accusations were made regarding what was not in the Bill. The four big ones concerned annuities, compulsion, state pension age and the reshaping of state pensions. Strong arguments were advanced today by noble Lords on all sides of the House, which I respect, about the role of annuities and about the degree to which taking them at the age of 75 could be seen as discouraging oversaving, which is what you might want people to do when they are younger. However, I ask your Lordships to bear in mind that it is not a problem that affects many people. To float off the amount of money you would need to protect yourself against income related benefits and so on, you would probably need at least £100,000. The average pension annuity is only about £25,000. Some 95 per cent of people draw their annuities now before the age of 70. There is no reason to think that they seek or need extended choice.
I accept—the point was well made by my noble friend Lady Dean—that with increasing movement towards DC schemes, this will be an increasing and not a diminishing issue. However, at the end of the day, I ask your Lordships to consider what you are arguing and whether you are willing to strip away all tax privileges and the like; that is, that people should have the right to be able to save through their pensions to gain the tax concessions without any of the constraints to ensure that that money is spent on pensions. There is nothing to stop everyone of us in this House tonight saving for our old age in any other way we see fit without necessarily expecting a cross-subsidy from other people possibly less well off than ourselves in the form of tax privileged entry into pension annuities.
445 As I say, there may be other issues that we can take up in future debates, but essentially the reason people do not wish to defer the measure until the age of 75 is because they wish to be able to pass on a tax privileged asset to their heirs. They can save in other formats but those do not enjoy the tax privileges that people currently enjoy with annuities.
I am sure that we shall revisit the issue of compulsion. The climate is changing on that matter. I do not think that live years ago we would have heard the arguments that we heard today. We await the report of Adair Turner. The debate on that matter, rather like the debate on annuities, will not go away and will increase in significance and importance over the next couple of years, as my noble friend Lord Lea said.
Accusations were made that we are not reforming the whole of the state pension system. I plead guilty to that. We are not reforming the whole of the state pension system, nor are we raising the state pension age. That would bear too unfairly on the poorest people in the poorest jobs who have the lowest life expectancy. Two-thirds of men and a half of women have already left the labour market before they reach basic state pension age now. The issue is to keep them in work in their 50s and 60s, not to extend their working years longer still. I ask noble Lords not to press that matter further.
We all share the objectives of security, stability and the building up of trust. We all accept that the Bill will need, and will incur, scrutiny. I emphasise that it has emerged after elaborate consultation exercises and that the regulations that will flesh out so much of the detail of the Bill will in turn be subject to consultation. The debate will not end with the completion of the passage of the Bill through your Lordships' House before the Queen's Speech. I appreciate that your Lordships have been grateful for the additional information that the officials produced. It involved a lot of work. I am glad that noble Lords opposite and my noble friends thought that that was a worthwhile exercise. We are all in this together trying to ensure that we build a better basis for the health of occupational pensions in the future.
Like others, I am appreciative of the courteous nature of the debate and the respect for information. Like everyone else, I am confident that together we shall ensure that the Bill will leave this House, if not changed, at least to your Lordships' satisfaction.
§ On Question, Bill read a second time.