Pensions Bill

Part of the debate – in the House of Lords at 3:30 pm on 27 October 2008.

Alert me about debates like this

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Parliamentary Under-Secretary, Department for Work and Pensions, Parliamentary Under-Secretary (Department for Work and Pensions) (also in the Department for Communities and Local Government) 3:30, 27 October 2008

My Lords, I thank the noble Baroness for tabling this amendment because it gives me a chance to update noble Lords on developments since we last debated this issue in Committee. Like the noble Baroness and other noble Lords who have spoken in this short debate, the Government are concerned about the trend of DB scheme closures. Back in July, when we debated these same amendments, we had just published a consultation paper, as has been acknowledged, on risk sharing. The paper was very wide-ranging and sought views on a number of proposals. It included material on risk sharing within the current regulatory framework, including what changes employers are making to their schemes, to illustrate what is currently possible. It also outlined some proposals for risk sharing put forward by stakeholders, which included conditional indexation restricted to new career average schemes or extended to all salary-related schemes, and collective defined contribution schemes.

We received more than 80 responses, which reflected a diverse range of views with no clear consensus. For example, a number of respondents to the consultation on risk sharing felt that the idea of collective defined contribution schemes was appealing in principle. In collective defined contribution schemes, employers would have certainty about their contributions and the financial risks would be shared between the members rather than between the members and the employer, but respondents also said that further work would need to be carried out before it could be implemented. Other respondents asked us to look at the legislative provisions that apply to cash balance schemes, which are structured like defined contribution schemes but where a member's pension pot is not exclusively reliant on contributions' investment returns. These schemes are treated by DWP legislation as defined benefit schemes because of the guarantee about the size of the pot provided by the employer. We are looking further at those issues.

While there was some support for conditional indexation arrangements and also for collective defined contribution schemes, a number of respondents expressed concern that the approaches set out in the consultation paper were too complex. Some wanted more radical and simpler solutions, and others asked whether the proposals were fair, in particular in the way that pensioners were treated. Some argued about specific further changes and felt that the current framework provides enough flexibility and that the opportunities for risk sharing that currently exist should be more widely publicised.

The question of demand for risk-sharing also arose in the consultation responses. Some of the views expressed chimed with the results from the recent research on employers' attitudes to risk sharing that was carried out on behalf of DWP and published in August. The findings of this survey indicated that among employers in the study who provided pension schemes for their employees there was relatively little interest in risk-sharing approaches.

While the consultation responses have not presented us with a clear mandate for a particular approach to the issues around risk sharing, we are continuing to work urgently to identify the appropriate way forward. The Government are committed to doing all we can to support good employer pension provision, but we must find a solution that strikes the right balance between employers and scheme members. We should keep in mind that these issues are about redistributing risks away from employers to scheme members, not about eliminating or reducing risk. It is that balance that underpins our considerations. While we are looking at the conditional indexation option, we are mindful that some consultation respondents found it too complex.

It is crucial to take into account how well arrangements can be understood by members of schemes. If complex messages about inflation protection were to undermine confidence in pensions at a time of such economic turbulence, that would be a high price to pay. We must also bear in mind that if conditional indexation is introduced in the same form as in the Netherlands, there would be a number of resulting issues. For example, whether it should be accompanied, as there, by a buffer requiring schemes to be funded to around 130 per cent of their nominal liabilities and whether there should be 50 per cent member-nominated trustees.

I understand the argument that something has to be done quickly to slow the decline in defined benefit provision, particularly in the current economic climate. However, we should not consider adopting this amendment simply to be seen to be doing something if the outcome would be to create a system that is so complex that it would do nothing to help stop the decline. It has been said that it is worth introducing these amendments if they stop even one employer closing its DB scheme, but it is just not that simple. I understand that the ACA model would apply to new schemes only. If that is the case, there is a risk that that would create churn in pensions market. Consideration needs to be given to the various options and their implications before we make any decisions on a way forward, including about what changes, if any, are needed. That would include consideration of the implications for the pensions regulator. The noble Baroness may be disappointed by my reply, but we are not prepared to rush into making changes to legislation without being clear that that is the right thing to do.

In response to the point raised by my noble friend Lady Turner, I reiterate that the ACA model before us is predicated on a career average scheme and would involve closing schemes and opening new schemes. She made an important point about considering not only the opportunities that might arise for some schemes but whether this would drive behaviours and encourage people away from their current provision.

Like us, the noble Lord, Lord Oakeshott, recognises the need to do something and to make progress but expresses scepticism about whether this model is the right one to adopt at the moment. If we were to conclude that we should introduce legislation along these lines, we could not, as the noble Baroness will appreciate, recommend adopting the amendments as they stand. We have real concerns that they are technically deficient—although I accept that the Government have the resources to address such technical issues—and would not deliver the kind of conditional indexation that the Opposition and the Association of Consulting Actuaries, which developed the idea, are proposing.

First, the amendments provide for indexation to be funded for as a liability of the scheme but specifically state that indexation is not a liability of the scheme, so as to create an accrued right or entitlement. It is therefore unclear whether a scheme would in fact be required to be funded so as to provide for indexation where indexation had not already been awarded. If no rights to indexation are to accrue to the member until awarded and therefore the scheme is not required to fund for them, this would in effect remove the requirement for indexation and make it discretionary. As I understand the ACA proposal, that is not the intention. In addition, the amendments could result in discrimination between early leavers and those who remain in the scheme until normal pension age, where the scheme is a final salary scheme. This is likely to be contrary to the requirements of EU legislation.

I acknowledge that these are extremely difficult issues with difficult judgments to be made, but I assure the noble Baroness that we have not closed the door on this option. I reiterate that we are working urgently on this issue and I do not preclude our returning to it at Third Reading. However, that is as far as I can go at the moment.