Clause 14
Pensions Bill
9:10 am
Andrew Selous (Shadow Minister, Work & Pensions; South West Bedfordshire, Conservative)
Good morning, Mr. Taylor. I welcome you back to the Chair.
We have come to part 2 of the Bill, which deals with the complex issue of contracting out. This clause deals with the conversion of guaranteed minimum pensions. It might be helpful if I set the scene as to how we have arrived at the need for these provisions. In 1978 it was established that where employees contracted out of the state earnings-related pension scheme, employers had to provide a defined-benefit scheme, and a guaranteed minimum pension that at least equalled the SERPS that they would have earned had they not been contracted out. Hence the contracted-out rebate, in effect a reduction in national insurance contributions paid by contracted-out employers and employees, was introduced. The rebate is set regularly by the Government on the advice of the Government Actuary’s Department, and is supposed to reflect the cost of providing the benefits that have been forgone.
However, it does not always do so; the Government have not accepted in full the most recent advice from The Government Actuary’s Department. I assume, therefore, that the Minister accepts that the rebate no longer reflects the actual cost of providing the forgone benefits, as was originally envisaged.
Following the Pensions Act 1995, contracted-out salary-related schemes do not have to provide guaranteed minimum pensions in respect of benefits accrued after 1997, but they do have to provide them for benefits accrued between 1978 and 1997. The new requirement is to provide benefits broadly equivalent to or better than something called the reference scheme test. The main features of that, for a defined-benefit scheme, are that it should provide for pensions to be paid at normal pension age of 65 and to continue for life; it should have an accrual rate of 1/80 up to a maximum of 40 years; it should define qualifying earnings as 90 per cent. of the employee’s earnings between the lower earnings limit and the upper earnings limit; and it should provide for a widow’s or widower’s pension at the rate of one half if the member dies after the age of 65 or one half of the pension rights already accrued if the member dies before the age of 65.
The Pickering report in 2002 recommended simplification of contracting out, and the pensions Green Paper of December that year proposed, among other things, that schemes should be permitted to convert the GMP use to the simpler reference scheme test benefits of equivalent value.
The Pensions Act 2004 rather ducked the issue of converting GMPs into scheme benefits. However, the Government belatedly introduced a new clause allowing pension schemes to modify members’ accrued rights, provided that that is done on the basis of actuarial equivalence.
Clause 14 would allow contracting-out defined-benefit schemes to convert GMPs into scheme benefits, but only if they meet certain conditions. Those conditions include the actuarial equivalence of the value of members’ conversion benefits with those possessed pre-conversion. We are promised regulations setting out how actuarial equivalence is to be determined; can the Minister tell us whether draft regulations are yet available? There should be no reduction of pensions in payment; conversion benefits should not include money purchase benefits; survivor’s benefit is to be provided; the agreement of the scheme’s sponsor is to be obtained; and the members and survivors and Her Majesty’s Revenue and Customs are to be informed. Can the Minister confirm that even where all members in a scheme do not convert to GMPs, trustees will be allowed to do so for individuals, provided that those individuals consent?
It will be for the pensions regulator to enforce the law in that area, but when does the Minister expect the provision to take effect? It is suggested in the Library brief that it will not happen before 2009 because, as we have found out on a number of occasions in the Committee, the Department’s computers cannot be programmed to do the job before then—another case of the computer saying no.
It would be valuable for the Committee to consider the views of outside bodies on the clause. The Engineering Employers’ Federation, which has followed the Bill carefully, describes it as “a useful provision” and
“one for which the EEF has been arguing for a number of years.”
It goes on to say:
“However, the EEF considers that there needs to be greater clarity about the requirement to notify members about a proposed conversion, as this may prove to be impossible for some deferred members whose current address may be unknown, and about what is meant by the requirement to ‘consult’ the earner in advance.”
That is a practical problem, and we are grateful to outside bodies such as the EEF for identifying it. Will the Minister address it?
A briefing provided by the Association of Consulting Actuaries makes the point that the provisions of the clause are supposed to ease administration costs. It states that
“the cost of running good existing occupational pension schemes must be significantly reduced if the wave of scheme closures”
in recent years is to be checked. Rather worryingly, the ACA goes on to suggest that the clause will not deliver savings, because of EU legislation. It states that the clause
“appears to allow conversion into normal scheme benefits to take place only if benefits are levelled up to avoid sex discrimination.”
Will the Minister comment on what appears to be another serious issue drawn to our attention?
The ACA goes on to suggest a number of methods to reduce the costs of the scheme. One is to restore the contracted-out rebate to the level recommended by the Government Actuary to meet the costs of replacing the state benefits forgone. As it points out,
“the 2007/12 rebates set by Government are an effective tax on providing a defined benefit scheme.”
Can the Minister confirm that he is reconsidering that?
Subject to the various points that I have raised, and of course to the Minister’s answers to them, we do not oppose the provisions in the clause.