New Clause 5
Nigel Waterson (Shadow Minister, Work & Pensions; Eastbourne, Conservative)
Good, I thought so. I will try to be brief—it was a brief trip. It seemed to me that if the Government were not taking much interest in what was happening in Holland, perhaps the official Opposition should. I have described Holland as, in pensions terms, not just a different country, but a different planet. The official figure is that 95 per cent. of all employees there belong to DB schemes, which is absolutely phenomenal.
Let me take a chunk out of the Minister’s speech for him: there are differences between the two countries, although there are many significant similarities. Holland has big sectoral schemes covering whole sectors of the economy, and there are a lot of legislative and other pressures for existing smaller schemes to keep merging and getting bigger, so it has enormous economies of scale. It is very much in the European social model, regarding the involvement of the trade unions as part of how those large pension schemes are run. They have different funding rules—they do not have the privilege of having a pension protection fund, for example—and they have a different approach to funding. So, there are differences, and I am sure that the Minister will come up with others with his own researchers.
First, let me put on record my thanks to Watson Wyatt. Its Dutch office was extremely helpful in putting the trip together and giving me a lot of the background. According to Watson Wyatt, only 5 per cent. of all pension liabilities in Holland are in DC, rather than DB, and I have already said that 95 per cent. of people are in DB schemes. About 10 years ago, things began to change. Like every other developed economy, Holland began to recognise the intense and growing burden that was being placed on pension schemes by various factors. It became the consensus that indexation must be conditional. Dutch law makes no requirements of any indexation in pension schemes. Incidentally, there is no auto-enrolment as such, but the vast majority of people join in any event.
I had a useful meeting with several bodies, including sectoral funds, the Ministry of Social Affairs and Employment, and so on. I went to see the employers’ organisation, which explained that there was a tradition of these matters being dealt with as a social partnership between unions and employers. Again, it emphasised the lack of movement towards DC. The Dutch association of industry-wide pension funds—I will not try to pronounce its name in Dutch—was in many ways the most interesting body. About 75 per cent. of all workers in Holland are in one of the industry-wide massive pension funds, which they describe as a matter of their culture. What I thought was really interesting, which may allay some of the natural concerns of trade unions in this country and Labour Committee members, is the extent to which conditional indexation is taken advantage of.
The Dutch association of industry-wide pension funds produced some interesting figures that it had only recently collated. It asked all its members about indexation in the years 2002 to 2006 when, as in every other part of the world, pension funds were under a lot of pressure. It discovered that the average pension paid by one of its members was indexed by 10.7 per cent. between those years, while price inflation was 10.9 per cent. The indexation almost exactly mirrored inflation rate. The association says:
“Some pension funds gave extra indexation in the years 2005 and 2006 to catch up the shortcoming of indexation in the years 2002-2004. In 2007 and 2008 more and more pension funds start giving extra indexations.”
That is relevant and interesting because in Holland it seems that the mere existence of conditional indexation is enough for employers to continue in the DB system. It is almost like a “Break glass in emergency” notice: it is there on the wall. If employers want to—if things are really tough—they can stop indexing their pensions. However, many have simply carried on indexing at the rate of inflation and others have, perhaps, indexed at 1 per cent. a year or something. In just about every other case, in any major scheme where employers have cut down the indexation, they have made it up retrospectively. The fears of some people, particularly those in this country’s trade union movement, that members would miss out in the long run might be misplaced.
I apologise for going into such detail, but this is an important issue. If the Minister and the Government will not accept our proposals, we will certainly pencil them in for a pensions Bill in 2009 or 2010.
“Only 31 per cent. of UK private sector DB schemes remain open to new entrants”
and mentioned developments in accounting standards, life expectancy assumptions and all the extra pressures on the continued survival of the DB schemes. She continued:
“The UK's unusual strictness on DB pension benefit indexation is underlined by a new book from the Organisation for Economic Co-operation and Development (Protecting Pensions: policy analysis and examples from OECD countries). This notes that a requirement to index benefits is rare in OECD countries...The OECD is worried about the gradual disappearance of DB schemes in the US and UK in particular”.
She cited Denmark, Iceland and the Netherlands
“as examples of countries with risk-sharing schemes that have proved resilient in recent adverse market conditions”.
She also mentioned the proposals and the ACA’s lobbying on the subject, and concluded by saying:
“The ACA is not asking for indexation on existing schemes to be axed, but only for new schemes to take a different approach. It deserves immediate consideration.”
That is what brings us here today. I want to stress that the proposal that I am talking about is for new schemes so that at the moment when employers are thinking of moving from DB to DC, another option will be available. They might choose not to take it, for various reasons, but they should have the option.