Pension Funds Unfunded Portion Variation

New Clause 13 – in the House of Commons at 6:30 pm on 25th March 1980.

Alert me about debates like this

'(1) The Minister shall specify in writing to the persons administering each BR pension scheme what general economic assumptions he has used for determining the proportion referred to in section 45(1) and what modifications he has made to those assumptions in order to take account of the particular circumstances of the said scheme.

(2) If the actuary to a BR pension scheme shall certify at any time after 1st April 1986:

  1. (a) that the assets held by that scheme in respect of the relevant pension obligations exceed or fall short of the amount required to meet the proportion of those obligations which is not being paid for by the Minister under section 43; and
  2. (b) that the reason for the said excess or shortfall, or part of it, is that the general economic assumptions made by the Minister in determinating the proportion referred to in section 45(1) have proved to be invalid;
then the Minister shall make an order to increase or decrease the said proportion with effect from a date later than six months but not later than one year after the date of the actuary's certificate to such an extent as to place the scheme in as nearly as possible the same position as it would have been in at the date of the said certificate had the proportion determined under section 45(1) been based on valid economic assumptions.

(3) An order under subsection (2) shall be made by statutory instrument which shall be subject to annulment in pursuance of a resolution of the Commons House of Parliament and may be amended by a further order under this section.'—[Mr. Booth.]

Brought up, and read the First time.

Photo of Mr Albert Booth Mr Albert Booth , Barrow-in-Furness

I beg to move, That the clause be read a Second time.

The Minister has said that in the provisions of the Bill there is no intention on the Government's part to worsen the pension rights of any of those affected by the Bill. The extent to which the pension rights are protected or worsened by this Bill is a matter of considerable contention between us and I have no intention on the new clause of rehearsing the very many arguments we had on that score in Committee, because, whatever else this new clause does, it does not attempt to state the basic position of the Opposition on historic railway pension rights. What it seeks to do, rather, is hold out to the Government the possibility of a compromise which would meet much of the concern of those responsible for the running of pension schemes.

The reason for a clause of this sort springs from the way in which the Bill is constructed and the way in which the Government seek to legislate in this Bill to evade their current statutory responsibility fully to fund the historic pension rights of certain railway pensioners and certain NFC pensioners. It springs also from the great difficulty which exists for anybody who is running a funded pension scheme today in working out how much funding is required at this time to ensure provision for payments of certain pension rights at some time in the future. Both of those considerations bear on the clause.

Clause 45 requires the Minister to determine the unfunded proportion of each of the pension schemes under which historic railway pension rights accrue before the end of 1981, and this is the proportion of the historic pension payments which from time to time the Minister will have to meet.

The Government's proposal in the Bill is that for the present statutory commitment of the Government fully to fund these pension rights there should be exchanged an undertaking to meet a proportion of these pension demands. The Government are proposing that such funding as has been paid up to now should be calculated as meeting the requirement up to a certain proportion of the funds and that the remaining proportion, what is called in the Bill the unfunded proportion, should be paid for on a pay-as-you-go basis by the Government in annual payments arrangements from now on.

7 pm

The difficulty to which the clause is addressed is that there is no provision in the Bill for adjusting the percentage of the unfunded proportion if the assumptions upon which it is originally calculated prove to be wide of the mark in practice. Anyone who has studied pensions recently must agree that it is highly likely that the Government in making the calculation will get it wrong. That is not to say that the Government are trying to diddle pensioners, or that they do not have good actuarial advice. But it is extremely difficult to predict what will happen to the inflation rate, to wages or to the dividend-earning capacity of the pension fund investments.

After consultation with the unions and the committee of the principal pension funds involved, the British Railways Board proposed to the Government that it was desirable for the unfunded proportion to be adjustable in future years. The board held that this would safeguard the position of members and pensioners and also of the Government. If it were adjustable, it was held that members and pensioners would have the safeguard that, if the assets held in respect of the historic pension funds became exhausted, the Government would have to adjust the proportion to be met on a pay-as-you-go basis upwards, possibly to 100 per cent. if the funded proportion had been fully exhausted. But the Government would have the safeguard on behalf of the British taxpayer that, if the actuarial basis used at the outset proved to be too conservative and a surplus arose on the funded proportion, it would be possible to adjust the unfunded proportion in a downward direction, even to zero, to avoid unnecessary calls upon public money. That is the basis of the proposition originally put to the Government which we argued for in Committee.

The Government raised several objections to this proposal which I will try to state as succinctly and fairly as I can. The Government said that if there were complete adjustability the incentive to those who manage railway pension funds to perform efficiently would be removed, and that it could even open the door to some abuse on their part because, so the Government argued, the board would not then have to meet the historic pension costs associated with any change in the definition of pensionable pay and, therefore, they could make those changes believing that the Government would pick up the tabs.

We are putting forward in the clause a compromise proposal which attempts to meet fully the Government objections while still maintaining the principle that some adjustability is needed if the propositions on which the unfunded proportion was originally calculated turn out in future to be incorrect. So we are trying to maintain the principle of adjustability if those general economic assumptions prove to be wrong either in one direction or the other—and we acknowledge that that is possible.

The clause proposes that the unfunded proportion shall remain fixed until 1 April 1986, no matter what happens, on exactly the same basis as the Government's proposals. If the clause is accepted by the Government, as I hope that it will be, there will be no change in the operation of the historic pension funds from what the Government propose until 1 April 1986. At any time after 1 April 1986, if there is a surplus or a deficiency in the fund in respect of the historic pension obligations, provided that it can be shown that the surplus or deficiency has arisen because the general economic assumptions that were made in calculating the historic pension obligation funding proportion were invalid, then, and then only, will the Minister be required to adjust the unfunded proportion to such an extent as to place the scheme in the position in which it would have been had those initial assumptions been correct.

The clause proposes that that adjustment should take place with no retrospection. If a surplus or deficit in the fund arises at any time after 1 April 1986 for any reason other than wrong economic assumptions, that would have to be dealt with under existing arrangements. If a surplus became available for a reason other than that the economic assumptions were wrong, it would be open to those who manage the funds to improve the benefits under them or to reduce contributions. If a deficit arose because the funds had not been managed well or terms other than those involved in the economic assumptions had turned against the funds, the deficit would fall to be met by the board under its guarantee of the solvency of the funds.

The effect of the proposal would be that the Government would be responsible for a surplus or deficit that arose because the initial economic assumptions were wrong and for no other reasons, whereas the railways would remain responsible for any surplus or deficit arising from any other cause.

The clause meets the Government's objection of incentive being removed. Clearly in the clause there is an incentive for railway pension schemes to be managed in the best possible manner and for the full costs of any proposed changes in pensionable pay to be taken into account on a proper basis before the board makes any decision about pension changes.

In practice I believe that the clause would require the Minister at the outset, when determining the unfunded proportion, to specify in writing to the trustees or the management committee of each pension scheme what general economic assumptions he had used and what modifications he may have made to those assumptions to take account of the particular circumstances of a scheme.

The reference that we make to general economic assumptions requires those assumptions to be defined, and we have sought to do that in the clause by saying that we are talking about future pay, prices and dividend increases in the United Kingdom. We are concerned with the effect of these factors on our economy and on future investment returns for United Kingdom pension funds in general. Either these assumptions, at the discretion of the Minister, could be as to a uniform rate for future years or the Minister could specify different Assumptions for different years. That is a matter for the Minister as long as he states the assumptions at the outset. Presumably, the Minister would make the same general economic assumptions for all the railway pension schemes in which he is concerned.

Modifications to meet particular circumstances of individual schemes might take the form of assumptions that the rate of pensionable pay will increase at a different rate from the assumptions made for the economy in general. Another possibility is that the Minister could assume a lower rate of investment return for railway funds because of their lack of new investment income. One change which the Bill brings about is the cutting off of these considerable funds to which the schemes have a right under present legislation. Those are all matters on which the Minister will have to make a decision in determining which proportion of the pension should be funded and which part should be covered by the annual pay-as-you-go payments.

Having specified his general economic assumptions, the Minister should also specify what official indices he will use as an indication of actual experience from time to time in future, because at some time beyond 1 April 1986 we shall compare what has actually happened with what would have happened had the assumptions been correct.

It would be a comparatively simple matter for an actuary, when making an actuarial valuation after April 1986, to estimate how much more or less the assets held in respect of historic pensions would have been if the unfunded proportion had been determined at the outset on the basis of assumptions which were in accord with the experience over the period from the outset to the date of valuation, and in accordance with the original assumptions from the date of valuation onwards.

The implicit assumption is that the original estimate could still come true in the final result after 1986, even if the performance year to year had not been in accordance with the assumptions. If that were to be the outcome it should be accepted by those in the pension scheme as putting them in a position similar to that which would have been brought about if the assumptions had been correct. That would enable the Government Actuary to certify how much of any surplus or deficit was attributable to the incorrectness of the general economic assumptions.

Once it has been determined that a deficit exists at the valuation date, because the general economic assumptions had proved invalid, the Government actuary could calculate the increase required in the unfunded proportion in order to eliminate the deficit. The same would apply for a surplus. It might not be possible—I am trying to cover the full range of possibilities—for a deficit or a surplus to be completely eliminated, because the unfunded proportion could not be increased by more than 100 per cent. or decreased to less than zero. Any balance of the surplus or deficit attributable to invalid economic assumptions would have to be borne by the funds and by the board in the same way as any surplus or deficit that has arisen for any other reasons would have to be borne in respect of historic pension obligations.

This proposal offers a compromise between the proposals in the Bill—where the unfunded proportion remains fixed for all time—and the proposals previously put forward by the board, which would entail complete adjustability. The proposal realistically meets the objections made by the Government on the basis of their assessment of the original proposals.

It is difficult to predict at this stage the proportion of the historic pension rights that can be said to have been funded already. It must be accepted that the return on shares might be different. I shall not tease the Government with the suggestion that success or failure of their monetary theory or economic policy might be in question in this respect. It would have been true of any calculation made by any Government over the last 20 years. It is difficult to predict uprating costs, inflation and dividends.

Our proposal gives a fair run to the Government's proposition, and it enables the Government to calculate on the basis of there being no change between now and April 1986. It has to be held also that the proposal offers a safeguard to pensioners, to those who manage the pension schemes, and to the public.

7.15 pm

I hope that it will be agreed that our proposal in no way reduces the responsibility of those who operate the funds. The proposal does not relieve them of any obligations to make decisions to carry through their responsibility in a way which has proper regard for the needs of pensioners, the public, and the British Railways Board as guarantor, to deal in a prudent way with the funds of the railways and the funds of the British public. It addresses itself to the simple question of the difficulty of calculation.

I hope that the Minister will be able to respond to the proposal constructively, and I hope that he will not attempt to damn it on a minor technical point. If the Government have decided that there must be a change in the way in which the public will meet a statutory obligation which has previously been decided by the House and on which those who have operated historic railway pension funds have made decisions in good faith, this proposal can give a fair run to what the Government are seeking to do. It will safeguard against dangers which could occur through no fault of the pensioners or those who have been appointed to manage funds for them.

Photo of Mr Norman Fowler Mr Norman Fowler Minister of State (Department for Transport)

Before I turn to the amendment, it may be helpful if I make a few introductory comments at this stage.

I should like to try to put the Bill into context and explain its relationship to the 1974 Act, which it will replace. The 1974 Act is a starting point for the Bill.

The pension provisions of the 1974 Act were part of a general reconstruction of the finances of the British Railways Board. The reconstruction was directed towards the various obligations of the board. It was not concerned with the pension entitlements of members of the pension schemes. The reconstruction did not deal only with the means by which support was to be provided for railway passenger services; it observed an important general principle. The functions and responsibilities of the board and of the Government were to be kept separate. The Government did not take over the board's pension scheme. Instead, a system was devised by which the board received a defined measure of support to enable it to discharge the historic obligations that it owed to its pension schemes.

Part III of the Bill reflects three main considerations. First, it retains the principle of support for historic obligations. As far as I am aware, that principle has not come under any criticism. Secondly, it is designed to meet the concern of the Public Accounts Committee that substantial public expenditure was incurred in advance of need. Thirdly, it is designed to secure public expenditure savings in the years immediately ahead.

I repeat that it is the Government's view that nationalised industry pension schemes should continue to be funded. It is right that the contributions should be collected from employees and employer and invested by management committees against future liabilities. The Bill maintains the principle of funding for a proportion of the liabilities of each scheme.

The purpose of part III of the Bill is to change the method by which support is provided, rather than using either the principle of funding or the principle that support should be provided.

The machinery of the Bill is in many ways similar to the machinery that was to have been adopted under the 1974 Act. The procedure is basically as follows: the actuary will have to assess the historic liabilities of each scheme. He will have to estimate the number of pensioners that there will be, how long they will live, and their pensionable salaries. I need not go into all the details.

The end result will be that the actuary will put a total capital value on historic liabilities. He will likewise have to estimate the value of the assets corresponding to the liabilities. He will have to make crucial assumptions about the rate of return on investments, interest rates and dividends. Again, the end result will be the total capital value of the assets. The difference between the two capital values is the deficiency or surplus in the scheme concerned.

It was proposed in the 1974 Act that funding debts should be created, equal in value to the deficiency. The schemes would then have assets and liabilities that exactly matched. The difficulty lay in the magnitude of the sums that were involved. Under the interim funding orders £1¼ billion stood to be paid from 1980–81 onwards. The board was arguing that that was nothing like enough fully to fund its obligations.

The Bill proposes that the proportion of the liabilities of each scheme that is not covered by the assets should be met by Government payments. It is proposed that the payments should be made on an emerging-cost basis as and when the corresponding pensions come to be paid. The remaining proportion of the liabilities would then exactly match the assets. Thus, as under the 1974 Act, the liabilities that were the responsibility of the scheme would be fully funded. The difference would be that the total sums involved would be proportionately smaller, and the risk with any future surplus or deficiency that emerged would be correspondingly less.

Photo of Mr Peter Hordern Mr Peter Hordern , Horsham and Crawley

Will my right hon. Friend explain the position of any possible limit of Government support to the British Rail pension fund within his proposals? I understood that in any one year there is a limit of £52 million. Will my right hon. Friend confirm that there is such a limit and that that is the sum?

Photo of Mr Norman Fowler Mr Norman Fowler Minister of State (Department for Transport)

That is the real value. I shall ask my hon. Friend the Parliamentary Secretary to give my hon. Friend a full reply. I say, off the cuff, that that is the real value averaged over the next few years.

The preliminary professional advice is that there would be great difficulties in operating the clause. However, I do not intend to seek to argue that. The starting point of the Bill was the 1974 Act. That measure provided for a once-and-for-all settlement by the end of 1979. No provision for adjustment was made after that. British Rail pension schemes would have been left with total responsibility for the historic pensions liabilities. They would have had a fixed quantity of assets with which to discharge the liabilities. Some of the assets would have been those that they have now—for example, equities, properties, gilt-edged stock, and works of art. The remainder of the assets would have consisted of funded debt.

If the actuarial assumptions under the 1974 Act had been wrong, the whole of any deficiency that emerged would have been a renewed burden on the board's finances. That is what was proposed under the 1974 arrangement, and that was the whole philosophy of the 1974 Act. In other words, a defined and fixed measure of assistance was to be given to the board. It might have proved too much and it might have proved too little. However, the whole of the responsibility for the historic pensions obligation would have remained with it. The difference would have been that it would have started from a higher base line, inasmuch as it had more assets.

The Bill proposes to reproduce the support that would have been given under the 1974 Act. It follows the same philosophy. Once again, we are proposing a once-and-for-all settlement, after which the board will basically be on its own. The differences are technical but they are important. As the Minister will be taking responsibility for a fixed proportion of the historic pensions' outgoings, the surpluses or deficiencies that will emerge in the part of the funds that is the board's responsibility will be much smaller than under the 1974 Act.

The substance of the amendment is that the Minister should take the main responsibility for the historic pensions' liabilities. It would isolate only factors local to the board and to British Rail pension schemes. That goes beyond the 1974 Act.

It has been argued that the actuarial assumptions are bound to be wrong. I do not seek to pretend that there is not bound to be a measure of uncertainty.

Photo of Mr Walter Johnson Mr Walter Johnson , Derby South

We are worried about the Bill and the actuarial valuation. Will account be taken of inflation proofing, especially for those superannuates who are not members of a new fund that automatically caters for inflation proofing? This is a real worry of the superannuates who are already on pensions.

Photo of Mr Norman Fowler Mr Norman Fowler Minister of State (Department for Transport)

I think that I can give the hon. Gentleman an assurance that it will do just that.

It has been argued that the actuarial assumptions are bound to be wrong. I should be less than frank if I did not say that there is bound to be a measure of uncertainty. However, if the actuarial assumptions that are used when the unfunded proportions are determined are significantly wrong, the consequences will obviously go much wider than British Rail pension schemes. Every funded pension scheme depends on actuarial assumptions. That is self-evident. At any given time not every actuary will be using the same assumptions. However, there will be some degree of agreement.

The actuarial assumptions that will be used in the determination of the unfunded proportions will not necessarily be exactly the same as those currently being used in routine valuations of funded pension schemes. Such assumptions are likely to be the base line.

If the actuarial assumptions used under the Bill are significantly wrong, the assumptions currently being used for most other funded schemes will also be wrong. Again, that will be a much greater problem than the problem being faced by British Rail. The clause will insulate the board and the British Rail pension scheme from general economic trends. That is an insulation that was not provided under the 1974 Act.

Photo of Mr Stan Cohen Mr Stan Cohen , Leeds South East

If the Bill is enacted in its present form, will any profits or surpluses made from the pensions schemes be distributed and used for other purposes, whereas any losses incurred will have to be covered by the scheme?

Photo of Mr Norman Fowler Mr Norman Fowler Minister of State (Department for Transport)

Profits and surpluses will be used for the benefit of the pensioners. We shall be discussing that issue in a later amendment.

For all pension funds there is a risk that actual experience will differ from the assumptions on which actuarial assessments were based. It is then for the employer and the fund managers to decide what action to take. If a major difference emerged between the actual experience and the assumptions on which the determination of the funded proportion was based, that would pose a serious problem for all pension funds.

There is no reason to legislate now to exempt BR funds from the risks that are faced by every other funded pension scheme. I know that that will come as a disappointment to Opposition Members. I thought that it was right to intervene at this early stage to indicate the Government's views.

Photo of Mr Leslie Spriggs Mr Leslie Spriggs , St Helens 7:30 pm, 25th March 1980

To which of the pension funds is the Minister referring? The superannuation fund has been in existence for many years. It was started by the private railway owners and then passed on when public ownership took place. There is a male wages grades pension fund, and a later superannuation fund that includes a number of the male wages grades. Will the Minister make it clear to which of the funds he is referring, so that we can follow his argument?

Photo of Mr Norman Fowler Mr Norman Fowler Minister of State (Department for Transport)

I refer the hon. Gentleman to schedule 8, where the pension schemes are listed.

Photo of Frank Dobson Frank Dobson , Camden Holborn and St Pancras South

I am finding it difficult to follow the Minister's arguments. He says that if there is a catastrophic error in the one-off valuation made by the Government Actuary there will be similar errors in the valuations made by the actuaries of other pension funds. That is nonsensical. The Government Actuary is not responsible for other valuations.

All other pension funds, including the funded aspect of the BR pension funds, will be subject to revaluation from time to time. It is usual for the revaluations to be carried out every three or four years. If the Minister does not accept the new clause it will mean a one-off valuation by the Minister with the assistance of the Government Actuary.

Representations were made by my right hon. and hon. Friends in Committee. Representations were made also by the management and the unions of BR against a one-off valuation. Those representations were unavailing. We are faced with a last effort in the House—although common sense may prevail in another place, as it did on another transport matter—to persuade the Minister to accept that he is not infallible. Certainly the Government Actuary is far from infallible.

If the Minister does not accept this reasonable clause, he will have to guesstimate about half a dozen fluctuating factors for 20 years ahead. The consequences of a one-off valuation, if it were not changed, could carry on for 80 years from now, by which time everybody in the House, including those in the Public Gallery, would be dead.

By asking the House to reject the clause the Minister is saying that he will carry out an actuarial valuation that could carry us forward until everybody in the House has died, probably from natural causes. That is not just nonsense; it is absurd. It is nonsense on stilts.

The Minister, together with the Government Actuary, needs to consider the rate of price inflation for the next 20 years, the rate of increase in public sector pensions—which are inflation-proof at present —and, because he has to value the funded part of the scheme, he needs to know the general rate of return on investment over the next 20 years.

I was reluctant to believe that the Minister could do that. I tabled a question to the Chancellor of the Exchequer for answer on 3 March. I asked him what is the Treasury's estimate for the next 20 years of the rate of price inflation, the increase in public service pensions and the general rate of return on investment. The Treasury mandarins considered the matter, but by 3 March all that the Minister could tell me was: I shall let the hon. Member have a reply as soon as possible."—[Official Report, 3 March 1980; Vol. 980, c. 35.] A further two days' wait brought forth an interesting reply: The Treasury has not made any estimates for the next 20 years of these three variables."—[Official Report, 6 March, 1980; Vol. 980, c. 211.] It was our understanding that the Government Actuary would not conjure these figures out of the air, but turn to the Treasury for advice. If he turns to the Treasury for advice, on the strength of the answers that have been given to me he will receive no worthwhile advice because such estimates are not made by the Treasury. I concluded that the Treasury did not know the answer.

Because the Minister of State, Civil Service Department has to consider Civil Service pensions, I asked him for how many years ahead he estimated the cost of Civil Service pensions, what factors he took into account, and what rate of inflation he was assuming for each of the years for which he made such estimates. His reply on 24 March 1980 stated: Estimates of expenditure on Civil Service pensions are made in the annual public expenditure surveys which are carried out in constant price terms; such estimates to 1983–84 will be included in the Government's forthcoming public expenditure White Paper. These take account of forecast retirements in each year as well as the assumed mortality rate of pensioners. The actuarial cost of Civil Service pensions is assessed by the Government Actuary in his review of the adjustment in pay research for differences in superannuation benefits. The assumptions about future price and salary inflation used in the 1979 review are set out in his 1979 report, a copy of which is in the Library. The Library staff, in their excellent and helpful manner, found the report. There was no reference to future inflation—only references to past rates of inflation. Even those were presented in the form of graphs. I understand that it would not be in order to wave graphs about to demonstrate what has happened.

Taken over the past 30 years, the average rate of return on equities has been 9·8 per cent. On occasions, the increase in the rate of return has dropped below 50 per cent., to minus 50 per cent., and has risen above 100 per cent. Those startling changes occurred within a span of two years during the latter part of that 30-year period.

The Government Actuary does not guess 20 years ahead for the purpose of Civil Service pensions, but he will be expected to guess 20 years ahead for the purposes of BR pensions. That is absurd.

I wish to demonstrate how much the position can change in 20 years.

Photo of Kenneth Clarke Kenneth Clarke Parliamentary Secretary (Ministry of Transport)

It is not possible to make actuarial valuations of funding that is needed to meet any pension obligations. Every actuary makes that sort of assumption when he issues a certificate to indicate that a pension scheme is properly funded. It is true that in this case, as a once-and-for-all funding, any further obligation to top-up if variations emerge will fall on British Rail as the employer, as it does with any other pension scheme.

We are replacing the 1974 Act, which had a once-and-for-all valuation in 1979, with no review. It does not strengthen the hon. Gentleman's case to produce in this tortuous way arguments that all actuarial calculations are impossible or always wrong, because actuaries make those kinds of calculations day in and day out.

Photo of Frank Dobson Frank Dobson , Camden Holborn and St Pancras South

The Parliamentary Secretary has given the game away with his last sentence. They make those valuations day in and day out, and in some cases they keep revising those valuations. In this case there will be no procedure whatever for revising the valuation once it has been made. The purpose of the new clause is to allow those sorts of revaluation to take place. Under the Bill as drafted, they cannot take place, and the fact that they were in the earlier Bill does not oblige me to support the provisions of the earlier Bill.

Photo of Mr Harry Cowans Mr Harry Cowans , Newcastle upon Tyne Central

Surely the point at issue has been revealed by the Parliamentary Secretary. By saying that actuaries make such calculations daily, he gave away the fact that the Government should now accept the new clause. The new clause gives an actuary the opportunity of putting right a mistake that he has made. That is basically what it is all about. My hon. Friend is seeking to help the Government. Will not the Minister accept the help that has been offered to him?

Photo of Frank Dobson Frank Dobson , Camden Holborn and St Pancras South

I am always happy to accept the help that is offered by my hon. Friend. Indeed, I have accepted that help for quite a long time with regard to this Bill. My hon. Friend makes the point very cogently. We are asking the Government Actuary, the Minister and the Parliamentary Secretary to guess accurately 20 years from now, yet we do not expect actuaries to do that in any other sphere.

I should like to illustrate my argument with two examples of what can happen over a period of 20 years. I do not claim to be able to predict. All that I can do is look back. When I looked back 20 years from 1980 to 1960, I discovered that the average wage in 1960 was £14 a week. In 1980, the average wage is, I understand, £114 a week. I do not think that any actuary who carried out actuarial valuations in 1960 would have guessed that that scale of increase was likely to come about. Had anyone made a one-off valuation at that time he would almost certainly have got it wrong.

I turn to something that is closer to the hearts of hon. Members. In 1960, Members of Parliament were paid £1,750 a year. They had no secretarial allowance and, more appropriate to this debate, no pensions. Today, in 1980–20 years later—I understand that Members of Parliament now receive £10,750, a secretarial allowance of £6,850 and provision for a pension. Of course, Ministers will chuckle, because they get a lot more than honest Back-Bench Members. They are getting rather more than the Queen's shilling for their services. In addition, following the previous debate on this matter, Members' secretaries will in future be entitled to some sort of pension.

I do not believe that many hon. Members who were present in 1960—when President Eisenhower was President of the United States, when the Cuban missile crisis had not even taken place, when the Minister was chairman of the Cambridge University Conservative Association and when the Parliamentary Secretary would have to wait another year before he moved into that warm seat which his right hon. Friend would leave—would have predicted those sorts of changes.

Photo of Mr Leslie Spriggs Mr Leslie Spriggs , St Helens

I am afraid that my hon. Friend will sit down before this matter has been clarified. A few moments ago, the Parliamentary Secretary said that the railway board would be left to fund its pension scheme as other pension schemes are funded by the employers. Will my hon. Friend try to discover from the Parliamentary Secretary how many of the non-contributory pension and superannuation schemes that operate today would fall into the scheme as it was explained to us? When I did my last research I discovered that there were quite a number of non-contributory schemes. The railmen contribute to their scheme. How are the other funds, which are non-contributory, actuarially funded?

Photo of Frank Dobson Frank Dobson , Camden Holborn and St Pancras South 7:45 pm, 25th March 1980

I trust that the Parliamentary Secretary will take my hon. Friend's question on board and will reply to it.

The Minister also suggested that British Rail would have to take on anything that went wrong, as everyone does. However, that is not a reasonable comparison, because in that case what may go wrong will be the fault of the Minister and the Government Actuary. It is quite unreasonable to expect the British Rail pension fund to take on board the consequences of its own possible mistakes as well as someone else's.

It seems to me that the Government will have to resort to necromancy or something of that sort in order to decide what the actuarial valuation should be. It reminds me of the three witches in Macbeth. We shall have the Minister, the Parliamentary Secretary and the Government Actuary going round some cauldron into which they will throw ideas, muttering: Double, double toil and trouble;Fire burn and cauldron bubble. I shall not go on to quote all that they say, except that at the end of that scene, Hecate, a strident female character, appears on the scene. I do not allocate that characterisation to any Member of the Government Front Bench, although other hon. Members may do so. Hecate comes in, sees the witches throwing all the stuff into the cauldron, Which will help them predict the future for Macbeth, and says: O! well done ! I commend your pains,And every one shall share i' the gains.And now about the cauldron sing,Like elves and fairies in a ring,Enchanting all that you put in. I believe that the Government will need some enchantment in order to predict what they are trying to in a way that will protect the pensions of a large number of railway pensioners.

Photo of Mr Peter Hordern Mr Peter Hordern , Horsham and Crawley

I followed with great interest what the hon. Member for Holborn and St. Pancras, South (Mr. Dobson) said about the difficulty of forecasting what funds would be required to fund pensions. Not only do I have sympathy with what he said, but I agree with virtually every word that he said. The only exception was the current salaries that are now paid to Members of this House. Otherwise, what he said seemed to be accurate.

It seems to me that the purpose of the new clause is to have a regular review, I think on a three-year basis, to see what the valuation of the fund is at any one time and, if necessary, to add to the fund if circumstances demand or, if there is a substantial surplus, to return such part of the surplus as may be required. In replying to the right hon. Member for Barrow-in-Furness (Mr. Booth), my right hon. Friend put the position very clearly. It is that the Government will set aside a certain sum annually which will account for the deficiency in the valuation which the Actuary has placed upon the historic obligations of the fund.

When the Public Accounts Committee, of which I have been a member for some time, first looked at this matter in 1976, the deficit on the fund stood at £660 million. At the time we were told that the Government would do something about it, and would pay large sums of money over to the British Rail pension fund. However, for one reason or another, which is understandable, those sums were not paid. As my right hon. Friend rightly said, that figure now amounts to £1¼ billion. That lends strength to the arguments of the hon. Member for Holborn and St. Pancras, South about the great difficulty in assessing what those obligations might be and what they will amount to. My hon. Friend the Parliamentary Secretary, in replying to the debate, will say whether there is to be a limit of £52 million, in real terms, in each year or any limit at all on what the Government propose to make available in paying off the unfunded proportion of the fund.

I have what are generally called unsound views about funding in the public sector. I believe that I am regarded otherwise as a sound money man and a convinced monetarist. But a problem arises by the very nature of public sector pensions. They are schemes that aim to provide an index-linked pension. Such an index-linked pension is not available in the private sector, so far as I am aware. The comparison that might properly be drawn between one funded scheme and another in the public sector and the private sector is therefore impossible to draw.

It is one thing to make an actuarial valuation of future liabilities with a funded scheme where one can forecast, perhaps inaccurately, what future pensions might have to be. It is quite another to have to make a forecast of future wage increases, because the pension depends on the salary at retirement and on future cost of living increases which arise because of the index-linking provision. How can anyone tell, 20 or 30 years away, what the cost of living will be at that time? I respectfully suggest to my right hon. and hon Friends that such an attempt is impossible in the present state of knowledge or in any reasonable course of prediction. I do not think that it is possible.

I have already stated that I think that the difficulty arises due to the index-linking commitment. One way out might be to say that if there is to be a funded scheme it must be on all fours with all funded schemes in the private sector. If left on its own, there should not be an index-linking provision. It should be the same as the others. I concede that this is a real argument. I do not think, however, that it is the position that the Opposition or those employed in British Rail would prefer to see. I believe that the employees value the index-linking provision and regard themselves as public servants in the same way as civil servants do. That is a natural proposition.

I should like to explain why I believe that the Government's proposals, if I understand them correctly, will prove ineffective as time goes on and why hon. Members were right to say that substantial increases will have to be given to the rail fund if this commitment is to be carried out.

The real rate of return—the essential element of the matter—has been unsatisfactory for many years. The average rate of return on a typical fund—and I know that there are difficulties in establishing what a typical fund is—has, for the last 15 years, been 8 per cent. But the increase in salaries over the same period has been 10·9 per cent. There has been a negative rate of return over the last 15 years of some 2 per cent. Over the last 50 years, for each of the last five decades, taking each separately, there has been a negative real rate of return on each of those periods.

The Government Actuary, when asked to report to the Wilson committee on what would be the position if a negative rate of return was achieved on a fund of investments, said that the contribution rate required to support the benefits of a new entrant to a scheme providing final salary pensions protected against inflation after award, assuming a negative rate of 2 per cent., which is what we have seen over the past 15 years, would be 50 per cent. of salary. He added: Employers would increasingly find it impossible to pay the rates of contribution recommended by actuaries and they would certainly doubt the wisdom of paying contributions to a fund where those contributions would wither away in real terms. I ask the House to note that the Government Actuary was talking about an index-linked fund of the kind that British Rail runs. I indicate the difficulty of the real rate of return because the nature of the capital market means that the problem is likely to get worse and not better. This is because of the weight of the funds themselves. Year after year there is a substantial increase in investment by institutions on the Stock Exchange, in property, in equities, and in gilt-edged securities.

In each of those areas, if the public sector fund has to be financed by the taxpayer, an extraordinary position arises. I invite the House to consider the gilt-edged market today. Where there is a deficit in a public sector fund, the deficit has to be made up by the taxpayer. If that money is invested in gilt-edged securities, the interest itself has to be paid by the taxpayer. So the taxpayer is paying both the contributions to the pension fund and the interest on the loan that arises from the investment. It is an extraordinary circular course.

In the equity market, a great deal depends on what capital appreciation is possible within any fund of investments. It is no secret that capital appreciation has been hard to come by, in nominal terms, let alone in real terms, on the Stock Exchange in recent times. I say recent times. It would perhaps be more appropriate to say over the last 15 years or so. There remains the property market—

Photo of Mr Stan Cohen Mr Stan Cohen , Leeds South East

Does the hon. Gentleman agree that investment in the public or the private sector, and expenditure in both, are paid for by the public?

Photo of Mr Peter Hordern Mr Peter Hordern , Horsham and Crawley

No, I do not agree. Investment by the private sector comes out of private savings. The same cannot be said of public sector contributions, except as forced savings. I do not agree with the hon. Gentleman. I was referring to property investment.

The average yield on properties at the moment is 5 per cent. Let us suppose that when a fund is in deficit the managers invest in property. At the end of the year they come back to the trustees and explain that there is a deficit on the fund that they want the trustees to make up. Five per cent. does not represent anything like the increase in salaries or the increase in pensions that the fund has to pay for. More money is passed across to the trustees and invested in other property still yielding 5 per cent. It will be argued that the rate of return on property in- volves not only the rents but the capital appreciation. But pension funds and other institutions are competing with each other for blocks of offices and other blocks of property, the valuation of which is based on a random market competition for assets by tax-free funds.

The House will remember what happened in 1972, 1973 and 1974 when there was a property collapse. Many pension funds found that the value of their investment had been halved, and sometimes gone down by two-thirds.

Photo of Mr Walter Johnson Mr Walter Johnson , Derby South

On a point of order, Mr. Deputy Speaker. What have the hon. Gentleman's remarks to do with the clause under discussion?

Photo of Lieut-Colonel Dick Crawshaw Lieut-Colonel Dick Crawshaw , Liverpool Toxteth

I understand the hon. Gentleman's remarks to be pertinent to what is being discussed.

Photo of Mr Peter Hordern Mr Peter Hordern , Horsham and Crawley

I should hope so. I am sorry that the hon. Gentleman has not been following what I say. I shall try to speak more slowly. It is difficult to achieve a real rate of return on investments by any fund, least of all a fund where the commitment is to provide a pension that is index linked. I would say that it is virtually impossible to do so. The hon. Gentleman may disagree. In the case of the British Rail pension fund, of which the hon. Gentleman probably has some knowledge due to his past experience, the position reached a height of absurdity. I am glad to say that the position has now been changed.

The position was reached where the British Rail pension fund was investing in works of art, achieving no rate of return of any kind. At one stage that pension fund was competing with the British museum and others for the bottom half of a silver gilt candlestick. As it happened, British Rail won and got the candlestick. But we had one lot of taxpayers' money competing with another lot of taxpayers' money. The amount of money that was devoted by that fund to works of art at one stage actually exceeded the amount of money that the taxpayer gives to the Tate gallery, the National gallery and the British museum. That was the absurdity of the situation.

8 pm

Photo of Mr Harry Cowans Mr Harry Cowans , Newcastle upon Tyne Central

I am following the hon. Member's argument very closely, and I agree with a lot of what he says. However, I must correct him on one point. He talks about the British Rail pension fund speculating in works of art with taxpayers' money. That pension fund is contributed and it does not consist of taxpayers' money.

Photo of Mr Peter Hordern Mr Peter Hordern , Horsham and Crawley

I am afraid that if the hon. Member looks at the forecast of public expenditure year after year he will see that this House has voted sums of money for the British Rail pension fund. I do not have the figures with me, but I assure the hon. Member that that is the case.

I wish to draw attention to one aspect of that arrangement. One interesting thing about the British Rail pension fund's works of art is that many people ask where these pictures are. Many of them are hanging in the City Club—the bastion of the City itself—where they are not on view to the public at all.

Finally, I turn to the general economic effect on pension funds, and particularly those of nationalised industries and local authorities—

Photo of Mr Leslie Spriggs Mr Leslie Spriggs , St Helens

The Railways Board does not make a contribution to the male wages grades pension fund. Any investment that it has made is not as a result of grants from the Government to British Rail, but comes from the wages of the railway workers themselves.

Photo of Mr Peter Hordern Mr Peter Hordern , Horsham and Crawley

I am sorry, but I did not fully grasp the hon. Member's point. My right hon. Friend the Minister says that he is wrong anyway. I assure the hon. Member that the taxpayer has made a continuing contribution to British Rail's pension fund for some years, and obviously will do so for many years to come.

I wish to draw the attention of the House to the general economic effect of paying contributions to nationalised industries' pension funds in this way. The Government Actuary says that if all the funds in the nationalised industries and local authorities were frozen as of tomorrow and pensions were paid, index-linked as they arose, there would be a saving on the public sector borrowing requirement of £2,000 million a year. I believe that that is a significant figure, and it is worth having. If it were announced in the Budget tomorrow that nationalised industries pension funds would be frozen and that all future payments and obligations would be made on a "pay-as-you-go" basis, that would give an immense saving.

I commend that argument to the right hon. Member for Barrow-in-Furness. I noticed in Committee that he had not definitely made up his mind about whether these pensions should be on a "pay-as-you-go" basis or on funded schemes. I ask the House to distinguish between the real nature of the guarantee for a person working in the nationalised industries, the local authorities or the Civil Service. In the Civil Service, pensions are "pay-as-you-go" and here seems to be no reason, in any proper sense, why pensions in the nationalised industries and local authorities should not similarly be so paid.

What is the effect of this extra money going into the pension funds? I shall give some idea of the growth. Institutions account now for some 60 per cent. of the entire turnover of the Stock Exchange. The nationalised industries invested £184 million in property in 1974, and £386 million in 1978. That amount will grow every year. Substantial funds are given by the taxpayer to these pension funds, which will be devoted to property—not only property in this country, but abroad as well. Those property values will depend on considerable increases in rents.

Let us take a typical City development. It may be funded by a nationalised industry pension fund, and it might have first-class tenants such as Marks and Spencer or Boots. The success of that scheme will depend entirely on substantial rent increases which those companies will have to pay. Of course they will pass these increases straight on to their customers. This money could be saved to the tune of £2,000 million a year if we simply paid the pensions on a "pay-as-you-go" basis.

I have been in the investment business all my working life and I should like to feel that there was a real rate of return on investment in the future, but I fear that that will not be the case. It is my belief that, having regard to the experience of the last 15 years, even on an ordinary funded pension scheme where there is no commitment for an index-linked pension, it will be very difficult to pay satisfactory pensions in future. In the case of a public sector pension scheme where the pensions are guaranteed to be index-linked, I believe that such a commitment will be almost impossible to bear, and will be borne only with considerable exertion and distortion of the market, and considerable waste of money from the public purse.

Photo of Mr Walter Johnson Mr Walter Johnson , Derby South

I shall not detain the House for long because I realise that we have a long way to go before the Bill receives its Third Reading this evening, or perhaps tomorrow morning. It is clear to me that the hon. Member for Horsham and Crawley (Mr. Hordern) knows nothing about the historic background of the railway pension scheme. Perhaps hon. Members do not realise that in 1948, when the railways were nationalised, the assets of the railway superannuation fund were taken over by the Government of the day—I am sorry to say that it was a Labour Government—on the understanding that pensions would be guaranteed, and that 4 per cent. would be paid as a result of the change in funding.

Between 1948 and 1974 no proper funding took place at all and, as a result, the superannuation funds of British Rail were unfairly treated by successive Governments. Governments did not play the game with these pension funds until 1974, when it was decided to make good the massive deficit that had been built up over the period from 1948. We were talking in terms of £1,000 million by the end of last year.

Had that money been properly invested, as it could have been during that period, we would not have any financial problem at all. Even with the 1974 Act, in time and with proper funding the pension fund would have been able to operate properly.

I give an example. London Transport was allowed to stay out of this situation although it was taken under the umbrella of the British Transport Commission. London Transport—and its pension fund—was permitted to stay outside, and as a result of proper wide-ranging investment over the years, apart from two or three years when there was rapid inflation of the order of 27 per cent. to 30 per cent. it was able to pay its pensions out of the return on its investments.

The point I am trying to make is that successive Governments have not played fair with British Rail funds. If they had we would not be in the present situation. I am convinced that, because the difficulties have never been understood by the House, we face problems today. I cannot for the life of me understand what the Government find so difficult about accepting the clause. I believe that it will provide the safeguards which are essential if we are to get proper consideration by the Government Actuary year by year so that this issue can be dealt with fairly.

One of the difficulties for any actuary is to estimate the level of inflation in the following year. If we look at what has happened we will see that as a result of the Pensions (Increase) Act 1971 astronomical amounts have been passed on in the form of supplementation justified by the Government of the day—both the present Government and the previous Government. I believe that to be right. The hon. Member for Horsham and Crawley said that he thought this was grossly unfair. But does he understand that the British Rail Pension Fund and other pension funds in nationalised industries are being paid for by increased contributions? That is the difference. Had those pension funds been able to invest money which was taken from the funds there would be no problem as regards paying out pensions.

Photo of Mr Peter Hordern Mr Peter Hordern , Horsham and Crawley

I must have misled the hon. Member, and I apologise for that. Clearly he has not grasped the drift of my argument. I fully agree that successive Governments have not handed over the money that should have been handed over, but my remarks concentrated on the fact that, even had money been passed over, a deficit would have emerged just as it has in virtually every private sector scheme. I ask the hon. Member to look at the public expenditure White Paper which, year after year, shows subventions to the British Rail pension fund.

Photo of Mr Walter Johnson Mr Walter Johnson , Derby South

Of course. That had to be done because the money was not funded. Surely the hon. Gentleman understands that. The Parliamentary Secretary knows about this because he sat on the Statutory Instruments Committee with me for two or three years when we dealt with it. It was something that had to be done because a guarantee had been given under the 1974 Act. Clearly that is the way in which we should proceed now, and not have the hotch-potch where an actuary determines just how much money is required to keep the fund going and to pay out any deficit.

From the response I received from the Minister to a question I put earlier I am pleased to know that supplementation has now been understood and guaranteed for those who are on pension. When the Minister replies I should like him to reiterate that that is where the Government stand. Among my many jobs I happen to be the honorary President of the British Transport Superannuitants Federation.

I believe that we have made a case why the House should support the new clause. I am surprised that the Government cannot see their way to accept it. It would provide a sensible approach to the problem and I believe that it would be supported by the House. I hope that the Minister will explain why he feels that he cannot accept it.

Photo of Kenneth Clarke Kenneth Clarke Parliamentary Secretary (Ministry of Transport) 8:15 pm, 25th March 1980

I begin by touching on what lay behind the interventions made by the hon. Members for Derby, South (Mr. Johnson) and for Leeds, South-East (Mr. Cohen). They were not engaged in the Committee proceedings, but both of them are well-known for their interest in railway matters. Both of them were plainly concerned about the position of pensioners and beneficiaries under the various schemes. That has concerned a number of people.

There is nothing in the Bill that affects the position of members of these pension schemes. Their rights and putative rights to pension depend on the rules of the pension schemes to which they belong supplemented by the practices which have sprung up in the area of railway pensions as regards the supplementation schemes.

What we are concerned about in the Bill are the technicalities of how those pension obligations should be met. Essentially it is a conflict between two giant bodies with the resources between them to meet these obligations in one way or another. On the one hand, there is the British Railways Board assisted by the managers of their fund and on the other hand the taxpayer. We are trying to make sense of a historic division of liability between them on a particular aspect of British Railways pension funds.

The battle is between the actuaries on both sides, the fund managers of the board and the Treasury, about who picks up how much of the bill towards these pension entitlements. The position of the members of the schemes remains as it was, determined by the rules and practices that have been accepted as of right.

Who is actually liable to those pensioners? The liability to pensioners lies with the British Railways Board. It always has. It is the board's scheme. The board is the employer and the Government are no more stepping into its shoes in the Bill than the previous Government did in the 1974 Act which set up these arrangements. We are dealing with a Government involvement in assisting the Board with those obligations.

The hon. Member for Derby, South, whose knowledge of these matters is considerable, said that it is a matter of history. Unfortunately, what we are talking about is constantly described as the historic obligations of the pension fund, which in railway terms turns out to be prior to 1 January 1975. That is historic enough to be going on with.

The current beneficiaries expecting their pensions in years to come are in a funded scheme which is the responsibility of the British Railways Board and to which the taxpayer has no obligation whatever. We are dealing with the pre-1975 obligations. How did the Government become immersed in making a contribution to this Fund? I cannot remember, but I believe that it goes back even further than the hon. Member for Derby, South indicated. Eventually we shall be adding to schedule 8 the South-Eastern and Chatham Railway Motormen's Fund. That was a scheme we missed. It is a pre-1923 company. It is not just Government, but railway management and companies over the years which have adopted a quite bizarre view of how they should fund their pensions. There is a difference between myself and my hon. Friend the member for Horsham and Crawley (Mr. Hordern) on the funding of pensions. But neither of us can approve of what went on in the railways before 1974. The railways used to invest in their own companies and in time-affixed interest stock. The Government used to make notional interest payments on moneys they took from their own pocket. In 1974 the railways wound the scheme up, having agreed meanwhile to go on to fully-indexed final salary pension schemes, with obligations which they had no prospect whatever of meeting.

In 1974 British Railways were faced with massive pension obligations which they could not meet. With respect to my hon. Friend the Member for Horsham and Crawley, one cannot draw analogies with other nationalised industries. I know of no equivalent of the unbelievable mess that the Government tried to sort out in 1974.

Photo of Mr Stan Cohen Mr Stan Cohen , Leeds South East

Why did the Minister decide to draw a demarcation line between the board of British Railways and the taxpayer, or those who fund that board? In the opinion of most people, British Railways exist as a result of their relationship with the taxpayer. It is ludicrous to try to draw such a demarcation.

Photo of Kenneth Clarke Kenneth Clarke Parliamentary Secretary (Ministry of Transport)

The Government are anxious to draw clear distinctions between British Railways—a nationalised commercial business providing transport services—and the obligations of the taxpayer. Contributions to the funding of railwaymen's pensions come from employees' contributions and from the revenue of the board, as employer. That will apply as long as British Railways continue to provide index-linked pensions. The taxpayer does not make a contribution to current service pensions. There is no reason why the general public should chip in towards the cost of pensions. That cost should be met by the board, as employer, and by its employees.

In 1974 it was decided that unfunded historic obligations should be funded. The board needed a financial reconstruction in order to get rid of its impossible debts. It was decided to try to convert those unfunded obligations into a funded scheme. Even then, the sums involved were massive. A fund could not be set up overnight. It was decided to fund it in instalments. Many of those instalments remain to be paid. As my hon. Friend has pointed out, by 1976 the Public Accounts Committee began to look at the size of the bills. Inflation took instalments steadily upwards. The Committee said that problems were involved in funding those pensions. It pointed out that one had started from nothing and that one was trying to build up a fund at a time when inflation and salaries were racing away. It pointed out that we were running up a down escalator at an impossible rate. It said that it would be impossible to finance that fund without a colossal cost to the Treasury.

In response to the Public Accounts Committee, the Bill was introduced. We must save the taxpayer from the huge contributions that will be required by the pension fund during the next few years. However, we should meet the Government's obligations under the 1974 Act in a different way. We are taking over the situation part way through the 1974 Act settlement. It is not possible to fund. It cannot be done other than at an impossible cost to the Treasury and to the public. We shall therefore treat them on the basis that they are partly funded.

We have got part way towards funding these pension obligations. I cannot say that we have got half way, because the clause seeks to determine that. A proportion is now funded. The funds must therefore look after that proportion. That is what they are there for. That is why the taxpayer has given his money. God bless all who sail in them. Funds are responsible for their proportion.

The taxpayer will continue to accept liability for the unfunded proportion. He will no longer do so in a foolish and expensive attempt to fund it, but on an emerging cost basis as those pensions become payable. That is the rationale of the Bill. It will save £70 million in the first year of operation. It will save countless hundreds and millions of pounds thereafter.

I realise that the Opposition would not choose this machinery. They say that they want regular reviews of the funded and unfunded proportion, according to the constant revisions of actuaries as assumptions emerge. Our reason for resisting that is simple. The Opposition seek to change the whole nature of the settlement made in the 1974 Act. They demand that the Government take on an obligation for all pensions, using the taxpayers' money. They want us to cover all eventualities and to relieve the fund of its basic obligations.

Our policy is to repeat the arrangements made in the 1974 Act; no more, no less. We accept that the Government and the taxpayer have continuing obligations under that 1974 settlement. However, there is no reason why they should be enlarged, made more flexible or extended as the Opposition have urged. We do not see why this particular pension fund should be given further guarantees—in the form of regular revisions—against the uncertainties that face any pension fund in our present economic circumstances.

Photo of Mr Harry Cowans Mr Harry Cowans , Newcastle upon Tyne Central

I do not believe that the hon. Gentleman has read the clause. It seeks only that there should be a revaluation where it is proved that the Minister's or the actuarial forecasts are invalid. That is not what the Minister is saying. He is saying that it will be for ever and a day.

Photo of Kenneth Clarke Kenneth Clarke Parliamentary Secretary (Ministry of Transport)

The hon. Gentleman helpfully leads me on to the points made by my hon. Friend the Member for Horsham and Crawley and the hon. Member for Holborn and St. Pancras, South (Mr. Dobson) about how actuarial assessments are made, and so on.

In the ordinary case, an employer with a contributory pension fund for his employees has actuaries to advise him on the present level of funding. They have to make long-term assumptions about movements, final salaries, inflation and so on. They certify the level of the fund each year. They have to vary those assumptions regularly, because no assessments are ever right. If the assessments turn to the good, there is a surplus which is devoted to improving benefits. If they turn to the bad and the surplus goes down, they look for increased contributions or even a lump sum topping-up from the employer. That is the obligation that every employer has to accept.

British Railways have that system for their in-service pensions for those who are contributing now. We are not relieving them of that obligation. To do so would be to subsidise labour costs in a way that no other business can be subsidised. We do not intend to do that.

My hon. Friend the Member for Horsham and Crawley has great knowledge of these matters and great erudition in financial matters generally. He argues that it is not even possible to have index-linked pensions. I do not accept that and neither do others with more expertise than myself. It is an opinion that I have heard previously and it is at the root of the argument about funded pensions in the public sector and index-linked pensions.

Many actuaries, however, believe that they can do it. At present about a dozen actuarial firms are engaged in issuing certificates about the funding of pensions that carry index-linked obligations. They are playing with a lot of variables, and assumptions may vary frequently. Nevertheless, they can do it. They have to respond to changes in their assumptions in the same way they have to in other pension schemes.

I am told that some actuaries find easier to allow for index-linking than for final salary arrangements in schemes that are much more variable and difficult to estimate. There are people around who do not know their own salary, like the hon. Member for Holborn and St. Pancras, South.

Photo of Mr Walter Johnson Mr Walter Johnson , Derby South

The hon. Gentleman is forgetting the 26 years. Had the pension fund been taken over and properly funded, there would be no problem for the taxpayer. The Government and the country are not doing the British Railways pension fund any favour. The money is owed to the pension fund.

Photo of Kenneth Clarke Kenneth Clarke Parliamentary Secretary (Ministry of Transport)

We are doing no more nor less than the previous Government in 1974. Our method is different.

I agree with the hon. Member for Derby, South (Mr. Johnson). I am an advocate of funded pension schemes and always have been. We are dealing with the consequences of failing to fund inflation-proofed final salary pension schemes.

My hon. Friend the Member for Horsham and Crawley is right in pointing out that in the short term, if we ceased to fund the current contributory and index-linked pensions, there would be a massive saving in the PSBR. We do not have time to enlarge that argument. However, by doing so we defer to later generations or, in the case of British Railways, business managers in 20 years' time, the problem of finding from revenue the necessary resources for an incalculable quantity of liabilities that will then exist, based on what inflation has done to final salaries. Although my hon. Friend can probably counter it, I believe that savings made now by ceasing to fund pension schemes in the public sector will be short-term. The long-term cost and difficulties may be enormous. Meanwhile we will no longer top up but will adhere to the settlement made in 1974.

We will do a once-and-for all actuarial calculation of what the funded and unfunded proportion is of each scheme. The 1974 Act was similarly based on a once-and-for-all actuarial assumption. Assumptions were made in 1979 and there was no provision for revision and the final payments of last instalments were to be made by 1986. If we had not introduced this Bill, the 1974 Act would still be in operation, there would be no revision of actuarial assumptions and the risks to the fund under the 1974 Act would have been much greater.

8.30 pm

If the actuarial assumptions had been found to be wrong by 1986 there would have been a large lump sum deficiency to be made up by British Rail. If we are wrong in our once-and-for-all calculation on this occasion it will become clear, year in and year out, that the proportions will be to the advantage of one party or the other. Sometimes British Rail may win and at other times the Treasury may win. The risks in that situation will be much more confined.

The core of the argument is that not only are we not differing from the 1974 assumptions but we are relying on the same justification as that relied upon by the then Government. The reason why we do not intend to review and are not behaving as employers, where our actuaries will come along every three or six years—or whenever the new clauses suggests—and revise our assumptions so that we top up depending on the position, is that it is not our pension scheme. It is the British Rail pension scheme.

We are taking over a 1974 financial reconstruction, when an agreement was entered into to put the scheme back on its feet to enable it to face up to its obligations. That was a once-and-for-all financial reconstruction. What will happen to final salaries as inflation progresses is within the control of the board just as what happens to basic pay rates and to the consolidation of overtime and bonuses is a matter for the board.

We wish to adhere to a once-and-for-all settlement in the style of the 1974 Act. We cannot enter into the complications of three-yearly discussions between the fund managers and the Treasury. No matter what period is chosen, we cannot enter into a continuing dialogue year after year about actuarial assumptions and constant adjustments and readjustments of the Government's liability.

The taxpayer's liability is fixed at £52 million at present prices for all payments throughout the years until the last beneficiaries have gone and all obligations are extinguished. What that means in money terms nobody knows. Anyone who hazarded a guess would be guessing at the rate of inflation over the next 20 years. The taxpayer's obligation is therefore limited and we are resisting pressure continually to review it. We all know in which direction that pressure will push us if the fund gets into further difficulties.

That figure of £52 million is based on proper actuarial assumptions made by technical experts and they cover the next 20 years. The Government Actuary and the fund's actuaries are accustomed to making those assumptions every time they are asked to value the obligation of the fund to meet any pension liability.

Photo of Mr Albert Booth Mr Albert Booth , Barrow-in-Furness

I cannot conceal that I am appalled at the Government's response to what was—putting it at its highest—a modest compromise proposal given acceptance of the Government's primary intention. The Minister and the Parliamentary Secretary have said that the provisions made by the historic railway pension fund under the terms of the Bill are as good as those made under the 1974 Act because the Government say that they are. The Government ignore the fact that the 1974 Act provisions for historic railway pensions were agreed with those who run the funds. The amount of funding was worked out and there was agreement. The Government's proposal will not be agreed; it will be imposed by the Minister, subject to Treasury approval, and rammed down their throats. Those who run the pension funds will be told to bear a certain proportion with a specified amount of funding and that the rest will be on a "pay-as-you-go basis".

The Government argument is that people running funded pension schemes will have to face the results of assumptions made by actuaries today which may turn out to be wrong in 5 or 20 years' time. The Minister says that the British Rail pension fund managers must be put in the same position.

British Rail pension managers are in charge of a different set of circumstances in several important ways. Those who run other funded pension schemes do not have to face a Tory Government who say "Whether you like it or not, funds guaranteed by legislation will be cut off and a certain proportion of the scheme will cease to operate on a funded basis".

Photo of Mr Peter Hordern Mr Peter Hordern , Horsham and Crawley

I have sympathy with the problem. Is the right hon. Member really saying that in the event of the Labour Party being returned at the last election, it would have paid £1,250 million until 1986?

Photo of Mr Albert Booth Mr Albert Booth , Barrow-in-Furness

I am not saying that. If a Labour Government had been returned at the last general election they would have either stood by the 1974 provisions and regarded themselves as being under a legal and moral obligation to pay to the trustees of the railways pension fund the amount promised in the 1974 Act or they would have gone to the trustees to see if they could agree on a different basis. A Labour Government would have asked the trustees to agree that if the 1974 Act provisions were carried out there would be an immediate call on public funds with no certainty of the pension fund being more than adequately or insufficiently funded.

I do not say that a Labour Government would have said that they must use the 1974 Act and nothing but the 1974 Act— till death us do part". They would have tried to find an agreed basis. A Labour Government would not have sought to impose an entirely different basis without consent.

The hon. Member for Horsham and Crawley (Mr. Hordern) was a member of the Public Accounts Committee. That Committee did not suggest that its recommendation should be applied by any Government in such a way as to disadvantage those who run pension funds.

No other body which runs a funded pension scheme will be called upon to reconstruct its investment pattern because guarantees have been totally changed. The managers of the British Rail historic pension fund have invested money on the assumption that they must produce returns from that investment from 1986 when the funding was to be cut off. They invested on that basis. Now they must change all that. There will be no compensation for difficulties or losses.

If British Rail is unable to pay for the funded proportion in 1986, or at some later date, a limited number of options will face it. First, it can possibly seek to put the burden on rail fares and to say that the railway passenger can meet its historic pension obligations. It could ask those in existing British Rail pension schemes "Will you make a contribution by paying more into the present pension schemes?" in the hope of funding something else. It may be difficult to get that agreed. However, it is one of the theoretical possibilities. It could return to the House of Commons and say "You passed legislation in 1980 which changed the basis for 1984. A proportion has been fixed by a Minister, whom you authorised, which turned out to be wrong".

In any of those circumstances it cannot lie in the mouths of any Ministers in a Conservative Government to say that they have not, in this Bill, put at risk guarantees and expectations on the part of pensioners and railway funds. I therefore call upon the House to vote for this modest amendment, which would do nothing more than to require in five years' time, if assumptions made on funding a proportion were wrong, that the matter should then be put right.

Question put, That the clause be read a Second time:—

The House divided: Ayes 225, Noes 283.

Division No. 244]AYES[8.42 pm
Abse, LeoFraser, John (Lambeth, Norwood)Oakes, Rt Hon Gordon
Adams, AllenGarrett, John (Norwich S)O'Neill, Martin
Allaun, FrankGarrett, W. E. (Wallsend)Orme, Rt Hon Stanley
Alton, DavidGeorge, BrucePalmer, Arthur
Anderson, DonaldGilbert, Rt Hon Dr JohnPark, George
Archer, Rt Hon PeterGinsburg, DavidParker, John
Armstrong, Rt Hon ErnestGourlay, HarryPavitt, Laurie
Ashley, Rt Hon JackGraham, TedPendry, Tom
Ashton, JoeGrant, George (Morpeth)Penhaligon, David
Atkinson, Norman (H'gey, Tott'ham)Grant, John (Islington C)Powell, Raymond (Ogmore)
Barnett, Guy (Greenwich)Hamilton, James (Bothwell)Prescott, John
Barnett, Rt Hon Joel (Heywood)Hamilton, W. W. (Central Fife)Race, Reg
Benn, Rt Hon Anthony WedgwoodHarrison, Rt Hon WalterRadlce, Giles
Bernett, Andrew (Stockport N)Haynes, FrankRees, Rt Hon Merlyn (Leeds South)
Bidwell, SydneyHeffer, Eric S.Richardson, Jo
Booth, Rt Hon AlbertHogg, Norman (E Dunbartonshire)Roberts, Albert (Normanton)
Bottomley, Rt Hon Arthur (M'brough)Home Robertson, JohnRoberts, Allan (Bootle)
Bradley, TomHomewood, WilliamRoberts, Gwilym (Cannock)
Bray, Dr JeremyHooley, FrankRobertson, George
Brown, Hugh D. (Proven)Horam, JohnRobinson, Geoffrey (Coventry NW)
Brown, Ronald W. (Hackney S)Howells, GeraintRodgers, Rt Hon William
Brown, Ron (Edinburgh, Leith)Huckfield, LesRooker, J. W.
Buchan, NormanHudson Davies, Gwilym EdnyfedRoss, Ernest (Dundee West)
Callaghan, Rt Hon J. (Cardiff SE)Hughes, Mark (Durham)Rowlands,Ted
Callaghan, Jim (Middleton & P)Hughes, Robert (Aberdeen North)Ryman, John
Campbell, IanHughes, Roy (Newport)Sandelson, Neville
Campbell-Savours, DaleJanner, Hon GrevilleSever, John
Carmichael, NeilJay, Rt Hon DouglasSheerman, Barry
Cartwright, JohnJohn, BrynmorShore, Rt Hon Peter (Step and Pop)
Clark, Dr David (South Shields)Johnson, James (Hull West)Silkln, Rt Hon John (Deptford)
Cocks, Rt Hon Michael (Bristol S)Johnson, Walter (Derby South)Silkin, Rt Hon S. C. (Dulwich)
Cohen, StanleyJohnston, Russell (Inverness)Silverman, Julius
Concannon, Rt Hon J. D.Jones, Rt Hon Alec (Rhondda)Smith, Rt Hon J. (North Lanarkshire)
Conlan, BernardJones, Dan (Burnley)Snape, Peter
Cowans, HarryKaufman, Rt Hon GeraldSoley, Clive
Spearing, Nigel
Crowther, J. S.Kerr, RussellSpriggs, Leslie
Cryer, BobKilroy-Sllk, RobertSteel, Rt Hon David
Cunliffe, LawrenceLambie, DavidStewart Rt Hon Donald (W Isles)
Cunningham, George (Islington S)Lamborn, HarryStoddart, David
Cunningham, Dr John (Whitehaven)Leadbitter, TedStott, Roger
Dalyell, TarnLelghton, RonaldStrang, Gavin
Davidson, ArthurLestor, Miss Joan (Eton & Slough)Straw, Jack
Davies, Rt Hon Denzil (Lianelli)Lewis, Ron (Carlisle)Summerskill, Hon Dr Shirley
Davies, Ifor (Gower)Litherland, RobertTaylor, Mrs Ann (Bolton West)
Davis, Clinton (Hackney Central)Lofthouse, GeoffreyThomas, Jeffrey (Abertillery)
Davis, Terry (B'rm'ham, Stechford)Lyon, Alexander (York)Thomas, Mike (Newcastle East)
Deakins, EricLyons, Edward (Bradford West)Thomas, Dr Roger (Carmarthen)
Dean, Joseph (Leeds West)McCartney, HughThorne, Stan (Preston South)
Dempsey, JamesMcDonald, Dr OonaghTilley, John
Dewar, DonaldMcGuire, Michael (Ince)Tinn, James
Dixon, DonaldMcKay, Allen (Penistone)Torney, Tom
Dobson, FrankMcKelvey, WilliamVarley, Rt Hon Eric G.
Douglas, DickMacKenzie, Rt Hon GregorWainwright, Richard (Colne Valley)
Douglas-Mann, BruceMaclennan, RobertWalker, Rt Hon Harold (Doncaster)
Dubs, AlfredMcMillan, Tom (Glasgow, Central)Watkins, David
Dunnett, JackMcNaily, ThomasWeetch, Ken
Dunwoody, Mrs GwynethMagee, BryanWellbeloved, James
Eadie, AlexMarks, KennethWelsh, Michael
Eastham, KenMarshall, David (Gl'sgow.Shettles'n)White, Frank R. (Bury & Radcliffe)
Edwards, Robert (Wolv SE)Marshall, Dr Edmund (Goole)White, James (Glasgow, Pollok)
Ellis, Raymond (NE Derbyshire)Marshall, Jim (Leicester South)Whitehead, Phillip
Ellis, Tom (Wrexham)Martin, Michael (Gl'gow, Springb'rn)Whitlock, William
Ennals, Rt Hon DavidMaxton, JohnWigley, Dafydd
Evans, loan (Aberdare)Maynard, Miss JoanWilley, Rt Hon Frederick
Evans, John (Newton)Meacher, MichaelWilliams, Rt Hon Alan (Swansea W)
Ewing, HarryMellish, Rt Hon RobertWilliams, Sir Thomas (Warrington)
Field, FrankMikardo, IanWilson, Rt Hon Sir Harold (Huylon)
Fitch, AlanMillan, Rt Hon BruceWilson, William (Coventry SE)
Flannery, MartinMiller, Dr M. S. (East Kilbride)Winnick, David
Fletcher, L. R. (Ilkeston)Mitchell, Austin (Grimsby)Woolmer, Kenneth
Fletcher, Ted (Darlington)Mitchell, R. C. (Soton, Itchen)Wright, Sheila
Foot, Rt Hon MichaelMorris, Rt Hon Alfred (Wythenshawe)Young, David (Bolton East)
Ford, BenMorris, Rt Hon Charles (Openshaw)
Forrester, JohnMorris, Rt Hon John (Aberavon)TELLERS FOR THE AYES:
Foster, DerekMoyle, Rl Hon RolandMr. Donald Coleman and
Foulkes, GeorgeNewens, StanleyMr, George Morton.
NOES
Adley, RobertFowler, Rt Hon NormanMeyer, Sir Anthony
Altken, JonathanFox, MarcusMiller, Hal (Bromsgrove & Redditchi
Alexander, RichardFraser, Rt Hon H. (Stafford & St)Mills, Iain (Meriden)
Ancram, MichaelFraser, Peter (South Angus)Mills, Peter (West Devon)
Arnold, TomFry, PeterMitchell, David (Basingstoke)
Aspinwall, JackGardiner, George (Reigate)Moate, Roger
Atkins, Robert (Preston North)Gardner, Edward (South Fylde)Moiyneaux, James
Atkinson, David (B'mouth, East)Garel-Jones, TristanMontgomery, Fergus
Baker, Kenneth (St. Marylebone)Goodhew, VictorMorgan, Geraint
Baker, Nicholas (North Dorset)Gorst, JohnMorris, Michael (Northampton, 3th)
Beaumont-Dark, AnthonyGow, IanMorrison, Hon Charles (Devizes)
Bell, Sir RonaldGower, Sir RaymondMorrison, Hon Peter (City of Chester)
Bendall, VivianGrant, Anthony (Harrow C)Mudd, David
Benyon, Thomas (Abingdon)Gray, HamishMurphy, Christopher
Benyon, W. (Buckingham)Greenway, HarryMyles, David
Berry, Hon AnthonyGrieve, PercyNeale, Gerrard
Best, KeithGriffiths, Eldon (Bury St Edmunds)Needham, Richard
Bitten, Rt Hon JohnGriffiths, Peter (Portsmouth N)Nelson, Anthony
Biggs-Davison, JohnGrist, IanNeubert, Michael
Blackburn, JohnGrylls, MichaelNewton, Tony
Blaker, PeterGummer, John SelwynNott, Rt Hon John
Body, RichardHamilton, Hon Archie (Eps'm&Ew'll)Oppenheim, Rt Hon Mrs Sally Osborn, John
Bonsor, Sir NicholasHamilton, Michael (Salisbury)Osborn, John
Boscawen, Hon RobertHampson, Dr KeithPage, John (Harrow, West)
Bottomley, Peter (Woolwich Wesl)Hannam, JohnPage, Rt Hon Sir R. Graham
Bowden, AndrewHaselhurst, AlanPage, Richard (SW Hertfordshire)
Boyson, Dr RhodesHastings, StephenParkinson, Cecil Parrls, Matthew
Braine, Sir BernardHavers, Rt Hon Sir MichaelParris, Matthew
Bright, GrahamHawksley, WarrenPatten, Christopher (Bath)
Brinton, TimHeddiG, JohnPatten, John (Oxford)
Brittan, LeonHenderson, BarryPattie, Geoffrey
Brocklebank-Fowler, ChristopherHeseltine, Rt Hon MichaelPawsey, James
Brown, Michael (Brigg & Sc'lhorpe)Hicks, RobertPercival, Sir Ian
Browne, John (Winchester)Higgins, Rt Hon Terence L.Pollock, Alexander
Bruce-Gardyne, JohnHogg, Hon Douglas (Grantham)Porter, George
Bryan, Sir PaulHooson, TomPowell, Rt Hon J. Enoch(S Down)
Buchanan-Smith, Hon AllckHordern, PeterPrentice, Rt Hon Reg
Buck, AntonyHowell, Ralph (North Norfolk)Price, David (Eastleigh)
Budgen, NickHunt, David (Wirral)Prior, Rt Hon James
Bulmer, EsmondHunt, John (Ravensbourne)Proctor, K. Harvey
Burden, F. A.Irving, Charles (Cheltenham)Rathbone, Tim
Butcher JohnJohnson Smith, GeoffreyRees, Peter (Dover and Deal)
Butler Hon AdamJopling, Rt Hon MichaelRees-Davies, W. R.
Cadbury, JocelynJoseph, Rt Hon Sir KeithRenton, Tim
Carlisle, John (Luton West)Kaberry, Sir DonaldRhodes, James, Robert
Carlisle, Kenneth (Lincoln)Kershaw, AnthonyRhys Wiliiams, Sir Brandon
Carlisle, Rt Hon Mark (Runcorn)Kimball, MarcusRidley, Hon Nicholas
Chalker, Mrs LyndaKing, Rt Hon TomRidsdale, Juliian
Chapman, SydneyKitson, Sir TimothyRifkind, Malcolm
Churchill, W. S.Knight, Mrs JillRoberts, Michael (Cardiff NW)
Clark, Hon Alan (Plymouth, Sutton)Knox, DavidRoberts, Wyn (Conway)
Clark, Sir William (Croydon South)Lamont, NormanRoss, Wm. (Londonderry)
Clarke, Kenneth (Rushcliffe)Lang,IanRossi, Hugh
Clegg, Sir WalterLangford-Holt, Sir JohnRost, Peter
Colvin, MichaelLatham, MichaelRoyle, Sir Anthony
Cope, JohnLawrence,IvanSainsbury, Hon Timothy
Cormack, PatrickLawson, NigelSt. John-Stevas, Rt Hon Norman
Corrie, JohnLee, JohnScott, Nicholas
Costain, A.P.Le Marchant, SpencerShaw, Michael (Scarborough)
Crltchley, JulianLennox-Boyd, Hon MarkShelton, William (Streatham)
Crouch, DavidLewis, Kenneth (Rutland)Shepherd, Colin (Hereford)
Dickens, GeoffreyLloyd, Ian (Havant & Waterloo)Shepherd, Richard (Aldridge-Br hills)
Dorrell, StephenLloyd, Peter (Fareham)Shersby, Michael
Douglas-Hamilton, Lord JamesLoveridge, JohnSilvester, Fred
Dover, DenshoreLuce, RichardSkeet, T. H. H.
du Cano, Rt Hon EdwardLyell, NicholasSpeed, Keith
Dunn, Robert (Dartford)McCrindle, RobertSpeller, Tony
Dykes, HughMacfarlane, NeilSpence, John
Eden, Rt Hon Sir JohnMacKay, John (Argyll)Splcer, Michael (S Worcestershire)
Eggar, TimothyMcNair-Wllson, Michael (Newbury)Sproat, Iain
Elliott, Sir WilliamMcNair-Wilson, Patrick (New Forest)Squire, Robin
Emery, PeterMcQuarrie, AlbertStainton, Keith
Fairbairn, NicholasMadel, DavidStanbrook, Ivor
Fairgrieve, RussellMajor, JohnStanley, John
Faith, Mrs SheilaMarlow, TonySteen, Anthony
Farr, JohnMarshall, Michael (Arundel)Stevens, Martin
Fell, AnthonyMather, CarolStewart, Ian (Hitchin)
Fenner, Mrs PeggyMaude, Rt Hon AngusStewart, John (East Renfrewshire)
Finsberg, GeoffreyMawby, RayStokes, John
Fisher, Sir NigelMawhinney, Dr BrianStradllng Thomas, J.
Fletcher, Alexander (Edinburgh N)Maxwell-Hyslop, RobinTapsell, Peter
Fookes, Miss JanetMayhew, PatrickTaylor, Teddy (Southend East)
Forman, NigelMellor, DavidTebbit, Norman
Temple-Morris, PeterWaddington, DavidWickenden, Keith
Thatcher, Rt Hon Mrs MargaretWakeham, JohnWiggin, Jerry
Thomas, Rt Hon Peter (Hendon S)Waldegrave, Hon WilliamWilkinson, John
Thompson, DonaldWalker, Rt Hon Peter (Worcester)Wiiliams, Deiwyn (Montgomery)
Thorne, Neil (Ilford South)Walker, Bill (Perth & E Perthshire)Winterton, Nicholas
Thornton, MalcolmWalker-Smith, Rt Hon Sir DerekWolfson, Mark
Townend, John (Bridlington)Walter, GarryYoung, Sir George (Acton)
Townsend, Cyril D. (Bexleyheath)Walters, DennisYounger, Rt Hon George
Trippler, DavidWard, John
Trotter, NevilleWatson, JohnTELLERS FOR THE NOES
van Straubenzee, W. R.Wells, John (Maidstone)Mr. John MacGregor gnd
Vaughan, Dr GerardWells, Bowen (Hert'rd & Stev'nage)Mr. Peter Brooke.
Viggers, PeterWhitney, Raymond

Question accordingly negatived.