Payments by Minister in Respect of BR and NFC Pension Schemes

Orders of the Day — Transport Bill – in the House of Commons at 10:07 pm on 26 June 1980.

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Lords amendment: No. 64, in page 41, line 3, leave out "sections 48 and 49" and insert "section 49".

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

I beg to move that this House doth agree with the Lords in the said amendment.

Mr. Deputy Speaker:

I should tell the House that privilege is involved with this amendment. If it is agreed I shall cause the appropriate entry to be made in the Journal. With it we may take Lords amendments Nos. 69 and 70, the amendment to Lords amendment No. 70, Lords amendments Nos. 71 and 72, the amendment to Lords amendment No. 72, and Lords amendment No. 73.

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

This series of amendments deals with the surpluses that may arise on basic schemes behind which there are supplementation schemes that cover the inflation-proofing element of those pensions.

Before I go into the technicalities of the amendments, it seems that there are broader issues of policy which I know have been troubling the Opposition throughout and which lie behind the Opposition amendments to the Lords amendments. Underlying the concern that has been expressed in this House at earlier stages and in another place is a fear that somehow the changes that we were making posed a potential threat to the position of pensioners. The feeling has been expressed repeatedly in debate on this and other parts of the Bill that behind the complexities of the drafting there lay a threat to the entitlements of retired railwaymen who have been contributing for many years to the British Rail pension funds.

Throughout, the Government have been anxious to make it clear that they are not in any way concerned with weakening the entitlement of pensioners who receive what are known as historic pension expectations. The Government are engaged in arguments about technicalities—about how those pension entitlements are to be secured and financed in future years. There have been disputes about those technicalities between people such as my right hon. Friend and myself, bearing in mind the interests of the taxpayer, and those on the British Railways Board and the managers of the funds who have had to bear in mind the way in which they are to meet their obligations to pensioners.

There are two giant interest groups, both commanding substantial funds, who are debating how best to divide the obligations towards the pensioners. We are all agreed that the pensioners and their widows should receive the pensions to which they are entitled. During debates on the Lords amendments and associated amendments these matters were voiced again by Opposition spokesmen in another place, and I can tell from the text of his amendments that the right hon. Member for Barrow-in-Furness (Mr. Booth) will pursue the matter yet again.

One of the Opposition's fears is that if the division that we are making between the obligations of the Government and the obligations of the British Rail pension fund managers should prove to be wrong in practice, and if the calculations of the actuaries are overtaken by movements of inflation and a change in the economy which cannot be forecast now, pensioners' rights will be threatened. They fear that it could throw on to the British Rail pension fund, and the British Rail Board behind that fund, financial obligations which they may be unable to meet.

My noble Friend Lord Bellwin sought to reassure Members in another place on that point, and it is important that I put on record at this stage the Government's position, in order to try to reassure everyone involved.

First, I make clear that the Government are talking about what I may describe in colloquial terms as a slightly doomwatch situation. We do not believe that the arrangements that we have set out pose a great danger of the Government, British Rail or the National Freight Corporation's pension fund managers being unable to meet these obligations. I understand the fears, and it is to those fears that I address my remarks. We are not seeking to remove or to reduce the pension entitlement of pensioners. I believe that the fears spring from misunderstandings of the Bill, and of the Government's intentions. I repeat that it is no part of our policy to worsen the position for railway pensioners.

The Bill is concerned with the arrangements whereby the cost of meeting the pensions is divided between British Rail and its pension fund and railway business on the one hand, and the Government and the general taxpayer on the other. The pensions in question are railway pensions. They are not Government pensions, and they are the responsibility of British Rail. The Government are committed to giving some financial support to British Rail to help with the payments, and the Bill changes the form of that help, although not its extent.

The arrangements that are proposed under the Bill are in many respects similar to those that were envisaged under the 1974 Act, and the responsibility for the historic pension liabilities will remain with the board, although Government support for those liabilities will be provided. We are contemplating a similar approach to the calculation of the amount of support. Under the 1974 Act there would have been an actuarial valuation of the assets and liabilities of each scheme. As a result of that valuation it would have been decided how much of the liabilities of each scheme, and what proportion of the liabilities, could not be met from the assets of the scheme. A funding debt would then have been created to cover that proportion. Under the Bill the same proportion of the liabilities will be met directly by Government support payments.

10.15 pm

As I have said, I accept that we may not get the actuarial assessment precisely right. There is inevitably a measure of uncertainty about the actuarial assumptions. But every pension scheme—and, indeed, every insurance scheme—depends on actuarial assumptions. I still do not see that the actuarial assumptions that stand to be made under the Bill are different from those that actuaries are making all the time in relation to occupational pensions of all kinds, or from the assumptions that would have had to be made under the 1974 Act. I do not believe, therefore, that the Bill introduces any new risks in this respect.

Nevertheless, the question arises of what would happen if the Government support payments proved to be insufficient and the pension schemes had to look to the British Railways Board for further funds to make good their obligations. I repeat that the Bill does not affect the pension entitlements of pensioners or the obligations owed by the board to its pension schemes.

Members and pensioners could in the last resort be at risk only if the board were to default on its legal obligations to its creditors. This is most important, because to allege that pensioners are at risk is to allege that the board would default on its debts.

The House will know that on a number of occasions nationalised industries have run into financial difficulties. Indeed, that is something of an understatement. There have been quite a lot of occasions on which nationalised industries have run into financial difficulties. It has happened to British Rail on three occasions. On each occasion it has been put in a position in which it could discharge its obligations.

People everywhere deal with nationalised industries on the basis that their credit is as good as that of the Government. Whatever the technical legal distinction, that is the practical position. There is no reason why they should not continue to do so, the railway pensioners can be confident that the board will be able to honour its legal obligations.

In the course of our discussions on the Bill the suggestion has been put forward that there ought to be an express Government guarantee of the historic pension obligations. I can well understand why the suggestion has been put forward. However, we have to look at the implications of the suggestion. I have already said that there is no realistic prospect that the board will not discharge its obligations. The effect of an express guarantee of these obligations will be to transfer them directly to the taxpayer.

If the board ran into further difficulties, to which the historic pension obligations were a contributory factor, it would mean that the other assets and obligations of the board—in other words, the remainder of the board's finances—would not be brought into account.

The 1974 Act, for which the Bill is merely a replacement, did not transfer the board's obligations to the Government, and we do not think that it would be right for there to be such a transfer now. While some of the obligations are of very long standing, the historic obligations, as they are called, are dominated by comparatively recent obligations, incurred in the early 1970s. Indeed, the magnitude of the obligations is not fixed even now.

At the margin, the board's eventual liability is affected by the board's current management decisions. It is not unreasonable, therefore, that responsibility should remain with the board. The issue whether the Government stand behind the specific obligation with a specific guarantee raises the whole question of the relationship between the Government and the nationalised industries.

Successive Goverments have maintained an arm's length relationship with the industries. Within the limits laid down by the law, they may manage their own affairs; they have their own assets, rights and liabilities. The Bill is not intended to disturb the overall financial settlement between the board and the Government; it is concerned with the mechanics of that settlement. Still less is the Bill intended to disturb the general relationship between the Government and the nationalised industries, or between the industries and those with whom they do business or to whom they owe obligations.

Confidence is something that builds up over time. It was by referring to the existing position, which has stood for many years, that I was able to say that railway pensioners can be confident that the board will be able to honour its obligations.

On the question whether one needs to go beyond that practical position, with which we are all familiar, and in regard to which everyone has traded with nationalised industries over many years, I do not believe that a specific guarantee would add to the security of pensioners or give them any protection that they do not now have but it could cause complications. The issue is whether the board will meet all its obligations. It could not be in financial difficulties in which the Government would rescue it in relation to one set of creditors and not in relation to another. I do not say that it is more likely that some obligations rather than others will be honoured. In the course of proceedings on the Bill Ministers have been asked to say that the Government stand behind some nationalised industry obligations. By implication, that might mean that we do not stand behind others. That would destroy the whole basis on which people deal with nationalised industries—a basis that has been accepted for many years by successive Governments.

I have attempted to sketch the relationship between the Government and the nationalised industries, on the one hand, and the basis upon which other people deal with the nationalised industries, on the other. Many are not profit-making. Many are not solvent, or would not be solvent if they were trading wholly in the private sector. The Government do not give a specific guarantee for any of their specific debts, but as British Rail has been rescued three times by financial reorganisations it is clear that in practice these industries continue trading because the Government's credit is implicitly behind them.

Looking at this doomwatch situation, I feel that what I have set out is a reiteration of the position, which is longstanding and is still accepted by the Government. If the British Railways Board had any doubt about its continuing ability to meet its pension arrangements for whatever cause, the basis of the existence of the nationalised industries which I have described would come into play.

Having set out the basic position, it seems easier to deal with the technical problems to which the amendments refer. Having drawn back from the general, which is the whole basis upon which British Rail pensioners can expect to receive their full pension entitlement and feel confident about it, I turn to the specific amendments, which deal with the inflation-proofing part of their pension expectations and the supplementation schemes that have been brought into being to provide inflation-proofing for those who are otherwise members of what are described as the basic schemes.

Amendments Nos. 64, 69, 70, 71, 72 and 73 are really drafting amendments. They are not designed at this stage to make any change in the policy upon which the Bill was based when it started. They are an attempt to delve into the complexities of clause 48, which is a nightmare of verbiage. The background is a nightmare of complications of pensions practice and the amendments attempt to make it clear and to provide guidelines within which the Government Actuary, pension fund managers and everybody else will work in practice.

The amendments have two aims. The first is to make sure that in the operation of the surpluses clause all future schemes of supplementation are taken into account.

The second—this is the most important objective—is to ensure that the reduction in the Minister's payment to the supplementation scheme matches the reduction in the proportion of future supplementation paid by the supplementation schemes.

The second is the major question, which recurs over several groups of amendments that we are about to discuss. I do not criticise the selection, Mr. Deputy Speaker, but one or two are paving amendments towards subsequent amendments, and so on. I shall be guided by the House at what stage, if necessary, we are taken into the details of exactly where the supplementation schemes now stand.

The supplementation schemes are designed to cover the inflation-proofed element of the pension expectations. We all know that inflation is going on at a great rate. That means that the obligations of the supplementation schemes continue and arise steadily year by year.

On the other hand, the basic schemes, which are relieved of their obligation to give inflation-proofing to their members, are given considerable surpluses by inflation. The debate turns on how much the Government and the taxpayer are entitled to recover from the surpluses created within the basic schemes to recompense the taxpayer for the inflation-proofing for which he has had to pay to the members of the basic schemes. The same inflation that increases the Government's obligations increases the surpluses in the basic schemes. It would not be right for all those surpluses to be distributed merely to continue improveing all the basic pension entitlements of the members. The taxpayer is entitled to his share to recompense him for the supplementation that he is otherwise standing behind.

The amendments cover various issues. Until I have heard what hon. Members think, I shall not go into detail. There are specific amendments that deal with the fair division of the surpluses that spring up in the basic scheme. That is probably the most important point.

I hope that I have explained the background to the drafting amendments. I hope that I have helped the House to agree with the Lords amendments. I also hope that I have put them in the context of the Bill's basic philosophy. The Government see themselves eventually standing behind British Rail's obligations.

Mr. Deputy Speaker:

It may be for the convenience of the House if I say that it will be in order for the Minister or any other hon. Member to speak to the amendments. When we come to them on the Order Paper, I shall put them to the House.

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

I thank the Parliamentary Secretary, because he has carefully outlined the assurance that was given by Lord Bellwin in the other place about the position of virtually all the railway pension schemes covered by the Bill. I refer not only to basic schemes with supplementation but to the other schemes that will have their means of funding changed under clause 44 and subsequent clauses.

The Parliamentary Secretary was clearly well aware that his words—which will appear in Hansard tomorrow—will be studied carefully by trustees of pension schemes, by members of the board of British Railways, by members of the executive committee of the Transport Salaried Staffs Association and by the National Union of Railwaymen, ASLEF and several others who have a special interest in this subject. Although that assurance was highly qualified, it recognised that there was a difference between the pension schemes under discussion and private industrial pension schemes in general. The Parliamentary Secretary set it in the context of the special position of nationalised industries and of the way in which the Government are assumed to stand behind them, but he nevertheless sought to say that at a certain point the Government could not allow the nationalised industries to default on certain basic pension commitments.

I do not wish to diminish the importance of statements that are made in the other place. However, it is important that a Government Minister should make the Government's position clear in this Chamber. Ultimate responsibility rests with the Minister, who is the authoritative voice of the Government. That applies to all issues, but it is particularly relevant to discussion of the Bill.

In previous debates, particularly in Committee, Government Ministers expressed a different view. I am not complaining. There would be little point in having such long and detailed debates on legislation unless members of the Government and Opposition Members could change their minds. However, their view has changed, and we welcome that change. That is not to say that we are completely satisfied with the provisions or that we would not have preferred our amendments to have been selected on Report. However, we recognise that the change has taken place and that an assurance has now been given that did not exist when the Bill left this House to go to the other place.

10.30 pm

I turn quickly to the amendments. I regard Lords amendment No. 64 as something of a legislative conjuring trick. I cannot complain of it that it is not literally true or that it is not legally correct, but the situation that it describes is not a commonsense one. What the amendment does is to say, in effect, that clause 48 no longer controls clause 44, or clause 44 is no longer qualified by clause 48. That is nonsense in commonsense terms because, clearly, the way in which clause 48 determines the relevant proportion must affect the amount that the Minister will have to pay out under the terms of clause 44. The cleverness of it—the conjuring trick, as I call it, without wanting to cause offence—is that the way in which the amount which the Minister pays to supplementation schemes is now changed by changing the relevant proportion, instead of the way in which it was done when the Bill left this House. Therefore, I regard it as not much more than a conjuring trick.

The more important amendments, those to which we have tabled amendments, are Lords amendments Nos. 70 and 72. In submitting to the House the Opposition's amendment to Lords amendment No. 70, I hope to make it clear that the purpose of the amendment is to ensure that once there has been a clawing back by the Minister of the surpluses in the basic pension funds which have supplementation schemes, for the purpose of reducing the amount which the Government pay to supplementation schemes, that should happen no more. In simple terms, that is the effect of Lords amendment No. 70.

Without the carrying of Lords amendment No. 70, at any time during the operation of this legislation when a surplus occurred in a basic pension scheme there could be a further clawback. The ultimate injustice of it is that this is a ratchet process. There can always be a clawing back whenever a surplus occurs, but there is no provision in the Bill for a reduction ever to be made in the clawback, for a change ever to be made in the relevant proportion reducing that in order that the basic pension scheme has to contribute less towards the supplementation. That is the issue of our amendment to Lords amendment No. 70.

Apart from what I call the basic injustice of the matter, I want to put to the House a limited number of further but important justifications of our amendment. The first of these is that it is illogical, unfair and unbalanced to say that in respect of the pension schemes covered by the Bill in which the Government contribution is determined by the unfunded and funded proportion the determination is made once and for all, never to be changed again, when, in clear contradistinction to that, in the case of the basic schemes it can be changed again and again. What possible justification can there be for these dual standards, for treating one sort of railway pension scheme in one way, as something to be determined once and for all, and treating another type of railway pension scheme in an entirely different way, making it subject to a ratchet which enables the Government to take more and more from any basic surplus?

Surely it must be the case that when the actuary comes to make his assessment of what is the funded proportion and what is the pay-as-you-go proportion, in the case of schemes other than the basics with supplementaries he will face exactly the same problems of judgment and estimation as faced the actuary dealing with the basic pension scheme. He will have just as much difficulty or ease in forecasting how inflation will move for the next 5, 10, 15 or 20 years, however long the scheme will run or have pensioners. He will have just as much difficulty or ease in predicting how the investments will perform and in estimating what the death rate of the pensioners will be. Those are all the factors which determine whether he has the right judgment of whether the schemes are properly funded. Yet the Government, in putting forward the Bill, suggest that in one case it should be done once and for all and that in the other case it should be opened again and again.

I argue, on Lords amendment No. 70, that there is a dual standard. There is almost a duplicity in the approach to the schemes. I argue, in addition, that in the 1974 Act—the Minister is aware of this, having studied the issue carefully—there could be no possibility of clawing back any surpluses which arose after 31 December 1979. Whatever merits or demerits the 1974 Act might have had, it established by 31 December 1979 the final calculations which had been made under that Act of the amount that the Government would put towards the funding.

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

Does my right hon. Friend accept that the dual standard is such that if, by prudent management and good housekeeping, a pension fund makes a surplus, that money will not be passed back to the participants of the scheme? If, on the other hand, the pension scheme falls into difficulty, no help will be forthcoming. Under the Government's scheme, anybody who exercises prudent management and thrift for the benefit of the members will be penalised. However, if the scheme falls into deficit, the Government will ignore that as well.

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

With great respect to my hon. Friend, who speaks with considerable concern and knowledge on this matter, I suggest that the situation is somewhat worse than he described in his intervention. He is right in saying that the beneficiaries of a basic pension scheme cannot fully benefit from good management of the scheme to the extent that a surplus is produced, because the Government can use part of it to make them pay towards supplementation.

The point that my hon. Friend did not touch upon, which I say makes the situation worse, is this. If the managers fail to manage the scheme well and do not ensure that they meet their obligation to contribute towards supplementation, by way in which the Bill determines the relevant proportion the members of the scheme will suffer. The British Railways Board will be put into a difficult financial position. Either way, the members will lose. Therefore, the situation is worse than my hon. Friend described.

There is a strong argument in favour of Lords amendment No. 70. Under the 1974 Act, there could have been no possibility of clawing back surpluses which arose after 31 December 1979. Our amendment would preserve the principle of the 1974 Act in that respect. The Bill would enable something to take place to the disadvantage of the funds which could not have taken place under the 1974 Act.

Our amendment would help the Government to keep their promise. They promised, when we began discussion of the Bill, that there would be no worsening of the pensioners' position under the Bill. A clawback under the Bill that could not have existed under the 1974 Act must surely mean a worsening. We want to avoid that situation. Our amendment is, therefore, designed to help the Government to keep their promise.

The purpose of our amendment to Lords amendment No. 72 is to ensure that any reviews of these basic schemes which have supplementation by the actuary take place at five-year intervals. We would prefer the even-handedness that would be achieved if the Government accepted our amendments to Lords amendment No. 70 and that if the determination is to be made with clawback it should be on a once-and-for-all basis.

If the Government will not accept that proposal, we believe that there is merit in considering reviews at fixed five-year intervals. This would help to protect the position of the funds. In some circumstances, as I believe the Parliamentary Secretary will realise, it could assist the Government. If a review showed that the fund was running into deficit because of the original estimate and the Government were prepared to provide further support for supplementation, it would throw another obligation on the Government. That has not so far been accepted.

If the Government do not accept our proposition in the amendments to Lords amendment No. 70, it would at least be a potential safeguard to know that following a review showing that the fund, despite the best possible management, was no longer able to cover the relevant proportion first determined, the Government would be pressed to reconsider their position.

I do not suggest that the amendment provides a wonder solution. It is no magic formula for solving the problem that will devolve on those who run the basic and supplementary schemes, but it would create an inferior alternative to our amendments to Lords amendment No. 70 in establishing a degree of certainty about the running of the scheme. It would limit for five years the number of variations and difficulties and would create a certain knowledge that a review would take place which, I believe, could lead only to one of two situations—the further clawback, if the Bill is not changed or, as I am certain will be the case, a call upon the Government from those who run the scheme and many more concerned about these railway pension schemes to change their position on a most unfair ratchet situation that could only worsen the situation of those who run basic funds and make no contribution to solving considerable problems.

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

I shall not go at great length into what I said on the important matter of the position of the Government, the board and the pensioners, who look to someone to make sure that their pensions are paid. I do not believe that what I said in Committee amounted to a great change. I may have been expressing an understanding that I believed to be the existing practice, that there was no real danger of a nationalised industry defaulting on the debts of others that were of any significance. That might have led to me being a little brusque with the Committee at times. What I have said this evening is the Government's considered view. It is not a personal opinion. I was more explicit than the previous Government were on the same subject.

10.45 p.m.

All that the White Paper on nationalised industries, produced by the last Labour Government, said about the key issue of how the nationalised industries trade was: The nationalised industries are free from the private sector discipline of bankruptcy. Perhaps that is really a terse way of saying what I have said this evening. I hope that I have reassured hon. Members about the risk of pensioners having their pensions entitlement reduced.

The right hon. Member for Barrow-in-Furness (Mr. Booth) described Lords amendment No. 64 as something of a conjuring trick. It is not. It is a paving amendment for a later amendment that alters the way in which we calculate the extent of the Government's clawback. The method that we have chosen can if necessary be debated in detail on later amendments.

The right hon. Member explained what is behind the amendments to Lords amendment No. 70 by expressing his concern about the way in which the Government's clawback will continue steady as long as surpluses emerge and are distributed. He saw in that some unfairness when contrasted with the way in which actuarial assumptions which lay behind the division between the funded and unfunded proportion of funds were fixed at one point once for all. Such a comparison is not fair. We are fixing once and for all the proportion of surpluses that the Government will be entitled to claw back. A later amendment states exactly what that figure should be.

The surpluses that are likely to emerge under the basic schemes will emerge not suddenly but steadily, year on year. The basic schemes have their obligations fixed in money terms. In times of inflation, at whatever level they are fixed, surpluses will steadily emerge. Part should be recovered by the taxpayer to protect against the same inflation pensioners who are members of the basic schemes.

The actuaries managing the schemes will not suddenly make distributions. Each year they will make a prudent calculation of what must be kept in the fund for contingencies and distribute that which they are free to distribute. We are determining that part of that should go to reimburse the taxpayer and part to improve the basic schemes. A fixed proportion will go to the taxpayer through the clawback arrangements in clause 48.

The clawback is a fair arrangement. The right hon. Member suggested that it represented a deterioration in the position in the 1974 Act, because then the Government did not have the ability to claw back any part of the surpluses. That is not right. It was a possibility. The supplementation schemes have the responsibility for inflation-proofing. The basic schemes have obligations only in money terms and are therefore likely to produce surpluses.

Even without the Act, British Rail and its pension fund managers would not accept the supplementation fund carrying all the cost of inflation when the basic schemes produced large surpluses to improve basic benefits.

I remind the House that the British Railways Board introduced a Private Bill towards the end of the last Parliament which, among other things, was concerned with basic schemes and supplementation schemes.

Essentially, the board's Bill would have enabled it to transfer the responsibility for paying future supplementation, together with the associated funding debt created under the Railways Act 1974, from the BR 1974 fund—the British Rail supplementation scheme—to any basic scheme. Behind that Private Bill the board obviously had in mind the possibility of future surpluses in basic schemes, and it was dealing with precisely the point that we are dealing with.

It was obviously only right that as they threw up surpluses those basic schemes should take on some of the obligations of inflation-proofing, which itself is creating those surpluses.

On his final point, the right hon Gentleman was trying to get back to what I know has been a fundamental policy difference between us throughout, about the reappraisal of actuarial valuations of any kind under these pension fund arrangements. I shall not rehearse the arguments again. I regret to say that we have never really come to agreement. I realise that. An amendment was moved in another place which was not carried, so, with respect, we cannot debate the issue again here.

If it pleases the Opposition, I realise that they remain unrepentant, but it is not within the scope of these amendments. Right hon. and hon. Gentlemen are as familiar with the Government's arguments as I am. The 1974 Act provided for a once-and-for-all fixed acturarial assessment, and we cannot, as part of this Bill, contemplate arrangements whereby we start improving the 1974 Act settlement at the expense of the taxpayer in order to give added guarantees to nationalised industry employees.

There it is. That is an issue between us. I suggest that it does not arise on these amendments.

Question put and agreed to. [Special Entry.]