I beg to move, That the clause be read a Second time. I am very glad to express my thanks to you, Mr. Speaker, for selecting for debate this afternoon my new clause 1. Perhaps I could explain my reasons for being especially grateful. They are that, in Committee, I embarked on a somewhat similar proposal and had the opportunity to express preliminary thoughts on the question of transfer payments in occupational pension schemes. As I pointed out in the course of the speech that I made in Committee, I was attempting to discuss the rules for dealing with early leavers who changed their jobs in relation to the new type of pension scheme that is introduced by this Bill. I took care not to expand too much on the ways in which I though we should deal with the transfer payments of people who are in the more conventional and longstanding occupational pension schemes.
We have had private sector occupational pension schemes funded by employers certainly since the 1920s. After the war, the movement expanded considerably. I think that the numbers involved in occupational pension schemes in the private sector probably reached their peak of somewhat more than 12 million employees during the 1960s. Since then, the expansion in the numbers of people in occupational pension schemes in the private sector has been rather disappointing. I think that the tendency, if anything, has been somewhat downwards. The value of the assets of people in the private sector schemes has enormously increased, however, not just because of inflation but because employers have steadily improved the quality of these schemes. Therefore, with the passage of years the stake of an employee who leaves his job early has grown enormously in real value.
Without wishing to speak too long on this subject, I should like to say why I think that first-class employers, who set up schemes which they intended to be excellent pension schemes, have fallen into the error of producing rules for their pension fund trustees that are extremely unfortunate for early leavers. These rules are working against the best interests of industry and business, because, by confining people in jobs where they are not particularly happy or where they do not feel that they are achieving as much as they could, rather than giving them all the freedom possible to better themselves by taking other employment and participating in other pension funds, the schemes have had a restrictive effect. Undoubtedly, many people today are working out their time in the service of an employer where they are not earning as much as they could or contributing as much as they should because they have found on making the calculation that the loss of their pension rights is so serious that they would be better to carry on doing a dull job that does not fully stretch them rather than to take the leap into a new firm, with all the risks that go with taking a new job, and certainly forfeit a large part of their pension rights.
A number of years ago I calculated that by the time an employee who is in the sort of job where he would expect to have a regular increment in his salary, as he progresses in the firm, and reaches middle life, the value of his assets in his pension fund is likely to be at least as great as the value of his house. If we imagine the reaction of an employee who was asked to write off the value of his house in changing his job, we then realise that we are anchoring potential mobile senior executives in pension funds and ensuring that they are not able to extricate their real asset.
The schemes have grown up wth this unfortunate built-in feature because in the 1920s and subsequently it was thought progressive and ideal to copy the features of the public sector pension schemes which were set up in the 19th century. I believe that this was a mistake, although one might say that the Civil Service scheme of the 19th century was an extremely handsome benefit. I do not think that it was appropriate in the private sector, however, and although I do not want to dwell on this for too long, I think that it is a good thing to realise why we have the problem that we have, which the new clause is attempting to overcome.
The Government schemes that were set up in Victorian times were unfunded schemes. The taxpayer took on the obligation of meeting Civil Service pensions as and when they became payable, and did not put money aside in a real sense to accumulate on behalf of the beneficiaries. The taxpayer simply accepted a rising obligation, and when the officials concerned retired, the taxpayer met that obligation out of current revenue. There was no way in the public sector schemes of identifying a real personal asset belonging to any individual employee. That was not the way in which those schemes operated.
There was a disadvantage with such schemes, because they did not add anything to real saving by the community and equally did not produce a class of people, or a tradition, directed to managing pension funds in the same way as occupational pension schemes, which rely on a real asset accumulating and increasing year by year as the liabilities of the scheme increased. That has obviously had to happen in the private sector.
We did not come to private sector schemes with a ready-made theory about the way in which funds should be managed and the individual assets of individual employees could be identified. The public sector scheme just did not lend itself to that type of thinking. When it comes to argument about the valuation of the rights of early leavers in private sector schemes, we have no tradition to build on when determining the way in which these things should he dealt with in the private sector.
The other big mistake, as it seems to me, from the start in the public sector schemes was that they were final salary schemes. This, of course, was intended to be generous. Somebody who rises to considerable seniority in the public sector becomes accustomed to a high income, and to fall on retirement to a much lower standard of living would be harsh and unsuitable. The idea that the pension scheme gives continuity in retirement—at any rate, something like a half or two thirds of final pay—was seen to be a humane and reasonable aspect of personnel management in the public sector.
A final salary scheme which is unfunded can be as generous as it pleases to the high risers—or the people who end up on very substantial salaries. Attention is not drawn to the fact that a final salary scheme is a money transfer scheme if it in fact relies on a fund. If a real fund has accumulated for all the beneficiaries in common and there is a final salary handout, that fund is given preferentially to the people who have risen to the top, to the disadvantage of the people who have remained on relatively humble salaries.
There is an undesirable money transfer going on in the private sector final salary schemes which people do not entirely detect. However, it tends to make the calculation of each individual's entitlement at any one time difficult, because it rests on a fund held in common. It is not like a bank account, where everybody who has money in the bank has an identifiable asset. It is a common fund where assets are constantly sliding from one person to another according to his rate of promotion within the type of employment covered by the scheme.
Another anomaly in the final salary scheme is that young people tend to put contributions in and those contributions are used to pay the pensions of older people in retirement, so there is a money transfer going on from young to old people as well. That also makes valuation difficult for people who might be regarded as oddities—people who do not stay until the normal age of retirement in the scheme but choose to make other plans for themselves in middle life.
The non-contributory character of public sector schemes has been imitated in private sector schemes. Here again, we see an origin in thoroughly muddled thinking. as I tried to point out in Committee, the non-contributory schemes in the private sector are not genuinely such. It is a commonplace in personnel management that a noncontributory pension scheme is reflected in the salaries or wages paid to its members. If one has a handsome pension on its way, to which one is not apparently contributing, one can reasonably expect to have somewhat lower remuneration than someone in comparable employment with an employer who requires him to make contributions which come out of his gross earnings.
In public sector schemes, it is hard to identify any part of the fund as belonging to any individual person —particularly the early leaver. But some 12 million people are now in private sector funded schemes. I am reliably informed that the total liabilities of the private sector funded schemes—I am not including the obligations of the taxpayer to public servants—have now reached over £200,000 million. If the true figure is anything like that, the House will agree that we are talking about very substantial sums belonging to the 12 million people who are building up claims on these funds. Therefore, for an employee to lose his rights or forfeit part of his rights, even in a move of job which appears to be good in his immediate circumstances—can be an extremely serious or even a financially disastrous matter in the long run.
It may also help the House if I explain some of the reasons why over the years, with the topic of the transferability of pension rights constantly under discussion, inadequate progress has been made. There are good reasons and bad reasons for that. I am interested in the first instance in what I regard as a bad reason.
When employers brought these schemes in before the war, and also after it, they saw them as an aspect of personnel management which was a generous but unnecessary gesture for the benefit of their employees. In providing a private sector pension fund, they were putting money, which might have gone back into the business or the shareholders, in the pockets of employees on top of their wages and salaries. It was regarded as a bounty to the employees, something for which they should be grateful but which did not give them much of an opportunity to chisel over the rights that they might have acquired under the schemes. It was a kind of gift.
Therefore, employers felt that there was no obligation on them to allow an early leaver to take an asset out of the fund, because the fund was seen as the employer's money, even if it had been put into the hands of trustees. A good employer simply thought that, if a person changed his plan and did not stay in the employer's service until the normal retirement age, he could have his own contributions, if any, possibly with interest, which might not be very generous — and the employer would deduct what he thought was appropriate in respect of any administrative costs.
Until 10 years ago, or less, early leavers were paid perhaps only a few hundred pounds when they left employment, even after 10 or 20 years service. The sum was made even smaller by the fact that inflation had changed the whole aspectof the matter, because, when they made their contributions in the 1940s and 1950s, they put good money in but, when they drew it out, they got bad money back. With depreciation in the meantime, employers tended to use purely arithmetical calculations and not to uprate the amount of the employee's contributions to take account of the change in the value of money.
There was another bad reason why employers have resisted the idea of paying adequate transfer values. Employers tended to regard the pension schemes, particularly for their more senior workers, as fidelity guarantees. Employers particularly chose to make them final salary schemes to hold people whom they regarded as key employees—people whom they did not want to leave their service to work for someone else, possibly taking much of the firm's know-how with them and putting it in the service of a competitor. Employers frowned on the idea of people claiming a transfer value because they thought that, by leaving, the employee was doing something undesirable or disgraceful and that there was no reason why an employer should lean on the trustees of the sponsored pension fund to pay a huge cheque to someone who was making a move which the employer thought undesirable and not in the employer's interest.
One found that bodies such as the CBI, I am sorry to say, took a blinkered approach in the course of the campaign for the transfer of pension rights, thinking of pension schemes as a form of fidelity bond, and not realising that many of the CBI's members were looking for employees in middle life whom they needed to attract into their businesses. They were not able to recruit those people, because they were anchored by their pension funds with their first employer and were not able to make the jump into employment with a new firm.
The employers who wanted to hold on to their staff won the day and those who were actively looking for new staff were not able to influence the CBI's policy which, as I know from my own campaign on the transferability of pension rights, was decidedly hostile in the early years. I do not think that I need remind hon. Members that I have been campaigning on this subject for some 19 years, so I can look over a fairly long span of time in relation, to the campaign for transferability.
There is also a good reason why transferability is taking so long and why we still have not reached it. Valuation presents a genuine problem. There are all sorts of reasons why even very fair-minded experts, wanting to give the early leaver a fair deal, might dispute what would be the appropriate amount for the pension trust to pay out. In the first place, one has to make an assessment of the likely effect of inflation and what it may have done to the employee's rights while they were building up in the fund.
Obviously, we are not talking about actuarial precision when dealing with purely speculative anticipations as to what may or may not happen to the retail prices index over the next 10 or 20 years or even longer. It is anybody's guess what one should allow for where inflation is concerned. The fact that people did not like guessing when they were having to write a cheque at the end of the day has meant that there has been a reluctance to err on the high side: transfer values therefore tended to be kept rather conservative.