`(1) It shall be permissible for the trustees of a pension scheme which is an exempt approved scheme under section 21 of the Finance Act 1970, to amend the rules of the scheme in regard to the calculation of transfer payments and of preserved benefits on behalf of any member ending pensionable service before the normal age of retirement under the scheme in accordance with the provisions of this section.
(3) To comply with the provisions of this section, the amended rules of the scheme shall require the trustees in respect of any member withdrawing from pensionable service before the normal age of retirement under the rules of the scheme at the withdrawing members' option either—
(4) In a case where an actuary certifies that on the date of the certificate the scheme is not fully funded, (which is to say that the scheme does not have sufficient assets to meet its liabilities in respect of the whole or any specified part of the accrued rights to benefit of its members), the transfer payment, or as the case may be, the part of the transfer payment which corresponds with that specified part of those accrued rights, may be reduced by the percentage by which the scheme is so shown to be deficient.
(5) A scheme which after 1st January 1988 does not have rules so that the transfer payments and the preserved benefits payable under the scheme are to be calculated on terms at least as favourable to the beneficiaries as those specified in this section shall not qualify as an exempt approved scheme in respect of liabilities incurred after that date except by the permission of the Occupational Pensions Board.
(6) The trustees of an exempt approved scheme may apply to the Occupational Pensions Board for deferment of the latest date for the amendment of its rules in accordance with this section and to retain its status as an exempt approved scheme in respect of its liabilities incurred after that date to a date not later than 1st January 1989.
(7) The Secretary of State for Health and Social Security shall lay before Parliament regulations under this section subject to affirmative resolution of the House of Commons which shall specify the grounds on which the Occupational Pensions Board may approve applications for deferment under subsection (6) above.'. — [Sir Brandon Rhys Williams.]
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.
I have been working on the subject for 19 years, so I think I might be permitted to resume my campaign for just 19 minutes. If I do not go over this ground, my attempt to do something for the early leaver today will be as futile as my other attempts over the last 19 years. Therefore, I hope that the House will give me the indulgence of allowing me to explain my case in my own way.
The genuine difficulty that still remains and that I am seeking to address head-on in my new clause 1 is that, in a final salary scheme, the calculation of the amount of benefit that the employee would get if he or she stayed until the normal age of retirement has to relate to what the person is earning at age 62, 65 or whatever is the normal age of retirement in the scheme. If someone goes to their employer at age 45 when they are not earning anything like the full amount that they might hope to get if they stayed with that employer and continued to get annual increments, promotion and the rest, somebody has to make a guess as to what the person might get if they followed their normal trajectory to retirement and got as much as they could, even staying in a firm that, in the opinion of the employee, will not give him or her the full amount of entitlement that the employee is entitled to and that they think they will get if they go to another firm that might put a higher value on their work.
Even if one stayed with an employer where one thought that one was not being fully used, once one has achieved a certain level of seniority, it is a reasonable expectation that one will continue to get increments and possibly promotion that will take one up to a final salary when one eventually leaves that will give one a handsome pension. However, if one related one's pension to what one was earning at the time of severance 10 or 20 years before, one is worse off, because one might be only half way to one's ultimate final remuneration, quite apart from the effects of inflation.
Under the system that is almost invariably in use at the moment, when someone notifies their employer that they wish to leave, they tend to have their transfer — or preserved value, if they chose to leave their money in the first employer's trust—valued on the basis of what they are earning in mid-career, which is not the same as what they might reasonably expect and hope to earn if they stay another 10, 20 or however many more years it might be, in that pensionable service.
In calculating the final salary on the basis of the salary in mid-career, the employer's trustees are taking advantage of the early leaver in a way that is sometimes exceedingly damaging, quite apart from the inflation expectation. Although we have made progress in recent years, we have not made nearly enough. I am reliably informed that the amount of money that early leavers are losing every year from their entitlement under the present regime is of the order of £1,000 million. The House must reflect on that figure.
It has already been suggested that I am speaking too long. I would prefer to take aside my hon. Friend—who problably knows more about those subjects than and tell him how I derived that figure. It would be wrong if I disclosed the origin of that figure, because it was given to me in confidence. However, I would be glad to discuss it with my hon. Friend afterwards. I think he will agree that, if anything, I have erred on the low side, as that is what I am reliably told.
The figure of £1,000 million being lost from pension assets by people seeking to better themselves and to make the most of their contribution to the economy is so serious that the House must return to the subject, to see whether what we are doing at the moment is enough. I feel very strongly that it is not enough.
Under the state earnings-related pension scheme, the guaranteed minimum pension is protected from inflation and employers have to respect that accruing entitlement. That is a plus, in that it is a sort of portable pension. Unfortunately, however, SERPS is on such a small scale that we are not really concerned with very large assets. I cannot say what the SERPS entitlement is likely to be, but I suppose that it is about a quarter of the amount that would accrue for a similar earnings record for a person working in the public sector. That means that the employee in the private sector will not do very well if he or she relies on SERPS. On retirement, the income from the occupational pension would probably be just about enought to rule the person out of entitlement to supplementary benefit, without doing him or her much more good than that. I do not believe, therefore, that the guaranteed minimum pension concept in the SERPS provision has solved the problems.
Since 1985, it has been obligatory for employers to protect the assets of the early leaver on the basis of a certain calculation, the merit of which is that it goes right back to the start of the employee's service, not just to 1985. For people who started working in the mid-1960s, therefore, under the new provisions everything that they accumulated since they began pensionable service now has to be protected.
The method of protection, however, is very partial in terms of inflation. I am on such technical ground here that I may risk misleading the House, but I believe that if the early leaver opts for preservation of the asset in the original employer's fund, inflation is put at a maximum of 5 per cent. That may not be a disaster in view of the present Government's record in defeating the vagaries of inflation, but some other Government may be returned at some time in the next 20 or 30 years which allows currency depreciation to start up again. In that case, a fund which increases at only 5 per cent. per annum will slowly chisel into the real value of the asset. If an asset is exposed to that risk, anyone seeking to set a value on it now is likely to say that it is not a cast-iron asset because in certain circumstances it could depreciate seriously. That being so, if the employee insists on taking a cheque equal to the value of the preserved assets at this stage, it may well have to have the corners knocked off. Therefore, if the employee opts to take a cheque rather than leave the money with the original employer, the inflation maximum set on the provision for inflation will mean that the cheque will not be quite so good as it should be.
Secondly, I understand that the obligation to revalue applies only to that part of the entitlement which accrues after January 1985, so if a person has 20 years service before that date, a substantial part of his of hers accrued rights will not be inflation-protected. Setting a value on the preserved asset will inevitably take that into account, to the benefit of the employer, so when the employee takes his transfer value and advances with it to the trustees of the fund that he is entering, instead of having 20 years service with his first employer automatically credited, he may be offered five added years or some other very disappointing figure. Clearly, that will reduce the value of the final pension so substantially that the employee will be calling for a golden hello or whatever also in order to make up the difference. Difficult negotiations then ensue, often resulting in the breakdown of discussions and a decision to remain with the first employer, which is not really to the advantage of anyone.
In addition to those two aspects of inflation protection, which are clearly inadequate, there is the problem of the trajectory. I do not know of any fund where, in the valuation of a preserved or transferred asset, a serious attempt is made to decide what the employee would have earned if he had stayed and thus what the fund owes him on the basis of a good average calculation of what pension he might have received had he stayed with the first employer. The employer does not feel under any obligation to make that calculation and does not pay out on that basis.
Yet when the actuaries advise the employer how much money is needed for the fund to meet its liabilities over time, they will say that, although they do not know which employees will reach the top, it is certain that some of them will. The employer therefore has to put money into the fund to cater for the fact that some present employees will be receiving much higher salaries and therefore will qualify for much higher pensions by the time they finish their service. If the employer is to maintain an adequate fund, that money must be put in, but it is not paid out to the early leaver. The money that should go to the early leaver remains in the fund, with the result that the fund becomes over-funded and the employer is advised either to put in less money in future or to take some money out. However, that aspect can perhaps more appropriately be dealt with on another new clause.
I have reached the point at which I am able to gratify the hon. Member for Sedgefield (Mr. Blair) by describing my reasons for the proposals in new clause 1. An avid reader of the Order Paper such as the hon. Gentleman will realise that it is virtually identical to a new clause that I moved during the report stage of the 1986 Finance Bill. I have not significantly altered the proposals, save perhaps to remove certain ambiguities. The point to which I would like to draw attention is the method of valuation.
The new clause suggests that the transfer value should be equal to the amount of money that the scheme that the employee is leaving would insist on being paid, by way of an incoming transfer value, in order to take on an employee with precisely the same status as the man or woman who is leaving. That takes into account all the points that I have dealt with thus far, including assessment of the trajectory to retirement.
I know that there are difficulties in valuation, but I am confident that, if the House accepts that this is the right formula, the actuarial profession and experienced trustees will very soon adapt their thinking to produce standard guidelines for valuation which would provide at any rate rough and ready justice for every early leaver. Unless we adopt something along those lines, the problem will continue year after year and the early leaver will remain exposed to injustice, and I am sure that that is wrong.
I will dilate just a little longer on what I am proposing. Clearly, I am speaking of final salary schemes. With money purchase schemes, the position is clear, just as when a person takes money from one clearing bank and puts it into another. There is an identifiable figure and everyone knows what it is. Final salary schemes, however, are fluid. They are collective funds and the valuation of the individual's assets at any given time presents great difficulties; but if one insists that all the questions of trajectory to final retirement, length of service, salary and other terms of employment should be taken into account on precisely the same terms that the first employer's scheme would have to accept in reverse, one arrives at a fair transfer figure.
If that transfer figure is then taken to another fund that is run on quite different lines — perhaps having a different age of retirement, different rates of accrual, or different types of benefit — it will not matter, because one would be speaking about a cash value. Once the cash value has been put at a fair figure, it is up to the employee to negotiate for himself when he goes to his new employer and seeks to acquire added years or whatever it may be in the new fund.
The new clause addresses an important matter. How does it get around the difficulty of the early leaver who may go on to much better things in later life if one makes his transfer payment the same as will be required by his scheme on the admision of a new member with exactly the same service and all the rest of it? I am not sure how the problem will be resolved by the new clause.
People are going to take different views about the quality of a man in mid-career who is footloose and wants to change his employment. The first employer may say, "He has been working for us for 20 years, and we know his limitations. We do not think that he will ever make it to the board or to the head of his department. We do not think that he is of that calibre. Therefore, his trajectory, if he stays with us, will not be that progressive. You may think that he is a wonderful chap and you may be willing to pay him all sorts of bonuses to take him over, but our opinion is based on experience. Therefore, we do not think that his trajectory should be as high as all that." That may be the case; but at any rate my formula takes a realistic trajectory into account with the first employer. If the second employer is putting a rather ridiculous premium on the man, that is up to the second employer. He can use golden hallos, or whatever it may be, to tempt the person across.
It is not only salary or pension rights that have to be taken into account in the negotiations to tempt a senior person to change jobs. Other factors may include location, housing or many other matters. But we have to arrive at a fair method of assessment of the size of the asset that has accumulated for the employee in his first employer's fund. Therefore, one has to get the first employer to focus on the eventual salary that that person might receive if the stayed in that employment, rather than the figure that he happened to be earning when he got so fed up that he decided to leave the firm. At that stage the employee was probably making a fair assessment that he was underpaid for what he could do; that would be why he was thinking of going.
That is precisely the purpose of the formula that I have arrived at. Let us imagine that the firm has to fill the vacancy. Suppose it decides to recruit precisely such a person as the man it has got and starts to consider what it will have to pay and what pensionable service would be appropriate to credit the man joining the scheme for someone whom the firm perhaps does not consider to be a man whom it is recruiting for ultimate promotion to the board but whose trajectory would be precisely parallel with that of the person whom it does not evaluate particularly highly who, nevertheless, is in a fairly senior job in middle life. The conventions and casework could soon build up. If the House decides that this formula is appropriate, it will not be long before professionals would be able to come to an agreement that will result in a clear settlement on a figure.
In the early days, once the House accepted this formula, there would be room for disputes. There will always be room for disputes. Professional opinion will quickly come to a consensus, however, and I am sure that in 99 per cent. of cases an early leaver will be willing to leave it to his advisers to settle on a figure, and that figure would be accepted. We will not see endless disputes after a year or two if the House accepts my formula. At all events, that is what I am advised by people who work in the profession.
When an employee gets to his new firm, he will have a cheque of perhaps quite a large value. He must negotiate with that cheque to get what terms he can. If the new firm's scheme is totally different—it may be contracted out, whereas the other was contracted in, or it may be based on a different age of retirement of totally different accrual basis—he must negotiate his entry into the new firm. That is up to him; but he will bring a cash value with him equivalent to what he has withdrawn from the previous scheme.
I have to draw attention to a serious point in my new clause. In a case where someone is leaving a firm in which the pension fund is not fully funded, if he insists on taking out the whole of his asset, he is diminishing somewhat the amount of money that is available to meet the liabilities of the fund to the other employees who remain with the first employer. If we are talking about just one or two people leaving a large firm over the course of time, that may not be important, even if the scheme is seriously underfunded for one reason or another. But if, for instance, a firm is hitting a bad patch and is in difficulty in funding the scheme anyway and many people decide to leave or are encouraged to leave early because the firm is not able to offer them much of a future, and if they use my formula as the basis of valuation, the early leavers might take so much out of the fund that it becomes totally unable to meet its liabilities to those employees who remain faithful to the firm. That is not my intention. It would merely put an early leaver in a position to cheat the stayers. That is not what I want.
I have therefore made the provision that, when a scheme is underfunded, an early leaver has the option of either taking a transfer value that is reduced by the percentage to which the scheme is underfunded, or leaving a preserved asset with the employer that would constitute the full amount of the asset. The employer would then have to honour the commitment at the normal age of retirement, which might be many years afterwards. That is not an attractive choice for the early leaver. If he is leaving the firm because he has doubts about its viability, he may not be too happy about leaving his preserved asset in the hands of trustees who may not have all the money that they need, even 20 years hence, to pay out according to the real value of his asset. Equally, if he takes a transfer value that must be diminished by 10 per cent., 20 per cent. or 50 per cent. because the fund is underfunded at the moment he insists on his cheque, he puts himself in a bad position when he negotiates with the new employer, or, for that matter, puts his money into a private pension scheme under the options that are now opening up under my right hon. Friend's proposals.
It is an invidious thing to be leaving a fund that is in low water. In that case, one may find that one's private sector pension scheme does not give the same security that one would have if one had been in the public sector. We must take that fact into account. Inevitably, private sector schemes are subject to the vagaries of the market and the future of the employer and other factors, whereas schemes that are underwritten by the taxpayer have a sort of cast-iron security that the private sector finds it difficult to match.
The House has been extremely indulgent with me in allowing me to explain all these points. I look forward to hearing what other hon. Members may have to say, particularly what my right hon. Friend may have to say. The Departments concerned with occupational pension matters have had an opportunity of looking seriously at my proposals. They are not new. I introduced them a year ago in a similar situation. There is an overwhelming consensus that the present way of dealing with early leavers is unjust and contrary to the national interest. If my right hon. Frend accepts that fact but does not accept my new clause 1, the House is entitled to insist on his putting forward a better alternative.
I congratulate my hon. Friend the Member for Kensington (Sir B. Rhys Williams) on his ingenuity in devising the new clause, getting it on to the Amendment Paper and ensuring that it is debated, because it is not a clause about taxation at all. It relates to occupational pension schemes, and my hon. Friend has included within it a device to ensure that it is a taxation clause because he wants to withdraw tax privileges for any occupational pension scheme that refuses to comply with the arrangements which he believes to be desirable.
The first objection to the new clause is that that is the wrong way to go about it. It is justifiable for the law to intervene in occupational pension schemes notwithstanding the fact that they are voluntary. Social Security Acts have done so in the past, and will no doubt do so in the future. To use the blunt weapon of tax privileges to say, "Either go along with my new clause by 1 January 1988 or lose your tax advantages", is rather unreasonable. Unless I have misread it, that is what my hon. Friend's new clause would do. He must make a better case. The new clause includes the words, "It shall be permissible", as though it would be permissive, but it is not. If the occupational pension scheme does not comply with the new clause within a very short period, it will lose all its tax benefits.
My hon. Friend has a great interest in these matters, but sometimes he goes too far. He is hostile to the final salary scheme to the point where he would like it to be broken up so that each member can have his own pension scheme. I think that it is good to have a diversity in pension provision and good that, in the future, individuals will be able to choose between an occupational scheme and a personal pension scheme.
When the time comes, it will be important properly to explain the differences between the two, because as 1 January approaches and people decide whether to opt for personal portable pensions a great campaign will be launched by the companies that wish to sell the schemes. They will be trying to sell the virtues of opting out of SERPS and occupational schemes and going into their personal schemes. It will be important for employers and others to explain to employees the benefits of occupational pension schemes. Listening to my hon. Friend, one would think that there were no benefits worth talking about in occupational pension schemes. But I believe that there are, and that those benefits have been substantial at times of fairly high inflation. The opportunity to have a guaranteed pension related to one's final salary has been a great advantage, and I hope that when the time comes there will be a balance in the debate that takes place and that employees will be told about the pros and cons of both.
The other day, I received a paper from the National Association of Pension Funds which is naturally concerned about the matter and which will do what it can to explain the virtues of occupational pension schemes.
The new clause deals with the problem of the early leaver, and there is no doubt that, in the past, the early leaver has been ripped off. I have been ripped off as an early leaver. But we have made improvements since then. My hon. Friend belittled the improvements that were made in the Social Security Act 1985. One has to strike a balance here. As well as having been a member of a private occupational scheme, I have had to run one. We must realise that the schemes are voluntary and that, in theory at any rate, an employer could wind them up at fairly short notice.
What is the object of an employer putting money into a scheme? He does so to attract employees to his company and to make them stay. He wants people to stay with the company, not to leave early, so he sees no reason why he should bend over backwards to help the early leaver. That is why the legislature is justified in intervening and making sure that the early leaver gets a reasonably good deal.
The question then arises: what is a reasonably good deal? Where should the balance of public policy be on this matter? At present, the Social Security Act says that if one takes out a deferred pension now, it must be revalued by the increase in the retail price index every year up to a maximum of 5 per cent. My hon. Friend belittled that and said that inflation may increase above 5 per cent. He is right, but there must be a ceiling. An open-ended commitment for a pension scheme would be unfundable, and at present 5 per cent. seems to be a reasonable figure.
I am sorry that I did not have the opportunity to hear the debate on the new clause last year, but, as I understand it, my hon. Friend wants to give to the early leaver all of his expectations up to retirement, to say to him, "You might have been very successful in this company and you might have been promoted to chief executive, so we should take all that into account and try to evaluate what your final salary would have been on a rather optimistic basis", and then offer him a guarantee on that basis. If that is what my hon. Friend wishes to do, it is going too far.
We must allow the actuarial profession some discretion in these matters. My hon. Friend is trying to impose rules upon a profession in which a considerable amount of judgment is involved. All sorts of assumptions must be made when calculating the value of a transfer payment, especially about interest rates, inflation and earnings growth, and to impose rigid formulae on the actuaries would be unreasonable. It is not surprising to me that the actuary acting for an employee leaving a scheme may take a different view from the actuary dealing with an employee entering a scheme.
My hon. Friend's new clause would calculate that amount by reference to the amount which would be payable by someone coming into the scheme. That is a purely notional concept, because people bring into a scheme something that is related to their previous pension scheme. My hon. Friend is talking about something that does not exist in practice—a notional sum that would be needed to fund all the back service of that individual had he been the individual who was leaving in the first place. That can be calculated only by reference to the current salary. It does not take us all the way that my hon. Friend wishes to go.
I am following my hon. Friend extremely closely, but I think that what I suggested was something which, arithmetically, is quite easy to arrive at. One knows the age of the person who is leaving, so that is not a matter of dispute. One knows the salary which he is earning at the time of his leaving, so that is not a matter of dispute. One can calculate the conditions of the scheme which would determine the capital value of the asset, because it is the scheme which the employer operates. One need not even guess what the pension scheme might be. One knows the scheme, the age and the salary. Where does the dispute arise?
None the less, it is a notional amount and it is subject to the criticism that was made by the hon. Member for Sedgefield (Mr. Blair). It cannot anticipate the future performance of an employee, so it does not give to the employee the benefits which I think my hon. Friend said the early leaver would gain from the new clause. If that is the case, it would be a good thing, because it is wrong to go as far as my hon. Friend wishes to go.
Although I have great sympathy with the early leaver, it is wrong to go as far as my hon. Friend wishes to go and to impose such substantial obligations on occupational pension schemes as the new clause would do.
During the Second Reading of the Finance Bill, my hon. Friend the Member for Kensington (Sir B. Rhys Williams) spoke after two maiden speakers and told them that he always worked on the Jericho principle. He recalled the story of Joshua's troops, who finally brought down the walls of Jericho by going round and round the city. He said that one should not be put off if an angel came along and said that it was hopeless. He said that one should go round the walls yet again and eventually they would fall.
We have not been round this city six times, but we have certainly been round it three or four times during the debate. The walls are trembling a little. My hon. Friend has advanced his case and educated hon. Members, including me, although the House will be indebted to my hon. Friend the Member for Beaconsfield (Mr. Smith) for putting the counter case for the final salary scheme.
My hon. Friend the Member for Kensington has consistently advocated the money purchase scheme and underlined the problems that the final salary scheme creates for the early leaver. I have great sympathy for what he says and I do not believe that we have a solution that entirely meets all the aspects of the problem of the early leaver. Such a solution would impose considerable costs on industry.
It may be for the convenience of the House if I underline the way in which the problem my hon. Friend the Member for Kensington has described arose. To take a simplified example, suppose someone worked for 10 years for employer A and earned £12,000 a year. If that person left in mid-career, on normal rates of accrual— one sixtieth final salary for each year of service — his deferred pension would be ten sixtieths of £12,000, which is £2,000. If that person then worked for 10 years for employer B and retired with a final salary of £24,000, his pension from employer B's scheme, on normal rates of accrual, would be ten sixtieths of £24,000, which is £4,000. Therefore, his total pension, assuming for these purposes zero inflation, would be £6,000 — that is his pension entitlements of £4,000 plus £2,000. If that person had stayed with employer A and served 20 years to retirement, his total pension would have been twenty sixtieths of £24,000, which is £8,000.
It is in that case that we come to the problem of the transfer value because if he had transferred his rights from scheme A to scheme B when he changed jobs, on present actuarial rules his transfer value might have been about £18,000. This would not buy him 10 years' additional service in scheme B. It would buy him only additional benefits equivalent to a pension of £2,000 a year. The transfer value to buy him the equivalent of 10 years' additional service would have to be £36,000. That would be double his present entitlement under the rules of the scheme.
In his new clause, my hon. Friend has set out certain proposals relating to transfer values, paid by occupational schemes, which provide benefits based on the length of service at final salary. My hon. Friend is proposing that the Government should effectively require schemes to provide transfer values on that improved basis. My hon. Friend the Member for Beaconsfield was quite right to say that it is not quite as permissive as the clause seems at first sight.
When we discussed this matter in Committee, the hon. Member for Sedgefield (Mr. Blair) tabled a similar amendment as did my hon. Friend the Member for Kensington. I made the same objection then, although it was probably true of one but perhaps incorrect about the other. As my hon. Friend the Member for Beaconsfield has said. it would require the schemes to provide higher transfer values because my hon. Friend the Member for Kensington would use the weapon of the tax system. Although the new clause would give schemes the option to change their tax rules, if they opted not to they would cease to be tax-approved. I must make it clear to my hon. Friend that if we were to go down that road, as my hon. Friend the Member for Beaconsfield pointed out, the requirement would be a matter for the DHSS and not the Revenue. As my hon. Friend the Member for Beaconsfield underlined, Revenue tax approval rules are concerned with setting maximum benefits, and the Revenue rules on transfers follow the DHSS.
As my hon. Friend the Member for Kensington knows, the question of transfers was considered in detail two years ago when the Social Security Act 1985 was before the House. Following that Act, regulations on transfer value were made following extensive consultations. Those regulations came into force on 1 January 1986. As I have advised my hon. Friend previously, in considering proposals for further changes, DHSS Ministers have taken the line that it would not be right to impose new requirements on schemes so soon after the recent legislation until there has been sufficient time to assess their effects.
Notwithstanding this, however, in my view the proper place for a provision on these lines proposed by my hon. Friend lies in social security legislation. As I have said previously, I shall ensure that my hon. Friend's proposals are reconsidered by my right hon. Friend the Secretary of State for Social Services together with either myself or my right hon. Friend the Chief Secretary.
I know that my hon. Friend the Member for Kensington was not very receptive to this when I put it to him in Committee, but we must have regard to the cost of pension provision to employers. The funding position of occupational pension schemes is reviewed by an actuary every few years to determine the level of contributions that is needed to keep it solvent. My hon. Friend's suggestion could impose considerable extra burdens on industry. In reviewing the funding of the scheme, the actuary must take account of the fact that some scheme members will leave in mid-career taking with them a transfer value based on their final salary and their service up to when they depart. If, as my hon. Friend proposes, the transfer value for every early leaver had to be calculated on a higher basis, that would inevitably depress the scheme's funding position. The actuary would have no option other than to recommend a higher level of contributions and the main brunt of that extra cost—in most cases, all of it—would fall on the employer.
I am grateful to my hon. Friend the Member for Beaconsfield for at least putting the case for the final salary scheme, which provides some certainty for some employers. My hon. Friend the Member for Kensington has said that he does not like that because it leaves the problem of the early leaver. However, as my hon. Friend the Member for Beaconsfield has said, we are moving towards a time when there will be wider choice and more and more people will be able to take out personal pensions which are more akin to the model which my hon Friend the Member for Kensington supports, and which will help to overcome that problem.
My hon. Friend the Member for Kensington points out that in recent years many schemes have become overfunded—so much so that they have been able to reduce contributions or even to make a refund to the employer. Of course, that is right, although I do not believe that it applies across the board to all schemes, nor do I necessarily believe that it is unfair that employers should enjoy some benefit from the good years when it is only about 10 years since the bad years, with negative investment returns, and when employers had to make contributions of 25 or 30 per cent. of payroll to keep their schemes solvent. I am sure that my hon. Friend remembers that. We are talking of a different world now. In the early 1970s the world appeared different.
Again, as my hon. Friend the Member for Beaconsfield has pointed out, the fact is that occupational schemes are voluntarily established by employers for their employees. Because employers who establish final salary schemes are taking on an open-ended commitment, it is important to allow them as much freedom of choice as possible, including the freedom to promise whatever benefits are considered affordable.
My hon. Friend the Member for Beaconsfield emphasised that if employers were effectively required to provide benefits that they did not think they could afford —bearing in mind that, above all, pension schemes are a long-term business — the danger is not only that employers would not set up new schemes but, as my hon. Friend has said, that some schemes might be wound up. I know that my hon. Friend the Member for Kensington will not be persuaded entirely by my argument. However, I advise him that we shall certainly consider the matter further and myself and a Minister of State at the DHSS will discuss it with him.
We have said repeatedly to my hon. Friend the Member for Kensington that such a radical reform could not be introduced through the tax system at this stage in a Finance Bill. However, I agree with him that considerable problems still relate to the early leaver. Those problems must continue to be addressed. They are paramount and we must consider them extremely seriously. For that reason I am afraid that it would not be right to accept the new clause as it is, so I fear that I cannot accept my hon. Friend's recommendations, persuasive though they are.
With the leave of the House, Mr. Deputy Speaker, I should like to reply to the points that have been made.
My hon. Friend the Member for Beaconsfield (Mr. Smith), whose opinions I greatly respect, said that it was good to allow final salary schemes as an option. I do not disagree with that. However, the employer has a responsibility to put something aside for his employee all the time in the form of deferred pay. That should be an identifiable sum. Preferably it should go into one of our tax haven schemes, build up compound interest and be available to provide an annuity at the end of the day. That does not mean to say that an employer cannot have a final salary scheme on top of his minimum obligation.
The minumum obligation that is imposed through the SERPS rules is far too small and I suggested in Committee that employers should put at least 10 per cent. on top of wages into provision for retirement. Anything less than that will leave many employees in a position where, when they come to retire, they must apply to the taxpayer for benefit in the form of supplementary benefit. That is an unsatisfactory state of affairs. To compensate for that extra burden on employers, I threw out the hint that the Inland Revenue might agree to forgo national insurance contributions, which are simply a form of income tax. I am not hostile to final salary schemes, provided the employer has first met his minimum obligation, which means to all employees, not just early leavers, whom I am dealing with in the new clause.
My hon. Friend said that final salary schemes were welcomed during the long period of inflation because they were protected up to the time when the employee left service at the normal age of retirement. Thus the inflation which took place during the course of his career was borne by the scheme and at the date of retirement his pension was awarded on the basis of the value of money at that time. That is true; but look at the deplorable record of occupational pension schemes in looking after beneficiaries after retirement. I believe that only 2 per cent. have undertaken to give full uprating to pensioners after the date of award. Therefore, the final salary scheme does not do so much for beneficiaries after they have left employment.
I cannot allow my hon. Friend to get away with that. It is difficult for trustees of an occupational pension scheme to give any guarantee. Again, it is open ended and no one knows what the rate of inflation will be. Large occupational pension schemes — I think of our multinational companies — have a tremendous record on uprating pensioners' benefits after retirement.
I know that occupational pension schemes have often in good faith made a gesture to their pensioners after retirement and have sometimes uprated benefits substantially. The figure up to 1983 that I was given in a parliamentary answer—if the figures were up to date they might be different, and admittedly they were out of date — was that only 2 per cent. of schemes had uprated fully by the amount of the retail price index. That does not seem to be a frightfully good record. I understand that it is difficult in dealing with fluid funds and unidentifiable assets to give justice to all concerned. That is an intrinsic fault of the final salary system. Money purchase obviates that weakness altogether, because the position is as clear as if one had one's money in a bank account.
My hon. Friend then said that the schemes were voluntary and that it was possible for employers to wind them up. I mention that as one of the bad reasons why we are where we are. Employers still tend to regard their pension funds as a bonus, not as an obligation. In the 1920s or 1930s it may have been a reasonable aspect of personnel management to run a pension scheme as a sort of Venus's flytrap, to get people to join one's fund and then to find themselves stuck because if they leave they have to write off so much. I do not think that nowadays that is regarded as an acceptable form of personnel management.
It is not healthy to have senior people in one's firm who wish to leave if they could only do so without losing their pension rights. To keep people doing work which is less good than they are capable of is only breeding sickness. I can speak from personal experience of working in industry where people were kept back by their pension fund and did not have a happy end to their career. Unfortunately, one sees similar effects in many Civil Service departments, where people mark time and block promotion lanes because of the nature of the final salary scheme.
Naturally, the employer who runs a super-generous scheme can change the policy and wind it up. But in setting the state earnings-related pension scheme and deciding to retain it, which the Conservative Government wrongly did, we have accepted that there is an element of deferred pay in the pension scheme and employers are obliged to pay deferred pay. We now need to bring the private-sector pension schemes up to the level of the public-sector schemes. I do not see why people working in the private sector should be second-rate citizens in retirement. We must do something about all our thinking regarding the deficiencies of the occupational pension schemes in the private sector.
My hon. Friend said that my new clause was obligatory, not permissive as it seems. With respect, he has not quite penetrated to the actual meaning of my suggestion. Suppose the sponsors or the trustees of the scheme refused to do what I am suggesting in this new clause after it has become law. They would not lose their tax concessions in respect of the whole of that accrual of value up to the date when my new clause would become operable. That is why it is not a retrospective provision. One must find a way of overcoming the argument that anything which benefits the early leaver who has a long record in his fund will be of a retrospective character. I would like to suggest to my right hon. Friend that he has not given sufficient attention to this aspect of the problem.
If one benefits someone who has had perhaps 30 years in the pension fund in relation to those assets which he has accumulated over that period, it might well be said that one would be making a retrospective change in the law, because the pension fund did not originally expect that it would have to give a fair deal to the early leavers—to those who chose to leave before the normal age of retirement. If we make it obligatory on the fund to do so in respect of those past years, we are putting a debt on the fund in respect of years which have gone by and where the accounts have already been closed. That is why it is important to say that it is only in respect of future years that pressure will be brought on the fund by the new clause.
Why should we not bring pressure on funds which are holding people unjustly in jobs where they are not doing their best? Why should we give tax concessions of this enormous value to funds which are not acting in the public interest or in the interest of their employees? My right hon. and hon. Friends must ask themselves why we give these enormous tax concessions to these schemes if they are not delivering the goods, but are treating people unfairly and acting against the public interest.
My right hon. Friend the Financial Secretary mentioned extensive consultations over the problem of the future of occupational pension schemes in general. It is true that there have been consultations, but one of the difficulties is that all the people who understand the law and practice of occupational pension schemes are employed by the sponsors of those schemes. They tend naturally in time to orient themselves towards the employers' interests because they get their bread and butter from the employers' side. Eventually, they find good reasons why claims made on behalf of employees should be set aside. They argue themselves into a firm belief that what the employer does is invariably right and what trade unions or individual employees argue on behalf of the wage or salary earner is in some way ignorant, excessive or biased, or at any rate not worthy of serious consideration.
For that reason, if one talks to the experts about the problems of occupational pension schemes, one tends to hear the employers' view. No one speaks confidently on behalf of the employees. The fact that no one from the Labour Benches has attempted to come to the support of my new clause once again emphasises my point. People who think it is their responsibility to speak for the employees fear to tread through these technicalities because it is a difficult subject. In my view, the consultations which have taken place have resulted in a raw deal for the beneficiaries. Therefore, I question their real worth. I believe that my right hon. Friend needs to widen his circle of advisers to take in people who will speak for the beneficiaries too.
My right hon. Friend said that it would be wrong to impose new requirements on schemes yet a while because of all the upheavals that have recently taken place. In Committee I drew attention to the fact that we are putting almost impossible administrative burdens on occupational pension schemes. That arises from the fact that we have dual control. The Inland Revenue is issuing extremely complex instructions relating to the Revenue's perspective of the way such schemes should be controlled—namely, in regard to the eventual benefits. In the last week or two, the Department of Health and Social Security also issued no fewer than 20 statutory instruments with meticulous instructions as to how those schemes were to be run. I am sorry to say that some of those statutory instruments are quite controversial and do not emanate from the discussions that we had in Committee. However, they are quite enough to burden these schemes with an enormous amount of administrative expense and problematical decisions.
I quite agree that the providers of occupational pension funds are probably sick to death of being told what to do, but that does not mean to say that we should allow them to continue to do what is wrong. We should simplify the regulations to the absolute bare minimum, so that everybody can understand the rights and wrongs and know what is expected of them. That is perfectly possible if we clarify our own ideas first as to what the pension schemes are all about. If we knew what the philosophy was, we would have no trouble with the details.
I cannot accept that this is simply a matter for the DHSS and that the Inland Revenue can wash its hands of the matter. The Inland Revenue must look after the taxpayers' funds. In occupational pension schemes, there is not only money put into trust by the employer or by the employee, but also a gradual roll-up of an enormous element that constitutes money belonging to the taxpayer. The taxpayer has a huge stake in these enormous funds. The taxpayer will recover that money when the pension comes to be paid because tax is payable on the pension. I do not accept that this is simply a DHSS matter and not a matter for the Finance Bill. If the public are expected to extend tax concessions to the schemes, the public are entitled to expect the schemes to be run in a proper manner. At the moment, that is not happening.
My right hon. Friend spoke of the considerable extra burden on industry. If I am right in saying that the beneficiaries are losing anything like £1,000 million a year and that that ought to be rectified, that £1,000 million must come from somewhere because it is going to go to the beneficiaries. That might be said to place an enormous burden on industry, which industry cannot bear. At this time, the papers are full of the Government's problems — wages are rising faster than productivity. We are all delighted to read that profits in industry are rising rapidly at this time. I am sure that that is a welcome sign. That means that the average employer is in a position to put more money out for the remuneration of employed workers, salary and wage-earning employees. Why not put that money into the pension scheme, that is, into the capital account, instead of putting it into the wage packet, which constitutes the current account? We all know that there is a risk of incipient inflation taking off again because, to quote the well-known phrase, "There's too much money chasing too few goods." Why not encourage employers to put more money into the capital account? The money would only be recycled by the occupational pension fund trustees, on the basis of the advice they receive, back into industry in the form of investment. Industry would not lose the money; it might even be argued that it would gain it in the form that is most required.
If pensions were better, wage increases might be smaller just now, but there would be less immediate inflationary pressure and there would be more money flowing into investment on capital account. Surely that must be good. and if anything it would tend towards lower interest rates and a better, more efficient capital market.
I do not wish to ask the House to go further with my new clause. I am grateful to right hon. and hon. Members for listening to my arguments. I will reluctantly ask leave of the House to withdraw my new clause; but I hope that the arguments that I have put forward will not be wasted and that some of the things that have been said against my new clause—I believe those arguments were inadequate to beat it down—will be reconsidered in the not too distant future.
I beg to ask leave to withdraw the motion.