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.