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.