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Occupational Pension Schemes

Prayers – in the House of Commons at 2:01 pm on 16th July 1992.

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Photo of Mr Michael Bates Mr Michael Bates , Langbaurgh 2:01 pm, 16th July 1992

I am grateful for the opportunity to debate occupational pension schemes. The schemes have a membership of about 11 million people and are important in this country. Some 300,000 schemes are in operation. The debate on pensions over recent years is welcome. As our population ages and people can look forward to periods of retirment of 20 to 30 years, the need for properly funded retirement via occupational pensions and state pensions is increasingly important.

There has been a great deal of success in occupational pension schemes, and we should start on that basis. We should mention that, in 1979, 54 per cent. of pensioners had a second income from an occupational pension scheme. That figure has now risen to 69 per cent., which is very welcome. We should also recognise that, in addition to occupational pension schemes, the number of people who can supplement their income has doubled from savings during that period. That is most welcome. The number of people who own property as another asset has increased during the period. As the wealth of the nation grows, pensioners can participate in that wealth, which is to be approved of greatly.

I want to bring a number of points before the House. One of the first problems that the industry and Government may face in coming months is surpluses. The fact that surpluses have built up in pension funds over the past 12 to 14 years is a credit to the economic conditions that have existed for the principal part of that time. The key point is what to do with those surpluses.

Who owns the surpluses in pension funds? I suggest that ownership of pension funds must lie with the employees and with the members of the pension fund. That key point must be accepted. The argument is helped by recent judgments in the European Court. The case of Barber ν. Guardian Royal Exchange established that pensions are deferred pay. Deferred pay, by its nature, must belong to the person who has earned the salary. Ownership is very much in the hands of the employees.

I do not welcome the way in which, in recent years, the surpluses that have been built up in pension funds have been attacked by predators and over-enthusiastic companies. I approved of the Conservative social security legislation which was introduced with the principal objective of placing limitations on what such surpluses can be used for. That was an excellent initiative, but it has still to be applied. The sooner the new rules are applied the better.

Other tactics, perhaps not as overt as taking over company pension schemes and creaming off their assets or taking loans from them, also give rise to anxiety. I refer to certain subliminal activities which have come to my attention—for instance, the practice of placing directors in the membership of an employee pension fund and allowing them to take up and backdate their benefit entitlements in the fund, following which, six or nine months later, they are given a transfer out of the fund and into their own executive scheme, taking with them a high transfer value. This causes concern among members of pension schemes and it must be dealt with.

Some employers are over-enthusiastic about taking contribution holidays. Some of them take employer contribution holidays of between five and 10 years. Given the ever-lengthening period of retirement these days, there will be ever-increasing demands on pension funds, so they will require increased resources. That in turn will require increased contributions, so employers must not set a bad example by taking these contribution holidays.

The security of pension funds has been much on our minds, given the tragic circumstances surrounding the Maxwell pensioners, but we must be careful not to over-legislate and place too heavy a burden on the 300,000 pension schemes in this country which operate successfully and effectively on behalf of employees.

Much of the great debate, inside and outside this Chamber, surrounds schemes with large memberships—multinational pension fund schemes, for instance. However, as we know, the vast majority of occcupational pension schemes are run by small manufacturing companies and small chains of shops with 20 or 30 staff. It may be right to impose on larger schemes professional actuaries who have to attend board meetings and be subject to increased compliance with legal requirements—that may tighten up on the investment and management of the large funds. We do not want, however, to place an excessive burden on smaller schemes. After all, where would the money to comply with more legislation come from? It would have to come from the pension funds themselves, to the detriment of their members.

Much of the protection required is already in place. Trustees must be better educated to know their rights and what to look for as they attend trust meetings. They need to know more as they take on responsible positions in companies and in occupational pension schemes.

We also welcome the review by Professor Goode initiated by the Department of Social Security. Most of us were extremely impressed with the quality and expertise of that distinguished committee. We have a great deal of confidence in the quality, knowledge and expertise of those people to produce sensible solutions which will be for the benefit of pensioners.

We must also consider portability. The nature of employment has changed. In the 1930s and 1940s, it was normal to think that people would spend 30 or 40 years with one company in one job. That was particularly so in the north-east of England. People would work in a mine from the time that they left school until they retired, or they would stay with a shipyard for their entire working lives. However, the nature of employment has changed. People change the nature of their duties and their professions and jobs. They also change employment on many occasions.

Under current legislation and the operation of occupational pension schemes, people who are mobile and move between different pension schemes can be disadvantaged because benefits have to be left or frozen within a particular scheme or transfers must be taken from a scheme, but the transfers are not a full and accurate reflection of the true value of the contribution in that fund.

We must recognise that there is a greater need for portability and mobility in the work force. We must encourage that, because it is good for the economy and for business. We must make it as easy as possible for people to move between jobs and to secure and build up pension benefits. Some people might argue that that is the responsibility of the individual, that people should take that decision and on their heads be it. However, if people fail to make adequate pension provisions during their working lives, they will become the responsibility of the state, which the taxpayer has to fund. We can legitimately take an interest in ensuring that people make adequate contributions into pension schemes to secure adequate benefits in retirement.

One cannot mention portability without referring briefly to the position in the European Community. I should welcome comments from my hon. Friend the Minister about pension benefits in the European arena because it would be helpful to draw comparisons. As we head towards a single market, the picture that I drew earlier of increased mobility in this country will be increased many times over. People will take advantage of the tremendous opportunities available through a single market to move between different employers and to change their professions, not just within the United Kingdom, but within the European Community.

Such movement raises questions about the funding of those pensions. The original European communication issued in 1991 by the Commission contained a provision for portability of pension benefits and for securing pension benefits as people move between member states. That was very welcome, but that provision was not adopted in the final document and that was very disappointing.

One appreciates that there are problems with different tax structures and that it is difficult to allow tax benefits in different member states. It is difficut to achieve harmonisation in that area. However, if we want a true, single European market and true mobility of labour, we must address that problem. I should be grateful if my hon. Friend the Minister would comment on that.

Many other things can be done for pensioners which relate not directly to pension schemes, but to the economic conditions that surround pensioners. We often hear from the Opposition the accusation that inflation is not the most important economic indicator. It is all right for hon. Members who will secure index-linked pension benefits, hut, for the vast majority of people—11 million—who do not have index-linked pension benefits, inflation and the control of inflation are of dire importance and are vital to their security and to maintaining the value of their pension benefits. We must bear that point in mind. We must imagine what it would have done to an occupational pension scheme in 1977, when the rate of inflation was 23 per cent. and a pension fund was limited to an increase of 5 per cent. Clearly, the Government have a duty, and the control of inflation for the benefit of pensioners is paramount.

The maintenance of low rates of taxation is another way of assisting occupational pensioners. The introduction of the 20p band for pensioners was a great assistance, particularly for pensioners receiving state and occupational benefits. The welcome increase in income support for pensioners is also a great assistance. There are things that the Government can do and I am pleased to say that they are doing them successfully.

If we want increased pension benefits, an adequate standard of living for an aging population and a decade of retirement, which is an excellent idea, we must strive towards flexibility of retirement ages. It is nonsense to suggest that everybody reaches an appropriate retirement age at exactly the same time. Individuals have different approaches to when they would like to exercise their retirement benefits. The ability to fund them is the key.

The individual must accept that it is his responsibility to fund pension benefits and pension schemes. Perhaps in the past we were used to getting our pension benefits on the cheap, certainly compared with other European Community states. Contributions by our employees are at the low end of the scale. The individual must say, "If I want to secure those benefits and to choose my date of retirement, those benefits need to be funded." That is the responsibility of the individual and the individual alone.

Photo of Ann Widdecombe Ann Widdecombe , Maidstone 2:17 pm, 16th July 1992

I congratulate my hon. Friend the Member for Langbaurgh (Mr. Bates), first, on obtaining the debate and, secondly, on the extremely lucid way in which he has made a wide range of points. His speech follows well on his excellent and well-acclaimed maiden speech on housing. My hon. Friend will be able to bring a great measure of judgment and expertise in serving his constituents. It is a tremendous pleasure for me to answer such interesting and thought-provoking thoughts. Given the time constraints, it is unlikely that I shall be able to address each of my hon. Friend's points, but I hope to be able to to respond to the most important.

My hon. Friend is right to welcome the review of trust law which the Government have implemented under Professor Goode. I am particularly grateful to my hon. Friend for making it clear that a balance is to be struck between, on the one hand, protecting the members of pension funds and making sure that the law is sufficiently tight to protect their assets and future pensions and, as far as possible, to avoid the excesses that we have seen as a result of the Maxwell affair, and, on the other hand, not drawing the rules so tight that they make it impossible for small funds to function or that they provide a major disincentive for employers to set up occupational pension schemes. That is an important balance to be struck. I am grateful to my hon. Friend for pointing it out.

The Government have always been aware that the security of pensions is a major issue. It was addressed in the Social Security Act 1990. Several measures in that Act have been implemented and we are still considering others. That is a tribute to the Government and a refutation of the frequent claim that somehow we know that problems were brewing in occupational pensions two years ago, well before any knowledge of Mr. Maxwell's activities, but did nothing about it. We were already implementing measures or consulting on measures to strengthen the law.

We took cognisance of the balance that my hon. Friend discussed when we introduced the self-investment regulations, because we wanted to limit self-investment because we recognised that it was in the interests of members of pension funds to do so. However, we did not want to limit it in such a way that we would cause funds and employers to wind up prematurely or make it impossible for them to function sensibly within whatever limits we introduced. Therefore, there was a period of consultation before we introduced the 5 per cent. limit. I suggest to my hon. Friend that that is evidence of our great desire to maintain the balance to which he referred.

My hon. Friend was right to put occupational pensions in the overall context of pensioner incomes and to assess how far occupational pensions have contributed to the welfare of Britain's pensioners. He asked me to make clear what pension benefits exist in the rest of Europe. In many of our European competitor countries highly developed occupational pension schemes such as we have here do not exist. Even in countries that have large occupational pensions schemes such as Germany or Holland, the schemes are not all run on exactly the same principles.

There is a healthy mix between private and public provision in Britain. Perhaps a good demonstration of that is the fact that the average income from occupational pensions is almost exactly the same as the state pension. The state pension makes a significant contribution to a pensioner's income. It is precisely that healthy mix which enables us to sustain an increasing pensioner population and maintain services for our pensioners which are not readily available in the rest of Europe.

I shall take the request of my hon. Friend to draw some comparisons with Europe. In much of the rest of Europe people already have to work much longer for their pension. For example, in Denmark the retirement age is 67. In the Netherlands people must have 50 years of insurance before they even qualify for a pension. The pension received by people who live in France or Germany depends on how much they have earned. Low earners end up with extremely low pensions.

In Britain a basic state pension is available to all with a contributions record. In both France and Germany people pay health insurance out of their pension. In Britain national insurance contributions stop when people retire. They simply draw their pension. Only Britain provides a separate pension for a spouse who has not worked. As that represents some 60 per cent. of the basic pension, it makes an enormous difference in any European comparisons.

In other countries, assessments for income support or its equivalent take account of children's income as well as that of the pensioner. In this country, we consider solely the income of pensioners. As my hon. Friend pointed out, half our pensioners own their homes and those at the poorer end of the scale can receive help with rent of up to 100 per cent., whereas housing costs are a major drain on pensioners' incomes abroad.

In France, pensioners pay £4·50 a day for the first week in hospital. In this country pensioners have no deductions for the first six weeks. In Belgium, they pay up to 10 per cent. of the cost of their treatment and in some other countries there are no automatic free prescriptions for pensioners or there is a system, for example as in France, where pensioners are entitled to free medicine but have to pay and claim back the cost. In most other countries, the cost of living is higher. That puts into context the good deal that pensioners have, if we look outside the narrow provisions of the state pension.

In the past 13 years, there have been significant improvements in pensioners' average incomes. Our policy to encourage such improvements has been in two strands. First, we have pledged—and have succeeded in ensuring—that basic state pensions provide a secure foundation for retirement, by increasing them in line with the movement in prices. Secondly, we have encouraged private provision for retirement, both through personal and occupational pension schemes, and by aiming to create a stable economic environment in which savings and investments can grow and maintain their value.

It was important that my hon. Friend the Member for Langbaurgh drew attention to the role of the control of inflation in promoting pensioners' incomes. He was right not merely to rely on the automatic uprating of occupational pension schemes but instead to point to central economic policy.

As there is no Opposition Front-Bench spokesman in the Chamber it might be rather ungenerous to draw the obvious comparison with the 1970s, when many pensioners' savings were effectively wiped out and when few of them—or far fewer than today—enjoyed the comfort of an occupational pension in addition to their state pension. Since 1979, pensioners' incomes from savings have more than doubled, whereas under the last Labour Government they fell by 16 per cent., and average income from occupational pensions has nearly doubled over the same period. The number of recently retired pensioners receiving income from occupational pensions has increased from 54 per cent. in 1979 to 69 per cent. today.

Photo of Ann Widdecombe Ann Widdecombe , Maidstone

That is a tribute to the success of our occupational pension strategy, and I am glad to have that sign of support from my hon. Friend the Member for Castle Point (Dr. Spink), whom I welcome to the Chamber.

While it is true that many pensioners rely on benefits for much of their income, during the past decade private incomes have become much more important. Social security now accounts for only about half of pensioners' average incomes, compared to three fifths at the end of the 1970s. That important shift in emphasis from state to private provision has given us much-needed flexibility in the way that we manage the wide range of pension provisions that my hon. Friend the Member for Langbaurgh referred to.

Real benefit expenditure on the elderly has risen by one third since 1979, but we have been able to target that towards poorer pensioners. My right hon. Friend the Leader of the House, the previous Secretary of State for Social Security, who is also in the Chamber in another guise, was firmly of the opinion and managed to carry through with great success the focusing of extra help on those pensioners who are generally regarded as being less well off. As a result of those measures, we have been able to reduce the proportion of pensioners among the poorest fifth of the population from 40 to 28 per cent. during the Government's term in office. Even among that group, the extra help that we have been able to give through increased income support pensioner premiums has contributed to a 15 per cent. real increase in their average incomes.

In the remaining minute of my time I shall turn from the general state of pensioners' incomes and European comparisons, on which my hon. Friend invited me to comment, and assure him on an issue on which he touched at the end of his speech when he called for a flexible decade of retirement. Contrary to speculation in the press and from the Opposition, the Government have not yet reached a view on how to equalise state pension ages. We are wholly committed to equalisation, but we have not decided on any one method. I can assure my hon. Friend that a flexible decade or flexible period of retirement in any one of a number of forms is under consideration. It is one of four principal options being considered by the Government. When we finally reach our conclusions we shall have taken into account the expert advice that we have received from him. I conclude by again thanking my hon. Friend for raising this important subject.

Photo of George Galloway George Galloway , Glasgow Hillhead

On a point of order, Mr. Deputy Speaker. It is fortuitous that the Leader of the House is by your right hand, which is where he should be. Have you had any indication from the Government that there will be, even at this eleventh hour, a statement about the plan to confiscate Scottish water? I note from yesterday's proceedings that the Secretary of State for Trade and Industry did the decent thing and made an important statement to Parliament about the proposals to privatise Parcelforce. We learn from the newspapers that the Government plan to steal Scotland's water. It would be an outrage if Parliament were to break up for the longest recess in living memory without our knowing what the Government plan for that most precious of natural resources, Scottish water.

Photo of Mr Geoffrey Lofthouse Mr Geoffrey Lofthouse , Pontefract and Castleford

I have received no information that any Minister intends to make a statement, and I think it highly unlikely.

Photo of Mr Mike Watson Mr Mike Watson , Glasgow Central

Further to that point of order—

Photo of Mr Geoffrey Lofthouse Mr Geoffrey Lofthouse , Pontefract and Castleford

Is it on the same point of order?

Photo of Mr Geoffrey Lofthouse Mr Geoffrey Lofthouse , Pontefract and Castleford

I am sorry, but I have ruled on that.