Annual Pension Allowance (Transferred Workers)

– in the House of Commons at 5:35 pm on 3rd December 2014.

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Motion made, and Question proposed, That this House do now adjourn.—(John Penrose.)

Photo of Toby Perkins Toby Perkins Shadow Minister (Business, Innovation and Skills) 5:38 pm, 3rd December 2014

I am pleased to have this opportunity to bring to the House’s attention a matter of significant importance to employees in my constituency who were transferred out of Royal Mail to the IT services provider Computer Sciences Corporation and, I suspect, to many other employees who were transferred out of the public sector. Changes to lump sum pension allowances introduced by the Chancellor in his 2013 Budget have had a catastrophic impact on my constituents’ pension pots and created an accidental discrimination that fits neither the principles nor the spirit of the transfer of undertakings protocol, otherwise known as TUPE.

The aim of this debate is to follow up letters I have exchanged with the Financial Secretary to the Treasury. I feel that his replies thus far have failed to grasp the full unfairness of the situation or to offer appropriate remedy. I aim to show the House that, as the mechanism currently stands, there is gross unfairness towards workers who have been transferred out of public sector pension schemes. I hope that the Minister, when she responds, can explain to my constituents why they have been hit with such a significant tax bill, often on revenues that they have not even yet received, and what further steps the Government can take to ensure that former public sector workers are not unfairly disadvantaged by an arbitrary decision they made several years ago.

Royal Mail has had a long tradition in my constituency. Back in the 1960s, as part of a move to get Government organisations out into the provinces, Royal Mail moved thousands of head office staff up to Chesterfield. It brought with it a Barbara Hepworth statue and a welcome number of high-skilled and pretty well-paid jobs. Royal Mail has been a key employer in the town ever since. The Loundsley Green housing estate was built specifically to house the influx of new workers. However, while it remains an important employer today, many staff have subsequently been transferred out and do the same or similar jobs working on the Royal Mail account on behalf of private outsourcing companies.

The workers whose case I am raising today were transferred from Royal Mail to the IT firm Computer Sciences Corporation Ltd—CSC—in 2003 as part of a contract to outsource all Royal Mail’s IT to the company and retain all the 1,713 staff under the TUPE protocol. At that time, employees had a choice either to leave pension contributions that they had already paid within the Royal Mail pension and start a new separate corporate pension with future contributions with their new employer, or to transfer all their contributions to a new CSC pension and subsequently pay into that. The only choice that appeared to face workers was whether their pension contributions would be safer in one scheme or another and where they would be most likely to get a decent return on the pension contributions to which they were entitled.

Many workers—it is not clear how many—elected to keep their pre-2003 contributions within the Royal Mail scheme and open a new CSC pension with future contributions. However, a combination of the changes to the allowance regime—which was dramatically reduced in October 2010 and further reduced in subsequent Budgets—enforcement of TUPE rights, previous changes made to the allowances on what are perceived to be temporary pensions, and Treasury guidance on what constitutes a temporary pension has led to huge costs being applied to workers made redundant from CSC in recent years.

Revelations in about the efforts that CSC has made to stem losses on its involvement with the Royal Mail account suggest that 63% of the staff who originally transferred from Royal Mail into CSC have now been cut. Although exact numbers are not known, it is believed that the majority have left the business completely. That suggests that some 1,082 employees could be affected in this case alone. Some of those will have chosen to move into the CSC pension scheme and will not be affected in the same way.

There appear to be two different ways in which workers have been disadvantaged. First, I would like to raise the case of Michael Randell. Michael had worked for Royal Mail Group for well over 25 years, during which he had saved for his retirement by contributing into the pension scheme. Mr Randell is now 53. Under the terms of his employment, had he remained a Royal Mail employee he would have been entitled to take his pension under early retirement provision if he had left the firm over the age of 50. Therefore, in order to comply with TUPE, CSC arranged to make a notional payment to source an equivalent pension value until he is 60, when he will move on to the Royal Mail pension. Mr Randell’s usual pension contributions are less than £5,000 per year, but when he is made redundant, this one-off notional payment—which would effectively buy an annuity for the next seven years to comply with TUPE regulations, from CSC’s perspective—is classed by the Treasury as a one-year contribution to a second, in this case temporary, pension. In practical terms, it is not a second pension—it is a continuation of the first pension that he has from doing the same job with two separate employers.

At a time when the Government rightly ask employees to put money aside to save for themselves in retirement and to plan ahead, this group of workers, who did precisely that, are being caused huge problems because, back in 2003, they made a decision about which pension scheme they should choose to contribute to, yet they could not possibly be expected to have had foresight as to the implications of that choice.

The intention of the Government’s proposals was to target richer pensioners. In 2010, Mr Hoban announced:

“It will be targeted at those who make the most significant pension savings. An annual allowance of £50,000 will affect 100,000 pension savers—80% of those will have incomes over £100,000.”

Unfortunately, as Mr Randell’s case has shown, the policy has also hit those on lower incomes with reasonable pensions. The Government have accepted the possibility that individuals on lower incomes could in exceptional circumstances face a sharp increase in the tax charged on their pension, but as I have demonstrated, such moderate language does not reflect the significant numbers that might be affected or the size of the impact on their pension planning.

The second example involves the group of CSC workers who were made redundant in 2012. That was part of a global redundancy programme in which CSC laid off 640 workers. The workers had their CSC pensions taxed as second pensions, whereas if, back in 2003, they had decided to transfer their pensions into the CSC pension scheme, it would all have been seen as the same scheme.

CSC attempted to honour its commitments to its employees by ensuring that they still received as employees of CSC what they would have been entitled to if they had remained with Royal Mail, but that led to those individuals being treated as though they had two separate pensions, although in practice they have been employed in the same job throughout that period. The issue is about how public sector workers whose employer changes, even though their job does not change, are seen as having two different jobs. Although TUPE should protect them from being worse off as a result, in practice they are not protected.

The Treasury viewed the money as having been paid all at once, even though it was received by the workers annually over many years, and the way in which workers’ pensions are taxed by the Treasury meant that people on decent but not in any sense exceptional salaries faced huge tax bills—more than £200,000 in one case that I have heard of—on income that they had not necessarily received.

It is too early to know the total number of people who will be sucked into this unfortunate state of affairs, but taking into account how many have moved from the public sector to the private sector, it might be very high. That raises important questions about the extent to which the Government fully understood the impact of the changes they made to the annual pension allowance when they made them.

The Treasury document, “Restricting pensions tax relief through existing allowances: a summary of the discussion document responses”, revealed:

“The nature of DB schemes means that some individuals on moderate incomes could exceed the AA—particularly where they are in final salary DB schemes and see spikes in pension accrual… The Government is committed to managing impacts on these individuals as far as possible.”

One of these solutions was to allow individuals

“to carry-forward unused annual allowance from up to three previous years, to offset against contributions in excess of the AA in a single year.”

However, the Government recognised that in exceptional cases such mitigation would not be sufficient. The Financial Secretary made that clear in correspondence with me. He said at the time that the Government had consulted on options to give individuals and schemes more flexibility over the payment of charges. On 3 March 2011, the Government announced that individuals with annual allowance charges of more than £2,000 would be able to elect for the full liability to be met from their pension benefit. That obviously made it easier in the short term, but in practice it still means that individuals will lose out, as they receive a lower pension than they otherwise would have done. The fact that they are still taking money out of their future earnings to pay a bill does not seem to fit with the principle of the Government’s measures.

It is ironic that this debate is taking place on the day that the House has again debated the Taxation of Pensions Bill, because the Bill was a missed opportunity to address the plight of TUPE-ed public sector workers who face the unfairness that I have highlighted. The Government have thus far fallen short of the action that is required. The measures that have been put in place are compensatory, but they do not compensate fully. They mean that the workers of CSC and probably many other former public sector workers will lose out on the pension to which they should have been entitled.

The further stages of the Taxation of Pensions Bill provide an opportunity to establish cross-party support for further analysing the effect that pension changes have had on CSC workers, and for setting out a framework in which the unfair nature of the situation can be tackled. I hope that that might happen in another place, as I suggested on Report. The Government’s approach to reforming pensions tax relief was supposed to be based on ensuring that fairness was maintained, but it appears that a loophole has developed that could, in some cases, lead to people losing thousands from their pension.

I would be grateful if the Minister recognised that the measures to alleviate the problem are sticking plasters that aim to provide compensation or to reduce the damage of the proposals, and that what is required is for people who are perceived to have had two jobs, when in reality they had one, not to have to choose to pay a tax bill, which they would not have faced if they were still in the public sector, either all at once or from their future pension income. I look forward to hearing her response on this important issue. I recognise, in bringing this matter to the House, that the Government’s intentions were positive. However, when unintended consequences arise, it is our responsibility to evaluate them and, hopefully, to work together to deliver a fairer outcome for our constituents.

Photo of Andrea Leadsom Andrea Leadsom The Economic Secretary to the Treasury 5:50 pm, 3rd December 2014

I congratulate Toby Perkins on securing this debate. It is a complicated subject and he explained it very well. I am sympathetic to the issues that he raised. He will know that the Government greatly value the important work that is carried out by public sector workers and by those who were previously in the public sector.

The hon. Gentleman discussed the effect of the annual allowance rules for tax-relieved pension savings. He will, of course, be aware that we live in difficult economic times and that few households in this country have not been affected in some way by the economic crash of 2008-09. As part of our deficit reduction plans, the Government had to make difficult decisions in 2010 and 2013 to restrict the cost of pensions tax relief by reducing the annual allowance from £255,000 to £50,000 from 2011-12 onwards and to £40,000 from 2014-15 onwards. We put those restrictions in place to ensure that the cost of pensions tax relief remained affordable and sustainable.

The hon. Gentleman raised a number of concerns about the way in which the annual allowance rules work for defined benefit pension schemes in the context of bridging pensions, which can affect individuals who are transferred from the public sector under TUPE. Although

I cannot comment on the particular circumstances that he raised, it might be helpful if I give some background to those rules.

The annual allowance rules provide a limit on the amount of tax-advantaged pension savings that can be made for individuals each year in registered pension schemes. Savings in excess of the limit are subject to the annual allowance income tax charge. For individuals in defined contribution schemes, it is straightforward to determine the level of contributions paid into a scheme to be assessed against the annual allowance limit. However, the position is more complex for defined benefit schemes because individuals accrue a right to an amount of annual pension from a set pension age, and the level of contributions made by the individual and the employer does not reflect the increase in the value of the member’s pension rights. We therefore needed a method to calculate the deemed level of contributions to test against the annual allowance. That method would have to be actuarially equivalent to the amount required to fund a similar promise in a defined contribution scheme.

Detailed consultations were held with the pensions sector before the rules were introduced in 2006, and in 2010, when the Government consulted on the reduction in the annual allowance. As a result of the consultations and with support from the pensions sector, the amount of defined benefit pension savings in a year, when measured against the annual allowance limit, is broadly equivalent to the increase in the capital value of a promised pension over that period.

To achieve the method of valuing pension savings under defined benefit schemes, special rules were developed so that for each £1 a year of pension that will be payable, the present capital value of that annual pension benefit is £16. The use of the 16:1 factor to value defined benefit pensions promises was adopted from April 2011 when the annual allowance was reduced, following recommendations by the Government Actuary. Before that, the factor was 10:1. The rules are intended to strike a balance between providing a system that is reasonably simple for individuals to understand and for pension schemes and HMRC to administer, and meeting the Government’s fiscal objectives.

The hon. Gentleman raised concerns about the treatment of bridging pensions under annual allowance rules. Tax relief is provided for pension savings under defined benefit schemes on the understanding that the funds are used to provide an income throughout retirement. To support that aim, scheme pensions must normally be payable for life, and must not decrease except in prescribed circumstances. One such circumstance is where a bridging pension is paid and the reduction occurs between age 60 and state pension age. A bridging pension is a temporary increase to a private pension. Typically, it is provided where individuals retire before reaching state pension age, and where the level of the bridging pension is broadly similar to the expected state pension. When the state pension starts to be paid, the bridging pension is reduced or comes to an end.

Where the bridging pension is offered as a discretionary award, or is a benefit to which the individual becomes entitled only if they choose to retire early, the award of the additional pension may give rise to pension savings in excess of the annual allowance limit. That is because the temporary nature of the increase to an individual’s pension is not recognised in the same way that increases to the pension’s capital value is calculated for annual allowance purposes.

The Government have considered whether special annual allowance provisions should apply for bridging pensions, and that can be found in our response to consultations on the reduction of the annual allowance limit from 2011-12. We recognise that the restriction of relief may create particular challenges for members of defined benefit schemes because of the way promised benefits in those schemes are valued, but we concluded that it would not be desirable to complicate the pensions tax regime by including special provisions for bridging pensions. Instead, we introduced special rules intended to mitigate “hard cases”. Those rules allow individuals to carry forward unused annual allowances from the three preceding tax years, and set them off against pension savings above the annual allowance limit in a single year, providing that the individual was a member of a registered pension scheme during those three years. They also allow individuals to meet annual allowance charges of more than £2,000 from their pension scheme. That is known as the “scheme pays” facility.

The hon. Gentleman raised concerns that when a bridging pension paid to an individual from one scheme comes to an end, future pension payments to that individual from that scheme are treated as unauthorised payments and liable to tax at a rate of up to 55%. As I have set out, scheme pensions can reduce only in certain prescribed circumstances. Where they are reduced in any other circumstances, unauthorised payments will arise and be subject to certain tax charges. The legislation for that is clear, has applied since April 2006, and is set out in schedule 28 to the Finance Act 2004. Those rules support the aim for defined benefit schemes to provide an income throughout retirement while protecting against manipulation of the tax-free lump sum.

This is not a simple area. Although annual allowance rules for defined benefit schemes may appear difficult to understand, they are a necessary part of meeting the Government’s fiscal and policy objectives of targeting tax relief effectively. The rules are intended, as far as possible, to provide a straightforward structure for individuals and schemes, but I recognise that there may be particular cases where the rules do not work as intended. I am grateful that the hon. Gentleman has raised these issues today; he should rest assured that they will be kept under review and that the specific cases he has discussed will be taken into account.

Question put and agreed to.

House adjourned.