moved Amendment No. 171:
Page 295, line 41, at beginning insert "Subject to sub-paragraph (3A),"
My Lords, in moving Amendment No. 171, I shall speak also to Amendment No. 174 and the associated amendments in the group.
There are three elements to these amendments to paragraph 23 to Schedule 7. The first—new paragraph 23(1)(a)—will allow the Secretary of State, through regulations, to provide for PPF compensation payments to be made to surviving partners. The second is a group of amendments to prescribe that the widow or widower of pensioners, postponed pensioners, and deferred and active members will not be entitled to compensation in such circumstances as may be prescribed. The third—new paragraph 23(1)(b)—is intended to clarify the circumstances in which the regulations may provide that the PPF board will be able to pay compensation to surviving dependants.
I shall explain the thinking behind paragraph 23(1)(a) first. The Bill currently makes provision for compensation to be paid only to surviving spouses. During the Committee stage in the Commons, an amendment put forward by Steve Webb sought to extend this provision to surviving unmarried partners. My honourable friend the Minister for Pensions, Malcolm Wicks, agreed to consider the proposal further.
On reflection, we considered that we did not want to close the door to payments to unmarried partners. Although among current and soon-to-be pensioners marriage remains overwhelmingly the norm—around 13.3 million out of a total population of 14.6 million of those over the age of 50 are married or widowed—there is an increasing preference among younger age groups for cohabitation without marriage. Further, about three-quarters of private sector defined benefit scheme members are in schemes that provide benefits to unmarried partners—that is, three-quarters of members and not three-quarters of schemes; the proportion of schemes is low because often very small schemes do not have this provision.
Given that, we felt that an amendment to the Bill was essential, and I hope that your Lordships will welcome it today. Without such an amendment, the PPF would be unable to cover a key feature of the pensions promise in the majority of schemes—a feature that will only increase in importance in the future. I think I am right to say that such a change was recently made to the MPs' pension scheme.
We also had to consider that, because marriage is not an option for same-sex couples, the PPF will provide no security for those in long-term same-sex relationships. Many of the same arguments apply here: a more significant number of co-habiting same-sex couples is in younger age groups, although the numbers remain small, and the majority of pension schemes will pay benefits to surviving same-sex partners. I think that something like 75 per cent of schemes do that. Therefore, we have ensured that the power is wide enough to cover same-sex partners and civil partners.
The detail will be set out in regulations but we expect to provide, first, for members of schemes that make any provision for unmarried survivors. Surviving civil partners and surviving unmarried partners will receive 50 per cent of a member's total compensation. In other words, if the scheme already makes such a provision, that will continue under the PPF.
Under schemes that make no provision for unmarried survivors, surviving unmarried partners will receive nothing but surviving civil partners will receive 50 per cent of a member's total compensation. That is because, for the first time, they will be treated as though they were in a spousal relationship for the purposes of this provision. We always intended that the PPF would pay compensation to surviving civil partners, and I think that in Committee I gave notice that I would be returning to this point as we worked through the amendments.
The second part of the amendment has been introduced to maintain consistency between surviving spouses, civil partners and unmarried partners. These amendments provide regulation-making powers to provide that the PPF will not pay compensation to a widow or a widower in prescribed circumstances. The power will be used to provide that compensation which will be paid only to those widows or widowers who would have received survivor's benefits under their scheme. These amendments ensure that the PPF is not more generous than the schemes, though spouses will not be assessed against scheme rules.
Through regulations, we will pay surviving spouses 50 per cent of a member's total compensation entitlement where the scheme would have paid surviving spouses benefits. In other words, the scheme may have paid 60 per cent or 70 per cent, but we will not take that degree of detail into the PPF. Everyone entitled to survivor's benefits—widows, widowers, civil partners in due course, and unmarried partners if they had that protection in their original scheme—would receive 50 per cent. We simply cannot go into the complexity of replicating the detail of each scheme and continue to fund that in the PPF.
I turn to the third part of the amendment, the proposed Section 23(1)(b). This amendment seeks to clarify the categories of dependants to whom compensation may be paid. The entitlement to compensation is to be prescribed in regulations. The first of the categories is composed of dependants of prescribed descriptions of individuals who were members of a scheme or who had rights in respect of such a member—such as individuals who were eligible for survivor's benefit under the scheme—before the assessment date. So no one who would have received it under the old scheme would lose it under the PPF.
The second category comprises dependants of individuals who became entitled to benefits in respect of a member—for example, those who became eligible for survivor's benefit—on or after the assessment date but before the board assumed responsibility for the scheme. The final category comprises dependants of individuals who became entitled to compensation under paragraph (22).
Essentially, those categories, which are entirely benign, allow us to capture the dependants of all individuals who are or may become eligible to receive PPF compensation. I believe that these amendments will form an important part of the security, propriety and decency that the PPF will offer to members of eligible schemes. I am confident that your Lordships will welcome these changes. I have taken a little time to spell them out because, given the Civil Partnership Bill, I think it important that people know what we are proposing. I hope that, with that explanation, your Lordships are happy to accept the amendment. I beg to move.
My Lords, I am sure that I speak on behalf of my right honourable friend the Member for Northavon in welcoming these amendments which properly reflect the modern world.
My Lords, as I was also heavily engaged in the Civil Partnership Bill, perhaps one understands this a bit better than the general public may initially do.
I have just a couple of questions. First, is the noble Baroness saying that the PPF will in some circumstances pay out benefits that the recipients would not have received under the scheme of which they are a member? Secondly, is it proposed to make provision for unmarried opposite-sex couples regardless of whether the scheme of which they are a member and which has been taken over does so? More particularly, will unregistered same-sex couples be in the same position as unmarried opposite-sex couples? I think that that is rather important, not least as far as the intended operation of the Civil Partnership Bill is concerned.
Basically, my Lords, we will be giving all widows and widowers 50 per cent rights. I think that there may be one or two schemes that still do not do that, which is very odd, but in that case it is a question of the scheme rules overriding the rules of the scheme. In some cases, widows may receive less than 50 per cent, rather than more, but they will receive 50 per cent under the PPF. Civil partners will, accordingly, be treated in the same way.
Where an existing scheme has survivor's benefits for unmarried partners, regardless of whether it is a heterosexual or single-sex couple, they will take the rules of their scheme into the PPF. In other words, we will not take away any rights that people currently enjoy in their existing scheme. However, if their existing scheme does not provide protection for unmarried partners in either heterosexual or single-sex couples, neither will the PPF.
My Lords, in moving Amendment No. 172 in the name of myself and my noble friend Lady Gibson of Market Rasen, I shall speak also to a number of other amendments in this group to which my name has been put: Amendments Nos. 173, 177, 178, 183, 184, 188, 189, 191, 194 to 197 and 200 to 203. I think that, in total, we have 14 amendments in this group, because the specific sentence that we wish to amend occurs about 14 times in the schedule.
The reason for the amendment is that we want to ensure that widow's and widower's benefit paid by the PPF are the same as widow's and widower's benefits would have been had they been paid by the scheme. As I am sure noble Lords will know, different schemes provide greater or lesser proportions of the member's pension to a surviving spouse on the member's death. In order to contract out of the state second pension, the proportion must be greater than 50 per cent.
Many schemes provide two thirds, which is the Inland Revenue maximum. However, the provision in Schedule 7 requires the proportion to be 50 per cent in every case. The purpose of the amendments is to reinstate the proportion as two thirds where that is what the scheme would have paid. I hope that my noble friend will regard this as a reasonable and sensible amendment. I beg to move.
My Lords, I should like to speak briefly in favour of the noble Baroness's amendment, which I think is about fairness to women more than anything else. The provision in the Bill means that, very largely, it is women who will lose out. The noble Baroness referred to schemes that pay out higher amounts than 50 per cent. There are indeed some.
Over the summer, I corresponded with the noble Baroness, Lady Hollis, about a slightly different position where a widow's pension was based on a proportion, but a proportion of the pre-commuted pension of her husband. Consequently, the proportion of the pension that she received was even higher than two thirds, because of the way in which a pension sacrifice had been taken earlier in retirement in order to provide for my mother. If this Bill is passed, her income could be sliced by almost a half. So the Bill could bear very unfairly on people whose expectations are that they will have a certain income level. It could come down very significantly on them.
The Minister said that it is too complicated to take in all the individual arrangements. If it is not too complicated to take in the primary pensioner's arrangements, I cannot see why it should be excessively complicated to take in the arrangements that apply to widowers or indeed dependants.
My Lords, I do not know whether I shall be able to answer the noble Baroness. I may be given the advice that perhaps the noble Baroness should write to me with the circumstances. I am not quite sure where tax-free lump sums came in and so on. Perhaps I may respond to the amendment of my noble friend Lady Turner, which in a sense revisits a previous discussion. Perhaps it should have been grouped with other amendments. If that is the case, the fault lies with me and I apologise.
Essentially, my noble friend is arguing that we should import into the PPF the same level of widows' benefits as existed in the previous schemes. As I say, we did go round this point. I am sorry but we are not going to do that; the PPF will not replicate it. However, our policy mirrors the survivors' benefits offered by the majority: 75 per cent of schemes covering 84 per cent of members of private sector DB schemes will do as we shall be doing. We have tried to keep a balanced package between a meaningful level of compensation and something that is affordable and easy to administer. Some schemes pay less, although I accept that, for the most part, they may pay slightly more.
I am afraid that we have made an administrative decision that the simplest way is to pay 50 per cent because what goes into the PPF is pooled assets. Logically, that could have led to excluding the payment of unmarried partners. We thought long and hard about what we should do there, when some schemes have it and some do not, unlike survivors' benefits. In that exception only—there are still quite strong feelings about it and in some schemes one pays additional money to receive those benefits—we decided that we would import that characteristic into the PPF only in so far as existing schemes had it.
I am afraid I have to say to my noble friend that we believe that what we are offering reflects what the vast majority of schemes do. There are schemes that can be more generous and there are schemes that are less generous. We thought that this was simple to understand and that people would know what their expectations would be after going into the PPF. It would not depend on some complicated assessment of 90 per cent of X and so on.
On the question posed by the noble Baroness, Lady Noakes, the PPF survivors' benefits will be post-commutation. That may help. If she cares to write to me with the details, I shall try to obtain a more careful answer for her. I do not believe that it is unfair to women. On this issue I believe that most women will have a fairly secure and predictable pension.
At the moment individual trustees make quite complicated decisions on whether a child is a dependant when he or she goes to university and such matters. We are trying to establish rules that apply to everyone so that people know what they are and reflect the situation in which they are engaged at the moment. I cannot help the noble Baroness beyond inviting her to write to me if she wishes, except to say that it will apply only to post-commutation.
To my noble friend I say that I am sorry, but in the name of straightforward administrative simplicity, the only exception where the details of the scheme will affect what comes out of the PPF will be in the situation of unmarried partners.
My Lords, I thank my noble friend for that explanation. I am a little disappointed because, as the noble Baroness, Lady Noakes, said, this relates largely to women. I thank her very much for her support. Of course, I am pleased that something is to be done for unmarried couples and I am delighted that same-sex couples will also be looked after in the way indicated by my noble friend. That still leaves widows, in many instances, with a much reduced expectation than they would have had, had the pension scheme still been in existence and able to provide for them. However, it is not my intention to press this matter this afternoon. In the circumstances, I beg leave to withdraw the amendment.
moved Amendment No. 174:
Page 295, line 47, at end insert—
"(3A) The pensioner's widow or widower is not entitled to periodic compensation under this paragraph in such circumstances as may be prescribed."
On Question, amendment agreed to.
[Amendment No. 175 not moved.]
moved Amendment No. 176:
Page 296, line 45, at beginning insert "Subject to sub-paragraph (3A),"
On Question, amendment agreed to.
[Amendments Nos. 177 and 178 not moved.]
moved Amendment No. 179:
Page 297, line 5, at end insert—
"(3A) The postponed pensioner's widow or widower is not entitled to periodic compensation under this paragraph in such circumstances as may be prescribed."
On Question, amendment agreed to.
[Amendments Nos. 180 and 181 not moved.]
moved Amendment No. 182:
Page 298, line 32, at beginning insert "Subject to sub-paragraph (3A),"
On Question, amendment agreed to.
[Amendments Nos. 183 and 184 not moved.]
moved Amendment No. 185:
Page 298, line 39, at end insert—
"(3A) The active member's widow or widower is not entitled to periodic compensation under this paragraph in such circumstances as may be prescribed."
On Question, amendment agreed to.
[Amendment No. 186 not moved.]
moved Amendment No. 187:
Page 301, line 25, at beginning insert "Subject to sub-paragraph (3A),"
On Question, amendment agreed to.
[Amendments Nos. 188 to 191 not moved.]
moved Amendments Nos. 192 and 193:
Page 301, line 40, at end insert—
"(3A) The active member's widow or widower is not entitled to periodic compensation under this paragraph in such circumstances as may be prescribed."
Page 304, line 20, at beginning insert "Subject to sub-paragraph (3A),"
On Question, amendments agreed to.
[Amendments Nos. 194 to 197 not moved.]
moved Amendments Nos. 198 and 199:
Page 304, line 36, at end insert—
"(3A) The deferred member's widow or widower is not entitled to periodic compensation under this paragraph in such circumstances as may be prescribed."
Page 307, line 18, leave out from "of" to end of line 22 and insert "—
(a) partners of prescribed descriptions of persons of prescribed descriptions who were members of the scheme immediately before the assessment date;
(b) dependants of prescribed descriptions of persons of prescribed descriptions who—
(i) were members of the scheme, or had rights to benefits payable under the scheme rules in respect of a member, immediately before the assessment date,
(ii) became entitled to benefits under the scheme rules in respect of a member on or after the assessment date but before the time the trustees or managers of the scheme received a transfer notice under section 158, or
(iii) have become entitled to compensation under paragraph 22 (survivors who do not meet conditions for scheme benefits at assessment date), in relation to the scheme."
On Question, amendments agreed to.
[Amendments Nos. 200 to 204 not moved.]
moved Amendment No. 205:
Page 315, line 12, at end insert—
:TITLE3:"Power to modify Schedule in its application to certain schemes
32A Where the scheme is a prescribed scheme or a scheme of a prescribed description, this Schedule applies with such modifications as may be prescribed."
On Question, amendment agreed to.
moved Amendment No. 206:
Page 317, line 14, leave out "or category"
My Lords, this amendment is necessary as a result of the change to the definition of occupational pension scheme made by Clause 237 and the consequential change that was made to the definition of employer in Clause 316.
Clause 237, which replaces the definition of occupational pension scheme in Section 1 of the Pension Schemes Act 1993, was made as a consequence of changes in the Finance Act. The old definition included the phrase, "categories of employment", which was replaced with "service in employments of a description". The word "description" refers to the description in the scheme rules. As a consequence of this, the definition of employer in Clause 316 was also altered to refer, in the case of occupational pension schemes, to the employer as "the employer of persons in the description of employment to which the scheme in question relates". This had also previously referred to "persons in the description or category of employment". With that lucid explanation of the amendment, I am sure that your Lordships will be happy to accept the amendment, which realigns the vocabulary.
My Lords, we come to a series of important amendments regarding the levy. It may be helpful if I say a few words by way of introduction. We have discussed this matter in Grand Committee. A number of the issues have become more clearly defined. It is important when looking at the Bill as a whole always to bear in mind that its effect, while beneficial in many respects, is nonetheless likely to encourage—if that is the right word—companies to abandon final salary schemes to avoid the levy or certainly not to encourage any company from setting up a final salary scheme, given that the company would then become liable to the levy. So, the burden of the levy, its timing and its nature are crucial to the whole scheme. The greater the extent to which the levy is more onerous than it ought to be or the longer it is in an unsatisfactory state, the greater will be the deterrents to which I just referred. Therefore, it is important that the House should get the thing right.
We consider the issue against the background of what can only be described as the tragic decline in the number of final salary schemes. It is due to factors including the fact that people live longer and what one might call the scandalous changes that the Chancellor of the Exchequer has made in advance corporation tax. A heavy burden has been imposed on companies as a result of those and other changes, combined with the fall in the stock market, the lowering of annuity rates, and so on. The Bill is necessary to deal with companies that have decided, one way or another, that their schemes cannot continue to function.
I turn to the specific question of the levy. The first amendment is concerned with timing. Others are concerned with the nature of the levy with regard to the extent that it should be risk-based, and so on. In Clause 172, the Government seek to set out the provisions with regard to the initial levy. That levy will be on a flat-rate basis. It will not take account either of the standing or solvency of the company whose scheme we are considering or the extent to which the scheme is underfunded. In that period, the levy will be on a flat-rate basis. We strongly believe that the scheme should be changed to a risk basis. In some ways, we would like it to start off on a risk basis.
There are considerations with regard to assessing the risk, but we do not accept some of the arguments that have been put forward that assessing the solvency of a company can be done using the available information on a broad-brush basis. Initially, it must be a broad-brush basis.
Secondly, we do not accept the argument that the question of the solvency of the scheme, and so on, is determined by the fact that pension schemes normally have a triennial valuation. I have been through that process. Not infrequently, companies will have an interim evaluation, not of every comma and dot but sufficient to enable a reasonable assessment of the position of the scheme.
The Bill says that the initial period will begin,
"with the day appointed for this purpose by the regulations".
We do not know how long it will be before that happens, although we hope that it will happen as soon as possible. The clause then says that the period will end on,
"the following 31st March or, if the regulations so provide, 12 months after that date".
We suggest that the date should be 12 months after the date when the regulations begin the initial period. It is a tightening of the timescale, but we believe that it is appropriate for all the reasons that I mentioned.
Once the Bill becomes law, we must get on with the matter and ensure that we move to a risk basis and away from a flat-rate basis at the earliest possible moment. I beg to move.
My Lords, we strongly support this amendment and have tabled a similar one. We are concentrating on this amendment, which establishes a principle that we strongly support.
We discussed the matter at length on Second Reading and in Committee. Together with, I think that it is fair to say, all the major industrial and commercial firms—certainly, the great majority—in this country, the National Association of Pension Funds, EEF and the vast majority of representative bodies, we believe that it is essential to move to a risk-based levy as soon as possible. "As soon as possible", for most people—certainly for us—means that the flat-rate levy should not last for longer than a year.
I have here, for example, the comments of Terry Faulkner, chairman of the National Association of Pension Funds, who said that the timetable that the Government were talking about was "absolutely unacceptable". He said:
"The purpose of the PPF is to protect benefits from those companies that go bust with an underfunded pension scheme. The right way to deal with the premium is on a risk-based basis like other forms of insurance".
Colin Hartridge-Price, chief pensions officer of the BT pension scheme—the largest pension fund in the country—said:
"The risk-based levy should be introduced in full as soon as is practicably possible. It should surely be possible for the PPF Board to agree a formula within the first 12 months of its operation".
At Second Reading, we discussed the idea that, over several years, some funds could be allowed to stay on a flat-rate basis and others go on to a risk basis. I think that we exploded the idea that we could have an insurance scheme in which the good risks paid one rate and were flat rate, while the bad risks were not. We must go over within a year to a fully risk-based—or minimum 80 per cent risk-based—levy. In any insurance scheme or policy, one will not know exactly what the risks are but, in this case, waiting for the best will be the enemy of the good. The one thing that we know is that the longer we go on with a flat rate policy—a poll tax on pension funds, in effect—the more unfair it will be to the better funded schemes and to the responsible employers who are doing their best to reinforce their funds.
The noble Baroness said a good deal about moral hazard. What greater moral hazard could there be than not going to a fully risk-based levy as soon as possible? We strongly support the amendment.
My Lords, the first thing to say is that I, too, support the amendment: I just cannot accept it. I hope to explain the reasons.
The noble Lord, Lord Higgins, clearly spoke about the initial period. The noble Lord, Lord Oakeshott of Seagrove Bay, talked about the initial and transitional periods put together. There is a wide chasm between those positions. We may be able to tease that out later.
Making the amendment moved by the noble Lord, Lord Higgins, would mean that the initial period would run from the appointed day until the following 31st March or 12 months after the appointed day. In effect, therefore, the amendment would limit the initial period, when everybody will be on a flat rate, to no longer than 12 months. I point out to the noble Lord, Lord Oakeshott of Seagrove Bay, that we propose a transitional period thereafter in which we phase in the risk-related levy. I got the impression that he thought that the whole risk-related scheme could come in one day after the 12 months. If that is what he is saying, it worries me considerably.
Limiting the initial period to 12 months would, first, remove the in-built element of contingency that we have put in place, should it be necessary for the period to be longer. When I sat on the Benches opposite, the late, lamented Lord MacKay of Ardbrecknish came here to explain why, although the Bill said that the jobseeker's allowance would take effect from April 1996, it would, to his regret, have to be delayed for another six months until October 1996. That inconvenienced him slightly, as he had found some difficulty with the regulations and the primary legislation, which determined the timetable. These things happen. It was not intended; we had to accept it. Any Minister knows that things do not always go absolutely according to plan—we do not need to talk about the CSA in that context.
Secondly, the amendment would also mean that the initial period could end after the start of the financial year. I said that I supported the amendment but could not accept it because we did not envisage the initial period being any longer than 12 months. However, as we are launching a new organisation, we think it prudent to build in an element of contingency to allow for unforeseen difficulties. Obvious examples would be computer hiccups: the Standish Group found that around two thirds of all computer projects ran over time. I do not want to get hung up on debates about computers but I can conceive that such problems could arise—they certainly did with JSA.
The formulation of the amendment means that the initial period could end after the start of a financial year. As the pension protection levies operate by reference to financial years, problems could arise. Sponsoring employers and schemes would find it more difficult to plan ahead financially, in line with current business and scheme requirements. It would also mean that the annual reporting requirements of the PPF and the general levy currently collected by OPRA, both of which operate by reference to financial years, were carried out at different times.
Again, we fully expect that the PPF will open its doors on the date anticipated and that the initial period will last no longer than 12 months. We just do not want to be tied to it by its inclusion in the Bill in case a contingency arises that has not occurred to noble Lords opposite or those on the government Benches. I hope that what I have said will enable noble Lords to withdraw their amendment.
My Lords, the noble Baroness asked whether the Liberal Democrats and the Conservatives were singing from the same hymn sheet. Yes, we are; that will become apparent in our debates on subsequent amendments.
Today's sitting began with Question Time, during which a Question was asked on firearms legislation. It was pointed out that the Government had not carried through the legislation, seven years after the Bill was passed. The Minister replied, "They did not put a date in the legislation. If a date had been included, we would have stuck to it". It seems that there is a lesson to be learnt as regard legislation: apparently, if you do not give this Government a definite deadline, the process may drag on for seven years or more—I suppose that they get an itch at that moment.
I understand the noble Baroness's point about financial years and so on. However, we want to insert a very clear deadline. We think, therefore, that the amendment is appropriate. I regret that, although the noble Baroness agrees with it, she is not prepared to accept it. Not only do we agree with the amendment, but we think that it would be appropriate to test the opinion of the House.
My Lords, I have already made preliminary remarks about this group of amendments. We are arguing very strongly that the scheme should be a risk-based scheme as soon as possible. The purpose of the amendment is to leave out the possibility that, after the end of the initial period, the Government would have powers to have either a risk-based basis or a scheme basis that is not risk based, or both. The amendment seeks to remove the possibility that they might be able to continue with a scheme-based basis—one that does not take risk into account—after the initial period. For the reasons that the noble Lord, Lord Oakeshott, and I have previously spelt out, in our view, at the end of the initial period, it would be appropriate for us to go to a risk-based basis. I beg to move.
My Lords, as the Minister seems to think that there might be a chasm opening between the noble Lord, Lord Higgins, and myself, perhaps I may make it clear that that is not so. I apologise if in my enthusiasm I ran slightly ahead of the narrow definition of the previous amendment. But I wish to make it clear that we sing from the same hymn sheet on this issue. For the reasons that I have discussed at some length, we support the amendment.
My Lords, I thought that the noble Lord's hesitation on the words "hymn sheet" was because he was trying to work out what the nature of the breadth of the inclusive Church might be.
As regards the amendment, we intend to give the board the flexibility to set the pension protection levies as it best sees fit, subject to certain constraints. Our general concern is that this amendment would unnecessarily constrain the board to the detriment of schemes and employers.
The pension protection levies must seek to balance two issues: on the one hand they should reflect the level of risk posed by schemes so that, very simplistically, well run and well funded schemes pay less, which we all accept; on the other hand, we must avoid setting the levy in such a way that it becomes unaffordable for many schemes.
We anticipate that the board will do that by setting a predominantly risk-based pension protection levy alongside a smaller scheme-based protection levy. As noble Lords know, we expect that ratio to be about 80:20 per cent risk-based to scheme-based when the transitional period is mature.
The scheme-based pension protection levy will also ensure that every eligible scheme may pay something to the pension protection levies. That reflects the view that in the very long term no scheme represents zero risk. That will mean that the board will be able to reflect, with a fair degree of accuracy, the level of risk that a scheme poses to the PPF, but the underlying scheme-based pension protection levy will help to narrow the range of levy charges so that schemes in difficulty are not landed with an unsupportable levy.
Basically, we have got the problem of adverse selection: not being careful and going too fast in this way will end up so reducing the risk-related levy that the scheme-based levy has to soar commensurately. Those schemes therefore that have not just that but also have poor risk could find themselves having a level of payment that I think that we might all judge to be, at least initially, unacceptable. So we anticipate that in most years the board will set both protection levies as required by the amendments.
However, there are several occasions when setting both protection levies and applying the risk-based protection levy to all schemes may not be appropriate. Noble Lords may want to reflect on whether it is appropriate to follow their amendment through after hearing the examples that I will offer the House.
For example, there will be a number of extremely small eligible schemes that are required to pay the levy—applying an extremely complex risk-based calculation to schemes, which might have 10, 20 or perhaps 40 members, would be a case of using a using a sledgehammer to crack a nut—and providing the required information may be overly burdensome and costly for the scheme.
We therefore want to give the board the freedom to set a simplified levy for small schemes should it so wish. That may involve setting only a scheme-based pension protection levy. Noble Lords will remember that that scheme-based protection levy, although it is so to speak flat rate, also differentiates between deferred, active and retired members—it has different rates for those. In other words, it assesses the liabilities of the scheme as opposed to the risk-related levy, which seeks to determine the risk to entering the PPF. That is the different functions of the two levies.
It may be that after consultation the board will establish a method for calculating the risk-based pension protection levy that does not result in any extremely high charges. For example, the board may start with a maximum charge for particular sizes of scheme and then discount according to risk factors. If that is the case, we would want the board to be able to charge a risk-based pension protection levy only.
Lastly, if the board estimates to collect an extremely small levy in any given year, we do not want that impeded because the costs of assessment might come near the value of recoveries for whatever reason. It does not seem that probable but if, for example, it wants a small amount, the costs of going for the risk-based levy in that case might be excessive.
We are therefore allowing the board to set a scheme-based pension protection levy only when it estimates to collect less than 10 per cent of the levy ceiling in any given year. That is almost like a cost benefit—a point made by the industry that it feels would be wise.
I reassure your Lordships that in the majority of cases we expect the board to act in accordance with the spirit of the amendments. However, because of concerns that that would require us to force an unnecessarily complicated levy structure on small schemes, and because until the method of calculating the risk-based pension protection levy is settled, we do not know the extent to which the scheme-based pension protection levy will be necessary. We therefore do not want to require that of the board, so I urge the noble Lord to withdraw his amendment.
The difference between us is that the noble Lord believes that the information that is necessary will be available in ways that we do not believe. It will be a secure enough base to resist possible challenges, and so on. During the initial period, we intend to differentiate charges for active, deferred and pensionable members. After the initial period, it will be up to the board to decide whether to do it. We do not disagree, but the implications of the amendment would be to impose a risk-related levy for small schemes, for example, when that would be inappropriate, costly and regarded as a burden by small businesses. With that explanation, I hope that the noble Lord will agree that the gap between us is small. We want some flexibility, and I hope that the noble Lord will feel able not to pursue his amendment.
My Lords, I am surprised that the noble Baroness can produce arguments at this stage of the Bill that she has not used previously. One or two which she produced this afternoon were not made as clear in Committee.
We believe that it is appropriate that the PPF should impose, after the initial period, both a risk-based levy and a scheme-based levy. Obviously, with regard to the scheme-based part, that may cover overheads and so on. I stress strongly that this is on a broad-brush basis—we do not want to go to the last decimal point. But it should be possible to work out a reasonable assessment of risk in relation to each scheme that pays the levy. Otherwise, it would be unfair on those who enter the scheme.
The noble Baroness says that it would be to the detriment of schemes and employers, but I do not see how. The noble Baroness likes to call it a compensation scheme, but it is effectively an insurance scheme. The curiosity is that if one were not careful one would end up with a flat-rate levy where there is a danger that the people who are the soundest—either in terms of the ability of the employer to continue in business, or in the financing of the pension scheme—would not operate effectively.
I am not persuaded by the arguments of the noble Baroness. It is right to put a firm framework in place for the Pensions Protection Fund to work within. That should not be too difficult.
One could do it by category of scheme for small schemes, when perhaps the risk element is small compared with that of larger schemes. I imagine that the board will wish initially to do it by type of scheme rather than on a general basis.
My Lords, it would be impertinent of me to ask a direct question, but I take it that the noble Lord has heard the view of industry on this issue. The ABI states:
"We believe that a maximum period of this length"— the transitional period, as envisaged by the Government—
"strikes the correct balance between what is administratively possible and what is desirable".
The industry, as reflected by the ABI, is backing the Government's position as against that adopted by the noble Lord. That point was made by his honourable friend Nigel Waterson in Committee in the other place.
The feeling within the industry is that a two-year period of transition is probably unrealistically tight. It would prefer a transitional period of about four years. The noble Lord's honourable friend in the other place argued for what the Government are proposing. Because of consultation with the industry, that position no doubt reflects the industry's views, and those of the ABI.
The provision is not something that has been dreamt up by the Government. It is the result of consultation. One should be a little careful about appearing to go against the wishes and consensus that appears to be emerging from the industry that we have consulted.
My Lords, things have moved on. An enormous amount of consultation has taken place on all those issues. When one receives representations, one should take into account the interests of those making them—I am not thinking of any particular organisation when I say that. Some of the initial representations that were made when the Bill was in the other place suggested that it might be 2009 before we got to a risk-based levy.
I presume that the arguments to which the noble Baroness is referring are those that she has put forward this afternoon. They relate almost entirely to the position of small firms rather than the overall situation.
My Lords, I refer to the quotation from the ABI that I mentioned in good faith. I was not present in the Committee attended by the noble Lord's honourable friend who was leading for the Conservatives, but he reflected the general position of the Government to phase in over a transitional period the risk-related levy alongside the scheme-based levy.
Small schemes are an additional problem. Given the amendments, small schemes would have to have a risk-based levy whether or not it was sensible or appropriate. That is an additional complication.
My Lords, I understand that it is an additional complication, although the noble Baroness did not put forward the other arguments to which she is referring. If we are to be fair to employers and companies generally, it is important to go to a risk-based levy at the earliest possible moment.
My Lords, does the noble Lord agree that the ABI does not represent the pension fund industry? It is a supplier of investment management services to the pension fund industry. It is in a small minority in its view; it is not the view of the National Association of Pension Funds, or the major in-house pension funds.
My Lords, I was carefully avoiding being rude about the ABI for whom I have enormous respect. I said that when receiving representations from outside bodies, it is wise to consider whether they have a particular axe to grind. I am not saying whether the ABI has or has not in this case. I think that one should apply—as all good economists do—an appropriate rate of discount. One must consider the arguments on their merits while taking into account the views that have been expressed. Having considered the issue carefully, and having discussed it over a long period—the Bill has been in progress for a long time—the amendment is appropriate. I wish to test the opinion of the House.
My Lords, in moving Amendment No. 212, it would be convenient also to discuss Amendment No. 217A. Noble Lords will appreciate that these amendments address essentially the same point. I shall argue them jointly, although we have come to the view that Amendment No. 212, although good, is inferior to Amendment No. 217A. At the appropriate moment, therefore, I shall withdraw Amendment No. 212 and in due course move and propose a vote on Amendment No. 217A.
Amendment No. 212 is the third of a group of amendments in which the point at issue is comparatively simple: what proportion of the levy raised under Clause 173(1)(a) and (b) shall be risk-based and what percentage on a scheme-based provision? While the noble Baroness earlier cited the views of industry—wrongly, in my view, given the context in which she made those remarks—so far as industry in general is concerned, I think that there is a strong feeling that the proportion on the scheme basis, which may be used to cover the overhead costs of the scheme and so forth, should be comparatively low while the risk-based element should be comparatively high. For that reason, our amendment suggests that the proportion ought to be at least 80 per cent.
The arguments are fairly simple and we discussed them extensively in Committee. It is now appropriate for the House to consider them. I beg to move.
My Lords, I should make it clear that Members on these Benches also support the amendments. I have already discussed why, but I rise to quote briefly from a very perceptive letter I have received from one of Britain's pension funds. It sets out clearly the problem being faced by private pension funds in this country and why moving quickly to as full a risk-based levy as possible is important:
"The practical question is how can we tackle the deficit ... This depends a lot on the long term strength of the business involved. In all probability, most of the big industrial companies will be around on a twenty year view and can approach this in a gradualistic way—a combination of increasing contributions, reinvested investment returns and changing benefit structures. The company that I work for has projects with streams of income going forward 20 years for example and I think it would be legitimate to spread any deficit recovery over a long period.
"The problem is that (a) many schemes are in deficit which do not have a strong covenant"— a strong employer behind them, as this particular one I am talking about does—
"and (b) the entire thrust of regulation seems to be to crystallise the problems rather than recognise that, as with banking crises, policies have to nurse the system to a point at which more radical security measures can be put in place. This requires quite subtle regulation and some long term thinking.
"Do not get me wrong. I am not arguing for evading the problem but . . . for those of us in the middle of the deficit hole and in financially viable companies, policy needs to ensure that we are taking measures that will lead to solvency in the mid term and then we should be regulated so that it will never happen again. Unfortunately, the [present] thrust of policy seems to be the reverse".
That sums up clearly what the big, solvent companies with strong backing are doing. It would be a real kick in the teeth for them to carry on with what is in effect a flat-rate basis any longer than necessary.
The noble Baroness talked about a chasm between us. Let me make it clear that on this amendment and on the thrust of these amendments, we are bound together with the noble Lord, Lord Higgins, with hoops of steel.
My Lords, perhaps there is a profound misunderstanding between us. The noble Lord, Lord Oakeshott of Seagrove Bay, said that companies should not have to have a flat-rate levy any longer than they have to. Fine. After the initial one-year period it is entirely in their hands. If they wish to produce the information required for the valuation so the regulator of the board can determine what their levy would be, they may do so. The assumption here is that the Government are delaying them going into a risk-based levy when they wish to do so. That is not true.
My Lords, let me explain the issue to the Minister. One cannot have a situation after the first year where some companies effectively are able to go on to a risk-based scheme and others are not. The people paying the risk-based levy at that time will not be paying the right rate. Everyone has to go over to it all together; that is obvious.
My Lords, on the contrary. That is exactly the point in dispute between us. It will certainly be the case that during the transitional period there will be a mixed economy in which all schemes will have some scheme-based levy and others will carry, by choice, a risk-based element. It is clear that insofar as the good companies seek the risk-based element in the hope of reducing their premium, this will have an adverse selection effect on the scheme-based levy for the rest. However, that is the choice of those companies—the very same companies quoted by noble Lords opposite. They have precisely that option and that flexibility now. The amendments produced today are built on a false hypothesis that it is either one or the other—flat rate or risk.
No, my Lords; that is not the case. I have circulated at least three trees' worth of paper on this. After the initial year—we have just discussed the date—we shall phase in over the transitional period the risk-based levy; that is why it is called a transitional period. We would expect companies to come within that on a three-year valuation cycle. If they feel they wish to bring that valuation cycle forward, they can do so, once the risk-based factors have been determined which is what the first year will be spent doing. Thereafter they will be able to go on to the risk-based levy.
The noble Lord is exactly right. He may well find a large company with 100,000 members that is well run and well funded with a secure employer coming on to a risk-based levy in year two or year three. It will have judged, probably accurately, that the collective levy will reduce accordingly. Another company, also as large but with a funding deficit and a struggling employer, will decide that it is better off remaining with a scheme-based levy as long as possible since, once the risk-based levy comes in, it will find that its premiums go up as a result.
We want to accelerate movement to the risk-based levy. There is no difference between us. Therefore the industry will have to address these adverse selection issues as it sees fit. It is not the Government saying they cannot move on to a risk-based levy. After year one, they can, but it is up to the companies to determine their entry to the scheme rather than for the Government to lay it down.
I have to say I am very surprised. We could almost be exchanging positions here. I would have expected the Opposition to say that individual companies should determine whether they go into the risk-based levy since they alone will know, when they have their valuations and make the judgment call, whether they wish the arrangement to be flat rate or some combination of the two elements. Instead, we would deny that flexibility or judgment call to companies and, if we followed this amendment, we would impose a straitjacket on how companies best see the way forward in terms of responding to this levy call. Members opposite have got it wrong. They seem to think that it is either one or the other. It is not. There is a phase-in period during which those companies that wish to do so can bring themselves into the risk-related levy ahead of the terminal point of the transitional period.
Why do Members opposite want to tell companies when they can enter the scheme? We are not doing that. We are saying that they can come into it as they see fit. I cannot believe that Members opposite, who say they are speaking for the industry, want to impose a government-ordained timetable as opposed to allowing companies to determine their own.
However, that is a bigger issue. I had not meant to say anything about it but there is such a profound misunderstanding of how the transitional arrangements will operate that I thought it was worth sharing my perceptions with the House. I shall now formally deal with the contents of the amendments.
The amendments would require the board to collect at least 80 per cent of the levy through the risk-based pension protection levy. Yes, as soon as maybe, I agree, but I cannot support the amendments, for reasons that I shall come to later. They would require the board to recover its administrative costs through the scheme-based pension protection levy and prevent it exceeding the administration costs—but the problem is that if you have very small schemes of two or three you will actually exceed the money you collect—and they would give the Secretary of State and Parliament control over the total amount of levy the PPF board could collect in any given year.
The approach to calculating the risk-based pension protection levy as the responsibility of the board has yet to be finalised. While we expect the risk-based levy to account for approximately 80 per cent of the levies, certainly by the time the transitional period is complete, in advance of the methodology being established it would be extremely unwise to restrict the board's flexibility in setting the levy's structure. For example, until it is known how the risk-based levy is to be determined, it is uncertain how much the worst-run, most underfunded schemes will be required to pay simply because of the problem of adverse selection. The noble Lord, Lord Oakeshott, identified that problem but is not willing to follow through the consequences of his remarks.
In order to prevent those schemes being landed with an unsupportable charge—a risk identified by NAPF—it may be necessary to impose a scheme-based levy of a value greater than 20 per cent in order to avoid the floor and ceiling of the risk-based levy being so wide that it would produce a scheme-based levy that is unacceptably low.
Conversely, the way in which the risk-based levy is calculated may enable the board to collect more than 80 per cent of the levy. Again, the amendments would prevent that. The amendments would freeze us into 80 per cent to 20 per cent, even though the smaller schemes—the two person schemes, the three person schemes—which you may wish to keep on a scheme-based levy would then be faced with costs wholly disproportionate given the way in which adverse selection has worked. Companies which would do well out of the risk-based levy have pulled out of contributing in the way in which they would under a flat-rate scheme.
We appreciate the importance of a risk-based levy in ensuring that the charge on well-run schemes is fair. That is why we have stipulated that the risk-based levy must form a minimum estimated 50 per cent of the total amount to be collected. We believe that will strike the right balance. But we are dealing with a zero-sum game—that is what adverse selection is all about. If some companies pay less, others will pay more. If the noble Lord's amendments are carried, it could make some struggling firms face an unacceptably high levy.
I now move to the second part of the amendments. I shall explain why we do not want the scheme-based pension protection levy to be linked to the PPF's administrative costs. I do not believe either noble Lord spoke to this issue—I agree that it is less of a blue sky issue than the one we have been discussing—but it may be worth spelling out our thinking on this and explaining why we are unable to accept the amendment.
As set out in Clause 115, the administrative costs of the board will be met by a grant in aid paid by the Secretary of State, which the Secretary of State will then recover through an administrative levy. This is quite separate to the pension protection levies with which Clause 175 and these amendments are concerned. This separation is important—as it is for other non-departmental boards—because it provides a clear demarcation between the expenditure and the income used to pay compensation, which is paid for by the levy, and the expenditure and income which is used to pay the administrative costs of the board.
The differing ways in which we are approaching this issue provides an important accounting clarity for the House. It will enable Parliament to scrutinise more closely the accounts of the PPF, which I am sure we will all welcome. It is worth noting that most of the executive NDPBs which operate at arm's length from government in the way in which the PPF will operate are funded in this way. Indeed, OPRA was set up and funded in this way, and the regulator will continue in a similar manner. I am sure that noble Lords do not want us to introduce a new method of funding other than the one we have for OPRA and other NDPBs. It would be unreasonable.
We expect that the scheme-based pension protection levy will have a particular role to play in ensuring that the application of the risk-based levy to struggling schemes does not result in an overall charge that is unsupportable. The amendments would ensure that the scheme-based pension protection levy could not exceed the administrative costs of the board. This would prevent the board using the scheme-based levy to control those unsupportable charges because, when compared to the overall levy, the estimated administrative costs of the board are insignificant. The board would therefore be forced to adjust the way in which it calculates the risk-based protection levy to take account of this. Again, that would be highly undesirable.
I have assumed that the third part of the amendments is intended to give the Secretary of State and Parliament control over the amount of levy the PPF board could collect in any particular year. Neither noble Lord addressed this point in their opening remarks but, given that your Lordships will be seeking, no doubt, to test the opinion of the House, it seems proper that I should specify what is going on in this area. The amendments would require the board to tell the Secretary of State what it estimates it will collect through the levies in the coming financial year. The intention is that if there was any change the Secretary of State would have to seek Parliament's approval via regulations. We believe that preventing government interference in deciding the rate of the pension protection levy is absolutely essential.
Again, I am surprised. I would have expected noble Lords on the other side of the Chamber to say exactly the opposite to what is in the amendment. It flies in the face of everything they say about "arm's length", "industry money" and "keep government out". Now they are trying to bring the Government back in. I cannot believe that is what they want to do.
The board of the PPF will be best placed to know what levy rate it needs to secure current and future liabilities. That is what the board, with its expertise, is meant to assess. We believe that the Government have no place in that kind of decision because political concerns could override what is best for the PPF. Indeed, the noble Lord, Lord Lucas, pressed me only three hours ago to say that there should be no political interference by government. That is until it suits the opposition amendments, whereupon we can have political interference by government. That cannot be sensible or decent.
I know we are all concerned about the possible impact of these freedoms on the levy payer. They are understandable concerns. But your Lordships know what safeguards are in place to prevent the board using any powers inappropriately in terms of the cap on the limit the board can raise and the total amount that it can raise. These controls are reflected in Clause 175, as your Lordships will know.
I could expand on these points, but I hope that I do not need to. Your Lordships know perfectly well the pattern of capping in terms of the levy that can be raised. We do not need the Secretary of State to do it; it is already there in the Bill, in the schedules and in the regulations.
I ask Members opposite to consider this. We have an initial one year—now with a fixed date, which obviously we shall try to honour—of a flat-rate levy. We are also saying that over the next four years or thereabouts the risk-based levy will be phased in. It will have to be phased in on the basis of the three-year accounts, but any individual company can choose to come on to the risk-based levy earlier than that if they wish by having a valuation out of time. It is their choice if they want to pay for it. To ask all small companies to go for valuation out of time in year one or year two to get onto the risk-based levy would add something like £100 million in valuation costs to 50,000 schemes, many of which are quite small in number—two member, five member, 10 member.
That is not the Government's approach. We are saying that by the end of this transitional period companies will be on a balanced levy, largely risk based but partly scheme based. How quickly they come on to the risk-based levy will be for them, not the Government, to determine. It is their choice; the companies decide. The opposition amendment seems to state, "No. Companies do not know what is the best thing for them. The Government will tell them what to do". I do not hold that position. We have built this Bill on consensus with the industry and I am confident that the industry would prefer to determine when it goes on to the risk-related levy. The opposition amendments would not permit that to happen.
I invite Members opposite to think through the implications of government interference in the timetable of when companies come onto the risk-related levy; government interference in terms of reporting on how the board may or may not cap the money raised and so on. If we are not careful we will be turning the PPF into an arm of government rather than, as we all wish, an arm's length body funded by the industry for the protection of scheme members in ways best structured to avoid moral hazard. I think that the Opposition amendments begin to subvert that thrust. To go for this would be very unwise, so I hope that your Lordships will reject the amendments.
My Lords, I listened with great interest to what the noble Baroness said, but I am somewhat puzzled by the initial part of her remarks. They seemed to be based on the assumption that the Government won the last vote, and that is not so.
My Lords, there has been a misunderstanding, which is why I was talking about chasms between two noble Lords opposite on what the last vote did. Instead of saying that the initial period would last about a year, which was the Government's intent, the amendment puts a date of
My Lords, that was the result of the vote on Amendment No. 208, but we have voted on another amendment since then. That said that the levy should be a flat-rate levy and have a risk-based element as well. In a sense, this debate is a consequence of the vote we have just had; namely, that there should be both a scheme-based levy and a risk-based levy, and that the proportion between the two is such that the risk-based element should be at least 80 per cent. This is what we are saying.
My Lords, that is not what the noble Lord, Lord Oakeshott, said. He talked about not wanting a flat-rate levy, about it being all or nothing, so to speak—you cannot have some companies included and some not—and about wanting the risk-based levy virtually immediately. That was what I was arguing against.
Forgive me, my Lords, I know this is not Committee, but we are not arguing about the year. The difference between us is whether, after that year has elapsed, companies go immediately on to the risk-based levy or whether they do so as they see fit.
Again, my Lords, that is what we debated on the previous amendment, which was carried. We are effectively debating a consequential proposal; namely, if we go after the initial period to a system, one component of which is scheme-based and the other risk-based, then the proportion between the two is such that the risk-based element should not be less than 80 per cent. That is what this amendment is about.
The other thing that puzzled me in the noble Baroness's remarks was that she quoted the NAPF as being against Amendment No. 217A, which we believe to be superior to Amendment No. 212. However, my understanding is that the NAPF is entirely in favour of what is suggested in Amendment No. 217A.
My Lords, that view is confirmed by the noble Lord, Lord Oakeshott.
We listened with interest to what the noble Baroness said, but we are not persuaded, for the reasons which I have just mentioned, and hope to take the opinion of the House.
My Lords, before the noble Lord sits down, I do not hear him respond to the point that this is a major responsibility of the board. However one does this, its responsibility is to make an assessment based on what I think my noble friend described as a zero sum game. I do not think that the noble Lord has answered that point about the board's responsibility.
My Lords, we are seeking to set out what seems to us a reasonable basis on which to set up the situation in the relationship between the Government and the board. That is what we have done. I beg to take the view of the House.
moved Amendment No. 217A:
Leave out Clause 175 and insert the following new Clause—
(1) Before determining the pension protection levies for any financial year after the initial period, the Board must estimate an amount which will reimburse as nearly as possible its total costs of administration and must determine the rate of scheme-based pension protection levy to raise that amount.
(2) The Board must also estimate the further amount to be raised by the risk-based pension protection levy it intends to impose.
(3) The Board must impose levies for a financial year in a form which it estimates will raise an amount not exceeding the levy ceiling for the financial year.
(4) The risk-based pension protection levy must amount to at least 80% of the total amounts estimated to be raised by both levies.
(5) The Board must notify the Secretary of State of its estimates and the levies it intends to impose at least three months before the beginning of each financial year in which those levies are to be imposed.
(6) In order to vary these proposed levies, the Secretary of State must lay regulations before Parliament before the start of the relevant financial year.
(7) For the first financial year after the initial period, regulations may modify subsection (3) so as to provide that the reference to the levy ceiling for the financial year is to be read as a reference to such lower amount as is prescribed.
(8) For the second year after the initial period and for any subsequent financial year, the Board must impose pension protection levies in a form which it estimates will raise an amount which does not exceed by more than 25% the aggregate of the amounts estimated under subsections (1) and (2) in respect of the pension protection levies imposed for the previous financial year.
(9) The Secretary of State may by order substitute a different percentage for the percentage for the time being specified in subsection (8).
(10) Before making an order under subsection (9) the Secretary of State must consult such persons as he considers appropriate.
(11) Regulations under subsection (7), or an order under subsection (9), may be made only with the approval of the Treasury.
(12) In this section "risk-based pension protection levy" and "scheme-based pension protection levy" are to be construed in accordance with section 173."
moved Amendments Nos. 219 to 221:
Page 135, line 9, leave out "a financial year" and insert "the period for which the levy is imposed"
Page 135, line 11, leave out "year" and insert "period"
Page 135, line 12, leave out "the year" and insert "that period"
On Question, amendments agreed to.
Clause 187 [Fraud compensation levy]:
moved Amendment No. 222:
Page 142, line 36, at end insert—
"(6A) The Board must in respect of any fraud compensation levy imposed under this section—
(a) determine the schemes in respect of which it is imposed,
(b) calculate the amount of the levy in respect of each of those schemes, and
(c) notify any person liable to pay the levy in respect of the scheme of the amount of the levy in respect of the scheme and the date or dates on which it becomes payable.
(6B) The Board may require the Regulator to discharge, on the Board's behalf, its functions under subsection (6A) in respect of the levy."
On Question, amendment agreed to.
Clause 188 [Information to be provided to the Board etc]:
[Amendment No. 223 not moved.]
Clause 189 [Notices requiring provision of information]:
[Amendment No. 224 not moved.]
Clause 190 [Entry of premises]:
[Amendment No. 225 not moved.]
Clause 192 [Warrants]:
moved Amendments Nos. 228 to 230:
Page 147, line 32, leave out from beginning to "restricted"
Page 147, line 37, leave out "except" and insert—
"(1A) Subsection (1) is subject to—
(a) subsection (1B), and
(b) sections 196 to 201 and 233.
(1B) Subject to section 200(4), restricted information may be disclosed"
Page 148, line 18, after "of" insert "subsections (1) and (1B) and"
On Question, amendments agreed to.
Clause 199 [Other permitted disclosures]:
moved Amendment No. 232:
Page 151, line 11, leave out from "Sections" to "except" in line 12 and insert "195(1B), 196 to 199, 201 and 233 do not apply to tax information which is disclosed to the Board as mentioned in subsection (3), and such information may not be disclosed by the Board or any person who receives the information directly or indirectly from the Board"
On Question, amendment agreed to.
Schedule 9 [Reviewable matters]:
moved Amendment No. 233:
Page 323, line 30, at end insert—
"29 Any determination by the Board under section 187(6A)(a) (occupational pension schemes in respect of which any fraud compensation levy is imposed) or the failure to make such a determination.
30 The amount of any fraud compensation levy payable in respect of an occupational pension scheme determined by the Board under section 187(6A)(b)."
On Question, amendment agreed to.
Clause 214 [Publishing reports etc]:
moved Amendment No. 234:
Page 161, line 36, leave out "absolutely privileged" and insert "privileged unless the publication is shown to be made with malice"
My Lords, moving on to a different subject altogether, the purpose of this amendment is to establish why the PPF ombudsman should have a right of absolute privilege and to suggest that he should not. The clause provides that for defamation purposes any matter published by the PPF ombudsman shall be "absolutely privileged". Elsewhere in the Bill, in Clauses 87 and 203, privileges are conferred on the regulator and the board of the PPF respectively, but those privileges are not absolute but qualified.
It is not immediately obvious why those other bodies should have qualified privilege when the PPF ombudsman has absolute privilege, and I await the Minister's explanation for that. Absolute privilege is very wide-ranging and places an emphasis on freedom of speech above any person's right to an action for defamation. We believe that absolute privilege for the PPF ombudsman goes too far and that the balance between freedom of speech for the ombudsman and the protection of the reputation of those mentioned in his or her response is wrong.
We agree that the ombudsman should be able to express his or her views freely, but we cannot see why he or she should be able to publish defamatory statements that are motivated by malice. We do not believe that it is necessary or desirable to grant an absolute privilege to the ombudsman to achieve the object of enabling him to do his work. Therefore, in this amendment we suggest that the clause be amended to delete the absolute privilege and insert a qualified privilege—that is, a privilege for publication unless the statement is shown to have been made with malice. I beg to move.
My Lords, it may be helpful if I explain the intention behind Clause 214, which provides for any matter published by the PPF ombudsman to be absolutely privileged for the purposes of defamation. This includes reviewable matters or maladministration and extends to the ombudsman's annual report.
The noble Baroness asked why we had chosen those words, rather than more qualified words. The provision is broadly equivalent to the one in place for the Pensions Ombudsman now, under Section 151 of the 1993 Act. We are doing nothing particularly new here but are broadly rolling over an existing provision. I accept that this provision is slightly different from the provisions for the Pensions Regulator and the PPF board under Clauses 87 and 203, where we have said that any publication is privileged unless the publication is shown to be made with malice. That is because those bodies—particularly the board—are not quasi-judiciary, whereas the ombudsman is.
Clause 214 began its life as an opposition amendment, Amendment No. 535, in the other place. When the amendment was tabled by the Opposition, it proposed "absolute privilege". The Government took the Opposition's concerns on board and came up with this amendment. I believe that the remarks of Peter Carter-Ruck have already been read into the record.
With the explanations that the amendment originated from the Opposition in the other place, that we believe that the ombudsman is different from the PPF board and the regulator because he has a quasi-judicial function and that the provision is, broadly, a rollover from the provision in the 1993 Act, I hope that the noble Baroness will feel able to withdraw her amendment.
My Lords, I thank the Minister for that reply. I take what she says about the ombudsman being in a quasi-judicial position. That has more force as an argument than saying that the provision is already in the 1993 Act for the Pensions Ombudsman. There is still a question in my mind on whether it is appropriate in practice to give such a blanket degree of privilege. However, I listened to what the noble Baroness said and shall take the matter away and think about it again. I beg leave to withdraw the amendment.
My Lords, in Committee we expressed some concerns about Clause 236. We are all in favour of employees having as much information as possible, but it is very important that they should not receive information that leads them to make mistaken decisions. By regulation, the clause,
"may require employers to take action for the purpose of enabling employees to obtain information and advice about pensions and saving for retirement".
We are concerned that that puts the onus on the employer. It is extremely difficult for employers who are not technically qualified to give information and advice to carry that into operation.
A debate in Committee was concerned with the problems that trustees have—they had it in Equitable Life, for example—in giving advice to their employers. The clause seems to say that employers, but apparently not pension fund trustees, will be enabled to give advice about pensions and savings. The noble Baroness shakes her head. If it is so, no doubt she will say so in a moment.
We have serious doubts about whether it is practical for employers to fulfil the functions specified. The noble Baroness was kind enough to say earlier that the regulations involved in the Bill were now in draft form and that, as on previous occasions, she would courteously enable us to see them. I was not absolutely clear whether that remark was made in the context of the Bill as a whole—whether all the regulations were in place—but she shakes her head. I did not think that it could be so; I imagined that she was referring to the clause that we were debating at the time.
My Lords, I was lucky. The regulations for which the noble Lord, Lord Skelmersdale, asked were ones that we had ready to offer for scrutiny. I am not so fortunate with the other regulations yet.
My Lords, we hope that the noble Baroness will be as successful as she can be, as she has always been very courteous.
My main concern about the clause is the use of "advice". Perhaps it would have been more appropriate had our amendment, instead of leaving out the whole clause, merely left out "and advice". However, the regulations, of which we know nothing at the moment, may impose very considerable burdens on employers if they are required to give even information on pensions and saving for retirement. After all, it is not their function, although it may be the function of the Department for Work and Pensions. To put the onus on employers seems likely to be an excessive burden. I beg to move.
My Lords, the clause is very important if we are looking to the future. The Turner report and all that goes with it would make for a much wider debate than falls within the scope of the Bill. The advice that in the broader national sense goes to people is to save more, to have more faith and trust in the pension arrangements being made, to respond to what employers say and so on. Can anyone doubt that a major qualitative step forward is required in the arrangements if people are to trust and believe in that on which they are told to embark?
There have been so many schemes that, for a variety of reasons, have caused people to get into difficulty. It is difficult territory and I suspect, although I may be wrong, that the noble Lord, Lord Higgins, is worried about the word "advice" in the sense of getting into legal difficulties about the giving of individual advice. The noble Lord is shaking his head. Again, that cannot be a reason, if we are looking at the future, for an employer not to be in a position where the concrete reality of increased savings and so on for the people involved starts to constitute something that we can call "advice". Whether or not that word has technical connotations that cause a problem here, the principle of the clause, which is not just an add-on, is vital and indispensable, the more we look at the changing demands of savings for people at work.
My Lords, perhaps I may contribute to the debate as someone who has come late into the House and not been party to the whole discussion, and as someone who has negotiated on pensions for many years as a trade union official, including with Norwich Union, ICI and other organisations. They would be concerned about implementing the amendment.
Clause 236(1) states:
"Regulations may require employers to take action for the purpose of enabling employees to obtain information".
Most employers would not be qualified under the Financial Services and Markets Act to do so anyway, but in my experience of negotiating with employers in a partnership arrangement, it is most likely that they would see it as part of their social responsibility towards their employees to ensure that any information that was helpful to them was made available. In many instances they provide that on the premises and make arrangements for that to happen. So I cannot see any way forward other than to welcome this clause.
My Lords, I am not sure how much difference there is between the different sides of the House in this matter. I am struck by the good sense of the contributions made from the Government Benches. But in practice there seems to be a possible, rather technical, problem with "advice". It was noticeable that the noble Baroness, Lady Wall, said "information". I would have thought that the right compromise was to stick to "information" and take out the term "and advice" which has a slightly technical ring.
My Lords, I agree entirely with the comments of the noble Lord and the noble Baroness who have just spoken. The House needs more information on the Government's intention. In principle I am entirely in favour of enabling employees to obtain the maximum amount of information and to receive advice—a point to which I shall return in a moment. Without wishing to be unduly controversial, one of the Government's failures has been that they have not encouraged sufficient saving over the past few years. That is a great pity and future generations will pay for that.
"Regulations may require employers to take action for the purpose of enabling employees to obtain information and advice about pensions".
It is regarding that word "advice" that one really wants to find out exactly what is envisaged. Is it envisaged that employers will be required to give advice? The Minister shakes her head, but I notice that subsection (2)( c) makes,
"provision as to the action to be taken by employers".
What will that action be? Employers will rightly be concerned, as should employees for that matter, about any legal liability which would then be involved. In principle I find myself in sympathy with the way in which this is moving. In practice, I need to be reassured that it will not have effects that the Government do not intend.
My Lords, this has been an interesting debate. I am particularly grateful for the contributions of my noble friends who, as former trade union officials or, indeed, staff members, speak with real expertise on this issue.
There may have been a little misunderstanding here. I thought that my noble friend had clarified matters to the satisfaction of Members opposite, but perhaps that was not the case. The clause provides a reserve power to require certain employers to provide their employees with access to sources of information and advice about pensions and savings for retirement. That is very clear. It does not say that regulations may require employers to "provide" information and advice; it states that they must,
"take action for the purpose of enabling employers to obtain information and advice".
The clause is drafted in exact terms precisely to avoid the understandable concerns that noble Lords may have about where the liability lies.
What is going on here? If one reads this across to the regulatory impact, I think that the situation is clear. If employers make little or no contribution to their employees' pensions—that is, less than 3 per cent but usually nil—in consequence, there will be low levels of scheme membership.
Perhaps I may digress for a moment. I think that I am quoting the figures broadly accurately when I say that L&G has shown that, where employers contribute to stakeholder pensions, take-up by members is between 70 and 80 per cent; where they do not, the take-up by members is 13 per cent. Therefore, the degree of employee saving is conditioned by the actions of the employer in the workplace. That is not to say that the employer must be responsible for giving advice—nor should he be, unless he is a licensed IFA, which is extremely unlikely.
In that situation, we believe that employers who fail to provide a contribution to a pension scheme should, at the very least, have responsibility for ensuring that their employees have access to the information and advice that they need in order to make informed retirement planning decisions. We are currently carrying out the scheme on a pilot basis. It will be rolled out and then, if your Lordships' House agrees, we shall have the reserve powers to extend it nationally.
A significant number of employees work for such firms. Around 6 million employees work for firms that offer contributions of less than 3 per cent to at least some of their workforce, and most are working in firms that make no contributions at all. As a result, pensions are simply not on those employees' radar screens. From all the research that I have read, I know that the real push into pension provision comes about when it is focused on within the workplace. Therefore, removing this clause would remove an opportunity to help employees who would benefit most from access to pension information and advice.
This is a reserve power. It is broad, and any regulations will go through the affirmative procedure so that they can be scrutinised by both Houses. I think that that is proper. Proposals for regulations would also be subject to consultation with all interested stakeholders, such as the representatives of employers, employees, consumers, pensioners and the financial services industry. Of course, any employer who does not wish to go down the route of enabling employees to have access to information and advice can take himself out of the frame by making a 3 per cent contribution to a pension. If that encourages employers who currently do not do so—particularly for stakeholders—then that is a not unintended consequence of what the clause seeks to achieve. Employers have that choice.
My Lords, is the request for this information and advice—perhaps the noble Baroness will say where the advice will come from—triggered by the employee or is it given compulsorily to all employees who are not covered?
My Lords, we have various pilots which deal with information packs, and so on, and I am happy to write to your Lordships about the different types available. But basically, under the Bill, any employer who does not make contributions of at least 3 per cent to a scheme will have a duty—once the reserve powers through regulations may be extended—to provide his employees with information and advice. The information could be a factual pack that the employer puts together. Beyond that, however, it is the territory of independent financial advisers. Only they are regulated to provide financial advice.
So, as my noble friend absolutely rightly picked up, the wording of the clause is not that the employers must provide financial advice and information, but that they must enable employees to have financial advice and information. The understandable concern expressed by the noble Lord, Lord Higgins, about whether they would be accountable for mis-selling would not arise in this case. It would be a matter for the IFA.
As I say, we would expect the sessions to be delivered face to face and in private by an independent financial adviser and to follow the current financial services industry practice. They will be driven by the individual employee's requirements and deal with what they need and the connections with state benefits and so on.
Employers would not be liable because the pension information packs will set out what employers may and may not say to their employees. The packs can provide factual information about what the employers currently offer, but they are not entitled to give advice. Employees will be given access, but there is no requirement that they must attend. In other words, the duty will be on the employer to offer, not on the employees to receive; they may have a perfectly comfortable personal pension and want nothing to do with it. So they can decide not to attend.
I hope that, in a slightly more conversational way, I have addressed all the concerns that your Lordships have raised. We know that if people do not have access at the right time to information about pensions and savings for retirement, they do not take it up. That point can also be seen in the context of some of the Secretary of State's comments on issues such as auto-enrolment. It is all part of trying to persuade employees to value pensions and to say to employers who have chosen not to contribute—which would make me very sorry—that they should at the very least provide in lieu the alternative of information and access to financial advice. I hope that that helps your Lordships.
My Lords, in moving Amendment No. 237 I shall speak also to Amendments Nos. 238 and 298.
When we debated the clauses on member-nominated trustees and directors in Committee, the Secretary of State had that very morning announced at the TUC conference that the Government intended to raise the minimum proportion of member-nominated trustees from one third to one half. I said at that time that what we expect and hope to see in the reasonably foreseeable future is that all schemes will have 50 per cent member-nominated trustees. I have been going round meeting chief executives of blue chip companies and have often been told by those who have 50 per cent member-nominated trustees just how valuable their contribution is.
Amendment No. 237 will allow us to make that change. Everyone agrees that member-nominated trustees and directors are a good thing. They bring value to any trustee board by offering a different set of skills and experience and by bringing a different perspective to bear on trustee discussions and decisions.
We think that it is right that we should proceed down this path. I would remind your Lordships that we have general powers in Clause 313 which would allow us to implement the change at different times and in different ways for different types of scheme. This provision will give us the opportunity to work with the industry to determine the best way of meeting the challenge of moving to 50 per cent MNTs, which is something that we intend to do. We will certainly give time for the new provisions in the Bill to bed in before moving to 50 per cent MNTs. In other words, we will move to it over time.
In Committee, the noble Lord, Lord Oakeshott, in supporting the principle of an equal proportion, suggested that some flexibility might be needed in certain circumstances. He cited the case, I think, of schemes with independent trustees in particular. I think that that is a genuine issue and we are looking at it. However, my thinking on this is that we would expect an independent trustee to be, so to speak, ring-fenced outside the divvying up of the rest of the board membership. However, we will look at that. Your Lordships will know that we have the power in Clause 241(1)to modify application of the provision in prescribed cases, and schemes with independent trustees could well be such a case.
The amendment to Clause 314 will require any order to be subject to affirmative resolution, as I am sure your Lordships would wish. We are moving towards 50 per cent MNTs, but we have made no decisions yet on timing. There are issues of detail to be resolved, including the independent trustees. I have tried to give the noble Lord some indication of our thinking. It is a perfectly proper and important consideration, but we shall consult fully on all these issues in the coming months. With that explanation, I hope that your Lordships will accept the government amendments. I beg to move.
My Lords, those of us who have been arguing for this for some time—my noble friend Lady Turner did take the lead—would say that to see this matter almost reaching fruition is a very happy moment indeed. The psychology of this matter is tremendously important. I repeat the wider point that I made a few minutes ago about the next few years being very difficult for people organising pensions within industry.
Of course, there is a need for people to take responsibility and ownership. There is no better way for people to take ownership of these difficult decisions than to be equally responsible, with the rest of the people carrying out the work, as trustees. This is not a collective bargaining matter, but it is a matter on which taking joint responsibility means that there is nowhere to hide. I am quite sure that when we come to the final version of the Turner report and various degrees of obligations on companies to do something in this area—it is already at the top of the agenda—it will be a very taxing and challenging matter for people at work. I think that this is a very good foundation stone on which to make this a successful development.
My Lords, I, too, thank the Minister and the Government for the amendment. I referred to it in discussions on previous amendments. I am absolutely delighted that this has happened. We have wanted such a provision for a very long time, not only in this Bill, but the issue has also been raised on previous occasions. I am very pleased that the Government have decided to accede to what is a very reasonable request.
As my noble friend Lord Lea has said, it involves people directly in the provision of pensions at a difficult time. They will have to be trained to take difficult decisions, but I am sure that they will be very capable of doing so, with the assistance of the training that we know will be provided. I thank the Minister for all she has done to bring this about.
My Lords, the Minister is right to say that I expressed some sympathy in Grand Committee with the objectives made by, I think, the noble Baroness, Lady Turner, that in many cases it is appropriate and perfectly sensible to have 50 per cent of member representatives or trustees on pension fund committees. But what I did not say, and what I do not agree with, is the idea that it has to be 50 per cent. I find it surprising. I ask the noble Baroness how this has come about. Whether one agrees with having 50 per cent of members is a fairly clear principle.
Why has it come up in the past few weeks at this very late stage? It could perfectly well have been put forward in the Commons. As she said that very day, what a happy coincidence it is that the new Secretary of State can have a nice big sticky lollypop to take down to his former colleagues at the TUC. I am delighted, although surprised, to hear her say that chief executives of blue chip companies say how happy they are to have a composition of 50 per cent member trustees. I invite the Minister to tell me of one chief executive of a blue chip company who wants to be told in regulation that he has to have such a membership.
I believe that there is some misunderstanding here. While in many cases it is a good idea to have 50 per cent of the board composed of member trustees, I do not support making it compulsory in this way and I would oppose the amendment.
My Lords, the noble Baroness referred to exchanges in Committee. I think that it is true—the noble Lord, Lord Oakeshott of Seagrove Bay, may agree—that we did not see this coming and have not, perhaps, cleared our minds as much as we might have. I did not move the previous amendment because I thought that it might be easier to debate the issue with this government amendment.
There are one or two points about which we ought not to be confused. There is a growing feeling that there should be pensioner representation on trustee boards, as well as the normal arrangement for members to elect people from the workplace and so on. It is probably a good thing if it is not only those actively in the scheme but those who are retired who have some say in the way in which matters proceed.
Having said that, there is a big distinction between member-nominated trustees and member trustees. I think that, at the moment, normal practice in most good schemes is for the members to have arrangements for, in some cases, electing their fellow members to serve on the trustee board. In my experience, that can be extremely valuable. There will be an expression on the trustee board of a view that, if the board were made up entirely of technical people dealing with actuaries and everything else, might not be expressed. When I was in that position, I used to say in the strongest terms to any member trustee arriving on the board, "You must realise that you are in the same legal position as everyone else on the trustee board. If we do something wrong, you're as responsible as we are". They need good training. I found that valuable.
Member-nominated trustees are something else. The members might nominate someone who is not a member of the scheme but has some expertise or represents a particular political viewpoint.
My Lords, I am sorry to interrupt the noble Lord. My question arises from the fact that he said that he was not moving Amendment No. 236. Now that we are on Amendment No. 237, he seems to be concentrating on Amendment No. 236. If that is allowed, we can both engage with the matter.
Does the noble Lord have examples of situations in which the practice—in any way that is of any significance—has created a political question? I know of no such occasions. We should exercise care before we make such broad statements.
Some trustees have come from the trade unions. The finance director and the personnel director can be on the board, but how will people who, say, work in a company with several plants throughout the country—quite a big scheme—have any dialogue among themselves, unless there is some framework for consultation among the 50 per cent? That is more important—not less—than the ability of people to have proper input if the position of having the 50 per cent is to work satisfactorily.
As the noble Lord sees the matter as being integral to Amendment No. 237, we should take it head-on and say, "OK. There will be an opportunity—it will not be compulsory—for people to get other colleagues to be part of their number". That equates to allowing the finance directors and others, as members, to be trustees.
My Lords, I have sought to indicate that there are three separate issues: first, whether there should be member trustees on the board—that is to say, members of the scheme—secondly, whether there should be non-members who are nominated by the members; and, thirdly, the issue of percentages. My experience suggests that it can be extremely valuable to have member trustees on the board. I have a more open mind about whether it is advisable for members to nominate outsiders who might have particular expertise.
I do not know whether the matter is political, but the new Secretary of State certainly seemed to think that it was important to raise it at the TUC conference. Clearly, it was thought to be important at that stage. Based on my experience, I have serious doubts about the 50:50 argument. Employers might be deterred from continuing schemes if they think that the outcome on an issue may be uncertain. Again, I know from experience that there is often conflict between the trustees and the employer. So if we are in a 50 per cent situation, what happens about the chairman's casting vote, for example; who appoints the chairman, and so on? There are real problems.
I am not against member trustees; I am in favour of them. I am not necessarily against member-nominated trustees. However, the 50 per cent issue raises serious questions. That view was expressed, for example, by the National Association of Pension Funds, which disagrees with the Government on the issue. On this side of the House we think that the amendment goes too far. It may create tensions and problems in schemes. For the reasons also mentioned by the noble Lord, Lord Oakeshott, we are not in favour of the government amendment.
My Lords, I ask the noble Lord to rethink his use of the word "political". I have made the point about the tremendous contribution that people make over the years; that is not on any political basis. The fact that the Secretary of State announced the reform at the TUC conference was no different from his announcing it to the CBI. Would that have made it political?
My Lords, that is a very good question; I do not know the answer. However, the Secretary of State might have got a different reception.
The amendment is a step too far. It will create a considerable number of problems if it becomes general practice. No doubt the noble Baroness could tell us what she thinks the position of the chairman of the trustees will be in those circumstances. Also, will the provision apply just to final-salary schemes or to defined contribution schemes also?
My Lords, I do not see how the provision can apply to DC schemes because they do not have trustees. Members will normally buy their package in the marketplace, so to speak. It will apply to where there are trustees of schemes. It depends on whether it is a DC company scheme; clearly, it would not apply to a stakeholder scheme.
Let us take, first, the canard of what was "political" and the tease about the CBI. It always amazes me that Members opposite think that their views are common sense but the views of those who oppose them are political. It so happened that on the day on which my right honourable friend the Secretary of State addressed the TUC conference, we discussed the issue in Committee—
The noble Lord raised the "member" and "member-nominated" issue. Our concern is, as the noble Lord has expressed, that a "member" is not necessarily someone nominated by members. As far as I know, he or she could be appointed by the employer. He could be the finance director. It could be that the members, the workers, in the company might have no control over who is on the board because all that is required is members—even the finance or personnel directors are likely to be a member of the pension scheme—as opposed to people who are nominated by the body of members to reflect their interests. That is why there is this distinction that my noble friend has picked up.
My Lords, perhaps I may clarify that. I was speaking from experience. In fact, the schemes with which I have been involved made arrangements for the members to elect one or more of their number to serve on the trustee board. But I did not take that to be the debate that we had in Committee, which was that the members would nominate outsiders to serve on the board. If I understand it correctly, that is what the Government have in mind.
My Lords, that is my next point. Perhaps we may keep this debate structured. There are two separate issues here. There is the amendment that the noble Lord chose not to move, which refers to "member" as opposed to "member-nominated". My noble friend was right to ask whether we are in fact revisiting a previous issue that the noble Lord chose not to move. The point here is that, under the noble Lord's amendment that he chose not to move, there could be a board made up of members of the scheme, none of whom were "member-nominated". That is why I would have been very happy to oppose that. Almost everyone employed in the entire company—management or otherwise—would be a member of a scheme but not necessarily member-nominated.
The noble Lord indeed raised his second point in Committee, which was that they could be outsiders. Yes, it is the case that members could choose to nominate as their "voice" on the trustees board someone who is not employed in that scheme. The reason is obvious. There can be quite modest-sized companies in which membership, at least for a time, may feel under equipped through training and so forth to take on all of the responsibilities. They may well wish to stiffen the expertise on their side by bringing in a colleague from outside the company.
But—this is the key—a member-nominated trustee who is not a member of the scheme has to be approved by the employer. We said that in Committee. It could be that the employer is concerned that the member-nominated trustee who is an outsider works for, say, a rival company, which is perfectly legitimate. The employer has the power to veto without having to give cause, so to speak.
Therefore, it is within the employer's hands if he thinks that that is unreasonable. I hope that employers will not take that step. Very often, they would much prefer to deal with a professional or a semi-professional, possibly from the trade union movement, who knows what he or she is doing and has a breadth of experience across other similar companies in similar schemes. Ultimately, all such schemes are voluntary. Under Clause 239(5)(c), the employer has a veto. We are going for "member-nominated" rather than "member", although the two may of course overlap considerably.
My Lords, we are still holding to 50 per cent. But I made it very clear that we will go to that over time and following consultation. I am not saying that this will be the case, but it could be that it will be banded by size of company. There could be a whole range of ways in which it is introduced. We are not trying to use a shotgun approach to small companies that are not equipped yet to do that. But over time we will move in that direction and expect to see 50 per cent of member-nominated trustees—leaving aside the point about an independent trustee possibly.
That will enrich the quality of the board and ensure that employees have on their radar screens, if they do not already, the significance and importance of pension provision and will own the problems, the risks, the challenges and the solutions that go with being trustees of that board. So I hope that Members will accept the amendment.
My Lords, that will be for the rules of the scheme.
My Lords, my noble friend must ask a question, starting with, for example, "am I aware".
My Lords, is my noble friend aware that experience in industry is such, as the noble Lord said, that the management of the board of trustees wants employee representatives to be trained and to understand what they have to do? In a way, the proposal formalises what already happens. For example, a trade union pension expert may, by invitation from the management, advise members on issues. The reservation being felt may be unjustified when the intention of the provision is to ensure that those who participate can do so in a concentrated way.
My Lords, I thank my noble friend for that intervention. As a result, I hope that your Lordships will accept the government amendments.
moved Amendment No. 239:
Page 187, line 22, leave out from "if" to end of line 23 and insert "the benefits are provided under a money-purchase scheme"
My Lords, we now move on to what I hope are less controversial matters. Clause 255 covers the conditions for pension protection when an employee transfers from one firm to another within the same group or, indeed, the company is taken over and the employee transfers to the new company under what is probably its own scheme but, possibly, maintaining the old scheme depending on the conditions of the takeover. This amendment seeks to ensure that the condition that the transferor contributes to the scheme is restricted to money purchase schemes.
As currently drafted, there are two conditions in Clause 255(2). The first is that the person is an active member—a person in pensionable service. It would apply to a defined benefit scheme, a money purchase scheme or a hybrid scheme. The second condition is that where any of the benefits under the scheme are money-purchase benefits, the employer must have been required to pay contributions in respect of the employee or has done so. In a situation where the scheme is a defined benefits one, but the member pays voluntary contributions applied on a money purchase basis, I believe that the employer is not required to pay contributions in respect of that member as an individual. An employer is only required to contribute to the funding of the scheme as a whole.
In my view there is a danger that defined benefit schemes are thereby excluded from pension protection. I hope the noble Baroness will tell me this is incorrect. However, on the basis that it is correct, for it to be otherwise, surely it would be logical that the phrase "in respect of the employee" would have to cover an obligation to contribute to the common fund. I would very much like this clarified. I beg to move.
My Lords, we are returning to three amendments, the first of which was brought forward in Grand Committee on
The noble Lords, Lord Higgins and Lord Skelmersdale, have requested that this clause should be amended to provide for benefits under a money-purchase scheme as opposed to any scheme which provides money-purchase benefits. The noble Lords' amendments would do exactly the opposite of what they seek to do. In Committee, the noble Lord, Lord Higgins, said:
These amendments would do the opposite simply because they flip flop between the word "schemes" and the word "benefit".
Let me clarify the situation. The Pension Schemes Act 1993 defines a money-purchase "scheme" as one which provides money-purchase "benefits". However, there are other kinds of schemes, such as salary-related (defined benefit) or hybrid, that also provide money-purchase benefits in addition to, or as an alternative to, salary-related pensions.
If we amend the clauses that the noble Lords want us to amend to include benefits provided under a money-purchase scheme, this would in effect restrict the requirement to money-purchase schemes only and the requirement would not be complied with in respect of salary-related or hybrid schemes which provide money-purchase benefits.
These schemes are becoming more popular with employers and employees and we have therefore contemplated upon them. As I said earlier when we were discussing this issue, while drafting the clause we tried to "future proof" it to a degree to ensure that the protection is extended to cover any scheme, the basis of which may be DB but which also provides money-purchase benefits.
I hope that we are on the same side on this. With that explanation, I hope the noble Lord will feel able to withdraw the amendment.
My Lords, I am grateful to the noble Baroness. I shall have to take advice on this. As to the last remark of the noble Baroness that we are on the same side, I am still slightly doubtful about that in this particular respect. I shall read very carefully what she has said and come back to the matter, if necessary, at the next stage of the Bill. I beg leave to withdraw the amendment.
My Lords, in moving Amendment No. 242, I shall speak also to Amendments Nos. 243, 244 and 245, with which it is grouped.
These amendments deal with the situation which arises in the case of merger and transfer. As we know, employment rights are largely covered by what is known as the TUPE regulations, the Transfer of Undertakings (Protection of Employment) Regulations dating from 1981. These were introduced to protect the employment rights of employees transferring to another undertaking. Their employment rights are protected but pension rights have not in the past been adequately protected.
The Bill attempts to deal with this, but not completely adequately in our opinion and in the opinion of my union, to whom I am indebted for this briefing. Further consideration needs to be given to the protection of active members of a scheme, particularly those who are nearing retirement. As the Bill is drafted, such a member in a DB scheme is entitled to membership of a DB scheme providing reference-scheme benefits only, or membership of a DC scheme to which the employer pays matched contributions to a maximum of 6 per cent. At least, I think that is what it is intended should be put into the regulations.
If the receiving scheme is a DC scheme, the member will be considerably worse off. A 6 per cent contribution into a DC scheme provides worse benefits for an older worker than a 6 per cent contribution for a younger worker. In a defined benefit or a DC transfer, if the contribution rate is set at 6 per cent a young worker may earn a decent income-replacement level but an older worker will not have the time to do that. Of course, in Committee the Minister said that an older employee has already built up accrued rights in the transferring scheme, but there is still a loss of expectation.
The purpose of these amendments is to try to ensure that the benefits should be as valuable as those which would have accrued at normal retirement age in the old scheme. The mechanism envisaged is that the scheme actuary would certify that future service rights in the new scheme are as valuable. This point has been discussed with one of the union's pensions experts and I am told that it is perfectly feasible.
Moreover, it is our view that the employer's contribution should be the same pre- and post-transfer. After all, pension benefits have always been regarded—correctly, in my view—as deferred pay. Many people understand this, and sometimes work for a lower salary than they might have got elsewhere simply because they believe that their pension scheme provides for their future security.
If salary benefits must be maintained under TUPE regulations, it seems right and proper that the right to deferred salary should be maintained as well. Hence, one of the amendments in the group spells out that the employer should not pay less and the employee should not pay more.
As I said earlier, the intention is to conserve the value of the benefits that accrue in the case of a transfer by merger. I beg to move.
My Lords, my noble friend will not be surprised to learn that I shall give her amendments the same cool response on Report that I gave them in Committee. They seek to provide or require there to be broadly comparable pension provision, be that on a salary-related or money purchase basis. Our policy intention is to strike a balance on pension provision where there has been a transfer—a balance between keeping businesses open, where the only option is a transfer and therefore keeping people in jobs, against an element of necessary flexibility in pension provision.
If we made it mandatory for the transferee to offer broadly comparable provision, it would be complicated and very expensive for some transferee employers. Broadly comparable pension provision does not mean, as one might think, a rough-and-ready equivalent. Actuaries would have to crawl over it, frankly, for it to apply, taking into account the value test, benefits test, actuarial equivalence, pension age, and so on.
The transferor scheme may not look like anything that the transferee already has running and could result in the transferee employer running two or more different types of scheme, resulting in a two-tier workforce. Alternatively, he may have to adapt his own scheme to fit with that of the transferor—a most unusual position for a firm involved in a takeover.
This is where both schemes are essentially the same kind—both DB or both DC. It would be virtually impossible for a scheme actuary to provide satisfactory confirmation that DB schemes will provide benefits that are broadly comparable to DC schemes, and vice versa. In salary-related schemes, employer contributions are dependent on a number of conditions, as well as overall membership and funding position. In money purchase schemes, actuaries would have to assume and project the impact of market influences for each individual over their working life. I think that this would be virtually impossible.
The additional costs of this could clearly be substantial and could prevent businesses being sold. Any increased costs could affect the possibility of restructuring.
Pension provision by employers is at present voluntary. This policy, which introduces an element of compulsion for transferred employees only, has been designed to balance the rights of employees with the need for employers to control costs. The amendment would shift that balance away from the employer, increasing the cost of takeovers.
We have gone a long way to ensuring that a decent minimum platform is provided for TUPE arrangements, which is private to private. I think that my noble friend's amendment takes that too far. It would be very hard for it to work in practice; it would also go beyond what we think is reasonable under the circumstances in which we envisage these proposals applying. So I am unable now, as in Committee, to accept my noble friend's amendments.
My Lords, I thank my noble friend for that quite detailed response. I can understand that it could be quite a complicated matter in some companies. Nevertheless, the principle is really quite important—the acceptance of the view that all of us in the trade union movement have held for a long time, that pensions are deferred pay.
If that is so, it is reasonable to try to get as near as possible to what was on offer before the transfer took place. Moreover, it has been stated again that, if this were to be put into operation, it might mean that actual transfers did not take place, with consequent loss of employment to people who otherwise would be transferred into other employment. That is a consideration.
On the other hand, I reiterate the principle that deferred pay is important. I will not press the amendment this evening, but I will consider carefully what my noble friend has said and see whether there is any way in which we can return to this at a later stage. In the mean time I beg leave to withdraw the amendment.
The first amendment deals with the situation in which it is proposed that contributions to personal pension schemes be reduced. My amendment requires consultation when an employer who contributes to a personal pension proposes to reduce his contributions.
The category of schemes concerned is wider than might be supposed. Group personal pensions—the commonest form of the DC arrangement and the usual mechanism for providing stakeholder pensions—are personal pensions and not occupational schemes. The clause as drafted requires the employer to consult if it is proposed to change the application of contributions—if the employer proposes to go to a different life office to provide its stakeholder or other GP arrangement. It does not require anything to be done by way of consultation if the employer proposes to change the amount of contributions; surely a more important issue as far as the employee is concerned.
The other amendments in this group deal with consultation and what happens if there is a failure to consult. The Minister made the point in Committee that the content of the right to be consulted can be set out in regulations. However, the penalty for failure to consult cannot and, as drafted, the Bill allows the regulator to fine the employer or trustees only if there is a failure.
The amendment puts enforcement in the hands of the unions and that is important. It is modelled on the tried and tested arrangements for equivalent consultations in the event of collective redundancies or in the event of a TUPE transfer. It gives the union the right to enforce the obligation to consult and to do so through an employment tribunal if necessary. After all, this is an employment issue. Employment tribunals exist for that purpose. The employment tribunal may make a declaration to that effect if it finds that there has been a failure to consult. It may order appropriate compensation to be paid. I emphasise that we are dealing with employment issues, and tried and tested methods exist for dealing with such matters.
The amendments also set out what the consultation regulations shall require. The employer shall consider any representations made by persons prescribed, must reply to the representations and, if he rejects any of those representations, state his reasons. In view of what has happened recently in the pensions industry, it is surely important that employees and those representing them should have a great deal more involvement in whatever changes may be proposed in relation to their schemes. I beg to move.
My Lords, I rise to support my noble friend in these amendments. There does not seem to be a cost element, but what is important is the consultation with the employee concerned. As my noble friend has said before when she has been on her feet, we regard pensions as part of deferred salary. The matter is very important to ordinary people. Pensions are vital to them. Changes that take place should not be made unilaterally. Consultation should be required.
Not only should consultation take place, it is very important when we look at Clause 258 that, having considered the views of the employees, the employer must then make it clear why he or she is rejecting the representations that have been made. That is natural justice, and I hope that the Minister can accept this very reasonable proposal.
My Lords, the three clauses, Clauses 257, 258 and 259, introduce the requirement to consult. These clauses place a statutory obligation on employers to consult before making major or significant changes to future pension arrangements. The obligation will apply to employers who offer occupational pension schemes or group personal pension schemes which have direct payment arrangements in place.
Amendment No. 246 would ensure that an employer must consult before making a reduction in contributions that he pays to an employee's personal pension scheme. The effect would be to impose the obligation to consult in the instance of any reduction in contribution—for example, to changes such as corrections for past overpayment. We intend to use the power in Clause 258 (1)(b) to prescribe decisions that significantly reduce or remove an employer contribution to a personal pension scheme with direct payment arrangements.
Amendment No. 247 would allow employees and trade unions to make a complaint to an employment tribunal, if an employer failed to consult on future changes to personal pension schemes when direct payments exist but not, as it happens, in respect of changes to occupational pension schemes. It would enable the tribunal to make an award of compensation of up to 13 weeks' pay to affected employees in respect of personal pension schemes only. I am not sure whether that was the precise effect intended by my noble friend's amendment.
Part of the duties and objectives of the regulator is to promote compliance and best practice by employers. The regulator has powers to investigate and require employers to provide evidence of compliance. In cases of non-compliance, sanctions may be imposed by way of a civil penalty. I cannot see that it would be appropriate to have employment tribunals make compensation awards against employers in cases of personal pension schemes only, whereas the regulator would sanction employees, trustees or managers in the other occupational pension schemes.
Amendment No. 248 would require employers to consult with a view to seeking agreement and to consider and reply to any representations made, explaining the reasons for any rejections—but, again, only in respect of personal pension schemes. Private pension provision is made voluntarily by employers as part of good HR practice. Therefore, it is right that a requirement to consult on pensions has some differences from existing legislation such as collective redundancies and TUPE transfers, where there are statutory consultation requirements which arise from European directives relating to the protection of employment.
Seeking to put changes to pension provision on the same footing as collective redundancies, for example, would constitute a significant step towards compulsory employer provision of pensions. We intend real substance to these consultative processes and believe that the use of the term "consultation" conveys this in itself. There is established case law to the effect that consultation means the communication of a genuine invitation to give advice, and a genuine consideration of that advice. So it is unnecessary to add the step-by-step procedure suggested by my noble friend. It will be for the Pensions Regulator to consider the actions of an employer in relation to existing and established case law in respect of consultation.
With that fairly lengthy reply, I hope that my noble friend feels able to withdraw her amendment.
My Lords, I thank my noble friend for that response. We attached the amendments to the provisions in relation to personal pensions, mainly because there has been a growth in that area in recent years. The Government have been intent on encouraging the growth of stakeholder pensions—and we will have more to say about that later. That introduces another element into the whole pensions and employment scene, and there must be some means of dealing effectively with it. We believe it to be an employment issue on the same basis that we believe pensions of any kind are deferred pay. Therefore, we attached our amendments to the part of the Bill dealing with personal pensions. However, I note what has been said, and shall consider it carefully in the Official Report to see whether there is any way in which we might pursue the issue of consultation at a later stage. In the mean time, I beg leave to withdraw the amendment.
moved Amendment No. 249:
Page 191, line 6, leave out from "scheme" to "to" in line 7.
My Lords, Amendments Nos. 249 and 250 amend new Section 67(1) of the Pensions Act 1995, contained in Clause 260, by introducing a power to exempt prescribed schemes or schemes of a prescribed description from the requirements imposed by new Section 67. They are technical amendments to ensure that we have the necessary powers to exempt certain types of scheme from the Section 67 provisions. The schemes that we have in mind are "non-approved" or "not registered" for tax purposes. They are currently known as funded unapproved retirement benefits schemes, and unfunded unapproved retirement benefits schemes. From April 2006, they will be known as employer-financed retirement benefit schemes.
Those schemes do not receive tax privileges and are mainly top-up schemes providing benefits to senior employees in excess of Inland Revenue limits. They are exempt from most of the provisions in the Pensions Act 1995, on the grounds that they do not need the protection afforded to ordinary occupational pension schemes. The power contained in the amendments will allow us also to exempt them from the new Section 67 provisions. That seems sensible; I hope noble Lords agree. I beg to move.
My Lords, my immediate response is to say that I cannot see how it could be. If I am wrong, I shall write to the noble Lord.
moved Amendment No. 250:
Page 191, line 7, at end insert "other than a power conferred by—
(a) a public service pension scheme, or
(b) a prescribed scheme or a scheme of a prescribed description."
On Question, amendment agreed to.
My Lords, the clause contains complex new procedures to allow, under prescribed rules, past-service benefits to be modified so long as their overall value is not reduced. It modifies Section 67 of the Pensions Act, which places a rigid restriction on changes that affect past-service rights and has been criticised as inflexible and a barrier to simplification.
Some concern has been expressed that the test of actuarial equivalence is not sufficiently defined. An overall test of value will seemingly have to make assumptions about members' circumstances, to assess the actuarial value of their past-service benefits. At an aggregate level an actuary could calculate the equivalent value, but that might not be wholly relevant to the circumstances of particular members, who may or may not have dependants defined under current rules.
The amendment requires the actuary to take account of the interests of dependants in assessing equivalence. That is what it is really about. It suggests that account must be taken of the rights of,
"any other person contingently entitled to benefits under the scheme through", the member. I hope that it will be sympathetically received by the Minister. I did not have the opportunity to make those points on the amendment in Committee. I beg to move.
My Lords, the noble Baroness is correct is saying that some concern has been expressed about the provisions. In simple terms, if I understand correctly, the concern is that the actuarial equivalence will be for the average and there may be dispersal around it. Some people will gain and others will lose, even though the situation is said overall to be equivalent. What is important is what happens to the individual, not what happens on average.
My Lords, the amendment concerns contingent benefits payable to survivors. It seeks specifically to include rights of contingent beneficiaries in the calculation of an actuarial value as if they were rights actually belonging to the contingent beneficiary. However, contingent beneficiaries do not accrue pension rights of their own. It is the scheme member who accrues those rights on behalf of the contingent beneficiary. Clause 260 has been drafted to that effect.
The provision in new Section 67C(8), which the amendment seeks to change, provides that the actuarial value of a member's subsisting rights after a scheme modification has been made must be at least equal to the value of the member's rights immediately before the modification. The definition of "subsisting rights" in new Section 67A(6) says that subsisting rights in relation to a member include any right that has accrued to or in respect of him. The words "in respect of him" capture any rights the member may have in respect of contingency benefits, such as survivors' benefits.
My noble friend's amendment is, therefore, unnecessary and I hope that she feels able to withdraw it.
moved Amendment No. 252:
Page 212, line 1, after "must" insert "except in prescribed circumstances"
My Lords, I shall talk extremely briefly to what I believe is an old chestnut that ran through discussions on both the 1993 and 1995 Bills. My excuse for doing so is that I was not involved in them at the time—I was doing a few other things.
The issue is that of regulations in respect of occupational pension schemes. I believe that the obligations in respect of personal pension schemes and occupational pension schemes in this instance should be the same. The amendment seeks to ensure such conformity. It is intended to allow the issue of regulations to prescribe circumstances where a notice is not required. That explanation may be somewhat confusing to the noble Baroness, because I have a nasty suspicion, now that I look at the matter again, that the amendment is not actually in the right place. But I have no doubt that she will tell me if that is correct and, indeed, whether it is an old chestnut. On that basis, I beg to move.
My Lords, I accept that the noble Lord, Lord Skelmersdale, was not around in 1993 and 1995, when these issues were discussed, however he was around when he moved the same amendment on
However, I can understand the argument for a consistent approach to be taken between the provisions relating to personal pension schemes in what is now Clause 266, and to occupational pension schemes in Clause 267. Indeed, we are taking the same the approach. Trustees should inform the regulator within a "reasonable period" about late payments which are of "material significance", and the regulator will issue a code of practice on the meaning of those terms to help trustees interpret these legal requirements. However, taking a power to prescribe the circumstances when the trustees of a personal pension scheme do not have to report a late payment to the regulator is unnecessary and will not provide any additional clarity.
The current Section 111A of the Pension Schemes Act 1993 contains such a power. And regulation 4(2) of the Personal Pension Schemes (Payments by Employers) Regulations 2000 provides that a late payment need not be reported if the regulatory authority has informed the scheme that such a notification need not be made.
Under our new provisions, the Pensions Regulator will have that power in any case—either by a notification to an individual scheme or, in a more general way, by guidance in a code of practice. Given that the outcome is already achieved, we do not believe that it is necessary also to take a power to prescribe.
I could continue, but I will stop there and I hope that I have given the noble Lord the reassurance that he sought.
My Lords, well, perhaps the chestnut was not quite as old as I suggested. I found that explanation somewhat easier to understand than the Minister's original explanation. She certainly did not make it clear to me then—whether I was listening comprehensively, and have read since in the alternative sense of the word, I do not know. But she has now said that the aim of the amendment is already achieved under Section 111A of the 1993 Act. On that basis, I am totally satisfied and I beg leave to withdraw the amendment.
moved Amendment No. 253:
Page 226, line 46, at end insert—
"( ) Where an application for the resolution of a pension dispute is made in accordance with the dispute resolution arrangements, the trustees or managers must—
(a) take the decision required on the matters in dispute within a reasonable period of the receipt of the application by them,
(b) notify the applicant of the decision within a reasonable period of its having been taken, and
(c) notify the applicant that the Pensions Advisory Service is available to assist in connection with any difficulty which remains unresolved and the address at which it may be contacted."
My Lords, I start by declaring my interest. For many years, I have been a member of the board of OPAS, the Occupational Pensions Advisory Service—the "Pensions Advisory Service" referred to in the amendment.
OPAS is an unusual and, in my view, thoroughly praiseworthy service. It was founded years ago by a retired civil servant (who, when I knew her, was secretary to the Occupational Pensions Board) and her partner, who was the pensions adviser to BALPA, the airline pilots' association. The idea was that people who were, or had recently been, professionals in the pensions industry should be recruited on a nationwide basis to provide advice to individuals with pension problems and to do so for free.
Over the years, a network of advisers was established from professionally qualified people who wanted to give something back to the community. The service gradually attained prominence. A small full-time administrative staff was appointed; it attained acceptability by successive governments; and funding for its administrative centre was secured. That was provided, first, by the Occupational Pensions Board and later by OPRA. The Government will continue the funding under the new arrangements—not via the regulator but directly from the DWP, which has promised to maintain the independent role so valued by the service.
It is acknowledged that the service is a very good one, that it is professionally administered and that the advice, which, as I said, is free, is of considerable help to many people. It also acts as a sifting mechanism for the ombudsman service. The Minister has assured me that the Government continue to value what is done.
The service recently celebrated its 21st birthday. It has 525 advisers nationwide. It runs a telephone helpline at its Belgrave Road offices and, in the past year, the number of calls totalled 52,000. It also now advises on stakeholder and state pension problems, and so it has dropped "Occupational" from its title and will now simply call itself the Pensions Advisory Service. It has done a remarkable job in recruiting professionally qualified people, who give their services to others free. We simply pay expenses.
At the last board meeting that I attended, other board members wanted to have the organisation named in the new Bill. In view of what the Minister has already told me, it seemed a good idea to set out in an amendment precisely what is done and to notify applicants of the way in which the Pensions Advisory Service can be contacted. I hope that the amendment will be sympathetically received. I beg to move.
My Lords, I support my noble friend. She has outlined in great detail the quality of the work done by the Pensions Advisory Service, and I shall not go over that again. It is very important that that work continues and this is one way of bringing it to people's attention. Therefore, I agree with my noble friend and hope that the amendment receives sympathetic consideration from the Minister.
My Lords, I shall be very brief. I join my noble friend in paying tribute to the Pensions Advisory Service. The service is available for any scheme member to use at any point. However, we accept that it is important to remind members of the Pensions Advisory Service when they are going through a dispute. Therefore, we make it clear in regulations that trustees and managers are required to notify applicants that the Pensions Advisory Service is available to advise and help with any disputes. I hope that, with that assurance, my noble friend will feel able to withdraw her amendment.
My Lords, in moving Amendment No. 254, I could speak also to Amendments Nos. 255 and 256 because the issue that I wish to raise is the same in all three. This matter was raised and discussed to some degree in Committee. At that stage, I notified my intention to raise it on Report because I was not happy with the response received.
Under present law, all benefits earned after April 1997 must be increased at a minimum by the lower rate of inflation or 5 per cent a year when they come into payment. The Bill will reduce the figure of 5 per cent to 2.5 per cent. In DB schemes, I gather that it will take effect only where there is a change in the rule to take advantage of it. This has been justified as being a suitable response to lower inflation, offering a saving to employers, and it would appear to be compensation for the cost arising from the PPF levy.
The issue was debated in Committee but we failed to convince the Minister that what we were saying was fair and reasonable. The amendment seeks to maintain the status quo. In principle, it is desirable that pensions should hold their value over what can be a long period of retirement. Women, who tend to live longer than men, will suffer potentially disproportionately if this change goes through.
There is absolutely no guarantee that inflation will remain at its present low level, although we all hope that it does. It has been said that the proposal to reduce the inflation guarantee will help employers in the industry who are wary of the present proposed levy, but why should older pensioners have their pensions threatened with a fall in value in order to meet these concerns? I said in Committee that I could not accept the reasoning behind the Government's opposition to the proposal to retain the 5 per cent cap and I am therefore returning to the argument on Report. I beg to move.
My Lords, I support my noble friend's amendment. It is important that consideration is given to the status quo because inflation may not stay where it is. We all hope that it will remain low, and in that our Government have been highly successful, but who knows what will happen in the future? This is an attempt to protect pensioners and we ask only that the status quo be maintained. I hope that the amendment receives favourable consideration.
My Lords, during the course of the Bill, I have been astonished by the number of avid readers of Hansard who appear to be interested in our debates. The same cannot always be said of the press. However, given the amendment moved by the noble Baroness, Lady Turner, I should clarify my position.
In Committee, I argued strongly with the noble Baroness that the Government's proposals, as part of their "package" for getting those in the industry to agree to the Bill, were that the rate of indexation for inflation protection, which turns up here and in other parts of the Bill, should be reduced from 5 per cent to 2.5 per cent. My argument was that the trouble with the deal was that those who would gain from the Bill were not those who would suffer if inflation took off and they were protected only to the extent of 2.5 per cent rather than 5 per cent. That argument is still valid.
However, I have since examined the issue in greater depth and the problem is that it is part of a package. The Pickering report strongly argues that in any event there is a case for reducing the rate from 5 to 2.5 per cent, but the fact that it is mixed up in this Bill is, to say the least, confusing. However, his arguments are strong in one respect.
I share the views of the noble Lord, Lord Hoyle, on future inflation. The Chancellor is borrowing enormous sums of money and one of two things will happen. He either funds the borrowing fully, which can be done only at significantly higher interest rates, or he does not. In that case, the money supply—an unfashionable subject—increases and so does inflation. We are potentially in a dangerous inflationary situation or one in which interest rates rise very fast.
Against that background, it is worrying, but I also carried out further consultations and the argument from some in the industry was that the potential cost of this amendment to schemes, certainly if inflation takes off, could be very great indeed—perhaps even greater than the levy. I have received some representations saying that. Consequently, there is a real problem here as regards the burdens imposed on pension schemes and the balance between them.
As the noble Baroness has raised this amendment, I thought it right to make my own position clear. On balance, I am persuaded that it is right to go to 2.5despite the fact that that may have very serious effects on pensioners. On the other hand, there is advantage in the scheme. The unfortunate point is that the Government have not presented this argument on its merits, but have mixed it up in a package which implies some sort of deal. As I say, I thought it right to make my own position clear. I am persuaded, contrary to some of my own arguments in Committee, that probably this is not the right amendment to accept. I thought an explanation was due from me, lest those who read the first debate wondered why on earth I was silent now.
My Lords, it is a package. I have no hesitation in saying that. We seek to preserve the viability of occupational pensions, particularly DB schemes, where possible. We are doing that by going for a pension protection fund which is paid for by the industry. What we are told by the industry—the noble Lord, Lord Higgins mentioned this—is that one of the biggest concerns about the viability of schemes is the fact that the industry has to insure, almost speculatively, against future rates of inflation at 5 per cent whether they happen or not. Therefore, for us to seek to ask them to insure, while at the same time carrying a responsibility for the 5 per cent, was unreasonable. The truth is that we would not have had consent to what we believe is the greater good, which is actually an insurance fund without some offsetting arrangements with the industry.
My noble friend's amendment—I take it that this includes Amendments Nos. 255 and 256, as she said—would impose price indexation at 5 per cent on defined contribution schemes, which I very much hope she does not think now is sensible. Where people have a free choice, 75 per cent of them go for level annuities. We think it is now unreasonable—we debated this with the noble Lord, Lord Hunt—to continue to impose even limited price indexation on even a portion of a DC pension pot in order to meet the GMP rights. I hope that my noble friend will accept that.
I return to the main body of pension provision—namely, that comprising DB schemes—with which I believe my noble friend is most concerned and which forms part of our package. I appreciate that noble Lords may think that this will mean lower increases in pensions in payment, but against that one has to set the risk of not having a pension at all. We calculate that the total effect of this is about 2 per cent over a lifetime; possibly 2.2 per cent for women. There is a marginal additional disadvantage to women because of their greater longevity, but equally over a period of time they also take out more from a DB scheme, even though there are the same rates of accrual, because they live longer. The money has to come from somewhere.
I want to make a second point which I do not believe we made in Committee and which may help our consideration of this. LPI currently requires all occupational pensions built up from
However, over the years, our success in controlling prices has meant that inflation has been consistently low and has never risen above 4 per cent. That means that the existing cap is not so much a cap as full protection. That was never intended. It was meant to be a contribution towards it, rather than full protection. It imposes large and, on the whole, unnecessary liabilities on the schemes in respect of their forward funding requirements, given the need to plan for contingencies.
I mentioned DC schemes. I am sure that my noble friend does not intend the provision to affect DC schemes. On DB schemes, I accept that it is part of a package. We are trading off the desirability for insurance against the capacity of schemes to maintain their existing level of RPI indexation at 5 per cent for rights built up from
My Lords, I see the force of the arguments that the noble Baroness makes and that the industry has made to us about the package deal and the great difficulty of getting the whole thing to hang together, if the reduction in the LPI were not made in this way. Despite the considerable reservations that I expressed in Grand Committee, I am persuaded by the combined charms of the noble Baroness and Mrs Farnish of the NAPF.
My Lords, all that I can say to my noble friend is that she will understand that, because of the package, we are not willing to go down that path. The 5 per cent indexation has played a greater part than we anticipated in 1997.
We will not be able to accept the amendment. I am sure that my noble friend would not wish us to revisit the issue of DC schemes. We do not propose to do so, as we have made an undertaking on that. I understand where my noble friend is coming from, but, I regret, she cannot keep the bits that she likes, such as the PPF, and get rid of the bits that she does not care for. We cannot do that. It is a construction that has been carefully negotiated and consulted on. I ask your Lordships not to unpick it at this stage and not to accept my noble friend's amendment.
My Lords, I thank my noble friend for that explanation, which did not surprise me in the least. She told us in Committee that it was all part of a package that could not be unpicked. That is unfortunate, as it will mean that, in the main, older pensioners will suffer if there is a rise in the rate of inflation. There are indications that that may happen in the next year or so. We cannot be certain that we will be lucky enough to have such low inflation indefinitely.
We have a package that, in the main, we all want. We all want the Bill to go through and to provide the security and insurance that it will provide for future members of pension schemes. However, it is unfortunate that one of the items in that deal involves some loss of security for future older pensioners. Having said that and having listened to the debate, I beg leave to withdraw the amendment.
My Lords, in moving Amendment No. 257, I shall speak also to Amendments Nos. 258 and 259. The amendments stand also in the names of my noble friends Lord Hoyle and Lady Dean of Thornton-le-Fylde. The amendments are drafted solely as a means of advocating a minimum level of compulsory contributions by employers and employees. They relate to a clause defining requirements for stakeholder pensions for employers and employees.
Stakeholder pensions were originally designed specifically by the Government to provide a pension framework for thousands of employees without pension provision via occupational schemes. While employers are obliged to facilitate access by their employees to a stakeholder pension, they are not obliged to make a contribution.
As everyone knows, and, I think, the Government accept, take-up has been disappointing. But the picture changes when the employer makes a contribution. There is a developing consensus that compulsion will eventually be required if the problems facing pension provision are to be resolved more effectively. The Bill still seems committed to the voluntary approach, but nobody now believes that it will resolve future problems.
We have returned to this argument because, although our amendment was not agreed in Committee, there seemed to be a general view that compulsion would need to be considered fairly urgently. It will be recalled that during a debate on pensions in the House of Lords, the noble Lord, Lord Fowler, indicated support for the notion of compulsion.
I do not deny that there could be problems. Getting people to agree to compulsory deductions from their salary to go into a pension scheme is likely to be acceptable only if there is a general view that the scheme to which they are contributing is likely to offer security. In that respect, it is perhaps a good idea to raise the issue within the context of this Bill, for this legislation is concerned, above all, with security. For the first time, we are to have legislation specifically designed to regulate, and to do so on the basis of the security of the investment made by the individual member. It is a wholly praiseworthy endeavour; I support what the Government are attempting.
However, if people believe that their pension will be secure, there is more reason to ensure that they will contribute to it. Our amendment, therefore, involves a contribution from employees as well as employers. There is mounting evidence that public opinion is increasingly supportive of compulsion. Moreover, as I said in Committee, a survey indicated that 72 per cent of the members of my union are in favour of compulsion, including employee compulsion. The time is ripe for a move on this issue. I therefore beg to move.
My Lords, I shall speak briefly, as my noble friend has set out the case in detail. Although we hope that voluntary methods might succeed, all the practical circumstances show that they will not. I think that compulsion will be needed in the end. Where the employer makes a contribution, employees' take-up of the scheme is considerably better. Although I hope that voluntary methods will work, I am afraid that they will not. That is why I support the amendments.
My Lords, I guess that this amendment will not be agreed to, but it is very timely that my noble friend Lady Turner has tried to sketch out one way in which compulsion could work. Interestingly, not only did Amicus members vote in favour of compulsion but the results of a national poll, reported in a broadsheet last week, indicated that people across the nation favour it. There was a very high figure—at least as high as the one that my noble friend mentioned.
The proposal requires a tremendous amount of thought. It is very much on the agenda. Its timing will depend on when we get the definitive Turner report, no doubt within six or nine months after the election. I hope that the noble Lord, Lord Higgins, will allow me to mention the word "election", because Adair Turner said that the definitive proposals would be published after the election. The amendment is very timely, because, along with my noble friend Lord Hoyle, I think that the issue is firmly on the agenda for consideration in the not-too-distant future.
My Lords, I am entirely in sympathy with the aims of what the noble Baroness, Lady Turner, is trying to do. On this side of the House our difficulty with the amendment is that it is prescriptive about the level of contribution. I say that with some feeling. As the noble Baroness may know, I work with very small employers. When stakeholder pensions were introduced, they tried their level best to find money to put into pensions for people who previously had not had any pension cover at all. They struggled with that, but they managed to do it.
This late hour is not the time to go into the extent to which stakeholder pensions have or have not succeeded, but many people who have them were never previously allowed to join pension schemes. When one takes into consideration not only that compulsion of this magnitude is a lot to put on the salary bill of a small employer and that for many small employers it will also probably have to cover people who were never previously covered, it becomes something of a mountain for employers to climb.
I have no doubt that the noble Baroness, Lady Turner, is travelling in the right direction. I hope that, as the noble Lord, Lord Lea of Crondall, said, when, after the election, this becomes a matter that is more fully, openly and transparently discussed, we will find a greater degree of consensus than is possible under these amendments.
My Lords, I do not know if the noble Baroness, Lady Turner, has read the recent report of your Lordships' Economic Affairs Committee. In, I think, chapter 10 of that report, the point is made that the take-up of pension schemes by employees shoots through the roof, in comparative terms, when the employer makes a contribution.
Some time ago, when I was chairman of the Stroke Association, I set up a new pension scheme for the employees of that charity where equal payments of employer and employee, up to what we reckoned we could afford as trustees, which was 9 per cent, would be appropriate.
The trouble with the amendment proposed by the noble Baroness, Lady Turner, lies in new subsection (12). So I go along very much with what the noble Baroness, Lady Barker, said. The idea of a 2:1 ratio of employer to employee contributions in a prescriptive way fills me with total horror.
My Lords, currently, we have a voluntary approach to pensions. Basically, my noble friend is arguing for a compulsory pension system in this country at what, I accept, is really quite a high level of contributions. A 10 per cent contribution from the employer, plus 5 per cent from the employee, plus the effect of tax relief, plus recycled rebates, as well as the basic state pension and so forth, probably produces about an 80 per cent replacement rate over a full working life, which might seem quite high in terms of the employer's contribution.
While pensions remain voluntary, the Government are committed, as your Lordships know, to increasing the take-up of pension schemes. We are doing that through our informed choice programmes and automatic enrolment proposals, where, again, the numbers shoot through the roof: we have spoken to senior executives of major companies that have gone to automatic enrolment where membership of pension schemes has increased from 47 per cent membership to more than 90 per cent.
As we discussed earlier, above all, where employers do not make financial advice and information available to employees, they will be exempt from doing that only if they are already making a contribution of at least 3 per cent. We hope that with all of these measures we are increasing the pressure on employers to make adequate pension provision for employees through employer contributions, and of course employee contributions as well.
As my noble friend Lord Lea suspected, we shall not go beyond that until the second stage of the Turner report, which we shall have next year. If my noble friend is right that there is a growing movement towards compulsion and a growing consensus behind it, I am sure that the Government will want to take that on board. Until we have it, and until we have the information from it, the amendments are premature, even if the detail in terms of the figures were acceptable. I ask my noble friend to withdraw her amendments.
My Lords, I am not surprised at that response, and thank the noble Lords who contributed to the discussion.
It is all part of a general drive towards some form of compulsion. Eventually we shall get there—probably after the second report from Adair Turner. I understand why the Government may wish to wait until we have that report.
This short debate is all part of the general campaign and drive to what will eventually become compulsion, which we shall have to have if people on pensions are to have any sort of security. In the mean time, I beg leave to withdraw the amendment.