Pension Schemes (Conversion of Guaranteed Minimum Pensions) Bill - Second Reading

Part of the debate – in the House of Lords at 10:28 am on 25 March 2022.

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Photo of Lord Davies of Brixton Lord Davies of Brixton Labour 10:28, 25 March 2022

My Lords, I thank the noble Baroness, Lady Redfern, for her detailed and clarifying introduction to the Bill. It is a complicated subject but she made an excellent job of providing the necessary clarification for your Lordships. I do not want to get into the detail of these proposals except in one respect, but I do want to put them in the context of pensions policy as a whole.

If I was asked whether I welcomed the Bill, I would be equivocal, because it is a recognition of the failure of a policy which is dear to my heart. The policy of better pensions, introduced in 1978, with all employees receiving an earnings-related pension from the state or a substitute scheme from the employer, was good and in advance of its time. We should not forget that. To a large extent, the introduction of the new state pension was only possible because of the success of the state earnings-related pension scheme.

I will resist the temptation to wander down memory lane, but I was in at the birth of contracting out. I was a member of the occupational pension board. We set out the rules by which contracting out should operate. We spent a great deal of time assessing how guaranteed minimum pensions should work. It is always worth making the point that they became extremely complex largely because of the industry demanding particular provisions. The idea was simple, but it became more and more complex as further demands were placed on it by the pensions industry, and there is a certain ruefulness when the pensions industry then complains about how complex it is. The complexity was largely brought about by the industry itself.

Contracting out was an essential element of the state earnings-related pension scheme, but that is history now. I accept that, but we have these leftovers, the GMPs, which potentially will be with us for many years. With the possibility of survivor benefits being paid in respect of GMPs, it could be decades into the future.

This Bill is essentially about a process. It is not about the principle of conversion, which is already being built into the legislation. Instead, it facilitates the process of conversion. Conversion has come to the fore because of the need to equalise benefits in respect of GMPs. It is not the GMPs that must be equalised but the benefits in excess of GMPs, adding complexity on to complexity. The principle of conversion was seen as a particular method of achieving equalisation, but they are separate.

There is the possibly, rarely taken, I am told, of the dual records approach, whereby each scheme keeps a record for each member, whether they are a man or a woman, and each year it pays the higher pension. Schemes were not keen on using that approach because it meant that members ended up with more pension. From their perspective, the members might have thought it was a good idea to have dual records and best-of year-by-by-year schemes against that approach, and if pushed, I see their point. However, it is important to understand that this arrangement is for the benefit of schemes and their administration. It is difficult to argue that there is much in here which is of benefit to members, which is my major concern.

As I said, the ship has sailed. The problem with the Bill for me is that how it operates in practice depends on material outside its scope. It depends principally on the detailed guidance which has been issued by the DWP, as well as professional practice, because at the heart of conversion is this concept of actuarial equivalence. The legislation and the DWP guidance say nothing about what is meant by actuarial equivalence, and it is in effect left to the actuarial profession, but it is a key issue. We are legislating for something which is effectively outside the control of the law. It is down to the actuaries to assess how that works in practice.

I do not want to be difficult on this Bill, and I will certainly not oppose it. Given the problems we have with the legislative timetable, if we were to make an amendment to it in Committee, it would crush its opportunity of getting through. But we must look in detail at how the Bill works with the underlying guidance and actuarial practice in Committee, when we can press the Government to ensure that members do not lose out.

In that context, my concern, which I am not sure can be handled in this Bill, is that the proposal for conversion is made by the trustees. They must consult the employers but there is no requirement for any consultation with the members. In the pensions legislation, there is a requirement that if you make a major change to a pension scheme, there must be a process of consultation, but on this change, there is no requirement for that level of consultation. That concerns me. It might be argued that the members are not losing out, since they are getting benefits the actuarial equivalent of which is worth the same to the member before and after. However, there is a change in the structure of the benefits being provided, and that potentially is of value to members, even if the monetary value is the same.

Therefore, there is a key issue here. I do not want to delay the Bill, since so much work has gone into preparing it, but I am concerned that the people who appear to be left out of considering these issues are the members being affected. It is not enough to say, “Well, they’re getting something which is actuarially equivalent.” We must think about that in a way which has not so far been reflected in the discussions on the Bill.