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

Part of the debate – in the House of Lords at 10:41 am on 25 March 2022.

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Photo of Baroness Drake Baroness Drake Chair, Constitution Committee, Chair, Constitution Committee 10:41, 25 March 2022

My Lords, I refer to my register of interests, in particular my position as a pension scheme trustee. I support the Bill, which clarifies legislation that enables occupational pension schemes to convert guaranteed minimum pension benefits into other scheme benefits. I congratulate Margaret Ferrier MP, and the noble Baroness, Lady Redfern, who is sponsoring the Bill through the House. This is not an easy issue to pick up and run with, and I compliment the noble Baroness on her speech; it was quite a tour de force on this very technical issue.

How to resolve guaranteed minimum pension equalisation has remained unsettled for 32 years. Although it is very important, the longevity of the issue bears a resemblance to the Schleswig–Holstein question, about which Lord Palmerston said: “Only three people have ever really understood the Schleswig–Holstein business—the prince consort, who died; a German professor, who has gone mad; and I, who have forgotten.” However, having listened to my noble friend Lord Davies, he has confirmed that certain actuaries still have a long memory on the detail of this issue. For lots of other people, it is a mystery lost in the 32-year mists of time.

The GMP equalisation issue arises because, from 1978 to 2002, the state pension had two parts: the basic state pension and the state earnings-related pension, which was known as SERPS. Employers with salary-related pension schemes could contract their employees out of SERPS, so that the employers and employees paid lower national insurance contributions, but the employers remained obliged to provide a guaranteed minimum pension similar to that which would have accrued under SERPS, if the employee had not been contracted out. That the state pension age for women was 60 and for men was 65, at the time, led to some unequal outcomes, the description of which I will leave in Schleswig-Holstein, but the noble Baroness, Lady Redfern, and the Lords Library have done an admirable job in describing how those inequalities occurred.

A decision of the European Court of Justice that occupational pensions constitute deferred pay meant that, from 1990, these unequal pay outcomes had to be addressed. That decision was confirmed by the High Court in 2018; hence the 32-year history we are trying to address. Over many years, pension schemes have sought legal certainty on how to implement GMP equalisation, but the Government have sought to rely on guidance—presumably because of their own liability concerns about being firm and fast in addressing the issue.

There are a number of ways in which schemes can equalise benefits for the differences in outcomes between men and women. As referred to by the noble Baroness, Lady Wheatcroft, the unequal impact of this can affect men as well as women. In 2016, following a government consultation on a proposal to convert guaranteed minimum pensions into scheme benefits under the provisions in an amended Pension Schemes Act 1993, many respondents still expressed concern about the lack of legal certainty in certain respects.

The Government support this Bill, as I do, which amends GMP conversion legislation for schemes that want to use the conversion method of equalisation and makes it easier to use. Guy Opperman, the Minister in the other place, said:

“What the Bill does is key. It … gives the Government the ability to set out in regulations the details of how survivor benefits will work for surviving spouses or civil partners of people with guaranteed minimum pensions” and

“who must consent to the conversion of guaranteed minimum benefits”,—[Official Report, Commons, 26/11/21; col. 627.] when the scheme’s sponsoring employer no longer exists—normally, the employer has to consent.

I support the Bill but have three questions that seek clarity—they are not rowing against the intent of the Bill—that I would like to put to the Minister. Given the Government’s and respondents’ previous reservations about the conversion methodology and what was permissible under the Pension Schemes Act 1993, what confidence does the DWP have that this Bill will now provide legal certainty? Are there any implications for the Pension Protection Fund arising from GMP equalisation, in respect of scheme members who have entered the PPF, who are in schemes in PPF assessment or schemes that might go into PPF assessment in the future, where equalisation issues have been in play?

Finally, there is an important outstanding problem that needs addressing, although it is not in itself a reason not to support the Bill: the lack of clarity on the tax implications of GMP conversion. GMP equalisation could bring negative tax penalties for some scheme members, where an increase to pension benefit or the value of a past transfer payment flowing from equalisation impacts an individual’s annual allowance or lifetime allowance position, and therefore potentially exposes them to a greater tax bill.

Such individuals will have planned their pension savings in good faith, in adherence to the tax rules, unaware of potential retrospective adjustments to their benefits from GMP equalisation and the impact on their tax position. The Minister kindly wrote to my noble friend Lady Sherlock recently, advising that:

“The tax position regarding the conversion method is potentially more complex than other methods. This is because the conversion method can change the form of a member’s benefits and therefore its effects may have a wider impact. More detailed work is being done by HMRC to understand the tax issues associated with the conversion method. HMRC is working closely on this with its industry working group.”

Can I push the Minister to give further reassurance on this matter, given the potential for unfairness to arise from the tax rules, and to give an indication of how soon an answer can be expected? Something of a precedent was set quite recently when the tax rules were favourably adjusted for public sector workers whose pension benefits were retrospectively enhanced to address age discrimination.

Those are my three questions, but the noble Baroness, Lady Redfern, very kindly referred to the wonderful Lord McKenzie of Luton, and I have not had a chance to comment on him in this House. I remember on my second day in this House, I was proverbially pinned against the wall by him. He said, “You’re working on the Equitable Life compensation Bill because I know you’re going to know about guaranteed annuity rates.” I thought gosh and said okay. I assured him that I had many other qualifications and many other interests but I would work with him on it, and that was the start of a very strong working relationship over 10 years in this House. I personally, let alone the House, sadly miss the quality of the contribution he brought on these issues.