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

Part of the debate – in the House of Lords at 11:00 am on 25 March 2022.

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Photo of Baroness Stedman-Scott Baroness Stedman-Scott The Parliamentary Under-Secretary of State for Work and Pensions, Parliamentary Under-Secretary (Foreign, Commonwealth and Development Office) 11:00, 25 March 2022

My Lords, I first congratulate my noble friend Lady Redfern on the excellent way she introduced this debate. My noble friend has brought to the attention of the House and explained very clearly the need for occupational pension schemes to correct the issue of men and women being treated differently because of the impact of having a guaranteed minimum pension.

As my noble friend reminded us, Members of the House have been calling for this legislation for several years now. I am delighted to say that I can finally give the noble Baronesses, Lady Drake and Lady Sherlock, the assurance that they have been seeking. This Bill, admirably, makes the requested changes to the guaranteed minimum pension conversion legislation and has the full backing of Her Majesty’s Government. I am deeply sad, however, that Lord McKenzie of Luton is not here to see the Bill being debated today; I know that he was a great advocate of this change. I am sure that the whole House will join me in endorsing the tribute that the noble Baroness, Lady Drake, paid to him; he was outstanding in his field and is greatly missed.

My noble friend has set out very clearly and concisely what guaranteed minimum pensions are, why an occupational pension scheme might want to convert them into other scheme benefits and why this Bill is so helpful. I will therefore limit myself to recapping the issue in brief. Guaranteed minimum pensions, or GMPs, were built up in the UK’s occupational pension system between 1978 and 1997. During this period, occupational pension schemes could contract out of the additional state pension; in return, they were required to provide their members with a GMP. As it sounds, this was a guaranteed minimum level of pension with important rights attached, including revaluation, post-1988 indexation and survivor benefits.

The rules for GMPs are subtly different for women and men. For example, women can start receiving their GMP at age 60, while men have to wait until 65. This has resulted in complex differences in the amount of GMP a man and a woman can receive. So complicated are these differences, indeed, that overall, both men and women can in fact lose out, depending on individual circumstances. The key issue being addressed dates back to May 1990, when the European Court of Justice ruled that pensions are deferred pay and must therefore be paid equally to men and to women. The Lloyds case at the High Court in 2018 put beyond doubt the question of whether the effects of the GMP rules must be equalised. If a member of a UK pension scheme has GMPs for the period May 1990 to April 1997, their pension needs to be equalised for the negative effect of any differences created by the GMP rules.

It is up to pension schemes themselves to decide how best pensions should be equalised. Individual pension scheme trustees will know more about their members and their scheme rules than government does. However, equalisation is not exactly an easy thing to undertake; we are, after all, talking about complex scheme rules and pensions legislation as they apply to GMPs accrued in the 1990s. Unsurprisingly, therefore, schemes did look to government for help.

My department worked with the pension industry to develop a suggested methodology that uses GMP conversion, and published guidance to help schemes. The basic idea is that schemes can use existing GMP conversion legislation set out in the Pension Schemes Act 1993 to convert the GMP part of the pension into other pension benefits to which the complex GMP rules no longer apply. The whole pension can therefore be equalised to correct for the effects of the GMP rules.

Although this methodology was welcomed by the pensions industry when the guidance was published in 2019, industry also pointed out that the conversion legislation set out in the Pension Schemes Act 1993 is unclear in places. This means that some pension schemes have been unwilling to use it to convert their members’ GMPs in order to fulfil their requirement to equalise. The pensions industry has therefore called on the Government to make amendments to the GMP conversion legislation. These amendments would go a long way to giving schemes more certainty over what they need to do to meet the legal requirements of GMP conversion, and would therefore make it a lot easier for schemes to equalise benefits as part of a GMP conversion exercise. It is these amendments, I should add, to which the noble Baronesses, Lady Drake and Lady Sherlock, referred in previous debates.

The pensions industry has two significant areas of concern about the conversion legislation: first, how survivor benefits must be provided by the scheme once the GMP has been converted, and whether survivor benefits themselves can be converted. Many pension lawyers argue that it is currently unclear exactly how the conversion legislation applies to people who are survivors at the time of the conversion, as well as to the actual earners. Secondly, the pension industry has some concerns as to who exactly needs to consent to a GMP conversion exercise being carried out. The legislation in the 1993 Act specifies “the employer” in relation to the occupational pension scheme, but the identity of this entity may be uncertain given that 30 years may have elapsed since the GMP was accrued.

The Bill before us today responds to these calls from the pensions industry to bring clarity to the GMP conversion legislation. It addresses all of these points and also includes a further amendment requested by Her Majesty’s Revenue & Customs, which saves time and money for both pension schemes and HMRC.

I will speak first about the changes to how the conversion legislation treats survivor benefits. This Bill amends the Pension Schemes Act 1993 to make it clear that the conversion legislation can be applied to someone who is a survivor at the time of the conversion. The Bill also removes the existing legislation setting out what GMP survivor benefits are to be paid when a member’s GMP has been converted, and replaces it with a power for the Secretary of State for Work and Pensions to set out conditions for these benefits in regulations. I today reiterate what my fellow Minister at the Department for Work and Pensions said in the other place: the Government will consult fully on the drafting of these regulations.

These changes are important—survivor benefits provide a crucial source of income to widows, widowers and survivors of civil partnerships. To many people, the knowledge that their surviving spouse or civil partner will receive a portion of their pension is hugely reassuring. It is therefore vital that pension schemes are absolutely clear how survivor benefits must be treated when GMPs are converted, and what survivor benefits must be paid after conversion has been carried out.

Turning to the pensions industry’s concern about how to identify “the employer”, the Bill removes the term “the employer” and replaces it with a requirement for “each relevant person” to consent before a GMP conversion exercise is carried out. Relevant persons will then be defined in regulations.

Finally, both the administrators of occupational pension schemes and officials in HMRC will be delighted to see that the Bill removes the requirement to notify HMRC when a scheme converts its GMPs. In 2019, HMRC published guidance for formerly contracted-out schemes, which made it clear that it no longer required schemes to notify it if GMP conversion had been carried out. However, because this is still a requirement of the Pension Schemes Act 1993, many schemes do still submit this information to HMRC, despite HMRC having no use or need for it. I should be clear at this point that the notification requirement in the 1993 Act did not function as a check by HMRC that a scheme had carried out GMP conversion correctly, or indeed at all; it was simply a notification of facts, which is no longer needed by HMRC.

I shall sum up why Her Majesty’s Government support the Bill. It is with real pleasure that I am able to give the Government’s backing to the Bill that my noble friend Lady Redfern has brought before us for discussion today. It is another significant step in clearing the path for schemes to meet their legal obligation and to equalise for the effects of GMPs. It will be welcomed by the industry, pension scheme trustees and of course the members who stand to benefit from the equalisation of pension benefits.

Some excellent points have been made in this debate, and I am immensely grateful to noble Lords for their interest and insights. Again, I am very sorry that Lord McKenzie is not here today to be part of this debate and see this Bill go through.

I shall deal with some of the specific points raised by noble Lords. The noble Lord, Lord Davies, asked why there is no requirement for consultation with members. When the trustees of a scheme decide to use GMP conversion to convert GMPs into ordinary scheme benefits, they are required to take all reasonable steps to consult in advance the people whose GMPs will be converted. The noble Lord asked about government guidance. We will revisit the guidance following the passage of the Bill and update it to reflect recent developments, including this legislation.

I wholeheartedly agree with the noble Baroness, Lady Wheatcroft, about equality going both ways. That is something that in my role as Minister for Equalities I intend to do. She asked, quite understandably, why it has taken so long to get to this position. The Government have been clear that, in light of the Barber judgment of 17 May 1990, occupational pension schemes need to equalise pensions accrued from that date to take account of the unequal effect of guaranteed minimum pensions. The High Court judgment in 2018 put beyond doubt that occupational pension schemes must equalise pensions to address these inequalities.

The noble Baroness, Lady Wheatcroft, raised the issue of the content of the survivor benefit regulations. The honourable Member for Rutherglen and Hamilton West’s Bill generously gives the Government the ability to set out in regulations the details of how survivor benefits will work for the surviving spouses or civil partners of people with guaranteed minimum pensions. The Government are aware of how important survivor benefits can be, as I have said. We will therefore work with the pensions industry on the details and then consult on the draft regulations. The noble Baroness asked how many people are affected. I can confirm that there were around 8 million people with contracted-out memberships at the final count in 2015.

The noble Baroness, Lady Drake, asked what the implications are for members in PPF assessment or those who might go in. I thank her for raising the question of whether there are any implications for schemes going into the Pension Protection Fund, and I will write to her and place a copy of the letter in the Library.

The noble Baroness, Lady Drake, asked whether the Bill would give schemes the legal certainty that they have been seeking in order to enable them to use GMP conversions to meet their equalisation obligations. The Government are confident that the Bill and the regulations that will be made if it is passed will address the concerns that the industry has raised. It will give the schemes the certainty that they have been seeking.

We should give our best wishes to the noble Baroness, Lady Sherlock. I will confirm to her that her colleague, the noble Baroness, Lady Merron, has done an admirable job in representing her.

The noble Baroness, Lady Merron, asked about the tax impacts and what HMRC is doing—specifically, when will HMRC provide guidance on the tax position? HMRC will publish supplementary guidance in the coming weeks on the tax implications of conversion as well as highlighting to industry where tax issues could arise for certain types of member. HMRC is working with industry, DWP and Her Majesty’s Treasury to determine the appropriate outcome and treatment for those affected by conversion as well as the scope and timing for any legislative changes.

The noble Baroness asked me if we could get the Bill through and what it would take. It would take the Bill having its Second Reading approved and no amendments being tabled. That is why it is important that I and my colleagues work hard, in the short period we have, to ensure that all questions are answered. As to that, I give the undertaking, which I have given on numerous occasions, that we stand ready and the door is open to do that in the time available.

The noble Baroness, Lady Merron, asked if the Bill would have an impact on those who have transferred out. Trustees will need to revisit past statutory transfers and assess what steps they should take in relation to members who transferred their benefits out of the scheme without being equalised for the effect of the GMP rules. Trustees of occupational pension schemes will have to make their own decisions, and different schemes are likely to have different approaches. Trustees will need to take advice on how they should approach unequalised transfers.

The noble Baroness asked whether the Bill should have covered the position on members in the PPF or who might go in. I have given the answer to the noble Baroness, Lady Drake, that we will write, and the noble Baroness, Lady Merron, will receive a copy of that letter.

The noble Baroness, Lady Merron, asked about reaching the statute book, and I think I have answered that question. She asked what consultation there had been with the industry. I am happy to confirm that we have had extensive consultation with the industry through the GMP equalisation industry and government working group.

Ensuring that no one loses out on pension income as a result of the complicated rules around guaranteed minimum pensions is important, and this Bill will help occupational pension schemes to better achieve that.