Clause 204 - Form of protection

Pensions Bill – in a Public Bill Committee at 3:30 pm on 18th March 2004.

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Photo of Kevin Brennan Kevin Brennan Labour, Cardiff West 3:30 pm, 18th March 2004

I beg to move amendment No. 310, in

clause 204, page 129, line 8, leave out from 'scheme' to end of line 12 and insert

'is certified by the actuary to be broadly comparable to the occupational pension scheme referred to in section 203(1)(c)'.

Photo of Mr James Cran Mr James Cran Conservative, Beverley and Holderness

With this it will be convenient to discuss the following:

Amendment No. 311, in

clause 204, page 129, line 25, at end insert—

' ''actuary'' means the actuary appointed by the trustees of the scheme referred to in section 203(1)(c) pursuant to section 47 of the Pensions Act 1995'.

Amendment No. 312, in

clause 204, page 129, line 36, at end insert

'but in the case of contributions payable by the employer shall not be less than the contributions paid by employers into the scheme referred to in section 203(1)(c) and in the case of contributions payable by members shall not be more than the contributions paid by members into the scheme referred to in section 203(1)(c).'.

Photo of Kevin Brennan Kevin Brennan Labour, Cardiff West

My hon. Friends will be aware that my amendments refer to the Transfer of Undertakings (Protection of Employment ) Regulations 1981, S.I. 1981, No. 1794, which I am thankful to say that someone shortened to the acronym TUPE, and which has become an important part of the discussions about what happens to workers when they are transferred to another employer.

I welcome the protection that the Bill introduces. The purpose of my amendments is to probe my hon. Friends the Ministers as to why the Government are not going a little further. The amendments would provide full protection for the value of pension scheme benefits after a transfer rather than insist only on the level of pension provision outlined in clause 204.

For final salary schemes the test would be that the actuary of the old scheme would certify that the schemes of the new employer were of a quality comparable to the scheme of the previous employer. For money purchase schemes the requirement would be that the employer should pay no less and the employee no more than under the old company scheme. The Bill proposes a reference scheme standard for final salary schemes. In a way, that is the minimum standard for contracting out, and below the quality of the typical final salary pension scheme. The Bill also leaves the door open to the employee being asked to pay an unreasonably high contribution.

Having schemes of comparable quality is the formula applied in the public sector when there are transfers as part of Government policy. The debate about pensions has highlighted the fact that we have a two-tier system for pension schemes as between the public sector and the private sector. Those in the public sector are thoroughly protected and have security, and the promise of security, in retirement. That is a promise that we tend to make to everybody—or rather, we tend to say that that is the aim of pensions policy. We should therefore extend that protection as far as is practically possible—I know that the Minister may have some practical objections—to all workers, whether or not they are employed by the Government.

For money purchase schemes, the Bill requires an employer to provide a contribution that matches any employee contribution up to 6 per cent. There is some concern that that could lead to the employer paying less and the employee paying more after a transfer. I would be grateful to hear from the Minister why the Government have not gone that step further to provide protection greater than the welcome protection that is being introduced under the Bill.

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne

By speaking to these amendments, I might be able to obviate the need for a stand part debate. I will, of course, attempt to remain in order at all times.

Representing Eastbourne, I know a fair bit about TUPE. Eastbourne was the place that furnished the cause célèbre involving the Eastbourne dustmen who were originally employed by the borough council and 10 transferred to a private provider. If I remember rightly, the case went all the way to the House of Lords, and the dustmen won. Hence Eastbourne can to a large extent be regarded as the birthplace of TUPE. The proposals go further than TUPE has ever gone, and extend the principles to private or occupational pensions.

I want to probe Ministers on a few points, not least those raised by the Library briefing, which is particularly good on this aspect. As I understand the position, when the transferor company, the original employer, has provided either a defined benefit or a defined contribution scheme, the new employers have to provide the following: an occupational DB scheme that satisfies the reference scheme test, or any alternative standard that may be prescribed—under regulations, I assume; an occupational DC scheme to which the employer makes a ''relevant contribution''; or an employer ''relevant contribution'' to a stakeholder pension scheme of which the employee is a member. The ''relevant contribution'' will be defined in regulations. Again, I am not holding my breath. I assume that the draft regulations will not be available for our debates. However, it has been suggested that the transferee will have to match the employee's contribution up to a maximum of 6 per cent., as set out in the explanatory notes.

As the Library briefing points out,

''It is not clear whether acquiring employers will have to provide this level of contribution even if the transferor's contribution was lower.''

I am sure that the Minister will want to deal with that.

The Library briefing also says:

''As the consultation on extending TUPE . . . has progressed, so the degree of protection on offer from the Government has reduced. One of the four options under the 2001 consultation document was that 'if the transferor offered either a contracted-out salary related scheme . . . or a contracted-out money purchase scheme . . . then the transferee would be required to offer a scheme of the same type'.''

There was no mention of the stakeholder option.

One of the other two options in the 2002 Green Paper was that when the old employer had offered a DB or a DC scheme, the new employer, too, would have to offer one of those schemes, with a comparable contribution. The second option was a group personal pension or a stakeholder pension. Again, the Library briefing states:

''In the event, the Government is supporting the simplest option which imposes the lowest costs on transferee employers. Many consumer representatives argued strongly for a more generous approach during the consultation.''

The views of the TUC and OPAS bear out that view.

It is also worth noting the slightly different point of view of the CBI, which is not at all happy with the

maximum figure of 6 per cent. It is opposed in principle to the extension of TUPE to cover occupational pensions, but it points out that if the Government are determined to do that,

''it is important that the extension of TUPE to occupational pensions is accomplished in a way that is workable for business so that it does not undermine transfers by imposing excessive costs and is not used as a method to ratchet up levels of private sector pension provision. Finally it must be simple to understand and administer, avoiding any need for actuarial certification.''

I would be grateful if the Minister dealt with that specific point. The CBI goes on to say:

''the minimum for employer contribution should be set at the 3 per cent. level—not the 6 per cent''.

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne

I have no settled view of the figures.

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne

We have not heard the Librarian's view—we have heard differing views expressed about the percentages. If the major employers organisation in this country is unhappy with the proposals, the Minister has a case to answer on whether the Government took the trouble to consult it properly. I am passing on its concerns. Does he think that they are groundless? They clearly have not featured in the Government's conclusions. To repeat, the CBI thinks that 3 per cent., not 6 per cent., should be

''established under the stakeholder rules as giving exemption when made to a Group Personal Pension.''

I will be fascinated to hear what the Government have to say about the CBI's position.

It is instructive to look again at the famous regulatory impact assessment. It comes up with the figure of about £5 million in any one year, and that is on the basis that between 145,000 and 175,000 employees will be affected by such transfers each year. That is an interesting figure, as it is rather higher than I would have expected. Of those, an estimated 40 per cent. will be eligible to join an occupational pension scheme. The regulatory impact assessment suggests that the costs reflect the costs of pension provision or contributions only in the first year after transfer, because the new protection is explicitly designed to protect only workers who would otherwise lose pension rights by reason of transfer. Continuing provision will be a matter for the new employer, and that is the basis for the calculation. It is of some interest that the RIA takes the view that a large number of employees will take advantage of the provisions when they are introduced.

Photo of Steve Webb Steve Webb Shadow Secretary of State for Work and Pensions

I echo the comments of the hon. Member for Cardiff, West in warmly welcoming the extension of TUPE to cover occupational pension provision. It is right and long overdue. I have a lot of sympathy with this group of amendments because they suggest that the pension rights that people acquire in a new firm should be strictly comparable with what they had before. That is in the spirit of what TUPE is supposed to be about.

I have a technical question that I want to flag up now to give the Minister a chance to seek inspiration. Those rules apply on the first transfer of employer, but employees who are transferred are often transferred again. For example, if the bin contracts are taken over by a new contractor, the employee will be transferred from the first to the second employer. Will the same level of protection apply at each stage, or could it get diluted? I have a constituent who is a pension fund trustee, and she occasionally sends me difficult e-mails. One of the concerns that she has raised is that although the protection on the first transfer might look fine and dandy, when employees move on to the second employer the waters might be muddied. I want the Minister to put on the record how those situations will be treated.

I was interested in the comment of the hon. Member for Cardiff, West that the Bill is imposing a lower standard in the private sector than in the public sector. I would be interested to hear the Minister's response to that, because I would not have thought that we wanted to do that.

I have two questions about the 6 per cent. figure. Where has that figure come from? Is it based on an estimate of how much people need to save to avoid poverty in old age, or an average estimate of what current schemes offer? I do not agree with the CBI that the figure should be 3 per cent. However, at least that figure is in the existing regulations in connection with stakeholder schemes.

If the scheme that the worker starts in is non-contributory, the requirement for the next employer to match employee contributions up to 6 per cent. starts to become onerous for employees whose previous scheme did not require them to contribute anything, because the employer was putting all the money in. I accept that that is probably not common, but it is possible. In those circumstances, does the employee effectively lose a valuable pension right because the employer is now required only to match contributions, but the employee was not even making them in the first place?

Photo of Malcolm Wicks Malcolm Wicks Minister for pensions, Department for Work and Pensions

I welcome the support of my hon. Friend the Member for Cardiff, West and the hon. Member for Northavon for the broad thrust of what we are trying to achieve. This is an important clause. It ensures for the first time that employees can benefit from a statutory minimum standard of pension protection following a business transfer, and it details the options available to the transferee employer to deliver this requirement.

I had previously thought of Eastbourne in terms of the bracing air of Beachy Head, and my knowledge of history was deficient in that I did not know that it was the home of TUPE. Given that, I thought that the hon. Member for Eastbourne might be the champion of TUPE. We heard the Librarian's analysis, which was interesting, and the CBI analysis, but we did not hear at what level he thought the protection should be pitched; there may well be an opportunity for him to tell us that later.

Amendments Nos. 310, 311 and 312 relate to the form of pension provision, that the transferee

employer—that is a terrible term; I prefer ''the new employer''—must provide to transferring employees. They would still provide transferee employers with the option of providing a salary-related or money purchase occupational scheme, or a stakeholder scheme. However, if the transferee employer chooses to offer a salary-related occupational pension scheme, amendments Nos. 310 and 311would require the scheme offered by him or her to be broadly comparable to the one offered by the transferor employer. That addresses the argument of my hon. Friend the Member for Cardiff, West. Such comparability is to be certified by an actuary, and that would apply even where the transferor's scheme was a money purchase scheme.

Amendment No. 312 would specify the level of contributions to be paid if the transferee employer chose to set up an occupational defined contribution scheme or a stakeholder scheme for transferred employees. Contributions would be as follows: for the transferee employer, no less than those paid by the old employer, and for members, not to be required to contribute more than members of the old scheme.

I have been asked about consultation. We did consult on our pension proposals. Many responses to that extensive process, and to an earlier DTI consultation on TUPE, have set out the difficulties of comparing different types of pension scheme. Requiring actuaries to compare money purchase and salary-related occupational pension schemes would impose further problems.

In defined benefit schemes, the employer contribution rate depends on its funding position and is determined in relation to the entire membership, not particular individuals. For example, it could be higher in a scheme with more old members and pensioners, lower in a scheme with younger members. Where schemes are particularly well funded, employers may be able to reduce their contribution rates, so there is no necessary read-across from what an employer contributed to a DB scheme at any particular time to what a transferee employer should contribute to a DC or stakeholder scheme.

Therefore, we have opted in the clause to set a statutory minimum standard to apply to all transfers. If the transferee employer chooses to offer a salary-related occupational scheme, it must meet the reference scheme test, which is the statutory minimum requirement for contracted-out schemes. A scheme must meet the test to be allowed to contract out. The reference scheme test relates to a scheme that provides entitlement to a pension at 65, continuing for life at an annual rate of one 80th of average earnings of the last three years of service multiplied by the number of years' service. The scheme must also provide benefits to the widow or widower whether the earner dies before or after the normal pension age.

If the employer chooses to offer a money purchase scheme, the requirement is, as we have heard, for matched 6 per cent. contributions even where the transferor offered a defined contribution scheme with an employer contribution of less than 6 per cent. The hon. Member for Northavon asked why we chose 6 per cent. I do not pretend that there is an exact

science, but there is some empirical context to that figure. Research published by the Government Actuary and by our Department indicates that the average contribution to a defined contribution scheme by employers is between 5 and 6 per cent.

I do not have the answer on second transfers readily to hand. I hope that my hon. Friend the Member for Cardiff, West and other Committee members will accept my offer to write to them. I have not had a yes or no wave of enthusiasm. The answer does not occur to me at present. Although the point is important, I am afraid that I will have to write. I will certainly do so.

I respect where my hon. Friend the Member for Cardiff, West is coming from. The thrust of his policy proposals is that, although he welcomes what we are doing, he does not think that we are doing enough, and that the process should be absolutely managed. I think that we want to avoid an approach that could prevent mergers and acquisitions, or increase costs so much that employers would be encouraged to withdraw pension provision. A company in difficulty may often be saved by an acquisition. Pitching the pension liability at too generous a level could stop that happening, with debilitating consequences for the employment opportunities of the workers.

In that, as in other aspects of the Bill, we have sought to get the balance between protection and costs right. That is why in parts of the Bill—this may be one such part—we have been conscious of the costs being imposed. We do not want to go for such wonderful pension provision that it threatens employment, or the future of pension schemes. That is the balance that we are trying to strike.

I suppose the only substantial answer to the important question about the difference between TUPE in the public sector and TUPE in the private sector is that by definition, the state is the employer in the public sector. It can make judgments about such costs. The situation is altogether different in the private sector, even though the state regulates its arrangements. My hon. Friend may wish to continue this argument outside the Committee, but at least he acknowledges that the measure is a notable social advance for this important group of workers.

Photo of Kevin Brennan Kevin Brennan Labour, Cardiff West 4:00 pm, 18th March 2004

It is a notable social advance, and we could debate at length the nature of the risks that workers, employers and shareholders should have to accept with pensions. My intention in tabling the amendment was to stress my strongly held view that it is essential that people have confidence in their pensions, and the risk to the worker be minimised. After all, the purpose of the pension is to provide security, and the governing party to which Labour Members belong was founded to provide security for workers.

The Bill is a welcome step forward, and I shall not prolong the debate at this stage. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 204 ordered to stand part of the Bill.

Photo of Mr James Cran Mr James Cran Conservative, Beverley and Holderness

It would be helpful for me to know whether any of the Opposition parties want stand part debates on clauses 205 to 208.

Photo of Mr James Cran Mr James Cran Conservative, Beverley and Holderness

Fine. I will take the clauses separately.

Clause 205 ordered to stand part of the Bill.