Clause 212 - Annual increase in rate of certain

Pensions Bill – in a Public Bill Committee at 4:15 pm on 18th March 2004.

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Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne 4:15 pm, 18th March 2004

I beg to move amendment No. 293, in

clause 212, page 140, line 37, at end insert—

'(5A) After subsection (6), insert—

''(7) Regulations may provide that this section does not apply to schemes falling within a prescribed class or description, or applies to them with prescribed modifications''.'.

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

With this it will be convenient to discuss New clause 7—Annual increase in rate of certain personal pensions—

'Sections 162 and 163 of the Pensions Act 1995 (c26) (annual increase in rate of certain personal pensions) shall cease to have effect.'.

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne

The amendment and the new clause are linked. They seek to deal with what I understand to be quite a technical, narrow, but nevertheless important issue. This will not be an occasion where there will be no other matters that I want to raise in the clause stand part debate.

The amendment and the new clause relate to money purchase schemes, as opposed to defined benefit or final salary schemes. As I am informed, it is a question

of possibly unnecessary complexity—although one must accept that in this field there is much necessary complexity—and whether there is an unintended consequence in the drafting. In as brief a way as possible I will take hon. Members through the point.

It seems that someone retiring from a money purchase scheme after April 2005 and who has been a scheme member since before April 1997, might need to buy six different types of annuity with what is effectively one pot of money. As my briefing says with admirable understatement, that is confusing and complex for consumers to understand and there will be costs attached to that complexity. One way of overcoming the requirement to buy different types of annuity is to transfer the fund to a personal pension. Those with larger funds will often get access to the advice needed to make that transfer, but those with smaller funds will not and will therefore be the main sufferers from the proposals. As there is no objection to such transfers in principle, there cannot be an objection to the amendments.

The second problem with indexed annuities is that they generally do not represent good value for money compared with level annuities. The current version of indexation—limited price indexation as it is known in the trade—requires pensions built up from 1997 to be increased in line with inflation up to 5 per cent. That represents full inflation linking in the current market on short and long-term inflation expectations. In other words, an LPI annuity costs the same as one that provides full retail prices index protection.

The people briefing me have obligingly produced figures based on the average private money purchase annuity pot of £23,000. To receive the same total payments from an RPI annuity as from a level annuity, a 60-year-old male must live to the age of 94. Sadly, the average 60-year-old male in the UK lives only to the age of 79. One of the changes that the Bill introduces is a cap on LPI annuities at 2.5 per cent. rather than 5 per cent. That should reduce the break-even age to 90, but that is still 11 years longer than normal life expectancy.

There is also a sub-issue of whether the problem affects the public finances. With the growth in means-tested benefits, a reduction in real private pension incomes should result in an increase in state-funded top-ups for the group that we are discussing. However, it is an issue of complexity and we are trying to get to the bottom of the intentions behind the proposals.

I should explain that the issue applies in a different way from defined benefit or final salary schemes. In those cases, compulsory indexation is of real value to the employee as the initial benefit is fixed, unlike in a money purchase scheme. Although the different bases for indexation still make administration more complex, we are not suggesting that indexation is removed from defined benefit pension schemes. I hope that that is reasonably clear. It is a genuine attempt by those in the industry, particularly in DC schemes, to probe the exact intentions of the provision.

[Mr. Jim Cunningham in the Chair]

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

As we have heard, amendment No. 293 would insert a regulation-making power at the

end of clause 212. It would allow regulations to provide that annual indexation increases under section 51 of the 1995 Act should not apply to schemes of a prescribed class or description, or should apply with prescribed modifications. Without further amendments to clause 212 the amendment is technically flawed, but I will concentrate on the argument behind it in a moment.

The Opposition's proposal to introduce new clause 7 would remove the mandatory indexation of contracted-out rights in personal pension funds. It would apply to all scheme rights built up since 1997 that have not yet been used to buy an annuity by the time the changes come into force.

Clause 212 eases the limited price indexation requirement in occupational pension schemes by reducing the existing cap on an annual rate of increase from 5 per cent. to 2.5 per cent. for future benefits. For defined benefit occupational schemes, reducing the cap on mandatory indexation will balance the cost of the levy imposed by the pension protection fund, which we shall come to soon, while continuing to provide protection against the worst effects of inflation.

The Government accept that there are different arguments and legitimate concerns about the implications of changing the mandatory cap on limited price indexation for defined contribution schemes. First, in contrast with defined benefit rights, in DC schemes the cost of indexation falls on the member, not the scheme. Indexation affects the annuity purchased, not the size of the pot, so that the starting pension is lower than would otherwise have been the case.

Secondly, the schemes are not subject to the protection afforded by the pension protection fund, which is reserved for defined benefit schemes. Thirdly, the change proposed under the Bill would add administrative complexity and require people to purchase more separate annuities to meet the different requirements on each tranche of benefits. Those are fundamentally different issues from those affecting defined benefit schemes.

The Government are therefore prepared to consider such issues in light of responses to earlier consultations on the proposals and we shall bring forward further proposals in due course. I would welcome a wider debate about defined contribution schemes and, in particular, how we can promote a better informed understanding of the choices that individuals need to make about annuities. On that basis and given my assurance, I hope that hon. Members will agree to withdraw the amendment and not press new clause 7 to a Division.

[Mr. James Cran in the Chair]

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne

I am grateful to the Minister for that response and his acceptance that a serious issue must be tackled. Indeed, what he said might also shorten some of the stand part debate. However, my

enthusiasm and gratitude for his response is somewhat tempered by the matter of when—and if—the Government will table amendments to the Bill or whether the provision will be dealt with differently. Clearly, in all sorts of ways there might be differences between DB and DC schemes, as the hon. Gentleman has acknowledged, and different approaches need to be taken in legislation. My narrow and selfish concern is whether such approaches will be taken in the Bill and, if so, when. On that basis, however, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Sally Keeble Sally Keeble Labour, Northampton North

I beg to move amendment No. 224, in

clause 212, page 141, line 2, leave out 'lesser' and insert 'greater'.

The amendment links in with the different figures for the protection of pensions and future increases. It would increase the level of pensions that people will receive in later years. It is a probing amendment. I understand the Minister's point that we have to balance protection-related costs. However, under the clause, the balance is very much in terms of the costs rather than the protection of future increases for pensioners.

The amendment follows on from our discussions this morning about women pensioners and the need to tackle poverty among them. I draw attention to the consequences of a system that reinforces the poverty of women pensioners and which, in particular, takes away some of their financial independence. We also talked this morning about the changing circumstances of pensioners. There are probably more women working full-time and more who have equal pay and equal access to jobs. There is greater awareness of the need for financial independence. As was said this morning, more women are now taking out private and occupational pensions, and some of them are making better pension provision than men.

It is particularly ironic that, just as women are moving into occupational, private, personal and stakeholder pensions, the Bill limits the increases that they receive in future years. The amendment is very much tied up with the others that I have tabled. It would ensure that women received greater increases and that their incomes in retirement were protected. Limited price indexation affects occupational pension schemes and also elements of private and stakeholder schemes. I understand that that measure was introduced in 1995 by the Conservative Government and applies to rights that accrue post 1997. It limits pension increases to 5 per cent. or RPI, whichever is lower. The Bill proposes that the limit should be set at 2.5 per cent., which would, if my understanding is accurate, limit the future increases that people would get.

My amendment would replace that measure with increases linked to the RPI, or increases in average earnings. It is intended to find out the thinking about the level of increases that people get and why the Government have plumped for these figures without any indication that the 2.5 per cent. limit would apply to higher pensions, rather than across the range of earnings, and would hit older pensioners in particular.

The helpful Library note illustrates the differences between the 2.5 per cent. and the 5 per cent. limits in weekly income in retirement. For somebody who has been retired for 15 years that would be £10 a week, and if they had been retired for 20 years it would be £15. The impact on people would be much greater. It would not just be about the difference between those two limits; it would be a choice between 2.5 per cent. and whatever was the inflation rate. People would feel that impact.

The reason why that impact would particularly affect women, and why I tabled the amendment to change the balance of what people get, is that women live longer. The Library note says that on average women live for three years longer than men. However, with due respect to the Library, the figures are somewhat different. It would take a long time to look through all the relevant papers. However, the Budget papers from yesterday include a helpful graph illustrating the age and gender profile of the population, and showing that at the age of 80 there are twice as many women as men. The impact of what looks like a small change is quite substantial for women; it will not be felt now, but in about 20 years.

It seems that we have got the balance between the protection for pensioners and the costs to the pension fund slightly skewed, particularly since that will be in primary legislation and will therefore be harder to change. It puts a very low cap indeed on pension increases in the future. It is right that inflation is currently low, we have the symmetrical target and policies are in place to keep inflation low. However, to say that that will apply for 20 to 30 years—[Interruption.] Well, I am not sure that anyone has a crystal ball. Our party has been able to control inflation and provide the economic climate that we have now. However, in 20 to 30 years the difference in ages may be even greater than 18 years. Given the backlash that we experienced over the changes to index linking of the state pension and the impact that that had on the erosion of people's income—people who felt intensely bitter about that—I wonder whether there should be a more flexible mechanism to deal with future pension increases, bearing in mind that there is a big shift into different types of pension provision. For the first time, women are paying into personal, stakeholder and occupational pension schemes. It would be sad if women, having got a greater level of financial independence and the right to independent pension provision, found 20 or 30 years down the line that they were not receiving the sort of income in old age—particularly frail old age—that they thought they would, due to a small rule change now.

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne

I shall speak on the amendment, and therefore cut out one of the issues that would otherwise arise during the stand part debate. The hon. Lady makes some telling points. There will be some resentment that as a result of cutting the LPI, occupational pensions could lose value in years to come.

Inflation will not necessarily remain at recent levels. We all remember the disastrous years of a previous Labour Government. We may become used to double-digit inflation; who can look that far ahead? We have

to look that far ahead because we are dealing with pension schemes. There is a real problem in the clause. It is informative that even in this supposedly low inflation environment, in December 2003 and January 2004, inflation was running at 2.8 per cent. and 2.6 per cent. respectively. Those figures are not vastly different from 2.5 per cent., but they are higher.

It would be particularly tough on pensioners if in one year, 10 years or 20 years, inflation were running in double digits again. If the public were foolish enough to re-elect a Labour Government after a sustained period of Conservative Government, we could return to the banana republic finances that produced such levels of inflation. None of us knows with any great certainty what will happen, but locking a reduction into the pensions increases will be seen as unfair by many people.

The good old regulatory impact assessment is instructive. I do not know on what basis the figure is used, but it makes an assumption of an average long-term inflation rate of 2.5 per cent., with a 1.5 per cent. fluctuation either way. It concludes that the cut in the LPI will reduce total pensioner income by just less than 2 per cent. Finally, it says:

''In light of the additional funding costs that schemes will incur . . . it is estimated that around 75 per cent. of DB . . . schemes would take this option up—resulting in actual aggregate savings of approximately £370 million a year, if applied to all future accruals''.

That is a not insubstantial amount, based on that assumption. I do not know how valid the assumption is. Economists seem quite capable of getting most predictions wrong. Perhaps the Minister will explain to me whether those who prepare the RIA make the assumptions up themselves—or is a handle supplied to them by the Department?

Photo of Vera Baird Vera Baird Labour, Redcar 4:45 pm, 18th March 2004

I shall be brief. I support my hon. Friend the Member for Northampton, North (Ms Keeble). I have added my name to the amendment for the reasons that she set out, and in particular because of the emphatically clear point that she made about the differential impact that the provisions are likely to have on women, who live longer than men. I have no further arguments to add to those she has made, but I raise two queries, which are essentially encapsulated in one.

As I understand it, the provision is not retrospective. I am not saying that it would ever be likely to take away any increases above 2.5 per cent. that had already been added on. Currently accrued pension rights will continue to increase on an annual basis at whatever is the lowest of RPI and 5 per cent. If RPI is above 2.5 per cent., that will mean that they will increase at a rate that is more than the rate that applies to pension rights accrued after the day that the provision comes into force. If that is right, that means that, in many situations, there will be two pots, increasing at different rates. I want to be sure that I have understood that properly.

At a number of points in the Bill, as other members of the Committee have pointed out, the Government have given themselves the power to make regulations in order to change the terms of a provision in the Bill.

Is this not an ideal situation for including just such a clause? Members in all parts of the Committee would be likely to welcome that. It would not commit the Government to changing their view, but would leave them with a reserve power should inflation start to increase at a more rapid rate, and would enable them to ensure that there is not the injustice that we now fear.

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

The amendment goes to the heart of the clause. It specifies what the level of inflation protection should be. The motivation behind the amendment is absolutely right. We know that among the pensioner population the poorest tend to be women and the most elderly, and the people who lose out most through inadequate inflation protection are precisely the most elderly because pensions erode over a long period. I am absolutely with the spirit of the amendment. However, if I understand the letter of it, it would mean that protection would be whichever was greater of 2.5 per cent. and actual inflation.

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

Well, my understanding is that the clause as it stands states that protection shall be the lesser of—

Photo of Sally Keeble Sally Keeble Labour, Northampton North

The amendment substitutes ''greater'' for ''lesser''. The full series of proposals was about taking out the 2.5 per cent. and simply linking increases to RPI or average earnings.

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

All I would say is that amendment No. 224, which we are debating in isolation, would appear to refer to any inflation level. That would be an unacceptable risk to schemes, which is why I would have trouble supporting it. However, I absolutely agree with what the amendment is driving at.

The key point is that the Government have said that on one hand they will put a new burden on company schemes in relation to the pension protection fund, but on the other they will raise the burden from schemes in relation to indexation, which is what we are dealing with at the moment. The idea is that those things will balance each other out, or make life a bit easier for company schemes. However, that depends on how much benefit the provision to relax limited price indexation will be to schemes. I am sure that the Minister would accept that many schemes have scheme rules that require indexation protection that is better than 2.5 per cent. Under the scheme rules, those schemes will not be able to take advantage of the relaxation of price indexation. Will the Minister reassure us that the estimated saving to schemes—I think it was £370 million—takes account of the details of scheme rules and is based on an analysis of those rules and the extent to which schemes will benefit? If some scheme rules do not allow the scheme to go below inflation—let us say it was 4 per cent. or thereabouts—the estimate of the reduced burden on schemes would be inaccurate. I hope that the Minister can clarify that.

Even the regulatory impact assessment allows for the fact that inflation, even when it averages 2.5 per cent., can go either side of that: down to 1 per cent. or

up to 4 per cent. That fact that it is 1 per cent. in a given year and 4 per cent. in another does not mean that the effect is offset, because this is not an average process. Once someone has had a bad year, they have lost that increase for ever. If inflation is 1 per cent. one year, people get their 1 per cent.; they do not get 2.5 per cent. If it is 4 per cent. the next year, people lose 1.5 per cent. of their pension, in real terms, for ever. Although on average inflation might be 2.5 per cent., even in the fairly static sort of world that we live in there will be fluctuations, and the bad years are never recovered by the good years, so that people's real living standards will decline year after year.

My only other observation is that the regulatory impact assessment tries to say, ''Well, it's only a couple of per cent. What's that among friends?''—that is not quite the language of the regulatory impact assessment, but that is the implication. However, 2 per cent. of income over retirement is £7,000. The regulatory impact assessment puts ''£7'', and at the top it states that the figures are in thousands. That is £7,000 of retirement income. I accept that over the course of a retirement, hundreds of thousands of pounds are involved. However, this would still cost the typical pensioner £7,000.

The other question is whether the regulatory impact assessment understates the impact of the change to indexation because it takes as its average the average of all retired occupational pensioners, whereas the people that it will affect most are just coming into retirement. I think that I am right in saying that the £70 is an average over zeros. I think that I am right in saying that the £70 in the regulatory impact assessment is the average for the entire retired population.

However, the typical figure for the occupational pension of someone newly retiring would be much higher: the impact would not be £7,000, but quite a bit more. Even if the average does not include the zeros, it must be the case that the figure will be much lower if all retired people on occupational pensions are taken into account, rather than the people coming into the system. As the hon. and learned Member for Redcar (Vera Baird) said, the people coming into the system will bear the brunt of the proposals.

Although I have some technical concerns about amendment No. 224, it raises grave concerns and I have great sympathy for the motivation behind it.

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

This has been a useful debate about a complex question and a fundamentally important issue. As we have heard, the amendment tabled by my hon. Friend the Member for Northampton, North would affect the indexation of defined benefit and defined contribution occupational pension schemes. She will have heard what I said earlier about our thinking on defined contribution pension schemes.

The amendment would remove the new indexation cap of 2.5 per cent. that we propose to introduce for the future. Instead, it would set a minimum indexation rate of 2.5 per cent., capped at 5 per cent. It says in my notes that the amendment is technically flawed; I can hardly believe that. [Interruption.]

Let me deal with the substance of the amendment. Clause 212 would ease the limited price indexation requirement in occupational pension schemes by reducing the cap from 5 per cent. to 2.5 per cent. for benefits built up on or after the date at which the change comes into force. Of course, schemes would be able to retain a 5 per cent. indexation rate if that were wished; some schemes intend to do that.

My hon. Friend suggests a move in the opposite direction to that of our proposals. I will try to explain why in our judgment that would not be sensible. Proposals to reduce the indexation cap will balance the cost of the levy imposed by the pension protection fund.

I will go into some detail about this issue. I am not trying to be patronising; I found some of this difficult to understand. Let me explain my understanding of the issue to Committee members. When trustees are planning how much money they need to hold to meet their schemes' future pension payments, their actuary needs to make assumptions about factors such as future salary growth, investment returns and inflation. Those assumptions feed into the actuary's calculations of the contributions needed in the future. For example, the higher the assumption made about future investment returns, the less money would need to be held now, because the money would grow faster in the future. In making an assumption about future inflation, the actuary will build into the calculations an allowance for the fact that year-by-year inflation in future will not be exactly 2.5 per cent. In some years it will be more, in other years less.

At the moment, in the years in which it is assumed that inflation will be more than 2.5 per cent., the scheme would have to pay pension increases higher than that, subject to the cap of 5 per cent. Once the reduction in the cap from 5 per cent. to 2.5 per cent. is introduced for the future build-up of pensions, the scheme would only have to pay an increase of 2.5 per cent. in those years. So after the reduction in the cap is introduced, the actuary's calculations would show that lower contributions were needed to meet the cost of pensions.

Therefore, our concern about the costs of accepting the amendment is that we estimate that the amendment would achieve the opposite of what we are trying to do. Depending on inflation, the application of the amendment could result in annual costs of around £900 million for defined benefit schemes, for the reasons that I have tried to specify. I return to the point that I made earlier. In all our proposals, we are seeking to balance our objective of bringing security back into social security in old age—hence the pension protection fund—with realism about the costs that are incurred by companies and by schemes. The actuarial reasons that I have specified make it difficult to accept the amendment.

We need to be realistic about the world in which we live when it comes to final salary schemes. Although some commentators exaggerate the trends, we know of companies that are withdrawing, either completely or for new members, from such schemes. It would be absurd for any of us to pontificate about the desirability of levels of pensions and guarantees, if it

were to drive some companies and schemes from final salary schemes to other schemes that might be less advantageous. That is my concern about an amendment that, otherwise, seems perfectly reasonable and, indeed, just.

Limited price indexation requires all occupational pensions built up from 6 April 1997 to be increased by the RPI index capped at 5 per cent. When that was introduced, it was intended only to provide a degree of protection against inflation. However, our success in controlling prices over the years means that the 5 per cent. cap has effectively become full protection. It imposes large and, on the whole, unnecessary liabilities on schemes in respect of their forward funding requirements, given the need to plan for contingencies.

Defined benefit occupational schemes already find the 5 per cent. cap a significant cost even during periods of low inflation. The amendment would result in increased costs for schemes, which would have to pay indexation of 2.5 per cent. even where price growth was below that. They would still have to plan against possible indexation rates of 5 per cent. That would mean higher costs for schemes and could have a detrimental effect on existing defined benefit schemes. It could lead to some schemes closing down.

In defined contribution occupational schemes, the cost of mandatory indexation is borne by the pensioner in the form of an index-linked and, therefore, initially more expensive annuity. I will not say more about that, given what I said about our thinking through some of the arguments presented by the hon. Member for Northavon. On that, and touching on the issue raised about women making more choices about pension schemes, I say that our earlier discussions about defined contribution schemes have a marked bearing on this issue. To answer the hon. Gentleman's earlier point, our intention is, during the Bill, to bring amendments forward on the points raised. We need to take advice before saying when such amendments will be tabled.

My hon. Friend the Member for Northampton, North said that our proposals would be bad for women. It is true that women in defined benefit occupational schemes will see a slightly higher reduction in their overall retirement income than will men. However, it is important to remember that the change will balance the cost of the pension protection fund to schemes. That will give all scheme members, including women, much greater protection of their pension rights and will encourage wider membership of pension schemes. I believe that, if asked to make an informed judgment about indexation versus security should their company crash, many women, and men too, would opt for security.

On the point about women living longer than men, and how that might adversely affect women when it comes to indexation, I counter by saying that the pension protection fund will, on average, protect women for longer than it will protect men, because of life expectancy. So there is a swing and there is a roundabout on that one. It is a complex matter. Many of the cost issues are not straightforward; they are about the long-term funding of schemes, and are technical but important actuarial points.

Notwithstanding those difficulties, I hope that my hon. Friend the Member for Northampton, North will consider withdrawing the amendment.

Photo of Sally Keeble Sally Keeble Labour, Northampton North 5:00 pm, 18th March 2004

I apologise for the inelegance of the amendment. I might have drafted it differently if I were a draftsperson and if I had realised that only a bit of it might be selected for debate. However, it has been helpful to talk through some of the issues.

I think that my hon. Friend makes a rash assumption if he thinks that people would choose a levy for a fund the benefits of which they do not yet know over what they understand is proper inflation proofing of their pension. People have a big awareness now of what happens if their pensions are not uprated each year.

What happens with women is very striking. When I first became an MP in 1997, I held quite a few pensioners' surgeries. It must be borne in mind that people have paid for private pensions for a long time, and they have had occupational pensions. Into the surgery came many desperately poor elderly women whose savings and state pensions had eroded in value. Their real problem was that they were widows aged over 80 and their pensions had not kept track with the cost of living. What happens with indexation is an important issue; people are acutely conscious of it. As the hon. Member for Eastbourne said, this is not about a difference between only 2.5 per cent. and 5 per cent. but between 2.5 per cent. and 7 per cent. or more.

If any more thought were given to being a bit more flexible about this—perhaps in the way that my hon. Friend the Minister suggested—that would be helpful. However, this is a technically flawed proposal, so I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne

In light of a couple of things that the Minister said, my remarks can be shorter than they otherwise would have been. I want to commend to the Committee the ''Action Plan on Defined Contribution Pensions'' of the Association of British Insurers. It makes several very sensible proposals, some of which I hope that the Government will take on board. As has been said, it remarks that

''the process of converting a pension fund into an annuity is far more complicated than it needs to be.''

It also states:

''Even though the PPF is not designed to protect DC schemes, this change will force many people to buy two further annuities with their DC pension.''

There is clearly an element of unintended consequences there, with all the ''confusion and additional costs.''

The ABI also offers a variety of proposals, one of which is

''that compulsory indexation of occupational DC schemes and protected rights pensions should be abolished at the earliest opportunity''

although it also accepts that indexation should remain compulsory for DB schemes because they do not depend on the size of the individual's pension pot. The Minister touched on that.

I am pleased that we shall hear more about this, but we are at the end of the second week of the Committee stage and it is not unreasonable for us to be a little more pressing than we have been with the Government. When will we see the amendments? They are likely to change the shape of the Bill considerably, but I cannot comment any further until I see them.

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

I will not detain the Committee unduly. If the Government cannot produce the amendments, it would be helpful if we were given a steer as to their direction of thinking with regard to defined contribution schemes and indexation. I have only started to appreciate that whereas the indexation burden on a DB scheme falls on the scheme and is, if not a free lunch, good news for the recipient, for a DC scheme member it might be bad news. That is an important distinction, so it would be helpful to have a steer from the Minister about the Government's provisions on DC schemes.

I have looked again at the regulatory impact assessment estimate of the effect of the clause on a typical pensioner and, unless I misunderstand, the £70 seems to be an average over the zeros. I believe that it is a serious underestimate of how much a typical pensioner with a typical occupational pension will lose. If it is £7,000 based on £70 a week and that £70 is averaged over many people who do not have occupational pensions, the typical occupational pensioner could lose far more than £7,000. The scale of the consequences of the clause could be much greater than the regulatory impact assessment implies.

I accept the Minister's point about there being a balance, but he is saying that if we do not lower the requirement or impose another burden or fail to remove a burden, we might force more schemes to close, but inflation indexation might be required because that would be less of a burden and they would be even less likely to close. Clearly, there is a spectrum and the requirement seems to go up to 5 per cent. when inflation averages 2.5 per cent. That is not so onerous and the saving from cutting it would not be as great as the Minister suggests, but the reassurance and protection that it affords, particularly to women, might be, at not that great a cost, worth keeping in the Bill.

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

We have had a useful mini-debate. In response to the last points made by the hon. Member for Northavon, which go back to an earlier debate, I urge hon. Members to consider seriously the issues surrounding costs and how we balance them against security. I do not want to exaggerate—I leave that to financial pundits—but there is clearly a long-term trend away from final salary schemes to other schemes. We can debate the pros and cons of that, but a correlated concern is the way in which employers' contributions to many defined contribution schemes average out at about half the contribution to final salary schemes. The issues are serious and when boards might be considering the costs and the long-

term future of final salary schemes it would be absurd if Parliament started to make those schemes so generous, well indexed and protective in respect of TUPE arrangements in the private sector that we encouraged more boards of directors to make the wrong decisions. If we made those mistakes, we would seriously over-egg the pension pudding. The issues are fundamental.

I must not be churlish, but the hon. Member for Eastbourne raised a serious issue about defined contribution schemes and urged us to think again. We were already thinking again about the issues, but that is part of scrutinising legislation. Having reflected, I made my points, but, having done that, I am not going to pull the specific amendment out of my top pocket.

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne

I will not go into the Minister's tailoring, but he cannot have it both ways. He is a member of the Government with the massive resources of his Department and the benefit of representations from organisations such as the ABI. The problems are apparent to anyone with the slightest knowledge of the matter and he cannot bluster himself out of them. Where are the amendments, when will we see them and does he expect them to be debated in the Committee?

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

I have given a clear commitment to think again and to bring forward proposals during consideration of the Bill. I hoped that the hon. Gentleman would be grateful for that, given the way in which he introduced the amendment.

I hoped that we would have a well informed debate about the issues concerning defined contribution schemes and annuities, some of which touch on gender. Were people to have more choice—broadly where we are coming from—the choice to have as much annuity as possible in the first year and not to index it would be tempting. However, informed choice would suggest that people think through the consequences for the future. Similarly, when someone is married with an annuity, or is about to take one out, another choice they have is whether to protect the annuity for the survivor. They are very difficult issues, and I suspect that men in particular may not be taking out an annuity that has a survivor's element.

There are some important issues with gender, and we should not rush in one direction without thinking through the importance of enabling people to make proper decisions about annuities. That includes the option now available to take the annuity from a company other than one's existing company pension scheme. There are difficult issues to consider before we immediately grasp what may seem to be the right way ahead.

We will return to the matter, and when the hon. Member for Eastbourne takes his walk across the beach this weekend, he will know that we need to be patient.

Question put and agreed to.

Clause 212 ordered to stand part of the Bill.

Clauses 213 and 214 ordered to stand part of the Bill.