'For section 67 of the Pensions Act 1995 (c. 26) substitute—
67 The subsisting rights provisions
(1) The subsisting rights provisions apply to any power conferred on any person by an occupational pension scheme, other than a public service pension scheme, to modify the scheme.
(2) Any exercise of such a power to make a regulated modification is voidable in accordance with section 67G unless the following are satisfied in respect of the modification—
(a) in the case of each affected member—
(i) if the modification is a protected modification, the consent requirements (see section 67B),
(ii) if it is not, either the consent requirements or the actuarial equivalence requirements (see section 67C),
(b) the trustee approval requirement (see section 67E), and
(c) the reporting requirement (see section 67F).
(3) The subsisting rights provisions do not apply in relation to the exercise of a power—
(a) for a purpose connected with debits under section 29(1) of the Welfare Reform and Pensions Act 1999, or
(b) in a prescribed manner.
(4) References in this section and sections 67A to 67I to ''the subsisting rights provisions'' are to this section and those sections.
(5) Subsection (6) applies in relation to the exercise of a power to which the subsisting rights provisions apply to make a regulated modification where a member of the scheme dies before the requirements mentioned in subsection (2), so far as they apply in his case, have been complied with in respect of the modification if—
(a) before he died he had given his consent to the modification in accordance with section 67B(4)(b), or
(b) before he died, or before the trustees of the scheme had become aware that he had died, the trustees had complied with section 67C(4)(a), (b) and (d) in respect of the modification in his case.
(6) Any of the requirements mentioned in subsection (2), as it applies in respect of the modification—
(a) which is satisfied in the case of the member, or
(b) which would have been satisfied in his case had he not died before it was satisfied,
is to be taken to be satisfied in the case of any survivor of the member in respect of the modification.
67A The subsisting rights provisions: interpretation
(1) In the subsisting rights provisions, each of the following expressions has the meaning given to it by the following provisions of this section—
(2) ''Regulated modification'' means a modification which is—
(a) a protected modification, or
(b) a detrimental modification,
or is both.
(3) ''Protected modification'' means a modification of an occupational pension scheme which—
(a) on taking effect would or might result in any subsisting right of—
(i) a member of the scheme, or
(ii) a survivor of a member of the scheme,
which is not a right or entitlement to money purchase benefits becoming, or being replaced with, a right or entitlement to money purchase benefits under the scheme rules,
(b) would or might result in a reduction in the prevailing rate of any pension in payment under the scheme rules, or
(c) is of a prescribed description.
For the purposes of paragraph (a), the reference in the definition of ''money purchase benefits'' in section 181(1) of the Pension Schemes Act 1993 to the widow or widower of a member of an occupational pension scheme is to be read as including any other survivor of the member.
(4) ''Detrimental modification'' means a modification of an occupational pension scheme which on taking effect would or might adversely affect any subsisting right of—
(a) any member of the scheme, or
(b) any survivor of a member of the scheme.
(5) A person is an ''affected member''—
(a) in relation to a protected modification within paragraph (a) or (b) of subsection (3), if, at the time the modification takes effect, he is—
(i) a member of the scheme, or
(ii) a survivor of a member of the scheme,
and, on taking effect, the modification would or might affect any of his subsisting rights as mentioned in that paragraph,
(b) in relation to a protected modification within paragraph (c) of that subsection, if he is of a prescribed description, and
(c) in relation to a detrimental modification which is not a protected modification if, at the time the modification takes effect, he is—
(i) a member of the scheme, or
(ii) a survivor of a member of the scheme,
and, on taking effect, the modification would or might adversely affect any of his subsisting rights.
(6) ''Subsisting right'' means—
(a) in relation to a member of an occupational pension scheme, at any time—
(i) any right which at that time has accrued to or in respect of him to future benefits under the scheme rules, or
(ii) any other entitlement to benefits which he has at that time, under the scheme rules, and
(b) in relation to the survivor of a member of an occupational pension scheme, at any time, any entitlement to benefits, or right to future benefits, which he has at that time under the scheme rules in respect of the member.
For this purpose, ''right'' includes a pension credit right.
(7) ''Scheme rules'', in relation to a scheme, means—
(a) the rules of the scheme, except so far as—
(i) paragraph 3 of Schedule 5 to the Social Security Act 1989,
(ii) section 129 of the Pension Schemes Act 1993,
(iii) section 117 of this Act, or
(iv) section 230 of the Pensions Act 2004,
(b) any provision of any of those Acts which overrides or modifies any of the rules of the scheme by virtue of one of the provisions mentioned in paragraph (a), and
(c) any provision which the rules of the scheme do not contain but which the scheme must contain if it is to conform with the requirements of Chapter 1 of Part 4 of the Pension Schemes Act 1993 (preservation of benefit under occupational pension schemes).
(8) For the purposes of this section—
(a) ''survivor'', in relation to a member of an occupational pension scheme, means a person who—
(i) is the widow or widower of the member, or
(ii) has survived the member and has any entitlement to benefit, or right to future benefits, under the scheme rules in respect of the member, and
(b) a modification would or might adversely affect a person's subsisting right if it would alter the nature or extent of the entitlement or right so that the benefits, or future benefits, to which the entitlement or right relates would or might be less generous.
(9) In the subsisting rights provisions, in relation to—
(a) the exercise of a power to modify an occupational pension scheme to which the subsisting rights provisions apply, or
(b) a modification made, or to be made, in exercise of such a power,
references to ''the scheme'' are to be read as references to the scheme mentioned in paragraph (a).
67B The consent requirements
(1) References in the subsisting rights provisions to the consent requirements, in respect of a regulated modification, are to be read in accordance with this section.
(2) The consent requirements apply in the case of an affected member—
(a) if the modification is a protected modification;
(b) if it is not a protected modification, unless the actuarial equivalence requirements apply in his case.
(3) The consent requirements consist of—
(a) the informed consent requirement (see subsection (4)), and
(b) the timing requirement (see subsection (6)).
(4) The informed consent requirement is satisfied in the case of an affected member if before the modification is made—
(a) the trustees have—
(i) given him information in writing adequate to explain the nature of the modification and its effect on him,
(ii) notified him in writing that he may make representations to the trustees about the modification,
(iii) afforded him a reasonable opportunity to make such representations, and
(iv) notified him in writing that the consent requirements apply in his case in respect of the modification, and
(b) after the trustees have complied with paragraph (a)(i), (ii) and (iv), the affected member has given his consent in writing to the modification.
(5) The trustees are to be taken to have notified an affected member as mentioned subsection (4)(a)(iv) if they have notified him in writing that—
(a) if he gives his consent to the modification for the purposes of the consent requirements, those requirements apply in his case in respect of the modification, but
(b) otherwise, the actuarial equivalence requirements apply in his case in respect of the modification.
(6) The timing requirement is satisfied in the case of an affected member if the modification takes effect within a reasonable period after the member has given his consent to the modification in accordance with subsection (4)(b).
67C The actuarial equivalence requirements
(1) References in the subsisting rights provisions to the actuarial equivalence requirements, in respect of a detrimental modification which is not a protected modification, are to be read in accordance with this section and section 67D.
(2) The actuarial equivalence requirements apply in the case of an affected member only if—
(a) the modification is not a protected modification, and
(b) the trustees of the scheme determine that they are to apply in his case.
(3) The actuarial equivalence requirements consist of—
(a) the information requirement (see subsection (4)),
(b) the actuarial value requirement (see subsection (5)), and
(c) the actuarial equivalence statement requirement (see subsection (6)).
(4) The information requirement is satisfied in the case of an affected member if before the modification is made the trustees have taken all reasonable steps to—
(a) give him information in writing adequate to explain the nature of the modification and its effect on him,
(b) notify him in writing that he may make representations to the trustees about the modification,
(c) afford him a reasonable opportunity to make such representations, and
(d) notify him in writing that the actuarial equivalence requirements apply in his case in respect of the modification.
(5) The actuarial value requirement is satisfied in the case of an affected member if before the modification is made the trustees have made such arrangements, or taken such steps, as are adequate to secure that actuarial value will be maintained.
(6) The actuarial equivalence statement requirement is satisfied in the case of an affected member if the trustees have, within a reasonable period beginning with the date on which the modification takes effect, obtained an actuarial equivalence statement relating to the affected member in respect of the modification.
(7) For the purposes of subsection (6) ''actuarial equivalence statement'' means a statement in writing which—
(a) is given by—
(i) the actuary appointed in relation to the scheme under section 47(1)(b), or
(ii) a person of a prescribed description, and
(b) certifies that actuarial value has been maintained.
(8) For the purposes of subsections (5) and (7) as they apply in relation to an affected member, actuarial value is maintained if the actuarial value, immediately after the time at which the modification takes effect, of the affected member's subsisting rights is equal to or greater than the actuarial value of his subsisting rights immediately before that time.
67D The actuarial equivalence requirements: further provisions
(1) This section applies for the purposes of section 67C.
(a) the information requirement has been satisfied in the case of an affected member in respect of a proposed modification (''the original modification''),
(b) before the trustees have made a determination, or given their consent, for the purposes of section 67E(1) in relation to the original modification, the original modification has been revised, and
(c) the modification as so revised (''the revised modification'') does not differ from the original modification in any material respect,
the information requirement is to be taken to have been satisfied in relation to the revised modification.
(3) The trustees are to be regarded as having taken all reasonable steps to notify an affected member as mentioned in section 67C(4)(d) in respect of a modification if they have taken all reasonable steps to notify him in writing that—
(a) if he gives his consent to the modification for the purposes of the consent requirements, those requirements apply in his case in respect of the modification, but
(b) otherwise, the actuarial equivalence requirements apply in his case in respect of the modification.
(4) Any calculation for the purposes of section 67C of the actuarial value of an affected member's subsisting rights at any time must conform with such requirements as may be prescribed.
(5) Requirements prescribed by regulations under subsection (4) may include requirements for any such calculation to be made in accordance with guidance that—
(a) is prepared and from time to time revised by a prescribed body, and
(b) if the regulations so provide, is approved by the Secretary of State.
(6) Nothing in subsections (6) and (7) of section 67C precludes actuarial equivalence statements relating to—
(a) two or more affected members, or
(b) affected members of any particular description,
in respect of a modification being given in a single document.
67E The trustee approval requirement
(1) For the purposes of section 67(2)(b), the trustee approval requirement is satisfied in relation to the exercise of a power to make a regulated modification if—
(a) the trustees of the scheme have determined to exercise the power to make the modification, or
(b) if the power is exercised by another person, the trustees have consented to the exercise of the power to make the modification,
and the making of the determination, or giving of consent, complies with subsections (2) and (3).
(2) The trustees must not make a determination, or give their consent, for the purposes of subsection (1) unless, in the case of each affected member—
(a) if the modification is a protected modification, the informed consent requirement is satisfied (within the meaning of section 67B), or
(b) if it is not—
(i) the informed consent requirement is satisfied, or
(ii) the information and actuarial value requirements are satisfied (within the meaning of section 67C),
in respect of the modification.
(3) The trustees must not make a determination, or give their consent, for the purposes of subsection (1) more than a reasonable period after the first consent given by an affected member under section 67B(4)(b) in respect of the modification was given.
67F The reporting requirement
(1) For the purposes of section 67(2)(c), the reporting requirement is satisfied in relation to the exercise of a power to which the subsisting rights provisions apply to make a regulated modification if the trustees have, in accordance with subsection (2)—
(a) notified each affected member in whose case the consent requirements apply in respect of the modification, and
(b) taken all reasonable steps to notify each affected member in whose case the actuarial equivalence requirements apply in respect of the modification,
that they have made a determination, or given their consent, for the purposes of section 67E(1) in relation to the exercise of the power to make the modification.
(2) The trustees must give (or, where the actuarial equivalence requirements apply, take all reasonable steps to give) the notification—
(a) within a reasonable period beginning with the date of the determination or giving of consent mentioned in subsection (1), and
(b) before the date on which the modification takes effect.
67G Powers of the Authority: voidable modifications
(1) Subsection (2) applies in relation to a regulated modification made in exercise of a power to which the subsisting rights provisions apply which is voidable by virtue of—
(a) section 67(2), or
(b) section 67H(3).
(2) The Authority may make an order declaring that subsection (6) applies in relation to the regulated modification.
(3) An order under subsection (2) relating to a regulated modification may also declare that subsection (6) applies in relation to—
(a) any other modification of the scheme made by the exercise of the power mentioned in subsection (1), or
(b) the grant of any rights under the scheme (whether by virtue of the attribution of notional periods as pensionable service or otherwise) in connection with the regulated modification.
(4) An order under subsection (2) relating to a regulated modification must specify the affected member or affected members or description of affected members in respect of whom subsection (6) applies (''the specified persons'').
(5) An order under subsection (2) relating to a regulated modification may also—
(a) require the trustees to take, within the time specified in the order, such steps as are so specified for the purpose of giving effect to the order;
(b) declare that subsection (7) applies in relation to anything done by the trustees after the time at which the modification would, disregarding the order, have taken effect which—
(i) would not have contravened any provision of the scheme rules if the modification had taken effect at that time, but
(ii) as a result of the modification being void to any extent by virtue of the order, would (but for that subsection) contravene such a provision.
This is without prejudice to section 174(3).
(6) Where the Authority make an order declaring that this subsection applies in relation to a modification of a scheme, or the grant of any rights under the scheme, the modification or grant is void to the extent specified in the order, and in respect of the specified persons, as from the time when it would, disregarding the order, have taken effect.
(7) Where, by virtue of subsection (5)(b), the Authority make an order under subsection (2) declaring that this subsection applies in relation to anything done by the trustees, that thing is to be taken, for such purposes as are specified in the order, not to have contravened any provision of the trust deed or scheme rules.
(8) An order under subsection (2) relating to a regulated modification, or other modification, of a scheme or the grant of any rights under the scheme may be made before or after the time at which the modification or grant would, disregarding the order, have taken effect.
67H Powers of the Authority to intervene
(1) Subsection (2) applies where the Authority have reasonable grounds to believe that a power to which the subsisting rights provisions apply—
(a) will be exercised, or
(b) has been exercised,
to make a regulated modification in circumstances where the modification will be voidable by virtue of section 67(2).
(2) The Authority may by order—
(a) in a case within subsection (1)(a), direct the person on whom the power is conferred not to exercise the power to make the regulated modification;
(b) require the trustees to take, within the time specified in the order, such steps as are so specified for the purpose of securing that any of the requirements mentioned in section 67(2) is satisfied.
(3) A regulated modification made in exercise of a power to which the subsisting rights provisions apply is voidable in accordance with section 67G if—
(a) the exercise of the power contravened an order under paragraph (a) of subsection (2), or
(b) the trustees fail to comply with a requirement imposed by an order under paragraph (b) of that subsection relating to any exercise of the power to make the modification.
67I Subsisting rights requirements: civil penalties
(1) Subsections (2) and (3) apply where a regulated modification is voidable by virtue of section 67(2).
(2) Where the modification was made by the exercise of a power—
(a) by the trustees of the scheme, or
(b) by any other person in circumstances which do not fall within subsection (3),
section 10 applies to any trustee who has failed to take all reasonable steps to secure that the modification is not so voidable.
(3) Section 10 applies to any person other than the trustees of the scheme who, without reasonable excuse, exercises a power to make the modification if—
(a) the trustees have not given their consent, for the purposes of section 67E(1), to the exercise of the power to make the modification, or
(b) in the case of any affected member, the timing requirement is not satisfied (within the meaning of section 67B) in respect of the modification.
(4) Where the trustees fail to comply with any requirement imposed, by virtue of subsection (5)(a) of section 67G, by an order under subsection (2) of that section, section 10 applies to any trustee who has failed to take all reasonable steps to secure such compliance.
(5) Where a regulated modification is made by the exercise of a power in contravention of an order under section 67H(2)(a)—
(a) if the power is exercised by the trustees, section 10 applies to any trustee who has failed to take all reasonable steps to secure that the order was not contravened,
(b) section 10 applies to any other person who without reasonable excuse exercises the power in contravention of the order.
(6) Where the trustees fail to comply with any requirement specified in an order under section 67H(2)(b), section 10 applies to any trustee who has failed to take all reasonable steps to secure such compliance.''.'.—[Malcolm Wicks.]
Brought up, and read the First time.
I beg to move, That the clause be read a Second time.
Good morning, Mr. Griffiths. This may be our last day in Committee, but if we need to sit on Thursday, we can do so. The formalities that we have just gone through rather remind me of when one is trying to follow a drama that spreads over six weeks on television; sometimes, at the beginning of a new episode, they remind the viewer of what has gone before. That was exciting.
I have always lived in hope that at some stage I might understand parliamentary—and particularly Committee—procedure, and I hoped that this would be the occasion for me, but perhaps next time.
Before I come to new clause 30, I should like to say a little about where we are; it will take just a couple of paragraphs. I said during last Thursday's programme motion debate that the Government would table the remaining amendments to be dealt with in Committee last week, and that if we were unable to do so for any reason, they would be brought forward on Report. I confirm that we have no more amendments to table for Committee. The second tranche of clauses dealing with moral hazard are on the amendment paper, and we shall discuss them today.
We were also hoping to bring forward a clause on cash-equivalent transfer values to early leavers; however, it is a complex clause, and we have decided to table it on Report. In the intervening period we shall be testing the clause with outside experts.
New clause 30 replaces section 67 of the Pensions Act 1995. It will give schemes more flexibility to reshape their rules and cut back on their administrative costs. The current section 67 quite properly protects the rights that scheme members have already built up in a pension scheme by preventing rule changes that would have a detrimental effect on a member's accrued rights. However, the effect is that schemes can only apply rule changes to future rights, and as a result every rule has to remain in place exactly as it first existed, resulting in layer upon layer of rules, and ever-increasing complexity and cost.
The new clause will give occupational pension schemes the flexibility to rationalise and streamline their pension rules, and so will allow schemes to remove what has been described as a layer cake effect. However, there will be strict safeguards to ensure that scheme members are treated fairly, and that their interests are protected. As is the case now, whenever a rule change would have an adverse effect on a member's accrued rights the trustees will have to agree to it before it can go ahead. Schemes will still be able to
make a rule change with the consent of the individual member. The difference that the new provisions will make is that although schemes will not be able to reduce the value of a member's accrued rights they will be able to make changes to the nature of the rights. That will allow them to make the sort of sensible and perfectly reasonable simplifications and rationalisations that they have long complained that they are prevented from making under the present section 67 rules. Trustees will be able to replace one accrued right with another, provided that the overall actuarial value of the affected person's accrued rights is not reduced. In other words, the actuarial value of each member's accrued rights must be at least equal to what it was before the change was made.
Where trustees are proposing to make a change of that nature they will have to give the members advance notice of the change, tell them how it will affect them, and give them the opportunity to make representations about the proposal. The trustees will then make their decision in the light of any feedback that they receive from scheme members. Certain changes will be prohibited unless they are made with the express written consent of the member in question. Schemes will not be able to convert defined benefit rights into defined contribution rights. It would be going too far to allow a scheme to put a value on the rights that someone had built up in a defined benefit scheme and then just put an equivalent sum into a money purchase pot. We will also not allow schemes to make a change that would reduce the prevailing amount of a pension that is in payment.
Freeing up section 67 was one of the key simplification measures in Alan Pickering's report of July 2002, ''A simpler way to better pensions''. Schemes have long complained that the present section 67 is too restrictive and prevents them from making what are perfectly sensible and reasonable changes. In his report, Alan Pickering acknowledged how important it is that
''employers keep their pension promise.''
However, he also said that
''it should be easier for employers to re-shape pension arrangements in the light of contemporary economic or other circumstances.''
''A careful balance needs to be struck . . . between giving employers the right to amend pensions in the light of changed circumstances and their responsibility to keep their pension promise.''
The new clause strikes that balance. It follows Pickering's recommendation by allowing schemes to replace an accrued right with something else that is of at least ''equivalent value''. It then goes further in protecting members' interests by insisting that they are told about the effect of a change and by giving them the opportunity to make representations about it. It also prevents certain types of changes altogether, unless the scheme obtains the consent of the member. As I have said, there is no switching from defined benefit to money purchase and no reduction in the amount of pension in payment.
Alan Pickering was of course right when he said that employers should ''keep their pension promise'', but he was also right that the present section 67 rules are very restrictive. They prevent schemes from re-shaping their rules.
For example, we are talking about where, for a section of someone's pension rights, the scheme—maybe reflecting the 1995 Act—says that that must be increased by 5 per cent. whereas a later layer of the cake might say something different. It is about trying to produce the actuarial equivalent for the member so that they do not lose out. For example, as an illustration, it is about saying, ''If we are going to rationalise so that in future the pension—all the different layers of the cake—can increase by x per cent. a year, the pension member should not lose out.'' This might not be an actuarially exact example but it is the kind of thing that is involved: one year at 5 per cent. might become, for example, 1.2 years as an actuarial equivalent in the future. It is about that, rather than the scheme at the moment having to organise itself so that different parts of the final salary scheme increase in different ways. Perhaps, as a result of company and pensions amalgamations, there have been different rules about dependants: children up to 16 or 18. The measure is designed to rationalise such rules in ways that produce no losers.
One is always nervous about making it easier to make changes that are detrimental. I understand that the rights earned to date are not treated detrimentally, but does this make it easier for companies to make their ongoing pensions less generous?
No. This is not about making ongoing pensions less generous, but about rationalising scheme rules with the consent of the trustees so that, in future, members should get the actuarial equivalent of what they would have got anyway. If in future all the pension increased by the same x per cent., instead of one bit by z per cent., one bit by y per cent. and so on, buying more time for the member—actuarially, instead of one year under a certain chunk of the scheme, one would get 1.2 years—would enable the member to get the same pension in the future.
This is not about reducing the costs to the scheme or about reducing the benefits to the member. It is about simplification, in line with Alan Pickering's recommendations. Another example might be changing payment frequency from every four weeks to monthly. We are trying to achieve a range of things of that kind.
Schemes have the option of obtaining members' consent for a rule change, but experience shows that in practice obtaining the consent of every individual member is rarely possible, particularly when a scheme has lost touch with some of its deferred members. For the very reasons that Alan Pickering outlined in his report, we think that pension schemes should have more flexibility to reshape their rules. The new clause will give them that flexibility, but at the same time will ensure that members' interests are properly protected.
Good morning, Mr. Griffiths. We share the Minister's hope that we can finish the Committee stage today, although we have some weighty matters to debate.
The Minister was right in setting out the background to new clause 30, which was foreshadowed by Pickering and by the Green Paper, and has been long awaited by industry. There was a howl of protest when the Bill was first published because these provisions were not in it.
If things can be simplified, that will be widely welcomed, although it is a bit difficult to see how the average layman, flicking through the dense print of the pages upon pages of new clause 30, would see it as a simplification measure. Let us hope that it is in practice. There is certainly a feeling among the people who have made initial comments to me that it may be adding more complexity.
However, the Minister is right about the layer cake effect that has been created with the passing of time, and about the absolute need to tackle this issue. Many people now consider it easier to close a scheme than to amend it. That cannot be sensible. It is surprising that it has taken so long for the provisions to appear, given that they have been flagged up so regularly and over such a long period. We now have relatively little time in Committee to go around getting expert comments on how the provisions might operate. I am sure that you are aware, Mr. Griffiths, of Bismarck's famous remark: those who like legislation, like those who like a sausage, should never see how it is made.
He was a great pensions reformer, as the Minister reminds me.
Let us consider more specific issues. Flexibility is important. If the long, complex provisions deliver that, we shall be very happy. The area is likely to remain one of considerable complexity and potential uncertainty for trustees.
One of the issues that has been flagged up with me, and on which we might table an amendment on Report, is whether it might be sensible to include a mechanism by which, rather as people can clear certain tax schemes in advance with the Inland Revenue, trustees will be able to seek advance clearance from the regulator if they are trying to make a change that they think is both in the interests of the members of their scheme and suitable under the new provisions.
Certain problems remain. What is and what is not a power to modify the scheme? The classic example would be a specific power to change the actuarial factors used to calculate benefits. The Minister touched on that. Proposed new section 67A(6)(a) moves on from section 67 in the earlier Act and does not use a definition of accrued rights that treats active members as if they had opted out. There could be additional problems in trying to sort out what accrued means in this context. Did the Government deliberately not use the definition in section 124 of the 1995 Act?
It is useful and sensible that the new provisions will make amendments voidable rather than void. Many of the issues that I am raising could be tabled as amendments, but because of the time scale I am making them as points so that if the Minister can deal with them before they become amendments on Report and have to be debated he will be able to save us a great deal of time.
Would it be sensible to incorporate into proposed new section 67I(2) something about reasonable excuse or taking reasonable steps? Again, I aim to protect trustees who might be trying to do their best for their scheme. Further, should the regulator be able to give a binding commitment that it will not exercise its powers under proposed new section 67G in relation to any particular modifications that have been submitted to it in advance? I have already mentioned the genuine doubts as to whether a modification is a regulated modification. In other words, in this case would the regulator be expected by Ministers to take a proactive role rather than simply reacting after the event to an inappropriate modification?
May I also raise a series of practical issues that have been put to me by people who are far more expert than I? In relation to those parts that replace rather than add to the original section 67, the Government seem to be ignoring advice that they have had not to use a single actuarial value because that does not address each part of the benefit. If there is to be a test that values each aspect of the benefit package, it needs to be written into the legislation. Perhaps the Minister can help me on that.
It is good that under proposed new section 67A(3), issues such as switches of a scheme from defined benefit to defined contributions are covered specifically for the first time. The question arises under proposed new section 67A(3)(a), why not both an actuarial equivalence requirement and a consent requirement? One might have thought that both would apply in relation to an internal transfer value within the scheme. However, it depends on what is being certified by the actuary. If it is a fixed amount, ignoring solvency issues, but the transfer value might be less if solvency issues were taken into account, that needs to be considered. A weakness in the current legislation is that internal scheme transfers are not covered. The provisions for internal and external transfers should be the same when initiated by the scheme sponsor and trustees, rather than the member.
Given the concern about employers avoiding section 75 debts, has the need for employers to make up any deficiency in funding that affects the transfer value been considered? We shall debate that issue further, later today. Anti-avoidance provisions need to be on a level playing field, especially as the spectre of criminality is raised in new clause 39.
Another question, about internal transfer, is: what protections will the new money purchase benefits have on winding up? It is far from universal that there are separate funds constituting separate schemes.
Turning to proposed new section 67A(3)(b), there is a question of whether employers will obtain consent. Will the measure cover partial wind-ups, which are not normally considered to be a modification? Will annuities have to be purchased under the provisions of the 2004 Finance Bill where previously a pension had been paid from the scheme investments envisaged? There is something odd about pensions in payment. Normally, there is no cash equivalent for a pension in payment, but there is for pension sharing purposes. As those provisions could include pension credit members, that could involve a variation of a pension sharing order. Has that been considered?
There is also something odd about the actuarial equivalence requirements in proposed new sections 67C and 67D. Under proposed new section 67C(2), the requirements apply only if the trustees decide that they should, but on what basis are they to make that decision? Under the current legislation, section 67(2) is regarded as a filter mechanism by which trustees determine whether the actuary should become involved in the certification process. That was referred to in the joint opinion on section 67 that was obtained by the actuarial profession. The basis for the trustee decision is less clear under the new wording. It may tie in with whether informed consent is needed, or, from a practical point of view, it may tie in with the opportunity to make representations. We then have the fall-back position of the actuarial equivalence statement in proposed new section 67D(3), which suggests that the normal route is to obtain the consent of members, but is not entirely clear whether that is the case. Consent would be consistent with giving effect to the information and consultation directive 2002. We believe that trustees and their advisers are entitled to better guidance on those issues. There is also an issue with the quality of the consent route taken. If the fall-back position is the actuarial equivalence requirement, how can a modification go through without that requirement being satisfied?
Those are some of the issues that members of the profession have flagged up. Another is the current cash equivalent test. I understand that there has been some legal debate on whether that is a benefit, and that that was one of many issues covered in the joint opinion from the actuaries. The question whether it is an entitlement was considered on arguments of private trust law, rather than employment law, and was ruled out. It is not certain on accrued rights, but that was also rejected. The conclusion was that, as with so many aspects of section 67, that view could not be expressed with confidence. The effect on the benefits that would
be available in the receiving scheme on transfer was not considered. However, some issues arise from the Coloroll cases—I am sure that the Minister is familiar with them, or is about to become so—that support the position taken in the joint opinion.
On the question of sex-equal transfer values, a transfer value is not paid. The reasoning is tied in with transfers in and out operating on a neutral basis, so that, all other things being equal, the member's accrued rights should not be changed if a transfer payment is made. Therefore, as regards benefits under the receiving scheme, the obligation is to ensure a sex-equal transfer value of benefits, but not a unisex transfer value. It was stated that in order to ensure that the sex equality requirements are met, the receiving scheme may need to consider whether it is possible to claim a higher transfer value from the transferring scheme if the transfer value is insufficient for that purpose. The cash equivalent is relevant as regards benefits. Furthermore, if a unisex requirement comes in under European law it is possible that, because that part of the objection would cease, a transfer value would be regarded as a benefit. Any distinction would then be about whether there was a permanent change, as opposed to a temporary easement or an adjustment built into the original terms. Nevertheless, the ultimate test is whether the benefits on a like-for-like transfer are reduced as a result.
Those are all important issues, as far as I can tell. They raise significant concerns about the way in which the new clause will operate in practice and how the regulator is to use its powers in that area. I appreciate that it has not been possible to cast these points as amendments, because of the lateness of the new clause, and that it has equally not been possible for the Minister to flag up detailed answers to the questions. I would be more than happy if he wanted to write to me and to other members of the Committee on the detailed issues. However, on some of the big issues, he may be able to explain why some of the concerns may be overstated.
I cannot begin to match the erudition of the hon. Gentleman on such matters, but I want to make a few humble contributions, if I may.
I wanted to raise three issues with the Minister. The first, which I am flagging up early to give him the chance to become inspired, is the issue of actuarial equivalence. As I understand it, if something happened that would otherwise diminish the rights accrued to date, one would be given a sum of money that was the actuarial equivalent of the amount accrued so far. The new rules would then apply, but one would have had one's rights effectively replaced by something of equivalent value. That seems reasonable in principle, looking backwards.
However, is actuarial equivalence definitive or is it a matter of judgment? Can one always say that a sum of money is of equivalent value to any given accumulated pension right to date or is it a guess? Is it an estimate, subject to judgment and a range of uncertainty? If one were given a certain sum of money in lieu of previously
accrued pension rights, could it turn out that the sum was not equivalent? It may have looked as though it would be equivalent according to the best assumptions available at the time, but it may not be because interest rates were higher or because the person involved lived for a longer or shorter period. If that is the case, will there be any redress? In other words, what happens if I am a member of a scheme and have accrued rights to date, but the scheme comes along and says that it wants to change something that would otherwise be detrimental to my accrued rights but that it will give me some money instead, and it turns out five years later that the money that I was given—although I was given it in good faith, as it appeared to be of equal value at the time—is not of equal value? Can I then go back and tell the scheme that it made my pension rights worse, that the money that I was given did not cover my rights in full and that I want the difference or do I just have to lump it, as we say in the trade? Can it be revisited, or is it a once-and-for-all definitive matter?
My second concern is about whether scheme members will understand what on earth is going on. I presume that the trustees will write to the scheme members, saying that they hope to make a fairly technical change to the rules of the scheme. My hunch is that the vast majority of scheme members will not have the foggiest idea what that means. The Minister will know that when his Department does surveys on pensions and company pensions, scheme members have trouble knowing whether they are in a final salary scheme, a money purchase scheme or something else. They have trouble getting that far, and also in knowing whether they have contracted out or not. The idea that they would be able to make an intelligent assessment of a technical rule change seems entirely incredible.
The question remains, does that matter? Scheme members will receive the letter, which will state, ''We are going to change such-and-such, under this rule, paragraph so-and-so,'' and they will say, ''Wot?'' Does it matter that they will not understand? Presumably, it matters a bit or we would not have all this stuff about notification, consent and so on. It must matter to some extent. I do not suppose that plain English is ever a requirement in such things, but can we be confident that scheme members will have the first idea what they are being written to about, or is this just another consultation on the nod? Will trustees say, ''The law said we had to write to you, so we did. We know that 95 per cent. of you didn't understand a word of what we said, but, what the heck, we're going ahead anyway''? I have a feeling that that is how it will be in practice, because no one will understand the issues. That makes me slightly nervous.
My last point is the substantive one about which I intervened on the Minister: will the provisions be used as an excuse for making cuts? The Minister said not, but I want to pursue him a little about that. I accept that they will not be used as an excuse for making cuts to rights that have already been accrued, but the Minister used the slightly ominous phrase ''new economic realities'', which makes me very nervous given that we are talking about changing people's pension rights.
I accept that there will be trivial changes, and it would be absurd if the Pensions Act prevented us from changing the payment frequency from four-weekly to monthly. I do not have a problem with trivial administrative changes in areas where the law has become so rigid that it is absurd. However, I am still worried.
When I intervened on the Minister, he gave two answers: one was perhaps inspired, while the other was perhaps more off the top of his head. The one off the top of his head was about future indexation, which is far from trivial. He seemed to be saying that future indexation might, for example, be lower than scheme indexation to date. Those are the new economic realities: lower inflation, lower indexation rights. That does not damage people's accrued rights, because people who, for example, get one year at 5 per cent. might then get one and a half years at 2.5 per cent, which would be equivalent, so that would be fine.
I am not sure, however, that companies could, at present, worsen someone's future pension rights. Would section 67 prevent them from doing so? If the revised version of section 67 allows them to do so, are we making it much easier for firms to cut future—I stress the word ''future''—pension rights because of the new economic realities, to use the Minister's words? He clearly said no when I intervened on him, but I want to give him the opportunity to do so again, because I am not sure that he is right. I am not sure that the new clause does not give companies the power to change scheme rules and to put the past right. The new rules for future accruals could be less generous and, I assume, go through without the consent of all members. I am very nervous about that, and the Minister has not quite reassured me that we are not making such things easier.
So, there are three key questions. First, is actuarial equivalence definitive? If not, and if someone gets a bad deal, can they go back to it? Secondly, will employees understand any of that stuff anyway, and does it matter? Finally, will the provisions make future cuts easier? Those are my concerns.
I start by acknowledging the generous offer from the hon. Member for Eastbourne (Mr. Waterson), who said that the timing of the changes before us meant, among other things, that the Opposition had not had time to table amendments. He added—this, I thought, was the generous bit—that the Government had not had time fully to take on board the nature of the non-existent amendments. Given the detailed nature of the brief, we will obviously consider the issues before Report and write to hon. Members about them. However, I will do my best to deal with some of the points raised by the hon. Members for Eastbourne and for Northavon (Mr. Webb).
The hon. Member for Eastbourne made the jest—it was perfectly reasonable, and we rather anticipated it—that if the provisions are a matter of simplification, do we really need 10 new sections? The answer is that simplification, in this instance at least, is not about cutting the number of words in the legislation, but
about making it simpler for schemes to operate. As we have heard, the new sections will give them the flexibility to simplify their rules. It is the sort of simplification that pension schemes have been asking for, and we must take that into account. It is also along the lines recommended by Alan Pickering.
If there are now 10 new sections, instead of just one, that is because they incorporate the necessary safeguards for scheme members. We have freed up the position for pension schemes but ensured that it has not been done at the expense of scheme members. To precis what I am saying, it is a complex task to achieve simplicity.
We were teased again as to why it had taken us so long to produce the new clause. It is a familiar answer: it is an important and complex matter, and we have had to think hard about it and take advice. I am sorry that it should be somewhat late.
Some questions were raised about proposed new section 67G, which provides the pension regulator with the power to order that a modification is void. That may touch on some of the concerns expressed by the hon. Member for Northavon about the regulator's role. If a scheme has not properly complied with the new section 67 requirement, the regulator will be able to order that the affected members are returned to the position that they would have been in had the modification not been made. That is a further measure to protect members' pension rights. The regulator can also require that the trustees take certain steps for the purpose of giving effect to the order, or declaring that anything done by the trustees before the order was made did not breach the scheme's rules.
The hon. Member for Eastbourne asked about advance clearance. Whether scheme rules should be changed is rightly a matter for trustees, depending on the circumstances of their scheme and its members. If the trustees are in doubt as to whether a change should be made, they can seek members' views to help them in their consideration. It is not a matter for the regulator, but he will issue a guidance note.
Various questions were asked about the actuarial value of members' accrued rights, and how they will be calculated. The actuarial evaluation of members' accrued pension rights in defined benefit pension schemes has long been a standing feature of pensions legislation. For example, when a member wishes to transfer his rights from one scheme to another, or when members are transferred in bulk following corporate mergers, the rights accrued need to be valued. In conjunction with the actuarial profession, we plan to ensure that an appropriate methodology is put in place, through regulation and actuarial guidance, to ensure that members' accrued rights are appropriately valued at the point of change. We will be building on the well established actuarial certification process for bulk transfers.
Nothing in the legislation will prevent trustees from giving schemes actuarial equivalence if members' consent has been given, but such equivalence must be given if no such consent is obtained. As I implied, the regulator will issue guidance about that.
The issue of gender was raised. Proposed new section 67C(8) provides that the actuarial value of the rights of each affected member immediately following modification must be equal to the value of the rights before the change. Regulations, together with professional guidance to actuaries, will ensure that each affected member's accrued rights under the original and the revised scheme rules are properly and fairly valued for the purpose of meeting the statutory requirement. The calculation of the value of each member's accrued rights will properly take into account all the relevant factors, and that will obviously include the member's gender. I hope that that answer is satisfactory.
The Welfare Reform and Pensions Act 1999 introduced pension sharing on divorce. Under the provisions of the Bill, it is possible for the value of pension rights held by either member of a married couple to be shared on divorce. Section 67 of the 1995 Act restricts the power conferred on occupational pension schemes to make changes that would or might affect a person's entitlement. However, it does not apply to section 29(1)(a) of the Welfare Reform and Pensions Act, which provides for the creation of the pension debit when a pension sharing order has been made.
In order to comply with the pension sharing order, the person responsible for the pension arrangements has to reduce the value of the member's accrued shareholder rights by the percentage ordered by the court. That reduction would affect the member's rights, and if the existing section 67 were to apply it would not be possible to implement a pension sharing order. The existing exemption will, in proposed new section 67(3), be carried over into the clause 67 provisions, thereby enabling pension sharing to continue.
The line of questioning by the hon. Member for Northavon was about actuarial equivalence. At the risk of repeating myself—I have not had time to paraphrase my remarks—actuarial equivalence is a well established process used in various areas of pension work. For instance, it is used to set the amount of contributions required from the employer. There is a need to make assumptions about the future to work out how much income from contributions a scheme needs. It is also used to change one set of benefits into another. It changes the shape of the benefits, but not the overall value; for example, individuals may want to transfer their accrued rights from one scheme to another when they move jobs. The first stage will be for the scheme to calculate the existing accrued rights for each scheme member using actuarial assumptions. The actuary will then work out the value of each member's accrued rights.
In broad terms, that calculation is done by working out how much pension will be paid to individuals each year up to the point where it is assumed that they will die, and how much scheme benefit will be paid to their surviving spouse until it is assumed that they too will die. To produce those figures, the actuary will have to use various assumptions about the future; for example,
he will have to make assumptions about mortality to decide how long the pension will be paid and about inflation to decided how much of an increase will be awarded in each of those years, and he must decide how much money has to be invested to produce a stream of income. To do that, the actuary has to use an assumption about future investment returns. That latter figure is the value of the member's accrued pension rights before the scheme amendment. The actuary will then repeat that calculation to work out the value of the member's accrued pension rights after the proposed scheme amendment. The two actuarial values will be compared and, if necessary, an adjustment made to the member's accrued rights to ensure that the value after amendment is no less than before.
I am grateful to the Minister for that response. He confirmed my point when he talked about the different assumptions that must be fed into that process. Nobody doubts that those assumptions are made in good faith with the best guess at the time, but we all know how useless actuaries are. The only thing that they want to know in life is how long people will live, and they keep getting that wrong. Presumably, they will get this wrong too. The new clause is therefore allowing changes the resulting outturn of which may be right on average; in some cases however we will be allowing people's accrued rights to be damaged.
I am just about to deal with the hon. Gentleman's points, following his vicious attack on a great profession. In case I speak to actuaries in the future, I want my comments recorded.
The hon. Gentleman seeks an impossible guarantee, which would be like guaranteeing that all members of a scheme will live until they receive their annuity or that those who are married will stay married. With any set of pension scheme benefits, the circumstances of life and death will ensure that some individuals end up better off than others. However, I assure the hon. Gentleman that the objective of actuarial conversion is to ensure that every scheme member retains an equivalent value of benefits at conversion and, as far as the human predictive ability can provide, into the future.
The hon. Gentleman is concerned about possible losers, and even winners. As he acknowledges, any long-term gains or losses will depend on the accuracy of the actuaries' long-term forecast and the future circumstances of the individual member—age at retirement, age at death, and so on. This is a matter of informed judgment, and the actuarial profession will recognise that it cannot be an exact science.
I can confirm that, when a change is made without member consent, the actuarial value of each member's rights at the time of the change will be maintained. No member will suffer a reduction in the actuarial value of his or her rights, as I have been at pains to spell out.
One of the issues raised by the hon. Gentleman's concerns is that, although we need to be able to seek the views of members, requiring every member's consent would be impossible. Schemes lose touch with
some members, and some would not reply. Of course, I recognise that many members of pension schemes feel relatively ignorant about such matters, and that raises the issue of the important role of trustees. By definition, trustees are there to ensure that members are protected. Trustees must act in the best interests of scheme beneficiaries, so far as is permitted by their trust deed, the scheme rules and general law. That duty refers to the scheme's beneficiaries as a whole.
When making a decision to modify scheme rules, trustees have to consider the implications of the decision on all beneficiaries and weigh up the pros and cons to decide whether their decision is in the overall interest of beneficiaries. Trustees are also required not to exercise a power to modify scheme rules for an improper purpose. Trustees will be required to tell scheme members about the effect of the change on them as individuals. The regulator will give guidance to trustees on that point. A member could appeal against an earlier rule change on the grounds that it was based on wrong assumptions or was carried out on the wrong basis.
Alan Pickering's review of occupational pension regulations, which prompted the proposed changes, suggested that section 67 is a contributory factor in the move by some employers from defined benefit to defined contribution pensions arrangements. He therefore recommended that schemes be allowed to make the rule changes that we have discussed. It has been a theme of our discussions that no one wants layer upon layer of regulations if the result is that more employers decide to move out of final salary schemes. That is one of the factors that we bore in mind when we listened hard not only to Alan Pickering, to whom we are obviously grateful for his report, but to many other people in the industry who were saying that the move towards simplification was important. We have taken that seriously at a time when, in other sections of our Bill, we are imposing new burdens, such as the pension protection fund, on schemes.
I repeat that, although no absolute guarantees can be made about every last pound of every last member, the whole basis of actuarial equivalence is to make sure that we can achieve simplicity, with all the benefits that that brings, at no expense to the member. The proposals are a fair package, not least to members.
Question put and agreed to.
Clause read a Second time, and added to the Bill.