Clause 20

Pensions Bill – in a Public Bill Committee at 12:00 pm on 29th January 2008.

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Test scheme standard

Photo of Nigel Waterson Nigel Waterson Shadow Minister, Work & Pensions

I beg to move amendment No. 23, in clause 20, page 9, line 4, leave out subsection (3).

If there was an Olympic event for probing amendments, this would surely be among the medal winners. The amendment is reasonably narrow. It would remove clause 20(3), but I have comments to make on the rest of the clause, so if we can obviate a clause stand part debate, I will touch on those provisions as well.

Let me make my fundamental point. As part of the deregulation and simplification agenda, there is a move towards what some people call principles-based legislation. That is probably more likely to be appropriate in respect of pensions than many other areas. For the most part, the people involved are grown-ups and the organisations and companies involved are big organisations and sensible, respectable companies. There is an agenda for turning to principles-based legislation, but if clause 20 is an example of what we are to expect, perhaps that is not such a good idea after all.

My particular beef with subsection (3) is that it does not really mean anything. It states:

“In applying this section the pensions...must be considered as a whole.”

I have no idea what that means. Is the alternative to consider them piecemeal? I have no understanding of what it means, but I am sure that the Minister will explain it to us.

I do not understand subsection (3) any more than I understand subsection (4), which makes the point that regulations will be made and refers to determining whether the pensions to be provided under a scheme are

“broadly equivalent to, or better than, the pensions which would be provided...under a test scheme.”

Again, I have no idea what “broadly equivalent” means, and the word “broadly” creeps in at one or two other places in the clause, including subsection (1). Is that really the sort of word that should appear in primary legislation? If this is the new world, I am not sure that I am buying.

We were told that there would be regulations, but I have not seen a glimpse of any draft regulations on this or any other part of the Bill in which they are proposed. Subsection (5) provides for guidance to be issued from time to time by the Secretary of State, but I have not seen any draft guidance. Perhaps the Minister will give us some clues about how people in the real world will be affected by clause 20.

Photo of James Plaskitt James Plaskitt Parliamentary Under-Secretary, Department for Work and Pensions 12:15 pm, 29th January 2008

I am grateful to the hon. Member for Eastbourne for the points that he made and I believe that I can give him the reassurance that he seeks.

Together, clauses 20 and 21 establish the test scheme standard for defined benefit schemes that are not contracted out of the state second pension. The test is conducted by comparing the benefits payable in the scheme with those payable in a hypothetical test scheme, and the features of the test scheme are set out in clause 21. Clause 20 sets out instructions for conducting the comparison.

The test scheme standard is a benchmark for occupational pension saving and has been set at a level that would broadly put a median earner on course to achieve the sort of replacement rate recommended by the Pensions Commission. Those schemes contracted out of the state second pension will automatically meet the qualifying criteria, because to be contracted out, schemes must already pass the reference scheme test set out in the Pensions Act 1993. Rather than introduce a new test for those schemes, we have set that as the qualifying requirement for the purpose of the employer duty in this measure.

Those schemes that are not contracted out will meet the qualifying requirements through the test scheme standard. That has been developed by simplifying the principles from the existing reference scheme test, and the amendment would require the test scheme standard to be conducted on a different basis from the reference scheme test. Employers conducting the test would be prevented from looking at the average benefits paid to members of the scheme. That is the answer to the hon. Gentleman’s question about what “as a whole” means.

Requiring an individualised calculation in respect of each member of the scheme, which would be the effect of the amendment, would place a significant burden on any employer seeking to meet the test, with a risk that the whole scheme would fail if even one member’s pension did not meet the standard.

Photo of Paul Rowen Paul Rowen Shadow Minister, Work & Pensions

I listened to what the Minister said about clauses 20 and 21. Clause 21 defines the test scheme and subsection (2) refers to the age of 65, but we are moving away from 65 as the retiring age. What provision is there for changing the test scheme as the  retirement age is changed? Surely 65 should not be stated so firmly in the Bill when the retirement age will change over time. The calculation that will be needed in future years will not have that figure as a requirement.

Photo of James Plaskitt James Plaskitt Parliamentary Under-Secretary, Department for Work and Pensions

I do not want to tempt you to rule me out of order, Mrs. Anderson, but I have been asked a question about a clause that we have not yet reached. Briefly, the purpose of stating the age of 65 in clause 21 is that it ties it clearly to the current state retirement age. It is not the age at which people will choose to start drawing pensions, but the age at which the state system currently indicates that state pension is payable.

Returning to amendment No. 23, I was trying to point out that it would require employers to assess their schemes against every individual member in the scheme, which would be very administratively complicated and, undoubtedly, hugely expensive for employers. Members will be aware that we are committed to a programme of deregulation for pensions, and some important elements of that deregulation are contained in the Bill. The amendment would run completely counter to the deregulatory reform agenda, so although the hon. Member for Eastbourne says that he is not sure that he wants to sign up for principles legislation, we do not want to sign up to his amendment, which would cut against the drive to deregulate and simplify the rules relating to schemes. The amendment would represent a big step backwards.

The amendment could also inadvertently lead to employers levelling down pension provision—the very thing that the hon. Gentleman seeks to avoid—as they would be forced to abandon good pension schemes because only one member’s pension did not meet the standard. That point is interesting with regard to the lengthy discussion that we had on clause 18.

We recognise, however, that there might be concern that a test based on collective pensions across the scheme could mean that some individuals lost out. To limit that risk, we intend to use the regulation-making power in clause 20 to put in place safeguards that prevent excessive distortion of the scheme’s average test by high earners and all differentiated benefits. Therefore, when developing the quality tests for defined benefits schemes, we sought an appropriate trade-off between protecting members’ interests and minimising burdens on business, and we believe that we have struck the right balance.

The measure is in the interests of simplification, which I think the hon. Gentleman would expect us to support. I have tried to explain precisely what “as a whole”, which he teased out of the language, actually means. In relation to a further point that he made, the word “broadly” will, of course, be clearly explained to employers in the plain English guidance that will be delivered in due course. With those reassurances on the points that he raised, I hope that he will withdraw the amendment.

Photo of Nigel Waterson Nigel Waterson Shadow Minister, Work & Pensions

I am grateful to the Minister for that explanation and those reassurances. The amendment was clearly thoroughly rotten, and I wonder at my temerity at tabling it in the first place. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 20 ordered to stand part of the Bill.

Clauses 21 to 23 ordered to stand part of the Bill.