I am happy to relieve my hon. and gallant Friend the Member for South-West Bedfordshire—Captain Selous—and to take on the arguments about a new set of issues.
This is our first sniff of the simplification—or deregulation, as it is sometimes called—agenda. We shall hear much more about that in a later sitting when we debate our new clauses relating to conditional indexation, for example, so I will hold my fire on many of the issues until then.
The Department commissioned an independent report on deregulation from Chris Lewin and Ed Sweeney some time ago. They published their report on 25 July 2007. The Government subsequently issued their own detailed comments on the Lewin-Sweeney document.
Of course, I pay tribute to Chris Lewin and Ed Sweeney for their labours—they obviously expended a lot of time and effort—but it is interesting that on some of the key questions they were unable even to agree among themselves. In some ways, what we have is a fairly timid report with some fairly timid recommendations about deregulation. With all due respect, the Government’s own timidity about deregulation builds on that.
Why does that matter? It matters because those of us who still believe that the best way forward for many people is defined-benefit schemes are prepared to try almost anything that might encourage a sponsoring employer to continue providing a DB scheme open to both new members and existing members. We know there has been a gentle trend of decline in defined-benefit membership since, if I remember rightly, the late 1960s. On this Government’s watch, that decline has speeded up dramatically, and bodies that should know what they are talking about—such as the Association of Consulting Actuaries—are warning all of us that a second or third wave of companies might get out of the DB business in the near future unless they are thrown a lifeline. I do not wish to reopen the levelling down argument which we have exhaustively investigated in previous debates, but the crunch moment for many of them may come in 2012, or whenever the system of personal accounts comes in.
The smokescreen of having a Government-sponsored, Government-backed scheme, albeit with only a 3 per cent. employer contribution, might encourage some employers—and I am not necessarily talking about unscrupulous employers—to say to their employees, “We are not going to carry on with our own scheme; here is a Government scheme. It’s perfectly okay. Why don’t you enrol in that?” We know from the National Association of Pension Funds that the average employer contribution in traditional DB schemes is about 16 per cent. That is going to make a very significant difference to people’s outcomes for retirement. The onus is on us, on both sides of the Committee, to grab any passing suggestion which can make it easier for these employers to keep going.
I recently had a trip to the Netherlands, about which I will say much more when we talk about conditional indexation. I went there to find out why they have something like 94 per cent. of all employees in DB schemes. It is absolutely incredible. What are they doing right that we are not doing? It is always difficult to export and import ways of doing things from one country to another, although there are a lot of similarities between what we do and what they do in the Netherlands. What they do is to build flexibility into the system, making it more attractive for employers to keep on with proper DB schemes. Lewin and Sweeney’s starting point, which we accept as common ground for us and the Government—and, I suspect, for the Liberal Democrats as well—is that accrued rights should be protected. Any rights acquired up to this date should be left alone.
Lewin and Sweeney said that risk sharing should be facilitated, and I think that is important, so that we get a third way—to coin a phrase—between DB schemes and straightforward DC schemes where the whole risk is put on to the employee rather than the employer. Their review has some interesting things to say about other issues, particularly principles-based legislation, which is a big topic, and perhaps not one for today. There is the abiding problem of section 67 of the Pensions Act 1995, about which debate rages as to whether it stops employers changing some of the terms of existing pension schemes.
I may be wrong, but I think the Government’s default position on this is that section 67 does not stop people doing these things, which might be worth doing. It seems to me that as long as many employers think that—presumably on the basis of the legal advice they are getting, since I know we lawyers are always ultra-cautious in these matters—then perhaps we should be doing something about section 67. There is also talk about statutory override, but a new clause deals with that so I shall return to the subject later. One recommendation was for a change in the law on pension and divorce, hence clause 78—a clause of one and a quarter lines but of substantial significance.
I mosied down to the Library to dig out a volume called “Jackson’s Matrimonial Finance and Taxation”, which gives some useful background. I hope that there is not an eighth edition; the seventh is the best I can do. The authors make the point that pension rights are nowadays one of the most valuable assets to be argued about between the parties on divorce. When it comes to dividing the matrimonial assets, the pension is more important than ever. In Brooks v. Brooks, a famous case, many of those issues were addressed, and much dissatisfaction was expressed about the existing state of the law.
The view has been expressed that as a matter of common law the courts still had some power to offset—I think that was the expression—pension rights versus other rights. For instance, if the husband—almost invariably it is the husband—had built up a substantial pension pot, the wife might get more of the equity in the house. In the Brooks case, the House of Lords decided that there was such a jurisdiction. It was the Pensions Act 1995—as a fresh-faced young Back Bencher, I had the privilege to serve as a member of the Committee that considered that legislation—that first gave the courts the power to attach or earmark part of all of a pension or a commuted lump sum. That came into effect in 1996. Under the Welfare Reform and Pensions Act 1999, which came into effect in 2000, the concept of pension sharing replaced that of pension splitting.
The issue has been round for some time, but one of the difficulties is apparently the concept of protected or safeguarded rights within pension funds. The Government’s position was given in the deregulatory review of private pensions. The review stated:
“There are concerns about the complexity of the requirements and the different treatment of pension credit rights. The Government agreed that some of the requirements are unnecessary and, at the next suitable opportunity, will repeal the legislative requirements relating to safeguarded rights.”
The review continued:
“The Government’s proposals in this area were warmly welcomed by all the correspondents who raised the issue.”
Pausing there for a moment, it is interesting to note that I have not seen any briefing notes or evidence from any outside bodies opposing the provision—nor have I seen any that support it. I can only assume that a veil of silence has fallen over the proposal, which must mean that everyone is happy with it. If I get a sack full of letters as a result of this speech, we will know differently. The review went on to say that
“The abolition of safeguarded rights will be taken forward in the Pensions Bill.”
That is exactly what is happening.
According to the explanatory notes,
“Where, on divorce or dissolution of a civil partnership, rights to a person”— to a pension—
“are shared under the mechanism in Chapter 1 of WRPA 1999, and those rights include contracted-out rights, the law as it stands treats the contracted-out rights in a different way from the other shared rights. They are known as ‘safeguarded rights’ and are subject to various restrictions.”
Clause 78 and schedule 8 would abolish those restrictions completely, after which
“shared rights that derive from contracted-out rights will be treated in the same way as other shared rights.”
That seems to be the right way forward.
I believe that some 10,000 pension sharing orders are made every year and in the impact assessment the Government estimate that between 4,000 and 5,000 will be affected by the change. From what I can gather, it is something that the courts would welcome, as would many of the couples involved in these difficult divorces. Assuming that my understanding of the thrust of the modest little clause is correct this side of the Committee welcomes the proposal.
I am grateful to the hon. Gentleman for supporting the clause in that way. It abolishes safeguarded rights and as such is part of what will be a rolling review of the pensions regulations designed to achieve a degree of deregulation. He will of course know, having seen the Lewin and Sweeney report, that there is no magic bullet that will achieve the deregulation that we want. It is an exercise that needs to take place over time, looking at all aspects of existing pension regulations. A number of measures that we can take to achieve deregulation now appear in the Bill. This is one of them and there are others that we will debate either today or in later sittings. The hon. Gentleman is perfectly right to identify that as one of those deregulatory steps and I am pleased that he welcomes it. As he says, when a divorcing couple or civil partners who are dissolving their relationship—it does include that—seek a final financial settlement the court must take into account the value of any pensions held by either party to the divorce or partnership dissolution. One of the options open to the court is to make a pension-sharing order.
When a divorced scheme member’s sharable pension rights include contracted-out rights, the former spouse’s share of those rights is know as the safeguarded rights, and those rights are subject to a detailed regulatory regime, similar to but not the same as the rules for contracted-out rights from which they are derived.
We have received representations, both as part of the deregulatory review of private pensions and also prior to the review, that safeguarded rights serve no useful purpose, that they restrict the options available to the member and just add administrative complications to pension schemes. We have been persuaded by those arguments and have taken the opportunity to bring forward the clause and to remove safeguarded rights. That is a useful, and I am pleased to hear a supported, step towards the process of deregulation.
Safeguarded rights were introduced for contracted-out benefits—derived from the national insurance rebate—to protect public funds. Therefore, safeguarded rights were created to protect the national insurance rebate when contracted-out rights were shared between the parties to a marriage or a civil partnership. They were broadly intended to reflect contracted-out rights and to ensure that those rights were securely protected and used for their intended purpose, that is to provide an income in retirement. When they were introduced it was thought that they provided additional protection to pension credit members, but since they do not require a minimum level of payment that is not in fact the case. They were introduced for good reasons but have proved to be unnecessarily bureaucratic and that is why we brought forward the proposal to abolish them. I am pleased that the hon. Gentleman supports that and I hope that it will therefore become part of the Bill.