Clause 79

Pensions Bill – in a Public Bill Committee at 1:30 pm on 7th February 2008.

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Revaluation of accrued benefits etc.

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

Photo of Danny Alexander Danny Alexander Liberal Democrat, Inverness, Nairn, Badenoch and Strathspey 1:45 pm, 7th February 2008

First, I want to echo some of the comment made by the hon. Member for Eastbourne about both the importance of the deregulatory review and the work that came out of that, and of the deregulatory agenda more generally, aimed at protecting, where possible, existing defined benefit schemes. Some of the matters that we will come to discuss, particularly under the new clauses, are ones for which I have considerable sympathy.

However, I would be grateful for a bit more information from the Minister on the evidence base for the Government’s decision to include the provision to reduce the cap on growth funds for deferred members of certain occupational pension schemes from 5 per cent. to 2.5 per cent. Obviously, the main argument in favour of clause 79 and the associated schedule 2 is that it will provide support for the remaining defined benefit schemes. That certainly has been the representation made to the Committee by organisations such as the National Association of Pension Funds and the Engineering Employers Federation, which made the point both in its evidence and the briefings it supplied.

I would like to know what evidence the Minister has that this will do something to slow the closure of defined benefit schemes. It is interesting to look at what the independent reviewer said around this idea.

“We are not inclined to recommend a change in approach to the revaluation requirements for deferred benefits. Although there will be some cost savings for final salary schemes (partially offset by extra administrative costs due to the need to revalue two separate tranches of benefit at separate rates) these would be made entirely through reduction in the value of the benefits of those who leave the scheme before pension age. We have seen no evidence that this change would ease administration, encourage risk sharing or slow closure of final salary schemes.”

That is a fairly strong view from the people the Government asked to conduct the independent review into deregulation. I would be interested to hear on what basis the Government and their officials reached the opposite conclusion, which led to the inclusion of this provision in the Bill.

Certainly, representations from other organisations—I particularly draw the Committee’s attention to the TUC and to Unite in this context—suggested that what this provision could potentially mean is a significant erosion of some members’ benefits. Depending on the measure that is used, inflation is currently running at around 4 per cent., which would mean that deferred pensions  would be worth 1.5 per cent. less per year in real terms at the moment, if this arrangement applied now. Over a long period, if those arrangements were maintained—the Minister will no doubt draw attention to the Government’s inflation target and so on—this could amount to deferred pensioners, perhaps those who deferred a long time in advance of retirement age, losing quite a considerable proportion of the benefits they would have expected to receive.

As with many other provisions in the pension system, there is currently, therefore, a risk. I wonder to what extent the Government have evaluated the possibility that this change could potentially have a significant effect, particularly on women pensioners. Women pensioners suffer from a number of different aspects of our pension system and I would like to hear from the Minister that the impact on women is something he has particularly taken into account in considering and bringing forward the proposed change.

To quote the independent reviewers again:

“Although available data is patchy, it seems to us that women could be proportionately affected by a reduction in the cap, because they are more likely to earn pension benefits early in their careers and then leave the workforce for periods of time to undertake caring responsibilities.”

Clearly, in the Bill that went on to become the Pensions Act 2007, the Government made the argument that at least some of the changes that they were bringing forward were there to support and advance the position of women pensioners. Though the Bill did not go as far as some of the amendments tabled by my hon. Friend the Member for Yeovil (Mr. Laws) at that time, we did welcome the progress that was made. There is a concern, however, that the current Bill—subject to what the Minister has to say in response about the evidence he has looked at in relation to the impact on women pensioners—is actually sending some quite mixed messages.

The argument, which has some force, that has been advanced particularly by the NAPF is that the measures contained in the clause and in schedule 2 are necessary to help protect existing defined benefit schemes. The representation from the TUC has suggested that this change might, in some circumstances, encourage employers to close high-quality existing schemes, saying:

“The statutory revaluation cap also provides protection for current employees in defined benefit pensions, not least when employers make changes to schemes. If for example a scheme was closed to future accruals, all the existing members would be treated as deferred members with their benefits adjusted for inflation up to statutory cap.”

In other words, if the scheme is closed and people are therefore able to apply the lower cap that is proposed, there is a potential advantage to employers of closing the scheme. That is the TUC's argument. I wish to hear what consideration the Minister has given to that important point, because it needs to be thought through properly before the item we are discussing is put on the statute book.

Finally, I should like to hear the Minister’s answer on this complicated issue, about which there are arguments on both sides. I wish to be reassured that the impact that the provision may have on young people's incentive to save was considered properly by the  Government when drafting the clause. Clearly, in the modern labour market, we all know—I guess that Members of Parliament are more conscious of it than most—that there is no such thing as a job for life. [Interruption.] Perhaps the Minister thinks there is; perhaps the hon. Member for Eastbourne does. People often move from job to job and might have several jobs—or even two, three, four, five or six jobs in a year—and under the Bill there will be the opportunity for automatic enrolment in respect of every one of those jobs, because having left an employer and moved to other employment, people are therefore deferred in the context of earlier employment. What impact does the Minister think the reduction in the cap would have on the incentives for people to join pension schemes throughout their lives, given that doing so could result in a reduction of the benefits that they could receive from the pension schemes from earlier periods of employment?

I should be interested to hear the Minister's answers to all those important questions, before we move on and agree to the clause standing part of the Bill.

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

I suppose that the hon. Member for Inverness, Nairn, Badenoch and Strathspey should know about having more than one job, because not only is he trying to shadow the Department that it is possible for 40 per cent. of all Government spending, but he is also chief of staff to his new party leader. Clearly, he is a renaissance man. However, I do not agree with him. I do not agree with the TUC, either, which was wrong to throw its toys out of the pram when this proposal surfaced. We Conservatives were quick to support the Government on this matter, but we said, in other ways, that they should be going further and faster.

The TUC needs to take a trip to Holland, because the unions there are closely involved in running the big sectoral defined benefit schemes and are totally on the same page as employers’ organisations on how such things are run and on having flexibility built in. People like those at the TUC need to get on board with the idea that it is about having a choice between having a Rolls-Royce pension and, perhaps, a Jaguar or even a Volvo one, if that is their tipple. However, if people insist on a Rolls-Royce pension, they may have no such scheme at all and may end up with an employer reverting to a simple defined contribution scheme or, when the day dawns, pointing his employees towards the personal accounts with their 3 per cent. employer contributions. So there are some real dangers of people, such as those in the TUC, overplaying their hand. All credit to Ministers for at least coming up with this brand of risk sharing and flexibility.

I commend the hon. Member for Inverness, Nairn, Badenoch and Strathspey for picking a quote out of the Lewin and Sweeney report that sounded clear-cut and black and white on the issue, but it seems to me that the more relevant quote from their report is this:

“Once again, we find good arguments on either side of this question.”

That is very much in the mode in which they discuss almost everything in the report. I do not criticise them, in that they were coming at the issue from different  directions. They are both experienced men with a lot of expertise, but they simply could not agree on some of the fundamental issues.

Photo of Danny Alexander Danny Alexander Liberal Democrat, Inverness, Nairn, Badenoch and Strathspey

The hon. Gentleman is right in what he points out about the report. The purpose of what I said was simply to hear from the Government the reasons why they had decided to come down on one side of the argument rather than another when the independent reviewers had not been able to do so.

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

It certainly was not the conclusions of Sweeney and Lewin that persuaded the Government to do anything specific. In a masterpiece of draftsmanship, they finally came up with this immortal line. As the hon. Gentleman accurately said, they did not recommend a reduction in the cap, but they concluded by saying that they would

“understand if Government took the view that, when looking at the package as a whole, a reduction in the cap from 5 per cent. to 2.5 per cent. was one of the measures needed”.

If I was a Minister receiving that report, I would probably be tearing my hair out. [Interruption.] The Minister has been, obviously, or somebody has. It seems strange to produce a report with so few firm conclusions. Perhaps that illustrates the minefield that we are in at the moment, but let me be absolutely clear about this. We think that the prize is to retain and encourage DB schemes, which will always produce the best possible retirement income, broadly speaking, for individuals—much better, let it be said, than personal accounts and significantly better, on average, than DC schemes.

Again, to their credit the Government, in their own conclusion, said:

“The Government remains concerned about the continuing decline in occupational pension provision and that, if nothing is done, the decline will continue...It is clear that there is no single ‘magic bullet’, or, as this consultation has shown, ‘a consensus option’.”

We agree with all of that. There is no single magic bullet, but there is a package of different things, some of which are in the Bill but some of which are not yet, that we think could give the necessary impetus to DB schemes for the future.

As I understand it, the measure is meant to take effect from January 2009 and will affect only rights accrued after that date. The basic principle, which I think is common ground, is that any rights accrued before this legislation will not be touched at all. The Government estimate that

“a reduction in the cap would deliver potential savings for employers of up to £250 million...a year”,

possibly rising to as much as £400 million a year. That is worth having in what is a difficult environment for companies running these schemes.

I totally agree with the NAPF. When it commented on this aspect of the Bill when it was published, it described it as “an important first step”. We agree. We also agreed with Pensions Week when it said:

“Most notable by its absence in the bill was any conclusion over the industry’s proposals for risk-sharing strategies.”

Photo of James Plaskitt James Plaskitt Parliamentary Under-Secretary, Department for Work and Pensions 2:00 pm, 7th February 2008

This has been a helpful debate on an important change that the clause introduces. I am grateful to the hon. Member for Eastbourne for his expression of support for it. My problem with the approach of the hon. Member for Inverness, Nairn, Badenoch and Strathspey is that he has taken this entirely in isolation, and based his criticisms of it as through it were a stand-alone change. It needs to be seen in the context of everything else that is happening. The reform is part of a broad package. That is what Turner asked us to do; it is what everyone has understood needs to be done. For example, the hon. Gentleman tried to argue that this specific form would in some way be particularly disadvantageous to women. He should bear in mind the whole package.

For example, we have already made changes, which will apply in due course, to the number of years required to qualify for a state pension. The main beneficiaries of that reform are women. The majority of those in the income bracket who will, we hope, become participating members of the new personal schemes introduced by the Bill will also be women. The net effect of all the measures being taken will be substantially to improve the pension position of women in the future. I suggest that the hon. Gentleman should bear all of these things in mind, because this is part of making a sustainable whole.

Photo of Danny Alexander Danny Alexander Liberal Democrat, Inverness, Nairn, Badenoch and Strathspey

I think that I acknowledged, in what I said earlier, that the measures taken in the previous Pensions Bill, as well as the personal accounts, will have benefits for women. My intent was not necessarily to criticise these arrangements, but to probe the Minister’s evidence base on aspects of the clause, so that the Committee can be assured that all potential criticisms have been looked into in deciding to bring the measure forward.

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

I am coming to that. I understand that the hon. Gentleman wants to know the evidence base, and I will come to it in detail in a moment. I wanted to reassure him on the broader context. One thing on which we all agree is that good quality occupational pension provision has to be encouraged. Traditionally, in our country, such provision has tended to be made up of defined-benefit, often final salary, schemes. However, due to a combination of factors such as high life expectancy and lower investment returns, the cost to sponsoring employers of running defined-benefit schemes has increased significantly over recent years. Mainly as a result of these cost pressures, we have seen a decline in the number of schemes which are open to current and new employees.

While the Government have no power to control many of the underlying cost factors, what we can do is review legislation which affects occupational pension schemes, and seek wherever possible to minimise the cost burdens arising from such provision. If a member leaves an occupational scheme before reaching pensionable age, the pension rights which have been left behind in the scheme—the deferred rights—can be undermined by inflation if no revaluation increases are provided by the scheme over the period of deferral. That is why schemes are required to award a minimum level of  revaluation on such rights. When in the 1980s the statutory revaluation requirement was introduced for deferred pensions, it was recognised that it would be counter-productive and wrong to impose a potentially unlimited cost burden on schemes.

The balance of member protection and scheme affordability was set by requiring schemes to revalue deferred pension rights by the rate of inflation over the period of deferral, or by 5 per cent. per annum, whichever is less. When the 5 per cent. cap was set, inflation was running at a significantly higher level than it is now. In fact, over the previous five years, it had averaged almost 9 per cent. In other words, the balance was struck such that there was no expectation that schemes would have to protect deferred pensions fully against inflation. Due, however, to the sustained reduction in inflation in recent years, that is now the effect of the 5 per cent. cap. The similar cap which applies to the limited price indexation requirement on pensions in payment has already been reduced to 2.5 per cent. per annum, and bringing the revaluation cap into line with this figure was one of the proposals considered as part of the recent deregulatory review of private pensions. We think that it is sensible to include this reform in a package of measures to help employers to continue to provide occupational pension schemes for their work forces.

In judging that a reduction in the revaluation cap is now appropriate, the Government are clear that pension rights that have already accrued—this point was made by the hon. Member for Eastbourne—should not in any be affected by the introduction of the lower 2.5 per cent. cap. We have drafted the legislation carefully to make sure that that is absolutely clear.

The Committee will have noted that schedule 2 makes equivalent changes to the provisions of the Pension Protection Fund, so that the shape of PPF compensation continues to reflect the statutory requirements of the pension scheme. It would be perverse for a compensation scheme to offer better benefits than those that a person would have expected from their own pension scheme.

The hon. Member for Inverness, Nairn, Badenoch and Strathspey asked for specific evidence. Let me share with him the extent of support for this measure, the endorsements that it has received and the reasons why it has been endorsed. For example, this clause is specifically endorsed by the National Association of Pension Funds, the Association of British Insurers, the Engineering Employers Federation and the Co-op Group.

In endorsing the clause, the EEF said that the reduction in the cap would

“make it more likely that those schemes that have been closed to new members will decide to remain open for future accruals to existing members”.

I think that the hon. Member for Inverness, Nairn, Badenoch and Strathspey would like to see that happen and there is evidence, from those in the field, that that would be the effect.

The CBI also gave us a little more insight in this area. If the hon. Member for Inverness, Nairn, Badenoch and Strathspey does not mind, I will share with him the full extent of their support for the measure, because what the CBI said is interesting in the context of the way that the hon. Gentleman spoke. The CBI told us:

“Firms have faced an escalating burden of cost in running DB schemes over the past decade, resulting from longer lives and higher regulatory costs. Where appropriate, it is right to reduce these burdens to improve scheme health. The proposals to amend the limited price indexation (LPI) cap to 2.5% for deferred members...is therefore welcome. As this is a forward-looking measure, scheme members will know from the outset what rate of revaluation their savings will have and will not be “unfairly” re-valued. Reduction to 2.5% is also appropriate to delivering the original intention of the legislation - limited price indexation - in the current the economic climate.”

I hope that the hon. Member for Inverness, Nairn, Badenoch and Strathspey will accept those arguments. This is a measure that reflects today’s lower inflation environment and it is part of a package of wider deregulatory measures. We hope and believe that it will help employers to maintain defined benefit occupational pension provision into the future. Therefore, I hope that the hon. Gentleman will support this clause.

Question put and agreed to.

Clause 79 ordered to stand part of the Bill.

Schedule 2 agreed to.