When I first looked at the clause, I thought that it was very techie and that we did not need to say anything about it. All it seemed to do was to clarify the technical issues surrounding the powers of the Pensions Regulator under the Occupational Pension Schemes (Scheme Funding) Regulations 2005.
One of the things that drives the regulator is the principle that the methods and assumptions used by pension fund trustees are chosen prudently. For example, if they assumed that their members would live to the age of 36, that would clearly be a bit imprudent. All of this—surprise, surprise—emanates from the European occupational pensions directive of 2003. So far, so good. The clause, as I read it, does what it says on the tin and clarifies that the regulator can use their powers under section 231(2) of the 2004 Act, where the sole ground of concern is that the actuarial methods or assumptions do not appear to be prudent. However, what gives that topical salience is the flurry of press comment in the past few days about the changes in assumptions on longevity figures being proposed by the regulator. I gather that those changes are now out for consultation until May sometime. No doubt the Minister will be able to tell us a bit more about that. Potentially, those changes could have a dramatic effect on pension scheme deficits. I have seen one estimate that adds an extra £75 billion to the burden on existing schemes. Sometime this week, we will get on to risk sharing and how we can encourage various schemes to stay in business, as it were. The need for those measures is given extra urgency by these proposals.
One might say that it will cost £75 billion extra simply to reflect the fact that, for example, under the PPF’s current assumption a man will live to 87.9 years on average, which is up from 86.8 in its 2006 report and accounts. The figure being bandied around at the moment by the Pensions Regulator is 89. That is very encouraging if you are a man and, presumably, no doubt, even more encouraging if you are a woman—[Interruption.] I should tell my hon. Friend the Member for Bromsgrove, who makes a comment from a sedentary position, that the gap between the sexes is narrowing quite rapidly, although I will not speculate why that is so. Those figures raise some important issues that go way beyond the technical issue in the clause.
Regulators have been worried that schemes have been understating or underestimating the rate at which life expectancy continues to increase. I have read some statistics, which will no doubt perk up Committee members who may not have volunteered to sit on the Committee, that say that for every hour they spend here, their life expectancy increases by a quarter of an hour. That is quite dramatic.
Time moves more slowly in this Committee. I think that Albert Einstein would have said something about serving on a pensions Bill Committee. Time appears to move slowly here. However, broadly speaking, we all end up in the same place, whether we are sitting in a Committee, in the Chamber or in our offices, which would make a nice change from sitting here.
The big issue is how we deal with this new development. It is very encouraging that, thanks to the foresight and wisdom of successive Governments, life expectancy has increased. Of course, we know that the state pension age of 65 for men was borrowed from Bismarck, who came up with it in the middle of the 19th century. That was a time when few people made it to the age of 65 and certainly not far beyond it, although I think that Bismarck did. How do we factor that in?
I was about to say that one could argue that, if the extra costs are £75 billion, so be it. That fact must be built in to pension schemes more generally. However, it is bound to be a factor in the attitude of sponsoring employers to keeping their existing pension schemes open to new or existing members. In the same way, to take an example, FRS 17, introduced at exactly the wrong point in the economic cycle in my opinion, had an effect on undermining that commitment.
Yes, it is important that we clarify that the regulator has those powers, but it is not the Committee’s job to argue whether the EU directive was sensible in the first place. As a Committee, we need to put all this in a broader context, which is the dramatic increase in life expectancy. Ultimately, matters such as obesity and selling off playing fields will have an impact on slowing the increase in longevity, but short of a massive pandemic it seems to go up and up inexorably, which is enormously encouraging.
I have a constituent who is 111 years old. Of course, Eastbourne tends to have a slightly older population than average, but it is remarkable how many 100th birthday parties I get invited to; sometimes two a week. That says something about the health service and all sorts of related matters, such as better nutrition. It also brings a different reality with it, which is how we pay for the very long periods of retirement that people will increasingly be enjoying—hopefully that is the right word—based on a reasonable income to do so.
Therefore, the clause seems relatively modest and inoffensive, but behind it lurks the elephant in the room—to use a marvellous and much over-used analogy—which is the question of rapidly increasing life expectancy. I would be fascinated to hear what the Minister has to say on those matters.
I am sorry to hear that the hon. Member for Eastbourne is not enjoying the Committee’s deliberations. Perhaps time slowing down means that he wants to spend more time in these sittings. Certainly, the record of the number of 100th birthdays in his constituency suggests that time there is speeding up, so there is a balance to be struck somewhere.
Dressed up as a technical clause, this raises an important point, rightly lighted upon by the hon. Gentleman. I do not wish to repeat his remarks, as he made many of the points that I had intended to make. However, the key word in relation to the clause is “prudent”.
The report released this week, which is now a matter out for consultation from the regulator, suggests that the regulator is doing its own work on what it considers to be prudent. Does that mean, should the clause be enacted, that the regulator will therefore effectively determine the actuarial considerations each scheme should make? Or is it a slightly looser arrangement, under which the regulator has the power to determine the prudence of the actuarial considerations? That does not mean that they have to be exactly along the lines of the examples that the hon. Gentleman gave, which have been reported quite widely this week. But, for example, a pension scheme, that made actuarial assumptions higher or lower than those made on the national average could, none the less, justify those assumptions as being prudent on the basis of its team members’ knowledge.
It would seem not quite right that uniform actuarial assumptions should be imposed by the regulator across all pension schemes. However, it is sensible and necessary, given the content of the European law, that there should be an ability to determine whether the actuarial assumptions made by the scheme are prudent.
I note, in closing, that the work of the Pensions Regulator on understanding the extent to which life expectancy is increasing has not only an implication for pension schemes in the private sector, which the clause refers to, but a significant effect on the liabilities of public sector pension schemes. That is a matter that is debated and highlighted all too rarely by Ministers. Information was recently brought forward, or at least endorsed, by the Government on the work of the Institute for Fiscal Studies on a rough estimate of unfunded public sector pension liabilities. Given that, if the new actuarial considerations were applied to public sector pension liabilities what greater extent would the Minister see those liabilities taking? There is also a massive implication for the public purse that is being swept under the carpet, and I would welcome his comments on that. While the debate concerns a technical point, it has much broader implications across the public and private sectors.
This is an important issue and my hon. Friend the Member for Eastbourne is on to something in raising it, but listening to the hon. Member for Inverness, Nairn, Badenoch and Strathspey reminds me what the issue was about originally, which is not quite what we are discussing. My understanding is that it is about ensuring that members of schemes have reassurance and confidence that the funding of their schemes by employers is adequate. Of course, in the great debate about public sector pensions that does not quite apply in the same way. Many public sector pensions are unfunded; one thinks particularly of the police service. What to do about the burgeoning liabilities of public sector pensions is a major political issue for this Government and any future Government. The Minister will remember a point I made on Second Reading, which is that it will be a huge tragedy if we continue to move away, right across the piste, from final salary schemes, simply on the argument about what is affordable. I have real concerns about what future generations may be entitled to in retirement, which in a sense is linked up with this issue.
On the issues that my hon. Friend the Member for Eastbourne has raised, there must be a concern if the regulator is to use the new power in clause 99 to impose an actuarial calculation regime on schemes that until now everybody has regarded as being well-managed, prudent and properly funded. I would share his concern if that were the case, however, my reading—I may have it completely wrong—is that this is actually a provision to assist members of schemes who feel that employers are not contributing sufficiently. That has been a major scandal in many schemes. The new power would enable the Pensions Regulator, which is the watchdog on behalf of scheme members, to make an intervention even if the cosy relationship between trustees and employers means that they think that all is well, which has also gone on in the past.
This is a critical issue. For the reasons I have stated, we need this power in the Bill. What we need from the Minister is a reassurance it will not be used across the board to impose new funding requirements on all kinds of schemes, in response to the longevity information that my hon. Friend the Member for Eastbourne rightly drew attention to. Those two points are different. Those schemes that the regulator feels are underfunded can now be dealt with even if the trustees and the employers think that they are funded sufficiently.
My understanding is that at the moment, the regulator cannot intervene—with this power he could, and that is important. I entirely share the concern of my hon. Friend the Member for Eastbourne. If the provision enables the regulator to interfere right across the board in employer pension schemes, particularly in the private sector, that could potentially impose funding requirements which would drive even more schemes into defined contribution arrangements and away from defined benefit arrangements. That would add to the problem of levelling down about which we are all concerned.
I thank the hon. Member for Ryedale; he has encapsulated the argument well. We must ensure that members of a pension scheme can be sure that the funding of their pension scheme is adequate. On occasion, sometimes after discussions with employers, trustees have accepted that a particular level of funding is adequate when circumstances have changed. Over recent decades we have seen actuaries who calculate the amount of liability a pension fund has based upon the data that they look at. That data is about how long people are living. Over the last decade or so we have recognised that data about how long people have lived for the last few decades will no longer reflect how long they live in the decades to come. That has implications for pension funds, which will have to provide for greater funding if people are living longer—there must be more money to pay their pensions for longer.
Actuaries have made various calculations and shared views about projections for life expectancy, and therefore how much money pension funds have to have. However, many of the calculations established, particularly during the late 1990s, were wrong and the amounts that needed to be put in were higher than expected. The result of that is that a lot of work has been done by actuaries over the last decade, seeking to get a better fix on how long people are likely to live. There is no one-size-fits-all solution to deal with the point raised by the hon. Member for Inverness, Nairn, Badenoch and Strathspey. People in different types of occupations have longer life expectancies than others.
I represent a mining area. We still have a working pit and I am a miners’ MP—a rarity these days. In my area there are many people who have pneumoconiosis and other pit-related diseases, and life expectancy is therefore reduced as a result. The mortality rate in my local hospital, the George Eliot hospital, is very high. Various figures have suggested that that is due to a poor hospital—actually it is due to the fact that it represents an area where there is a history of particular types of disease. Therefore, if we make projections in a particular industry about how much funding we will need, we must have data about the nature of the life spans of people in that industry. The life span of a miner is now greater than in was in the past: care for their health and safety is greater, and the general health benefits and the lifestyles that people lead are better than they were in the past.
The miners’ pension funds must make calculations based not on how long miners lived in the 1970s, 80s and 90, but how long they are likely to live in the 2020s, 30s and 40s and decades to come. Provision in the fund must be made for those sorts of life expectancies. Some trustees—not in that particular fund, but in some—have taken somewhat conservative views about life expectancies. I use the word “conservative” with a small “c”. The result is that the fund is underfunded, or at least that there is some concern among members about its adequacy.
The regulator has a specific ability to intervene, as the hon. Member for Ryedale suggests, but there is also a more general issue, to which the hon. Members for Eastbourne and for Inverness, Nairn, Badenoch and Strathspey have referred: what about the concerns that the regulator may have that some pension funds may well not have made adequate provision, and how do we ensure that there is adequate provision in pension funds and that trustees are properly advised about how to approach such issues of increased longevity?
The clause addresses an uncertainty that has arisen about the circumstances in which the pensions regulator can use its powers to regulate a scheme funding requirement for private sector defined benefit schemes. The regulator has a range of scheme funding powers that it can use where there has been a breach of the legislation, or where the trustees and sponsoring employers cannot reach agreement on a key aspect of the scheme’s funding arrangements.
One of the duties of a pension scheme’s trustees is to decide which actuarial assumptions to use. They can look at particular actuarial valuations of their scheme as a result of that. Legislation requires that those assumptions must be chosen prudently. Where it appears that the trustees have not complied with that requirement the regulator has the power to specify what assumptions must be used.
The regulator has recently faced challenges to its power to intervene where the actuarial assumptions used in a valuation do not appear to have been chosen prudently by the trustees. The actuarial assumptions used in a valuation are crucial to establishing the scheme’s correct funding position, and therefore the level of contributions payable by the sponsoring employer.
The clause does not give the regulator any new powers. It clarifies what powers we assumed the regulator had. It simply ensures that the regulator can use its scheme funding powers, thereby protecting both members’ benefits and the PPF, where the assumptions chosen by trustees do not appear to be prudent. In that sense, the hon. Member for Ryedale is entirely right.
The hon. Member for Eastbourne has however raised the broader issue about the recent consultation document, which was published yesterday. I want to tell him clearly and candidly that the regulator takes its independence very much to heart and is clear that it has a role to look after the general security of the industry and make sure that trustees consider appropriate actuarial assumptions. Therefore it took a view that it wanted to publish the consultation document.
When I was made aware that the regulator was about to do that—and I saw some of the media—I approached it, and we considered the matter. Once pension fund representatives examine the document they will see that it is essentially a consultation document, to ask them their views on how those issues of increased longevity should be dealt with. It is not a diktat from on high. It is an attempt by the pensions regulator to engage in a serious process of examining actuarial projections, which are constantly changing.
That has implications for pension funds. We do not know quite what those are yet. Some of the headlines that I saw in the Daily Express and elsewhere are lurid, fanciful projections based on journalists seeking to get a headline from an issue that would probably be seen as more technical than anything else. The implications are profound and important; but they are also technical. The question is how best to make the calculations, and by what means to deal with a major change in society. It is a very welcome change: on average we are living longer. That is great, but it has to be paid for, and that sometimes is not so great, because it leads to problems over where to find the money.
We need a way to gauge how much we must pay, and that is why those actuarial issues require broad discussion. What the regulator has sought to do is set out a consultation document that says, “Look, we have an issue here. Let’s talk about it and discuss how we can best calculate this. These are our ideas, what are yours? Let’s have a proper consultation discussion about the best way in which trustees can deal with the issue and have appropriate actuarial calculations for your particular industry and, more broadly, for pension funds as a whole.”
I condemn some of the lurid headlines. I do not think that they are helpful. They are raising fears among pensioners, which is unnecessary. At the same time, however, this is a genuine issue that needs to be dealt with in a technical and serious way. What the regulator has done, independently of Government, is to put forward the idea of having a broad-based consultation on an enormously important issue to see whether we can get a consensus between trustees and actuaries about how to proceed.
I am listening with great interest to the Minister. We are all grateful to him for his very discursive and useful analysis of this very important matter. However, I am not aware that he has responded to the point that was raised by my hon. Friend the Member for Eastbourne about the big increase in childhood obesity and type 2 diabetes. Are those conditions feeding into the life expectancy figures? While I accept that people are living longer, we are all aware of the increase in childhood obesity and I wonder whether that has been factored into the actuarial figures. Perhaps the Minister could get back to the Committee at a later stage on that important issue.
Actuaries will have to take into account projections of the possible impact. I do not know whether they have decided on the projections. The extent to which they need to take them into account will depend on the type of industry in question. There are some occupations in which obesity is unlikely to be a problem. However, other occupations might need to take into account issues related to obesity. This is not a one-size-fits-all issue. It is about getting trustees in particular areas and particular occupations to be able to project what sort of longevity members of particular schemes might have and therefore what the adequacy of funding will be. One of the issues that they will consider when they make their calculations is the projections offered by the Office of National Statistics, which will deal with the sorts of points raised by the hon. Gentleman.
In terms of affordability and what is set out in the Bill that we are currently looking at as opposed to the consultation exercise that is now going on, what kind of options for affordability is at the behest of the regulator? Is it simply to increase employers’ contribution, to change the amount of pension that will be paid out, or to stop pension holidays? In determining affordability, what kind of issues can the regulator decide upon? Can it increase employers’ contributions to beyond 3 per cent. that is set out in the regulations for lower paid workers?
In terms of personal accounts, projections about life expectancy will obviously have a relevance. However, we are dealing with defined benefit schemes rather than defined contributions schemes. In defined contributions schemes, such as personal accounts, the amount that is built up in the pot will determine the amount that the person gets. Although it is a relevant consideration, it does not have the crucial importance that it does in the defined benefit scheme, which is, in effect, a final salary scheme. In such a scheme, the employer may well have the obligation, but it may, in some circumstances, be shared with the employee to ensure that the scheme is adequately and properly funded. If a projection by an actuary employed by a scheme says that they expect a defined benefit scheme to have a longer life expectancy, in some cases, depending on the terms of the scheme, it will sometimes predominantly affect the employer because they will have to properly fund the scheme. The hon. Lady asked whether it would affect issues such as holidays and so on, which employers might take as contributions—the answer is yes. If it looks like there is a surplus, and if new projections suggest that the surplus is not that great, a holiday or whatever the employer may have felt possible may not be possible. The level of adequacy of the funding will have been increased, because of new projections on longevity. Holidays and other things will be affected.
The reason why I am concerned about lurid headlines on whether some pension schemes are able to be paid is that in the vast majority of cases, they are not justified. In some cases, the headlines are about life expectancies some decades into the future. The provisions that must be put in place now will deal with a problem that will occur in 2050, say. The problem does not exist now, so there is plenty of time to make provisions to deal with it. When the consultation document was published, the journalists said, “We could have this problem now—the schemes are underfunded”, but that is not the case. The problem may well appear only in decades to come, so there is plenty of time between now and then to make adequate provision to deal with it.
The hon. Member for Ryedale, with his usual precision, touched on the broader issue of the move away from final salary schemes, which has been going on since the 1960s. Some 8 million people were in private final salary schemes in the 1960s; the number fell to about 5 million by 1995; and it has now gone down to about 3 million. Only some of those are open schemes. There has been a major change, and one of the things that that the Bill does more broadly is bring about deregulation changes that will encourage people to stay in, and employers to stay with, final salary schemes. I am not claiming that the Bill will reverse the process to which the hon. Gentleman referred, whereby employers move away from final salary schemes, but I hope that it will slow or steady it. In the past two or three years, the movement away from final salary schemes has steadied, and employers tend to stay with them more than before. I hope that we will further be able to steady the process—I do not think that we will reverse it—but, hopefully, we will be able to extend final salary schemes for longer. They are good schemes, so we should keep them if we can. No doubt we will have the opportunity to discuss that further when we debate shared risk.
The hon. Gentleman is entirely right. It will depend on the scheme, so the terms of those will be relevant, but the cost will not necessarily always fall on the employer. The issues are complex—sadly, lurid headlines do not help public understanding—and they need to be explained seriously and in a way that recognises the long-term nature of some of the problems that we need to address. The clause will enable the regulator and everyone else to know that it has the powers—we always assumed that it had such powers—to say that trustees and employers cannot continue to underfund schemes, and to intervene and say that employers must have an appropriate actuarial longevity assumption in their pension scheme and ensure that it is properly funded.