Clause 99

Part of Pensions Bill – in a Public Bill Committee at 12:15 pm on 19th February 2008.

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Photo of Mike O'Brien Mike O'Brien Minister of State (Pension Reform), Department for Work and Pensions 12:15 pm, 19th February 2008

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.