Clause 99

Part of Pensions Bill – in a Public Bill Committee at 12:00 pm on 19th February 2008.

Alert me about debates like this

Photo of Mike O'Brien Mike O'Brien Minister of State (Pension Reform), Department for Work and Pensions 12:00 pm, 19th February 2008

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.