Clause 24 - Abolition of contracting-out for salary related schemes etc

Pensions Bill – in a Public Bill Committee at 2:45 pm on 4th July 2013.

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Photo of Gregg McClymont Gregg McClymont Shadow Minister (Work and Pensions) 2:45 pm, 4th July 2013

I beg to move amendment 16, in clause 24, page 11, line 37, at end insert ‘but may only do so with the consent of the employee trustees.’.

The clause takes us into the realms of some of the more granular aspects of the ending of contracting out. It was the subject of considerable evidence heard at Select Committee sittings and at our evidence sittings last week. Subsections (2) and (5), as well as schedule 14, give employers the powers to amend employee contributions and benefits in their occupational schemes to an extent limited to recouping the cost of the extra national insurance that the employer will have to pay as a result of the end of contracting out.

I said earlier in our proceedings that the contracting-in, contracting-out dynamic under the Bill was perhaps its most significant and complicated part. For those who are contracted out in the public sector, the increased national insurance contributions will have to be absorbed either by the public services themselves or by the Government. It is fair to say that there is some obscurity about how the national insurance contributions will be made up in the public sector, given that more than 5 million employees are in final salary defined benefit schemes, which led to their being contracted out of the second state pension. In the private sector, there are 1.6 million active members of private sector defined benefit schemes.

The amendment would not impact the 5.4 million active members of public sector DB schemes, as the power under the Bill does not extend to public service schemes. The ability to recoup the national insurance contributions applies only to private sector DB schemes. Our proposal would enable an existing protection for members’ benefits under legislation or schemes to be subject to trustee consent. As it stands, the Bill will enable the existing protection for members’ benefits under legislation or scheme rules to be overridden. There is a statutory override. I am sure that the Minister will say that the Government also want to take the power to exempt schemes from that override.

It is unclear how the Government intend to proceed on certain aspects of the private sector DB schemes, specifically protected schemes. Leaving the protected schemes aside, as things stand there will be a statutory override. That includes specific statutory protection given to members in former nationalised industries when they were privatised, and also measures of protection that employers in times past have agreed to write into their schemes.

To put it straightforwardly, we have in the private sector 1.6 million members in final salary defined benefit schemes who have been contracted out of the state  second pension because their company pension scheme is going to give them as good a deal as they were getting from the S2P. Central to the Bill is increasing national insurance contributions as these individuals are brought back into the state system. To make the numbers work, to get to a cost-neutral system, there will have to be some pretty significant savings somewhere. It is fair to speculate that a decision has been taken that one way to make those savings—certainly to get the Treasury’s consent, if not to make the system cost-neutral—is that those in private sector DB schemes will have to absorb that pretty significant national insurance increase.

What does that mean for the members of those schemes? A scheme will have to decide how it absorbs those costs. We heard evidence from the CBI and others. The Minister fairly put the viewpoint of the employees to the CBI regarding protected schemes. That view is: “We were promised when these schemes were privatised under a previous Conservative Government that the conditions of our pension were protected; that we could not, by law, have a worse outcome at any stage than we had at the time when our industries were privatised.”

The Minister put that view pretty straightforwardly to the CBI. I do not think I am doing the CBI an injustice if I say that its representative’s response, not unreasonably, was along the lines that the money has to come from somewhere, and if it does not come from an adjustment to the rules of these schemes, it will come from the employees’ pay packets, because the business will have to absorb the cost one way or another. As I understand it, the CBI favours enabling these private sector DB schemes to absorb those costs, whether through higher contributions from scheme members or, potentially, a lower accrual rate of pension going forward.

This is a thorny issue. We suggest in the amendment that trustee consent should be required to make the changes. For example, we heard from witnesses from the employee side of the argument that the ending of contracting-out and the associated increase in employer NI is in principle no different from any other risk employers with DB schemes might face, and there is no sound justification for the Government’s disturbing the existing balance of power in the schemes.

The Minister may or may not agree at this stage, and the situation is not entirely clear, certainly so far as protected schemes are concerned. Some on the employee side argued in written evidence and in witness sessions that the extra cost to employers is no greater than might arise in the event of a small change in market interest rates. There was no suggestion of intervening to protect scheme members who lost out when the Government amended the statutory basis of pension increases from RPI to CPI. The Government should allow the resulting problems for employers to be dealt with through established processes, whereby changes can be effected by negotiation and agreement.

Based on what we heard in the oral evidence sessions, my sense of the argument from the employee side is that an overriding power based on the ability to recoup a set amount could result in great unfairness. There may be no correspondence between the variable amounts members may gain from the single state pension and the amounts they may lose if employers are allowed to determine unilaterally the form of contribution and benefit changes in occupational schemes.

There is something to be said on the point that there might not be a correspondence between the variable amounts members gain from the single state pension and the amounts they may lose if employers are allowed to adjust the terms of the occupational DB scheme of which these employees are members. The Minister will doubtless say, rightly, that in some instances, what a scheme member currently in a contracted-out private sector DB scheme will lose through the mechanism for absorbing the increased national insurance contribution, they might gain—and more—from the ability to get a significantly higher state pension. The calculations are difficult, however, and I am not sure the Government have done such a calculation.

As things stand, someone who is contracted out into a final salary scheme can only get, at most, the basic state pension of around £110 a week. Under the new system, as they are brought back into the state pension, it will be possible—certainly in theory and in practice for some individuals—to get to £144 or whatever the level of the new state pension is set at. That is a significant benefit, although again, the calculations are difficult. It depends on circumstances, how close the recipient is to retirement, whether it is possible to buy back in, and so on. That issue must be considered, but it is not necessarily as simple as it first appears.

The TUC told us of its opposition, in principle, to the statutory override in clause 24 and schedule 14. It would regard an amendment such as the one we have tabled as a far from ideal solution; indeed, I would not claim that it is wildly enthusiastic about our amendment. I am sure hon. Members remember the TUC’s evidence session. I asked what it thought about an amendment such as this, on trustee consent, and it said that it would be an improvement. [Interruption.] I did not catch what the hon. Member for Tamworth said; I invite him to let me hear what he is saying.

Photo of Gregg McClymont Gregg McClymont Shadow Minister (Work and Pensions)

It is fair to say that those who represent employees, the trade unions, strongly oppose the statutory override. It is important that the Committee hear that argument. The TUC says that because the cost calculation will be made at the aggregate level rather than per individual, it is expected that many individual scheme members will be worse off, although the impact will be neutral overall.

As the Work and Pensions Committee pointed out, the DWP has not undertaken an impact assessment of those affected by this measure. Schedule 14 requires actuarial certification of scheme changes to ensure consistency with the Bill, but we believe this protection is insufficient. Schedule 14 indicates that the Government also intend to apply the override to protected persons, meaning individuals transferred from public sector employment due to privatisation with a legal guarantee that their pension entitlements could never be altered without their consent. The TUC is strongly opposed to this measure.

The TUC has quite a lot of experience of pensions, understandably, because historically, pensions in the occupational sphere are bargained between employers  and employees. My hon. Friend the Member for Middlesbrough South and East Cleveland was a trade union organiser. He is close enough for me to hear not so much what he is saying as the noise emanating from him—[Interruption.] I caught the last word the hon. Member for South Derbyshire said: I think it was script”. I must invest in a hearing aid.

That is the trade unions’ position. They are strongly opposed to a statutory override in principle and in practice, and oppose the application of the statutory override to the protected schemes. The Government’s position on non-protected schemes is clear. The statutory override will apply, and those who run the schemes will be able to adjust the benefits or contributions to absorb the significant national insurance rise. We know it is significant because the Government have calculated that an extra £5.5 billion a year in extra national insurance contributions will go to the Treasury from 2016 when the new state pension begins. The bulk of that will come from the increase in national insurance contributions in public sector schemes, which have 5 million members rather 1.5 million. It is unclear how the increased national insurance contributions in the public sector will be met because the Government have not wanted or are unable, rightly, to reopen the public sector pensions settlement undertaken by the Chief Secretary to the Treasury, the right hon. Member for Inverness, Nairn, Badenoch and Strathspey (Danny Alexander).

We are talking specifically about private sector DB schemes that have been contracted out. It is clear that the statutory override for these schemes, other than protected person schemes, is a consequence of a larger reform the Government are undertaking. As people are brought back into the system, their contracting out, by definition, must end. Given the opportunity for individuals to buy back into the state system and to get up to a higher state pension, we do not oppose that.

Protected schemes are protected because when the last Conservative Government privatised industries, the workers were promised that the terms and conditions of their pensions would never be worse than at the moment of privatisation. The argument is that having to absorb those national insurance contributions will result in the deterioration of those terms and conditions.

The Minister wants to give himself the power in the Bill to exempt such schemes from the statutory override that the rest of the private sector DB schemes will have to undertake. It is not unfair to say that the Minister’s position remains undecided. He was straight in putting the employers’ case to the CBI and the CBI’s case to the trade unions in Committee last week, but according to his evidence, he had yet to come to a decision on whether the protected schemes should be exempted from the statutory override.

The amendment, which adds the words

“but may only do so with the consent of the employee trustees”,

would bring the trustees four-square into the matter. Often, they will be involved naturally, but the amendment would ensure through legislation their involvement in the negotiation process. We do not yet know what the Government’s intentions are. I await the Minister’s response with particular interest, given the ambiguity that still surrounds the Government’s intentions, and I ask him to take seriously our proposed amendment on this thorny issue.

Photo of Oliver Colvile Oliver Colvile Conservative, Plymouth, Sutton and Devonport

Thank you, Mrs Main, for allowing me to serve under you. What I am about to say will be short, brief and to the point. I will try to make sure for the sake of the Minister that I do not end up troubling the back-room staff, who might also be here. I hope that this will be simple.

The LGA came to speak to me earlier this week and raised one or two issues about what the impact of the proposal would be. Perhaps the Minister will clarify the Government’s position. The LGA was most concerned about the impact it was going to have on local authorities and also on health services, too. I want to add to those the impact it will have on our armed services. As my hon. Friend the Minister knows, I represent a naval garrison city. I am keen to make sure that monies spent on the defence budget will be spent on the front-line job of defending our country and making sure that we reward our service people accordingly.

When the LGA came to speak to me, my understanding was that it was talking about how it might need a 3% increase for employers, as far as national insurance is concerned, and a 1.4% increase for employees. I know that it has also been to speak to my hon. Friend the Member for Burton, who may wish to correct me if I get any part of this wrong, because he probably has an even better understanding of the issue than I do. However, the LGA would be grateful for clarification. I have raised the issue with the Minister, but it would be helpful if it were to be rehearsed publicly so that we can understand where we are going.

I am also concerned about the significant impact on the council tax payer. If it is the case that local authorities have to absorb the cost, that will be passed on to the council tax payer, and—surprise, surprise—I happen to be a Conservative who believes in low taxation and wanting to make sure that my council tax payers, especially the pensioners and the elderly, are not going to be forced to pay even more money.

Perhaps, if we are expecting local authorities to do things without receiving the money, there is a real opportunity for us to review what we are asking local authorities to do in the first place; I wonder whether we ask them to do significantly more than we think. That is all I want to say. I hope that it is reasonably clear.

Photo of Sheila Gilmore Sheila Gilmore Labour, Edinburgh East 3:15 pm, 4th July 2013

It was always going to be complex to make the changes required. For many years, we have had a system that assumed that if people were in a defined benefit scheme—in the public or private sector—they would be contracted out. That was part of the whole structure of the scheme that we have had for probably 30 to 35 years. Even though individuals are not always fully aware of all that is going on, that is how matters have been structured.

Of course, at various times, different Governments have attempted to put those who are not in such schemes in a similar position through some form of state provision with varying degrees of success, and with disruption and break-up of the various alternatives.

To look from the perspective of the pensions reforms introduced in 1975 by Barbara Castle, the assumption was that we would have one group of people covered by employers’ schemes and other people who would never get into those—although at that time there was still  hope that those would still expand—who would be covered by a state scheme. It has taken us a long time to get to the point we are at now. I accept that we need to do something about contracting out, because, if we did not, it would be difficult to manage the change.

We also have the problem that there are now only a limited number of DB schemes in the private sector; I believe that only 13% of private sector schemes are open to new members. Others are still open for existing members’ future accrual, but there are some instances where existing members had their schemes ended and switched to a different form of provision.

When the Work and Pensions Committee looked at that, the National Association of Pension Funds said that it anticipated that one in five of those schemes still open to new members would close and switch to a DC scheme. Concerns were expressed when we took that evidence, as they have been throughout this process, that the change to encompass the new single-tier pension could speed up the demise of the remaining defined benefit pensions, particularly in the private sector.

Some will take the view that DB pensions are all but dead anyway, so that would not make much difference, while others are anxious to retain what remains of them. That includes a substantial number of employers who see a benefit in having defined benefit schemes, such as attracting and retaining skilled employees, and see their retention as the right thing to do.

There is a concern, however, that as we now have to go through this change, it may be yet another factor, of which there have been many, that sees defined benefit schemes falling by the wayside. We have argued across the House on numerous occasions about whose fault that is, with fingers pointed at various Government policies.

We know that some policies, including some of those implemented in the 1980s, had an impact on defined benefit schemes, just as those implemented by the previous Government did. Other factors have been equally, if not more, important, such as the longevity risk and the fact that some schemes were started on a set of actuarial assumptions that have been confounded by the events of recent years.

Actuaries, despite everything, seem not to be particularly good at catching up with that; they seem to be behind events rather than predicting them. Therefore, what seemed to be fairly safe assumptions 20 years ago have turned out not to be. In the face of that, regardless of any other governmental changes, a number of employers have taken the view that the risk of maintaining the schemes is too high. We would all prefer not to see these pension reforms being used as another reason for more of the schemes to go out of business and for people not to have that protection.

When we took evidence, a 2017 start date was assumed for the single-tier pension. Most of the main collective organisations, such as the NAPF, the Association of British Insurers and the CBI, accepted that the changes were necessary as there had to be some adjustment. The reason for having some adjustment for schemes—this is where the statutory override comes in—is that on a balance of risk, the concern was that if existing DB schemes did not have the ability to change the way they operated, it was even more likely that such schemes would simply be closed by employers.

If faced with higher national insurance contributions and no means of adjusting their schemes to take that into account, an employer might simply say, “This is the last straw. We have had this, this, this and this over the years. We have been trying to keep DB schemes because we are the good guys”—as the Minister said—“but this is the last straw.”

Hence the proposal for schemes to be able to make adjustments to contribution levels, or, I suspect, largely to benefit levels. Schemes will make their own choices on that, but given that employees are going to be paying higher national insurance contributions as well, I suspect it may be seen as easier to adjust future benefits rather than expect people to pay more in the present.

There is, therefore, the suggestion that there should be some leeway. I understand that, because in the scheme of things it would perhaps be tempting to say, “No, they shouldn’t do that; they have just got to absorb it.” However, since there is another exit, which is to get out of the scheme altogether, we could be shooting ourselves in the foot. Hence the proposals here.

The question then is how employees can be satisfied that all is in order and that the opportunities are taken to make changes that go beyond what is necessary to provide for the additional national insurance contributions. There are concerns that in some cases, because changes are being made anyway, such changes might be greater than is essential. Where is the safeguard for the scheme members in all that? One safeguard would be that trustee consent should remain necessary before the changes can go ahead. That is the protection for employees and that is the purpose of having trust-based schemes in which trustees look after the interests of scheme members.

If the case is well made, I do not think that trustees are necessarily going to be a block. They have to look at the balance of risk as well. They understand that we cannot deny reality and say, “Oh well, we are not going make any changes,” if that results in a decision that would not be for them to make. It would be for the employer to say, “Well, that’s it then. We are away from DB altogether.” I think that trustees would take a balanced view and that they understand the balance of risk, but the continuing involvement of trustee consent would give employees the safeguard.

I assure hon. Members that the only script of any description that I am speaking from is the Work and Pensions Committee report. We on that Committee heard and discussed considerable evidence on this issue. The other issues that arise are partly to do with the change from 2017 to 2016. I have already said that most of the umbrella organisations that gave evidence on this subject were reasonably satisfied at that point that there was time to make the changes and that they could manage the process.

However, subsequent to those organisations’ evidence to the Work and Pensions Committee, the date changed: it was brought forward a year. At the time when that change was announced, a number of organisations expressed concern about whether it would make things more difficult and the risk that it could make the implementation of the changes unworkable for pension funds.

On hearing the announcement of the change of date, the NAPF said that it was still supportive of the reforms, but that

“the Government must ensure that the implementation of these changes is workable for pension funds.”

It also pointed out that we now have a tight timetable for bringing forward the changes, which brings us back to the question: if it is too tight or seems too difficult, is there a risk that employers will simply decide to shut up shop rather than go through the process? In the words of the NAPF:

“It would be a shame if big mistakes were made in a rush to implement the changes.”

As we know from bitter experience of pension policy that inadvertent consequences of what seem to be good ideas are all too common, it is important to listen to those words.

In our unanimous report, the Select Committee’s conclusion was:

“it is self-evident that having one year less to prepare for the ending of contracting-out will impose a significant burden on both groups of stakeholders. Having previously appeared to listen and respond to the concerns of pension schemes and employers about the impact of the STP, the Government has now sprung this earlier implementation date on them. We believe it is therefore the Government’s clear responsibility to work with these key stakeholders to ensure that the transition to the ending of contracting-out is as smooth as possible and that already beleaguered Defined Benefit private sector occupational schemes do not suffer further adverse consequences.”

I am sure that the Minister will have taken cognisance of those comments and will have been working as hard as possible since then to ensure that the bringing forward of the date does not adversely affect those schemes.

The situation is different in the public sector. It sometimes feels as if one bit of Government—one bit of public spending—will be taking money to pay out to another, and the Government as a whole will have to decide how to deal with that. There will doubtless be calls from local government and other Departments saying, “We need our funding increased to pay the higher contributions.” I hope that the ground is well prepared, not just for that—although it will interesting to see what the Government have to say about how they will resolve the additional expenses and how Departments and local government will be equipped to deal with the increased cost—but for the increased cost to individuals.

I understand that the maximum additional national insurance payment that employees will be expected to make is about £480 a year. That will make a significant difference to people’s bottom line, when they look at their payslips and see that they are suddenly paying more national insurance and their take-home pay is down. Although the trade-off is what happens later, it is always difficult to manage expectations because most people are more interested in what they get in their pay packet today than what they will get in the future. What communication strategy does the Minister have for that? If there is no strategy, there might be a lot of disappointed and angry people.

The Government’s own words to the Select Committee—the Minister may have more information for us now—were that

“90 per cent of those reaching State Pension age in the first two decades after implementation”— of the single-tier pension—

“will gain enough extra state pension over retirement to offset both the increased National Insurance contributions they will pay over the rest of their working lives and any potential adjustments to their occupational pension.”

Nevertheless, that leaves 10% for whom that is not the case, so there are some trade-offs and some people will be in a more difficult position. It is extra-important, therefore, that we get it right.

Finally, has the Minister made further progress in relation to his ambitions for “defined ambition”? There was some discussion about it in Select Committee and, for those who might not know, “defined ambition” is an attempt to improve the pension provision for those predominantly in defined contribution schemes. We shall be discussing many such schemes under other parts of the Bill, but the current measure will spread a bit more of the risk and perhaps encourage employers to take on a little more provision in respect of their employees. Unlike defined benefit, which places a large risk on employers who take on big liabilities, defined contribution places a lot of the risk on the individual rather than the employer. The employer contributes, but the risk is transferred substantially to the individual.

When the Minister was giving evidence to the Select Committee, he said that he wanted defined ambition to be in operation by 2017 and that,

“We are working non-stop on the plans.”

It would be illuminating to know how much progress the hon. Gentleman has made, given that his timetable has been somewhat shortened since he said that.

Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions 3:30 pm, 4th July 2013

Replying to amendment 16 requires me set out a little bit about the clause and to put matters in context. As has been discussed, when contracting out ends in 2016 for defined benefit pension schemes, the rebate that employers have enjoyed hitherto will be no more. There will be nothing to contract out of, and the rebates will no longer be there. Clearly, that is a substantial additional cost to employers and, in respect of private sector employers, I am talking from memory about £700 million. It is a significant sum for private sector employers.

Among other things, the Bill allows the employers to change their schemes so that they recoup exactly that money. For example, if they have a scheme that accrues benefits at a 60th of a final salary for each year and they lose the rebates, they might change that 60th to a 70th, or whatever the actuary says is the right number. The provision is not intended to allow firms to go further. To reassure the hon. Member for Edinburgh East, I draw attention to the fact that schedule 14 specifically precludes the use of the power to go beyond recouping the lost rebate. The power can be used only for the lost rebate.

We have built in flexibility so that the power can be used more than once. A firm could, for example, not go the whole hog in the first instance if it did not consider that it needed to, but with the confidence that, if it did need to, it could come back for the balance. We considered making firms take such action all in one go, but the worry was about firms that would take the whole lot out of the scheme, although some might not choose to do so.

We must reassure firms that do not have to offer occupational schemes. As the hon. Lady said, they are the good guys in many senses. To encourage those firms to be willing to carry on offering defined benefit pensions,  which most of us want them to do, we need to allow them to recoup the money. Many employers will do that by having a conversation with the trustees of their pension scheme and reaching an agreement. That would be the norm. It would be quite proper. It is worth remembering that such employers offer the benefits as part of the remuneration package, and to generate good will with their employees. The strong incentive, therefore, is still to have a mature conversation with the trustees in order to reach an agreement. We believe that many employers will do that.

Photo of Heather Wheeler Heather Wheeler Conservative, South Derbyshire

I am happy to put on the record that I have regular meetings with the unions at Rolls-Royce, which employs a lot of people who live in south Derbyshire. To allay its fears, I am pleased to hear the Minister refer to ongoing discussions and conversations with the trustees, and to say that good firms will carry on such an excellent procedure for their employees.

Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions

The Rolls-Royce plant in Bristol employs many of my constituents, and I shall soon be meeting its trustees and trade union representatives to discuss such worries. I am of the view that if we say to employers that, when push comes to shove, they may not be able to recover that money, if this coffin has any room for more nails in it, that would be the final nail; it really would kill off DB. I do not think any of us want this entirely welcome reform to state pensions to have that effect.

Amendment 16 says that there should be an override for “employee trustees”. The hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East will recognise that in law there is no such thing as an employee trustee. He may be referring to member-nominated trustees, or he may just mean trustees. His amendment is defective as it stands because we do not know what an employee trustee is. Is it a trustee who is a current employee? Is it a trustee who has been an employee? Therefore, I take it as a probing amendment, which sets out the hon. Gentleman’s position.

However, the amendment is rather odd. Let us suppose the hon. Gentleman means member-nominated trustees. There would then be two categories of trustee: trustees whose consent is required and trustees whose consent is not required. That seems to be the logic of his position, but it is a misunderstanding of the notion of what a trustee is for. All the trustees have a fiduciary duty to all the members. It is not the case that the member-nominated trustees are there to look after the workers, and the firm’s nominated trustees are there to look after the firm. A trustee acts in a fiduciary role for the entire membership of the scheme. Therefore, the amendment would create a rather unwelcome division between different sorts of trustees with different powers. It is undesirable on that basis.

If the firm were to say, “Well, we won’t kill off the DB scheme, but we will recover the money through lower pay rises and pay cuts”, that would be incident on the entire work force. The members of the DB scheme would keep their DB pension rights, but the entire work force of the firm would pay for it. It would be unfair to leave firms no way of taking the money from the members of the scheme, but allow them to recoup it from people who are not in the scheme. Almost by definition, employees who are not in the scheme have worse provision than employees who are in the scheme.  It would be very odd for the firm to recoup the cost from the people who have inferior pension provision.

The issue of whether it is fair for people who pay more NI to have their workplace pension accrual reduced, for example, comes back to what we call “something for something”. The hon. Member for Edinburgh East accurately quoted our estimates. We estimate that, across the public and private sectors, 90% of people in the next 20 years will get back more through enhanced state pension than they pay in, even taking account of an employer offset on the accruals on their employer scheme.

If a person works for Tesco—I use Tesco as an example because it is a big DB scheme, not for any other reason—their Tesco accrual might be lower if the statutory override is used, their employee national insurance will be higher, but they will be accruing a £144 pension, not a £110 pension. The vast majority of people—lower paid workers in particular —will get back more than they pay extra in NI. Even in the private sector—the override does not apply in the public sector—we estimate that 80% will get back more than they put in. There will be some for whom that is not the case, but the vast majority of workers, in particular those on lower wages, will get back more, even if the employer uses the override power.

It is worth remembering that all we are doing is putting those employees on exactly the same rate of national insurance as anybody else. They will accrue exactly the same state pension as everybody else. The hon. Gentleman gave some current estimates of the numbers contracted out at the moment. By 2016, on current trends, we estimate that there will be a whisker under 1 million private sector workers contracted out. The numbers affected are continuing to drop, and we think there will potentially be 1 million fewer public sector workers, depending on trends. Therefore, the numbers affected will be somewhat lower than the hon. Gentleman indicated. We are giving firms the override as a reserve power. Most firms will want to do this in a negotiation, but they do need the reserve power.

The hon. Gentleman raised the issue of protected persons. We have consulted on that issue, and we are still considering our response. There might be a set of schemes to which we do not apply the override. For example, if someone was in a privatised firm where there is statute that protects their pensions, it would go against that potentially if we were to say that the employer in that industry can in any case change the rules of the scheme.

We have to weigh up the rights of the members of the scheme—as the hon. Gentleman, the GMB and the TUC said—against the position of the employers. Clearly, the employers have got protected and non-protected workers. Would they recover the rebate wholly from the non-protected workers? Does that create even more of a two-tier work force and industrial relations problems? If they do not do that, and pass it on to the consumer, does that mean higher rail fares, energy prices or whatever it is? It is a complex issue. We will publish our conclusions later in the summer, but we have not reached any yet. We recognise the arguments on both sides on that point.

My hon. Friend the Member for Plymouth, Sutton and Devonport was approached, understandably, by local government organisations asking what happens if they have to recoup the lost rebates from council tax and so on? To clarify, the rebate money comes from  employee and predominantly employer, and from public and private sector; predominantly the public sector because of the work force.

The Chancellor has made it clear that part of the rebate money will go to do two things that I think we all agree are worth doing. One is to enable from April 2014 employers to offset the first £2,000 against their national insurance bill. That will enable, for example, a small firm potentially to pay no employer national insurance. Part of the rebate money will do that. Part of it will contribute towards what are called the Dilnot social care reforms. The cap on social care and changes to inheritance tax are part of that mix as well.

That does still leave a significant multi-billion pound unallocated amount from the rebate. Crudely, if one thinks of that unallocated amount as being broadly the employer public sector rebate, that is the figure to which my hon. Friend referred. That is a transfer within the public sector. That is money that the Exchequer will no longer have to pay to local government employers, armed forces employers, schools, hospitals and so on. That money will come in or not go out from 2016-17 onwards.

The House will be aware that the comprehensive spending review just announced ceases at the end of 2015-16. It is, therefore, entirely a matter for the Chancellor of the Exchequer of the day to decide what to do with that money. The Chancellor, hypothetically, could decide to allocate all of that money back to public sector employers from whence it has come. If he or she were to decide to do that at that point the employers, about whom my hon. Friend is concerned, would be more or less in exactly the same position as they were before. They would be reimbursed for the loss of the rebates.

Photo of Oliver Colvile Oliver Colvile Conservative, Plymouth, Sutton and Devonport

Is the Minister’s advice, if I wish to take this any further, that I should write to the Chancellor of the Exchequer about it?

Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions

Far be it from me to advise my hon. Friend. Clearly, that will be a decision taken by the Chancellor of the Exchequer and, assuming that our right hon. Friend will still be in that role at that point, that might be something my hon. Friend will wish to do. I hope that clarifies the situation. Clearly, it will be a matter for a future Chancellor to decide the allocation of that money.

I will say a little more about the point of clause 24.

Photo of Gregg McClymont Gregg McClymont Shadow Minister (Work and Pensions)

Before the Minister goes any further, could I take him back to his explanation of the Government’s position regarding the protected schemes? Is it that they have not made up their mind yet and it is a complex issue? Could he say a little about the complexities and why the Government are not able to clarify the position on protected schemes when the Bill is proceeding quite speedily through this House?

Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions 3:45 pm, 4th July 2013

Just to be clear, clause 24 and the associated schedules provide for a statutory override, but they also provide for subsequent regulations to exempt specified employers. If the Government were to decide that certain  categories that employed protected persons should be exempt, we would have to bring before the House regulations to that effect, which would then be debated. So, it is the general power that we are asking the House to accept here. I hope we will be in a position to conclude our deliberations relatively shortly, certainly while the Bill is still before Parliament. Later in the summer is the timetable we are working towards.

Photo of Gregg McClymont Gregg McClymont Shadow Minister (Work and Pensions)

I thank the Minister for that elaboration. Can he say a little more about what the things are that the Government are weighing up? What we are discussing is a consequence of the ending of contracting-out, which is itself a consequence of the Government’s drive for a flat-rate state pension. I would like to get an idea from the Minister of the factors that the Government are considering as they try to come to a decision.

Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions

I hope that I have already given a brief flavour of them. On the one hand we have the important issue that pension promises were made in legislation—oral and written assurances have been made—and such promises should, ideally, be kept. On the other hand, we could argue that the people who are protected persons will still get the pension they thought they would get but some of it will come through single tier rather than through the scheme. They are contracted back in and start to accrue single-tier rights for future service. When the promise was made, the thing they had contracted out of took them down to a £110 pension and they are now heading for a £144 one, so one could argue that the spirit if not the letter of the promise is being kept by delivering part of the benefit through the state scheme from which their scheme is contracted out.

There are issues of whether the measure would make a substantive difference, which industries would be affected, and how long we would be talking about if the override were not applied—many of the promises were made decades ago, but in some cases to young workers. The issues in the energy sector might be slightly different from those in the transport sector. One of the first things we did was to trawl around the whole of Government trying to find legislation that had protected persons promises in it, and we found one or two pieces that we would not necessarily have found, in the nuclear industry for example. The matter is involved and detailed, but the substantive issue is, ultimately, a judgment call, and we are weighing things up carefully because we do not lightly override pension promises.

Photo of Gregg McClymont Gregg McClymont Shadow Minister (Work and Pensions)

I thank the Minister for that further elaboration. Can he inform the Committee how many active members there are in the schemes? How many individuals will be affected by the decision on the exemption from the override?

Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions

We published a consultation document on the subject, in which we estimated a figure in the order of 60,000 workers. One or two respondents found a few we had not thought of, but I think we are talking in the high tens of thousands.

We do not think, therefore, that the amendment works. If it were part of the law of the land it would not be clear what it did, because there is no such thing as an  employee trustee. We do not like the idea of different categories of trustee, and we believe that the employer statutory override, within constraints, as we will discuss in a moment, is an appropriate response to the concerns, and protects the future of DB pensions. On the strength of that, I urge the hon. Gentleman to withdraw the amendment.

Photo of Gregg McClymont Gregg McClymont Shadow Minister (Work and Pensions)

The Minister referred to the wording of the amendment and observed that in law there is no such thing as an employee trustee. I can assure him that we were not trying to distinguish between categories of trustee. It was not about member-nominated trustees but about trustees generally. It has, however, been useful to try to draw the Minister out a little about the basis on which he intends to make a decision about the protected schemes, and on whether an exemption from the statutory override will be used. I observe that he is understandably keen to process the legislation through both Houses, but in this not-insignificant aspect of the Bill it is unclear what the Government will do, so we are being asked to vote for the legislation without being clear about what will happen with protected schemes.

I understand, as the Minister says, that this is a thorny issue, but from observations I have a strong sense that he is clear about the basis of the decision. He said that on the one side there was the promise that was made to the schemes’ members when the industries were privatised—he rightly said that a promise is a promise—and, on the other, that it could be argued that the promise had been kept because the individuals would be getting more from the new flat-rate state pension. It just was not clear to me what was preventing the Government from coming to a decision such that we could scrutinise that in the round as part of the Bill. However, it has been helpful to get that clarification and to ask for more from the Minister, so I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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

Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions

Clause 24, as we have been discussing, sets up the framework for the statutory override and the abolition of contracting out. We will debate schedules 13 and 14 shortly. As clause 24 indicates, schedule 13 relates to the consequential issues that must be resolved after the abolition of contracting out—I will give the Committee a flavour of that during the next debate. Schedule 14 explains how the power to amend schemes may be used and, as I indicated a moment ago, the limits on that power, including, for example, firms not being able to use it to recoup more than the extra cost of the rebate. Clause 24 is necessary to pave the way for the more detailed measures in schedules 13 and 14, so I commend it to the Committee.

Question put and agreed to.

Clause 24 accordingly ordered to stand part of the Bill.