New Clause 6 - Collective benefits exempt from indexation

Pension Schemes Bill – in a Public Bill Committee at 2:45 pm on 4th November 2014.

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‘(1) In section 51 of the Pensions Act 1995 (annual increase in rate of pension)—

(a) in subsection (1), for “Subject to subsections (6) and (7)” substitute “Subject to subsections (6) to (7A)”;

(b) after subsection (7) insert—

“(7A) This section does not apply to any pension, or part of a pension, that is a collective benefit.”

(2) Omit section 21(2) of the Pensions Act 2011, which is no longer needed given subsection (1).”.—(Steve Webb.)

This text is taken from paragraphs 1 and 2 of Schedule 4 to the Bill, which is left out by amendment 40. The effect is unchanged.

Brought up, and read the First time.

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

I beg to move, That the clause be read a Second time.

The Committee will be relieved to know that I can be relatively brief. New clause 6 puts back in the Bill two paragraphs from schedule 4, which were deleted when we deleted schedule 4 last Thursday. These relate to the requirement to increase pensions in payment and the fact that that should not apply to collective benefits.

That exemption from the requirement to index comes about because collective benefits are not like other benefits. They are provided on the basis of investing members’ assets on a pooled basis in a way that shares risk across the membership. As discussed, there will always be a target attached to collective benefits. The target could be an income in retirement, a pot of money or something else. In existing CB schemes in other parts of the world, it is normal for increases to pensions in payment to form part of the benefit design, but that is a matter for the scheme. It is important to remember that targeted benefits can go up or down, and benefits in payment can fluctuate in response to funding pressures. The essence of collective benefits is that they make no promise. There is a target, which trustees and managers work towards, but the eventual benefit always has to depend on the amount available to pay benefits to or in respect of the member, and to other members of the scheme.

Against that backdrop, it would make no sense to require pensions in payment to be increased by statute. A statutory promise of pension increases would undermine the way collective benefits work. On that basis I commend new clause 6 to the Committee.

Question put and agreed to.

New clause 6 accordingly read a Second time, and added to the Bill.