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Annual Rate Of Earner's Pension

Volume 893: debated on Thursday 12 June 1975

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4.3 p.m.

I beg to move Amendment No. 22, in page 22, line 34 at end insert—

'(8) In the case only of a scheme certified by the Occupational Pensions Board to be an industry-wide scheme for earners employed by more than one employer in the same field of industry the rules of the scheme may provide, as an alternative to the other provisions of this section, for determining pensions by reference to the earner's average salary revalued where, in the opinion of the Occupational Pensions Board, the benefits of the scheme, taken as a whole, are likely to be more favourable to most earners than would be the case if the rules of the scheme were in accordance with subsection (2) of this section'.
This is a modest amendment aimed at achieving the maximum number of occupational pension schemes without sacrificing the high standards which the Government understandably wish to achieve. It is a recognition of the fact that in some cases the basic requirements for an earner's pension as laid down in the clause would be close to impossible of achievement.

We have in mind an industry such as the building industry, where there is considerable mobility, and where there are many small firms which on their own could probably not sustain an occupational pension scheme. I do not in the least quarrel with the Government over the high standards which they have laid down in the Bill as the test of good pension schemes. I can see that they do not wish to have the contracting out requirements watered down beyond a certain level. We are with the Minister in that aim.

I am talking of a narrow range of schemes where transfer of pension should be facilitated, because transfer of employer within the same industry is very much the order of the day; where some small employers have no more than five or 10 people on their staff; and where small employers abound. The small employer is understandably put off an occupational pension scheme by the thought of the administrative work involved. Anyone who has had anything to do with the administration of a private pension scheme within an organisation of any size will have sympathy with that view. We believe that this fear of the administration involved in a small scheme can be relieved by the participation of the employer in an industry wide scheme. Therefore, by the amendment we wish to encourage the development of such industry wide schemes.

It may be asked why such schemes cannot be fitted into the contracted-out requirements laid down by the Bill. There are a number of reasons, some of which I shall put briefly. A large employer could accept the need for cross-subsidy between employees of different ages, but with different employers that is not easy. An employer with young employees would be asked to subsidise companies with older employees, so that there would be an additional barrier to the acceptance of good pension schemes and all that that means for the employees. Whilst endorsing the Government's approach, which is that there should be high standards for schemes, the amendment asks the Government in turn to accept that in some industries it would be almost impossible to achieve them.

It would be a tragedy if an over-rigid attitude by the Government prevented many people from joining a scheme which in most other respects is perfectly satisfactory. The Government should be with us in this attempt to increase the number of people in occupational pension schemes.

The Government's fear is that acceptance of the amendment would mean lowering standards and encouraging the development of schemes such as past schemes of which few of us can be particularly proud. The Government probably see, as we do, that there are still many people who, even if the amendment is accepted, will never be in an occupational pension scheme. I think particularly of the catering industry, where men flit from hotel to hotel or restaurant to restaurant, and in and out of the industry. For those people, the opportunity to become a member of an occupational pension scheme is probably not even a starter, even though some of them may spend most of their lives in the same industry.

The building industry, upon which I focus particular attention, is different. It may be possible to include many industries ancillary to building under the aegis of one body in such a scheme. This would mean that we should be opening the opportunity of membership of occupational pension schemes to about a million people, as far as I can estimate. The Government will have to have strong reasons for refusing the amendment, if they mean what they say about encouraging the development of occupational schemes, because the difference between being able to bring up to a million people into an occupational pension scheme and not being able to do so is considerable.

In summary, I put the amendment forward for the following reasons. The first is that, without unduly diluting the Government's requirements for pension provision, encouragement should be given to industry-wide schemes whose common denominator will often be an employers' federation or the like. Secondly, it would be an encouragement to the mobility of labour, and in those industries where mobility of labour is already the norm, it would ensure the continuity of pension arrangements. Thirdly, failure to accept the amendment would prevent many people from becoming members of an occupational pension scheme.

Remembering the good will between both sides in the earlier stages of our consideration of the Bill, I hope that the Government will be able to accept this modest amendment.

I support my hon. Friend's amendment. In Committee, I moved an amendment designed to achieve the same objective and withdrew it following an undertaking by the Minister of State to consider what had been said and to try to find ways in which centralised and multi-employer schemes would be able to contract out.

I think the whole House is grateful to the right hon. Gentleman for the study he has given to the problems which these scemes face under the Bill, and also for considering the detailed proposals which I have put to him. I believe that these schemes have a big job to do in the future and that they will grow in importance and in extent. They would have been encouraged by special arrangements made under the 1973 Act but there is not similar encouragement by similar special arrangements in this Bill.

Why are these schemes important? My hon. Friend has referred to this and I agree very much with what he says. Perhaps I can give two examples of the most obvious types of areas where they are important. The first is the situation where there is a big turnover of labour between firms in one industry. Building and construction is the most obvious example. In cases of this kind the centralised scheme covering one industry can do much to solve the otherwise daunting problems of transferability or preservation of pension rights which might in such circumstances deter employers from introducing schemes or continuing schemes they have already. This is the first and most obvious area where the centralised scheme lends itself to the conditions of the industry and solves problems which would otherwise be very acute.

The second area is that of the small employer who, in many cases, will wish to provide benefits of occupational pension schemes but finds it difficult to do so on his own. The umbrella of a centralised scheme covering one industry, or where there is a common factor such as membership of a chamber of commerce, can be the only effective way in which that small employer can provide his employees with the benefits of an occupational scheme.

If these and other areas are to be covered successfully by these types of multi-employer schemes, it is essential that they are able to fulfil three criteria. The first is that they must be simple. If they are not simple, the employer concerned is likely to feel that he cannot embark on the obligations which are likely to be involved. Secondly, the financial obligation must be measurable and not open ended. Thirdly, they must avoid cross-subsidies between participating members, many of whom will be in direct competition with each other.

On those three criteria, the final salary formula, which is the basic formula in this Bill, is ruled out. They cannot hope to maintain those characteristics of the final salary formula. The most suitable formula would be, I believe, a contribution test.

I think it would be wrong to rule out a scheme, such as, for example, the Merchant Navy scheme, which has a contribution of 15 per cent., just because it does not fit in with the tidy framework laid down in the Bill. The fact is that a scheme with a contribution of that level going into it is almost bound in any circumstances to be able to meet, and more than meet, the levels of pension laid down in the Bill. It would be very wrong to exclude these schemes because they do not happen to fit.

I hope that the Minister of State, having reconsidered this matter, will be able to see his way to providing for a contribution test. If he cannot see his way this far—I understand the difficulties, because we have discussed this in some detail—then there are, I believe, two other possibilities. One is the "average salary revalued" formula, which may be—I do not think it is—a way round the difficulty. The second is the fixed contribution, with some means of the employer meeting any shortfall that there may be. These are two other possible routes, though not as satisfactory as the other. If the Minister of State has rejected the contribution test proposal, which I still favour, I hope he will at least assure us that he will see that is no obstacle in the Bill as it stands at present to these two possible routes.

I hope he will also agree—as he has said that he will—to look at a model scheme to ensure that these types of multi-employer arrangements are not excluded for insubstantial reasons.

I therefore support my hon. Friend. I hope that the Minister of State will be able to go as far as we desire. If he cannot do that, I hope he will back up the expression of support for these schemes which he gave in Committee by assuring the House either that there are no obstacles in schemes on the lines I have mentioned, or, if there are obstacles, that he will ensure that the necessary amendments to the Bill are introduced in another place.

4.15 p.m.

The Minister of State, Department of Health and Social Security
(Mr. Brian O'Malley)

I am very grateful to the Opposition for moving this amendment. I gave an assurance during the Committee stages of the Bill that I would consider in detail the whole question—and it is a difficult question—of centralised schemes and of multi-employer schemes. Since the Committee stage I have made such a detailed investigation and I should like to report my conclusions.

First, I should make it clear that there is no difference between my attitude, the Government attitude and the attitude of the Opposition, expressed by the hon. Members for Brentwood and Ongar (Mr. McCrindle) and for Somerset, North (Mr. Paul Dean), in the comments they have made this afternoon setting out their belief that it is important that employees should be able to be members of good occupational pension schemes. One does not want to see a situation in which, because a man or a woman works for a small employer, or in an industry with a very high degree of labour mobility—for example, the building industry referred to by both hon. Gentlemen in their speeches a few moments ago—there is exclusion from good occupational pension provision because of the peculiar circumstances of employment.

The hon. Gentleman referred to the Merchant Navy officers' scheme. It is my understanding, as it is his, that that scheme, which is a money purchase scheme, has a total level of contribution amounting to 15 per cent. With a level of contribution of that kind, one can expect, even within the limitations of a money purchase scheme—I have never hidden my views about the desirability or otherwise of money purchase schemes and the difficulties inherent in them—a respectable level of benefits. Therefore, in the concluding stages of a succession of debates before the Bill goes to another place, we must first attempt to ensure that any arrangements we make do not hinder the membership of occupational pension schemes by employees in the type of employment I have described.

I have made it clear from the outset—in a Press notice of a speech I made some months ago and in all the discussions that I have had and comments I have made in Committee and elsewhere that I do not think there is any major future, certainly not within the contracting-out arrangements in the Bill, for money-purchase schemes. I advised hon. Members and organisations that the very mention of a scheme based on money-purchase principles could not be expected to produce a favourable reaction from trade unionists and employees generally.

The basic difficulty about money purchase is that by its nature it does not give a guarantee that it will meet inflation. The White Paper on which this legislation is based described a better pension as being one guaranteed against inflation. While the Government do not wish to hinder the development of occupational pension provisions for men and women, I have made it clear that I could not accept pure money-purchase principles.

There has been a genuine attempt at reconciliation on this matter. It was said first of all that there was no possibility of what I have always feared—that if we allowed money-purchase type provision in multi-employer schemes we would be driven to open wide the gates for such schemes for the generality of employers. Assurances have been given to me on that point, in Committee and by outside organisations, for which I am grateful. Propositions were put to me during my consultations aimed at guaranteeing the guaranteed minimum pension, thus meeting one of the two contracting-out conditions. Since the end of the Committee stage I have been engaged not only in a detailed departmental examination of this but in discussions with outside individuals to see whether we can go any further.

I have tried to see whether we could allow employees in the types of employment concerned to be in good occupational pension schemes recognised for contracting-out purposes and meeting the two contracting-out conditions. This has always been the difficulty. I understand that it is for this reason that this amendment has been put forward. Conservative Members will say that if this amendment was written into the legislation there would be a guarantee that every individual would receive a pension which met the two conditions. They would say that it would be expected that contributions would be set at such a level that in the generality of cases people would get a pension which would comply with the two conditions. Factors such as investment yield, inflation patterns and the relationship between the investment curve and wage and salary movements would be involved.

I cannot accept the amendment because it would not mean that the two conditions were met. Since we last discussed these matters there have been a number of developments. I said that I thought that this was my FSSU. Hon. Members will remember that that issue was not settled when the 1973 Act ended its Committee stage. Indeed, a party was held only yesterday to celebrate the reorganisation of that scheme. We are moving into a situation when there can be a settlement of this issue, when there can be guarantees to the individual employees that the contracting-out conditions can be met. We are reaching the point when it will be possible for multi-employer and centralised schemes to be set up and recognised for contracting-out purposes by the Occupational Pensions Board.

I must first deal with a detail. In Committee the hon. Member for Somerset, North moved an amendment dealing with the treatment of a number of separate schemes operated by a group of associated employers as one scheme for the purposes of contracting out. The amendment was to meet the desire of the CBI that a parent or holding company of a group of associated companies should be able to make elections in respect of each scheme operated by the group and to operate the subsequent procedure for notification of termination on behalf of subsidiary companies. I undertook to look at this.

It is the considered view of my Department that on the basis that the schemes operated by the group would be multi-employer schemes, the wishes of the CBI can be met by using the powers in Schedule 2 (7). Provided that a centralised scheme meets both contracting-out conditions, the Government are ready to make changes in the structure of the administrative arrangements for contracting out to facilitate the contracting out of those schemes.

I turn now to what I see as being the way forward. The hon. Member for Somerset, North mentioned the prospect of average salary revalued. I understand the problem of cross-subsidisation, particularly in fiercely competitive industries. Nevertheless, it may well be that this is a way forward in some of the types of employment with which we are here concerned. I refer the hon. Gentleman to an article written by a Mr. John Sparks in The Times on 21st May in which he set out what he believed to be a broad basis for such schemes whereby there could be reserve arrangements, avoiding the difficulties and pitfalls that have been discussed in so much detail recently.

We have there all the indications of the ingenuity of the pensions industry to devise arrangements. As it has said that it could meet the second contracting-out condition, I am extremely hopeful that it can also meet the first one without having final salary type arrangements written into the funding of the schemes.

What is in a name? The Occupational Pensions Board is concerned with solvency and whether pensions will be payable at a certain level. If there was an existing money-purchase scheme, all the benefits before the inception of the new scheme would be on the old-established basis and it would be only slowly, over a number of years, that a new pattern would begin to emerge in respect of the post-1977–78 period. Even now I am awaiting receipt of a model scheme from a large and influential group in the pensions industry.

4.30 p.m.

I am hopeful that with the customary ingenuity of the pensions industry it will overcome not only the second but also the first contracting-out condition. Therefore, I advise the House that although I cannot accept the amendment because it does not meet the two contracting-out conditions, on the basis of the discussions and thought given to this subject so far there is no need to amend the Bill to meet the needs of the multi-employer and the centralised schemes.

The type of arrangements that I have described in reply to the amendment tabled by the hon. Member for Brentwood and Ongar will assist. However, the Occupational Pensions Board would be able to accept multi-employer and centralised schemes on the basis which is now emerging not only in the article by Mr. Sparks published in The Times of 21st May but also on the basis of the type of model schemes which I expect to receive in the near future from important and influential pensions organisations in this country.

I was heartened to hear the Minister tell the House that he had no wish to exclude anyone who, by the application of a reasonable pensions scheme, could be brought within the orbit of private pensions provisions. He spoke, quite fairly, about the difficulty that exists of complying with both the contracting-out conditions in schemes of the type about which we have been talking under the amendment. This is the heart of the difficulty with which we are faced and the reason why the Opposition felt that they had to put forward the amendment this afternoon.

The Minister spoke about the money purchase schemes and the almost emotional objection which is felt in some quarters to the provision of those schemes. I understand that, although I do not go quite as far as the Minister in my objections to them. When I put forward the amendment I had no wish to suggest that we should be turning the clock back. As the Minister believes that money purchase schemes would, by and large, be doing just that, I can quite understand that he wants to lay down conditions so that as many people as possible can be covered by them, but that they can be guaranteed the return on their contributions which the people in large occupational pension schemes can reasonably hope to enjoy.

The Minister did not quite answer the point made by my hon. Friend the Member for Somerset, North (Mr. Dean) when he said that any arrangements made to accommodate the type of schemes we are talking about would, first, have to be simple, secondly, have to have the financial obligations measurable and, thirdly, have to take into account the fact that cross-subsidisation was difficult. I do not want to press him particularly on that, but as he went on to say, fairly and favourably, that without the acceptance of the amendment our objective could be achieved, I hove that he can—also by simplicity—tell us that he has understood what my hon. Friend was saying and that that triple requirement, plus anything else, might well, without amending the Bill, be built into the type of scheme about which we are talking.

I entirely agree with the hon. Gentleman about the merits of simplicity. The difficulty is always that we cannot allow simplicity to become an enemy of equity. However, it will be possible, on the evidence that is coming forward, to devise schemes for which there can be a money purchase basis but in which the final salary level of provision is guaranteed. This is a matter of funding, and we should not call them money purchase schemes at all in future because the nature of the animal has changed. They have become inflation-proofed and it would be to the detriment of the development of good centralised schemes if we were to use that terminology.

I understand perfectly what the Minister says. It was useful that he intervened to place on record that he understands the need for simplicity. I, in turn, must concede that I understand the difficulty of achieving simplicity. If anyone had listened to our deliberations yesterday evening, "simplicity" is about the last word they would have employed in describing them. Nevertheless, to aim at the greatest possible degree of simplicity is something that does not divide the Minister and myself; on the contrary, it unites us.

The Minister said that he could not accept the amendment, and, by implication, did not agree that the amendment was necessary. For the purpose of arranging the debate we felt that it was wise to table the amendment.

If, instead of accepting our amendment, the Minister is asking us to accept his good faith, that he wants the same as we do but that it may have to be achieved in a different way from that outlined in the amendment, I have no objection.

On that basis it would be uncharitable if we were to continue to press the amendment any further. It would be churlish indeed if I were to suggest that we should press it any further.

Before officially asking leave to withdraw the amendment, I would like to point out that the Minister completed his remarks with a challenge to the pensions industry. Not for the first time has he shown a high degree of faith in one of the bastions of private enterprise. It has warmed the hearts of many of the strong supporters of private enterprise in Standing Committee A that he did so during the Committee's proceedings.

The Minister was absolutely right to say that he wanted to have the maximum number of people brought within occupational pension schemes. That is what we have said since the introduction of the Bill and that continues to be our purpose. We want to include in occupational pension schemes many of those in industries in which at present it is difficult to achieve such schemes. However, if we accept from the Government that there are difficulties in achieving that, it is partly up to the occupational pensions industry to find an acceptable formula. I do not believe that the pensions industry will be found wanting. It will continue to pursue the challenge given to it by the Minister this afternoon.

In all these circumstances the outcome of the amendment is distinctly favourable. We know that the Government, the Opposition and the private pensions industry are all on the same side and are pressing for the same thing. Therefore, Mr. Deputy Speaker, I do not wish to pursue Amendment No. 22.

Is the hon. Gentleman asking for leave to withdraw it?

Amendment by leave withdrawn.