House of Lords
Monday, 14 July 2008.
The House met at half-past two: the LORD SPEAKER on the Woolsack.
Prayers—Read by the Lord Bishop of Exeter.
Introduction: Lord Smith of Kelvin
Energy: Nuclear Development Forum
asked Her Majesty’s Government:
Who will be invited to take part in the proposed nuclear development forum announced on 12 June; and whether it will include representatives of the bodies engaged in promoting skills and training for work in the nuclear industry.
My Lords, my right honourable friend the Secretary of State is considering the detailed operation and membership of the nuclear development forum. He expects that members should be invited from across the industry to make the most effective forum for ensuring progress on nuclear new build and would expect this to include those responsible for promoting skills and training. He expects to finalise and publish proposals over the summer.
My Lords, does not the Government’s welcome, if somewhat belated, commitment to a substantial civil nuclear programme make it more important than ever that we have a competent, well trained and skilled workforce for that industry? Do the Government recognise that the National Skills Academy for Nuclear, which enjoys the support of all the leading employers in the industry, is very well placed to address this issue, and should therefore be represented on the nuclear development forum? Is not the commitment of employers absolutely crucial to the development of skills training?
My Lords, I agree but, tempting as it may be, I cannot make the announcement on behalf of the Secretary of State, so we will have to wait for it. However, the National Skills Academy for Nuclear is central in ensuring that we get apprenticeships, foundation degrees and upskilling of existing workers in the nuclear force.
My Lords, the Government are fully aware of the potential shortage of skilled nuclear inspectors, which is why we allowed a 15 per cent pay flexibility last year for existing and new staff, and is why the NI was able to recruit nine new inspectors earlier this year and has an ongoing recruitment programme. Dr Tim Stone’s review will look into ways to ensure that the NI is ready for significantly increased new build in the future.
My Lords, to go a step backwards, in order to have these skills presumably the individuals concerned will have to have physics and chemistry in their background. What is being done to increase the number of qualified physics and chemistry teachers in schools?
My Lords, the noble Countess is totally correct in her analysis that that is where we need to start to address the problem. We have a £140 million programme over the next three years to encourage the teaching of science, technology and maths in schools. We also have a programme for recruiting teachers, which includes the use of golden hellos to get them into schools, as well as training existing teachers and providing an entitlement for all children doing GCSEs to study two science GCSEs.
My Lords, what is being done to encourage more of the able and fully trained women members of the engineering profession to stay in it? They are the leaders of the future, who could well and truly be trained to take on the nuclear energy side of things.
My Lords, the noble Baroness is right that, as in many other skilled professions, the lack of women joining the profession and being retained in it is a key gap. That is why we have a number of what we call engineering ambassadors, who work to encourage girls in particular to join, and why a lot of employers have programmes to try to encourage women to stay in the profession.
My Lords, at lunch today Professor Sir David King stated that we have enough uranium in this country to last for something like 127 years without importing any more, and that that good stock would be of great benefit to our nuclear industry. Many people are concerned on that issue, so does the Minister think that such good news should be more widely broadcast?
My Lords, it is the turn of the Liberal Democrats, but there is time for both noble Lords.
My Lords, I do not know the plans of all individual universities, but I am pleased to say that at least two have started to provide undergraduate degrees in nuclear power, and a significant number provide postgraduate degrees in it. I would be happy to write if the information were available, but of course the plans are undertaken by the universities directly.
My Lords, to make teaching in schools interesting in science and technology, one needs practical and experimental work, and there is a lack of training and support for technicians’ careers in schools. Does the Minister recognise that problem, which was pointed out by the Select Committee on Science and Technology in our report last year, Science Teaching in Schools?
Indeed, my Lords. My right honourable friend the Secretary of State for Children, Schools and Families is very well aware of this, which is why we have put significant funding into the ability of young children to have STEM education in schools, part of which requires technicians.
My Lords, the reference to eight nuclear power stations was to the ministerial commitment for new nuclear build to at least replace existing capacity. That will mean that we need eight, but of course, given that new nuclear generation has a greater capacity per generator, that is not a cap, but is simply an aspiration to replace existing nuclear.
Pensions: Retirement Age
My Lords, under the Pensions Act 2007, the state pension age for men and women will increase to 68 by 2046. This increase is broadly in line with projected increases in average life expectancy and is a sensible response to the demographic challenge we face today. It will be for future Governments to consider any further increase beyond 68, if evidence indicates that life expectancy continues to further increase in the latter part of this century.
My Lords, I thank my noble friend for that reply, which was rather limited. In the early post-war years, life expectancy after retirement was only a few years. We have seen a much greater increase in retirement years. Is it not clear that the large numbers of doctors and scientists involved in the extension of life will lead to a much greater increase than the Government’s proposed three years, from age 65 to 68, in 2046? What consideration is being given to age in pension provision, given such a change in life expectancy?
My Lords, the timetable for changes until 2046 is at the limit of our current abilities to project life expectancy. Increasing the state pension age to 68 in 2046 is broadly in line with those projected increases, which will ensure, as the Pensions Commission recommended, that each generation spends a broadly similar proportion of adult life receiving the state pension and that our state pension reforms are affordable. Following the state pension reforms, from 2020 to 2050, men will live approximately 21 years after the state pension age; for women it will be 24 years. The time spent after the state pension age over that period as a percentage of working life will broadly be even, at around 30 per cent for men and 33 per cent for women.
My Lords, I may be coming to this subject from the wrong angle, but when I started work in the steel industry in 1951 it was pretty tough. Some men were well over 70 with no pension and very poor conditions of employment. That was rectified under a Labour Government. We are not turning the clock back, are we?
No, my Lords, on the contrary, in the 2007 Act we made significant improvements to state pension provision, and the Bill that we are considering will look at automatic enrolment in private sector schemes for all employees. But my noble friend is right about the changes that have taken place. In 1911 there were 10 individuals of working age for every pensioner; today there are about four; and in 2055 there will be two. One in four babies born today is expected to live to 100. There are now 9,000 centenarians. While I hesitate to mention this, in case they are present, we expect the first 120 year-old female pensioner to be with us in the 2060s.
My Lords, what was the average age last year at which public sector employees retired with a full pension? If women will have to wait eight years longer for their basic state pension, what is the projected rate at which retirement age in the public sector will rise? If the Minister does not have the answers at his fingertips, will he let me know? Will the Government publish every year the average retirement age of public sector employees on a full pension?
My Lords, I will be very happy to seek those figures and provide them to the noble Lord, but we should not confuse the age at which people retire with the age at which the basic state pension becomes payable: those are two separate things. As the noble Lord is aware, between 2010 and 2020 there will be equalisation, currently up to 65, between men and women, with further changes after that. Off the top of my head I think that the average retirement age in the public sector is something like 62, but I will write to confirm that in case it is not right.
My Lords, what steps will the Government take to ensure that employment is available at these later ages? Many employers currently seem reluctant to retain people beyond the normal retirement age. Steps will have to be taken to ensure that employment is available. Do the Government have this in mind?
Yes, my Lords, my noble friend is right to press on this matter. I confirm that there is no national mandatory retirement age, although there is still the default retirement age of 65, which we are committed to reviewing in 2011. There are 800,000 more people between 50 and state pension age in employment now than there were a few years ago, but there are real challenges and we are working with employers to increase flexibility in employment arrangements, to make sure that there is proper skills training for older people as they wish to change their role within the labour market and to make sure that there is not discrimination in practice, although obviously we have dealt with the legislative framework to prevent that.
My Lords, for some time now the Government have been encouraging people to continue in some form of paid employment after the state retirement age. At the moment, this encouragement applies to those up to age 70. First, how many people between 65 and 70 are working and, secondly, what plans do the Government have to increase such encouragement for those beyond the age of 70?
My Lords, that encouragement is not specifically targeted at people up to the age of 70. We encourage every older person who wishes to continue in work to do so for as long as they feel able. I do not have to hand the data concerning those who are actually in employment between state pension age and 70, but I shall happily write to the noble Lord.
My Lords, once we have reached that first point of equality of opportunity, at which the statutory state retirement age is the same for both sexes, may we expect the Government to insist that insurance companies pay on the same basis of non-discrimination and equality for annuities?
My Lords, the noble Baroness is trailing the amendment that we are due to consider very shortly in Committee on the Pensions Bill. It is riveting stuff, and I encourage noble Lords to stay for it. As the noble Baroness will be aware, we do not believe that it is discriminatory that there are different annuity rates for men and women so long as those rates are based on hard evidence and facts, which take into account the differences in longevity between men and women, although the gap in life expectancies is narrowing.
My Lords, I think the noble Baroness may be referring to the review of the default retirement age. As I said earlier, we have committed to do that in 2011. There may well be good arguments for doing it early, but that is the commitment that we made. We recognise that it is a potential constraint on people being able to stay longer in the labour market.
Aviation: Air Quality
My Lords, most modern commercial aircraft are fitted with high-efficiency particulate air filters, which are very efficient in removing airborne contaminants such as droplets, bacteria and large viral particles. Compulsory fitting of filters for volatile organic compounds would have to be required by the regulator, the European Aviation Safety Agency, on the basis of evidence that there was a harmful substance in cabin air and that a particular specification of filter would remove it.
My Lords, I am amazed by the noble Lord’s reply because I have had an enormous amount of correspondence on this from cabin crew and pilots. Is the Minister aware that 50 per cent of the air reaching passenger cabins is unfiltered and contaminated with hydraulic fluid and engine oil containing organophosphates? Will the Government take urgent action to require internationally that all aircraft must be fitted with filters before being passed for service?
My Lords, if 50 per cent of the air reaching passenger cabins were unfiltered and contaminated, as the noble Baroness suggests, I have a feeling that there would be a major crisis in the aviation industry and that very few planes would take off. It is not correct to say that. Studies such as those conducted by the European CabinAir project have shown that the levels of chemical and biological contaminants in aircraft are normally lower than in many work environments, such as office buildings. Compulsory fitting of filters, as suggested by the noble Baroness, for volatile organic compounds would have to be required by the regulator on the basis of evidence. At present, there is no such evidence.
My Lords, in our recent exchanges in your Lordships’ House, the Minister failed to respond to the recommendation of the Science and Technology Committee that there should be an epidemiological study of pilots to ascertain the incidence and prevalence of ill health in air crews. Can he now say what the Government’s attitude is to that recommendation and why he referred to there being question marks over the veracity of some of the research conducted? What research was he speaking of; why does he dispute the findings; and will the Government now take this problem more seriously?
My Lords, we do take this seriously, and that is exactly why we have commissioned further research from Cranfield University. There is a question mark over the veracity of some of the research that has been quoted—in particular, that of Professor van Netten. We remain sceptical of that work because, in correspondence with the department, the professor was unable to give information on the chain of custody for samples that were apparently taken without the knowledge of UK airlines. As to the epidemiological survey to which the noble Lord referred, there are some difficulties with the methodology. Those need to be very carefully considered and I understand that further thought is being given to them.
My Lords, I am surprised that the Minister is not resorting to epidemiology as a backstop. Having been through interminable sheep dip and Gulf War veteran cases involving epidemiological studies, which have delayed the answers, does he not agree that epidemiological studies conducted in line with clinical studies, such as those being conducted by Dr Mackenzie Ross at University College Hospital, London, are the way to find the answer to ill health? Will he ensure that the doctor is provided with the information that she requires to conduct those studies?
My Lords, I understand the noble Countess’s question about Dr Mackenzie Ross’s approach to this matter but that researcher has not yet provided sufficient information to justify the very rare step of using CAA pilots’ addresses to recruit them for that form of research. That remains a difficulty. We need to keep a sense of proportion about this issue. If the case were as the noble Baroness, Lady Trumpington, made out, I think that there would be a profound problem. There is not a profound problem, and no research has yet substantiated that claim.
My Lords, does the noble Lord accept not only that there is the epidemiology problem but that the situation is made much worse because of the often insufficient distribution of oxygen in airliners? It is known to be much less sufficient in economy class than in first class. Surely that makes the matter a far more urgent one for the Government to consider.
My Lords, oxygen supply is a different question from studies of cabin air quality. Let us try to keep a sense of proportion about this. So far, on the worst estimates possible, a fume event—that is what we are talking about—takes place on fewer than one in 2,000 flights, and there is considerable dispute about what the quality of such a fume event might be. I have written to the noble Baroness, Lady Trumpington, on the oxygen issue. There is no evidence to suggest any variation at all in the level of oxygen supply, and my understanding is that the suggestion that the crew somehow interfere with the supply of oxygen is not true either.
My Lords, I say to my noble friend that I feel the House wants to move on to the next Question.
Higher Education: Office of the Independent Adjudicator
My Lords, in designating the Office of the Independent Adjudicator for Higher Education as the operator of a student complaints scheme, under Chapter 8, Section 13, of the Higher Education Act 2004, the Government were satisfied that the OIA was able to operate independently of the higher education sector. We are confident that that continues to be the case. The OIA provides a speedy and effective mechanism for resolving student complaints.
My Lords, I am delighted that the Government have confidence in the Office of the Independent Adjudicator, but it has been quite difficult for the public to have confidence because until very recently there were seven university board members to five independent members, and one of the supposedly independent members was a professor who was on the council of a leading university. Is it not important that both the council of the Office of the Independent Adjudicator and its sub-committees should be seen to be independent of the university sector so that all those students and others who rely on the independence of its judgment can have confidence in it?
My Lords, I completely agree with the noble Lord’s sentiments. My reading of the situation is that of the 13 board members, seven are independent and six are nominated by higher education institutions. Whether or not some of the seven have experience of or are involved in higher education, they are not nominated by a higher education institution. In fact, one of those nominated is a representative of the NUS. I agree that the body needs to be independent and perceived to be so. It is a company limited by guarantee and, therefore, the onus on the board is to take corporate responsibility for that independence, as I believe it does.
My Lords, I can confirm my noble and learned friend’s comments. It is quite interesting to analyse the significance of that. It could be because there are more issues of concern, or it could be that the Office of the Independent Adjudicator is becoming more widely known and, therefore, more able to get involved with dispute resolution, which is very important. We need to keep the numbers in perspective. I believe that from more than 3.5 million students, 150 complaints were upheld, which gives us a sense of proportion.
My Lords, I understand the purpose of the noble Lord’s Question and the need for the body to be seen as independent. Having said that, I know from attending an international conference how very highly regarded the independence of the adjudicator is. Will the Minister confirm that students pursuing courses of higher education in colleges of further education have access to the independent adjudicator? If they do, will she ensure that those students are aware of any such right?
My Lords, I believe that that is the case, but it is still very early days for the office and we should be very encouraged by the enormously important work that it does. The organisation was led by the first independent adjudicator, the noble Baroness, Lady Deech, whom we all should congratulate on her contribution. We also welcome the new independent adjudicator, Rob Behrens, and wish him well in his role. This is not something that we take lightly. The work of the independent adjudicator is also about ensuring that institutions know how to resolve complaints locally rather than elevating them to the higher status that this body represents.
My Lords, will the Minister say why the source of the funding for the Office of the Independent Adjudicator for Higher Education changed from being the Government in 2004 to subscriptions from a large number of universities? Surely in the light of this funding, students will rightly have little confidence in being treated impartially by the adjudication process.
My Lords, I am aware that there is a sliding scale of contributions made by institutions, depending on the number of students that they have. I am not sure why we would not want an independent higher education system to have a very independent and successful adjudicator. As far as I understand, the system is working very well and larger institutions are making a much greater financial contribution than the smaller ones, and we should be pleased with the way in which it is progressing.
My Lords, is the Minister aware that many of the complaints to the independent adjudicator have come from overseas students who feel that they are not getting value for money from their fees? Does she feel that this indicates that these fees might sometimes be too high or that the quality of service might be too low?
My Lords, I congratulate the noble Baroness on introducing overseas students’ fees into the discussion on the Office of the Independent Adjudicator for Higher Education. International students do make complaints, but they are not in the majority. According to the office’s annual report, the majority of complaints come from students who are concerned about their academic status, exam results and degree award. A smaller proportion—9.7 per cent—complains about the contract.
My Lords, with the leave of the House, my noble friend Lord Hunt of Kings Heath will repeat a Statement on House of Lords reform at a convenient point after 3.30 this afternoon. For this Statement, the usual channels have agreed that the noble Baroness, Lady D’Souza, should have the opportunity, as the Convenor of the Cross-Bench Peers, to speak within the initial 20-minute period set aside for the Front Benches, along with the noble Lords, Lord Strathclyde and Lord Tyler. As usual, there will then be another 20 minutes for noble Lords from all sides of the House to put questions. I urge them to put short questions so that the maximum number can be taken. I reassure the House that we intend to find time to return to this subject for a full debate at a later stage.
Repeating the Statement will remove time from the Committee stage of the Pensions Bill. It is hoped that the Committee stage will conclude today. If it does not, further time will be available on Wednesday 16 July. I am an eternal optimist.
Housing (Scotland) Act 2006 (Consequential Provisions) Order 2008
My Lords, I beg to move the Motion standing in my name on the Order Paper.
Moved, That the draft order laid before the House on 9 June be approved. 22nd Report from the Joint Committee on Statutory Instruments. Considered in Grand Committee on 8 July.—(Lord Davies of Oldham.)
On Question, Motion agreed to.
Producer Responsibility Obligations (Packaging Waste) (Amendment No. 2) Regulations 2008
London Waste and Recycling Board Order 2008
My Lords, I beg to move the Motions standing in my name on the Order Paper.
Moved, That the draft order and regulations laid before the House on 11 and 18 June be approved. 22nd and 23rd Reports from the Joint Committee on Statutory Instruments. Considered in Grand Committee on 8 July.—(Lord Rooker.)
On Question, Motions agreed to.
My Lords, I beg to move that the House do now again resolve itself into Committee on this Bill.
Moved accordingly, and, on Question, Motion agreed to.
House in Committee accordingly.
[The LORD SPEAKER in the Chair.]
126: After Clause 88, insert the following new Clause—
“Equality of annuity rate between men and women
Notwithstanding any statutory provision or rule of law to the contrary, any compulsory annuity forming part of a pension shall be payable at the same rate to men and women upon reaching a common retirement age.”
The noble Baroness said: In many ways, but not all, Amendment No. 126, a probing amendment, is similar to the one I moved in June 2006. Its aim is that the intentions of the Equal Pay Act and the Sex Discrimination Act 1975—equal treatment for men and women—be applied to annuities, thus ending this, sadly continuing, discrimination against women in their retirement income.
The history of this takes me back to my early days as the junior partner of the noble Baroness, Lady Lockwood, on the Equal Opportunities Commission. When the EOC was first established in 1975, retirement age and pensions were firmly outside the scope of the Sex Discrimination Act and were not the commission’s concern. However, it was not long before pensions, following a decision in the court, were firmly ruled to be a part of pay and, thus, became the EOC’s responsibility.
Interestingly, we received an almost equal number of complaints about pensions from both sexes. Men thought it was unfair that they had to work five years longer than women before they could receive their pension, while most complaints from women were that they were not allowed to work beyond 60 and were thus deprived of any opportunity to earn a higher pension. The situation today, of course, is very different. Plans to increase the state pension age for women to equal the male pension age of 65 by 2020—we have already had a preliminary discussion on that—are already under way. Perhaps over time there will be a further rise of three years to a new common retirement age of 68. Interestingly, when this happens, men’s statutory retirement age will rise by only three years, while for women there will be a hefty rise of eight years. At least, both would retire at the same statutory age, or range of ages, with the same pension expectations. Equality will have been achieved at last.
But, will it? There remains the problem of annuity injustice, which I have pressed on this House for years—no doubt I will continue to do so for many more. Understandably, the law requires a percentage of the benefit from private pension schemes to be taken from the date of an individual’s retirement as an annuity. But a woman with a pension entitlement that is, on the face of it, identical to a man’s receives a smaller annual pension from a sum set aside for an annuity on the basis that women live some three years—a number that is declining, as the Minister confirmed—longer than men. All that this amendment proposes is that when the equal retirement age is reached and an equal pension pot becomes available to man and woman alike, the annuity payable to each of them should be the same, which certainly is not the case today.
Let me inform the Committee about what happens by referring to a report in the Times on Saturday, 24 May 2008. Based on a pot of £100,000, six insurance companies gave their varying quotes. I shall take just one of them, from Legal & General. At the age of 65, the annuity offered for a man is £7,674, while for a woman it is the considerably lower figure of £7,075—an inequality of £600 a year for the rest of the woman’s life. I would argue that that is hardly just. I do not suggest that the insurance industry should bear the huge extra cost that may or may not be incurred, merely that an annuity should be split evenly between the sexes in employment.
I have two further arguments to put to the Minister in support of my case. First, a final-salary company pension scheme will pay an equal annual sum to employees of either sex who have reached a common statutory retirement age of, say, 65, and who retire at the same management level. Each will receive the same annual pension for the rest of their lives. What possible justification is there, then, for continuing sex discrimination in annuities on the basis that women live for a tiny percentage of years longer than men? Secondly, the new equality legislation will outlaw discrimination on the grounds of age, which presumably includes longevity, and make illegal different pay for men and women working for the same employer at the same job level. This surely strengthens my case. When the equality Bill is passed, will the Government instruct insurance companies to quote exactly the same annual sum for both sexes from the same pot? I gather that I am going to be disappointed, but I hope that I shall be given rather more detail about the reasons why.
When the noble Baroness, Lady Andrews, repeated the equality Bill Statement on 26 June, I asked her what effect this Bill, covering as it will both age discrimination and sex discrimination in pay, will have on the annuity situation. I cannot claim that she said that, once passed, the equality Bill would provide an instant solution to this injustice. However, I was encouraged when she said that the issue, although “extremely sensitive”, was both “very important” and,
“alive and flourishing in this House, and there will be opportunities to address it”.—[Official Report, 26/6/08; col. 1597.]
I certainly hope that there will be.
As I said, this is a probing amendment. I look forward very much to hearing the contributions of other noble Lords and particularly the Minister’s reply. I beg to move.
I support very much the amendment moved so ably by the noble Baroness, Lady Howe. Most of us know the arguments for and against unisex annuities. The arguments for them state that unequal payments are discriminatory, that different life expectancies are irrelevant as there is considerable overlap of the age at which most people die, that they would increase women’s retirement incomes, and that gender is increasingly less relevant compared with health and smoking for annuity pricing. In the arguments against them we may be told that women live longer and therefore their total income produces a broadly similar financial package, that they would cost more for men and therefore reduce couple income, and that they could have a knock-on effect on other areas of insurance policy such as car insurance.
As the noble Baroness argued so well, not having unisex annuities is clearly discriminatory. We do not permit discrimination in employment law, and pensions are deferred pay. In the United States and Canada, annuities bought with employment-funded sums must be unisex—in the strongholds of capitalism it is unisex—and the market may not judge by gender. A similar rule would make all DC payments unisex just as DB pension payments are. Unisex annuities are also used in the state pension system in the UK and Sweden.
Would anyone in the House believe, as the noble Baroness said, that a DB occupational pension should pay out different pensions for the same pay and years? Should a woman teacher, police officer or civil servant retiring at the same age and on the same pay as a male colleague receive a lower final-salary pension? I cannot believe that anyone in the House would support that, yet we are allowing it to happen in DC schemes because it suits and is easy for the private market. Do we think it acceptable that two office managers, a man and a woman, on the same pay and service, in a final salary scheme for 20 years and with the same pension promise, should expect, when the employer closes that scheme and switches over to a DC scheme, to receive unequal pensions for the next 15 years as a result of the employer’s decision? Is that fair? It is clearly discriminatory.
A couple of years ago the Pensions Policy Institute carried out some useful research on the effect of unisex annuities on men’s and women’s financial returns. It found that unisex annuities, despite widespread belief, would not damage men’s retirement income and could usefully improve women’s. In any case, annuity income for most pensioners is only a minor part of their retirement income, which is largely dependent on state benefits.
The PPI research showed that at 65 the best unisex rates are the same as a male annuity rate, which is 14 per cent higher than the comparable female figure. The PPI’s figures on £50,000 in 2004-05 were: £2,754 for a woman, £3,149 for a male and £3,151 for a unisex annuity. Win, win. In a competitive market where it was compulsory, the PPI calculates, the male rate might reduce fractionally by, at worst, 3 per cent and the women’s rate would improve considerably, by 10 per cent or more. Annuity rates today, of course, are somewhat higher.
It is true that women who only have access to income from their husband’s annuity might lose out if his income took a tiny drop. The identical argument was used against equal pay in the 1950s and the 1960s—that married women were dependent on their husband’s wage and would therefore lose out if other women got equal pay and possibly depressed male rates—and it took the law and Barbara Castle to say that such discrimination was not acceptable. We should say the same about pensions. In any case, three-quarters of annuities are single life, so wives are unaffected, and with joint life annuities, as I have said, there is virtually no difference between the male and the unisex rate. We expect to see women develop their own pensions. If the gains and losses are relatively tiny and it is fair to pay men and women the same final-salary pensions, it is discriminatory not to do so in DC pensions, especially as DB schemes fold into DC schemes.
Life expectancy between men and women is narrowing, as the noble Baroness, Lady Howe, said, but life expectancy by social class is wider and widening. Presumably that is why Aviva is going for postcode rates. Let me remind the House of the statistics. Twenty years ago, women lived on average 5.7 years longer than men, and the gap between social class 1 at the top and social class 5 at the bottom was also 5.7 years. Now we are all living longer, but what has happened to the differentials? Women are living three years longer than men—down from 5.7 years—but the social class gap, to my sorrow, has widened from 5.7 to seven years. So the social class gap is now double that of the gender gap and the predictor at 65 shows the same tendency, although not quite as marked. So, if companies wish to cherry-pick they should give those of us with degrees, as a proxy for social class, less favourable terms than those without. Higher education should matter more than high heels in determining annuity rates.
Essentially the market is lazy. It finds it easier to identify gender than it does class, and too many men—although, I am sure, not in your Lordships’ House today—are happy to collude with artificial annuity rates that unfairly discriminate against women. As I say, we do not discriminate in final-salary schemes or in state schemes, and we should not allow discrimination in DC schemes—including, in the Bill we are debating today, personal accounts.
I declare my interest, which is in the register of interests, as a partner in the national commercial law firm Beachcroft, as president of the Chartered Insurance Institute and as chairman of the Life Trust Foundation.
I pay tribute to the noble Baroness, Lady Howe of Idlicote, for her remarkable perseverance and the tremendous amount of work she has done in the area of equality. I recall that I used to be harassed—sorry, contacted—by the noble Baroness when she chaired the Equal Opportunities Commission, where she did very good work. As I think she recognised, though, we are dealing with a reflection of life expectancy—she has already conceded that point—and the price-per-risk principle that lies behind insurance products.
There is, however, some reasonably good news, as both the noble Baroness and the noble Baroness, Lady Hollis, have just referred to: namely, the life expectancy tables. I shall come back to social class in just a moment. The good news for us men is that our life expectancy is increasing at a far greater rate than that for women. The exact figures in the latest national statistics are that, in the past 25 years, life expectancy at the age of 65 has increased by four years for men and by two point eight years for females. Whatever one says, the noble Baroness will eventually achieve her objective because there will be an equalisation of life expectancy; it is only a matter of time.
I should also declare another interest: I have become an honorary fellow of the Institute of Actuaries. Attending actuarial meetings is a wonderful experience because the general principle is that the longer you live, the longer you will live. It is a wonderful feeling when you emerge from these highly academic meetings knowing that you are going to live longer than you originally thought you were.
I say to the noble Baroness, Lady Hollis, that changes are proposed in the methods used to estimate life expectancy by social class using the longitudinal study by the Office for National Statistics. I refer her—although, knowing her, she has probably already read it—to the work by Louisa Blackwell and Brian Johnson of last autumn in Health Statistics Quarterly.
We will see how the debate develops, but at present it is difficult to find support for the noble Baroness. Over their lifetimes, individuals, whether they are male or female, will receive the equivalent value in exchange for the same-sized pension pot. That is the point that leads me to believe that her amendment should not succeed.
I rise with the words of my noble friend Lady Thomas ringing in my ears: “Say something nice, won’t you, Matthew”. So I will try.
I start by paying tribute to the noble Baroness, Lady Howe. She may not know it, but in the dim and distant past I was special adviser to Roy Jenkins when he was Home Secretary, and I remember many meetings considering and discussing the scope of the Sex Discrimination Act. We decided not to introduce this sort of amendment, but life moves on.
I am sorry to disappoint the noble Baronesses, Lady Howe of Idlicote and Lady Hollis of Heigham, on this amendment, given that we agree on so much. As the noble Lord, Lord Hunt, said, the gap in life expectancy between men and women has narrowed a bit but it is still substantial. It is life expectancy at 65 that matters, because that is the age at which one generally buys an annuity. I would be surprised if the gap were as little as three years at that level, but even if it is, that is very significant. We are not talking about 3 per cent or 4 per cent; three years on an expected life of, say, 20 years, is 14 per cent or 15 per cent, as borne out by the figure given by the noble Baroness, Lady Hollis. That is a significant difference in actuarial expectancy and the rate quoted by somebody in the market who is trying to make a profit.
I did not agree with the noble Baroness, Lady Hollis, or with the PPI calculations. The best rate in the market can be 15 per cent better than the average, but by definition the best is not the average. On average, there is still a big difference. If everyone started getting the best rate, the market would then change very quickly.
We will be moving amendments to encourage the widest choice, and annuities to be offered on the most actuarially correct basis. The noble Baroness, Lady Hollis, talked about social class. Will we say that insurance companies have to offer exactly the same rate for every social class? To carry the argument to its logical conclusion, we would have to offer the same rate for annuities to everyone, whatever their age, otherwise it would be age discrimination. There is a genuine theoretical problem and we are in favour of not interfering with the market. If there is a genuine and significant difference in life expectancy, whatever groups are involved, then, sadly, people should be free to quote accordingly. One cannot just say that this approach is wrong and that every other way of pitching this so that it is correctly market-adjusted is right. If such an amendment were passed, insurance companies would, for perfectly understandable reasons, try very hard to find ways of not selling annuities to women. Women would not be best served; unless there were a Star Chamber, the market would not work.
I am sorry, but there is a genuine problem. Let us hope that the gap in life expectancy between men and women continues to narrow so there will not be a problem in future. As my noble friend Lord McNally said, if we are looking at social class, the people who ought to be paying the highest possible prices for their annuities are Members of this House.
I should like to add to the tributes to the noble Baroness, Lady Howe of Idlicote, for her perseverance. When I was Permanent Under-Secretary in the Foreign and Commonwealth Office, I was working for her noble kinsman, the noble and learned Lord, Lord Howe of Aberavon. He used regularly to question me about equal opportunities in the Diplomatic Service. It was no coincidence at all that he had just come from having breakfast with the noble Baroness.
I find this amendment, introduced so ably by the noble Baroness, Lady Howe of Idlicote, a little strange. It talks only about men and women reaching a common retirement age. Is that really what she wants? Does she not also want to cover compulsory annuities at 75? It seems illogical not to cover both aspects. I much dislike compulsory annuities, which we shall come on to with the next amendment, but I am the first to admit that it makes sense in many cases for pensioners to take out an annuity at retirement age—the Minister surely agrees.
Having got that off my chest, I agree with what the Minister said at Question Time today. I am afraid that, even if it is only three years, a difference still exists between the life expectancies of men and of women. If an insurance company is to annuitise a lump-sum pension or any saving, the subsequent annual income will need to be spread for more—possibly many more—years. It is thus inevitable that a woman’s annual income will be lower than that of a man, given the same percentage conversion rate. We have already heard figures on that and I will say nothing about my own researches unless I am driven to do so.
To insist that private companies disregard the reality, whether it be that women tend to live longer or young men to drive faster, or that people of either sex ski off piste and therefore attract bigger insurance premiums—
Even smoking, of which I am guilty, and of which a noble Lord on the Front Bench opposite has been guilty in the past.
How far does the noble Baroness hope that her equality proposals will go? Would private health insurers—on which the noble Lord tempts me—have to raise women’s premiums because of the possibility of prostate cancer? That would be ridiculous. As I said, why stop at sex equality? Why should not travel insurance companies be able to charge more if people plan on their winter holiday to ski off piste rather than in the normal run of things? Competition between providers already protects the consumer against unreasonable discounting on the ground of gender. Any remaining discount for women is therefore merely a reflection of the extra money that they will receive as a result of living longer.
The figures that the noble Baroness, Lady Hollis, has produced will inevitably come together over time. I agree with my noble friend, Lord Hunt, on that and I see no reason for the amendment.
I support the amendment and commend the noble Baroness for introducing it. I have listened carefully to what has been said in opposition, but the amendment takes a large step in the right direction, because it refers not to the difference in life expectancy—that may change over time, as everybody has said—but to,
“reaching a common retirement age”.
As we are moving in the direction of a common retirement age, that is a good step in the right direction.
The amendment stipulates that,
“upon reaching a common retirement age”,
there should be equality of treatment by the financial services industry. That objective is legitimate and should receive the Committee’s support.
I thank the noble Baroness, Lady Howe, for the amendment. Like others, I pay tribute to her persistence on the issue, about which she feels passionately.
I am sure that everyone agrees that an unfair and unjustifiable difference in treatment of a person based on their gender is discriminatory and unacceptable. However, the Government do not believe that differential insurance pricing based on relevant and accurate data constitutes unfair discrimination. In the annuity market, that means that insurers should be allowed to take into account all relevant data on people’s life expectancies and price accordingly.
When people come to purchase their annuity, a provider will offer them an annuity rate that is based on their life expectancy. That can be affected by several factors, such as lifestyle—for example, smoking—any known health issues and gender. Recently, insurers have started to take into account a wider range of factors, such as postcodes, to ensure that they make the most accurate assessment of their customers’ longevity. In other words, annuity pricing works on an objective basis, looking at relevant factors, including gender, that influence longevity.
Noble Lords will recognise that the consequence of taking account of postcodes will typically mean that individuals in poorer neighbourhoods with lower life expectancies should get better rates than individuals in more affluent neighbourhoods—an outcome that we would presumably welcome. It is a fact that, in general, women live longer than men. The pension fund that they have accumulated needs to provide them with an income for the rest of their life, and over the lifetime of the annuity they are, on average, likely to receive payments for longer. At every age from 65, women continue to have a longer life expectancy than men. The important variable is the amount that the average person receives over the whole life of the product, not a snapshot based on the income for a small part of the product’s lifetime.
Annuity providers base their rates on the expected life expectancy of a group of cohorts; that is mortality pooling. It is one of the main reasons that annuities are seen as a good way in which to provide an income in retirement. The amendment seeks to mandate unisex annuities, which would, in all likelihood, cause a fall in average annuity rates, because firms would not know in advance the proportions of men and women who might buy their annuities. They are therefore likely to include margins in their pricing of products to cover the risk that their assumption is incorrect; they may also be required to hold more capital to cover this risk—or, indeed, to indulge in the sort of practices at which the noble Lord, Lord Oakeshott, hinted. Although over time insurers would learn to assess this risk more accurately, it would remain a risk, which would have to be reflected in pricing and capital. In other words, because insurers would have to price in the risk of getting a large number of longer-living women in their annuity pool, rates on average would fall; so, overall, pension savers would be likely to lose out from this proposal.
We should remember that the principle of taking into account gender differences in insurance pricing applies widely. Based on evidence, younger women benefit from lower life insurance premiums than men of equivalent age. The evidence used for this differential pricing is based on the same principles as those for annuity rates. Earlier this year, the Government introduced changes to the Sex Discrimination Act, implementing the EU equal treatment directive. Under the new rules, gender-based differences in annuity rates and all other insurance pricing are allowed only when they are based on relevant and accurate actuarial and statistical data. If male and female longevity continue to converge, as has been the recent trend, that will be reflected in a convergence in male and female annuity rates, as the noble Lord, Lord Hunt, confirmed. The Sex Discrimination Act also gives people the right to challenge insurers if they feel they have been unfairly discriminated against because of their gender.
In its research on unisex annuities published in 2004, the Pensions Policy Institute concluded that,
“the impact on overall retirement income from compulsory unisex annuity rates would be small. More people would see lower retirement income, and not even all women who have annuities would see higher incomes. Many women with annuities would not have access to competitive annuity rates, and might not get a better deal than today. Lower male annuity rates would also lead to wives who rely on their husband’s income seeing lower income in retirement”.
The noble Baroness, Lady Howe, and my noble friend Lady Hollis drew a comparison between final salary schemes and annuity rates. I take their point, but an annuity is a risk-based product and you have to apply the rules of the market to identify the outcomes from that.
As for the differentials in life expectancy, the noble Lord, Lord Oakeshott, touched on the current position. In 2010, male expectation of life at 65 is estimated to be 21.8 years, while women’s expectation of life at 65 is estimated at 24.6 years. When pension ages are equalised at 2020, that would be 22.9 years for a male and 25.7 for a female.
The underlying proposition has not changed since the PPI research was published. Annuity rates for men and women may not be the same, but in our view they are none the less fair and equitable. I hope the noble Baroness understands our reasons for objecting to the amendment. I understand that it is a probing amendment, and I know that she will continue to campaign on the issue.
I am most grateful to noble Lords who have supported my attempt to have the whole issue looked at once again and even more thoroughly. I am particularly grateful to the Minister for his comments.
I was somewhat surprised by the comment of the noble Lord, Lord Skelmersdale. I was trying to say that with all the additional sacrifices that women will be making by giving up those extra years and joining in an equal retirement age, compared with very few extra years for men, application of the law on sex discrimination and equal pay would be justifiable at that time. Of course I would much rather that it started operating now. There is no law governing the various districts around the country, but there is a law governing equal treatment and sex discrimination. So it seems perfectly logical to continue arguing this point.
I had hoped for a slightly more encouraging reply, but I understand the point from which the Minister is coming. I very much bear in mind that, as a group, women are among the poorest of retirees. They are also among those who have played a major part in saving the state money by heading up carers in every form. This is just one other area where, by equalising the situation between men and women, one would hope to take a small step in women’s favour and in the favour of equal treatment in every other respect.
I cannot promise not to return to the matter. I think the Minister realises that I may very well return to it—I have a slightly different amendment up my sleeve for Report. I will think about it. But regardless of whether I return to the issue then or at a later opportunity, with a different Bill, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
House of Lords: Reform
My Lords, with the leave of the House, I will now repeat a Statement made in another place by my right honourable friend the Lord Chancellor on House of Lords reform, on which he is today publishing a White Paper. The Statement is as follows:
“In my Statement to the House on 19 July last year, I said that I would continue to lead cross-party talks on reform of the House of Lords. Those talks have included Front-Bench representatives of the main parties from both Houses, as well as of the Cross-Bench Peers and the Bishops. The talks have made good progress. I am most grateful to all those who have served on the group. I pay tribute for their constructive contributions and readiness to consider alternative proposals. Our discussions have been much informed by the work of others, including the Public Administration Select Committee, informal cross-party groups, the Cunningham report and above all the report of the Royal Commission under the chairmanship of the noble Lord, Lord Wakeham.
“The basis for our talks was the outcome of the votes in the House of Commons in March 2007. This House voted then for a wholly elected, and for a mainly elected second Chamber and rejected all other alternatives by a large margin. The Lords took a different view. It voted for a fully appointed second Chamber. However, as I said in my Statement on 19 July last year, reflecting the remarks of my right honourable friend the Prime Minister on 3 July last, work taking forward House of Lords reform had to be based on the will of the House of Commons, which is the primary chamber in our legislature.
“The proposals we make today are consistent with the 2005 manifesto commitments of the three main parties. The White Paper sets out how a wholly or mainly elected second Chamber might be created within a bicameral legislature in which the House of Commons retains primacy. The White Paper reflects the considerable consensus reached in the cross-party talks. Inevitably, we did not reach agreement on all issues. In some instances, those taking part asked that the White Paper record their difference of view, which it does.
“As I indicated to the House in my Statement on 19 July last, our intention is that the product of the cross-party talks would be the basis of a,
‘package that we would put to the electorate as a manifesto commitment at the next general election and which hopefully the other main parties would include in their manifestos’.—[Official Report, Commons, 19/07/07; col. 450.]
“It has never been the intention to legislate in this Parliament. The White Paper represents a significant step on the road to reform and is intended to generate further debate and consideration rather than being a final blueprint for reform.
“The White Paper sets out how Members could be elected to a reformed second Chamber from the nations and regions of the United Kingdom. It was a key recommendation of the Royal Commission of the noble Lord, Lord Wakeham, and has since enjoyed strong consensus, including within the cross-party group, that Members should serve a single, non-renewable term of three electoral cycles—that is, of 12 to 15 years. This reflects proposals in the February 2007 White Paper. Elections would be held at the same time as those for Members of this House, so as to minimise disruption to the business of Parliament.
“The current House of Lords has over 700 Members. The Government intend that the reformed second Chamber should be significantly smaller, of not more than 400 to 450 Members and maybe less, and that costs should be similar or reduced. We envisage all Members of a reformed second Chamber making a full contribution to its work and would welcome views on its size. Single, non-renewable terms would help provide a membership for the second Chamber which continued to be distinct from that of this House and hence which could bring an added dimension to the work of Parliament. It is proposed that this be reinforced by the use of large constituencies for elections to the second Chamber.
“I referred earlier to the primacy of this House. Analysis of other countries’ arrangements and our own history shows that primacy does not depend on the fact that this House is elected while the Lords is not. It is rooted in the Parliament Acts of 1911 and 1949, and the conventions which govern relations between the two Houses. With the introduction of elected Members into the second Chamber, however, we have to ensure that the mandate of this House and the government it sustains continues to hold sway. The Membership of a reformed second Chamber should be such that it could not challenge that mandate. This is why we saw considerable merit in staggered elections to a reformed second Chamber, with a third of Members returned at each election. In this way, the electoral basis of the reformed second Chamber could never, as a whole, be more recent than that of this House.
“The cross-party group considered at some length possible voting systems. The White Paper presents detailed modelling on the possible effects of each of four electoral systems for elections to a second Chamber. The systems are first past the post; alternative vote; single transferable vote; and open or semi-open list systems. The Government would welcome views on the choice of system.
“The cross-party group considered the powers of a reformed second Chamber. We took the view that it would be wrong to pre-suppose conflict between this House and a reformed second Chamber. The working relationship between the two Houses currently functions well, and we could see no reason why it should not continue to do so. Creative tension between the Houses can lead to better government, not an undermining of this House’s primacy. If conflict arose in future, it would, as now, be for both Houses to devise a way through that conflict. We identified no persuasive case for reducing, in advance of that, the powers of a wholly or mainly elected second Chamber.
“Given that the Commons voted last March for both, the White Paper does not take a view between the options of either a 100 per cent or an 80 per cent elected second Chamber. However, it includes detail on a possible 20 per cent appointed element, should the latter option be chosen. There would be a statutory Appointments Commission and published criteria for appointments. Any appointed Members would serve for three electoral cycles in the same way as elected Members.
“If the second Chamber became fully elected, there could be no seats appointed or reserved, including for Church of England bishops. But in recognition of the wide and important role played by the Lords Spiritual in the life of the nation and the special constitutional position of the church, we propose that their representation should continue in a mainly elected House. In that instance, their numbers would not contribute to the 20 per cent appointed element.
“The White Paper includes proposals on eligibility and on disqualification. Because of the long, non-renewable terms for which they would serve, we were attracted to the system discussed in the White Paper of recall ballots for elected Members of the second Chamber, with analogous arrangements for any appointed Members. This would apply only after the first of three parliamentary terms which Members would serve. The Government welcome views on this. Members of a reformed second Chamber should receive salaries, with the Senior Salaries Review Body asked to advise.
“The transition to a reformed second Chamber raises a number of important issues, not least about the future arrangements for existing Members of the Lords. Those Members, collectively, enable the Chamber effectively to fulfil its key roles of scrutinising legislation, conducting investigations and holding the Government to account. This Government, and I know the whole House, greatly value the work of the Lords and the contributions of individual Members to it.
“However, it was made clear in 1999 that the rights of hereditary Peers to sit and vote would be removed as part of the next phase of Lords reform. The Government propose that, following legislation and during the transition to a reformed second Chamber, there should be no further by-elections to fill vacancies for hereditary Peers.
“The February 2007 White Paper included a proposal from me that a reformed House should be 50 per cent elected and 50 per cent appointed. One of the many merits I saw of that proposal was that it would have enabled existing life Peers to remain for life, if they had wished to. However, that 50/50 proposal was comprehensively rejected by both Houses. The votes in this House for a wholly or 80 per cent elected House mean that the context for the transition to a reformed second Chamber has changed. There may not be an appointed element in a reformed second Chamber. If there is, it may comprise 90 or fewer Members. A discussion is therefore now required to determine how far the rights of life Peers to sit and vote during any transition to a reformed second Chamber should continue. The White Paper sets out three options for managing the transition to a second Chamber: first, for all existing life Peers to leave in tranches allied to the three electoral cycles; secondly, for all to leave on the third cycle; and, thirdly, to remain as now for life. The Government welcome views on these options”.
My Lords, I think I know where your Lordships stand on this.
“Mr Speaker, the cross-party group faithfully and assiduously followed the mandate set for it by the Commons last March. We are now keen for there to be a wide-ranging and thorough debate, but I think all Members of the cross-party group share my view that to have got this far on such an important but highly complex issue is a considerable achievement.
“As I said in my Statement on 19 July last, our intention now is to continue developing consensus round a comprehensive package for reform of the House of Lords. Any final package would have to be put to the electorate as a manifesto commitment at the next general election. I hope that we will be able to build on the considerable consensus established already in the cross-party group, to the extent that other parties include similar commitments in their manifestos.
“An effective second Chamber plays an invaluable role in holding the Government to account and in scrutinising legislation. Our belief is that the proposals in the White Paper, and of the group, will lead to a more legitimate and strengthened second Chamber. I commend this Statement and the White Paper to the House”.
My Lords, that concludes the Statement.
My Lords, that the Statement is being presented to Parliament on 14 July, when the French celebrate the storming of the Bastille, demonstrates that someone in the Ministry of Justice has a sense of humour, if not a sense of history. I thank the noble Lord, Lord Hunt of Kings Heath, for repeating the Statement made in another place, and for giving me an advance opportunity to read the White Paper. It is the third White Paper on this House from this Government, and there have been even more major statements on its role, Members and powers over the years.
Of course, many proposals have preceded it since the curbing of this House’s powers in 1911, when both Houses resolved that in due time the House should be constituted on a popular basis. We had the Bryce commission of 1918, the talks of Lord Longford and my noble friend Lord Carrington in 1968, the Home report, the Plant commission, and the royal commission chaired by my noble friend Lord Wakeham. One has only to read a few of the names to realise how long the debate about the future of our House has continued. For all the Lord Chancellor’s ingenuity, the problem has been neither newly identified nor finally resolved in the White Paper; there is much work to be done before a Bill could be presented.
This House is no stranger to reform. The Conservative Life Peerages Act 1958 was a revolutionary experiment in composition, enacted some 80 years after the controversy over life peerages first raged in the Wensleydale case. The Conservative Party enabled women who inherited peerages to enter this place in 1963, and in 1968 the House voted for substantial further reforms only to see those plans scuppered in another place. In 1999, half this House departed in the face of the House of Lords Act. Much as they disliked it, they accepted that as their duty in view of the binding undertakings given by the noble and learned Lord, Lord Irvine of Lairg, to provide for a comprehensive stage 2 reform. In 2005, further legislation reversed the first life peerages provisions in relation to the judiciary and provided for Law Lords to be excluded. So let it not be said that this House is not prepared to entertain change, accept it or adapt to it when it occurs.
I thank the Lord Chancellor, the noble Lord, Lord Hunt of Kings Heath, and the noble Baroness, Lady Ashton, who joined the cross-party talks referred to in the Statement actively when she became Leader of the House, for the care with which they conducted them. They did so with responsibility and a clear understanding of the role, authority and importance of this House in our bicameral constitution, something not always seen from every member of this Government.
Equally, I know that the cross-party talks have created resentment in this House, although cross-party talks are of course normal in a functioning democracy. Many of your Lordships felt excluded, which was unnecessary and avoidable. For my own part, I would have had no difficulty with publishing the papers or the records of the talks, and I always thought that it would be wise to have a parallel process made up of Back-Benchers examining the implications of the votes of this House on reform. There is a majority in this place for a fully appointed House, an idea that in itself presents substantial practical issues. However, the Government chose to proceed on the basis of votes in the House of Commons for an 80 or 100 per cent elected House, which made known—for this Parliament at least—the will of another place.
Of course, the Government could not and should not have ignored the votes of another place and—I must say, bluntly—neither should we as a House. If we do not engage with another place, it can impose its will on us; we cannot just sit this one out. That is why the Front Benches in this Parliament, the noble Baroness the Convenor of the Cross-Bench Peers, and the right reverend Prelates accepted the Lord Chancellor’s invitation to participate actively and constructively in wrestling with the issues arising from the votes in the other place; I make no apology for that. After all, the unilateral proposals for change put forward by this Government since 1999 have not exactly had a rapturous welcome.
We started the talks with the aim of working out what the House that another place voted for might look like and setting out for both Houses to consider a potential design for such a House. The paper published today is a step towards this, but let me make it clear that it is a government White Paper, not a cross-party paper, although, as the Statement says, we found wide areas of agreement. That is hardly surprising, given the commitments of the main parties to seek consensus for a partially elected reform. However, it is equally unsurprising that we also found major areas of disagreement and it is inevitable that this White Paper will be the basis of a long and heated debate which I hope will take place in this House some time after we return from the Summer Recess. Without pre-empting that debate, I shall sketch briefly some areas of agreement and disagreement.
If there is an elected House, we must keep, so far as possible, the strengths of this House while increasing its will to use its powers. We agreed that that means no reduction in the powers of this House. We agreed that it means long non-renewable terms for Members, so that they are free of coercion and as independent as possible from threats and rewards by party Whips. We agreed that it means retaining the right reverend Prelates. It also means, in my view, “no” to a 100 per cent-elected House, because that would exclude the Cross Benchers who put a particular stamp on this House and whose expertise is so valuable to Parliament.
Any reformed House must pass these and other key tests. It must complement the other place, not compete with it; it must not be a House of opposition, but nor should it be servile; it should be no less capable of performing the key roles of the current House and it should be a House to which the people of this country can genuinely relate.
That takes me to an area of major disagreement—how an elected House should be chosen. It may surprise noble Lords to hear that the Liberal Democrats shocked us in the working party by calling for proportional representation. We prefer smaller constituencies based on our historic cities and counties, with Members chosen directly by “first past the post”. The Government sat on the fence. That is not a good basis for legislation.
Many grey areas also remain for which the White Paper has not provided adequate answers for public scrutiny. There are the difficult questions of the transition from one House another, the pay and pension arrangements for the new House and outgoing Members of the present one and, indeed, the overall costs of a reformed House. These issues cannot be fudged in a Bill.
There has been perhaps a little fudging, which is why this is not really a White Paper at all. It is a Green Paper. The Government’s mind is unclear on so much that you have to wonder why they are publishing it in the first place. Even the name of a reformed House is a mystery. Leaks a few weeks ago suggested that it would be called a senate, but even that seems to be too radical a step for this Government, and the name disappeared in the final draft. What will the House be called? The Minister and the noble Baroness the Leader of the House will have to make the Government’s position far clearer in the months ahead.
There is a great deal yet to do. There should now be a pause while both Houses, the wider public and, in due time, the next Parliament work to resolve the many questions raised by this process. That should be no excuse for suspending further work. The Executive are too strong and Parliament, for all the efforts of your Lordships over the past 10 years, is too weak to restrain them properly. We have too many laws in this country and too many lawmakers who lack the capacity or authority to prevent or improve them. We must not set our faces against change that might help Parliament to do its vital job more confidently.
As I am sure all noble Lords will agree, this is a great House, a House of ceremony and dignity, a place to which all of us feel privileged to belong. The 20th century was not the happiest for our House, but in some ways in this new century, against all expectations, we have begun to feel our way back to the heart of national affairs. The White Paper does not impede that movement, but it leaves us far from agreed legislation. The next reform of the House will be a democratic one—I am sure of that and I expect that the noble Lord, Lord Hunt, will agree with me—but when will it happen? Of that, I am far, far less certain.
My Lords, we on these Benches warmly welcome the Statement and the White Paper. The approach fulfils the objectives that my honourable friends at the other end of the Corridor—the Liberal Democrat MPs—voted for absolutely unanimously in March 2007, and which my noble friends in this House voted for at the same time by a majority.
I hope that I will not do damage to the reputation of the noble Lord, Lord Strathclyde, among his loyal supporters on the Conservative Benches if I say that I am not quite sure what the noble Lord was actually suggesting. Is he suggesting that we should have another pause in reform? If so, he is not fully taking account of the fact that the Statement makes it clear that his very constructive contribution to the work of the cross-party group was acknowledged and warmly welcomed. I am sure that the Minister will reflect that again in a moment. Although he may have problems with the detail of the White Paper, he was, I think it would be fair to say, a very constructive contributor and I pay tribute to him for that. I hope that I have not done great damage to his leadership.
I am sure that there will be a very firm commitment to reform along the lines of the White Paper in the next Liberal Democrat general election manifesto, but it is far from clear, from what has been said this afternoon by those on the Opposition Front Bench in this House and the other House, whether that remains the case for the Conservative Party. I am not sure whether it is still committed to the reform that it said it was committed to in the 2005 general election. Is it the Minister’s intention to seek an exact common manifesto commitment from all three major parties to make progress in future?
The question that the public will ask is, “Why are we waiting?”. Why do the Government hesitate? It was clear—was it not?—that when we were all expecting a general election this year or in 2009, there was a very good case for delay. Now, since the Prime Minister has made it clear that there will not be a general election until 2010, it should surely be possible for us to make some progress on this clear set of proposals.
The Prime Minister’s first Statement, on 3 July 2007, contained a firm intention to give priority to reinvigorating democracy and strengthening Parliament. Why are we in this House to be left in illegitimate limbo? In the Statement and in the conclusion of the White Paper, great emphasis was given to clear legitimacy for this House. That is surely what we should all seek. Given that the so-called Constitutional Renewal Bill has proved to be nothing of the sort, surely this is a genuine reform that can be included in the Queen’s Speech in December.
When I have previously questioned the Minister, he has said, on two occasions, that it was the Government’s intention to submit draft clauses for pre-legislative scrutiny. He seemed very sympathetic to my idea that this should be examined by a Joint Committee of both Houses; that would at least reduce the ignorance there is about the other place and this place among Members of the two Houses. Surely that is a way in which we could make some progress. We could, in the phrase of the Lord Chancellor’s Statement,
“build on the considerable consensus established already”,
and sort out some essential details. For example, we on these Benches think that it would be preferable to hold elections for the senate on a fixed date to avoid the considerable practical difficulties involved when the House of Commons is elected on an indeterminate date; we would be seeking a firm, fixed term for Members of the reformed second Chamber. It would also mean that we could avoid confusion among the electorate, who I am sure many of us recognise often vote for—or, indeed, against—a Government when they see an opportunity at a general election to do so. We surely do not want that to determine what will happen in this House. The Government are promoting a different option; why cannot we now debate those two alternatives and see which best meets the needs of this House?
Ministers have been quite specific in the White Paper on so many points that it is curious that they are havering between an 80 and a 100 per cent elected senate. No one is asking them to be absolutely determinate about that but at least some preference could be indicated. Surely they could now reveal that.
It is now 15 months since the House of Commons, for which everyone claims primacy, voted by such large majorities for reform. Surely unnecessary delay simply plays into the hands of the refusniks or reactionaries. In his Statement in the other place, the Lord Chancellor referred to the possibility that we might achieve reform by 2011. As Members of this House will no doubt recall, it was on the face of the Parliament Act 1911 that we should move towards a second Chamber based on a popular mandate. If we are to fulfil that firm commitment of 100 years ago by 2011, surely we should start now.
My Lords, I thank the Minister for repeating the Statement and offer congratulations to the team of officials, who managed to make coherent what was often less than coherent.
All that I wish to say has been said many, many times before. Nevertheless, I feel compelled to make just a few points, if only because there is very strong feeling about this issue among the independent Cross-Bench Peers. Some might say, “Well, they would, wouldn’t they?”, but I think it is more than that. There is a deeply felt concern that some of the measures proposed will have an undoubtedly deleterious effect on the chief functions of this House and on legislation more generally. More than 60 independent Cross-Bench Peers have, for example, endorsed a statement focusing on incremental House of Lords reform.
I start with the premise on which the White Paper, and the work of the cross-party group on Lords reform, is based. In no other legislation since I have been in this House has the overwhelming vote of this Chamber been so entirely disregarded. The Lords voted on 14 March 2007 for an appointed or predominantly appointed upper House by a majority of 327 votes, which represents almost 60 per cent of the votes cast on that day.
Perhaps I may also add that the two options—wholly or 80 per cent elected—which have now become the only options, were in fact voted against in 2003 and 2007 by two leading members of the cross-party working group; namely, the right honourable Jack Straw and the right honourable Theresa May. Therefore, in fact they are arguing for something that they had voted against.
It is difficult to know from where this pressure for radical reform is coming. It is certainly not coming from this Chamber, the public or the media, nor, as far as I can tell, from a significant body of Members of the other place. However, inexplicably, even the relatively minor and sensible reforms put forward in, among others, the so-called Steel Bill have been rejected by the Government in favour of this radical reform.
Crucially, I have not heard from within the working group or without it any argument that a radically reformed House would demonstrably improve the work of this House. The need for legitimacy is constantly emphasised, but we are not illegitimate as we stand—a view endorsed by the Government’s public reference to the “increased legitimacy” of the House of Lords. Legitimacy is not necessarily or exclusively guaranteed by elections. Are, for example, judges or senior academics non-legitimate by virtue of having been appointed? Furthermore, are we talking about genuinely open elections or about simply substituting the present appointments system with a more politically based one?
The process of democratic reform is achieved by greater transparency, accountability and debate, and not by the single fact of election alone. It is difficult to see how an individual elected for a 10 to 15-year period with no opportunity for re-election can offer accountability.
The potential effects of a predominantly elected second Chamber can be summarised as follows: the rise of a competitive state of affairs with the other place, which would have an inevitable effect on the primacy of the House of Commons—elected Members would, I suspect, not be content merely to delay legislation but would in time demand a veto; an increase in the politicisation of this House, no matter what voting systems are adopted; an inevitable decrease in the expertise, independence and diversity of this House—it is, for example, less likely that mid-career people, women, representatives of ethnic minorities, and, most importantly, people with disabilities would put themselves forward for a potentially gruelling election process; and, finally, its relative cost as compared with the other place, a matter on which this House has always prided itself, will be lost—an elected Chamber will involve a massive rise in expenditure.
I regret so much that, in the past few months, I have sounded much like a stuck record in the proceedings of the cross-party group, but I genuinely believe that the changes outlined in the White Paper will neither enhance nor improve the work of this House but may result in politicisation and a degree of confusion to the ultimate detriment of the crucial work that this House undertakes.
My Lords, noble Lords will have a flavour of the fascinating discussions that we have had in the 12 meetings of the cross-party working group since it was established following the free votes in the Commons. I say at once to the noble Lord, Lord Strathclyde, that I agree that your Lordships’ House makes a huge contribution to the work of Parliament. An intention behind the White Paper and its proposals is to build on that contribution. He is right to say that there have been many reports and many White Papers on Lords reform, starting with that of Viscount Bryce and the Bryce conference in 1917-18. The noble Lord might also have mentioned the memorandum of Winston Churchill to the Cabinet arguing for some form of indirect elections, I think, during the 1920s. That illustrates to me that reaching consensus on the future of your Lordships’ House is very difficult indeed, which is why the cross-party group was established.
Of course, there is much more work to be done. This White Paper spells out the implications of the vote of the Commons and allows for a debate on those implications. I do not think that we are the poorer for that kind of process or that it was an unreasonable way in which to proceed. The noble Lord, Lord Strathclyde, is right: it is a government White Paper, but it draws heavily on the long and detailed discussions in the cross-party group. I pay tribute to all noble Lords and honourable and right honourable Members who took part in those discussions.
I agree with the noble Lord, Lord Strathclyde, about the issue of powers. We do not want to see a diminution in the powers of your Lordships’ House within the context of a mostly elected or all-elected Chamber. That principle was agreed right at the start of those cross-party discussions. I believe that it was agreement on that principle that enabled the talks to continue in such a fruitful way.
I also agree with the noble Lord, Lord Strathclyde, when he points to the importance of long, non-renewable terms of office and to the contribution made by the right reverend Prelates to your Lordships’ House, which, he argued, meant that he favoured an 80 per cent elected House. The Government have deliberately chosen not to come down in favour of either option at this stage, because the Commons voted for both options. We thought it better to produce a White Paper that allows the Commons and others to look at the consequences of that. The time for a decision will be later, but I think that the White Paper will be very helpful to that debate.
It was clear from our discussions in the working group that we were unlikely to achieve a consensus on voting systems. It seemed much more sensible to put into the White Paper a number of options and to allow a debate to take place.
On the name of the reformed second Chamber, I know that the noble Lord, Lord Strathclyde, is keen on the use of the word “senate”—“the senior senator from south Scotland” has a certain ring to it. Let us debate the title of the second Chamber and decide in the light of that debate.
The noble Lord then asked when that will happen. That very much depends on the debates on the White Paper and on the decisions of the political parties. This process allows manifesto commitments to be given at the next general election and subsequently for legislation to be made. That process was always laid out. The White Paper continues that and will allow the public as a whole to come to a view.
I also thank the noble Lord, Lord Tyler, for his kind comments. He asks why we are waiting. As we have already observed, there will be many reports on House of Lords reform, which started more than 90 years ago. Seeking consensus is surely the best way forward. Surely a modus that allows for debate, manifesto commitments and then legislation is the best chance that anyone could have for reaching agreement and producing legislation to enable reform. This is entirely consistent with the Green Paper, The Governance of Britain.
I did not recognise the unkind remarks of the noble Lord, Lord Tyler, about the draft Constitutional Renewal Bill. Reform of your Lordships’ House is entirely consistent with the Government’s intention to enhance the position of Parliament vis-à-vis the Executive. We have always said that, in the light of consultation, there may well be an opportunity to publish draft clauses. Just as we would welcome Parliament’s scrutiny of and debate on the White Paper, we would welcome further scrutiny of any draft clauses that might be produced.
The cross-party group discussed the Liberal Democrats’ view that elections should be held on a fixed date. That view is recorded. However, there are strong arguments for those elections to be held at the same time as general elections. That would certainly ensure that this House as a whole had no more recent mandate than that of the Commons, which is important, given the primacy of the Commons. On the point about confusing the electorate, the electorate are well up to being able to vote both for a Member of Parliament and for Members of your Lordships’ House.
I thank the noble Baroness, Lady D’Souza, for her contribution to the work of the cross-party groups. I was amused by her comments about coherence where there may be none; I often think about the work of Hansard when I read my speeches in the Official Report. I do not share her view that the measures in the White Paper would necessarily have a detrimental impact on your Lordships’ House. The question of legitimacy is very important. Surely the goal is to add legitimacy to the enormously important work of your Lordships’ House. That is what is intended. The question of independent Members is one of the strong arguments for an 80 per cent elected House and I am sure that she and others will pursue that option with great vigour in the future. Matters such as costs will need to be considered in greater detail when we are clearer about the way forward. We will want an effective second Chamber, but we will also need to ensure that public finances are managed as effectively as possible.
My Lords, is my noble friend aware that, if legitimacy is the underlying argument driving this forward, the conclusion—that we should have a 100 per cent elected House—is inescapable? Any other arrangement denies the very argument and principle that the Government have advanced. However, I must say that a 15-year term gives a fig leaf of legitimacy and no more. What in the White Paper will convince the public that an elected House on those terms will be more effective, more efficient, give better value for money, be more representative and speak more effectively for the people of this country? To describe what we have had presented to us as a White Paper defies logic. It barely can be dignified with that description. With the world economic crisis as it is, oil prices going through the roof, and food and commodity prices rising weekly, if the noble Lord, Lord Tyler, thinks that the public are hanging on for an imminent decision about reform of the House of Lords, I am afraid that he is not living in the real world.
My Lords, my noble friend perhaps has put the “price of bread” question to me. Of course, one would hesitate to say that reform of your Lordships' House is the first concern of many members of the public. None the less, the health of our democratic institutions is important. It underpins the whole nation. Therefore, measures to improve the effectiveness of Parliament are worthy of consideration. I take his point about legitimacy and a House that is 80 per cent elected as opposed to 100 per cent elected. However, we have taken both votes in the other place and presented to Parliament and the outside world the implications and consequences of that. Clearly, there will be an intense debate about whether 80 per cent or 100 per cent elected is appropriate.
As regards long terms, the aim was to have an approach and membership that are very distinct from the Commons’. I think that most of the working group believe that a non-renewable, long, one-term electoral term is likely to lead to a more deliberative approach by Members of the second Chamber, which very much fits in with its essential scrutinising role. However, we will have to see the outcome of the discussions.
My Lords, first, I thank the Minister for the very kind references to our Royal Commission report in the White Paper. A substantial piece of work was produced, which merits a lot of consideration and not detailed judgment. Having said that, all the outstanding points are those which were difficult for us 10 years ago. They are very nearly the same points. Our report at that time attempted to offer a compromise between those points, which was rejected by virtually everyone initially because no one wanted a compromise. Does the Minister think that, 10 years later, people might be prepared to seek a compromise, rather than everyone demanding exactly what they want, with the likelihood of getting nothing?
My Lords, I pay tribute again to the noble Lord for his chairmanship and leadership of the Royal Commission report. It remains a fount of wisdom and information about reform of your Lordships' House. He is right that the White Paper merits a great deal of consideration, which, I hope, your Lordships' House will be able to give it over the next few months. The noble Lord is also surely right that the lack of compromise has bedevilled Lords reform on many occasions. The noble Lord, Lord Strathclyde, referred to the 1968 proposals, which fell, due again to a lack of compromise.
Following the votes in the Commons and the cross-party working group, let us hope that what we have now engaged in can lead to a consensus which would enable Parliament after the next general election to legislate on the basis of a settled view. That is the hope and the expectation following this White Paper.
My Lords, I also thank the Minister for repeating the Statement, and welcome the White Paper. We on these Benches will play our part fully in the debates on the recommendations, including those that seek to secure a proper representation of all communities of faith in these islands. Given the evident interest in the future of these Benches shown by many noble Lords, not least during the reading of the Statement, perhaps I could comment on some of the recommendations that relate to the Bishops. While noting that there could be no continuing place for Lords Spiritual in a wholly elected Chamber, we welcome the fact that there would be a place for them within a partially elected Chamber. We therefore acknowledge that in a House with a reduced membership, consideration would need to be given to the appropriate number of Lords Spiritual, which currently stands at 26. We have long held the view that the minimum number required for an effective service to be offered to this House would be 20 and we would therefore welcome a commitment by the Government to discuss this issue with the church. In this context we would be happy to respond to the invitation in the White Paper to review the current system of selection to the Bishops’ Bench—
My Lords, in welcoming the continuing presence of Lords Spiritual in this House, would the Minister affirm that, whatever the final outcome regarding the place of Lords Spiritual in the House, there is an assurance that there would be no fundamental change in the relationship between church and state?
My Lords, I welcome such modest progress as has been made towards the democratisation of the second Chamber, but it pains me to reflect that in the years since the late Robin Cook and I signed a cross-party agreement, so little progress has been made. Does the Minister recognise that the failure to provide for the re-election of elected Members of the second Chamber deprives the public of the prospect of holding them to account, which greatly reduces the legitimacy of the second Chamber? What considerations might ultimately tip the Government’s mind with respect to whether it should be a wholly elected or partially elected House?
My Lords, the noble Lord says that little progress has been made. In the history of Lords reform there have been considerable problems in reaching agreement on the way forward, and that is why the process we are now engaged in is so important. He could have acknowledged that the Commons were able to come to a view, which, as he knows, was not the case in the first set of free votes. On re-election, I have already outlined the reasons why the Government and the cross-party group favour long, non-renewable election terms. The White Paper discusses the possibility of recall ballots as one way of ensuring accountability. We will welcome views on that.
My Lords, like most noble Lords, I have not been given the opportunity even to skim the White Paper before the Statement was made this afternoon, but I start by endorsing every word spoken by my noble friend the Convenor of the Cross Benches, which, I know, reflects the substantial majority of opinion on these Benches. I noticed that the Minister shook his head vigorously in denial when the Convenor referred to costs. While I do not expect him to answer the question this afternoon, how does he expect the Senior Salaries Review Body or its successor to devise an appropriate salary for 450 elected Members of this House within existing costs?
The Government have frequently assured us that they were seeking a consensus. What kind of consensus is it when only two options are put forward in the White Paper— for a fully elected or an 80 per cent elected House—which totally ignore the vast majority of opinion in this House that it should continue to be fully appointed? If the Government were really looking for a consensus or, to use the words of the noble Lord, Lord Wakeham, a compromise, surely the logical answer would be a 50:50 House. I am not saying for one moment that I would support that solution, and I doubt whether many of my noble friends on the Cross-Benches would support it, but it is surely logical. It is worth noting that that is the proposal included in the White Paper last year that was voted for by the Minister’s right honourable friend Mr Jack Straw.
Does the Minister consider that the premise of the White Paper—that there are only two options to be considered: a fully elected or an 80 per cent elected House—is a serious proposal and not a deeply flawed one?
My Lords, I do not agree. We need to go back to the reason why the first cross-party group was established: to enable both Houses to come to views on Lords reform and its membership. As we have heard, the Commons voted in favour of both 80 per cent and 100 per cent elected. Your Lordships voted only for a 100 per cent appointed House. Faced with that difference of view, and as the Commons has primacy, as your Lordships have always acknowledged, the Government decided that it was appropriate to carry out considered work on the options on which the Commons voted.
I understand where the noble Lord is coming from on compromise, and 50:50 sounds a comfortable compromise between both Houses. But, as he suggested, that proposal was comprehensively rejected by both Houses. That is why my right honourable friend the Lord Chancellor has taken forward the discussions on the basis of the Commons votes.
My Lords, is not a fundamental flaw at the heart of the White Paper that it treats the major reform of one House of Parliament as a stand-alone issue with no relevance to the rest of the constitution? Whatever the wishful thinking in the White Paper suggests, is it not inevitable that the relationship between the two Houses would change dramatically and permanently, with the role, powers and responsibilities of the House of Commons being diminished? Whatever people’s views on that might be, surely it is essential now that the Government recognise the work of the Cunningham committee, to which they have already subscribed and which has been the subject of unanimous support from both Houses of Parliament. It recommended that, before any further steps are made, the issue of an elected House of Lords and its impact on the powers of the Commons and the relationship between the two Chambers is fully examined, preferably at length.
My Lords, I have been aware of my noble friend’s views on Lords reform for a long time. He puts his case very powerfully, but I disagree with him, although I certainly acknowledge—and I should have done so before—the enormously valuable work of my noble friend Lord Cunningham in his chairmanship of the Joint Committee on Conventions, which has informed the Government and the working group.
My noble friend says that an elected second Chamber would diminish the role and powers of the House of Commons. I do not share that view. All members of the working group and the Government are firm that the primacy of the Commons must and will be retained. Primacy is underpinned by the Parliament Act, by financial privilege and by the confidence that a Government must have in the House of Commons. Of course an elected or mostly elected second Chamber will feel confident in the powers it has; we should not run away from that, but at the end of the day it is still within the context of the primacy of the Commons.
My Lords, we have a system of government that is 100 per cent democratic, and I do not believe that having elected Members of this House would in any way increase that percentage.
The Government have set about this matter of achieving consensus in completely the wrong way. They have put far too much emphasis on a single vote in the House of Commons, when what was absolutely clear from that vote was the disagreement between the Front and Back Benches in both Houses and in both parties. They then set up a group that was totally unrepresentative of the Back Benches, where we had no effective say in the matter at all.
The Minister has put much emphasis on the primacy of the House of Commons. Since this matter goes back to 1911, it is not entirely clear that that primacy extends to total revolution of the constitutional situation. In some respects at present, in fact, the House of Commons is not totally unfettered. That is an important issue.
The second point is that there was a stitch-up with regard to election manifestos; the role of the manifesto in relation to this matter is extremely questionable.
My Lords, the noble Lord is being a little unkind about the Government’s undertaking. We made clear in our 2005 manifesto that we would seek free votes of Parliament, and that is what we have done. It was not simply a vote in isolation; it took place in the light of a White Paper produced after constructive discussions between the political parties. That is not an unreasonable process. The Government could quite easily have produced a White Paper and a proposal without any consultation at all.
In the light of all the problems over many years about achieving longstanding reform of your Lordships’ House, this did and does appear to the Government to be the best way of achieving political consensus between the three main parties, which I believe provides the best foundation for taking reform forward.
My Lords, does the Minister agree that Tony Blair’s commitment in 1997 that no one party should have a majority in the House of Lords has contributed greatly to its effectiveness ever since? Does he also agree that if the first-past-the-post system or alternative-vote system had been in force for elections to this House, his party, the Labour Party, would have been in an overwhelming majority after the 2005 general election, at least among the political parties? Is it not therefore clear that some form of proportional representation will be essential if this House is to continue to play the role it does after we have become a partially or wholly elected Chamber?
No, my Lords, I do not accept that at all. That is why the White Paper puts forward four options in the appendices. It looks at past election results and makes predictions about how voters might have voted, although it is very difficult to come up with firm calculations. Depending on which electoral system is adopted, there might be majorities for one party if it was successful over three elections, but in most cases there would not be an overall majority.
Your Lordships' House has worked well for any number of reasons. We intend to build on that, and I believe that the White Paper will enable us to do so.
House again in Committee.
127: After Clause 88, insert the following new Clause—
“Minimum retirement income
(1) The amount of the minimum retirement income in respect of each tax year shall be set by the Chancellor of the Exchequer by order at the level of the standard minimum guarantee prescribed under section 2 of the State Pension Credit Act 2002 (c. 16).
(2) Before making an order under subsection (1), the Chancellor of the Exchequer shall consult such persons as he considers appropriate.
(3) An order under this section (other than the order that applies to the first tax year during which this section is in force) must be made on or before 31st January of the tax year before the tax year to which the order applies.”
The noble Lord said: I shall speak to Amendments Nos. 128, 129 and 140 as well. I follow a number of my noble friends on this subject; the most persuasive speech was that made by my noble friend Lord Higgins on 15 November 2004, when he reminded us that this matter has a long history, stretching back over decades and many debates on various Bills. Indeed, he also reminded us that on several occasions this House has passed amendments to remove the compulsory age of 75. Therefore, it is with a sense of history that I seek to do exactly the same.
I recall that one of the most persuasive parts of my noble friend’s speech on 15 November 2004 was when he referred to the Watson Wyatt study, a very comprehensive and technically well executed study about people’s attitudes to annuities. Over a reasonable sample survey, it came to the view that something like 58.8 per cent of those surveyed never wanted to annuitise their pension pots and something like 12.1 per cent wanted to do so later than required to at the time. Therefore, something over 70 per cent of the people surveyed were against annuitising their assets as the present law requires them to do. I am very pleased to have the opportunity of giving the House a further chance to make its views absolutely clear.
We return to the question of whether the law should require pensioners to have converted all their pension saving into a lifetime annuity by the time they reach 75. The Finance Act 2004 outlines the law; namely, that pension income has to be taken before someone’s 75th birthday, either as an annuity—a secured pension—or as an alternatively secured pension.
I recall that the upper age of 70 was set in the Finance Act 1970. In 1976 this was increased to age 75 for retirement annuities. When personal pensions were introduced by my noble friend Lord Fowler, the age limit was retained. I look forward very much to any contribution he may make on this very important subject.
This is now important for three reasons: first, the growing acceptance of increases in longevity and the implications for pensions in the United Kingdom. I have been looking carefully at the tables, to which I referred in the previous debate. It is remarkable how 75 is viewed as relatively young. That is borne out by the figures. In 1981, life expectancy at the age of 65 for males was 14 and 18 for females. Life expectancy at the age of 75 was 8.1 for males and 10.7 for females. These figures have increased, so far as present tables are concerned, to life expectancy at age 65 of 19.5 for males and 22.2 for females. At age 75, it has increased for males to 11.4 and for females to 13.1. In 2050, it will increase at age 65 to 23.6 for males and 25.9 for females. It is foreseen that, at age 75, life expectancy will be 15.2 for males and 16.9 for females. One can well understand therefore why this is a key issue to consider.
The second reason is that future increases to state pension age have been agreed by legislation; namely, the Pensions Act 2007. Thirdly, there has been a rise in the minimum age at which someone can take pension benefits, from 50 to 55 by 2010.
There was a good debate on this matter some four years ago, when I recall the noble Lord, Lord Oakeshott of Seagrove Bay, being moved to say that,
“we would prefer no limit at all”.—[Official Report, 15/11/2004; col. 1229.]
It is obviously that the persuasiveness of my noble friend Lord Higgins had quite a dramatic effect, because we will hear later in this debate whether the noble Lord was overcome by the cogency of my noble friend’s arguments to make that clear statement and whether he still holds to it. My persuasive powers may not be as great as those of my noble friend, but we wait to see.
Amendment No. 128 would set up a retirement income fund, so that there would be enough money to ensure an annual income above a minimum set by the Chancellor in Amendment No. 127. That level of income would ensure that the individual would not have recourse to the state and not be eligible for benefits such as pension credit. Amendments Nos. 129 and 140 are consequential.
I suppose that we could look at a number of alternatives. The first is the simplest: to remove the age limit of 75 all together, which is what the amendments propose. I suppose that we could go down more complicated routes. For example, we could agree to increase the age of 75 by a year every two years, which was argued with me by the president of the Institute of Actuaries at a recent dinner that I attended as an honorary fellow. That is an understandable suggestion that would lead in the right direction but would be an alternative method. I suppose that we could also increase the age of 75 by the same increases as the state pension age, or we could just increase the age of 75 in accordance with increasing longevity.
However, I am seeking in these amendments to apply the simplest approach; namely, to abolish the limit all together. I shall just indicate why I argue that case. First, I concede that annuitisation has its merits. Earlier in this debate, I made reference to my entries in the register of interests, where it is clear that I have for many years been involved in the insurance industry. I know that the industry regards annuitisation as a simple and secure way in which to maintain a certain level of income in retirement. Therefore, there is credence in having that as an option—but it should be a choice for the individual, who should be able to make up their mind whether they want to go down the road of annuitisation. However, we must safeguard the interests of the taxpayer by making sure that an individual cannot be reckless with regard to the pension pot.
There are already exemptions for the Christian Brethren. I referred in the debate last year—as did my noble friend in the debate four years ago—to the fact that the Christian Brethren, all 738 of them, had secured recognition of the fact that they objected to the pooling of mortality risk. We have asked on a number of occasions what the present situation was in that regard, and whether the Minister was minded to accept that others will have the same objection, on non-religious grounds. I know that on previous occasions he has said that it is a very dangerous road down which a Minister might travel, because of the problem of avoidance or, indeed, evasion—but primarily avoidance, which is perfectly acceptable but would not be accepted by the Government as an appropriate way in which to deal with this problem.
I would argue, too, that the ownership of the pension pot lies with the person who has saved throughout their lives, often at the expense of their living standards, in order to put aside a substantial sum of money for their retirement. I mentioned earlier that I am proud to be chairman of a body called the Life Trust Foundation, which is now looking at the effects of increasing longevity on the individual’s capacity to cater for those later years. Adding quality life to years of life is a theme that has to be considered. More people are now turning their minds to how on earth we are going to provide for the fact that we will all live very much longer.
The latest figures, some of which I referred to earlier, are quite remarkable. The Office for National Statistics and the Government Actuary’s Department’s figures predict that the cohort life expectancy for those aged 65 at present is projected to be 20.6 years for males and 23.1 years for females. That is an extensive period of time. Not only does it demonstrate that we are out of date in keeping to the limit of 75, but we should also be finding simpler and easier ways in which to enable people to save to cover their later years. That is a growing problem. The Life Trust Foundation has recently said that it is a bigger problem than climate change—the fact that so many people are living so much longer without really having had the opportunity to ensure that they have the necessary funds to maintain them in their old age.
My final point is that these amendments would re-establish individual control over a pension pot for the person who has done so much to save that sum. Of course, we are talking about a market which is expanding rapidly. The ABI estimates that the UK pension annuities market has tripled in size in the past 15 years.
Last year, premiums in the pension annuities market were over £11,000 million, and more than 400,000 contracts were sold, many to people who do not have very substantial sums and who need what I would give them in these amendments; namely, choice, freedom and the right to their property. I beg to move.
My name is coupled with that of my noble friend Lord Hunt of Wirral on these amendments. I congratulate him on putting down this series of amendments yet again. Compulsory annuities at age 75 is one of those subjects which has developed into a campaign in this House. I first observed it when, as my noble friend Lord Hunt reminded us, my noble friend Lord Higgins moved an amendment to the then Pensions Bill in 2004.
It is true; I first observed it then. Since then the issue has arisen from time to time, not least in last year’s Pensions Bill. Make no mistake about it: your Lordships’ campaigns have a habit of getting on to the statute book. One, in particular, is graven on my heart. Over 12 years the late Lord Rugby campaigned vigorously to break the opticians’ monopoly on the sale of reading spectacles. It came to a head when I was a very junior health and social security Minister and was able to put my limited weight behind it. A suitable amendment, moved by the late Lord Winstanley, came to a vote and your Lordships agreed to it—just. The Government in another place confirmed it, and now reading glasses—cheap ones at that—can be bought anywhere. No doubt some noble Lords use them.
That simply would not have happened without the support of the Government of the day; so it is with my noble friend Lord Hunt’s amendments. The Official Opposition, here and in another place, stand four-square behind the abolition of compulsory annuities, which, incidentally, do not exist, so far as I can discover, in any G8 country. It should not be possible for anyone of any age to so run down their savings as to bring them into the benefits culture. In other areas, this is actually illegal. That is why my noble friend has coupled the abolition of compulsory annuities with a retirement income fund in Amendment No. 128, in which the thought I outlined is incorporated in proposed subsection (2)(4). It is noteworthy that the minimum retirement income which must remain in the fund is set by the Chancellor of the Exchequer. So the Government of the day remain in total control, as they do now with compulsory annuitisation.
The Bill means that almost anyone working consistently from the age of 20 to state retirement age could end up with a pension pot of, I believe, around £240,000. Thus the Minister’s complaint last time we discussed this—that these amendments will only benefit 3 per cent of the very rich—just does not stand up. Another of his complaints is that a retirement income fund will be left with money in it and will form part of the owner’s estate when he dies, and that, unlike the rest of his estate, it should not be capable of being shared between his survivors and anyone else to whom he wills his residuary estate.
We should not forget that pensions have two foundations: personal savings, which under this Bill are at least 3 per cent of the employee’s annual income, and the employer’s minimum 4 per cent, which is deferred wages. Both belong to the individual, just as much as his house or the value of his ISAs or other savings. Why should they not be passed on in his will to whomever he wishes? Is not this a basic human right? It is most certainly a basic human need.
Lastly, the Government claim that, while they welcome,
“innovative ideas for retirement income products for all”.—[Official Report, 6/6/07; col. 1162.]
as the Minister said last year, there is no appetite among the insurance industry for a retirement income fund. I find that very surprising. If any industry is open to new ideas, it is the insurance industry—if, that is, the Government allow it to be. Indeed, I noticed the other day a new scheme which, while just within the existing law, seemed extremely similar to my noble friend’s retirement income fund. So just what gives the Government such confidence that there is no appetite for this among the industry? Who have they consulted? I welcome the debate to follow.
I do not know whether the noble Lord will press the amendment to a vote, but I would not support him in the Lobbies. I do, however, support his argument. What is the state’s public interest in this? It is twofold, as has already been suggested by noble Lords: first, to ensure that pension savings are privileged in order to provide an adequate retirement income; secondly, that there be no recourse to public funds. Both those objectives are met in the subsection of Amendment No. 128 referred to by the noble Lord, Lord Skelmersdale, by an annuitisation that I calculate to be between £120,000 and £150,000 a year. After that, if an individual chooses not to annuitise but to accept the implications of adjustment of the fiscal privileges that went to build up that fund, why does the state have any public policy interest in what happens to the residual money? It is not good enough to say that that money was protected for pension savings and must therefore be used for pension provision. A mantra is a statement of faith, not an argument based on evidence.
As the noble Lord, Lord Skelmersdale, said, 10 or 20 years ago this may have been a relatively rich person’s issue. It is no longer so, as we see the movement from DB to DC schemes. The noble Lord’s figures are exactly right; I did the calculations as he spoke. A woman on average earnings—£21,000—over 40 years, even in a personal account without a threshold, would have a pot of £250,000. That is with contributions only going in at 8 per cent of the total. If, more realistically, one has a DC scheme with higher rates, she might well have a pot of around £450,000. Only once the two considerations of no recourse to public funds and any necessary adjustment to remove fiscal privilege are accounted for has the state any public policy interest in what then happens. Not only is there therefore a residual pot of money, not only would the taxpayers’ interest be safeguarded, but the Treasury could actually get a profit on the result.
If that woman on average earnings with a pot of £450,000 had, after an annuity, some residual sum of £300,000—or £200,000 or thereabouts after tax privilege—it would perhaps go into a building society on which interest was paid. More likely, it would fall into her estate, on which inheritance tax after the basic rate would be 40 per cent. The state would recover for taxpayers what currently goes towards the profitability of private insurance companies. There is an additional argument that the taxpayer would not only not lose money, but returns would fall back to the country as a whole—and, therefore, to the improvement of benefits where appropriate.
I hope that my noble friend will not repeat the mantra that all Ministers, including me, have had to use on this subject at the Dispatch Box: “Pension savings are fiscally protected to provide income for retirement”. Provided that that need is met, and the fiscal protection has been adjusted, the state has no further legitimate public interest in what happens to the rest of the money. People should be free to make the dispositions they choose.
It may be that we are all eating our own words tonight. The noble Baroness gave an interesting speech, but, given that she seemed to support everything that the noble Lords, Lord Hunt and Lord Skelmersdale, said, I did not understand why she would not support them if they pressed the amendment. So be it. The noble Lord, Lord Hunt, kindly reminded me of my words four years ago. One of the problems of getting older is that one’s memory is not quite as good as it was. I will go and look at the context of what I said.
An imposed limit at age 75 is clearly out of date. It might have been right to impose such a limit in 1976, but it is clearly not right now. We want change. This is a slightly odd grouping because we will come to our amendments—for example, Amendment No. 132—on the same topic later. We prefer the much simpler option of increasing the limit, which was the fourth option mentioned by the noble Lord, Lord Hunt. I well remember standing shoulder to shoulder with the noble Lord, Lord Higgins, fighting for specific increases, but we thought that this time—we have all been round this track a few times—we would say to the Government, “You say how much life expectancy has increased since the limit was fixed, and that is the amount by which it should now increase”. Given how fast life expectancy is rising, the limit should be reviewed every few years to avoid this problem in the future.
Of course, things have changed a great deal since the 1970s. Being 75 in those days was probably characterised by the actors in “One Foot in the Grave”; for many people now “Strictly Come Dancing” would probably be a more accurate representation. However, I cannot agree with the noble Lord, Lord Hunt, that his is the simplest approach. His detailed amendments cover two pages of the Marshalled List, and, I believe, contain a few grey areas. We are strongly in favour of raising the limit, but we would not do it in this way.
As I understand it, the noble Lord is not in favour of the measure because he does not like the idea of money being inherited by family members. We part company with him there. Although he proposes that the age should be increased, that is not exactly the most fundamental reform of the system, if he does not mind my saying so. As for his argument that my noble friend’s amendments cover two pages of the Marshalled List, he has been involved in this area long enough to know that almost any reform involves at least two pages of text. Indeed, I am amazed at my noble friend’s modesty.
We differ from the Liberal Democrats on this rather important point. We believe that the family is the basis of society. We are probably not talking of spending vast sums to encourage people to save money for their children to inherit. Indeed, it is in the public interest that they are encouraged to do so. If that persuaded people to save money, it would be of vast public benefit. Therefore, I am not remotely persuaded by the argument of the noble Lord, Lord Oakeshott.
My noble friend Lord Hunt set out the case extraordinarily well. The matter has a long history and represents a longstanding injustice. There is absolutely no reason why people should be forced to take an annuity at 75. I agree with everyone who says that, if they wish to do so, they should have that opportunity. That is their choice, and some people will exercise it, as they do not want the trouble of looking after their money. That is fine. That is their choice and they should be allowed to exercise it. However, many people will not want to make that choice because they feel it is not in their interests to do so. On a number of occasions noble Lords have indicated that they would much prefer the citizen to exercise his own choice in this matter. Rather than getting weaker over the years that we have debated this issue, that case has become much stronger. As my noble friend Lord Skelmersdale said, pensions are changing rapidly. We are seeing the demise of the final salary scheme, apart from in the public sector, and the establishment of many more money purchase schemes. It is not an issue of marginal importance or interest any more; it is a case of fundamental importance. That is one argument for a change.
The case put by the noble Lord, Lord Oakeshott, about age was also true. Even if you believe in compulsory annuities, no one in their right mind would put the limit at age 75 because age expectation has increased. You are now talking about 80 or 85 if you are a believer in the system, which I am not.
Let us face it: only the Treasury stands against this proposal, as in all things good in this world. The only reason it has for doing so is that people could fall back on to social security. In my noble friend’s two-page amendment, he has gone to enormous trouble to prevent that taking place. After that, like the noble Baroness, Lady Hollis, I cannot think of any sensible arguments that can be put in its place.
My noble friend and others have talked about the pension pot of money that you hope to have at 75 or whatever age. If you are coming up to 75 now, you may well find that your pension pot is under more pressure than for many years. Your investment values will have gone down, probably at a worse rate than for 10 or 20 years; the noble Lord, Lord Oakeshott, is a greater expert on the investments than I am. At that point, you are saying to individuals, “We don’t mind that, but we insist that you annuitise at that inflexible age”. That is totally unjust.
For all those reasons, the time has come to reform the rule, whatever the past has been. The situation as everyone has recognised it has changed. There is a question of fundamental justice here, and I hope that the Minister will at long last recognise that.
I have been listening to the debate with great interest, and of course support everything said about compulsory purchase of annuities at 75. I also understand from the description that the noble Lord, Lord Hunt of Wirral, gave of his amendments that there is a case for them in the light of the changing situation, with the disappearance of final salary schemes and the introduction of money purchase and so on, so that people are left with a lump sum that they have to deal with when they reach the right age.
What bothers me about all this is that I am a supporter of final salary schemes; I hate to see them disappearing. Where the workers are strong enough and have enough collective pressure, in certain circumstances they have been able to retain their final salary scheme. I would hate to see anything introduced that could further encourage their disappearance. That is one reason why I have some dubiety in my mind about the amendments. Would they make the alternative to final salary schemes more attractive than it otherwise might be? I am in favour of retention—doing everything possible to retain final salary schemes in the private sector as well as the public sector.
I understand that the issue has a long history in your Lordships’ House, certainly longer than I have been here, but just from the debates on last year’s Pensions Act I get a sense of déjà vu, or as the sports commentator said, “It’s déjà vu all over again”.
It falls to me to set out the Government’s position—maybe the Government’s mantra—on this. The purpose of pension saving is to provide individuals with an income in retirement. In order to encourage and assist people in saving for their retirement, generous tax incentives are given to pension savers. In 2007-08 this tax relief was estimated to be worth £17.5 billion.
In addition to the tax relief given when a person makes a pension contribution and the tax-efficient environment in which their funds grow, you can take up to 25 per cent of your pension fund as a tax-free lump sum. In return for these generous incentives, the remainder of the pension fund must be, by the age of 75, converted into a secure retirement income for life, thereby achieving the purpose for which it was intended. In defined contribution schemes this secure income is usually in the form of an annuity. Annuities provide the peace of mind of a regular income for life, regardless of how long that may be. They provide simplicity, security and a guaranteed income and are low risk; in other words, they provide a pension. Between the ages of 50—rising to 55 from 2010—and 75, people are able to choose when to convert their funds into an annuity to suit their circumstances. There is a period of 20 years in which people can choose when to annuitise.
The Pensions Commission has endorsed this policy. It stated:
“Since the whole objective of either compelling or encouraging people to save, and of providing tax relief as an incentive, is to ensure people make adequate provision, it is reasonable to require that pensions savings is turned into regular pension income at some time”.
An alternative is available for those who have a principled objection to the way that annuities work by pooling mortality risk. The alternatively secured pension offers a product with similar restrictions to an annuity and achieves broadly the same aim without the mortality pooling aspect. Both these options, as well as the scheme pension, more typically used for defined benefit pension schemes, offer a secure income guaranteed for life. They use the pension fund built up to provide an income in retirement.
As the noble Lord, Lord Hunt, explained, his amendments would establish an alternative to annuities, scheme pensions or alternatively secured pensions: the so-called RIF. The intention is that the RIF product would remain invested and would permit withdrawals between an individual’s minimum and maximum level. An annual maximum withdrawal allowance would be set by the provider for each individual member, based on an assessment of their life expectancy. A member’s withdrawals from the fund could not in any year exceed that allowance. An annual minimum withdrawal allowance would also be set by the provider. In setting this the provider would have to ensure the member’s total income was at least equivalent to a minimum retirement income set by the Chancellor of the Exchequer.
There appears to be nothing in the noble Lord’s proposal to prevent the minimum allowance being set at zero if the member’s income from other sources was greater than the MRI. In those circumstances it is unclear how the maximum withdrawal allowance would work. As it is impossible to accurately assess an individual’s life expectancy—one of the requirements of the proposal—and there is no express requirement that the RIF be spread over the whole of the individual’s expected lifetime, it would be possible for a provider to set a high maximum withdrawal allowance. The member could then withdraw large lump sums of tax-advantaged pension savings. Alternatively the member might choose not to draw any pension income at all from the RIF in order to pass the fund on to heirs.
Indeed, ISAs have tax relief, but not the same as provided through pension saving. That is an absolutely fundamental point. The total taxation relief on pension savings is very substantial, which is why, as I explained, the deal is that you convert it to a stream of income. There is tax relief on the way in for the individual; for the employer, there is a tax-free build-up of funds and there is the ability to take a 25 per cent tax-free lump sum. That collection of tax relief provides a significant part of a retired person’s pension pot. The noble Lord, Lord Hunt, pointed out that these are a person’s assets; they own them and they should have the choice.
The Minister is moving into rather technical issues that demonstrate what I said previously: he and his colleagues are particularly concerned about avoidance. Although I cannot see what is wrong with someone pursuing the path that he is outlining, surely the answer lies in the amendment. The Chancellor, in bringing forward the order under subsection (1), could well cover the sort of situation that the noble Lord is most concerned about. I am happy to discuss with his officials ways in which we can ensure that when the order comes forward, provided that the House agrees to these amendments, there is no level of avoidance that would cause the sort of problems that he is talking about. I am also waiting to hear what the noble Lord has to say about Christian Brethren.
In answer to the first point, I do not believe that the amendment will do what the noble Lord describes. Perhaps I may expand on the issue of the tax risk to the scheme. I noted that no noble Lord who spoke in favour of the proposition—with the exception of my noble friend Lady Hollis, who talked about withdrawal of the scheme’s tax benefits—indicated in any way what tax regime he or she thought should apply to it. That was not part of the proposition advanced by the noble Lord, Lord Hunt, and adhered to by others who spoke in favour of the amendment. It can make a fundamental difference to the operation of the proposal.
I reiterate that, under this proposal, if someone has income from other sources, the minimum retirement income could be set at zero. If it is set at zero, so that the provider does not have to preserve amounts in the scheme for subsequent periods, there could effectively be no limit on the withdrawal. You could take a lump sum from the scheme in one go. It would be tax-advantaged savings with some real risks as to how the tax on it might be withdrawn. The noble Baroness, Lady Noakes, is shaking her head, but that is how this proposition would operate. A member would be able to withdraw large lump sums of tax-disadvantaged pension savings. Alternatively, as I said, a member might choose not to draw down any pension income at all from the RIF in order to pass the funds on to heirs.
I say to the noble Lord, Lord Fowler, that we have no objection to—we would support—people providing for subsequent generations, but enhancing that provision for heirs by means of the benefits of a very significant tax-advantage regime is not what that regime is for.
If the noble Lord, Lord Hunt, tabled a subsequent set of amendments to cover the point about tax privilege, and if that created no more and no less privilege in aggregate than, say, ISAs—which might seem an equitable way forward—would my noble friend change his mind?
I do not think so. The nature of the regime that would have to be established, particularly given the opportunity for withdrawing significant one-off lump sums in circumstances where someone might plan to be non-resident for a period, would require a raft of anti-avoidance provisions that would fetter the fundamentals of our current pension saving schemes.
None of these options is compatible with the basic and fundamental purposes of pension savings—to provide the member with an income in retirement. As I said, I would also like to consider the tax consequences of the amendments. These amendments do not indicate how withdrawals would be taxed. The expectation would be that a form of taxation would apply, but in most cases it would seem likely that the tax charge on RIF withdrawals would be less than the amount of tax relief enjoyed on these funds. RIF savings would clearly be tax advantaged compared with other forms of savings. Given the apparent ability of those with sufficient other income to extract RIF savings at will, there is a danger that it would become a vehicle into which other savings are recycled for tax advantage, rather than encouraging new retirement savings. It would be unfair to expect taxpayers to foot the bill for people who take the tax relief for pension savings but do not use the accumulated funds to provide an income in retirement.
It is unclear what would happen to the RIF on a member’s death but, given what is proposed by Amendment No. 140, which I shall move on to shortly, it seems that these clauses would allow a small group of wealthy individuals to pass their pension funds on to their heirs on death. There is no rationale for taxpayers to support bequests in this generous way.
One of the primary considerations of current pension provision products is that they provide an income that is guaranteed for at least the rest of the person’s life. With the proposed RIF, there is a risk of the individual running out of money in retirement. This is because it is impossible to accurately assess an individual’s life expectancy. How on earth would that be done? Insurance companies can protect the average life expectancy of particular cohorts. The noble Lord, with his expertise, does not need me to tell him that. The RIF requires an individual assessment to be made that enables a guaranteed income for life to be provided, regardless of how long the life is, by pooling the risk.
Annuities achieve exactly the same outcome for defined contribution pension schemes as exist for defined benefit schemes or, for that matter, state pensions; namely, that pensions are paid as a regular stream of income until death and, barring dependants’ pensions, that they end on the member’s death. No refund of contributions is given to the estate but everyone has the peace of mind of knowing that the pension will continue to be paid regardless of how long they live.
In essence, these amendments would benefit those who are able to take advantage of the tax relief given for pension savings to build up substantial pension pots, but who then want to use the accumulated fund for a purpose other than providing an income in retirement. In other words, the proposed RIF would provide significant tax benefits to the wealthiest in society at the expense of the taxpayer.
I will pick up on a number of points about the current range of pension pots. I take the point that, over time, more people will build up a significant retirement pot. However, the current figures show that, for 2007, a total of 445,871 annuities were sold, only 3.2 per cent of which—14,000—were for pension pots of more than £100,000. We also have figures for the first quarter of 2008, which show that 3.7 per cent of those sold were for pots of more than £100,000. I accept that that may change over time, as more people save in pensions and as personal accounts get under way. The Government have said that they will keep under review the age at which someone should annuitise in future.
What matters is not 3 per cent of the total but what the percentage is of those who have to annuitise compulsorily at the age of 75.
While I am on my feet, the Minister was good enough to say that he wanted to investigate the tax arrangements more fully than he has been able to do so far. I am sure that my noble friend Lord Hunt will welcome that. The Minister referred to tax savings of £17.5 billion; that is spread among a large number of pension savers. When he does his investigation, could he ask the Treasury for figures on the number of people who hold ISAs? We would then get a better sort of comparison, especially if he also looked at the tax advantages, which do exist—he admitted that they do—for saving through ISAs. Could he also look at the alternatively secured pensions? They have tax arrangements that are somewhat different from what is currently envisaged elsewhere in the system.
Finally, all this talk of taxes reminds me that we are not debating a Finance Bill; we are tying to look at pensions as pensions. When the Minister has conducted his investigations on tax, will he be good enough to write to my noble friend Lord Hunt and me and put a copy in the Library for the general education of noble Lords?
Precisely for that reason—taxation, as noble Lords know, is an issue not for this House but for the other place. The proposition was not acceptable to the other place; that is why it claimed financial privilege. We cannot debate sensibly a pensions issue of this nature without understanding the full range of taxation implications. My noble friend would not support one proposition at all if it did not involve full withdrawal; alternatively secured pensions—the money left in the pot when someone dies—involve a 70 per cent tax charge and the rest flows through for inheritance tax. Is that in the minds of noble Lords who support the proposition?
The noble Lord asked about ISAs. You do not get a tax deduction on the way into an ISA; you may get tax-free income.
And growth. I hang on to the point that the range of tax benefits going into pension savings—deduction for the employer, deduction for the employee, tax-free build-up and the opportunity to get 25 per cent tax free—means that this is a much more tax-supported regime than that involving ISAs; that is why there is a requirement to take an income flow from it.
With all this talk of tax, I cannot resist getting up to the Dispatch Box.
Does the Minister accept the proposition of the noble Baroness, Lady Hollis, which seemed to me to be perfectly reasonable? She said that if a scheme could be designed that neutralised the tax advantages that accrued to not taking the retirement fund in the originally envisaged form—that is, retirement income—the amendments in the name of my noble friend Lord Hunt would be acceptable. If so, there is a model involving alternatively secured pensions, which my noble friend Lord Skelmersdale has just raised, although many do not find the model particularly attractive. Would the Government accept the amendments if those tax arrangements were embedded into my noble friend’s amendments?
There is a big “if” about whether you could effectively describe the sort of regime that would cover the RIF. The proposition would facilitate the opportunity for someone to take a significant lump sum in one go as income or capital from the RIF. The noble Lord, Lord Fowler, looks askance at that but the RIF, as so defined, would provide it. If someone has enough income from the RIF, the minimum level that they must take, or which has to be set on an ongoing basis, would be zero, and the maximum amount that could be drawn could be very significant indeed. That would provide the opportunity for people to plan to take that in a tax-effective way. You could structure all sorts of anti-avoidance provisions that would greatly add to the tax legislation, for which the Government would doubtless be challenged. You would need that if you are going to make this fair. That is why we do not think that it is the right use of the pensions regime.
I was looking askance because I was wondering, while I listened to the Minister’s defence, whether there are any amendments or safeguards—however guaranteed—that would ever persuade the Minister. He is simply fundamentally opposed to any change in this area whatever, regardless of what is put forward.
Because of its tax impact, I do not see the merits of building on this proposal. With the exception of my noble friend, everyone who has spoken has been silent in advancing reasons for accepting it and, unless we know those reasons, it cannot be properly evaluated.
Perhaps I may help my noble friend. When I was in the department, I argued for changes in this area but I could not persuade HMRC. The figures may well have altered now and I would not wish to go to the stake on them, but the work that I had done suggested that the tax gain on pensions represented between 45 and 55 per cent of the total value of the final pot. That was the range that we dealt with and it included the tax gain from the 25 per cent lump sum.
At that time, they were almost entirely higher-rate taxpayers because they were the only ones who possessed such sums. Obviously the tax privilege would be considerably less. My estimate is that it would now be between 35 and 50 per cent on average if we included basic-rate taxpayers—for example, the woman on average earnings who will over the course of a few years find herself with a pot which is much larger than necessary to float her off income-related benefits.
Perhaps I may say a brief word as one of those who the noble Lord said had been silent on this issue, although that is partly because we will move our own amendment later. I think that there is a genuine problem here and I sympathise with the Minister on that. I say to the noble Baroness that, even if overall her figures are right, the key difference between pension pots and ISAs is that, although perhaps only a small number is involved, pension pots can be worth several million pounds. I do not know of anyone with an ISA of anything like that sum. That is why I am nervous about these amendments. Potentially there is quite a big tax linkage on some of the very big pots, so I do not think it is right to say that ISAs and pension pots are totally the same.
If someone had a pot of a couple of million pounds and was seeking not to annuitise it, the tax element in it, which might be at least a third and perhaps a half, would go back to the taxpayer. It seems to me that the consequences of the noble Lord’s argument are the reverse of the implications.
Indeed; I am with the noble Lord, Lord Oakeshott, on this. Perhaps I may recap the situation. First, I think that the question is: if I pay the tax back, why cannot I access my retirement savings as I wish? There is no reason for an individual to put substantial funds into a pension and claim the tax relief that goes with it if he does not want a retirement income at the other end. Tax relief on pension savings is not designed as a means of accumulating general savings. That is not the proposition.
Secondly, it would be very hard to work out the exact value of tax relief in any particular case, as it would depend on the profile of a person’s earnings and his tax and pension contributions over the years, plus tax regrowth on his pension investments. Therefore, this option would involve either very complex and expensive processes to work out individual figures—even if it were possible to do so—or a very high flat-rate level of tax recovery to avoid tax abuse. It would lead to the bizarre scenario where an individual saved in a pension vehicle to enjoy the tax relief but then faced the trouble of paying back the tax relief when he could have avoided all the inconvenience in the first place by saving in a savings vehicle such as an ISA, subject to the limits properly referred to by the noble Lord. Those who advocate this approach invariably want to access their pension fund taxed at their marginal income-tax rate, but that would greatly undervalue the tax relief previously enjoyed and would amount to a generous taxpayer subsidy.
I move on to Amendment No. 140. Although the amendment does not directly relate to the RIF, it nevertheless results in the same outcome—that of enabling those with the greatest means to use pension saving for a purpose other than providing an income in retirement. The amendment would remove the upper-age restriction on the payment of an annuity protection lump sum benefit.
An annuity protection lump sum death benefit was a concept introduced by the Government in the Finance Act 2004. It allows a return of pension savings used to secure an annuity, less any payments already made, to be made on a person’s death before age 75. The intention behind an annuity protection lump sum death benefit is to ensure that, should the member die early in his retirement, his family gets something back from the retirement provision that he has made.
Removing the upper-age restriction would go beyond that intention. The provision of this type of death benefit would make it attractive as an inheritance tax planning vehicle, due to the tax relief. An annuity with this form of protection typically costs more than one without it, reducing the income received in exchange for the protection offered. The extra cost of extending that protection beyond age 75 would be significantly more than under the current rules. That would make this option primarily suitable for those who could afford to take the reduced income and wished to use their pension savings for another purpose, such as inheritance planning.
The restriction on the payment of annuity protection lump sum death benefit beyond age 75 is consistent with other lump sum payments on death from pension arrangements and provides consistency between defined contribution and defined benefit pension schemes.
The noble Lord, Lord Hunt, asked me about alternatively secured pensions and referred to the Christian Brethren. For those with specific objections to pooled mortality risks in annuities, ASPs provide an option in drawing a pension. ASPs are not, and have never been, limited by legislation to specific religious groups such as the Christian Brethren. Although they are not a mainstream product, the Finance Act 2007 allows that for a small minority, and if well advised, ASPs exist for people to draw an income in retirement consistent with the principle that pension tax relief should be used to provide an income in retirement and not tax-favoured inheritances. Therefore, in ASPs a product already exists to give people an alternative to annuities from age 75 consistent with our principle of tax-advantaged savings being used to secure an income in retirement.
I have been speaking for some while on this issue and I know that I have disappointed those in favour of the proposition, although I suspect that I have not surprised them. I hope that the Government’s position is very clear on this. It is important to be clear that the amendments all share a common theme: they allow those who are able to afford it to utilise the tax relief available on pension savings for purposes other than providing an income in retirement. Although innovation in the pension market is to be welcomed, and indeed encouraged, the Government are clear that it should not allow the well-off to take advantage of the system at the cost of the taxpayer. I therefore ask the noble Lord to withdraw the amendment.
I am very grateful to the Minister for taking so long to explain the Government’s position. He said that a theme was running through these debates, and indeed there is. In this House, there is general dissatisfaction with the maximum age of 75, and we have voted on several occasions, often by substantial majorities, to remove that age limit.
The Minister also said that it was not his business to try to improve the amendment, but surely he has to accept that he has already lost the argument on several occasions. These amendments were passed last year and in 2004 substantial majorities were secured to remove the age limit of 75. I accept that last year it was not possible to debate the matter further because the other place invoked privilege, but if the Minister is listening to this place, should he not at least agree to sit down with us to see whether there is a way forward? I thought that the noble Baroness, Lady Hollis of Heigham, had a number of very interesting ideas. No one wants to create a serious situation for the Treasury; we just want to encourage more saving. We want to encourage people—particularly those who in the past have been deprived as regards pension arrangements—to save for their pension and to save for their later life, and perhaps we can devise a series of amendments that will achieve that.
The Minister is right that a number of people exercise the option to purchase an annuity at a comparatively early age because they know that by the time they get to 75 they will be forced to annuitise. As my noble friend pointed out, that may well be at just the wrong moment. So, of course, they annuitise in advance and they want to receive the money earlier because they know that they will be compelled to purchase an annuity. Surely there is a way, as my noble friends have pointed out from the Front Bench, by which we can at least meet some of the noble Lord’s concerns. Normally he says that discussions are ongoing; that we will have extensive consultation; and that we will find a way through. Will he do that on this point?
I am more than happy to set up a meeting with officials from the Treasury or HMRC. I do so, in all honesty, without any great hope that they will see a way through this that is satisfactory because there are real concerns, but they may be able to articulate those more effectively than I have been able to. Yes, of course, the Government listen to this House but they also listen to the other place, which has declared itself on this point on several occasions. On the crucial issue of the tax component, the other place has particular primacy.
I cannot let the noble Lord get away with that. The great clunking fist came down when the Commons discussed this amendment and so great was that clunking fist that not a single word was uttered against it in another place. The clunking fist was to invoke privilege.
I have no wish to make a comment on the voiceless clunking fist, except to say: what more could I ask? The Minister has probably gone much further than his brief, for which we all congratulate him. I thank all noble Lords who have participated in the debate. I say to the noble Lord, Lord Oakeshott, that it is important to put his remarks in context. I apologise to him if I did not mention that in the previous sentence to the one I quoted, he said that,
“there should, at the very least, be a substantial increase in the limit”.—[Official Report, 15/11/04; col. 1229.]
He went on to say that he supported the amendment and that at the very least there was a strong argument for an increase in the limit to 75, if the principle of abolishing the limit altogether was not accepted. He then voted to abolish the limit and the amendment won the day. I say to the noble Lord, please do not desert us now.
In our hour of need, as the noble Baroness says. I sense that the noble Baroness, Lady Hollis of Heigham, is moving because in that Division she voted against these amendments as she then held ministerial office. Last year, she did not appear in the voting Lobbies and I sense that there are ways in which we can find some form of accommodation so that the voice of this House can be heard.
I thank my noble friend Lord Fowler for a powerful speech. The noble Baroness, Lady Turner of Camden, shares my concern about final salary schemes. We must find a way through that in our debates. I would especially like to single out my noble friend Lord Skelmersdale on my Front Bench for emphasising that basic human right. It represents personal savings and deferred wages which belong to the individual. My noble friend Lady Noakes pointed out that there are tax implications and that we should be able to find a way through to give individuals choice, freedom and right to property, which I advanced at the outset. It would be churlish not to accept the offer made by the Minister. Therefore, I seek leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 128 and 129 not moved.]
129A: After Clause 88, insert the following new Clause—
“Override of scheme rules
(1) The Secretary of State may by regulations provide that the rules of an occupational pension scheme shall be modified so that they reflect—
(a) changes to the revaluation of accrued benefits introduced by section 88, and(b) limits on annual increases in occupational pensions for category Y pensions allowed by section 51 of the Pensions Act 1995 (c. 26) (annual increase in rate of pensions).(2) Regulations may not be made under this section unless a draft of the statutory instrument containing the regulations has been laid before, and approved by a resolution of each House of Parliament.”
The noble Baroness said: This amendment introduces a statutory override in respect of the indexation capping rules, both in the Pensions Act 2004 as well as in Clause 88 of the Bill. For today, this is a probing amendment, but I would not like the Minister to think that I do not raise this as a very serious issue. The statutory override was examined in the deregulatory review undertaken by Messrs Lewin and Sweeney, which reported last summer, and many are disappointed that the Government have not dealt with the issue.
Employer organisations such as the CBI and the Engineering Employers’ Federation, together with the National Association of Pension Funds, welcome Clause 88, as do we. It allows the indexation of accrued benefits attributable to pensionable service after this Bill is brought into effect to be capped at 2.5 per cent. Those groups similarly welcomed the changes made by the 2004 Act which capped increases for pensions in payment. A cap on increases to benefits, whether in payment or deferred, can have a big impact on the cost to employers. In particular, we are mindful that the inflation genie has now been let out of the bottle, hence the issue of a cap becomes very real and important.
The trouble is that having a statutory permission to cap at 2.5 per cent is not the same as being able to achieve it. Some pension schemes have rules which make it very difficult to implement the changes. Some paid-up schemes administered through insurance companies do not have an employer with which to negotiate. In most cases, employers face having to negotiate changes in their trust deeds and rules. Many employers have found it difficult to implement the 2004 Act changes without making improvements in other scheme benefits. That, of course, negates the purpose of the whole exercise. It is deregulation without meaning.
There are different ways of achieving a statutory override. My Amendment No. 129A is possibly the most radical solution as it allows the Secretary of State to provide a statutory override of scheme rules so that the changes in Clause 88 and also the changes in the 2004 Act can be implemented directly in scheme rules by regulations. In each case the changes are being made from particular dates and have no retrospective effect. Obviously, my amendment goes along with the scheme of introducing the indexation capping. The Engineering Employers’ Federation supports that approach. An alternative, recommended in the Sweeney and Lewin report, is a narrower override focused on eliminating technical problems about changes to rules but still based on agreement between the trustees and the employer. That would clearly be better than nothing.
I hope that the Minister will see that allowing indexation caps in legislation is not the same as employers achieving them. At a stroke, the Government could help employers to achieve the changes and in so doing provide a small but important lifeline for defined benefit schemes. Clause 88 will not help the preservation of defined benefit schemes unless it can be implemented in short order. This is in the gift of the Government and I hope that the Minister will indicate that the Government are prepared to support this or some other form of statutory override. I beg to move.
I thank the noble Baroness for tabling this amendment. I realise this is of great importance for a number of occupational pension schemes, particularly for those schemes whose rules even preclude any negotiation about changes to future benefits. In response to recommendations made by last year’s deregulatory review, the Government announced that they would regulate for overrides to enable scheme rules to be amended to reflect the 2005 change to the indexation cap for service going forward and for the proposed reduction in the revaluation cap in this Bill. In keeping with the recommendation from the independent deregulatory reviewers, Chris Lewin and Ed Sweeney, we have said that overrides would be exercisable provided trustees agree.
We already have the necessary powers to make these changes by regulation under existing powers in Section 68 of the Pensions Act 1995. We are committed to introducing these new arrangements in regulations in due course, which is what we will do. In fact, we have already begun work on this. Our aim is to consult on the draft regulations later this year and to have the new arrangements in place in the first half of next year. The noble Baroness’s amendment seeks to introduce further regulations on overrides. It would not be appropriate to introduce a further regulation-making power to make changes to scheme rules when sufficient powers already exist. Furthermore, to introduce unnecessary legislation would hardly be in the spirit of the deregulatory review. As I said earlier, we already have powers to introduce what we have proposed and what we think will be appropriate in the circumstances. Further legislation to achieve that is not necessary.
Moreover, if we were to adopt the amendment and regulations were made using the powers provided for in the amendment, it appears that schemes’ rules would have to be amended. The drafting of the amendment suggests that that would be compulsory. However, that is not the primary reason for asking the noble Baroness to withdraw her amendment. We have provision, and we are working on introducing regulations under it.
I repeat what I said. We are committed to introducing these new arrangements in regulations in due course, which is what we will do. In fact, we have already begun work on this. Our aim is to consult on the draft regulations later this year and to have the new arrangements in place in the first half of next year. That is what “in due course” means in this context.
I thank the Minister for that response, which at least confirms that the Government will proceed with the minimalist recommendations of the deregulatory review from last year. He has, however, failed to take the point that although the Government have wisely provided for indexation capping both for pensions in payment and for deferred pensions, employers cannot achieve it except by agreement with trustees, who always extract a price. The Government make a big fanfare about giving these things to employers, but in fact it achieves nothing for them. The Government are offering regulations that may free up scheme rules but do not actually help employers very much at all. If that is all that is on offer, I will go back after Committee to those who have asked us to raise this issue. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
129B: After Clause 88, insert the following new Clause—
(1) The Pensions Act 2004 (c. 35) is amended as follows.
(2) In section 126 (eligible schemes), after subsection (2) insert—
“(2A) A scheme in respect of which an authorised insurer has given an unconditional and irrevocable guarantee or made any other equivalent arrangements for the purposes of ensuring that the scheme’s liabilities are met is not an eligible scheme.””
The noble Baroness said: Amendment No. 129B seeks to insert a new clause after Clause 88. For today, this is a probing amendment, as I freely acknowledge that my new clause would at the minimum require some padding in the form of definitions before it could be accepted. Importantly, it asks whether routes are open to employers to de-risk their defined benefit schemes and in so doing remove their schemes from the ambit of the Pension Protection Fund. If employers could do this, it could be a win-win solution. For an employer, it could bring the advantage of removing the regulatory burdens and relief from the costs of the PPF. At the same time, employees could well gain greater security for their benefits.
The amendment is based on briefing given to us by an organisation called BrightonRock. The issues raised by BrightonRock were significant to an understanding of the future course of defined benefit pension schemes and their relationship to the PPF. We do not necessarily advocate the insurance model suggested by BrightonRock, but we do support a market-based approach to the risks posed by defined benefit pension schemes and do not see the PPF as having a right to a monopoly in handling that risk.
The Committee will be painfully aware that defined benefit pension schemes are in terminal decline, and that the chance of new ones appearing is close to zero; the Pensions Minister, Mr O’Brien, admitted as much in a recent interview with the Daily Telegraph. This is driven partly by cost but also, at least as importantly, by the need for certainty in business.
The Pensions Act 2004 created the Pension Protection Fund to underwrite the risk of failure in defined benefit pension schemes. To avoid the costs being borne by taxpayers, as is the case with the FAS, the PPF had to be paid for by all schemes within the PPF. When that Act was considered in your Lordships’ House, the expectation was that the PPF would raise around £300 million a year in levies. This has already more than doubled to £675 million a year, and some are already predicting that the trajectory of the PPF’s levies will take them to beyond £2 billion a year. This is already a noticeable and increasing burden that employers put as part of the cost of maintaining their defined benefit pension schemes.
It is very difficult for schemes to avoid being within the PPF’s clutches and thus having to pay its levies. At the insistence of your Lordships’ House, the PPF is supposed to raise most of its money as risk-based levies. It is possible to avoid the risk-based element by being excessively well funded or by having certain types of contingent asset in place. However, to avoid the totality of the levy and all the other costs such as valuations and advisory costs that go with being within the PPF, a scheme has to be ineligible. While insured closed schemes are ineligible, the rules currently do not treat an insured open scheme in this way. That may not be surprising, because insured open schemes as a product did not exist when the rules were originally set for what could be ineligible within the terms of the PPF rules.
An insurer underwriting the risk of scheme sponsor failure would be regulated by the Financial Services Authority if it was in the UK. There is no public policy reason for saying that the FSA’s oversight was of a materially lower quality than that provided by the PPF. Indeed, the compensation levels available via the Financial Services Compensation Scheme are higher than the ones that are typically available via the PPF, so the position of members should be enhanced if they are put within a scheme that falls within the FSA and the FSCS. Moreover, of course, if we allow insurance within the UK, we must allow similar insurers who are supervised to EU standards.
The reference in my Amendment No. 129B to authorised insurers is intended to refer to EU-regulated insurers, but it could clearly also extend to other insurers in other countries where the Secretary of State was content with the quality of regulation. This is one of the areas that clearly needs a lot more definition, as I mentioned when I began my remarks.
To date, the Government have resisted changing the PPF rules to facilitate insured open schemes. I am not at all clear about the substance to the objections that have been made to date, such as cherry-picking, which is a non-argument. There seem to be only two reasons for resisting these proposals. The first is that the PPF does not want its natural monopoly to be diminished. Monopolists never do. A monopolist who has the ear of government, which the PPF does, and who is not subject to competition legislation, which I believe the PPF is not, is a very dangerous combination. The second possibility is that the Government are too timid to back innovation in financial services in case they are proved wrong. If that is the case, our financial services industry must fear for its future, and since our financial services are a significant part of the UK economy and a major contributor to UK growth, that is a serious issue for the economy as a whole.
I hope that the Minister will be able to be encouraging about the Government's attitude to insured open schemes and will be able to say when they will be permitted to qualify for PPF ineligibility. I beg to move.
I found the noble Baroness’s speech very interesting. In talking over the proposals of Con Keating of BrightonRock briefly, although not specifically, with Lawrence Churchill of the PPF—I do not wish to attribute any views—I certainly did not recognise the noble Baroness’s monopoly or timidity arguments for saying that the Government would resist this. I have heard neither of those. Before my noble friends responds, perhaps the noble Baroness could help me on who insures the insurers. The point about the PPF is not that it wants to be all-encompassing. It has carefully gone to a risk-related levy in order to encourage funds to have a predictable and sensible approach to risk as faced with the DB schemes. I think we all recognise that there are complexities with hybrid schemes. The trouble with moving into the insurance market is that of the reinsurance proposals behind it. I am not sure that some companies which would like to move into this market place have sufficient resources for reinsurance. As I say, it is not a field I am comfortable with, so I will defer. Ultimately, we could easily have a fallback on the PPF or, almost, a version of why FAS had to be set up.
There are two answers to that. The Financial Services Authority or an equivalent EU supervisory body would regulate that body, which would be the case if reinsurance needed to be put in place as part of the risk management arrangements. The important distinction is the financial services compensation scheme. As I argued in my opening remarks, if there was a failure, that scheme would provide better benefits than would the PPF. The PPF is typically referred to as producing a 90 per cent benefit, which it does not. On average, it produces an 80 per cent benefit and often produces a 60 per cent benefit if a pension scheme has to go into the PPF. If a pension scheme had to go into the financial services compensation scheme, those PPF rules would not apply, so a higher degree of assurance would be provided through that compensation scheme than exists via the PPF.
I had a good discussion with the people at BrightonRock, who were kind enough to explain things. The more I talked to them, the less I liked this model. Quite frankly, they were very unconvincing as to what assets or strength they had behind them. In this situation, just to say that you could get reinsurance is not good enough. When one thinks about it, it is almost like a competing fire brigade to the existing fire brigade. We are not just talking about a monopoly. It reminds me of the old joke about Screaming Lord Sutch, who asked, “Why is there only one monopolies commission?”. For a very good reason, there is only one fire brigade that everyone has to pay for. After Northern Rock, I do not share the noble Baroness’s confidence that it is all right for the matter to be left to the FSA. I do not want pension funds to land up in the financial services compensation scheme. With a considerable amount of effort in this House, we set up the PPF. It is not exactly a lender, but it is a good underwriter of last resort.
De-risking pension schemes for employers is not the same thing necessarily as de-risking pension schemes for pensioners and employees. From the past year or two, we all should have learnt that it is much too easy to talk about reinsurance. Some of the very big insurers in America cannot meet their obligations and that ultimate risk is a very serious problem. I would be much more comfortable sticking with the PPF.
Before making my only intervention in this debate, I declare, first, my interest as chairman designate of BrightonRock, which, I would hasten to add, is not to be confused with any other rock. I should also make another declaration of non-interest: I am not a member of the Society of Turnaround Professionals, although I hold its lifetime award for achievement. That is not so very special when one bears in mind that I was once standing backstage at the Oscar ceremony when Mickey Rooney came off stage and immediately deposited his Oscar for a lifetime award in the trash can on the grounds that he thought that it would be more properly identified as a death-time award.
In the case of our friends at BrightonRock, there is one very important distinction, which may answer part of the concerns of the noble Baroness. It is not just intended to be an insurance company but would have a very big role as an interventionist in bringing to bear corporate rescue activity into the parent companies behind the sponsorship of the pension schemes concerned. There will be a proactive role to address the problem which is giving rise to the potential call which would come upon the PPF. That is a very important point and a most fundamental part of the BrightonRock concept.
I shall answer the noble Baroness’s concern on whether it will get the funding necessary. The due diligence for this, effectively, will be dependent on demonstrating exactly that point of financial viability to the City, which we are looking to at present for a substantial fundraising, being handled by City professionals, aimed at achieving full financing capability by the end of September. The arrangements that that implies require us to demonstrate that viability. If we do not demonstrate it, we will not be in business. If we do, it will be because the market has decided that we are able to cover it.
I would also remind Members of the Committee that the most successful corporate rescue ever mounted in this country was for Lloyd’s of London. It was beset widely by failure of reinsurance, but where the reinsurance was capable of being replaced and mutualised to an extent, that overcame the problem.
My final point is that we who have put this BrightonRock scheme together, having read very carefully the Pensions Bill, take the view that it is coming from the wrong direction in a very important respect. It starts from the supposition that the problem that has to be addressed is the failure of management of the pension schemes. I would respectfully suggest that it is not; it is the corporate failure of the sponsoring companies behind them. That is not properly addressed and, in many ways, the Bill tends to put obstacles in the way of the orderly approach to and correction of those problems. BrightonRock would seek to overcome those problems in the way I have indicated.
These concerns worry us greatly because we believe that the future viability of the pensions industry depends on an address to the corporate financial management of the sponsoring companies and not to the fundamental managements of the pension schemes, which we think are generally pretty good. In the world of corporate rescue where I have seen pension schemes fail, the failure usually has come many years prior to the time when it acknowledges the failure as a result of the collapse of the sponsoring company and its inability to maintain the funding.
The position demonstrated in the recent risk-sharing analysis in the risk-sharing consultation on 5 June was completely wrong when it said that the risks here are longevity and health improvement. They are not the risks which undermine the future viability of pensions. They are the risks of solvency to the sponsoring companies. In this respect, the Government and everyone in this country, all pension beneficiaries, need every bit of help that they can get in securing it, which is where what we are talking of would help. The easement of this arrangement by the manner of this amendment would greatly assist in the creation of the management of this company. I believe that it would make a positive contribution towards the Government’s own desire to come at it from the point of view of the corporate financing side, which is where the issue really lies.
I hope that the noble Lord will not take this the wrong way, but is he quite sure that his speech and remarks are appropriate? To start with, he very properly declared his interest, but he is in the middle of a major fundraising, for which he presumably has a financial interest. I wonder whether it is in the right traditions of this House for him, effectively, to promote the prospectus of the company. I would ask him to think again about that.
I shall seek direction on that, but my concern is the challenge to whether this would be useful in the context of what the Bill sets out to do. I have sought to correct what I thought was a misunderstanding on the issue. I am not financially involved at this stage of the process; I will be if and when it becomes a live project, but at the moment I am not seeking to promote it in that sense—only to noble Lords, not outside this Chamber.
Perhaps I can assist the Committee. In his enthusiasm for his project, I think that my noble friend may not have realised that we are not debating the specific proposition he has in mind. I sought to draw on the essence of the proposition in order to tease out whether the principles are those which could result in ineligibility being established, while recognising that there will be all kinds of questions if any particular company comes forward with a scheme such as that which has been promoted by BrightonRock, one that has interesting features which should be explored. However, it is not for this Committee to get into the detail of the specific proposition—where the money comes from or anything about the success of the particular operation. I am sure my noble friend did not intend to intrude in that way on the Committee’s deliberations.
I support those comments and I am grateful to my noble friend. I am concerned here with the benefits of this amendment on behalf of whichever company comes to create this function. It may or may not be the one about which I have spoken and it was identified before I rose to speak. I am concerned with the principle because other companies will come into this field to provide similar services, and it is appropriate that this amendment should be supported on their behalf too.
Perhaps I may start by acknowledging that in my view the noble Baroness was not in any way seeking to promote a particular company but was talking about the generality. I am not sure whether the effect of what the noble Lord, Lord James, said was the same, and I hope that he will reflect on his words. In the end he has to make his own judgment about how and what he speaks on.
The proposed new clause would amend Section 126 of the Pensions Act 2004. That section deals with eligible schemes for the Pension Protection Fund. It would exempt certain schemes from the PPF if they had guarantees from what the amendment calls an “authorised insurer”. I understand that the amendment has been tabled to explore whether schemes that purchase an insurance product along the lines of the one being promoted by BrightonRock also need to have protection for their members under the PPF. The Minister of State for Pensions Reform and I have met representatives of BrightonRock, including the noble Lord, Lord James of Blackheath. We listened with interest to their proposals on how a product intended to insure schemes so that they could pay scheme members in the event of the insolvency of their sponsoring employer might work. I understand that BrightonRock wants schemes that have purchased one of its products to be exempt from paying levies to the PPF and for scheme members not to be covered by the protection offered by the PPF.
The removal of the protection of scheme members by the PPF is not something to be considered lightly. There are some defined benefit schemes that are not eligible for protection by the PPF which include unfunded public service pension schemes, local authority pension schemes and schemes that provide only for death benefits. Broadly speaking, these schemes already have very secure provision for the protection of their members’ pensions. The likelihood of such schemes requiring PPF assistance therefore is zero. Anticipating that new schemes of this nature could emerge, Parliament ensured that the Pensions Act 2004 has a regulation-making power in Section 126 that allows the list of exempt schemes to be extended. The PPF and the Department for Work and Pensions have also identified a limited number of instances where the risk of a scheme calling on the PPF is extremely unlikely, such as where a scheme has no active members. In these cases, schemes may apply to the board of the PPF for a waiver of their pension protection levy.
Let me remind noble Lords that the PPF is funded by a combination of compulsory levies charged to all eligible schemes, any assets remaining in schemes which transfer to the PPF at the end of an assessment period, and the proceeds from the investment of these levies and assets. So if schemes are not eligible for the PPF or are not required to pay a levy or both, this has an impact on the financing of the fund and the protection it provides to millions of scheme members. BrightonRock suggests that it will only ever be marginal in terms of the number of schemes covered relative to the PPF’s universe. This may be the case, but any change to legislation would open up the market to other competitors, moving away from a “marginal” impact that would clearly have an impact on the financing of the PPF and the protection it provides.
We also need to bear in mind that the Pension Protection Fund is a relatively new institution and it is important that scheme members, people receiving compensation and people due to receive compensation in the future have confidence in the PPF’s financial security and long-term sustainability. However, the Government keep the PPF under review and already have the power to make regulations to exempt certain schemes from the protection provided by the PPF or to waive the pension protection levy if that is desirable. At this stage, however, my ministerial colleagues and I do not consider that it would be right to open up a market in the way suggested by this amendment.
If in the future we opened up the market to products like those of BrightonRock, we would need to be confident that the entry of BrightonRock and others could provide long-term security for those taking out such policies. Confidence in these insurers will be equally important to those members remaining under the wing of the PPF. The noble Baroness said that protection would come from the FSCS, but I would say to her in response that it does not come without cost either in that that protection would also have to be funded.
In conclusion I want to emphasise that there are already powers to exempt schemes if we want to do so in the future, so we do not need the amendment. However, we are not minded currently to open up the market in the way suggested.
What we are not yet happy about is the model which suggests that open schemes with ongoing liabilities would be protected by a third party. We are not sufficiently confident about the extent of that cover, and that is not to impugn BrightonRock or any particular entity. The Pension Protection Fund is not seeking to hold a monopoly position, but it is a fairly new institution that is building confidence with people in the pensions arena, and it should be entitled to do so. I also return to the point that in a model such as BrightonRock—the noble Lord, Lord James, indicated in his contribution that he was speaking more generally, but others would allow that there is a risk of cherry-picking—we would really need to understand exactly how secure the covenants were, particularly as some of the entities involved are not UK-based. In one particular case, it is regulated out of Malta.
That is where we are, but I stress to the noble Baroness that the powers are in place should there be a view to use them.
I thank the Minister for his response. He said that the PPF is trying to build confidence. What the PPF is doing is convincing the employer community that it is a very expensive route to dealing with the issue of scheme insolvency. That opinion will be expressed by almost any employer with a defined benefit scheme who has received this year’s fees demand and has been looking at what is happening to the costs in this area. There is potentially an issue here, which is why there is an incentive to look at other options.
One of the points I sought to make is that I hope that the department’s mind is not closed because it is too close to the PPF. The fund is the department’s own invention, so of course it is rather protective of it, but I was hoping that the Minister would demonstrate that he is open to open market solutions. I say that because we believe that open market solutions often produce innovation and thus dynamism in a given situation. I completely accept that there are big practical issues to be dealt with, as the noble Lord, Lord Oakeshott, said. I was not advocating the BrightonRock proposals but the use of market-based solutions as an alternative to state-based solutions. That may indicate a doctrinal difference between us.
The Minister for Pensions, Mike O’Brien, is on the record as saying that he welcomes innovation in the market. Obviously there needs to be a full analysis of the innovations and of the risks, but certainly our mind is not closed to those kinds of solutions.
130ZZA: Clause 89, page 43, line 36, leave out “uprated” and insert “revalued”
The noble Lord said: I shall speak also to government Amendments Nos. 130ZZB to 130ZZM inclusive and 139D.
Clause 89 provides a significant further step along the road of simplification of state second pensions. Of critical importance in the design of the reformed state scheme is the need to define the benefits that people can expect to receive when they retire so that they can make a judgment about how much to save. Last year we took an important step in reforming the state second pension so that in the future the pension would accrue largely as a flat-rate amount. This would be added to the basic state pension so that overall state pension outcomes and forecasts of the outcomes would be simpler to understand for individual contributors. But that is the future: Clause 89 and the amendments simplify the past.
As the Committee knows, the state second pension scheme is extremely complicated. It was complicated when it was introduced in 1978 and every change since then has added to its complexity, to the point where only a handful of people understand a benefit that costs the taxpayer more than £11 billion a year. Left unchecked, the last award of the pre-Pension Act 2007 S2P will be made in the 2060s and, with inheritance, we would still require all the benefit rules and the IT calculation routines for the old system until the end of the century. The bulk of the amendments refine Clause 89, which proposes that we wrap up all SERPS, S2P and graduated retirement benefit accrued to the tax year before we introduce flat-rate S2P. We would calculate the contributions made to that date using exactly the same rules as we would have used when the contributor reached state pension age. The sum that the calculation produces will be credited to people’s pension accounts. The sum, known as the consolidated amount, will be revalued during the contributor’s working life by earnings, the same as now, and uprated by prices once the person retires, the same as now. The measures seek to apply the current rules on revaluation, inheritance and appeals to the consolidated amount.
However, this is only part of the story, as those who have had the opportunity to read the fact sheet placed in the Library will testify. We want people who have been contracted out of the additional pension to have the same clarity over their pension outcomes as people who have not contracted out. This is challenging technically, especially for the 11 million contributors who will retire after 2020 and who have been contracted out of SERPS at some time between 1978 and 1997. This is a legacy of a variety of different rules on revaluation, to the point that it is almost impossible to calculate the pension that a person with contracted-out rights will receive in retirement. We give them some partial information but we cannot tell them with any degree of accuracy what they can expect to receive from the state when they retire. The department keeps a notional record that says each year how much a person would have secured in SERPS had they not been contracted out, and then when the individual retires the department makes a calculation deducting the guaranteed minimum pension, or the notional guaranteed minimum pension, from SERPS. If this contracted-out deduction is less than the SERPS accrual, the balance is paid to the individual.
The difficulty is that there can be up to three different ways in which a guaranteed minimum pension can be revalued before a person retires, so the amounts of SERPS accrued and the contracted-out deduction can often be different. On top of this, these amounts can be uprated differently after retirement. To achieve simplification we need to fix the difference between the SERPS accrued and the contracted-out deduction. If the difference produces a net amount of SERPS, then it needs to be revalued and uprated in exactly the same way as SERPS is now. We need to do all of this in an equitable way.
Amendment No. 130ZZE sets out the solution. Through the process of actuarial equivalence, we will estimate the value of the contracted-out deduction at retirement and through retirement and smooth this into a weekly amount that can be deducted from SERPS. The Committee will appreciate that my explanation of this process is somewhat simplified, as the system is extremely complex, but we will end up with a system where the contributor will have a much better understanding of what they can expect when they retire. We will also remove great complexity from the pension scheme. We have taken the opportunity with Amendments Nos. 130ZZM and 139D to bring forward some minor technical amendments which are consequential to the state pension reform measures and which were inadvertently omitted from the Pensions Act 2007. I am conscious that the Opposition have amendments to our amendment. Before they are moved, perhaps I may say that we look with some warmth on those amendments. I beg to move.
I shall speak to Amendments Nos. 130ZZEA and 130ZZEB, which are amendments to government Amendment No. 130ZZE in this group. This is getting ridiculous.
I thank the Minister for introducing his amendments and for circulating the note which was euphemistically headed “simplification of state second pension”. As he has demonstrated in his opening remarks, this is anything but simple. I learnt more from reading the note than I ever need to know about S2P. I cannot pretend to understand the precise technical impact of all the amendments in this group, but if the department’s note is an accurate reflection of what is planned, then we are broadly content with what the Minister is proposing.
However, there is one exception, which is dealt with by my amendments. I was alerted to this by the reference to actuarial equivalence in the department’s note. When I found out that it was in connection with contracting out—in this case the contracted-out deduction—I was put on full alert because the Government are not to be trusted in this territory. Paragraph 21 of the department’s note on these amendments refers to the way in which the contracted-out deduction will be arrived at. It states:
“The current intention is for the Government Actuary’s Department to consult on the proposed assumptions in the Summer of 2011 to ensure that consolidation can be based on the most up to date information on life expectancy, earnings and earnings growth. These assumptions will be used for the consolidation calculation”.
That seems entirely rational, and we support it. However, it is not what the legislation contained in these amendments says. Instead, proposed new Section 46A of the 1993 pensions Act, as inserted by Amendment No. 130ZZE, says nothing about consultation. Subsection (5) says only that the Secretary of State “may” require the Government Actuary to prepare a report; the Secretary of State is not required to involve the Government Actuary. Subsection (7) says, in effect, that even if the Government have a report from the Government Actuary, they are under no obligation to take it into account when issuing the regulations for determining actuarial equivalence.
The Committee may feel that this is just a technical issue, but very similar provisions on actuarial equivalence already exist in relation to the contracted-out rebates which are set on a quinquennial basis. I know that the Minister recalls our previous discussions on this, and I am sure that the noble Lord, Lord Oakeshott, will remember the debates we had on the order setting out the contracted-out rebate in 2006 after the last quinquennial review. At that time the Government Actuary reported, after consultation, that the rebate should be set at 5.8 per cent, although many of the consultees argued for a higher figure, some for higher than 8 per cent. The Government then plucked the figure of 5.3 per cent from thin air, citing something that was not found in the legislation or indeed in these amendments. They called it “sustainable affordability”—that is to say, if the Treasury says it cannot afford it, the Government will ignore actuarial equivalence determined by the Government Actuary’s Department.
The legislation, which is drawn in very similar terms to the amendments before us, did not stop the Government from acting in that way at the last quinquennial review, as the noble Lord, Lord Oakeshott, will recall. The government amendments give them carte blanche to carry on operating in exactly the same way, and possibly even to invent new bits of doctrine to sit alongside “sustainable affordability” and not do the right thing.
My amendments are modest. They would ensure that the Government of the day, when coming to these difficult and complex decisions, would be guided by what was right for the rights-holders when their rights were being consolidated, not what was convenient for the Treasury. I would replace the word “may” with the word “must” in subsections (5) and (7) of new Section 46A.
Will the Minister comment on the processes that will be used to assure the calculations on a quality basis when the single additional pension amount is arrived at? The department’s note makes it abundantly clear that no ordinary mortal could check the calculations attributable to his particular circumstances. Those calculations will fix an entitlement for all time for post-2020 retirees. Would the department, for example, use specially commissioned audits of the calculations? The ordinary audit of the National Insurance Fund will not give assurance of the granular level of the individual’s own rights and entitlements, and it is at that level that we need confirmation to exist.
We have seen too many government systems collapse in the face of complexity and fail to deliver what they need to. Child maintenance is a prime example, but anyone who has tried to check a contribution record extracted from NIRS2 will find that that is not a simple process either. The calculations that are involved in gathering these various entitlements and deductions are even more complicated, which is why I particularly want the Minister to reflect on the assurance processes that will ensure that individuals get that to which they are entitled once the actuarial rules have been set.
It would be churlish of me not to support these amendments, particularly as the noble Baroness has so kindly made the speech for me and referred to me several times. She asked whether I remember the debates on the order in 2006. I think of little else; I find them far better than counting sheep. I have only one question for the Minister. Could he please explain what the difference is between “affordable sustainability” and “sustainable affordability”?
I will pass on that last question, if I may.
The noble Baroness’s amendments would make it a requirement that the Secretary of State obtain a report from the Government Actuary advising on the method for determining actuarial equivalence and that the recommendation in the report be adopted. Incidentally, I am not surprised that the noble Baroness referred to contracted-out rebates; I thought that they might just be raised in the context of this issue.
Determining the method of actuarial equivalence will clearly require a great deal of expert knowledge. That is why we have made provision in the Bill to obtain a report from the Government Actuary’s Department. I assure the Committee that it is fully our intention to make use of that provision, and we will make a decision based on that advice.
I can, however, see considerable merit in the amendments. But there is a slight concern, about which we need to talk to the Government Actuary. It is suggested that the draft amendments compel the Government to accept the Government Actuary’s advice. That depends a bit on whether there is going to be a range of advice or a single proposition, and whether that places the responsibility for determining actuarial equivalence on the Government Actuary rather than on the Secretary of State. We would like to discuss that further. Subject only to that, I am hopeful that we can bring back on Report something that has the same effect, if not the same wording, as the noble Baroness’s amendments, because we are fully in agreement.
The noble Baroness rightly raised the issue of quality assurance. There are two strands of the work. There is the calculation of the growth of the additional pension before the contracted-out deduction. Of course that is a calculation that happens currently when people retire, but it is being done specially in 2012 to try to get this system under way. There are already systems in place that cater for that, but we would certainly consider the use of the NAO to quality-assure these calculations. That has not yet been looked at in detail. The suggestion is helpful and we will take it forward.
That is as much reassurance as I can give the noble Baroness. I hope that, on that basis, she will feel able not to press the matter today.
130ZZB: Clause 89, page 44, line 2, leave out from first “the” to end of line 3 and insert “amount referred to in subsection (2)(d).”
130ZZC: Clause 89, page 44, line 4, leave out subsection (5)
130ZZD: Clause 89, page 44, line 9, leave out “paragraph 3 of Schedule 4C to this Act” and insert “paragraph 1A of Schedule 4C to this Act by virtue of paragraph 1D(a) of that Schedule (the GRB amount)”
On Question, amendments agreed to.
Clause 89, as amended, agreed to.
130ZZE: After Clause 89, insert the following new Clause—
“Entitlement to guaranteed minimum pensions: effect on payment of additional pension etc
(1) The Pension Schemes Act 1993 (c. 48) is amended as follows.
(2) In section 46 (effect of entitlement to guaranteed minimum pensions on payment of social security benefits) after subsection (1) insert—
“(1A) Subsection (1) does not apply in relation to a relevant benefit if the weekly rate of the additional pension in that benefit is determined under section 45(2A) of the Social Security Contributions and Benefits Act 1992 (retirement in tax year after 5th April 2020).
(1B) In subsection (1A) “a relevant benefit” means—
(a) a Category A or Category B retirement pension, or(b) a widowed parent’s allowance.”(3) After section 46 insert—
“46A Retirement in tax year after 5th April 2020
(1) Subsection (2) applies where—
(a) for any period a person is entitled to a Category A or Category B retirement pension, or a widowed parent’s allowance, under the 1992 Act (“the benefit”),(b) the person is entitled to one or more guaranteed minimum pensions for that period, and(c) the weekly rate of the additional pension in the benefit is determined under section 45(2A) of the 1992 Act (retirement in tax year after 5th April 2020).(2) The weekly rate of the benefit shall, for the period mentioned in subsection (1)(a), be reduced by an amount calculated in accordance with regulations.
(3) Regulations under subsection (2) must provide for the amount of the reduction to be calculated in such a way that it does not exceed such part of the weekly rate of the additional pension in the benefit as is attributable to earnings factors for tax years ending before the principal appointed day.
(4) The effect of the reductions made under subsection (2) in relation to any person must be actuarially equivalent to the effect of the reductions that, but for section 46(1A), would be made under section 46(1) in relation to that person.
(5) The Secretary of State—
(a) may require the Government Actuary or Deputy Government Actuary to prepare a report on how actuarial equivalence should be determined for the purposes of this section, and(b) must lay any such report before Parliament.(6) Regulations may make provision for determining actuarial equivalence for the purposes of this section.
(7) Regulations under subsection (6) may, in particular, include provision by reference to a report under subsection (5)(a).
(8) In this section “the 1992 Act” means the Social Security Contributions and Benefits Act 1992.””
[Amendments Nos. 130ZZEA and 130ZZEB, as amendments to Amendment No. 130ZZE, not moved.]
On Question, Amendment No. 130ZZE agreed to.
130ZZF: After Clause 89, insert the following new Clause—
“Additional State Pension etc: minor and consequential amendments
Schedule (Additional State Pension etc: minor and consequential amendments) (Additional State Pension etc: minor and consequential amendments) has effect.”
On Question, amendment agreed to.
Schedule 3 [Additional pension consolidation]:
130ZZG: Schedule 3, page 69, line 32, leave out from “date”” to end of line 36 and insert “means the first day of the flat rate introduction year.”
130ZZH: Schedule 3, page 69, line 37, leave out “The consolidated amount” and insert—
“1A The Secretary of State must, in accordance with the following provisions of this Schedule, calculate an amount representing the weekly rate of the additional pension in a pensioner’s Category A retirement pension in relation to tax years before the flat rate introduction year.
1B The Secretary of State must comply with paragraph 1A before the pensioner attains pensionable age.
1C The calculation under paragraph 1A shall be treated for the purposes of Chapter 2 of Part 1 of the Social Security Act 1998 (c.14) (social security decisions and appeals) as a decision under section 8 of that Act.
1D The amount to be calculated under paragraph 1A”
130ZZJ: Schedule 3, page 70, line 17, leave out “paragraph 3 or 4” and insert “paragraph 1A”
130ZZK: Schedule 3, page 70, line 24, leave out “uprated” and insert “revalued”
130ZZL: Schedule 3, page 70, line 25, leave out from first “the” to end of line 26 and insert “sum of the following amounts—
(a) the amount calculated under paragraph 1A;(b) that amount multiplied by the revaluing percentage specified in the last order under section 148AB of the Administration Act to come into force before the beginning of the tax year in which the pensioner attains pensionable age.”
On Question, amendments agreed to.
Schedule 3, as amended, agreed to.
130ZZM: After Schedule 3, insert the following new Schedule—
“Additional State Pension etc: minor and consequential amendmentsSocial Security Contributions and Benefits Act 1992 (c. 4)1 The Social Security Contributions and Benefits Act 1992 (c. 4) is amended as follows.
2 In section 21(5A)(c) (contribution conditions) after “5(2)(b) and (4)(a)” insert “, 5A(3)(a)”.
3 In section 39(1) (rate of widowed mother’s allowance and widow’s pension) for “46(2)” substitute “46”.
4 (1) Section 39C (rate of widowed parent’s allowance and bereavement allowance) is amended as follows.
(2) In subsection (1)—
(a) for “45” substitute “45AA”;(b) for “and Schedule 4A” substitute “and Schedules 4A to 4C”;(c) for “46(2) and (4)” substitute “46”.(3) In subsections (3) and (4)—
(a) for “45” substitute “45AA”;(b) for “and Schedule 4A” substitute “and Schedules 4A to 4C”.5 (1) After section 45 (additional pension in Category A retirement pension) insert—
“45AA Effect of working families’ tax credit and disabled person’s tax credit on earnings factor
(1) For the purposes of calculating additional pension under sections 44 and 45 where, in the case of any relevant year, working families’ tax credit is paid in respect of any employed earner, or disabled person’s tax credit is paid to any employed earner, section 44(6)(a)(i) shall have effect as if—
(a) where that person had earnings of not less than the qualifying earnings factor for that year, being earnings upon which primary class 1 contributions were paid or treated as paid (“qualifying earnings”) in respect of that year, the amount of those qualifying earnings were increased by the aggregate amount (“AG”) of working families’ tax credit, or, as the case may be, disabled person’s tax credit paid in respect of that year, and(b) in any other case, that person had qualifying earnings in respect of that year and the amount of those qualifying earnings were equal to AG plus the qualifying earnings factor for that year.(2) The reference in subsection (1) to the person in respect of whom working families’ tax credit is paid—
(a) where it is paid to one of a couple, is a reference to the prescribed member of the couple, and(b) in any other case, is a reference to the person to whom it is paid.(3) A person’s qualifying earnings in respect of any year cannot be treated by virtue of subsection (1) as exceeding the upper earnings limit for that year multiplied by 53.
(4) Subsection (1) does not apply to any woman who has made, or is treated as having made, an election under regulations under section 19(4), which has not been revoked, that her liability in respect of primary Class 1 contributions shall be at a reduced rate.
(5) In this section—
“couple” has the same meaning as in Part 7 (see section 137);
“relevant year” has the same meaning as in section 44.”
(2) Sub-paragraph (1), together with paragraphs 4(2)(a) and (3)(a), 9(2)(a) and (3)(a) and 11 (which make amendments consequential on sub-paragraph (1)), are referred to in the following provisions of this paragraph as “the relevant provisions”.
(3) Subject to sub-paragraphs (4) and (5), the relevant provisions apply to a person (“the pensioner”) who attains pensionable age after 5 April 1999 and, in relation to such a person—
(a) have effect for 1995-96 and subsequent tax years, and(b) are deemed so to have had effect (with the necessary modifications) during the period—(i) beginning with 6 April 2003, and(ii) ending with the coming into force of this paragraph.(4) Where the pensioner is a woman, the relevant provisions have effect in the case of additional pension falling to be calculated under sections 44 and 45 of the Social Security Contributions and Benefits Act 1992 (c. 4) by virtue of section 39 of that Act (widowed mother’s allowance and widow’s pension), including Category B retirement pension payable under section 48B(4), if her husband—
(a) dies after 5 April 1999, and(b) has not attained pensionable age on or before that date.(5) The relevant provisions have effect, where additional pension falls to be calculated under sections 44 and 45 of the Social Security Contributions and Benefits Act 1992 (c. 4) as applied by section 48A or 48B(2) of that Act (other Category B retirement pension) if—
(a) the pensioner attains pensionable age after 5th April 1999, and(b) the pensioner’s spouse has not attained pensionable age on or before that date.6 (1) Section 46 (modifications of section 45 for calculating the additional pension in certain benefits) is amended as follows.
(2) In subsection (2) for “, 48B(2) or 48BB(5)” in both places it occurs substitute “or 48B(2)”.
(3) After subsection (4) insert—
“(5) For the purpose of determining the additional pension falling to be calculated under section 45 above by virtue of prescribed provisions of this Act, that section has effect subject to the following modifications—
(a) the omission in subsection (2) of the words “but before 6th April 2020”, and(b) the omission of subsections (2A) and (2B).(6) Regulations under subsection (5) may prescribe a provision in relation to—
(a) all cases, or(b) cases of a prescribed description.”7 In section 48A(4) (category B retirement pension for married person)—
(a) for “and 4B” substitute “to 4C”;(b) for “46(2)” substitute “46”.8 In section 48B(2) (category B retirement pension for widows and widowers)—
(a) for “and 4B” substitute “to 4C”;(b) for “46(2)” substitute “46”.9 (1) Section 48BB (category B retirement pension: entitlement by reference to benefits under section 39A or 39B) is amended as follows.
(2) In subsection (5)—
(a) for “45” substitute “45AA”;(b) after “45AA” (inserted by paragraph (a) above) insert “and 45B”;(c) for “and 4B” substitute “to 4C”;(d) for “46(3)” substitute “46”.(3) In subsection (6)—
(a) for “45” substitute “45AA”;(b) after “45AA” (inserted by paragraph (a) above) insert “and 45B”.10 In section 48C(4) (category B retirement pension: general) for “and 4B” substitute “to 4C”.
11 In section 51(2) and (3) (category B retirement pension for widowers) for “45” substitute “45AA”.
12 (1) Schedule 4B (additional pension: accrual rates for purposes of section 45(2)(d)) is amended as follows.
(2) In paragraph 2 (application of Part 2 of Schedule)—
(a) after “if” insert “—(a) ”;(b) after paragraph (a) (created by virtue of paragraph (a) above) insert “and (b) there is a surplus in the pensioner’s earnings factor for the year.”(3) In paragraph 3 (appropriate amount for year)—
(a) in paragraph (a), for the words from “there is” to “which” substitute “the pensioner’s earnings factor for the year”;(b) in paragraph (b), for “there is such a surplus which” substitute “that earnings factor”.(4) In paragraph 5(a) for “surplus” substitute “earnings factor”.
(5) In paragraph 6 (application of Part 3 of Schedule)—
(a) after “if” insert “—(a) ”;(b) after paragraph (a) (created by virtue of paragraph (a) above) insert “and(b) there would be a surplus in the pensioner’s earnings factor for the year if section 48A of the Pension Schemes Act 1993 did not apply in relation to any tax week falling in the year.”(6) In paragraph 8(1) (calculation of amount A: assumed surplus not exceeding LET), for the words from “there” to “which” substitute “the pensioner’s assumed earnings factor for the year”; and, accordingly, in the heading before paragraph 8 for “surplus” substitute “earnings factor”.
(7) In paragraph 9 (calculation of amount A: assumed surplus exceeding LET)—
(a) in sub-paragraph (1), for the words from “there” to “which” substitute “the pensioner’s assumed earnings factor for the year”;(b) in sub-paragraph (2)(a), for “assumed surplus” substitute “assumed earnings factor”,and accordingly in the heading before paragraph 9 for “surplus” substitute “earnings factor”.(8) In paragraph 10(1)(a) (amount B), for “assumed surplus” substitute “pensioner’s assumed earnings factor”.
(9) In paragraph 12 (interpretation)—
(a) omit the definition of “assumed surplus”;(b) after the definition of “the QEF” insert—““the pensioner’s assumed earnings factor”, in relation to a year, means the earnings factor that the pensioner would have for the year if section 48A(1) of the Pension Schemes Act 1993 did not apply in relation to any tax week falling in the year;”.
13 In Schedule 7 (industrial injuries benefits) in paragraph 3(3) after “section 46” insert “or 46A”.
Social Security Administration Act 1992 (c. 5)14 After section 148AA of the Social Security Administration Act 1992 (c. 5) (revaluation of flat rate accrual amount) insert—
“148AB Revaluation of consolidated amount
(1) The Secretary of State shall, in the tax year following the flat rate introduction year and in each subsequent tax year, review the general level of earnings obtaining in Great Britain and any changes in that level which have taken place during the review period.
(2) In this section “the review period” means the period since such day in the tax year preceding the flat rate introduction year as the Secretary of State may determine.
(3) If on a review it appears to the Secretary of State that the general level of earnings has increased during the review period, the Secretary of State must make an order under this section specifying the percentage of the increase.
(4) The percentage specified in the order is the “revaluing percentage” for the purposes of Schedule 4C to the Contributions and Benefits Act (additional pension: calculation of revalued consolidated amount).
(5) Subsection (3) does not require the Secretary of State to make an order if it appears to the Secretary of State that the effect of the order on amounts calculated in accordance with that Schedule would be inconsiderable.
(6) The Secretary of State may, for the purposes of subsection (3), adjust any amount by rounding it up or down to such extent as the Secretary of State thinks appropriate.
(7) If on a review the Secretary of State determines that no order under this section is required, the Secretary of State must lay before Parliament a report explaining the reasons for arriving at that determination.
(8) For the purposes of a review under this section the Secretary of State shall estimate the general level of earnings in such manner as the Secretary of State thinks fit.”
Pension Schemes Act 1993 (c. 48)15 The Pension Schemes Act 1993 (c. 48) is amended as follows.
16 (1) Section 46 (effect of entitlement to guaranteed minimum pensions on payment of social security benefits) is amended as follows.
(2) In subsection (6), in the substitute paragraph 3(3) of Schedule 7 to the Social Security Contributions and Benefits Act 1992, after “section 46(1)” insert “or 46A(2)”.
17 (1) Section 47 (further provisions concerning entitlement to guaranteed minimum pensions) is amended as follows.
(2) At the end of the heading add “and s. 46A”.
(3) In subsections (2), (3), (5), (6), (7), (8) and (9), for “section 46” substitute “sections 46 and 46A”.
18 In section 48(2) (reduced benefits where minimum payments or minimum contributions paid) for “section 46” substitute “sections 46 and 46A”.
19 In section 49(b) (women, married women and widows) after “46(1),” insert “46A(2),”.
20 In section 164(5) (Crown employment) after “46(1),” insert “46A(2),”.
21 In section 165(2)(b) (cases with a foreign element) after “those subsections),” insert “section 46A(2),”.
22 (1) In section 167(4) (application of provisions relating to social security administration) for “section 46” substitute “sections 46 and 46A”.
(2) Sub-paragraph (1) has effect only until the repeal of section 167(4) by the Social Security Act 1998 (c. 14) has come into force for all purposes.”
On Question, amendment agreed to.
Clause 90 agreed to.
130ZZN: After Clause 90, insert the following new Clause—
“Contracting-out: abolition of all protected rights
(1) As from the contracting-out abolition date, pension schemes are not required to make special provision in relation to the protected rights of members.
(a) the provisions of the Pension Schemes Act 1993 (c. 48) (“the 1993 Act”) within subsection (3) cease to have effect as from that date, and(b) sections 25A, 27A and 32A of the 1993 Act (as inserted by paragraphs 9, 10 and 12 of Schedule 4 to the Pensions Act 2007 (c. 22)) are not to have any effect as from that date (in spite of section 15(4) of that Act of 2007).(3) The provisions of the 1993 Act within this subsection are—
(a) section 10 (protected rights and money purchase benefits),(b) section 26 (persons who may establish scheme),(c) section 27 (identification and valuation of protected rights),(d) section 30 (securing of liability for protected rights), (e) section 32 (suspension or forfeiture), and(f) section 33A (appropriate schemes: “blowing the whistle”).(4) In this section—
“the contracting-out abolition date” means the day appointed under section 30 of the Pensions Act 2007 (c. 22) for the coming into force of section 15(1) of that Act (abolition of contracting-out for defined contribution pension schemes), and
“protected rights” has the same meaning as in the 1993 Act (see section 10 of that Act).”
The noble Lord said: I shall speak also to government Amendments Nos. 139ZC, and 139E. The new clause and associated amendments are concerned with the changes we are making to the arrangements for contracting out of the additional state pension. In particular, they deal with the use of protected rights. These are contracted-out rights held in a defined contribution pension scheme.
The Pensions Act 2007 already contains provisions to abolish contracting out on a defined contribution basis, and we expect that change to take place in 2012. The Act also contains provisions to remove most of the rules concerning the use of protected rights already accrued at the point of abolition. The exception is the rule on survivor benefit. Currently, protected rights have to provide for a survivor benefit if a scheme member is married or a civil partner at the time the annuity is purchased. Following detailed consideration of the survivor benefit rule and the open market option review, we have decided to remove this rule too. That is what the new clause and associated amendments will achieve.
The main changes are being made on the face of the Bill; however, we are also expanding a power in the Bill so we can make the necessary consequential amendments and ensure a smooth transition to the new arrangements. Removing the survivor benefit rule means that once contracting-out on a defined contribution basis ceases, there will be no requirements for how past protected rights might be used. This will mean greater clarity for individuals, who will be free to choose an annuity that is appropriate for their circumstances. At the moment, people have to buy an annuity that provides a survivor’s benefit, even if that is not in their best interests; for example, if their spouse has a good pension in their own right.
The change provides a big simplification for schemes, which will no longer have to track protected rights and apply separate rules to them. It is in line with the Government’s objective of reducing administrative burdens on employers and pension providers. I hope that this explains our approach. I beg to move.
I understand where my noble friend is coming from; obviously we all wish to see this simplification, particularly regarding the very complicated issue of protected rights when people are not in contracted-out schemes, or, indeed, contracted-out schemes in the future.
My noble friend is pursuing three or four objectives which sometimes clash with each other and are not reconcilable. I understand that this is an awkward bit of protected rights and there is therefore a different rule when it comes to the rest of the annuity; people can end up having two types of annuity. As we were saying earlier regarding the amendment of the noble Baroness, Lady Howe, women live longer, and we also wish to ensure that couples, particularly women, have protection and do not need recourse to income-related benefits, particularly pension credit, in widowhood. They are best protected against that, until the happy day when women have an annuity or pension in their own right of sufficient size, comfort and affordability, by having joint lives on their husbands’ pensions—in other words, survivors’ benefits. But we are stripping out even that benefit, which is available through protected rights.
That push to simplify is at odds with the push to keep as many people as possible off income-related benefits in older age. I do not have an easy solution: this is a problem that one hopes will diminish over time as more women carry their own pension. However, if we want to keep widows in particular off income-related benefits, we may do more to help them by changing the annuity rules rather than the pension credit rules. At the very least, spouses should be required to sign their spouse’s annuity forms so that they know what they are signing up to when they choose a single life annuity. From now on, such spouses will be even more vulnerable to having to receive income-related benefits than in the past.
I acknowledge the issue that my noble friend has raised concerning vulnerable survivors. The best way in which to help people make the right choice is to ensure that they have access to clear and appropriate information. My noble friend will be aware that we are working to facilitate and encourage improvements to the information on annuity choice so that people have the information they need. In particular we are working with the Pensions Advisory Service, supporting it on the development of its web tool to provide people with information about choosing an annuity. This is an important issue and we need to get the balance right.
On Question, amendment agreed to.
Clause 91 [Scope of mechanism]:
[Amendment No. 130ZA not moved.]
Clause 91 agreed to.
Clause 92 agreed to.
Clause 93 [Activation of pension compensation sharing]:
130ZB: Clause 93, page 46, line 23, leave out subsection (2)
The noble Lord said: I shall speak also to government Amendments Nos. 130ZC, 130ZD, 130BZA, 130BZB, 130BZC, 130BAA, 130DA, 130DB, 130DC, 130DD, 130DE, 130DF, 130DG, 130DH, 130DJ, 130DK, 130DM, 130DN, 130DQ, 130DT to 130EK and 140A. Before I explain the purpose of the amendments in detail, I thought it might be helpful to offer a brief reminder of the content and purpose of this chapter.
Since 1997, the Government have been committed to ensuring that divorcing couples can reach fair and equitable financial settlements. As part of that, in 1999, we legislated to enable couples undergoing a divorce or annulment to share pensions where that was appropriate to their circumstances. In 2004, we extended that in the Civil Partnership Act to couples who were dissolving a civil partnership. Although I shall refer mainly to divorce throughout my speech, the provisions being introduced refer equally to divorce or the dissolution of a civil partnership or an annulment.
When couples divorce they can, if appropriate, share their pensions like other assets in a way that ensures a clean break, and thus independence of income in later life. Where a person undergoing a divorce has pension rights, the court can transfer the value of some or all of those rights to their former spouse. That former spouse can then buy a pension of their own to ensure that they have independence and security. The courts can also do this while a pension scheme is being assessed for transfer into the PPF, but once a pension scheme has transferred, things change. As pointed out by my noble friend Lady Hollis during debate on the Pensions Act 2007, unlike cash, property or pensions, pension compensation cannot be shared even if a couple or court decide that that would be the best way of dividing their assets.
Where compensation is the only significant asset belonging to a divorcing couple, that could mean that one party was disadvantaged. To avoid such a situation and ensure a fair and equitable settlement, Clauses 91 to 104 ensure that sharing pension compensation is an option. These government amendments are about ensuring that the compensation-sharing provisions operate as effectively as possible.
I hope that Members of the Committee will bear with me as I go through this rather long list of amendments, all of which are important. Amendments Nos. 130ZD, 130BZC, 130BAA, 130DA, 130DT, 130DU, 130DV, 130DX, 130DY and 130DZ—the first batch—amend Clause 94 and Schedule 4. They are intended to ensure that the compensation-sharing provisions operate appropriately where a person has entitlement to compensation resulting from membership of more than one scheme that has been transferred to the PPF. They do this by allowing the courts to make a sharing order that relates to the individual parts of a person’s compensation where appropriate. They also provide for the PPF to calculate compensation accordingly.
Amendments Nos. 130DC, 130DF, 130DG, 130DH, 130DM, 130DN and 130DQ—the second batch—amend Schedule 4. They ensure that the provisions relating to compensation