My Lords, I beg to move that the Bill be now further considered on Report.
Moved accordingly, and, on Question, Motion agreed to.
65: After Clause 87, insert the following new Clause—
(1) A person who holds office as a director of a company is not, by virtue of that office or of any employment by the company, a worker for the purposes of this Part, unless—
(a) the person is employed by the company under a contract of employment, and(b) there is at least one other person who is employed by the company under a contract of employment.(2) In this section, “company” includes any body corporate.”
The noble Lord said: My Lords, noble Lords may recall the debate in Committee about the impact of the employer duty provisions in the Bill on non-executive directors. That debate was instigated by an amendment tabled by the noble Baroness, Lady Noakes, who raised an interesting issue about whether non-executive directors were exempt from being automatically enrolled.
We do not want to change the current market practice in relation to directors and have always considered non-executive directors to be outside the scope of these reforms. However, following further consideration and discussions with the noble Baroness, Amendment No. 65 is designed to avoid doubt by ensuring that a director with a contract of employment is included in the reforms, and a director with any other contract or letter is excluded. This would mean that unless a non-executive director has a contract of employment, they will not be automatically enrolled. Ultimately, if there is any ambiguity in a non-executive director’s contract about their employment status, then a decision about whether they should be enrolled will have to be made on an individual basis. Any uncertainty about employment status will have to be resolved by looking at the contract and possibly the factual background of how the document came into existence, the intention of the parties and how the relationship operated.
Amendment No. 65 also acts as a technical amendment to remove an anomaly in respect of sole worker-directors. Worker-directors pay themselves as a worker for their own company. Sometimes, they may be the sole worker in the company. In such cases, the Bill could create a situation where worker-directors would be required automatically to enrol themselves into pension saving and could then choose whether to opt out. Applying the duties in such cases would place unnecessary administrative burden on the worker-director, their scheme and the regulator.
I hope that these measures have addressed the concerns raised by the noble Baroness. I thank her for her engagement and help on this matter. I beg to move.
My Lords, I am grateful to the Minister for introducing the amendment and for responding constructively to the issues that I raised when I moved my amendment in Committee. It is helpful to have directors dealt with in the Bill. The more I research the issue and discuss it with the Minister and his officials, the more I realise that there is no simple answer to this issue, because much depends on the facts of individual cases. I support the approach that the Government have taken. I have just one plea: when the department or, as is more likely, the regulator issues guidance to employers on how to apply the Act, will they make it clear that the default or normal position is for non-executive directors not to be auto-enrolled except in particular circumstances, that being the purpose of the amendment that the Minister has just moved?
67: Clause 96, page 50, line 51, at end insert—
““tax year” means the 12 months beginning with 6th April in any year;”
On Question, amendment agreed to.
68: After Clause 96, insert the following new Clause—
“Report to Parliament about costs and implementation of personal accounts
(1) Before the end of six months beginning with the day on which this Act is passed, and annually thereafter, the Secretary of State must prepare and lay before Parliament a report setting out the matters referred to in subsection (2).
(2) The matters referred to in subsection (1) are the Secretary of State’s estimates of—
(a) the amounts of money that have been incurred on personal accounts up to the date of the report together with an estimate of the amounts that will be incurred during the 10 years beginning with the date of the report,(b) the amount, if any, of the money included in the estimates under paragraph (a) which will not be recovered from charges to members of a personal accounts pension scheme,(c) the charges which will be borne by members of a personal accounts pension scheme, and(d) the date on which the personal accounts pension scheme will start to operate and the date on which it will, in the opinion of the Secretary of State, be fully operational.(3) References to the amounts of money incurred or to be incurred in subsection (2)(a) are to the amounts incurred by—
(a) the Secretary of State,(b) the Personal Accounts Delivery Authority,(c) the trustee corporation referred to in section 73, and(d) a personal accounts pension scheme.(4) The charges which will be borne by members referred to in subsection (2)(c) shall be shown as an annual percentage of the sums expected to be invested in the personal accounts scheme or in any other way that the Secretary of State believes will provide a reasonable representation of the costs borne by members.
(5) References to personal accounts are references to the relevant proposals about personal accounts under section 21 of the Pensions Act 2007 (c. 22) and the matters dealt with under Chapters 5 and 6 of this Act.
(6) References to a personal accounts pension scheme are a reference to a scheme which has been or will be established under section 66 of this Act.
(7) A reference to the personal accounts pension scheme being fully operational is a reference to the scheme being capable of making arrangements which fulfil the obligations of an employer under section 3 of this Act with any employer which wishes to do so.
(8) If it appears to the Secretary of State that it would be prejudicial to securing the best value from the use of public money to publish any matter by including it in a report under this section, he may exclude that matter from that report.
(9) This section shall cease to have effect on the day on which the Secretary of State makes a written or oral statement to Parliament that in his opinion the pension scheme established under section 66 is fully operational.”
The noble Baroness said: My Lords, the new clause would introduce a requirement for the Government to make a report to Parliament on the costs and implementation of personal accounts. In Committee, we pressed the Government hard on various detailed aspects of the personal accounts scheme which the Government, with the assistance of PADA, are seeking to deliver. We did not get very far on any of the crucial issues about the costs of personal accounts or the likelihood of their being delivered by 2012. The Minister variously stood behind commercial confidentiality and the existence of some high-level information on implementation from the chief executive of PADA, which had been placed in the Library of another place.
We have lent our support to the concept of personal accounts, but that support is not unconditional. No one can be expected to sign up to personal accounts at any cost or in any form that PADA considers itself capable of delivering. Given the huge problem of lack of saving for retirement, no one can be expected to sign up to the possibility of a delivery date beyond 2012, especially as the Pensions Commission report recommended an earlier delivery date. More importantly, no one should be expected to sign up to a project whose detailed implementation is shrouded in mystery. No one should give the Government a blank cheque on this, and we certainly have not done so.
We fear that personal accounts will be delivered late. The latest weasel words are that they will be launched in 2012, but there has been no description of the functional capability of the scheme at that date. There has certainly been no confirmation of a start date of 1 April 2012, and anybody who has ever run a payroll department will tell you that implementing payroll changes on dates other than 1 April is a potential nightmare.
Importantly, we do not know the total cost of delivering personal accounts and how those costs will compare with the 0.3 per cent annual charge that the Pension Commission put forward in its final report. The Government subsequently said that they thought that the initial cost might be 0.5 per cent to take account of various factors, but all of the noise in the system suggests an even higher cost, and the Government have been developing a case for public subsidy for their invention of a public service obligation.
In Committee, we tabled an amendment to wind up PADA, not in 2012 but by the end of 2013, because we recognise that PADA would overlap with the start of personal accounts. We reckon that that should disappear fairly shortly after personal accounts have been set up. The Government did not accept 2013 and would not even accept my offer of an extra two years to 2015. We fear another runaway computer project. The public sector is littered with IT projects that failed to deliver either functionality or within cost budgets, or both. I will name just a few to remind the House—the Child Support Agency, tax credits, NHS IT. We all have our own personal examples.
We have no idea about the nature of the solution that is being adopted for personal accounts and we do not know how the risks to implementation are being identified or how they will be managed. Mr Frank Field, who has devoted considerable time in this area and who has become a personal account sceptic, warned recently in Pensions Week:
“There is … the likelihood that the Personal Accounts Delivery Authority will implode. The new body will depend on a specially commissioned IT scheme. When did the government last commission a successful IT operation?”.
In short, we know almost nothing about personal accounts, but are fearful about what we do not know. Parliament is expected to take delivery of personal accounts on time and at a reasonable cost as a matter of faith because the Government say so.
Against that background, we crafted Amendment No. 68 to ensure that Parliament is kept informed of the progress of personal accounts. It requires a report six months after the passing of this Bill and annually after that until the Secretary of State says that the scheme is fully operational. Subsection (2) sets out that the report should contain estimates of the amount spent and to be spent over the following 10 years. It must also state the date on which the scheme will be fully operational. Those are the basic building blocks; cost and timetable. The subsection also asks for the amounts that will not be recovered from members and which could well be subsidised, and for the charges to be made to members so that we can calibrate them against the Pensions Commission’s 0.3 per cent.
Most of the rest of the amendment is taken up with definitions of the terms that we have used, but I draw the House's attention to subsection (8), which is an exemption in order not to prejudice obtaining value for money. I am not convinced that it is appropriate, since it allows the Government an easy excuse for non-transparency, but when the Government conceded a similar clause in the Identity Cards Act 2006, that exclusion was built in. I would be happy to trust the NAO to act as policeman to ensure that the exemption is not abused. As I mentioned, there is a precedent for this clause in Section 37 of the Identity Cards Act. There we faced similar frustrations in not getting any detailed information during the passage of the Bill and we now get six-monthly reports on that scheme. My amendment modestly asks only for annual reports.
I would have preferred the Government to have adopted an open and transparent approach throughout the development of personal accounts. All that has been on offer has been some personal briefings from PADA and DWP personnel, and those are not a substitute for transparency in general—not only for parliamentarians but for those outside who have a legitimate interest in the progress of the scheme. I beg to move.
My Lords, we on these Benches certainly have some sympathy with this amendment. The noble Baroness is right to make our flesh creep at the prospect of another major computer project, given the Government’s—“erratic” is a kind way of putting it—experience so far.
I obviously look forward with interest to hearing what the Minister has to say in response. Our main concern, given the obvious risks involved, is how much a report six months after the day and then annually thereafter will actually help us. There is a danger of there being too much pulling up of the plant to see how it is growing. Having said that, we share many of the noble Baroness’s concerns.
My Lords, we return to the financial operation of PADA and the trustee corporation. As the noble Baroness has made clear, Amendment No. 68 seeks to put an absolute duty on the Secretary of State to produce a report six months after this Act has been passed, setting out amounts incurred and estimates on a range of financial and operational issues. The report must be prepared annually thereafter.
I recognise that Parliament has a legitimate interest in the financial affairs of both PADA and the trustee corporation, and that interest extends to getting information on a timely basis. It reasonably extends to the decisions that will have to be taken on such issues as the charge structure and charge level.
As the noble Baroness will be aware, some of the items that are listed in the amendment will already be included in the annual report and accounts of both PADA and the trustee corporation. These reports will be available to Parliament and will present the full picture of costs, revenues and how members’ contributions are invested. The information included in these annual reports will be consistent with guidance from the Treasury in respect of NDPBs. I accept, however, that some of the information listed in the amendment will not be contained in the annual reports or the accounts, although some might be included, but at a high level, in business plans and corporate plans of PADA and the trustee corporation.
However, in aggregate—including information included in the DWP supply estimates—this does not cover all of the detailed forward-looking information that the amendment would require. Some of that information we do not know, while other information has been treated as commercially confidential at this stage. I do not apologise for that. We may disagree as to whether it is the right judgment, but the clear advice to us is that it could seriously prejudice the procurement exercise. PADA will shortly begin negotiating with potential suppliers for the administration contracts needed for the scheme. Publishing even forecasts of costs over the next 10-year period, as the amendment would require, could undermine the negotiation process. We must ensure that PADA can obtain the best deal for members and, if there is government funding, the taxpayer. Releasing figures prematurely could damage PADA’s negotiating position, and could prejudice PADA’s ability to obtain the best deal.
I recognise that the noble Baroness’s amendment seeks to deal with the issue of commercial sensitivity in subsection (8) of the proposed new clause, but this is not simply an issue of value for public money. Members’ charges will ultimately pay for the personal accounts scheme, and members’ pension incomes will suffer if we do not respect commercial confidentiality.
However, there will be points in the future when decisions have been made, detail has been developed and the procurement process is sufficiently advanced. At these points, information that does not, or no longer, impacts on the commercial negotiations should be revealed. So I today make the commitment that the Government will, on a timely basis, make statements concerning the issues raised by the amendment. This information will supplement and explain that contained in the future annual reports and accounts of both PADA and the trustee corporation. We will seek to make available any information or analysis that we are able to at the same time as those accounts and reports are produced, although this would not preclude statements at an earlier time.
Unlike the amendment put forward by the noble Baroness, these statements will complement rather than duplicate information provided through the normal reporting framework for an NDPB and a pension scheme. It should therefore provide an appropriate balance between ensuring financial and operational transparency in a way that protects taxpayers’ and members’ interests without adding significant burdens to the Personal Accounts Delivery Authority and the trustee corporation.
I urge noble Lords to bear in mind that as the procurement process is due to start early next year and be completed by summer 2010, a report at six months after Royal Assent would not take us much further given the necessity of commercial confidentiality. Similarly, reporting at rigid annual dates thereafter might preclude producing information about a decision or event in as timely a manner as the noble Baroness is seeking.
In Committee we debated fears about whether personal accounts will be delivered on time. We have no information or reason to assume that the Government’s position as set out then has changed. Frank Field has been prayed in aid in respect of suggestions that personal accounts will implode. I should like to know the basis on which that judgment is made, which is a million miles away from our understanding. Charging levels for personal accounts are important but, as we debated previously, until procurement is undertaken and the funding structure for personal accounts is concluded, we cannot be absolutely clear about the charging structure or the end result. However, on the work that has been done, we believe that personal accounts can be delivered on the basis suggested by the Pensions Commission with low charges and that they will be self-funding in the long term. We have talked about subsidy. Perhaps it would be better to describe what the Government have in mind—if we go down this route at all—as compensation for the public service obligation being imposed on personal accounts. If the Government deemed that necessary and appropriate, it could become a reality only if we complied with European state aid rules. Compensation could be delivered to personal accounts only in those narrow circumstances. Beyond that, we are clear that it must be self-funding, and believe that it can be in the longer term.
I acknowledge the noble Baroness’s legitimate interest—and that of the whole House—in this issue and her reasonable desire to allow parliamentary scrutiny of the scheme’s funding requirements as a way of ensuring the taxpayer is protected. Following a debate on the first Report day, I propose to look again at the financial provisions within Clause 80 and Schedule 1 to ensure they clearly reflect the Government’s intention that the scheme is delivered at no overall cost to the taxpayer. I hope that I have said enough to persuade the noble Baroness not to press her amendment. I reiterate that I desire to help her achieve her objectives within the framework of commercial confidentiality and protecting the interests not only of the taxpayer but of future personal account members.
My Lords, I am intrigued by what the noble Lord said about the possible inclusion of additional material in the documents produced by PADA, the trustee corporation and possibly even the department. Are the Government prepared to put that in the Bill at Third Reading?
My Lords, we do not think that necessary. I am sorry that I cannot give a firm commitment on the record. If the noble Baroness thinks there are ways in which we can strengthen that commitment and put it on the record, I shall be happy to consider them. We have to accept that we are all dealing in good faith on this, but we need flexibility if we are to achieve what she seeks. To put something very rigid in place may not fit that purpose. There will be plenty of information in the accounts, but we recognise that that will be historic information that will be looked at in retrospect. We are trying to help the noble Baroness with a forward look at the information that she seeks, in a way that is consistent with commercial confidentiality. I hope that by putting it on the record today, the noble Baroness, her colleagues and the rest of the House will be prepared to accept that assurance.
I can give chapter and verse, if necessary, on the ability of the Secretary of State to cause that to happen and to cause those data to flow from PADA or the trustee corporation, which is enshrined in various bits of the legislation. We jousted a little on that on the previous day on Report.
My Lords, I am disappointed with the Minister’s overall stance. While seeming to open up to more transparency, he is in fact inviting us merely to have extra information in the annual report, which by definition is quite late. It is certainly out of date in terms of costs. I do not think that we have PADA’s annual report for last year yet, so we cannot rely on information coming promptly from these organisations.
My Lords, PADA’s annual report and accounts were filed late last week. I accept that it is only a short period and it does not tell you very much. If we had a flexible approach, we would not have to wait for specific events or timelines in terms of the production of accounts and reports, or for the annual reporting event that the noble Baroness suggested. We could seek to make statements at appropriate intervals when the relevant information became available.
My Lords, it is self-evident. It was in part to deal with the point made by the noble Baroness; that accounts for the period up to 31 March do not arrive on 1 April each year. We know that there can be a delay, and sometimes that delay is longer than we would hope. By recognising that the information requested should not wait for specific trigger points that could be at some time in the future, I was trying to see whether we could help her along the way. I cannot define it any more closely than that. That was the purpose of using the expression.
My Lords, the Minister continues to disappoint me. The issue is very clear. We have considerable concerns about this project, particularly about when it will be delivered and the cost. We do not accept that personal accounts are acceptable at any cost, and considerable doubts have been raised about what those costs might be.
The amendment was seeking to get into the public domain information equivalent to that produced in the context of commercial confidentiality concerns for identity cards. The Government are not seeking to be as transparent and open as they should be. Nevertheless, I do not think that it is appropriate to divide the House on this amendment. We have heard what the Minister has said. If the Minister and his Government do not deliver on that promise, we will all be clear where the blame will lie if and when the project does what many fear it will do, in the words of Mr Frank Field, implode. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
69: After Clause 98, insert the following new Clause—
“Conditional indexed arrangements
(1) Schedule (Provision for conditionally indexed arrangements etc), which—
(a) amends section 84 of and Schedule 3 to the Pension Schemes Act 1993 (c. 48) (basis of revaluation),(b) amends section 51 of the Pensions Act 1995 (c. 26) (annual increase in rate of pension), (c) amends section 67 of the Pensions Act 1995 (restriction on powers to alter schemes),(d) amends Schedule 7 to the Pensions Act 2004 (c. 35) (pension compensation provisions), and(e) makes provision for consequential amendments for the operation of conditional indexation in relation to a scheme that satisfies prescribed conditions,has effect.
(2) The amendments made by Schedule (Provisionally for conditionally indexed arrangements etc) do not apply in relation to any scheme or arrangement in existence prior to the coming into force of this section.
(3) In this section, “conditional indexation” relates to benefits provided by a conditionally indexed scheme.
(4) For the purposes of this section and any regulations made under it, a “conditionally indexed scheme” is an occupational pension scheme within the meaning of section 1 of the Pension Schemes Act 1993 which—
(a) was established after the coming into force of this section,(b) is not a money purchase scheme as defined by section 181(1) of the Pension Schemes Act 1993,(c) provides that the future indexation of pensions both in deferment and in payment (at least the minimum rate required under section 84 of and Schedule 3 to the Pension Schemes Act 1993 or section 51 of the Pensions Act 1995, as relevant, as if those sections applied to conditionally indexed schemes) is funded for in accordance with Part 3 of the Pensions Act 2004, but is not a liability of that scheme such as to create an accrued right or entitlement for or in respect of a member unless and until it is awarded by the trustees or managers in accordance with such terms and conditions as may be prescribed,(d) complies with methods and assumptions prescribed for the setting of normal pension age, and(e) complies with such other requirements as may be prescribed.”
The noble Baroness said: My Lords, in moving the amendment, I shall speak also to Amendment No. 70. These amendments insert a new clause after Clause 98 and a new schedule after Schedule 2. They would allow conditionally indexed pension arrangements to be introduced into the UK. I will not weary the House with an extensive explanation of conditional indexation, because we covered that in some detail in Committee. These amendments are identical to those that I moved in Committee and I understand from the Minister’s officials that, if not perfect, they are fit for purpose. I shall go straight to the issue.
Defined benefit provision in the private sector is in terminal decline. The Association of Consulting Actuaries estimates that only some 900,000 private sector employees remain in schemes that are open to new members. A recent survey by Aon shows that one-third of private sector schemes which were open to new members a year ago have now closed. The Association of Consulting Actuaries’ survey of SMEs shows a situation that is even worse—91 per cent have closed to new entrants and 48 per cent have closed to future benefit accrual.
Recent stock market falls will bring pension deficits to the fore again and, unless something is done, boardrooms will increasingly take decisions which will place more and more pension accrual on a defined contribution basis. The director-general of the CBI has said that we need to “set employers free” to design schemes which are open about the level of benefits to be provided to members, but which do not necessarily have to provide everything.
The Government’s rather belated consultation on flexibility ended nearly two months ago and we have heard nothing about that review. We have a Pensions Bill before us and we may not have another for some time. It seems that the Government will let this opportunity pass and, therefore, we have to doubt the degree of commitment within the Government to finding flexible ways in which the complete eradication of defined benefit provision in the private sector can be avoided.
The Association of Consulting Actuaries has developed one form of flexibility, conditional indexation, which is contained in the amendments. This gives only a modest degree of flexibility to employers who cannot afford to meet the onerous indexation provisions set out in our pensions legislation. I remind the House that we are the only country which insists on the indexation of pensions before and after retirement. Conditional indexation does not abolish that, but merely allows it to be modified in certain circumstances prescribed in regulations. The funding of the scheme would continue to be overseen by the regulator, who we know has a vast armoury of powers to deploy to keep schemes well funded.
We do not believe that these amendments would stand in the way of the Government bringing forward further flexibility arrangements. Indeed, we hope that the Government will genuinely set employers free to design pension arrangements which they are comfortable operating. Flexibility is the only route to avoiding the whole private sector population being forced to migrate to defined benefit provision. That will, of course, leave the public sector with its gold-plated pensions, but the noble Lord, Lord Kirkwood, will speak to that issue when he moves his Amendment No. 74.
The Minister claimed in Committee that the Netherlands scheme, on which these amendments are based, is not well understood by members. It is more difficult to communicate the details of conditional indexation than plain-manila defined benefit provision, but I do not see why employers on that ground alone should be denied the opportunity to develop conditional indexation schemes. The plain fact is that employees do not have a high understanding of pension issues generally, and let no one pretend that DC pension arrangements, which are the prevailing private sector provision, are easy for employees to grasp.
The only other ground that the Minister offered in resisting these amendments was that we should await the outcome of the Government’s own deliberations on flexibility. The review is clearly in the long grass and I have heard nothing to suggest that the Government share the employers’ views that flexibility is urgently needed. We should grasp any possibility that may preserve defined benefit provision, albeit in a modified form. A small bit of flexibility today is worth many times more than the vague possibility of flexibility tomorrow. I beg to move.
My Lords, I have had some doubts about the conditional indexation model in relation to final salary schemes. As noble Lords will remember from previous debates, I have always been very much in favour of final salary schemes, and it is a matter for regret that a number of them have been disappearing. In my opinion, the problem with the conditional indexation model is that it could simply precipitate the flight from existing schemes to conditionally indexed schemes, even when employers have no difficulty in funding their current schemes.
There is a fine balance to be struck between encouraging employers to retain DB provision where they would otherwise switch to defined contribution schemes and not incentivising employers to switch to risk sharing where they would otherwise retain their final salary scheme. I understand that the Government are committed to considering regulatory change, as necessary, and I should be happy for that to proceed. However, I am not at all convinced that the effect of adopting the scheme recommended in the amendment would be the retention of final salary schemes where employers were not under any pressure, either financially or in any other way, to switch to DC schemes.
My Lords, the noble Baroness, Lady Turner, is probably living in a bit of a dream world if she believes that there are now many private sector schemes which are not under pressure, particularly given what has been happening to stock markets in recent weeks. Hundreds of billions of pounds have been wiped off the assets of pension funds in general, and even some of the strongest and best funded private sector pension schemes are clearly now in a much more difficult position.
I pay tribute to the work of the Association of Consulting Actuaries, which has had meetings with us and other noble Lords, and has done a great deal of work on these amendments. I think it is right to raise this issue and the fact that we need a middle way between conventional DB schemes, which are now under so much pressure, and defined contribution schemes.
However, I am not sure that I agree with the noble Baroness’s argument that, even if we are not certain that this is the right approach, we should table some amendments now and the Government can come back on them later. It seems to me that it is probably a little soon to set these out, and other serious organisations with a great deal of experience in pensions—I think particularly of the EEF—are sceptical about this way of doing things. I shall listen with great interest to what the Minister says but it is important that this matter is not kicked into the long grass. It is important that we explore the issue seriously and that the Government bring forward their proposals on conditional indexation soon. If the amendment is not accepted—and I believe that the Government do not want to accept it—I want to know what are they going to do and when.
My Lords, I thank the noble Baroness for tabling this amendment because it gives me a chance to update noble Lords on developments since we last debated this issue in Committee. Like the noble Baroness and other noble Lords who have spoken in this short debate, the Government are concerned about the trend of DB scheme closures. Back in July, when we debated these same amendments, we had just published a consultation paper, as has been acknowledged, on risk sharing. The paper was very wide-ranging and sought views on a number of proposals. It included material on risk sharing within the current regulatory framework, including what changes employers are making to their schemes, to illustrate what is currently possible. It also outlined some proposals for risk sharing put forward by stakeholders, which included conditional indexation restricted to new career average schemes or extended to all salary-related schemes, and collective defined contribution schemes.
We received more than 80 responses, which reflected a diverse range of views with no clear consensus. For example, a number of respondents to the consultation on risk sharing felt that the idea of collective defined contribution schemes was appealing in principle. In collective defined contribution schemes, employers would have certainty about their contributions and the financial risks would be shared between the members rather than between the members and the employer, but respondents also said that further work would need to be carried out before it could be implemented. Other respondents asked us to look at the legislative provisions that apply to cash balance schemes, which are structured like defined contribution schemes but where a member’s pension pot is not exclusively reliant on contributions’ investment returns. These schemes are treated by DWP legislation as defined benefit schemes because of the guarantee about the size of the pot provided by the employer. We are looking further at those issues.
While there was some support for conditional indexation arrangements and also for collective defined contribution schemes, a number of respondents expressed concern that the approaches set out in the consultation paper were too complex. Some wanted more radical and simpler solutions, and others asked whether the proposals were fair, in particular in the way that pensioners were treated. Some argued about specific further changes and felt that the current framework provides enough flexibility and that the opportunities for risk sharing that currently exist should be more widely publicised.
The question of demand for risk-sharing also arose in the consultation responses. Some of the views expressed chimed with the results from the recent research on employers’ attitudes to risk sharing that was carried out on behalf of DWP and published in August. The findings of this survey indicated that among employers in the study who provided pension schemes for their employees there was relatively little interest in risk-sharing approaches.
While the consultation responses have not presented us with a clear mandate for a particular approach to the issues around risk sharing, we are continuing to work urgently to identify the appropriate way forward. The Government are committed to doing all we can to support good employer pension provision, but we must find a solution that strikes the right balance between employers and scheme members. We should keep in mind that these issues are about redistributing risks away from employers to scheme members, not about eliminating or reducing risk. It is that balance that underpins our considerations. While we are looking at the conditional indexation option, we are mindful that some consultation respondents found it too complex.
It is crucial to take into account how well arrangements can be understood by members of schemes. If complex messages about inflation protection were to undermine confidence in pensions at a time of such economic turbulence, that would be a high price to pay. We must also bear in mind that if conditional indexation is introduced in the same form as in the Netherlands, there would be a number of resulting issues. For example, whether it should be accompanied, as there, by a buffer requiring schemes to be funded to around 130 per cent of their nominal liabilities and whether there should be 50 per cent member-nominated trustees.
I understand the argument that something has to be done quickly to slow the decline in defined benefit provision, particularly in the current economic climate. However, we should not consider adopting this amendment simply to be seen to be doing something if the outcome would be to create a system that is so complex that it would do nothing to help stop the decline. It has been said that it is worth introducing these amendments if they stop even one employer closing its DB scheme, but it is just not that simple. I understand that the ACA model would apply to new schemes only. If that is the case, there is a risk that that would create churn in the pensions market. Consideration needs to be given to the various options and their implications before we make any decisions on a way forward, including about what changes, if any, are needed. That would include consideration of the implications for the pensions regulator. The noble Baroness may be disappointed by my reply, but we are not prepared to rush into making changes to legislation without being clear that that is the right thing to do.
In response to the point raised by my noble friend Lady Turner, I reiterate that the ACA model before us is predicated on a career average scheme and would involve closing schemes and opening new schemes. She made an important point about considering not only the opportunities that might arise for some schemes but whether this would drive behaviours and encourage people away from their current provision.
Like us, the noble Lord, Lord Oakeshott, recognises the need to do something and to make progress but expresses scepticism about whether this model is the right one to adopt at the moment. If we were to conclude that we should introduce legislation along these lines, we could not, as the noble Baroness will appreciate, recommend adopting the amendments as they stand. We have real concerns that they are technically deficient—although I accept that the Government have the resources to address such technical issues—and would not deliver the kind of conditional indexation that the Opposition and the Association of Consulting Actuaries, which developed the idea, are proposing.
First, the amendments provide for indexation to be funded for as a liability of the scheme but specifically state that indexation is not a liability of the scheme, so as to create an accrued right or entitlement. It is therefore unclear whether a scheme would in fact be required to be funded so as to provide for indexation where indexation had not already been awarded. If no rights to indexation are to accrue to the member until awarded and therefore the scheme is not required to fund for them, this would in effect remove the requirement for indexation and make it discretionary. As I understand the ACA proposal, that is not the intention. In addition, the amendments could result in discrimination between early leavers and those who remain in the scheme until normal pension age, where the scheme is a final salary scheme. This is likely to be contrary to the requirements of EU legislation.
I acknowledge that these are extremely difficult issues with difficult judgments to be made, but I assure the noble Baroness that we have not closed the door on this option. I reiterate that we are working urgently on this issue and I do not preclude our returning to it at Third Reading. However, that is as far as I can go at the moment.
My Lords, I thank the noble Lord, Lord Oakeshott, and the noble Baroness, Lady Turner, for their contributions to the debate. The noble Baroness appears to think that there are employers who will be happy to continue with defined benefit schemes. We always thought that the banks would carry on with their rather generous schemes, but I would be surprised if boardrooms will be so comfortable going forward, given the ravages to their finances over recent weeks.
The trend in the private sector is clear. Defined benefit will disappear and it is just a question of time, unless something can be done to make the liabilities more manageable for employers. Those liabilities are large, unpredictable and difficult for companies to absorb. That is just a fact; I cannot tell the noble Baroness this in more straightforward terms. It is what the employer and business community believes strongly, which is why the director-general of the CBI made a plea for companies to be set free to design something that they would be comfortable in persuading their workforce was an appropriate set of benefits.
The Minister said that the Government are looking at their consultation on flexibility. Inevitably there are different views, because some people are clinging to the belief that defined benefit will be kept in place by doing nothing. That is simply not the case. This is a serious issue. It is a failing by the Government that they have not used this opportunity to do anything in the Bill to help defined benefit. The Bill drives further and further towards defined contribution; that is what it is all about. I deeply regret that the Government are taking that approach. However, I will not divide the House on the issue. The Government said that the amendments are technically deficient, but that is not the most important thing. I recognise that, if the Government set their face against flexibility, there will be none. The Government will be judged on their record on defined benefit schemes, as they should be. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
69A: After Clause 98, insert the following new Clause—
“Suspension of annuitisation order
(1) The Secretary of State may by order suspend any statutory provision or rule of law requiring a pension to be taken in the form of an annuity.
(2) The Secretary of State may by order renew an order made under subsection (1).
(3) The period for which a suspension order, made under subsection (1) or (2), has effect must be stated in the order and may not be less than 6 months or more than 2 years.
(4) Any order made under subsection (1) or (2) does not have effect until a draft has been laid before, and approved by a resolution of each House of Parliament.”
The noble Lord said: My Lords, the new clause is designed to meet a particular and urgent need. As the House knows, the present rules on annuities require people who have personal, defined contribution pensions to buy an annuity at age 75. The difficulty is that people are being required to do this in the midst of disastrously falling markets, with the effect that their savings—their pot of money—have been radically reduced, and the annuity that they can buy has been reduced with that.
The Minister knows my view that compulsory annuities should be abolished altogether. That was the view of your Lordships when we debated an amendment tabled by my noble friend Lord Hunt of Wirral last June. My noble friend now has Front-Bench duties, shadowing the noble Lord, Lord Mandelson, but I know that that remains his view.
I emphasise that the proposed new clause is not an abolition clause; nor is it an attempt to increase to 80 or 85 the age at which an annuity can be taken—a later amendment deals with that, but that is not the proposition here. The purpose of this new clause is to give the Government the power to suspend the rule that an annuity must be taken at the age of 75. It is as straightforward as that in its intent. If there are imperfections in the drafting I apologise, and I am not over the moon about the description “annuitisation order”. But I hope that the Minister will respond not on the technicalities but on the principle of bringing help to those men and women who need it now.
At the heart of the proposal is the scale of the present financial crisis. We do not need to look very far to find evidence. The Chancellor of the Exchequer referred to it as the worst crisis for 60 years. The deputy governor of the Bank of England, Charlie Bean, was even more explicit. Last week, he said:
“This is a once in a lifetime crisis, and possibly the largest financial crisis of its kind in human history”.
In terms of the impact on the real economy we are still in early days. I should add that this was reported first in the Scarborough Evening News, which shows that even today with the internet and 24-hour television, regional newspapers still manage to get their scoops. It was a remarkably frank and important statement.
Stock markets around the world have crashed and the value of pension investments has radically reduced. The FTSE and Dow Jones have seen massive falls; the Nikkei is now down to its lowest position for a quarter of a century. The impact on savers trying to build up a pension has been little short of catastrophic. On average the value of defined contribution pensions has reduced by about a third. Everyone has been hit; but most of all those who are in their 70s. At this point, I should declare an interest. I am 70. I am not sure whether that causes surprise to noble Lords who thought I was much younger or much older.
I am relatively fortunate as I have five years to make up the losses in my pension if, as we hope, the markets eventually recover. However, consider the position of a man or woman now aged 74 or 73. They have no time to make up their losses, but as the law stands they will be forced to take an annuity. The time axe will come down on them and they will be forced to buy an annuity with a radically reduced fund. Having bought it, it is likely to be a permanent diminution in their retirement income. That is why I want there to be the power to suspend the compulsory annuity rule. How long that rule remains suspended is a matter for the Government—or any Government who may succeed them.
To be fair, the Government have shown in a number of comments from Ministers—not least those of the Leader of the House of Commons—that they are aware of the difficulties and the need for action. We now want those expressions of sympathy converted into action. The only half-argument that I have heard against such a change is that the rule affects only a small number of people. I do not regard that as an argument for inaction. Injustice is still injustice, however small the number affected.
There are two additional points. First, we have already legislated to exclude the Christian Brethren, the Plymouth Brethren, who have a principled objection to the pooling of risk of mortality. I understand that that exclusion affects fewer than 1,000 people. Secondly, and more crucially, it is important for pensions policy generally that we—all parties—want to encourage as many people as possible to make provision through saving for their pensions. Presumably, that is common ground around the House. The sight of the compulsory annuity rule being enforced in the present financial crisis would damage all our efforts. It would be hardly surprising if people said, “What is the point of saving if at the end of the road we are forced to take the kind of loss that so many people are facing at the moment?”
This is a question of justice for the men and women who have saved for their future but have been caught in a financial storm that they had no way of influencing and very little chance of avoiding. We have the opportunity of avoiding that injustice this afternoon. I hope that it is an opportunity that the Government will take. I beg to move.
My Lords, my noble friend Lord Fowler is quite right to remind us that in last year's Pensions Bill we passed an amendment moved by my noble friend Lord Hunt of Wirral, which abolished the rule that people holding pensions must take an annuity by the time that they are 75. He and I were more than a little annoyed that in another place, the amendment was not even debated. It was deemed out of time because of the guillotine. My noble friend moved the amendment again in Committee earlier this year, although he withdrew it due to the Government’s enduring obduracy.
Time has shown just how percipient he was in moving it; but his amendment, although remaining the Opposition's long-term policy, needs to be adapted to the situation in which we now find ourselves. After the worst autumn for the economy that most of us can remember, the financial security of pensions has deteriorated significantly. I congratulate my former temporary boss and noble friend Lord Fowler on picking up on something that my right honourable friend Mr Hague said at Prime Minister's Questions on 15 October. Referring to the extraordinary economic times we are now in, he spoke with feeling about the pensioners who are forced to buy an annuity, perhaps on reaching retirement or, by law, at least by the age of 75. He made the point that they will be locked into a lower income for the rest of their lives.
In the amendment, my noble friend proposes a temporary suspension of those arrangements. To be fair, Ministers have said previously that they will look at that. Indeed, the right honourable lady Ms Harman, in response to my right honourable friend Mr Hague, conceded that,
“the impact on family finances, businesses and jobs has been sudden”.
“It is important to consider the question of the impact on people—albeit a small number of people—who have to buy their annuities within a certain period of time ... I know that the Department for Work and Pensions is talking to the Treasury about the issue”.—[Official Report, Commons, 15/10/08; col. 787.]
It is an old saying that talk is cheap. It is the results, if any, of that talk that matter, and, currently, as I am sure the Minister is about to tell us, the omens are not good. Notwithstanding the fact that we on these Benches have always believed that the Treasury was 100 per cent wrong to maintain the rule of compulsory annuitisation by the age of 75, we reluctantly accept the right of another place to put the boot in and say, “No way”. At least, we did. However, as the right honourable lady said last Wednesday, the situation has indeed changed, and for the worse. She claimed that very few were affected, but the number is growing.
If memory serves me right, the noble Baroness, Lady Hollis, told us in 1974 that we were worrying about only 1 per cent or so of pensioners. Last year, the noble Lord, Lord McKenzie, told us that it was 3 per cent of those in the group with pension pots of more than £100,000, although both figures now need to be updated. The last figure that I heard was 5 per cent, but the exact figure hardly matters when the Government admit that Amendments Nos. 78AP and 78AQ on the buy-back of state pensions, welcome though they are, will help only a maximum of 110,000 people. As my noble friend Lord Fowler has said, alternatively secured pensions were invented for fewer than 1,000 Plymouth Brethren. Not only that, the £100,000 figure on which annuity rates are quoted has become totally meaningless. In October last year, the FTSE 100 stood at a smidgeon under 6,500. On 1 October this year, it had fallen to 4,959.60. By 16 October, it had dropped through the floor, and closed at 3,861.40. Over the weekend, it dropped again, and significantly, stood at 3,765 at lunchtime today. The net result of all this, as my noble friend Lord Fowler has just pointed out, is that the FTSE is down by more than 30 per cent this year.
It is not impossible to believe the NAPF when it says that pension pots, too, have shrunk by more than 30 per cent; nor that, according to Aon Consulting, assets of direct contribution schemes have plummeted from £552 billion to £395 billion, despite the £6.7 billion of contributions paid in by employers and employees during the year. These figures are already out of date because they are last week’s figures. Doubtless the situation is even worse today, as we are told that the FTSE dropped another 5 per cent at the end of last week. In other words, the £100,000 on which annuity rates are quoted has become less than £70,000.
What a time to take your annuity. It is no good the Minister saying, as I expect he will, “You should have taken it earlier”. Hindsight is a wonderful thing, but in this case it goes against the grain of human nature, particularly in uncertain times when people will delay taking out their annuities for as long as possible in the hope that the Stock Exchange will rise. That is precisely why the Government need in their back pocket the statutory instrument that my noble friend proposes. It is not, as he said, a blanket abolition of compulsory annuities; it would enable the Government to be flexible at a time of their choice but at a time of severe volatility on the stock market, which is precisely what we are seeing now.
My Lords, my noble friend Lord Fowler has tabled an amendment at a critical moment, particularly for pensioners. Fate has done me a good turn. I was 75 on 30 April this year. I took my annuity at the time, and I am very relieved that I did. The present situation is undoubtedly extremely hard on those who are six months younger than me. They have saved all their lives, and have had a self-invested pension plan. They have taken risks because we have to do so if we want to improve our lot. That is what everyone wishes to do. But to have at this point a shotgun marriage of a pensioner of 75 with his annuity is criminal. I hope that the Government understand that the present situation is unusual, very bad for anyone with money in the stock exchange, and particularly so for anyone who has to take an annuity by law when they are 75.
My Lords, I am nowhere near 75 so I do not need to declare an interest, but I am extremely concerned about this. If we look at the root cause of the financial catastrophe unfolding around the world, it is clear that it is about people borrowing too much and not saving enough. Surely we should be doing everything we can to encourage people to save for the future. I strongly support my noble friend’s amendment, although characteristically he has been more moderate than I would have been. I do not think we should have this rule at all, and I believe that my noble friend is of the same view. But in the interests of pensioners who are going to suffer real hardship, it is a sensible and moderate compromise.
I do not envy the Minister if he does not accept the amendment today because it will seem rather inexplicable when the Government can find huge sums to bail out the Royal Bank of Scotland and the Bank of Scotland. I mention those two banks in particular as their shares are typical of the kind held by elderly people. They believed that they were safe as houses and they considered the size of the dividend. The shares are part of their pension schemes, and now partly because of the Government’s insistence that no dividends are available, the funds are devastated. So even if the Minister is not able to accept the amendment now, I hope that the Government realise that there is real hardship and that the people who are suffering are those who have done the right thing—they are the people who have put money by.
If, we are to recover in the long term, to coin a phrase from Keynes who seems to be very fashionable on the Benches opposite these days, we will do so because people and Governments put money aside for a rainy day. People should be encouraged to save. The tragedy for those who have done that, particularly with this Government—we saw it in the changes to the tax rules for dividend income and in the Government’s toing and froing on what people could and could not invest in their SIPPs—is that they are beginning to think, “I am not sure I will be safe by putting my money into a pension scheme because the Government can act in an arbitrary way and change or alter the rules at any time”. Surely we should be liberalising the rules as far as we can, consistent with not putting a burden on the welfare state. Again, I support my noble friend’s amendment, and if the Government are serious in their rhetoric that they will help people through this crisis, and if that has any value at all, surely the oldest and most vulnerable in our society who have done the right thing should benefit first from that rhetoric.
My Lords, I shall not vote on this amendment if the noble Lord, Lord Fowler, proposes to put it to a Division, but it is a sensible proposal, and I should like to say why. I have supported it on previous occasions.
Perhaps I may start where I suspect my noble friend will be coming from—this has been alluded to by other speakers. The argument is that it will affect only a tiny percentage of people; the 3 to 5 per cent of the well-to-do who, if they can postpone taking an annuity until they are 75, must have other resources on which they can live and therefore this is relatively marginal to their financial well-being. In any case, it is argued, their savings pot has been protected and wrapped around with generous financial subsidy because it is meant to be exclusively a retirement income and not available for other purposes. While I hope that I am wrong, the argument I suspect my noble friend will adduce is that, first, it is a matter only for the well-to-do who are cushioned by other resources; and, secondly, that it goes against public policy for which the tax privileges of pensions were designed. Let us take a moment to unpick those two arguments because I do not think they are valid, and have not been so for some time.
The first government argument is that it affects only a tiny percentage of people. It may well be true that the people now coming up to their 75th birthday who have resources sufficient that they have been able to avoid annuitising so far are the well-to-do. However, that is because that generation has moved out of a DB world in which very often the pot has been accumulated through a change of life savings or in some other way. Now the predominant form of pensions in the private sector will be the DC scheme. I made a rough, 10 year-old-type maths calculation that someone on average earnings over 40 years, with real growth of 3 per cent, if that is not unrealistic, is now likely to build up a DC pot of around £300,000 to £400,000. That means that over the next 10, 15, 20, 30, 40 years what will matter to people is not what the current rule is for someone now approaching 75, but what they see themselves, in an almost aspirational way, as reaching.
Why would someone seek to increase their contribution to a DC scheme if in addition to the investment risk in, the disinvestment risk out and the longevity risk they are taking also have the additional risk imposed on them by government of the timetable, the guillotine? As the noble Lord, Lord Fowler, said, any wise Government wishing to encourage savings would seek to abate, as far as they can, some of the risk associated with a DC scheme, one of which is the arbitrariness of the 75 rule. It is a form of risk unlike conditional indexation and some of the other matters we have discussed. In a DC scheme, you do not have the protection of the PPF—although you do have the protection of the TPR—and there are many areas in which people are exposed, but this is an additional area of risk that is man-made, government made, and could be done away with.
The Government’s second argument is that this is heavily protected by fiscal privileges; it is designed for retirement and therefore it should not be available as a lifetime income but should be turned into an annuity. That is all very well, but let us suppose that at the point you suspend it you extend that suspension and insist that at 75 you take an annuity from that pot of, if you are in a DC scheme, £300,000 or £400,000 which is sufficient to cover your need to draw down on benefits, and that that would take perhaps £120,000 at 75 or £150,000 earlier. Let us also suppose that you make a fiscal adjustment to remove the tax privileges, which might be 30, 35, 40 per cent, leaving you out of your pot of £300,000 to £400,000 with perhaps £100,000 clear. If that were the case, what on earth would it have to do with the Government what you did with the rest of the pot, provided you had paid back your dues? If you do not fall back on benefits and you have an annuity to protect you against that, and if you have had the fiscal addition removed from you, then the rest of your money is, frankly, nothing to do with government.
On the contrary, the Treasury would make a profit. Not only would the fiscal protection be returned back to the Treasury but those moneys as income would generate income tax and possibly eventually IHT returns. There would be an impact on cash flow but the Treasury would not be out of pocket. What would happen is that the additional revenues would be going back not to other members in the pot but to taxpayers as a whole.
For those reasons, the case that the Government have run in the past—that it affects only the well-to-do who are not at risk and that these were privileged savings which should be taken only in the form of an annuity—should no longer apply. Like the noble Lord, Lord Fowler, I would like to see this rule removed subject to those two conditions: an annuity so that you never have future recourse on to public funds and the removal of the tax privileges. In the present tsunami, it is even more vital.
What are we saying to pensioners? Here we are, seeking to increase the basic state pension from 2012 by linking it to earnings and, with the help of your Lordships, seeking to help women improve their basic state pension. We are, however, saying as a Government, “Fine, but if you have a pension that you’re going to annuitise, we are willing to see it fall by between 30 per cent and 40 per cent from what it would have got six months or a year ago”. Why? We do not need to do that. We can put in the protections to make sure that this is not an unreasonable and advantageous thing for the well-to-do. Why add to the risk and penalise people at a difficult time in their life when the Treasury has nothing to lose by protecting them and everything to gain? It would be a win-win for all of us.
My Lords, I agree with every word that the noble Baroness has just said. I declare a rather unpleasant interest, in the sense that I fit two of the categories that have been described here. I am shortly to be 75 and I had an excessive investment in the Royal Bank of Scotland and other banks, because my stockbroker thought that they were a good dividend yield that would produce the sort of income that was needed in a pension scheme. All pension schemes are now going to be wrecked by the Government’s decision that dividends from banks should not be paid for a long time to come.
I rise, though, for another reason. I suspect it is possible that the Minister may introduce a topic that has already been referred to today, and which, if a quotation in one of last week’s papers is correct, led the Chancellor of the Exchequer to say, “Oh, there’s no need to do this because there is already an escape route. An alternative is already in place”. It is the escape route that my noble friend referred to as having been designed for the Plymouth Brethren. He said it applied to only a tiny handful of people. In fact, that rule is never restricted to the Plymouth Brethren; a large number of people took it up because they saw a way of avoiding estate duty. The Government intervened, perfectly reasonably, to stop that escape route, but the proposition that you can take out an alternative secured pension remains. Indeed, I have one.
For some time, I have had what is known as a drawdown arrangement in my personal pension scheme—managed by my broker, not tucked away in an insurance company or in any other way—and therefore do not have to buy an annuity. I do not begin to understand why, if the Government are prepared to allow that escape route, they are going to be so rigid about giving a rather wider escape route to all those who have not followed that route and for whom it might be quite difficult to enter into an alternative secured pension and a drawdown arrangement in the final months before the annuity rule applies to them.
If it is right and proper that a considerable number of pensioners can manage their affairs in this way, and quite a lot of them do, I see no possible reason why the Government should object to my noble friend’s other proposition that there should be a temporary escape mechanism—that is all he is suggesting—during this horrendous moment when the markets have been plunging through the floor. Like a number who have spoken, I think the whole rule should be dropped altogether, but let us be content for the moment with the amendment and rescue those people who do not have the escape route that I have provided for myself. I hope, and it is just possible, that some of my investments may recover in time for me to get rather a better pension than it looks as if I might at the moment, but at least I will not be forced in the next five months to buy an annuity at almost the worst possible moment.
If the Chancellor is saying, “It’s all right, I don’t have to do anything; there’s an existing escape route”, he should warmly embrace my noble friend’s proposition and offer an escape route for all those facing the kind of desperate situation that I would have been in if I had not already taken the drawdown and alternative secured pension route. I am not a member of the Plymouth Brethren, and there was no actual restriction applying it to them. There were statements that that was why it had been introduced, but a large number of people who do not belong to the Brethren have alternative secured pensions. It is a legitimate thing to do, and the Chancellor and the Government are now apparently saying so. Let us have no more nonsense; let us accept my noble friend’s amendment and give hope to a lot of people who are otherwise in a pretty desperate state at present.
My Lords, I, too, hope that my noble friend the Minister and the Government will find themselves able to look sympathetically and constructively at the amendment tabled by the noble Lord, Lord Fowler. I should like to reiterate a couple of points that have been made.
We have seen in recent years a substantial move towards people saving for their pensions by way of defined contribution schemes. The Government have smiled upon this; they have certainly not discouraged it, and all the signs are that that trend will continue. Although many people in defined contribution schemes must certainly be deeply worried about the future of their pension savings, there is, I think, no likelihood—and the present nightmare events in the stock market only reinforce this—that we shall see a return to defined benefit schemes as the norm, so people will have no choice. But as things are, and given that no one has been able to devise a way to smooth the exit into an annuity for people saving in money purchase defined contribution schemes, they face a kind of Russian roulette, and it is the responsibility of the Government to do what they can to help those people secure themselves in circumstances which could be absolutely catastrophic.
The other point to reiterate is that the Government want people to save more. They want people to work for longer and to be more flexible about the moment of their retirement. You must have a pensions regime that supports them in that approach and in taking those decisions. The noble Lord, Lord Sanderson, said that the present circumstances in the market are very unusual, and indeed they are extreme. However, market fluctuations are entirely normal and, that being the case, it must be wrong to require people rigidly to annuitise and take their pension at a fixed age, certainly in the circumstances we are considering. It could be cruel and even ruinous to require people in defined contribution schemes to take their annuity according to the letter of the present law. So I very much hope that my noble friend will be able to tell the House that the Government are indeed looking urgently and seriously at the very sensible and practical proposal that the noble Lord, Lord Fowler, has put forward.
My Lords, I, too, support the amendment of the noble Lord, Lord Fowler. A number of us in this House think the current annuity provisions and requirements are wrong anyway and need changing. The amendment does not do that: it simply meets the current circumstances that are facing people. Yes, we have had and always will have ebbs and flows in the stock market, but the current situation is different. There will be no going back; once people have taken their annuity at a much lower return, that will decide their pension for the rest of their lives. There is fairness in the amendment, so I look forward to the Minister’s response. It seems fair and equitable to realise and accept that these are extenuating circumstances. There is a time factor related to the amendment, and I hope that the Minister will say that he will move on it.
My Lords, it seems to be the fashion in this debate for most, if not all noble Lords, to declare their age and pensions arrangements, so I am happy to declare mine. I am 61, so I could be buying an annuity—I just have a defined contribution pension—but, luckily, I have a good salary and do not need to do so now.
If I were older, the last thing I would want is a temporary suspension, be it for six months or two years, not knowing where I stood. I am afraid that the speeches that we have heard, particularly the powerful speeches from the Conservative Benches, are effective in favour of not this amendment but Amendment No. 77 or Amendment No. 77A, in my name and that of the noble Lord, Lord Fowler, which would permanently raise the limit by a significant number of years. The point has been made very powerfully that people will need a few years to rebuild their pension pots, which have been cruelly savaged by recent market movements. I congratulate the noble Lord, Lord Fowler, on finding an ingenious way to bring his amendment up the batting order, but many of the arguments are essentially those with which we shall deal later.
Anyone who has experience in long-term pension planning would not and could not support an unknown and temporary suspension. This proposal appears to have been drafted on the back of a fag packet by the noble Lord’s right honourable friend David Cameron a week or two ago. We have not seen it previously. I remember jointly moving in this House an amendment with the noble Lord, Lord Higgins, to raise the limits to 85 and then to 80. Even if noble Lords feel that there should be no limit, surely the practical way to deal with the present situation is to support one of the later amendments to raise the limit either to 80 or 85. This amendment produces just uncertainty and confusion. How we do know when the markets will be more normal again? Surely we need at least five years for people who have 30 per cent or 40 per cent of their pot to rebuild it. That is the proper way to do it.
My Lords, I appreciate that there is in history perhaps less experience of government on the noble Lord’s Benches, but it sometimes helps to provide a Minister with a way out having rejected one thing. Given what is at stake here, which is many people’s livelihoods and pensions, would it not be sensible for the noble Lord to treat the amendment as giving the Government a way out, which can be reviewed subsequently, and deal with the matter immediately at hand, rather than being gratuitous in his comments about my right honourable friend’s fag packet? This is an attempt to provide the Government with a way out to help people who are in real need. Does he not see that?
No, my Lords. I have probably rather more experience advising Governments either than the noble Lord or the right honourable David Cameron. I was a special adviser in the 1974 Government when conditions were even more turbulent, which is why I say what I say. I also have 32 years’ experience of pension fund investment management. I believe that serious people in government have been thinking about compromise, which would, by however many years the limit were raised, be sensible and sustainable in the long term, but no serious Government would be able to accept the way forward proposed by the amendment. That is why I do not think that this proposal will work and we will not be able to support it. However, I hope that noble Lords will support Amendment No. 77A of the noble Lord, Lord Fowler, which is very sensible.
My Lords, I support the noble Lord, Lord Fowler. The amendment is a modest but effective way of dealing with the present, unfortunate situation, which will affect a lot of people. I shall also support the noble Lord, Lord Oakeshott, later. The amendment is a sensible way forward. It deals with the crisis at the moment and behoves us to support it.
My Lords, I was quite amazed by the various contributions to the debate and became more convinced as it wore on. Being 75-plus, I am glad, I suppose, that I have been able to take my annuity, although I wriggled like mad at the time, because, it will not surprise any noble Lords to know, annuities are not my favourite subject and they discriminate against women.
I am amazed by the views of the noble Lord, Lord Oakeshott, on this amendment, because I see it as being a temporary arrangement that cannot last for more than two years. My goodness, if the situation that we are now in lasts only two years we will be very lucky indeed. The amendment has a degree of flexibility attached to it, although I am equally likely to support raising the age of retirement, not least because I shall again have the opportunity to argue my case about the sex discrimination that exists. What the noble Baroness, Lady Hollis, said, with her background and knowledge was, as always, convincing in every way, although I also thought that the noble Lord, Lord Fowler, moved the amendment very thoroughly. I am just surprised that so little attention has been given to any of this in the other place.
My Lords, this has been an interesting debate. I will start by comforting noble Lords with the fact that the Government do not feel that they need a way out of this issue. I very much agree with the noble Lord, Lord Oakeshott, that the debate has been around 75 or some other date. It has not focused on issues of temporary suspension. That is a significant issue. Stakeholders out there in the pensions community are not enamoured of this suggestion either.
As the noble Lord, Lord Fowler, said, we face a global financial crisis that is imposing lots of challenges. The noble Lord, Lord Forsyth, said that we should be doing everything that we can to encourage people to save and I very much agree with that. That is why the Government have taken action to produce stability in the banking system through the measures that the Prime Minister and the Chancellor have announced. That is why the measure that is before us today in this House—and has been for several weeks—is about automatic enrolment into pension schemes to encourage further saving. That is why the Government introduced the PPF to protect people who might have lost their savings and, after some challenging debates, have dealt with VAs to protect people who lost their pension savings. That is why we strengthened the role of the Pensions Regulator, which we will come on to later. We have been encouraging people to save in this environment.
The amendment would allow suspension of requirements to buy an annuity by the age of 75. I will take this opportunity to clarify that there are no such requirements on the statute book. The noble Lord, Lord Crickhowell, hit the nail on the head with understanding what the regime says. The requirement is to have started to draw an income—either through an annuity, a pension scheme or, since 2006, an alternatively secured pension. There is nothing that says you have to annuitise by the age of 75. That is an important distinction and I want to reiterate that: nobody is forced to buy an annuity with their pension savings.
Indeed, my noble friend Lady Hollis advanced the proposition, as she has before, that people should be able to take a modest income out of their pension pot and withdraw tax savings, and then the rest has nothing to do with government policy. In essence, that is exactly what alternatively secured pensions achieve. Under an ASP, you are required to take between 55 per cent and 90 per cent of the annuity value of the pension pot. If there is anything left at the end of the day not taken as an income it has a tax exit charge. That is exactly the proposition advanced by my noble friend.
My Lords, is it not remarkable that, having tried desperately to minimise the number of people who took this route and suggesting that it was only introduced for a small number of religious objectors, the Government now turn around and say, “There has never been any pressure to buy an annuity. It is entirely a myth that has been thought up by the Opposition”? This is an extraordinary statement from the Minister, and an extraordinary development in government policy.
My Lords, it depends upon the precise arrangements. In some instances it goes to charity but, if it goes to people with heirs, then there is an exit charge on it which does exactly what my noble friend was proposing: drawing and clawing back the benefits of the accumulative tax relief that has been achieved.
That is how it works, so people must face three alternatives by the time they reach the age of 75. The additional flexibility introduced by the Government in 2006 allows people to leave their pension funds invested indefinitely beyond the age of 75 and an alternatively secured pension. The only requirement is to draw down an income from the fund of at least 55 per cent of that which would have been provided by an annuity. Consequently, suspension would only really benefit those who do not need to take any income from their pension savings and who may therefore wish to use them as a means of making bequests partly funded by the taxpayer.
I see the noble Lord, Lord Forsyth, bristling at this point; let me see if I can help him. Should you sadly die before reaching the age of 75, and before an income has been crystallised, then, routinely, the fund goes tax-free—free of inheritance tax to survivors. Of course, once you are into an income-crystallisation event—whether annuitisation or an alternatively secured pension—that is not the case, as I have just discussed.
I am aware of the strength of feeling on this issue; I have seen it in today’s debate. However, I ask noble Lords to consider the implications of such a suspension, the point that the noble Lord, Lord Oakeshott, focused on. A temporary suspension of the income requirements, either just for annuities or for all means of drawing an income, would add uncertainty, complexity and cost both to those making pension savings and the companies providing pensions and annuities. Those approaching retirement would face uncertainty about the choices that they must make and when they must make them. Annuity providers and pension companies would be faced with the same uncertainties and the additional costs in terms of system and literature changes that may well be passed on to consumers. There are systems in place that are currently geared to events at the age of 75. If you had to suspend them, not knowing when they were going to be reinstated or at what time, that would present real, practical commercial challenges to providers; go and talk to them and they will tell you that that is the case.
We should also consider the message that would be sent out to people by instigating such a suspension. There is a risk that those approaching retirement would believe that taking an annuity is not the right thing to do. While delaying annuitisation may be something that some people decide is in their best interests, and which they are free to do under the current framework, there are vital issues that they would have to consider in taking such a decision. After all, there is no guarantee that their assets will improve or even maintain their value. It is also possible that annuity rates could fall, potentially reducing the income available. In combination, a stagnation or fall in asset prices alongside a fall in annuity rates would have a severe impact on the income available from a person’s pension savings. For anyone relying on their pension savings to support themselves in retirement, these are serious risks. It would be irresponsible for the Government to do anything which could lead people to delay taking their pension income and expose themselves to such risks without fully thinking through the consequences.
There are also problems inherent in allowing an option to extend suspension. This would compound the uncertainty faced by consumers, companies and advisers. Those approaching retirement need certainty and stability. Those advising savers and those providing income products need to know that the rules which govern them are not subject to change on the basis of an undefined set of criteria.
The approach to retirement is an important and potentially complex time for many people. Pension companies begin to contact people with their options up to a year before they reach retirement age. For a suspension to be introduced potentially without the necessary lead-in times would do little other than cause confusion and could send out the wrong message to those faced with a very important decision about their future income.
I appreciate that in the current economic climate there are real concerns about the impact of the falls in the stock market on retirement incomes. However, the impact of these falls will not necessarily feed through directly into the value of an individual’s savings. The amount of income that a pension fund would provide via an annuity is based on two main items, annuity rates and fund size. Recently, rates on annuity levels—the most popular form—have increased due to rising corporate bond rates and are now around a five-year high. It is also important to remember that pension funds rarely invest exclusively in equities. Other investment methods have not been affected in the same way, and therefore not all pension funds will have suffered the same reductions. Indeed, many pension schemes offer a “lifestyling” option. For stakeholder schemes, it is mandatory for the default option to include lifestyling.
I hope I have explained that a temporary suspension is unnecessary because current rules already allow flexibility to delay annuitisation beyond age 75, and potentially damaging because it would create enormous uncertainty impacting on all parts of the pension system, from individual savers to advisers to pension companies.
My Lords, I am sorry to keep intervening, but is my noble friend arguing against the amendment on the ground of pre-emption because, if it were passed, we could not then discuss the subsequent Amendments Nos. 80 and 85, which, given his emphasis on the uncertainty of this as opposed to other ways forward, might be measures that he would favour?
My Lords, I am perfectly happy to offer my noble friend the Government’s view on those amendments when we reach them. As regards the amendment we are discussing, I argue that temporary suspension is simply not the way to address this. It would compound a challenging issue. My noble friend rightly referred to the fact that people are building up increasingly bigger pots in DC schemes. If you project forward 20 or 30 years, particularly with auto-enrolment, that will increase substantially. However, in the second quarter of 2008, there were something like 114,000 annuity sales, nearly 40 per cent of which were for pots of less than £10,000 and only 13 per cent of which were for pots in excess of £50,000. Therefore, we are a long way from that situation at the moment.
I am disappointed that when we debate this matter the focus of attention is on people at or around or approaching 75, whom I have sought to deal with. However, we have not discussed people who might be in more challenging circumstances—those who annuitise early because they need the income. Those people have very real deadlines driven by their economic circumstances. Frankly, I am more concerned about those people than those who have the options I have outlined. I think that the temporary suspension is the worst of all options that we face at the moment.
My Lords, at the end of the noble Lord’s remarks, which, like some of my noble friends, I found almost unbelievable, he referred to people needing to take an annuity at an earlier stage. Surely the whole point about that decision is that it is influenced by their individual circumstances; it is not imposed by government or anyone else.
My Lords, I thought we were discussing the practical circumstances that people face and what current equity values have meant for individuals. I was simply making the point that if somebody needs to convert their pot into an income because they need that income, that is very much a deadline for them now, even though they may not even be close to 75. That point is reinforced by the fact that only 5 per cent of people annuitise after 70.
My Lords, frankly, that was a deeply disappointing reply from the Government. The Minister talked about uncertainty. The uncertainty is caused by the worst financial position that we have had in this country in living memory; that is the uncertainty that would-be pensioners are living with.
It is significant that out of 10 speakers apart from the Minister, only one, the noble Lord, Lord Oakeshott, argued against the amendment. I thank my noble friend on the Front Bench for his support, and I thank my noble friend Lord Sanderson. My noble friend Lord Forsyth pointed out that the people who we are harming are those people who have done the right thing and have saved for their retirement. Surely the aim of policy should be to help them, not to damage their interests. The noble Baroness, Lady Hollis, made a powerful speech, which was made all the more powerful because of her knowledge as a former Pensions Minister. She rightly said again that the impact of this will be on future pension policy, and it will be profound. We want to encourage pension saving, not discourage it.
The noble Lord, Lord Crickhowell, made a very interesting point about alternatively secured pensions. The Government have suddenly become the greatest supporter of alternatively secured pensions. We never heard that argument from the Government before; up to now, they have regarded it as a bit of a loophole. Up to now, they have said, “Okay, the Plymouth Brethren can do it”. I had not realised that this was a central plank of government policy, or that they were putting it forward for everyone up and down the country. I had not realised that they were saying to financial advisers and banks, “Please tell people to take alternatively secured pensions”. This is entirely new; I do not remember that argument. If the Minister will forgive me for saying so, it is a very odd line. He is really saying, “We have this rule on compulsory annuities, but take a bit of advice and you can get around the rule”. It is the most extraordinary excuse that I have heard from a Minister for many years.
I thank the noble Lord, Lord Howarth, and the noble Baroness, Lady Dean, for their interventions. The noble Baroness said that there were ebbs and flows in the stock market, but we are not dealing with ebbs and flows. The comment made by the deputy governor of the Bank of England, Charlie Bean, was:
“This is a once in a lifetime crisis, and possibly the largest financial crisis of its kind in human history”.
That is not an ebb and flow; that is a crisis. The Government keep on saying that they will have policies to help people through this crisis. We challenge them to provide something in this area, and they do absolutely nothing.
The noble Baroness, Lady Greengross, with her vast experience in this area, also supported the amendment, as did the noble Baroness, Lady Howe. The only person who argued against it was the noble Lord, Lord Oakeshott. To be honest, I am puzzled by his position, although I could put it more strongly than that. He seems to basically be saying, “If you will not have my amendment, you cannot have any other amendment”. I am quite happy to go with my amendment if that is his only argument. The fatal flaw in his argument is that he is arguing for annuities at the age of 85. I do not see any sign whatever that the Government are going to give in to that position, so the noble Lord is arguing with the Government about annuities at 85. If the Minister wants to stand up and say that he will introduce annuities at 85, I am happy to give way, but I very much doubt that he is.
In those circumstances, I really would ask the noble Lord, Lord Oakeshott, to reconsider his position, because he is going forward on a proposition that will be rejected by the Government. This is the whole case—and I do not doubt the noble Lord’s goodwill—but we are both putting forward proposed solutions, and the Government are saying no to everything. This is a moderate, middle-of-the-road proposition.
This is a question of justice for men and women who have saved for their future, but have been caught in a financial storm which they have had no way of influencing and very little chance of avoiding. We have an opportunity of seeking to deal with that injustice. That was the challenge to the Minister which he was unable and unwilling to take up. In those circumstances, I would like to test the opinion of the House.
[Amendment No. 70 not moved.]
Clause 100 [Effect of entitlement to guaranteed minimum pension]:
71: Clause 100, page 53, leave out lines 7 to 15 and insert—
“(5) The Secretary of State must require the Government Actuary or Deputy Government Actuary (“the Actuary”) to prepare a report on how actuarial equivalence should be determined for the purposes of this section.
(5A) In preparing the report the Actuary must consult such persons as appear to the Actuary to be appropriate.
(5B) The Secretary of State must lay the report before Parliament.
(5C) Having considered the report, the Secretary of State must by regulations make provision for determining actuarial equivalence for the purposes of this section.
(5D) If any recommendation in the report is not followed in the regulations, the Secretary of State must prepare and lay before Parliament a report explaining why.”
The noble Lord said: My Lords, before I explain Amendments Nos. 71 and 72, it might help the House if I briefly remind noble Lords of the Government’s proposals with regard to additional state pension simplification. Under our proposals, people retiring from 2020 will have all their accruals of the different forms of additional state pension up to 2012 rolled up into a single consolidated cash value. This will greatly simplify the way such pensions are calculated.
Broadly speaking, for individuals contracted out of SERPS—the additional state pension between 1978 and 1997—a contracted-out deduction needs to be applied to the consolidated amount. The contracted-out deduction, which can currently vary in relation to the additional state pension, both before and after retirement, will need to be fixed using the principles of actuarial equivalence. This new deduction will be calculated so that it has the same overall actuarial value as the contracted-out deduction under the current rules. The new deduction can then be taken from the consolidated SERPS pension.
I turn to Amendments No. 71 and 72. In Committee, following amendments tabled by the noble Baroness, Lady Noakes, I agreed to consider whether it should be mandatory for the Government to commission a report from the Government Actuary’s Department on determining actuarial equivalence. It has always been the Government’s intention to commission such a report from the Government Actuary’s Department. The amendments I have tabled will make that mandatory. I have also considered whether it should be mandatory for regulations to be made based on that report. While it is absolutely right that the Government should fully consider the impartial Government Actuary’s report, the final decision on whether regulations are made with reference to that report should be a government decision. To do otherwise would, in effect, go against an important principle of legislative competence, which is that it is for the elected Government of the day to propose legislation and for Parliament to approve it. However, to ensure openness, our amendments commit the Secretary of State to lay the Government Actuary’s report before Parliament. Regulations setting out how actuarial equivalence will be achieved will be subject to debate in both Houses. Furthermore, should the Secretary of State not be minded to follow the recommendations in the Government Actuary’s report, we are proposing that a report must be laid before Parliament explaining why. I hope that I have been able to reassure the noble Baroness that we have taken on board the key concerns that she raised in Committee and that she will understand why we have not been able to agree absolutely 100 per cent. I beg to move.
My Lords, I thank the Minister for tabling this amendment. I was much encouraged in Committee when he said that he viewed my amendments “with some warmth”, but of course when we got down to the small print in his detailed response he revealed a difference of view about who should call the shots on actuarial valuation. That difference remains today.
The amendments that I spoke to in Committee made it clear that it should be the Government Actuary who determines actuarial equivalence. That is, after all, what actuaries spend all those years learning to do. The Government’s amendments leave the discretion in determining actuarial equivalence with the Secretary of State. I cannot ever recall a Secretary of State having an actuarial qualification and so being qualified to opine on actuarial equivalence.
The truth is that the Government like to pick and choose actuarial assumptions, as we have seen, whether it was DWP Ministers or Treasury Ministers working behind the scenes. When it came to contracted-out rebates, they ignored the Government Actuary’s advice on the basis of something that they called “sustainable affordability”.
I accept that the Government have improved on the clause that they introduced initially, as they must now involve the Government Actuary and explain to Parliament if they do not follow his advice. Moreover, the regulations will be subject to the affirmative procedure. On that basis, I have decided not to seek further amendments and to accept my half a loaf.
On Question, amendment agreed to.
72: Clause 100, page 53, line 17, at end insert—
“( ) In section 185(2) (consultation) at the end of paragraph (c) insert “or 46A(2); or”.
( ) In section 186(3) (parliamentary control) before paragraph (a) insert—
“(za) regulations made by virtue of section 46A(5C), or”.”
On Question, amendment agreed to.
Clause 112 [“Implementation Period”]:
73: Clause 112, page 58, line 28, leave out “or decree” and insert “, decree or declarator”
The noble Lord said: My Lords, Clause 112 sets out the timescale for a pension compensation credit to be implemented. The four-month period begins on the later of two dates: the transfer day or the first day the board is in receipt of the relevant documents. The relevant documents include a decree or order relating to the divorce, dissolution or annulment. This technical amendment adds “declarator” to that list. A “declarator” is a term in Scottish law that is in some cases used instead of a reference to an order or decree. For the reference to annulment in the clause, reference to “declarator” needs to be added in order to cover the position in Scotland, where the types of annulment in question come about by declarator of nullity. This amendment ensures that the provisions are triggered in the same way whether in Scotland or in England and Wales by accommodating the different terminology used in the different jurisdictions. I beg to move.
On Question, amendment agreed to.
74: Before Clause 123, insert the following new Clause—
“Independent Public Sector Pensions Commission
The Secretary of State shall establish an independent commission to be called the Independent Public Sector Pensions Commission to evaluate the terms, benefits and costs of public sector pensions; and report to Parliament within two years of the day on which this Act comes into force.”
The noble Lord said: My Lords, the provenance of this new clause, tabled in my name and that of my noble friend Lord Oakeshott of Seagrove Bay, was my looking, over the summer, at the debates in your Lordships’ House on the 2007 Pensions Bill. In June of that year, my noble friend eloquently moved a not dissimilar amendment in Committee. Indeed, the amendment was more widely drawn in that it would have provided for an independent commission with a remit to analyse research and provide information on pension costs and public policy issues over the longer term. I am grateful to other colleagues who have tidied up some of the wording, which improves the new clause which, for the purposes of clarity, is intended to be of permanent standing and not a temporary commission.
Over the summer I was able to draw on the very important publication of the Pensions Policy Institute, of which I am a governor. In 2008 it published an assessment of the Government’s reforms to public sector pensions. If I were concerned before, I was even more concerned after reading the document at some of the gaps in our knowledge in looking forward—very long term—to some of these important areas of public policy. The Pensions Policy Institute looked at the background to the 2002 Green Paper, which reformed public service pension provision, and at how those changes impacted on public sector employees, how the financial stability of the schemes were improved over the longer term, whether it closed the gap between public and private pensions, and whether public sector pensions made up for lower pay, which was an important part of the underlying argument when the Government changed the scheme for public sector pensions.
The report treats the subject very seriously; it repays careful study and I commend it to colleagues. It has convinced me that Parliament does not yet have all the facts in the public domain to enable it to make sensible and objective decisions about the future costs that the country may be facing in this important public policy area. These issues are not new; they have been debated before, but bringing them back in this Bill is important. For the reasons that we have just been discussing on annuities, the situation on pension provision is now more acute this year than last. Last year’s concerns are even more relevant and need consideration in today’s uncertainty about the future of savings schemes generally and private sector provision particularly, which is being delivered more and more through defined contribution schemes.
There is great potential for this issue to be debated in a non-constructive way; a lot of ill-informed comment can be expressed. Big numbers are involved in unfunded liabilities, and the rest, which can scare people. In the run-up to the next general election, debate may be less informed than it might be if we had transparent access to the facts. The Government can state that the 2002 Green Paper reforms were put in place and are only just maturing—the last of them were introduced in April 2008—but, by accepting the new clause, which seeks greater transparency in the future, they would have a better chance of instilling in the electorate confidence that they are taking the issue seriously. Indeed, it needs to be taken seriously.
I want to quote from this important PPI report. First, the section dealing with the financial stability of public sector schemes puts the debate into context, as there are issues that need to be considered.
The paragraph headed:
“Will the reforms improve the financial sustainability of the”,
public sector “schemes?” states that:
“Public sector pensions are projected to grow more quickly over the next twenty years than any other area of state spending for which long-term projections are available. Over this period, spending on unfunded public sector pensions is projected to grow from 1.0% of GDP to 1.4% of GDP in 2027/8, after allowing for the savings from the recent reforms. This is an increase of 40%, which compares to an increase of 17% for long-term care, 16% for health and 14% for state pensions over the same period”.
Of course, those are percentage increases, not absolute figures—we must bear that in mind—but that gives us a sense of the extent to which the current provisions after the reforms will build in long-term state spending over the next 20 years or so.
The latest estimate for the future unfunded public sector pension schemes liability that I have been able to find is from 2006. The figure is set at £650 billion. It would be of great interest to know whether the Government have a more current estimate of unfunded liability than that. Obviously, as the report makes clear, it depends a lot on discount rates, but the House is entitled to a much more up-to-date figure than one from 2006, which is likely to be higher than £650 billion. If the Minister can tell us the current estimate of liability, that will be very useful.
I have also not been able to find whether the Government have published an overall estimate of the year-on-year cost savings that they would expect in future as a result of the 2002 Green Paper reforms. We know—the then Chancellor, Prime Minister Brown, told the Treasury Select Committee—that the Government were anticipating saving about £13 billion over the next 50 years. That sounds like a big saving, but when you consider that there is a public sector contribution of £10 billion each year to public sector pensions, that puts it in context.
Just using those two examples, I make the case that it is nearly impossible, as far as I can judge with the information available to me, to assess the long-term affordability and sustainability of the 2002 Green Paper reforms. If that is the case, that is a serious matter for Parliament and it becomes an issue of what steps we need to take to get hold of that information so that judgment can be made.
I have no difficulty with the principle of unfunded public sector schemes being paid for by the taxpayer. I understand that those are contracted, negotiated arrangements between employers and employees, and that the trade unions take the very strong view that pension payments are deferred pay; I perfectly well understand all those issues. I am making no judgment about that in the proposed new clause; I am saying that we do not have the information available to us as policy-makers to make sensible judgments on important matters over the long term in the area of public provision of pensions.
I refer back to some of the advantages that we have been able to derive from work done by what were, admittedly, ad hoc groups in the past. I remember that the pensions provision group, which preceded the Turner commission, made a valuable contribution on the state pension sector some years back. The Turner commission also made a tremendously important contribution by illuminating, in a way that was trusted and independent of government, the whole background to the pension reforms that the Bill introduces. It helped to establish the consensus necessary to resolve some of these problems. The Pensions Commission comprised Miss Jeannie Drake, John Hills and Mr Adair Turner, as he was before he came into this House. It was not a big operation, a huge quango or a huge establishment, but it made a tremendous contribution to the way in which policy was debated after the report was produced.
The proposed new clause seeks to set up a standing body with characters of that calibre who are independent and are within the sequency of government and the department’s circle of knowledge so that they have access to the best, most relevant and up-to-date figures, working with the Government Actuary’s Department and regularly furnishing high-quality information that looks a long way forward. This is not the stuff that is easily traded in a normal political debate; it is an attempt to get more objectivity. Much of it is estimated, because many changes can be made in 20 years. The research and analysis that are available through such a route are invaluable when trying to get a better handle on exactly what provision needs to be made in Parliament.
Unless things are happening that I do not know about, the Government are not spending enough time looking at ageing as a policy. Ageing is not just a DWP issue; it affects everyone. I read papers at the weekend that reminded me that people in the 50 to 64 age cohort and the 64 to 75 age cohort have a much higher carbon footprint than other age groups. There is a whole raft of ageing-related issues. By 2031, the country will have 27 million people over 50 years of age. That is 41 per cent of the population. It will substantially change the way in which we run public services, and is not debated to the extent that it should be. The independent commission suggested by my proposed new clause is only part of that. The proposed new clause which my noble friend Lord Oakeshott tabled last year would have had a better chance of addressing broader pension provision. If the exclusive focus on public sector provision is too difficult for the Government, any truly independent commission set up to look at pensions should start by looking at the potential imbalance between public and private sector provision in the next 20 years. Perhaps that is what the Government are setting their face against in the amendment.
The House should look at tests that need to be met over the long term. I read with great interest the comments made by the noble Lord, Lord Turner, in Committee last year. He rightly talked about affordability, and the reasonableness of expenditure relative to the other public needs, being a cardinal test that needs to be passed. He also talked about fairness relative to the private sector. The PPI report adverts to this, and although it does not make judgments, it shed light on the relativities between the private sector and the public sector.
Another point made by the noble Lord, Lord Turner, concerned fairness within the public sector with regard to two-tier provision. Some final salary schemes have had to close because of the inherent discrimination involved. I do not want to find that, because of lack of forethought, preplanning and active, dispassionate consideration, public sector pensions suddenly become a hot political potato because they could be seen to be unstable at some point in the future. The only way that Parliament can be sure that it is attending to these important matters timeously and in a way that allows thought to be directed at the problems is with an independent commission in charge of its own agenda, working in a standing capacity and providing information in a transparent manner. That is what Parliament needs to make sensible decisions in these areas in the future. I beg to move.
My Lords, I am sure that the noble Lord will not be surprised to learn that I oppose the amendment. I do so because the present salary and pension structure for civil servants is the result of agreements between the Government and the unions, and because it is generally accepted that the pension package is an element of deferred income. As has already been stated, this is a question of deferred pay for the civil servants covered by the package. It is true that the present arrangements are non-contributory, but I understand that Civil Service salaries are effectively reduced by around 6 per cent in comparison with similar employment in the private sector to account for the non-contributory aspect.
We really are not talking about highly paid people. The average Civil Service pension is around £5,400 a year, with a quarter being less than £2,000 a year. Any attempt to make savings in public sector pensions will have a greater impact on women pensioners who have lower pensions than men due to their lower average salaries and shorter service records. Furthermore, if those pensions are taken away, the taxpayer will fund further payments under pension credit, since the people who would be disadvantaged if this package were removed would be those eligible for pension credit. As we all know, many of those who are eligible to receive means-tested benefits do not actually get them. Pension credit is not an easy way of covering the loss to those who otherwise would be compensated through the Civil Service pension scheme.
I understand that Civil Service pensions have already been through a process of evaluation and reform. The principles for reform of the scheme were agreed by the Government and the TUC in the Public Services Forum in October 2006. These principles recognise that public service pensions are a key benefit of public service employment and should be celebrated as such. It is important to maintain their good quality through retaining defined benefits and index linking. That is an important commitment. If the amendment to establish a commission was accepted, those covered by the present arrangements would be concerned lest the Government attempted to go back on what has already been agreed in the process of negotiations. I therefore urge that the amendment should not be accepted. We discussed this proposal during proceedings on a previous pensions Bill and the House rejected it. I hope that it will do so again. We have a negotiated agreement and there would certainly be difficulties if it was thought that any attempt was being made to go back on what has already been agreed. I suggest that this amendment should be decisively defeated.
My Lords, we wholeheartedly support the principle behind the amendment just moved by the noble Lord, Lord Kirkwood, and I agree that the recent report from the Pensions Policy Institute is valuable because it illuminates what we know and what we do not yet fully understand. We on these Benches have warned for some time that the increasing disparity between the pension benefits available in the public sector and those in the private sector is unsustainable. Increasingly, the country reflects a tale of two workforces. The latest official statistics show that employee membership of defined benefit schemes in the private sector continues to fall, with around 1.5 million still in open DB schemes, although the Association of Consulting Actuaries uses a much lower figure of around 900,000. On the other hand, 5.2 million people are in public sector defined benefit schemes which are obviously still open. Not only do these schemes give full DB benefits in retirement, they often have much earlier retirement dates than in the private sector.
The result is a huge cost burden which taxpayers have to pick up. Some of the schemes are funded, which is imposing a considerable cost on the services to which those employees are attached, but as the noble Lord, Lord Kirkwood, pointed out, many schemes are unfunded. The noble Lord also told us how difficult it is to get a fix on how much is actually involved, partly because of the delay in the numbers coming out and partly because of the assumptions that are used. If we add together some figures that were available in 2006 and 2007, we believe that the estimate on the Government’s assumptions is around £760 billion. But those figures use the perfectly ludicrous assumption of AA corporate bond rates in the discounting when it is obvious that the only correct rate to use for the state’s liabilities is the risk-free gilt rate. If that rate is used, the Institute of Economic Affairs earlier this year came up with a figure of £1,071 billion, which itself is out of date because the figure will be higher even now. But just that figure represents 73 per cent of GDP. That is what is overhanging our economy, which, as we know, is in a precarious state as it is.
If the Government were a private sector company, which of course they are not, the answer to the financial facts would be clear, because we can see what boardrooms have been doing consistently over recent years. They have been closing their defined benefit schemes to new entrants and have been revisiting whether or not future accrual would be modified or possibly even stopped. What has happened in the private sector is plain, and I outlined it earlier when speaking to my conditional indexation amendment. However, the Government live in a completely different world.
I understand what the noble Baroness, Lady Turner, said about a negotiation between Ministers and the TUC, but the plain fact is that that negotiation has sold taxpayers down the river. The solution at the end of that negotiation was a minimalist one, and there could not have been less produced. The noble Lord, Lord Kirkwood, gave us the figure of £13 billion over 50 years—around 1 per cent of the total liability on the assumptions I discussed earlier. Indeed, it is interesting to note that when the noble Lord, Lord Turnbull, was with us—he has much expertise in this matter and it is a shame that he is not in his place today—he described all criticism of the deal as entirely justified.
Noble Lords on these Benches find it difficult to support amendments that involve public expenditure. I am not sure that a pensions commission to look at public sector pensions would necessarily involve a large amount of public expenditure, and could even be contained within the margins of the DWP’s existing provision, but it is important to know how much it would cost. As I have explained, we believe that there is a big issue here and that any responsible government should address it in the future, if only because there will be anger from taxpayers who have to sustain a level of pensions that they themselves cannot even hope to have. Whether we need a report to make that happen is perhaps a moot point, but the issue is very important and one that must be addressed.
My Lords, I thank my noble friend for his remarks about my eloquence last year. I hope he will be rather more effective than me in getting this amendment through the House. I share very much the concerns of the noble Baroness, Lady Noakes, about the figures she quoted and I hope she will feel that if there is a very modest element of government expenditure involved in the amendment it is a drop in the ocean compared with the potential savings and the importance of properly identifying what are the costs of allowing these liabilities to continue.
I again pay tribute to the Pensions Policy Institute and the Nuffield Foundation which financed its excellent report on assessing the cost of public sector pensions which has recently been published. They have performed a signal service for informed debate in this crucial area. As always, the report is written in balanced and measured tones, but the figures contained in it are a substantial and devastating analysis of the unfairness and unaffordability of public sector pensions today compared with the clearly much poorer pension provision for the rest of our citizens who have to pay for the public sector pensions. Who does the noble Baroness, Lady Turner, think is paying for these pensions? Their costs come from taxpayers, and council taxpayers in particular, who, on average, have less good pensions by far than people in the public sector.
I shall quote some of the figures for the noble Baroness. I do not know whether she has read this balanced report but, on average, employers in the public sector contribute £4,000 per year per employee whereas the figure is £1,600 in the private sector. On pay rates, the report points out that there is no general pattern of public sector pay being lower than that in the private sector. It states that in the comparison between private and public sectors,
“women and low-skilled male workers seem to be paid relatively more on average in the public than the private sector. High-skilled male workers are paid more in the private than the public sector”.
So there is no general pattern. It goes on to say that,
“around 20 per cent of private sector employees who earn between £100 and £200 a week are members of an employer-sponsored pension scheme, compared to around 70 per cent of public sector employees”.
The noble Baroness referred to costs, but the negotiations and reforms that she mentioned have had the effect, basically, of producing savings of tuppence ha’penny in the pound on the total cost. The effect of those changes on the taxpayer—and remember the taxpayer is the employer here—is to reduce the employer contribution from 24 to 21 per cent in public sector pension schemes. For example—and this is for new entrants only—in the Armed Forces, the police and fire service, which are the most extreme versions, the contribution has been reduced from 37 to 33 per cent. Again, there is a distinct difference between the retiring age—or the pension age, should I say—in these sectors. So the changes have been very small. In the previous debate we were talking about how the value of private sector pension savings and pension schemes has been seriously affected—that will not change any time soon—but the figures today are even more dramatic.
No one is saying that the public sector should not go on having high quality pension schemes. What we are saying is that there needs to be proper, detailed, independent, regular analysis, as the Turner commission proposed, of what the costs are and how they should be paid for over the longer term.
My Lords, we have debated this topic before, as the noble Lord, Lord Kirkwood, and others have acknowledged. We recognise the importance of the issues raised by the noble Lord and I am happy to try once again to reassure him about our intentions. Much of the previous debate perhaps was less about the relevance of a commission—I understand that the proposition is for a standing commission rather than an ad hoc commission—and more focused on the position of public sector pensions as portrayed.
Our opposition to the amendment is not an attempt to avoid discussion of these important issues; nor does it reflect any reservations as to the usefulness of a commission in subjecting fundamental issues to rigorous scrutiny and establishing consensus on the way forward. As I have made clear, we are enormously indebted to the noble Lord, Lord Turner, and his colleagues for the work of his commission. However, that work having been completed, we feel the priority now is to implement the reforms to pension arrangements in both the public and private sectors that have been agreed in the light of the Turner commission’s findings. Noble Lords should note that public sector pension schemes have been undergoing major reforms. This was referred to in a somewhat dismissive way. The reforms already agreed or in train should mean that these schemes remain affordable.
I shall outline some of the changes that have taken and are taking place. All major public sector pension schemes have been under review since the 2002 pensions Green Paper and, as a result of these reviews, reforms in these schemes are now well under way. These reforms aim to ensure the long-term sustainability of the schemes. Thus far, agreement was reached in May 2006 with teaching unions on a set of reform proposals for the teachers’ pension scheme, and a new scheme has been operating since January 2007. Cost sharing with employees and capping of the employer contribution rates form a part of the scheme rules laid down in legislation. The Cabinet Office announced a new Civil Service scheme which has operated since July 2007 and which also included in amendments to the scheme rules laid before Parliament in September 2008 cost sharing and capping. The NHS employers implemented new arrangements for the NHS pension scheme which are also inclusive of cost sharing and capping from April 2008. The new local government pension scheme has been operating since April 2008 and is also due to incorporate cost sharing and capping arrangements. These reforms to the NHS, teacher, local government and Civil Service pension schemes ensure that any future increases in costs will be fairly shared between employers and employees. In addition, the cost capping mechanism will ensure that there will be an upper limit on the cost to the taxpayer should costs increase. Eighty-two per cent of public sector workers are now covered by cost sharing and cost capping.
Reforms also include increases in normal pension age for new entrants from 60 to 65 for the three main central government schemes, and the local government scheme includes arrangements to phase out the rule that has enabled scheme members to retire without a reduction in pension before reaching that scheme’s normal pension age of 65. New schemes for the Armed Forces, police officers and fire fighters have already been introduced in 2005 and 2006. So there has been a significant change.
It is suggested also that there is a lack of information about public sector pensions. A large amount of information is already publicly available on the terms, benefits and affordability of schemes. Public service pension schemes are monitored on a regular basis through built-in mechanisms such as the annual resource accounts and evaluation reports on the majority of schemes. Alongside these, in 2004 the Government introduced an annual evaluation of the financial sustainability of spending on unfunded public service pensions as part of a long-term public finance report published by the Treasury. The latest report, published alongside the Budget Report 2008, makes it clear that the long-term spending on unfunded public service pensions is affordable and sustainable.
I say to the noble Baroness, Lady Noakes, that one can come up with all kinds of figures depending on what discount rates you apply to projected streams of figures, but the real test for unfunded schemes should surely be the Government’s ability to fund them year by year on a long-term basis. That is exactly what the long-term financial report seeks to address.
I do not believe it is necessary to establish a commission further to review or evaluate these schemes. Indeed, we fear that such a body, which could not come free of charge, would act as a destabilising influence, a point made by my noble friend Lady Turner, compromising the successful implementation of reforms that are starting to deliver better value for taxpayers. I hope that the noble Lord is reassured by what I have said and will feel able to withdraw his amendment. I suspect not.
My Lords, I am grateful to the Minister for that reply, but it just will not do. I set myself a little test of whether we would be given two particular figures. The first was the Government’s figure for unfunded liability, and I noticed that we did not get an answer to that. The figure was from 2006, but this is 2008. These are big sums of money. Speaking for myself as a parliamentarian, I think we are entitled to that level of information at the very least.
The second thing that I was anxious to see whether the Government would share with us was the essential year-on-year cost saving from the 2002 Green Paper reforms. Answer came there none on that question either. If the Minister cannot give me figures for these things, that illustrates the fact that this is very hard. He talks about available information, but some of it is technical and you have to know where to look for it. I did my best over the past week to get all the information that was available to me. If I had not had the Pensions Institute’s report, I would have been struggling to form a view about whether this was a sensible thing to do.
There is a huge amount at stake here, and this is an issue for Parliament. If we as parliamentarians are willing to let the Government get away with not being required to produce the information that we need to make objective decisions, we are not doing our job properly.
My apologies, my Lords; I did not address those specific questions. With regard to the unfunded public service pension liabilities as calculated, the latest figure I have is the one the noble Lord cited, £650 billion. That figure looks at a stream of payments and applies some form of discount rate to it.
I urge the noble Lord—this is the more important thing—to look at the projections for public service pensions that are made in the long-term public finance report, because they reflect the agreement made in 2005. The latest report, published in March 2008, showed that expenditure on unfunded public service pension benefits remains affordable; it is projected to increase from around 1.5 per cent of GDP to a maximum of 2 per cent over the next 50 years. I remind him, when he considers those figures, that they partly reflect that there are now more people working in the public sector than in the past: more nurses, more teachers, more doctors. We should be pleased about that. However, the sustainability of that can be seen in the long-term public finance report.
My Lords, I am also grateful for that, although the Minister refers me back to a document that I have already been looking at. Something like a Turner-commission view of that technical document would be much more useful to me as a policy-maker. Of course the Government produce raw technical data, but having an oversight on a long-term basis by people who have a lot of experience in the field, as all three of the Turner commissioners had, adds value in a way that such a commission would but which the raw data that the Minister has adverted to just do not supply.
I am a simple seeker after the truth. We do not have the information we need to do the job properly, and the amendment would be a way of guaranteeing that all we had was the facts. If that destabilises anything, then that is seriously sad. If people are upset by others being required or commissioned to think about these things carefully and put information into the public domain, then I am sorry, but as a parliamentarian I cannot do the job that is asked of me unless I get the kind of information that at the moment is absent. The amendment is a way of putting that information into the public domain in a way that could be trusted and would help in the long term in an important area of public policy. I would like to test the opinion of the House.
75: Before Clause 123, insert the following new Clause—
“Parliamentary pension scheme member-nominated trustees
(1) After section 241 of the Pensions Act 2004 (c. 35) (requirement for member-nominated trustees) insert—
“241A Parliamentary pension scheme: member-nominated trustees
(1) This section applies to a scheme which is set up under section 2 of the Parliamentary and other Pensions Act 1987 (power to provide for pensions for Members of the House of Commons etc).
(2) The requirements of section 241 shall apply to the trustees of such a scheme subject to the following modifications.
(3) Section 241(2) shall be read as if for paragraph (b) there were substituted—
“(b) are selected as a result of a ballot in which all the eligible scheme members are given the opportunity to vote.””(2) Regulation 2(i) of the Occupational Pension Schemes (Member-nominated Trustees and Directors) Regulations 2006 (S.I. 2006/714) is revoked.”
The noble Lord said: My Lords, I will be brief as I believe that the proposed new clause will give the Minister the opportunity to say where government thinking has progressed on this point. As I explained in Committee, my aim is basically to bring into line the rules on trustees of the parliamentary pension scheme with those that apply to other contributory schemes, particularly in the election of those trustees.
As this Bill and other pensions measures show, we are very eager to set down requirements for occupational schemes generally, but when it comes to the parliamentary pension scheme—of which, to declare an interest, I am a member—there is a statutory exclusion from those requirements. The prime example is in the election of some trustees. My amendment would mean that at least a third of the trustees were elected—as is the case outside—rather than appointed, as is the case at present. Currently, eight out of 10 trustees of the parliamentary scheme are serving MPs, appointed by the Whips. One is a Member of this House but he is appointed; recently one member has been nominated by the association representing former MPs but, again, he is appointed.
The proposed new clause is not an attack on those appointed members; even less is it an attack on Sir John Butterfill, the chairman of the pension trustees, who has carried out some very valuable work trying to modernise the governance arrangements of the fund. But the fact remains that all the trustees are appointed, which is an unsatisfactory position. It is, and was, unsatisfactory for other occupational schemes and it is unsatisfactory here. In my view, contributing members to the scheme and retirement members should both have the right to elect some of the trustees—in my view, about a third.
In Committee, the Minister responded helpfully to this case and suggested that I meet with the Leader of the House of Commons. I received an encouraging reply from Harriet Harman, and earlier this month I met with her then deputy, Helen Goodman. Again, that meeting was encouraging and useful. Among the points that have now become clearer are that, first, the parliamentary fund could move to a position of elected trustees without the need for legislation at all. The legislation does not exclude the possibility of making such a change. Obviously, I would like the Minister to confirm on the Floor of this House that that is the position. Secondly, one possible model would be to have two sets of elections. A college, made up of contributing MPs and Members of this House, would elect one part, while a college made up of retired MPs and Peers would make up the other. Again, I would like the Minister to confirm that such an arrangement would be possible. Thirdly, and most importantly, my impression is that the Government are sympathetic to this principle. All the words so far uttered and all the correspondence that I have had leads to that conclusion. In other words, they see the advantage and justice of having elected trustees. Obviously, I would like the Minister to confirm that and what they intend to do about it.
I very much hope that we can settle this in agreement. It is difficult to argue that all-appointed trustees are necessary for the parliamentary pension fund but not for any other scheme in the country. It would be ironic if this obvious extension of democracy were rejected for, of all schemes, the parliamentary scheme. Frankly— and I have précised my case because of the remarks I made in Committee—the ball is now in the Minister’s court, and I wait to hear how he replies. I beg to move.
My Lords, perhaps I may be even briefer than the noble Lord. At an earlier stage, I strongly supported the case advanced by my noble friend. I would add one other good reason to those that he listed: when things go wrong, as they occasionally do—and they have gone wrong in the case of the parliamentary scheme—and corrections and adjustments have had to be made to people’s pensions, there is a great deal more confidence in those who are managing the scheme if it is known that they are elected and that the pensioners have had the opportunity to elect and know exactly who represents them, and that there are adequate means of communication between the trustees and those who represent them and pensioners. That was not exactly the case in the past. I hope that the discussions that my noble friend has described will lead to a satisfactory outcome to this problem.
My Lords, I support the amendment, and do so as a former chairman of the Parliamentary Contributory Pension Fund up to my retirement from the other place in 2001. Perhaps I may make one comment about the parliamentary scheme, which is frequently misunderstood in the media. The parliamentary pension scheme gets wrapped up with all public sector pension schemes, which are unfunded so frequently are non-contributory, as though it were exactly the same as them. The parliamentary pension scheme is like any other private sector pension scheme in that it is contributed—indeed, at one point, for much of my career in the other place, the members’ contribution was 9 per cent of salary, and I discovered that only 4 per cent of all occupational pension schemes had a members’ contribution as high as that—and it is funded. There is a Treasury contribution, but it is usually negotiated quite tightly and simply represents the contribution that a company would make in the private sector. The parliamentary pension scheme is very similar to all the private sector occupational pension schemes, which have other legislation applied to them.
As chairman of the parliamentary pension fund, I got the first pensioner trustee nominated, the noble Lord, Lord Stewartby, but as my noble friend Lord Fowler said, he had to be appointed. He was a very good trustee, but it was an appointed arrangement.
If I had looked at this proposal during my time as chairman, I would have been a little hidebound by the fact that, as I understood it then, it would have required a small legislative amendment, and small amendments of this kind do not command high priority in any government programme. However, if, as my noble friend has just said, this is not necessary, that objection disappears.
The Pensions Act 2004 considerably increased the responsibility of trustees and the methods by which they became trustees, and that, too, has changed very much since my time. I have always supported the Association of Former MPs in seeking for a pensioner trustee or trustees, as have occupational pension schemes in the private sector.
I have since become chairman of three pension funds, one of them very large. The contribution of the pensioner trustees is extremely valuable because they raise points that those who are still employees would not raise. As my noble friend said, it is peculiar that we have not yet been prepared to bring the legislative requirements for the parliamentary fund into line with those which we impose on all pension funds.
There is a lot of expertise in pensions in the other place. Elections for the member-nominated trustees would bring about much additional expertise and be valuable to the pension fund. For all these reasons, I hope that we can make progress and get this proposal implemented whether by legislation or otherwise.
My Lords, I speak with some trepidation as the only non-member of the parliamentary pension scheme to contribute to this debate. The noble Lord, Lord Fowler, makes a strong case, and, as he knows, we on these Benches are always in favour of election rather than appointment.
My Lords, I thank the noble Lord, Lord Fowler, for the chance to update the House on the Government’s position. I fear that I may disappoint him for the second time today on the substance of his case, but I am happy to update him on the process and the way forward.
I say to the noble Lord, Lord MacGregor, who made reference to the parliamentary pension scheme, that the Senior Salaries Review Body is undertaking a major review of the arrangements, although it is not expected to report until later in 2009. As the noble Lord, Lord Fowler, indicated, I have previously committed to facilitate engagement with ministerial colleagues so that the issues raised by him could be considered further. I am pleased to say that this consideration has taken place, and I understand that the noble Lord met the former Deputy Leader of the other place on 1 October to discuss his proposals. I understand, as the noble Lord suggested, that the meeting was helpful to both sides, and although a new Deputy Leader, my honourable friend Chris Bryant MP, was appointed in the recent reshuffle, I can assure the House that he is already engaged on this matter and is very happy to continue the dialogue with the noble Lord and others with an interest. Indeed, I am aware that a number of representations from other parties have been made since the noble Lord, Lord Fowler, tabled his amendments in Committee.
The noble Lord has raised a number of concerns. He has, however, acknowledged that the position relating to the ability to draw on professional pensions expertise in the running of the parliamentary scheme has changed in recent years. This is an important point that is worth reiterating, as there has been considerable work undertaken.
I have been given assurances that the secretariat to the trustees is now staffed by suitably qualified pensions experts, and that the day-to-day administration has been outsourced to a reputable third party. I understand that the current trustees have the broad range of skills and experience that a body of this type looks for, and that they have either sat the relevant examinations of the Pensions Management Institute or are undergoing a course of study.
Member involvement is the other issue which the Deputy Leader is looking at. As the noble Lord knows, there is already involvement in the running of the parliamentary pension scheme by members of the scheme. The scheme regulations require all the trustees to be either Members of the other place or former Members who are entitled to a pension from the scheme.
However, it is essential that noble Lords have confidence in the running of the scheme and it is clear that changes might be necessary to the appointment process to instil a sense of ownership. The Deputy Leader will continue to explore ways of doing this with the noble Lord, Lord Fowler, and other stakeholders.
I must admit that we do not believe that the major changes that the noble Lord proposes are appropriate at this stage, particularly in advance of the major review of the parliamentary pension arrangements announced by the Leader of the other place in a Written Ministerial Statement on 17 June. The interaction between the various pieces of legislation is complex and we do not yet have a consensus on exactly what should be done. As such it is right that we continue to look at and talk about this issue.
I assure the noble Lord, however, that, as the former Deputy Leader of the other place made clear in her meeting with him, any changes to the selection process and, if it is felt appropriate, the removal of the Pensions Act exemption could be achieved without the need for primary legislation, which is one of the points on which the noble Lord pressed me particularly.
The noble Lord also asked whether electoral college arrangements would be possible. I understand that that would be a possible option and we are continuing dialogue to get started on subject and other options. I hope that I can indicate to the noble Lord a degree of process, although the key point is that dialogue should continue. Certainly, my honourable friend in the other place is keen for that to happen. Any changes that might need to flow from that dialogue do not need primary legislation and do not need to be dealt with in this Bill. I hope that that will satisfy the noble Lord that there is some movement on this although I suspect that it is not as robust and fast as he would like.
My Lords, the Minister can say that again. He said “not as robust and fast”, but this is snail-like progress. It certainly does not in any way fulfil the implied promise in the comments of Ministers up until now. I noticed the careful phrases that the Minister used when he talked about the appointment process, and the careful way that he managed to steer away from the concept of elections. If you are in any other pension scheme the power to elect trustees is a matter of right. That comes with the rations and rightly so.
My noble friend Lord Crickhowell made an important point: if things go wrong the fact that there are elected trustees, who are to some extent accountable either to contributing members or pensioners, helps the matter considerably. My noble friend, Lord MacGregor speaks with the experience of a past chairman. He said that this is a contributory scheme and the Pensions Act 2004 laid down further duties on the trustees. Frankly, I can see no reason whatever why similar rights should not be given to contributing members or retired members of this scheme. That is the position in every other scheme and I cannot see why it cannot be extended to Parliament.
It seems absurd that Parliament, the home of democracy, does not allow this kind of step forward. The Minister’s reply bordered on reactionary in the sense that he offered nothing. Perhaps I overstated that and that he is offering talks. Very well; my colleagues and I will seek to have talks on this issue. However, at the next stage of the Bill this is something that can be brought back. Although we do not require legislation to change the pension scheme, the Bill does not exclude legislation to change that scheme. It is with the background that talks might be entered into that I will pursue this matter with the Minister and the Deputy Leader of the House of Commons. In the mean time, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
76: Before Clause 123, insert the following new Clause—
“Annuities: form of consent
A provider of a pension scheme must not sell an annuity unless the purchaser has signed a form of consent, to be prescribed and kept under review by the Financial Services Authority, so as to ensure that the purchaser is fully aware of the options available to provide best value annuities in relation to matters including, but not limited to—
(a) ill health,(b) employment,(c) smoking,(d) place of residence,(e) inflation protection, and(f) any dependents’ benefits after the purchaser’s death.”
The noble Lord said: My Lords, this is a straightforward amendment designed to make it crystal clear to both buyers and sellers of annuities that the full range of options must be available, including enhanced annuities. I am old enough to remember that they were called impaired annuities when they first came in, but that was before the insurance company marketing departments got to work and decided to put a rather more favourable spin on them.
There is an important fundamental point here. Initially, this started when companies offered better rates to smokers or people with diabetes or cancer, but many people are now able to benefit from the fact that there is an enormous discrepancy in life expectancy, even within cities. For example, in Glasgow compared with Bearsden, which is literally five miles away, there is a difference in life expectancy of more than 10 years. The same is true in Sheffield, as my right honourable friend Nick Clegg has pointed out. The real scandal is that, because people are not properly advised by their insurance companies of their options when they come to buy an annuity, only a quarter of those who would be eligible for these best-value insurance annuity products currently buy them. Some 500,000 people retired in Britain last year and more than 400,000 bought annuities, but the best estimates are that people who did not take advantage of this option lost about £1 billion in pensions. That is a sophisticated industry ripping off some of its most vulnerable customers. It is cheating them out of a chunk of their life savings, in many cases, in a way that cannot be rectified. Once you have bought your annuity, that is it for life.
The insurance industry has been making some changes. The Association of British Insurers, partly under pressure from some effective journalism and obviously from speeches in this House and another place, has moved to some extent. But I do not believe that it has moved enough. I have had useful meetings with Legal & General, the leading provider of annuities and the biggest annuity supplier in the field, which would be happy to see more specific requirements for these options to be made available to people. I have not discussed the exact wording of my amendment with Legal & General, but it would prefer to go further than the rather general guidance coming from the Association of British Insurers.
In drafting this amendment, I have tried to place the responsibility on the Financial Services Authority, not necessarily to draft the form, but to approve a standard form that all insurance companies must show people buying an annuity, and people have to sign to say that they have read it. If not, people will not have the proper confidence that they have been given those options. We have to face the fact that a commercial issue is involved. By doing this, insurance companies may lose business by having to say, “You could do better elsewhere than the rates we are offering you”. There is a hard commercial issue here, but given the fact that the insurance companies are sophisticated and that consumers are not, a serious issue of consumer protection is involved. We believe that this is the right way to ensure that this rip-off—and I say that advisedly—does not continue. I beg to move.
My Lords, I for one find this a curious amendment, as the noble Lord, Lord Oakeshott, knows because we discussed it last week or possibly the week before. It is clearly well intentioned, because it is certainly in pensioners’ best interests to get value for money when annuitising their pension pots. However, the 400,000 that he just mentioned presumably includes those people whose pension schemes pay out in the form of an annuity immediately after they retire. That is the whole predication of a particular pension scheme. Any generic advice that they received would of course encourage shopping around, not least because a quick reference to “annuities” on Google will tell you that competition is alive and well in the annuities market. However, it is not always the consumer who has to do the shopping around. It might well be the pension scheme that they signed up to while they were in employment.
Going back to competition, when I looked last week, I found that a man of 65 with a 65 year-old wife and a pension pot of £100,000 could receive a joint-life annuity from one provider of almost £100 a year higher than from another. The difference was even more stark when a compulsory annuity had to be taken by the age of 75; on exactly the same basis, the difference was just over £232. The curious element comes in lines 3 and 4 of the amendment. The form of consent is to be signed to ensure that the purchaser of the annuity is fully aware of the options available to provide even better value for money than the rates to which I have just referred. Thanks to the Minister’s comments on the earlier annuities amendments, the little list in the amendment should clearly include ASPs.
One must ask whether having signed this form is likely to affect a person’s attitude to life. For example, it is unlikely that someone aged 65 with a £100,000 pension pot will take up smoking to get the extra £1,300 a year that is available. What about the ex-smoker? Would he go back to smoking? He might well. Much more likely would be a person moving his residence to a less healthy part of the country; the noble Lord, Lord Oakeshott, mentioned Glasgow and Bearsden, just next door to each other. That is a possibility. However, is moving from leafy Surrey up to Glasgow really likely?
Of course, I accept that there is a postcode lottery in annuity rates, as exists in many other walks of life. However, is it right that such a thing is rammed down people’s throats? The same applies in the other direction. Inflation protection and dependence benefits go to reduce an annuity, although they may well be sensible for some people and not for others. Then, of course, there is the confusion aspect that the noble Lord, Lord Oakeshott, is so keen on. Just knowing their effects, the pensioner may well have to weigh up the relationship between several of the specified items in the six paragraphs, which are the minimum a pensioner must sign to having been informed about at the point at which he takes his annuity. How does someone in ill health or a smoker—which are likely to be plus factors—balance these with a possible decision as to whether he also wants inflation proofing and/or dependence benefits? Even worse, if such a list changes the annuity rates across the board, as it well might, who is the gainer? I doubt that it will be the pensioner, especially one who delays taking his annuity until the last possible moment.
Lastly, is the Financial Services Authority the right organisation to maintain and update the noble Lord’s form of consent? I would not have thought that it was the FSA’s job. I am not even sure that it should come within the Pensions Regulator’s remit, but perhaps the Minister has some ideas on this.
My Lords, I have a lot of sympathy with the objectives of the amendment. In a sense, it is almost a subset of the need to get generic financial information. We are talking about ensuring that people use their money in the best possible way when purchasing an annuity, so that they are aware of all the factors that affect it. I could add that gender might be included, but I know that the noble Lord and I do not see eye to eye on this issue.
I have two questions; whether my noble friend or the noble Lord, Lord Oakeshott, can best answer them I do not know. First, I am not comfortable with the idea of the proposed new clause being in the Bill. I am not sure that this is an appropriate place for it. Secondly, I am not sure that it should not be done straightforwardly by the Financial Services Authority. I see no reason why the Financial Services Authority should not be encouraged, through its consumer panel—chaired by the noble Lord, Lord Lipsey—or whatever, to take this forward. It is a worthwhile thing to do and explore. In so far as the amendment is a useful hook for that debate, I welcome it.
I do not go along with the noble Lord, Lord Skelmersdale, about people trying to create or avoid moral hazard by shifting addresses and things. That is not likely to happen. However, I am not sure that it is the Government’s job at this stage to lay the duty on the FSA, and for the FSA to, in turn, lay the duty on pension or annuity providers.
This issue should be explored with the FSA, if it is not already doing so. It is a perfectly sound idea. However, from my feeling of where the Bill is going on this, I do not think that it is the right medium for a clause of this sort. In so far as we can encourage the FSA to take this issue forward as part of the post-Thoresen debate, I welcome that very much.
My Lords, the amendment has a serious consumer-protection objective, but I doubt whether it can achieve it. Consent forms in most areas of life, particularly complex forms, simply do not ensure that purchasers are fully aware of the matters to which they are appending their signature. A supply-side solution is more likely to be effective. A consent form is an ornament too far.
My Lords, I thank the noble Lord for moving the amendment; it gives us a chance to discuss an important issue. The Government fully support the objective underlying the amendment. People choosing an annuity should have the best possible understanding of the options available to them, and of the potential impact that their choices can have on their own retirement income and that of their dependants.
However, the Government also believe that it is vital to avoid imposing unnecessary, and potentially costly, legislative burdens on pension savers and annuity companies. The most effective way of ensuring that people make an informed annuity choice is to give them the best possible information at retirement, rather than legislating to make them sign additional forms. I agree with the noble Baroness, Lady O’Neill. If you get people to sign forms and tick a box, there is a great risk that they will take their eye off the ball of what they should really be doing: ensuring that people have information.
We are actively working to ensure that people have good information about their annuity choices. Legislation and FSA rules require providers to disclose relevant information about annuities to members and for members to sign the contractual documentation to take an annuity. In addition, FSA rules more generally require firms to treat their customers fairly and to disclose relevant information. These rules ensure that a baseline level of information is available in all cases.
However, we recognise that more can be done. Improving information was a key recommendation of the Government’s review of the open market option published with the Pre-Budget Report in 2007. Following one of the recommendations of the review, the Pensions Advisory Service has launched an online annuity choice tool to help people understand the complex issues involved. Initial feedback from those who have used the tool has been very positive. The Government support, and are taking, this type of action to help people make the right annuity choice. Therefore, while I support the spirit of the noble Lord’s amendment, it seems unnecessary. There is also the issue of compliance. A process would need to be determined for when an individual did not receive a form, or did not want to sign it, and all that that entails.
In conclusion, the Government agree that it is vital that people should make an informed choice about their annuity, but we do not agree that legislating to add more forms and administration to the process of choosing is the right way to achieve this. Following the noble Lord’s discussion with Legal & General, I should be happy to engage with him and Legal & General to elicit any views that it may have, even if it is not particularly wedded to this approach. We have a shared objective, but I am not convinced that this prescription is the right way to go.
My Lords, this has been a useful and thoughtful debate. However, I was rather confused by the contribution of the noble Lord, Lord Skelmersdale, which seemed in essence to boil down to saying that people do not need advice at all. The measure does not suggest that people do anything different or that insurance companies offer different options. It is not a question of moving or not moving. I do not think that insurance companies would be fooled by people moving at the age of 65 or stopping smoking. We are not talking about that but about how we ensure that vulnerable people get the right advice. Not for the first time today, I think that the noble Lord, Lord Skelmersdale, and I are not communicating properly, which may be my fault as much as anyone else’s.
The contributions of the noble Baronesses, Lady Hollis and Lady O’Neill, were very helpful. I agree with the noble Baroness, Lady O’Neill, that a supply-side solution is much the best. I am not in favour of any more legislation or prescription than one has to have. Part of this process, and of trying to get publicity for the points we are making, is to put pressure on the industry to get its own house in order, and to encourage the FSA to focus a little more directly on these issues. I take the Minister’s point that the measure is probably a little too prescriptive. However, in some ways this is reminiscent of the debate we had on generic advice. I am delighted that some people are using an online tool, and that the feedback is positive. However, the problem arises with the people who are not using the online tool and who do things automatically. We are not getting through to those people. That is why I am trying to highlight this problem. There is a sloping playing field, particularly as regards some of the smaller insurance companies, which may be less scrupulous or less well informed about annuity options. There is a wide range of insurance companies in this country. Some companies such as Legal and General at the top of the tree are completely transparent—it is in their interest to have the most level playing field possible for everybody—while some smaller ones are, frankly, not as good as regards consumer protection. That is what I am trying to highlight. As I say, I thank all noble Lords for their contributions, which I hope will be noted by the people who need to make changes. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
77: Before Clause 123, insert the following new Clause—
“Amendment of rules to take pension annuities by the age of 75
(1) Any statutory provision or rule of law requiring a pension to be taken in the form of an annuity by the age of 75 is amended so that the age limit is 85.
(2) The Secretary of State must review the age limit no less frequently than every five years and report on the average life expectancy.”
The noble Lord said: My Lords, this is the second bite of the cherry as we debated this matter earlier today. Therefore, I do not propose to cover all the same ground again. As I said, many of the arguments supporting this amendment and Amendment No. 77A, in the name of the noble Lord, Lord Fowler, are about tactics on the best way of relaxing the rules applying to the purchase of annuities, which I think most noble Lords regard as onerous. However, the important thing is to get a worthwhile increase in the age of compulsory annuitisation. If the noble Lord, Lord Fowler, decides to press his amendment on the 80 age limit, I shall be happy to go along with that. It is right to have a compulsory limit for annuitisation, but it was fixed at 75 a generation ago in the mid-1970s. Since that time life expectancy has risen by slightly more than eight years. Therefore, even if one accepts that it was right to fix it at that age at that time, it should be raised to at least 80, if not to 85. My amendment seeks to raise the relevant age and proposes that it should be reviewed every five years so that we do not have to wait another 30 years before it changes.
Given the substantial falls in the market in recent months—the noble Lord, Lord McKenzie, said that not everyone’s pension fund is fully invested in equities, but corporate bonds, in which many are also invested, have also taken a tumble—it is highly unlikely that those losses will be regained for several years to come. As regards giving practical help to people in this situation, a minimum of a five-year, or preferably a 10-year, increase in the annuity age would enable advisers to offer proper planning and would provide a reasonable period for the long-term market to reassert itself. In this country equities have always produced good returns over long periods, but losses cannot be recouped in a short time.
I accept the basic present structure—I think we all agree that the Government are not likely to give way on that—but consider that, given the present crisis, we should move to an age limit which allows for a reasonable period during which pension funds can be rebuilt. Given the large increase in life expectancy over the past 30 years, we should accept the logic of moving, preferably, to a limit of 85, although I would accept one at 80. I beg to move.
My Lords, my Amendment No. 77A is grouped with Amendment No. 77. I shall not add much to what I have said. I have already made two speeches on annuities this afternoon, and I think that by now everyone has a clear idea of where I stand on them. I want the total abolition of compulsory annuities. Indeed, the Minister’s suggestion that alternatively secured pensions are the way forward has rather torpedoed his own case in that respect. However, we shall have to see about that.
In wanting compulsory annuities to be abolished, I differ from the Liberal Democrats, who do not want them to be abolished, but want the age limit to be extended. There is no question that there is a financial crisis and there is no point in repeating the detail of it. However, given that crisis, I seek a compromise and the provision of help to people reaching 75. However, the compromise has been rejected and the help is not forthcoming. The noble Lord, Lord Oakeshott, said that one of his objections to my proposal for suspending the annuity rule was that his proposal for an 85 age limit was the only answer. We shall see what the Government say. Frankly, I doubt very much that they will give ground. I do not know whether anyone on the Liberal Democrat Benches thinks that the Government will announce a sudden conversion to the 85 age limit for annuities. If anyone thinks that, they are living in a fool’s paradise. The Liberal Democrats voted solidly against my proposal and consequently we missed an opportunity to change the situation for the better, and the losers—
My Lords, if the noble Lord will allow me, what is his basis for saying that he thinks the Government would not possibly accept an increase in the age limit but that they would accept a temporary amendment? Why would they accept one and not the other?
My Lords, I am not saying that. The Government will not accept either. I hate to teach the noble Lord his business, but the point is that we could have defeated the Government this afternoon, but we cannot defeat them now. I guarantee to the noble Lord that we will not defeat them now, because of the time and because of all the points that anyone with any sense knows about this House. If the noble Lord thinks that we are going to defeat them now, he is living in a fool’s paradise. We should not have arguments about such basic politics.
The losers on this are going to be people in their 70s. I much regret that, and it is on the conscience of the Liberal Democrats that they have done that. The noble Lord, Lord Oakeshott, referred to tactics. I fear that his tactics this afternoon have not been very bright and the losers are a number of pensioners and people coming up to pension age. I very much regret that.
My Lords, I support the amendment. I hope that the Government and the Minister will agree to reconsider this in the light of what has been said by the noble Lord, Lord Oakeshott, about increased longevity, which I think the Government and most people in this country underestimate. The change is phenomenal. Since the rules were brought into play, there has been an enormous change in life expectancy. We now have legislation encouraging older people to stay on at work. We have a great deal of encouragement for flexibility in work, in retirement and in increased activity to a much older age than we could have imagined in 1976 or 1986.
In the light of that, it is absolutely essential that the age at which you need to convert savings into an annuity should be looked at again, I hope to as high an age as possible, or removed. It is high time that the Government took these proposals seriously in the spirit in which they are intended. Please look again and see whether something can be done.
My Lords, I very much regret that I was not able to be present for the earlier debate, owing to a long-standing lunchtime engagement that I had in Norfolk. I would certainly have strongly supported my noble friend Lord Fowler in his proposal.
This proposal is obviously second best, but I wish to support it on the obvious ground of longevity, which the noble Lord, Lord Oakeshott, and the noble Baroness have just mentioned. Clearly, this is changing the whole scene for pension funds in so many ways. There is also another point—if this was raised in the earlier debate, I apologise for repeating it. The Bill is supposed to be about some further encouragement for everyone in pension provision. People have had so much discouragement already with company pension schemes, final salary schemes diminishing and so on. I can think of very few things more likely to discourage them than in the next two years to have a whole crop of media stories about people who had expected to have a pension beyond the age of 75, based on the kind of equity levels that we have had until recent years, who discover that there will be a massive reduction in the pension that they can get from the annuity after the age of 75. That is if the noble Lord, Lord Oakeshott, is right, and I suspect he is, that there will not be a big improvement in the equity situation in the next two or three years. That applies in particular to people over the age of 72 and approaching 75 now. One can just imagine the sob stories that there will be every weekend in the papers about that sort of thing. I ask the Government to look at it again, because it will be yet another discouragement among the many that there have been for people voluntarily to make greater contributions to their pensions themselves.
My Lords, the noble Lord, Lord MacGregor of Pulham Market, has just made a powerful speech adding to the arguments that were put forward in the earlier debate, and I certainly do not intend to repeat any of them. I simply say to the Minister that there will be a not insignificant number of people who, under the present dispensation, will face an appalling crisis in their personal lives. I really hope that the Government will take this away and think very carefully, sympathetically and constructively about the inadequacy of the present dispensation and see what they can do.
My Lords, following on from that point, surely the same happens at whatever age you decide to annuitise; whether 80, 85 or 90. The crunch point can come at any point. The Minister said that, although not quite in those terms, on the last “abolition of annuitising” amendment. You just do not know whether it will come at a particular point for you. It is inevitable that annuity rates and the value of pension pots will vary over time. Who is then to say that annuitisation at any particular age will be appropriate for a particular individual, or even in general? It is only if you believe, and I have said that I do not, that there should be an age by which you have to annuitise your pension pot that you can argue for or against a particular age. I am not in that position, seductive though it might be—it clearly is on both sides of the House—to some noble Lords.
I do not know whether it will be of any comfort to those noble Lords, but in all the discussions that we have had I have never heard anyone say that 75 is 10 years after the current state pension age. Only the Minister can tell us whether that was the Treasury’s original intention. If so, do the Government intend to compound their error of keeping to a specific age when state pension age for men and women increases to 66 in 2024, 67 in 2034 and 68 in 2044? Each rise will be phased in over two years. In other words, do the Government intend as a long-term expedient to have compulsory annuities when people are 76, 77 or 78? Perhaps the noble Lord could help the House by telling us.
My Lords, this has been a shorter debate, and I seek not to reiterate all the points that I made when discussing the proposed temporary suspension of the age 75 “annuitisation requirement”.
I say to the noble Baroness, Lady Greengross, that of course the Government keep this under review, and we will continue to do so, although we are not in a position tonight to accept either of the amendments in this group. It is interesting that there is a difference of view. The noble Lords, Lord Fowler and Lord Skelmersdale, said that they did not want any age by which you have to annuitise. I am not sure whether that translated to them not wanting any age at all at which some form of crystallisation of income stream must take place. If that is their proposition, they have not said anything about the inheritance tax consequences.
My Lords, the noble Lord has misunderstood that part of the argument. No one is suggesting that annuities should be made illegal. Of course, annuities will continue in one form or another. What the noble Lord, Lord Fowler, I hope, and I have sought to persuade the House of is the abolition of compulsion.
My Lords, I understood that point, but if there is no requirement to crystallise some form of income flow from the pension pot at any stage, that raises the question of what happens to the pension pot on death. Is that going to lead to some tax-free inheritance proposal? That would be what happens if someone should, sadly, die before they reach the age of 75 at the moment. The noble Lords need to address those issues as well, as to whether they would see any arrangements under which they propose that the pot should be converted to some form of income flow, which is the key purpose of the tax regime. The noble Lord looks as though he wants to have another go.
My Lords, it is interesting if that is implicit, or perhaps now explicit, in the Opposition’s proposal. It certainly was not so in relation to the RRIF, which is one variation of achieving what the noble Lords want. More specifically on the amendments, I will go over the issues around tax relief, because pension savings receive significant tax relief—some £18.9 billion in 2007-08. By the time an individual retires, it is very possible that well over half their fund may be made up of tax relief. In exchange for this, it is not unreasonable that pension savings are used to provide an income in retirement. Tax relief is given so that people do not have to fall back on means-tested benefits and to encourage pensioners to save for a reasonable income in later life. Increasing the age at which income must be paid would mean that a minority of people would be able to use tax-relief pension savings to benefit their heirs, at a cost to the Exchequer. That would devalue the reason for which tax relief is given.
Amendments Nos. 77 and 77A would increase the age at which an individual must begin to receive a retirement income. I stress that that is not compulsory annuitisation. I can appreciate that having an age-related requirement raises questions about its continuing applicability over time. However, I assure the House that the Government are committed to monitoring the available evidence around this requirement.
While it is an undeniable fact that general longevity has been increasing, the latest evidence available shows that at present only 5 per cent of people have taken a retirement income after the age of 70. For 19 out of 20 people, taking a secure income from pension savings happens by the age of 70; they do not even wait until 75. Moreover, despite increasing longevity, evidence shows there has been little change to the age of retirement. In fact, figures from the Office for National Statistics show that the average retirement age has increased by about only one year since 1984. Therefore there is no “cliff edge” at 75 for the majority of people. They generally take the income from their pension savings when they need it—when they retire in their early or mid-60s.
On the question of why the age of 75 continues to be appropriate, there is the issue of the age at which most people retire. The average retirement age is 63.8 years. Before the age of 70, most people have already started to take an income from their pension savings. There is also the impact of the effects of mortality pooling, which means that the return required for other investments to match the return on annuities becomes unrealistic when one reaches the age of about 75.
Overall, the evidence suggests that raising the age would be of no benefit to the vast majority of people who use their pension savings for the intended purpose—providing an income in retirement. Those with other sources of income who wish to leave their pension invested can do so through an alternatively secured pension. Therefore it would seem that such changes would benefit only those who seek to delay securing an income in an attempt to avoid tax charges on death. This is neither the purpose nor the intention of pension savings, and that would be of benefit only to those who had no need of their pension savings to provide an income in retirement.
As I said, we are committed to monitoring the available evidence and will consider a review of the age limit if that appears justified. That is the commitment I can give, but I cannot go beyond that. On that basis, I hope that noble Lords will not press their amendments.
My Lords, that response was disappointing and I am bound to say that I did not see the significance of the arguments that the Minister used at the end of his speech— that most people have already started taking the income before the age of 75 and that that is their choice. However, that is not the reason for saying that 75 is the right age for compulsory annuitisation. Secondly, he said that because returns are unrealistic for people beyond the age of 75, it was right therefore for annuitisation to be compulsory. The whole point is that if people do not like the returns, they will obviously not take them; however, I do not see why that is an argument that 75 is the right age.
I thank noble Lords who have spoken, particularly those who supported the amendment, including the noble Baroness, Lady Greengross, and the noble Lords, Lord MacGregor and Lord Howarth. I should say to the noble Lord, Lord Fowler, in clarification of the substance of my argument, that I tried to reach compromise on an amendment on which the Government could have been beaten. I congratulate him on his ingenuity in working his temporary amendment—if I may refer to it that way—into the Bill rather earlier than otherwise would have been the case. I should be clear that we on these Benches were happy to combine and support the amendment of the noble Lord, Lord Fowler, on an age limit of 80. The Question would have been put in prime time if the Conservatives had not chosen, for their own reasons, to move another amendment, which they perfectly well knew we would not support. Let us not have any nonsense about whether the Government could or could not have been beaten today. They could have been beaten on the amendment of the noble Lord, Lord Fowler, which we were happy to support, to raise the age to 80—which we are now talking about. Let us not have any disinformation on that point. We were quite happy to give our support; we offered to do that and were rejected.
Let me make it clear that we do not support a temporary change because that would be completely unworkable; I am unaware of any serious pension provider or anyone else who has examined such a proposal and said that it would work. It would create more uncertainty and instability in a very unstable situation. That is why we were unable to support such a proposal, but we believe that the age of compulsory annuitisation should be raised. Ideally, we would like it to be raised to 85 and we wish to test the opinion of the House.
77A: Before Clause 123, insert the following new Clause—
“Amendment of pensions annuities rule
Any statutory provision or rule of law requiring a pension to be taken in the form of an annuity by the age of 75 is amended so that the age limit is 80.”
The noble Lord said: My Lords, I shall be very brief because I think we all know where we now stand on annuities. As I said, my preferred option was the suspension of the compulsory annuity rule. The Government voted that down with the help of the Liberal Democrats and I deeply regret that. We missed an opportunity to change the pension position of this country and I think that we will live to regret it.
However, raising the age limit to 80 is an option. Given the result of the Division that we have just had, I am not unbelievably optimistic but I think that it is a better option than an age limit of 85. It has some of the characteristics of the suspension; it would serve the interests of people who are coming up to the age where they take an annuity; and I think it would protect their interests. I therefore commend the proposal to the House. I beg to move.
77B: Before Clause 123, insert the following new Clause—
“Disclosure in the public interest
In section 87 of the Pensions Act 2004 (c. 35) (other permitted disclosures), insert at the end of subsection (2)—
“(i) if, and to the extent that, having regard to the rights, freedoms and legitimate interests of any person, the disclosure is necessary in the public interest.”
The noble Lord said: My Lords, this is a slightly strange amendment for the Bill. Over the summer, my eye was caught by an article that appeared in Professional Pensions headed:
“TPR removes authority for 29 schemes from GP Noble”.
The article stated that the schemes were under the control of Nottingham-based GP Noble, but are now under the trusteeship of Independent Trustee Services. Official Pensions Regulator documents confirm this fact.
A spokeswoman for the regulator quite rightly declined to comment on individual cases, as this is restricted information under the Pensions Act 2004. That is a correct interpretation of Section 82 of the Act, which makes it quite clear that restricted information must not be disclosed,
“by the Regulator, or … by any person who receives the information directly or indirectly from the Regulator”.
However, although disclosures are allowed under Sections 84 to 87, nowhere, as far as I can see, does the Act say that, if the press discovers that the regulator is working on a case or has decided to pursue a particular course of action, that information is restricted.
The regulator took exception to the article to which I referred and threatened to take the journalist who wrote it to court, which could have resulted at best in a fine up to the statutory maximum or at worst in a fine plus imprisonment for up to two years under Section 82(5). Furthermore, he ordered her to reveal the sources of her story, something that journalists never do and are frequently protected in law against, not least in Section 59 of the Data Protection Act, from which the amendment is copied.
Through its lawyers, Professional Pensions contested this rather high-handed approach by the regulator, saying that the article did not contain,
“any information obtained by the Regulator in the exercise of its functions which relates to the business or other affairs of any person”.
That is identical to the words found in Section 82(4) of the 2004 Act. As far as I know, the regulator then calmed down, although I have no knowledge about whether he intends to pursue the case. I hope that the Minister will tell us that he has backed down completely.
I contend that, had the Pensions Act been clearer in what it would and would not allow, this spat between the publication and the regulator, which no doubt cost Professional Pensions and maybe the journalist concerned a considerable sum of money, would never have happened. I believe that the press should be able to publish information that it discovers as long as the information does not come from the regulator’s office. This amendment seeks to achieve that. I beg to move.
My Lords, I am not sure that I have a complete answer to the noble Lord’s amendment, but I will have a go with what I have and follow up if necessary.
I start by reminding noble Lords that there are already several mechanisms in place for disclosing information in the public interest. For example, Section 89 of the 2004 Act gives the regulator the power to publish reports of its consideration of any particular matter where it considers it appropriate to do so. The public interest is one of the factors that the regulator bears in mind when deciding whether publication is appropriate. The form, manner and timing of that report are matters for the regulator. In carrying out its functions, the regulator is the recipient of a considerable amount of sensitive information, much of it commercial in nature and provided in confidence.
The noble Lord’s amendment would allow the regulator to disclose restricted information that it deemed in the public interest, having had,
“regard to the rights, freedoms and legitimate interests of any person”.
This would clearly lend itself to a wide interpretation and views on how it should be read would differ considerably. As a result, the regulator could be placed under pressure to disclose restricted information where it was inappropriate or premature to do so. It would be very difficult for the regulator to carry out its functions if providers of information could not be certain that the information would not be made public. Stakeholders would become reluctant to disclose commercial information in confidence to the regulator. That is a particularly valid concern where the regulator is involved in an ongoing investigation or considering a particular transaction. I believe that it is sensible to allow the regulator to conduct its business free of such pressures and to leave it to report at the appropriate time, which, in most cases, would be at the conclusion of its investigations.
On the specific case, GP Noble is, as noble Lords will be aware, a firm of independent trustees that is currently under investigation by the regulator and the Serious Fraud Office, among others. I will endeavour to be as helpful as I can on this, although I am sure that the noble Lord will appreciate that I would not wish to prejudice the outcome of those investigations.
On 18 August this year, Professional Pensions magazine published a news story revealing that the Pensions Regulator had appointed Independent Trustee Services Limited as trustee to 29 schemes for which GP Noble had previously been the trustee. The article included details that were not previously in the public domain and that the regulator considered to be “restricted information” under Section 82 of the Pensions Act 2004. Under that section, it is an offence for the regulator or for anyone who has obtained restricted information directly or indirectly from the regulator to disclose it other than in the circumstances set out in the Act. On 22 August, the Serious Fraud Office confirmed that it had arrested three men as part of an ongoing investigation into GP Noble.
I believe that this highlights the importance of handling such sensitive data appropriately and that it is right and proper that personal and confidential information held by the regulator should be protected carefully. As I said, I believe that it is sensible to allow the regulator to conduct its business free of the pressures that the amendment could impose and to leave it to report at the appropriate time. I hope that that explanation is sufficient for the noble Lord. If he thinks that I could provide further information, I should be happy to try to do so.
My Lords, I admit that I was speaking even faster than I usually do, so perhaps the Minister did not quite understand what I was getting at. He and I have both related the incident behind the regulator’s complaint. He relied on Section 89 of the Act, which I looked up while he was speaking, but that has nothing to do with the press, me, the Minister or anyone else; it concerns solely the regulator. The question here is what happens when, without reference to the regulator, an outside body—be it a member of the press, one of your Lordships or whoever—finds out what the regulator is doing and publishes that information. There seems to be no direction in the 2004 Act to cover that situation. In those circumstances, I will certainly take up the Minister’s offer of a meeting, with or without an exchange of letters, because we need to get to the bottom of this point.
My Lords, perhaps the noble Lord will permit me to reiterate what I said. Under Section 82, it is an offence for the regulator or anyone who has obtained restricted information directly or indirectly from the regulator to disclose it other than in the circumstances set out. Therefore, someone disclosing information that they had received directly or indirectly would be acting outside the Act. However, I can see that that has not dealt with the issue about which the noble Lord is concerned, which I will take up separately.
My Lords, this information did not come from the regulator or from anyone connected with the regulator, as I am told by Professional Pensions. However, we are not going to get any further tonight. I will certainly accept the Minister’s offer of further discussion. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.