That the Grand Committee do report to the House that it has considered the Occupational Pension Schemes (Contracting-out) (Amendment) Regulations 2009.

Relevant Document: 7th Report from the Joint Committee on Statutory Instruments

Before I proceed further, I wish to state that in my view this statutory instrument is compatible with the European Convention on Human Rights.

Before speaking on the content of the regulations, it may be helpful for the Committee if I set the regulations in context and explain a little of the history behind the accrual of guaranteed minimum pensions. Between 1978 and 1997, if a defined-benefit occupational pension scheme wanted to contract out of the state additional pension, the employer had to agree that the scheme would pay at least a statutory minimum level of benefits—the guaranteed minimum pension. When an employer provides a contracted-out pension scheme, both he and his employees pay a lower level of national insurance contributions. Employees who are contracted out into a defined-benefit occupational scheme forgo all or part of their state additional pension entitlement, and instead receive a private pension from their employer’s scheme.

As I explained, the GMP was the minimum benefit that schemes were required to provide. Many schemes offered more generous pension benefits in excess of the GMP; consequently, those schemes have had to record both the GMP and the scheme excess. GMPs ceased to accrue in 1997, and for service beyond 1997 a new standard, the reference scheme test, applies. However, schemes retain liability for GMPs and therefore have to operate two different sets of rules. That has caused complications and extra costs for many schemes.

The provisions of the draft Occupational Pension Schemes (Contracting-out) (Amendment) Regulations 2009, together with Sections 24A to 24H of the Pension Schemes Act 1993, will permit the trustees of defined-benefit contracted-out occupational schemes to simplify their scheme structure and reduce the regulatory and administrative burdens placed on them. This new legislation will allow the trustees to convert their GMPs into ordinary scheme benefits which are of at least equal actuarial value.

The regulations are technical in nature and complement the detailed provisions for GMP conversion in Sections 24A to 24H of the 1993 Act, which were introduced by Section 14 of the Pensions Act 2007. Those sections set out the conversion conditions that occupational pension schemes must meet in order to convert GMP rights into scheme benefits, provided that the overall actuarial value of the benefit package is maintained.

Sections 24B and 24C of the Pension Schemes Act 1993 provide for regulations to be made for the purposes of prescribing the method by which actuarial equivalence is achieved, and for setting out when the scheme receiving the converted GMPs must provide a survivor benefit. These regulations seek to fulfil those requirements.

I turn to the detail. The new sections introduced by the Pensions Act 2007 set out five conversion conditions that must be met in order to convert the GMPs. It is only after these conditions have been met that a scheme can extinguish its liability for paying the GMP. The draft Occupational Pension Schemes (Contracting-out) (Amendment) Regulations 2009 facilitate conversion conditions one and four, so I will concentrate only on those two.

Conversion condition one requires that the pension a member is entitled to after GMP conversion is actuarially at least equivalent to what it was before conversion. Actuarial equivalence allows the whole structure of benefits already accrued in a pension scheme to be changed while maintaining their actuarial value. It is a concept that has been in existence for some time and is often used for private pension schemes. For the purposes of GMP conversion, it is the scheme trustees who will decide whether the GMPs held in a scheme should be converted into equivalent scheme benefits. If the trustees do decide to convert GMPs, they are required to seek advice from an actuary about the actuarial assumptions to be used. In deciding what assumptions are to be used, the trustees and actuary will need to refer to the provisions set out in the draft Occupational Pension Schemes (Contracting-out) (Amendment) Regulations 2009.

In order to ensure that actuarial equivalence has been achieved, the scheme trustees must arrange for the actuary to calculate the actuarial values of the pre- and post-conversion benefits. It is only after the actuary is satisfied that actuarial equivalence has been met that the actuary will provide a certificate to certify that condition one has been satisfied; that is, that the post-conversion benefits are actuarially at least equivalent to pre-conversion benefits. The actuary is also required to provide the trustees with a certificate within three months.

I turn to conversion condition four, which seeks to protect the position of the spouse or civil partner post-conversion in the event of a member’s death. Currently, on the death of a member, a contracted-out occupational pension scheme is required to pay a survivor benefit based on the earner’s accrued GMP rights. Section 24D of the Pension Schemes Act 1993 sets out the current survivor benefit requirements, which are that in the relevant circumstances, a widow is entitled to a survivor benefit based on her husband’s accrued GMP from 1978 to 1997. A widower or surviving civil partner is entitled to a survivor benefit based on the earner’s accrued GMP from 1988 to 1997. After conversion, a requirement to provide a survivor benefit is retained based on the scheme pension earned from 1978 to 1997 or from 1988 to 1997 as the case may be. The requirement seeks to protect the position of the beneficiaries whose additional state pension will be subject to a contracted-out deduction following the member’s death.

Section 24C of the 1993 Act requires regulations to be made for the purpose of prescribing the circumstances in which and the periods for which the survivor benefits are payable from the new scheme benefit; that is, after the conversion of the GMP. The circumstances under which a survivor benefit is payable after conversion remain the same as those which apply before conversion, as does the period for which it is payable. The survivor benefit rules are complex, and in their simple terms, the regulations require that the survivor benefit may be withdrawn where the survivor is not in receipt of a relevant benefit such as widowed carer’s allowance, widowed mother’s allowance, widow’s pension or bereavement allowance, or where the survivor is aged over 45 and has remarried, formed a civil partnership, or is living with somebody as husband and wife.

In summary, although the regulations may appear complex, they simply ensure that post-conversion benefits are actuarially at least equivalent to the pre-conversion benefits and that the current rules which specify when and for what period a survivor benefit is payable are retained post-conversion. These regulations are to facilitate GMP conversion and thus enable contracted-out defined benefit occupational pension schemes to simplify their benefit structures by moving to one set of scheme rules. Schemes that undergo a conversion exercise will benefit from no longer having to purchase advice for GMP calculations, no longer having to deal with queries from members on GMPs, simpler awards of benefit where pensions become payable, and a single approach to the annual uprating of pensions in payment.

Finally, I should point out that the facility to convert GMPs is purely an optional one which is being made available to schemes. The requirements of these regulations become mandatory only at the point at which a scheme decides it wishes to convert its GMPs. I commend these regulations to noble Lords.

We have now turned our attention to guaranteed minimum pensions and I, for one, am grateful to the Minister for his attempt to steer us through what this most complicated order is doing. The noble Lord called it complex. If I had a deeper word in my vocabulary to express complexity, I would most certainly use it. I say “complicated” because, although Section 14 of the Pensions Act 2007 is crystal clear in its intent and is referred to in the Explanatory Memorandum, nowhere could I find a reference to it in the order itself. I would not expect it to be in the main guts of the order, but I would expect to find it in a footnote. Footnote (a) on the front page of the order states:

“1993 c.48. Sections 24B and 24C were inserted by section 14(3) of the Pensions Act 2007”.

I did not find that terribly helpful. I therefore had to mount a paper chase to discover that Section 14 actually amends Sections 13 and 17 of the Pension Schemes Act 1993.

I hope that I have understood the order correctly, not being nearly so expert in the field of guaranteed minimum pensions as my noble friend Lady Noakes. Its background, though, is, I think, fairly clear. As the Minister has said, between April 1978 and April 1997 defined-benefit schemes and, I believe, members of the schemes themselves—I stand to be corrected on that—could, and often did, contract out of the second state pension in its various guises. Why we have to have different names for essentially the same thing defies me, but I shall let that pass.

The point is that the schemes themselves had to be as good as, or better than, the state scheme, and provide what came to be known as the guaranteed minimum pension. How many schemes have contracted out, and how many have already converted? As I read the situation, it has taken until now for the Government, through the Pensions Act 2007, to come up with a way to mitigate the fact that schemes have to continue to administer the rights already accrued, even though they ceased accruing as long ago as April 1997. Not only that, but many scheme benefits have already been converted. I have assumed, therefore, that this order is required to convert the rest. However, I am confused by paragraph 8.2 of the Explanatory Memorandum, which ends by stating that schemes would be unlikely to convert “in the near future”. Presumably, that means that more schemes would be unlikely to convert in the near future. I hope that the Minister will be able to tell me the reason for this, as I would have thought that most of the conversion would have been done already, at least in those schemes that have already contracted out. This order might have been in operation had Section 14 of the 2007 Act been in the Child Support, Pensions and Social Security Act 2000 instead. Given that, I would be grateful if the Minister would explain the timing of what this order does. In essence my question is, why now? Why has it taken so long to achieve this?

One usually gets to penetrate the opacity of Department for Work and Pensions orders. However, new Section 69B is more than opaque; I suggest that it is the darkest night just before the dawn. Can the Minister—as the noble Lord, Lord Richard, requested at Question Time—explain in English the two parts of new Section 69B as none of my advisers could translate it to my satisfaction? Unusually, we received no comment on this from the Merits Committee. Therefore, I would be grateful if the Minister could provide me with an answer to that.

Perhaps the Merits Committee did not comment on the provision because it could not understand it. Like the noble Lord, I picked up the Minister’s phrase that the regulations may appear complex. He can certainly say that again. The noble Lord, Lord Skelmersdale, was searching for a deeper expression than “complex”. I suggest “utterly obscure and totally incomprehensible”.

On a point of fact, I see that the regulatory impact assessment suggests that the total initial cost—presumably the one-off cost of making these changes—will be between £11 million and £22 million, and would produce a total annual cost saving of £6 million to £13 million. That is a 50 per cent to 60 per cent annual rate of return of which any pension fund with which I have been associated would have been proud. I just wonder whether those figures can be right. They seem to be particularly hopeful, do they not? That is one question.

More generally, and more seriously, the order shows how totally wrong and unnecessary contracting out the whole state second pension is. I have been in the pensions industry for 33 years and understand how it works, and I just wish that the Government had been bolder and scrapped it rather than slowly phasing it out following the Turner report.

I thank each noble Lord for their contributions. I do not have data to hand on the number of schemes that have been contracted out, but I will dig them out and write to the noble Lord, Lord Skelmersdale. He suggested that the schemes would already have converted GMPs. They could not, however, because it is the legislation that was inserted into the recent Pensions Act and these regulations provide the wherewithal to do that. The GMPs had to be preserved, even though, as he suggested, there are no longer accruals post-1997.

The noble Lord, Lord Oakeshott, asked why this is being done now. I accept what both noble Lords say; this is complex stuff, which is partly to do with simplification. The noble Lord, Lord Oakeshott, is absolutely right that the legislation is impenetrable. That is why we have taken action, certainly so far as DC schemes are concerned. As the noble Lord will be aware, we are going to abolish contracting out for those schemes very shortly. The Turner commission report expanded on the reason for not doing this more immediately for DB schemes. There needed to be a period in which the long-term effects of removing GMPs and removing contracting out had to be reflected in those arrangements. The Turner commission was pretty clear that they could be phased in over time.

As the noble Lord knows, this is due to expire by 2030. As we generally squeeze out the earnings related part of S2P, there will be a diminishing earnings related part to contract out.

I thank the noble Lord for those kind remarks. In the light of what he said, I have decided not to point out that he read out the whole of his brief verbatim. I think that was the first time I have ever seen him or any other Minister do that, but I do not blame him for that in any way.

I always read my brief verbatim; I am a noble servant of the Government. The noble Lord, Lord Skelmersdale, asked me to interpret new Regulation 69B. I will have a go, but the important thing to recognise is its reference to Condition 4 of Section 24B of the 1993 Act. Condition 4 is one of five conditions, and requires that the converted scheme provides certain survivor benefits in circumstances and during periods that are prescribed by regulations. That is the thrust of that condition and the thrust of what new Regulation 69B seeks to address. Rather than test the noble Lord’s patience today, I am happy to have a private word with him or to write him further if he so wishes.

This is such a complicated matter that on this occasion I would much prefer a letter. The first part of new Regulation 69B—that is, paragraphs (1), (2) and (3)(a)—appear to have rather different connotations from (3)(b), (3)(c), (3)(d) and (4). My question was about comparing the two halves of 69B. I would be grateful for an explanation.

In short, the explanation may be that the first part deals with the requirements of provisions for survivors and the second part touches on the time frame in which they have to operate. Because they do not necessarily need to continue for ever, as I touched upon in assiduously reading my brief, there are circumstances that will trigger the cessation of those benefits for survivors—for example, someone remarrying after a certain age. I will be happy to write in more detail to the noble Lord if he thinks that would be helpful.