Pensions Bill

Debate between Lord Freud and Lord Whitty

Monday 24th February 2014 Lords Chamber

[Lord Freud]

My noble friend is probably way ahead of everyone in this Chamber at this moment on this matter, but I think I can simply answer yes to his understanding. As he says, whereas final decisions tend to get taken at a relatively late moment, if the processes are well organised, that matters less and they can be effectively activated.

The ending of contracting out is an inevitable consequence of the state pension reforms. We want to manage this as smoothly as possible and to minimise impacts on employers, schemes and individuals. I have set out why the override is necessary and why the amendments tabled by the noble Baroness and the noble Lord would make the override unworkable. Amendment 11 would in many cases allow trustees to block changes to the scheme and would increase the risk that employers would simply close their schemes. That is why I urge the noble Lord to withdraw his amendment.

[Lord Whitty]

My Lords, I thank the Minister for that. There is quite a lot in there which has cheered me up slightly—not everything, but bits of it. I am grateful for this update on the LGA position. We will watch this space. I am interested to see that there are other sectors that could be involved in that. I welcome the Minister’s statement in relation to the consultation of members of the scheme. I think I am quoting him correctly that the override does not affect the duty to consult, that the Government support the continuation of DB schemes and that the rules of such schemes on consultation are not affected by the override.

That deals with the consultation with members of the scheme, but it does not effectively deal with the trustee position, and the role of the trustees is very important in the future of the schemes and in future faith in them. The Minister said that trustees are bound to consult; yes, they are possibly bound to consult. The override clearly applies in his mind, and I presume the intention of the override is that in those schemes that require trustee consent, the employer, using Clause 24 and Schedule 14, can override the need for that consent. That seems a pretty fundamental alternation in the role of trustees. I hope that, even at this late stage, the Government would reconsider that position.

I am grateful for the Minister’s view on accrued rights and the fact that Amendment 12 is not, therefore, needed. I am less grateful for his indication that “protected workers” will not apply to those who are protected on the word of the Government of the day but not actually embedded in statute. This applies principally to the gas workers and I suspect I will be in correspondence with him about that.

The central point of this group of amendments is that, in this clause, the Government have, effectively, overridden the governance structure of work-based occupational schemes by attacking the very fundamentals of trusteeship. That is a mistake. Over the years, many changes have been made at the behest of employers and with the agreement of trustees. Some of these were detrimental to future members because of the financial position of the scheme or legislative changes. Trustees are unlikely to be unable to recognise the need for such changes, but to override and delete trustee consent is a very serious step which the Government should be much more hesitant about taking. However, for the moment, I beg leave to withdraw the amendment and thank the Minister for some of his other remarks.

Pensions Bill

Debate between Lord Freud and Lord Whitty

Monday 13th January 2014 Grand Committee

[The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud) (Con)]

My Lords, before I speak directly to the subject of the amendment tabled in my name, I would like to address some of the points raised in debate last Wednesday while we were still considering amendments to Clause 24 and Schedule 14. I will start by acknowledging the points made in Wednesday’s debate about the need to ensure that statutory mechanisms to amend schemes are used with care. We have not chosen to apply an override lightly and we recognise the need to ensure that the extent is tightly defined.

The primary legislation sets out the key limits on the scope of the changes under the override, but much of the detail that deals with this, including how the extent of the changes is limited, will be set out in the technical regulations that we have been working on with trustees, scheme managers, the actuary profession and pension lawyers. We intend the regulations to set out a methodology and the assumptions that will apply to the calculation of the lost rebate.

We also intend to set out in the same way how the impact of changes to scheme rules are to be valued so that the actuary can certify that the employer is not recovering more than the lost national insurance rebate. We will of course conduct a full public consultation before these regulations are laid. As I said in my letter to Peers, if it would be helpful I would be happy to offer a separate briefing meeting with officials before Report. This will allow us to go through our thinking in detail in a way that is not possible in debate or correspondence.

I also want to make clear that we do not see use of the override as a default position for employers. We expect the override to be used by employers only as a fall-back position where they need to offset the costs resulting from the end of contracting out and have no options available other than closing the scheme. As several Lords pointed out, there are long-standing and established ways in which employers work with trustees to make changes to schemes when required. The noble Lord, Lord Browne, when paraphrasing the Pensions Minister, said:

“The strong incentive, therefore, is … to have a mature conversation with the trustees in order to reach an agreement”.—[Official Report, 8/1/14; col. GC 427.]

The Government have every expectation that, in the majority of cases, employers will do that and trustees will fully engage.

However, employers have told us that without the override, some of them will have few or no options available to them because such agreement cannot be reached or because scheme rules will not allow it. They tell us that this will force them to close their schemes. Some trustees have told us that without the override, they will find it difficult to agree changes. We therefore believe that the override is necessary to avoid schemes being closed, even though we believe that in most cases employers and trustees will be able to explore other options. As employers and trustees can be expected to discuss scheme changes as a matter of routine, and as it is in their interests to do so, we do not believe that those discussions would be facilitated by overlaying legislative requirements concerning the content and time limits of consultation. That is why we have not provided for that.

The noble Lord, Lord Browne, also asked whether the changes had been discussed with employers and, especially, small businesses concerning the impact of the increases to national insurance that they and employees will have to pay on the ending of contracting out. In particular, what would be the impact of large numbers of employees leaving schemes because of the increases in contributions? During the development of our policy we have engaged with a large range of employers, including the British Chambers of Commerce and the Federation of Small Businesses. Small businesses expressed no particular concern on the ending of contracting out. When we consult on our regulations, we will of course ensure that we gather views from employers of all sizes.

I turn now to scheme members. Notwithstanding the potential for increased contributions, members of defined benefit schemes will continue to get good-quality pension provision. Our expectation is that members, as demonstrated by the low opt-out rates with automatic enrolment, will choose to remain in their schemes. Our communications strategy will seek to ensure that both employers and employees are properly supported through this change and that both parties understand why the changes are taking place and what options and outcomes are available to them.

As to whether the override regulations should follow the negative procedure, I recognise the desire of the Committee to ensure proper scrutiny of the regulations. There is just over two years until the end of contracting out. To ensure that employers have adequate time to consult with actuaries, trustees and members about any potential changes, regulations need to be finalised as soon as possible. We are working hard to complete the regulations. However, these are complex provisions that require us to have extensive discussions with employers and trustees during and after a consultation period before we can get them right. Based on previous experience, we do not expect a final version to be ready to present to Parliament until May or June.

Our concern is that, with the affirmative procedure, we would not be able to secure time for a debate in both Houses before the Summer Recess. This would potentially delay the point at which employers can start to plan with confidence until October this year, just 18 months before contracting out ends. So, while recognising that the negative procedure does not allow Parliament the same level of scrutiny, it will mean that employers and schemes have longer to consider and consult on any changes. We believe that, on balance, this is the right approach.

The noble Lord, Lord Browne, specifically referred to the power in Clause 24(8) to extend the five-year window in which the employer override can be used. I will make clear that we think it important that there is a strict time limit on when the override can be used, which is why the Bill repeals the relevant provisions of Schedule 14 after five years. We fully expect those employers who wish to employ the override to have done so by 2021. However, we recognise that, in limited circumstances and given the complexity of some schemes, some employers may find it difficult to meet that time limit; for example, if several diverse employers have to agree on changes to a multi-employer scheme.

We therefore think it is vital that the time limit can be extended if absolutely necessary, but we also think that the extension of an existing time-limit period should not require the affirmative procedure when using the power would only allow employers otherwise prevented from using the override to do so. The power does not allow us to alter the way the override works or to extend its scope—only to extend the window in which employers can use it. As such, I do not believe the affirmative procedure would be appropriate. I apologise for the length of my contribution to the debate, but I hope that I have helped to reassure noble Lords on the issues that were raised last time we met.

I turn to Amendment 44 to Schedule 13. As I said when we last met, the abolition of contracting out is a natural consequence of the implementation of the single tier. With the ending of the additional state pension, there will no longer be anything to contract out of. Employers who contract out of the additional state pension must provide their scheme members with pension benefits that are broadly equal to, or better than, the benefits they would have received had they remained contracted in. To do so, they must satisfy the statutory standard set under Section 12A of the Pension Schemes Act 1993.

This is a consequential amendment to existing legislation to remove the reference to this statutory standard, as the standard will no longer exist once contracting out has ended. The amendment is to the provision for pension protection when someone transfers employment under TUPE regulations. For future transfers, and those who have already transferred, the intention is that regulations will ensure that employees will receive or continue to receive the same protection of their pension rights as they currently enjoy. I beg to move.

[Lord Whitty (Lab)]

My Lords, I am grateful to the Minister for giving in his opening remarks a reply wider than the amendment before us merits. I have no particular objection to the amendment, in so far as I understand it, but a few issues were raised in the debate last week that I do not think the Government have yet fully answered, even given the Minister’s speech today.

We have a difficult situation here. Everyone understands that contracting out has to cease in this respect, but the way in which it is done is vital. The Minister referred to the measures for private sector occupational schemes being tightly constrained by technical regulations. They definitely need to be tightly constrained because the Bill provides the ability to override trustees in all circumstances, to avoid any form of negotiation, and to place the full cost of any replacement of the contracting-out benefit on the employees. The cost of contracting out will jeopardise the solvency and therefore the future of many of these schemes. As we discussed at some length, and as was pointed out by my noble friend Lord Browne in particular, there is also the question of statutory protection in some circumstances in certain fairly significant schemes.

The Minister continues to justify doing all this on the basis of a negative resolution procedure. This is quite a revolution that will be imposed by this statute on private sector occupational pension schemes. There is not even, for example, a provision that states that there should be no retrospection. The whole principle of pension scheme regulation is that at any given point, benefits accumulated by an individual until that point will be frozen, even if changes are made by the trustees, by statute or whatever. That is not written into Schedule 14, as far as I can see. We need some reassurance on that.

The wider point is the one I raised last week. Where do the Government think we are going on private sector occupational pension schemes? The Minister said—perhaps not with relish; I would not put it quite like that—that it was a matter of inevitability that the decline in the number of people covered by defined benefit schemes had already reduced from more than 2 million to 1.6 million, and that the figure was expected to be roughly 0.9 million in a couple of years’ time. The Government seemed to regard that with some complacency. Of course changes will have to be made to those schemes, but it is not right to say that this imposition will have an effect only on defined benefit schemes, because the lack of trust in the future for any form of scheme is affected by the way that the Government can change solvency rules and the prospects of this scheme so drastically.

I am grateful to the Minister for offering us a meeting between now and Report. We will probably wish to take up that offer, and some schemes may wish to write to the Minister, but my point is that it is extraordinary that the Government seem to be relaxed about the prospect of the whole occupational pension scheme sector being undermined without any serious guarantees to beneficiaries or a clear strategy as to where we are going on the pensions scene.

The proposal is even odder coming from a Conservative-led Government, because these private sector schemes allow individuals to provide savings for the whole of their working lives. They are a way of providing security in retirement. They are a form of collaboration between employees and the employer in providing that. They defer pay in a way that, because it is in the pension pot and not in the pay packet, reduces inflationary pressures. Of course, they also create funds that will be the long-term investors in our business and industrial performance.

Pensions Bill

Debate between Lord Freud and Lord Whitty

Wednesday 18th December 2013 Grand Committee

[Lord Whitty]

Before the Minister replies, the noble Baroness, Lady Greengross, who has an amendment in this group, has had to leave. She apologises.

[Lord Freud]

My Lords, the engagement of the guaranteed minimum 2.5% uplift in April this year saw the basic state pension reach a higher share of average earnings than at any time since 1992. Next year, in 2014-15, the basic state pension will be more than £8 a week higher than if it had been uprated by earnings alone in this Parliament.

This Government believe that, like the basic state pension, the single-tier pension should be uprated by at least earnings to ensure that it retains its value compared to wages, but there is flexibility in legislation for above-earnings increases. I therefore reassure the noble Lord, Lord McKenzie, that the triple lock could be used for the uprating of the single-tier pension, as it has been in this Parliament for the uprating of the basic state pension.

Clearly, the noble Lord would not—and the noble Baroness, Lady Sherlock, was generous enough not to—expect me to commit future Governments for the next 47 years. Looking back 47 years would take us back to 1966. That was a long time ago. Was it the summer of love? Perhaps that was 1967, but in any case it takes us back a long way. Therefore, I do not think that one could commit any Government to anything, and I am sure that there will be lots of different Governments over the next 47 years. However, when you look at the proportion of GDP taken up on the assumption of a triple lock, it is possible that Governments will want to stick to it. The Office for Budget Responsibility adjusts for the triple lock by applying a 0.3 of a percentage point premium to the annual uprating of the basic state pension over and above the earnings rate.

Clearly, the triple lock has insulated pensioners from periods when the inflation rate has been relatively high, and has been particularly important in the unusually uncertain economic climate that we have seen in recent years. The Government do not want to constrain future Administrations by placing a requirement to uprate by the triple lock in primary legislation. It must be up to future Governments to decide, based on their annual reviews, whether uprating above the minimum of earnings is applied.

In response to the noble Lord’s question, the expenditure figures include the impact of the minimum qualifying period and deferrals, but the chart in chapter 3 of the impact assessment—there is a loser’s chart there —does not. No savings are assumed from passporting.

On the provisional outcomes on the basis of earnings upratings, the White Paper set out the assumption that the triple lock would be extended until 2060, but we have nevertheless demonstrated the impact on earnings upratings on expenditure in our impact assessment. That is in chart B2 in the impact assessment, which shows that the triple lock uprating has a progressively greater impact on expenditure, and therefore pensioners’ incomes, over time.

The annual uprating process for the state pension is transparent, based on a review made by the Secretary of State with reference to the general level of earnings and the overall economic situation. The indices for earnings and prices are published by the Office for National Statistics before the uprating decision is announced and are readily available. As a result, we see no advantage in committing in legislation to providing a relatively straightforward calculation. I therefore ask the noble Lord to withdraw his amendment.