Pension Schemes

Stephen Timms Excerpts

Thursday 2nd May 2024 Commons Chamber

[Sir Stephen Timms (East Ham) (Lab)]

I welcome the debate, and congratulate the right hon. Member for Orkney and Shetland (Mr Carmichael) on securing it at a time when a lot is happening in pensions policy. I will take advantage of its broad scope to comment on wider issues, as well as picking up on the points that he made. I agree with a great deal of what he said.

Auto-enrolment, which was devised by a Labour Government, legislated for under the coalition, and implemented under subsequent Conservative Governments, has been a huge success in increasing the number of employees saving for a pension, but a lot of challenges remain. Above all, the amounts that people are saving under auto-enrolment are not enough for an adequate retirement income, and if we do not increase pension saving soon, we will have a crisis of inadequate pension incomes before very long. The gender pension gap remains much too big. Pension saving among self-employed people, to whom auto-enrolment does not apply, has plummeted.

The Chancellor is rightly looking at how he can boost investment in the UK economy from pension funds, but UK pension funds, for understandable reasons, some of which the right hon. Member for Orkney and Shetland touched on, have largely withdrawn from investments in companies, as regulation has pushed them to reduce the risks that they face. We must not force those defined benefit funds that are still open and investing to close prematurely.

The right hon. Gentleman highlighted this afternoon, as he has previously—he mentioned his debate in Westminster Hall—that members of some defined benefit pension schemes, such as those of BP and Shell, and I think ExxonMobil, as the right hon. Member for New Forest East (Sir Julian Lewis) pointed out, have in recent years not received the discretionary increases that they used to. We looked at that issue in the Select Committee report on defined benefit pension schemes, which we published on 26 March. We took oral evidence from the BP Pensioner Group, and we also heard from the HP Pension Association—the right hon. Member for Orkney and Shetland also mentioned that company. The association represents people who previously worked for the computer company Digital, which Hewlett-Packard acquired. Much of those people’s working lives was before 1997. There was no general requirement to uprate pensions in payment before 1997, and our witness told us that Hewlett-Packard pensioners had received only three discretionary increases to pre-1997 benefits, amounting to 5% in total, since 2002, which is just over 20 years.

In our report we called for the Pensions Regulator to find out how many schemes had discretionary increases on pre-1997 benefits in their rules and how that discretion has been exercised in recent years. Given recent improvements in scheme funding levels, we also called for DWP to look at

“ways to ensure that scheme members’ reasonable expectations for benefit enhancement are met, particularly where there has been a history of discretionary increases.”

Perhaps the Minister, when he winds up, would comment on whether he will look at the reasonable expectations for benefit enhancements for scheme members with a lot of pre-1997 service, and whether they can be met. The Hewlett-Packard Pension Association is calling for a code of ethical practice to be drawn up between the Pensions Regulator and DWP, particularly on pre-1997 pensions, and for their former employer and its pension trustees to work out a policy for sustainable future discretionary increases.

[Mr Carmichael]

I am grateful to the right hon. Gentleman for touching on an area that I should perhaps have given more attention to. The most important protection we can give the beneficiaries is through ensuring that there are independent trustees, and that the office of trustee cannot be manipulated by the company. Does the Select Committee have any proposals for improvement in that regard?

[Sir Stephen Timms]

The right hon. Gentleman is quite right. We have noted a bit of a move towards sole trustees in a number of cases, which clearly gives rise to concerns about how one person can represent the interests of the members of a pension scheme. We are reflecting on that in our work, but one of the members of the Hewlett-Packard scheme wrote to me this week—he may well also have written to other Members—about

“the further fear and despair they are now feeling as it dawns upon them that their company and pension scheme trustees are meanwhile preparing plans to derisk by transferring their Pensioner responsibilities to an Insurance Company”—

something the right hon. Gentleman touched on. That transfer will quite possibly mean

“no subsequent possibility ever for pre-1997 increases.”

He calls that “a frightening prospect”, and it is hard to disagree.

The Committee also looked at concerns about the new defined benefit funding regime to be introduced for scheme valuations from September. We noted that the regime had been developed

“in a different era when the vast majority of DB schemes were in deficit and amidst concern that employers were seeking to evade their responsibility to underfunded schemes.”

There have been big changes since then, especially in the wake of the liability-driven investment crisis following the Budget of 18 months or so ago. In particular, there have been significant improvements in scheme funding, but the principles of the new regime have not been changed. Schemes are expected to target a position of low dependency on the sponsoring employer, meaning low-investment risk at the point of significant maturity. That has promoted concerns that the funding code will, when introduced, force more unnecessary de-risking, particularly among open schemes, as well as among those that are closed but have long time horizons, which would increase costs to employers and result in premature closure.

We said that the DWP and the Pensions Regulator needed

“to act urgently to ensure they do not inadvertently finish off what few open schemes remain by further increasing the risk aversion”.

In a letter to the Committee on 18 December, the Minister told us that both the Department and the Pensions Regulator were

“acutely aware of the need to take account of the specific needs of open schemes,”

and he agreed that

“open schemes should not be forced into an inappropriate de-risking journey.”

We welcomed that assurance, but it needs now to be reflected in the final wording of the funding code and in the regulator’s approach.

The vote in Parliament on the statutory instrument came before the final version of the funding code was published, so Members did not quite know what they were voting for at that point. We recommended that the Department and the Pensions Regulator should work with open schemes to address their concerns, particularly on the employer covenant horizon—the length of time for which they are confident in the sponsoring employer’s willingness and ability to support the scheme—and report back to us on how they will do so before the new funding code is laid before Parliament.

Since our report was published, feedback from schemes suggests that things may not be moving in the right direction. In a consultation response last week, the University Superannuation Scheme—a large and still open scheme—described the regulator’s proposed approach as

“university superannuation schemes”.

In its view, the statement that it will be required to complete under the terms of the new code will demand

“significant…resource for little or no benefit to our members.”

To the USS, and to me, that appears inconsistent with the assurances that open schemes will not be adversely impacted by the new funding regime. The USS adds:

“Not…having had sight of the revised…Funding Code and accompanying covenant guidance has exacerbated”

their worries.

I know that the Minister understands these concerns well. Closure of those schemes would reduce pension fund investment in the productive economy at a time when the Chancellor wants—absolutely rightly—to increase investment from pension schemes into the productive economy. Can the Minister tell us when he expects the new funding code to be published, whether he will report back to the Committee before then on how the concerns of open schemes have been addressed, and whether he is open to considering a separate chapter in the funding code, setting out how the code will apply to open schemes?

Let me take a few minutes to talk about what is happening on the defined contribution side of the picture.

[Sir Julian Lewis]

I wonder whether the Chair of the Select Committee shares my concern that when those schemes go wrong, it seems to take an interminable time to get any form of resolution. I have in mind a scheme that I am sure he is familiar with: the Atomic Energy Authority Technology pension scheme. The Government gave strong guarantees from the Dispatch Box that transferring into that scheme would give benefits roughly similar to those of remaining in the original Atomic Energy Authority scheme, but that did not happen. I first quoted the concerns of my constituent, Dr Keith Brown, in 2016. The most recent answer that I received to a question on this subject was:

“This is a complex issue requiring further consideration”

between the DWP and the Cabinet Office. I first raised the matter in 2016, but the Government are still saying that in 2024.

[Sir Stephen Timms]

The right hon. Gentleman makes a very fair point. That is certainly a very long-running case, and the Select Committee has recently been looking at a notable pension scam case—the Norton Motorcycle Company pension schemes, which was a straightforward scam—that has been running for years and years. He is right that we need to find ways to speed up some of these processes, because the victims in these cases have their lives really blighted. We are allowing that blight to last for years and years, and that needs to change.

On the issue of defined-contribution schemes, the Committee published a report in September 2022 on saving for later life, which pointed out that auto-enrolment has been a very big success, doubling the proportion of eligible workers saving in a pension. I applaud the approach now being taken by Uber following the Supreme Court case that it lost, and the recognition agreement that it now has with the GMB trade union. It is now auto-enrolling large numbers of its drivers into a pension scheme, albeit with higher opt-out rates than elsewhere, which is making some real inroads into pension scheme saving in the gig economy. We need much more of that among other gig economy workers. However, many auto-enrolled people are not contributing enough at the moment for an adequate retirement income, and quite a lot of them are probably not aware of that. Contribution rates need to go up.

As such, the Committee recommended that the Government should first implement the recommendations of the 2017 auto-enrolment review: reducing the minimum age for auto-enrolment from 22 to 18, and minimum contributions being paid from the first pound of earnings. Almost all of our witnesses supported those measures, and we welcome Royal Assent being given to the legislation that will implement them. That legislation requires a public consultation on implementation, and for its findings to be reported to Parliament before the regulations are made. However, as yet there has been no consultation, and nor has any date been announced for it, so can the Minister tell us when the Department will be consulting on implementation of those regulations? Will that consultation be launched before the end of this Parliament, and does he still expect—as the Government have long maintained—that those changes will be implemented by the mid-2020s?

We always knew that auto-enrolment would lead to many small pension pots. People change jobs, so they accumulate, on average, 10 pension pots across their working life. By November 2022, there were over 12 million deferred pots under £1,000. The Department for Work and Pensions has proposed automatic default consolidation to deal with small pots, but that will not in itself stop small pots from building up in future. As such, the Department has proposed a lifetime provider model with member choice, so that employees tell their employer which pot to put their contributions into, and a pot for life, so that employees stay in the pension scheme they started out in throughout their working life unless they choose to move.

Consultation responses on those proposals raised some very serious concerns from the TUC, Age UK, and the Pensions and Lifetime Savings Association and the Association of British Insurers—the main industry bodies. Age UK, for example, said that the proposals would be

“highly disruptive and lead to poor outcomes for mass market savers.”

Major concerns raised in the responses include potentially unwinding the consensus on auto-enrolment; that other measures in train, such as pensions dashboards, value for money and consolidation, will reduce the number of small pots anyway and improve value; that the proposals would benefit savers with larger pots, but harm lower-income savers; and that they would increase employers’ costs while entirely removing their role in selecting a pension scheme for their staff.

I have heard time and again, as I am sure the Minister has, how important employers are to trust in pension savings and that employers have delivered in auto-enrolment what we have asked them to deliver. Other such concerns are that these changes would require a new infrastructure, which would be hard to build, as pensions dashboards have certainly proved to be; and that they distract attention from the important effort to increase auto-enrolment contributions over time, which the responses argue—correctly, I think—should be the main focus of changes over the next few years. The Minister will be very familiar with all those concerns. Will he tell us when the Department will publish its response to the lifetime provider model consultation, and does he acknowledge that responses to the consultation so far have indicated very significant risks in the Government’s proposal for rather limited gains?

There is a lot going on in this area. I am very grateful to the right hon. Member for Orkney and Shetland for giving the House the opportunity to reflect on all this at this particular time. There has been some good progress, for example with auto-enrolment, but a lot more work is needed. I look forward to hearing the Minister’s reply.

--- Later in debate ---

[Paul Maynard]

My right hon. Friend has pre-empted a topic that I was about to come to, because I could see that it was going to come up in the discussion on the Select Committee report. I have now been to see the Cabinet Office Minister with my officials, and my officials then went back for a second visit. So although I cannot give him a timeline, I can say that I am motoring this issue along as rapidly as I can. When I say that this is complex, it is because it is complex; it is not merely because that is a useful and convenient word to cover a multitude of things. We continue to work as fast as we can to try to reach a conclusion. I hear the points that he has made to me, both in this place and outside, about wanting to draw this to a conclusion as best we can.

The regulations that I referred to on the funding and investment strategy clarify what prudent funding plans look like, allow open schemes to take account of new members and future accrual, make it explicit that there is headroom in the regulatory environment for schemes to invest more productively, and require all schemes to be clear about their long-term strategy to protect member benefits.

DB funding levels have improved in recent years, and it is important that schemes take advantage of the opportunities that this brings. The scheme funding regulations will help schemes get the most from their assets, while at the same time ensuring that scheme members can be confident that they will receive the benefits that they are promised.

The regulations embed good practice and build on the existing funding regime for DB schemes by providing clearer funding standards, which will ensure, as far as possible, that schemes are properly funded over the long term. Scheme members can and should be confident that the regulations provide increased security for their promised pensions, which is important to many of the people whom the right hon. Member for Orkney and Shetland is trying to support through this debate.

In addition, the new general code for the Pensions Regulator has come into effect since we last discussed these issues. The new general code consolidated and simplified 10 of the existing codes to make it easier for trustees and those running occupational pension schemes to find the information they need on the regulators’ standards of conduct and practice. It came into force at the end of March this year.

I will do my best to reply to some of the points that have been raised in the debate before I continue with my speech. I am grateful to the Chair of the Work and Pensions Committee, the right hon. Member for East Ham (Sir Stephen Timms), for covering many of the issues in what was a very helpful report on DB schemes. I know that we often discuss Select Committee reports in this place on a Thursday, and it is quite right that we should do so. Normally, however, we do so after the Government have issued their official response to that Committee report. If the Chair of the Select Committee will forgive me, I will not pre-empt every recommendation in the report. But I can assure him that I sat down for a marathon session with my officials not so long ago, going through every last sentence in the report, so I can tell him that I am giving the matter full consideration.

It is worth noting that both the right hon. Member for East Ham and the hon. Member for Strangford (Jim Shannon) mentioned the auto-enrolment reforms. I am happy to place on the record today our ongoing commitment to consult in the mid-2020s on that issue. I am keen to make progress. I hear all across the Chamber that there is a recognition of why it is important that we make as rapid progress as we can.

The right hon. Gentleman mentioned that he will have to provide a consultation. He summarised the general tone of the contributions very well. Certainly there have been more responses to that consultation than to any other during my time in the Department. I have read most of them myself, rather than just waiting for the summary. I have absorbed similar mood music to the right hon. Member for East Ham, and I hope that we can have a proper Government response very soon.

[Sir Stephen Timms]

I thank the Minister for the attention that he is paying to the recommendations in our report. On the auto-enrolment review recommendations, does he envisage the consultation on implementation happening this side of the election?

[Paul Maynard]

No decision has yet been taken on when that might be. It would be wrong for me to speculate at the Dispatch Box about when it might occur but, as I say, I am keen for it to happen as soon as we can manage it.

The hon. Member for Cardiff South and Penarth (Stephen Doughty) rightly raised his constituents and the AWS pensioners. As he may be aware from the oral evidence I gave to the Work and Pensions Committee, I have met with the pensioners. I fear this always sounds like a cliché, but I listened carefully, commissioned work on the back of that meeting, received that work and reviewed it, and then commissioned some further work on the back of that. The policy development process is ongoing. I am happy to meet the hon. Gentleman. He asked for a timeline. He actually read out my timeline when he quoted my reply to him from 18 April, so he answered his own question. As I say, I will happily meet with him and the pensioners, but I caution him that I doubt that I can say very much more at this stage than I have already. He may want to consider at what point he wishes to have a further meeting, given that it is a long way for them to come from south Wales to hear me say what I already said to them a few months ago, but I am working hard on the issue.

My right hon. Friend the Member for Suffolk Coastal (Dr Coffey) spoke eloquently about the potential value of CDCs, not least in this place. I cannot wait for the Royal Mail one to get off the ground. I welcome her comments on the importance of employers doing right by their employees. We should always note just how many do that. She asked for an update on the pensions dashboards. As I am sure the House knows, there was a reset of the pensions dashboards shortly before I arrived in the Department. I have taken a close personal interest in it, having overseen a few rail infrastructure projects in my time that also needed a bit of a reset. The chief executive of the Money and Pensions Service, Oliver Morley, and I are taking a careful, scrupulous and in-depth interest in the progress of the reset. I am satisfied that we are making good progress. The timetable for connections has now been issued, and we are very much on track.

The hon. Members for Strangford and for Ayr, Carrick and Cumnock (Allan Dorans) mentioned WASPI. I am not sure that there is much that I can usefully add right now, because I do not think that this is the debate for it. I note the comments that were made and entirely understand them. As the hon. Member for Strangford mentioned, there will be a debate on WASPI in this place very soon, as an important part of the engagement with Parliament that the ombudsman identified. I look forward to hearing what Members have to say.

I will do my best to cover a few issues around discretionary increases, because it is important to put on record the legal situation. There are clear legal requirements for schemes to provide indexation on all defined-benefit rights accrued after 1997, and on guaranteed minimum pension rights accrued between 1988 and 1997. Some pension schemes go beyond the legal requirements and provide more generous indexation. If higher levels of indexation are set out in the scheme rules, those levels of indexation must be paid. The scheme rules set out the pension package that members have the right to receive. Some schemes provide additional indexation on a discretionary basis. In some cases, these payments may have been made regularly in the past, but they are not part of the pension package promised by the employer; rather, they are, and remain by definition, discretionary.

I understand the frustration that will cause for pension scheme members no longer receiving such discretionary increases, and during a previous debate I committed to looking closely at the situation in order to better understand whether the arrangements that we have in place are working as intended. That commitment still stands, and I recently met with the Pensions Regulator to personally discuss the issue, along with many of the other concerns that were raised in January, and indeed some of those raised today. I have to stress that the legislation does not and cannot seek to set out exactly what every scheme must do in each and every circumstance. The legislation sets out some minimum standards for indexation. That does not prevent more generous arrangements, which may be brought into a scheme through its rules or provided on a discretionary basis. Those arrangements are the concern of the scheme trustees.

The Government set a minimum legal requirement, which trustees and sponsoring employers can exceed if they choose, if they judge that scheme can afford it in the short and the long term. It is important to achieve a balance, providing members with some measure of protection against inflation while not increasing a scheme’s costs beyond what most schemes can generally afford. Trustees, whether of big firms or small ones, must have an eye to the future viability of their scheme.

I am very grateful to all Members who have contributed to this debate. It has been wide-ranging, partly because, being called “Pension Schemes”, it covers a multitude of issues beyond the more precise ones that the right hon. Member for Orkney and Shetland raised. I am grateful to all who have participated, and I commit to working much harder on this issue in the future, because I know how important it is to many of our constituents.