My Lords, I shall speak to all the amendments in this group, particularly Amendments 38ZB, 40A and 68A, which are in the name of my noble friend Lady Sherlock and myself. In total, this is a comprehensive grouping of amendments that deals with what my honourable friend Gregg McClymont described in the Commons as,
“the more granular aspects of the ending of contracting out”.—[Official Report, Commons, Pensions Bill Committee, 4/7/13; col. 236.]
However, it is important to recognise that, although these amendments are almost comprehensive, there is one aspect of the ending of contracting out with which they do not directly engage: the abolition of contracting out itself. I feel motivated to say that with the honourable exceptions of my noble friends Lord Whitty and Lady Turner of Camden, there is broad agreement that the change to a single-tier pension and the aim of introducing simplicity into the state pension system require an end to contracting out, so we are dealing here with the consequences of contracting out, not the fact of its abolition. I will leave my noble friends to speak eloquently for themselves, and I have had private conversations with them to articulate their position on these issues.
When the Committee last met on this Bill, we debated in part the consequences of the ending of contracting out but only for public sector schemes. There were a lot of good questions for the Minister but, with respect to him, his response was essentially—this is not a direct quote—“How to deal with these consequences is a matter for future Chancellors”. The provisions that we are debating here and these amendments make it clear that that is not a luxury that employers with private sector defined benefit pension schemes have available to them.
As my noble friend, Lord Whitty, made clear in his contribution, and this has been his abiding concern regarding aspects of this Bill since his engagement with it, the ending of contracting out could have fatal consequences for occupational pension schemes. The Government’s response to that challenge is to give employers, through the vehicle of a statutory override, the powers to increase employee contributions and/or reduce accrual rates of defined benefit schemes in order to reflect the cost of the extra national insurance that the employer will now have to pay as a result of the end of contracting out. However, these powers are limited by the mechanism set out in Schedule 14, which precludes the use of them beyond the cost of the extra national insurance that the employer will have to pay.
Amendments 37 and 38, in the names of my noble friends Lord Whitty and Lady Turner, seek to delete that override power completely. While we on this Bench do not directly support these amendments, they raise a number of interesting questions. The Pensions Minister in the other place has said repeatedly, in public and in debate, that he is keen to help employers to maintain their defined benefit schemes.
I have some questions for the Minister today. Have the Government consulted employers to assess whether the changes may have the consequence that my noble friend Lord Whitty fears and lead them to close their defined benefit schemes or move employees on to career-average schemes, which are still good but not as good as defined benefit schemes? Should the costs of the additional amount of national insurance fall on to employees, my noble friends are fearful that employees will be unable to pay this from their salary and be forced to leave their schemes. Even a 1.4% additional contribution may be more than can be afforded by some workers living with static salaries and the rising cost of living. This is clearly not in their long-term
interest, but if a large percentage of workers withdraw it will also threaten the viability of some pension schemes. As my noble friend Lady Drake has pointed out, 5% is a huge amount to find between employer and employee at a time when so many small businesses are seeking to get back on their feet. My noble friend reflects the views of trade unions, but have the Government discussed the changes with employees and employers, especially small businesses that will be affected by this?
However the changes are achieved—by consultation, as we advocate, or by imposition, as this Bill permits—employees will not be happy. They will struggle to understand the changes to single-tier pensions that are justified. I shall share an anecdote of my consistent experience as a Member of Parliament: I was regularly assailed on the main streets of Kilmarnock by pensioners who asked me why they had to pay tax on their pension. I became quite adept at replying. I will not bore the Committee with the explanation, which is simply that you make up the pot from untaxed income and the deal is that you pay the tax as you draw down. Try as I might, though, I do not think that I ever, even with charts, persuaded one pensioner that that was the case with regard to their pension. I spent from 1997 to 2010 as the MP for those people, and I would be surprised if I persuaded one person of the mechanism for their pension scheme and the operation in this fashion and how it was taxed, despite my very best endeavours to develop skills and take advice in order to do this.
Will employers end up saying, “We’re going to have pain over these changes whatever we do”—I am imagining the kinds of conversations that I have had with people—“so we might as well bite the bullet and close the final salary scheme”? We know that the Government, particular the Pensions Minister, are keen to help employers retain the remaining defined benefit schemes. That is a justification for the override, as he said at col. 245 of the eighth sitting of the Committee in July 2013, but have the Government discussed with employers how many of them will use this as an opportunity to consider the closure of schemes? These are important questions that need to be tested. My noble friend Lord Whitty asks us all the time what the consequences will be.
This is a complex and expensive matter. Actuaries are costly, and scheme changes are extremely costly to achieve. The amendments tabled by my noble friends Lord Whitty and Lady Turner are helpful in raising questions that we should know the answers to, if they exist. If these measures will lead to employees being forced or inclined to leave schemes and schemes being forced to close, then we should debate that matter as I accept that it is not an intended consequence of the Government’s position.
The second issue engaged by these amendments reflects the fact that, apart from being subject to an actuarial check, this Bill gives the employer largely unfettered power. In particular, as we have heard, the employer does not need to reach agreement with, or even to consult, pension fund trustees or scheme members. As I understand it, existing employers’ rights under the Pensions Act 2005 are already quite significant.
As my noble friend, Lady Drake, made very clear from her extensive experience of this, further extensions of that power should be done with great care, if at all. As she explained in convincing fashion, statutory overrides are very strong measures and should be used with care in all cases.
The opposition Benches do not believe that the override power, in this form, is needed or desirable. Amendment 38ZB, tabled in the name of my noble friend Lady Sherlock and myself, would require that changes to pension schemes could be made only with the consent of pension trustees. I accept that it is unlikely that the Government will accept that amendment, but my noble friend Lady Drake offers more of a compromise position that the Minister may find acceptable. In her Amendment 39, she proposes that an employer has the power to amend a pension scheme after consulting pension trustees, and her Amendment 50 states that regulations may require employers to reach agreement with trustees.
It is interesting that in the debate in the Commons, the Pensions Minister, Steve Webb, said—I am keeping this short but I promise the Committee that I have not changed the meaning of it; I have merely taken out extraneous words:
“To encourage … firms to be willing to carry on offering defined benefit pensions, which most of us want them to do, we need to allow them to recoup the money. Many employers will do that by having a conversation with the trustees of their pension scheme and reaching … agreement. That would be the norm. It would be quite proper … The strong incentive, therefore, is … to have a mature conversation with the trustees in order to reach an agreement. We believe that many employers will do that”.—[Official Report, Commons, Pensions Bill Committee, 4/7/13; cols. 244-45.]
If I understand this legislation correctly—and I have to admit that I cannot always guarantee that I do, given its complexity—without the statutory provisions for override in the Bill, that is what all employers would have to do. As is clear, many Members of the Committee, and all of us on these Benches, are at a loss to understand why that best practice, endorsed by the Minister himself, is not what the Government are legislating for.
Our amendments, including Front-Bench Amendment 38ZB, ask these questions: why are the powers set out in the Pensions Act 2004 not sufficient? Why is it necessary to legislate for an override in this fashion at all? Why is it necessary, as the Government are doing in Amendments 48 and 49, to give employers even more powers than in the original drafting of this Bill? What possible reason can the Government have for not reflecting their own Pensions Minister’s endorsement of best practice in their Bill? Where is the opposition coming from to consultation at least, if not to consultation and agreement, if not—as it clearly is not—from the Pensions Minister himself? I hasten to add that I reinforce that I am not reading the Pensions Minister’s words from the debate in a way that misrepresents his argument; I have taken out some extraneous words but that is all.
It is just good management practice, never mind in pensions, to consult staff. Consultation assists implementation and, consequently, staff buy-in to the need for changes. To seek the agreement of pension trustees to changes to schemes, as we propose under
Amendment 38ZB, can only prove helpful to employers. As we have heard, trustees have fiduciary duties and responsibilities to act in the best interests of scheme members, so why should the Government not think it sensible, as well as best practice, to consult trustees and seek their approval?
I turn to the limitation on the power to override and the effect of the amendments in relation to this. There is a limitation on the exercise of this override power. As has been said, the employer’s override powers are limited to recouping the cost of the extra national insurance that the employer would have to pay as a result of the end of contracting out. Under the terms of Schedule 14, the exercise of this power must be certified by an actuary as doing no more than that.
My noble friend Lady Drake’s amendments, which I do not intend to engage with in any detail, given her eloquent and convincing arguments for them, are designed to put more definition in the extent of this power. In particular, her Amendments 37ZA, 45, 46 and 47 are designed to define more clearly the values that limit the exercise of the power and would clarify the power of override in a way that I am sure the Government would find helpful. They are within the spirit of the Government’s proposal and the Minister’s intentions, as explained by him repeatedly.
I have some experience of engagement with actuaries when I practised law in Scotland. Given that it is improbable that actuaries, who are notoriously independent of each other and seldom ever agree on discount rates, are likely to come separately to different conclusions, is it not better that the statutory limitations on the use of this power are expressed in such a way as set out in my noble friend’s amendments, rather than in the way that the Government have chosen to do it?
I turn to the issue of protected persons. We have not had an extensive debate on this issue or protected pension schemes, but I have been subject to some very powerful arguments, made not only by noble friends and other parliamentarians but by those with whom I have engaged in preparing for the debates on the Bill, about such persons. I have studied carefully the words of the Pensions Minister, which I encourage people to do—they are very instructive about the thinking behind some of this legislation. To me, his words clearly imply his preference for exempting protected persons. Having done that, one cannot but feel that there is a special set of circumstances arising from the privatisation of nationalised industries in respect of these pension schemes.
Curiously, the Bill is drafted in a way that allows the Secretary of State the power to keep the promises that were made to the members of the schemes. I am really interested in why this has been done. What was the motivation behind it if there was no inclination to do it?
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Curiously, despite the fact that he has created this opportunity and then deployed the best time-wasting tactic known to any Minister—a consultation—to its fullest extent, we are now in a position where we have no idea, despite a consultation which promised to report in the summer, what the Government’s position
is in relation to the exercise of that power. This affects 60,000 or more members of these schemes awaiting this decision. They are entitled to know what it is.
My noble friends’ amendments relate to specific pension schemes. Our Amendment 40A deals with the issue of former nationalised industries in the round, covering all the relevant schemes; if it is not comprehensive then I am happy to take it away and recast it because I understand that people are coming across other information on these schemes, as was clear in the debates in the House of Commons.
It is also clear that specific undertakings were given to the members of these schemes to encourage them to accept privatisation of the industries in which they worked. As my honourable friends Katy Clarke and John McDonnell, and others, made clear in the Commons in debate, these privatisations were hugely contentious and there was substantial opposition to them. These promises were in a very specific category. They were designed to encourage workforces to accept privatisation, if not to support it. Those who made them, many of whom are now noble Lords—honourable men—expected them to be honoured. Curiously, I have concluded that the drafting of the Bill implies that the Minister in another place wishes to do so. Otherwise, I do not understand why this power has been put into the Bill. Why not just wait until a decision has been made and then amend the Bill one way or another? Why was the power specifically put into the Bill if somebody did not want to exercise it at some point? The Minister said:
“I hope we will be in a position to conclude our deliberations relatively shortly, certainly while the Bill is still before Parliament. Later in the summer is the timetable we are working towards”.—[Official Report, Pensions Bill Committee, 4/7/12; col. 248.]
Those of us who have been Ministers know the value of using seasons as opposed to months for promises but, by any view, we are well beyond the summer of 2013 now that we are into 2014.
At the very least, is it not therefore appropriate for us to be asking the Minister when this decision will be made? It is difficult to avoid the conclusion that the way in which this issue of protected persons is being dealt with is becoming an affront to Parliament. Parliament is being promised, in the context of the Bill, a decision about this. Whatever decision the Government make, there will be consequences that we are entitled to debate and consider in the context of this legislation. We have been denied the opportunity to debate these properly and to make a decision as a Parliament. It is getting very close, in my submission, to being contemptuous of Parliament. Promises were effectively made about timescales which have now been comprehensively broken. Is the Minister at least in a position to tell us today when we can expect the Government’s decision on protected pensions?
Finally, conscious of the time, Amendment 68A is simple and straightforward, and merely seeks, through the mechanism of an amendment to Clause 49— “Regulations and orders”—to require the Government to have regulations to extend beyond five years the period of time for which an employer may amend
pension schemes to reflect the abolition of contracting out dealt with by affirmative resolution rather than negative resolution.
There is an extremely interesting passage in the debates in the Commons about the value of the negative resolution as opposed to the affirmative resolution, conducted by the Pensions Minister, in which he goes very close to saying that there is no substantial difference in these processes. An affirmative resolution requires the Government to make their argument and a negative resolution requires someone to pray against, to encourage the debate. In my view, the extension of these powers beyond a five-year period is such a significant thing to allow an employer to do, against all the consequences that we have debated, that it would be proper for the Government to make their argument for an extension as a matter of legislation rather than expecting someone to pray against it and then have to make the argument.