I understand what trustees in pension funds do and I understand that some of them find themselves in very difficult positions when having to address those issues.
Referring to those private sector employees who are contracted out immediately before implementation, who reach state pension age in the first decade of single tier, around 75% of them will receive enough extra state pension to offset both the increase in national
insurance contributions that they will pay over the rest of their working lives and any potential adjustments to their occupational pension schemes. Such a move must be considered in this context.
In contrast to the figure that the noble Baroness, Lady Turner, and the noble Lord, Lord Whitty, were looking at—1.6 million in private sector schemes—regrettably, by 2016, we expect only 950,000 individuals to be affected. That figure is in the impact assessment at paragraph 128.
Amendments 37 and 38 would remove the statutory override power and prevent Schedule 14 from coming into force. The practical effect would be that an employer would be required to get trustee consent for the changes they wanted to make to their scheme should their pension scheme rules require this. For the reasons I have just set out, we feel the override is necessary.
Amendments 38ZA, 45, 46 and 47 of the noble Baroness, Lady Drake, relate to the calculation of the value of the employer’s lost national insurance rebate. For the statutory override to operate as intended we must balance two competing factors: first, safeguarding members from changes to scheme rules that go beyond offsetting the loss of the rebate; and, secondly, providing an override that remains workable for employers—otherwise in practice they will still be left with little real alternative to scheme closure. Schedule 14 sets out important safeguards in the Bill and includes powers to put further safeguards in regulations. Paragraph 2(2) of the schedule prevents the employer making changes beyond those necessary to recoup their increase in national insurance contributions. We intend for this amount to be calculated in accordance with regulations—allowing us to define annual national insurance contributions—and an actuary must certify that any changes do not recoup more than that amount before they are made.
Importantly, any proposed scheme changes cannot take effect before April 2016 and individuals’ accrued pension rights are protected by the Bill. The amount will be calculated in accordance with actuarial methods and I accept that that can be a changeable feast, as the noble Baroness, Lady Drake, pointed out. However, we intend to specify the methods and assumptions in regulations following consultation with the actuarial profession. We are working on the detail of the override regulations and are developing the legislation with stakeholders. We have shared an early draft of the key technical provisions of the regulations with the industry and will undertake a full public consultation on the full regulations as soon as possible. The override will not remove an employer’s obligations under existing legislation to consult their workforce in the usual way before making changes.
Amendments 38A, 39 and 50 refer to the role of trustees in the use of the statutory override. Legislating for trustee consultation risks unnecessarily complicating existing communication channels. It would be counterproductive to require employers to seek trustees’ agreement that the proposed changes recoup no more than the increase in national insurance costs. Trustees would be put in a position of either accepting or challenging the professional view of the certifying actuary. The proposal that the trustees could block the
use of the override would negate its purpose. It is worth remembering at this point that, as with any significant alteration to pension schemes, existing legislative provision means that members must be consulted before any changes take place, which is a point I have made.
Where employers wish to make changes to their scheme, whether using the override or through existing scheme rules, it is in their interest, as my colleague Steve Webb said, to engage with their employees and scheme trustees. They will not want to make changes that are impractical or have unforeseen consequences for the scheme or themselves. We can see no reason why employers would not engage in the usual way without the trustees in this case.
We have placed a limit of five years during which employers may use the statutory override. This ends in 2021 but, as the noble Lord, Lord Browne, observed, that time limit may be extended by an order made by the Secretary of State. Based on all the information we have at the moment we believe employers who choose to use the override should be able to do so within this time limit. However, contracting out is complex and there may be unforeseen problems for some employers. An employer who is unable to use the override within the time limit, without the possibility of an extension, may have no option but to close their defined benefit scheme. This would be a compelling reason to use the power and we feel that an affirmative resolution procedure on this matter would not be a prudent use of parliamentary time.
8 pm
On the question about the affirmative procedure, technical regulations have been drafted in consultation with pension industry representatives and advisers. We are directly engaging with industry professionals to ensure that these provisions are workable in practice and we will have full public consultation.
Noble Lords will remember that the Government have assured employers and the pensions industry that they will have a two-year preparation period for the changes relating to the ending of contracting out. That timetable is already very demanding. Subjecting the draft regulations in addition to the affirmative procedure, which is lengthier than the negative one, would considerably shorten the amount of time which schemes will have to prepare and put in place amendments for April 2016. This would mean a prolonged period of uncertainty that the industry and employers have said will delay them being able to commit resources such as the employment of actuaries and other professionals to work on the scheme changes that may be necessary, and will in turn delay any negotiation between employers, members and trustees. Delay also increases the risk that employers will simply close the schemes.
I turn to Amendments 40 and 40A. In some formerly nationalised industries, employers and trustees are limited in their ability to change scheme rules by legislation made at the time of privatisation. However, Governments cannot bind their successors. The radical overhaul of the state pension system and the abolition of contracting out in this Pensions Bill leaves this Government with a very difficult decision—should the statutory override apply to those covered by protected
persons legislation or not? Trade unions have strongly urged us to honour the promises made at the time of privatisation. They have argued that a change in 2016 would leave those close to scheme pension age no time to make adjustments. It is also reasonable to ask why we would disturb the pension provision of a relatively small group of workers. Around 60,000 individuals are covered by protected persons legislation. This represents a small proportion of the members in private sector contracted out schemes. However, employers and the National Association of Pension Funds argue just as strongly for the override to apply to protected persons because they want all scheme members to be treated in the same way. If protected persons are excluded from the override, employers will look for other ways to offset the loss of the rebate for that group. Consumer prices may rise where regulatory regimes allow. Wages could be held down, which would also affect those outside the protected persons group. Additionally, employers fear that any differential treatment carries a risk of industrial dispute.
One could also argue that those protected under privatisation legislation will in many cases have ended up with more generous pension terms than their counterparts in the public sector. We also have to factor in that the design of the single tier reforms means that those with a long history of contracting out will in most cases build up significantly more state pension. Around 75% of people in the private sector who pay higher national insurance contributions and reach state pension age during the first two decades following implementation will receive enough extra state pension over their retirement to counterbalance the increase in national insurance contributions. This is a very complicated issue with many different and conflicting interests, and the Government are still deliberating the matter. A decision will be made as soon as possible and we will inform Parliament accordingly.
Finally, we come to government Amendments 48 and 49.