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Bob Spink (Castle Point): Does the hon. Gentleman accept that the suspension of final salary schemes by companies has been caused in part by the £5 billion tax that was imposed by the Labour Government, which caused the returns on those companies' investments to fall?
John Robertson: I thank the hon. Gentleman for that contribution. I shall completely ignore it, as I should. I will say, however, that many withdrawals of money and opt-outs happened when his party was in power.
David Taylor: Will not my hon. Friend be relieved when that particular example being used by the Opposition crawls out of the Chamber and dies? It is a very minor matter compared with the cost to 10 million pensioners of the breaking of the link by Mrs. Thatcher in 1980, which costs them a minimum £15 billion a year. Does my hon. Friend agree that the hon. Member for Castle Point (Bob Spink) should be ashamed of that?
With money purchase schemes, the size of an individual's pension pot on retirement determines the size of the pension. If the individual has not put in enough, or if investment returns have been poor, there may not be enough to fund a decent pension. At the moment, that situation is made immeasurably worse by the very high price of annuities. The law currently obliges people to use their pension fund to buy an annuity.
There are also implications for employee relations in the closure of final salary schemes. While it may not be a breach of contract to close a final salary scheme, it could be regarded as the breaking of an implicit promise in the employer-employee relationship. Apart from the obvious damage to the commitment that employees have to their company, the loss of a guaranteed pension and reduced contributions may increase wage demands as employees seek to maximise their pensions. A disturbing tendency is also emergingdirectors are keeping their own final salary schemes while removing them from their employees. That must be stopped. I ask the Minister to ensure that, if there is no law to cover this, there will be in future. There cannot be one law for directors and no law for employees.
The unions are very concerned about the dangers of closing final salary schemes, and I pay tribute to Amicus and Connect, the union for professionals in communicationsI draw to the House's attention the disclosure of my membership of Connect in the Register of Members' Interestsfor the work that they have been doing to inform people of why final salary schemes are needed and must be brought back. Earlier, I mentioned that Ernst and Young was one of the employers who had closed the scheme to existing employees. This company has now been forced to reopen the scheme owing to the sheer pressure that it faced from its employees. Do we really want to go down the industrial action road? Who would win in those circumstances? I also have to ask how the company can go back into a final salary scheme once it has come out of it.
The problem with the minimum funding requirement is twofold. First, the test for the schemes is too onerous. Secondly, a scheme that is fully funded under the MFR rulesone that can meet its pension obligationsis in fact overfunded. In other words, the MFR is too cautious. It might seem absurd to make that statement, but actually it is not. Under the MFR rules, schemes have to be returned to fully funded status within a fairly short timenow 10 years. The only way that that can happen is through employers making sizeable payments to their pension schemes. That is the nature of the second problem, because it places the onus on employers to make up the shortfall, although in many cases the shortfall is really nothing of the kind.
Another problem is FRS17. This is a new accounting convention, designed to force companies to show any shortfall in their pension scheme funding as a liability on their balance sheet. I disagree with some of my colleagues on this, because I do not agree with the measure. We should either modify it or get rid of it. It is supposed to aid transparency in company accounts, but all it does is add the money in one fell swoop to the liability of a company. That can drastically affect the company's share price, which can also have a knock-on effect.
Funded pensions are important to every person, not only in the Chamber but in the whole of Britain. This is not an issue to be taken lightly, and it is certainly not an issue on which to score points. I have tried not to do that. The Government are trying hard, and they have gone a long way, butas my colleagues have saidthere is still a lot to do.
Hywel Williams (Caernarfon): As we have heard, the funded pension system is in considerable difficulties. The amount already saved is unclear, as is the amount being saved, and employers are opting out of occupational pension schemes. Pensioners and future pensioners are uncertain as to their future pension incomes, and many people are uncertain about their entitlement, not least because the system for income maintenance in retirement is so complicated.
Conservative Members have referred several times to the complicated nature of the pension system. Last Friday, I had the daunting task, as a relatively new MP, of trying to explain part of the pension system to a puzzled constituent. I will certainly not go into it again today, except to list some of the features that I was trying to explain: the state retirement pension; the minimum income guarantee; the state second pension; the stakeholder pension; occupational pensions; private pensions; and the pension credit. That was without going into disability or housing benefits. Many pensioners are bemusedas, occasionally, are Members of Parliament, when trying to explain all these various provisions.
Final salary schemes are in considerable difficulties. The TUC estimates that there are 1.8 million fewer people in such schemes today than there were 10 years ago. Only 200,000 of those people are likely to have transferred to money purchase schemes. What has happened to the other 1.6 million? The assumption must be that they now have no form of occupational pension. The Association of Consulting Actuaries estimates that only 37 per cent. of final salary schemes now remain open to new members.
The hon. Member for Glasgow, Anniesland (John Robertson) referred to the case of BT, which closed its scheme some 14 months ago. New workers will now be lucky to have a pension worth 25 per cent. of their final salary. Since the scheme closed, about 3,000 workers have joined BT, and a Communication Workers Union official has estimated that the average contribution of new joiners to their pension was 4.7 per cent. in that period, matched by 4.7 per cent. from BT. That represents a considerable saving to the company, and, as the hon. Member for Stalybridge and Hyde (James Purnell) said, it means a pay cut in the future.
That is the situation for new entrants, but people who are already in the scheme are worried that it will be closed, forcing them, too, into a money purchase scheme. The hon. Member for Glasgow, Anniesland mentioned that the average employer contribution into final salary schemes was 15 per cent.I understand that it was actually 15.4 per cent.whereas the contribution to a money purchase scheme is 6 per cent.
The Government have a policy of changing the ratio of state to private pensions from 60 per cent. state and 40 per cent private to 40 per cent. state and 60 per cent. private by 2050. There must be serious concerns about that. Future pensioners are suspicious, not least because of the pensions mis-selling scandal, the Maxwell scandal and now the Equitable Life debacle.
A change in the ratio is not guaranteed to provide pensioners with a decent income in retirement, which must be our aim. There are particular difficulties for people in areas such as my own and throughout Wales, where incomes are lower and the ability to save is much more restricted. There are difficulties for individuals, and a difficulty for Welsh society as a whole. We have an employment structure that is skewed towards lower paid jobs, which are much more common. The difficulty in the pensions system is a difficulty for the community in general.
The Government make great play of the stakeholder pension. The Welsh economy is overwhelmingly made up of small businesses with fewer than five employees, so those employees will not necessarily get access to stakeholder pensions. Take-up may be a problem in Wales, especially among the lower end of the target groupthose on incomes of £10,000 up to about £18,000. We in Plaid Cymru look forward with great interest to the publication of the comprehensive take-up figures in October.
We need a better system of funded second pensions that will reach the lower paid, especially those in small enterprises such as those I have mentioned in Wales. We also need a proper retirement pension, and a redistributive rise in that pension is essential.