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20 Jan 2003 : Column 74—continued
6.26 pm
Mr. James Arbuthnot (North-East Hampshire): I have a huge regard for the Minister for Pensions and for what he knows and does in relation to pensions, so I hope that he does not take it as a discourtesy when I say that it is a great pity that the right hon. Member for Birkenhead (Mr. Field) did not remain in his job. Had he done so, we might not be facing some of these problems.
I declare an interest as a member of Equitable Life and as a pensions barrister. I also declare an interest as one of the guilty men who introduced section 73 of the Pensions Act 1995. Experience has shown us that the priorities highlighted by my hon. Friend the Member for North-East Hertfordshire (Mr. Heald) need fine tuning. That makes the problem sound small, but it has turned into a major one. We all know that it arises from a more fundamental issue than a stock market collapse—the fact that we live longer, join the working population later because we spend longer in education, retire earlier and save less. Possibly the most important issue of all is the post-war baby boom, which we have yet to take account of in funding our pension schemes.
We have a recipe for a catastrophic old age for many people, and the system that we have set up to cope with that potentially catastrophic old age is not at all simple. It is expensive, complicated, intimidating and run by a set of trustees who are largely unpaid and frequently untrained, yet they bear huge responsibility for our future in old age. The Government have introduced some fairly sensible measures in some places to deal with that. The Myners, Pickering and Sandler reports impress me, as do many points in the Green Paper, notably on the simplification of taxation, but the radical nature of the problem brings me back to what the right hon. Member for Birkenhead said: it does not seem to have been addressed by a radical solution. Overall, there is nothing in the Green Paper to start people saving when they would not otherwise do so.
I take as my text a letter that Professor Blake from the Pensions Institute sent to the Select Committee in August. He is a highly respected, independent academic who deals with these issues. He asks about the word "crisis" and says:
- "The word 'crisis' may be an exaggeration, but it is certainly the case that within a few short years what was the envy of Europe, namely a good well-funded private pension system sitting on top of an admittedly poor-in-comparison-with-the-rest-of-Europe basic state pension system, appears to be on the verge of possible disintegration."
The issue of winding up schemes has become extremely urgent. The National Association of Pension Funds confirms in its report that the issue is urgent. What sense of urgency have the Government shown? I am afraid that they have not shown very much. I agree with the right hon. Member for Birkenhead, who stresses the need for urgency.
Two measures are required: the first is difficult, and the second is easy. The difficult one arises out of Professor Blake's letter, in which he considers how we can get out of this mess. He highlights certain relationships and says:
- "higher state pension entitlements reduce the need to save privately for retirement, but have no discernible effect on the timing of the retirement decision
higher occupational (defined benefit) pension entitlements have the effect of increasing private savings, but also of encouraging earlier retirement
higher personal (defined contribution) pension entitlements have the effect of increasing private savings, but also of delaying retirement."
There is nothing wrong with money purchase schemes, provided—it is a huge proviso—that companies pay into those schemes the same amount as they were paying into their final salary schemes, or more. A major problem is that companies have tended to pay much less into their money purchase schemes than they were paying into final salary schemes. What does the Green Paper suggest to address the need for
higher defined contribution payments? I am afraid that the answer is nothing. Companies that pay more into their schemes encourage individuals who would not otherwise be given to saving to decide to save in a defined contribution pension scheme.Therefore, the first thing that the Government should do is to give companies major incentives to pay more into their defined contribution schemes. If the Government do not do that, we run the risk, as set out in Professor Blake's letter, of retirement becoming a 20th century concept—something that came in towards the end of the 19th century and went out at the beginning of the 21st. We as a country would find that change devastating.
The second thing that the Government must do is relatively easy. They must accept the urgent need for a change of priorities. The priorities that arose out of section 73 of the Pensions Act may have been right or wrong at the time. If they were wrong, I accept my fair share of responsibility. They are certainly wrong now, and something needs to be done about them. What we require from the Government is not endless consultation, but action this day.
6.34 pm
Mr. Terry Rooney (Bradford, North): Occupational pensions have an inherent strength, partly because they have the widest possible membership. We should take account of the fact that the changes in April 1988, which led to 5 million people leaving occupational pension schemes, resulted in £13 billion being paid in compensation because of mis-selling. All that money came out of insurance companies' reserves, so it is not available now to get us through the difficult times that the financial world faces. In the past 15 years, employers have taken about £31 billion in contribution holidays. Had part of that money been put into schemes during those years, many of the difficulties would have been dealt with.
I want to dispel the myth that means-testing by the Government is a disincentive to save. No one in their right mind, whether they are 21, 31, 41 or 51, says to themselves that, as there is a minimum income guarantee of £98 a week, they do not need to save, because that is fine for their retirement. No one in their right mind wants to retire on £98 a week, and no one consciously takes that decision.
Much has been said about the need to protect workers. It is staggering that those words have been used by Conservative Members, but we live and learn. Information and consultation have also been discussed. Frankly, information is fine, but not consultation, because consultation gives no rights to workers. It is the ability of working people and members of a scheme to influence decisions that counts, not the fact that they are consulted when the scheme is in a mess and the company wants to close it. That is no good at all.
We had the Goode report in 1993, a Green Paper in 1998, and now we have the 2002 Green Paper. They all raise the same issues, which have been ducked. This problem has gone on for far too long, and it is time that we grasped the nettle and took action. A vital component of that action must be proper training and support for trustees of pension schemes. At the moment, the position is quite scary. In view of their
responsibilities, the training and skills that they are given to manage schemes are appalling. They should have much better support.Dubious comments have been made about the minimum funding requirement, and I am amazed that no one has mentioned FRS 17. It is not a problem in itself; it is a warning when a fund is out of kilter. The problem is the response that is taken to it. In the past couple of years, it has been used as an excuse for closing down schemes. When a problem has been identified, it should be cured in the shortest possible time, but not necessarily overnight. Better regulation of the response to deficiencies thrown up by those two requirements would be far preferable.
I find it difficult to get into a debate about who has priority when a scheme goes into liquidation—it is like shifting the deckchairs on the Titanic. It is more important to consider what mechanisms can be put in place so that when a scheme unfortunately goes into liquidation there is adequate funding from somewhere, be it Government, a discontinuation fund, an insurance fund or a mutual fund. However, that would not affect what will happen in the next year or two, even if we brought in legislation today. This is a matter for the future.
When schemes go into liquidation, an independent trustee is appointed. That is an introduction to the world of the golden salary. A company in Bradford called Lund Humphries went into liquidation, and an independent trustee was appointed at a fee of £100,000 a year. He was working on the scheme four hours a week on average. It took six years to wind up the scheme, because there was no incentive for him to do so. The longer it went on, the longer he got his £100,000. One of the issues that came up was the length of time it takes the Government to give notification of the minimum pension guarantee. For that scheme, it took 18 months. The Government could provide such information a lot faster. There should be tightly controlled time limits on winding up a scheme once it goes into liquidation. The accountants are ripping people off. Not the pensioner, not the worker but the trustee is the No. 1 priority. He, with his £100,000 a year, must come first.
Many years ago, in 1990 or 1991, the European Court made a judgment that became known as the Coloroll judgment. It decided that pensions were deferred wages. That judgment has never been effected in British legislation, but it would change our landscape dramatically. A pension scheme's assets would become the property of the workers rather than the company. Decisions and power would lie elsewhere, and there might be a rather different response to market conditions.
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