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27 Feb 2003 : Column 455—continued
Pensions
3.25 pm
The Minister for Pensions (Mr. Ian McCartney): I beg to move,
- That the draft Guaranteed Minimum Pensions Increase Order 2003, which was laid before this House on 5th February, be approved.
This may well be a parliamentary first, in that orders such as this are usually included in the overall debate. I shall be honest with the House: I have just received a message from the Department relating to what I am to say. This is unusual in my case, but I shall stick to the brief that I have been given. I hope that hon. Members who have questions to ask will accept my assurance that I will write to them with technical answers.
A guaranteed minimum pensions increase order is laid every year to prevent a person's contracted-out pension from losing its value because of inflation. The orders were introduced in 1978, at the same time as the state earnings-related pension scheme. Employers who ran good occupational pensions for their employees could contract out of SERPS, provided that they promised to pay their staff pensions that were no less than the guaranteed minimum pension. In return, both employer and employee made reduced national insurance contributions.
The calculation of the GMP is laid down in legislation, and is roughly the same as the SERPS calculation. It is earnings-related, and based on a person's earnings over a maximum of 40 years. If those earnings were not increased in line with inflation, by the time the person retired his pension would be very low as inflation ate into the value of his past earnings. When a person retires, therefore, past earnings are increased to reflect the changes in their value. There is, however, a limit: the earnings are increased by the retail prices index capped at 3 per cent.
Mr. David Willetts (Havant): The Minister has explained that pensions contracted out as part of this formula involve a lower rebate. Will he explain why, in calculating that rebate, the Government Actuary assumes that the rate of return on indexed gilts will rise from 2 per cent. to 3.5 per cent., and will rise by 0.1 per cent. a year over the next 15 years?
Mr. McCartney: That is why we employ the Government Actuary: to make such judgments. What a silly question. Why would we pay the Government Actuary not to give us advice?
Let me be honest: one hopes that by the time the advice is given there has been a reshuffle. We should remember some of the things said from the Dispatch Box when the Conservatives were in power, for which they then blamed others. I take full responsibility for the information given by the Actuary, but I assume that he will have used his professional judgment.
The earnings figure used to calculate SERPS is also increased, but in line with average earnings, and is not subject to a cap. When a person retires who has a
contracted-out, salary-based pension, his GMP is compared with his notional SERPS entitlement. [Interruption.] I hope that everybody is following me. If SERPS is higher, the difference between the two amounts is paid with his retirement pension. Thus the state makes up the possible shortfall between the level of inflation and the capped amount that the employer is expected to pay. Although GMPs ceased to accrue from 1997, residual rates still exist, so increase orders are still required.This order is a routine measure to ensure that people's future pensions are not eroded by inflation. This protects the current system, but we are committed to ensuring that the legislation governing how pensions are run is proportionate to the required outcome, and to simplifying as far as possible the burdens placed on employers in this respect. In line with this intention, we announced in the recent Green Paper that we are working with the pensions industry to try to find a workable and affordable solution to the problems associated with the GMP's operation that have been brought to our attention.
I am pleased to say that, as part of our commitment to working with those who will need to operate the system, Department officials are holding meetings with experts in the pensions industry, as well as with those representing scheme members. Only last week, the Department ran a workshop to which those interested in occupational pensions—including the Consumers Association, the national association of pension fund managers and the TUC—were invited. The discussions were particularly fruitful, and indicated some possible ways forward. In addition, we have issued a detailed technical paper on GMPs to widen the debate to include those who cannot attend such meetings. Indeed, I have offered to meet them at their convenience, and I make a similar offer to hon. Members if, after this debate, they feel in need of further information on what I have said.
3.30 pm
Mr. David Willetts (Havant): I am grateful to the Minister for what was undoubtedly an entirely accurate, as well as a typically authoritative, account of this order. As the explanatory note points out, the order establishes the basis on which contracted-out occupational pensions have to offer the guaranteed minimum pension in order to be contracted out properly. As the explanatory note makes clear, the order covers contracted-out, defined benefit occupational pension schemes, so I hope that the Minister will be able to answer two questions.
First, he will know that, despite his respect for the professional advice of the Government Actuary, which I share, just about everyone in the actuarial profession believes that the value of the contracted-out rebates—currently about £11 billion to British industry—is no longer actuarially fair. They believe that the cost of providing the guaranteed minimum pension, the uprating of which we are debating, is no longer properly covered by the value of the contracting-out rebate. The general view among actuaries is that the value should be about £12.5 billion—in other words, that the current value is £1.5 billion short. This is a very important point, because it is one reason for the pensions crisis. I know that there are many such reasons, and that not all of them are under the control of Ministers, but the
reduction in the contracted-out rebate, compared with the cost of offering contracted-out pensions, is one of the main ones.I hope that the Minister will not shelter entirely behind the advice of the Government Actuary. Given that this issue is so important to our funded pensions, I hope that he will explain why the Government Actuary uses assumptions to calculate the value of the contracted-out rebate that are out of line with those used in the rest of the industry, and which are particularly out of line with those relating to returns on indexing gilts. That is not considered plausible, and I am afraid that the belief exists in the industry that that obscure assumption was one way in which the Government ensured that the cost of the contracting-out rebate was held down, and was therefore less than was actuarially fair.
That leads to my second concern. We need to know how many pension schemes are still contracted out and therefore covered by the terms of this order, how many are contracted in, and—even more significantly—how many are contracting back in, having been contracted out. The question is whether contracted-out schemes will be re-entering the state system. At the moment, probably the only thing that is keeping them contracted out is the sheer administrative hassle of contracting back in. I fear that one reason why companies are closing their schemes to new members is that by doing so the new alternative defined contribution pensions that they offer instead are often contracted back into the state system. So one reason for the widespread closure of pension schemes for new members—a development that is causing much concern—is that it is used as a mechanism for contracting back in.
The Government Actuary's report—one of the documents that is relevant to our debate—is very explicit. In paragraph 25, on page 10, the Government Actuary explicitly states that he does not know what is going on in respect of contracting out, partly because of the Government's problems with their NIRS2 computer system. He says:
- "The introduction of NIRS2 originally led to a lack of data showing numbers contracted out through different routes. I understand that data is now becoming available, but that it is currently being analysed and validated. Consequently there is, pending the completion of this validation exercise, still uncertainty about the numbers of people contracting-out."
The order covers the incomes of millions of pensioners and I hope therefore that I may take this opportunity to confirm what my right hon. Friend the shadow Chancellor said in the Chamber earlier—that it is simply not the case that we are looking for a 20 per cent. reduction across the board in all public expenditure. Having taken that opportunity, I may also say that we will not, of course, oppose the motion, and certainly not in the light of the lucid explanation that we received from the Minister.
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