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Occupational Pensions

12.30 pm

The Secretary of State for Work and Pensions (Mr. Andrew Smith) rose—[Interruption.]

Mr. Speaker: Order. Hon. Members must leave the Chamber quietly.

Mr. Smith: Thank you, Mr. Speaker. With permission, I wish to make a statement on action that the Government propose to take on occupational pensions following the Green Paper.

Our proposals build on the historic strength of the UK's voluntary system—the partnership between Government, individuals and employers which has seen pensioner incomes rise faster than average earnings over the past 20 years, but which now faces real challenges as people are living longer at a time when birth rates are falling. Although the UK is well placed compared with other countries to deal with that, still more needs to be done. People need to be able to plan for their retirement and make informed choices about how and when to save, and how long they work so that they get the income in retirement that they expect. We will make further announcements in due course on the suite of Sandler products; a better deal for those who take their state pension later; and on the proposals outlined in the tax simplification review.

Today, however, I want to focus on occupational pensions because they are under pressure now and we need to take early action. I am therefore setting out a balanced package of reform that better focuses regulation on things that people are most worried about so that we can cut burdens on business and increase member confidence in pensions. We will strengthen the protection of pension rights that people have built up to make sure that rights promised are rights delivered. Getting that balance right means taking a tough look at areas where regulation has grown out of all proportion. It also means taking action to deal with the demands of an increasingly dynamic economy in which companies are taken over and people move between jobs more frequently.

In February, we tackled the challenge of two-tier work forces to extend protection of pension rights to new starts working in many previously public enterprises. However, it must be wrong that solely because of a takeover workers in any private company have their rights scrapped. That is why I can announce that we are extending the protection of pensions provided by TUPE—the Transfer of Undertakings (Protection of Employment) Regulations 1981—to private sector transfers. We will insist that where pension rights have been established, the new employer will need to match employee contributions up to 6 per cent to a stakeholder pension or offer an equivalent alternative. That is a fair adjustment. It builds confidence in pensions and reflects company best practice. To provide security for a more mobile work force, we will help people build up rights in short-stay jobs by enabling them for the first time to take with them the full pension that they have built up to another scheme.

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I am clear that in a voluntary system, such protection of rights must be balanced with measures that make it easier for companies to set up and run good schemes for their employees. As I have stressed before,

In a voluntary system we must be mindful of the costs for providers. Over the years regulation has built up, often for the best intentions, into a layer cake of complexity. That cannot be right. If we are to make the voluntary system work more effectively, we need to make sure that regulation is well targeted and effective.

That is why I can confirm today that we will be driving ahead with measures to cut regulations and costs on companies running schemes. We will replace the minimum funding requirement with scheme-specific funding arrangements. We will simplify and consolidate legislation in key areas to make it easier to administer pension schemes and, taking account of consultation responses, we will go further than we signalled in the Green Paper. We will radically reform section 67 of the Pensions Act 1995 to give schemes more freedom to adapt to changing circumstances without closing or even having to wind up. I am also taking forward a raft of specific simplification measures, such as streamlining the requirements on member-nominated trustees, improving dispute procedures, ending the requirement to offer additional voluntary contributions, and introducing less bureaucratic reporting arrangements.

I have received submissions from the Pickering review and others that we should abolish compulsory inflation indexation because the requirements are too onerous and expensive. Although some important points have been made about the knock-on effects of costs putting schemes at risk, I do not believe that we should do away with indexation. However, guaranteed indexation of 5 per cent. was proposed in 1995, when market long-term expectations of inflation were at 5 per cent. Today, because of the stable macroeconomic environment that this Government have put in place, inflation has been driven down to average just 2.4 per cent. over the years since 1997. That means that under present arrangements, we are effectively forcing purchase of more than full inflation cover, which may be disproportionately expensive.

I therefore propose that the cap on mandatory indexation will now be set at 2.5 per cent., giving schemes and their members more flexibility to agree together on the form of pension that suits them best, easing funding pressures and helping to keep schemes open. I stress that there will be no effect on the value of today's pensioners' rights. It is a measure for future accruals only, to give more freedom to design schemes in the most sensible way. I can tell the House also that we will keep survivors' benefits—the requirement for contracted-out schemes to provide for widows, for example—because making any change here would have a bad effect on women's pension prospects, in particular.

With increased flexibility, we need to make sure that employees' rights are protected without employers winding up their schemes as a result, so I can announce today that we will set up a new, proactive pensions regulator to focus on tackling fraud, bad governance

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and poor administration. It will adopt a more proportionate approach, making sure that members are protected, while reducing burdens on well-run schemes.

Pensions are a voluntary partnership and it is for workers and employers to decide on what type of scheme suits them best. We have seen welcome examples in recent months of employers and trade unions deciding together how best to ensure continuing high quality provision, and we set out in the Green Paper a proposal to require employers to consult scheme members before making changes. I can confirm that, working with my right hon. Friend the Secretary of State for Trade and Industry, I will be taking this into effect, requiring consultation to strengthen partnership in pensions.

Examples of good practice are too often over-shadowed by cases where employers have gone back on promises, causing anxiety. People also worry about the get-out clause that lets solvent companies which could afford to keep their pension scheme running wind it up with inadequate compensation.

In the cases where firms have done that, it has inflicted untold damage on confidence in the whole system. People worry that other schemes will follow suit. We need to act to make sure that a pension promise made by employers is a pension promise honoured by employers. We will therefore strengthen member protection where solvent employers decide to wind up their pension scheme.

I have placed in the Library draft regulations to apply to schemes that are winding up from today. As from now, trustees will have the power to make solvent employers who choose to wind up their schemes buy out members' accrued rights in full. That will greatly increase security for members of solvent schemes. But there is one further issue that we must tackle.

Sometimes, when firms go bust, the money is not there to meet pension commitments. Recent cases have shown the terrible injustice when that happens, and the public are right to demand action. We should not accept that just because a firm goes out of business workers can find that a pension that they have saved in for all their working lives becomes worth next to nothing.

Our Green Paper set out options for sharing out assets more fairly. Today I can announce that we will change the priority order to give greater weight to those who have been in schemes and making contributions the longest. We will lay draft regulations on that shortly. I hope that the hon. Members for Havant (Mr. Willetts) and for Northavon (Mr. Webb) will welcome the cross-party agreement that I believe that there is on that point.

But we need to go further. Ever since I started looking at this I have asked why, if people expect their holiday provider or motor insurer to be covered if the firm goes bust, there is no cover for something as important as an occupational pension. We will therefore legislate to set up a pension protection fund. That fund will take over the schemes of insolvent companies to ensure not only that pensions in payment are protected, but that those still working can be sure of getting 90 per cent. of what they were promised. It will be paid for by a fixed-rate levy and an additional risk-related premium, which, together with a salary cap, will minimise perverse

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incentives and moral hazard. The fund will be a non-Government body. It will meet its obligations through the power to set and vary the level of charge without recourse to public funds. Taken with the other measures, that is a big extension of pension security, for the first time guaranteeing protection if a company scheme goes bust.

I have always said that my aim is to build a wide and deep consensus in this country that embraces employers, employees and pensioners. This is a balanced package to reduce costs and complexity of regulation, making it easier for employers to run schemes while ensuring that pensions promised are pensions delivered. Many of the proposals will require legislation, which the Government will bring forward as soon as parliamentary time allows.

These measures will protect the pension rights of millions of pensioners and employees throughout Britain and I commend the statement to the House.

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