[Mr. Jim Cunningham in the Chair]
Malcolm Wicks: As we have heard, amendment No. 293 would insert a regulation-making power at the
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end of clause 212. It would allow regulations to provide that annual indexation increases under section 51 of the 1995 Act should not apply to schemes of a prescribed class or description, or should apply with prescribed modifications. Without further amendments to clause 212 the amendment is technically flawed, but I will concentrate on the argument behind it in a moment.
The Opposition's proposal to introduce new clause 7 would remove the mandatory indexation of contracted-out rights in personal pension funds. It would apply to all scheme rights built up since 1997 that have not yet been used to buy an annuity by the time the changes come into force.
Clause 212 eases the limited price indexation requirement in occupational pension schemes by reducing the existing cap on an annual rate of increase from 5 per cent. to 2.5 per cent. for future benefits. For defined benefit occupational schemes, reducing the cap on mandatory indexation will balance the cost of the levy imposed by the pension protection fund, which we shall come to soon, while continuing to provide protection against the worst effects of inflation.
The Government accept that there are different arguments and legitimate concerns about the implications of changing the mandatory cap on limited price indexation for defined contribution schemes. First, in contrast with defined benefit rights, in DC schemes the cost of indexation falls on the member, not the scheme. Indexation affects the annuity purchased, not the size of the pot, so that the starting pension is lower than would otherwise have been the case.
Secondly, the schemes are not subject to the protection afforded by the pension protection fund, which is reserved for defined benefit schemes. Thirdly, the change proposed under the Bill would add administrative complexity and require people to purchase more separate annuities to meet the different requirements on each tranche of benefits. Those are fundamentally different issues from those affecting defined benefit schemes.
The Government are therefore prepared to consider such issues in light of responses to earlier consultations on the proposals and we shall bring forward further proposals in due course. I would welcome a wider debate about defined contribution schemes and, in particular, how we can promote a better informed understanding of the choices that individuals need to make about annuities. On that basis and given my assurance, I hope that hon. Members will agree to withdraw the amendment and not press new clause 7 to a Division.
[Mr. James Cran in the Chair]
Mr. Waterson: I am grateful to the Minister for that response and his acceptance that a serious issue must be tackled. Indeed, what he said might also shorten some of the stand part debate. However, my
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enthusiasm and gratitude for his response is somewhat tempered by the matter of when—and if—the Government will table amendments to the Bill or whether the provision will be dealt with differently. Clearly, in all sorts of ways there might be differences between DB and DC schemes, as the hon. Gentleman has acknowledged, and different approaches need to be taken in legislation. My narrow and selfish concern is whether such approaches will be taken in the Bill and, if so, when. On that basis, however, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Ms Sally Keeble (Northampton, North) (Lab): I beg to move amendment No. 224, in
clause 212, page 141, line 2, leave out 'lesser' and insert 'greater'.
The amendment links in with the different figures for the protection of pensions and future increases. It would increase the level of pensions that people will receive in later years. It is a probing amendment. I understand the Minister's point that we have to balance protection-related costs. However, under the clause, the balance is very much in terms of the costs rather than the protection of future increases for pensioners.
The amendment follows on from our discussions this morning about women pensioners and the need to tackle poverty among them. I draw attention to the consequences of a system that reinforces the poverty of women pensioners and which, in particular, takes away some of their financial independence. We also talked this morning about the changing circumstances of pensioners. There are probably more women working full-time and more who have equal pay and equal access to jobs. There is greater awareness of the need for financial independence. As was said this morning, more women are now taking out private and occupational pensions, and some of them are making better pension provision than men.
It is particularly ironic that, just as women are moving into occupational, private, personal and stakeholder pensions, the Bill limits the increases that they receive in future years. The amendment is very much tied up with the others that I have tabled. It would ensure that women received greater increases and that their incomes in retirement were protected. Limited price indexation affects occupational pension schemes and also elements of private and stakeholder schemes. I understand that that measure was introduced in 1995 by the Conservative Government and applies to rights that accrue post 1997. It limits pension increases to 5 per cent. or RPI, whichever is lower. The Bill proposes that the limit should be set at 2.5 per cent., which would, if my understanding is accurate, limit the future increases that people would get.
My amendment would replace that measure with increases linked to the RPI, or increases in average earnings. It is intended to find out the thinking about the level of increases that people get and why the Government have plumped for these figures without any indication that the 2.5 per cent. limit would apply to higher pensions, rather than across the range of earnings, and would hit older pensioners in particular.
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The helpful Library note illustrates the differences between the 2.5 per cent. and the 5 per cent. limits in weekly income in retirement. For somebody who has been retired for 15 years that would be £10 a week, and if they had been retired for 20 years it would be £15. The impact on people would be much greater. It would not just be about the difference between those two limits; it would be a choice between 2.5 per cent. and whatever was the inflation rate. People would feel that impact.
The reason why that impact would particularly affect women, and why I tabled the amendment to change the balance of what people get, is that women live longer. The Library note says that on average women live for three years longer than men. However, with due respect to the Library, the figures are somewhat different. It would take a long time to look through all the relevant papers. However, the Budget papers from yesterday include a helpful graph illustrating the age and gender profile of the population, and showing that at the age of 80 there are twice as many women as men. The impact of what looks like a small change is quite substantial for women; it will not be felt now, but in about 20 years.
It seems that we have got the balance between the protection for pensioners and the costs to the pension fund slightly skewed, particularly since that will be in primary legislation and will therefore be harder to change. It puts a very low cap indeed on pension increases in the future. It is right that inflation is currently low, we have the symmetrical target and policies are in place to keep inflation low. However, to say that that will apply for 20 to 30 years—[Interruption.] Well, I am not sure that anyone has a crystal ball. Our party has been able to control inflation and provide the economic climate that we have now. However, in 20 to 30 years the difference in ages may be even greater than 18 years. Given the backlash that we experienced over the changes to index linking of the state pension and the impact that that had on the erosion of people's income—people who felt intensely bitter about that—I wonder whether there should be a more flexible mechanism to deal with future pension increases, bearing in mind that there is a big shift into different types of pension provision. For the first time, women are paying into personal, stakeholder and occupational pension schemes. It would be sad if women, having got a greater level of financial independence and the right to independent pension provision, found 20 or 30 years down the line that they were not receiving the sort of income in old age—particularly frail old age—that they thought they would, due to a small rule change now.
Mr. Waterson: I shall speak on the amendment, and therefore cut out one of the issues that would otherwise arise during the stand part debate. The hon. Lady makes some telling points. There will be some resentment that as a result of cutting the LPI, occupational pensions could lose value in years to come.
Inflation will not necessarily remain at recent levels. We all remember the disastrous years of a previous Labour Government. We may become used to double-digit inflation; who can look that far ahead? We have
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to look that far ahead because we are dealing with pension schemes. There is a real problem in the clause. It is informative that even in this supposedly low inflation environment, in December 2003 and January 2004, inflation was running at 2.8 per cent. and 2.6 per cent. respectively. Those figures are not vastly different from 2.5 per cent., but they are higher.
It would be particularly tough on pensioners if in one year, 10 years or 20 years, inflation were running in double digits again. If the public were foolish enough to re-elect a Labour Government after a sustained period of Conservative Government, we could return to the banana republic finances that produced such levels of inflation. None of us knows with any great certainty what will happen, but locking a reduction into the pensions increases will be seen as unfair by many people.
The good old regulatory impact assessment is instructive. I do not know on what basis the figure is used, but it makes an assumption of an average long-term inflation rate of 2.5 per cent., with a 1.5 per cent. fluctuation either way. It concludes that the cut in the LPI will reduce total pensioner income by just less than 2 per cent. Finally, it says:
''In light of the additional funding costs that schemes will incur . . . it is estimated that around 75 per cent. of DB . . . schemes would take this option up—resulting in actual aggregate savings of approximately £370 million a year, if applied to all future accruals''.
That is a not insubstantial amount, based on that assumption. I do not know how valid the assumption is. Economists seem quite capable of getting most predictions wrong. Perhaps the Minister will explain to me whether those who prepare the RIA make the assumptions up themselves—or is a handle supplied to them by the Department?