Vera Baird (Redcar) (Lab): I shall be brief. I support my hon. Friend the Member for Northampton, North (Ms Keeble). I have added my name to the amendment for the reasons that she set out, and in particular because of the emphatically clear point that she made about the differential impact that the provisions are likely to have on women, who live longer than men. I have no further arguments to add to those she has made, but I raise two queries, which are essentially encapsulated in one.
As I understand it, the provision is not retrospective. I am not saying that it would ever be likely to take away any increases above 2.5 per cent. that had already been added on. Currently accrued pension rights will continue to increase on an annual basis at whatever is the lowest of RPI and 5 per cent. If RPI is above 2.5 per cent., that will mean that they will increase at a rate that is more than the rate that applies to pension rights accrued after the day that the provision comes into force. If that is right, that means that, in many situations, there will be two pots, increasing at different rates. I want to be sure that I have understood that properly.
At a number of points in the Bill, as other members of the Committee have pointed out, the Government have given themselves the power to make regulations in order to change the terms of a provision in the Bill.
Column Number: 311Is this not an ideal situation for including just such a clause? Members in all parts of the Committee would be likely to welcome that. It would not commit the Government to changing their view, but would leave them with a reserve power should inflation start to increase at a more rapid rate, and would enable them to ensure that there is not the injustice that we now fear.
Mr. Webb: The amendment goes to the heart of the clause. It specifies what the level of inflation protection should be. The motivation behind the amendment is absolutely right. We know that among the pensioner population the poorest tend to be women and the most elderly, and the people who lose out most through inadequate inflation protection are precisely the most elderly because pensions erode over a long period. I am absolutely with the spirit of the amendment. However, if I understand the letter of it, it would mean that protection would be whichever was greater of 2.5 per cent. and actual inflation.
Ms Keeble: No.
Mr. Webb: Well, my understanding is that the clause as it stands states that protection shall be the lesser of—
Ms Keeble: The amendment substitutes ''greater'' for ''lesser''. The full series of proposals was about taking out the 2.5 per cent. and simply linking increases to RPI or average earnings.
Mr. Webb: All I would say is that amendment No. 224, which we are debating in isolation, would appear to refer to any inflation level. That would be an unacceptable risk to schemes, which is why I would have trouble supporting it. However, I absolutely agree with what the amendment is driving at.
The key point is that the Government have said that on one hand they will put a new burden on company schemes in relation to the pension protection fund, but on the other they will raise the burden from schemes in relation to indexation, which is what we are dealing with at the moment. The idea is that those things will balance each other out, or make life a bit easier for company schemes. However, that depends on how much benefit the provision to relax limited price indexation will be to schemes. I am sure that the Minister would accept that many schemes have scheme rules that require indexation protection that is better than 2.5 per cent. Under the scheme rules, those schemes will not be able to take advantage of the relaxation of price indexation. Will the Minister reassure us that the estimated saving to schemes—I think it was £370 million—takes account of the details of scheme rules and is based on an analysis of those rules and the extent to which schemes will benefit? If some scheme rules do not allow the scheme to go below inflation—let us say it was 4 per cent. or thereabouts—the estimate of the reduced burden on schemes would be inaccurate. I hope that the Minister can clarify that.
Even the regulatory impact assessment allows for the fact that inflation, even when it averages 2.5 per cent., can go either side of that: down to 1 per cent. or
Column Number: 312up to 4 per cent. That fact that it is 1 per cent. in a given year and 4 per cent. in another does not mean that the effect is offset, because this is not an average process. Once someone has had a bad year, they have lost that increase for ever. If inflation is 1 per cent. one year, people get their 1 per cent.; they do not get 2.5 per cent. If it is 4 per cent. the next year, people lose 1.5 per cent. of their pension, in real terms, for ever. Although on average inflation might be 2.5 per cent., even in the fairly static sort of world that we live in there will be fluctuations, and the bad years are never recovered by the good years, so that people's real living standards will decline year after year.
My only other observation is that the regulatory impact assessment tries to say, ''Well, it's only a couple of per cent. What's that among friends?''—that is not quite the language of the regulatory impact assessment, but that is the implication. However, 2 per cent. of income over retirement is £7,000. The regulatory impact assessment puts ''£7'', and at the top it states that the figures are in thousands. That is £7,000 of retirement income. I accept that over the course of a retirement, hundreds of thousands of pounds are involved. However, this would still cost the typical pensioner £7,000.
The other question is whether the regulatory impact assessment understates the impact of the change to indexation because it takes as its average the average of all retired occupational pensioners, whereas the people that it will affect most are just coming into retirement. I think that I am right in saying that the £70 is an average over zeros. I think that I am right in saying that the £70 in the regulatory impact assessment is the average for the entire retired population.
However, the typical figure for the occupational pension of someone newly retiring would be much higher: the impact would not be £7,000, but quite a bit more. Even if the average does not include the zeros, it must be the case that the figure will be much lower if all retired people on occupational pensions are taken into account, rather than the people coming into the system. As the hon. and learned Member for Redcar (Vera Baird) said, the people coming into the system will bear the brunt of the proposals.
Although I have some technical concerns about amendment No. 224, it raises grave concerns and I have great sympathy for the motivation behind it.
Malcolm Wicks: This has been a useful debate about a complex question and a fundamentally important issue. As we have heard, the amendment tabled by my hon. Friend the Member for Northampton, North would affect the indexation of defined benefit and defined contribution occupational pension schemes. She will have heard what I said earlier about our thinking on defined contribution pension schemes.
The amendment would remove the new indexation cap of 2.5 per cent. that we propose to introduce for the future. Instead, it would set a minimum indexation rate of 2.5 per cent., capped at 5 per cent. It says in my notes that the amendment is technically flawed; I can hardly believe that. [Interruption.]
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Let me deal with the substance of the amendment. Clause 212 would ease the limited price indexation requirement in occupational pension schemes by reducing the cap from 5 per cent. to 2.5 per cent. for benefits built up on or after the date at which the change comes into force. Of course, schemes would be able to retain a 5 per cent. indexation rate if that were wished; some schemes intend to do that.
My hon. Friend suggests a move in the opposite direction to that of our proposals. I will try to explain why in our judgment that would not be sensible. Proposals to reduce the indexation cap will balance the cost of the levy imposed by the pension protection fund.
I will go into some detail about this issue. I am not trying to be patronising; I found some of this difficult to understand. Let me explain my understanding of the issue to Committee members. When trustees are planning how much money they need to hold to meet their schemes' future pension payments, their actuary needs to make assumptions about factors such as future salary growth, investment returns and inflation. Those assumptions feed into the actuary's calculations of the contributions needed in the future. For example, the higher the assumption made about future investment returns, the less money would need to be held now, because the money would grow faster in the future. In making an assumption about future inflation, the actuary will build into the calculations an allowance for the fact that year-by-year inflation in future will not be exactly 2.5 per cent. In some years it will be more, in other years less.
At the moment, in the years in which it is assumed that inflation will be more than 2.5 per cent., the scheme would have to pay pension increases higher than that, subject to the cap of 5 per cent. Once the reduction in the cap from 5 per cent. to 2.5 per cent. is introduced for the future build-up of pensions, the scheme would only have to pay an increase of 2.5 per cent. in those years. So after the reduction in the cap is introduced, the actuary's calculations would show that lower contributions were needed to meet the cost of pensions.
Therefore, our concern about the costs of accepting the amendment is that we estimate that the amendment would achieve the opposite of what we are trying to do. Depending on inflation, the application of the amendment could result in annual costs of around £900 million for defined benefit schemes, for the reasons that I have tried to specify. I return to the point that I made earlier. In all our proposals, we are seeking to balance our objective of bringing security back into social security in old age—hence the pension protection fund—with realism about the costs that are incurred by companies and by schemes. The actuarial reasons that I have specified make it difficult to accept the amendment.
We need to be realistic about the world in which we live when it comes to final salary schemes. Although some commentators exaggerate the trends, we know of companies that are withdrawing, either completely or for new members, from such schemes. It would be absurd for any of us to pontificate about the desirability of levels of pensions and guarantees, if it
Column Number: 314were to drive some companies and schemes from final salary schemes to other schemes that might be less advantageous. That is my concern about an amendment that, otherwise, seems perfectly reasonable and, indeed, just.
Limited price indexation requires all occupational pensions built up from 6 April 1997 to be increased by the RPI index capped at 5 per cent. When that was introduced, it was intended only to provide a degree of protection against inflation. However, our success in controlling prices over the years means that the 5 per cent. cap has effectively become full protection. It imposes large and, on the whole, unnecessary liabilities on schemes in respect of their forward funding requirements, given the need to plan for contingencies.
Defined benefit occupational schemes already find the 5 per cent. cap a significant cost even during periods of low inflation. The amendment would result in increased costs for schemes, which would have to pay indexation of 2.5 per cent. even where price growth was below that. They would still have to plan against possible indexation rates of 5 per cent. That would mean higher costs for schemes and could have a detrimental effect on existing defined benefit schemes. It could lead to some schemes closing down.
In defined contribution occupational schemes, the cost of mandatory indexation is borne by the pensioner in the form of an index-linked and, therefore, initially more expensive annuity. I will not say more about that, given what I said about our thinking through some of the arguments presented by the hon. Member for Northavon. On that, and touching on the issue raised about women making more choices about pension schemes, I say that our earlier discussions about defined contribution schemes have a marked bearing on this issue. To answer the hon. Gentleman's earlier point, our intention is, during the Bill, to bring amendments forward on the points raised. We need to take advice before saying when such amendments will be tabled.
My hon. Friend the Member for Northampton, North said that our proposals would be bad for women. It is true that women in defined benefit occupational schemes will see a slightly higher reduction in their overall retirement income than will men. However, it is important to remember that the change will balance the cost of the pension protection fund to schemes. That will give all scheme members, including women, much greater protection of their pension rights and will encourage wider membership of pension schemes. I believe that, if asked to make an informed judgment about indexation versus security should their company crash, many women, and men too, would opt for security.
On the point about women living longer than men, and how that might adversely affect women when it comes to indexation, I counter by saying that the pension protection fund will, on average, protect women for longer than it will protect men, because of life expectancy. So there is a swing and there is a roundabout on that one. It is a complex matter. Many of the cost issues are not straightforward; they are about the long-term funding of schemes, and are technical but important actuarial points.
Column Number: 315Notwithstanding those difficulties, I hope that my hon. Friend the Member for Northampton, North will consider withdrawing the amendment.
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