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On the back of lower stock market performance, companies redirected investment decisions for pension funds towards Government bonds. That trend has been accelerated by the fact that the Pension Protection Fund has charged risk-rated premiums, which in turn has encouraged a move into low-risk assets such as bonds. Over the past few years, that has depressed yields and reduced the ability of pension funds to recover from their deficit position. I acknowledge the tension that exists between ensuring that high-return,
high-risk investments do not jeopardise the long-term financial situation of schemes, and allowing recovery to take place quickly. However, I would be grateful if the Minister could say in his winding-up speech whether his Department will look again at whether the PPF could change that rule in relation to risk-related premiums.
Underpinning those developments have been the strong forces of globalisation and demographic change. The opening up of international markets and the rise of the electronic economy mean that companies have become ever-more powerful and are able to transfer operations anywhere on earth in order to secure a more effective rate of return. The culmination of those forces has meant that companies providing occupational pension schemes have sought to transfer the risk of providing pensions away from themselves and towards their employees and Government. Given the growing power of companies, they have been able to achieve that with some success and in recent years there has been a reduction in the number of defined benefit schemes on offer.
That trend has been accelerated by a wholly inappropriate accounting scheme. FRS 17 could almost be seen as the last nail in the coffin for decent occupational pension schemes. I should point out that I am a member of the Institute of Chartered Accountants in England and Wales. FRS 17 has good intentions in that it tries to push forward the correct principle that a pension fund and its assets and liabilities should be an integral part of a company’s financial position. However, the fact that surpluses or deficits in the pension scheme are recognised in full on a firm’s balance sheet has meant significantly greater volatility, with adverse effects on pension schemes.
All those factors have meant that companies have had an appropriate environment in which to try to transfer the risk of planning for the retirement of their work force away from themselves and towards employees and Government. Perhaps more than any thing else, that is a vivid example of companies in the modern era becoming possibly more powerful than Governments.
Sir John Butterfill: I hope that the hon. Gentleman does not overlook the role of the Inland Revenue. One of the reasons why a lot of companies took contributions holidays was that the Revenue rules said that the schemes were overfunded—115 per cent. was the maximum. That was fine when the stock market was strong and technically there was overfunding, but it did not allow companies to build up adequate reserves to allow for the fact that the stock market was going to crash one day. I am afraid that the Revenue is as much a culprit as anyone else.
Mr. Wright: I understand what the hon. Gentleman is saying. Hindsight is a wonderful thing. I remember a report at the time that said that the stock market would go on rising and that there was no need to worry. That proved to be plainly wrong. We should be a lot wiser in this day and age.
It is important to recognise that, in the context of big, global forces, the lives of ordinary men and women are being affected. My hon. Friend the Member for Cardiff, North (Julie Morgan), who is not in her place, secured an Adjournment debate in Westminster Hall earlier this month about the financial assistance scheme, and made
vivid points about workers in her constituency. My hon. Friend the Member for Ayr, Carrick and Cumnock (Sandra Osborne) has also made such points, as has the hon. Member for Hemel Hempstead. I am not as eloquent as those hon. Members, but I echo their points on this issue. Far too many of my constituents have been caught up in these large forces as the risk of providing for retirement is being moved away from employers towards employees. Those men—in my constituency, they are predominantly men—did everything that was expected of them. They are decent, ordinary, hard-working, working-class men. They wanted to provide a secure and enjoyable retirement for themselves and their wives and families. They did not want to be a burden on the state. They paid into a pension scheme, often for decades, because they had an implicit understanding with their company that a definite level of payment would be provided for them when they retired. Now, because companies are trying to shift the risk, as I keep mentioning, those people are being left with nothing—often months before retiring. That is surely not fair.
I have a number of constituents who are part of the Roxby pension scheme. The scheme is in the process of being wound up, but because that is taking some time and it is still classed as operational—it started to be wound up in 2003—the Roxby pensioners are not eligible for Pension Protection Fund money. I understand that they may be entitled to financial assistance scheme money, but have not heard anything yet. This issue is taking some time to resolve, causing stress, anxiety and uncertainty to my constituents and their families. Like my hon. Friend the Member for West Bromwich, West (Mr. Bailey), I urge the Government to consider streamlining the processes to provide a swift judgment for those pensioners and others.
The plight of those people is exemplified by Mr. Robson, a constituent of mine. After paying into the Roxby scheme for decades, he would have been entitled to about £14,000 a year at the normal retirement age. We are not talking about footballers’ salaries. Now, he is forecast to get nothing and, given his age, he is not really in a position to do anything about it. Although the financial assistance scheme is a good idea, it fails to take account of length of service and concentrates instead on the length of time before retirement. If the likes of Mr. Robson have paid into a pension scheme for some 30 years, surely there is a moral, if not legal, obligation for commitments to be honoured by firms.
Mr. Hughes came to see me in my constituency surgery only last Friday. He has worked at Carpets International for many years, but the firm is now being wound up. He was told in 2002 that his fund was worth £67,000 and that he would be entitled to a pension of about £8,000 a year. Now, some four years later, that fund is worth £18,000, which has to last him a full retirement. He has an estimated 10 years of his working life in which to sort that out. I know that the financial assistance scheme will, I hope, help people such as Mr. Hughes, but there is a strong case for providing even more help for people such as Mr. Robson and Mr. Hughes, who have done everything right, yet find on the eve of their retirement that all their plans have been destroyed.
I just want to mention one final pension scheme. Expanded Metals, or Expamet, is a staple firm—I hope that hon. Members will forgive the pun—of my
constituency. However, the pension scheme is in the process of being wound up because the firm cannot meet its liabilities. Expamet is still trading, so the workers and former workers who are affected fall between two stools. I understand that the financial assistance scheme applies only when a firm has gone bust, while the Pension Protection Fund covers future victims. Will the Minister explain what can be done for people such as Paul Whitton, who has worked for Expamet for some 30 years, yet will now receive only 40 per cent. of his planned pension, and Mr. and Mrs. Edwards, who, together, were members of the scheme for 53 years, but are now contemplating a pension of £12,000 a year, rather than close to £30,000 a year, as was originally planned?
I stress again that these people—my constituents—did everything right, but are being penalised for a combination of global factors that were outside their control. I understand that those forces are pushing firms to move risk away from themselves and towards individuals. I do not want to tip firms such as Expamet into liquidation, which would lead to the loss of valued jobs in my constituency. However, I urge Ministers and, indeed, the whole House to reach a consensus that people who have planned for their retirement in the correct manner, using occupational pension schemes, should have such commitments honoured as much as possible.
As the White Paper rightly identifies, pension provision will become more problematic as the general population gets older and there is a greater squeeze on the working population. I have tried to acknowledge in my contribution that these forces are great and cannot be reversed with any great ease. However, I still think that both firms and the Government, to some extent, have a moral, if not legal, duty to people who did what they should and planned for retirement properly.
8.32 pm
Mr. Philip Dunne (Ludlow) (Con): I remind the House of my entry in the Register of Members’ Interests. I have a personal pension, and I am also the director of an investment management fund that manages several small pension funds.
I shall talk about specific aspects of the proposals in the White Paper for most of my contribution, but I would first like to touch on an issue that has resonated around the Chamber from many hon. Members’ speeches: trust and consensus, and the need to rebuild confidence through the Bill that emerges from the White Paper. The issue was put forward most succinctly by my hon. Friend the Member for Weston-super-Mare (John Penrose), and I pay tribute to him for his persuasive and forceful contribution. It is important that there is a broad political consensus on whatever emerges from the proposals.
When I first arrived in the House a year ago, I took the view that the question of pensions was one of the two or three biggest issues that parliamentarians needed to address in this Parliament, not least because pensions had been left woefully adrift for the previous 10 years or so. We cannot allow that situation to continue, for all the reasons that have been cited in the debate. The demographic changes are so important that we cannot continue to ignore the pension system
that we set up for future generations. I congratulate the hon. Member for Hartlepool (Mr. Wright) on his positive contribution. He made useful remarks about the need for consensus.
We need to remind ourselves that the Government are not immune from responsibility for several factors behind the difficult situation in which many pensioners find themselves. Hon. Members on both sides of the House have talked about problems that are beyond the Government’s control, but at least some responsibility for the significant erosion of confidence in our pension system and the savings culture lies at the Government’s door. Although I want to maintain the spirit of consensus, I cannot resist reminding hon. Members of some of the problems. They are relevant because it is important that we overcome the drawbacks as we look forward.
My hon. Friend the Member for Poole (Mr. Syms) referred to the Chancellor’s tax grab on savings. The abolition of dividend tax credits played a significant part in undermining defined benefit pension schemes in particular, and occupational schemes in general.
The 2001 initiative of introducing stakeholders was announced with a fanfare as the great white hope for introducing people on lower and middle incomes to the savings culture, but it would be fair to say that it has not been a great success. Take-up has been poor. The latest available figures show that there are about 1.5 million stakeholder pensions in operation, and the number has been broadly flat for the past three years. The schemes have suffered from high lapse rates, for reasons that are well documented.
The Government must take responsibility for the consequences of introducing so much means-testing. I, like hon. Members on both sides of the House, acknowledge that means-testing has led to a benefit in the form of reducing pensioner poverty, but it is also perhaps the matter for which the Government are accountable that is most responsible for the collapse of savings over the past nine years. Until a couple of years ago, when the Government introduced some changes to the rules and the system became less regressive, many people had no incentive whatever to save, because each pound that they saved would lead to their losing pension benefits. We need to reverse a situation in which it is in individuals’ financial interests not to save, as the hon. Member for Dumfries and Galloway (Mr. Brown) said.
Several hon. Members have referred to the survey that was published today by Scottish Widows. It shows graphically that the percentage of people saving adequately for retirement has fallen from 55 per cent. last year to 46 per cent. this year. There has thus been a significant reduction in just one year. The problem is especially acute among those who rely on defined benefit schemes for their pension savings. This morning, I spoke to Ian Naismith, the head of pensions market development at Scottish Widows. He said today:
“4 in every 5 people who aren’t relying on a final-salary pension are failing to save adequately for their retirement, and ...2 in 5 are saving nothing at all.”
That, in part, comes down to means-testing.
The final issue that needs to be borne in mind is the consequences of the delay until 2012—and potentially longer, as we heard earlier—of the introduction of the earnings link. As the hon. Member for Bradford, North (Mr. Rooney)—the Chairman of the Work and Pensions Committee, which I am proud to serve on—said earlier, a six-year delay is very significant for existing pensioners, or people who are about to become pensioners. Such a long period before implementing the proposals does not help to build confidence. Of course the proposals have got to be got right; I would not deny that for a moment. But steps could be taken earlier that would have a much more immediate impact—for example, introducing the earnings link. I know that that has been the subject of great debate between the Prime Minister and the Chancellor, but Ministers need to look at that issue when they turn the White Paper into a Bill.
Having got that off my chest, I endorse the view that we need to achieve a consensus through this proposal in order to rebuild trust among the population at large in the idea that saving is worth while. I am not absolutely convinced that the Secretary of State’s claim that for every hour that we sit in this Chamber we add an extra quarter of an hour to our own longevity helps to build confidence in the system—although I am sure that he will be able to produce the evidence that supports that claim. I again endorse what the Select Committee Chairman said: this is a fine example of how pre-legislative scrutiny could be undertaken to ensure as broad a consensus as possible in all parts of the Chamber on the resulting Act. I urge the Minister to address that issue in his wind-up. Is he prepared to consider a draft Bill for when we return in the autumn?
I turn to a few specific points. When the Select Committee took evidence, one issue that arose—it has not been raised so far this evening—was that employers might regard auto-enrolment as a tax on jobs. Much has been made, particularly by Labour Members, of rogue employers seeking to force people to opt out of auto-enrolment. But the valid point that was made to us, and which needs to be borne in mind, is that once we are through the phasing in period, the contributions by employers of 3 per cent.—and by employees of 5 per cent., when tax relief is included—will add a total of 8 per cent. to the employee wage bill of employers who do not provide an existing occupational scheme. That is a significant addition to the cost base of some employers, and we cannot just dismiss them as rogues because they encourage people to opt out.
We need to look very carefully at the transitional arrangements referred to in the White Paper to ensure that they assist such employers. They may not be rogues; they could be going through difficult trading periods or a rapid growth phase, during which they need to invest as much as possible in their own business, rather than paying inflationary wage demands. We all recognise that the employee contribution is likely to be reflected in wage bargaining negotiations, and that some inflationary pressures will therefore emerge as a result of these proposals.
For those with existing occupational schemes, there is also the risk of the levelling down of contributions from employers who may currently provide more for their employees. As defined benefit schemes decline, there has been a shift towards occupational defined
contribution schemes—the real comparator to the proposed national pension savings scheme, which will be the ultimate defined contribution scheme—so that benefits get reduced for existing occupational schemes as they move on to a defined contribution basis.
Because the NPSS is unprecedented, it is not easy for us to foresee its impact on existing schemes. We can make some glib remarks in this Chamber, but none of us really knows how it is going to work. Some comparisons can be drawn with schemes in other countries, but none of them are of the magnitude of this one. There is a real risk that existing defined contribution schemes will trend toward the state scheme, particularly with small and medium-sized employers who, for example, are experiencing trading difficulties. If that happens, savings might decline as a result of the scheme’s introduction, and the Government’s objectives will fail. This is another area in which I urge the Government to consider transitional measures to limit the impetus for companies to level down.
The Government seem a bit complacent about that risk. A survey by Capita Hartshead last month indicated that 58 per cent. of providers of large schemes who are not using auto-enrolment thought that employers would level down when required to implement auto-enrolment within their existing scheme.
The next issue on which I shall touch is fairness, which has been mentioned by several of my hon. Friends in relation to the perception that the Government are taking different approaches towards private sector schemes and public sector occupational schemes. My hon. Friend the Member for Runnymede and Weybridge (Mr. Hammond), who is just leaving the Chamber, spoke clearly and well about the lack of balance and fairness in the Government’s approach to the retirement age of members of occupational schemes in the public sector and in the private sector.
It is extremely important for rebuilding trust in the whole pensions arena that the Government face up to the clear public perception, right or wrong—Labour Members have said that they believe that it is a false impression—that the Government think that it is okay to push up retirement ages for those in the private sector, but when the Government themselves are the employer, they are not willing to raise retirement ages for their own occupational schemes, which are, in effect, defined benefit final salary schemes, which are rapidly disappearing from the private sector.
That brings me to what the Government’s role should be in the new savings scheme. As others have said, there is little confidence in their ability to manage complex IT administrative schemes. There is little confidence in the Government as an investor: without wanting to get too political, we need look no further than the Chancellor’s so-called prudent stewardship of the value of the country’s gold reserves. There is little confidence in the Government’s statements on the security of occupational schemes, as many have said in relation to the ombudsman’s criticisms of maladministration. For all those reasons, it is vital that the Government acknowledge that they are not the best placed people to run the national pension savings scheme.
I endorse the view expressed many times by the right hon. Member for Birkenhead (Mr. Field) that the Government should take a leaf out of the Monetary Policy Committee’s book. They should appoint a board
of trustees independent of Government, and that board should be responsible for appointing an administrator for the scheme, as well as investment managers to undertake its management. Competition between the investment managers will improve performance and drive down costs. In addition, an independent body should regularly review longevity and the retirement age. When he appeared before the Select Committee, the Secretary of State agreed that that review should take place according to a predetermined timetable, which is important to building confidence in the scheme.
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