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Session 2006 - 07
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General Committee Debates
Pensions Bill

Pensions Bill

The Committee consisted of the following Members:

Chairmen: Mr. Roger Gale, † David Taylor
Bailey, Mr. Adrian (West Bromwich, West) (Lab/Co-op)
Banks, Gordon (Ochil and South Perthshire) (Lab)
Brown, Mr. Russell (Dumfries and Galloway) (Lab)
Burt, Lorely (Solihull) (LD)
Creagh, Mary (Wakefield) (Lab)
Heppell, Mr. John (Vice-Chamberlain of Her Majesty's Household)
Hillier, Meg (Hackney, South and Shoreditch) (Lab/Co-op)
Keeble, Ms Sally (Northampton, North) (Lab)
Lancaster, Mr. Mark (North-East Milton Keynes) (Con)
Laws, Mr. David (Yeovil) (LD)
Penrose, John (Weston-super-Mare) (Con)
Plaskitt, Mr. James (Parliamentary Under-Secretary of State for Work and Pensions)
Pritchard, Mark (The Wrekin) (Con)
Purnell, James (Minister for Pensions Reform)
Selous, Andrew (South-West Bedfordshire) (Con)
Smith, Ms Angela C. (Sheffield, Hillsborough) (Lab)
Waterson, Mr. Nigel (Eastbourne) (Con)
Alan Sandall, Committee Clerk
† attended the Committee

Public Bill Committee

Thursday 1 February 2007


[David Taylor in the Chair]

Pensions Bill

9.10 am
The Chairman: Good morning, and welcome to the seventh sitting of this Committee.

Clause 14

Conversion of guaranteed minimum pensions
Question proposed, That the clause stand part of the Bill.
Andrew Selous (South-West Bedfordshire) (Con): Good morning, Mr. Taylor. I welcome you back to the Chair.
We have come to part 2 of the Bill, which deals with the complex issue of contracting out. This clause deals with the conversion of guaranteed minimum pensions. It might be helpful if I set the scene as to how we have arrived at the need for these provisions. In 1978 it was established that where employees contracted out of the state earnings-related pension scheme, employers had to provide a defined-benefit scheme, and a guaranteed minimum pension that at least equalled the SERPS that they would have earned had they not been contracted out. Hence the contracted-out rebate, in effect a reduction in national insurance contributions paid by contracted-out employers and employees, was introduced. The rebate is set regularly by the Government on the advice of the Government Actuary’s Department, and is supposed to reflect the cost of providing the benefits that have been forgone.
However, it does not always do so; the Government have not accepted in full the most recent advice from The Government Actuary’s Department. I assume, therefore, that the Minister accepts that the rebate no longer reflects the actual cost of providing the forgone benefits, as was originally envisaged.
Following the Pensions Act 1995, contracted-out salary-related schemes do not have to provide guaranteed minimum pensions in respect of benefits accrued after 1997, but they do have to provide them for benefits accrued between 1978 and 1997. The new requirement is to provide benefits broadly equivalent to or better than something called the reference scheme test. The main features of that, for a defined-benefit scheme, are that it should provide for pensions to be paid at normal pension age of 65 and to continue for life; it should have an accrual rate of 1/80 up to a maximum of 40 years; it should define qualifying earnings as 90 per cent. of the employee’s earnings between the lower earnings limit and the upper earnings limit; and it should provide for a widow’s or widower’s pension at the rate of one half if the member dies after the age of 65 or one half of the pension rights already accrued if the member dies before the age of 65.
The Pickering report in 2002 recommended simplification of contracting out, and the pensions Green Paper of December that year proposed, among other things, that schemes should be permitted to convert the GMP use to the simpler reference scheme test benefits of equivalent value.
The Pensions Act 2004 rather ducked the issue of converting GMPs into scheme benefits. However, the Government belatedly introduced a new clause allowing pension schemes to modify members’ accrued rights, provided that that is done on the basis of actuarial equivalence.
Clause 14 would allow contracting-out defined-benefit schemes to convert GMPs into scheme benefits, but only if they meet certain conditions. Those conditions include the actuarial equivalence of the value of members’ conversion benefits with those possessed pre-conversion. We are promised regulations setting out how actuarial equivalence is to be determined; can the Minister tell us whether draft regulations are yet available? There should be no reduction of pensions in payment; conversion benefits should not include money purchase benefits; survivor’s benefit is to be provided; the agreement of the scheme’s sponsor is to be obtained; and the members and survivors and Her Majesty’s Revenue and Customs are to be informed. Can the Minister confirm that even where all members in a scheme do not convert to GMPs, trustees will be allowed to do so for individuals, provided that those individuals consent?
It will be for the pensions regulator to enforce the law in that area, but when does the Minister expect the provision to take effect? It is suggested in the Library brief that it will not happen before 2009 because, as we have found out on a number of occasions in the Committee, the Department’s computers cannot be programmed to do the job before then—another case of the computer saying no.
It would be valuable for the Committee to consider the views of outside bodies on the clause. The Engineering Employers’ Federation, which has followed the Bill carefully, describes it as “a useful provision” and
“one for which the EEF has been arguing for a number of years.”
It goes on to say:
“However, the EEF considers that there needs to be greater clarity about the requirement to notify members about a proposed conversion, as this may prove to be impossible for some deferred members whose current address may be unknown, and about what is meant by the requirement to ‘consult’ the earner in advance.”
That is a practical problem, and we are grateful to outside bodies such as the EEF for identifying it. Will the Minister address it?
A briefing provided by the Association of Consulting Actuaries makes the point that the provisions of the clause are supposed to ease administration costs. It states that
“the cost of running good existing occupational pension schemes must be significantly reduced if the wave of scheme closures”
in recent years is to be checked. Rather worryingly, the ACA goes on to suggest that the clause will not deliver savings, because of EU legislation. It states that the clause
“appears to allow conversion into normal scheme benefits to take place only if benefits are levelled up to avoid sex discrimination.”
Will the Minister comment on what appears to be another serious issue drawn to our attention?
The ACA goes on to suggest a number of methods to reduce the costs of the scheme. One is to restore the contracted-out rebate to the level recommended by the Government Actuary to meet the costs of replacing the state benefits forgone. As it points out,
“the 2007/12 rebates set by Government are an effective tax on providing a defined benefit scheme.”
Can the Minister confirm that he is reconsidering that?
Subject to the various points that I have raised, and of course to the Minister’s answers to them, we do not oppose the provisions in the clause.
The Parliamentary Under-Secretary of State for Work and Pensions (Mr. James Plaskitt): I welcome you to the Chair, Mr. Taylor.
The hon. Member for South-West Bedfordshire has helpfully introduced the clause and explained the purposes behind it. It is one of the Bill’s private pension simplification measures and is designed to remove some of the complexity that, as the hon. Gentleman said, has built up over time. It is a long clause, but we believe that it will achieve a straightforward and desirable end—reducing the administrative burdens on schemes and making it easier for their members to understand what they are entitled to. It is a reform that implements a recommendation of the Pickering review.
It will help the Committee if I provide a brief history and make some points in addition to those already contributed. The schemes involved are those that were contracted out of the state earnings-related pension scheme for all or part of the period 1978 to 1997. In order to contract out, people running those schemes had to ensure that the benefits offered were at least as good as the statutory minimum—the guaranteed minimum pension. However, a two-tier system developed over time and the GMP and the scheme excess now have different rules applying to different parts. That is too complex. GMP conversion will allow schemes to move to one set of rules. The clause will allow, but not require, the schemes to convert the GMPs of all or some of their members as long as actuarial equivalence is maintained.
Ms Angela C. Smith (Sheffield, Hillsborough) (Lab): The hon. Member for South-West Bedfordshire mentioned the helpful comments of EEF. I wonder which other organisations commented on the complexity of the issue and whether the shape of the clause was altered in any way because of that consultation.
Mr. Plaskitt: I thank my hon. Friend for that point. Over time, as the two-tier system has evolved, there has been considerable representation from across the industry urging us to achieve the simplification. As she knows and as I said, when Pickering looked at the issue during his review, he recommended such changes. What has been composed here is very broadly welcomed by the industry, subject to one or two caveats, which may have been raised earlier but to which I will come shortly.
I will explain the most significant provisions, beginning with those designed to protect the members’ interests during the conversion exercise. First, as I said, the scheme must maintain actuarial equivalence, which means, put simply, that at the date of conversion the value of the scheme benefits being offered must be the same as, or better than, the value of the GMP being given up. Then, if the scheme converts a pension already in payment, the amount of that pension immediately after the conversion must be no lower than the pension currently in payment. The clause provides trustees with power to amend their scheme rules, if necessary, to allow for the GMP conversion.
The power has two restrictions. First, the scheme must continue to have a defined-benefit structure—it cannot change the basis of the scheme to defined contribution. Secondly, at present, where the member dies, his or her surviving spouse or civil partner can inherit a part of the deceased member’s GMP; the position of a survivor after conversion must be broadly the same as it would be if the scheme had not converted the GMP.
Ms Sally Keeble (Northampton, North) (Lab): I have some problems hearing—I wonder whether my hon. Friend could speak up a little?
Mr. Plaskitt: I will do my best.
All the provisions protect the member. In addition, the clause requires the employer to consent to GMP conversion, because it might be necessary for the benefits in the scheme to be rounded up to achieve a sensible converted benefit.
Ms Keeble: I wonder if I might just—
Mr. Plaskitt: Am I doing any better?
Ms Keeble: I thought that my hon. Friend was going to talk a bit more about spouses. Is there anything—which, I am sorry, I should know—that will ensure the proportions that the surviving spouse or civil partner will get?
Mr. Plaskitt: Some of the issues that my hon. Friend is raising are covered by the clause. I think that the rules surrounding actuarial equivalence address some of her points, but others are covered by subsequent clauses, which we have yet to reach. I hope that her questions will be answered then.
Finally—I am just working my way through the main provisions of the clause—at present, when a person retires, the state earnings-related pension scheme entitlement based on earnings before April 1997 is reduced by the amount of their total GMP entitlement. Known as the contracted-out deduction, the reduction is made to reflect the fact that the person has paid a reduced level of national insurance contributions and thus prevents double provision. The clause allows a person who has had their GMP converted to be treated as if they still had the GMP, for the purposes of reducing the state pension. It allows for a notional contracted-out deduction to be made from the person’s SERPS entitlement to reflect the lower rate of national insurance contributions paid by the member.
The hon. Gentleman also asked—this has also been raised by the EEF—what happens if the scheme has lost contact with some members and therefore cannot consult them. Under proposed new section 24E(3), the draft legislation requires the scheme trustees to “take all reasonable steps”. Sometimes, deferred members fail to update the address details held by a former pension scheme when they move. Schemes therefore cannot be confident that their address databases for deferred members are always entirely accurate. We accept that it would be impractical and uneconomic for schemes to have to set about tracing all members who may have moved house after leaving the scheme. If correspondence is returned from the last known mailing address, the details of the individual case will determine what constitutes further “reasonable steps”.
The hon. Gentleman asked about costs. Our view is that when the provisions are implemented, they are liable to ensure annual administrative cost reductions for schemes, because there will no longer be two sets of rights to administer. We estimate that scheme savings could be around £15 million a year.
Andrew Selous: The Minister might be coming on to this in the course of his remarks. The ACA made a point about the impact of EU sex discrimination legislation. I should be grateful if he would respond to that.
Mr. Plaskitt: That will apply across the board; it is not specifically related to this measure. Schemes will incur some up-front costs on a one-off basis in making GMP conversions, but in the longer run they will make annual savings. We are taking on board the point that the hon. Gentleman just made.
The hon. Gentleman asked about the timing of the regulations and the introduction of the change. We aim to have draft regulations ready for consultation this summer. The plan is to seek to implement them in April 2009. I hope that I have dealt with the hon. Gentleman’s points.
Question put and agreed to
Clause 14 ordered to stand part of the Bill.
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