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Session 2006 - 07
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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


[Mr. Roger Gale in the Chair]

Pensions Bill

Clause 15

Abolition of contracting-out for defined contribution pension schemes
Amendment proposed [this day]: No. 37, in clause 15, page 19, line 16, at end add—
‘(10) The Secretary of State must lay before Parliament no later than 31st December 2007 a report setting out how additional revenues from increasing National Insurance Contributions collected from abolishing contracting-out will be used to improve pension provision.’.—[Mr. Laws.]
1.30 pm
Question again proposed, That the amendment be made.
The Chairman: I remind the Committee that with this we are discussing the following:
Clause stand part.
That schedule 4 be the Fourth schedule to the Bill.
New clause 3—Review of the abolition of contracting-out for defined contribution pensions schemes—
‘(1) The Secretary of State shall make a statement to Parliament in each financial year after 6th April 2010 on the use of the revenue that would previously have been assigned to contracted-out rebates for defined contribution schemes.
(2) For the purposes of subsection (1) above, the statement shall cover the extent to which the revenue is assigned to promoting saving.’.
Andrew Selous (South-West Bedfordshire) (Con): Welcome back, Mr. Gale. As I was saying, new clause 3 would require the Secretary of State to report to Parliament every financial year on how the Government have used the revenue saved by abolishing contracting out and, in particular, how that money has been used to encourage a culture of savings in this country. Amendment No. 37, tabled by the Liberal Democrats, is along much the same lines. I am happy to endorse much of what the hon. Member for Yeovil has said. New clause 3 is essentially a probing amendment. We will listen to what the Minister has to say in response.
Before I conclude, I should just like to reiterate my plea to the Minister for a clear explanation of how the contracting-out rebate figure moved within the space of under a year from £4 billion down to £1.6 billion. Were a company listed on the stock exchange to come out with such a massive variation in financial forecast it could have its shares suspended and the directors would probably be hauled before the stock exchange board to account for themselves. I am sure that all members of the Committee are waiting with bated breath to hear what explanation the Minister can give us on that point.
The Minister for Pensions Reform (James Purnell): Thank you, Mr. Gale. It is a pleasure to serve under your chairmanship this afternoon. I hope that I can answer the points raised by the hon. Members for South-West Bedfordshire and for Yeovil to their satisfaction. We have had accusations of mis-selling and of companies being suspended on the basis of these figures. The rather more prosaic truth is that the figures on which we base our assumptions change, so the resulting projections change. I will seek to explain that; if the hon. Gentleman remains unconvinced, I am sure that he will press his amendments ruthlessly.
The core of the debate is the abolition of contracting out for defined-contribution schemes, which we announced in the White Paper in May. That was one of the key recommendations of the Turner Commission. In principle the view is shared across both Opposition parties—[Interruption.] I am getting a nod of assent from the hon. Member for Yeovil. He said earlier that he did not think that tax relief made any difference to overall pension saving. I think that was the implication of what he was saying. We look forward to his seminar on that subject.
Andrew Selous: I thought we had that this morning.
James Purnell: It is hard to know when one is not in a seminar with him. Life is one long seminar.
We took the approach of abolishing contracting out because we essentially agree with the Pensions Commission that it was making decisions for people too complex. The system was understood by few people, especially in defined-contribution schemes, and overall, rather than helping to support saving for a pension, it may have been discouraging it. Clause 15 and schedule 4 seek to achieve this abolition, and amendments that we have already agreed provide a regulation-making power to remove or vary the rules on protective rights.
There has been interest in the effect of abolishing contracting out on the national insurance rebate, so it is important that we should be able to discuss that now. We have already covered the fact that the abolition of contracting out would mean that more people build up rights in the state second pension, and that takes the form that we were discussing earlier. Therefore, the first answer to the question put by the hon. Member for Yeovil is that it will be broadly financially neutral. People who withdraw from contracting out are building up future rights in the state second pension and therefore those are set at a broadly actuarially neutral basis. That is the point that the hon. Member for Weston-super-Mare was making.
Some of the debate, which has been based on the assumption that there was a huge saving here is incorrect, because any reduction in the cost of the contracted-out rebate is paid for later through increases in S2P obligations. The way that this will operate in practice is that from the date of abolition, contracting out will cease to be available for schemes that contract out on a defined-contribution basis. The members of such schemes will begin to build up state second pension. Contracting out will continue to be allowed for schemes that contract out on a defined-benefit basis. That is the answer that I tried to give the hon. Member for Yeovil on the quinquennial review, but there were two slightly separate points. One was our proposal for twinning the date for the earnings link with that for abolishing contracting out for DC. The other is when the next quinquennial review will happen. That continues to be relevant, even if we abolish defined-contribution contracting out, because that review will set the terms for defined—benefit contracting out. So, that process continues to be relevant and those issues are quite separate.
Mr. David Laws (Yeovil) (LD): Has the Minister considered the practical issues of having such uncertainty about when contracted-out rebates will end as a result of uncertainty over the earnings link? Is he worried that life will be made a lot less certain than it ought to be for the schemes involved?
James Purnell: I think that we are giving people the appropriate level of certainty by saying that our objective is to do this in 2012. As we previously established, our policy on this is much clearer than the hon. Gentleman’s, or that of the official Opposition. We are legislating to give people a clear timetable, and that applies here as well.
New clause 3 and amendment No. 37 are both concerned with how the putative revenue that would otherwise have been used for the contracted-out rebate is to be allocated in future. I have tried to explain that there are no actual savings there, as the change is, broadly, intended to be actuarially neutral. Without wanting to go into excessive detail, the abolition of the defined-contribution rebate reduces cost in the short term, but there is a broadly equivalent increase in future spending on the state second pension. Thus, changes to the rebate are not a real saving in the sense that it could be used to fund other expenditure.
The hon. Member for South-West Bedfordshire—and, I think, the hon. Member for Yeovil—asked why the figures on contracting out had changed. The reason is that the assumptions on which the projections are made have also changed, as the regulatory impact assessment set out in some detail. Perhaps they have been able to read that as well. The estimates in the White Paper were based on the 2005 pre-Budget report, which used the data available in autumn 2005. To have consistency within the document, all of the figures used within its cost projections were from that same period.
In publishing the latest White Paper, we have been able to look at how the numbers were changing; in particular, at new evidence of the numbers of people contracting back into the state second pension. A number of major schemes had contracted people back in, which, with the effects of the review that we have put in place, meant a significant downward effect on the number of people who had contracted out. As a consequence, the forecasted cost of the contracted-out rebate, based on real figures, had also fallen significantly. So, there is no great mystery about how that happened. It is a significant change, but one that reflects a big change in people’s behaviour. People are contracting out less; partly because of specific changes and also because there is a growing view that contracting out is too complicated, and people find that a disincentive to save rather than an incentive.
Andrew Selous: I am grateful to the Minister for trying to explain how this came about, but some fairly big question marks are left in my mind. The Minister is saying that between autumn 2005 and the end of 2006, the projections—on what was, after all, a pretty static pension scheme with no massive changes in that time—changed to the extent that the figures altered by £2.4 billion. That is a huge change, so could the Minister say a little more about those changed assumptions? Is he worried that his officials are suddenly going to come to him with other massively changed assumptions within the next six months or so? That could alter the figures even further.
James Purnell: The hon. Gentleman’s premise is that there was a stable pension population, but that is wrong. The figures actually reflect a significant change in the number of people contracting out. Her Majesty’s Revenue and Customs collected data from providers running exercises to contract their members back into S2P, which became available in January 2006. The data showed that about 200,000 people contracted back in every year from 2003-04 to 2006-07, a total of 800,000 people, which will reduce the cost of the rebate in 2010 and 2011 by about £1 billion. There were some significant changes; they were not forecasting changes but actual changes.
Mr. Laws: I am grateful to the Minister for that clarification. Will he put on record the number of people who were contracted out at the first date cited by the hon. Member for South-West Bedfordshire and the total number contracted out on the basis of the new estimate?
James Purnell: I am happy to write to the hon. Gentleman with that information. I hope that I have explained why the figures changed. There is no great mystery to them.
The second thrust of the debate was about what, if there is some money, it will be used for, and the hon. Member for Yeovil advanced four theories. There are two separate matters: first, the cost of pension benefits and pensions, which is set out in the White Paper; and, secondly, tax relief. The two are taken separately in respect of policy and how the figures are explained in the White Paper.
The way we set out our expenditure means that it does not include the contracted- out rebate in terms of the GDP figures that the hon. Member for Yeovil quoted. Nor does it include the increase in tax relief which will come from personal accounts. Personal accounts will drive an increase in the number of people saving through a company or a personal pension. That in itself will lead to an increase in tax relief. The Turner Commission’s recommendation that tax relief should be available to encourage people to save is exactly what our policy will implement.
Mr. Laws: I am grateful to the Minister for his customary patience in giving way to me. He said that the net cost of the policy was zero for the reasons that he set out. Did that estimate include the cost of tax relief on personal accounts? If it did—or even if it did not—does he have an estimate of the cost of that new tax relief?
James Purnell: No and no is the answer to the hon. Gentleman. The change to the contracted-out rebate is actuarially neutral and therefore broadly cost-neutral because there is a direct correlation between people opting back in to the state second pension and there being more state second pension costs in the future. The cost of extra tax relief on personal accounts is not included in the GDP figures that he quoted earlier. It demonstrates my point, that we have to consider affordability within the benefits system. Tax relief policy is set by the Treasury and is accounted for separately from these procedures. If our policy is a success, it will increase the number of people saving in a pension and therefore the overall cost of tax relief.
Mr. Nigel Waterson (Eastbourne) (Con): Can the Minister explain how the first of those sets of figures is affected by the gap between the current basis of the contracted-out rebate and what it would be if the Government had followed the Government Actuary’s recommendations?
James Purnell: I do not have those figures off the top of my head, as they do not relate to our policy. We considered the recommendations and put in place our own policy based on conclusions from the quinquennial review. I am sure that the hon. Gentleman can elucidate on those figures if he wants to. I hope that I have answered his question. There are no savings; that was the economists’ version in the Work and Pensions Committee. There are tax relief implications from the introduction of personal accounts, but they are done separately. There is not a huge pot of money that we should hypothetically be parcelling out among our favourite good causes.
Mr. Laws: Again, I am grateful to the Minister for being both patient and clear, but how does he tally that with the Secretary of State’s statement to the Select Committee on Work and Pensions about the £4 billion or £5 billion that would be freed up by the change? The Secretary of State clearly said that he was making a bid to keep that money within the pension system.
1.45 pm
James Purnell: It is clearly consistent with what the Secretary of State said. The money pays down the National Insurance fund, which is in the quote. There should be tax relief for personal accounts, which is what is going to happen. My point was that those two, as an accounting issue, are done separately, one within the benefits system—the figures that we set out in the White Paper. There is then the issue of overall tax relief and its affordability, which is a matter for the Treasury, although of course we work closely together on it. I hope that that answers the Opposition’s general enquiry.
The hon. Member for Yeovil made a specific point about risk sharing, which is worth touching on briefly. People say that there is a transfer of risk from companies to individuals and, indeed, from the state to individuals. To an extent that is true, insofar as we are encouraging extra personal responsibility. We are asking individuals to make provision for themselves, but that statement is worth qualifying. There are a number of ways in which we are trying to help people with those risks. I want to trot through three.
First, personal accounts will help people to manage risk, because they will be pooled in an organisation that is governed on their behalf and has a genuine critical mass of investment, which would, one would hope, give it greater security. Also, the organisation will be lifestyling the investments for them, managing the security of the investments according to their age profiles. Compared to a situation in which people made the investments entirely by themselves, with their own investments in the stock market subject to fluctuation, then the risk is being managed.
The second point is that, because of automatic enrolment, there will be more people involved in company pension schemes than there would otherwise be. So, in that sense, that also moderates the general trend.
Thirdly, we are interested in encouraging risk sharing between companies and individuals. There is a growing discussion in the financial services industry and among people who run company pension schemes about whether it is possible to bring back some risk-sharing hybrid schemes. That has been mentioned, as has risk sharing with particular parts of pension provision—for example, life assurance could be provided by the company. We are interested in looking at that because, if it is true that finance directors increasingly want to moderate the risk on the balance sheet, a halfway house between transferring it completely to the individual and keeping it on the balance sheet may be some kind of risk sharing. That is one of the things that our regulatory review is keen to look at.
John Penrose (Weston-super-Mare) (Con): Will the Minister make it clear that he disagrees with some outside commentators, who seem to make the point that defined-benefit schemes are some sort of gold standard and inherently better than defined-contribution schemes? I think that he is making that point, or it seems to be underlying what he is saying. Certainly based on the information that we received in Select Committee, the differential is mainly based on different levels of contributions; if one puts less into either sort of scheme, one gets less out.
Also, providing the market risk is managed as he described, there is another significant element of risk, which there is not for a defined-contribution scheme. That risk is regulatory change over the course of someone’s working life. The degree of regulatory change and, therefore, the risk of having one’s supposed benefits eroded through law changes, here and elsewhere, are much less in the case of a defined-contribution scheme than in other options.
James Purnell: That is why the Pensions Commission recommended personal accounts, which it wanted people to know was their individual pot. They would have a mixture of provision, with state provision subject to those political risks, but moderated by accounts that were a person’s own property and subject to another type of risk—investment risk. From an individual’s as well as a country’s point of view, sharing those risks is good. The portfolio of risk consists of a mixture of political and stock-market risk, with some people wanting their company to stand behind their pension, too.
The hon. Member for Yeovil also asked whether there was a risk of mis-sellng—one of his favourite words—because of the changes to the rebate. I hope that I can reassure him. It is for individuals to decide what sort of pension provision is best in their circumstances; the information that they get at the point of sale, through regulated financial advice, is a key part of their doing so. However, they may want to review annually the advantages and disadvantages of contracting out. The Financial Services Authority will keep a close eye on that. My officials are working closely with the FSA on the consumer information on contracting out that it provides.
Mr. Laws: Is that really good enough? The Minister says that this is a matter for individuals and their advisers in the context of the Government’s rejection of advice from the Government Actuary’s Department about the level of rebate that is appropriate in order for people to be sensibly contracted out. Surely there is a mis-selling risk, because the Government are ignoring that advice.
James Purnell: As I say, it is for individuals to make those decisions. The hon. Gentleman sometimes talks as though it will be the Government making the decisions rather than the individual. The individual takes out a pension—regulated by the FSA—and it is the individual’s decision. In practice, some providers have chosen to contract their members back into S2P. It is because of the difficulty of making those decisions that we think that contracted-out DC schemes, with the extra complexity that they introduce, should be abolished.
I hope that I have answered the points that hon. Members have made—
Mr. Laws: Will the Minister give way one last time?
James Purnell: Obviously not.
Mr. Laws: This really is my last intervention, and I know that the Minister will want to have a chance to respond directly to it rather than just listening to my short summing-up speech. Is it the Government’s policy on personal accounts on the one hand and other employer schemes, including DB schemes, on the other to achieve neutrality—the Government are not seeking to incentivise employers to take up one scheme rather than the other—or do the Government intend to tilt the playing field either towards encouraging employers to make their own provision, as in the past, or towards personal accounts?
James Purnell: I think that the tax relief on each will be broadly equivalent. However, we do want to encourage employers to continue to provide company pension schemes, or to start to do so. The range of measures set out in the December White Paper is designed to do exactly that. We are not proposing extra tax relief above and beyond that which already exists to do that, but, like all parties, we want to encourage people to provide company pension schemes. As I told the hon. Member for Weston-super-Mare, we are not making a value judgment between the two.
The aim of all the provisions in the schedule and the clause is to ensure a smooth and ordered end to contracted-out DC schemes. That will bring to an end an element of pension regulation that has been an increasing source of complexity for both providers and individuals, and I urge hon. Members not to press amendment No. 37 and new clause 3.
Andrew Selous: I am grateful to the Minister. Our debate has shown the benefit of repeated interventions in drawing out further information from him. If I have missed the assumptions in the Government’s latest regulatory impact assessment of which the Minister spoke, I apologise. I tried to look at it as carefully as possible.
James Purnell: I am sorry; it is the RIA to the White Paper.
Andrew Selous: I am grateful for the Minister’s correction. He has rather more officials working on his behalf than the hon. Members for Eastbourne and for Yeovil and I have researchers, but I am none the less grateful. The debate has been useful in explaining the huge change in the figures.
Mr. Laws: I am grateful to the Minister for his reply and for accepting my interventions. I promise the Committee that I shall try to put my contributions on a fast track for the rest of the afternoon.
The debate has been useful and the Minister’s answers have been candid and direct. I shall sum up where we are and where there are still problems. He said that there is a clear timetable for getting rid of the contracted-out rebate. His idea of a clear timetable is slightly different from mine, because his allows for the opted-out rebates to be abolished in any of four years. He gave us an insight into the decline—pretty much the collapse—of defined-contribution schemes in a short period. He has kindly said that he will put in writing the number of people who were in DC schemes and what that number has come down to.
James Purnell: It is important to say that it is not the defined-contribution schemes that have collapsed but those that are contracted out. People are still contributing to their pensions, but they are in the state second pension system rather than contracted out.
Mr. Laws: I am grateful for that clarification. It has perhaps been a collapse in the attractiveness of remaining contracted out. In that regard, I remain concerned about the Government’s determination to ignore the potential mis-selling of the level of contracted-out rebates. We all know that that is uncertain by the nature of DC schemes, but the Government should not say that it is simply an issue for advisers and individuals. The Pensions Commission has shown that the Government chose to ignore the advice of the Government Actuary’s Department, and it set out the implication of that in black and white terms in its final report: that
“unless individuals aged over 44 in APPs and 48 in money purchase schemes receive higher investment returns than assumed by GAD, the contracting-out rebate will not replace foregone S2P benefits.”
The Government chose to ignore the GAD’s advice and to allow people who decide not to go back into the S2P to risk losing out, which creates a dangerous position. The Government ought to consider whether to give further advice to people in that position to ensure that there is no possibility of our being back here in 10 years with a case of serious mis-selling. People would have a strong case to argue.
The Minister mentioned the missing £5 billion, or £4 billion—it is now down to £2 billion—and plumped for what I describe as the economist’s case: that it is a zero-sum game because the rebates will offset the extra S2P obligations. In fact, he went a bit further and said that the Government have coughed up tax relief on personal accounts, although he did not give us a figure. It would be useful to get one on the record. Also, the contracted-out rebates are not compensating properly for the state second pension, so if there is any value in what the Government are doing it might be that they are taking on board an additional cost, which is set against a saving. The Minister has been clear about that, but it seems at least moderately to contrast with the Secretary of State’s acceptance of the fact that there was a pot of £4 billion or £5 billion that he was desperate to get his hands on. Other people who have also been desperate to get their hands on it will be disappointed to know that they are not allowed to and that the amount has shrivelled so much.
The issue of Government incentives in relation to personal accounts and company schemes, including DB schemes, will be dealt with to a greater extent when the personal accounts come in. However, there is widespread, legitimate concern that there could be a levelling-down process that will accelerate the decline in the contributions made by many companies. The Government need to give some thought to the extent of the regulatory changes that they could introduce to make it easier for DB and other good employer schemes to remain in existence. The Minister indicated that the Government have an open mind on that issue and are willing to examine changes that could facilitate more affordable schemes.
2 pm
There is also an issue about whether the Government will take a completely neutral attitude on whether employers will opt for personal accounts or for DB or other schemes. I hope that the Government would be, at the very least, neutral on that matter, and that, if anything, they would acknowledge that those employers who choose the non-personal account schemes will be taking on very large costs and burdens. Furthermore, the Government should consider what they can do, through legislation and other means, to ensure that those schemes do not disappear in the years ahead.
Having aired those concerns reasonably extensively, I will not press amendment No. 37 to a Division. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 15, as amended, ordered to stand part of the Bill.
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