 House of Commons |
Session 2006 - 07 Publications on the internet General Committee Debates Pensions Bill |
Pensions Bill |
The Committee consisted of the following Members:Alan
Sandall, Committee
Clerk
†
attended the Committee
Public Bill CommitteeThursday 1 February 2007(Afternoon)[Mr. Roger Gale in the Chair]Pensions BillClause 15Abolition
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.
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.
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.
However, I am obviously not
regulated under the Financial Services Act 1986 to give people
financial
advice. They must decide which kind of scheme is
most appropriate to them and the risk that they want to take. That is a
rather pedantic way of saying that different types of scheme have
different risks and advantages, and people need to decide what is right
for them.
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:
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.
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.
|
| |
| ©Parliamentary copyright 2007 | Prepared 2 February 2007 |