Clause
92
Supply
of information about pension compensation in relation to divorce
etc
Amendment
made: No. 179, in clause 92, page 43, line 10, at end
insert—
‘(iv) orders for
financial provision under section 8 of the Family Law (Scotland) Act
1985 (c. 37) (orders for financial
provision);
(v) provision as
to pension sharing, or pension compensation sharing, that is contained
in an
agreement that is a qualifying agreement for the purposes of section
28(1)(b) and (c) of the Welfare Reform and Pensions Act 1999
(c. 30) (activation of pension sharing) or this
Chapter.’.— [Mr.
O'Brien.]
Question
proposed
, That the clause, as amended, stand part of the
Bill.
Danny
Alexander:
Again, I have a couple of points that relate
equally to clause 93, so I have the chance to make them twice. Both
clauses relate to provisions to allow the supply and sharing of
information, and therefore presumably the transfer of information
between bodies. I raised that point at an earlier stage when we talked
about transferring information in other circumstances and it is an
obvious one: the Minister may wish to reassure the Committee about the
appropriate security provisions and so on that will be made with regard
to information that is being transferred. There have been
well-publicised problems about information being lost and during the
course of a transfer. Therefore, if regulations are made under the
clause to allow information to be passed from one body to
another—for example, from a pension protection fund to another
body—we must ensure that it is done in the most secure way
possible to avoid any data loss taking place as a result of the
clause.
Mr.
O'Brien:
I reassure the hon. Gentleman that in terms of
information being transferred between pension trustees and the PPF, or
information being transferred further to the various transferors and
transferees who will receive the payments, we will do all we can to
ensure that information is properly handled. The PPF already has to
handle substantial amounts of personal data, and it is right to
highlight the importance of security. The PPF has managed to do that
with some degree of skill. It is always the case, particularly in the
light of recent events, that we should be more concerned than we have
been that data can be lost. I reassure the hon. Gentleman that as a
result of his comments I will draw to the attention of the board of the
PPF that Members want it to be sure that its handling of data is at the
level of security and competence that we have a right to
expect.
Question put and agreed to.
Clause 92,
as amended, ordered to stand part of the
Bill.
Clause 93
ordered to stand part of the
Bill.
Clause
94
Pension
compensation sharing and attachment on divorce
etc
Amendment
made: No. 180, in clause 94, page 43, line 31, leave out
‘has’ and insert
‘and Schedule [Pension
compensation on divorce etc: Scotland] (which amends in relation to
pension compensation sharing orders similar legislation applying in
Scotland) have’.—[Mr.
O'Brien.]
Clause
94, as amended, ordered to stand part of the
Bill.
Schedule
5 agreed to.
Clauses 95 and 96 ordered to
stand part of the
Bill.
Schedule
6 agreed to.
Clause
97
Pension
sharing: power of Court of Session to extend time
limits
Danny
Alexander:
I do not wish to entangle the Minister in Scots
law—in fact, it is the other Minister’s chance to be
entangled in Scots law, which is welcome. Will the Minister clarify the
intention of the clause? It seems that it allows the Court of Session,
as well as the sheriff, to be involved in decisions about extending
time limits, but it does not extend time limits. Is that interpretation
correct?
The
Parliamentary Under-Secretary of State for Work and Pensions
(Mr. James Plaskitt):
Broadly, yes, but I will
clarify for the hon. Gentleman to get it straight on the record. The
clause amends sections 28 and 48 of the 1999 Act, which deal with the
orders that activate pension sharing on pension arrangements and on
shareable state scheme rights respectively. The amendments deal with
orders made in Scottish
courts.
When
a couple divorce or civil partners dissolve their relationship, they
can ask for a financial settlement. One of the options open to the
court is to make a pension-sharing or corresponding order. Such an
order can be made against a pension arrangement or the shareable state
scheme rights. For orders made under the Family Law (Scotland) Act 1985
or a corresponding provision to have effect, the person responsible for
the pension arrangement must receive the order and the matrimonial
documents within two months of the date of the order. If the order is
not received within that period it is deemed never to have taken
effect.
A party with
an interest in the order may apply to extend the two-month period if it
has expired and the order and the matrimonial documents have not been
received by the person responsible for the pension arrangement.
Applications for extensions can currently only be made to the sheriff.
However, as I am sure the hon. Member for Inverness, Nairn, Badenoch
and Strathspey knows, some divorces in Scotland are heard in the Court
of Session. Currently, there is no provision for applications to be
made to the Court of Session to extend the two-month period and there
is no reason why the Court of Session should not consider those
applications. Otherwise, such an application would have to be remitted
to the sheriff. The clause gives the Court of Session in Scotland the
same powers as the sheriff to extend the two-month period. That will be
a modest but worthwhile improvement, which should help the
pension-sharing process. I hope that that explains the clause and that
the hon. Gentleman will agree that it should stand part of the
Bill.
Question put and agreed to.
Clause 97
ordered to stand part of the
Bill.
Clause
98
Interest
on late payment of
levies
Question
put, That the clause stand part of the
Bill.
11.45
am
Mr.
Waterson:
The purpose of clause 98 and accompanying
schedule 7 is to allow for interest to be charged on late payment and
levies to the PPF. That proposition is so obvious and reasonable that
one wonders
why it was not included in the original legislation. No doubt the
Minister will explain that apparent
oversight.
The
explanatory notes, to which I like to refer from time to time, just to
ensure that the person who drafted them was not completely wasting
their time,
says:
“There
may be circumstances in which it would be inappropriate to charge
interest on late payment of
levies”,
and that there
would be
“power to
prescribe such circumstances in
regulations”.
I will not
waste my breath by asking whether the draft regulations are available,
but it would be helpful if the Minister said what circumstances would
constitute a good reason or an excuse for not paying on time. After
all, a payment not made on time is costing money to all the people who
pay the levies on
time.
It is clear that
the Pensions Act 2004 does not contain a power for the board of the PPF
to make a charge of interest. The impact assessment makes the obvious
point, which is that if these monies—these interest
payments—were available, they could be used for investment and,
presumably, to defray the overall costs of the levy to British
industry. The research paper
says:
“we would expect
the fact that interest would be charged on late payments would reduce
the incidence of late
payment”—
although
I suspect that that would depend on the interest rate and how it
compared with how much the company had to pay for its own
borrowings—
“as
schemes would aim to pay Levy bills more promptly to avoid paying
interest.”
It is
calculated, on a particular rate of interest, that that would have
brought in about £600,000, which is, as the saying goes, better
than a poke in the eye with a sharp
stick.
This matter is
certainly worth pursuing. I will be interested to hear the Minister's
explanation, or apology, for not putting such a provision in the
previous legislation, although I appreciate that he was not the
Minister responsible at the time, and I should like to know in what
circumstances it would be inappropriate to charge interest in
particular
cases.
Danny
Alexander:
Further to those comments, again, I agree with
the hon. Gentleman that it is sensible to have provisions allowing
interest on late payment of levies relating to the PPF. Such provision
should probably have been included in the 2004 Act, deliberations on
which the hon. Member for Eastbourne was also involved in, as he said
in response to an earlier point. Of course, for the sake of
completeness, I am sure that Liberal Democrats were also involved in
that legislation, too, so we cannot be wholly blameless in this regard
either. None the less, the Government have the resources, as has been
said
before.
I
should like the Minister to clarify whether this provision has been
advanced to rectify an omission, whether there have been cases where
levies have been paid late and whether there is a particular problem
with late payment which the Pension Protection Fund has drawn to his
attention. It will be interesting to know what information the Minister
has, if any, about the extent of the problem of late payment, how late
payments
are being made and whether that is causing a problem for the PPF
carrying out its business. In other words, having introduced these
powers, does he expect that the PPF will need to use them regularly?
What is the proportion of companies making late payment of levies to
the PPF? Does the provision answer a significant practical problem that
is currently being experienced or does the Minister regard it more as
an insurance policy to ensure that it does not happen in
future?
Mr.
O'Brien:
First, I am assured that some of the levies were
set in the Pension Schemes Act 1993. The 2004 Act merely created the
PPF, but some of the levies were set out in the 1993 Act, for which
another Government may wish to claim
responsibility.
Mr.
Waterson:
I am sure that the Minister is
desperately trying to shift the blame, but if the levies were being
levied from 1993 onwards, what were they for if there was no PPF until
2004?
Mr.
O'Brien:
When we came into office, we felt that protection
under the Pension Schemes Act 1993 was not adequate. Given that there
was broad support for the PPF, I presume that the hon.
Gentleman’s party also felt that the provisions that it had put
in place were inadequate. However, when it put them in place, it did
not have in that Act, which provides that interest may be charged on
late payment and makes sure that there is coverage for the Office of
the Pensions Advisory Service and the pensions ombudsman, a provision
for the levy to have interest if it is paid late. Perhaps the better
argument would be that we should have spotted in 2004 the mistake made
by the previous Conservative Government. As the hon. Member for
Inverness, Nairn, Badenoch and Strathspey said, the hon. Member for
Eastbourne was a member of the Committee considering the Bill at that
time, while I was not, so perhaps he should have spotted the mistake
that his Government had made in 1993. However, perhaps we can all share
the
blame.
Let
me be clear. I mentioned that the levy covers the Office of the
Pensions Advisory Service and the pensions ombudsman. The total general
levy from occupational and personal pension schemes for 2008-09, for
example, is expected to collect £42 million, but that will be
divided. It will not all go to the PPF. About £7 million is
earmarked to recoup one third of the deficit that has built up over the
past three years. I shall return to that issue in a moment. The
bulk—84 per cent.—of the ongoing £35.6 million is
to pay for the Pensions Regulator, with the balance being split roughly
between the Office of the Pensions Advisory Service and the
pensions ombudsman. The general levy has not increased since
2005, when the Pensions Regulator replaced the Occupational
Pensions Regulatory Authority, because of a ministerial commitment that
we would not increase
it.
In answer to the
hon. Member for Inverness, Nairn, Badenoch and Strathspey, we need the
power to tackle the late payment levies and 40 per cent. of the pension
protection levy collected for 2006-07 was paid after 28 days,
which accounted for about £114 million of the £271
million collected. We had quite a bit of late payment. The hon. Member
for Eastbourne rightly asked whether there are circumstances in which
it is
justifiable to pay late. One of the reasons why we have had a lot of
late payment in recent years is that there has been a dispute about the
amount of levy. A number of the funds involved have said that the level
of risk, for example, that is included in the calculation of the levy
is wrong and that they are not as risky as all that. The funds have had
it looked at again and, in many cases, it has been agreed that the levy
can be reduced. It
seems that there was some justifiable reason for a late payment and, in
such circumstances, it would be open not to charge interest on the late
payments because that was justified; the original levy that was imposed
was not right. There are circumstances in which it may be right not to
charge interest. Obviously, there are circumstances in which there is
no dispute about the level of the levy and payments just arrive late
when it would be appropriate to charge interest. I hope that I have
answered the various issues that have been
raised.
Question
put and agreed
to.
Clause 98
ordered to stand part of the
Bill.
Schedule
7 agreed
to.
Clause
99
Intervention
by Regulator where scheme’s technical provisions improperly
determined
Question
proposed, That the clause stand part of the
Bill.
Mr.
Waterson:
When I first looked at the clause, I thought
that it was very techie and that we did not need to say anything about
it. All it seemed to do was to clarify the technical issues surrounding
the powers of the Pensions Regulator under the Occupational Pension
Schemes (Scheme Funding) Regulations 2005.
One of the things
that drives the regulator is the principle that the methods and
assumptions used by pension fund trustees are chosen prudently. For
example, if they assumed that their members would live to the age of
36, that would clearly be a bit imprudent. All of this—surprise,
surprise—emanates from the European occupational pensions
directive of 2003. So far, so good. The clause, as I read it, does what
it says on the tin and clarifies that the regulator can use their
powers under section 231(2) of the 2004 Act, where the sole ground of
concern is that the actuarial methods or assumptions do not appear to
be prudent. However, what gives that topical salience is the flurry of
press comment in the past few days about the changes in assumptions on
longevity figures being proposed by the regulator. I gather that those
changes are now out for consultation until May sometime. No doubt the
Minister will be able to tell us a bit more about that. Potentially,
those changes could have a dramatic effect on pension scheme deficits.
I have seen one estimate that adds an extra £75 billion to the
burden on existing schemes. Sometime this week, we will get on to risk
sharing and how we can encourage various schemes to stay in business,
as it were. The need for those measures is given extra urgency by these
proposals.
One
might say that it will cost £75 billion extra simply to reflect
the fact that, for example, under the PPF’s current assumption a
man will live to 87.9 years on
average, which is up from 86.8 in its 2006 report and accounts. The
figure being bandied around at the moment by the Pensions Regulator is
89. That is very encouraging if you are a man and, presumably, no
doubt, even more encouraging if you are a
woman— [Interruption.] I should tell my hon. Friend the
Member for Bromsgrove, who makes a comment from a sedentary position,
that the gap between the sexes is narrowing quite rapidly, although I
will not speculate why that is so. Those figures raise some important
issues that go way beyond the technical issue in the
clause. Regulators
have been worried that schemes have been understating or
underestimating the rate at which life expectancy continues to
increase. I have read some statistics, which will no doubt perk up
Committee members who may not have volunteered to sit on the Committee,
that say that for every hour they spend here, their life expectancy
increases by a quarter of an hour. That is quite
dramatic.
Mr.
Greenway:
This is an important point. When he says
“here”, is my hon. Friend referring to service on the
Pensions Bill Committee or in the whole of the House Of
Commons?
Mr.
Waterson:
Time moves more slowly in this Committee. I
think that Albert Einstein would have said something about serving on a
pensions Bill Committee. Time appears to move slowly here. However,
broadly speaking, we all end up in the same place, whether we are
sitting in a Committee, in the Chamber or in our offices, which would
make a nice change from sitting
here.
The big issue is
how we deal with this new development. It is very encouraging that,
thanks to the foresight and wisdom of successive Governments, life
expectancy has increased. Of course, we know that the state pension age
of 65 for men was borrowed from Bismarck, who came up with it in the
middle of the 19th century. That was a time when few people made it to
the age of 65 and certainly not far beyond it, although I think that
Bismarck did. How do we factor that
in?
12
noon
I was about
to say that one could argue that, if the extra costs are £75
billion, so be it. That fact must be built in to pension schemes more
generally. However, it is bound to be a factor in the attitude of
sponsoring employers to keeping their existing pension schemes open to
new or existing members. In the same way, to take an example, FRS 17,
introduced at exactly the wrong point in the economic cycle in my
opinion, had an effect on undermining that commitment.
Yes, it is important that we
clarify that the regulator has those powers, but it is not the
Committee’s job to argue whether the EU directive was sensible
in the first place. As a Committee, we need to put all this in a
broader context, which is the dramatic increase in life expectancy.
Ultimately, matters such as obesity and selling off playing fields will
have an impact on slowing the increase in longevity, but short of a
massive pandemic it seems to go up and up inexorably, which is
enormously encouraging.
I have a constituent who is 111
years old. Of course, Eastbourne tends to have a slightly older
population than average, but it is remarkable how many 100th birthday
parties I get invited to; sometimes two a week. That says something
about the health service and all sorts of related matters, such as
better nutrition. It also brings a different reality with it, which is
how we pay for the very long periods of retirement that people will
increasingly be enjoying—hopefully that is the right
word—based on a reasonable income to do
so.
Therefore, the
clause seems relatively modest and inoffensive, but behind it lurks the
elephant in the room—to use a marvellous and much over-used
analogy—which is the question of rapidly increasing life
expectancy. I would be fascinated to hear what the Minister has to say
on those
matters.
Danny
Alexander:
I am sorry to hear that the hon. Member for
Eastbourne is not enjoying the Committee’s deliberations.
Perhaps time slowing down means that he wants to spend more time in
these sittings. Certainly, the record of the number of 100th birthdays
in his constituency suggests that time there is speeding up, so there
is a balance to be struck
somewhere.
Dressed up
as a technical clause, this raises an important point, rightly lighted
upon by the hon. Gentleman. I do not wish to repeat his remarks, as he
made many of the points that I had intended to make. However, the key
word in relation to the clause is
“prudent”.
The
report released this week, which is now a matter out for consultation
from the regulator, suggests that the regulator is doing its own work
on what it considers to be prudent. Does that mean, should the clause
be enacted, that the regulator will therefore effectively determine the
actuarial considerations each scheme should make? Or is it a slightly
looser arrangement, under which the regulator has the power to
determine the prudence of the actuarial considerations? That does not
mean that they have to be exactly along the lines of the examples that
the hon. Gentleman gave, which have been reported quite widely this
week. But, for example, a pension scheme, that made actuarial
assumptions higher or lower than those made on the national average
could, none the less, justify those assumptions as being prudent on the
basis of its team members’
knowledge.
It
would seem not quite right that uniform actuarial assumptions should be
imposed by the regulator across all pension schemes. However, it is
sensible and necessary, given the content of the European law, that
there should be an ability to determine whether the actuarial
assumptions made by the scheme are prudent.
I note, in closing, that the
work of the Pensions Regulator on understanding the extent to which
life expectancy is increasing has not only an implication for pension
schemes in the private sector, which the clause refers to, but a
significant effect on the liabilities of public sector pension schemes.
That is a matter that is debated and highlighted all too rarely by
Ministers. Information was recently brought forward, or at least
endorsed, by the Government on the work of the Institute for Fiscal
Studies on a rough estimate of unfunded public sector pension
liabilities. Given that, if the new actuarial considerations were
applied to public
sector pension liabilities what greater extent would the Minister see
those liabilities taking? There is also a massive implication for the
public purse that is being swept under the carpet, and I would welcome
his comments on that. While the debate concerns a technical point, it
has much broader implications across the public and private
sectors.
Mr.
Greenway:
This is an important issue and my hon. Friend
the Member for Eastbourne is on to something in raising it, but
listening to the hon. Member for Inverness, Nairn, Badenoch and
Strathspey reminds me what the issue was about originally, which is not
quite what we are discussing. My understanding is that it is about
ensuring that members of schemes have reassurance and confidence that
the funding of their schemes by employers is adequate. Of course, in
the great debate about public sector pensions that does not quite apply
in the same way. Many public sector pensions are unfunded; one thinks
particularly of the police service. What to do about the burgeoning
liabilities of public sector pensions is a major political issue for
this Government and any future Government. The Minister will remember a
point I made on Second Reading, which is that it will be a huge tragedy
if we continue to move away, right across the piste, from final salary
schemes, simply on the argument about what is affordable. I have real
concerns about what future generations may be entitled to in
retirement, which in a sense is linked up with this issue.
On the issues that my hon.
Friend the Member for Eastbourne has raised, there must be a concern if
the regulator is to use the new power in clause 99 to impose an
actuarial calculation regime on schemes that until now everybody has
regarded as being well-managed, prudent and properly funded. I would
share his concern if that were the case, however, my reading—I
may have it completely wrong—is that this is actually a
provision to assist members of schemes who feel that employers are not
contributing sufficiently. That has been a major scandal in many
schemes. The new power would enable the Pensions Regulator, which is
the watchdog on behalf of scheme members, to make an intervention even
if the cosy relationship between trustees and employers means that they
think that all is well, which has also gone on in the past.
This is a
critical issue. For the reasons I have stated, we need this power in
the Bill. What we need from the Minister is a reassurance it will not
be used across the board to impose new funding requirements on all
kinds of schemes, in response to the longevity information that my hon.
Friend the Member for Eastbourne rightly drew attention to. Those two
points are different. Those schemes that the regulator feels are
underfunded can now be dealt with even if the trustees and the
employers think that they are funded sufficiently.
My understanding is that at the
moment, the regulator cannot intervene—with this power he could,
and that is important. I entirely share the concern of my hon. Friend
the Member for Eastbourne. If the provision enables the regulator to
interfere right across the board in employer pension schemes,
particularly in the private sector, that could potentially impose
funding requirements which would drive even more schemes into defined
contribution arrangements and away from defined benefit arrangements.
That would add to the problem of levelling down about which we are all
concerned.
Mr.
O'Brien:
I thank the hon. Member for Ryedale; he has
encapsulated the argument well. We must ensure that members of a
pension scheme can be sure that the funding of their pension scheme is
adequate. On occasion, sometimes after discussions with employers,
trustees have accepted that a particular level of funding is adequate
when circumstances have changed. Over recent decades we have seen
actuaries who calculate the amount of liability a pension fund has
based upon the data that they look at. That data is about how long
people are living. Over the last decade or so we have recognised that
data about how long people have lived for the last few decades will no
longer reflect how long they live in the decades to come. That has
implications for pension funds, which will have to provide for greater
funding if people are living longer—there must be more money to
pay their pensions for longer.
Actuaries have made various
calculations and shared views about projections for life expectancy,
and therefore how much money pension funds have to have. However, many
of the calculations established, particularly during the late 1990s,
were wrong and the amounts that needed to be put in were higher than
expected. The result of that is that a lot of work has been done by
actuaries over the last decade, seeking to get a better fix on how long
people are likely to live. There is no one-size-fits-all solution to
deal with the point raised by the hon. Member for Inverness, Nairn,
Badenoch and Strathspey. People in different types of occupations have
longer life expectancies than others.
I represent a mining area. We
still have a working pit and I am a miners’ MP—a rarity
these days. In my area there are many people who have pneumoconiosis
and other pit-related diseases, and life expectancy is therefore
reduced as a result. The mortality rate in my local hospital, the
George Eliot hospital, is very high. Various figures have suggested
that that is due to a poor hospital—actually it is due to the
fact that it represents an area where there is a history of particular
types of disease. Therefore, if we make projections in a particular
industry about how much funding we will need, we must have data about
the nature of the life spans of people in that industry. The life span
of a miner is now greater than in was in the past: care for their
health and safety is greater, and the general health benefits and the
lifestyles that people lead are better than they were in the
past.
The
miners’ pension funds must make calculations based not on how
long miners lived in the 1970s, 80s and 90, but how long they are
likely to live in the 2020s, 30s and 40s and decades to come. Provision
in the fund must be made for those sorts of life expectancies. Some
trustees—not in that particular fund, but in some—have
taken somewhat conservative views about life expectancies. I use the
word “conservative” with a small “c”. The
result is that the fund is underfunded, or at least that there is some
concern among members about its adequacy.
12.15
pm
The regulator
has a specific ability to intervene, as the hon. Member for Ryedale
suggests, but there is also a more general issue, to which the hon.
Members for Eastbourne and for Inverness, Nairn, Badenoch and
Strathspey have referred: what about the concerns that the regulator
may have that some pension funds may
well not have made adequate provision, and how do we ensure that there
is adequate provision in pension funds and that trustees are properly
advised about how to approach such issues of increased
longevity? The clause
addresses an uncertainty that has arisen about the circumstances in
which the pensions regulator can use its powers to regulate a scheme
funding requirement for private sector defined benefit schemes. The
regulator has a range of scheme funding powers that it can use where
there has been a breach of the legislation, or where the trustees and
sponsoring employers cannot reach agreement on a key aspect of the
scheme’s funding arrangements.
One of the duties of a pension
scheme’s trustees is to decide which actuarial assumptions to
use. They can look at particular actuarial valuations of their scheme
as a result of that. Legislation requires that those assumptions must
be chosen prudently. Where it appears that the trustees have not
complied with that requirement the regulator has the power to specify
what assumptions must be used.
The regulator has recently
faced challenges to its power to intervene where the actuarial
assumptions used in a valuation do not appear to have been chosen
prudently by the trustees. The actuarial assumptions used in a
valuation are crucial to establishing the scheme’s correct
funding position, and therefore the level of contributions payable by
the sponsoring
employer.
The clause
does not give the regulator any new powers. It clarifies what powers we
assumed the regulator had. It simply ensures that the regulator can use
its scheme funding powers, thereby protecting both members’
benefits and the PPF, where the assumptions chosen by trustees do not
appear to be prudent. In that sense, the hon. Member for Ryedale is
entirely right.
The
hon. Member for Eastbourne has however raised the broader issue about
the recent consultation document, which was published yesterday. I want
to tell him clearly and candidly that the regulator takes its
independence very much to heart and is clear that it has a role to look
after the general security of the industry and make sure that trustees
consider appropriate actuarial assumptions. Therefore it took a view
that it wanted to publish the consultation document.
When I was made aware that the
regulator was about to do that—and I saw some of the
media—I approached it, and we considered the matter. Once
pension fund representatives examine the document they will see that it
is essentially a consultation document, to ask them their views on how
those issues of increased longevity should be dealt with. It is not a
diktat from on high. It is an attempt by the pensions regulator to
engage in a serious process of examining actuarial projections, which
are constantly changing.
That has implications for
pension funds. We do not know quite what those are yet. Some of the
headlines that I saw in the Daily Express and elsewhere are
lurid, fanciful projections based on journalists seeking to get a
headline from an issue that would probably be seen as more technical
than anything else. The implications are profound and important; but
they are also technical. The question is how best to make the
calculations, and by what means to deal with a major change in society.
It is a very welcome change: on average we are living
longer. That is great, but it has to be paid for,
and that sometimes is not so great, because it leads to problems over
where to find the money. We need a way
to gauge how much we must pay, and that is why those actuarial issues
require broad discussion. What the regulator has sought to do is set
out a consultation document that says, “Look, we have an issue
here. Let’s talk about it and discuss how we can best calculate
this. These are our ideas, what are yours? Let’s have a proper
consultation discussion about the best way in which trustees can deal
with the issue and have appropriate actuarial calculations for your
particular industry and, more broadly, for pension funds as a
whole.”
I
condemn some of the lurid headlines. I do not think that they are
helpful. They are raising fears among pensioners, which is unnecessary.
At the same time, however, this is a genuine issue that needs to be
dealt with in a technical and serious way. What the regulator has done,
independently of Government, is to put forward the idea of having a
broad-based consultation on an enormously important issue to see
whether we can get a consensus between trustees and actuaries about how
to proceed.
Andrew
Selous:
I am listening with great interest to the
Minister. We are all grateful to him for his very discursive and useful
analysis of this very important matter. However, I am not aware that he
has responded to the point that was raised by my hon. Friend the Member
for Eastbourne about the big increase in childhood obesity and type 2
diabetes. Are those conditions feeding into the life expectancy
figures? While I accept that people are living longer, we are all aware
of the increase in childhood obesity and I wonder whether that has been
factored into the actuarial figures. Perhaps the Minister could get
back to the Committee at a later stage on that important
issue.
Mr.
O'Brien:
Actuaries will have to take into account
projections of the possible impact. I do not know whether they have
decided on the projections. The extent to which they need to take them
into account will depend on the type of industry in question. There are
some occupations in which obesity is unlikely to be a problem. However,
other occupations might need to take into account issues related to
obesity. This is not a one-size-fits-all issue. It is about getting
trustees in particular areas and particular occupations to be able to
project what sort of longevity members of particular schemes might have
and therefore what the adequacy of funding will be. One of the issues
that they will consider when they make their calculations is the
projections offered by the Office of National Statistics, which will
deal with the sorts of points raised by the hon.
Gentleman.
Miss
Julie Kirkbride (Bromsgrove) (Con): In terms of
affordability and what is set out in the Bill that we are currently
looking at as opposed to the consultation exercise that is now going
on, what kind of options for affordability is at the behest of the
regulator? Is it simply to increase employers’ contribution, to
change the amount of pension that will be paid out, or to stop pension
holidays? In determining affordability, what kind of issues can the
regulator decide upon? Can it increase employers’ contributions
to beyond 3 per cent. that is set out in the regulations for lower paid
workers?
Mr.
O'Brien:
In terms of personal accounts, projections about
life expectancy will obviously have a relevance. However, we are
dealing with defined benefit schemes rather than defined contributions
schemes. In defined contributions schemes, such as personal accounts,
the amount that is built up in the pot will determine the amount that
the person gets. Although it is a relevant consideration, it does not
have the crucial importance that it does in the defined benefit scheme,
which is, in effect, a final salary scheme. In such a scheme, the
employer may well have the obligation, but it may, in some
circumstances, be shared with the employee to ensure that the scheme is
adequately and properly funded. If a projection by an actuary employed
by a scheme says that they expect a defined benefit scheme to have a
longer life expectancy, in some cases, depending on the terms of the
scheme, it will sometimes predominantly affect the employer because
they will have to properly fund the scheme. The hon. Lady asked whether
it would affect issues such as holidays and so on, which employers
might take as contributions—the answer is yes. If it looks like
there is a surplus, and if new projections suggest that the surplus is
not that great, a holiday or whatever the employer may have felt
possible may not be possible. The level of adequacy of the funding will
have been increased, because of new projections on longevity. Holidays
and other things will be
affected.
The reason
why I am concerned about lurid headlines on whether some pension
schemes are able to be paid is that in the vast majority of cases, they
are not justified. In some cases, the headlines are about life
expectancies some decades into the future. The provisions that must be
put in place now will deal with a problem that will occur in 2050, say.
The problem does not exist now, so there is plenty of time to make
provisions to deal with it. When the consultation document was
published, the journalists said, “We could have this problem
now—the schemes are underfunded”, but that is not the
case. The problem may well appear only in decades to come, so there is
plenty of time between now and then to make adequate provision to deal
with it.
The hon.
Member for Ryedale, with his usual precision, touched on the broader
issue of the move away from final salary schemes, which has been going
on since the 1960s. Some 8 million people were in private final salary
schemes in the 1960s; the number fell to about 5 million by 1995; and
it has now gone down to about 3 million. Only some of those are open
schemes. There has been a major change, and one of the things that that
the Bill does more broadly is bring about deregulation changes that
will encourage people to stay in, and employers to stay with, final
salary schemes. I am not claiming that the Bill will reverse the
process to which the hon. Gentleman referred, whereby employers move
away from final salary schemes, but I hope that it will slow or steady
it. In the past two or three years, the movement away from final salary
schemes has steadied, and employers tend to stay with them more than
before. I hope that we will further be able to steady the
process—I do not think that we will reverse it—but,
hopefully, we will be able to extend final salary schemes for longer.
They are good schemes, so we should keep them if we can. No doubt we
will have the opportunity to discuss that further when we debate shared
risk.
Mr.
Greenway:
It is my understanding that the regulator will
be enabled under the clause to impose a different actuarial
calculation. That does not mean that the whole cost will fall on
employers; there could be negotiations about employees increasing their
contributions.
Mr.
O'Brien:
The hon. Gentleman is entirely right. It will
depend on the scheme, so the terms of those will be relevant, but the
cost will not necessarily always fall on the employer. The issues are
complex—sadly, lurid headlines do not help public
understanding—and they need to be explained seriously and in a
way that recognises the long-term nature of some of the problems that
we need to address. The clause will enable the regulator and everyone
else to know that it has the powers—we always assumed that it
had such powers—to say that trustees and employers cannot
continue to underfund schemes, and to intervene and say that employers
must have an appropriate actuarial longevity assumption in their
pension scheme and ensure that it is properly funded.
Question put and agreed
to.
Clause 99
ordered to stand part of the
Bill.
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