House of Commons portcullis
House of Commons
Session 2008 - 09
Publications on the internet
Public Bill Committee Debates

The Committee consisted of the following Members:

Chairman: Mr. Martin Caton
Baron, Mr. John (Billericay) (Con)
Blackman, Liz (Erewash) (Lab)
Buck, Ms Karen (Regent's Park and Kensington, North) (Lab)
Corbyn, Jeremy (Islington, North) (Lab)
Evans, Mr. Nigel (Ribble Valley) (Con)
Hepburn, Mr. Stephen (Jarrow) (Lab)
Hoyle, Mr. Lindsay (Chorley) (Lab)
Jones, Helen (Warrington, North) (Lab)
Kawczynski, Daniel (Shrewsbury and Atcham) (Con)
Kidney, Mr. David (Stafford) (Lab)
Linton, Martin (Battersea) (Lab)
Main, Anne (St. Albans) (Con)
Rowen, Paul (Rochdale) (LD)
Waterson, Mr. Nigel (Eastbourne) (Con)
Webb, Steve (Northavon) (LD)
Winterton, Ms Rosie (Minister for Pensions and the Ageing Society)
Anne-Marie Griffiths, Sara Howe, Committee Clerks
† attended the Committee

First Delegated Legislation Committee

Monday 30 March 2009

[Mr. Martin Caton in the Chair]

Draft Occupational Pension Schemes (Contracting-out) (Amendment) Regulations 2009
4.30 pm
The Minister for Pensions and the Ageing Society (Ms Rosie Winterton): I beg to move,
That the Committee has considered the draft Occupational Pension Schemes (Contracting-out) (Amendment) Regulations 2009.
It is a pleasure to serve under your chairmanship, Mr. Caton, particularly to discuss these important draft regulations. Before explaining their purpose, it might be helpful to set out why they are being made, and the history of the contracting-out system.
Contracting out was introduced for defined-benefit schemes in 1978, when the state earnings-related pension scheme was created. Contracting out arises when an employee leaves the state second pension scheme and joins a private sector pension scheme offered by their employer. When an employee leaves the additional state pension scheme, they pay a lower rate of national insurance contributions because the employee will receive their second pension from their employer's scheme and not from the state system. Employers who offer contracted-out defined-benefit schemes also pay reduced-rate national insurance contributions, as they contribute to participating employees’ private pensions.
Between 1978 and 1997, an employer with a defined-benefit pension scheme had to agree that their scheme would pay at least the statutory minimum level of benefits—the guaranteed minimum pension—before that scheme would be permitted to contract out of the state earnings-related pension scheme. Many schemes offered a higher pension than that minimum level, but still had to adhere to the strict rules applying to the guaranteed minimum pension. As any pension earned above the guaranteed minimum pension was not subject to the same strict rules, many schemes were effectively operating a two-tier benefit assessment structure.
The draft regulations will assist defined-benefit schemes by enabling them to convert the guaranteed minimum pension element of members' benefits into ordinary scheme benefits. That was first recommended in 2002 by the Pickering report. The Government set out plans to make the change in the May 2006 White Paper “Security in retirement: towards a new pension system”. The Pensions Act 2007 legislated for the guaranteed minimum pension conversion, setting out the broad framework and the conditions to be met before a scheme could convert its members' benefits.
Steve Webb (Northavon) (LD): This is a question that I intended to ask the Minister during my contribution, but I do not want to spring it on her and it is relevant to what she has just said. Is the concept of actuarial equivalence an average for everyone, or is it true for every single individual? If my guaranteed minimum pension rights were converted into scheme rights, would everyone in the scheme always receive at least as much as they would have done, regardless of their circumstances, gender and so on, or is that true only on average? The Minister may respond now or later.
Ms Winterton: I will return to that later if I need to. An actuary will go in at the beginning of the process and consider what should have been the guaranteed minimum pension. At the same time, the trustees will have to consult with as many scheme members as possible to ensure that the sum of the guaranteed minimum pension reflects what they would have got if they had stayed with the system without undergoing the conversion.
Steve Webb: For each individual?
Ms Winterton: The scheme as a whole and the individual will have to decide whether the actuarial conversion is for that person’s benefit. If necessary I will add more to that in a further response.
Mr. Nigel Waterson (Eastbourne) (Con): I welcome you, Mr. Caton, to the Chair. Let me help the Minister. If she turns to page 74 of the regulatory impact assessment prepared for the 2007 Act, it makes it very clear in paragraph 4.36 that the requirement of actuarial equivalence is
“to be awarded to each individual member in a converting scheme”.
It says that that
“means that no-one will suffer any loss at the point of conversion.”
Therefore, the answer to the hon. Gentleman’s question is that it is individualised. If the Minister is told anything different, I would be very interested to hear.
Ms Winterton: I thank the hon. Gentleman for that helpful comment. The way in which the decision will be made with regard to the level of benefits is by the actuary coming in at the beginning of the conversion and calculating the formula that is to be followed, and the individual benefits will flow from that.
Although the regulations appear complex—and they are—they will ensure that in cases in which the scheme chooses to use the new flexibility and convert guaranteed minimum pension benefits into ordinary scheme benefits, the post-conversion benefits must be actuarially at least equivalent to the pre-conversion benefits. The provisions of the regulations will enable scheme trustees, on an optional basis, to reduce the regulatory burden on the schemes that they operate.
In my view, the statutory instrument is compatible with the European Convention on Human Rights, and I commend the regulations to the Committee.
4.38 pm
Mr. Waterson: Again, it is a pleasure to be serving under your chairmanship, Mr. Caton. I have to confess that I have been waiting with eager anticipation for the Minister’s explanation of such complex regulations. I have to say that she was admirably concise, if not terse. I apologise if my comments may be slightly longer. It was her noble Friend Lord McKenzie who said in the debate on the regulations that
“this is complex stuff, which is partly to do with simplification.”—[Official Report, House of Lords, 23 March 2009; Vol. 709, c. 185.]
I think that I understand what he was trying to say, and that I more or less agree with him. The regulations are extremely complex. I commend the Minister for not allowing herself to be drawn too much into that complexity. None the less, the regulations have the intention of trying to simplify the position. In summary, they arise from a period of time between 1978 and 1997 when people contracted out of the state system, and it is their accrued rights for GMPs that we are talking about. No one has accrued any such new rights since 1997, which seems a long time ago. The date sticks in my mind for some other reason, but I cannot quite put my finger on it. The result is a two-tier structure, as the Minister rightly described it. Although no stone has been left unturned in getting the details of the regulations and, indeed, the explanatory memorandum right, in a nutshell, we are trying to convert GMP rights to ordinary scheme benefits based on three or four factors—as the Minister said. First, is the notion of actuarial equivalence—I think that the Minister was clear in her answer to the hon. Member for Northavon. Secondly, there should be agreement by the sponsoring employer—to that extent this is a voluntary option—and thirdly, there will be administrative savings.
The regulatory impact assessment prepared for the Pensions Act 2007, part of which is in annex A to the explanatory memorandum before us today, sets out reasonably clearly the cost-benefit analysis. We seem to be talking about a one-off cost for a typical scheme—reminding ourselves that such a scheme has volunteered to do this—to go through conversion, which involves modifying IT and incurring various legal, actuarial and other administrative costs. That is set against ongoing savings that involve not having to purchase actuarial advice, not having to deal with queries from members and so on.
I would be interested to know if the Minister could confirm whether she still believes the following figures to be accurate. Using an assumption that between a quarter and a half of the relevant schemes will choose to convert their GMPs, the estimate for the total initial cost across all schemes is in the region of between £11 million and £22 million, which is quite a big envelope, with a total annual cost saving of between £6 million and £13 million. If that is still true—the Minister will tell us whether it is in a moment—that seems to be a good return on the initial investment.
I have various questions I would like to the Minister to answer, if she can. Why have the regulations taken so long? As she has pointed out, the issue first surfaced in a formal document—the Pickering report—a few years ago, so why has it taken so long for the matter to come before a Committee of the House? May I also deal with a question raised in the Lords about the number of schemes that we are talking about where there has been contracting out? How many schemes does the Minister believe will be affected by the regulations and how many therefore are likely to take up this option? Will she also confirm that it remains the Government’s intention to follow the recommendation of the Turner commission that the phasing out of the contracting-out arrangements will take place over time and will not happen in a sort of big bang any time now—as I think was being proposed by the Liberal Democrat spokesman in the Lords, the noble Lord Oakeshott?
Returning to actuarial equivalence, we have established—to my satisfaction anyway—that this is an individualised, or personalised, process. However, the RIA states:
“It is possible that actual experience of future variables such as inflation may differ from the assumptions made at the time.”
That means that
“a member could receive more or less pension over the period of retirement than would otherwise have been the case.”
Perhaps the Minister can confirm whether that is a general reference to all pensioners in such an arrangement? The RIA goes on to state that
“Such possible effects are unquantifiable but unlikely to be significant.”
Will she confirm that that is still the Government’s view? The RIA goes on to state in relation to actuarial equivalence that
“no-one will suffer any loss at the point of conversion.”
Again, it is important for the Minister to confirm whether that is still her understanding. I think that she has already confirmed a matter relating to the RIA’s statement that this is an
“option for schemes; no scheme would be required to convert.”
I have dealt with the likely ongoing savings, as well as the initial one-off costs to schemes. However, she may wish to amplify on that.
Ultimately, the regulations constitute a sort of technical easement for some defined-benefit schemes and remove the need for two parallel systems running alongside each other, one relating solely to the accrual of GMPs between 1978 and 1997. To that extent and from that point of view, we are trying to deal with an historical anomaly. As we have seen, the scheme should provide a benefit by cutting administrative complexity and costs.
It is a shame that the Government have no apparent sense of urgency about other more significant forms of red tape and excessive costs imposed by successive pension Acts, introduced under this Government, that are contributing to the almost daily demise of defined-benefit schemes. Will the Minister deal more generally with other measures for deregulation and cutting red tape, costs and bureaucracy that she intends to bring forward?
The Chairman: Order. We have to stick specifically to this piece of delegated legislation, so I hope that the Minister will not stray too far from that path.
Mr. Waterson: I was drawing my remarks to an end by suggesting that the Minister may wish to consider some of the action points raised recently by the National Association of Pension Funds in its report that sets out an action plan to try to restore and encourage pension schemes in these difficult financial and economic circumstances.
I reassure the Minister that, unless she says something egregiously provocative in her further remarks, I will not urge my hon. Friends to vote against the regulations, providing that, as always, she can provide satisfactory answers to the questions that we have raised from the Conservative Benches.
4.47 pm
Contents Continue
House of Commons 
home page Parliament home page House of 
Lords home page search page enquiries ordering index

©Parliamentary copyright 2009
Prepared 31 March 2009