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Steve Webb: The regulations are welcome, if long overdue. As the Minister said, they were mooted in the 2002 Pickering review. The previous Secretary of State but several, the right hon. Member for Oxford, East (Mr. Smith), on 20 October 2003 said:
“We intend to introduce measures that will permit contracted-out defined benefit schemes to convert GMPs into scheme benefits.”—[Official Report, 20 October 2003; Vol. 411, c. 26WS.]
One would not accuse the Government of precipitous action on this matter. Nevertheless, it is welcome that schemes will have this option—as the Minister rightly said—of not having to run what are essentially two separate pension schemes under one roof. That is good news.
I am grateful to the hon. Member for Eastbourne for dealing out the line about actuarial equivalence being at an individual level, but that raises an interesting question. If the process of actuarial equivalence is to ensure that nobody loses, and it has to be consistently applied to every scheme member, will some people gain? It is always interesting to know the answer to that question, because money does not come from nowhere. If a scheme decided to switch the GMP into actuarially equivalent scheme benefits for every individual and if the rules are such that nobody loses, could some people gain in that process? If the conversion-to-scheme benefits are identical for every individual, the GMP has just been reinvented. However, we are not doing that; we are replacing the GMP with scheme benefits.
If the requirement is simply that nobody loses, and everybody will have diverse circumstances—years of service, life expectancy, future experience of inflation, and all the rest of it—could some people gain from that? Given that the gainers will incur costs on the scheme, by definition, because more will be paid out to them than would have been so without the transfer, does that mean that, for example, people who have joined a scheme since 1997, when all of this stopped, could be losers? The more I think about it, the more I am slightly troubled about it. Should those scheme members have some sort of voice in the process? We talked about the employer consenting and opting for this process, but could their opting for it be to the detriment of the scheme members who do not have pre-1997 GMP rights, but could end up paying more from what is left in the fund to those who do have such rights and who are net beneficiaries from the conversion process? I hope that the Minister can clarify that point.
I accept the point that the conversion will not hurt me, in the sense that the payment will not be any lower because of the regulations, but, for instance, the indexation rules might be different for scheme benefits as distinct from GMP benefits. Could I find that my annual pension statement looks different, and has different amounts under different headings? Although the total will not be any lower, might it, for example, behave differently in response to inflation? I am not clear whether the regulations apply to pensions in payment or just future rights. It would be helpful if the Minister could clarify that point.
There is an important reason for asking those questions. The Minister will know of the cock-up—I do not know whether that is an admissible phrase—or problem with payments to public sector workers. It was announced just before Christmas by the Cabinet Office Minister. Their schemes were being administered by companies that were over-indexing the GMPs. If a conversion were done for a scheme of that kind, it would require the people who are running the scheme to have extremely good data, because actuarial equivalence requires good information on people’s rights.
We know that there have been real problems getting reliable data from the national insurance system through to the people who administer the schemes, so if these provisions will apply to pensions that are in payment, is the Minister confident that the quality of data going from the national insurance people to the people who pay out the pensions will be good enough to get the payments right? They were not right before Christmas under the present rules, before these changes. Now that the changes are coming in, can we be confident that they will be correctly implemented? We do not want the set of people who have already had a clawback on their public sector pensions to be messed around again, possibly erroneously, because the processes have not been sorted out.
Could the Minister give us some sense as to whether the public sector is particularly affected by the regulations? I would have thought that many public sector workers are just the kind of people whom we are talking about here. They contracted out into final salary schemes and built up GMP rights.
Will the changes save the taxpayer money? Does the Minister have any indication of the schemes that we might be talking about, and the potential saving to the taxpayer if some of the public sector schemes that tick all the boxes in the regulations opt to do the conversion? Indeed, has she had any discussions with the people who run the various public sector pension schemes to see whether they would be likely to take up the option? I would have thought, in principle, that they should because they could save the taxpayer some money in running the pension schemes.
Finally, on contracting out, which underlies the regulations, I believe the intention is to stop contracting out for defined contribution schemes in 2012, which will be before the earnings link will be introduced, as far as we can tell. Could the Minister update us on her thinking on contracting out of defined-benefit schemes—the kind of schemes that we are talking about here? What is her thinking on that?
Broadly, the regulations are welcome. If they make life simpler for pension scheme administrators and operate on a voluntary basis, that would be entirely desirable.
4.54 pm
Ms Winterton: I thank the hon. Members for Eastbourne and for Northavon for their comments and questions.
The first question, which was from the hon. Member for Eastbourne, was why it has taken so long for the Government to bring in GMP conversion. As I said in my opening remarks, the Pickering report in 2002 recommended the simplification of contracting out, and there was a pensions Green Paper in December 2002. However, the measure was not included in the Pensions Act 2004, because that Act concentrated on improving security and confidence for occupational scheme members by establishing the Pension Protection Fund and the financial assistance scheme. The conversion measure was therefore delayed, but it was introduced at the next available opportunity, which was the Pensions Act 2007. At that time, we agreed that we would introduce the measure in April 2009, and that is what we now seek to do.
The hon. Gentleman also asked about the previous figures in the impact assessment. Since they were published, the number of private sector DB schemes has fallen and, as a result, the aggregate costs and benefits have also fallen. Based on the 2007 Office for National Statistics occupational pension scheme survey, the one-off costs from GMP conversion could be between £7 million to £15 million, and the annual saving would be between £3 million to £6 million.
The Government are committed to reviewing the long-term future of DB contracting out, which the hon. Gentlemen touched on. The plan is to review it about five years after the reform package’s implementation. The contracting-out rebate will gradually reduce for employers and employees, reflecting changes to the state second pension as it becomes a flat rate by 2030. DB schemes will retain the option of contracting out, as they do now.
The hon. Member for Northavon asked whether there are notional gainers, and whether that was to the detriment of those with post-1997 benefits but no GMP. Although some members with GMP rights could gain, any such gains are likely to be small in the context of the scheme as a whole, and there should therefore be little impact on members who joined post-1997.
On the question of how many schemes will be involved, about 5.4 million members who are over 65 years old have GMPs, and about 4.6 million people under GMP-pensionable age have GMPs. Condition 5 of the conversion rules means that scheme trustees must take all reasonable steps to consult the owner in advance and notify all members and survivors affected by the GMP conversion before or as soon as reasonably practical after the conversion date. The hon. Gentleman asked about pension change, and the GMP after conversion must be the same as it was before the exercise.
The overpayment of public sector pensions occurred because the indexation method for GMPs is different from that which is required for the other benefits that a scheme administers, but, by allowing schemes to convert GMPs, schemes can adopt a much more simple, single benefit structure. That reduces the complexity of schemes and lessens the likelihood of similar overpayments in the future.
Both hon. Gentlemen said that actuarial equivalence for all members is a very technical area. A scheme that wants to convert its GMPs into scheme benefits needs to be able to change the structure of the benefits offered. Actuarial equivalence is needed to protect the actuarial value of the member’s benefits. That will be for each individual member’s benefits, as the hon. Member for Eastbourne correctly suggested.
Steve Webb: The Minister just said that the changes will make it cheaper to run a pension scheme. Will she address my earlier point about the administration of public sector schemes that have been contracted out, for which savings may run into many thousands of pounds? Indeed, the aggregate, across all schemes, will be millions. If it is suddenly cheaper for Capita, or whoever, to run those schemes, will they simply pocket those savings and make more profit, and or will the taxpayer get that money?
Ms Winterton: There has been wide consultation on the scheme benefits, and I will write to the hon. Gentleman about where the costs will fall, but we certainly expect that the savings in administration costs will mean that there is not necessarily a need to pay more.
I thank all members of the Committee who have contributed to the debate on this complex legislation. As I have said, the idea is to make the administration of schemes simpler, and it is entirely voluntary. Eligible defined-benefit schemes may choose whether to take advantage of the provision, but we think that those that do will make administrative savings year on year. Members and survivors’ benefits will be protected, and the benefits received after conversion must be at least actuarially equal to those that would have been received before the conversion. These are good regulations and I commend them to the Committee.
Question put and agreed to.
Resolved,
That the Committee has considered the draft Occupational Pension Schemes (Contracting-out) (Amendment) Regulations 2009.
5.2 pm
Committee rose.
 
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