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Lord Mackay of Ardbrecknish: It is obvious from this short debate that not only do we all accept how vital it is to have a pension when we retire but also to have one that as far as possible keeps in pace with the cost of living. However, a balance must be struck between protection against inflation and the ability of the schemes and the employers who stand behind them to afford such protection. We must not lose sight of the fact that it is an entirely voluntary act on the part of an employer to set up and run an occupational pension scheme. My noble friend Lord Dean of Harptree acknowledged that. Imposing significant extra financial burdens, whether actual or potential, on employers must always carry a risk of deterring them from starting schemes or even continuing to run them. Many of the

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measures introduced by the Bill would impose costs on schemes and employers, so the cost of indexation cannot simply be seen in isolation.

During the past 10 years, inflation has on average been below 5 per cent. We certainly are committed to keeping inflation low. Of course, we cannot offer an absolute guarantee about what will happen in the future, and therefore a limit is needed to give schemes and employers the ability to plan their long-term funding needs with confidence. I am not entirely sure whether the noble Lord, Lord Eatwell, was exposing the fact that his party believes that perhaps if it wins the next election its inflation figures and ranges might be significantly above what we are trying to adhere to. But we believe that our proposed 5 per cent. indexation requirement is the right limit and the right balance. It strikes an appropriate balance between affordability and protection against inflation.

The figure of 7 per cent. given by my noble friend Lord Lindsey and Abingdon would result in wrong signals being sent as to the seriousness of the Government's commitment to keep inflation low. The figure of 10 per cent., which was suggested by the amendment of the noble Lord, Lord Eatwell, would further exacerbate the position. Schemes would have to consider how best to take into account in their funding plans the possibility of higher inflation. Extra costs would thus fall on schemes and employers—costs which, taken with the cumulative effect of other measures, might well have a deterrent effect on scheme provision.

I am not sure whether the noble Lord, Lord Eatwell, wants to continue to speak to actuaries; he referred to them as a cross between astrologers and astronomers. All the actuaries I know are profoundly serious and worryingly clever mathematicians. While the point that he made about young schemes may be true, I believe that the more mature schemes with a larger proportion of pensioners might find the proposal more expensive than he envisaged.

As regards Amendment No. 145M, I must confess that I do not find the detailed working of pensions legislation and pension schemes easy and this amendment was a good example. However, if I understand it correctly—and now I have heard the noble Lord, I believe that I do understand it correctly—I congratulate him on the ingenuity of his approach in trying to get round the minimum ceiling we impose for the indexation of pensions and payment. The amendment would have the effect of altering the way in which indexation increases are calculated. It would change the fixed annual minimum ceiling into a cumulative one, in effect, changing annual indexation into something more akin to the revaluation of deferred pensions. It would allow any "unused" part of a revaluation order in one year (where the RPI was under 5 per cent., or in this case, 10 per cent., I imagine) to count towards an increase in pension in payment in the following year if inflation in that second year was higher than, in my case, 5 per cent. and, in the noble Lord's case, 10 per cent.

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It is an ingenious amendment, but I am sorry to tell the noble Lord that it is not one that we can accept. It would just as much amend the rate of indexation as do some of the other amendments; for example, my noble friend's amendment to get to 7 per cent. As was rightly pointed out by my noble friend Lord Buckinghamshire, it would have quite significant complicating effects on the administration of pension schemes. Schemes would end up giving different increases to different pensioners, depending on when in a year they retired. It would be a recipe for complexity and confusion and could well result in pensioners receiving the wrong rate of pension. It would certainly increase the costs of running a scheme.

Therefore, taken as a whole, the amendments may cause employers to reconsider their pension provision both from the point of view of the cost and the administrative complexity. Such consequences would not be in the interests of anyone. I suspect that, whatever figure we had chosen, the noble Lord would seek to double it in one way or another. The figure that we have chosen is sensible and balanced. It gives protection to pensioners and if we can keep inflation low, that protection will be very substantial indeed; but it should not discourage employers from entering and carrying on important occupational pension schemes. Having heard my arguments and those of other Members of the Committee, I hope that my noble friend will withdraw the amendment.

The Earl of Lindsey and Abingdon: I thank the Minister for that reply. I realise that the schemes are voluntary. But taking all considerations into account I still believe that 7 per cent. is a reasonable figure. With all due respect to the noble Lord, Lord Eatwell, to whom I listened with great interest, I believe that 10 per cent. is slightly excessive. I ask the Minister to refer the matter of indexing to the Government Actuary. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 145E to 145G not moved.]

Clause 44 agreed to.

Clause 45 [Restriction on increase where member is under 55]:

The Earl of Lindsey and Abingdon moved Amendment No. 145H:

Page 25, line 7, leave out ("55") and insert ("50").

The noble Earl said: In moving this amendment I shall speak also to Amendments Nos. 145J, 145K and 145L. The purpose of the amendments is to draw attention to the fate of the over-50s when they are made redundant through no fault of their own. Employees who have given many years' service and who have contributed to their company pension fund may suddenly find themselves surplus to requirements. It is a fact that with the advance of technology and machinery, people in that age group are more vulnerable and expendable. With a few exceptions, they find it increasingly difficult to obtain alternative employment.

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It should be borne in mind that the younger a person is, the cheaper he is for an employer to retain. Therefore, I should like to see a 50 year-old given the same rights as a 55 year-old in relation to indexing. I beg to move.

Baroness Hollis of Heigham: In speaking to this group of amendments, I should like to speak also opposing the Motion that Clause 45 shall stand part of the Bill.

The Bill removes provision whereby RPI increases are not required for members under the age of 55. That exclusion applies unless the member is incapable of full-time work or is retired on ill-health grounds. In any event, the pension has then to be increased at the age of 55 to the rate that it would have been had he been entitled to the increases. Therefore, effectively, the provision simply defers the need to make increases until the age of 55, at which age the pension is increased to the level at which it would have been had the increases applied.

That provision is included in the Bill by the Government because it exists already in public sector schemes. We assume that the Government wish to allow private sector schemes to do the same to avoid the criticism that more onerous obligations are being placed on private sector schemes. However, as in practice virtually no private sector schemes include such a provision, we believe that it is both unnecessary and unjustified. Whatever the original justification, the provision should be abolished for private and public schemes alike. Therefore, we oppose the Question that Clause 45 stand part of the Bill.

Lord Burnham: I must declare a personal interest in that I was made redundant at the age of 54½. Because it turned out that I did not obtain further employment for nearly two years, I took my pension at the age of 55. The pension, which of course is based on the expectation of life, was devalued by almost exactly 50 per cent. because it was taken at that time. Nine years later I rather regret that I took it at that time because the pension that I would have taken had I waited until the age of 65 would have been that much greater.

If a pension is to be taken and can be taken at the age of 50, the actuaries referred to by the noble Lord, Lord Eatwell, would be calculating exactly how much more the discount will be in the pension to be paid at that age and what will continue to be paid for the rest of the pensioner's life. I do not have the figure and I should have checked but that discount must be considerable, bearing in mind the expectation of life of somebody at the age of 50. Therefore, I believe that it is against the interests of a pensioner to be able to take the pension at the age of 50. I understand why my noble friend has moved the amendment, but I believe that he is misguided in doing so.

4.15 p.m.

Lord Mackay of Ardbrecknish: My noble friend Lord Burnham has just made a very good point to balance the understandable anxiety which I have heard from a number of Members of the Committee when discussing this part of the Bill in relation to people who find themselves out of a job in their fifties.

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At the risk of repeating myself—and I promise not to use the word too often—that is a matter about which we must try to find a proper balance and avoid imposing more burdens than are absolutely necessary to provide security, whether from malpractice, from future inflation or early retirement situations. We must be careful not to impose such a burden that it makes it unsustainable for the employer and discourages employers from considering starting schemes.

Of course, with early retirement being increasingly commonplace, we accept that pensions taken before normal retirement age need some degree of protection against inflation. But, as with the level of indexation, we need to strike a balance between that need and affordability. As my noble friend Lord Burnham pointed out, if you are allowed to take your pension earlier, the actuaries do their clever mathematical calculations because they still assume that you will die at the same time that they had previously assumed you would die. Therefore, the payments have to be spread out over a longer period of time and, inevitably, the annual payment is thereby reduced. That must be borne in mind as part of the balance.

Equally, as part of that balance, although we do not require indexation until the age of 55 we have introduced what I hope the Committee will accept is a slight bow in the direction of the argument being put to me this afternoon. When somebody reaches the age of 55 and is retired we require a revaluation of the pension at that age to the level at which it would have been had the increases been payable from the age of 50. Such a provision ensures that a pension receives appropriate protection as normal retirement age approaches, reflecting the fact that there will be increasingly less likelihood of individuals either wanting to continue work or necessarily being able to find appropriately remunerated employment. I should point out to Members of the Committee that our proposals relate to a minimum. If a scheme is in a position to afford indexation from the age of 50, we are not seeking to stop that.

However, requiring indexation from the age of 50, as the amendments propose, would add significant extra cost to schemes—up to a maximum of 8.5 per cent. if inflation were ever again to run at 5 per cent. through the period of retirement between the age of 50 and 55. The amendments could also send a message that those drawing a pension from the age of 50 are no longer considered to be in the employment field. We do not believe that such a message is justified.

I should also point out that our proposed revisions do not apply where early retirement is granted on grounds of ill-health. In such circumstances, we will require a pension to be indexed from the point at which it comes into payment, acknowledging the fact that such pensioners are not likely to be in a position to add to their income by gainful employment. I believe that the amendments do not add significantly to scheme members' protection, but they could possibly add to the

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burden on employers. With that explanation, I hope that my noble friend will feel able to withdraw the amendment.

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