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Baroness Seear: We are discussing an extremely difficult point; indeed, there are strong arguments on both sides. Perhaps I may put into the Minister's mind a suggestion for consideration which is not on the Marshalled List. It is an issue which has been raised in some quarters in connection with the studies of pensions. We know that there is an increasing problem with many people who take early retirement. They find themselves in the position outlined by the noble Lord who retired at the age of nearly 55. Would it not be possible to find a way whereby those people who have taken very early retirement and therefore a very low pension and who go on to reach a ripe old age should receive an increase in their pension, recognising that many others, by the nature of things, will no longer be here? In other words, the burden of cost would be much less.

While one is at the age of 50—and it varies with different people—one may be able to obtain part-time work; indeed, one can certainly do things to save money. However, when one becomes really old one cannot do either. That is when the pinch is very hard. The idea is not in the Bill, but I should like to put it to the Minister for consideration.

Lord Mackay of Ardbrecknish: As usual, the noble Baroness, Lady Seear, is fairly ingenious. I understand her point. As I have explained, I am not an actuary. However, if such a provision were to be built into the legislation—the idea that a person who takes early retirement should, when he reaches the age of 70 or 80, receive an extra boost to his pension—I imagine that the inevitable consequences would be that the actuary would advise the scheme that the starting pension for such a person at the age of 51, 52 or 53 should be even lower. The blunt fact of the matter is that we are discussing pots into which—

Baroness Seear: I must tell the Minister that that might be the choice some people would make—the wish for security when one reaches the stage when one cannot look after oneself. Such people may be able to earn quite a bit when they are younger.

Lord Mackay of Ardbrecknish: I understand the noble Baroness's point that some people may prefer that option. However, we are now beginning to stray into rather deeper water. It is possible—and I would certainly have to take advice—that a scheme could have such a policy within it; but the consequences would be those I outlined. There is much evidence to suggest that people do not think in that way regarding, for example, personal pensions. Indeed, some of them rather like to take a larger amount at the beginning and not bother about inflation. That is a point we shall discuss later.

I see the point that the noble Baroness is seeking to make. I believe that my original point when talking about the clause in general—namely, that if people retire very early and the added years come into the actuarial cost, then the pension they receive is reduced—covers

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the position. As regards the amendment, I suggest that we shall achieve a better balance if we continue along the present route. In other words, when a person reaches the age of 55 his pension is revalued for inflation and indexed thereafter.

I believe that my noble friend wants the process to start at the age of 50 and I understand that the Opposition, who have a Motion tabled against the clause standing part of the Bill, have the same view. As I said, it is a question of balance; it is the balance I have outlined. I recommend the Committee to stick with the Government's sensible conclusion.

The Earl of Lindsey and Abingdon: I am grateful to my noble friend for his response. My original intention when tabling the amendments was to draw the Committee's attentions to the increasing problem which confronts people reaching the age of 50. It is unfortunate that, when companies have to make people redundant, they find it economical to pick those aged of 50 to 60 because of the rising costs of contributions.

Before I withdraw the amendment, I should like to read out another quotation. It comes from a report of the Legal & General insurance company dated 1983 and explains the situation. The report says that,

    "underlying funding rates for existing final-salary schemes increase with age. Thus the annual cost for an older employee is significantly greater than for a younger employee".

That is the answer. It is an unfortunate situation that if a company has to get rid of staff it is rather more apt to go for the age group referred to in my amendment. However, in view of the contributions made by Members of the Committee, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 145J to 145L not moved.]

Clause 45 agreed to.

On Question, Whether Clause 46 shall stand part of the Bill?

Lord Eatwell: I oppose Clause 46 standing part of the Bill. The clause is yet another weakening of the process of indexation. It introduces a rather peculiar provision. When trustees have made an increase in a tax year which is greater than that which happens to be required under the limited price indexation legislation, in a following or subsequent year they can offset that increase, thus, so to speak, averaging downwards the overall increase.

Let us suppose that we have a year in which the rate of inflation happens to be 8 per cent. The trustees feel comfortable, given the performance of the fund, with increasing the payment by 8 per cent. Then, in the following year, inflation is 5 per cent. and the trustees apply the LPI of 5 per cent. Very roughly, leaving out the power of compound interest, that would give a 13 per cent. increase over the two-year period and would actually protect entirely against inflation.

However, if the clause stands part of the Bill, then, in the second year, the trustees could offset the extra 3 per cent. they previously gave and give only 2 per cent. Therefore, over the two years, pensioners would only enjoy the LPI even though in particular periods the

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trustees had previously been happy to increase pensions at a greater rate. In other words, the Government are trying to encourage levelling down. That is essentially what the clause seeks to do. There appears to be no sensible justification for that. It would be most helpful if the Minister could provide one.

4.30 p.m.

Lord Mackay of Ardbrecknish: This clause deals with the situation, as the noble Lord, Lord Eatwell, explained, where pensions are increased by more than the minimum required under Clause 44 and under Section 109 of the Pension Schemes Act 1993. It will allow, but not require, a degree of offset against the statutory requirement.

Under the current contracting out system guaranteed minimum pensions and payment must, every tax year, be increased in line with retail price inflation up to a ceiling of 3 per cent. Any increase that schemes make above that level in a tax year can be offset against the 3 per cent. increase in the following tax year. This system will continue for the GMP rights accrued before April 1997. We believe that schemes should continue to be allowed to take account of discretionary increases in providing indexation but this clause will ensure that only increases made above the 3 per cent. required for GMP and above the 5 per cent. required for all rights accrued after the appointed day may be offset against the new indexation requirement.

I should point out that this provision does not require schemes to offset; it only permits them to do so. In addition the ability to offset would only apply to cases where a scheme makes discretionary increases above the statutory minimum. If scheme rules already require, for example, full RPI indexation there will be no offsetting calculation from one year to the next as the scheme is already complying with the statutory requirements in full. Where a scheme makes discretionary awards above the statutory requirement we believe it right that some offsetting should be allowed, particularly where the funding position of the scheme might not be so strong the following year. I move that the clause stand part of the Bill on those grounds.

I believe the noble Lord, Lord Eatwell, said that this is encouraging levelling down. I should have thought that it might encourage schemes to make discretionary additions in the knowledge that if they were wrong, and a scheme was not in such good form the following year, they could make this discretionary offsetting. If we go down the road of not allowing them to do that, I suggest they will be more reluctant to use their original discretion.

Clause 46 agreed to.

Clause 47 [Sections 44 to 46: supplementary]:

Lord Eatwell moved Amendment No. 145M:

Page 26, line 23, leave out from ("percentage"") to end of line 27 and insert ("means the percentage increase in the appropriate revaluation percentage for the revaluation period which is the same length as the payment period for a pension as compared to the appropriate revaluation percentage for the payment period for that pension in the preceding year.

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"payment period", in relation to an increase in the whole or part of the annual rate of a pension, means the period from the appointed day or the date on which that pension was first paid, whichever is the later, to the last calendar year before the date upon which the increase is to be made.").

The noble Lord said: I refer to the short debate we had earlier on Amendment No. 145M because it seems to me that the arguments that were put against the amendment were not satisfactory except in one important case. The first argument against it, put forward by the noble Lord, Lord Dean of Harptree, and by the Minister, was that it would be terribly expensive and a burden on the scheme. That argument was refuted by the noble Earl, Lord Buckinghamshire, who pointed out that there would not be any increase in actuarial expense as a result of this averaging technique.

Secondly, the Minister said—perhaps the adjective I should use here is "cheekily"—that over the past five years inflation had been on average below 5 per cent. He is, of course, quite right that it has been on average below 5 per cent. but it has not been below 5 per cent. in every year. It is because the calculation of increases is not allowed to be averaged, as the Minister was doing, that the loss to pensioners would over the past five years have been 10 per cent.—a little less than 10 per cent.—of the real value of their pensions. His comment that inflation has been below 5 per cent. in the past five years effectively makes my case.

The third argument made against this amendment by both the noble Lord, Lord Dean of Harptree, and again by the Minister, was that it would be terribly complicated and would increase costs. But neither of them explained why it is perfectly possible to allow averaging in the case of pensions in deferment, and why that is not complicated, but why it would be complicated to increase pensions in payment. Why is it allowed and indeed supported by the Government in one case but not in the other?

I found those arguments about increased costs—the Minister accepted my point about averaging, which was nice of him—and the argument about complications as compared with deferred pensions to be entirely unsatisfactory. The single powerful argument was that put forward by the noble Earl, Lord Buckinghamshire, when he referred to the implications of averaging for the minimum solvency requirement. With that argument I agree.

The Committee will discover that later on this evening I intend to argue that the minimum solvency requirement is creating a major distortion in the entire attempt to create protection for pensions, and high quality pensions, in this country. Here is one of the examples of the distortion that the minimum solvency requirement is introducing into our attempt to provide protection against the effects of inflation.

I ask the Minister to take these arguments back, particularly after we have had the chance to review the issue of the minimum solvency requirement, to consider them carefully and perhaps to come back with some

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proposal which will protect pensions by averaging inflation rates in future years. I beg leave to withdraw the amendment.

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