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Baroness Castle of Blackburn: As I feared, the Minister has of course taken refuge behind technicalities and even digging uphe hopedsome terrible skeletons in my cupboard of yesteryear. I can assure him that that failed abysmally. Despite the fact that all he has done is to reveal the barrenness of ideas and arguments and the paucity of spirit which we have come to associate with this Government, I shall withdraw my amendment in order to fight another day. I beg leave to withdraw the amendment.
The clause sets out new requirements for contracted out schemes other than money purchase schemes and in so doing seeks to abolish the guaranteed minimum pension, as the Minister said in response to the previous amendments.
At present in order to contract out, schemes have to meet the guaranteed minimum pension test. In this clause the Government propose an alternative based on a reference scheme which in some cases will provide an inferior substitute for GMP benefits.
The original intention with SERPS was that a contracted out scheme would have to satisfy two main complementary conditions. The first was the requisite benefits rule. That, like the reference scheme proposed by the Government, was based on a 1/80th accrual rate. The second was the GMP rule. However, in 1988 the requisite benefits test was dropped by the Government. It was argued that it had become very complex and, secondly, that it was ineffective. There is no reason to suppose that the proposal now being made in the Bill will be any more effective.
The requisite benefits test ensures that the pension provided must be better than those set out as a reference scheme in the Bill. For some peoplethose on good wages, in a good scheme for a large part of their working livesthat may well represent a good deal and will guarantee them better benefits than the GMP. But for others that will not be the case. The low paid, in poor schemes and with short periods of service, stand to be disadvantaged by the disappearance of the GMP test. It is no consolation to an individual who falls through the safety net formerly provided by the GMP to be told that others have been assured of better benefits.
It must be the intention surely to try to ensure as far as possible that people do not end up worse off than they would have been had the GMP test continued in existence. That must be particularly so in the case of people who are less well off and less privileged in every sense of the term.
During our debates yesterday the Minister referred to those of us who could look forward to final salary earnings-related pensions and those already receiving them. He spoke of such people as privileged. He surely cannot support a system which would further undermine the position of those who are not so privileged.
The reference scheme may provide lower benefits if there are periods of high inflation during a working lifetime because it provides an inadequate level of inflation protection as compared with the GMP. The reference scheme provides benefits as good as the GMP only if inflation rises no higher than 5 per cent. If it exceeds that level either before or after retirement there is the possibility of the GMP being better, depending on the extent and duration of the relevant periods of high inflation. The reason is that SERPS is inflation proofed. Even when scheme members contract out of SERPS they remain entitled to what are called residual SERPS benefits, which can be a significant part of some people's pensions.
In addition, members of contracted out schemes could suffer losses under the provisions of the Bill as a result of the removal of the guaranteed protection which the DSS currently offers for GMP benefits. The value of that protection was made clear in the Maxwell fiasco when the scheme members at least had their GMPs restored immediately because the guarantee was absolute. That is of immense value, particularly to the poorly paid.
The Minister may argue that with the other provisions in the Billthe solvency standard and the compensation scheme -the guaranteed support represented by GMPs is no longer necessary. But the system of compensation guarantees only up to 90 per cent. of benefits as compared with the total GMP. Some types of loss will not be covered, notably losses arising from poor investment decisions. GMPs are guaranteed, whatever the reason for the shortfall.
Of course, the Government do not really like SERPS at all. I well remember the days of the Fowler review, which was referred to yesterday by the Minister in the course of debate. It was clear that at that time the Government would have liked to do away with SERPS altogether, but there was such a fuss that they withdrew from the confrontation that could have ensued and settled instead for a gradual undermining of the scheme. First the accrual rate was worsened and then the best 20 years provision disappeared. Then we had the campaign to encourage people to take out personal pensions and to opt against SERPS, with the encouragement of the national insurance rebate. Now we have the disappearance of the GMP test altogether. That is a potential worsening for the poorer paid, less privileged members of the workforce. We should not let it pass without attempting to persuade the Government that they are doing something wrong.
As has been pointed out, 10 years ago the Government announced that they were going to abolish the scheme. But there was an outcry because, despite the weakening of the scheme which has taken place, 9 million people are still members of it. It is a lifeline to them and the best that is available. It is better than any personal pension scheme which is supposed to give them so much choice.
The article also points out that, although the Government have failed in the abolition of the scheme, they have been tireless in ill-doing ever since. The economists claim that the benefits that accrue under SERPS have been halved in the past 10 years. They also point out that the benefits will be further halved by this Bill. Those two economistsRichard Disney and Paul Johnsonwrite on the basis of expert analysis of the benefits people will receive and the attacks which the Government are making on the scheme.
The Government's long-term aim is most vividly summed up in the recent book by the No Turning Back movement which is currently lending such support to our Prime Minister. In that book the group does not hide the fact that it believes in two things. It believes that state benefits should be only for the poora reversion to the dear old Victorian divisions in our society and charity for the poorand very meagre charity at that. The book goes on to state that eventually the state may have no insurance scheme of its own at all. That is the aim.
Those of us who resist that aim and believe that you cannot provide security and dignity in old age for everyone without the state coming in with its support must rally against this clause in particular.
The Earl of Clanwilliam: Perhaps I may ask the Minister to advise the noble Baroness, Lady Castle, of the maximum percentage of final salary to be obtained from SERPS, and what one would expect in respect of an ordinary pension, which would be at least 50 per cent.?
Baroness Castle of Blackburn: I am very fascinated by the way in which this Government, who clearly have their back to the wall, are increasingly trying to hand over the role of government to the Opposition. I should be delighted to become Minister of Pensions again. If so, I could have turned to the officials' Box and rustled up the exact figure for which I had been asked. However, I am afraid that I do not have the figure at my fingertips.
Lord Mackay of Ardbrecknish: I intend to reply to the debate. I shall answer the questions that arise. First, however, perhaps I may say to the noble Baroness, Lady Castle, that I have no intention of giving way from this side of the Chamber to allow the party opposite to take their places on these Benches. We intend to do our level best to see that that does not happen. That will not come as a surprise either to the party opposite, or indeed to my noble friends.
This is a complex area of social security. I hope that I can explain it as clearly as possible although I am under the strictures that nothing I say will ever be as clear as the explanations and the legislation put forward by the noble Baroness, Lady Castle.
The current contracting-out system of guaranteed minimum pensions known as GMPs has been criticised because of its complexities. There is also the problem which no one has addressed of how occupational pension schemes can provide equal pensions for women while SERPS remains unequal, as it will be until the state pension equalisation is completed by the year 2020.
We consulted widely on options for the future. Following consultation we have decided to break the links between SERPS and contracted-out schemes from 1997. For service from then, salary-related schemes will no longer be required to provide GMPs but instead will be required to meet a test of overall scheme quality.
Schemes must comply with the new statutory standard introduced by new Section 12A. I shall come back to that in a moment. Schemes must confirm that they are not exempt from the rules restricting self-investment. Schemes must have sufficient resources to warrant the issue of a contracting-out certificate; that is, they must be able to show that they can meet their contracted-out liabilities. To cover this, in the long-term we will require an assurance that the scheme complies with the minimum solvency requirement at the time of the election to contract out. During the transitional period for the introduction of the minimum solvency requirement, schemes must be fully solvent in relation to contracted-out liabilities.
We also expect to prescribe conditions relating to financial propriety to ensure that schemes have a clean bill of health at the time of election to contract out. Finally, the subsection provides for schemes not within a prescribed class. We expect to use this power to set extra conditions for overseas schemes wishing to contract out.
These contracting-out conditions, over and above the need to meet the new standard test of scheme quality, are required to ensure that the Government can appropriately permit the employer and employee to pay rebated national insurance contributions. I am sure that the Committee would agree that it would not be appropriate for the Government to permit the rebate to
The clause then sets out the arrangements for the new scheme-based contracting-out test which salary-related schemes will have to meet from the principal appointed day. Although the current GMP test will be replaced by this new test, GMPs accrued before it comes into force, planned to be in 1997, will continue to form part of the occupational pension and will continue to be subject to broadly the current rules.
New Section 12A sets the statutory standard which schemes must meet. It requires schemes to provide benefits for earners and their widows/widowers which are at least broadly equivalent to the reference scheme defined by new Section 12B. The scheme actuary will be required to certify that this requirement is met.
The new section makes powers for regulations to set the criteria for the comparison of scheme benefits to the reference scheme. It also has powers to allow the method of comparison to be explained by a guidance note prepared by a body prescribed by the Secretary of State, such as the actuarial profession. The approach of a mixture of secondary legislation and professional guidance received widespread support during the consultation exercise on the new contracting-out test.
New Section 12B sets the benchmark for the reference scheme which must be met by contracted-out salary-related schemes. The benchmark for members' benefits will be based on an accrual rate of 1/80thsI referred to that on the last amendmenta definition of final average salary and 90 per cent. of band earnings (that is, earnings between the upper and lower earnings limit) payable at a normal pension age of 65. The benchmark for survivors' benefits will be 50 per cent. of the members' benchmark. This takes account of the response to the consultation exercise and the benchmark has been set at a level which strikes the right balance between the interests of employers and scheme members. The reference scheme has been set to ensure that contracting-out continues to offer an attractive alternative to SERPS.
The section provides powers for detailed requirements for the reference scheme to be set out in regulations. It also contains powers to make additional provisions relating to benefits for widows and widowers. Those will cover exceptions to the general requirements.
New Section 12C provides powers to prohibit or restrict the transfer of a liability or the commutation of part of the benefit into a lump sum except in prescribed circumstances. The regulations governing transfers will be used to ensure that liability for the payment of pensions, or in respect of accrued rights to pensions, can be transferred only to appropriately secure arrangements. The intention regarding lump sums is to follow current Inland Revenue limits with appropriate exceptions for public sector schemes. There will be a small effect in the long term on income-related benefit costs, although this will be a relatively insignificant amount.
New Section 12D provides a power to prescribe the ages at which benefits become payable in the case of a salary-related contracted-out scheme where members have service which falls after the principal appointed day.
The noble Baroness, Lady Turner of Camden, gave the example of the Maxwell scheme and asked whether, under the new rules, people would be able to obtain a transfer back into SERPS. I believe that that was her question. In Clause 125 there is a power for the Secretary of State to do that in conditions where the scheme fails and the employer is insolvent.
The new contracting-out test, which I explained to the Committee, is a key part of the Government's reforms of the contracting-out system. Although the detailed exceptions will be in regulations, this clause is an important part of the Bill. I commend it to the Committee.
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