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Lord Skelmersdale: Yes, but it is not statutory!

Baroness Hollis of Heigham: My Lords, no. But whether trustees have behaved prudently and reasonably in the light of that guidance will be taken into account.

Part 4 deals with the Government's Informed Choice agenda. It is the individual's own responsibility, where possible supported by their employer, to determine the level of income in retirement they want over and above the foundation provided by the Government through the basic state pension, state second pension and the pension credit. Many people, in changing jobs through their lives, may end up with several different sources of quite modest pension incomes which they must somehow integrate in order to understand what they can expect to receive in retirement, and whether during their 40s and 50s they need to make good a shortfall that perhaps they had not expected.

The Government are working in partnership with pension providers and employers to offer people combined pension forecasts. This Bill contains reserve powers to make it a statutory requirement for pension providers to offer combined pension forecasts if significant numbers remain outside the voluntary scheme.

In addition to pension forecasts, the Government are developing a retirement planning tool, to be made available on the Internet, to empower people to put tailored information about the financial outlook for their retirement into their own hands. I have seen a model of the tool and I invite noble Lords to look at it themselves at an appropriate time. I think that it will be a very effective and valuable aid.

The Government believe that employers who make little or no contribution to their employees' pensions, and who have low levels of scheme membership, should ensure that their employees have access to the information and advice they need in order to plan for retirement. The Bill includes a clause to introduce this obligation. Its use will be informed by a pilot study to evaluate the most effective ways of delivering pensions information and advice to employees through the workplace. The findings of that study will be published during the summer of 2005.
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Part 5 applies the simplicity, security and choice agenda to the Pensions Act 1995. This is how we are trying to simplify matters and, as a result, encourage employers to continue to support the defined benefit agenda.

On indexation, it was clear that the degree of inflation protection and hence the costs and liabilities that this imposed on schemes had become disproportionate. In effect, we were forcing everyone providing a pension to buy a high level of inflation insurance, which was becoming so expensive that some providers were choosing to pull out of pension provision altogether. Reduction of the mandatory indexation cap for defined benefit schemes reduces this burden going forward—and we must remember that people are trying to plan for not just two years ahead, but for 20 or 30 years—and help such schemes in paying for the pension protection fund levy.

For defined contribution schemes we have accepted that a reduction in indexation would in fact increase complexity by adding an additional regime to the rules already governing the purchase of annuities. We therefore intend, as a result of guidance given to us, to correct this. If noble Lords are comfortable with this, and I would welcome views on the issue, the Government will take the opportunity further to simplify pension rules by introducing an amendment in Committee to reduce post-1997 indexation requirements for defined contribution schemes altogether. The member will then have the choice of turning their pension pot into an annuity, whether they do or do not buy an inflation-proofed annuity.

The Bill will also drive forward a range of other simplification measures to enable schemes to restructure historic patterns of benefit provision providing suitable protection is offered. The Bill will streamline the requirements on member-nominated trustees, on dispute resolution procedures and reporting arrangements, in particular in relation to late payments, and remove the requirement for schemes to provide additional voluntary contributions. The point of this is that when that provision was introduced in 1987 or 1988, someone could not run a personal pension alongside an occupational pension, and therefore AVCs were offered. Now that it can be done, it is no longer necessary for this to be a mandatory provision by employers.

On member-nominated trustees, we have accepted that our simplified requirements would nevertheless be better balanced by giving pensioners as well as active scheme members a statutory role in the member-nominated trustee processes. We shall introduce an amendment to that effect in Committee.

On security, Part 5 includes provisions to provide TUPE-style protection—transfer of undertakings—of occupational pensions where a transfer of employment takes place, and for employers to consult their employees about major prospective changes to pension entitlement. It also seeks to improve the governance and hence the security of pension schemes
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through basic requirements to ensure that trustees are properly conversant with and knowledgeable about their powers, responsibilities and duties. I am sure that noble Lords will agree that all these are important safeguards.

Finally, on measures to increase choice in Part 5, I am pleased to draw the attention of noble Lords to Clause 253. This will enable the many employees, in particular young people, who join an employer's pension scheme but leave before their rights have vested—most schemes vest rights only after two years—to choose between a refund of their own contributions in cash, which is all they can do now, or for the first time receive a cash equivalent of all their acquired rights which they can transfer into a pension of their own choosing. That means that they will be able to take with them the virtue of the contracted-out rights and the employer's contribution. The difference between that and the existing system can be 300 per cent. Instead of taking £800, a young person may take £2,500 with them.

Also on choice, which is particularly important for young people moving between jobs, and for women who may have very different pension and work cycles by virtue of their caring responsibilities, I should point out that our intended amendment to remove indexation from defined contribution pensions will provide greater choice to members of such schemes when they come to purchase an annuity.

Part 5 also contains measures to mesh pensions legislation in with the radical simplification of tax rules in the Finance Bill.

Part 6 gives the detail of the new financial assistance scheme that has already been widely welcomed, helping to resolve what I would call the Allied Steel and Wire problem, with which I am sure noble Lords are familiar. The Government have made available £400 million of public money to provide assistance to those people who have lost their pensions due to their defined benefit schemes being wound up underfunded. The Government are talking to industry about the contribution it may wish to make, as well as discussing the best ways of administering the scheme. Further details of the financial assistance scheme, including who will be eligible and the level of assistance to be provided, will be developed through consultation with stakeholders. I shall not be able to give noble Lords much information on those today, but they will include pension scheme trustees, trades unions and key business representatives.

Part 7 deals with the cross-border provisions of the European Union Directive on the Activities and Supervision of Institutions for Occupational Retirement Provision. The directive puts in place regulatory mechanisms to support the operation of pan or cross-European occupational pension schemes. Crucially, it leaves member states free to determine the structure of their pension systems in accordance with the principle of subsidiarity. This is an extremely technical and complex area, and we may need to ensure by amendment that the occupational scheme covering employees in the northern and southern Irish
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bodies established under the Good Friday agreement is adequately covered. We are still taking advice on this.

Part 8 includes measures that will further support our aim of increasing choice about when people retire and encouraging those who wish to do so to work on into later life.

That brings me to the state pension section of the Bill. The proposals will improve the reward for those who delay claiming their state pension by bringing forward the increase in the rate at which state pension increments build up and removing the current time limits on deferral. These changes were due to come into effect in 2010, but we will be implementing them from April 2005.

We acknowledge that increments to the pension even at this enhanced rate will not suit everyone, in particular those who may feel that they cannot necessarily look forward to a long life in retirement. Some people might prefer to get the gains from deferral straightaway in the form of a lump sum, in particular if they are moving into retirement without much in the way of capital or savings. So we will also introduce an entirely new alternative to the higher weekly pension that comes from deferring the drawing of the state pension in the form of a lump sum payment consisting of the pension given up while deferring, plus a rate of interest. This interest rate, set at 2 per cent above the Bank of England base rate, is, we believe, a very fair return. For example, it would mean that for a couple, he may decide to take increments while she decides to take the lump sum. Such choices will be available.

To conclude, the key issue is whether, in the view of noble Lords and those of industry, employers, pensioners and employees, the Bill answers the right questions as well as getting the answers right. The key question is: will the Bill encourage both employers and employees to invest more in their pensions to protect against poverty or a lack of adequate income in old age?

This leads to further questions. For employees, will the Bill secure greater stability of schemes; greater confidence in the pension promise; greater willingness—this is key—to forgo current income for future needs? It can do that only if there is confidence in the security of their deferral and the sharing of their income over a lifetime with both the scheme specific funding, on the one hand, and the pension protection fund, on the other, in place.

For employers, will the Bill not compromise the ability of the employer to remain solvent as an employer as well as guardian and co-provider of the pension promise?

In the process, has the Bill got the balance right between intervention, regulation and protection from scheme insolvency and the need of the pension regulator to focus on risk and the need for schemes to have greater flexibility in meeting their own commitments?
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As to cost, is the "who pays/who gains" equation reasonable and equitable between employers and employees; between pensioners, deferred pensioners and employees; and between stakeholders, genders and generations? I believe so. The consultation process suggests that this view is widely shared. I commend the Bill to the House.

Moved, That the Bill be now read a second time.—(Baroness Hollis of Heigham.)

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