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On conditional indexation, however, I wonder whether the noble Baroness can help me. I thought she suggested that accrued rights would be protected, but that an existing employer within an existing DB scheme could switch future accrual of rights for existing members of existing schemes to the new conditional indexation basis. She is nodding. If so, why would not every employer go down that route? For every DB scheme that might be saved from going over to DC, would not 99 other DB schemes worsen the rate of return, which they would not have done otherwise, for their existing
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I absolutely accept and respect the fact that this may save the closure of some DB schemes that would have become DC for new members though not necessarily for existing members. But how would the noble Baroness protect members of existing DB schemes from being moved on to conditional indexation at a time when indexation, after a long period of stable inflation rates under this Government, may begin to move as the current recession sweeps in from the United States? That may produce a more volatile environment, causing a greater wish among financial directors to go down that path and a greater exposure to risk for the members.
In a way, I am asking the noble Baroness whether she has any counterfactual evidence. I can see that this may prevent the closure of some DB schemes, but at what cost to members of existing DB schemes who will almost certainly, across the board, see their returns reduced?
Lord Kirkwood of Kirkhope: I support the amendments, although we will need to ask some technical questions. I have two simple points to add.
I concur with the comments of the noble Baroness, Lady Noakes: there is not enough urgency about the extent of the problem. The noble Baroness, Lady Hollis, says that this might encourage more DB schemes to level down, but a great amount of DB erosion is occurring at the moment. Evidence was produced earlier in the Committee stage which included the PricewaterhouseCoopers survey Does the Exodus Signify Genesis?.The Minister is right that it is a small sample of big companies. However, it shows not only that the schemes are being closed to new members, but that accrual rates are being dramatically affected. The Office for National Statistics survey published on 2 July 2008 confirmed that erosion. The starkest statistic in that report was that, in the three years since 2004, mostly because of defined benefit scheme closures, the number of active members of any private sector pension scheme has reduced by 25 per cent to 3.6 million members.
That is happening in real time. It is happening now and in a very big way. Are the Government really sure that they are on top of it? Do they have a handle on the extent to which the erosion is happening in front of their eyes? The economic circumstances will not get better any time soon, and that will make the situation worse. The noble Baroness, Lady Noakes, is absolutely right that an enormous transfer of risk is taking place. This proposal is a halfway house and a statable and arguable case has been made.
The noble Baroness, Lady Noakes, is right that we could talk about this for an awfully long time, but at 6.55 pm on a Thursday I do not think that that would be the right thing to do. However, what harm can the proposal do? The noble Baroness, Lady Hollis, says that it might increase the temptation to tip some people in that direction. Apart from that—it is an important point which I have not heard before; I will have to think about it—what possible harm or difficulties could be caused by allowing this flexibility? And it is flexibility. I think most employers out there want to help as best they can. This device has been worked on
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Baroness Hollis of Heigham: The noble Lord would be the first to accept that if you go for a level annuity, as opposed to an index-linked annuity, you have your money up front from that same pot—but over the course of 10 or 12 years with 5 per cent inflation, it will probably halve in value. As I understand the consultant actuaries’ report, what is happening with conditional indexation is that companies would index only where they felt they could afford to do so, given the state of the deficit or surplus in the fund. That would mean that unless the fund were adequately funded—it may partly be a matter for the regulatory regime to ensure that that is so—the value of the pension would be eroded for many years because it was not indexed. I am perfectly willing to be persuaded that that is still preferable to a DC scheme without any indexation at all because people object to the level of annuity, but that is the risk. Although that reduces the cost for the employer, it means that the employee is effectively taking on the vast bulk of the risk of inflation over a period when they are also carrying increased longevity. That may be a risk worth taking, but that is surely where it lies.
Lord McKenzie of Luton: The Government have said that we are interested in the concept of risk-sharing, which is why we recently issued a consultation paper on that very topic. That paper has been welcomed in many quarters as a step in the right direction. To be clear: the consultation paper we published on 5 June is very wide-ranging; it does not set out a government policy position but seeks views on a number of different proposals.
On the question of whether the Government are concerned about the decline in private sector defined-benefit provision, there are a variety of estimates of the number of active members in such schemes, but we are not under any illusion that there are serious issues around the decline of defined-benefit provision, which is why we launched a deregulatory review and why we are interested in risk-sharing.
The consultation paper includes material on risk-sharing within the current regulatory framework, including what changes employers are making to their schemes currently, what is possible and why only a few employers are taking advantage of these options. It also outlines proposals for risk-sharing put forward by stakeholders that include conditional indexation but also collective defined-contribution schemes.
The noble Baroness’s amendments seek to modify the application of existing legislation for new schemes that provide conditional indexation. However, it is important to remember that conditional indexation schemes are just one form of risk-sharing, as we set out in the consultation document; I have just mentioned collective defined-contribution schemes, and conditional
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We need to bear in mind that risk-sharing could have far-reaching consequences for schemes and their members. Making conditional indexation possible would be a significant move away from the current requirements and would remove a valuable protection for members. Given that targeted indexation would not in itself deliver any immediate savings for employers, we need to find out how much real appetite there would be for such a change. Our consultation paper asks for views on whether greater flexibility in the way employers and employees share pension risks would encourage employers to provide good workplace pensions. We also want to find out whether employers who provide defined-benefit pensions today would adopt the conditional indexation or collective defined-contribution approach as a middle ground for continuing to provide some sort of defined-benefit provision.
We do not want to introduce legislative changes that would introduce another layer of legislative complexity if those changes would not be of sufficient benefit to warrant it. That is why we want to hear from employers and others about the likely impact of different risk-sharing approaches. This is an important issue and we do not want to rush into legislating for one form of risk-sharing until we have had the opportunity to consider responses to the consultation. We need to hear views about, and gauge the level of interest in, the other forms of risk-sharing outlined in the paper.
7 pm
I assure Members of the Committee that we want all types of good employer pension provision to continue and we will explore all means of achieving that. Changing the law to encourage the development of more innovative approaches to risk-sharing may be the way forward, but we want to hear from employers and other stakeholders before we consider what changes, if any, need to be made. We understand concerns that urgent action is needed to slow down the closure of good pension provision, but legislating at this stage for just one particular form of risk-sharing would be premature and could even accelerate closures.
There was one issue that arose regarding the Netherlands and the impact that this can have. I do not want to dwell upon the technicalities of the proposal, but we know from the Dutch experience that where indexation is withheld but subsequently restored, there is an issue regarding fair treatment between those accruing rights or with deferred rights and those already drawing their pension. This is not least because pensioners feel the loss of indexation immediately in their pocket.
We should also bear it in mind that on a recent visit to the Netherlands, a DWP official was told by the Dutch Government and industry representatives that the intricacy of the new conditional indexation system means that schemes are understood by fewer members than ever before. One of our aims throughout this programme of reform has been to encourage people to take personal responsibility for saving for retirement, and adding complexity to the occupational pensions landscape would not sit well with this aim. If they are
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I reiterate that we are interested in risk-sharing. We expect to publish the response to the consultation in the autumn, and I will keep the House updated on progress in the mean time. Until we have gone through that detailed consultation, we believe it would be premature to rush into legislation, particularly given that there are fairly broad powers and no great detail about what may be prescribed. Given that there is not just one model of risk-sharing, we need to evaluate them all. However, it is an important issue.
Baroness Noakes: I thank the Minister for that reply. Given the time, I will not prolong the debate too much. The noble Baroness, Lady Hollis, asked for an assurance that there would be no levelling down. She knows that I cannot do that, but she should be under no illusions—defined benefit schemes are going in one direction only, and that is closure. This proposal has been developed as a way of mitigating the impact of closure. I cannot say how many defined benefit schemes would be converted into conditional indexed schemes; I cannot say that it would even stop any vestige of defined benefit remaining. It is just one way of seeing whether we can stop what appears to be an irreversible trend. Even the Pensions Minister, Mr Mike O’Brien, in an interview with the Daily Telegraph earlier this week or late last week, effectively accepted that defined benefit schemes are going in that direction. It is the first time we have heard a Minister say that.
There are clearly concerns that if employers switched on a future basis to conditional indexed schemes, employees would get less than they would under existing defined benefit schemes, but they may just be switched into money purchase schemes. That is the alternative and we have to weigh it up.
I was grateful for the support of the noble Lord, Lord Kirkwood. I agree with him that there does not appear to be enough urgency about this issue. I am afraid to say that while I am grateful for what the Minister said, he rather underlined that. People on the street say that the DWP is not committed to flexibility and that in many ways it is not committed to stopping
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Lord McKenzie of Luton: Who is saying that? Who are these people? Which streets is the noble Baroness travelling?
Baroness Noakes: The Minister would not expect me to name names because all the people concerned need to deal with the DWP. Therefore, I will not reveal who says what about it. However, it is a fact that it took a long time from the deregulatory review even to put out a consultation document. The document was carefully timed to avoid anything being done in this Bill.
I accept that more work may need to be done on the amendment, but, as I was trying to point out in my opening remarks, it would at least be something that is available to employers to stop them having a simple decision to make: money purchase or carry on with a defined benefit scheme whose cost they cannot bear. I hope that the Minister and his colleagues will reflect on that again during the summer, because it would be a shame to lose the opportunity afforded by the Bill to create something to help defined benefit schemes stay in existence in some form. The Association of Consulting Actuaries remains fully committed to working with the Government if they would like to perfect an amendment that satisfied them. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 125 had been withdrawn from the Marshalled List.]
Lord Tunnicliffe: I beg to move that the House do now resume.
Moved accordingly, and, on Question, Motion agreed to.
- House adjourned at 7.07 pm.
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