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6.30 pm
Baroness Noakes: Perhaps I can assist the Committee. In his enthusiasm for his project, I think that my noble friend may not have realised that we are not debating the specific proposition he has in mind. I sought to draw on the essence of the proposition in order to tease out whether the principles are those which could result in ineligibility being established, while recognising that there will be all kinds of questions if any particular company comes forward with a scheme such as that which has been promoted by BrightonRock, one that has interesting features which should be explored. However, it is not for this Committee to get into the detail of the specific proposition—where the money comes from or anything about the success of the particular operation. I am sure my noble friend did not intend to intrude in that way on the Committee’s deliberations.
Lord James of Blackheath: I support those comments and I am grateful to my noble friend. I am concerned here with the benefits of this amendment on behalf of whichever company comes to create this function. It may or may not be the one about which I have spoken and it was identified before I rose to speak. I am concerned with the principle because other companies will come into this field to provide similar services, and it is appropriate that this amendment should be supported on their behalf too.
Lord McKenzie of Luton: Perhaps I may start by acknowledging that in my view the noble Baroness was not in any way seeking to promote a particular company but was talking about the generality. I am not sure whether the effect of what the noble Lord, Lord James, said was the same, and I hope that he will reflect on his words. In the end he has to make his own judgment about how and what he speaks on.
The proposed new clause would amend Section 126 of the Pensions Act 2004. That section deals with eligible schemes for the Pension Protection Fund. It would exempt certain schemes from the PPF if they had guarantees from what the amendment calls an “authorised insurer”. I understand that the amendment has been tabled to explore whether schemes that purchase an insurance product along the lines of the one being promoted by BrightonRock also need to have protection for their members under the PPF. The Minister of State for Pensions Reform and I have met representatives of BrightonRock, including the noble Lord, Lord James of Blackheath. We listened with interest to their proposals on how a product intended to insure schemes so that they could pay scheme members in the event of the insolvency of their sponsoring employer might work. I understand that BrightonRock wants schemes that have purchased one of its products to be exempt from paying levies to the PPF and for scheme members not to be covered by the protection offered by the PPF.
The removal of the protection of scheme members by the PPF is not something to be considered lightly. There are some defined benefit schemes that are not eligible for protection by the PPF which include unfunded public service pension schemes, local authority pension schemes and schemes that provide only for death benefits. Broadly speaking, these schemes already have
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Let me remind noble Lords that the PPF is funded by a combination of compulsory levies charged to all eligible schemes, any assets remaining in schemes which transfer to the PPF at the end of an assessment period, and the proceeds from the investment of these levies and assets. So if schemes are not eligible for the PPF or are not required to pay a levy or both, this has an impact on the financing of the fund and the protection it provides to millions of scheme members. BrightonRock suggests that it will only ever be marginal in terms of the number of schemes covered relative to the PPF’s universe. This may be the case, but any change to legislation would open up the market to other competitors, moving away from a “marginal” impact that would clearly have an impact on the financing of the PPF and the protection it provides.
We also need to bear in mind that the Pension Protection Fund is a relatively new institution and it is important that scheme members, people receiving compensation and people due to receive compensation in the future have confidence in the PPF’s financial security and long-term sustainability. However, the Government keep the PPF under review and already have the power to make regulations to exempt certain schemes from the protection provided by the PPF or to waive the pension protection levy if that is desirable. At this stage, however, my ministerial colleagues and I do not consider that it would be right to open up a market in the way suggested by this amendment.
If in the future we opened up the market to products like those of BrightonRock, we would need to be confident that the entry of BrightonRock and others could provide long-term security for those taking out such policies. Confidence in these insurers will be equally important to those members remaining under the wing of the PPF. The noble Baroness said that protection would come from the FSCS, but I would say to her in response that it does not come without cost either in that that protection would also have to be funded.
In conclusion I want to emphasise that there are already powers to exempt schemes if we want to do so in the future, so we do not need the amendment. However, we are not minded currently to open up the market in the way suggested.
Baroness Noakes: Can the Minister explain why the Government are happy with insured closed schemes but are drawing the line at insured open schemes?
Lord McKenzie of Luton: What we are not yet happy about is the model which suggests that open schemes with ongoing liabilities would be protected by
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That is where we are, but I stress to the noble Baroness that the powers are in place should there be a view to use them.
Baroness Noakes: I thank the Minister for his response. He said that the PPF is trying to build confidence. What the PPF is doing is convincing the employer community that it is a very expensive route to dealing with the issue of scheme insolvency. That opinion will be expressed by almost any employer with a defined benefit scheme who has received this year’s fees demand and has been looking at what is happening to the costs in this area. There is potentially an issue here, which is why there is an incentive to look at other options.
One of the points I sought to make is that I hope that the department’s mind is not closed because it is too close to the PPF. The fund is the department’s own invention, so of course it is rather protective of it, but I was hoping that the Minister would demonstrate that he is open to open market solutions. I say that because we believe that open market solutions often produce innovation and thus dynamism in a given situation. I completely accept that there are big practical issues to be dealt with, as the noble Lord, Lord Oakeshott, said. I was not advocating the BrightonRock proposals but the use of market-based solutions as an alternative to state-based solutions. That may indicate a doctrinal difference between us.
Lord McKenzie of Luton: The Minister for Pensions, Mike O’Brien, is on the record as saying that he welcomes innovation in the market. Obviously there needs to be a full analysis of the innovations and of the risks, but certainly our mind is not closed to those kinds of solutions.
Baroness Noakes: The Minister reassures me. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 130 not moved.]
Clause 89 [Additional State Pension consolidation: Category A and graduated retirement benefit]:
Lord McKenzie of Luton moved Amendment No. 130ZZA:
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The noble Lord said: I shall speak also to government Amendments Nos. 130ZZB to 130ZZM inclusive and 139D.
Clause 89 provides a significant further step along the road of simplification of state second pensions. Of critical importance in the design of the reformed state scheme is the need to define the benefits that people can expect to receive when they retire so that they can make a judgment about how much to save. Last year we took an important step in reforming the state second pension so that in the future the pension would accrue largely as a flat-rate amount. This would be added to the basic state pension so that overall state pension outcomes and forecasts of the outcomes would be simpler to understand for individual contributors. But that is the future: Clause 89 and the amendments simplify the past.
As the Committee knows, the state second pension scheme is extremely complicated. It was complicated when it was introduced in 1978 and every change since then has added to its complexity, to the point where only a handful of people understand a benefit that costs the taxpayer more than £11 billion a year. Left unchecked, the last award of the pre-Pension Act 2007 S2P will be made in the 2060s and, with inheritance, we would still require all the benefit rules and the IT calculation routines for the old system until the end of the century. The bulk of the amendments refine Clause 89, which proposes that we wrap up all SERPS, S2P and graduated retirement benefit accrued to the tax year before we introduce flat-rate S2P. We would calculate the contributions made to that date using exactly the same rules as we would have used when the contributor reached state pension age. The sum that the calculation produces will be credited to people’s pension accounts. The sum, known as the consolidated amount, will be revalued during the contributor’s working life by earnings, the same as now, and uprated by prices once the person retires, the same as now. The measures seek to apply the current rules on revaluation, inheritance and appeals to the consolidated amount.
However, this is only part of the story, as those who have had the opportunity to read the fact sheet placed in the Library will testify. We want people who have been contracted out of the additional pension to have the same clarity over their pension outcomes as people who have not contracted out. This is challenging technically, especially for the 11 million contributors who will retire after 2020 and who have been contracted out of SERPS at some time between 1978 and 1997. This is a legacy of a variety of different rules on revaluation, to the point that it is almost impossible to calculate the pension that a person with contracted-out rights will receive in retirement. We give them some partial information but we cannot tell them with any degree of accuracy what they can expect to receive from the state when they retire. The department keeps a notional record that says each year how much a person would have secured in SERPS had they not been contracted out, and then when the individual retires the department makes a calculation deducting the guaranteed minimum pension, or the notional guaranteed minimum pension, from SERPS. If this contracted-out deduction is less than the SERPS accrual, the balance is paid to the individual.
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6.45 pm
The difficulty is that there can be up to three different ways in which a guaranteed minimum pension can be revalued before a person retires, so the amounts of SERPS accrued and the contracted-out deduction can often be different. On top of this, these amounts can be uprated differently after retirement. To achieve simplification we need to fix the difference between the SERPS accrued and the contracted-out deduction. If the difference produces a net amount of SERPS, then it needs to be revalued and uprated in exactly the same way as SERPS is now. We need to do all of this in an equitable way.
Amendment No. 130ZZE sets out the solution. Through the process of actuarial equivalence, we will estimate the value of the contracted-out deduction at retirement and through retirement and smooth this into a weekly amount that can be deducted from SERPS. The Committee will appreciate that my explanation of this process is somewhat simplified, as the system is extremely complex, but we will end up with a system where the contributor will have a much better understanding of what they can expect when they retire. We will also remove great complexity from the pension scheme. We have taken the opportunity with Amendments Nos. 130ZZM and 139D to bring forward some minor technical amendments which are consequential to the state pension reform measures and which were inadvertently omitted from the Pensions Act 2007. I am conscious that the Opposition have amendments to our amendment. Before they are moved, perhaps I may say that we look with some warmth on those amendments. I beg to move.
Baroness Noakes: I shall speak to Amendments Nos. 130ZZEA and 130ZZEB, which are amendments to government Amendment No. 130ZZE in this group. This is getting ridiculous.
I thank the Minister for introducing his amendments and for circulating the note which was euphemistically headed “simplification of state second pension”. As he has demonstrated in his opening remarks, this is anything but simple. I learnt more from reading the note than I ever need to know about S2P. I cannot pretend to understand the precise technical impact of all the amendments in this group, but if the department’s note is an accurate reflection of what is planned, then we are broadly content with what the Minister is proposing.
However, there is one exception, which is dealt with by my amendments. I was alerted to this by the reference to actuarial equivalence in the department’s note. When I found out that it was in connection with contracting out—in this case the contracted-out deduction—I was put on full alert because the Government are not to be trusted in this territory. Paragraph 21 of the department’s note on these amendments refers to the way in which the contracted-out deduction will be arrived at. It states:
“The current intention is for the Government Actuary’s Department to consult on the proposed assumptions in the Summer of 2011 to ensure that consolidation can be based on the most up to date information on life expectancy, earnings and earnings growth. These assumptions will be used for the consolidation calculation”.
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That seems entirely rational, and we support it. However, it is not what the legislation contained in these amendments says. Instead, proposed new Section 46A of the 1993 pensions Act, as inserted by Amendment No. 130ZZE, says nothing about consultation. Subsection (5) says only that the Secretary of State “may” require the Government Actuary to prepare a report; the Secretary of State is not required to involve the Government Actuary. Subsection (7) says, in effect, that even if the Government have a report from the Government Actuary, they are under no obligation to take it into account when issuing the regulations for determining actuarial equivalence.
The Committee may feel that this is just a technical issue, but very similar provisions on actuarial equivalence already exist in relation to the contracted-out rebates which are set on a quinquennial basis. I know that the Minister recalls our previous discussions on this, and I am sure that the noble Lord, Lord Oakeshott, will remember the debates we had on the order setting out the contracted-out rebate in 2006 after the last quinquennial review. At that time the Government Actuary reported, after consultation, that the rebate should be set at 5.8 per cent, although many of the consultees argued for a higher figure, some for higher than 8 per cent. The Government then plucked the figure of 5.3 per cent from thin air, citing something that was not found in the legislation or indeed in these amendments. They called it “sustainable affordability”—that is to say, if the Treasury says it cannot afford it, the Government will ignore actuarial equivalence determined by the Government Actuary’s Department.
The legislation, which is drawn in very similar terms to the amendments before us, did not stop the Government from acting in that way at the last quinquennial review, as the noble Lord, Lord Oakeshott, will recall. The government amendments give them carte blanche to carry on operating in exactly the same way, and possibly even to invent new bits of doctrine to sit alongside “sustainable affordability” and not do the right thing.
My amendments are modest. They would ensure that the Government of the day, when coming to these difficult and complex decisions, would be guided by what was right for the rights-holders when their rights were being consolidated, not what was convenient for the Treasury. I would replace the word “may” with the word “must” in subsections (5) and (7) of new Section 46A.
Will the Minister comment on the processes that will be used to assure the calculations on a quality basis when the single additional pension amount is arrived at? The department’s note makes it abundantly clear that no ordinary mortal could check the calculations attributable to his particular circumstances. Those calculations will fix an entitlement for all time for post-2020 retirees. Would the department, for example, use specially commissioned audits of the calculations? The ordinary audit of the National Insurance Fund will not give assurance of the granular level of the individual’s own rights and entitlements, and it is at that level that we need confirmation to exist.
We have seen too many government systems collapse in the face of complexity and fail to deliver what they need to. Child maintenance is a prime example, but
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Lord Oakeshott of Seagrove Bay: It would be churlish of me not to support these amendments, particularly as the noble Baroness has so kindly made the speech for me and referred to me several times. She asked whether I remember the debates on the order in 2006. I think of little else; I find them far better than counting sheep. I have only one question for the Minister. Could he please explain what the difference is between “affordable sustainability” and “sustainable affordability”?
Lord McKenzie of Luton: I will pass on that last question, if I may.
The noble Baroness’s amendments would make it a requirement that the Secretary of State obtain a report from the Government Actuary advising on the method for determining actuarial equivalence and that the recommendation in the report be adopted. Incidentally, I am not surprised that the noble Baroness referred to contracted-out rebates; I thought that they might just be raised in the context of this issue.
Determining the method of actuarial equivalence will clearly require a great deal of expert knowledge. That is why we have made provision in the Bill to obtain a report from the Government Actuary’s Department. I assure the Committee that it is fully our intention to make use of that provision, and we will make a decision based on that advice.
I can, however, see considerable merit in the amendments. But there is a slight concern, about which we need to talk to the Government Actuary. It is suggested that the draft amendments compel the Government to accept the Government Actuary’s advice. That depends a bit on whether there is going to be a range of advice or a single proposition, and whether that places the responsibility for determining actuarial equivalence on the Government Actuary rather than on the Secretary of State. We would like to discuss that further. Subject only to that, I am hopeful that we can bring back on Report something that has the same effect, if not the same wording, as the noble Baroness’s amendments, because we are fully in agreement.
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