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Lord McKenzie of Luton: My Lords, I thank the noble Baroness for tabling this amendment because it gives me a chance to update noble Lords on developments since we last debated this issue in Committee. Like the noble Baroness and other noble Lords who have spoken in this short debate, the Government are concerned about the trend of DB scheme closures. Back in July, when we debated these same amendments, we had just published a consultation paper, as has been acknowledged, on risk sharing. The paper was very wide-ranging and
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We received more than 80 responses, which reflected a diverse range of views with no clear consensus. For example, a number of respondents to the consultation on risk sharing felt that the idea of collective defined contribution schemes was appealing in principle. In collective defined contribution schemes, employers would have certainty about their contributions and the financial risks would be shared between the members rather than between the members and the employer, but respondents also said that further work would need to be carried out before it could be implemented. Other respondents asked us to look at the legislative provisions that apply to cash balance schemes, which are structured like defined contribution schemes but where a member’s pension pot is not exclusively reliant on contributions’ investment returns. These schemes are treated by DWP legislation as defined benefit schemes because of the guarantee about the size of the pot provided by the employer. We are looking further at those issues.
3.45 pm
While there was some support for conditional indexation arrangements and also for collective defined contribution schemes, a number of respondents expressed concern that the approaches set out in the consultation paper were too complex. Some wanted more radical and simpler solutions, and others asked whether the proposals were fair, in particular in the way that pensioners were treated. Some argued about specific further changes and felt that the current framework provides enough flexibility and that the opportunities for risk sharing that currently exist should be more widely publicised.
The question of demand for risk-sharing also arose in the consultation responses. Some of the views expressed chimed with the results from the recent research on employers’ attitudes to risk sharing that was carried out on behalf of DWP and published in August. The findings of this survey indicated that among employers in the study who provided pension schemes for their employees there was relatively little interest in risk-sharing approaches.
While the consultation responses have not presented us with a clear mandate for a particular approach to the issues around risk sharing, we are continuing to work urgently to identify the appropriate way forward. The Government are committed to doing all we can to support good employer pension provision, but we must find a solution that strikes the right balance between employers and scheme members. We should keep in mind that these issues are about redistributing risks away from employers to scheme members, not about eliminating or reducing risk. It is that balance that underpins our considerations. While we are looking at the conditional indexation option, we are mindful that some consultation respondents found it too complex.
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It is crucial to take into account how well arrangements can be understood by members of schemes. If complex messages about inflation protection were to undermine confidence in pensions at a time of such economic turbulence, that would be a high price to pay. We must also bear in mind that if conditional indexation is introduced in the same form as in the Netherlands, there would be a number of resulting issues. For example, whether it should be accompanied, as there, by a buffer requiring schemes to be funded to around 130 per cent of their nominal liabilities and whether there should be 50 per cent member-nominated trustees.
I understand the argument that something has to be done quickly to slow the decline in defined benefit provision, particularly in the current economic climate. However, we should not consider adopting this amendment simply to be seen to be doing something if the outcome would be to create a system that is so complex that it would do nothing to help stop the decline. It has been said that it is worth introducing these amendments if they stop even one employer closing its DB scheme, but it is just not that simple. I understand that the ACA model would apply to new schemes only. If that is the case, there is a risk that that would create churn in the pensions market. Consideration needs to be given to the various options and their implications before we make any decisions on a way forward, including about what changes, if any, are needed. That would include consideration of the implications for the pensions regulator. The noble Baroness may be disappointed by my reply, but we are not prepared to rush into making changes to legislation without being clear that that is the right thing to do.
In response to the point raised by my noble friend Lady Turner, I reiterate that the ACA model before us is predicated on a career average scheme and would involve closing schemes and opening new schemes. She made an important point about considering not only the opportunities that might arise for some schemes but whether this would drive behaviours and encourage people away from their current provision.
Like us, the noble Lord, Lord Oakeshott, recognises the need to do something and to make progress but expresses scepticism about whether this model is the right one to adopt at the moment. If we were to conclude that we should introduce legislation along these lines, we could not, as the noble Baroness will appreciate, recommend adopting the amendments as they stand. We have real concerns that they are technically deficient—although I accept that the Government have the resources to address such technical issues—and would not deliver the kind of conditional indexation that the Opposition and the Association of Consulting Actuaries, which developed the idea, are proposing.
First, the amendments provide for indexation to be funded for as a liability of the scheme but specifically state that indexation is not a liability of the scheme, so as to create an accrued right or entitlement. It is therefore unclear whether a scheme would in fact be required to be funded so as to provide for indexation where indexation had not already been awarded. If no rights to indexation are to accrue to the member until awarded and therefore the scheme is not required to fund for them, this would in effect remove the requirement
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I acknowledge that these are extremely difficult issues with difficult judgments to be made, but I assure the noble Baroness that we have not closed the door on this option. I reiterate that we are working urgently on this issue and I do not preclude our returning to it at Third Reading. However, that is as far as I can go at the moment.
Baroness Noakes: My Lords, I thank the noble Lord, Lord Oakeshott, and the noble Baroness, Lady Turner, for their contributions to the debate. The noble Baroness appears to think that there are employers who will be happy to continue with defined benefit schemes. We always thought that the banks would carry on with their rather generous schemes, but I would be surprised if boardrooms will be so comfortable going forward, given the ravages to their finances over recent weeks.
The trend in the private sector is clear. Defined benefit will disappear and it is just a question of time, unless something can be done to make the liabilities more manageable for employers. Those liabilities are large, unpredictable and difficult for companies to absorb. That is just a fact; I cannot tell the noble Baroness this in more straightforward terms. It is what the employer and business community believes strongly, which is why the director-general of the CBI made a plea for companies to be set free to design something that they would be comfortable in persuading their workforce was an appropriate set of benefits.
The Minister said that the Government are looking at their consultation on flexibility. Inevitably there are different views, because some people are clinging to the belief that defined benefit will be kept in place by doing nothing. That is simply not the case. This is a serious issue. It is a failing by the Government that they have not used this opportunity to do anything in the Bill to help defined benefit. The Bill drives further and further towards defined contribution; that is what it is all about. I deeply regret that the Government are taking that approach. However, I will not divide the House on the issue. The Government said that the amendments are technically deficient, but that is not the most important thing. I recognise that, if the Government set their face against flexibility, there will be none. The Government will be judged on their record on defined benefit schemes, as they should be. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Fowler moved Amendment No. 69A:
69A: After Clause 98, insert the following new Clause—
“Suspension of annuitisation order
(1) The Secretary of State may by order suspend any statutory provision or rule of law requiring a pension to be taken in the form of an annuity.
(2) The Secretary of State may by order renew an order made under subsection (1).
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(3) The period for which a suspension order, made under subsection (1) or (2), has effect must be stated in the order and may not be less than 6 months or more than 2 years.
(4) Any order made under subsection (1) or (2) does not have effect until a draft has been laid before, and approved by a resolution of each House of Parliament.”
The noble Lord said: My Lords, the new clause is designed to meet a particular and urgent need. As the House knows, the present rules on annuities require people who have personal, defined contribution pensions to buy an annuity at age 75. The difficulty is that people are being required to do this in the midst of disastrously falling markets, with the effect that their savings—their pot of money—have been radically reduced, and the annuity that they can buy has been reduced with that.
The Minister knows my view that compulsory annuities should be abolished altogether. That was the view of your Lordships when we debated an amendment tabled by my noble friend Lord Hunt of Wirral last June. My noble friend now has Front-Bench duties, shadowing the noble Lord, Lord Mandelson, but I know that that remains his view.
I emphasise that the proposed new clause is not an abolition clause; nor is it an attempt to increase to 80 or 85 the age at which an annuity can be taken—a later amendment deals with that, but that is not the proposition here. The purpose of this new clause is to give the Government the power to suspend the rule that an annuity must be taken at the age of 75. It is as straightforward as that in its intent. If there are imperfections in the drafting I apologise, and I am not over the moon about the description “annuitisation order”. But I hope that the Minister will respond not on the technicalities but on the principle of bringing help to those men and women who need it now.
At the heart of the proposal is the scale of the present financial crisis. We do not need to look very far to find evidence. The Chancellor of the Exchequer referred to it as the worst crisis for 60 years. The deputy governor of the Bank of England, Charlie Bean, was even more explicit. Last week, he said:
“This is a once in a lifetime crisis, and possibly the largest financial crisis of its kind in human history”.
In terms of the impact on the real economy we are still in early days. I should add that this was reported first in the Scarborough Evening News, which shows that even today with the internet and 24-hour television, regional newspapers still manage to get their scoops. It was a remarkably frank and important statement.
Stock markets around the world have crashed and the value of pension investments has radically reduced. The FTSE and Dow Jones have seen massive falls; the Nikkei is now down to its lowest position for a quarter of a century. The impact on savers trying to build up a pension has been little short of catastrophic. On average the value of defined contribution pensions has reduced by about a third. Everyone has been hit; but most of all those who are in their 70s. At this point, I should declare an interest. I am 70. I am not sure whether that causes surprise to noble Lords who thought I was much younger or much older.
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I am relatively fortunate as I have five years to make up the losses in my pension if, as we hope, the markets eventually recover. However, consider the position of a man or woman now aged 74 or 73. They have no time to make up their losses, but as the law stands they will be forced to take an annuity. The time axe will come down on them and they will be forced to buy an annuity with a radically reduced fund. Having bought it, it is likely to be a permanent diminution in their retirement income. That is why I want there to be the power to suspend the compulsory annuity rule. How long that rule remains suspended is a matter for the Government—or any Government who may succeed them.
To be fair, the Government have shown in a number of comments from Ministers—not least those of the Leader of the House of Commons—that they are aware of the difficulties and the need for action. We now want those expressions of sympathy converted into action. The only half-argument that I have heard against such a change is that the rule affects only a small number of people. I do not regard that as an argument for inaction. Injustice is still injustice, however small the number affected.
There are two additional points. First, we have already legislated to exclude the Christian Brethren, the Plymouth Brethren, who have a principled objection to the pooling of risk of mortality. I understand that that exclusion affects fewer than 1,000 people. Secondly, and more crucially, it is important for pensions policy generally that we—all parties—want to encourage as many people as possible to make provision through saving for their pensions. Presumably, that is common ground around the House. The sight of the compulsory annuity rule being enforced in the present financial crisis would damage all our efforts. It would be hardly surprising if people said, “What is the point of saving if at the end of the road we are forced to take the kind of loss that so many people are facing at the moment?”
This is a question of justice for the men and women who have saved for their future but have been caught in a financial storm that they had no way of influencing and very little chance of avoiding. We have the opportunity of avoiding that injustice this afternoon. I hope that it is an opportunity that the Government will take. I beg to move.
Lord Skelmersdale: My Lords, my noble friend Lord Fowler is quite right to remind us that in last year's Pensions Bill we passed an amendment moved by my noble friend Lord Hunt of Wirral, which abolished the rule that people holding pensions must take an annuity by the time that they are 75. He and I were more than a little annoyed that in another place, the amendment was not even debated. It was deemed out of time because of the guillotine. My noble friend moved the amendment again in Committee earlier this year, although he withdrew it due to the Government’s enduring obduracy.
Time has shown just how percipient he was in moving it; but his amendment, although remaining the Opposition's long-term policy, needs to be adapted to the situation in which we now find ourselves. After the worst autumn for the economy that most of us can remember, the financial security of pensions has
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In the amendment, my noble friend proposes a temporary suspension of those arrangements. To be fair, Ministers have said previously that they will look at that. Indeed, the right honourable lady Ms Harman, in response to my right honourable friend Mr Hague, conceded that,
“It is important to consider the question of the impact on people—albeit a small number of people—who have to buy their annuities within a certain period of time ... I know that the Department for Work and Pensions is talking to the Treasury about the issue”.—[Official Report, Commons, 15/10/08; col. 787.]
It is an old saying that talk is cheap. It is the results, if any, of that talk that matter, and, currently, as I am sure the Minister is about to tell us, the omens are not good. Notwithstanding the fact that we on these Benches have always believed that the Treasury was 100 per cent wrong to maintain the rule of compulsory annuitisation by the age of 75, we reluctantly accept the right of another place to put the boot in and say, “No way”. At least, we did. However, as the right honourable lady said last Wednesday, the situation has indeed changed, and for the worse. She claimed that very few were affected, but the number is growing.
If memory serves me right, the noble Baroness, Lady Hollis, told us in 1974 that we were worrying about only 1 per cent or so of pensioners. Last year, the noble Lord, Lord McKenzie, told us that it was 3 per cent of those in the group with pension pots of more than £100,000, although both figures now need to be updated. The last figure that I heard was 5 per cent, but the exact figure hardly matters when the Government admit that Amendments Nos. 78AP and 78AQ on the buy-back of state pensions, welcome though they are, will help only a maximum of 110,000 people. As my noble friend Lord Fowler has said, alternatively secured pensions were invented for fewer than 1,000 Plymouth Brethren. Not only that, the £100,000 figure on which annuity rates are quoted has become totally meaningless. In October last year, the FTSE 100 stood at a smidgeon under 6,500. On 1 October this year, it had fallen to 4,959.60. By 16 October, it had dropped through the floor, and closed at 3,861.40. Over the weekend, it dropped again, and significantly, stood at 3,765 at lunchtime today. The net result of all this, as my noble friend Lord Fowler has just pointed out, is that the FTSE is down by more than 30 per cent this year.
It is not impossible to believe the NAPF when it says that pension pots, too, have shrunk by more than 30 per cent; nor that, according to Aon Consulting, assets of direct contribution schemes have plummeted
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What a time to take your annuity. It is no good the Minister saying, as I expect he will, “You should have taken it earlier”. Hindsight is a wonderful thing, but in this case it goes against the grain of human nature, particularly in uncertain times when people will delay taking out their annuities for as long as possible in the hope that the Stock Exchange will rise. That is precisely why the Government need in their back pocket the statutory instrument that my noble friend proposes. It is not, as he said, a blanket abolition of compulsory annuities; it would enable the Government to be flexible at a time of their choice but at a time of severe volatility on the stock market, which is precisely what we are seeing now.
Lord Sanderson of Bowden: My Lords, my noble friend Lord Fowler has tabled an amendment at a critical moment, particularly for pensioners. Fate has done me a good turn. I was 75 on 30 April this year. I took my annuity at the time, and I am very relieved that I did. The present situation is undoubtedly extremely hard on those who are six months younger than me. They have saved all their lives, and have had a self-invested pension plan. They have taken risks because we have to do so if we want to improve our lot. That is what everyone wishes to do. But to have at this point a shotgun marriage of a pensioner of 75 with his annuity is criminal. I hope that the Government understand that the present situation is unusual, very bad for anyone with money in the stock exchange, and particularly so for anyone who has to take an annuity by law when they are 75.
Lord Forsyth of Drumlean: My Lords, I am nowhere near 75 so I do not need to declare an interest, but I am extremely concerned about this. If we look at the root cause of the financial catastrophe unfolding around the world, it is clear that it is about people borrowing too much and not saving enough. Surely we should be doing everything we can to encourage people to save for the future. I strongly support my noble friend’s amendment, although characteristically he has been more moderate than I would have been. I do not think we should have this rule at all, and I believe that my noble friend is of the same view. But in the interests of pensioners who are going to suffer real hardship, it is a sensible and moderate compromise.
I do not envy the Minister if he does not accept the amendment today because it will seem rather inexplicable when the Government can find huge sums to bail out the Royal Bank of Scotland and the Bank of Scotland. I mention those two banks in particular as their shares are typical of the kind held by elderly people. They believed that they were safe as houses and they considered the size of the dividend. The shares are part of their pension schemes, and now partly because of the Government’s insistence that no dividends are available,
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