My group of amendments would strengthen the protections for private sector scheme members in respect of two issues: first, the involvement of trustees through the consultation in the process when an employer exercises this power, so that it is explicit what the duty is on the employer in relation to consulting the trustees; and, secondly, being clearer as to the value of what it is the employer has the right to recoup from scheme members. That clearly has lots of ambiguity in it and it is not clear what exactly it is that this statutory override will allow the employer to recoup.

Taking first the involvement of the trustees, and I hope that Members of the Committee will indulge me a little if I go on, Amendment 39 would provide for

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the employer’s use of this power to be subject to consultation with the trustees. I know that it is the Government’s intention to remove any requirement for agreement with the trustees—that is the driver of the amendment—but there is no explicit provision in the Bill for any consultation with the trustees. In Schedule 14 there is some limit on the employer’s power in Clause 2—for example, the employer cannot increase the amount of the annual employee contributions by more than the employer’s annual increase in national insurance contributions as a result of the abolition of contracting out. However, certain key definitions, such as exactly what amount the employer is entitled to recoup, are to be set out in regulations. Unless I have missed something and the Minister corrects me, I think that it is still proposed that they are going to be negative regulations. Even if they are positive regulations, my argument still stands.

The Delegated Powers and Regulatory Reform Committee has also expressed concerns about the strength of the protections afforded to members. It said that, in effect, there is a protection but its substance is unclear. We have not yet heard the Minister’s arguments on the Government’s Amendment 48 but, through that, we are seeing further elaboration on the employer’s power whereby, for example, if an increase in employee contributions would trigger an increase in the employer’s contribution, further amendments can be made to the scheme to prevent the employer’s contributions increasing. Similarly, if reducing future benefits would lead to a decrease in employees’ contributions, this power can be used to ensure that those contributions are not decreased. This expansion of the employer’s power introduces more complexity, particularly in a multi-employer shared cost scheme—for example, the railways pension scheme—which I suspect is part of the driver behind the Government’s amendment.

We are seeing what seems like a simple principle—that is, that employers should be able to recoup their lost NI rebate from their employees—resulting in ever-increasing complexity as employers, actuaries and pension lawyers start to identify the problems in implementing such a principle. In the face of such complexity, it should be absolutely and unequivocally clear in the Bill that trustees have the right to be consulted. Even if the Government do not want to concede to trustees that they have to concur with or agree to the change, it is nonsense not to make it explicit that there is a right of consultation. If the Government are concerned that consultation with trustees could delay the single tier implementation timetable of April 2016, they should set consultation time limits in regulations. That is not without precedent. Trustees can be held to time limits on consultation. The bringing forward of the implementation date is not of itself a reason for removing an explicit requirement to consult with the trustees.

A statutory override will be very difficult to operate in multi-employer schemes as there is more than one employer. They will have different views on if, when and how they want to exercise the override. Depending on how many employers and how many variations on a principle are exercised, the trustees could potentially be faced with a bedlam of a situation. Again, there is no explicit requirement in the Bill to consult on these

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measures. Statutory overrides are not mechanisms to be used lightly. Later I may well argue the merits of statutory mechanisms regarding legacy schemes, and I do not want to walk into a trap, but they are not mechanisms to be used lightly in the area of pensions and they certainly should not be used without care.

I turn to the second issue that my amendments embrace, which is what employers have the right to recoup from scheme members. Schedule 14 leaves to regulation the definition of,

“the annual increase in an employer’s national insurance contributions in respect of the relevant members”

of a scheme, which is what the employer is being given the power to recoup. That will be a pretty important definition. Defining something, however, is not necessarily the same as establishing its value. What I want to establish very clearly is that the regulation will address how you determine the value of what the employer is entitled to recoup. My Amendments 45 and 46 would explicitly provide for the regulations to address the value of what the employers can seek to recoup.

Depending on the definition, private sector active members of defined benefit pension schemes could be contributing significantly for access to the single-tier state pension, given the 1.4% increase in their own employee’s NI on the relevant band of earnings and the cost of the employer’s 3.4% increase. If I have got the figures wrong I apologise but, on a quick arithmetical check, for someone earning £40,000 per annum that could amount to around £1,500 a year, with no tax relief on the employee element of the NI increase because, clearly, the treatment of private pension contributions is different from NI.

If an employer seeks a reduction in the value of future benefits, it is important to ensure that the reduction is not greater over time than the real net cost to the employer of the loss of the NI rebate. Depending on the approach that the employer takes, that is not an uncomplex issue to assess—what is the value of the reduction over time, as against what it is that the employer is seeking to recoup?

Is it, for example, the Government’s intention that what the employer can recoup is permanently crystallised in terms of the value of their lost NI rebate in 2016, or will it reflect that the band of earnings to which the rebate applied would have become narrower under the existing arrangements anyway? So, if you freeze its value in 2016 terms, it is arguable that you are giving the employer an advantage because the value of the rebate two, three or four years later may well have reduced as a result of what was happening to the earnings-related element under the current arrangements.

When it comes to the value of what an employer can recoup, myriad questions are prompted, but I will put just a few to the Minister. Is it the gross or the net value of the increase in the employer’s NI contributions? Where salary substitution is operating, and furthermore where an employer is taking a share of the employee’s NI savings, how will it work? What will happen in shared cost schemes if the employer reduces future benefits? How will the regulations work in schemes that are integrated with the state system where, for example, only pay above the level of the lower earnings limits counts as pensionable pay, resulting in significantly

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different accrual rates, depending on salary level? Add a shared cost arrangement and you have the potential for real equality-proofing problems in how this principle is applied.

Schedule 14 provides for an actuary to certify that the employer’s proposed use of this power complies with the regulations. This is the Government’s way of dealing with any employers trying to overmilk the statutory power. However, actuaries often differ on their assumptions—and this is quite a big issue at the moment, particularly over actuarial valuations. Anyone who has been involved in them knows that things like assumptions on discount rates and on inflation rates can make significant differences when setting the value of something. Just giving the employer the right to select the actuary who countersigns, authorises or concurs that the employer’s amendment fits the regulation is not fair.

My Amendment 50 would provide for the actuary acting for the employer and the actuary acting for the trustees to agree, not on the employer’s proposed amendment itself—I am not seeking to do that; I am establishing a right of consultation—but for them to agree that the amendment met the regulatory requirement. Why should the actuaries of both employer and trustees not have to agree that the amendment meets the regulatory requirements that are set out as a consequence of this clause?

The Government are going to be under considerable pressure to release details of these regulations so that employers can start to prepare for 2016. Most of the consultation is with the employers, so it is really important that that level of protection where both actuaries have to concur that a change deduced under this statutory override meets the regulations should be in the Bill. There is an even greater defence for my argument. The majority of private sector active members contracted out of DB schemes are concentrated into the biggest schemes. Of the 1.6 million active members in schemes, 1.2 million are in schemes with more than 5,000 active members. This means that the total membership of the scheme will be much bigger because there are 5,000 active members. These regulations will be drafted under pressure from an influential group of employers so it is important that, if the Bill is to provide a statutory override, there should be a clear provision for consultation with the trustees. There should also be clarity as to the value of what it is that an employer can recoup, and for the scheme and the employer’s actuary to agree—not the amendment itself necessarily, but that the amendment or the proposed change meets the regulations.

7.30 pm

Lord Browne of Ladyton: My Lords, I shall speak to all the amendments in this group, particularly Amendments 38ZB, 40A and 68A, which are in the name of my noble friend Lady Sherlock and myself. In total, this is a comprehensive grouping of amendments that deals with what my honourable friend Gregg McClymont described in the Commons as,

“the more granular aspects of the ending of contracting out”.—[

Official Report

, Commons, Pensions Bill Committee, 4/7/13; col. 236.]

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However, it is important to recognise that, although these amendments are almost comprehensive, there is one aspect of the ending of contracting out with which they do not directly engage: the abolition of contracting out itself. I feel motivated to say that with the honourable exceptions of my noble friends Lord Whitty and Lady Turner of Camden, there is broad agreement that the change to a single-tier pension and the aim of introducing simplicity into the state pension system require an end to contracting out, so we are dealing here with the consequences of contracting out, not the fact of its abolition. I will leave my noble friends to speak eloquently for themselves, and I have had private conversations with them to articulate their position on these issues.

When the Committee last met on this Bill, we debated in part the consequences of the ending of contracting out but only for public sector schemes. There were a lot of good questions for the Minister but, with respect to him, his response was essentially—this is not a direct quote—“How to deal with these consequences is a matter for future Chancellors”. The provisions that we are debating here and these amendments make it clear that that is not a luxury that employers with private sector defined benefit pension schemes have available to them.

As my noble friend, Lord Whitty, made clear in his contribution, and this has been his abiding concern regarding aspects of this Bill since his engagement with it, the ending of contracting out could have fatal consequences for occupational pension schemes. The Government’s response to that challenge is to give employers, through the vehicle of a statutory override, the powers to increase employee contributions and/or reduce accrual rates of defined benefit schemes in order to reflect the cost of the extra national insurance that the employer will now have to pay as a result of the end of contracting out. However, these powers are limited by the mechanism set out in Schedule 14, which precludes the use of them beyond the cost of the extra national insurance that the employer will have to pay.

Amendments 37 and 38, in the names of my noble friends Lord Whitty and Lady Turner, seek to delete that override power completely. While we on this Bench do not directly support these amendments, they raise a number of interesting questions. The Pensions Minister in the other place has said repeatedly, in public and in debate, that he is keen to help employers to maintain their defined benefit schemes.

I have some questions for the Minister today. Have the Government consulted employers to assess whether the changes may have the consequence that my noble friend Lord Whitty fears and lead them to close their defined benefit schemes or move employees on to career-average schemes, which are still good but not as good as defined benefit schemes? Should the costs of the additional amount of national insurance fall on to employees, my noble friends are fearful that employees will be unable to pay this from their salary and be forced to leave their schemes. Even a 1.4% additional contribution may be more than can be afforded by some workers living with static salaries and the rising cost of living. This is clearly not in their long-term

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interest, but if a large percentage of workers withdraw it will also threaten the viability of some pension schemes. As my noble friend Lady Drake has pointed out, 5% is a huge amount to find between employer and employee at a time when so many small businesses are seeking to get back on their feet. My noble friend reflects the views of trade unions, but have the Government discussed the changes with employees and employers, especially small businesses that will be affected by this?

However the changes are achieved—by consultation, as we advocate, or by imposition, as this Bill permits—employees will not be happy. They will struggle to understand the changes to single-tier pensions that are justified. I shall share an anecdote of my consistent experience as a Member of Parliament: I was regularly assailed on the main streets of Kilmarnock by pensioners who asked me why they had to pay tax on their pension. I became quite adept at replying. I will not bore the Committee with the explanation, which is simply that you make up the pot from untaxed income and the deal is that you pay the tax as you draw down. Try as I might, though, I do not think that I ever, even with charts, persuaded one pensioner that that was the case with regard to their pension. I spent from 1997 to 2010 as the MP for those people, and I would be surprised if I persuaded one person of the mechanism for their pension scheme and the operation in this fashion and how it was taxed, despite my very best endeavours to develop skills and take advice in order to do this.

Will employers end up saying, “We’re going to have pain over these changes whatever we do”—I am imagining the kinds of conversations that I have had with people—“so we might as well bite the bullet and close the final salary scheme.”? We know that the Government, particular the Pensions Minister, are keen to help employers retain the remaining defined benefit schemes. That is a justification for the override, as he said at col. 245 of the eighth sitting of the Committee in July 2013, but have the Government discussed with employers how many of them will use this as an opportunity to consider the closure of schemes? These are important questions that need to be tested. My noble friend Lord Whitty asks us all the time what the consequences will be.

This is a complex and expensive matter. Actuaries are costly, and scheme changes are extremely costly to achieve. The amendments tabled by my noble friends Lord Whitty and Lady Turner are helpful in raising questions that we should know the answers to, if they exist. If these measures will lead to employees being forced or inclined to leave schemes and schemes being forced to close, then we should debate that matter as I accept that it is not an intended consequence of the Government’s position.

The second issue engaged by these amendments reflects the fact that, apart from being subject to an actuarial check, this Bill gives the employer largely unfettered power. In particular, as we have heard, the employer does not need to reach agreement with, or even to consult, pension fund trustees or scheme members. As I understand it, existing employers’ rights under the Pensions Act 2005 are already quite significant.

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As my noble friend, Lady Drake, made very clear from her extensive experience of this, further extensions of that power should be done with great care, if at all. As she explained in convincing fashion, statutory overrides are very strong measures and should be used with care in all cases.

The opposition Benches do not believe that the override power, in this form, is needed or desirable. Amendment 38ZB, tabled in the name of my noble friend Lady Sherlock and myself, would require that changes to pension schemes could be made only with the consent of pension trustees. I accept that it is unlikely that the Government will accept that amendment, but my noble friend Lady Drake offers more of a compromise position that the Minister may find acceptable. In her Amendment 39, she proposes that an employer has the power to amend a pension scheme after consulting pension trustees, and her Amendment 50 states that regulations may require employers to reach agreement with trustees.

It is interesting that in the debate in the Commons, the Pensions Minister, Steve Webb, said—I am keeping this short but I promise the Committee that I have not changed the meaning of it; I have merely taken out extraneous words:

“To encourage … firms to be willing to carry on offering defined benefit pensions, which most of us want them to do, we need to allow them to recoup the money. Many employers will do that by having a conversation with the trustees of their pension scheme and reaching … agreement. That would be the norm. It would be quite proper … The strong incentive, therefore, is … to have a mature conversation with the trustees in order to reach an agreement. We believe that many employers will do that”.—[Official Report, Commons, Pensions Bill Committee, 4/7/13; cols. 244-45.]

If I understand this legislation correctly—and I have to admit that I cannot always guarantee that I do, given its complexity—without the statutory provisions for override in the Bill, that is what all employers would have to do. As is clear, many Members of the Committee, and all of us on these Benches, are at a loss to understand why that best practice, endorsed by the Minister himself, is not what the Government are legislating for.

Our amendments, including Front-Bench Amendment 38ZB, ask these questions: why are the powers set out in the Pensions Act 2004 not sufficient? Why is it necessary to legislate for an override in this fashion at all? Why is it necessary, as the Government are doing in Amendments 48 and 49, to give employers even more powers than in the original drafting of this Bill? What possible reason can the Government have for not reflecting their own Pensions Minister’s endorsement of best practice in their Bill? Where is the opposition coming from to consultation at least, if not to consultation and agreement, if not—as it clearly is not—from the Pensions Minister himself? I hasten to add that I reinforce that I am not reading the Pensions Minister’s words from the debate in a way that misrepresents his argument; I have taken out some extraneous words but that is all.

It is just good management practice, never mind in pensions, to consult staff. Consultation assists implementation and, consequently, staff buy-in to the need for changes. To seek the agreement of pension trustees to changes to schemes, as we propose under

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Amendment 38ZB, can only prove helpful to employers. As we have heard, trustees have fiduciary duties and responsibilities to act in the best interests of scheme members, so why should the Government not think it sensible, as well as best practice, to consult trustees and seek their approval?

I turn to the limitation on the power to override and the effect of the amendments in relation to this. There is a limitation on the exercise of this override power. As has been said, the employer’s override powers are limited to recouping the cost of the extra national insurance that the employer would have to pay as a result of the end of contracting out. Under the terms of Schedule 14, the exercise of this power must be certified by an actuary as doing no more than that.

My noble friend Lady Drake’s amendments, which I do not intend to engage with in any detail, given her eloquent and convincing arguments for them, are designed to put more definition in the extent of this power. In particular, her Amendments 37ZA, 45, 46 and 47 are designed to define more clearly the values that limit the exercise of the power and would clarify the power of override in a way that I am sure the Government would find helpful. They are within the spirit of the Government’s proposal and the Minister’s intentions, as explained by him repeatedly.

I have some experience of engagement with actuaries when I practised law in Scotland. Given that it is improbable that actuaries, who are notoriously independent of each other and seldom ever agree on discount rates, are likely to come separately to different conclusions, is it not better that the statutory limitations on the use of this power are expressed in such a way as set out in my noble friend’s amendments, rather than in the way that the Government have chosen to do it?

I turn to the issue of protected persons. We have not had an extensive debate on this issue or protected pension schemes, but I have been subject to some very powerful arguments, made not only by noble friends and other parliamentarians but by those with whom I have engaged in preparing for the debates on the Bill, about such persons. I have studied carefully the words of the Pensions Minister, which I encourage people to do—they are very instructive about the thinking behind some of this legislation. To me, his words clearly imply his preference for exempting protected persons. Having done that, one cannot but feel that there is a special set of circumstances arising from the privatisation of nationalised industries in respect of these pension schemes.

Curiously, the Bill is drafted in a way that allows the Secretary of State the power to keep the promises that were made to the members of the schemes. I am really interested in why this has been done. What was the motivation behind it if there was no inclination to do it?

7.45 pm

Curiously, despite the fact that he has created this opportunity and then deployed the best time-wasting tactic known to any Minister—a consultation—to its fullest extent, we are now in a position where we have no idea, despite a consultation which promised to report in the summer, what the Government’s position

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is in relation to the exercise of that power. This affects 60,000 or more members of these schemes awaiting this decision. They are entitled to know what it is.

My noble friends’ amendments relate to specific pension schemes. Our Amendment 40A deals with the issue of former nationalised industries in the round, covering all the relevant schemes; if it is not comprehensive then I am happy to take it away and recast it because I understand that people are coming across other information on these schemes, as was clear in the debates in the House of Commons.

It is also clear that specific undertakings were given to the members of these schemes to encourage them to accept privatisation of the industries in which they worked. As my honourable friends Katy Clarke and John McDonnell, and others, made clear in the Commons in debate, these privatisations were hugely contentious and there was substantial opposition to them. These promises were in a very specific category. They were designed to encourage workforces to accept privatisation, if not to support it. Those who made them, many of whom are now noble Lords—honourable men—expected them to be honoured. Curiously, I have concluded that the drafting of the Bill implies that the Minister in another place wishes to do so. Otherwise, I do not understand why this power has been put into the Bill. Why not just wait until a decision has been made and then amend the Bill one way or another? Why was the power specifically put into the Bill if somebody did not want to exercise it at some point? The Minister said:

“I hope we will be in a position to conclude our deliberations relatively shortly, certainly while the Bill is still before Parliament. Later in the summer is the timetable we are working towards”.—[Official Report, Pensions Bill Committee, 4/7/12; col. 248.]

Those of us who have been Ministers know the value of using seasons as opposed to months for promises but, by any view, we are well beyond the summer of 2013 now that we are into 2014.

At the very least, is it not therefore appropriate for us to be asking the Minister when this decision will be made? It is difficult to avoid the conclusion that the way in which this issue of protected persons is being dealt with is becoming an affront to Parliament. Parliament is being promised, in the context of the Bill, a decision about this. Whatever decision the Government make, there will be consequences that we are entitled to debate and consider in the context of this legislation. We have been denied the opportunity to debate these properly and to make a decision as a Parliament. It is getting very close, in my submission, to being contemptuous of Parliament. Promises were effectively made about timescales which have now been comprehensively broken. Is the Minister at least in a position to tell us today when we can expect the Government’s decision on protected pensions?

Finally, conscious of the time, Amendment 68A is simple and straightforward, and merely seeks, through the mechanism of an amendment to Clause 49— “Regulations and orders”—to require the Government to have regulations to extend beyond five years the period of time for which an employer may amend

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pension schemes to reflect the abolition of contracting out dealt with by affirmative resolution rather than negative resolution.

There is an extremely interesting passage in the debates in the Commons about the value of the negative resolution as opposed to the affirmative resolution, conducted by the Pensions Minister, in which he goes very close to saying that there is no substantial difference in these processes. An affirmative resolution requires the Government to make their argument and a negative resolution requires someone to pray against, to encourage the debate. In my view, the extension of these powers beyond a five-year period is such a significant thing to allow an employer to do, against all the consequences that we have debated, that it would be proper for the Government to make their argument for an extension as a matter of legislation rather than expecting someone to pray against it and then have to make the argument.

Lord Freud: My Lords, I particularly enjoyed the stories of the noble Lord, Lord Browne, about his dealings with pensioners. I am disappointed that he and his silver tongue were unable to persuade against the pocket. After single tier is introduced, there will not be an additional state pension to contract out of. Employers with such schemes will no longer receive the national insurance rebate; they will pay the same rate as other employers and will have to continue to provide a pension scheme that is generous but which will therefore be more costly. To continue funding these defined benefit schemes and to keep them open without the rebate, employers will be forced to find other ways to reduce running costs. They may wish to reduce the future rate of accruals, or to increase employee contributions.

Employers have told us that, without the override, they will have to consider closing their schemes, particularly if they have no other way of offsetting the costs of contracting out. Clearly, members are not served by their pension schemes closing. It is vital that we support those employers who are seeking ways of offsetting the increased cost of national insurance, including where their scheme rules would not allow the change or where the consent of trustees cannot be obtained. We also recognise that trustees may be put in a difficult position if employers come to them with a request to reduce benefits or increase contributions.

Baroness Drake: On the point that trustees find themselves in difficult positions if they are asked to consider increasing contributions or reducing benefits, I am not sure whether the Minister appreciates what trustees have been doing in the past 10 years in addressing precisely those kinds of requests from employers.

Lord Freud: I understand what trustees in pension funds do and I understand that some of them find themselves in very difficult positions when having to address those issues.

Referring to those private sector employees who are contracted out immediately before implementation, who reach state pension age in the first decade of single tier, around 75% of them will receive enough extra state pension to offset both the increase in national

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insurance contributions that they will pay over the rest of their working lives and any potential adjustments to their occupational pension schemes. Such a move must be considered in this context.

In contrast to the figure that the noble Baroness, Lady Turner, and the noble Lord, Lord Whitty, were looking at—1.6 million in private sector schemes—regrettably, by 2016, we expect only 950,000 individuals to be affected. That figure is in the impact assessment at paragraph 128.

Amendments 37 and 38 would remove the statutory override power and prevent Schedule 14 from coming into force. The practical effect would be that an employer would be required to get trustee consent for the changes they wanted to make to their scheme should their pension scheme rules require this. For the reasons I have just set out, we feel the override is necessary.

Amendments 38ZA, 45, 46 and 47 of the noble Baroness, Lady Drake, relate to the calculation of the value of the employer’s lost national insurance rebate. For the statutory override to operate as intended we must balance two competing factors: first, safeguarding members from changes to scheme rules that go beyond offsetting the loss of the rebate; and, secondly, providing an override that remains workable for employers—otherwise in practice they will still be left with little real alternative to scheme closure. Schedule 14 sets out important safeguards in the Bill and includes powers to put further safeguards in regulations. Paragraph 2(2) of the schedule prevents the employer making changes beyond those necessary to recoup their increase in national insurance contributions. We intend for this amount to be calculated in accordance with regulations—allowing us to define annual national insurance contributions—and an actuary must certify that any changes do not recoup more than that amount before they are made.

Importantly, any proposed scheme changes cannot take effect before April 2016 and individuals’ accrued pension rights are protected by the Bill. The amount will be calculated in accordance with actuarial methods and I accept that that can be a changeable feast, as the noble Baroness, Lady Drake, pointed out. However, we intend to specify the methods and assumptions in regulations following consultation with the actuarial profession. We are working on the detail of the override regulations and are developing the legislation with stakeholders. We have shared an early draft of the key technical provisions of the regulations with the industry and will undertake a full public consultation on the full regulations as soon as possible. The override will not remove an employer’s obligations under existing legislation to consult their workforce in the usual way before making changes.

Amendments 38A, 39 and 50 refer to the role of trustees in the use of the statutory override. Legislating for trustee consultation risks unnecessarily complicating existing communication channels. It would be counterproductive to require employers to seek trustees’ agreement that the proposed changes recoup no more than the increase in national insurance costs. Trustees would be put in a position of either accepting or challenging the professional view of the certifying actuary. The proposal that the trustees could block the

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use of the override would negate its purpose. It is worth remembering at this point that, as with any significant alteration to pension schemes, existing legislative provision means that members must be consulted before any changes take place, which is a point I have made.

Where employers wish to make changes to their scheme, whether using the override or through existing scheme rules, it is in their interest, as my colleague Steve Webb said, to engage with their employees and scheme trustees. They will not want to make changes that are impractical or have unforeseen consequences for the scheme or themselves. We can see no reason why employers would not engage in the usual way without the trustees in this case.

We have placed a limit of five years during which employers may use the statutory override. This ends in 2021 but, as the noble Lord, Lord Browne, observed, that time limit may be extended by an order made by the Secretary of State. Based on all the information we have at the moment we believe employers who choose to use the override should be able to do so within this time limit. However, contracting out is complex and there may be unforeseen problems for some employers. An employer who is unable to use the override within the time limit, without the possibility of an extension, may have no option but to close their defined benefit scheme. This would be a compelling reason to use the power and we feel that an affirmative resolution procedure on this matter would not be a prudent use of parliamentary time.

8 pm

On the question about the affirmative procedure, technical regulations have been drafted in consultation with pension industry representatives and advisers. We are directly engaging with industry professionals to ensure that these provisions are workable in practice and we will have full public consultation.

Noble Lords will remember that the Government have assured employers and the pensions industry that they will have a two-year preparation period for the changes relating to the ending of contracting out. That timetable is already very demanding. Subjecting the draft regulations in addition to the affirmative procedure, which is lengthier than the negative one, would considerably shorten the amount of time which schemes will have to prepare and put in place amendments for April 2016. This would mean a prolonged period of uncertainty that the industry and employers have said will delay them being able to commit resources such as the employment of actuaries and other professionals to work on the scheme changes that may be necessary, and will in turn delay any negotiation between employers, members and trustees. Delay also increases the risk that employers will simply close the schemes.

I turn to Amendments 40 and 40A. In some formerly nationalised industries, employers and trustees are limited in their ability to change scheme rules by legislation made at the time of privatisation. However, Governments cannot bind their successors. The radical overhaul of the state pension system and the abolition of contracting out in this Pensions Bill leaves this Government with a very difficult decision—should the statutory override apply to those covered by protected

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persons legislation or not? Trade unions have strongly urged us to honour the promises made at the time of privatisation. They have argued that a change in 2016 would leave those close to scheme pension age no time to make adjustments. It is also reasonable to ask why we would disturb the pension provision of a relatively small group of workers. Around 60,000 individuals are covered by protected persons legislation. This represents a small proportion of the members in private sector contracted out schemes. However, employers and the National Association of Pension Funds argue just as strongly for the override to apply to protected persons because they want all scheme members to be treated in the same way. If protected persons are excluded from the override, employers will look for other ways to offset the loss of the rebate for that group. Consumer prices may rise where regulatory regimes allow. Wages could be held down, which would also affect those outside the protected persons group. Additionally, employers fear that any differential treatment carries a risk of industrial dispute.

One could also argue that those protected under privatisation legislation will in many cases have ended up with more generous pension terms than their counterparts in the public sector. We also have to factor in that the design of the single tier reforms means that those with a long history of contracting out will in most cases build up significantly more state pension. Around 75% of people in the private sector who pay higher national insurance contributions and reach state pension age during the first two decades following implementation will receive enough extra state pension over their retirement to counterbalance the increase in national insurance contributions. This is a very complicated issue with many different and conflicting interests, and the Government are still deliberating the matter. A decision will be made as soon as possible and we will inform Parliament accordingly.

Finally, we come to government Amendments 48 and 49.

Baroness Drake: I wish to clarify one or two points, if I may. The Minister said that these changes would still be subject to consultation with employers, by which I assume he is saying that they would be considered as listed changes and therefore trigger the listed changes regulations. What triggers that? Those provisions can be operated in a way that excludes the trustees, if the employer takes a certain route. I do not want to go into the detail; perhaps I can do so outside. I would like to understand how consultation with employers is triggered because I would almost certainly want to go on to say that what I think will be triggered will not be fit for purpose in a statutory override situation. I have a couple more points.

Lord Freud: Those are not straightforward points to answer and, given the time pressure we are under, I will write on those two matters.

Baroness Drake: I completely understand these technical matters. We are up against the clock but I think they need answering and I would want to respond

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to the answers. There could be an element of the positive in the second—on specifying the assumptions in the regulations—because it starts setting out the rules more explicitly. However, it appears that the Government are still proceeding on the basis that these are negative regulations. The trouble is that other interested parties cannot make an effective contribution unless this House has the opportunity to question those assumptions and those regulations. I have no idea what the delay implication would be of allowing this House to consider the proposed regulations and assumptions more actively when they are brought forward.

Secondly, I would still like an answer to what it is that can be recouped. Is it the definition of the NI rebate in 2016, or is it the NI rebate as it would evolve anyway over time under the current arrangement, meaning that, because of the reduction in the earnings element, it would contract?

Again, I do not want to get too much into protected persons but, on the fourth point, if one takes as an example the railway pension scheme, the Minister is absolutely right. Lots of people in that scheme do not have protected pensions, but they do have the shared cost. There are particular complexities that arise from shared costs and some other things as well, but I feel that there is no opportunity to flesh these out. I have spent some time looking at the railway pensions bill. Even if one did not want to challenge the Government on the principle, there are some complexities here. It is not easy just to adjust the contribution rate or to adjust the benefits in a shared cost situation and where there are variable accrual rates. How are we going to get a chance to look at these?

Lord Freud: My Lords, given our time constraints, I will pick up those issues—the shared cost and the rebate over time. With the negative and affirmative, there is a time saving and a certainty. The difference is that you get them in and, within a matter of a month, they are effectively law and they can then be prayed against, but they are in shape unless they are undone. Affirmative has to be approved. So there is quite a process and a time loss in going one way or the other, which I hope I have spelt out. Let me rush to—

Lord Browne of Ladyton: I am grateful to the Minister. I am conscious of the time, but I am also conscious that we should not move on from this particular part of the Bill with all its complexity because we are pushed for time, due to the accident of when we held this debate. I say this for a good reason. The Minister read a speaking note about affirmative resolution procedure in relation to regulations which was not written to respond to the amendment that I proposed but was a much more general speaking note. The amendment tabled by me and my noble friend Lady Sherlock related only to Section 24(8)—a very specific part that would not involve the complex regulations which the Minister narrated. The regulations in Section 24(8) will probably be two short paragraphs.

The Minister has given us a lot of other food for thought about how the regulations will be promulgated more broadly. He tantalisingly gave us some of the

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detail about what may be in there, which may answer many of our questions. It is inappropriate that we just move on from Committee in relation to all these issues that he has raised in his response, and which none of us has had the opportunity to tease out. There are three or four other issues that he raised in response to my contribution with which I would like to engage, because I am not certain that these arguments would stand the test of debate.

Lord Freud: Well, my Lords, I was responding to the comments of the noble Baroness, Lady Drake, on the negative procedure generally. It is fairly odd to have two separate procedures going on within one process. That is the point.

I will try to deal with government Amendments 48 and 49. Schedule 14 currently provides that regulations can create exceptions to the limits set out in paragraph 2(2). This was originally provided to deal with unusually funded schemes, such as fixed cost-share schemes, which I hope goes to the issue raised by the noble Baroness, Lady Drake. The Delegated Powers and Regulatory Reform Committee raised concerns about the power. In light of this and our ongoing discussions with the pensions industry, we no longer believe that we need this power—we believe that something different is required—so Amendment 49 removes it. Amendment 48 then makes specific provision for employers with atypical scheme-funding arrangements, such as cost-share schemes. It allows those employers to recover their increased costs without affecting the safeguards provided by Schedule 14.

In the statutory override we have designed a process whereby employers can continue to sponsor defined-benefit schemes without losing the rebate. We have included provision to allow for a pivotal role for actuaries in signing off any changes but we have not restricted the ability of trustees, and indeed members, to express their views to the employer. We have ensured that trustees are not forced to decide whether to accept scheme changes or risk closure of the scheme. I hope that this reassures noble Lords and I urge the noble Baroness to withdraw her amendment.

Baroness Turner of Camden: I thank everyone who has contributed to the debate. I agree, of course, that it is a complicated matter but, on the other hand, the complications take place within the context of what is in the Bill. The Bill makes it clear that in future employers will have the right to change the provisions of pension contributions and benefits. That is what most of us are concerned about. I do not think that

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the Minister’s response has dealt with the fear that people have that they are now facing a possibility that DB schemes could be under attack. They have been under attack in the past. Although I agree with everything that has been said about the necessity of involving trustees—of course I believe in that—when in the past employers have changed from a DB scheme to something less good, which has happened, the trustees have been consulted but have made no attempt to disrupt what the employer had intended to do. I therefore still do not think it is sufficient to say that the trustees have to be consulted. There has to be general consultation. The problem is, of course, that it is in the general context of the Bill, and the general context of this clause, which gives the employer power to change the benefits system through the DB scheme that may exist.

People are concerned about the continuation of their DB schemes. As I have said in the past, DB schemes which have been negotiated in the past have been responsible for improving benefits for a whole generation of pensioners. They want to continue with those schemes and to ensure that the unions to which most of them belong will have the right to ensure that negotiation will properly take place before anything can be done to remove those benefits that they all value so highly from them.

In those circumstances, while I have listened very carefully to what has been said, particularly to what the Minister has been saying this afternoon, I will look again at what he said. However, concerns still exist about Schedule 14 and the wording of this clause, and we shall certainly return to it on Report. Personally, I have not been satisfied with what I have heard and am quite certain that a number of other people will not be either. There has to be much more of a debate. Unfortunately, a number of our Members have left because we are running rather late tonight. A number of people who have tabled amendments have not had the opportunity to speak to them and so on. I beg leave to withdraw the amendment.

Amendment 37 withdrawn.

Amendments 38 to 38ZB not moved.

Amendment 38A had been withdrawn from the Marshalled List.

Amendments 39 to 42 not moved.

Clause 24 agreed.

Committee adjourned at 8.15 pm.