§ 5.56 a.m.
§ Sir Brandon Rhys Williams (Kensington, South)
The problem I am raising tonight is not a political one, for all parties are agreed that a solution to it must be found: it is a technical problem which is taking a great deal too long to solve. I am referring to the protection of pension rights, which is a particular interest of mine. I hope that all hon. Members with an interest in the subject will work together to find an early solution to it. The problem affects millions of workers and we cannot allow indifference over it to continue.
I would like particularly to draw the attention of the House to Statutory Instruments Nos. 710 and 790 both of 2001 which have just come into effect and which both contain one extremely obnoxious feature to which I will refer. Students of this complex subject will agree that the protection of pension rights can be achieved by either preservation or transferability. The former is a poor alternative to the latter. Briefly, under preservation a man may on retirement look back to his first or second employer and find that they have retained a memory of his service right up to the time of his retirement, even if he left them many years before; and when he retires he is able to draw pensions from each according to the records they have retained.
Under transferability, the beneficiary obviously does better because as he moves from one employer to another he is able to ask the trustees of the pension fund of each employer to write a cheque to the next fund and there is, therefore, no break in the build-up of the asset; in other words, there is no break in the continuity of the increase in value of the pension entitlement which he can expect to accumulate by the time he reaches retirement age.
In answer to a Parliamentary Question on 24th February, the Under-Secretary of State for Employment and Productivity gave me two estimates; first, that the cost to employers of giving preservation of pension rights would be between £20 million and £25 million, and, second, that the cost of giving transferability might be as much as a further £100 million. In other words, to the average pension beneficiary in occupational schemes, transferability is worth at least five times as much as preservation.
The Government are not being consistent in their approach to the problem of the protection of pension rights be cause they are only aiming to achieve preservation in the private sector, while in the public sector transferability is established by long-settled practice.
We are none of us, with the honourable exception of the right hon. Lady the Paymaster-General, getting any younger, and it is now 15 years since the publication of the Phillips Committee Report on pensions. Even in that report it was noted that in the public sector transferability of pension rights had been achieved to a great extent. These two Instruments commendably seek to give 2002 transferability; but if one is eating a pudding, it is extremely disagreeable to crack one's teeth on a stone. Likewise, in both these Instruments, in so much that is workmanlike and good, it is regrettable to come upon a highly objectionable feature. In each case it is the degree of discretion left in the hands of pension fund authorities.
This is entirely out of accord with up-to-date concepts of good management practice and the ethics of good pension fund management. Suppose someone had £100 on deposit in his bank and left it there for two years. If he went into the bank to ask the manager to take the money out of deposit and put it in his current account, he would be shocked and aghast if he were told "You have not been near the bank for a couple of years, so we have taken this money and used it for our own purposes. You should have got in touch with us and made sure this did not happen." If that person were to say to the bank manager in those circumstances "You must write to your head office and restore my rights" and if the manager then replied that he would write to his head office, but that it was entirely at its discretion whether it would pay, the depositor would think that the bank's conduct was intolerable and he would tell his friends to have nothing to do with such an institution.
Yet both these Instruments include provisions analogous to this fantastic situation. In No. 710 on the first page, under the heading "Extension of time" it says:Notwithstanding any provisions of these rules, the authorities may at any time, on the application of a person who desires these rules to apply to him, agree to extend any of the following periods. …The word I wish to draw attention to is "may". The same feature appears on page 5 of No. 790, where paragraph (3)(2) says:The Secretary of State in the case of a person entering teaching service and the fund authority in the case of a person entering local government employment may, with the agreement of the other, extend the period to six months or twelve months, whichever is appropriate. …The word "may" should not appear in either case. The proper word, if the changes are to be drafted in this way at all, would be "shall" in both cases. I recognise that a man who leaves the public sector scheme without knowing 2003 where he will spend the rest of his career may well feel that he is still entitled to his pension rights if after twelve months, two years or five years he re-enters the public service. Such a situation would pose a clerical problem, and for the sake of good administration it should be permissible for these Statutory Instruments to make some provision for recovery of the clerical cost involved in keeping track of such people and of their former employment. This much I recognise. But if there has to be a safeguard, I do not see why the deduction should be more than, say, £25 at most to cover it.
I have withdrawn the two Motions which I set down rejecting these two Instruments, but I ask the Government to make their position clear. I believe that they will agree, as many hon. Members feel who are interested in this problem, that a pension is a form of deferred pay and that a pension, once earned, is inalienably the property of the beneficiary: it may not in any circumstances be forfeited by the trustees or by the fund authority, and it certainly may not be returnable to the employer. If the Government will make that commitment, mistakes of judgment of the kind exemplified in these two instruments will no longer arise.
I am not fastening on these two Instruments because they have appeared in isolation with this feature. They are typical of many which I have seen, of which scores or even hundreds are probably now in operation.
I think that the Government should deal, with the protection of pension rights, first as a matter of valuation, so that we can define in precise terms what the beneficiary's rights are. This has never been done. In occupational schemes, particularly in the private sector, beneficiaries frequently have no concept of the value which has accumulated for them in the pension fund. Indeed, nor has anybody else.
Second, they should treat it as a problem of communication, so that once a valuation has been made, all the parties concerned may understand what the beneficiary's asset amounts to, and why it is what it is.
The Government should seek to take away the quite unacceptable element of 2004 discretion which remains with employers or with the trustees appointed by employers. They should lay down the basis by which pension entitlements can be accurately determined like any other question of sheer arithmetic, which is, indeed, all that we are concerned with when dealing with pensions.
I hope that the right hon. Lady will take this opportunity of making the Government's commitment absolutely clear.
§ 6.8 a.m.
§ The Paymaster-General (Mrs. Judith Hart)
I am sure that the hon. Gentleman will realise that I cannot comment in detail on the Instruments to which he has referred. They are matters for my right hon. Friends the Minister of Housing and Local Government and the Secretary of State for Education and Science. What I can do is to talk in general terms about the arrangements for transferring pensions between public sector schemes. As the hon. Gentleman has recognised, they are extensive. They cover a very wide area of employment, including the Civil Service, the National Health Service, Local Government, teaching, the nationalised industries and many other public bodies. Where there are gaps, we do our best to plug them as the need arises.
In general, the basic similarity of pension terms in most public sector schemes makes it possible to provide that a transfer value purchases the same credit in the new employer's scheme as is transferred from the old. In other words, service is transferred on a year-for-year basis. But where pension accrues at different rates, this is not possible, and some alternative method of reckoning has had to be devised. For example, transfers between the Civil Service and the police and fire services are made on the basis that four years' service in the Civil Service reckons as three years in the police and fire services.
In other cases, where the schemes vary too much for the differences to be properly reflected simply by adjusting the basis of reckoning by one formula of general application, it is possible for a transfer value to be paid by the old employer, representing the actuarial value of the man's service with him, and for this to be converted, again on an actuarial basis, to an appropriate credit in 2005 the scheme run by the new employer. In this way the transferring employee may get more or less than year-for-year reckoning depending on the level of benefits provided by the two different schemes. An arrangement of this sort governs transfers between the Civil Service and the British Transport Services.
A degree of discretion is allowed in the rules that govern some of the pension authorities which are involved. For example, there can be a discretion to vary the time within which a transferring employee must enter the new scheme and apply for a transfer value to be paid. But this discretion is not operated restrictively. The rules provide a limited period, normally twelve months, within which the employee must enter the new pension scheme if his pension benefits are to be transferable, and a further period thereafter, normally three months, within which he must ask for the transfer value to be paid. This is entirely reasonable. A pension fund cannot remain liable over an indefinite period, during which a former employee may have passed through several other jobs, to pay a transfer value in respect of a period of service long past if he finally turns up in another employment within the transfer network.
Twelve months is by no means an unreasonably short period, but we recognise that there may be special reasons why he could not complete his transfer within this period. For example, it may have been necessary for him to acquire a new qualification, or he may have been prevented by ill-health from securing immediate entry into his new pension scheme. To deal with situations of this kind the pension authorities are given discretion to extend the time limits. It is important to notice that the discretion operates one way only—the time limits may be extended, but not shortened. It is there to protect the interests of the individual, and it would be a retrograde step to deny pension authorities this measure of flexibility to deal with the hard case.
We all understand the hon. Gentleman's interest in this. I know that he recognises the value of our present transfer arrangements, and that he is anxious to see them extended to include moves 2006 between the public and private sectors. We are not opposed to this in principle, but there is a wide diversity of pension arrangements in the private sector, and an extension of our existing transfer network to include private sector schemes will need very careful consideration. It is essential that transfer arrangements should operate in a way that is fair to the individual concerned, and also fair, from a financial point of view, to both the old and the new schemes.
As the hon. Gentleman knows, we are at present engaged very fully in a detailed review of the Civil Service pension scheme. We are taking into account the implications of the new State earnings related scheme and the recommendations of the Fulton Committee, which also drew attention to the desirability of transfer arrangements on the widest practicable scale, but it also recognised the real practical difficulties. We shall certainly be considering in the course of that review how far we can improve and extend our existing arrangements, and no doubt other public authorities will be thinking along similar lines as they examine the implications of the State scheme for their own occupational schemes.
We certainly hope that it will be possible to introduce preservation with retrospective effect in the public service, whatever may be the attitude of the private sector, because preservation without retrospection is of very little value, and without it, and without the accelerated maturity of the State scheme which gives a 20-year maturity period, it would mean that preservation would take 40 years before it would be fully effective. Indeed, without retrospection one would be talking about the next generation, or the generation after that, and not about the present one. We intend to talk in the public sector about the present generation in terms of preservation. I hope that the private sector will do the same, but certainly in the public sector that is what we shall base our discussions on. These are highly complex matters, and I am sure the hon. Gentleman will understand that as far as the future is concerned I, with the best will in the world, cannot at this moment promise him more than that everything he has taken into account will clearly be relevant in the studies that we are making.