PENSIONS (TRANSFERABILITY) (Hansard, 12 December 1978)

§ Mr. R. A. McCrindle (Brentwood and Ongar)

It is a well-known fact that an hon. Member sometimes has to wait in this Chamber a long time before the Government business is completed so that 622 he may have an opportunity to address the House on his topic for the Adjournment. I think I can say with some safety that on only a few occasions have hon. Members had to be somewhere in the vicinity of the Palace of Westminster for a period in excess of 20 hours. That has been my fortune, good or bad, having drawn the Adjournment debate on this day.

I raise the subject of the transferability of occupational pension scheme benefits when a person changes his occupation because I believe that it is swiftly becoming the aspect of pension schemes which is of most concern to their members and because of the sharp difference in the effect of changing employment within the public and the private sectors respectively. I shall suggest that this is an occasion when the private sector might very well be able to take a leaf out of the public sector book in an attempt to overcome the injustice which I shall seek to portray.

Recently, Money Which? was moved to say that pension schemes were penalising people who changed jobs. As I shall seek to prove, it is difficult to deny that this is so. People in private pension schemes cannot understand why they should be treated so much less generously when they reach retirement age if they have changed their job several times during their working careers. This realisation is leading people to think twice about moving jobs, and that cannot be good for the mobility of labour. I might add in passing that it does not contribute to efficient management if the principal reason why a person does not move on to another job is his fear of the consequences on his expected pension.

I am convinced that it is highly desirable that we prevent what has been called the new feudalism caused by employees being tied to their present firms for fear of the disadvantage to them if they leave.

I am aware that the Secretary of State for Social Services has asked the Occupational Pensions Board to look into the pensions problems of employees who change jobs and to make recommendations. My reason for raising this matter is that I feel that it is timely for Parliament to be among those who make recommendations to assist the board in its deliberations. First, however, I want to 623 underline how devastating can be the effect of no more than four changes of occupation over a 40-year period of employment.

If employee A has remained with the same company and received an initial salary of, let us say, £5,000 inflated by 5 per cent. a year to become a final salary of £35,200, his pension entitlement will be £23,466, or 40 /60ths of his income on retirement.

Employee B, who has changed his occupation on four occasions, will receive 10/60ths of his final earnings in each of his periods of employment. By comparison with the pension of £23,466 per annum of the man who stays put, employee B will receive £13,035 a year, or about 55 per cent. of the pension of employee A who remains with the same firm. It cannot be right that not much more than half a pension is paid to the second employee. The reason, in a nutshell, is that pension entitlement ceases to compound when an employment is left behind.

This seems to suggest that the case for full transferability of occupational pensions is irrefutable. It seems only fair that an employee should get two-thirds of his final salary, irrespective of how many times he has changed jobs during his working life.

Here I come to the crucial question, which is who is to pay the bill. If it is to be the company whose service the employee is leaving, that can be done only at the expense of the standard of pensions of those who remain or, alternatively, by a substantially increased contribution by both the employer and the employee. If this were to happen, the standard of the pension would go down for the employee staying on until 65 with the same firm in the interest of the man who had left presumably to better himself. So, although this appears to be a straightforward matter, on closer examination the solution is not at all simple.

I ask myself, therefore, whether there is not a compromise solution to which the Occupational Pensions Board could realistically turn its attention. With that in mind, I turn my attention to the answer which has been found in the public sector —an arrangement known affectionately as the "transfer club".

624 In the example which I gave earlier, if the second employee who changed jobs went through his career having only employers who were members of the "transfer club ", his pension on retirement would be the same as the employee who stayed with his original employer for 40 years. Each time that second employee changed jobs, his new employer would give him credit for his years of service with his former employer. Although this would not and could not be cost-free, the cost to one pension scheme would tend to balance out against the cost to another, on the assumption that employers both shed employees and receive them.

What I am suggesting is in the nature of a clearing house, and I am anxious that the Occupational Pensions Board should turn its attention to the practicability of this suggestion and that, at the same time, the pension interests should be turning their thoughts to the possibility of such machinery being created with minimum Government intervention rather than simply awaiting the report of the Occupational Pensions Board. If Her Majesty's Government felt that some sort of tax concession would assist in the establishment of the clearing house to which I have referred, in my judgment that would be a major step forward. I remind the Minister that he could draw on the practice of the public service if he were minded to meet my suggestion.

In case it is thought that I am singling out an an unusual set of circumstances in the example which I gave earlier of the man who changed employers on four occasions, let me conclude by exemplifying the man who stays with a company for 40 years and receives a salary of £18,000 on retirement. His pension would be £12,000 per annum. But if a colleague of his moved not four times but only once after 20 years, his pension would be £10,000 on precisely the same basis. So a change of occupation only once in a working career of 40 years, which surely is not extraordinary, penalises the person concerned in that he receives a pension which is 16½ per cent. less advantageous to him. But, whether a man changes jobs once or four times, there is no doubt that there is an argument to be answered, and I hope that the Minister will be prepared to put my suggestion of a clearing house both to the pension interests and to the Occupational Pensions 625 Board and in the process, I hope, contribute to a solution of this problem.

The London Evening Standard recently headed an article on this subject Can I take it with me when I go? The answer seems to be "Yes, you can, but nothing like all of it."

§ The Financial Secretary to the Treasury (Mr. Robert Sheldon)

The hon. Member for Brentwood and Ongar (Mr. McCrindle) has waited a very long time for this debate, and his assiduous attendance has been noted by me amongst others.

The hon. Member is very concerned about the position of pensions in our society and, quite rightly, has devoted a fair amount of his energies to this important sphere of activity. He is concerned with the transferability of pension schemes which he concludes is becoming more and more important as pension schemes generally become more and more important. They are becoming more important because of the greater sums of money now being committed by the firms concerned and because of the individual's view of the role of pensions in our modern society. The enormous growth of pensions funds is an illustration of the role pensions play in the total remuneration of the individuals concerned.

The hon. Gentleman instanced two people with comparable careers, one who changes jobs several times and the other who stays in the same employment. He was right to point out the differences in the treatment accorded to each in the circumstances which he postulated. On the hon. Gentleman's figures, the man who remained in the same employment would receive £23,466. The second one would get much less because his pension would be insufficiently dynamised.

In this context, let us look at two kinds of employer. A man who leaves the service of employer A may be given a deferred pension, commencing at normal retirement date and calculated by reference to his 20 years' service and his remuneration at the date of leaving: or a transfer value payment from the scheme of employer A to that of employer B. 626 The value of that payment will almost always be equal to that of the deferred pension. The payment will be used to purchase a pension from employer B's scheme, which might be greater or less than the deferred pension would have been depending on the set-up of that scheme. As the deferred pension is calculated by reference to earnings in mid-career, it will probably appear inadequate compared with the end-of-career earnings, particularly if it has been seriously eroded by inflation in the meanwhile. That is one of the major problems.

How can the Revenue rules assist? Most of the hon. Gentleman's points were directed to the Occupational Pensions Board and therefore to my right hon. Friend the Secretary of State for Social Services. I should like to comment briefly on the matter, even though I am not directly concerned with those areas.

I am concerned with the Revenue rules. Firstly, under the heading of dynamism, these permit that, if a deferred pension is taken, the first employer may dynamism its amount either by reference to the increase in the cost of living during the period of deferment or at a fixed rate of increase up to 3 per cent. compound per annum. By this means, the purchasing power of the deferred pension can be completely or partly protected.

Secondly, there is the augmentation aspect which can be done by the second or subsequent employers. This is where employer B is able to augment the pension provided under his scheme. Under the Finance Acts, an occupational pension scheme is capable of approval if, amongst other things, it provides benefits in the form of pension not exceeding one-sixtieth of final remuneration for each year of service to normal retirement date.

The Inland Revenue has discretion to allow some relaxation here, and it exercises that discretion generously. Perhaps I should go into some detail, because it might be useful to know the area of discretion. The Inland Revenue will, for example, allow a pension exceeding one-sixtieth of final remuneration if the employee has more than five years' service with his final employer up to normal retirement date. It applies a scale which allows the maximum permissible benefit 627 of forty-sixtieths—two-thirds—of final remuneration for 10 or more years' service. The pension will be restricted by the annuity value of any lump sum benefit by a deferred pension from previous employment or the benefit provided by transfer value. The total value of these benefits must not exceed two-thirds, but it will not be reduced below one-sixtieth of final remuneration for each year of service with the employer.

The augmentation of benefits—the increase given by the second or subsequent employers—may be given in this way through the scheme whether employer A dynamised them or not. If employer A dynamised them, that would produce a result that the hon. Gentleman would be happy to see. Even if he did not, it would be open to employer B so to augment them. If the employee finds that his deferred pension, plus the benefit normally allowable in respect of his new employment, is less than the benefit he expected in monetary terms for service with his first employer to normal retirement age, and such expectation can be satisfactorily established, the Revenue will normally permit the new employer to provide further benefits to bring the aggregate in terms of purchasing power up to the former expected level, subject always to the overriding two-thirds limit.

If full advantage is taken of the Revenue's practice of relaxations, an employee retiring on his normal retirement date who has had 10 or more years' service with his final employer can be given a full pension—including the annuity value of any lump sum benefit—of two-thirds of his final remuneration. He can be given the maximum lump sum after 20 years' service. Obviously, that requires a willingness on the part of the employer to provide up to the full allowable amount.

The Inland Revenue rules permit but do not compel. The employer is under no moral or other obligation to dynamise that benefit. In these respects, the Inland Revenue rules are right. If we are to bring in any element of compulsion, which the hon. Gentleman seemed to be seeking, it would need to be done by other methods. The hon. Gentleman discussed 628 those other aspects. Perhaps I might deal with some of those aspects briefly. Although it is not the area of my responsibility, I think it is right to mention it.

The inadequacy outlined by the hon. Gentleman stems from two main causes —a low accrual rate of pensions in some schemes and a lack of dynamism for some deferred pensions whose purchasing power has been eroded by inflation.

The hon. Gentleman pointed out one of the ways in which this could be done and suggested this should be examined by the Occupational Pensions Board. He suggested that there should be some form of clearing house for those who move from one job to another. Indeed, he took it that in a static situation where two firms were not expanding or contracting their labour forces, the movements of individuals from one such firm to another would bring about a certain neutrality. What one would gain, the other would lose in individual instances, but over the area as a whole gains would balance losses.

The hon. Gentleman looked for some kind of clearing house which could be devised for the benefit of the individuals concerned with no great disadvantage to the firms in general. Of course, he will be aware that one obvious problem arises when firms expand their labour forces. At the pace of industrial change which we expect to see and would welcome, a number of growing firms could be adversely disadvantaged. I think that the hon. Gentleman understands the problem. He does not seek a simple solution. In fact, he said that there was no simple solution, but he felt that the whole matter should be looked at because it is of great importance. Therefore, he asked that these matters be put to the Occupational Pensions Board. I am sure that the board will note the clear way in which the hon. Gentleman put his arguments.

My right hon. Friend the Secretary of State for Social Services has asked the Occupational Pensions Board to examine the whole problem and report back to him. Clearly, this will take some time. The hon. Gentleman, with his understanding of the complexity of these matters, would not expect it to be completed quickly. It is likely to be two or three 629 years before the board can complete it. The Inland Revenue will naturally wish to study the board's conclusions carefully.

The hon. Gentleman has drawn attention to an area of activity that will increase in importance with time. He has put his argument in a very restrained 630 way, and it needs to be looked at carefully. I am sure that it will receive the consideration due to it.