HC Deb 26 June 1980 vol 987 cc906-17

Lords amendment: No. 70, in page 45, leave out lines 34 to 44 and insert— (2) If the actuary to the basic scheme certifies that the assets of that scheme exceed its liabilities, then, in relation to the supplementation scheme, any obligation arising after the date of the actuary's certificate to pay or secure the payment of any increases of pensions payable under the basic scheme or, if less, the relevant proportion of any such increases shall not be regarded as a relevant pension obligation for the purposes of any determination under section 47(1).

Read a Second time.

Mr. Deputy Speaker

Does the right hon. Member for Barrow-in-Furness (Mr. Booth) wish to move his amendment?

Mr. Booth

Yes, Mr. Deputy Speaker.

Amendment proposed to the Lords amendment, after 'liabilities', insert 'such certification being given before the date of the Minister's determination under section 46(1)(b)'.—[Mr. Booth.]

Question, That the amendment to the Lords amendment be made, put and negatived.

Lords amendment agreed to.

Lords amendments Nos. 71 to 73 agreed to. [Some with Special Entry.]

Lords amendment: No. 75, in page 46, line 3, leave out "the basic" and insert "that".

Mr. Kenneth Clarke

I beg to move, That this House doth agree with the Lords in the said amendment.

Mr. Deputy Speaker

With this we may take Lords amendment No. 76 and the amendment to Lords amendment No. 76.

Mr. Clarke

The best way to open a debate—I shall reserve other matters for my reply, if one is called for—is to explain how we envisage the clause being administered. It is an extremely complicated clause. It is the so-called surpluses clause, dealing with the position where a basic scheme keeps producing surpluses, whereas the supplementation scheme keeps making inflation-proofed payments to members of the basic scheme.

The Opposition amendment is con-concerned with the problem of what will happen if the arrangements provided for by these amendments, whereby the Government claw back a certain proportion of basic scheme surpluses, result in a situation in which, because the actuarial assumptions are wrong and, in practice, things happen in a different way, a basic scheme that has been in surplus, and has therefore been reimbursing the taxpayer and making some modest improvements in his pension entitlements, suddenly goes into deficit, with the apparent result that the basic scheme entitlements are threatened. The fears on that score are much exaggerated, but I entirely appreciate that they are felt deeply by many people concerned with the interests of the railwaymen and the employees of the National Freight Corporation, who are merged with the scheme.

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Let me deal with the first point, concerning the distribution of surpluses. It will be for the actuary of the basic schemes to advise on how much surplus it is safe to distribute. If he thinks that a contingency reserve should be held back he can use a basis of valuation on which only the amount that it is safe to distribute appears below the line as a surplus.

We shall not be seeking to impose any particular basis of valuation. All that we are seeking is a reduction in the taxpayers' payments to the supplementation scheme equal in value to a certain percentage of the surplus available for distribution.

Secondly—and this is important—we are not proposing that the offset should be immediate. A surplus will not be used up at once. It is to deal with this point that we have had to extend the clause so extensively. The clause envisages that when a surplus emerges the actuaries should consider all future schemes of supplementation and decide what proportion of all future supplementation can be met from the surplus. In effect, the proportion of the surplus that is earmarked for supplemen tation will be gradually and evenly distributed over the whole term of liabilities of the basic scheme. A small proportion of the surplus will be used to offset part of the first future schemes supplementation, a further small proportion will be used to offset part of the next scheme of supplementation and so on year by year. The surplus will not immediately be swallowed up in one bite.

Thirdly, the clause does not require the trustees of the basic scheme to change the rules of the scheme so as to provide for increases to be paid. The Lords amendments to clause 50 give them the power to do so if they do not already have it, but they are not compelled to pay the increase. In practice, they may wish to pay increases on an annual basis. The clause operates on the Minister's payments to the supplementation scheme.

The right hon. Member for Barrow-in-Furness (Mr. Booth) has, during debates throughout the passage of the Bill, argued a point that was again pressed very strongly in another place. That is the point on which I have just touched, which is that there could be circumstances in which a basic scheme ran into deficit with the operation of the clause. I hope that the House will welcome some considered words on that possibility, which has caused so much trouble, even at this late stage of the passage of the Bill.

We consider, for two basic reasons, that this is most unlikely to happen. First, the actuary will have to hold back a contingency reserve when he gives a certificate. Obviously, the purpose of such a reserve is to provide protection against experience being worse than the assumption. Secondly, if the actuary made a mistake, with the measure of self-correction under the clause the main risk would be that the assumptions about inflation might be wrong. The liabilities of the basic schemes are largely fixed in money terms. If inflation were worse than the actuary assumed, the basic scheme's scheme of supplementation would certainly rise in money terms, but so would the money value of the surplus on the basic scheme, because inflation would increase the money return on the scheme's investments.

Equally, if inflation fell the surplus might fall in money terms, but so would the money costs of supplementation. Even so, I am not prepared, certainly at this stage of the Bill, to argue that such a deficit would never arise, although, as I have explained, I think that it is very unlikely.

The right hon. Gentleman has tabled amendments to try to deal with the eventuality, because he is not satisfied that it will not arise. There will be drafting difficulties with his amendment. It is always difficult to legislate precisely for something that is difficult to foresee. I have tried to find a form of words that will meet the right hon. Gentleman's fears.

I realise that if I argue that this is a most unlikely eventuality I am not on strong ground in saying that we need not bother to provide against it, because it will not cost much to do so. However, one enters a minefield if one tries to provide against any eventuality in precise terms. I can suggest another approach. I have to begin by qualifying what I have to say. As his amendment shows, the right hon. Member accepts that there are circumstances in which a deficit would arise which would not merit relief. I am talking only about a deficit that satisfied two conditions, which would have to apply before there was an obligation on the Government to do something about it.

The first condition is that the deficit should have arisen because of the previous operation of the surpluses clause. The second is that it should be attributable to an incorrect estimate of the proportion of supplementation that the basic scheme could bear, and that the error should be an error due to factors outside the control of the scheme.

If the deficit arose for another reason, for instance, because over-generous improvements in the basic benefits had been granted by a reckless or imprudent decision, it would be accepted that that did not apply, because it would not be an obligation for the Government. But in the case of a deficit that met the two conditions that I described, and where a deficit had occurred for reasons beyond anyone's control, because the actuarial assumptions had been wrong and the Government had benefited from clawback as a result of those wrong assumptions, I assure the right hon. Gentleman that the Bill would not prevent the supplementation scheme from resuming the payment of supplementation in full, or to whatever extent was necessary to put matters right.

The Bill would simply prevent the increase from being a relevant pension obligation and subject to mandatory reimbursement. However, in the circumstances that I have outlined—the faultless deficit—it would be reasonable to look for additional assistance from the Minister for the supplementation scheme. It is likely that the Government would be prepared to look favourably on such a request.

Mr. Booth

Obviously, the Parliamentary Secretary has given an important assurance to the House. Does he accept that if the trustees of the fund were to use that 20 per cent. of the surplus which could not affect the proportion to deal with improvements it would not be held against them in determining whether there was a liability arising from the obligation to meet their increases in payment towards supplementation because of the determination of that relevant proportion that subsequently proved to be incapable of being met by the basic fund scheme?

Mr. Clarke

The best answer to that is "Yes." However, that is outside what I said about imprudent distribution give the right hon. Gentleman the assurance that he seeks. On that basis, I shall deal briefly with the technicalities of the amendments, which are a recasting of the way in which the obligation on the Government is calculated when such circumstances arise. There is even a mathematical formula—fortunately of an elementary sort—that intrudes into one of the Lords amendments. It achieves the purpose of ensuring that the clawback to the Government is the correct amount—80 per cent. in the Bill as returned from another place.

If any hon. Member wishes to press me on that mathematical formula I can explain it by giving examples, but I assure the House that it works. I have seen the examples, but, without some magic of mathematics which is beyond me without a close study of my brief, I cannot enlighten the House further.

Mr. Booth

As a trained engineer, I cannot resist the reference to the mathematical formula. I have no objection to the Government legislating by way of mathematical formulae instead of the use of beautiful English prose, but I hope that if they do so they will include the appropriate mathematical qualifications. If they are using a formula A+B-1/A to describe what can only operate within the limits of positive values, they should make it subject to that qualification. It would be nonsense if it were used out of that range.

I turn to the issue on which the Parliamentary Secretary has made an important statement to the House and on which he has given what will be regarded by those who are concerned about clawback as a valuable assurance. It is one which, short of dealing with the matter in legislation, could hardly be improved upon. Therefore, I hope that I shall not be thought to be carping if I suggest that we should consider, albeit briefly, the case for stating the assurance in terms of our legislation. After all, we are legislators; that is one of the purposes for which we are elected to this House.

The purpose of our amendment to Lords amendment No. 76 is to attempt to legislate the assurance, difficult though that is. In other words, the purpose is to provide for the Government to repay sums of money which have previously been clawed back if a pension fund which was thought to be in surplus runs into a deficit at a later date.

I shall not enter into the argument whether this is likely or unlikely to occur. It is a matter which has been argued between us across these Benches for some time. We are clearly on record as saying that we believe that there is a considerable possibility that the actuarial estimates may be wrong in one way or the other.

I have considerable sympathy with the Parliamentary Secretary when he says that it is difficult to draft an amendment or to draft legislation to give effect to that assurance. I press upon him only that it is exceedingly difficult to draft it bearing in mind that the Lords have altered beyond recognition the clause as it left this House and that we have had relatively little time to consider it, the Lords having finally decided the matter last Thursday and there having been a batch of about 130 amendments on Monday.

There has been very little time in which to attempt this drafting exercise. Nevertheless, we have attempted it. I do not claim that we have produced an elegant piece of prose. I claim that it is a serious and sincere attempt to put into words—we did not try an algebraic way of doing it—a legislative assurance that if the funds ran into debt by reason of the Government reducing their supplementation payments because of the way in which the relevant proportion was calculated, there would be a legal requirement to repay a just proportion. That is what we are arguing for in the amendment.

One has only to cite a fairly simple example to show the importance of this matter. Where there was a surplus in the basic fund and 80 per cent. of that surplus was estimated by the actuary to be capable of financing 40 per cent. of the supplementation, 40 per cent. would be the relevant proportion. Suppose that the actuary's assumption about inflation turned out to be too low, or that the assumption about the interest which he was to get on the fund's investments turned out to be too high. A more likely possibility, as I see things at the moment, would be that inflation rose faster than interest rates.

The other important factor with these relatively small funds arises where the death rate of pensioners turns out to be higher than expected. In such circumstances, it is quite likely that the fund could run into deficit and be unable to meet the relevant proportion laid upon it by the requirements of the Bill. The Government have not denied that it is a possibility, although perhaps an unlikely one. Previously when we have argued the matter they have said that if they wrote into legislation an absolute assurance that if the fund went into deficit they would alter the proportion, it would be open to the trustees to increase benefits or to reduce contributions in such a way as absolutely to ensure that the fund was run into deficit, and the relevant proportion would then be adjusted appropriately. That is a slight on those who run the funds.

Putting that aside, we have tried, as has the Parliamentary Secretary in giving us an assurance, to guarantee that that will not happen. I think that the amendment meets that point by making it clear that the liabilities of the fund arise only if the rules on payments remain unchanged and the scheme is run properly on the lines envisaged when the relevant proportion was first determined.

11.15 pm

The only improvements which could be paid would be from the 20 per cent. of the surplus which does not contribute any money towards the relevant proportion. In so far as those improvements improve the basic scheme, they would in some ways reduce the amount of supplementation required.

The basic schemes to which these supplementation schemes apply bear the names of railway companies long forgotten by the average member of the public. They are probably remembered by the cognosenti and literati of railway history, I suppose. The names certainly do not appear on current railway timetables. One can find them in only three places: railway history books, pension documents and schedule 8 to the Bill. On page 72 we see names such as the Lancashire and Yorkshire Railway Pension Fund Society, the London, Brighton and South Coast Railway Pension Fund, North British Railway Insurance Society, the South Eastern and Chatham Section of the Southern Railway Enginemen and Motormen's Pension Fund Society and the Thomas Bantock & Co. Superannuation Fund.

The decision that we make now cannot affect the past when these funds were formed, but it will affect the future, just as the Parliamentary Secretary's assurance will affect the future. In providing for that future, we would be failing in our duty if we reneged upon what are properly called historic pension rights.

Question put and agreed to. [Special Entry.]

Lords amendment: No. 74, in page 46, line 4, leave out "85" and insert "80".

Mr. Kenneth Clarke

I beg to move, That this House doth agree with the Lords in the said amendment.

Mr. Booth

I beg to move, as an amendment to the Lords amendment, to leave out '80' and insert '75'.

The effect of the amendment would be to reduce the amount of any surplus clawed back from the Government in respect of the older pension funds from 80 per cent. to 75 per cent. The purpose of the clawback is to help to pay for cost of living increases.

The past practice has been to claw back only about 60 per cent. Here I agree with the Parliamentary Secretary again. I am agreeing with him rather a lot tonight. Even without this legislation, the situation would not go on in which vast surpluses in the few basic funds which could accumulate such surpluses did not contribute towards supplementation. But the figure chosen by the Government is too high for the purposes for which those funds have had to provide.

I remind the Parliamentary Secretary that some of these pension funds provide very low pensions—some would say miserably low pensions—compared with those provided by a number of other industries. In some cases the pension funds exist for the sole purpose of paying pensions to the widows and orphans of railwaymen. The fact that some older widows are reliant on the funds is a reminder of the dangers that attached to railway work when their husbands were involved in the running and managing of our railways.

I rely more on the views of the managers of the funds than on my own opinion, and they have complained bitterly that if the Government go ahead on the basis of an 80 per cent. clawback there will no longer be scope to increase pensions out of future surpluses that would have existed but for the Bill. They can see no compensating advantages for their pensioners under any other provisions of the Bill.

With whatever persuasive power I may have left at the eleventh hour and fiftyfith minute of our discussion of the Bill. I urge the Minister to reconsider his proposal. It would be better to revert to 60 per cent., but it would be unrealistic to urge that on the Minister. Obviously, we should not agree on that. We want to be realistic and we must reach a compromise. At least, let us agree that we must meet, to a degree, the proper claims of those who have been at the sharp end of running the funds and have had to answer directly to the beneficiaries.

The Government have made clear that they will not abandon what we regard as a high percentage, but, while not conceding our principle and not expecting the Government to abandon their principle, I believe that if the Government accepted our amendment they would make a practical contribution to easing the difficulties in the running of pension funds. Those who run the funds make a useful contribution to dealing with a complex and continuing problem of providing for beneficiaries of funds created long ago in anticipation of a problem that exists now and is serious.

Mr. Kenneth Clarke

I confirm that the Government have had in mind the position of the beneficiaries of some of the old pension funds in all our provisions. The railways that set up the funds are historic—many of them pre-1923 regrouping railway companies—and it is amazing that the obligations exist to railwaymen, their widows and dependants. In these inflationary times, their pension entitlements are important to them.

We have debated the Government's clawback throughout the Bill. We are all agreed that the Government—that means the taxpayers—are entitled to have some clawback, for the reasons that I was labouring a little while ago. Inflation creates the obligation but it also creates earnings for the basic scheme, and that should go, in some part, to compensating the taxpayer for the inflation proofing.

We have been searching for the right figure and, to an extent, our proposal is an arbitrary choice. I shall not rehearse the arguments, but I do not accept that 60 per cent. is the usual practice. It varies widely. The difficulty is that there is such a wide variation between pension schemes. In some cases, all the pensions are in payment and it is good fortune that inflation proofing has been provided. Such schemes are in a different situation from those in which a substantial part of the membership are serving railwaymen, contributing to a scheme that is supposed to be inflation-proofed. It is somewhat hard in that case if the taxpayer takes back most of the surplus on the investments that the serving railwaymen is funding and leaves only a small proportion to inflation-proof the pension.

We have been searching for the right figure. The Government began with a figure of 85 per cent. The figure of 80 per cent. has been inserted after the Lords amendment was moved as an Opposition amendment and was accepted by the Government in another place. That is Lords amendment No. 74 which we are now considering.

The Opposition have canvassed various figures. There was an Opposition amendment in this House to reduce the figure to 70 per cent. which was rejected on a Division on 25 March. We are left with 80 per cent. and 70 per cent. The right hon. Member for Barrow-in-Furness (Mr. Booth) drives a hard bargain but urges compromise in an eloquent fashion. His amendment is, in effect, an offer of settlement at a figure of 75 per cent. As it is an arbitrary figure and as we have moved slowly towards it, I am disposed to accept it. I invite the House to accept the Opposition amendment to Lords amendment No. 74.

Mr. Frank Dobson (Holborn and St. Pancras, South)

It would be churlish to criticise the Parliamentary Secretary, but I am a churl. Perhaps one of the reasons why I am a churl about old railway pensions is that my paternal grandfather was killed in a railway accident before the First World War and the circumstances then were such that my grandmother got nothing from the railway company following the accident. I do not have any interest to declare in this because my family was not a beneficiary.

Both of the undertakings which the Minister has given tonight about other aspects of these pensions and this agreement to accept the reduced figure put forward by my right hon. Friend the Member for Barrow-in-Furness (Mr. Booth) are welcome. It is a pity they were not conceded or made clear earlier. My right hon. and hon. Friends and the Minister and his hon. Friends would have saved a great deal of time if that had been the case. One might say that there is almost a justification for the House of Lords as a result of this—and that is the first time I have ever thought of a justification for that place.

Perhaps if we could send the Bill back to the Lords with this amendment and have the Lords send it back to us in about six months' time we would have reduced the clawback to nothing. That would be the one justification for the House of Lords. However, I do not think that, even then, we should preserve that archaic heap at the other end of this building—just for the sake of a minor reduction in the clawback.

I welcome the Minister's concession on this issue. I wish that it had been made earlier in our proceedings.

Amendment to the Lords amendment agreed to.

Lords amendment No. 74, as amended, agreed to. [Special Entry.]

Lords amendment No. 76 agreed to. [Special Entry.]

Lords amendment: No. 77, in page 46, leave out lines 16 to 21 and insert— (5) References in this section to the assets and liabilities of the basic scheme are references to the assets and liabilities of that scheme so far as it relates to the payment of pensions increases of which are or are likely to become payable under the supplementation scheme.

Mr. Kenneth Clarke

I beg to move, That this House doth agree with the Lords in the said amendment.

This amendment, made in another place, discharges an undertaking that I gave in this House to my hon. Friend the Member for Brentwood and Ongar (Mr. McCrindle), who raised a particularly difficult point about the British Transport police force superannuation fund. When I replied to him then I said that there were so many different pension funds, all of which have the most extraordinary rules, that it was almost impossible for those who drafted the Bill to cover every eventuality. This fund pays increases of pension to some of its pensioners but not to others. The others receive their pension increases from the supplementation scheme.

11.30 pm

As I promised, the amendment provides that the clause will apply only to so much of any surplus in such a scheme as is attributable to those of the members and pensioners who stand to receive their increases from the supplementation scheme.

I am grateful to my hon. Friend the Member for Brentwood and Ongar (Mr. McCrindle), as he has pointed out a discrepancy in the Bill that might have caused minor hardship to the fund.

Question put and agreed to.

Lords amendment No. 78 agreed to. [Special Entry.]

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