§ Sir Brandon Rhys Williams (Kensington)Before the House adjourns I should like to raise a subject that has been of particular interest to me since I was first elected to the House. I should also like to rebate a short, personal anecdote to introduce the subject.
I was elected to the House in 1968. When I was contemplating the contents of my maiden speech, I had the extraordinarily good fortune to win the first place in the ballot for private Members' motions. I chose the subject of the transferability of pension rights. Before I entered the House I had given that subject some study and it was a topical matter as long ago as 1968. After that we had a series of Government Bills on pension rights and I had the good fortune to serve in Committee on two of them. I also had the good furtune to enjoy the collaboration of an hon. Member who had won a place in the ballot for private Members' Bills in 1969. I refer to Miss Quennell, whom many hon. Members will still remember with respect and affection. She worked, together with me, on the introduction of a Bill to provide a solution to the problem of the protection of pension rights on changing employment. I subsequently also introduced a Bill of my own and from time to time in subsequent years I have sought to draw the attention of the House to the problems of early leavers in occupational pension schemes and to put forward worthwhile solutions.
In all those years I do not know whether we have made much progress on protecting the pension rights of early leavers, but I am sure that the subject is even more topical now than it was when I and other hon. Members first sought to raise it in 1968. It so happened that I entered my name, as I normally do, in he ballot for private Members' motions earlier this year, and once again I had the amazing good fortune to win first place for the debate on 14 February. I thought that nothing would be better or more fitting than to raise the same subject again, and I should like to read to the House the motion that I tabled for 14 February. Unfortunately, the debate on it did not take place, because a debate under Standing Order No. 9 took precedence over it on the day.
By courtesy of Mr. Speaker, however, I have been allowed to raise the subject today and it might be helpful to read out my motion, as it covers the subject that I want to raise with the Minister. It stated:
To call attention to protection of pension rights and other entitlements on termination of employment; and to move, That this House recognises that the Social Security Pensions Act 1975 holds out the expectation of benefits in retirement for which the working population in the future may be reluctant to pay either through taxation or through higher national insurance contributions; stresses therefore the importance of provision for retirement through personal and occupational pension schemes; deplores the fact that those who leave pensionable employment before retirement age frequently incur a loss of their pension expectations; notes that few schemes are able to maintain the real value of pensions in payment against changes in their purchasing power; urges employers and pension scheme administrators to give fuller protection to the entitlements of their beneficiaries; and recognises that legislation may be required to ensure that a minimum standard of provision is fully funded in every case.Before dealing with specific recommendations I should like to comment on the general outlook for provision for that element of the population that has retired from active work. Many disturbing factors are already plainly discernible and they will be very troublesome both to the 1025 House and to the nation in the next 10 to 30 years. When making plans about pension rights, it should be borne in mind that a pension contract is of extremely long duration and is probably the longest contract that anyone enters into in the course of a lifetime. It is common for people to join occupational pension schemes in their early 20s. Many people are members of their schemes for 40 years before they even start to draw benefits from it. They may then have many years ahead of them. The total time span is likely, on average, to be at least 60 years. Perhaps that is an exaggeration, but it gives some idea of the span of time involved.In looking 60 years into the future of the British economy and the demands that will be made on it, we must take account of certain factors. Indeed, I hope that the Department is taking serious account of them even now. Each of the subjects that I have in mind to mention could be debated at length, but I shall hurry through them, partly because I know that my hon. Friend the Minister is well aware of them and scarcely needs to be reminded of them. However, we must bear in mind the lower fertility rate of the population and the lower mortality rate. Both of those trends are likely to exaggerate the difficulties of making adequate pension provision, with a shrinking work force and an increasing number of people making claims upon it. We must also consider the rather slowly increasing productivity of the British economy and the still rising expectations for living standards in retirement. In considering the British economy and its role in the world economy, we must recognise the increasingly fierce competition, particularly from the economies of the Pacific. They are now drawing ahead of us so quickly that if we do not take urgent steps to overtake them it will become impossible to do so and Europe will become a world "Distressed Area".
There is a trend, which probably cannot be stopped, towards earlier retirement. It is partly due to the change in employment patterns and to the accelerated rate of change in the skills that are required at work. People's skills become obsolete at a much earlier point in their working lives. There is also a problem because of the longer periods of induction for work. As work becomes more complex, longer training is required. Those being trained have to be borne by the rest of society and are not adding mean-time to the total amount of wealth.
It should be recognised also that we are still dependent upon the tremendous capital investment of Victorian and early 20th century times. Much of that capital stock is now obsolescent and urgently needs to be replaced. However, in putting our productive effort into replacing water services, roads and so on, we are not adding to the immediately available stock of goods for sale. That represents a further strain on the economy, which it will have to bear. In recent years we have developed a strong propensity to consume and have lost our impulse as a nation towards thrift. There are many reasons for that, and it is quite understandable, particularly as inflation creates an unpredictable climate in which to save.
But even those savings that we have been making seem to have been excessively devoted to the purchase of existing assets or assets that do not create wealth direct, particularly housing. Other investments that pension funds have been making in recent years, such as in works of art, do not seem to me to be proper for pension funds to invest 1026 in. However, shrewd people have thought it wise on behalf of their beneficiaries to make such investments, and that is a sign that there is something badly wrong with the way in which we use the nation's savings and the opportunities offered by the capital market.
It would be highly desirable if we also took a long look at the promises being made between the generations. We have a Government pension scheme that holds out rosy hopes to people now at work for the level of income that they can enjoy in retirement. However, I am not certain whether our children will say, when we start to make claims on them in our retirement; "Did you do for your parents what you are asking us to do for you? If you are making claims on us because of an Act passed in the 1970s or the 1980s, that does not establish a moral claim." We may find that our children are reluctant to pay the price of the pension provisions that we have installed for our own benefit and which we are still counting upon, perhaps unwisely.
There are already signs of restiveness in the working population about the burden of providing for those in retirement. In particular, there has been a strong campaign, mounted from the Government Benches as much as from elsewhere, against the indexation of public service pensions. I have never joined that campaign, except to cast some doubt on the commitment to the retail prices index as the particular index that we should use to uprate these pensions.
On the other hand, there has been, and there is now, a strong outcry against any hint of a cut in real retirement benefits, at any rate against a cut in the flat rate of retirement benefits. At the same time, occupational pensions payable after award in the private sector have in recent years almost always been uprated at less than the rate of inflation. This seems to be a circumstance that people are prepared to accept without too much controversy. It is rather surprising that beneficiaries of private occupational pension schemes do not raise more hubbub, and compare their lot with that of people in the public sector.
lately there has been some suggestion that employers could and should give full indexation after award. I am not an expert, but I understand that in Germany and the Netherlands there has been a much greater tendency for occupational pension schemes to accept that it is incumbent upon them to uprate pensions after award in accordance with the change in the value of money. For the future this should indeed be a possibility in Britain, too, because of the much lower rate of inflation, thanks to the efforts of my right hon. Friends, and because the Government are now offering indexed stocks which are freely available to pension fund managers. Whether employers can now gove full protection to the pensions that they are paying to people after retirement must depend on the profitability of the individual business and the performance of the paper currency over time.
As indexed Government stock is now freely available, new circumstances have arisen in the long-term planning of pensions. I welcome the Government's innovation in this, though I personally should like to see the measure of indexation related to gross national product rather than to the retail prices index. That, however, is a different point. Whichever index is used, the rate of interest to the pension fund investor is only about half the current rate of depreciation of the currency in terms of the rise in retail prices. The Government have to pay about 10 per cent. To 1027 raise long-term stocks in the normal gilt market, but they pay only about 2.5 per cent. interest on indexed stocks, at a time when the permanent rate of depreciation of the paper currency in terms of retail prices is proceeding at about 5 per cent. Thus there are many puzzles in estimating the real long-term returns available on the amounts that pension fund managers have to dispose of year by year for investment to protect their beneficiaries.
One has also to look at the level of retirement living standards that people are entitled to expect. Hitherto, occupational pension schemes have not normally attained the rate of two-thirds retirement income which is implicit in what is now coming to be regarded, not just as the best, but as the standard occupational pension scheme. It will be obvious to everyone that I am much indebted to Mr. Stewart Lyon—and have been for many years—for his wise advice on pension provision. He has estimated that in 40 years' time, pensioners' net income could be approaching 25 per cent. of total consumer expenditure. That is nearly twice its present level. I do not believe that the Government or the private capital market have even begun to prepare themselves for the increase in demand that is implicit in those figures.
The conclusion that we must come to is that we must learn to save a far higher proportion of our national income than we are now doing. We must deploy our savings so as to achieve much higher productivity. This is not just a matter for the tax collector. I do not see thrift being organised through higher taxation and the use of more funds for investment by Government agencies. Every citizen must want to save and have every encouragement to do so on a scale far greater than now; and should be given the facilities and the incentive to examine the way in which his savings are being used, so as to ensure that investment skills are of the highest order. The nation's savings must be invested to the best possible effect.
There are two things, which I shall mention in parenthesis, that are necessary if our investments are to be more profitable in real terms. We have to get back to a longer time-span in investment discretion. Nowadays, merchant banks and people advising businesses on investment projects tend to think in terms of a time-span so short that it is barely possible for anything but the most sparkling and fruitful investment to be profitable within the time allowed by the capital market. I am thinking of three-year, five-year and seven-year returns. People cannot look further forward into the future than that and therefore investment of the kind that is likely to be the most profitable of all—the investment that bears fruit over 20,30 or 50 years, in major projects such as the Suez canal in the last century and the Severn barrage in this — is not within the capacity of the private capital market even to contemplate. We must also make the most of the Common Market, working for stabilisation of exchange rates and the creation of a united European market for capital. Without those essential pre-conditions we are failing to create the context within which investment fund managers can succeed in making the necessary provision for their beneficiaries.
To return to the future of occupational pension schemes in particular, I would venture to remind the House of the provisions that Miss Quennell and I worked out in 1968 and 1969 and incorporated into our Bill. Those provisions have stood the test of time—which goes to show what excellent advice we had at that time—and I believe our recommendations for the most part would still be a good 1028 idea if the Government were now to implement them. We said then that the trustees must provide copies of the rules of the scheme to all the members; that all approved schemes must be brought under the supervision of the Registrar of Friendly Societies; that annual returns should be published in a specified form; and that the value and the nature of the assets and commitments to the scheme — and therefore the level of funding — should be disclosed. We also provided that all employees should be notified of the level of funding of the scheme at each annual valuation.
The average beneficiary of a private occupational pension scheme, particularly of a final salary scheme, assumes that money is in the hands of the trustees to meet the commitments of the scheme, but that is often not the case. Many schemes are only partially funded, and that is not necessarily bad financial management. A prudent actuary may advise an employer to take a long time to bring his fund up to the full matching requirements of the claims that will ultimately be made by the beneficiaries.
When considering the rights of the early leaver, the level of funding of a scheme is important. That is why the Bill specified that the members who hope to become beneficiaries of a scheme must be notified annually of the level of funding of the scheme.
The Bill provided that self-investment should be limited to one per cent. of the value of the fund; that the auditors of the scheme should not be the auditors of the sponsoring employer, that there should be triennial actuarial assessments and that the rules of the scheme should state what post-retirement increases, if any, would be given. That would be a difficult requirement for many employers to comply with nowadays, but I should like that suggestion to be considered further.
The Bill proposed that trustees must observe explicit rules of management, that in schemes with fewer than 50 members the employees should be entitled to elect one trustee and that in larger schemes they should be entitled to elect two trustees. We said that the procedure for tackling the valuation of a beneficiary's entitlement should be laid down and that there should be provision for arbitration in the event of dispute.
The valuation of the entitlement of an early leaver is such a knotty problem that we need to lay down rules to clarify the position.
The Bill provided that transfer payments must take account of the funding level, so as not to weaken the assets retained for other beneficiaries. In recent circumstances, when industries have been undergoing rapid change, there have been all too many instances of firms having to shed many jobs, perhaps through the closure of one of two factories, which could dramatically reduce the size of the work force and, hence, the number of members of a pension scheme in a short time.
If it were obligatory on a firm to pay the early leavers the whole of their pension entitlement, the fund could be bereft of money and those who remained with the firm could find that the pension fund was bankrupt. That would obviously not be fair.
The Bill provided that the level of funding should be calculated on a stated basis and that the benefits for the early leaver should be calculated on his estimated trajectory to retirement, multiplied by the level of funding. Let me explain what we meant by that. In a final salary scheme, some people, probably the junior and less well remunerated staff, may retire at a similar level of earnings 1029 as that at which they began work—apart from changes in the value of money. But the high fliers in a business are likely to retire at an income that is much higher than that at which they started work. The final salary scheme gives a tremendous inducement to senior managers, who may have much to offer a business, to stay with the firm until the end of their careers. Their pension will rapidly rise in value in their last years of service.
However, if a high flier, looking after himself and the planning of his career, decides to leave in his 40s how does one value his pension entitlement? Obviously, what the actuary has to set aside in respect of that person should be related to what he might be expected to earn if he stayed with the business until the normal age for retirement; but his earnings in mid-career are likely to be much lower, quite apart from changes in the value of money. A man in his 40s is unlikely to be earning as much as he would if he were appointed to the board or to high office in a firm in his late 50s or 60s.
Notwithstanding that fact, it is almost universal practice for occupational pension schemes in which the entitlement of a beneficiary is related to his final salary to regard the final salary as the man's earnings when his connection with a firm is severed, even if he is only in mid-career at that time. That is clearly unfair to the early leaver. On the other hand, it is almost impossible for an actuary, the most far-seeing personnel manager or the most benevolent employer to estimate what might have been the career of a man who has chosen to leave. There are serious difficulties in trying to arrive at the entitlement of an early leaver on the basis of the entitlement that he would have had if he had stayed in a final salary scheme.
The Bill that Miss Quennell and I introduced did not tackle that issue in what I now believe is emerging as the right way. However, we were beginning to move in the right direction and I would like to put some ideas to my hon. Friend the Under-Secretary of State for Health and Social Security. In some ways, the schedules were the glory of our Bill. In one of them we suggested that the accounts of the trustees should be separated under four headings — a beneficiaries' secured account, a beneficiaries' accrued rights account, a beneficiaries' unallocated account and a reserve account.
I believe that prudent investment management requires that the assets of a fund should be separated under those headings. If it became the practice to have a separate secured account in all occupational pension schemes, it would be much easier to identify the claims of each individual member. I am working towards the view that we ought to provide a statutory core in every occupational pension fund, which would be fully funded and secured, directly related to the career pattern of each beneficiary on a money-purchase basis uprated at compound interest and protected from depreciation in accordance with the index used for Government indexed stock.
Such a recommendation was not feasible until the Government started to issue indexed stock that was freely available and traded in the capital market in large volume, so that the price was predictable and pension funds would have no difficulty placing their entire reliance, if they wished, on ownership of such stocks to meet their minimum statutory commitment.
If we were to specify by legislation that employers' schemes must include an element of deferred pay, building 1030 up in secured accounts on a money-purchase basis and indentifiable for each individual, it would be possible for the individual to take that money out if he moved. Indeed, an individual could contract out from the start of his service so that he had nothing in the firm's fund and could make his own provision from the beginning of his career in an approved outside scheme, as he would if he were self-employed.
If an employee took out that money he would not damage the interests of the employer or put any strain on him; and he would not damage the interests of other members who remained in the scheme. Of course, an employee might wish to leave his core of entitlement to accumulate in the employer's hands rather than remove it and have to exercise his discretion as to what he did with the fund. In any event however, the employee should not be allowed to withdraw from the fund and spend it as he chooses, because there is a taxpayers' ownership element in occupational pension schemes. Part of the money comes from the employee's contributions and part from the sponsoring employer's contributions; but while such schemes enjoy the benefit of tax concessions which are of great value because interest can be added to the fund without incurring tax, the taxpayer also has a growing entitlement in the fund and is justified in laying down rules as to the way in which the fund is operated.
If there were a provision that every occupational pension scheme should include a statutory minimum indexed core secured for each employee, it would not prevent an employer from operating a final salary scheme which left him with discretion to add whatever amount he chose. The majority of employers—unless the statutory minimum was set so high that it was placing a serious burden on the fund—would want to offer their own inducements, just as in the past they had incentives to introduce pension schemes for job enrichment, the improvement of the standard of living of their long-serving employees or as an aspect of personnel policy, to encourage people to stay with the firm after they had acquired valuable skills.
There would be no harm in employers having discretion in the extent to which they allowed the bonus element in the pension fund to be withdrawn by the early leaver. But it should not be left entirely to the employer to decide what should be done with the balance of an employee's entitlement above the central core, because the taxpayer also has a stake in the fund and is, therefore, entitled to lay down certain rules.
An important point has been made by my right hon. and hon. Friends about legislating for the future of occupational pension schemes. We could perhaps institute a scheme starting this or next year under which future contributions to pension funds would be protected in a certain way and the rights of the early leaver would be specified for future years—in respect of contributions to be made after the passing of such a Bill. But some people are reluctant and fearful of the consequences of legislating in a way that might appear to be retrospective. Employees who will retire within the next 20 or 30 years will already have started their careers in occupational pension schemes and some provision will already have been made for them under existing Acts.
If one laid down new provisions in respect of the entitlement of beneficiaries now in mid-career, one might be placing burdens on employers which they had not provided for and which they could not meet. If an element 1031 of discretion is provided for employers in regard to the treatment of existing entitlements, one would have to say that a fund that chose to comply with the guidelines on the treatment of the early leaver would continue to enjoy the benefits of the tax concessions that are provided for such schemes. An employer who preferred to flout the guidelines and operate his scheme at his own discretion, without protecting the accrued rights of people now at work for him, would have part or all of the tax concessions enjoyed by the occupational pension fund withdrawn in respect of future years. I believe that that would be a proper sanction for the taxpayer to apply in the future. That provision would not be retrospective. It is, however, a matter upon which actuaries and occupational pension fund managers will no doubt have much to say.
I hope that this debate has been useful. Legislation will be needed in the coming Parliament. I am sure that all hon. Members would be delighted if the Minister were the man charged with the responsibility of introducing such a Bill. We look forward to what he now has to say. He may have some reservations, but I hope that I can dispel his doubts and that legislation will soon follow.
§ Mr. Harry Greenway (Ealing, North)This important subject has been drawn to my attention frequently by my constituents over the past three or four years. I congratulate my hon. Friend the Member for Kensington (Sir B. Rhys Williams) on bringing this vital matter before the House.
We all accept the principle that a pension should be related to the salary and responsibility of the working life and achievement of the individual, but that there should be a minimum below which a pension should not be allowed to fall. There are three unfairnesses between pensioners which should be drawn to the attention of the House. First, some people contribute more than others, in percentage terms, to their pension. That seems unfair. Secondly, some pensions are payable at an earlier age than others, although the contributions have been similar. Thirdly, some pensions are index linked and some are not. I do not carp at those who have enjoyed the best aspects of those three points, but I believe that it is right to draw the attention of the House to those who do not enjoy such advantages.
Another important point, which is being put to me constantly at my surgeries and in letters, relates to the taxation of pensions. Pensioners find it hard to understand why, when they have worked all their lives and paid for a pension, they should be taxed on it. That causes considerable distress. I am conscious of the enormous improvement made by the Government in reducing taxation on occupational pensions, but there is a long way to go. I invite my hon. Friend the Minister to underline the principle that, as soon as reasonably practicable, the Government will seek to end the taxation of pensions earned by individuals during their working lives.
It is important that the elderly should be active in their retirement. If society expected the retired to sit down and be inactive they would soon curl up and die, and the experience that they acquired during their working lives would be lost to society. They would cease to be the catalyst to show younger members of their families the best way to go.
An adequate pension is essential. Expenses do not change just because one is old. Rates and food costs 1032 remain the same. Pensioners have considerable concessions in relation to their basic expenses, but we must respect the pride of elderly people who try to live on their pensions and do not like what they call charity.
People who save for their old age must be rewarded, or at least they must not be penalised. That is an important principle. Contributions from people in work towards the pensions of others are not always understood or welcomed, because to a young person a pension seems remote. The principle of the pension and its importance should be explained and studied at school. Young people should be taught that the pension is a necessary part of life in a civilised society, that society should make steady provision for the future elderly during their working lives and that that should be bolstered by their children and their children's children. It is right, fair and equitable in a civilised society for the subject to be covered in schools where it can be absorbed at an early and receptive age to enable people to understand that important part of life.
I am very disturbed, as are many of my constituents, by the Labour party's proposal to use pension funds for their own purposes. The proposal is immensely disturbing. If, by a ghastly mischance, a Labour Government are elected to power to run the country, they intend to take by force and statute at least £6 billion from pension funds. They intend to take the money accrued by people throughout their working lives for their pensions and direct it to schemes which they think are deserving. That is deplorable and terrifying to people at work and to all who believe that it would be a gross intrusion by the state into the freedom of people to work and save to provide for their old age in the best way.
The country will assert on 9 June that pension funds should be in the hands of those best able to use them profitably, so that pensions provided out of them are as high as possible. If the money is taken away and used for the state's purposes as Ministers direct, it could be frittered away and wasted, as Labour Governments have already wasted so much money. That is why people are frightened.
§ The Under-Secretary of State for Health and Social Security (Mr. Tony Newton)I thank my hon. Friend the Member for Kensington (Sir B. Rhys Williams) for the trouble that he has taken on this subject. I appreciate the way in which he spoke because of the long-term interest which he has shown in the subject, as he revealed in his historical survey. It is appropriate that my hon. Friend should raise the subject on the last day of a Parliament.
I am glad that my hon. Frend the Member for Ealing, North (Mr. Greenway) joined the debate. He will understand that I am hesitant to discuss the differences between the contribution rates and retirement benefits of various schemes because that would lead me to an even broader discussion on the discrepancy in the retiring age under the national insurance pension scheme on which a Select Committee reported recently.
§ Mr. GreenwayI am glad that my hon. Friend linked those two points. It shows how important are the unfairnesses. I thought it right to draw the attention of the House to those unfairnesses in the private sector, although they exist elsewhere, and something must be done about them in due course.
§ Mr. NewtonI was not complaining about my hon. Friend mentioning the subject, but excusing myself from dealing with the topic when the Government are considering their response to a Select Committee report.
I apologise in advance to my hon. Friend the Member for Ealing, North for not dealing fully with the taxation of pensions. The Government have made substantial reductions in taxation that will affect my hon. Friend's constituents, particularly by raising the age allowance level. That will have been of considerable benefit to-many. The taxation of occupational pensions, or the treatment of them as taxable income, historically is linked with the fact that contributions are tax relievable. If the pension income were regarded as being non-taxable, the tax relievability of contributions would be put in question.
I am glad that my hon. Friend the Member for Ealing, North discussed the current plans of the Labour party for the use of pension funds. It must be stated firmly that the assets of pension funds represent the savings required to pay benefits to about 11½ million people when they retire and the benefits of their dependants when they die. The money is held in trust for them and their dependants. Only an unwise political party would seriously threaten to direct those funds for primarily political purposes. When understood, the prospect of a Government, even in the guise of a national investment bank, using private funds for schemes based upon political judgments will cause widespread public alarm. My hon. Friend's remarks this morning will make that prospect better understood. My right hon. Friend the Secretary of State was right when, in a speech to the Natonal Association of Pension Funds last weekend, he said:
Millions will say quite simply 'Hands off our pensions.'The Pensions Act 1975, under which pensions are provided, was a considerable political achievement. Under it, a partnership has been forged between the state and good occupational pension schemes. It has a bearing, directly or indirectly on the pension rights of all employed persons. About half the working population participates fully in the state scheme, but over 10 million employees are in occupational pension schemes contracted out of the state scheme. Occupational schemes had investments of £50 billion in 1979 and currently the figure is probably nearer £75 billion. About half of that amount is invested in equities and about one third is invested in fixed interest securities. We must recognise that we are dealing with a major social issue—the pension rights of millions of employees—and that pension schemes are a considerable source of institutional investment.Contracting-out arrangements have been a major success. The Government have reaffirmed their commitment to the parternship with occupational pension schemes. We have tried to ensure that that commitment is reflected in the revised contracting-out terms that have operated from April 1983, while maintaining our overall objectives of stability and fairness to everyone involved. The 1975 Act at last provided for substantial pensions related to earnings during working life. The state scheme provides a flat-rate pension for everyone who meets contribution requirements. In addition, a substantial earnings-related pension will become available as the new scheme matures.
The difficulty was to ensure that those provisions worked in harmony with occupational pension schemes, the members of which already contributed to earnings-related pensions. Indeed, it is because occupational 1034 pensions got there first that the complex and intricate fabric of contracting-out arrangements evolved. The overriding objective was plain enough. Good occupational pension schemes should have the option to contract out of the earnings-related element of the two-tier state scheme. They should pay lower national insurance contributions but would have to satisfy the Occupational Pensions Board of their ability to meet strict conditions which were aimed at safeguarding members' rights. The most important of those conditions was a minimum guarantee of a pension broadly equivalent to what would be payable for those not contracted out under the state earnings-related arrangements.
At the time there was great anxiety among employers responsible for occupational pension schemes and those advising them that they would be entering an open-ended commitment as accrued rights would be related to future earning trends. There was also uncertainty about the future return from investments. In opposition, the Conservatives welcomed the concessions for which we and the pensions industry pressed, and applauded the substantial political consensus which accompanied the passage of what was then the Bill.
The basis of our present system is partnership between good occupational pension schemes and the state social security arrangements. It is also the duty of the Government of the day to maintain a fair balance between the interests of those who are participating fully in the state scheme and those whose rights are secured in contracted out schemes.
The foundations of our social insurance system laid down by Beveridge in his historic report were intended to provide income for people when their period of earning was interrupted for whatever cause. The longest period of interruption of earnings may be said to be retirement and the state has a duty to assist people in the provision of income for old age.
We now have a system whereby about half of the working population is covered by occupational pension schemes and the other half is covered by the state earnings-related pension scheme. All of the working population contribute to and are covered by the state basic retirement pension scheme. There is, of course, no barrier to the further development of coverage of occupational pensions. All that is needed is that the schemes should conform to specified minimum criteria, but after the surge in the growth of membership of occupational pension schemes from the 1950s, we have probably now reached a period when growth will be somewhat slower.
It is, of course, for employers to decide, in the light of the needs of their organisation, whether they should set up an occupational pension scheme. Having so decided, in consultation with their employees, they should decide whether their employees should be contracted in or contracted out of the state pension scheme. I believe that that is right. Contracting out represents an arrangement which has the support of the pensions industry, employers and employees. The extent to which contracting out has been adopted well over our original estimates shows that it has produced an attractive harmonisation of interest in which all sides can work together constructively.
We must recognise that occupational pension schemes are still developing and have a long way to go to reach a point when the benefits they pay out match the contributions they receive. Already, however, we can see a significant increase in the numbers receiving 1035 occupational pensions and in the level of those payments. Since 1979 it is already estimated that the amount of such payments by occupational pension schemes has risen by 50 per cent. In 1979 it was estimated that the average occupational pension was about £17.60 per week whereas in 1981 it was about £27 a week — a 54 per cent. increase. Also, the numbers of pensions have risen by 15 per cent. between 1979 and 1981.
I therefore suggest — I hope that my hon. Friend agrees—that in the first five years of the new pensions arrangements we have got off to a good start. There are, of course, those who say that we are promising too much and that this will provide too great a bill for future generations to meet. Clearly we must review that. Various other points have been made, but I suggest that five years is far too short a period to start contemplating major surgery.
The Social Security Act 1973—or rather those parts of it which were allowed to survive by the new Government in 1974 — also set up the Occupational Pensions Board. That body, which was initially charged with looking after the arrangements for preservation of occupational pensions, is now also responsible for the supervision of the contracting-out arrangements and the equal access requirements of the Pensions Act 1975.
The board has established a unique reputation for thoroughness, impartiality and being a centre of informed knowledge on occupational pension matters. I should like to pay tribute to the work that it has done and the way in which it has adapted to the varying demands that have been made on it. It has produced authoritative reports on such subjects as occupational pensions for the disabled, equal treatment, solvency, member participation, disclosure and, more recently, on early leavers and the security of pensions rights.
It is obvious that not all of the board's recommendations have been acceptable to the Government of the day. However, with regard to the early leaver report, the Government have accepted the recommendations to ban franking and to relax the requirements for transfers between contracted-out occupational pension schemes. On the latest report, the Government announced on the day of publication that they accepted in principle the need for legislation to compel schemes to disclose information to their members.
I shall say a little about the solvency report and the Government's response to it as I know that it interests my hon. Friend the Member for Kensington. The report had three main themes. The first was the risk of insolvency. It concluded that there was no general risk of insolvency and that it would be inappropriate to impose statutory funding standards on occupational pension schemes.
Secondly, the report recommended that legislation be introduced to compel all schemes to disclose information to members, especially in the form of annual reports containing accounting and actuarial data. The Government especially welcomed that proposal as it is one of the most important ways in which to help pension scheme members to ensure that schemes are managed in their best interests. We attach the utmost importance to that and my right hon. Friend the Secretary of State has announced that the Government accept in principle the need for legislation to regulate that aspect of pension scheme management. I know that my hon. Friend the Member for Kensington will welcome that.
1036 Thirdly, the report called for a review of the legal framework within which pension schemes operate. Most schemes are set up as trusts. The Government have set up a working party of senior officials and expert advisers to assess the representations that were received during consultation on the report to set out the strategic options for dealing with the issues that were raised and related matters. The working group has completed its studies and will present its conclusions to Ministers.
There are, of course, those who declare that we should be better off without the contracting-out arrangements. That would be to ignore that pension schemes are a vital source of institutional investment, and any decision affecting the contracting-out partnership could permanently depress the level of institutional investment. There would also be effects on the stock market if schemes sold investments to buy back into the state scheme. All of that points to the fact that the current partnership between state and occupational schemes is something that we firmly feel should continue. Moreover, some stability is necessary. The new arrangements for the state scheme do not mature until another 15 years have elapsed, and we are only five years into the new scheme. We must maintain confidence in those arrangements. The unique spirit of cooperation between the main political parties when the original terms were settled and the political consensus that formed the basis of those pension arrangements should not be disturbed. That is one reason why I am anxious about the signs that some parts of that consensus may well be disturbed by some recent Opposition proposals.
My hon. Friend referred to Mr. Stewart Lyon and to the help that he has provided for many years. In his presidential address to the Institute of Actuaries last October, Mr. Lyon made a thoughtful and subjective review of the long-term outlook for pensioning or, as he said,
The question of how far one generation can stake a claim to the next generation's production and get away with it.We have an aging population, with currently 9.5 million people over pension age. By 2019 that figure is expected to reach 10.5 million. Some people have predicted dramatic changes in mortality as our remaining killer diseases—cancer and heart ailments—are cured, which would increase the numbers of pensioners still further. One can make reasonably accurate projections of the future number of pensioners to about 40 or 50 years ahead, because they are already born.However, estimates of the future working population —the other half of the equation—present many more hazards. Future fertility rates could vary, and, if the replacement rate falls, a smaller working population must finance a larger pensioner population. I recognise the importance of some of the considerations that my hon. Friend mentioned in this context, although I cannot spend much time discussing future prospects for the population in the time available to me this morning.
§ Sir Brandon Rhys WilliamsWill the departmental study group's report, which my hon. Friend says has been completed, be published as a Green Paper, or do the Government intend it to emerge in due course as a Bill?
§ Mr. NewtonThe Government intend to study the conclusions of the working group's report when they have been presented to Ministers. At the dying gasp of the 1037 present Parliament, I do not wish to give a commitment beyond that, not even in response to the charm with which my hon. Friend asks his questions.
We must remember that occupational pension schemes are set up voluntarily. Ultimately the employer must decide whether to embark upon such an arrangement, although normally today he would also take into account the views of his employees and/or their trade union representatives. At present, there are 90,000 such schemes in the United Kingdom covering more than 11.5 million employees. The number of employees covered by a scheme varies enormously. Some are individual arrangements while others include hundreds of thousands of employees. The decision to set up a scheme could result from pressure from employees, or from a desire to provide employee benefits so that employees think carefully before going elsewhere.
Given the voluntary nature of the schemes and the scope for negotiation between employer and employee about benefits, contributions and the general basis of operations, it is hardly surprising that the early leaver—who I know is one of my hon. Friend's main concerns —has so far fared rather badly. Who will look after his interests? The existing employees would not regard his claims as having priority on resources compared with lower contributions or higher benefits for them, and employers are reluctant to increase their contributions for people who may have gone to seek higher pay elsewhere. For similar reasons, trade unions have not pressed the claims of early leavers.
The Social Security Act 1973 was a big step forward in that it promised some pension rights for those leaving pension schemes before retirement. Before that many people received only a refund of their contributions and had no other rights. The criticism is that the Act required pension rights only to be preserved, with no requirement for indexing or increasing them in the years to retirement. The inflation rate during the past 10 years was such that people now doubt whether a preserved pension will be worth having by the time they retire. Due to the general concern about early leavers, the occupational pensions board was asked in 1978
To consider what further steps should be taken to protect the occupational pension rights and expectations of employees who change employment including the transfer of rights between pension schemes; to review the financial and other implications and to make recommendations".The board's report, completed after taking evidence from all interested parties, was published in June 1981. The main or majority recommendation was that the preserved pensions of early leavers should be revalued in line with earnings up to a ceiling of five per cent. A minority suggested a rate of increase no lower than 8.5 per cent. The board estimated that the extra labour costs in a model scheme would be about one per cent. of payroll for men and two per cent. for women. That excluded any knock-on effect caused by pressure to increase pensions in payment by the same amount as deferred pensions. However, it must be stated that employers and the pensions organisations have not reacted with enthusiasm to those recommendations. Their basic argument has been about the costs involved.Having carefully considered all the representations, my right hon. Friend the Secretary of State announced last October that there was no intention to legislate on the 1038 matter for the moment but urged employers to make improvements voluntarily while the matter was kept under review. Nevertheless, other recommendations by the board have been accepted. The first is the abolition of franking, which everyone agrees had to be done. It became clear that insufficient consideration was given to franking during the run-up to the start of the new contracting-out arrangements. Many, looking back, would probably have given different advice at the time.
There are many forms of franking, and we do not intend to ban them all. It will continue to be the case that a scheme may include all benefits, before and after 1978, to meet the requirement to provide guaranteed minimum pensions. We intend to legislate only in respect of future early leavers, and will not ban franking in respect of those who have already left, because that would be unfair and would impose new burdens that were not budgeted for. We intend to deal with the practice whereby the required increases to guaranteed minimum pensions that must be provided by contracted-out schemes are obtained by reducing other benefits. The effect will be to erode benefits in excess of the guaranteed minimum pension for the early leaver. It is generally accepted as, to say the least, a dubious practice, and draft regulations have been referred to the Occupational Pensions Board.
The abolition of franking in this area demonstrates the Government's resolve to improve matters for the early leaver. The board pointed out that transfers of pension rights between contracted-out schemes were inhibited by some revaluation requirements. They were relaxed in regulations recently laid before the House. Meanwhile, there has been evidence of initiatives from the pensions industry designed to assist the early leaver. New types of insurance policies have been introduced whereby the early leaver would, depending on investment yield, possibly receive a higher pension at retirement while guaranteeing the minimum level for conteracting out.
Another development about which I can inform my hon. Friend and the House today, and which I hope will please him, is that the Government have today laid regulations to enable the pensions industry to offer a further option for early leavers. They ease the contracted-out requirements for early leavers who wish to purchase an insurance policy instead of having their benefits preserved in their previous pension scheme.
§ Sir Brandon Rhys WilliamsHear, hear.
§ Mr. NewtonI am glad to have generated so much pleasure in my hon. Friend. Although only the guaranteed minimum pension is guaranteed, higher benefits could result depending on the yield of the investments.
Another relevant matter is the central fund proposed by a prominent group of members of the National Association of Pension Funds. The fund would accept transfers and use investment yields to provide increases for the deferred pensions concerned. The suggestion has been adopted as official association policy and has received considerable press publicity. It has been implied that all that is required to start the scheme is ministerial approval. Unfortunately, I have to tell my hon. Friend and the House that, as so often, life is not quite as simple as that. If the idea were to be accepted, it would require primary legislation.
Full details of the scheme were sent to my Department and to other Government Departments. The comments received from the Occupational Pensions Board and other 1039 Departments highlighted a number of problems. For that reason my right hon. Friend, at its conference last Saturday, invited the National Association of Pension Funds to consider whether the proposals could be recast in a form that would be acceptable under the Insurance Companies Act 1982.
It should be stressed that neither the fund nor the insurance-based initiatives to which I have referred do anything to improve the level of payments made by funds to early leavers. That is where most of the criticisms are levelled. All the new initiatives are doing is to invest the early leaver's money with a view to obtaining for him the best possible return. What is really needed is improved payments by funds, either in the form of higher transfer values or increased deferred pensions.
To that extent I welcome the move by the Confederation of British Industry. In its publication "Guidelines for Employers on Early Leavers", it has asked employers to review the arrangements for early leavers and consider the possibility of voluntary improvements wherever those are practicable within the scheme's resources.
There is also the interesting paper just published by the Centre for Policy Studies entitled "Personal and Portable Pensions for All". It suggests that the problems for early leavers might be solved if each pension scheme member had his share of the fund individually attributed to him in units. Those units would be made up of his own and his employer's contributions. He could then, on leaving employment before pension age, use the units to transfer into another scheme, to purchase his own preserved pension, or retain his units in the scheme so that he and his new employer could contribute to that scheme.
Obviously the proposals need very careful study. No firm decisions have yet been taken and I must stress that the proposals undoubtedly present very considerable problems. Therefore, I have to acknowledge to my hon. Friend that for the moment we are trying to use the carrot rather than the stick. We are well aware that if the carrot does not have the necessary force in encouraging action we may well have to grasp the stick. It is certain that the early leaver problem will not go away; rather it is liable to increase as the trend is for people to have not one job in a working life but several. Many professional associations claim that such changes of jobs are essential to provide the varied experience needed by their members, and we must ensure that beneficial moves of that kind do not entail concealed penalties in the pension expectations.
As I have said, the bulk of the complaints arise from the involuntary early leaver — the person declared redundant with little chance of finding another job. From my correspondence and the correspondence in the Department, it appears that he usually wants one of two things. He either wants a refund of his pension contributions to enable him to pay off debts or set up in business, or, alternatively, he seeks protection of the value of his pension rights against inflation.
With regard to refunds, although I can appreciate how useful such a sum of money would be, they ignore the purpose of pension contributions—to provide income in retirement. I admit that in the past many people have looked on pension schemes as savings banks from which their contributions could be withdrawn. However, that is no longer an option, except for short periods of service. The Occupational Pensions Board considered the question in its report and decided that no change was appropriate.
1040 The OPB looked at special pension arrangements for redundant early leavers, and its view was:
With regard to the plea for special treatment for redundant workers and others who are involuntary early leavers, we do not feel able to recommend that particular categories of early leavers should be singled out for special protection by the law".It is open to employers to make special arrangements such as added years, immediate pension and the like, but that is at their discretion. That again serves to illustrate the flexibility of the private occupational pension schemes. As the pensions movement has developed it has shown its capacity to adapt to changing circumstances and new demands. I hope that it will be able to respond to the growing challenge that is being faced in relation to the early leaver problem.I have already referred to the 90,000 pension schemes that we have today in the United Kingdom. Over the last decade the most significant factor has been the move towards final salary schemes. Over 90 per cent. of scheme members are now covered by final salary type pension arrangements. Such arrangements ensure that the pension is based on earnings near to retirement and therefore take account of inflation and salary increases to that point.
I am aware that there are those — and even more aware that my hon. Friend is one of them—who favour instead the money purchase type of scheme. Under such a scheme employer and employee pay fixed contributions, usually a percentage of salary. The pension produced cannot be predicted, because it is the amount and length of time over which the contributions are invested and the yield, which together determine the rate of pension. Small contributions paid early in the career, together with larger contributions paid later, produce varying rates of pension. Increases in salary towards the end of the working life cannot in any way be reflected fully in the eventual pension. That means that there is no relationship in a money purchase scheme between the pension and salary before retirement.
It is significant that the final salary scheme has largely replaced the money purchase scheme. There are those—my hon. Friend is among them—who are now trying to revive interest in money purchase arrangements. The suggestion is that such arrangements can produce a better deal for early leavers. It could be true for the young early leaver if the final salary scheme offered no increases on the deferred pension.
The other claim that is made is that the cost of such a scheme can be quantified, as against the final salary scheme with escalating costs. Money purchase schemes, it must be stressed, are not acceptable for contracting-out purposes. That is because the emphasis is on the contributions paid, whereas for contracting out the pension is all important.
Several ingenious hybrid schemes are now coming forward that will need to be carefully considered. This again provides an example of the way in which the pensions industry can respond to challenge and innovation. The parliamentary pension scheme, of which we are all members, is itself a final salary type arrangement.
The Government remain very firmly committed to the partnership between the state scheme and occupational schemes. We wish to continue to encourage the development of good occupational schemes. It is important that the pensions industry should continue to 1041 grow in strength, because its contribution to our economic recovery is essential. That emerged from some of the things that my hon. Friend said in his speech.
Glad as we are of the investment potential of such funds, the pensions industry must also be responsive to the criticisms which are being made, particularly with regard to the early leaver. We have all heard the well-worn phrase that early leavers pay for the stayers' benefits. Whether it is put in those words or any others, it is clear that improvements for early leavers have to be paid for. That means either higher contributions or cutting the existing cake in a different way.
At the same time, many other improvements are being called for—equal survivors' benefits, flexible retirement, increases for pensions in payment, equal pension ages, touched on by my hon. Friend the Member for Ealing, North schemes for part-time workers, and so on. Each scheme and employer will have their own ideas as to priorities.
The Occupational Pensions Board recently recommended that whatever increases are given to early leavers should apply to pensions in payment. If a scheme has large numbers of women, it is only to be expected that they will press for widowers' benefits. For the moment the Government have ruled out legislation to compel improvements for early leavers, but our initiative to ban franking will of itself produce improvements. Similarly, on equal survivors' benefits and part-time workers, there are initiatives from the European Commission which could have a significant bearing on future developments.
The Government respect the voluntary nature of occupational pension schemes and do not seek to impose new liabilities on employers with such schemes, but we have set out our anxieties and some of them reflect the anxiety of my hon. Friend. I hope that those involved will consider their priorities and ensure that within the limits of their resources they are offering a fair deal to all 1042 members—workers, early leavers and pensioners, men and women alike. In some cases it may be necessary to renegotiate the benefits to introduce integration or to reduce the accrual rate in order to provide a more balanced structure of benefits.
I assure my hon. Friend that the Government will be keeping a very close watch on the situation. Our decision in principle to legislate on compulsory disclosure of information to pension scheme members should ensure that eventually all concerned are better informed as to the scheme's finances—what it can and cannot afford to do —and that they will therefore be in a better position to influence priorities in provision. There is now a greater interest in pensions than ever before. My hon. Friend, characteristically doing his job well on behalf of his constituents and others, reflected that in his speech.
I trust that the pensions industry will rise to the occasion and confirm that our confidence in the partnership that exists rests on firm foundations.
§ Sir Brandon Rhys WilliamsWith the leave of the House, I thank my hon. Friend the Member for Ealing, North (Mr. Greenway) for his contribution to this debate and, in particular, I thank the Minister. I made my maiden speech on this subject, so I wondered whether I was tempting providence by raising it again on the last day of this present Parliament. I certainly hope that none of those who have spoken today will find that they have made their last speech in this place.
The subject is one that affects many millions of people. My hon. Friend has chosen this morning to make a most important and helpful analysis of the Government's position on the matter. In particular, he made an announcement that will bring relief and satisfaction to many, particularly to Conservative Members who have campaigned for an improvement of the rights of early leavers. So I am extremely grateful to the Minister for the trouble that he has taken, and I believe that at last we are on the way to doing something that will establish the rights of the early leaver on a proper footing.