Pensions Commutation Bill (Hansard, 23 February 1984)

§ The Minister of State, Treasury (Mr. Barney Hayhoe)
I beg to move, That the Bill be now read a Second time.
The purpose of this minor measure is to modernise the arrangements, established by the Pensions Commutation Act 1871 and the Pensions Commutation Act 1882, for commuting certain pensions into lump sum payments. Dissolving the pensions commutation board is expected to lead to a reduction in the administrative costs of providing the commutation service with the benefit going to the individual pensioners concerned.
The board was originally established by act of Parliament in 1869. It is composed entirely of officials, the chairman being the director of the national investment and loans office in his capacity as comptroller-general of the national debt office. Other members are appointed from the Ministry of Defence, the Department of Health and Social Security, and the Treasury.
The right to apply to the Pensions Commutation Board for commutation of part of a pension is conferred by various Acts of Parliament. At present, almost all applications come from retired officers of the armed forces, although certain civilians in receipt of pensions awarded for abolition of office before 1972 are also entitled to apply. The board is dealing with more than 1,000 applications a year, involving lump sum payments totalling about £20 million a year.
When the board was established, commutation decisions were more difficult, and potentially more controversial than they are now. That, no doubt, was why elaborate control procedures were established. However, in recent years, when we have had a mass of published information about the likely effects on life expectancy of various medical conditions, much of the work of the board has become routine. Commutation decisions are taken in accordance with tables drawn up by the Government Actuary. Most applicants receive the full amount, unless medical evidence dictates otherwise.
In recent years the board has become something of a historical curiosity. It is insulated from the main pensions commutation work of the Ministry of Defence. The national investment and loans office, with which it is associated, has no other pension or commutation functions. Nevertheless, the board has to meet every six weeks or so. As a result of changes in pension arrangements for the armed forces, introduced in 1978, the board's work will eventually come to an end, but there is expected to be a substantial body of work each year, until the end of the century and beyond.
The main effect of the Bill will be to dissolve the pensions commutation board and, in effect, pass the responsibility to the Secretary of State for Defence. The commutation work on officers' pensions will be done, like normal departmental business, by the division of the Ministry of Defence that deals with other pensions matters.
The Bill is confined entirely to changing administrative procedures. It does not affect in any way the rights of any 999 person who is eligible to be a potential applicant, nor does it affect the amount of money that he or she is likely to receive.
Applicants for commutation are charged a fee which is related to the costs of providing the service. By making the changes proposed in the Bill, we can reduce the administrative costs, and that will be of benefit to applicants.
The Officers' Pension Society has been consulted and has raised no objection.
Under the provisions of the 1871 Act, commutation awards are paid out of funds administered at present by the National Investment and Loans Office and are reimbursed by annuity payments from the Votes upon which the respective pensions were charged. To change these provisions could affect the way in which the defence budget is at present controlled and the Bill therefore leaves them in place. However, it also provides for the financing of the awards direct from Votes and for the early discharge of annuities, thus giving greater flexibility.
The Bill also provides for the continuing in force of the existing regulations concerned with fees and the commutation tables.
This is a very modest measure, but it will secure a worthwhile reduction in costs and an improvement in efficiency. I commend it to the House.

§ Dr. Oonagh McDonald (Thurrock)
The Opposition accept that the board has become an anachronism, having been set up in Victorian times when decisions about life expectancy were far more difficult to make. We are interested to note that the Government have now acquired a great deal more expertise in assessing life expectancy and we may wish to consult them from time to time about how it is done.
I have been in touch with the Officers' Pension Society, which welcomes the measure. It believes that the process will be speeded up and that applications to medical boards may be handled with more understanding than previously.
I have just one question. Perhaps the Minister will say something about the age limits now applying to applicants. I understand that one applicant applied on his 89th birthday, claiming that he needed the money to help him to "break in" his third wife, whatever that may mean. Presumably applications of that kind will be ruled out in future.
The Opposition do not wish to oppose or criticise the Bill in any way.

§ Mr. Michael Stern (Bristol, North West)
I wish to make two brief points. I share the view of both sides on the necessity for the Bill. I wish to comment on it only because it seems a shame that in seeking to modernise a system set up in 1871 the Bill modernises only the structure rather than the work carried out within it. The processes by which retired officers apply for commutation of pensions will remain firmly rooted in the 1870s and will bear no comparison with the processes by which similar commutations are effected under normal commercial and private occupational pension schemes. I raise these points not to put the officers concerned in a privileged position, 1000 but to suggest that their situation should be no better and no worse than that of people in other occupations who apply for commutation.
My hon. Friend the Minister of State said that under the Bill, as under the system set up in 1871, an officer might be charged a fee for the work done in calculating and certifying the amount of commutation to which he was entitled. Does any member of an occupational pension scheme expect to pay such a fee, often before knowing how much he will receive and before deciding whether he wishes to go ahead with commutation? That is certainly not the practice of insurance companies and it seems a shame that it should continue in relation to retired officers' pensions.
My second point relates to the amount of the commutation. As the House will be aware, this is laid down in a table produced from time to time, the latest being in the Pensions Commutation (Amendment) Regulations 1983. The table makes certain assumptions which were valid then but may not be valid now. Nevertheless, the regulations continue to apply. When they were made, it was assumed that the interest rate to be taken into account was 11 per cent. That would not be the case today, but the regulations are still in force. Similar assumptions were made about future pensions increases which would apply to pensioners under the existing Act. I do not know whether the same assumptions would be made today.
In the real world outside, anyone applying for commutation of all or part of a pension receives a rate based on conditions at the date of application, not on tables which may be a year or more out of date. I wish to suggest an alternative system. It may work to the detriment or the benefit of the officers concerned, but it will certainly work in favour of reality. Rather than relying on tables that the Government may update from time to time, for the specific and limited case the applicant should be able to apply to the Government Actuary for a certificate of the commutable value of his pension on that date. That system operates very well in commercial pension schemes and is certainly far more flexible than the system carried over from the 1871 Act.
Finally, like everyone else, I welcome the Bill in the limited terms in which it has been introduced, but I should have hoped that the opportunity would be taken to bring the whole scheme rather than merely its administration out of the 1870s.

§ Mr. Hayhoe
I thank the hon. Member for Thurrock (Dr. McDonald) for the welcome that she gave to the Bill on behalf of the Opposition. I also thank my hon. Friend the Member for Bristol, North-West (Mr. Stern) for the general welcome that he has given to the Bill. I shall try to answer the various questions raised.
I understand that there is no age limit as such, but that the tables stop at age 89, so the individual to whom the hon. Member for Thurrock referred would be chancing his luck. Nevertheless, I hope that he found the money that he received helpful for the purpose that he had in mind. If anyone over the age of 89 applied for commutation, we should of course consult the Government Actuary, but I understand that it is extremely unlikely that much money would be involved.
My hon. Friend the Member for Bristol, North-West rightly said that we had not taken the opportunity of this 1001 modest measure to make wider changes. I thought that I had made it clear that we saw advantage in making this very small but useful change in administration as the reduction in fees would benefit the applicants. Fees are charged only if the award is accepted. The person can ask for commutation and be told the amount that has been determined. He or she can then decide whether to accept it and pay the fee. The fees are payable under the old legislation, and no change has been made in that respect, save to ensure that they are less likely to rise in future than they would under the old arrangements.
My hon. Friend is right to state that the commutation tables remain in force for a limited period and are changed from time to time. It is probably in the interests of administrative efficiency to avoid the need for separate calculations to be made for each individual request for commutation. I understand that in future the process will be exactly the same for officers and other ranks. I hope that that, too, will commend the Bill to the House.