§ The Secretary of State for Social Services (Mr. Norman Fowler)
With permission, I should like to make a statement about occupational pensions and early leavers.
At present just under 12 million people—about half the national work force—are building up occupational pension rights. That pension provision is of vital importance in retirement, yet in many cases people who change their jobs suffer a loss of pension rights as a result. In the words of the Occupational Pensions Board:it remains a fact that at the moment many early leavers lose, and they often lose substantially".The Government believe that this position should be reformed and that those who leave their employment before pension age are as much entitled to the complete package of rewards for their years of service as those who stay. It was for that reason that I convened a special conference on this problem Last September and at the end of last year issued a consultative document on the question. The responses to that document showed wide support for change and certainly no new arguments against. Accordingly, the Government have decided to bring forward legislation at the first possible opportunity to correct the present injustice.
At present, many people who change their jobs leave behind a pension, which is basically frozen in cash terms and, therefore, loses value up to the age of retirement. That provides the most fundamental complaint about the present arrangements. I shall therefore introduce legislation to require occupational pension schemes to revalue deferred benefits for future early leavers at 5 per cent. a year compound or in line with the rise in prices, whichever is less, over the whole period from leaving to pension age.
That will have a beneficial effect not only for the person who leaves his pension with his old employer but for the person who transfers it. The transfer value of those rights will be increased by this change. The House will know that I am currently consulting on proposals to give every early leaver a legal right to transfer.
In money purchase and average salary schemes we shall require comparable treatment for leavers and stayers. We shall also remove the age limit of 26 for entitlement to preservation so that anyone with 5 years' service in a scheme will be entitled to a preserved pension.
Although it is not practicable to legislate for improvements for those who have already left, I want these changes to come into effect as soon as possible. It is with this in mind that I am proposing legislation which will override scheme rules, so that the service which is to count for improvements shall start to build up as soon as possible. However, I am willing to explore any alternative to overriding legislation, which the occupational pensions schemes joint working group might suggest, provided that such a proposal is effective and can be implemented quickly.
These proposals are an important part of our plans to improve the position of members of occupational pension schemes. We have already introduced legislation to end franking. The improvements I have just announced will provide a fair deal for all members of schemes and ensure that no artificial barriers are created to job mobility.
However, more action is still needed. I am at present considering the comments that I have received on the 643 consultative document on disclosure of information, and will announce my conclusions shortly. The consultative document on transfer rights was published last month and my inquiry into provision for retirement has been considering the arguments for personal portable pensions. These steps represent a substantial programme of reform. It is central to that programme that action should be taken to improve the position of early leavers.
§ Mr. Michael Meacher (Oldham, West)
Is the Secretary of State aware that the Opposition support in principle the ending of present pensions discrimination against people who change jobs, when, given for example, the current annual rate of earnings growth of 7.5 per cent., an early leaver with only three job changes involving final salary schemes may achieve less than 50 per cent. of the pension awarded to a long-serving member of a comparable scheme? We also accept that voluntary persuasion of the occupational schemes has not worked, as no effective action has been taken by them to safeguard early leavers since the Occupational Pensions Board report on the problem in June 1981.
However, is the Secretary of State aware that the Opposition do not accept that his formula properly protects early leavers? Is he aware that his formula continues to cheat early leavers of their clear rights? Is he further aware that, during the past 15 years, earnings have not once risen by as little as 5 per cent. a year? This formula is therefore a shift from revaluation in line with earnings to revaluation in line with prices.
The Government did that in 1980 in respect of basic retirement pensions, and today married pensioners are consequently £5 a week worse off than they would have been if the Labour Government's formula had continued. The same treatment is now being meted out to occupational pensions—that is the Secretary of State's message today. The previous Labour Government from 1978 required full indexing — I emphasise the word "full" —of the guaranteed minimum pension without a price ceiling.
Is the Secretary of State aware that he has rejected the partial OPB recommendation of 8.5 per cent. a year revaluation, which is much nearer to the likely movement of future earnings, and has not even provided price protection without a ceiling? Is he aware that the best solution would be to require frozen pensions to be fully index-linked, although I accept that that would force a renegotiation of the benefit scales? Is he aware that that would not be so burdensome to the corporate sector as many funds are accumulating substantial surpluses?
Has the Secretary of State considered the retrospective application of his proposals, since millions of young people have been cheated of their basic rights by the tardiness with which the Government have acted— [Interruption.] It is three and a half years since the publication of the Occupational Pensions Board's report in 1981.
Finally, and above all, will the right hon. Gentleman take on board the fact that a 5 per cent. revaluation for occupational pensioners is grossly unacceptable, since the Datastream survey showed recently, for example, that between 1981 and 1983 the top 100 directors of public companies awarded themselves pay increases of no less than 61 per cent?
§ Mr. Fowler
It is becoming increasingly difficult to take the hon. Gentleman's comments seriously. The Labour Government did nothing for early leavers except to set up a committee to consider the position. We are implementing the proposals made by the Occupational Pensions Board almost without exception. When the hon. Gentleman talks about 8.5 per cent., he is talking not about the majority report of the Occupational Pensions Board but about a minority report. The obvious reason for not having 8.5 per cent. is that it would destabilise pension schemes and would be too expensive.
§ Mr. Meacher
§ Mr. Fowler
Of course that is right. The hon. Gentleman should understand that the laws of arithmetic cannot be suspended, even for his peculiar policies.
The reason why we can implement the scheme is that we can now plan ahead because we have achieved low inflation. The hon. Gentleman talks about the rights of the elderly, but I remind him that between 1974 and 1979 inflation increased by 110 per cent., which was devastatingly bad for the elderly.
As to the formula of 5 per cent. and price indexing, I should tell the hon. Gentleman that most public or private firms revalue on the basis of prices, which is why we have adopted that formula. I ask the hon. Gentleman to accept the advantages. What we are doing—we are doing it, not just talking about it—is providing a better deal for early leavers. There is no reason why they should lose, and we are ending barriers to job mobility. That series of proposals should be welcomed by anyone with common sense on both sides of the House.
§ Mr. Anthony Nelson (Chichester)
I congratulate my right hon. Friend on announcing these long-awaited and wholly beneficial changes. In drafting the legislation, will he take into account the fact that, although the trend towards early leaving and job changes may be circular, the increase in entitlement to such occupational pensions can be afforded only at the expense of those who stay in their companies, unless the Government inject money? An allowance should be retained for companies to allow a premium for those who display loyalty and stay with a company for a long time, while at the same time rightly enhancing the pension entitlement of those who decide to leave early.
§ Mr. Fowler
I am grateful for my hon. Friend's constructive point. We estimate that the change will add about 1 per cent. to 2 per cent. to pension costs, and clearly we shall leave it to the pension schemes to decide how that will be afforded. It can be afforded by increased contributions, or companies can take advantage of the good returns which pension schemes have enjoyed in the past, they can reduce the fraction, or they can move to integration.
It is better to have good scheme for everyone than a scheme that is good for a few and bad for many. In this legislation we seek to provide a fair return for the person who stays and for the person who leaves.
§ Mr. Archy Kirkwood (Roxburgh and Berwickshire)
Is the Secretary of State aware that we on these Benches are willing to give the announcement a cautious welcome but will reserve final judgment until we see the fine print in the Bill? The statement is better than nothing, but I press the right hon. Gentleman on the timing of the schemes 645 both for early leavers and for portability. Is the House to assume that he will bring forward legislation on both subjects for the next Session?
§ Mr. Fowler
No, the House should not assume that. We shall bring forward the legislation on early leavers at the first possible opportunity. As to portable pensions, my inquiry looking into this has not yet formulated its proposals. It is unlikely that we shall be able to bring that forward this October.
§ Mr. Nigel Forman (Carshalton and Wallington)
Is my right hon. Friend aware that the statement today will be welcomed not only for its contribution to labour mobility but because it is a way to reduce some of the discrimination that there has been in the system as between the private and public sectors, and that this will be much welcomed by the private sector?
§ Mr. Fowler
Yes, the position has changed on that and there is now a wide consensus in favour of such action as this. There is not total agreement, but the atmosphere and the attitude in the private pensions industry has changed radically over the past 12 months.
§ Mr. Donald Stewart (Western Isles)
Is the Secretary of State aware that, however belated and with whatever shortcomings in the legislation, the step that has been taken today is a significant advance for thousands of people who have been tied to unsuitable jobs simply because they have been unable to transfer their pension rights, and that it will be welcomed on those grounds?
§ Mr. Fowler
I am very grateful for the right hon. Gentleman's remarks, and I think that on reflection most hon. Members on the Opposition Benches will share that wise view.
§ Mr. Nicholas Budgen (Wolverhampton, South-West)
If my right hon. Friend is right in saying that this is a widespread problem, will he explain why his proposals will add only 1 per cent. or 2 per cent. to pension costs?
§ Mr. Fowler
That is the estimate of the Government Actuary's department—1 per cent. is the cost for male pensions and the 2 per cent. is the cost for female pensions.
§ Mr. Tam Dalyell (Linlithgow)
I was the late Dick Crossman's PPS when a similar scheme was put forward in the late 1960s and the objections from the Government Actuary then were on the grounds of the sheer difficulty of making calculations. Is it true that, because of modern computer techniques, it is now easier to do what 15 years ago—or even 10 or five years ago—would have been difficult to calculate? Can the Secretary of State confirm that the costs are no more than 1 per cent. or 2 per cent., because my recollection is that the Government Actuary, a decade or more ago, was talking in terms of 10 per cent. or 15 per cent? That is quite a change.
§ Mr. Fowler
The advice that I was given is the advice that I have given to the House. There must always be some uncertainties in projections. On reflection, the hon. Gentleman may realise that his recollections of the figures is too high.
§ Mr. Kenneth Carlisle (Lincoln)
Will my right hon. Friend accept that it is good that the Government have decided to take action in this difficult matter? The statement recognises the reality that people change their jobs regularly. As I understand it, he said that he only 646 hoped to give people the right to transfer pension rights. It is important that they have this right. Will he do everything possible to make certain that ways are found for them to have this right.
§ Mr. Fowler
Yes, Sir. I have issued a consultation document on that, of which the aim, as it is the Government's aim, is to give people the choice between leaving the pension rights where they are; transferring to a new scheme on a basic agreement with the new employer, purchasing an annuity from an insurance company, or, if we so decide, transferring the money to their own personal portable pension. We want to see the right to have a transfer.
§ Mr. D. N. Campbell-Savours (Workington)
I welcome the proposed change, but is there not a danger that, if the legislation is delayed, people who are planning to change their employment may defer that change so as not to miss out? Could not some retrospectivity be introduced to cover that position?
§ Mr. Fowler
I do not think that it can be retrospective in the sense of going back to past rights and past service. It is clear that pension schemes have not been able to plan on that basis. That would simply add a cost to them for which they had no means of planning. However sympathetic I might be to what the hon. Gentleman proposes, I do not think that it is practicable.
§ Mr. Anthony Beaumont-Dark (Birmingham, Selly Oak)
Does my right hon. Friend accept that most people believe that some change is needed for people leaving their jobs early, but is he really confident that the 1 per cent. or 2 per cent. is right? Most schemes are not fully funded. The nationalised industries especially are nowhere near being fully funded. Does not that mean that quite a heavy burden could fall upon the taxpayer to fund these schemes properly, or it would mean either a reduced amount of pension for those in a scheme or a very much increased contribution payment? If these actuaries are such great experts, does my right hon. Friend accept that it would be an excellent idea to have a few models, possibly based upon one or two of the nationalised industries, so that we could see into what uncharted waters we were heading?
§ Mr. Fowler
Of course, what is being proposed now is already the case in the public sector. That is the answer to my hon. Friend's fundamental question. But perhaps I ought to make clear what I said in reply to the supplementary question of my hon. Friend the Member for Chichester (Mr. Nelson). It means that schemes will have the option of increasing contributions, of taking advantage perhaps of the good returns that they have had over the past few years—there is no question about that—of reducing the fraction from one sixtieth to one seventieth, or of integration. I claim that these proposals give justice both to those who leave and to those who stay. It seems to me that there is no justification for those who stay behind being subsidised by those who leave.
§ Mr. Michael Stern (Bristol, North-West)
I congratulate my right hon. Friend on the latest of a series of moves towards full portability of pensions, which so many people on all sides of industry desire. Is the five-year limit on entitlement to the rights that my right hon. Friend proposes intended to be an absolute limit, or will he allow 647 it not to override those forward-looking schemes which already give rights to pensions before the five years are up?
§ Mr. Fowler
I shall consider that, but in principle I have some sympathy with the point.
§ Mr. Timothy Yeo (Suffolk, South)
Is my right hon. Friend aware that these proposals will be especially welcomed by women, particularly those who have interrupted their careers to have children and who for a long time have been effectively the victims of quite severe discrimination in respect of occupational pensions? I suggest to my right hon. Friend that one reason why the cost of these proposals is lower than might have been estimated some years ago is the Government's success in reducing the rate of inflation.
§ Mr. Fowler
It is entirely right that we are now able to plan forward in a period of low inflation, where previously plans of this kind would almost have been laughed out of court. I agree that one of the groups who will benefit most is women.
§ Mrs. Edwina Currie (Derbyshire, South)
Does my right hon. Friend agree that most people seriously underestimate the cost of their pensions? In a report in The Observer on 3 June it was suggested that if my right hon. Friend wished to provide for himself and his family a pension of two thirds of his final annual salary plus indexation, he should be forking out 38 per cent. of his annual earnings. Does he accept that there will continue to be a role for the state in setting minimum standards to protect the rights of future survivors, especially widows?
§ Mr. Fowler
I agree with my hon. Friend. I also agree that there is a range of policy considerations concerned with pensions. It is precisely because of that, the cost of pensions and the rest, that we have set up the inquiry into pensions which will look not just at occupational pensions but also at state pensions.
§ Mr. Harry Greenway (Ealing, North)
Where a person transfers from one scheme to another, the first scheme having involved a lump sum payment upon 648 retirement, will the lump sum be safeguarded under the arrangements which my right hon. Friend has just announced?
§ Mr. Fowler
I shall have to look at the details of what my hon. Friend is saying, but my understanding is that it will be safeguarded. Nothing that I am saying now will take away rights. It will add to the rights of the person transferring.
§ Mr. Meacher
I return to two questions which the right hon. Gentleman did not answer. First, is not the overall cost of these proposals so small partly because for so many years the occupational schemes have cheated early leavers of their basic rights? Should there not be some element of restrospection, as least backdating to the statement today? Will he reconsider that?
Secondly, the Secretary of State said that he wished to be fair as between early leavers and stayers. Apart from the principle, exactly how does he intend to do that? Is he in favour of cost neutrality — in other words, that if early leavers' benefits are improved, others' benefits must be cut? Could not improvements be met from the large surpluses currently being earned by pension funds, instead of those large surpluses being used to reduce employers' contributions.
§ Mr. Fowler
The answer to the hon. Gentleman's first question is that I shall certainly give consideration to some backdating, but the period will not be long; 12 months will be about the limit. The basic point that I am making on retrospection is that, regrettable though this may be, there is no way in which we can create rights for people's service 10 or 20 years ago.
On the second question, about affording it, I cannot usefully add to what I said. It is a matter for schemes—we are leaving it to them—and, clearly, they have a range of possibilities. One is the point that the hon. Gentleman raises, which is to take advantage of the good returns that they have had in recent years. However, they may have to increase contributions or take some other action, and we should not run away from that possibility, either. The basic point that I am making is that we are trying to get justice between those who stay in a pension scheme and those who leave it for another job. That is what these proposals are about.