PENSION SCHEME SURPLUSES (Hansard, 17 July 1986)

Mr. Deputy Speaker
With this it will be convenient to take Government amendments Nos. 91, 92, 94 to 97 and 101.

§ Dr. McDonald
I should like the Minister to confirm that amendment Nos. 89 and 91 are designed to improve the drafting, and that amendment Nos. 96 to 98 and 101 are technical amendments. Amendment No. 92 enables the Inland Revenue to ask an actuary to explain his valuation of a pension fund's assets and liabilities, and to provide background information. The amendment also lays down procedures for negotiations between pension scheme administrators and the Revenue. Why does that amendment appear at this stage? It seems to be obvious that such procedures should be in place.

§ Mr. Ian Stewart
The hon. Lady has interpreted the amendments correctly. The answer to her question about why the amendment has been included at such a relatively late stage is that the procedure for which the amendment provides is likely to be unusual. It was therefore not one of the first aspects of the scheme that came to mind However, I agree that once one alights on the point it is obvious. I am glad that we have been able to include it.

§ Dr. McDonald
I beg to move amendment No. 90, in, page 148, line 31, at end insert 'except that the method prescribed in paragraph (a) shall only be a permitted way of reducing the excess if the other ways set down in paragraphs (b) to (f) are to be utilised to the fullest extent as is reasonable in all the circumstances.'.

Mr. Deputy Speaker
With this it will be convenient to consider amendment No. 93, in page 148, line 38, at end insert— 'The Board shall not approve any proposals which include repayments under sub-paragraph 3(a) above unless the 1277 administrator has provided in the submission explanations which in the view of the Board satisfactorily explain why the other permitted ways set out in sub-paragraphs 3(b),(c), (d) , (e) and (f) cannot reasonably be used, or further used, to reduce the excess'.

§ Dr. McDonald
The purpose of the amendment is to make the repayment to the employer of pension fund surpluses the last resort. This will effectively force the employer to adopt other ways of eliminating surplus such as suspending contributions or meeting benefits.
In essence, contributions to pension funds by employers are part of the pay package and it is suggested that, other things being equal, they are used to depress the level of current pay. It seems correct therefore that the surplus belongs effectively to the present and past generations of employees, allowing that a raid on the fund does not inevitably recognise that.
The issue of surpluses is not only that the tax benefits of pension funds might have been overused, but that the resources of employers for enhancing pay deals has been incorrectly allocated. Obviously the best way—and this is what we want to see happen—to deal with surpluses would be to enhance the benefits, as this would redress both the erstwhile excess use of the tax efficient regime and the fact that employee's pay has been unduly restricted.
The withholding of employers' contributions should logically be preferred to withdrawals from the fund as these are more likely to be taken into account both by employees and employers in the determination of the amount and shape of remuneration packages. It enhances the opportunity of trade unions negotiating better terms than simply being able to point to a refund which the employer could say belongs to the past rather than to the current generation of employees. Additionally, the fact that the withholding of contributions is more likely to be spread over a number of years reinforces the link between a continuing negotiation on pay and conditions and the available resources.
The amendment is in two parts: the addition at line 31, and the consequential addition to line 38 which gives to the board the obligation not to approve proposals which give unreasonable priority to other means of dealing with surplus pension fund. We recognise that the amendment is not entirely satisfactory because it equally gives precedence over "(a)" to permitted ways under "(f)" as well as "(b)" and "(d)" although "(f)" is the undefined category. We are moving the amendment to ensure that where there is a surplus employees should benefit and that the repayment of any surplus to the employer should be the last item that is taken into consideration.

§ Mr. Ian Stewart
The hon. Member for Thurrock (Dr. McDonald) has raised a matter which we discussed in a slightly different context in Committee in relation to the pension provisions in the Bill. She has candidly explained her amendments, saying that they might not be perfect. Treasury Ministers never complain that Opposition amendments are perhaps less than perfect and it would be churlish of me to make any such suggestion. I shall take the point for its substance, not its detail, and I hope that she would like me to proceed in that way.
However one defined the provisions of the type the hon. Lady has described, it would be difficult if a requirement were placed on the Inland Revenue to judge whether 1278 certain matters had been adequately fulfilled by the trustees before the Inland Revenue was willing or able to sanction repayment or refund to the company. Purely regarding mechanism, I must repeat that the Inland Revenue is not a suitable body to exercise judgmental decisions about the adequacy of pensions or how money is distributed by trustees of pension fund schemes.
As I explained in Committee, there are three main options. The first is that an excessive surplus in a pension fund scheme can be reduced by increasing benefits for the members of the scheme. The second is that the contributions of the employer and employee can be reduced. Indeed, they can be fully suspended for a period, if need be, as a means of causing an immediate recalculation of the commitments of the scheme which would do away with the whole or part of the excess over-funding. The third option is a refund to the company.
The hon. Lady's amendments are designed to ensure that the third option was not available, in effect, until one or other or both of the other two options had been exhausted. I understand and have some sympathy with her feelings that schemes should try to do as well as they can for their members as beneficiaries, and that it may in some cases be suitable both for the company as an employer and for the members of the scheme as employees not to have to pay any money into the pension scheme for a period. Obviously, that is the case.
However, I must stop at the idea that in no circumstances should a company be allowed to have a refund unless it has used the scope of those two alternatives to the limit. A reason for that is that if a pension fund on valuation is shown to be underfunded, there will be a requirement on the employer to top it up to a level where it will meet the commitments it faces. There were cases in the 1970s when, because of a negative return on gilt edged securities, the level of the stock market and the difficulty of calculating future income streams from companies in which pension funds were invested, some trustees found that their schemes were insufficiently funded to meet their commitments. Therefore, companies often made substantial extra payments into those schemes to meet the shortfall.
It seems wrong that if in better times the pension scheme recovers and finds with hindsight that the extra money paid in to meet the emergency is not needed the company should not be able to obtain a refund of the extra money that it had to pay in. Given that there are such circumstances, it would be wrong to accept the amendments, although I understand the spirit in which the hon. Lady moved them.

§ Sir Brandon Rhys Williams
As my hon. Friend has been kind enough to refer to the speech which I made earlier and has touched upon his difficulties, as a Treasury Minister, in trying to make policies in the area of occupational pensions, I should like to take the opportunity of drawing his attention to the remarks made this year by Professor Moore in his presidential address to the Institute of Actuaries.
Professor Moore took the trouble to emphasise that there does not appear to be any Government Department with overall control of policy governing these schemes. He pointed out that it is partly an Inland Revenue matter and partly a Department of Health and Social Security matter as well as a matter for the Department of Employment, the 1279 Occupational Pensions Board and the Government Actuary. I consider that the Treasury must have an overall interest in this because of the important part that these schemes play in striking a balance between consumption and saving in the economy.
What my hon. Friend has said seems to reinforce my suggestion that there should be a serious and early inter-departmental study of the way in which these schemes are operating, the tax provision and aspects of the law connected with occupational pension schemes. In that way the Government can make known a policy which is satisfactory to those who put money in and also to those who rely on the money that comes out of these schemes at the end of their careers.

§ Mr. Ian Stewart
I remind my hon. Friend the Member for Kensington (Sir B. Rhys Williams) that I shall be conferring with my right hon. and hon. Friends in the Department of Health and Social Security about these matters. In a recent survey of opinion relating to pension funds it was suggested that almost two-thirds of the schemes would probably choose to improve benefits rather than the other methods. We welcome that.

§ Dr. McDonald
I am glad that the Minister is prepared to consider the issues which have been raised in the amendments I tabled.
I accept the Minister's point regarding employers paying an extra contribution when there was a negative return on investments during the 1970s. Nevertheless, the rights of employees as contributors to such schemes are being overlooked. When there is a surplus, their interests should be properly taken into account. They are, after all, deferring pay in order to receive a pension in the future. Part of an employee's pay goes into a pension fund and it is time that proper weight was given to this when we consider the disposal of pension fund surpluses.
I accept that the Board of Inland Revenue may not he the best possible mechanism to use. Tabling this amendment has given us the opportunity to air these important issues. Much thinking still needs to be done about pension schemes and the way in which they operate to ensure that they benefit those who contribute.
We wish to highlight that importance. I am glad that the Government will consider this matter, and we on this side of the House will certainly give a great deal of attention to these issues. I beg to ask leave to withdraw the amendment.