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`(1) It shall be permissible for the trustees of an occupational pension scheme which is an exempt approved scheme under section 21 of the Finance Act 1970, to amend the rules of the scheme in regard to the calculation of transfer payments and of preserved benefits on behalf of any member ending pensionable service before the normal age of retirement under the scheme in accordance with the provisions of this section.
(2) For the purposes of this section "trustees", in relation to a scheme which is not set up or established under a trust means the managers of the scheme.
(3) To comply with the provisions of this section, the amended rules of the scheme shall require the trustees in respect of any member withdrawing from pensionable service before the normal pension age under the rules of the scheme at the withdrawing member's option either—
(4) In a case where an actuary certifies that on the date of the certificate the scheme is not fully funded, (which is to say that the scheme does not have sufficient assets to meet its liability in respect of the whole or any specified part of the accrued rights to benefit of its members), the transfer payment, or as the case may be, the part of the transfer payment which corresponds with that specified part of those accrued rights, may be reduced by the percentage by which the scheme is so shown to be deficient.
(5) A scheme which by 1st January 1987 has not amended its rules so that the transfer payments and the preserved benefits payable under the scheme are to be calculated on terms at least as favourable to the beneficiaries as those specified in this section shall not qualify as an exempt approved scheme in respect of liabilities incurred after that date except by the permission of the Occupational Pensions Board.
(6) A scheme may apply to the Occupational Pensions Board for deferment of the latest date for the amendment of its rules in accordance with this section and to retain its status as an exempt approved scheme in respect of its liabilities incurred after that date to a date not later than 1st January 1992.
(7) The Secretary of State for Health and Social Security shall lay before Parliament regulations under this section subject to affirmative resolution of the House of Commons which shall specify the grounds on which the Occupational Pensions Board may approve applications for deferment under subsection (6) above.'. — [Sir Brandon Rhys Williams.]
§ Brought up, and read the First time.
§ Sir Brandon Rhys Williams (Kensington)I beg to move, That the clause be read a Second time.
I think that the House is well aware of my longstanding interest in the protection of the rights of early leavers in occupational pension schemes. This issue is of significance when considering this year's Budget, because the Government have rightly introduced a measure in the Budget that will have a bearing on the way in which such schemes are required to balance their assets and liabilities.
About 18 months ago, there was an extensive debate about the way in which occupational pension schemes should be allowed to develop. Several people said that the tax regime enjoyed by those schemes was either too generous or was being abused. Rumour had it that in the 1985 Budget my right hon. Friend the Chancellor of the Exchequer intended to make a dramatic reduction in the extent of the tax advantages enjoyed by private sector occupational pension schemes. Fortunately, the predictions published in the press at that time proved to be incorrect. But the debate served a useful purpose, as it drew attention to the fact that the 1970 Act was open to serious abuse.
I do not wish to detain the House long, but I should like to draw attention to a letter that I wrote last year to The Times, and which was published on Budget day, 19 March 1985. I shall not weary the House by reading it all, but the last two paragraphs are still relevant. I wrote:
If the Chancellor were to require pension trustees to separate the assets which are allocated for individual beneficiaries from their general reserves, the former could retain the habitual tax exemption, while the income from the unallocated or excess funds could be taxed like that from any other company assets.1230It would be a reasonable reform, and it would serve the good purpose of encouraging trustees to adopt conventional money-purchase principles. I would also encourage them to allocate each individual his full accumulated rights, while still in service, and to pay transfers for the early leavers of the full amount of their entitlements.I do not think that much notice was taken of my letter at the time, because on the same day it became evident that my right hon. Friend the Chancellor would not make any dramatic change in the 1985 Budget. But the problems of the early leavers remain. I was, therefore, particularly pleased when, to the surprise of all concerned, the Chancellor announced in this year's Budget speech that he intended to tackle abuse of the 1970 Act along more or less exactly the lines that I had recommended in my letter. What the Government are doing is entirely right. There may need to be further study as to whether 105 per cent. is the right amount for funds to be able to retain without incurring any penalty, but, having listened to experts, I believe that the Government have got things right. However, no doubt that point can be further considered by the experts.In general, the Government seem to be moving in the right direction. There has undoubtedly been a tendency for corporate treasurers to park funds in pension schemes when there was an occasional surplus in the availability of capital, so that advantage could be taken of the tax regime intended for the pension funds' beneficiaries. The money could be drawn out again when the company required it by the simple device of paying less money into the pension fund than would be demanded in the normal course of events by the annual increase in its liabilities.
The Government saw that abuse, and have acted to prevent it from continuing. When I heard the speech of my right hon. Friend the Chancellor, I thought that the Treasury would at the same time produce a new regime for assessing the assets and liabilities of occupational pension funds, so that there would be a compelling advantage to funds to put the highest possible value on the rights of potential early leavers in order to reduce the likelihood of a tax penalty being incurred from time to time as the scheme's funds developed. But I understand that the Treasury has not seen the opportunity, or, if it has seen it, is not seizing it. That is why I have devised this new clause.
In a moment I shall go through the provisions that I recommend. However, if I took as long to explain the precise purpose of every line as I took to draft it, and if I added to that the amount of time that I insisted that senior people in the profession should devote to giving me advice, hon. Members would be here for a long time. I do not want to weary hon. Members with the precise implications of every line, but I hope that the provisions I am suggesting in my new clause will be drawn to the attention of the Treasury and of those interested in occupational pension schemes. In addition, I hope that other Departments that have an interest in how we provide for private retirement provision will also take an interest.
It is the Government's policy to encourage British citizens to be independent, to stand on their own feet financially, and to make their own provision for retirement. That is so much a part of Government policy that it hardly needs restating. In particular, it is the Government's stated policy to encourage the development and improvement of occupational pension schemes. This is not a matter of controversy; all hon. Members accept it. Moreover, few people would deny that there is now a tendency in Britain towards consumption rather than 1231 saving. That is an unhealthy feature of the economy. One need only compare the sort of goods in high street shops and the volume of imports of consumer goods that British people can afford with the volume of investment, particularly in manufacturing industry, to see that there is a rather unsatisfactory balance.
If the Government did something to encourage money to flow into fresh, real savings and investments, and which at the same time would discourage the flow of money into consumption —particularly as current wage settlements are often far higher than is justified by the growth in productivity—it would be a healthy move.
It is only reasonable to point out that early leavers in occupational pension schemes who change jobs in mid-career incur substantial losses. Even if I consult people like the Government Actuary, or study published returns, I find it difficult to make a fair assessment of the amount of money being lost by early leavers through their being paid their transfer values—or being awarded preserved benefits—which are far less than the value of the assets that they leave behind. However, it would appear that the figure is not less than £20 million every week, or £1,000 million every year. Some reliable estimates put the figure much higher than that; but I do not know whether to place too much emphasis on them, partly because it is difficult to assess the effect of the reforms that have been made in recent years, particularly with effect from 1 January 1986.
We hope that those reforms will alleviate the situation. But we are talking about a substantial loss of money, when that money should constitute part of each individual's real assets and part of his savings for a future time. The effect of that forfeiture is that there is a burden on employers to tip the amount of remuneration that goes to employees away from deferred pay, and to increase the amount of money that goes into immediate consumption through the pay packet or salary. More money flows in the direction of immediate consumption and less in the direction of savings. If the pension fund can make a profit from the early leavers, the employer does not have to subscribe so much to enable it to meet its liabilities.
If the Government have taken steps to prevent the abuse of the tax exemptions—they might be called the tax "privileges" — of occupational pension schemes, which are of long standing and were confirmed by the 1970 Act, we are right to consider whether the House should not also take this matter further. Schemes which are overfunded in relation to their present liabilities will be encouraged by this year's Budget to improve the award of benefits; but not enough is being done specifically to help the early leavers. If schemes do not take the opportunity to improve the level of benefits, they may have to take steps to bring their assets and liabilities into better balance in ways that could involve tax penalties. That is self-evident and quite proper. I had hoped that, in working out the details, Treasury Ministers would ensure that the tightening Op would specifically include a compelling incentive to occupational pension schemes to put their houses in order in regard to the calculation of transfer values.
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Two serious obstacles are believed to lie in the way of dramatic action to stop the occupational pension schemes from bleeding the early leavers: the fear that employers will protest strongly at the extra burdens and that there 1232 will be a political reaction; and secondly the understandable reluctance to bring in what might be held to constitute retrospective legislation.
Obviously, if early leavers are losing £1 billion a year and Parliament acts effectively to remedy that, the money must be found from somewhere. There is no necessity for that burden to fall immediately on employers because, to a great extent, occupational pension schemes at present are flush with funds. They could well afford to carry this extra burden, especially if the liability is spread over some years, without needing to go immediately to employers to require them to top up their schemes.
Firms which expect to recruit staff from other firms over some years would also recognise that, although there would be bigger outgoings with the staff they lost, there would be larger receipts with the staff they gained from other occupational pension schemes. Firms which expect to bring people on to their books in mid-career would be relieved of the necessity of putting enormous sums of money in the pension funds in respect of people whom they recruited from elsewhere, because they would bring with them a full transfer payment to justify their inclusion in the pension fund on reasonable terms.
There would also be a switch from payment of remuneration, mainly in the form of a stimulus to current spending, and some movement to saving through a formal trust instead. There is no reason why employers who are under pressure to give greater remuneration to their payroll staff and management should not point out that they will put more into the pension fund as a result of Parliament's intervention and that, therefore, there is genuinely less money available to distribute in the form of increased wages.
I would like to consider the position of firms that might judge that they would stand to lose substantially if they were required to pay transfer values that genuinely reflected the value of the early leavers' assets. Presumably, they would be firms that expected to have decreasing numbers of senior employees. The obvious case would be firms that had just been the victims of take-overs by unscrupulous bidders who would expect to discharge a large number of senior people with the objective of relieving the burden on the pension fund. They could then raid the pension fund to restore the expenditure which they had had to incur on acquiring the firm.
I have no sympathy with take-over bidders whose main objective is the pension fund with which they can recoup the expenditure laid out in acquiring the business. They attack defenceless people who have given long service to the firm so as to grab their rights and put the money into the bank. If Parliament intervenes to prevent such conduct, it will be applauded by every fair-minded person.
We must all respect the natural reluctance of Governments to let themselves be accused of introducing legislation with retrospective effect. We must concede that, when pension schemes have been in existence for many years, people who have been accumulating assets in those funds for 30 or 40 years will be involved. The assets held against the fund's liabilities have been built up under a stable tax regime which everyone understands and under employment contracts which are known to the parties and are generally in the form of the printed rules of occupational pension schemes. It could be said that it is undesirable, but it is a fact under the rules which have existed for years that transfers are not expected to he made at the full actuarial value. It is possible to argue that it is 1233 an accomplished fact. If we now try to insist that people of long service who leave their service before normal pension age should be given money which their employers did not expect to be obliged to give, Parliament's intervention to require employers to pay out much more money could be held to be retrospective.
I have deliberately drafted my proposals to escape that criticism. My provisions would reflect only on future tax concessions in respect of future liabilities. A firm that felt that it was under too much pressure because of my proposal that early leavers should be given a fair deal in future would have the option of winding up its fund within five years, and of making a new start in regard to its further liabilities incurred under the more generous regime which my new clause would impose. I do not envisage there being a danger — and professional people who work with these schemes agree—of a serious risk arising of a great number of firms winding up their schemes. I shall not go into the many reasons unless the House wishes me to do so.
The Government plainly do not think it is obligatory to leave the tax provisions totally unchanged in regard to the abuse of stacking funds into occupational schemes simply to take advantage of tax benefits. I believe that the House concurs with that. We can therefore feel free to amend the tax regimes of occupational schemes under the 1970 Act to prevent this abuse of overfunding. Surely we are also free to exercise the taxpayer's rights in the interests of securing natural justice for early leavers. The taxpayer has a stake in these private sector schemes because the essence of the tax concession is that tax liability is deferred until the money is paid out. The taxpayer therefore may have to wait 40 or more years before the tax which might have been levied on the firm is eventually recovered in the form of the income tax which has to be paid by the pensioner at the end of his days. In all that time, the money is building up, completely free of capital gains and other taxation, at compound interest in the hands of the firm's trustees. The taxpayer is making a substantial tax concession to the schemes and at the end of the day a large part of the funds of these schemes is, in effect, the taxpayer's money. I see no reason why taxpayers should be obliged to help these schemes in such a way if they continue to act in a way which nobody can seriously believe to be in accordance with natural justice or the best interests of the economy.
I took the opportunity yesterday, when there was a debate on the plight of the elderly, to point out how much it would assist the elderly if they were able to rely on better incomes from occupational pension schemes. I pointed out that there is a major deficiency in these schemes, which is that the high fliers and other people who have to change their jobs stand to lose so much under the way in which the transfer valuations are made. My hon. Friend the Under-Secretary of State for Health and Social Security suggested that nothing should be done immediately, and that we should see how the transfer regulations which were brought in at the beginning of the year would work out in practice.
As I have said, I have consulted a large number of well-informed people. I do not think that any of them has expressed the view that what has been done so far to remedy the abuse of early leavers will put the problem right. That is not the expectation of the actuaries or the 1234 people who operate in the area. Of course, I recognise and am grateful for the work that has been done by the Department of Health and Social Security and others concerned to make some improvement. However, they have not met the problem fully. That is the opinion of well-informed people.
Let us suppose we are all wrong, and that what was done at the beginning of this year has solved the problem. In that case, there would be no extra burden to the occupational pension schemes if the Government were to accept my new clause because they would simply be confirming something which they had already brought about. In that case there would not be any serious risk of imposing new burdens on the schemes.
I should like the House to give serious consideration to this problem. We need to encourage job mobility, we need better provision for retirement, and we have to ensure that taxpayers' money is not misused, as it certainly is by occupational pension schemes that act against the more efficient running of the economy. We have to uphold natural justice. I therefore trust that the House will agree to give my new clause a Second Reading.
§ Mr. Ian StewartMy hon. Friend the Member for Kensington (Sir B. Rhys Williams) has a deserved reputation for having, over a long period, expressed an interest in and campaigned on behalf of early leavers from pension fund schemes. I think that by that campaign, which he has pursued by raising the matter in the House on numerous occasions and by other means such as writing to The Times last year, as he reminded us, he has done a great deal to draw public attention to one of the problems which has become more acute in recent years. People tend to change jobs more often and, therefore, the number of those who leave pension schemes before retirement age has been increasing.
Credit is due to my hon. Friend for having, if not single-handedly, changed the climate and approach of many trustees of pension schemes to the way in which they consider the position of early leavers. He has certainly done something towards encouraging a greater awareness of their problems and, as a consequence, by practical means early leavers are now not treated quite as badly as they were a few years ago. I would accept that there is probably further to go on this issue.
6.15 pm
My hon. Friend's new clause is ingenious and, in technical terms, it is well organised. He has taken a great deal of trouble not only to specify clearly what his objectives are, but to find a means of establishing how they can be achieved in statute. However, I am sure that he will not be surprised to learn that I do not feel inclined to recommend to the House that his new clause be accepted.
My basic reason for opposing the new clause has nothing to do with whether I am sympathetic to the position of early leavers, or to many of the arguments that my hon. Friend has deployed. The central point is that an occupational pension scheme is a voluntary arrangement set up by an employer for his employees and, although the Revenue has rules governing the maximum level of benefits that a scheme may offer if it is to qualify for tax exemption, I do not think that it would be right for the tax system to be used as a means of compelling trustees to dispose of their resources in a particular way.
My hon. Friend obviously takes a different view. However, we believe that it is right to leave the trustees of 1235 schemes with the freedom to provide whatever benefits they consider appropriate in relation to membership of the scheme and, of course, what they presume would over a period of time, be in the interest of employment in the company concerned.
In principle, that is the right approach. Even if it were not, I do not think that it would be right to entrust the Inland Revenue with the responsibility of establishing whether the distribution was properly organised to meet the approval which would be required to avoid an extra charge to tax.
My hon. Friend's new clause introduces a new condition for tax exemption and any scheme that did not offer full protection in those terms for the pension rights of early leavers would lose its approved status. As I said, I do not regard that as a natural or, perhaps, proper use of the tax system for pensions, because the tax system is essentially designed to ensure that tax relief is given only for bona fide pension arrangements without looking through them to try to determine the quality or distribution under the schemes.
Last night my hon. Friend spoke of introducing what he called an "overpowering" incentive. Today he used the term a "compelling" incentive. Certainly, to use the tax lever in the way in which he has suggested today to deal with the content of pension schemes would amount to an overpowering and compelling instrument for achieving that end. I am not at all convinced that it would be proper to proceed in that way.
My hesitation is strengthened by looking at subsection (7) of new clause 34 where my hon. Friend is inviting the Secretary of State for Social Services and not my right hon. Friend the Chancellor of the Exchequer to lay regulations before Parliament. The approach to the conduct of pension schemes really is a matter for the DHSS rather than for the Treasury. I am not in a position to judge whether the new regulations will have more favourable results than my hon. Friend suspects. However, my right hon. and hon. Friends in the DHSS will need to follow that through.
I see certain problems, even if one accepts the principle of what my hon. Friend is trying to achieve, because if a scheme failed to satisfy the Inland Revenue on his new condition, it would lose tax exemption on all its resources. That would affect long-stay members of pension schemes, shorter-stay members, and so on. I cannot believe that that consequence would be in scale with the objective that my hon. Friend is trying to achieve.
There can be little doubt that our proposals this year for dealing with pension scheme surpluses will result in improvements in pension benefits. Like my hon. Friend, hope very much that a material part of that improvement will go towards providing a better deal for early leavers than many schemes have in the past. If the debate serves no more immediate purpose than drawing to public attention the case for doing so, the House and the public will have cause to be grateful to my hon. Friend for it. However, the subject of early leavers, important as it is, must remain a matter for the trustees of individual schemes to decide upon in the light of their own circumstances.
While I have sympathy with the principle of the case that my hon. Friend is advancing in terms of better provision for early leavers, and while I recognise the changes in employment patterns of recent years and the way in which early leavers have always had a worse deal 1236 than those who have stayed through to retirement, I am sceptical about the method that he has chosen as the prospective means of trying to achieve it. Following this short debate, I shall discuss the matter with my right hon. and hon. Friends in the Department of Health and Social Security because it is right that I should give something more than a commitment just to draw it to their attention. It should be drawn to their attention, but I should like to talk to them about it.
I doubt whether there are likely to be circumstances, even in the light of all that, which would justify using a direct tax weapon to achieve what, after all, is a structural change in the pattern of pension provision. A structural change has begun to take place, and we may encourage it, but I reluctantly part company with my hon. Friend on the suggestion of using tax penalties to achieve it.
§ Sir Brandon Rhys WilliamsI should like to comment on some of the remarks of my hon. Friend the Economic Secretary. If he had had longer to consider the precise implications of the new clause, he would not have made them: his criticisms of my proposals do not bear comparison with my text.
My hon. Friend takes the view that private occupational pension schemes are voluntary arrangements, and it would be wrong to use tax as a means of compelling the trustees to dispose of their resources in a particular way. However, the tax regime that applies to those schemes is already extremely rigid. Many regulations have been introduced through the Inland Revenue's administrative control or in statute which require the trustees to act in a particular way. In my new clause, I am merely suggesting that there should be one more provision for the future.
My hon. Friend also made the mistake of thinking that what I am suggesting would, have a retrospective effect; but I spent quite a long time seeking to explain that it would not. I did not go into the new clause line by line, but it would have no retrospective effect because the trustees, in so far as they had acquired liabilities or assets up to the date on which the new clause came into operation —which would probably be deferred for as much as five years—would be able to continue to enjoy precisely the same tax regime as they do now.
The other thing that surprises me is that at the very moment when the Government are introducing their own changes in the tax provisions governing these schemes they should object to a Back Bencher trying to do the same. My hon. Friend is not logical if he recommends to the House that we should approve the tax changes in regard to the overfunded schemes, yet says that there should be no lax changes in regard to schemes that offend in other ways against the principles under which they were set up.
I cannot believe that anyone on either side of the House seriously thinks that it is right that early leavers should be given transfer values or preserved benefits that are far less than the value of the assets that the scheme is holding for them should they decide to remain in the service of the employer. That offends against natural, justice. I cannot accept that my hon. Friend's speech today is to be the last word on the subject.
My hon. Friend made a commitment, which I value, and I trust him implicitly. He agreed that he would commit himself to discuss the matter with the DHSS. I suggest that he should also discuss it with the Department of 1237 Employment, because there is a substantial interest for that Department, too, in promoting job mobility, particularly for senior management and high fliers.
I conclude with the same recommendation that I made last night, that the Government should set up an interdepartmental study of the matter and produce a White Paper at an early date. In view of my hon. Friend's reaction, I can see that it would be futile to press my new clause now, so I beg to ask leave to withdraw the motion.
§ Motion and clause, by leave, withdrawn.