§ APPROPRIATE PERSONAL PENSION SCHEMES
§ Mr. MajorI beg to move amendment No. 192, in page 82, line 9, leave out pargraph 2 and insert—
'2. The Secretary of State may prescribe descriptions of persons by whom or bodies by which a scheme may be established and, if he does so, a scheme may only be established by a person or body of a prescribed description.'.
§ Mr. Deputy Speaker (Mr. Ernest Armstrong)With this it will be convenient to discuss Government amendment No. 193.
§ Mr. MajorParagraph of schedue 1 provides a power to prescribe who may establish personal pension schemes. The amendments extend that power, adding a general power enabling requirements to be placed on personal pension schemes as a condition of them becoming appropriate to receive minimum contributions from the DHSS Newcastle. The amendments also reword paragraph 2 so that the Secretary of State need not exercise the power given there to prescribe who may establish a personal pension scheme if that proves unnecessary to enable the new providers—unit trusts, banks and building societies—to participate in personal pensions.
Our intention is to use the power in the new paragraph 5(b) set out in amendment No. 193, to make regulations 77 about the form and nature of appropriate personal pension schemes. For example, they are likely to specify that schemes which are authorised unit trusts under the financial services legislation, or which offer special kinds of contract under insurance company legislation, may be appropriate. That approach will enable us to ensure that the investor protection provisions that apply to existing forms of investment business will apply automatically to personal pension schemes receiving the minimum contributions.
We had a lengthy and interesting debate in Committee about investor protection and we regard that as critically important in the provision of pensions. I am sure that that view is supported by all hon. Members. Together with other legislation, for example the Building Societies Bill, the proposed regulations will show that the route for the new providers to become involved in the provision of personal pensions is by setting up or by being associated with suitable forms of investment business offering such pensions.
§ Amendment agreed to.
§ Mr. NewtonI beg to move amendment No. 3, in page 82, line 11 leave out paragraph 3.
§ Mr. Deputy SpeakerWith this it will be convenient also to discuss Government amendments Nos. 5, 8, 24 and 25.
§ Mr. NewtonThese amendments meet a point that was raised by Opposition Members during the Committee stage. The Government undertook to discuss these points with the parliamentary draftsmen. The amendments ensure that the minimum contributions to a personal pension scheme and the corresponding minimum payments and incentive payments to a money purchase occupational scheme are used for the benefit of the member concerned. That anxiety was expressed in an amendment in Committee. The amendment also paves the way for other amendments to clause 6 and schedule 2 which meet a related point raised in Committee by my hon. Friend the Member for Bristol, North-West (Mr. Stern).
Appropriate personal pension schemes and money purchase contracted-out occupational pension schemes will not, as the Bill presently states, have to provide only money purchase benefits. They will also be able to provide some defined benefits provided that the minimum contributions are applied — subject to permitted administrative charges—to providing money purchase benefits. I hope that that explanation will assist the House to form a favourable view of the matter.
§ Mrs. BeckettI listened with interest to the Minister's explanation of the reasons for the amendment, and the debate affords an opportunity to the Opposition to draw attention to a couple of defects that we still see in the scheme.
The Minister said that the amendment would allow occupational pension schemes to give defined benefits as well as only money purchase benefits, which might have been the case previously. We are concerned that the part of the Bill that is now being amended will allow schemes to be contracted out on the basis of minimum contributions rather than, as in the past, on the basis of the much higher standard of defined benefits.
Most people who were anxious when the Government proposed the abolition of SERPS might have felt some 78 sense of relief that they now propose only to modify that scheme. But such relief will rapidly evaporate once it is realised that as a quid pro quo for having a modified earnings-related pension scheme within the state sector the standards that occupational pension schemes are expected to meet are significantly lowered. Rather than merely making the state pension worse, the Government have effectively lowered pensions right across the board, but, as that is the clear intention of their overall policy, I suppose we should not be surprised.
The Minister also said that another intention of the amendments was to try to ensure that benefits were more definitely devoted to the interests of the member. That goes to the heart of our concern about the proposal to introduce personal pensions.
In Committee it was noteworthy that all the amendments that sought to introduce some guarantee—even insurance—that people would not be able to sign away all their pension rights, thereby finding themselves destitute when they retired, were repulsed. The Government made it very clear that personal pensions were a risk — although they described it as an opportunity—and that the full burden of that risk should be borne by the individual who chose to take out a personal pension. To be completely fair to the Government, that was made plain in their first consultative document, but it has been far from the forefront of their remarks ever since.
§ Mr. FreemanAs I did not serve on the Committee I did not have the benefit of hearing the arguments that I am sure the hon. Lady deployed with great skill. However, I am concerned about the line of her argument. She has expressed fears — which I do not share — about the introduction of personal pensions. This is a marvellous opportunity to encourage those who are not already in occupational pension schemes to make provision for themselves. Will the hon. Lady enlighten us by explaining the risk that she thinks will be borne by those who take out personal pensions? Perhaps she will bear in mind that before such a pension is taken out there are restrictions on those who may offer such schemes and limitations on the amount and timing of the benefit to be received. The hon. Lady should also bear in mind that those already in occupational pension schemes might think carefully about withdrawing from such generous schemes, particularly those which are non-contributory.
§ Mrs. BeckettI am grateful to the hon. Gentleman, who has led me to my next point. I shall tell him why the Opposition and others are concerned about personal pensions and why some of the major insurance companies have expressed reservations. I can do no better than quote the CBI. The hon. Gentleman may not have much sympathy with my views, but I am sure that he sympathises with the view of the CBI. It states that relying solely on personal pensions could leave people and their families less well off and inadequately provided for in later years because they do not provide a pension based on final salary or average earnings, as would an occupational pension; they do not include discretionary increases to keep pace with inflation; and they do not provide life assurance, and so on. The CBI also draws attention to the danger that younger employees may be tempted to leave their occupational pension schemes. When we are young, we are less worried about our pension provision and are 79 much more likely to be tempted by cash in the hand. Many people are extremely concerned about the dangers that could be incurred as a result of unwise investments.
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There are other problems, as well as the possibility of not getting an adequate pension because of poor investments. The Minister said that it was intended to try to obtain better value for money, but he must be aware that the overheads of personal pension schemes are likely to be substantially higher than those of occupational pension schemes, and infinitely higher than those of SERPS, which is the most efficient way of providing a good pension and good value for money. After all the things that they have said, it is extraordinary that a Conservative Government should be insisting on people getting poor value for their investments.
There is the danger that people may be misled into taking out personal pensions, without realising the risks that they will incur. I draw the attention of the House to an advertisement that appeared shortly after we finished debating these matters in Committee. It is almost as misleading as an advertisement for pensions could be. It says that SERPS is unfair and poor value for money. That is totally untrue. Even Conservative Members would not argue that. They would complain that it is too good value for money, which is why it must be reduced. The advertisement lists all the advantages that would accrue to someone setting up or taking out a personal pension.
One of the most disturbing things about that advertisement is that it is placed by a company which has in its title the word "Crown". Its logo is very like the HMSO logo. It looks very much like a Government-sponsored advertisement. But it is a misleading attempt to draw someone into taking out a personal pension that might well be to his or her disadvantage. I know that the Government intend to control misleading advertising, and the sooner they start the better.
We are also concerned about what is likely to happen at a time when unemployment is high and is likely to remain high even when, after the next election, we have a Government who will bend all their efforts towards reducing it.
In Committee we discussed whether the value of someone's personal pension would be treated in the same way as other insurance policies are now—for example, whether as a capital resource it would deprive someone of entitlement to income support, housing benefit, and so on. I am not sure whether the Minister has wholly met that concern, but we will not know what the dangers are until we see how the value of personal pensions is assessed.
I am much more concerned about the fact that someone who is unemployed is unlikely to be able to maintain the contributions. People will then be in danger of effectively losing all of their supplementary pension entitlement.
The hon. Member for Kettering (Mr. Freeman) spoke of the opportunity of encouraging people who have no occupational pension. But if, having taken out such a pension, they become unemployed for a sustained period and are forced to give up the scheme to which they have contributed, they will then have no state earnings-related supplement and no occupational pension supplement either. That is a serious danger that the Government have effectively ignored.
80 Later amendments deal with what the Government call a 2 per cent. incentive, but what we call a 2 per cent. bribe. The proposal to give people extra contributions to attract them into such schemes is particularly invidious because those people are in serious danger of providing themselves with an inadequate pension. It seems wrong for the Government to seek to give someone a cash incentive which will ultimately leave that person in poverty in retirement.
I shall draw attention to the observations of the United Kingdom steering committee on superannuation about what are and what are not advantageous proposals and what is and what is not in the public interest. During the Committee stage, and again on report, that committee wrote saying that its views have not changed. It draws attention to the fact that, the Secretary of State has claimed that the proposals will foster industrywide schemes, but that it believes that damage could accrue to industrywide schemes, especially specialised ones for the police and firemen.
In Committee the Minister said that no one in the police or the fire service would be so unwise as to leave an occupational pension scheme, and we hope that no one will do so. However, those who represent the police and firemen and their pension schemes are worried about the temptation to do so. They draw attention to the fact that contributions to the police scheme are 11 per cent. per annum for men and 8 per cent. per annum for women, and 10.75 per cent. per annum for both male and female fire fighters. Those figures represent considerable sums. such as would cover the cost of running a car. They think it is likely that some young people will be tempted to take out proposals of the type envisaged in this section of the Bill. Our anxiety, like theirs, remains unassuaged by our discussions in Committee.
Although we shall not vote against the amendment, we believe that it is right to express our anxiety at the damage that the Government are doing to pension provisions.
§ Mr. FreemanI did not have the benefit of listening to the arguments of the hon. Member for Derby, South (Mrs. Beckett) in Committee, but I disagree with two of her criticisms of the provisions for personal pensions in this amendment, with which I agree.
The hon. Lady cited the anxiety of the Confederation of British Industry, which I believe is misplaced. I have read the article in question. If I have understood her summary of the argument correctly, it is that if an individual leaves an occupational pensions scheme and makes a money purchase provision for his personal pension, it would not be as good as a final salary or defined benefit scheme. That misses two points.
First, about 11 million employees — a goodly proportion of whom are admittedly on extremely low pay, such as married women who work, and for whom discussion of the provision of a personal pension is not entirely appropriate—are not covered by occupational pension schemes. Therefore, the introduction of personal pensions is a major breakthrough which will be popular with the electorate during the next few years and as the schemes get going. Those who are not covered by occupational pension schemes will mainly be attracted to personal pension schemes. Therefore, The CBI's argument is not relevant to them. Surely the objective is to bring in as many people as possible who have no provision made for them by their employer, perhaps 81 because they work in a small firm or for an employer who does not have a final salary scheme. Many small and medium firms have money purchase schemes only and do not have defined benefit and final salary schemes.
§ Mrs. BeckettI take the hon. Gentleman's point but I am sure he will recall the two arguments expressed by those worried about personal pension schemes. He said that many people did not have occupational pensions. We do not think it matters what type of pension one has, so long as it ensures an adequate income. We do not agree with the Secretary of State that sticking a different label on a rose makes it smell different. We believe that a poor occupational pension is disadvantageous. The hon. Gentleman also pointed to the stop in growth of occupational pensions. He will be aware that it is widely believed that, as the state scheme has been so good, there is no need for an expansion of occupational pension schemes.
§ Mr. FreemanMy experience does not bear out what the hon. Lady says. It is wholly at variance with hers.
Some analysis is needed of the central point of the hon. Lady's speech. She expressed the fear that some people would leave a relatively good occupational pension scheme which provides two thirds of final salary after 40 years of service and an indexed pension or one increased by a minimum of 5 per cent. per annum. She feared that people nearing retirement might be induced away from the relatively generous benefits of that scheme and seek to make their personal pension provision, ending up worse off than if they had remained in the occupational pension scheme.
The fallacy of that argument is the implicit belief in a relatively high rate of inflation. The hon. Lady will agree that if one assumes that inflation will remain below 5 per cent. and an economic growth of 2 to 3 per cent. per annum, a money purchase scheme will provide adequate benefits compared with the best occupational pension scheme on a final salary basis. One would be substantially worse off only if there was a high rate of inflation. The Government's proposal contains the implicit assumption that inflation has been licked, thus providing the economic background for pension provision with inflation under control and sustained economic growth.
We must consider the young person who leaves, or never joins, an occupational pension scheme, and makes his own personal pension provision. It must be remembered that we are not dealing with an economy where a person joins an employer at 18 and stays until he retires. We must deal with a flexible employment career where a person is in employment, is unemployed temporarily, and moves to a different employer. Gone are the days when a person joins an employer and remains with the company for the whole of his working life.
I hope that before a young person opts out or decides not to join a generous occupational pension scheme, he will think carefully about it. He may decide not to join, based on a correct assessment of all the facts. Earlier I alluded to my belief that the literature presented by employers and those selling personal pensions should be clear and enable those who are considering them to reflect properly and with due regard to the seriousness of their decision. The legislation that the Government have enacted, coupled with the Financial Services Bill, fulfils those objectives.
82 The second objection of the hon. Member for Derby, South concerned what she described as the unemployment problem. We have unemployment problems, as dc many other countries in the Western world, but she must distinguish between the long-term unemployed and those who are moving out of employment temporarily and will go back into other employment.
I grant that there is a problem in pension provision for the long-term unemployed. However, those who move out of employment for a few months before finding other employment, and who are making provision for their personal pension under a money purchase scheme, will find that when they go back into employment they can probably increase their contributions for a short time up to the Inland Revenue limits. That will allow them to catch up for the period when they were not making provision. Therefore, when it comes to retirement, their prevision will be adequate. The results of the original clause and the amendments now tabled to it are wise and beneficial and will be popular with the electorate.
§ Mr. NewtonThe hon. Member for Derby, South (Mrs. Beckett) ranged widely in her comments and made almost a Second Reading speech. I hope that she will not expect me to respond in the same way to everything that she said.
Once again, in the Opposition's response to these amendments, which are quite modest in themselves, we have had a clear illustration of how they dislike offering people a wider choice in making provision for themselves and their pensions. The experience of the past 10 or 20 years shows that such behaviour will carry a penalty, in that it will make it more likely that people who should have access to occupational or personal pensions will not have such access, simply because schemes in which they could participate will not be there. We believe that it Js right to open up those choices, for the reasons on which my hon. Friend the Member for Kettering (Mr. Freeman), with his particular expertise, touched.
We have to accept that many purchase schemes cannot, by definition, give the same guarantees that can, at least purportedly, be given by the state earnings-related pension scheme. Its ability to deliver depends on the capacity and willingness of future generations of taxpayers and contributors to find the money. We accept that there is a different balance of considerations for purchase schemes, occupational money purchase schemes and personal pension schemes. I hope the hon. Lady will at least acknowledge that although she talks relentlessly as if it were all downside risk, a good money purchase scheme or personal pension scheme will bring significant additional rewards for those who have made that choice. We simply think that those opportunities should be made available.
I shall not proceed further down that almost Second Reading line of argument, but will move on to some more particular issues raised by the hon. Lady. Money purchase schemes, both occupational and personal pensions, will have to provide widows' and widowers' benefits in circumstances which parallel those required from salary-related schemes. The hon. Lady seems not to have sufficiently appreciated that point.
The hon. Lady spoke about representations on behalf of some of the local government schemes. We have already made it clear that we do not expect people in good occupational schemes to leave them and take personal 83 pensions, and that would apply to the special pension schemes for policemen and firemen, which provide rapid accrual. It is significant that the examples quoted by the hon. Lady are all from the public sector, which returns us to my earlier point. Without the option of money purchase contracted out, there is no real prospect of the sort of growth in private-sector, industrywide schemes which we, and many others, would wish to see. As I understand what the hon. Lady was saying, she was not seeking to attack or resist our amendments, but rather to use them as a peg on which to hang some wider points. I commend the amendments to the House.
§ Mrs. BeckettWith the leave of the House, Mr. Deputy Speaker, I shall make a few brief observations on what the Minister said.
It still remains significant that the Government have refused at any stage to accept any proposal that people should have any minimal guarantee. In their consultation document, the Government said that if a personal pension scheme failed to provide people with adequate income, that would be hard luck. They did not phrase it quite like that, but that is what they meant.
Both the Minister and the hon. Member for Kettering (Mr. Freeman) asked how anybody could think that people might get poor pensions. I draw the Minister's attention to the fact that when the Government initially put forward these proposals, everyone throughout the pensions world, and everyone who wrote to us or whom we consulted, could not understand why the Government were making these proposals, because they were likely to provide so much lower pensions than SERPS. Much of the comment on the Minister's consultation document drew attention to that fact. Therefore, it is not merely the Opposition who think that people are likely to get a lower pension as a result of these changes.
The Minister talked about the way in which the Government wanted to extend freedom. That is an objective with which we agree. They want to extend the freedom to make people destitute in their old age. We see no qualms of conscience in resisting that.
§ Amendment agreed to.
§ Mr. MajorI beg to move amendment No. 4, in page 82, line 25 after 'member', insert—
`(aa) of any income or capital gain arising from the investment of payments such as are mentioned in paragraph (a) above;'.In Committee hon. Members were concerned, as are the Government, to ensure fair and proper control of administrative charges. The amendment extends the power to control such charges in respect of personal pension schemes and contracted-out money purchase occupational schemes. The practical effect is to include in the controls any deductions from income and capital gains arising from investment of members' contribution. As the House will know, there is already a power in schedule 1(5) to control charges deducted direct from contributions or benefits.This new power is entirely beneficial to the potential holders of pensions. Without the extended power it might not be possible to make effective regulations controlling the administrative charges on schemes offering benefit in the form of a declared interest or bonus, for example with a with-profits insurance contract. In such cases, the 84 charges are not explicity or overtly deducted from contributions or benefits, but are taken into account in deciding what benefits or returns are declared.
I must emphasise again, as we made clear in Committee, that all the power of schedule 1(5) may be kept in reserve if we are satisfied that the combined effect of disclosure and extra competition will be sufficient to keep charges down to reasonable levels. Equally, if we are not sure that that will happen, we shall not hesitate to exercise the power from the outset. The amendment ensures that the power will serve as a catch-all should we need to use it.
§ Amendment agreed to
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Amendments made; No. 5, in page 82, line 31 at end insert—
'5A.—(1) Subject to sub-paragraph (2) below, all minimum contributions which are paid to a scheme in respect of one of its members must be applied so as to provide money purchase benefits for or in respect of that member, except so far as they are used—
(2) If regulations are made under paragraph 5 above, minimum contributions may be used in any way which the regulations permit, but not in any way not so permitted except to provide money purchase benefits for or in respect of the member.'.
No. 193, in page 82, line 31 at end insert—
`5B. A scheme must satisfy such other requirements as may be prescribed.'.
No. 6, in page 82, line 35 after `rights', insert 'to money purchase benefits'.
No. 7, in page 82, line 38 after 'his', insert `to money purchase benefits'.
No. 8, in page 83, line 7, after `member', insert `to money purchase benefits'.—[Mr. Major.]
§ Mr. NewtonI beg to move amendment No. 9, in page 83, line 9, leave out 'or' and insert `and'.
§ Mr. Deputy SpeakerWith this, it will be convenient to discuss Government amendments Nos. 10, 14, 15, 16, 17, 30, 31, 32, 33 and 106.
§ Mr. NewtonAmendments Nos. 9 and 10 are minor drafting amendments. The Bill as drafted provides power to require that the protected rights which result from the minimum contributions to a personal pension scheme are calculated in a way approved by an actuary, and power to prescribe who may act in that capacity. it will not always be an actuary who is the appropriate person to ensure that the protected rights are calculated properly. In many money purchase schemes, it is more likely to be an accountant or auditor. The amendments generalise the power in the Bill, so that "persons" can be prescribed for this purpose. They also correct some minor drafting errors, bringing the wording into line with similar provisions about the calculation of transfer values in paragraph 14 of schedule 1 A to the Social Security Pensions Act.
Amendments Nos. 14 to 17 and 30 to 33, among other things, meet a query which was raised by Opposition Members about the drafting of clause 5(9). They clarify the fact that someone other than the member himself or herself can top up the amount of a protected rights premium. They also correct other unintended effects of the drafting so that, where a person wishes to top up the premium, he need not include the value of his other rights 85 in the scheme if he does not want to; nor will he be obliged to make a topping-up payment just because he has expressed a wish to do so.
These are matters of some complexity, but I hope that the House will accept that the amendments are moved in good will with the aim of doing good, and will accept my brief explanation.
§ Amendment agreed to.
§
Amendment made: No. 10, in page 83, leave out lines 11 to 21 arid insert—
'(5) The power to make regulations conferred by sub-paragraph (4) above includes power to provide that protected rights such as are mentioned in sub-paragraph (2) above are to be calculated and verified in such manner as may be approved in particular cases—
§ Mr. Deputy SpeakerWith this, it will be convenient to discuss Government amendment No. 12.
§ Mr. MajorAmendments Nos. 11 and 12 reorganise the order and wording of paragraph 8 of schedule 1 to ensure that it works properly as intended. They meet a point which was made by Opposition Members in Committee by clarifying that the pension or annuity paid to a widow or widower in respect of a person's protected rights in a scheme is subject to the same conditions as the pension or annuity paid to the member.
That will be generally welcome to the Opposition. It responds to the anxiety that they expressed in Committee, and I commend the amendments to the House.
§ Amendment agreed to.
§
Amendment made: No. 12, in page 83, line 31, leave out from beginning to end of line 15 on page 84 and insert
`or
(b) in such circumstances and subject to such conditions as may be prescribed, by the making of a transfer payment—
§ (1A) If—
- (a) the rules of the scheme do not provide for a pension; or
- (b) the member so elects,
- (i) complies with the requirements of sub-paragraphs (2) and (3) below; and
- (ii) satisfies such conditions as may be prescribed. (1B) If the annual rate at commencement—
§ (1B) If the annual rate at commencement—
- (a) of a pension under sub-paragraph (1) above; or
- (b) of an annuity under sub-paragraph (1A) above, would not exceed a prescribed amount, effect may be given to protected rights by the provision of a lump sum calculated in a manner satisfactory to the Occupational Pensions Board by reference to the amount of the pension or annuity and payable on the date on which the member attains pensionable age or on such later date as has been agreed by him.
(IC) If the member has died without effect being given to protected rights under sub-paragraphs (1), (1A) or (1B) above, effect may be given to them in such manner as may be prescribed.
(1D) No transaction is to be taken to give effect to protected rights unless it falls within this paragraph.86
§
(1E) Effect need not be given to protected rights if they have been extinguished by the payment of a personal pension protected rights premium.
(2) A pension or annuity complies with this sub-paragraph if—