§ Motion made, and Question proposed, That this House do now adjourn.—[Mr. Brooke.]
§ 10.1 pm
§ Sir Brandon Rhys Williams (Kensington)There are many reasons why the House should not yet adjourn but should give consideration to the responsibilities of occupational pension fund trustees.
Here are some of the reasons: the changes in the tax treatment of pension funds in last year's Budget and in this; the reforms of the law, which offer great new opportunities for employers and employees to accumulate capital to provide for retirement in different ways; the spate of recent takeovers and company amalgamations in which pension funds are often conspicuously involved: and the very rapid growth in the value of the assets of the funds held in trust, coupled with the fall in current inflation and inflationary expectations. All these are creating a new context for pension fund managers or, as I prefer to call them, pension fund trustees.
The Occupational Pensions Board has been too economical, in my view, in the guidance that it has been giving lately to trustees in these conditions. The House should therefore speak clearly on the various questions which trustees now have to ask themselves, bearing in mind that approved occupational pension funds enjoy valuable tax concessions because they are considered to perform an important public service. The trustees have an obligation to act in a way that is genuinely in the public interest.
I would like to express my own opinions, which I hope my hon. and learned Friend the Minister will be prepared to endorse. I know that they are widely shared on both sides of the House. First, I would like to look at the public sector schemes, to see if they provide an example. The Civil Service scheme is a good scheme, firstly because it is very generous. I believe that its real cost to the taxpayer is some 17.5 per cent.—or even more—on top of public sector wages and salaries. Secondly, it is a good scheme because it is fully transferable over a very wide area of employment, for the whole length of the early leaver's service. In both these ways, it is still well ahead of the great majority of private sector schemes and sets an example that they ought to follow.
I personally dislike the fact that the Civil Service scheme is a final salary scheme, that is to say, a scheme which allocates benefits preferentially to the high-paid rather than to the low-paid. That is a feature of all final salary schemes. I find it objectionable. On principle, I prefer money purchase, and I hope that employers and pension fund trustees, in considering how to institute or to improve their schemes, will look favourably at the money purchase principle, at least for the core of the pension entitlement. A final salary scheme can possibly then be set up on top, as a frill at the edges of the conditions of employment, to attract high fliers or for some other purpose.
Another feature of the public sector schemes which I do not like is the availability of a tax-free lump sum. I am not ignoring the popularity and the advantages of a lump sum option, but I believe that it is now being exploited in a way which is not part of the real object of pension schemes, which is to provide a reliable annuity for members in retirement and for their closest dependants. I would 1137 therefore prefer to see the tax-free element in the lump sum entitlement phased out in respect of entitlement accruing in years of future service. However that may be, I would like the trustees to make the provision of income their priority, rather than lump sums. I believe that would also represent the view of the great majority of members.
I look forward to a time when private sector schemes will provide benefits as generous as can be obtained right up to the limits which prevent the tax advantages from being exploited unacceptably. That is the best way to prevent members from a humiliating decline in their standards of life after retirement or possibly lapsing into the need to apply for supplementary benefit.
The provision of better occupational pension annuities in the private sector is not just a matter for employers: it is very much a matter for the trustees as well in the large number of schemes which are currently technically overfunded in relation to their ascertainable commitments.
What should the trustees do—and what should they avoid— if they have a surplus in their fund? The Occupational Pensions Board looks favourably at an increase in the benefits, and that is surely right. In my opinion, the opportunities for trustees to improve pension benefits are not exhausted until they have done all of the following things.
First, they should have increased pensions in payment fully to uprate their real purchasing power to the point where they have lost nothing at all through inflation since the date of award. Very few schemes do that, although very many could now afford to do so.
Secondly, they should give full measure to those people who have left the scheme before the normal date of award in search of other employment or through early retirement to protect them from a decline in the purchasing power of their retained asset.
Thirdly, they should uprate the benefits to members currently in service as far as the employer is able to sustain such a commitment in the long term.
Next, they should pay over the full accrued value of the entitlement of the early leavers who ask for a transfer to a new fund into a personal scheme.
I defined in an amendment to the Finance Bill on Report on 17 July last year the way in which the transfer value should be ascertained. I said that it should be
the sum that would he required by the withdrawing member's scheme for the purpose of admitting a new member of the same age, sex and pensionable remuneration as the withdrawing member in order to credit him with the same number of years of pensionable service as the withdrawing member."— [Official Report, 17 July 1986; Vol 101, c. 1228.]Of course, that formula would apply only in final salary schemes or other, as I think curiously misnamed, "defined benefit" schemes.My hon. Friend the Economic Secretary to the Treasury, in replying to the debate last year, undertook—if I recall correctly—to consult the DHSS about my recommendation. However, I think that he has not yet done so. In the meantime, few if any defined benefit schemes are paying transfer values which fully cover the whole of the early leaver's accrued entitlement and they ought to do that.
I made my maiden speech in 1968 on this subject and in 1969 I introduced a Protection of Pension Rights Bill, which would have given effect to the transferability of 1138 pension rights in full on very much the lines that I am recommending now. I suppose that, 20 years after I made that first move, we may now get near to what I have been fighting for all these years.
I would strongly endorse the view of the DHSS that pension schemes should be put on a strictly equal unisex basis. The simple way to achieve that result, bearing in mind that women live longer than men and may retire earlier, while men are much more likely to leave a surviving spouse, is to balance the spouse's benefit so as to produce an equal actuarial entitlement for men and women employees. Schemes which do not give equal treatment or do not give awards to surviving spouses adequately should hasten to amend their rules accordingly.
Those are some of the ways in which trustees can put funds which are surplus to current commitment to good use. I want to state two very clear opinions as to the nature of trustees' responsibilities in other situations. They should recognise that they are holding funds in trust for the members and other specified beneficiaries of the scheme. They should not, for instance, indulge in self-investment in the shares of the sponsoring employer, to an extent, I believe, greater than 1 per cent. The trustees have no obligation to return surplus funds to the sponsoring employer, because they are indeed trustees. They are not administrators with a divided loyalty and they are certainly not appointees with a primary loyalty to the employer. That is a matter which deserves to be clarified and made extremely explicit for the guidance of the many people who find themselves acting as trustees, but who are not certain of their responsibilities and status.
In my view, therefore, there is never any justification for making a return payment of money out of trust to the sponsoring employer or anyone else, except in the rare circumstance where the fund is greater than is needed to pay the maximum benefits permitted for approved schemes under the tax rules. The trustees must find another way. This is particularly relevant in takeover and merger situations. Secondly, they should regard the employer's contribution as a form of deferred pay which is due on top of current wages and salaries whether the fund is flush with cash or not. A contribution holiday for the employer is therefore difficult if not impossible to justify, because it constitutes a cut in wages. A contribution holiday for the employee is also unacceptable because it is just a way of encouraging the members to live on their capital.
The reason why schemes are overfunded is almost certainly in part that they are holding funds which have grown as big as they are because of the tax concessions. They should be held for the purpose for which the tax concessions were granted, remembering that part of the money belongs in effect to the taxpayer. That is money which is held in trust but which has accumulated because of the existence of very substantial tax advantages; it will be recovered for the benefit of taxpayers at the time when the pensions are paid out. The principle on which all these schemes are established is, "Save now, pay tax later." That is an invaluable principle on which we should build. The schemes pay tax later when the benefits are put into award, and at that point the taxpayer recovers that share of the fund which was in effect the taxpayer's property all along.
In this connection, I should like to censure with particular emphasis the very bad suggestion by Philips that its employees should take a contribution holiday and that 1139 their wages and salaries should he adjusted accordingly. What is proposed is an utterly improper use of pension trust money and amounts to a barefaced attempt to take money out of the capital account and put it into the current account at the employees' expense. I hope that my hon. and learned Friend the Minister will join hon. Members on both sides of the House who are shocked at this appalling proposal. I trust, too, that that great Dutch company will drop the idea immediately and that it will not be followed by any other company in Britain.
An unfortunate phrase in a recent Philips advertisement caught my eye in The Times of 12 March. It states:
In today's financial jungle we have a number of unfair advantages".A firm of the standing and reputation of Philips ought not to exploit its employees by making such a proposal. It may have the unfair advantage of a very satisfactorily funded pension scheme. It may also have a reputation as an excellent employer, I am sure it has. Nevertheless, the idea should not have been conceived and certainly should not have been proposed to the employees.To make certain what the issues are in this and similar cases, the Occupational Pensions Board should immediately put out a guidance note to clarify the matter. I hope it will follow the general lines of the recommendations that I have made today.
§ The Parliamentary Under-Secretary of State for Health and Social Security (Mr. Nicholas Lyell)The concern of my hon. Friend the Member for Kensington (Sir B. Rhys Williams) for the interests of members of occupational pension schemes and the protection of their rights is well established and ought to be better known, although it is widely known among those who understand these matters. He has fought a long and often valiant campaign to improve the lot of the early leaver. The Government have recognised the problems of members of occupational pension schemes who leave before pension age and have done much to remove those problems.
Today. my hon. Friend has drawn attention to the obligations of trustees in the comparatively new situation in which pension funds, though by no means all pension funds, are reported to be in surplus. lie has expressed the desire that surpluses should be used to assist beneficiaries, both current and former employees, and the point is one with which I have sympathy. We must, however, set the issue in perspective. Looking back, say, over the period that my hon. Friend has been a Member of the House, one sees that the present situation has not always been the case.
A pension fund surplus can arise due to a number or combination of circumstances. In part it may be due to a decrease in long-term liabilities, or the financial markets may perform better than allowed for by the actuary when assessing the security of the scheme's funding. But markets may also under-perform— my hon. Friend remembers well the period of high inflation during the 1970s—and trustees have a responsibility to ensure that they have planned wisely to meet their obligations in the long term.
Pension schemes are, of course, voluntary arrangements set up by employers to provide benefits to employees. There are wide variations in the types and levels of benefit provided under different schemes. These reflect the employers' expectation of the long-term costs that they expect to be able to afford. A fund may elect to improve transfer values beyond what is required by 1140 legislation, or improve benefits generally. It must be borne in mind, however, that if these are long-term commitments with long-term cost implications beyond what the employer could in the long-term afford, they could undermine the security of all scheme members' prospective benefits.
It is clearly desirable that, in cases where a scheme is in surplus, surplus funds should be used to benefit scheme members. We believe it would be wrong to force this option on scheme administrators ahead of all others and regardless of the circumstances. Nevertheless, in many cases we would expect that benefit improvements, particularly increases to pensions already in the course of payment, would indeed he the favoured approach. And we would hope that, wherever the circumstances permit, surpluses should be used in this way.
My hon. Friend has mentioned a particular case involving suspension of contributions into a scheme. I shall not comment in detail on that case, but two points of general application should be made. First, a contribution holiday may, in certain circumstances, be a perfectly proper course of action. It is the case with most benefit-defined schemes that the benefits are financed from the proceeds of investing contributions paid by the employer and—in most cases—the employee throughout working life. The contribution rates are calculated on the basis of an actuarial assumption about a number of factors, including the relationship between the rate of return on the scheme investments and the growth of earnings. The actuary makes a new assessment at regular intervals and, if he finds in the light of experience or changed prospects that the scheme assets and liabilities are not in balance, he may well advise a change in the level of contribution so as to bring them into balance.
The second point is that the duties of the trustees of a pension scheme extend—I know that my hon. Friend will welcome this—to all the members of the scheme.This includes not just the current employees of the company but those retired members who are receiving pensions, and former employees still under pension age who have preserved pensions in the scheme.
My hon. Friend will know that the Government have, in recent years, looked very carefully at the question of whether trust law is a suitable framework for the operation of occupational pension schemes. The decision to set up an occupational pension scheme rests with the employer. While the views of employees and their representatives will no doubt have an influence, it is the employer who decides whether there shall be a scheme, who will be eligible for membership, and the rules under which it is to operate. To qualify for tax exemptions, however, the scheme must be set up under an irrevocable trust. That means that in practice virtually all schemes are set up under such a trust. I believe it would be helpful if I were at this point to set out some of the duties imposed by trust law.
Trust law places a general duty on trustees to act at all times in the best interests of all the members in accordance with the provisions of the trust deed and scheme rules. The trustees are therefore answerable to the members for any breach of that duty. The trustees have the duty of carrying out the terms of the trust, of acting prudently, reasonably, and in good faith, of paying the stipulated benefits, of exercising discretion over other payments and of keeping proper account. In addition, the establishment of a trust 1141 fund alienates the funds set aside for pension provision so that they are held separate from the employer's other assets.
If a member or group of members sued the trustees for any breach of trust, the civil sanction which would be available at the High Court would include court orders to secure compliance with the deed of trust, or the appointment of a judicial trustee or, as a last resort, the administration of the trust taken over by the court itself. I must stress that, for the most part, occupational pension schemes pay members their full entitlements under the scheme rules, and in many cases members' expectations about increases of pensions in payment are fully met. Where the trustees of a fund properly feel that they can do so, it is certainly a step that the Government welcome.
Scheme members obviously have a very direct interest in the way their schemes are managed. One of the most important ways in which they may be helped to ensure that trustees are acting in accordance with their obligations and in the best interests of all the members— a matter to which we attach the great importance—is to give them access to information about the way in which the scheme is run. It is in this area that the Government have recently introduced important new measures.
The Social Security Act 1985 and regulations made under it have introduced new requirements on pension schemes to disclose information to members. Broadly speaking, members and those who represent them must have access to the trust deed and scheme rules, and to an annual report which embraces the audited accounts, an actuarial valuation and an investment report, as well as information on the rights of individual members. This gives members and their professional advisers—I invite them all to take note—a real opportunity to scrutinise the degree of skill with which their scheme is being run and the way in which its proceeds are being, or if it be the case are not being, deployed for the fair and balanced benefit of the scheme's members as a whole. I invite all beneficiaries of such schemes to make full use of that opportunity.
The 1985 Act introduced two other important measures to improve the position of scheme members whose pensionable service ends before pension age. These were the revaluation of preserved pensions and the right to a transfer value. The legislation followed a report by the Occupational Pensions Board—"Improved Protection for the Occupational Pension Rights and Expectations of Early Leavers", Cmnd. 8271, published in June 1981—and two consultative documents issued by my Department.
Since 1975 members who leave occupational pension schemes after a minimum period of qualifying service must have a pension preserved for them until normal pension age. That preserved pension was often eroded by inflation and unless the scheme was prepared to allow a transfer to another scheme, the early leaver could do little about it. The improvements introduced in the 1985 Act require a measure of revaluation of preserved pensions in line with the rise in prices, up to a limit of 5 per cent. per annum compound. But the Government have gone further than that. I would not underestimate that, given a Government who believe in keeping inflation down.
It is now a requirement that those who leave a pension scheme after 1 January 1986 shall have the right to a 1142 transfer value. That transfer value must be the cash equivalent of the preserved benefits in the scheme, increased to take account of the projected revaluation. The effect of these provisions is that when a member leaves a pension scheme before pension age he has three options. He may leave his preserved pension in the scheme where it will be subject to revaluation, he may have a transfer payment to a new employer's scheme, or he may use the cash equivalent to purchase a deferred annuity with an approved insurance company of his choice.
What is more, the important provisions of the Social Security Act 1986 have to be taken into account. When these provisions come fully into effect, there will be a further option—that of putting the transfer value into a personal pension scheme. The provisions of the 1986 Act will allow employees to withdraw from an employer's scheme to take out a personal pension scheme which will be completely independent of any particular employment. This and other types of pension provision which will be encouraged by the 1986 Act, money-purchase schemes and industry-wide schemes, where early leaver problems do not arise, will be of particular value to those who change jobs frequently. My right hon. Friend the Chancellor of the Exchequer announced on Tuesday that from October all members of occupational schemes will be able to make additional voluntary contributions independently of their employer's scheme.
I realise that my hon. Friend thinks that these measures do not go far enough, and he has on more than one previous occasion proposed that a higher value should be placed on transfer payments than that attributable to the preserved benefits. But, as the Occupational Pensions Board said in its report, the choice between a transfer payment and preserved benefits should be financially neutral. Were it not to be so, those early leavers who were entitled to an enhanced transfer payment would have a considerable advantage over those who opted for a preserved benefit. Furthermore, unless the whole basis of funding the scheme were to be changed, it could act against the interests of those scheme members who remain in employment.
In this short debate, I have sought to make the Government's view on occupational pension schemes clear. We believe that it is important to retain the voluntary principle in occupational pensions provision: in relation to the employer who can provide arrangements that he thinks are right in the circumstances of his business and tailored to the needs of his work force, and in giving the individual greater choice in making the pensions arrangements which suit him. We believe that the provisions of trust law provide a framework which is flexible in the variety of arrangements that it will allow and effective in the protection that it affords properly informed members. We believe that the Social Security Acts 1985 and 1986 taken together represent a significant advance. My hon. Friend will recognise from what I have said that the occupational pension scheme is fully free to go far down the route that he would prescribe—and if such schemes, so many of which are very well run, should choose to do so they certainly have the Government's blessing. Where he and I might part company is only in this—that, although we would certainly encourage it, we would not think it right to compel it.
§ Sir Brandon Rhys-WilliamsMay I take the opportunity to thank my hon. and learned Friend, who has made an 1143 extremely helpful statement of the Government's position. It is gratifying to see how very much progress has been made in the interests of beneficiaries, particularly of early leavers. But, as my hon. Friend supposed, I believe that there is still a distance to go and I shall continue to press my points. I hope, too, that the Occupational Pensions 1144 Board will take note of this short debate and will make it very clear to the trustees of occupational pensions schemes where their duties lie.
§ Question put and agreed to,.
§ Adjourned accordingly at twenty-seven minutes past Ten o'clock.