HC Deb 28 March 1990 vol 170 cc546-62

'.—(1) The following section shall be inserted alter section 58 of the Pensions Act—

"Annual increase in rate of pension, other than guaranteed minimum pension or money purchase benefit.

58A.—(1) This section applies in relation to any occupational pension scheme—

  1. (a) which is neither a public service pension scheme nor a money purchase scheme; and
  2. (b) whose rules do not require the annual rate of every pension which commences or has commenced under the scheme to be increased each year by at least an amount equal to the appropriate percentage of that rate.

(2) On and after the appointed day, Schedule 3A to this Act shall have effect for the purpose of providing annual increases in the annual rate of pensions under schemes to which this section applies.

(3) In this section— annual rate", in relation to a pension, means the annual rate of the pension, as previously increased under the rules of the scheme or under Schedule 3A to this Act; the appointed day" means the day on which this section and Schedule 3A to this Act come into force; the appropriate percentage", in relation to an increase in the annual rate of a pension, means the percentage specified in the last revaluation order made before the increase is to take effect as the revaluation percentage for the last revaluation period of twelve months; money purchase scheme" means a pension scheme under which all the benefits that may be provided are money purchase benefits; pension" does not include—

  1. (a) a guaranteed minimum pension or any increase in such a pension under section 37A above; or
  2. (b) any money purchase benefit;
revaluation order", "revaluation percentage" and "revaluation period" shall be construed in accordance with section 52A above. (2) After Schedule 3 to the Pensions Act there shall be inserted the Schedule set out in Schedule [Insertion of Schedule 3A to the Pensions Act] to this Act.'.—[Mr. Newton.]

Brought up, and read the First time.

7.10 pm
The Secretary of State for Social Security (Mr. Tony Newton)

I beg to move, That the clause be read a Second time.

Mr. Speaker

With this, it will be convenient to discuss Government amendments Nos. 22 and 23.

Mr. Newton

I hasten to assure the House that I shall not read the contents of the new clause, still less the two amendments linked with it. I shall seek to keep my speech brief, in line with anxieties expressed by the Opposition about whether they will have sufficient time to develop their arguments on these undoubtedly important issues. The House will recall the wide welcome that was given to an important part of our aim in the Bill—to give members of occupational pension schemes greater protection in various ways. Most of the proposals flowed from an important and valuable report by the Occupational Pensions Board and I wish to renew my thanks to the board for that. There were proposals to reduce the scale of self-investment in pension schemes to try to reduce the risk that members of schemes might otherwise face—a double risk to their jobs and to their pensions; and proposals for improved protection when a pension scheme was wound up, particularly to reduce the scope for such schemes being exploited by those who might be described as asset strippers. There was a range of measures designed to improve the advice, information and help available to members of occupational pension schemes with the creation of a pensions ombudsman, the strengthening of some of the aspects of the work of the occupational pensions advisory service and the creation of a tracing service to help people who might have pension rights in a wide variety of schemes to establish precisely where and what they are.

In general, those aims have been welcomed by hon. Members on both sides of the House, by many people throughout the country and by the industry.

Some reservations have been expressed about some aspects of our proposals on self-investment and we have modified those to meet what we thought were legitimate criticisms. We shall mount a survey of the scale and extent of self-investment before deciding precisely how to use the regulation-making powers in the Bill. That has also been thought to be sensible.

The second main area of our proposals about which reservations were expressed, while the general principle was welcomed, was the proposal to require pension increases according to certain formulations when a scheme winds up. Some people—certainly the official Opposition —have said that I should have gone further and placed a similar requirement for pension increases on schemes that continued as well as those that were wound up. Other people have pointed out the possible consequences for some businesses of the original winding-up provisions in the Bill. They said that in certain cases at least the employer would have faced additional contingent liabilities for which they had had no opportunity to plan, and if they had to meet those requirements the viability of their businesses might be put at risk in certain circumstances.

Having listened carefully to those arguments, having had a number of discussions with representatives of the industry, and having listened carefully to what Opposition Members said in Committee and to suggestions made in those quarters and the industry that there are other ways to achieve the basic objective, we came to the conclusion that we could strike a better balance between the different aims of pension policy.

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The principal element of that conclusion is that it is better to make general requirements about the payment of pension increases after members retire if the requirements that we are now proposing apply to schemes that continue as well as to schemes that wind up.

The new requirements are set out in new clause 19 and the associated amendments. We will avoid forcing employers to put new money into schemes to fund commitments to past service. That was the issue in our original proposals which caused so much unease.

The new clause makes two requirements. First, schemes will have to pay annual increases to members for pension rights which they build up after an appointed day. For those rights derived from future service, members should be guaranteed increases in line with the retail prices index up to a maximum of 5 per cent. a year. There is nothing in that proposal to prevent schemes from continuing to pay more than that or starting to if they wish to do so, and if they feel able to.

That new provision for improving rights for future service is an important step forward which will give members of private sector schemes, in particular, increasing security in the future. It has been widely welcomed in the industry, by the press and in other quarters as a sensible step forward. However, on its own it does not go far enough, because it does nothing for existing pensioners who have rights derived from past service.

The latest statistics from the Government Actuary suggest that about 80 per cent.—four fifths—of members of schemes are getting annual increases, mostly in the 3 to 5 per cent. range. That is obviously welcome, but it follows that some 20 per cent. —one fifth—are getting no increase. Frankly, that is not good enough, especially when the strong investment performance of pension funds in recent years has continued to yield large surpluses which could be used by many schemes to provide some measure of indexation.

Therefore, we are proposing a second requirement in the new clause and associated amendments so that from an appointed day schemes will have to use surpluses to pay increases to members for pension rights which they have already built up. That should include pensions that are now in payment. The guaranteed rate of increase that each scheme will have to pay will depend on the surplus in the pension fund, but the target rate of increase for schemes will be the rise in RPI up to 5 per cent. a year, with the rate to be guaranteed by each scheme, depending on the amount of its surplus. In other words, schemes that have surpluses will have to use them to guarantee increases at target level before taking a contribution holiday or a refund. Schemes will be able to continue or to start to do more than the basic requirement if they wish.

I expect that the appointed days in both cases—both in the first requirement and the latter requirement—for the use of surpluses will be no later than the end of December 1991, although the date that could turn out to be convenient and sensible is 1 January 1992.

I have asked my officials to begin discussions with the actuarial profession to determine the appropriate methods and assumptions for calculating the size of scheme surpluses and the guaranteed increases that would flow from them.

The proposal offers a sensible balanced and affordable measure of security to existing pensioners. For many in the private sector it will turn existing discretionary increases into rights. That can only be an advance in making such schemes even more attractive to their members.

The new requirement will cover benefits paid to widows, widowers and dependants. It will apply to all retirement benefits paid by occupatonal pension schemes with two exceptions. The first is guaranteed minimum pensions and any increase in these pensions under section 37A of the Pensions Act. Those benefits are already protected through the contracting-out arrangements of the state earnings-related pension scheme.

The second exception is money-purchased benefits, including personal pensions schemes to which I believe rather different considerations apply. Their members aready have an opportunity to use the proceeds of their investments to choose a pension that increases after retirement—or not, as the case may be. No doubt one could argue about whether that choice ought to be restricted, but, in my view, this is not the time to attempt to make any decision on that. The question of pension increases in those schemes would be best resolved as part of the review of the terms for contracting out of SERPS that is due to start next year.

Under the new proposals, the position when a scheme winds up will match the general requirements for pension increases. In the event of a scheme winding up it will be a liability on the employer to provide increases at the prices up to 5 per cent. rate in respect of pensions accruing after the appointed day. For pension rights based on service before then, increases will depend on the extent of increases already guaranteed as a result of the new requirements and any additional surplus emerging when the scheme winds up.

The new provisions will give members of occupational pension schemes growing certainty about the rate of pension increases that they will receive after retirement. Increases will be guaranteed for future service in line with prices up to 5 per cent. a year. For benefits already accrued—including pensions in payment—guaranteed increases will become the first call on scheme surpluses.

It is well understood that the Government have placed considerable weight on people's own occupational and personal pension provision—building over and above the basic state retirement pension—as a central element in placing retirement provision on a secure foundation for the future. The gathering success of that policy is clear. As the House knows, by 1987, the average value of occupational pensions received by people over pension age had increased by 77 per cent. in real terms since 1979 when we took office. That means that for many pensioners their occupational pension is now their most important source of income. For pensioners receiving an occupational pension the average amount received in 1987 was £44.80, and that was nearly three years ago.

The increasing importance of occupational pensions underlines the need to ensure that we have the right framework for the schemes. We have introduced a long series of measures to achieve just that. In 1985, we introduced the protection for early leavers so that pensions could no longer be frozen. We introduced the right to a transfer value when leaving the scheme and we passed legislation to enable scheme members to be provided with information about their scheme as of right. In 1986, we brought to an end compulsory membership of occupational schemes and extended the choice available to individuals planning for their retirement to include personal pensions, which have been an outstanding success.

The Bill provides increased protection for scheme members. In future, early leavers will have all their preserved benefits revalued by prices up to 5 per cent. a year—and not just those rights built up since 1985. For members needing help and advice we are ensuring that the occupational pensions advisory service is put on a firm financial basis. We shall also put in place the pension ombudsman to give members a quicker, more effective means of seeking redress of grievances and we shall expand the range of tracing services that we already provide to cover occupational pension schemes. We are limiting the scope for self-investment. The requirement in the new clause for schemes to provide pension increases is a further major step forward and may prove in time to be among the most important that we have taken.

I commend the new clause to the House.

Mr. Michael Meacher (Oldham, West)

I welcome the fact that the Government have accepted our argument that a pensions scheme that does not guarantee reasonable increases in pensions is a bad scheme. But it is quite clear that the proposal to limit increases to only 5 per cent. a year still gives inadequate protection against inflation.

Mr. Tim Smith (Beaconsfield)

indicated dissent.

Mr. Meacher

I cannot understand how the hon. Gentleman can shake his head, given that inflation is now rising towards 9 per cent., but I do not wish to provoke him.

We believe that it is both practical and desirable to give a higher level of protection—a point which I emphasised strongly on Second Reading. Frankly, the 5 per cent. limit is not high enough. The average employee can now expect to live 20 or more years into retirement and we need a measure that provides adequate protection over that sort of lifespan. It is a relevant consideration for the House that if someone who retired 20 years ago had had only increases on the basis that the Government now propose, his benefit would be worth only about 40 per cent. of its initial value. With inflation rapidly rising towards double figures, a measure that purports to protect the real value of members' benefits but allows them to fall to less than half their initial value is—not to put too fine a point on it—a fraud.

If anything, pensioners' needs increase as they get older and the Government's proposal is a recipe for continued poverty for the very old. We are therefore opposed to the 5 per cent. limit. We consider that schemes should he required to increase pensions fully in line with the retail prices index.

The argument that has always been advanced against such a measure is that it is too costly. It has been suggested that it would be too expensive to legislate for larger increases and that to do so would frighten employers away from providing pension schemes. We reject that argument, and I want to say why. Employers provide pension schemes because it is in their interests to do so. They need to attract and retain staff. They also need their staff to retire as they get older. It is therefore in their interests to provide attractive schemes with a competitive level of benefit.

The big increases in the current cost of providing a pension scheme arise when a scheme that makes no provision—the Secretary of State said that about one fifth of schemes made no provision—

Mr. Newton

I would not want to mislead the hon. Gentleman. My statistics related to the members of the scheme. Rather more than one fifth of schemes would be involved, I think, because, on the whole, the large schemes have been making the increases.

Mr. Meacher

The right hon. Gentleman simply strengthens my point. The big increases in the current costs of providing a pension scheme arise when a scheme that makes no provision for increases is improved to provide RPI increases limited to 5 per cent. It has been estimated that that could increase the cost of a scheme by up to one half. But most schemes do not start from that position; we all agree about that. Most employees belong to schemes that already guarantee or make provision for increases at or near the Government's proposals—3 to 5 per cent. is probably the norm. The relevant point is that the move from limited increases to full RPI increases without a limit is much less significant than the move from no increases at all. That is because in most cases the assumptions made by the actuaries that determine the contributions to be paid are in practice similar whether or not there is a limit. The key factor is the difference between the assumptions made about future investment returns and assumptions about future pension increases.

I am the first to recognise that these are complex matters, but I am told that, although there are probably as many different sets of assumptions as there are actuaries, broadly speaking, the difference will be similar for schemes that guarantee increases, whether or not there is a 5 per cent. limit. Opposition Members therefore consider it reasonable to require schemes to provide full inflation-proofing for future benefits, for the reasons that I have given. In practice, many schemes, particularly the larger schemes, are already providing increases in line with what we propose. We are the first to recognise that. The current cost for those schemes will be even smaller; they may even be nil.

As to past service benefits accrued before the appointed day, they should also be increased in line with the RPI, as far as surpluses permit. For as long as a scheme has a surplus, there is no reason why it should provide for employer refunds or contribution holidays before it is used to protect the real value of members' benefits. The money was paid into the scheme to provide pensions as part of the employee's contract of employment, so why should any of that money benefit the employer before being used to increase pensions in line with the RPI? I hope that that argument will commend itself for general support.

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The cost of our proposals should not prove to be a deterrent against good pension provision. Over the past five years, the pension schemes to which most people belong already adopt the practice that we propose. Watson's index of pension increases—Watson is a firm of actuarial consultants which I gather is quite famous—shows that, allowing for a lag in implementation, average pension increases have more or less kept in line with the RPI. Clearly there is no practical objection to making that practice a legal requirement of all schemes.

The only opposition is likely to come from a minority of employers who want to take money away from their pensioners and use it for their own purposes. We reject entirely the suggestion that surpluses are in any sense the employer's money. Each year, the employer paid in an amount that was considered to be right at the time, and therefore it is a perversion of the language to refer to any surplus as overpaid employer contributions.

This matter is not of a highly party political nature, so it should not be considered in a partisan way. I hope that the Government will see the sense in our argument. I agree entirely with the Secretary of State's concluding comment concerning the importance of these matters. They are far more significant than many of the issues that cause so much commotion in the House.

Mr. Tim Smith

If a surplus is not an employer's overpaid contribution, what is a deficit? Who would the hon. Gentleman expect to make up any deficit?

Mr. Meacher

Deficits do not exist except in a minority of cases. I cannot off the top of my head say what proportion of all schemes are in deficit. At present, total surpluses are estimated as being in excess of £50 billion, so it is difficult to believe that any schemes are in deficit. If there are, they must have evaded the requirement that pensions legislation of successive Governments placed on schemes to ensure an adequacy of contributions to meet the retirement pensions that they must honour.

Deficits are not the real problem. The important questions are who owns the surplus, how should it be used, and who has first rights to it. Our view is that unquestionably the first rights to any surplus are with employees now in retirement. I repeat that as long as a surplus exists, we do not believe it right that there should be employer refunds or contribution holidays.

The basis of the Bill is that members are entitled to adequate protection against inflation, and that that priority should have first call on any surplus. There is no dispute between us on that, so I hope that I carry Conservative Members with me in arguing that it makes no sense to impose a 5 per cent. limit while allowing employers to benefit from any surplus.

The Secretary of State's announcement is something of an about-face, but I do not want to embarrass him—and I am glad to see him turning in our direction. Nevertheless, a large number of practical points remain to be clarified before a final judgment can be made. We are keen that new schemes should be obliged to pay increases along with the existing obligation to revalue deferred benefits, and there is a responsibility on the Government to ensure that schemes are adequately funded for that purpose. If employers are to commit themselves to paying benefits that meet legislative standards, members are entitled to more reassurance that adequate financial provision is being made.

At present, pension scheme members can look only to the disclosure requirements, which entitle them to some important but essentially limited information about benefit provisions. That approach does not provide scheme members with the kind of yardstick by which they can readily judge whether a scheme has enough money to meet its liabilities and whether contributions are sufficiently high.

The Secretary of State should take power to lay down standards on funding rates that schemes must meet. That has not been done up to now. Such a provision takes on particular significance as this country enters a recession and the risk of deficits mentioned by the hon. Member for Beaconsfield (Mr. Smith) arises.

The Secretary of State will have powers to lay down the basis on which any surplus is calculated. That raises two questions. The first is whether there will be a surplus, and hence whether increases must be paid on past benefits. The second is whether there is sufficient surplus to entitle the employer to take a contribution holiday. In either case, it would be wrong if employers were able to manipulate the requirements of the legislation simply by making a choice between extreme financial assumptions or unreasonable valuation methods. We do not believe that it would be reasonable to leave that decision simply to actuarial judgment—just as actuaries are not left to their own devices in undertaking statutory valuations in life assurance companies. We envisage a period of consultation on the rules to be laid down. Ultimately, the Government will have a duty to ensure that the system that they propose cannot be used against the interests of scheme members.

We welcome what we view as a Government U-turn as a consequence of the pressure that we put on them on Second Reading and in Committee. However, we remain critical of the Government's half-measures, which still fall far short of what is properly required. We shall continue to press our case until our proposals are fully implemented.

Mr. Timothy Wood (Stevenage)

I welcome the new clause and the amendments. Before going further, I must declare that I am a parliamentary adviser to BZW Investment Management, though it has not pursued the Bill with me. However, there are within my constituency a number of firms engaged in the provision of pension funds, some of which have contacted me about the Bill.

It is important that a fair balance is struck between the possible liabilities placed on the employer and the benefits to be enjoyed by the employee or retired employee. The new clauses and amendments are an important step in the right direction. I agree with both my right hon. Friend the Secretary of State and the hon. Member for Oldham, West (Mr. Meacher) that, when there is a significant increase in inflation, the first call on any pension fund surplus should be to the benefit of employees or retired former employees.

However, one must also be wary of discouraging employers from providing pension funds by presenting a vision of future liabilities. It is all very well for the hon. Member for Oldham, West to say that pension funds are currently in surplus, but I recall a period eight or 10 years ago when that was far from true. At that time, unfortunately, companies were not making satisfactory profits and producing for the pension funds that had invested in them sufficient income to provide adequate pensions, which caused serious problems to develop.

One cannot assume that the current success in terms of profitable companies generating the necessary funds for pensions will continue, especially if there is a change of Government. That is one of the difficulties that actuaries face—they cannot predict with absolute accuracy who will be in power in the next 20, 30 or 40 years. We should like it to be the present Government, which would give actuaries more confidence in the future.

I welcome the new clause and the protection that has been provided to ensure that surpluses are used to benefit the pensioner who has first call on the pension fund. It also recognises that placing excessive contingent liabilities on employers could cause some employers to decide not to provide pension funds on behalf of their employees. That would be totally unfortunate, so I welcome the steps that have been taken today.

Mr. Tim Smith

New clause 19 constitutes a major step forward for millions of occupational pensioners in the United Kingdom and I congratulate my right hon. Friend the Secretary of State on introducing it. It represents a sensible balance between the interests of the employers and of employees. What my right hon. Friend has done is the right way to proceed in legislation affecting occupational pension schemes. He gave us some figures on the present position.

Of course, occupational pension schemes are voluntary arrangements. The hon. Member for Oldham, West (Mr. Meacher) said that employers provide occupational pensions for their own benefit because they want to attract or retain staff. I recognise that, but such schemes are voluntary arrangements, so it is sensible for legislation to reflect what is already best practice. Practice has improved over the years and the occupational pension schemes have changed out of all recognition in the past 20 years. By the new provisions, my right hon. Friend is reflecting what is already best practice and telling occupational pension schemes to bring themselves up to best practice.

If we were to go as far as the hon. Member for Oldham, West wants, we would be in a different position, because we have to consider the trade-off between improving existing schemes, as the new clause will do, and extending the coverage of occupational pension schemes. Although millions of employees are members of occupational pension schemes, many employees are not. In an ideal world, everyone who had a job would belong to an occupational pension scheme, but if we were to impose upon occupational pension schemes the open-ended commitment that the hon. Gentleman has in mind it would be very difficult because we do not know what future rates of inflation are likely to be.

It would be difficult to fund the schemes and would act as a major deterrent to any employers considering starting up an occupational pension scheme for the first time. Those employers are usually small employers, because most large employers already have such schemes. We are talking about what is a sensible burden to place on small businesses. I do not believe that what the hon. Gentleman has in mind would be sensible. It would be seen as a great burden by small businesses, so they would simply decline to introduce occupational pension arrangements for their employees, and very little would be achieved in the process.

Mr. Meacher

I hope that the hon. Gentleman has taken on board the essential point that I was making. Whether inflation is high or low, there tends to be the same ratio between investment yields and the retail prices index, which is the basis of pension increases. Even if the RPI rises, in the middle or longer term investment yields tend to rise roughly in the same proportion.

Mr. Smith

The hon. Gentleman forgets what happened in the late 1970s when, it is no coincidence to report, we had the misfortune to have a Labour Government. On Second Reading, I referred to two interesting tables which appeared in the report of the Occupational Pensions Board which show the way in which the investment yield on occupational pension schemes has improved over the past 10 years, as a result of which we now have large surpluses. We are not entitled to assume that we will always have large surpluses on pension schemes.

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When we had the misfortune to have a Labour Government, pension schemes were regularly in deficit. Of course, the employees expected the employers to make up the deficits and that is exactly what they did. They sometimes had to transfer considerable additional sums to the pension schemes to ensure that they could meet the liability.

We are now considering a further extension of those liabilities, and I accept that it is the right time to make that extension. However, if we were to go further and make the change that the hon. Gentleman has in mind, and if we were to return to those dark days of poor economic and investment performance, it would be extremely difficult for employers to meet the commitment that the hon. Gentleman has in mind. The past five years have been very different from the six years of Labour Government. There has been a great transformation and no comparison can be made. However, we are not entitled to assume that that will continue for ever.

By definition, occupational pension schemes are instituted for the long term. We are talking about long-term commitments, long-term investments and long-term liabilities. That is why it is sensible to proceed cautiously. My right hon. Friend the Secretary of State, who has great expertise in these matters, has always taken a cautious approach.

The new clause constitutes a sensible balance. I accept what the hon. Member for Oldham, West said about actuaries and how they always produce different figures and assumptions, but actuaries may say that, as a result of the new clause, which will involve an extra commitment for many schemes, it will be necessary to increase the funding of those schemes by increasing the employers' or the employees' contributions.

I am sure that the hon. Member for Oldham, West realises that Members of Parliament have to pay such a large contribution to their pension scheme because we already have indexation. Our contribution is 9 per cent., which is very high.

Ms. Clare Short (Birmingham, Ladywood)

That is because we have so many early leavers.

Mr. Smith

Early leavers are an occupational hazard here. I was an early leaver once and I do not wish to repeat the experience, and I am not expecting to do so. That may be a particular difficulty, but we pay 9 per cent. because of the generous indexation provision in the House of Commons pension scheme. It is the open-ended arrangement that the hon. Gentleman wants. A contribution of 9 per cent. is nearly double what most employees pay as members of occupational pension schemes, and during the recent debate on the matter there were complaints about the contribution which hon. Members make.

I am not sure that such a high level of contribution would be welcomed by people in industry generally. We should understand that, if we were to introduce the change that the hon. Gentleman has in mind, employees or employers would have to pay such a rate. There would be a substantial increase in contributions and that would be a considerable additional burden on business, would make it particularly difficult for small businesses and would lead to a reduction in the number of members of occupational pension schemes. Presumably that is exactly the opposite of what the hon. Gentleman hopes to achieve.

My right hon. Friend has found a sensible balance in the new clause. It will involve a major improvement for millions of members of occupational pension schemes, and the House should welcome it.

Mr. Archy Kirkwood (Roxburgh and Berwickshire)

I intervene briefly to ask only a couple of questions, because I am more interested in progressing to the later stages of the Bill.

I welcome new clause 19, which is complicated. It enshrines a schedule and brings the benefits that have already been mentioned. Why did not the Government take the power to vary the 5 per cent. limit? The hon. Member for Oldham, West (Mr. Meacher) made a valid criticism of the new clause, because there may be circumstances in which the 5 per cent. ceiling is considered onerous and unfair. In the past, Social Security Ministers, in a variety of guises and on a variety of benefits, have resorted to the power of regulation to amend such things as child benefit, which the Government have the power to increase annually but have not exercised. The Secretary of State could use such devices to ensure that yearly returns on schemes are fair and in line with the retail prices index. No doubt there is a technical reason why that is not possible, but it is worth pursuing.

The welcome changes made by new clause 19 may not take effect until 1 January 1992. The Government have had the report of the Occupational Pensions Board for several months, and Ministers have been considering the new clause for many months. Why might it be January 1992 before the benefits take effect? If it will take the Government that long to finish their homework, why did they not move the new clause during next year's Social Security Bill?

I am sure that the Minister will deal with that, but subject to those qualifications I give the new provisions a warm and enthusiastic welcome.

Mr. David Shaw (Dover)

I welcome new clause 19. The improvements in private sector pension schemes under this Government are to be welcomed. The proposal for guaranteed minimum increases is extremely good.

As an accountant, during the period of office of the previous Labour Government in the late 1970s, I had some experience of company audits. One of the major accounting tasks for the year was to examine a company's pension fund to ascertain the deficit and whether the company was capable of making available the financial resources to meet it. During the period of price and dividend restraint, deficits increased enormously as profits were curtailed. Deficits in pension funds often were not capable of being met within a year or two, and as auditors we had to take a strong view of whether a company could survive. Many companies did not and their auditors had to say that the directors were unable to continue in business. While the Labour Government were in office between 1974 and 1979, companies closed because of deficits on their pension funds. Dividend restraint had a severe effect, because 40 per cent. of all dividends are paid into pension funds and life insurance schemes. The significant amounts that are paid can contribute to whether a pension fund is in deficit or surplus.

I further welcome new clause 19 because it will benefit about 10 million people. I am sorry that my right hon. Friend the Secretary of State did not say that it will benefit many women who have jobs for the first time as a result of the growth in employment under the Government. It will be good for women generally, who have taken the opportunities for equality provided by the Government, and as a result the pensions and economy will be fairer and more balanced. It is churlish for Labour Members to criticise the limiting of the increase to 5 per cent. During the late 1970s, they were unable to provide significant investment returns and much of British industry showed minus investment returns. They should not complain that the Government are trying to ensure increases in private pension plans. I do not know why they want to hark back to the late 1970s, when British industry showed negative returns and growing deficits in pension funds.

There is a danger of getting trapped in the wording of the legislation. One moves into theoretical areas, whereby if the legislation says that there will be a 5 per cent. increase, one assumes that such an increase is possible. Legislation is not responsible for growth in the economy. Growth in the economy provides increases in pensions. Legislation provides only a best intention and a practice that might he followed. Without growth in the economy, which we have had under the Government, there will be no growth in pensions. Unless the economy continues to expand as it has under the Government, and unless we have another decade of Thatcherism—

Ms. Short

Another decade of Thatcherism?

Mr. Shaw

Unless we have another decade of Thatcherism, there will not be the increases in pensions that the hon. Member for Birmingham, Ladywood (Ms. Short) would like. I know that the hon. Lady sincerely wants increases in pensions, but she must accept that that will not happen under a Labour Government. She must accept that the pension increases under this legislation would not be possible under a Labour Government.

Ms. Short

The thought of another decade of Thatcherism is unbearable to me, to the rest of the nation and, if they are honest, to many Conservatives Members. We had economic growth before we had the present Prime Minister. I do not know whether the hon. Gentleman is aware of it, but he will find that since the second world war, and under different Governments, growth has increased by about 2.5 per cent. Pensions have been uprated and standards of living have increased. I am afraid that that was not invented by the present Prime Minister.

Mr. Shaw

I must disagree with the hon. Lady. The hon. Member for Oldham, West (Mr. Meacher) said that investment returns are the key. We have had economic growth since the second world war. The Conservative Government between 1951 and 1964 achieved phenomenal economic growth, which worked its way into investment returns. Under the Labour Governments of 1964–70 and 1974–79, not only was there a lower rate of economic growth than under Conservative Governments, but far more important was the effect of that on investment returns and on dividends paid into pension funds. I hope that the hon. Lady will accept that my accounting experience was that we had considerable deficits in pension funds between 1974 and 1979 and that much of British industry was technically insolvent because it could not meet its obligations to the pension funds that it had contracted to meet.

Mr. Wood

Does my hon. Friend agree that one of the features of the period between 1974 and 1979 was that borrowers gained while those who relied on pension funds suffered because investments were losing out? Any growth that there might have been in the economy did not benefit pension funds.

Mr. Shaw

My hon. Friend makes a strong point. Any growth during the period of the previous Labour Government—few people have been able to measure growth under the Government—often benefited borrowers rather than savers. Because of the reduction in inflation and the increase in growth in the economy, which has started to filter through to savers, 16.5 million people are confident enough that savers will be rewarded that they are party to either private pension plans or life insurance savings schemes. We have increased people's confidence in saving. By encouraging people to save, we shall have a more responsible country. That is what the new clause is all about. Like the Budget, it provides great incentives for saving. People will not only save in their employers' pension plans but will feel more confident about saving generally in pension plans and about the rewards of saving.

The new clause is dependent upon the growth in the economy, on employers succeeding and having good rates of return and on those good rates of return working through into dividends and pension schemes that can afford to pay the pension increases intended by the Government. It is for those reasons that I welcome the new clause.

8 pm

Mr. Tim Devlin (Stockport, South)

I, too, welcome the new clause, which requires the payment of annual increases to members guaranteed up to the retail prices index or 5 per cent. It will give greater security to members of private schemes. I listened with interest to what my right hon. Friend the Secretary of State said about four-fifths of scheme members already obtaining increases.

The new clause is especially welcome because it runs alongside the many other welcome provisions in the Bill that we discussed at great length in Committee. There is encouragement and security for private pension schemes across the board. The Bill already provides for the establishment of an ombudsman to investigate disputes, the establishment of a tracing service to help track down pensions held with previous employers, further protection for members of schemes that are wound up, further protection for members of schemes when they leave early, and a provision to enable the Secretary of State to introduce a new ceiling on self-investment for pension schemes. The Bill does a great deal to look after those who, together with their employers, have invested in private pension schemes.

In Committee I made much of the ITM/Head Wrightson Teesdale scheme, which illustrated the need for greater security for small investors in private pension schemes. I made one or two remarks which, having appeared in the record, might give a slightly incorrect impression. I wish to take a minute or two to place an accurate account on the record. I do not wish anyone to be misled by what I said in Committee.

The Davy Corporation sold the business of Head Wrightson Teesdale to ITM, a company operating in my constituency. Part of the sale agreement was that pension benefits no worse than those enjoyed by employees under the Davy Corporation scheme would be provided by ITM. That obligation was accepted by ITM. The Davy Corporation transferred from its existing pension scheme a sum of money that had been re-negotiated between the actuaries of the two companies to meet the accrued benefits of those employees transferring to ITM. When ITM went into receivership, its employees found that the benefits under their pension scheme did not match the benefits that they had been promised.

The problem was brought to the attention of the Davy Corporation, which contends that it fulfilled all its obligations to its previous employees—first, by ensuring that the new employer committed itself to maintain the benefits of the pension scheme for its new employees, and, secondly, by transferring the correct sum of money to the new scheme. That matter is still under debate.

Since then, partly because I raised the matter in Committee and elsewhere, the Davy Corporation is voluntarily helping the investigation into why the benefits were short, because it recognises that the employees have no means of carrying out that investigation for themselves and because the trustees of the scheme—three individuals—do not have the financial resources necessary to investigate the position properly.

In Committee, we discussed the security for employees in schemes that might collapse, and what could be done to remedy the position. In particular, arguments were advanced about the establishment of a pensions omudsman. I still contend that it is interesting that two individuals who were trustees of the ITM pension scheme were later taken into employment as directors by a subsidiary of the Davy Corporation, subsequent to the ITM receivership. They were employed by ITM at the time of the sale of Head Wrightson Teesdale and became employees of the Davy Corporation subsidiary only after the receivership years later.

There is a major question about whether a psroper value for the pension scheme was transferred between the companies. Of course, the Davy Corperation has no legal or contractual obligation towards the pensioners of that pension scheme. It is a difficult and highly complicated case and a good illustration of the reason why the new measures in this Bill are needed to protect the rights of employees. I hope to raise this case again, as it illustrates what can go wrong in the pensions world.

The new clause is a proper compromise between the interests of the employer and those of the employee. It is part of the Bill's much wider approach towards the whole question of private pension schemes. We need to encourage such schemes, but it is not the case that all schemes will always be in surplus. The scheme to which I have just referred and which I raised in Committee was significantly in deficit. I look forward to a report, at an early date, by the Davy Corporation actuaries detailing proposals to help those employees who lost when the company went into liquidation.

Mr. Newton

In my fairly extensive experience as a Social Security Minister at every level it has been rare that such a universally warm welcome should be given to my proposals. I shall bask in that for a moment, in the sure expectation that that mood is unlikely to continue throughout the night. I am grateful for the support that has come from all quarters. I am deeply admiring, even more so than previously, of the assiduous way in which my hon. Friend the Member for Stockton, South (Mr. Devlin) has pursued the interests of a significant number of his constituents—

Mr. Frank Field (Birkenhead)

With a reading age of 12.

Mr. Newton

I do not know to whom the hon. Gentleman is referring, but as it sounded offensive I shall not pursue his remark.

I say gently to the hon. Member for Oldham, West (Mr. Meacher) that it is wrong to talk of a Government U-turn in what I have said and done to change the balance of what was already a very significant proposal for schemes that are wound up. I understood him to be claiming credit for the Opposition, but I must disappoint him: what I have proposed is a very long way away from what I can only describe as the half-baked and irresponsible proposal that he made on Second Reading.

According to the hon. Gentleman's proposal, we should make schemes give away every scrap of their surpluses straight away, and if they could not then continue to pay the benefits to which that gave rise, they should be allowed to cut them again. That was his proposal.

Mr. Kirkwood

indicated assent.

Mr. Meacher

rose—

Mr. Newton

I was not trying to enrage the hon. Gentleman.

Mr. Meacher

The Secretary of State's last comments were not worthy of him. He made a very silly knockabout comment which did not even begin to reflect what I said. However, instead of taking up time with another debate on what I said on Second Reading, I hope that the Secretary of State will read my Second Reading speech closely. If he then wants to talk about it, he will at least reflect accurately what I said.

Mr. Newton

I will not go any further down what is obviously a sensitive path. However, taking the hon. Member for Roxburgh and Berwickshire (Mr. Kirkwood) as an independent arbiter, as he was nodding, he is obviously on my side in this argument.

It was suggested that we should have gone beyond the 5 per cent. ceiling of the legal requirement, as distinct from what we might like to see schemes do in certain circumstances. In the course of making points about that and asking whether the figure should be higher, the hon. Member for Oldham, West referred to inflation over the past 20 years and to the scale of investment surpluses that we have all seen in schemes over the past few years. The only comments that need to be made about that were eloquently made by my hon. Friend the Member for Dover (Mr. Shaw) in his excellent speech and by my hon. Friends the Members for Stevenage (Mr. Wood) and for Beaconsfield (Mr. Smith) in their equally eloquent speeches.

By taking the last 20 years, the hon. Member for Oldham, West includes a period in which inflation rose to disastrous levels under the previous Labour Government. Partly as a consequence of that inflation, more and more schemes found themselves in great difficulty because the investment surpluses on which the hon. Member for Oldham, West would rely did not exist. If we were to go beyond the requirements that I am proposing, even if there was the remotest possibility of the hon. Member for Oldham, West being the Secretary of State for Social Security imposing these requirements, employers are afraid that they would go bankrupt and that they would not be able to pay pensions.

Mr. Meacher

I do not want to prolong the debate. However, we must be absolutely clear that the very high level of inflation in the mid-1970s occurred for two central reasons. The first was the quadrupling of the price of oil that fed through all western economies after 1972–73. The second cause was the enormous and irresponsible credit explosion which Lord Barber, the then Chancellor of the Exchequer, unleashed on the economy, the effects of which lasted for the next four years. That is exactly what the former Chancellor, the right hon. Member for Blaby (Mr. Lawson), did between 1985 and 1987. Those were the causes of the inflation. Perhaps the Secretary of State should recall that in 1981, when this Government had been in power for two years, inflation reached 22 per cent.

Mr. Newton

That most certainly reflected the legacy of the Labour Government who had presided over the latter part of the 1970s.

The serious point in the debate is that, in this area above all, it is necessary to strike a balance in the requirement that one imposes on schemes. If we overdo it and impose requirements that frighten off employers or which they believe in certain circumstances—some of which I speculated about already-would become unsustainable, some employers who are already running schemes would consider whether they should continue to do that, and others which might be considering setting up schemes might decide that the risk of doing that was too great.

Of course the balance of considerations can be seen as changing from time to time. It is implicit in my proposals that we believe that, in present circumstances, the balance has moved decisively in favour of the additional requirements that I am now imposing. I also believe that, if we were to go much further—one or two in the industry have expressed doubts whether we may not have gone a fraction too far in our proposals—some people would be frightened off from having schemes or continuing the schemes that they have at present. We must strike a balance and I am sure that my hon. Friends believe that we have got it about right.

As my hon. Friend the Member for Beaconsfield stated, a balance must be struck with surpluses. He put his point very well. As happened in the late 1970s, if a deficit emerges, the employer is expected to make it up. I do not believe that it would be reasonable to create a double bind for employers. If they get it wrong one way and their actuaries under-forecast the amount of contribution that is required, the employer is expected to make it up without limit. If the employer and the actuary get it wrong the other way and they over-contribute, there is no way in which they can get any of that back. I believe that we have the balance about right.

8.15 pm

The hon. Member for Roxburgh and Berwickshire queried whether we should vary the 5 per cent. limit from year to year. Inescapably, employers and those who advise them must be able to look ahead at their commitments and plan for the contributions or investment provisions required to meet them. It is not possible suddenly to impose from year to year, according to the rate of inflation in any particular year, a sudden increase in commitment because by definition the employers would not have been able to account for that.

The hon. Member for Roxburgh and Berwickshire also referred to 1 January 1992. That is the likely date, although it is not certain. If I can bring it forward, I will. The reason for that date relates back to points made by the hon. Member for Oldham, West. In some cases, because of the new requirements that we are imposing, employers will have to look at the rate of contribution required in the scheme to ensure that they can meet those requirements. It is obviously right to give them some time to consider the scheme before imposing requirements on them. 1 t would be wrong to say that, as from tomorrow, a requirement which employers had heard about only a few weeks ago and for which they had not funded should suddenly have to be met. We must give schemes some time to adjust.

I hope that I have covered most of the points raised in the debate. I am sorry if I inflamed the hon. Member for Oldham, West beyond what I had intended in what has in general been a very good-natured debate. I am very grateful to the hon. Member for Oldham, West for the supportive attitude that he has adopted, which I am sure will be continued throughout our debates this evening.

Question put and agreed to.

Clause read a Second time, and added to the Bill.

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