§ Motion made, and Question proposed, That this House do now adjourn.—[Mr. Ainger.]
§ 10 pm
§ Linda Perham (Ilford, North)I am very pleased to have secured the debate this evening. Although it takes place when the country is rightly focusing on other matters, the subject is most important. The little known issue of clawback reflects on our treatment of our pensioners. Many of them, like my parents, are of the generation that fought in or lived through the second world war.
I was first elected to Parliament a few weeks before my 50th birthday and was promptly approached by Age Concern, which assisted me in drafting my private Member's Bill on age discrimination. Since then, I have been closely involved with issues that affect people in their later years, and I am the secretary of the all-party group on ageing and older people. My constituency has about 18,000 pensioners, who are ably championed by the Redbridge Pensioners Action Association. I therefore have an obvious interest in challenging the inequitable practice of pension clawback.
I pay tribute to my hon. Friend the Member for St. Albans (Mr. Pollard), who supports me in the Chamber tonight and has campaigned on the issue for several years. I also thank my right hon. Friend the Minister, who will reply to the debate. I know that he is aware of the issue, and he has helpfully agreed to meet my hon. Friend the Member for St. Albans and a small delegation in the near future.
Pension clawback operates to the detriment of millions of pensioners, yet, as far as I know, it has not been debated in the Chamber before tonight. I want to raise the anxieties that, I believe, the 137 colleagues who signed my early-day motion, tabled on 8 February 2001, wish the Government to consider seriously.
Clawback is officially known as pension integration or abatement. It means a reduction in retired people's company pension simply because they receive a state pension. Employers can—and all too often do—deduct a sum every week up to the amount of a single person's basic state pension from the occupational pension that the former employee receives. Even those who are not entitled to a full state pension can find their company pension reduced by anything up to £72.50 per week.
That means that hundreds of thousands of pensioners lose significant sums every year. How can that be justified? An obscure legal loophole under the National Insurance Act 1946 allows companies to take account of state retirement benefits when paying retired employees a company pension. In most cases, an amount equivalent to the current value of the basic state pension or the lower earnings limit is deducted; in other words £3,770 a year for a single person from April 2001.
I understand that Inland Revenue rules allow retired workers to claim both a state pension and a full occupational pension without any clawback. It is therefore by no means obligatory for companies to operate clawback. Indeed, its existence works against the interests of the Inland Revenue. Pensions, whether provided by the state or occupational schemes, are treated as taxable income. If those pensioners received their full and rightful 1143 amount, not only they but the Exchequer would be better off. Pensioners would have more income and would therefore pay more tax.
Why should the taxpayer subsidise the pension funds of cash-rich companies that operate pension clawback? Why should the Government be deprived of millions of pounds which could be better spent on health, education and other public services?
§ Mr. Kerry Pollard (St. Albans)As well as paying tax, some people on low occupational pensions would be able to claim benefits. If clawback were abolished, would not the Exchequer benefit substantially from the reduction in the number of housing benefit and other claimants?
§ Linda PerhamThat is an important contribution to my argument.
There is also the argument that those whose pensions are clawed back make lower contributions throughout their working lives. In the case of non-contributory pension schemes, however, that benefits only the employer. Regardless of any benefits to the employer, is the welfare of future pensioners so secure that employers may discourage people from making maximum provision for their retirement years?
Employees are free to make additional voluntary contributions, but evidence suggests that employers do not specifically make it clear that the deduction will be made. Even so, when the Government's pension forecast statement is rolled out across the country, which I shall welcome, we may see some improvement, as we hope employees will, for the first time. We hope that employees will be able to see clearly what they will receive on their retirement.
The operation of pension clawback is widespread. According to figures produced by the National Association of Pension Funds, it is estimated that up to 2.5 million pensioners across the United Kingdom are affected by pension clawback. Four out of 10 schemes in the private sector operate the practice, compared with only 6 per cent, of public sector schemes.
Of course, those hardest hit by clawback are not people with large occupational pensions, but people who were low paid and part time when in employment. Unfortunately, it is not just grasping Gradgrinds who are exploiting the legal loophole; penalised pensioners come from a wide range of sectors of the economy. In the financial services industry, they include tens of thousands of staff at banks and other financial institutions. It is only right to note that some employers have never operated pension clawback, while others, to their credit—for example Shell, BP Amoco and the Bank of England—have ended the practice within the last few years.
The Daily Mail—which, in 1998, took up the campaign spearheaded by UNIFI, the trade union representing employees in the financial services industry, and my hon. Friend the Member for St. Albans—reported in June 2000 that BP Amoco had abolished clawback for its 35,000 pensioners at a cost of £6 million, that Shell was cutting the amount of pension clawback for eight out of 10 of its 21,000 pensioners, and that Nestle had halved the amount that it deducted.
UNIFI has argued tirelessly that this practice is unfair, discriminatory and unnecessary, and that it costs the taxpayer and the Inland Revenue millions of pounds a 1144 year in lost revenue. I am grateful to UNIFI for its assistance in furnishing me with information about the issue. I first became aware of it when my constituent Mrs. Engleback visited me at my surgery last December, and I have since been contacted by a number of affected pensioners from other parts of the country.
UNIFI's campaign has also attracted the support of the TUC. John Monks spoke at a packed rally of pensioners last February. But this is not merely a matter for collective bargaining between employers and trade unions; it is, I believe, a moral and legal issue. The Government should consider what can be done to close the legal loophole to ensure that the practice does not continue.
Clawback is morally offensive because it is unfair. Why should staff who have been paying into their pensions for years not receive their full entitlement? It affects the poorest pensioners the most. A clawback of, say, £1,300 a year may not make an appreciable dent in an annual pension of £50,000, but it can cause real difficulty for someone receiving £5,000 a year. It is also discriminatory, and contributes to the pay gap between men and women. Clawback applies only to final salary schemes. Money purchase schemes are not affected. Women, generally leaving on lower salaries and therefore entitled to lower pensions, suffer the most. My constituent Mrs. Engleback has also asked whether this discriminatory practice is illegal under European Union law.
This Government have consistently attacked discrimination against women and put in place measures to improve women's lives. In particular, the pensioners' minimum income guarantee can rightly be praised for redressing an injustice against women. Last year, the then Secretary of State for Social Security, my right hon. Friend the Member for Edinburgh, Central (Mr. Darling), said of the minimum income guarantee:
The changes that we are making will be of particular advantage to women, because on average, women have smaller occupational pensions than men, and of course they are likely to live longer." —[Official Report, 9 November 2000; Vol. 356, c. 453.]Many clawback companies, and banks in particular, have announced record profits over the years—some as much as £32 billion a year. Do they really need to hoard former employees' pension money as well?Trade unions can and do achieve notable successes through negotiations with individual employers, but they need and deserve assistance from legislators. Pressure from hon. Members who join individual campaigns can have a decisive impact, but I believe that we can do more.
A Bill was recently introduced in Ireland, with the full support of the Irish Government, freezing the amount deducted by clawback at the 1998 rate, ensuring that it cannot rise in line with state pension increases. Over time, that will lead to the phasing out of this unfair practice. I would like the Government to review the whole issue of clawback and consider what they can do, drawing on the Irish experience as appropriate.
§ Mr. PollardIs my hon. Friend aware that I recently met the Irish pensions Minister, who told me that the Irish Government wanted to signal to employers that they should scrap clawback, and that the Bill in question is just two pages in length?
§ Linda PerhamI was indeed aware of that. It is important to consider what has been done in other 1145 countries, and especially Ireland, and I pay tribute to my hon. Friend for pursuing this matter. He started campaigning more than three years ago, and I am grateful that I am able to carry the debate forward.
It would be helpful if the Government could indicate that they agree in principle with the hon. Members who signed my early-day motion, as well as the 200 who signed the one that my hon. Friend tabled in a previous Session, which states that clawback is unfair and discriminatory, as well as a burden on taxpayers.
After a lifetime of paying into their company pension scheme, former employees should be looking forward to a peaceful, well-earned retirement. Because of clawback, pension payments are reduced, leading to real resentment and hardship. It is time that the injustice of clawback was more widely recognised. It is time that the Government took a serious look at how they can help those who have provided for their retirement yet find their pensions raided and their incomes slashed.
§ The Minister for Pensions (Mr. Ian McCartney)Good evening, Mr. Speaker. In the many years in which I have addressed the House from the Government or Opposition Front Bench, I have never known a Speaker do us the honour of coming to listen to an Adjournment debate. I hope that I live up to your expectations.
I am grateful to my hon. Friend the Member for Ilford, North (Linda Perham) for highlighting this issue. It is true that she has been campaigning on it for some time. I will indeed meet my hon. Friend the Member for St. Albans (Mr. Pollard) on 6 November, and I invite my hon. Friend to attend, too, if she wants.
I will try to answer in general terms as well as responding to some specific questions, but if I am unable to give full answers tonight, I assure my hon. Friends that I will place letters in the Library, so that the other 137 hon. Members who signed the early-day motion can have a full picture of our debate.
Many people are members of integrated pension schemes, and I know that feelings run high when pensions are offset by basic state retirement pension. The Government feel strongly that it is important for all pensioners to have a decent and secure income in retirement. Occupational pensions are an excellent way of providing for this. The Government are keen to encourage both the provision and membership of private pension schemes.
My hon. Friend the Member for Ilford, North asked about potential discrimination against part-time workers, who are mainly women. The directive on part-time workers was implemented in April 2001, when I was Minister of State at the Department of Trade and Industry. To comply with it, schemes operating integration will need to ensure that the way in which they do so does not discriminate between part-time and full-time employees. I hope that that answers her point.
We must bear it in mind that employers do not have to provide occupational pension schemes for their employees. The costs of running a pension scheme are part of the overall remuneration package that a company offers. All pension schemes vary in the structure of the 1146 benefits that they provide. The level of benefits of course affects the cost of providing them. Because of this, the employer must make the decision of how and when integration should be abolished. If employers were forced to change their schemes overnight and remove clawback rules, many of them might decide that they could no longer afford to provide a scheme at all. An integrated scheme is surely better than no occupational pension at all.
It is true that the practice of taking account of basic state pension goes back a long way. It started when national insurance contributions and state retirement pensions were introduced in 1948. At the time, a number of employers who offered occupational pension schemes felt that there was some duplication between the two types of provision.
With the aim of reducing contribution costs for employers and employees alike, some defined benefit schemes were adjusted to take account of some or all of the state retirement pension when calculating the occupational pension payable. That aimed at providing, overall, the same level of benefits. Although the aims of integration are clear, the result is that the occupational pension can be reduced to a level lower than that expected by the scheme member. It is important that employees fully understand the pension benefits that they can expect from their scheme at retirement.
The Government place great importance on the provision of good, clear information, enabling individuals to make adequate provision for their retirement. All schemes are required by law to provide every member with basic information about the scheme, either before they join or shortly after. That information must include an explanation of contribution and benefit rates that includes how benefits are calculated. Members must be informed of changes in scheme rules that affect benefit rates. In addition, scheme members can ask for a benefit statement every year that gives a projection of their entitlement. Most schemes provide these statements automatically.
The Government have built on that scheme. A pilot scheme has been running for almost two years for new-style combined pension forecasts. The forecasts are clear and understandable and give details of both state and occupational pension entitlement. The pilot scheme for these new-style statements is now in its second year and has been a resounding success. We will make a statement tomorrow, announcing the second phase, in which we start recruiting companies to participate with the Government in the hope that, between 2005 and 2006, as many as 15 million people will get a combined statement about what they should expect in terms of their occupational pension and their basic state pension entitlement. The new statement will allow individuals to make informed decisions about their financial needs in retirement and encourage them to take advantage of membership of their employer's scheme.
My hon. Friend asked about Ireland and about clawback that cannot take account of increases in state pension. A majority of members of Irish pension schemes are covered by integrated schemes. The amendments made by the Irish Government do not phase out integration. The change was made simply to ensure that pensioners got the full value of the state pension increase in Ireland. We have no evidence that occupational pension schemes in the UK take increases in the state pension into 1147 account once a member's pension has gone into payment. There would be no additional benefit to scheme members by following the Irish legislation in this matter. However, I am happy to discuss this subject with my hon. Friends on 6 November. If they have evidence, I ask them to provide it at our meeting. Many, although not the majority of, private sector defined benefit schemes are designed to take account of state retirement benefits. The factors used by schemes operating integration vary and it can be achieved in a number of ways. It remains a fact however that whatever method is used by a scheme to achieve integration in a contributory scheme, the employee will pay less than in a corresponding non-integrated scheme.
As to whether the clawback system is unfair to women, all pension schemes must have an equal treatment rule. Since May 1990, the date of a European Court ruling, occupational pensions have had to be equal for men and women who are doing the same work of equal value. If a member believes that the rules of her scheme discriminate against women, she can lodge a claim with an employment tribunal. The same applies to a part-time worker.
The Government recognise the need to boost rates of pension for low earners and those who take breaks in employment to look after children. That is why, starting next year, we are reforming the state earnings-related pension scheme through the state second pension, which will give more help to those on low earnings—some 14 million people. Some 2 million carers and 2 million long-term disabled people with broken work records will be among those helped to build up second-tier pensions for the first time. Those who are looking after a sick or disabled person, or caring for a child under six, will also benefit for the first time. Women will particularly benefit from those changes.
As I said earlier, occupational pension provision in the UK is voluntary. It is up to employers to decide the nature of the scheme and the benefits that they will provide. A scheme will, however, have to meet any Inland Revenue and legislative requirements in force. Also, if the scheme is contracted-out there are certain other conditions that must be met.
Pension schemes vary greatly in the type of benefits that they provide, as do the rules on how those benefits are calculated. Integrated schemes have been in place since the introduction of the state retirement pension. Now to compel schemes to withdraw integration would be in effect a retrospective measure and likely to place significant unexpected costs upon employers. It has to be a matter for employers to decide whether their schemes should continue to operate on an integrated basis.
The contribution levels of schemes are based on benefits that accrue under them. Removing clawback may also result in scheme members having to make higher levels of contributions than they do now. In recent years, trade unions and members in general have pressed employers to review integrated arrangements. My hon. Friend mentioned some of the successes achieved in that area. I do not argue against those continued debates and negotiations, because changing a scheme must be a decision for employers and those who negotiate on behalf of employees. I am not arguing against her, but trying to put the debate in context. The picture as a whole is a little more complex than some of our colleagues appear to wish it to be.
1148 We welcome any action taken to improve the level of occupational pension available to lower paid employees. Some employers have indeed made changes to how they operate integration and some have ended the practice in respect of their scheme altogether. Perhaps some more will do so, following the campaign run by my hon. Friends and UNIFI with some success. The Government hope that all employers will see the advantages of ensuring that pension scheme benefits are fair to all employees.
The provision of an occupational pension by an employer for his employees has always been voluntary. It remains for the employer to decide what type of scheme and level of benefits he wishes to provide. It is therefore very important that employees fully understand the type of scheme that is run by their employer and the benefits that they can expect at retirement.
The Government recognise the importance of good information, which enables individuals to plan their income in retirement. That is why we will introduce, in April, the new pension service, which will help provide integrated roll-out of information about the state and second-tier pensions, whether provided by the state or the private sector. Occupational pensions play an important part in providing income in retirement. They have been one of the great pension success stories and we will continue to support and encourage them.
The Government came to power four years ago, but we did not inherit a blank sheet of paper. The state system was badly in need of modernisation. It excluded more than a million women, thereby causing them to be in poverty. From a standing start, the Government have worked to identify the poorest pensioners, and to put in place the minimum income guarantee.
We have been criticised for the complexities of the MIG, but it was right not to wait the three or four years that it would have taken to create an all-singing, all-dancing system. We therefore rolled our sleeves up and tackled pensioner poverty. We got the job done, with the result that more than 1.6 million pensioners—many of them women—who lost out when the welfare state was created have received an increase in their basic pension income of an average of £15 per week. In addition, the latest figures show that the last 100,000 or so who have gained access to the minimum income guarantee have received an increase of some £20 per week. We are therefore reaching the very poorest pensioners, and that is important.
The modernisation strategy has to be successful, however. We are not dealing only with pensioner poverty today; we must ensure that the pension system is modernised in a way that will prevent pensioner poverty in the future. It is a big task. I have said to colleagues that it is a bit like painting the Forth road bridge—no sooner has one finished than one has to start all over. However, with a mixture of public and private provision, every change and modernisation in the state or private sectors will help to establish the principle, for the first time, that every citizen has equal access to the basic state pension and the minimum income guarantee. Citizens will also have access, in the work place, to a range of pension benefits.
That is why the second state pension and stakeholder pensions are so important. From a standing start, we have already ensured that hundreds of thousands of workers who 1149 previously had no pension now have access to a second-tier pension. Also, more than 150,000 small companies that had never considered having a pension scheme have now established such a scheme. That is essential progress.
People can also top up their pensions by investing in additional voluntary contributions. From this April, anyone who belongs to an occupational scheme with earnings up to £30,000 a year can top up their pension by investing in a stakeholder pension. A major modernisation strategy is in place, and great progress is being made.
I should like to continue this dialogue with my colleagues and employers. One thing is certain, regardless of whether the scheme provided is in the public or private sector: when an employer makes a contribution, the take-up by employees is significantly larger. We will do whatever is necessary to get the message across to employers that investing in pensions for their employees is the same as investing in the work force. 1150 Increasingly, employers recognise the importance of a trained and committed work force in the global economy. Such employees are effective and committed, but the cost of training them is huge. Employers want to retain trained employees, and so I believe that employment packages will soon begin to outline employee pension entitlements, as well as weekly or monthly pay.
I am optimistic about the future, and I look forward to further debates and discussions. I do not think that we will resolve the issue on 6 November, but the Government's strategy is clear. We want to ensure that everyone in Britain gets the opportunity to have a second-tier pension on top of the basic state pension. That will ensure that we will never again have a large number of retired people in Britain living in poverty.
I thank my hon. Friend for raising the subject of this debate, and I look forward to our meeting on 6 November.
§ Question put and agreed to.
§ Adjourned accordingly at twenty-nine minutes past Ten o'clock.