§ 3.8 p.m.
§ The Minister of State, Department of Social Security (Lord Mackay of Ardbrecknish)
My Lords, I beg to move that this Bill he now read a second time. Of all the issues we discuss in Parliament, this is one of the few subjects of which it can be said truly that it affects every man and woman in our country—everyone with regard to the state pension, and a large and increasing number with regard to private non-state pensions.
The Government already spend more on the state retirement pension than any other state benefit. This year we are spending £28 billion, and if we did nothing this would more than double to almost £66 billion by the year 2030. Occupational and personal pension provision in the United Kingdom complements state pension provision. Its development has been of enormous value to individuals, their families and the country as a whole. For most people, their pension rights are their largest financial asset apart from their home.
There are over 20 million people with rights to a pension from an occupational pension scheme. Around 5 million people have appropriate personal pensions and a total of 8 million people use a personal pension to save for retirement. Accrued rights in occupational pensions are worth around £600 billion—over a quarter of all personal wealth in the United Kingdom. We are determined to build on those strengths and encourage more investment by working men and women of all ages in their own pensions future. This legislation is essential if we are to achieve that, and provide the confidence in both the state and non-state provision which people rightly want. 975 There are four major principles underlying this legislation. First, confidence in the security of occupational pensions schemes was undermined by the Maxwell affair and we intend to restore that confidence by improving security. Secondly, equal pension rights for men and women are required by the European Court of Justice rulings. The Bill will bring domestic legislation into line with European law, and will make it easier for contracted-out salary schemes to equalise benefits for men and women for the future. Thirdly, in order to ensure a fair and sustainable basis for state pensions in the next century, we intend to phase in equalisation of state pension age at 65. Finally, we are committed to making personal pensions attractive across a broader age range, introducing age-related rebates for those investing in personal and money purchase pension schemes.
I begin with security in pension provision—the subject of Part I of the Bill and the part that relates directly to the Maxwell affair. Pensions are for many people the most significant single investment they will ever make. They must be confident that the pensions promise of today will indeed be matched by the pension of tomorrow. That is why my right honourable friend Peter Lilley set up the Pension Law Review Committee after the Maxwell affair. Professor Goode and his committee produced an excellent and substantial report. I am sure I speak for the whole House, and indeed for everyone involved in the pensions field, when I express our thanks to Professor Goode and his colleagues for their work. Their recommendations were widely welcomed. We have accepted all the main recommendations and we consulted widely across all pension interests before drawing up this Bill.
As Part I of the Bill makes clear, we now intend to provide a clear framework of statutory obligations on employers, trustees, scheme professionals and others connected with pension schemes. The measures in the Bill will reinforce trust law as the basis for pensions law; bring the management of all schemes up to the level of best practice; give scheme members more influence in the running of their schemes by giving them the right to select at least one-third of the trustees; underline the fact that trustees are responsible for running schemes properly, and give them the tools they need in order to do so; introduce a statutory minimum solvency requirement to maintain the adequacy of pension fund assets; establish an occupational pensions regulator with robust and wide-ranging powers; and set up a compensation scheme.
Like the Pension Law Review Committee, we accept that the great majority of pension schemes are secure and well run, but it is important that we make sure that there is proper security for all schemes' members. At the same time we must not impose such burdens on employers and schemes that we put funded pension provision at risk through over-regulation and unnecessary cost. The provisions strike a balance. They will achieve the desired security, without imposing unnecessary burdens on employers and pension schemes.
976 No system can offer a total guarantee against fraud. However, we will do everything possible to eliminate the likelihood of fraud or other wrongdoing by strengthening the framework of pension provision. First, we shall give scheme members the right to clear and relevant information; to select at least a third of the trustees; and access to a procedure to resolve disputes. Secondly, the Bill will underline the responsibility of trustees to run schemes properly through a general tightening of scheme management and administrative arrangements; a reinforcement of the need to safeguard assets and invest them prudently; and entitle trustees who are scheme members to paid time-off for training and trustees' meetings. Thirdly, the Bill will empower professionals—actuaries and auditors—through requiring them to take instructions from and report to the trustees not the employer, and to report breaches of statutory obligations to the regulatory authority.
Fourthly, the Bill introduces a statutory minimum solvency requirement for salary-related schemes to underpin the employer's pension promise.
This requirement will reinforce trustees' and employers' responsibility for ensuring that schemes are properly funded, thus enhancing security for scheme members. This will provide an objective benchmark for assessing the adequacy of the fund, setting contribution levels and monitoring the fund's performance. It will act as a mechanism for ensuring that schemes have adequate funds to meet contracted-out benefits. Finally, it will provide the measure against which the amount of compensation will be calculated when a successful claim for compensation is made.
We have consulted widely on how such a requirement should be defined in order to balance the concerns of employers, particularly those running large mature schemes, against improving security for scheme members. We believe that we have struck the right balance to give scheme members the security they must have if occupational pensions are to prosper and to encourage employers to run good schemes.
A further line of defence will be the regulatory authority. It will be appointed by the Secretary of State and have powers which carry the full force of the Pension Law Review Committee's recommendations. It will have the power to investigate non-compliance with the law, to impose sanctions and to suspend and disqualify trustees. It will focus its attention on those schemes where there is some reason for unease. It will not monitor all 150,000 plus schemes on a daily basis. That would be an unnecessary bureaucracy. It would not be efficient and it would not be a good use of resources.
The new measures for increasing security will be backed up by a compensation scheme to cover the dishonest removal of funds when the employer is insolvent. It will be administered by an independent pensions compensation board, chaired by the Pensions Ombudsman. The regulatory authority and the compensation board will be quite separate and independent of each other. Both will be fully accountable to Parliament. They will be funded by levies on pension schemes. Taken together, the measures in Part I of the Bill enhance the security of 977 occupational pensions and strike a fair balance between the interests of scheme members and their sponsoring employers.
We also propose to protect the value of pensions in payment. Currently only that portion of a pension which is paid by contracted-out pension schemes in lieu of SERPS has to be protected against inflation. The new provisions will provide for the whole pension to be indexed in line with inflation, up to 5 per cent. a year. SERPS will cease to offer top-up inflation-proofing to those who are contracted-out of the state scheme. This will apply to occupational and appropriate personal pensions for all rights built up after our proposals take effect in 1997.
I turn now to the state pension and Part II of the Bill. My right honourable friend the Secretary of State announced in December 1993 the Government's plans to equalise the state pension ages for men and women by the year 2020, with a phase-in period starting in 2010. The difference in state pension age for men and women is the last big inequality in our benefit system and the Government are committed to phasing it out.
We believe that it is right to equalise at 65 because, first, women are increasingly playing a role equal to men in the economy. They live longer and can expect to work as long as men. Secondly, equalising at 65 will improve the future support ratio between those working and those on a state pension. Lastly, throughout the world, countries are equalising upwards or increasing pension ages for both sexes. This move will help to maintain our international competitiveness while ensuring that the state pension remains affordable. It is also right in the light of developments in occupational pensions.
In 1990 the European Court of Justice ruled that occupational pensions constituted part of pay and must be equal for men and women in respect of pensionable service from 17th May 1990. The great majority of schemes which have equalised their pension ages have done so at 65. The Bill will bring domestic legislation into line with the requirements of European law by requiring schemes to comply with an equal treatment rule which ensures that schemes do not discriminate on grounds of sex. This features in Part I of the Bill.
Parts III and IV of the Bill deal with a number of important pensions issues. The Government recognise that it is difficult for salary-related schemes which are contracted-out of SERPS to equalise their benefits because the current contracting-out requirements are linked to the state pension age which will not be fully equalised until 2020. We are therefore bringing forward provisions which will make it easier for salary-related schemes to achieve equality by replacing the requirement to provide a guaranteed minimum pension with a simpler requirement. In future they will have to satisfy a test of overall scheme quality. The scheme actuary will be required to certify that the scheme provides benefits which meet a statutory standard. That will be set so as to ensure that contracted-out schemes continue to offer an attractive alternative to SERPS for scheme members.
978 Under the proposed new arrangements people who are in contracted-out schemes will no longer build up rights in SERPS which currently provide a top-up of their occupational pension. This new system will be introduced in 1997.
For those who expect to change jobs frequently and for those whose employers do not run pension schemes, personal pensions can be by far the best method of investing for their old age and building up savings. They have an important part to play in giving people choice and flexibility in their pension provision. This Government have already done a great deal to extend choice. We now propose to extend it further.
Our new provisions will fulfil our manifesto commitment to making personal pensions attractive across a broader age range. We shall introduce age-related rebates of national insurance contributions for those personal pensions, known as "appropriate personal pensions" which are taken out in place of SERPS. The rebates will apply also to contracted-out money purchase schemes. At present appropriate personal pensions become less attractive for contracting out of SERPS as people get older. The new structure will mean that most appropriate personal pension holders will be able to maintain their plans until retirement rather than having to contract back in to SERPS.
We propose also to allow individuals on retirement to withdraw an income from their personal pension fund while deferring purchase of an annuity, thus enabling them to maximise their income. Ordinary personal pension holders will be able to draw an income from age 50 up to age 75. Appropriate personal pension holders will be able to draw an income from their protected rights from age 60, for both men and women, up to age 75. There will still be a requirement to purchase an annuity at age 75.
That extra flexibility will make it worthwhile for most personal pension holders to time the purchase of their annuity and enjoy the potential benefits from the investment of their pension fund so as to improve their income in retirement. To allow schemes time to set up the new arrangements, our aim is that most of the changes should come into effect in April 1997.
The equalisation of state pension age will be phased in starting in 2010 and reach the 65-all figure—if I may use that expression—in 2020.
We are grateful for the contributions of all those involved in pensions in developing our proposals through to legislation, and we shall go on consulting them as we develop secondary legislation, and implement the provisions.
This is a major piece of legislation which I wholeheartedly commend to your Lordships. The new arrangements will recognise the needs of all the pensions interests in providing improved security, equality and choice in pension provision. It will encourage greater provision of and investment in occupational and personal pensions provision. It will set the framework for pension provision into the next century and beyond. I beg to move. 979 Moved, That the Bill be now read a second time.—(Lord Mackay of Ardbrecknish.)
§ 3.24 p.m.
§ Baroness Hollis of Heigham
My Lords, I am sure that we all thank the Minister for introducing the Bill so clearly. I thank him too for the briefings that he kindly arranged. We are not talking today about one Bill, but three Bills. The first, in the light of Maxwell and the Goode Report, intends to make occupational pensions more secure. A second Bill raises women's state pension age and makes their old age less secure. And a third Bill—the one in the shadows—contains the alarmingly extensive regulatory powers of the Secretary of State, the breach of which in Clauses 106 and 134 will be a criminal offence. In Committee we hope to bring that hidden Bill into the light.
The same test must apply to all the Bills: do they deliver the pension promise that, in return for an appropriate contribution to a scheme of choice, one's pension will be both secure and adequate enough to float one off poverty in old age? There are many good things in the Bill, such as the new disputes procedure, which it would be churlish not to recognise, but one thing the Bill does not do is deliver that pension promise. By that test it fails, unless together we can amend it.
I quote:There is a feeling of powerlessness and insecurity about jobs, housing … etc".I am quoting John Maples, deputy chairman of the Tory party. He could have added, "pensions" because pensions, as we know, extend into old age the security or insecurity, employment or unemployment, health or disability, prosperity or poverty, that has shaped one's working life.
We know that the days of one full-time job with one employer for life have mostly gone. In the 1960s or 1970s people began increasingly to move between employers so that now most men have on average six employers and women five employers during their working lives; in other words, early leavers are now the majority and not an aberrant minority of the working population.
To this mobility was in the 1980s added severe unemployment. Forty per cent. of the population has been unemployed in the past five years, and as many again are expected in the next five years. That affects us all, not just the "Portillo myth" of the feckless minority. In the 1990s has come the casualisation of the workforce. One major retailing company last week followed Burton's example and put 90 per cent. of its full-time staff onto 12-hour-a-week contracts. Those people must now scramble, if they can, to put together a portfolio of fractions of jobs in the desperate hope that they can put together a portfolio of fractions of a pension for their old age.
People are fearful, apprehensive and insecure, and, as John Maples said, they have good cause to be because, without security of earnings, they cannot build up a secure pension. In such circumstances what must the pension promise mean for occupational pensions? 980 Surely, that as employee and pensioner both, one's pension rights are secure from damage if one changes jobs; if one's employer or scheme professional behaves fraudulently; or if one's company merges or winds up.
How much of that pension promise did the Goode Committee recommend? It proposed to strengthen, as the Minister said, the competence and balance of trustees who are required to appoint scheme professionals, and to pursue an investment strategy to ensure their scheme's solvency; and that if they failed to do so, the professionals would whistle blow to a new and active regulator financed independently by the state; together with additional powers for an ombudsman, including the power to award compensation. Yet as The Times, if I may use it almost as a Greek chorus as the Bill proceeds, said on 1st October 1993 in its editorial on Goode:In central areas of compensation and minimum solvency requirements, Goode has erred on the side of the employers".That is a criticism echoed by consumer groups and by the TUC, worried at the employers' continued dominance of the trustees. The Times went on prophetically:The Government must not allow its ideological distaste for a paternalistic form of pension provision to stand in the way of protection for 11 million present and future pensioners".Of course, when it came to the government White Paper less than a year later, that was exactly what the Government did. The Government weakened Goode. The Government weakened the regulator, who became merely a long-stop and, as the authority was to be funded by the industry, effectively diminished it into a form of self-regulation. We all know the efficacy of that.
Goode recommended, but the Government weakened, the statutory two-thirds minimum of trustees on money purchase schemes. The Government weakened Goode's compensation scheme. Above all, the Government weakened the minimum solvency standard by reimporting into pension investment those very equities whose volatility in value contributed to so many pension funds going into liquidation, unable to meet their liabilities. As was stated of the White Paper in The Times, on 24th June 1994, the Secretary of State "has pleased almost nobody".
Goode was an incomplete response to the problems. The Government's White Paper retreated from Goode. Now, six months later, we have the Pensions Bill which further retreats from the Government's White Paper. In particular, the compensation scheme has been limited to the point at which a company goes into liquidation. The Mirror pensioners would have received nothing because the company did not go into receivership. Above all, the Government have so watered down the minimum solvency standard that if companies level down to it, as we fear they may, it will endanger fund after fund.
Swan Hunter, with a £60 million pension fund, would have met the Government's new solvency standard. Yet when Swan Hunter went into liquidation it could not meet its pension liabilities and some pensioners will have their pensions cut by up to 40 per cent. However, it meets the new government solvency standard. The Institute of Actuaries is furious. As was said by Bacon & Woodrow, one of the most respected actuary 981 companies in the country, the Government's changes to the solvency measures "cannot be justified". On 17th December 1994, The Times, if I may quote it yet again, noted,widespread anger that several important measures contained in last summer's White Paper have been watered down, providing scheme members less protection".I can assume only that this is the Government's homoeopathic version of security; the more you dilute it the stronger it becomes.
During the passage of this Bill we will seek to help the Government to deliver the pension promise. As regards trustees, we will seek to increase the number of trustees to the best practice of ICI and Unilever, which have 50 per cent., and add a pensioner trustee. We will seek to protect trustees against unfair dismissal, ensure that they are trained, and review their liabilities. We will also seek to enhance the independence of scheme professionals and consider whether their assets should be held by a custodian. We hope to get the Government to spell out and to strengthen the role of the regulator and give trustees not merely a power but a duty to refer certain matters to him; for instance, the payment of scheme surpluses back to employers. As the regulator takes over so many functions of the state-funded Occupational Pensions Board, and in order to secure its independence, we shall seek to have it funded by the state and not by the industry.
As regards the benefits in the pension promise, we will seek to re-introduce the guaranteed minimum pension within occupational pensions so that poorest members—usually women—do not lose out. Above all, we will seek to ensure that minimum solvency means precisely that—the ability to secure the pension promise. Otherwise it is meaningless. Employees and pensioners alike are owed—literally owed—nothing less.
Finally, with help from the CBI and the NAPF, we will try to ensure fairness between occupational and personal pensions. Personal pensions are suitable for a few; for instance, the well-off, the highly mobile and the self-employed. Instead they were sold to those who could not afford them. As regards men, the average median earnings of personal pension holders is only £9,600 and as regards women it is only £6,300. Nearly one-third had incomes so low that they did not even pay national insurance, which starts at £56 per week. As was said by the Consumers' Association in December, 1.5 million people were wrongly sold personal pensions.
The companies have learnt from their mistakes but, from today's speech, not so the Government. They propose to raise still further the bribes into personal pensions—at the expense of occupational pensions. This folly must stop. We will seek to amend the Bill accordingly in order to protect people from being bribed by the Government into poverty in old age.
I turn to the last part of the Bill. Women have a worse deal in pensions even than in other fields of social security because of their low and intermittent earnings and their childcare and caring responsibilities. It means that only one woman in four receives just some SERPS, only one woman in five receives some occupational pension, and only one woman in six receives a state 982 old-age pension in her own right. So within the framework of occupational pensions for women, we will seek to restore the GMP and give women more protection. We also hope to gain the support of noble Lords on all sides of the House—I am sure that we will—to give women a fair deal upon divorce by insisting that courts must, not merely may, take pension assets into account. As regards disability, at present when a husband goes into residential care he takes all of his occupational pension with him to pay the fees. His wife is left bereft. If she loses him to death she receives half his pension but if she loses him to Alzheimer's disease and nursing care she receives nothing at all. That must be changed.
We also hope to expose the myths upon which rest the Government's proposal to raise women's state pension age to 65. Some of those myths were repeated today by the Minister. The Government insist that we face a demographic time-bomb. That is not true. We are ahead of Europe in that respect; it has already happened. Between 1971 and 1991, the number of people over the age of 65 rose by 1.6 million; in the next 20 years it will rise by only 0.7 million. Even by 2040, three-quarters of our population will be under the age of 65 and we will have the best support ratio bar one in western Europe and within the OECD.
As regards cost, it is not true that we face a financial time-bomb any more than we face a demographic one. The financing cost of elderly people per person of working age will be the lowest but one in the OECD by 2010 and thereafter by far the lowest. In Britain we have proportionately fewer elderly people and they cost us less. The additional cost of ageing during the next 50 years will add less to the social security bill than the rising cost of unemployment during the past five years. Far from the elderly being a social and financial burden on the rest of us, they are a source of social and common wealth. They sustain family life and voluntary work, as your Lordships know.
The real problem is that of unemployed, middle-aged men, 59 per cent. of whom between the ages of 55 and 64 are not in work. Therefore, they do not pay the national insurance to fund their parents' pensions or build occupational pensions and savings of their own. Reduce unemployment, invest in education and training for economic growth, recognise that the growing number of women in work adds to the national insurance base without taking out much extra in the way of pensions over what they currently receive as their husbands' dependants, and we shall be better poised than all our European and OECD competitors to face the next century.
Then why do it? To save £5 billion for the Treasury. Of course, that means taking £5 billion away from some of the poorest members of our society; women without independent incomes of their own. We do not support a rigid retirement age but we believe in a flexible decade of retirement for men and women alike so that they and not the state—and certainly not the Treasury—determine what is best for them. It is called choice.
Men and women alike—I quote again John Maples, the deputy chairman of the Tory party—are becoming fearful. They are becoming fearful about old age. They 983 face insecurity, poverty and uncertainty. If we amend the Bill, together we can slay that fear and deliver the pension promise to which they are entitled.
§ 3.40 p.m.
§ Baroness Seear
My Lords, it will be generally agreed on all sides of the House that this is not the most sexy piece of legislation which has come before your Lordships. It is long, complicated and highly technical but, of course, it is also extremely important.
We do not owe very much to Mr. Maxwell, but it was the scandal of the Maxwell pension scheme which alerted the Government to the need to take action and to make sure that nothing like the Maxwell disaster ever happened again. But of course, no Bill will be able to ensure that nothing like the Maxwell scandal ever happens again because the fact is that if someone is sufficiently determined, brutal, ruthless and unflinchingly dishonest, he can get away with almost anything. It will not be possible to devise any legislation which can really guard against villains of that kind. Therefore, it is extremely important that the legislation before us should make it as certain as possible—and that is as far as one can honestly go—that such a scandal never happens again.
Therefore, as the noble Baroness, Lady Hollis, said, we must look at the Bill to see to what extent its provisions can give the security which all of us in old age want to have and for which those of us who have it are extremely thankful. It seems to me that the two key points are in relation to the nature and make-up of the trustees and the way in which their activities can be controlled.
As has already been pointed out, the Bill provides that only one-third membership of the trustee board must be in the hands of members. That is less than a great many of the better schemes today already provide. We shall certainly move amendments to provide that at least 50 per cent. of the trustee boards are made up of members and that some of those members should already be pensioners. It is a great advantage to have one or two pensioners on the board because they are completely free from any possible influence exerted upon them by the employers.
Of course, the European Court of Justice said that pensions were a form of deferred wages. Up to a very considerably important point, that is true; but it is not the whole truth because the employer has to pick up the tab if the funds are inadequate. We wish to ensure that the employer does have to pick up the tab if the funds are inadequate. Therefore, it is important that the employer should have representation on the board of trustees if he so wishes. I am not so sure that all employers will so wish. The company for which I worked many years ago now has a trustee board which is made up entirely of members with one exception only appointed by the employer. I was informed only last week that that works extremely satisfactorily. I do not believe that we need to look too closely at the protection of the employer once a good scheme is set up and the necessary safeguards are introduced. Therefore, we shall 984 require that a minimum of 50 per cent. of the boards are made up of members and we may even strive for something better.
The fact that the trustees are made up of elected members does not ensure that the funds will be properly dealt with or that there will be no scandals. We all know that elected persons—and we have had plenty of evidence of it—can be knaves, fools or both. Indeed, Mr. Maxwell was (was he not?) an elected person, a Member of Parliament and a member of the noble Baroness's party.
Secondly, there need to be safeguards other than those provided by member trustees. Therefore, we turn to the question of what should be the powers of the regulator. On these Benches we attach the greatest importance to the authority and real power of the regulator. As I looked at the Bill, I must say that I was totally dissatisfied as to whether the regulator has the powers that he needs effectively to regulate. Whistle-blowing seems to me a very frail mechanism on which to rely if the regulator is to operate effectively. Who is to blow the whistle and when? The idea that the professionals, the actuaries, the accountants, lawyers and administrators should blow the whistle seems to me totally inappropriate.
If an actuary is working for an organisation, it is quite unreasonable to impose on him the additional burden, which may surely involve him in conflicts of interest, of blowing the whistle as well as being the person working for and paid by the organisation against which he is blowing the whistle. That puts him in a professionally impossible position which we should not dream of supporting.
How and when do you blow the whistle? It is not when things are palpably and obviously in a state of near disaster that the whistle needs to be blown. That is probably too late. It is when it looks as though matters are going wrong but nobody is quite sure whether or how they are going wrong. You may think you smell a rat but you are not quite sure whether it is only a mouse. You are not really certain whether it is the time at which you should blow the whistle. I suggest that we forget about whistle-blowing and turn our attention to making the regulator really effective.
It would be a very poor economy to fail to finance the regulator sufficiently for him to be able to make really strong effective dawn raids. I know that it says in the legislation that he is able to do that, but we are talking about 150,000 schemes. Therefore, the regulator will need a proper staff. A phrase which is bandied about today is, "that would be bureaucratic". I dislike bureaucrats as much as most people, but I recognise that in order to get certain jobs done, we have to have a few bureaucrats and we have to pay for them. There will not be a proper scheme of regulation unless there is a totally independent regulator who has adequate staff so that he is able to go in on his own initiative, unwarned, and investigate where there is a need for him to do so. We must forget all about whistle-blowing.
I believe that those are the two major areas at which we must look to see that we provide increased security for pension holders. 985 There are two other aspects to the Bill which are of very great importance. It would be quite wrong of me and of anybody dealing with the Bill not to refer to the very wide range of matters which very closely affect women's interests. I accept that it is absolutely right that the pension age for men and women should, in due course, be the same. I see no reason whatever for saying that women should have equality in relation to most matters but unequal pension ages. Indeed, that should have been corrected a long time ago. It takes a little time to put the matter right but it most certainly must be put right.
I agree—and, indeed, my party has advocated this for a long time—that there should not be a final, fixed retirement age, but that there should be a decade of retirement. I believe that that proposal fits not only the requirements of women but also those of men, especially today—and, as the noble Baroness, Lady Hollis, said, in the future— when people have a variety of different jobs and, to quote Professor Handy, will have portfolios made up of different types of employment or activity with which they put together an income for themselves.
We propose the idea of a decade of retirement actuarially calculated so that people can start retiring early with a small pension at a time when they are able, in many cases, to add something to that pension by way of part-time work. I ask the Government to look once again at the possibility of a decade of retirement rather than a fixed retirement age. I should add that if that had an actuarial basis—as it should have—and the early pensions are relatively small, we must consider, as my party has put forward in the past, the fact that, when one reaches what most people—that is, except those in your Lordships' House—would regard as the ripe old age of about 75 or perhaps even 80 years of age, the pension should then be adjusted upwards on the assumption that, by then, people are less likely to be able to have additional earnings or even undertake the DIY which, if one is capable of doing it, saves one a good deal of money.
I ask the Government to consider that point once again and to look at ways in which women will be disadvantaged by the proposals that have been put forward. However, we shall return to that aspect of the matter in greater detail in committee.
There are other questions of very considerable importance to women. I am looking forward very much to hearing the maiden speech of the noble Lord, Lord Freyberg. He has taken up with great gallantry the cause of the widows, so I shall not refer to them. That is a very important aspect of the Bill. I shall leave it to be dealt with by the noble Lord's maiden speech which we are all anticipating with great pleasure.
The question of women in divorce must be examined as regards the way in which the woman who is divorced does or does not receive an adequate share of her husband's pension. I should like to reiterate a. point already made. It is only one isolated incident, but extremely serious to those who are involved. I refer to the position of the wife—although, of course, it could he the other way round and could equally be the husband—when the partner goes into a residential 986 institution suffering from the kind of illness with which one can now live for a considerable time and the whole of the pension money is thereby taken in order to support that person in residential care. I am sure that no one ever intended that such a thing should happen, but plainly it is a very cruel consequence of the present regulations. We now have a good opportunity while the Bill is going through the House to alter the situation.
Another opportunity that must be seized is surely to correct that shameful meanness under which pensioners from this country living in the Commonwealth do not receive an updating of their pensions. A small sum of money is involved. How can we continue to be so illogical and mean as to refuse to update the pensions of pensioners from this country who are living in the Commonwealth? Again, that is a matter to which we shall return in Committee.
Up until now, I have been talking about certain important details in the Bill. However, I should like to impress upon your Lordships' House the fact that this is a matter of great importance quite beyond the issue of the individual pensioner. As I said earlier, there are 150,000 pension schemes in the country. The total assets of the pension companies fall little short of the same amount as the GNP of this country in one year. We are talking about huge sums of money. What happens to such money is of great importance and way beyond the affect that the legislation will have on individual pensioners.
If, 50 years ago, employers, trade unions and the like had had the good sense to negotiate pensions as part of wage agreements, the poverty in this country among old people would have been reduced to a point whereby it would no longer be a problem. However, the position today is that over 70 per cent. of the lowest income pensioners have no pension other than the state pension. Everyone must know that if a person is attempting to live on the state pension alone then that person is living in the very greatest poverty. If those people had had occupational pensions—and I believe that occupational pensions should be made more adequate—then, with one blow, it would have eliminated a great deal of the poverty of this country and we would also have eliminated very heavy costs on social security.
We are now dealing with an approach to some of our most serious and expensive social problems; but we are also dealing with vast sums of money. How will that money be used? There is a conflict here that must be faced. In order to achieve security, there is bound to be a tendency for pension funds to go into gilts. Yet, in this country, we put too little money—not too much—into equities and investment in industry. We must strike a balance so as to ensure that those large sums of money are used in a way which is beneficial to the development of industry and, therefore, to the wealth of the economy from which we ultimately derive all our benefits. We must consider that aspect of the matter. We cannot afford to tie money up in a way which might give benefit in the short run but which will, in the long run, be harmful.
The noble Baroness, Lady Hollis, referred to our position in relation to other countries in the European Union. However, I believe that the noble Baroness 987 overlooked the fact that the question of pensions is causing the greatest possible anxiety in those countries. We at least have had more sense than them as regards the funding of our provision for old age. It has been inadequate; but it is a great deal better than theirs.
I should like to refer noble Lords to an extremely good report entitled, The Pension Time Bomb in Europe which was produced by a leading member of my party, Mr. Taverne. Yes, my Lords; Mr Taverne happens to be a member of my party. However, that is not the reason why I am advertising the report. In the document, Mr Taverne draws attention to that great anxiety throughout the European Union and to the fact that, unless the problem is handled, prosperity in the Union will be greatly handicapped. I should point out that we are ahead of the European Union in this area. Indeed, it gives us an opportunity to take the lead in showing the other countries what can be done with properly funded pension schemes which they have not developed for themselves.
As I understand it, Mr Taverne has been asked to talk on the subject in no less than three countries in the European Union. I mention that because I believe it is important that we should have regard to the much wider issues connected with the question of pensions and not merely consider—important though it is—the effect on individual pensioners.
§ 3.58 p.m.
§ Lord Freyberg
My Lords, it may seem a little strange that someone still in his early twenties should choose the subject of pensions for his maiden speech. It may seem even odder that the branch of pensions about which I want to speak—one closely related to our debate today—is war and service widows' pensions.
I am not myself, and have never been, in the Army, the Navy or the Air Force—indeed, my chief interest is in the arts. I am, as yet, unmarried and I shall have to wait 41 years before I am eligible to draw a state pension. Nonetheless, war and service widows' pensions have a special relevance to my own family. My father and grandfather were both in the Army; my mother and grandmother both service widows. But it is only recently that I have learnt just how badly off are many war and service widows. In this anniversary year of the end of the Second World War we naturally want to honour those of all ranks who fought unstintingly for their country and made victory possible. One of the best ways to do this, before any money is spent on celebrations, is to correct the distressing anomalies in war and service widow pensions, thereby easing the lot of many military widows who live in an unacceptable state of extreme poverty and hardship.
I was surprised to discover, as I am sure many of your Lordships will be, that among our Allies, or those against whom we fought, Britain currently pays the lowest rate of service pension to one category of widows. Service widows whose husbands either died in service or retired before April 1973 (and this includes 988 many who fought in the Second World War or Korea) receive a pension of only one-third; that is, 33 per cent., of their late husband's retired pay. In France the figure is 50 per cent., in the USA 55 per cent., in Germany 60 per cent., in Australia and Belgium up to 67 per cent., and in the Netherlands 71 per cent. Of the 14 comparable Allied and European forces schemes studied by the Officers Pension Society, there is no other country which pays any military widow less than a half-rate pension.
The result of such a policy can be seen in the case of a widow living in Oxford whose late husband was a Fleet Air Arm pilot. He flew throughout the war, including the famous raid on the "Tirpitz" in Alten Fiord. His death at 37 of a massive heart attack while still serving as a pilot was not judged to be attributable to service, and after tax, the MoD pension to which she is entitled amounts to £29.06 a week.
As I am sure your Lordships are aware, the Officers Pension Society and the War Widows Association of Great Britain, backed by all 132 member groups of the Confederation of British Service and Ex-Service Organisations, have set up a campaign to persuade Parliament and the Government to ease the severe restrictions still placed on our war and service widows. In the case of the widow I have just mentioned, the campaign proposes she should be paid not a one-third but one-half of her late husband's occupational pension. That would still only amount to about £44 a week.
The campaign has received overwhelming cross-party support and been strongly backed in an Early Day Motion (No. 186 in the name of Alfred Morris) in another place. Specifically it highlights three groups of widows who are especially disadvantaged, and with your Lordships' indulgence I will speak briefly about each of them in turn. First, I shall discuss war widows. Thanks to a previous campaign in 1989, British war widows' pensions are now more adequate for all those whose husbands died in battle or attributably. There is, however, one restriction still in place—again unique to Britain—which causes particular distress. If a British war widow remarries or is discovered cohabiting she not only loses her entire pension, but, with the exception of a very few officers' widows with reserved rights, will not have it restored should she divorce or be widowed again. (For post–1973 war widows there is an MoD attributable pension which is only restorable against a strict means test).
By contrast, in Belgium, Canada, Denmark, Holland, Italy and South Africa, once awarded the war widows pension is never removed. In the case of Australia and New Zealand there is a permanent annuity under a revised scheme. In France, Germany, Norway and Spain, war widows are granted automatic restoration of their pension on second bereavement or failure of the second marriage.
I am sure your Lordships will agree that no one would expect or want war widows to spend the rest of their lives alone, but sadly that is the effect of this ruling. Not surprisingly, few are prepared to run the financial risk of re-marriage—in 1993 only one in a hundred war 989 widows under 60 years of age did so—thus ensuring that they suffer a second enforced loneliness for the rest of their lives.
Because so few war widows change their marital status, granting them a pension for life, regardless of any subsequent change in their status, would be both morally right and involve no extra cost to the state: it is already being borne in 99 per cent. of cases. It should also be noted that according to the National Association of Pension Funds' statistics, more than 84 per cent. of all public and private pension funds in the UK now pay a widow's pension for life regardless of any subsequent changes of status. It seems only reasonable that, in keeping with most current pension schemes, we should honour the war dead by paying their widows a pension for life.
The second and third cases, for service widows, are slightly different. We are here dealing with the widows of military personnel whose death in service or in retirement was not judged to be attributable to active duty. In this less emotive group there have been long-standing inequities, and sadly the 1989 campaign achieved nothing for the two categories I now wish to mention.
First, there is the widow whose husband died or retired before 1973; she is entitled to only one-third of her late husband's occupational pension. The widow I mentioned earlier, who receives only £29.06 a week, comes under this category. She is 74 years old and still has to work to make ends meet.
Then, finally, there is the widow who married her husband after he had retired. Whereas the ruler were quite justly changed in 1978, a widow whose husband had no service after that date today receives no pension whatsoever from the MoD despite his—typically 34—years of service. The financial hardship this restriction causes is dreadful. The campaign proposes that such a widow should receive an occupational pension related to all the years of service of her late husband provided the marriage was entered into during the years when he had a liability of recall to full-time service—normally to the age of 65—and provided the marriage had lasted for at least three years.
Again, pension provision for the widow of a post-retirement marriage with such safeguards is a characteristic of all but one of the 14 comparable schemes examined. It is worth noting that the parliamentary contributory pension fund to which all Members of another place belong, pays every widow of a member who dies a pension of 62.5 per cent. Your Lordships may be asking how the most elderly and vulnerable of the British service widows could be so uniquely disadvantaged. The explanation given by the Government for such omission is the cost of remedial measures. But I have already shown that in the case of war widows, remedial measures would cost virtually nothing. In the case of the service widows about whom we are talking, they are by definition already over 70 and most of them very much more. Helping them in their advanced years could hardly be described as an open-ended or prohibitive financial commitment.
990 As I have studied these matters I have been appalled by what I have found. Fifty years on from the Second World War we should recognise our debt to those whose heroism and sacrifice we shall commemorate later this year. We owe these widows something better than poverty, loneliness and fear.
§ 4.7 p.m.
§ Baroness Young
My Lords, it falls to me to be the very first to congratulate the noble Lord, Lord Freyberg, on what I think we would all regard as a most remarkable maiden speech. It was remarkable both for its compassion and, if I may say so, his grasp of technical detail on a subject which is, I think, difficult for all of us. We welcome him very much into the House as the grandson of a very distinguished soldier who I believe won the VC and four DSOs. The noble Lord had a remarkable father who also fought in the Second World War. Although I must confess that I had always thought of the noble Lord as a New Zealander, he tells me that he was in fact born in London. We may all be very pleased that he is as British as the rest of us. We welcome him to the House and congratulate him most warmly on an outstanding maiden speech. We look forward to hearing from him on many occasions in the future.
I begin by thanking my noble friend the Minister for introducing this Bill so clearly to us. I wish to say right away that I am in broad agreement with its main aims which, perhaps in shorthand, have been stated as dealing with the scandal and tragedy of the Maxwell affair and with the equalising of pension ages of men and women at the age of 65. I think the backdrop to the Bill on pensions—here I find myself in agreement with much of what the noble Baroness, Lady Seear, said—is the fact that there is growing concern across the world about how post-retirement is to be funded and at the enormously high costs that this could place on governments and employers. We have to recognise the great demographic changes which are taking place and the greatly increased numbers of old people. It is now, I believe, estimated that the average person lives four years longer than in the days of Beveridge and some, of course, live very much longer still.
I say to the noble Baroness, Lady Hollis, that we are making some very good changes, but we should not underestimate the costs which that will place on governments—of any political complexion—employers and individuals. We need to educate the public at large about this huge problem.
It is important that we should deal with this matter, because pensions are of acute importance to individuals. Those of us who are fortunate enough to be provided for can be thankful. But the problems of old age are very real.
It is good news that Britain is leading the way on private pension schemes. We put more money into those schemes than any other country in the European Union and, I believe, than all the European Union countries added together. In 1991 some 10.7 million people of working age were in occupational pension schemes and 991 another 3 million had a preserved pension from former employers. That is higher than in other countries in the European Union and is a most welcome fact.
Turning to Part I of the Bill, it must be right following the Maxwell scandal to legislate to give much greater pensions security. The proposals in the Bill are based on the recommendations of the Goode Committee. As I understand it, they reflect best practice as it is exercised today. We can debate all the details, but the Bill brings into legislation the involvement of members at trustee board level; the setting out of the respective responsibilities of employers, trustees, professionals and members; the introduction of a statutory minimum solvency requirement to ensure that schemes have sufficient funds to pay pensions; the establishment of an independent regulatory authority; the introduction of a compensation scheme to protect against dishonest removal of assets; and a limited indexation of pensions in line with the retail prices index.
We have already been warned that there will be a great deal of debate on those points, but it is important that we have legislation before us which takes account of those matters which have been identified as difficulties, and that we are addressing them. That fact should be widely welcomed.
Of course, it is never possible to legislate against every disaster. After all, who foresaw the Maxwell scandal? However, the Bill gives reassurance to pensioners. I should like to comment on the aspect of whistle blowing. It is my experience—and I am sure that this is true for other noble Lords—that as a member of a board or any other important organisation it is very difficult to know what is happening and whether something is going wrong. One has to ask the right questions if one is to get to the bottom of the matter.
None of this will work unless boards and trustees accept that they must themselves have the highest possible ethical standards. They must not be dependent exclusively on the regulator, because the regulator will never really be able to find out what is happening, whatever extra powers he may be given. At the end of the day, it will depend on those involved knowing what is going on.
I turn now to the proposals to equalise pensions for men and women at 65. That follows a decision of the European court. I have already referred to the cost of pensions in the future. We know that equalising pension ages—which I believe must be right and is long overdue—will result, without any changes, in a doubling of spending on pensions by the year 2025 from just under £30 billion a year to almost £60 billion a year, even assuming constant prices. Equalisation of pension ages at 60 would cost an additional £7 billion by 2025; equalisation at 65 will save £5 billion. Equalisation at 65 will cost £12 billion a year less than equalisation at 60. The idea that that is a cheap option is an illusion and is not one that we should support.
We have to recognise what our competitor countries are doing in this regard. Most European Union, Scandinavian and North American countries either have or are heading for pension ages of at least 65 if not higher. In the United States the pension age will go up 992 from 65 to 67. I understand that even in Denmark it is going up to 67. Therefore, we are not taking action which is out of line with our competitor countries.
This is a serious matter. We talk about the taxpayer, and we are all taxpayers. It also affects employers. Therefore, there must always be a sensible balance between what can be afforded and what should be done.
I realise that the Equal Opportunities Commission is very concerned about this matter. I too have read the material which it has produced. However, there are two ways in which women will benefit from a higher retirement age. One is that they will have a longer working life and therefore have greater opportunity to contribute to a pension. One of the difficulties for women at present is that there are gaps in their employment when they have children or look after elderly parents. A longer career expectation could also help them to defeat what has come to be called the glass ceiling, because at present by the time many women return to their careers employers may think that they do not have long enough to contribute to the company or the organisation before retirement.
It is important to recognise that the changes will not affect any current pensioners or any woman over the age of 45. The scheme will not start until the year 2010 and then will be phased in over 10 years.
I recognise the anxieties in relation to equal opportunities. They have been set out very clearly this afternoon by the noble Baroness, Lady Hollis, and I shall not repeat the figures which she quoted, which I have also seen. However, I should like to ask my noble friend the Minister whether he can tell us whether there will be any further help for women to accrue pensions during their working life. It is certainly not mentioned in the Bill. However, I wonder whether anything will be included in regulations which would help them to accrue something like the equivalent of 40 years of working life when they have worked for only 20 or 25 years. Perhaps some allowance could be made for a career break when they have children or when they look after elderly relatives, or when they are only able to work part time. I realise that my noble friend may not be able to answer all those points, but it would be immensely helpful at this stage of the Bill if he could say something about the Government's thinking on that important matter.
I should now like to turn to what the Bill does not mention but has been referred to by both the noble Baroness, Lady Hollis, and the noble Baroness, Lady Seear; namely, occupational pensions on divorce. This matter was first brought to my attention when I was a Foreign Office Minister. Since then I have become aware of its further effects on service wives, and indeed all wives whose husbands work abroad and who accompany their husbands. I have also been approached by the organisation Fair Shares, which is interested in divorce generally.
The wives of those serving in the Foreign and Commonwealth Office are at a particular disadvantage because they are unable to pursue a separate career. They therefore cannot possibly earn money for a pension. If the couple divorce and the husband remarries then the husband's pension, when he dies, will go to the 993 second wife and the first wife can be left in dire straits. There can be tragic circumstances in which people who never expected it find themselves dependent on social security.
Others who know far more about the issue than I do will speak further on that subject. However, there seems to be an injustice which should be put right. It also affects all divorced couples as, on the whole, women are not able to pursue a full-time career and earn a pension. As we all know, the number of divorces has risen. In 1987 there were 165,000; in 1991 the figure was 171,000.
I found the Government's response in the White Paper disappointing. I do not understand it. Paragraph 1.45 on page 14 states:There is at present no clear evidence of the extent of the problem".I should have thought that the figures indicate the extent of the problem. I accept that both the Goode Committee and the Pensions Management Institute state that it is a complex problem. However it has been reviewed on at least five occasions since 1969: first, by the Law Commission in 1969 and again in 1977; by the Occupational Pensions Board in 1976; by the Lord Chancellor's Department in 1985; and by the Law Society Family Law Committee in 1991. It hardly seems necessary, therefore, to set up another committee which, if I have understood the matter correctly, is not expected to report until September when the Bill will have become law. It will be helpful to know what the Government believe will happen when the committee reports. If we are unable to achieve anything in the Bill that will be the next point at which some action could occur.
The Pensions Management Institute made a number of proposals in its report on pensions and divorce. Time does not allow me to go into detail. However, the report includes the proposal that courts should have power to share out occupational and personal pension rights between the divorcing parties and for that purpose should be able to issue directions to trustees and others running pension schemes. Other proposals are that arrangements for sharing out pension rights on divorce should cover the working population and pensioners, and that the arrangements should extend to the guaranteed minimum pension or protected rights element of a pension used for contracting out of the state earnings related pension scheme (SERPS).
I recognise that there are a number of complex issues. However, I believe that it has been accepted by all who have reported on the subject that there has been no commonly accepted value to accrued pension rights. There is now such a value following legislation, allowing employees to "carry" their pension from one job to another. The value is known as the cash equivalent or transfer value. That is an important point which could help in the calculations which might be made at a divorce. Underlying most of the proposals is the suggestion that essentially splitting pension rights on divorce amounts to one party forfeiting his or her rights, or assigning them to the divorced partner. In that connection, it would be helpful if the Minister could say 994 anything about the position in Scotland. If that is not possible today, perhaps he would be good enough to write to me on that point.
As the Bill will not become law until 1997, could enabling legislation allowing changes to pension rights on divorce be introduced as soon as possible? This is a matter to which I, and I am sure others, will return in Committee. I hope very much that the Minister will consider the point seriously. I do not believe that such a provision would be more expensive. I recognise that the Inland Revenue gives tax relief for pensions and that if there were more pensioners that relief might increase. However, offset against that has to be set the cost of supplementary benefits for helping the spouse who is disadvantaged on divorce.
I hope that my noble friend will consider the issue carefully. As has already been said, it has support from all parts of the House. I believe that it is an injustice in today's time and age. I hope that the Minister will bring forward amendments which might meet the problems.
That said, I wish to return to my first point. It is an important Bill. It seeks to deal with important issues which have arisen following the Maxwell case and the European Court's decision. I support and welcome the Bill.
§ 4.25 p.m.
§ Lord Stallard
My Lords, I congratulate the Minister on his opening remarks and for going through some of the proposals in the Bill in such detail. The spokesmen from the Opposition Front Benches, too, have done much to enlighten those of us on the Back-Benches about the details of the Bill. It has already been mentioned that the Bill is an amalgam of three Bills encompassing the Goode report on Pensions Law Reform; the Government 1994 White Paper, Security, Equality, Choice: The Future for Pensions, volumes I and II; European law provisions on equal treatment for men and women; the Barber judgment; the White Paper, Equality in State Pension Age; and government proposals to restructure pensions and break the link between SERPS and occupational pensions.
Cynics have said—far be it from me to join them—that the Bill was drafted at some considerable speed following the collapse of the Government's plans to privatise the Post Office. That left a huge gap in the Government's programme which had to be filled fairly quickly, preferably by some issue that could be seen to be at least partially non-controversial. Therefore we have before us what has been recognised by most experts to be a badly drafted Bill, with the possibility of scores of government amendments to put right the bad drafting, with many more proposals remitted to regulations. That is the background to the Bill.
I do not profess to be an expert on pensions although I have studied them over the years as much as most. However, perhaps I may pay tribute to those voluntary organisations and individuals who have taken the trouble to hold meetings here and elsewhere and to attend in person to discuss with interested Members the details of the Bill and how it affects people who are in work or who have left work. They took a great deal of 995 trouble to bring those issues to our notice. As a result we are far more informed about pensions and the shortcomings of the provisions of the Bill.
I wish to make a few general comments on some issues which interest me. Other speakers have referred to the proposals involving occupational pensions and the complex issue of personal pensions. Those provisions will no doubt be the subject of a number of amendments. I have a number of points to make on those important issues. However, I shall not do so now; I shall wait until we have a further detailed discussion in Committee.
I wish briefly to mention two proposals which have already been touched upon. Clauses 114 and 115 and Schedule 4 to the Bill deal with the equalisation of pensionable age. Of course that is to be welcomed in its broad sense. That is the good news. However, the bad news for most people is the age that the Government have chosen: the men's pension age of 65. For men there will be no change; for women there will be five more years of working before they can draw their state pension. For as long as I can remember (it is a fairly long time) I have been involved with campaigns and organisations campaigning for a reduction of men's pension age to 60—for the equalisation of all pension ages to 60. Had that been granted even halfway through one of the campaigns, it would long since have been in operation and there would be no argument about the great expense and how much it will now cost.
We are, therefore, greatly disappointed that the Government have chosen the age of 65 instead of 60. The more so, since the Government's proposals for full equality in the state pension age, in relation to benefits, will not be achieved for another 26 years. That is another generation. After years and years of discussion, Motions, debates and Bills, it will still be another 26 years before the proposals become totally effective. Many of the ill-effects will be felt by women, as one or two speakers have mentioned.
The Government claim that the reason they are altering women's retirement age now has nothing to do with the campaign that we waged all those years ago. The reason is that they are required to equalise the age under European law but they say that to do so at 60 would be too expensive. In practice, the majority of men between the ages of 60 and 65 are not working because they have retired on good occupational pensions or they have been made unemployed or they receive invalidity benefit. The latter will not last much longer, either.
The proposals will not change that. People in good occupational pension schemes will continue to retire at 60 or even earlier, if they can afford to. People in not so good occupational pension schemes will have to stay on until they are 65 or draw other state benefits, which are also in the process of being cut back. Women are far more likely than men, in our view, to be in that position. So in effect, we shall still have two retirement ages for a long time to come.
I wish to go into two issues which have been briefly mentioned by previous speakers but which deeply affect me and many people outside. One is a matter raised by the Alzheimer's Disease Society, not for the first time. 996 For many years it has been campaigning, with support from Members on all sides of the Chamber. It has been worried about occupational schemes and particularly the effect of residential care on them. Under existing rules, when someone enters long-term care in a residential or nursing home, the whole of their occupational pension is taken up with the costs of care. The society is deeply concerned about the financial impact that that has on elderly couples, in particular on women carers. We have dealt with some of the issues in debates in the recent past, but the difficulties must be repeated as no one seems to be listening.
It is clear, from the cases of which we know, that the wife's income is substantially reduced and women face severe financial hardship as a result of the present way of dealing with occupational pensions. One of the adverse effects concerns the payment of income support to people who would otherwise be unable to support themselves. They now have to rely on state benefits. One carer wrote to me:I have no occupational pension myself, I have had to apply for income support which has been granted. But I am left in much poorer circumstances and I have to meet the heating, telephone and repair bills for the house as though my husband were still there".The fact that he happens to be in residential care does not reduce the expenditure of the carer, the wife who is left. Most women who have contacted the Alzheimer's Disease Society or Members of this House complain about the effects of the occupational pensions rule. They point out that they are worse off than if they were widows or had divorced their husbands. They would have been better in either of those two categories than they are at the moment.
Although there will undoubtedly be amendments on those issues, I should have thought that the Government might well take the chance between now and the Committee stage to put down a government amendment, among all those drafting amendments, to take care of the outstanding anomaly so that at least they would be seen to be, in some ways, non-controversial.
The other point which exercises my mind goes back about a quarter of a century. It must be nearly 25 years since I first raised the matter in another place on many occasions, as well as in this House. The point was mentioned this afternoon by the noble Baroness, Lady Seear. It is the matter of expatriates, pensioners living abroad. Many of them live in Commonwealth countries like Canada, New Zealand, South Africa and Australia. Currently, there are some 400,000 UK state pensioners worldwide whose pensions are frozen at the rate current when they left this country. The great majority—340,000—live in the Commonwealth countries of Australia, Canada, New Zealand and South Africa. There are many cases of pensioners who have qualified in exactly the same way as we did, by contributions and paying national insurance, and who have retired. However, they receive a pension of less than £10 per week. In one case, somebody wrote to me saying that he had retired in 1968 and he receives £4.50 per week, the pension has never been updated.
However, there are approximately 280,000 British pensioners in 32 other countries, including all those within the European economic area and 15 other 997 countries, including the United States, whose pensions are index-linked. The reason is that the United Kingdom has reciprocal social security agreements with those 32 countries and the pensioners receive the full pension which is now £57 per week. That is totally unjust. No argument ever existed to justify our not accepting the offer from the Canadians, in particular, to come to a reciprocal agreement with this country. At certain stages, they even offered to help towards the initial payment for the introduction of such a scheme. For those pensioners, it is long overdue. The only reason for it is based on their domicile and that is ruled out by the fact that 32 other countries have overcome the problem.
The main argument put by the Government on every occasion when I have raised the problem has been the cost. Of course the cost has increased every time the pension has been raised. At the moment the Government are discussing how much they will save by the introduction of the Bill with all its proposals. It would be of great advantage if some of the savings—perhaps half—from the equalisation of the pension age could be used. It would be more than enough to index-link the outstanding pensions in the Commonwealth countries. The Government ought to be thinking in those constructive terms rather than constantly harping on the fact that they do not wish to pay the pensioners, using the excuse that it is too costly. The suggestion becomes more costly every time they mention it.
The Government have put forward a number of excuses. I shall not go into them at this stage but shall return to the point in more detail at the Committee stage. This is an issue about which everyone feels bad because it is unjust and immoral. We all have consciences and we know that it is wrong that those people suffer as they do. I know of a case of two pensioners who left this country at the same time. One went to Canada, one to America, and according to the letter they live about 15 minutes apart. I have never been to the place but it is somewhere near Niagara Falls. I am told that there is a bridge which one can walk across from Canada to the States in 15 or 20 minutes. The pensioners meet regularly in a local hostelry. One is on a pension of £7.50 a week because that was his pension when he left and it has never been uprated. The other one's pension is £57 a week because he lives 20 minutes away in the United States. Our consciences should not allow us to permit that to continue; it is unjust and immoral. We are talking about Commonwealth nations, the nations which supported this country through thick and thin in every war and every troublesome period that we have had. Many thousands of the pensioners are ex-servicemen who were well decorated. They deserve far better treatment. I shall return to the point on an amendment which I intend to put down for the Committee stage.
For the time being I shall leave the matter there. But I hope to be involved in many more discussions on that and other issues when we come to Committee.
§ 4.40 p.m.
§ Lord Marsh
My Lords, the noble Lord, Lord Freyberg, in what I would describe, if he does not mind my saying so, as a remarkable and in some ways quietly devastating speech, said that we might find it strange 998 that someone in his twenties or thirties should take an interest in a debate on pensions. I can assure him that if those of us in the industry thought that there was any possibility of getting large numbers of people in their twenties and thirties to take an interest in pensions, life would be joyful beyond belief. The noble Lord does not perhaps realise what that would mean. It would mean happy, laughing actuaries. I can assure him that we on the Cross Benches listened to his speech with great pride. We hope that he will make many more speeches of that kind and continue to maintain the level of good judgment that caused him to choose these Benches despite blandishments to go elsewhere to inferior places.
First, let me declare an interest. I have been employed in the life insurance industry in the United Kingdom and North America for some years past. I am still so employed. Secondly, although I have not yet retired I am also the very happy recipient of six different pensions: private, occupational and state. I shall talk on the virtues of putting them together. I can assure the House that it does make people feel a lot happier and more comfortable if they have them.
Inevitably, the large and sinister shadow of Bob Maxwell hovers over the debate. That is inevitable: the tragedies which flowed from his looting of employees' pension funds were so many, so heartbreaking in their results and so widely reported. But Maxwell's obsessive criminality, certainly in its scale, was a one off. It was a terrible problem, but there is not a major problem on that scale within the pensions industry or business. In fact, it is probable that more pension funds get themselves into trouble through incompetence than through criminality.
Nevertheless, the Maxwell affair raises many issues. Some of them are more concerned with corporate governance than with pension legislation. Indeed, in the Bill reference is made to the need for good provision for whistle blowing. Matters connected with Maxwell are likely to come before the courts in the not too distant future. I believe that there are elements where the whistles were not blown when fully covered by existing legislation governing companies and financial transactions. No doubt that will come out in the course of the trials.
The Bill makes an important contribution to what I personally believe and hope will be the first stage of a fundamental review of the funding of retirement pensions. It is not a matter of patching up. The system is not working to anybody's advantage; it cannot work to anybody's advantage. It does not provide adequate pensions for the poorest section of the community. It does not provide a clear situation for people. It costs a great deal of money and most of it, in terms of universal state pensions, is wasted. Private pension provision is needed simply because of the changes that are taking place demographically. It is becoming increasingly clear that we face a major change. There are problems stemming from the fact that fewer and fewer people will be contributing to pensions and more and more people will be drawing pensions. If we have problems now we are bound to have bigger ones later
. 999 In 1951, 28 per cent. of the population was over 50 years of age; today, the figure is 33 per cent. The numbers will continue to rise, certainly for the next 30 years. The fact is that universal state pensions are an increasingly expensive nonsense which cannot begin to meet the real and growing problem. It is not just a British problem. Most advanced countries face very similar problems. Many of them are moving in the same direction, away from universal provision by the state and strongly towards the encouragement of personal savings by way of occupational or private pension schemes; and ideally a mixture of both. I say "a mixture of both" because, for a start, 50 per cent. of the population are not covered by occupational schemes. Secondly, as has been said, most people change jobs half a dozen times or so in the course of employment and almost inevitably therefore lose out on their final provision.
Moreover, it is a fact of modern life that many people will be unemployed for a period of time. Quite a few others will be forced to take early retirement. Occupational pension schemes are a crucial part of the pension package but they cannot stand alone and they cannot be depended upon. Let me say, having declared my interest, that with private insurance provision the problem is to get people in their twenties or thirties to consider their likely needs in 30 years' time.
Many people who take out private pension schemes do so far too late in life to cover themselves. Financial advisers have a standing joke about the chap aged 58 who tells them that he has no need for any sort of cover because he has £30,000 saved up. That does not last very long. The major problem lies in educating people about the need to take out provision for themselves—not as a benefit for the economy. It is far better that pensions should be funded to the maximum degree (for those who can afford to do it) by the people who will subsequently draw those pensions. They can plan for themselves and can afford them earlier but it requires the assistance of the Government, in many ways as introduced in the Bill.
I referred to the problem of education in this area. British people are very strange in that they do not like talking about money. Many other nations do not mind at all. I can meet some happy Cantonese chap who shakes me by the hand and says, "How nice to see you, Lord Marsh. How much do you earn?" That seems to me a perfectly reasonable question. One does not always tell him the truth but it is a fair question. In this country people are very touchy about talking of money. They do not like it; they are not interested. We can all think of friends or neighbours who have had affectionate and loving relationships only for the widow to be left in an appalling situation with no provision—a large mortgage and no ability to provide for it. The husband was loving. But not only did he not provide for his widow; she never thought to ask him, and he never thought to tell her. It is amazing that that should happen to people who, frequently, are well educated.
Like many companies in the marketing field we regularly commission polls on various aspects of life. About 18 months ago, a reputable national polling 1000 organisation asked interviewees what they thought would be the proportion of their income upon which they would retire. The answers were very interesting. People were given a number of figures to choose from; some 48 per cent. were quite specific and said two thirds. We all know where that two thirds comes from; it comes from the Revenue rules. So 48 per cent. of the people polled believed at that time that they would suffer a reduction in their income but that it would still be two thirds of what they previously received. Two-thirds pension is taken up in this country by only 1 per cent. of pensioners. The people polled were that far out.
Much has been said about the controversy of pension transfers out of various state industries into the private sector. I shall not go into it at this stage; it is not even a question for the Committee stage, but at some point we will discuss it. Criticisms can be made of both sides. But I find it extraordinary that any adult with a reasonable education, working for a nationalised industry—for example in a hospital—and on a pension scheme common to everybody else standing around, in the course of one day, walking as such people do each day within 10 yards of the pay office or the finance office of the hospital, the electricity institution or whatever, did not think, "I will ask what my pension scheme is like". Yet that, together with a number of other matters, was a major factor in some of the wrong transfers.
People do not understand; it has not been brought home to them, and knocking the life insurance industry has a degree of justification. It certainly provides a full-time occupation for some journalists. It is good sport. But the government of the day will find themselves in serious difficulties if private sector provision dries up and if, in some years time, one finds that the number of people who might otherwise have been taking out provision for themselves have not done so, and have only one other place to go; that is, to the British taxpayer and government agencies.
Therefore there is a need to take a look at a situation which accepts that there are two main reliable providers of pensions for people in this country. One is the private sector and the other is occupational pension schemes. The sensible person will be informed about his interests in both and make whatever amalgamation of the two he can for his specific benefit. With regard to the state system, it is inadequate for those it wishes to help and pointless for those who do not need it. It is a drain on the Exchequer and the money would be better spent on other areas, not least on some of the people at the very bottom of the heap.
That is not popular. There is a romance about the state pension as apparently there is a romance about poverty—it can be heard being expounded in great detail in Hampstead, Islington and other areas of experience. But there is no romance in it; it is deeply miserable. We have no justification whatever, with scarce resources, to apply those resources in areas where they are not necessary and deny them to areas where provision is inadequate. In my view there is a clear relationship between high levels of personal savings and good levels of industrial investment in industry. A classic example 1001 of that is Japan, where people have high levels of personal savings. That would be of assistance rather than just putting responsibility on the state.
This is a large and important piece of legislation. It touches delicately on wider and more controversial issues. However, its primary concern is the need to deal with failures in the existing system. That being so, I find one omission quite extraordinary. I refer to the custody of assets. The Maxwell funds were, on the whole, not out of line with the requirements of the Bill. It was a perfectly reasonable company pension scheme. But a major element in that disaster, as I understand it, was Maxwell's ability to obtain direct access to the assets and to documents relating to them. I hope that the Minister will at least give an indication of the nature of the Government's objection to independent custodianship of the assets of pension funds. There will be ample opportunity to debate this and other issues in Committee.
Another major issue arises; that is, the extent to which complex and serious issues are being left to regulation and secondary legislation. That cannot be justified. This is neither a parliamentary nor a constitutional issue:, it is simply not fair, on matters as important as this, to deny these areas a proper airing in the Chambers of both Houses for expressions of view. I am strongly in favour—again I declare a sort of counter-interest in that I take a minority view of my colleagues—of statutory regulation as opposed to voluntary regulation. I will do whatever I can for the PIA, but at the end of the day, with statutory regulation, whether or not one likes it, one knows what it is and can come to terms with it. When one is dealing with regulations and all sorts of bodies representing all sorts of interests, frankly, one does not have a clue what they are going to do. Frequently they will be guided more by emotional prejudice than by a deep study of the subject. The more matters are in legislation where we can argue about them, the better.
That is particularly true in the question of solvency. Leaving aside the general issue of solvency, where a scheme fails to meet the solvency criteria (it may not be for any wicked reason but simply because of the markets, bad investment and so forth) and demands to get the fund up to the level of solvency required—in principle I would not object to that at all—a company may suddenly be forced to find many millions of pounds to cover the liability. It must do it, but it is not reasonable to say that the time allowed is something that will be dealt with at a subsequent date. The time allowed is a crucial issue which employers and industry will want to know.
Not only are we going to see proportionately more pensioners who live longer, but, as the noble Baroness, Lady Hollis, said, they will retire earlier. It is now commonplace for people to retire well before the age of 65. It can mean more time for hobbies and holidays, and be a happy period of life. For others it may be the beginning of 20 years or more of increasing poverty. Some people never have enough money to provide for retirement and the state should provide for them on a more generous basis than at present. Most people could, by personal savings, provide—if they were encouraged 1002 to do so—a much better retirement for themselves than the state can or will, regardless of the political party in power. It is a problem that exists in most advanced countries. A great deal of the research points in the same direction: universal state pensions waste money and fail to protect the poorer sections of society. People must learn to protect themselves and be helped to do so by the state.
I wish the Bill well. It is a significant step in the right direction. But there are still some big issues to be faced and I look forward to that much wider debate.
§ 4.58 p.m.
§ Lord Boyd-Carpenter
My Lords, as the noble Lord, Lord Marsh, said, this is an extremely important Bill. It affects almost everybody in the country in one way or another and certainly, with the possible exception of the Finance Bill, it is the most important Bill that Parliament will see this Session.
The only problem in debating the Bill on Second Reading is that there are so many issues of such great importance that if one is to keep one's speech within a tolerable length, then one will have to pick and choose a few issues without for one moment suggesting that the issues one does not pick out are unimportant. Therefore, I shall seek to make two or three quick references to matters of great importance upon which one could probably have made a whole speech, and then come on to the question of the equalisation of the pension age and perhaps deal with that a little more fully.
First, perhaps I may say how much I agreed with what, in his most admirable maiden speech, the noble Lord, Lord Freyberg, said about provision for war widows. Where a woman has lost her husband fighting in the defence of our country my view is that there should be generosity on a scale that other benefits need not necessarily attain. It is such a sacrifice—and it is so much a sacrifice aimed at preserving this country—that I should like to see a very considerable improvement in provision for war widows.
I believe that one is now supposed to be inhibited, if one does not immediately follow a maiden speaker, in congratulating him on it. I am going to risk the disapproval of our procedure pundits by saying how much I admired the noble Lord's speech, both for the way it was delivered and particularly for the choice of subject. I hope indeed that my noble friends on the Front Bench will pay attention to it. I think they will find throughout the country as a whole and in this House as a whole that there is a very strong feeling in favour of substantial provision for war widows—more substantial provision, I say bluntly, than as regards most other benefits.
I agree to some extent with the noble Lord, Lord Stallard, on the treatment of the holders of British pensions who go overseas, at any rate to the Commonwealth. When British pensioners emigrate to Canada, Australia or New Zealand it is difficult to justify that they should not receive the increases in pension which are being made at home in respect of that very pension which they are receiving. It puts this country in rather a bad light with some of our Commonwealth friends and it certainly involves 1003 unnecessary hardship for people who, ex hypothesi, are to some extent at least dependent on pensions. I would not go so far as to suggest that this should apply wherever they go. But where they go to Commonwealth countries, and where there is the possibility of a reciprocal agreement with the Commonwealth country, the matter should be seriously considered. The cost, given the very limited number of these people, would not be great.
The Bill also seeks to deal with what one could call Maxwell-type frauds on pension schemes. The noble Lord, Lord Marsh, expressed some doubt as to whether it will be effective. It is a highly technical question. I am sure the House will favour tightening up protection for pension schemes and for the pensioners who hope to benefit from them. What the late Robert Maxwell did was one of the most deplorable actions that one has seen in recent years. Robbing the till of pension schemes, on which, in the future, very large numbers of people would need to subsist, was a terrible thing to do. I hope that the Government and their draftsmen have been capable of ensuring that that does not happen again. I should welcome some reassurance from my noble friend the Minister on that point.
The main matter to which I wish to refer is the equalisation of pension ages, which is effected by Clause 114 of, and Schedule 4 to, the Bill. Schedule 4 sets out in elaborate detail how this will work. I was fascinated to see those provisions in the Bill for the very personal reason that I have been concerned with this subject for a great number of years. As some of your Lordships may know, I was Minister of Pensions and National Insurance, as the Minister for social security was then called, in the late 1950s and early 1960s. At that time we were very concerned indeed about the inequality of retirement ages for pensioners. It seemed to us then, as it seems to me now, that it was unfair to men that women should receive their pension five years earlier despite the fact that in general they had a life expectancy of four or five years longer. I have heard the contrary argument, which is that as women have to give up earning, often for considerable periods, and have the care of their family and children, there is a case for a disparity in pension age. But I do not think it is justified, seeing that women receive their pension five years earlier and then subsist for four years longer on it. I am glad that the Government are facing up to the problem.
We considered the matter in the Ministry of Pensions and National Insurance in the late 1950s. I came to the conclusion that we should not act on the matter—it was just as great a problem then as it is now—because I was convinced that the change would have to be effected over a number of years and that to be sure it was so effected one would have to have inter-party agreement. Even the most optimistic Conservative Minister in the 1950s would not really expect to continue in office for the following 25 or so years. It was quite clear at that time that there could be no inter-party agreement. I felt that if I produced and succeeded in carrying legislation which would raise the age, it would be revoked or be generally messed up when, as would happen sooner or later, there was a change of government. Therefore, 1004 rather reluctantly, because the merits of the matter were overwhelming, I decided not to do anything at the time. But the issue has been with me for a considerable number of years and I am delighted that the Government have decided to go ahead with this change.
I should be interested to know from my noble friend the Minister whether there is any understanding between the parties as to, in the event of a change of government, the programme of a move to equalisation being continued, and continued, broadly at any rate, on these lines. It would certainly cast a rather dark shadow over the proposals if it were thought that if there were a Labour Government in the next 25 or so years the whole scheme would be altered. That would be extremely confusing and worrying to the people concerned.
There is also the question of whether this is the right solution. When we looked at the problem years ago there were three possible choices. The first choice, which the Government have made, was to take women's retirement age to 65. There was the possibility of reducing men's retirement age to 60. There was an intermediate choice of moving both ages of retirement to 63. The idea of lowering the age of retirement for men to 60 had to be dismissed out of hand because it would have been immensely costly. The argument for the retirement age for both and men and women being 63 was a plausible one. But it is still accepted that women should become entitled to a retirement pension at an age where it was arguable, as it is arguable, that it was too soon and that, on the contrary, they should wait until they attain the same age as men. I am very glad that the Government have accepted this solution. If one looks at the fourth schedule to the Bill one sees the very elaborate mechanism for the changeover with precise dates at which the lady concerned reaches pensionable age and at which the various changes will be made in the rate of her pension.
It is all a number of years ahead and will not affect anybody for a considerable number of years. But if your Lordships and another place enact the Bill in its present form it will come into effect and bring both sexes to the same age of 65 as being the pensionable age. I believe that that is right. We shall have to spend a little time looking at the cases of those who find that their retirement age has risen too much. It may well be that some adjustment of the system will be required.
But I believe that this is the right and a splendid step to take. I recognise the courage which the Government have shown over this matter. I also recognise that it is not uncontroversial. Indeed, I have received quite a lot of material through the post which has been highly critical of the Bill. I am fully willing to support the Bill. I am delighted to know that my noble friend and his colleagues have had the courage and determination to do that which I myself failed to attempt a number of years ago.
§ 5.12 p.m.
§ Baroness Lockwood
My Lords, in his introduction the Minister referred to four principles underlying the Bill. In her speech my noble friend Lady Hollis referred to three distinctive elements. Both speakers included in their analysis of the Bill the principle of equalisation of 1005 the pension age and the equality provisions of the Bill. I hope that I shall be forgiven if I concentrate on these aspects.
My interest in the subject does not go quite so far back as that of the noble Lord, Lord Boyd-Carpenter, but it does go back to my period as chairman of the Equal Opportunities Commission where from the very outset in 1975, equality between the sexes in pension provision became a major issue. In that sense I warmly welcome the equality principle in the Bill although I shall be critical of a number of the provisions in the course of my remarks.
During my chairmanship of the Equal Opportunities Commission from 1975 to 1983, there were five studies and publications by the commission; subsequently, there have been another six publications on the subject which indicate the attention which the commission has given to the matter. In addition there have been a number of in-depth research projects on the implications of equalisation. That includes a publication only last week entitled Equalisation of State Pension Ages: the Gender Impact.
Initially, the commission suggested an equal age of 63 on the basis that that would he more or less cost neutral. Subsequently, further research has indicated that to equalise at any age above 60 could exacerbate problems for women in their retirement years. Therefore, we need to look beyond what I believe is a universally accepted principle of equalisation to assess how these problems can be alleviated.
Basically, despite changes in legislation, our social security system is still founded on the principle of woman's financial dependency on their husbands. Even now about 1.1 million women in work are paying the married woman's national insurance contribution which was stopped for new entrants way back in 1977. There are also many—I suspect the majority of women—drawing benefit resting entirely on their husband's contribution.
Moreover, women's work patterns are still vastly different from men's and that seriously affects their pension provision. The differences arise from women's child bearing function and from their larger caring role. Despite the Equal Pay Act, women's pay is still not equal to men's pay. All of this means that women are less well catered for in retirement.
For example—and I give figures provided by the Equal Opportunities Commission relating to 1991—in that year, of men retiring aged 65, 79.77 per cent. received state pension; 67.4 per cent. of women retiring received state pension, but only 15.04 per cent. received a full basic pension on their own contributions. Further, 71.4 per cent. of men received SERPS and 28.04 per cent. of women; 73.6 per cent. of men were in an occupational pension scheme and 57.1 per cent. of women. Even last year approximately 2.25 million women earned too little to pay national insurance contributions.
These statistics demonstrate how unequal the position is and how unequal it is likely to remain well into the 21st century. So in the light of that we have to ask how far the Bill before us will help in coping with these facts, bearing in mind that the Government have chosen the age of 65 as the equal pension age.
1006 The EOC research has produced some interesting conclusions which I suggest the Government must answer. Those women who continue to retire at the age of 60 will of course be much worse off under the Government's proposed changes than those who retire at 60 now. It is not unnatural to assume that a considerable number of women will still want to retire at 60 bearing in mind that about 46 per cent. of men who are expected not to retire until 65, either retire or are unemployed and effectively retired between the ages of 60 and 65.
Women who continue to work until 65—assuming that they are continuing to pay their contributions—will earn a basic pension 72 per cent. less than it would be if they retired at 65 under the present scheme. The reason is that under the present system, by deferring her pension to 65, a woman would receive increments for those five years amounting to something like an increase of 37 per cent. on her entitlement. Under the proposed new scheme, she would not receive that enhancement.
For women either leaving work at 60 or switching to low-paid, part-time work between the ages of 60 and 65—that is, to work with pay that is below the lower earnings limit—the effect of the Bill would be to lower their SERPS pension because it would be based on an average of 44 years, not the present 39 years or, as was introduced originally, the best 20 years in a woman's working life.
The EOC report contains a number of case illustrations of that unfavourable impact on women. Therefore, I have to ask the Government whether that was anticipated when they decided on the age of 65. The Minister might respond by saying that there are other changes in the Bill to counterbalance that, but the EOC research suggests that that is likely to have little practical effect on women's pension entitlement. Therefore, we might ask whether it is wise or even necessary to raise the pension age to 65 for both sexes instead of equalising it at 60.
The Government's case rests on demographic factors, on costs and on the need to be competitive. But again the EOC research suggests a number of flaws in that reasoning. I shall summarise them briefly. First, demographic projections are not particularly reliable for costing purposes. Even the Government actuaries are suggesting that there could be a margin of error of 10 per cent. either way. Secondly, the prediction is that by 2040, as my noble friend Lady Hollis said, the United Kingdom will have the second highest support ratio—that is, workers to pensioners—within the OECD. Thirdly, the United Kingdom has one of the cheapest pension systems in the OECD. Fourthly, the maximum increase in national insurance contributions is likely to be only 1.4 per cent. more than at present, but by 2050 it should fall to 2 per cent. below the present rate. Fifthly, factors other than the increasing number of retired people need to be taken into account in assessing our ability to support pensioners. Such factors include the increase in the labour force participation rate which is due to still more women entering employment, the level of earnings, the growth in earnings and the cost of unemployment. All of those suggest that the Government's case for 65 is by no means watertight. 1007 The Government's previous change in pensions provision (when they changed the earnings-related indexation to inflation indexation) was not particularly helpful to women. Here I disagree with the noble Lord, Lord Marsh. It seems that women gain their best pension protection through the basic state provision yet that state provision today is worth only 15 per cent. of average earnings and by 2030 it will be worth only 7 per cent. of average earnings. That will not be sufficient for anyone to retire on in comfort. Again, that—together with the proposed equalisation at 65—is detrimental to women. We shall certainly have to return to a discussion of that issue in Committee.
We shall also need to return to a number of other issues, some of which have already been raised. Although time does not permit me to develop them, they include possible delay of the introduction of the provisions at 65—that is, if the Government are adamant about 65—at least until SERPS has matured so that all women who will be affected will have had an opportunity to earn a full additional pension. Secondly, we should examine the possibility of reverting to the "best 20 years" for calculating SERPS. That would certainly help women. Thirdly, we should consider changing the "complete tax year principle" for calculating home responsibility protection. A number of women come in and out of such protection provisions and do not always qualify for a full year's entitlement. Fourthly—this has already been mentioned and there is clearly widespread support for it—we should consider giving a statutory pension entitlement to divorced spouses. Fifthly, we should examine the different actuarial calculations for men and women for occupational pensions. Sixthly, we should examine the proposed retrospective rights to occupational pension schemes for part-time workers. The Government are suggesting a two-year period. Is that enough? Seventhly, we should re-examine the lower earnings limit to see whether there is any way of bringing all women workers into pension entitlement. Finally, we should press that the annual savings, which are estimated to amount to some £5 billion for the Treasury, should be used to assist women to earn a reasonable pension in the future.
It has been accepted over the past 20 years that equalising the pension age for men and women would have implications in many directions. Recent court cases on the subject have added to that belief. And now this Bill has confirmed beyond question that some very difficult problems need to be solved. Nevertheless, the principle is right and it is accepted by noble Lords on all sides of the House. Therefore, our discussions in the coming stages of the Bill must confirm that principle, while at the same time examining carefully the additional or alternative measures that are required to meet those implications and to assist women to achieve a more secure retirement.
§ 5.27 p.m.
§ Lord Wright of Richmond
My Lords, I should like first to join those of your Lordships who have spoken in general support of Part I; namely, the proposed measures to put right the failures that were exemplified 1008 by the Maxwell affair. As a trustee on two company pensions committees, I have no doubt that any measures that will give occupational pensioners some assurance that those failures can be avoided in future are to be welcomed. I should add that I agree with the noble Baroness, Lady Seear, that no legislation can give a total assurance.
I should also like to endorse the remarks of the noble Baroness, Lady Young, about the problems faced by divorced spouses of members of the public service and the Armed Services and to deplore the failure of this Bill in its present form to address those problems.
I hope that the House will understand if my brief remarks concentrate on the problems of Diplomatic Service spouses, speaking both as a former head of that service and as the husband of a former president of the British Diplomatic Spouses' Association. In concentrating on the Diplomatic Service, I hope that your Lordships will not think that I have neglected or underestimated the extent to which these problems also affect spouses of those who serve abroad in the public service, whether as members of the Home Civil Service or the Armed Services, on whose behalf the noble Lord, Lord Freyberg, spoke so persuasively.
The problems are particularly acute in the case of the Diplomatic Service, where spouses tend to be more dependent than most on the income or pension of their husband or wife, as the case may be. In a service where many can expect to serve, as my wife and I did, over half their career abroad, where opportunities for a spouse to earn a living, or to pursue an alternative career and thereby earn a pension, whether state or private, are blighted by frequent moves and interruptions, where such opportunities as exist are often lowly paid and unpensionable, and where research shows that only 39 per cent. of spouses are able to find any kind of paid employment overseas, compared with the 70 per cent. of married women in this country in full or part-time employment, the effect on the income of diplomatic spouses is considerable.
Even compared with their colleagues in the Home Civil Service, where similar interruptions may occur, though less frequently, the average earning capacity of those diplomatic spouses who are able to have separate employment is considerably less.
The problem—I echo the description of it as an injustice given by the noble Baroness, Lady Young—that I wish to address today, and which I would urge the Government to correct, is the very real hardship faced by widows and divorced spouses of Diplomatic Service officers: first, for widows who have lost their pension on remarriage and have no entitlement to their second partner's pension in the event that he predeceases her; and, secondly, for the divorced widow who sees the second wife of the former husband receiving all the benefits of his pension on his death, even though the latter had shared only a minimal part of his life in the Diplomatic Service.
I understand that the question whether a wife should be entitled to a share of her husband's pension in a divorce settlement has been under consideration by the Law Commission for many years, and, indeed, that there is a case under appeal to your Lordships' House at 1009 present. I shall not therefore pursue the general point much further beyond saying that the present position bears particularly hard on divorced spouses in the Diplomatic Service, especially as even those spouses who are working as members of the locally employed staff in our diplomatic missions abroad are not, under present rules, able to make voluntary national insurance Class 3 contributions.
I repeat my hope that the Minister will be able to give the House some reassurance that the Government will aim to correct those anomalies which have existed for too long and which in my view amount to a grave and outdated injustice towards those who have married and served loyally with partners who have dedicated their working lives to serving the nation overseas.
§ 5.33 p.m.
§ Baroness Seccombe
My Lords, I wish to register my interest, although not a pecuniary one, in the Bill. I am deputy chairman of Nuffield Hospitals and chairman of the trustees of the Nuffield Pension Scheme.
There are many facets to the Bill, with a great amount of technical detail, but today I want to speak on general principles and the changes to occupational pensions. I welcome the Bill and am delighted that the Government have made time for this important and necessary major legislation. The predicted increase in elderly people, particularly those over 85, is significant. Alarm bells must have been ringing for those who are involved in preparing for the care of the elderly after the early years of the next century.
In 1991, the ratio of people of working age to those of pension age was 3.3:1. By 2030 that figure will be 2.2:1. It is clear, therefore, that other than state provision must be made to ensure that pensioners will enjoy an acceptable standard of living without placing an intolerable burden on taxpayers.
As has been mentioned by other noble Lords, we in the UK have taken steps to alleviate the problem through the promotion of private pensions. Already about 20 million people are investing into pension funds for their retirement. I understand that only the Netherlands has developed similar policies, and more money has been invested in pension schemes in this country than the rest of the European Union put together.
Most of the money invested in pension schemes is contributed by full-time workers, but many part-time workers—that means women particularly—will still need support from the state. I hope that a way will be found to enable part-timers to participate without there being too onerous a burden on employers. At this stage I should like to pay tribute to those who have devised a scheme for their employees, especially the smaller firms where the cost is considerable.
I have always been concerned that so often women, because of the pattern of their working lives, do not start to make provision until it is almost too late to create a meaningful pension. So I was greatly interested to hear that, under new regulations for home responsibility protection, women who have time off paid work to bring up their children or care for a sick relative will be able to have those years credited to them; in other words, as 1010 I understand it, someone acting as a carer for three years would have to work for 36 years and not 39 years. Similarly, a mother bringing up her children for 10 years would have those years credited and would have to work 29 years and not 39 years. I should be grateful if my noble friend the Minister would tell me whether I am right in my understanding. If so, it is one of the most exciting and imaginative initiatives for a long time, and good news for women.
As I said earlier, it would be even better if there was a way to extend some help to part-timers who often combine the role of mother or carer while supporting themselves financially. It would be a real incentive to those people to try to work for a realistic pension in those later years rather than take the attitude, "It's too late now".
Most elderly pensioners are women—many on benefit—and it would be a real advance if a framework could be devised so that their latter years could be spent independently with a higher quality of life and less drain on central funds.
I welcome the proposals for the regulation of occupational pensions. Following the debacle of the Maxwell scandal and the resulting Goode Report, the legislation will set a strict code of conduct, and put in place most of the report's recommendations, plus others resulting from wide consultation. It is vital that members of schemes who invest for their retirement have complete confidence in the security of their funds.
From my experience as chairman of trustees, I appreciate the importance of the involvement of members in the organisation of the scheme. I am, among our trustees, the only non-beneficiary of the scheme. I remember only too well getting to grips with the pension scheme and being most grateful for the training I received. All trustees must be given detailed tuition if they are to assume the heavy responsibilities involved in the scheme's administration.
Our funds are small to medium-sized as schemes go, but even so the amount of money involved is considerable and usually very different from anything for which one has been responsible previously. Professional advisers are most important to the trustees, and the obligation for the provision of an annual solvency certificate will not just be of great assistance and comfort to the trustees but, more importantly, a great reassurance to the members.
There are 150,000 schemes in existence, the vast majority of which are well run, providing adequate security for their members. However, the legislation provides for the regulator to respond quickly and effectively when trustees or their advisers fear problems.
I do not wish to comment on the equalisation of state pension ages. However, I believe that all occupational schemes should equalise both age and benefits. The Nuffield scheme, where retirement is at 65 for both men and women, provides exactly the same treatment of benefits for the widows and widowers of members. I have seen how much that has been appreciated, in particular by the male beneficiaries who have lost their spouses 1011 I conclude with a matter which, sadly, is not dealt with in the Bill. It is the problem of pensions and divorce. I appreciate that it is a complex matter but, with the increase in divorce, the great injustice and treatment of such pensions is real and growing. Decisions should be made quickly and with a degree of urgency.
I welcome the Bill and I support it. No doubt there will be fierce debate as it progresses. I believe that when the legislation is on the statute book many people will be able to look to a more secure future.
§ 5.41 p.m.
§ Baroness Dean of Thornton-le-Fylde
My Lords, when as general secretary of SOGAT, the printing and paper trade union, I was discussing the anxieties of some of our member trustees about the Maxwell pension funds, little did I appreciate that we would be speaking of it 10 years later on the Second Reading of the Pensions Bill. The Minister is right in asserting that the Maxwell scandal is one of the main reasons why we are here today discussing pensions. It makes me wonder whether, if Mr. Maxwell had not fallen off his boat into the sea, this Bill would have been before us.
The reality is that in many cases the structure of the Maxwell pension funds appeared on paper to be working all right. Our trustees came to the union with genuine anxieties and questions to which they could not obtain answers and they asked the union to pick them up. We could not obtain answers either. We could not take industrial action because the legislation relating to trade unions had been changed and it would have been illegal.
We retained professional advisers. We went to the Occupational Pensions Board; we wrote to Mr. Maxwell's professional advisers; and we took the matter up with the chairman of the Maxwell pension funds. Of course, he was anxious about his job; he could have been dismissed had he seriously challenged Mr. Maxwell. Eventually, on the steps of the court, Mr. Maxwell agreed to disclose the information we were seeking. As with many other matters, he did not keep his undertaking. I received a letter from him only one week before his death stating that he wanted to be open and to discuss with us the issues and our anxieties. Along the way we had seen him remove some of our member trustees from office and make many other punitive moves.
Today we are discussing the Bill logically and sensibly, as we should, from our individual positions. However, that is not how many people affected by the Maxwell scandal feel. It destroyed so many lives. Although I do not wish to give anecdotal evidence I wish to cite one case because listening to a direct experience is better than reading a great deal of information.
Two of our women members were employed in a company in Oxfordshire. They were twin sisters and both spinsters. Their father had died and they were the breadwinners in a small flat looking after their mother. They had worked in the company for more than 30 years and had wonderful work records. Every day they went home for lunch. One day when they went back to work the managing director sent for them and had to ask their 1012 names. He was new to the job and did not know them. He told them that they were being made redundant. Things moved very fast. Not only were they redundant; there was no money to meet the redundancy pay, although we had an industrial agreement. They then lost their pensions. The lives of those two women were destroyed, and one can replicate that experience.
I hope that the Minister will reflect on the fact that although on paper the Maxwell schemes appeared to be all right the assets were not. He used the assets like pieces on a chess board; he used them to raise money in a criminal way. It is essential that the Bill is amended to deal with that and to require the independent lodging of the assets of funds.
The Goode Report did not cover personal pensions. That is regrettable because approximately 24 per cent. of employed people are covered by personal pension schemes. I do not mean to indicate that I have any preference for personal or occupational pension schemes. In the world in which people live and work today, whatever is suitable for them in choice should be applied.
Today, 11 million people are covered by occupational pension schemes. Personal schemes are better for some people because of their changing work patterns. There is casual and part-time work. It is no longer a job for life with one employer.
The information one finds when researching for a debate in your Lordships' House is amazing. I understand that the first occupational pension was founded 250 years ago. The Minister may be interested to know that it was for Scottish ministers. No, not Ministers of the Crown but ministers of the Church. Being canny Scots, I doubt that they would have had problems with solvency, contribution levels and so forth.
It took a long time for the rest of the world to catch up. In 1953, approximately 28 per cent. of the working population was covered by occupational pension schemes, with just under one million pensions in payment. By 1983, that had increased to 52 per cent., with five million pensions in payment. I regret that the figure has now dropped to 48 per cent. of employees in occupational pension schemes but the number in payment has risen to 7 million.
I visited many companies covered by occupational pension schemes but I was never asked questions about those schemes. The workers, who were predominantly male, genuinely believed that their schemes were well run and administered with integrity. They did not have too much to worry about and they had a retirement to look forward to that would give them an income. In the majority of cases, they were right to feel as they did.
I suggest that today the majority of occupational pension schemes are administered to a high standard and with integrity. They will have no problem complying with the changes proposed in the Bill. However, the late 1970s and the 1980s were different. Surpluses were creamed off by some companies. Some companies—I suggest that Mr. Maxwell's was one—took over others so that they could get their hands on the surplus in the pension fund. In some companies, perhaps after two or three years, the employer made no contribution to the 1013 occupational pension scheme but the employees carried on paying. Although there was no provision for a statutory trustee, the employers had the right of veto when a scheme provided for member trustees. The lack of confidence that many people have in occupational pension schemes and the experience of what happened last year in respect of personal pension schemes must be addressed by the Bill. The trade union movement recognised that some time ago. It provides training courses for trustees and, as part of a negotiating agenda, pension schemes.
All too often we fall into the trap of believing that Maxwell was the one. It may have been the watershed but there have been other cases of significant abuse of occupational pension schemes by unscrupulous employers. I suggest that there has been a robbing of employers' contributions.
Goode said in his report—he was so right—that for many people their pension rights are the most valuable investment they will ever make. In many cases it is the most important investment an individual makes during his working life. It is not surprising that there should be considerable interest in the subject after the scandals that have been revealed. It is not surprising that there is keen interest among individuals, their representative organisations, the TUC and, indeed, many companies wishing to see pensions legislation strengthened considerably.
We should be in no doubt that in many thousands of cases what emerges from the Bill at the end of the day will determine whether people live their retirement in poverty or whether they can look forward to being financially independent. There will also be implications for the taxpayer. On those grounds and many more, most of us here today have been lobbied by interested groups, and rightly so. Many anxieties have been expressed by noble Lords; I agree with most of them. We can each point to areas of particular concern. I shall list some areas, in addition to that of the independent lodging of assets, where I should like to see the Bill amended.
The Bill does not provide a fair balance and a real and flexible choice for individuals between occupational and personal pensions. As a whole, the Bill generally favours personal in preference to occupational pension schemes. I wish that balance to be redressed to provide a real choice for individuals. I should like the Bill to provide for a trade union representative on the new regulatory body, just as there is on the Occupational Pensions Board.
One third of trustees on boards is insufficient. I ask the Minister to change that to 50 per cent. Employees have invested the money they have earned. This is not a matter which is being paid for wholly by the employer. Indeed, I suggest that it will be a greater proportion of an individual's income than it is of a company's assets. Therefore, it is not unreasonable to ask for 50 per cent. membership.
The Bill provides that if there are no member trustees on a board at present that may remain so provided there has been what is called in the Bill a "statutory consultation procedure". Those procedures will be 1014 encompassed by regulation. I hope that the Minister is in a position to say what it is intended the regulations should include.
The Bill provides that trustees can be fined £5,000 for malpractice or for failing to carry out their responsibilities. On indictment that can increase to a prison sentence of up to two years and an unlimited fine. Will anyone volunteer to be a member trustee on a pension board without proper training? Those are extremely serious responsibilities. For example, one would not put an accountant in charge of a company unless he was qualified and had received training. As a minimum requirement, we should seek compulsory training to a certain standard for trustees.
We must make sure that member trustees are not looking over their shoulders and are not anxious about the safety of their jobs if they wish to raise difficult matters. We need to amend the Bill to cover that. The Mirror scheme and the Scottish Daily Record scheme provided for member-elected trustees. We elected one in Scotland but Mr. Maxwell did not want him so he would not send for him to attend meetings. One of the trustees, Harry Templeton, started to cause problems. He asked some very difficult questions. Mr. Maxwell sacked him. I cancelled my Easter holidays to try to negotiate his reinstatement. Mr. Maxwell refused to do that but said that he would receive very generous redundancy pay. The man lost his job and was out of work for a long time. More importantly, the problems which Harry Templeton highlighted never surfaced at the trustees' meetings because he had been removed. Therefore, it is essential to amend the Bill to provide protection of employment for an individual member trustee so that he is not dismissed if he starts to be difficult with regard to pension schemes. That provision is made in the health and safety Act and applies also where there is a trade union representative. I see no reason why the Bill cannot be amended also to make such provision.
I shall not deal too deeply with the issue of the retirement age for women. I do not argue against equalisation and the whole package of equality. However, I believe that the Government are saying to women that they must retire at the age of 65 while the Government save £5 billion by taking them off benefit. On present trends, by 2023 two out of every three retired women will be living on the poverty margin. That is wrong. I hope that I am wrong in my reading of the Bill but as a result of a European Court of Justice decision, I believe that limits will be imposed on the awards which women who work part time will be able to receive.
The position of women carers who lose their occupational pensions if their husbands go into long term care is another problem we must address.
I conclude by congratulating the noble Lord, Lord Freyberg, on his very interesting and compassionate address. More importantly, I suggest that he was right. Later this year we shall be holding VE Day celebrations. A German widow standing next to a British widow may ask, "What do you receive from your government?" One will reply that she receives one third while the other receives 60 per cent. I do not know how your Lordships 1015 feel about that. I suggest that that was not what was intended, nor is it a reflection of a civilised society. I hope that the Government will change that.
In general terms, the Bill is to be welcomed but it needs amending to make sure that the Maxwell scandal does not happen again. We must make sure that people see that the money which they invest is being taken care of properly and that they have a say in how schemes are managed.
§ 5.57 p.m.
§ Lord Dean of Harptree
My Lords, I too am grateful to the Minister for a very clear explanation of what is a complicated and technical Bill. Perhaps the single most important point in the Bill is the equalisation of pension ages. The Government are absolutely right to equalise upward rather than downwards. We must be very careful about the cost burdens that we are placing on future generations.
Having said that, I echo very much the pleas which were made by my noble friends Lady Young and Lady Seccombe with regard to the special position of women within employment. Even today they tend to earn less than men and they are almost certain to have greater gaps of time out of employment while they are bringing up children or caring for elderly relatives. That should be recognised more clearly in the national insurance scheme than it is at present.
It has been suggested by the Fawcett Society, and others, that there should be a carers' credit to keep women in the contribution system during caring periods on the same basis as those registered unemployed or sick. The concept of credits is well established in the national insurance scheme; indeed, it has been there for a good many years. I can see that there could be a difficulty of definition. But I hope that my noble friend will at least be able to say that he will give careful consideration to the possibility.
I was also glad to hear what my noble friend said about the easier arrangements that will apply for women as regards equal treatment in occupational pension schemes. It seems to me that the new minimum solvency requirement will be simpler to administer and that it will enable occupational schemes to introduce equal treatment for women more readily and more quickly than can be done under the present arrangements. That will be a distinct advantage for women.
I should like to say a word about personal pensions, a subject just mentioned by the noble Baroness, Lady Dean. Personal pensions have been a great success. I congratulate the Government on that success. Indeed, over 7.5 million people are already covered by them. They provide a wider choice for those who cannot join occupational pension schemes or for whom an occupational pension scheme is unsuitable and to those who want a flexible alternative to the state earnings related pension scheme. I believe that the criticism has been directed at the wrong target. The scheme is not at fault; the fault lies with over-zealous selling and, in some cases, with misleading information. I very much hope—as, indeed, I am sure the whole House does—that people who have lost out in that way will receive 1016 speedy redress either by reinstatement in their previous occupational pension scheme or by appropriate compensation. However, I realise that it is a matter for the regulating authorities more than for the Government.
I turn now to Part I of the Bill and the new regulatory framework. I have a nostalgic regret for the passing of the Occupational Pensions Board as I happened to be in it at its birth. I am sure that all noble Lords would wish to pay tribute to successive chairmen, members and staff of that board. They carried out valuable pioneering work and that work will endure even though the board itself will cease to exist. In the new circumstances, I believe that it is right to have the new regulatory authority proposed in the Bill as well as the compensation board.
I noted that the noble Baroness, Lady Hollis, expressed the view that the board should be paid for by the taxpayer. I understand those arguments, but I hope that my noble friend will resist them. Members of occupational pension schemes are in a privileged position in relation to other taxpayers in the country who are not able to join such schemes. Scheme members have a strong vested interest in the success of the regulator. He is, so to speak, their policeman of last resort. It seems to me that it is perfectly reasonable that they, rather than the taxpayer, should pay for his services.
In any system of regulation of occupational pension schemes there is inevitably a dilemma in deciding the form and extent that regulation should take. The cost of schemes and the security for scheme members have to be balanced. I noticed that the Association of Consulting Actuaries has recently stated:We believe that the delicate balance between security and cost that has been struck is just about right—but only just".That is praise indeed from such a staid body.
In striking the balance, we have to remember that occupational pension schemes are voluntary and that, if the regulations are too onerous, there is a risk of deterring employers from setting up new schemes or improving existing ones. On the other side of the equation, members are entitled to expect efficient administration, wise investment, effective supervision and protection against dishonesty and fraud as well as compensation where fraud is proved.
Therefore I ask: is the balance in the Bill about right, as suggested by the Association of Consulting Actuaries? I have already mentioned that, in my view, the new minimum solvency requirements are simpler and should encourage the development of occupational pension schemes. Then there is whistle blowing. I remember that the noble Baroness, Lady Seear, did not think that that would be effective. I respectfully take a rather different view; indeed, I rather like the idea. I believe that the notion of the regulator crawling over every occupational pension scheme would really be much too burdensome. It would be much more effective for the regulator to concentrate on those schemes where there is a suspicion that something has gone wrong or is likely to do so fairly soon.
However, having said that, I am surprised that Clause 41 of the Bill only mentions auditors or actuaries as being entitled to blow the whistle. I hope that that does not exclude other people who are directly involved in 1017 pension schemes. It seems to me that trustees, professional advisers and members of schemes should be entitled to blow the whistle if they feel that something is likely to go wrong.
I turn now to another aspect of the matter which was mentioned by the noble Lord, Lord Marsh. I refer to the custody of assets. It seems to me that the National Association of Pension Funds makes a good point in saying that control in the area is not adequate. The association suggests that assets should be held by a custodian who is independent of the employer and that the custodian should be regulated. It is really a parallel with what exists in insured schemes at present. I hope that my noble friend will give serious consideration to what could turn out to be a rather serious gap in the control mechanism.
In conclusion, I believe that this is a good and much needed Bill. It will provide a more robust framework of regulation. However, I believe equally that it can be made better. I feel sure that my noble friend will listen sympathetically to any amendments that are tabled at later stages in the proceedings.
§ 6.8 p.m.
§ Lord Monkswell
My Lords, pensions are a long-term business. I fear that the Bill will not set the scene for even the next 20 years, far less for longer as it should do. It was interesting to listen to the Minister's opening remarks. He said that the pensions provided for under the Bill would affect every man and woman in the country, but he left out children. I believe that that is quite significant because, as I said, pensions are a long-term business.
I believe that we should consider the background to the Bill during this Second Reading. I should like to say a few words about the latter and then touch on three aspects; namely, security, the state pension provision and what I describe as level playing fields. Finally, I should like to conclude my remarks by concentrating on the effects of meeting the needs of the nation.
Perhaps I may begin with the background. If we return to the end of the war, it will be seen that for 30 years from the mid-1940s we had a period of virtually full employment where labour was in demand and where companies had to provide good employment conditions and good pay in order to recruit and retain labour. One of the key aspects in terms of retaining labour was to have a good occupational pension scheme. Effectively, it locked the workers into the company as they could see the long-term benefit involved.
If we look back at what has happened over the past 20 or 25 years, we can see that, instead of those pension schemes being seen to be there as a means of recruiting and retaining workers—and, therefore, something with which the workers were involved and about which they were concerned—we have moved to a situation where companies have thought of pension schemes not as a mechanism for providing for their workers' retirement and for retaining workers but rather almost to be used as their own personal piggy banks to be raided, as and when the pension scheme surpluses allow it, and to be used not to benefit the workers in the company but, quite often, to be disbursed to shareholders. Effectively 1018 they were often taking money out of pension schemes and sticking it into shareholders' pockets. Even Maxwell did not do that. He raided the pension scheme but he used it to try to prop up the company, not to stick money into either his own or other shareholders' pockets, which a large number of employers did with pension schemes during the 1980s.
That is one of the aspects that we need to recognise. The other is the scandal that has emerged over the past year as regards personal pensions. The Government have promoted the concept of personal pensions as a means of achieving flexibility for workers but that has led to enormous numbers of people being deprived of their involvement in good pension schemes and to their buying expensive personal pension schemes that will not provide for them so effectively. The net result of both those occurrences that we have seen over the past 10 or 15 years within the pensions industry will effectively be poverty in old age. That is something that we all need to address.
If we think in terms of security of pension schemes, in order, first, to prevent them from being raided by employers and, secondly, to ensure that the assets in schemes are capable of providing adequate pensions in the future, we must recognise that the only way to ensure that those pension schemes are not seen by employers as personal piggy banks—if I may call them that—is to ensure that a majority of the trustees are there representing the members of the pension scheme. That is the only way that we can do this if we retain the archaic view that the way to deal with financial assets is through trustees. I could extend my remarks extensively on the misguided notion that the 19th century concept of trustees is valid in the latter part of the 20th century, but I shall not digress into that.
The other requirement we need is high minimum solvency requirements. That may be seen to be a burden on pension schemes contributors, both the employers and the employees, in building up to those minimum solvency requirements. But one of the things we must recognise is that well-funded pension schemes not only provide for the retirement pensions for people in the future but they are also a valuable asset in terms of an investment facility for this nation as it stands at the moment. One of the problems that we have seen emerge over the past few years is of a nation that has consumed more as a proportion of its national wealth than it should have done. Unfortunately we have not invested enough in our society in all sorts of ways. Having a high minimum solvency requirement will be beneficial on two fronts: first, for the nation now and, secondly, in terms of higher pension provision in the future.
I now wish to turn to the state pension provision and the equalisation of the pension provision for men and women. One of the aspects that has concerned me about the whole debate on the equalisation of men and women's pensions is that there has not been a recognition by society at large—unfortunately this view is shared by many women too—that the role women play as carers, either of young children or of elderly relatives, is immensely important and valuable to our society. Other speakers have suggested that the time spent away from the job market, if I may describe it like 1019 that, in caring for young children and elderly relatives should be counted in terms of a national insurance credit for years worked. I think we need to take it a little further. I would suggest that that time spent in a caring role should be credited for national insurance contributions at average earnings. I am sure that that would make a significant contribution to the pension entitlement of women. I would hope that that would receive support in this House.
I now wish to talk about level playing fields. This matter has been referred to by a number of speakers. This Bill appears to give preference or an unfair advantage to personal pension schemes as opposed to occupational pension schemes. I think it is a dangerous concept that a particular form of pension provision should be given a preferential advantage. I believe that that will do us no good at all. We only need to look at how the personal pensions market has developed over the past few years, how the products were mis-sold and how—dare I say it?—people on relatively low incomes were seriously disadvantaged as a result. There may be a case for personal pensions being a good vehicle for high earning individuals who move from job to job or who are self-employed, but for the vast majority of people that will not be the case. It would be totally unfair if those high earning individuals were to be given a preferential advantage over the rest of society. It would only compound the various disadvantages that this Government have caused in our society and the shift in income and wealth from the poor to the rich.
I touched earlier on the importance of pensions in meeting national need. It is something on which I should like to finish. Something we must be mindful of in our deliberations on this Bill as it goes through this House is the importance to our whole nation—not just in the future in terms of pension provision for people as they retire, but also as regards the improvement in living standard for the benefit of the nation as a whole now—of ensuring that we have a high provision of pension, whether it be through the state, whether it be through occupational pension schemes or whether it be through personal pensions. We must hope to see a high provision into pension savings as only one mechanism of taking money away from consumption and putting it into investment. For now and for the foreseeable future that will be crucially important for this nation.
§ 6.19 p.m.
The Earl of Buckinghamshire
My Lords, in rising to welcome this Bill I wish first of all to declare an interest. I am a director of the Wyatt Company, which is forming an alliance with R. Watson & Sons. I think that as a matter of good practice your Lordships should be aware of my position. The comments that I make this afternoon are my own. They do not necessarily reflect the views of Watson Wyatt.
Like many other speakers, I welcome and support the Government's expressed desire to protect the interests of members of occupational pension schemes. As we have heard, the Bill follows on from the report of the Goode Committee published in the autumn of 1993. While I believe that the Government have tried to deal 1020 with the complex issues raised by the Maxwell scandal and other matters in a pragmatic and sensible way, I have some anxieties about the Bill. In drawing out those concerns I shall deal with four areas on which I hope my noble friend the Minister will be able to comment either later this evening or at another time. Those points are minimum solvency, the trusteeship and custodial arrangements, the level playing field between personal pensions and contracted out defined benefit plans, and the compensation scheme.
As regards minimum solvency, I am pleased that the Government have paid some attention to the comments made by those who sponsor occupational pension schemes. In the White Paper the Government had proposed that pension funds which fell below a minimum solvency standard would have three years to restore full funding, and funds which fell below 90 per cent. of the solvency requirement would have three months—a very short period—to top up that funding level to 90 per cent. I understand that the Government now propose that those restrictions will be eased and the relevant periods extended to five years and one year respectively. Like other Members of your Lordships' House, I am surprised that that is not included in the Bill but is to be covered in regulations.
Schemes will now be allowed to smooth asset values over a period of months. That will help to remove the variability in the value of assets and in assessing the minimum requirement. In addition, large schemes—probably those of more than £100 million—will be allowed to value pensioner liabilities making some allowance for equity investments. That will be less onerous.
On the question of equity investments, which was raised by the noble Baroness, Lady Hollis, funds winding up now and in the recent past have had immense difficulties in coping with solvency issues. We would like the equity markets to be higher, and we would also like interest rates to be slightly higher in certain instances. However, we do not have that juxtaposition at present. There is also the problem that insurance companies cannot make reasonable assumptions as to investment income.
Therefore, the whole issue of solvency, which has been attracting the attention of the professionals, is an extremely difficult one. It highlights the difficulty of guaranteeing high solvency levels. If one tries to guarantee high solvency levels one will immediately incur high additional costs. In a balance of costs scheme in which the employer picks up those deficiencies that will have a major impact on the profit and loss account of that company. I believe that if we move towards stronger solvency levels—although I understand why that has been proposed—we shall see final salary schemes being attacked and perhaps revised. It is well known that very few final salary schemes have been set up in the recent past. The schemes have mainly been defined contribution plans.
I should like to return to one technical issue concerning minimum solvency requirements. I do not believe that we are talking about a minimum solvency requirement but that we are really talking about minimum funding requirements. Indeed, it never has 1021 been a minimum solvency requirement. While I said that I welcome the changes made by the Government, I believe that the requirement to certify a contributions schedule as sufficient to secure solvency over a prescribed period will be totally unworkable. I also believe that it will be misunderstood by the members of pension schemes.
The noble Lord, Lord Marsh, made some jokes about actuaries. In fact, we have been asking the actuary who has to certify the certificate to act as an astrologer rather than an actuary. Most noble Lords may have thought that actuaries were astrologers! (That is a cheap joke at the expense of my colleagues.)
I believe that actuaries should only be required to certify a funding level as at a point in time. Otherwise, the purpose of relaxing some of the solvency requirements in this Bill will be negated, because if the actuary cannot use those assumptions then one will have to change one's investment policy. If one changes one's investment policy from equities to gilts the cost of final salary schemes will move upwards.
I turn now to the question of trusteeship. We heard from the noble Baroness, Lady Seear, and others, that they would like to move towards a situation where 50 per cent. or more of the trustee body is elected directly from the membership. I shall not say that I believe that that is a red herring, but the important point is that trustees have a primary duty to represent the interests of all the beneficiaries. That is an overriding duty. It matters not whether they are appointed by the employer or are elected from the membership: they have an overriding duty towards the membership. Whether they have carried out that duty in the past is obviously open to some doubt, as we have heard. However, the Bill contains some nasty surprises for trustees who do not carry out their responsibilities properly.
It is not perhaps realised that there is an enormous shift in powers from the employer to the trustees in the Bill. It is much greater than most of us, and certainly I, had expected. In particular, investment consultation is only on a statement of the principles for investment. There is no requirement to take account of the interests of the employer.
I turn now to the solvency certificate or the schedule of contributions payment. If agreement cannot be reached with the employer on the schedule the trustees must determine one. That is a huge transfer of power. I say that because it is not clear to me from the Bill whether that schedule of contributions relates solely to a schedule to meet the funding or solvency requirements or whether it should be used to determine the total pace of funding of that particular pension plan. If it is the latter, then in a balance of cost scheme, which includes most defined benefit plans in the UK, it is a serious dilution of the employer's ability to control the costs of the pension plan. Once again, it will add another disincentive to run final salary schemes, which I do not believe is the intention of the Government.
Clause 51 as presently drafted opens up areas of conflict between the trustees and the employer. That was a theme which ran through the Goode Report. It is one area to which attention needs to be paid. If I am incorrect in my analysis I am sure that my noble friend 1022 the Minister will put me right. However, it seems to me that in a balance of cost scheme, in which the employer is picking up the deficiency and the ongoing costs of the scheme, the employer should have some rights in the matter. After all, it is said that if one puts two actuaries in a room together they will never agree with one another. It is important that employers have some recourse to discussion of the assumptions made in the contributions schedule.
I do not wish to belabour the point, but I believe that what is at issue in the debate on trusteeship is not the balance of power within the trusteeship body but the balance of power that exists between the trustee body and the employing company. I believe that it is an area in which there could be significant conflicts in the future.
Turning to custodial issues, I agree with comments made, among others, by the noble Lord, Lord Marsh. I am surprised that custodial issues have been left out of the Bill. I know that such provision is not a panacea. It would not have solved the specific situation relating to Maxwell, but he would have had one further hurdle to overcome if he had been unable simply to go to the safe, lift out the share certificate and wander around the corner to hand over the shares. External custodial arrangements, which are in place in most schemes in this country, should apply to all. Before the banks come after me I should add that I exempt banks, for whom that issue is part of their normal business. I believe that comments have already been made on the regulatory issues.
I do not wish to dwell on personal pensions. I agree with noble Lords, some from other Benches, that the Bill favours personal pensions. I believe that some of the test for personal pensions should be made tougher. Perhaps I should say "enforced" but that is a dreadful word to use in your Lordship's House: we do not believe in such things. However, there should be enforcement to ensure that contributions are in excess of the rebate required. If we do not, as those individuals come to retirement they will require income support. Why require income support on retirement for a saving made today? I put forward that small thought for my noble friend.
My last point relates to the compensation scheme. I wish to raise a slightly technical issue. The compensation scheme makes good 90 per cent. of any loss due to fraud, theft or misappropriation of assets where the employer is insolvent. For a final salary scheme, compensation is limited to the amount necessary to restore that 90 per cent. solvency. There is no comparable limitation for defined contribution schemes. Either compensation should be limited to bringing the assets up to 90 per cent. of the liabilities, or defined contribution schemes should pay much larger levies. I do not believe that that will be popular with some of my clients.
I note that the noble Lord, Lord Freyberg, is not in his place. After three-and-a-half hours of debate that is understandable; even he may be excused for a short while. However, I congratulate him on his cogent, focused and timely maiden speech. I am sure that we can all take a few lessons on how to present an argument 1023 determinedly with cogency and in a pleasant manner. I am sure that all noble Lords will join me in wishing him well in our House.
This is a complex Bill. In some instances I have been slightly critical of the issues. Nonetheless, I support the Government in their endeavour to bring the standing of occupational schemes up to the highest possible level. I am sure that we shall have some interesting debates in Committee, and that the Bill will be thoroughly debated as it moves through your Lordships' House. I welcome it and look forward to hearing a response to some of the issues that I have raised.
§ 6.45 p.m.
§ Lord Braine of Wheatley
My Lords, I welcome much in the Bill. However, I rise to express my dismay that this long, detailed and important Bill fails in at least one respect to rectify a serious and growing injustice. I express my surprise that a Conservative and caring Government have laid a measure before Parliament which in this one matter is neither fair nor just.
I understand that there are some 400,000 British pensioners overseas whose pensions are frozen. Most of them live in the Commonwealth countries—Australia canada, New zealand and South Africa. That is hardly surprising since many of us have relatives in those countries, and there is no problem of language and culture. Let us take one example. If a pensioner chose to retire to one of those areas in 1964, he would receive a pension of only £4.50 a week, despite a lifetime of work and service in this country. I contrast that figure with the fact that 280,000 British pensioners living overseas in 30 other countries, including all those within the European Economic Area, and 15 others including the United States, have their pensions linked so that they receive the full current UK state pension of £57 per week.
How can those contrasting arrangements be justified? How can we pay pensions over 10 times greater to those who chose to retire to certain foreign countries than to those who have chosen to retire, for example, to one of the old dominions where they may already have relatives, perhaps grandchildren? How can that position be justified? I refer to countries which stood firmly with us in two terrible world wars. How can one discriminate in that way against fellow Britons who served often with great distinction in those wars and who in their later years, often for family reasons, chose to make their homes in Commonwealth countries? How can one explain that to our friends and allies overseas?
I cannot therefore support the Bill in its present form, excellent though many of its provisions are. I may be wrong; I am ready to listen to what is said in reply. We know the reason given for that palpable injustice. The Government claim that it would be too costly to index all expatriate pensions. I understand that the cost of righting the matter might amount to £230 million, but that amounts to about one third of 1 per cent. of the total social security budget. The situation is also palpably unfair that some 280,000 British pensioners living abroad have their pensions index linked but the remainder do not. For example, why should a British 1024 pensioner be index linked if he lives in Detroit, in the United States, while another British pensioner—he may be related—living to the north over the Canadian border in Ontario has his pension frozen? Where is the logic and justice in that?
Why should someone who has retired to Barbados have an index-linked pension while someone who retired to Jamaica for family reason has his pension frozen? What is the reason? What is the explanation? I do not know the answers. I eagerly await some enlightenment on the subject. When such questions are raised, we are surely entitled to ask for an explanation.
Someone should remind the Treasury that most British pensioners who retire abroad go to Commonwealth countries because that is where their children or grandchildren are. That is where they wish to pass their remaining years. In all charity and common sense, there should be no discrimination against our elderly citizens who have gone, or who wish to go, to a Commonwealth country to spend the remainder of their days. Someone should remind Treasury Ministers that, where index linking is denied because otherwise 17.5 per cent. of revenue from indirect taxation would be lost, the plain fact is that the choice made by pensioners to live abroad results in substantial savings. Indeed, I am advised that about half an individual's health costs—and I hope that this does not apply to me, I am now 80—tend to occur in the last three years of his or her life. If the matter is to be costed, let it be costed accurately.
I might understand the Government's position better if all British pensioners who choose to spend their retirement abroad because of family ties and the attractions of a warmer climate—and that is not unfair or unreasonable—were treated alike. But, alas, that is not so. All British pensioners have contributed to their pensions during their working lives in this country. There can really be no defence for a system which provides for index-linked pensions in some 30 countries, but does not include Commonwealth countries where many of our pensioners wish to go for family reasons or for language or cultural reasons.
It may be right and sensible to provide for index-linked pensions in some 30 countries overseas, but it is certainly not right and sensible to fail to make such provision for Commonwealth countries—our blood brothers and staunch allies in two world wars, in which so many of our pensioners served and which they were fortunate to survive. This is a moral issue, if ever there was one. In my view, it touches upon our national honour. I support the Government in all other matters, but I expect them to think again on it and to act accordingly.
§ 6.41 p.m.
§ Lord Desai
My Lords, as number 17 on a list of 22 speakers, I rise late in the afternoon and I am conscious that many of the points I wished to make have been made. Others are so technical that I had better stay quiet about them. However, a few points need to be made and I hope I can make them quickly 1025 The Bill, which is long and technical, is more backward-looking than forward-looking. It is designed to cure scandals which have already happened. We are bolting the door when the horse fled long ago and trying to solve a crisis which has happened and not one which may yet arise. Although many noble Lords referred to the Maxwell scandal, less emphasis and attention has been given to the scandal of personal pensions which still surrounds us. I do not see much in the Bill to tell me that it will avoid the kind of things which happened when the Government went out of their way to offer concessions.
In his memoirs the noble Lord, Lord Lawson, said that the concessions which were offered to people to switch to personal pensions were embarrassingly generous. Those concessions and overselling led to many problems which are still with us. In this morning's newspapers we read that the independent financial advisers are reluctant, unwilling or worried about how they will pay for the people who lost out on personal pensions.
I may be missing the point here, but while there is much in the Bill about occupational pension schemes, trustees' duties and so on, where are the safeguards to prevent a repetition of the personal pensions scandal? I do not see them. Indeed, the encouragement I am given in the latter part of the Bill by way of rebates very much recalls what we had before. That is a worrisome aspect of the Bill.
I wish to say a few words about the broader economic perspective which relates to a more forward-looking analysis of the pension problem. Many noble Lords have mentioned the demographics and the major problem of how society will pay the pensions of a larger proportion of a longer living population, given that there will be a larger dependency ratio and a proportionately smaller working population. We hope that the working population or some of it will be very productive, but it is a matter of extracting from the working population what it will give to feed the people who are retired. Much care can be taken by way of prudent savings, but eventually it is a matter of sharing the day's output between the workers and the pensioners. That problem will reach us in the first two decades of, or later in, the 21st century but I am not sure that the necessary thinking has been done about it.
The Bill relates to quite important administrative and technical aspects but I saw an echo of the problem in the excellent speech of the noble Earl, Lord Buckinghamshire, which I must read with care tomorrow. He was saying that the kind of returns that pension schemes want and that a buoyant equity market, looking for nice large interest rates, wants, may not come about. That suggests that we must be careful about the long-term growth perspective of the country in order to know that those things can be afforded.
As my noble friend Lord Monkswell emphasised, another problem will be that we shall not all be in employment all the time. There will need to be a "feminisation" of work; men will have episodic employment, as women have. They will be in and out of jobs. Therefore, what they earn over their life cycle will not be enough to pay for their pension, even if they 1026 are prudent. So we shall have to enforce much higher savings rates than we have been used to. Lastly, as many people predict and as we may witness, in the next 10 or 15 years there is likely to be world-wide excess demand for capital and a shortage of savings.
I am not sure that the Bill has an answer to all the problems which will pose a challenge to us. If the Bill envisages a world more or less as it has been for the past 30 years, how can we prevent a couple of huge scandals like those which happened a few years ago and pretend that we can carry on ever afterwards? While there are many interesting technical points to make about the Bill I am worried that the future pension problem of the country is not being addressed in a serious way.
On solvency, many speakers, including the noble Lord, Lord Dean of Harptree, and the noble Earl, Lord Buckinghamshire, have mentioned the briefing document which the Association of Consulting Actuaries produced for Members of Parliament. It suggests that a minimum solvency standard conveys an impression of being an absolute guarantee when it is not. This is a technical matter. I confess that I do not quite understand it. I should like someone to tell me what would happen if some pension schemes go bust after all the solvency requirements. Who will pick up the pieces? It is important to know. How will people be looked after if, despite all the guarantees, something goes wrong?
My noble friend Lady Dean mentioned the matter of employee nominees. I agree with her that one-third is too little. If decisions are made by a majority of trustees, one could easily find employees in a minority and their interests not necessarily being protected. My noble friend's suggestion that the proportion should be a half is an excellent one. It is a minimum provision, but we must think about such a provision. That being the case, I am sure that there will be time in Committee to look carefully at the Bill and scrutinise it.
I am worried that by and large the Bill is backward looking. I am not at all sure that it has foreseen the problems which are yet to come and done anything about them.
§ 6.50 p.m.
The Earl of Clanwilliam
My Lords, it is a pleasure to follow the noble Lord, Lord Desai. Perhaps I may immediately take up his point about the mis-selling of personal pensions. There is no doubt that there was gross mis-selling, which was the fault of intermediaries, pension companies and a whole range of people. On the other hand, the fact that pensions were mis-sold does not mean that the personal pension plan itself is wrong. I am convinced that the personal pension plan is the right answer for the country, for various reasons. I thought that I should make that point clear to the noble Lord who declaimed against personal pension plans because they had been badly sold. They were not necessarily bad plans in themselves.
I welcome the Bill, which is extremely complicated and very large. I should like to make six main points, which are partly the result of a flood of briefing material received from many quarters: the National Association 1027 of Pension Funds, which looks after final salary occupational schemes; COPAS, which looks after pensioners; the TUC; and the CBI. All those bodies have commented. I think none of them can be said to be too angry about the Bill. They all rather welcomed the Bill. I believe that the principle of the Bill is absolutely right, although there may be certain faults in it. I feel that one of the best items in it concerns the new responsibilities—the creation of a new body of trustees with defined responsibilities and penalties and with representation from employers; but not, so far, from pensioners, as the noble Baroness, Lady Seear, said. Where there is a pension plan with more pensioners in it than there are employees, there should certainly be pensioner representation on that board.
Trustees will need to have a very thorough and proper professional training. Given that proper professional training, they will understand the overriding duty of care which is the responsibility of a trustee. Once they understand that, the balance between employers and employees may not matter too much.
Additionally, trustees are being given powers of investment. That is an onerous charge upon people who may not be well trained in that field. It is another reason, as was said by many of your Lordships, including the noble Lords, Lord Marsh and Lord Dean, and the noble Earl, Lord Buckinghamshire, as well as some other noble friends, why there should be an independent custodian of assets. That is a very important point. Indeed, it is an accepted practice with insured funds, which are the source of the dreaded personal pensions. Nearly all personal pensions are secured through custodian trustees.
Solvency rules have been introduced. The point here is that occupational schemes are largely funded by the employer. The employer probably pays at least two-thirds. If there is a solvency shortage, the employer picks up the tab, not the employee. To that extent, it is not fully understood that the employer has a very large, open-ended responsibility, which he is finding more and more difficult to fulfil. Therefore, if there is a surplus, the employer should have the right to return it to his funds, assuming that the Inland Revenue will accept the idea and that he is properly over-funded and has not received too much tax relief on the contributions. Also, he must be assured that the remaining assets are sufficient to provide for full future indexation.
Equalisation was discussed by many of your Lordships. It will certainly be a matter of debate at Committee stage. I shall leave the matter there for the moment.
The Occupational Pensions Regulatory Authority will be an important and expensive body. There is some complaint that the charge will be placed upon the pension funds. But, as was pointed out, the funds are extremely rich and very large, the largest in Europe, and probably they can just about bear it.
Your Lordships will perhaps understand that I am not absolutely certain that the final salary occupational scheme is the only answer to the pension problems of the 21st century. It is to the years 2010 to 2040 that we must now look. That is appropriate, as the occupational 1028 schemes have a 40-year timescale. The noble Lord, Lord Marsh, more or less said, "Forty years, what a hope! Who has spent 40 years in one employment?" Certainly there must be very few people who have done so and, if they have, they will have no problem with their pension.
That brings me to the vexed question of pension transfers. Many people, as the noble Lord, Lord Desai, said, will be moving about. The problem of transferring from an occupational pension scheme is quite difficult. The calculation of the accrued rights of the member is complicated and involves to some extent, if I may borrow from the noble Earl, Lord Buckinghamshire, the use of a crystal ball by the actuary. The problem, it is reported in some quarters, is that not all actuaries use the same crystal ball. That leads to certain problems of delay and obfuscation and offers another disadvantage in the movement of funds from one occupational pension scheme to another or to a personal plan.
By contrast, the employee who has a personal plan has an accumulated fund which is immediately recognisable and accessible. For that reason, I suggest that the way forward may be by way of a personal plan, probably allied to the remaining occupational pension scheme. As the noble Earl, Lord Buckinghamshire, said, there are not many new occupational pension schemes about. The reason is that they are too expensive for the employer. New legislation is making the indexed provision very expensive. As I said, the best new schemes are of the group personal pension variety, with a projected benefit. The most important word to understand there is "projected" because a personal plan has no defined benefit; it is only a projected and not a guaranteed benefit. At the end there is an accumulated fund which can be used for a variety of purposes. With the new Bill, the benefits can be extended over a period of 10 years: from age 65 to 75. To that extent, the personal plan again has an enormous advantage, as is being recognised by industry.
That provision is part of the Government's stated policy and is to be welcomed as it is promoted in the Bill. What is not clear is that, whereas in an occupational scheme the employer is bound to make a contribution, in a personal scheme the employer does not necessarily have to do so. Where personal schemes are prepared instead of occupational schemes, there should be an equal duty of provision by the employer.
There is already a model in the form of the provision for contracting out from the national insurance contributions. The point here is that a pension plan cannot work unless it has something like 40 years of contributions in it. If it has 40 years of contributions in it, then it may only be necessary to make an additional contribution of 10 per cent. of one's salary per annum. In fact, figures demonstrate that a reasonable accumulated fund can be achieved by that method. We already have 4.8 per cent. rebate from the national insurance contributions, so it only requires another 2.7 per cent. to be input by the employer, the Government, the employee or whoever, to make up the contribution to 10 per cent. It is extremely simple and therefore, if we can arrange for national insurance contributions to be deducted at a very early stage—from the word go—then it will be possible to make contributions at the last. 1029 Those funds would work on the basis that, because there was a statutory requirement to make the contribution, there would be no great selling problem. If there is no great selling problem, there is no great commission problem. If there is no great commission problem, then the performance of the fund can be extremely good. It is the initial charges in all funds which delay the increase in benefits. Given a 10 per cent. contribution, figures show that fund-based commission could be reduced, providing the investment manager has an incentive to achieve an increased commission as his fund improves in value. That would he a good Conservative way forward for pension planning which I recommend to your Lordships.
§ 7.2 p.m.
§ Lord Skidelsky
My Lords, may I add my congratulations to those of other noble Lords on the cogent and attractive maiden speech of the noble Lord, Lord Freyberg. I look forward to hearing him many more times in this House.
The noble Lord, Lord Desai, says that the Bill does not address the pension problem of the 21st century. It would need to be a big Bill that claimed to solve the pension problem of the 21st century. However, it addresses the pension problem by creating a more secure framework for the development of private pension provision. After all, that is the Government's strategy and it is perfectly well known. In his 1993 Mais lecture, the Secretary of State for Social Security—Peter Lilley—said,Elderly people already account for almost half of all benefit spending. Most countries finance virtually all their pension provision by taxation. So in the next century the increasing elderly population in most developed countries will impose a crippling tax burden on the declining number at work. Britain is much better placed because we have encouraged people to invest in private pension schemes".That is the Government's strategy and they opened up the debate. It would have been politically easy for them to postpone the crisis for the next generation. The Government rejected that course and deserve enormous credit for doing so.
The nub of the problem is that the state pension scheme is not a funded pension scheme. My noble friend Lord Braine of Wheatley asks why overseas pensioners, who have made contributions, as he put it, to their pension funds, should have their pensions frozen. The trouble is that they have not made contributions to their pension funds. The pension they receive is entirely at the discretion of the government of the day. Today's working-age taxpayers fund today's retirement pensions; they do not fund their own pensions. As the ratio of the working population to the retired population falls, it becomes ever harder to provide a decent level of state pension. That is the problem. Even maintaining existing real levels, which are admitted to be inadequate, will be virtually impossible in two or three decades and the link to prices rather than to earnings means that those who depend on state pensions will see their position relative to average earnings decline even further.
The fact is that we have been playing political roulette with pensions. The system depends on the willingness of future taxpayers to pay for other people's future 1030 pensions. We are writing post-dated cheques which we do not know whether we will be able to honour when they are presented. As I understand it, the Left's solution is to raise taxes to raise the value or extend the coverage of state pensions. I reject that. I believe that we should have lower, not higher taxes. But the financial implications are pretty horrendous. Just to maintain the present value of pensions relative to earnings would mean tax increases of 2 to 3 per cent. of gross domestic product by the year 2030. Restoring the relation of state pensions to earnings as it was in 1979 would cost 5 per cent. of GDP—roughly the amount we spend on the National Health Service today.
Because we believe in lower rather than higher taxes on this side of the House, we reject these suggestions. What can we do? First, we can do what has already been done in the Bill; that is, equalise the retirement ages for men and women at 65. That will save around £3 billion when it comes into effect. On the other hand, equalisation at 60 would cost an extra £3.5 billion and would make worse the imbalance between the working and the inactive parts of the population.
I welcome, as everyone does, the idea of a shorter working week as science and technology increase the power to produce. But that is quite different from artificially shortening people's working lives at a time when their capacity to go on working is steadily increasing. Proposals for dropping men's pensionable age from 65 to 60 reflect worries about where male jobs will come from far more than the feeling that we, as a society, are wealthy enough to afford a shorter working week. It is a counsel of despair; it is the idea of cutting down the supply of available labour because we shall not be able to find jobs, rather than increasing the total number of jobs. It is to that we must look for an increase in wealth; not the policy of cutting down.
However, I disagree profoundly with the noble Lord, Lord Marsh, when he declares that a universal state pension is irrelevant. In fact, he almost said that it was a wicked thing to have; it should be scrapped; state pensions should only apply to the poorest part of the population and everyone else should go into private pension schemes. I do not believe that that is right. A much better way to think of the state pension is as a basic income; or, if you like, a basic income supplement to those above a certain age, and not as an alternative to paid work.
That leads naturally on to the second thing that we can do; that is, to encourage people to invest in private pension schemes. The first half of the Bill does that by increasing the security of occupational plans. I want to make only one comment on this aspect of the Bill. I want to endorse what was said by the noble Baroness, Lady Seear, and my noble friend Lord Buckinghamshire about the danger of occupational plans investing too much in gilts and not enough in equities. It is an important point and I hope that the Government will take it on board. It is important because pension funds are now around 50 per cent. of equity markets and are therefore a vital source of investment to this country. Time will tell whether the Bill has struck the right balance between security and risk—security for those who save in order to obtain pensions and the risk which 1031 is inherent in the investment process. The savers in pension schemes are not only providing for their future old age but are also in a sense stake holders in the economy of the country. That is the balance that needs to be struck.
I want to go further in encouraging people to top up. We need to encourage people to consider their future retirement income from the moment they enter the labour market. Private insurance markets are already emerging to meet the costs of long-term care in retirement. That is a very interesting development. They are developing more flexible products to enable people to pay into a lifetime fund that can be drawn on to meet particular contingencies at different periods of life, including, but not confined to, old age. This is a field in which the private sector has a big opportunity to show off its paces. I am looking for exciting developments over the years.
The issue of pensions is one of the most important facing the country. It offers exciting and creative opportunities for the private sector. The Government are to be congratulated on tackling difficult issues ahead of time—a week is not always a long time in politics—and putting us even further ahead in pension reform than other countries facing the same problems.
§ 7.11 p.m.
§ Lord Haskel
My Lords, with this Pensions Bill we have before us a piece of legislation which seeks to regulate the operation of the nation's largest group of shareholders—pensioners. As shareholders, pensioners have two main interests: first, good management of the companies in which they invest, so that the money will be available for their pensions—the noble Lord, Lord Skidelsky, has just reminded us of the risk—and, secondly, regulation, so that their investments are safe and secure from incompetence, negligence or criminality.
I should like to explore and make proposals regarding these two aspects of the Bill: better corporate governance and better regulation. First, on corporate governance, my proposal is very simple. It is that pension fund managers should have a duty to vote at company meetings. In theory everybody is in favour of this. The Cadbury Committee, reporting in 1992, strongly recommended that institutional investors exercise their voting rights. Industrialists, the parliamentary Select Committee, and indeed the Government's own White Paper, all emphasise the importance of shareholders voting at meetings in order to improve the competitiveness of British industry. The response, however, has been disappointing.
According to PROSHARE, it is rare for more than 15 per cent. of shares to be voted at company meetings. When there is trouble or publicity, this can increase to 20 or even 30 per cent., but that is most unusual. Bearing in mind that institutions own two-thirds of all the shares quoted on the London Stock Market, and, as other noble Lords mentioned, more than half of those are owned by pension funds, these votes can wield 1032 immense power to influence the standards of corporate governance. This Pensions Bill gives us an opportunity to convert these exhortations into a duty.
There is another reason why I think there should be a duty to vote included in this Bill, and that is because of the lessons learnt in the United States. Since 1988, pension funds in the private sector have had a duty to vote under the Employee Retirement Income Security Act. Since 1994, this duty has been extended to shares held outside the United States. The result of this became apparent three weeks ago with the removal of Maurice Saatchi, chairman of the advertising agency which he established. The fund managers in Chicago who threatened to vote him off the board were acting under this law. Similarly, American pension fund managers have been targeting British Gas over its employment record in Northern Ireland.
Activity by American pension fund managers in the UK is about to increase dramatically. Remember, there are a large number of leading UK companies which have more than 10 per cent. of American shareholders, and others such as Glaxo, Hanson and SmithKline have over 25 per cent. American shareholding. Does it not seem ironic that this kind of activity is left to American shareholders; and is it not sensible to bring British law into line with American law?
Not only does American law oblige pension fund managers to exercise their vote on issues which may affect the value of their shares, but also they are obliged to inform beneficiaries in advance of their voting intentions, and their voting record is open to later inspection by the beneficiaries. This is very much in keeping with the Cadbury proposals, and these obligations will be incorporated into an amendment which I propose to move at a later stage.
Until now I have heard only two arguments against this proposal. The first is that the City's reputation depends on its ability to trade shares easily and quickly, and pension fund managers are reluctant to make waves for fear of jeopardising this. My response is that nowadays few doubt that our economy will perform better with relationships of commitment rather than short-term relationships between companies and their shareholders. There is a growing trend in this direction urged on by Cadbury. There is also a growing trend in trust law that pension fund managers have a duty to manage their investments as well as merely hold them and not just to walk away from an investment which does not perform as expected. Would the Minister not agree that this duty to vote reflects the view of his friends in another place, the Prime Minister and the President of the Board of Trade, during the recent arguments over directors' pay, and the statement of the Chancellor of the Exchequer about this earlier today? The second argument against an obligation to vote is the cost of the extra time and effort involved. This is like saying that we are against democracy because of the cost of elections. We have in this country a huge financial services sector, with organisations geared up to provide research and advice which is independent and cost effective. 1033 However, it is not intended that this duty to vote will apply to all companies. Obviously small shareholdings in small companies can be left to the discretion of pension fund managers. How do we enforce this duty to vote? The answer is simple. The record of voting could be a condition of approval by the Inland Revenue. In addition, one of the "other matters" in Clause 31, dealing with the duties of trustees, could be an obligation to report to the beneficiaries on the voting record of the managers.
The second area of the Bill which I wish to explore is regulation. The purpose of regulation is to ensure that the beneficiaries' investments are safe and secure from incompetence, negligence and criminality. Regulation will be in the hands of the Occupational Pensions Regulatory Authority. The Bill gives the regulator power to investigate complaints from trustees and professionals, but this sounds very much like the slamming of stable doors after the horses have bolted. My noble friend Lord Desai spoke about that. As at present drafted, the Bill leaves the duties of the regulator to be defined from time to time by orders in council. But I, like many other noble Lords, believe that the Bill should lay down the duties of the regulator much more precisely, especially in the areas of member trustees, minimum solvency requirements and custody of assets.
We have had the Maxwell experience. The noble Lord, Lord Marsh, told us that it is unlikely to be repeated. But who can predict in what form the next mishap will occur and will the proposed regulatory structure ring warning bells early enough? To help ensure that they do, the regulator must lay down and enforce a code of practice. The regulator should be obliged to make compliance visits and to obtain annual returns and to require managers to provide other information, to enable the regulator to check that the code is being carried out. The regulator should update this code from time to time and have the power to give "urgent issues" guidance.
And here I wish to make a fundamental point about pensions and their regulation. In most markets, the best way of monitoring product quality and suitability is where the purchasers have sufficient information to choose the products rationally. Their purchasing of the products signals which ones are attractive and what qualities they demand.
Pensions are different. They are a product that people buy, but rarely understand. Few people understand the alternatives of contracted-in and contracted-out status and what they can expect to receive from the state additional earnings related pension if they choose to remain contracted-in. People may understand in general terms that their pension will be based on years of service and their final salary, but few people can project what their final salary will be, how the formula works and what happens if they leave or change their job before retirement age. It is because of this complexity that pension scheme members cannot "self-regulate" and therefore external regulation is essential.
But if scheme members understood a good deal more about how their scheme worked it would make regulation more effective and beneficiaries themselves could listen for warning bells. Therefore, I should like 1034 one of the duties of the regulator to be to draw up a code of practice to do more to assist members to understand how their scheme works, how their benefits accrue and how their scheme performs relative to other similar schemes. Most fundamentally, I would like to see each member receive an annual statement as to how his or her accrued pension has changed over time. That is quite straightforward in money purchase schemes; it is trickier to do in a traditional scheme, but it is feasible.
Therefore, equipped with a statement of their own "stake" in a pension scheme and with a greater understanding of what the scheme is doing, members are in a much stronger position to take an active interest in their scheme and thereby exercise more self-regulation rather than by relying solely on the Occupational Pensions Regulatory Authority. In that way, not only shall we have regulatory structures designed to avoid a repetition of previous mistakes, but, hopefully, we shall have the best form of regulatory structure—regulation by the participants. At Committee stage we shall bring forward amendments which will deal with the duty to vote and the duties of the regulator.
There will not be another pensions Bill for many years and it is important that we use the opportunity of this one not only to put right what has gone wrong in the past, but also to anticipate a better informed and better educated generation. The amendments which we shall propose are designed to empower these people: empowering them as shareholders to open up the corporate governance of our nation's businesses, and empowering them to eliminate incompetence, negligence or criminality in the management of their own pension schemes. On these Benches we call that "social justice".
§ 7.24 p.m.
§ Lord Ashbourne
My Lords, I shall not detain noble Lords long, but I wish to join with others who have already spoken in congratulating the noble Lord, Lord Freyberg, on his apt and lucid maiden speech. I strongly endorse his judgment that we are seriously at fault in our provision of both social security and occupational pensions for our war and service widows. It is clear to me, from my discussions with the Officers Pensions Society, that arrangements for British war and service widows are uniquely meagre when compared with those of the 14 nations' schemes which they have studied in detail. It is proper that there should be a tight pip on public expenditure but that grip must not be mindless or soulless. The noble Lord, Lord Freyberg, concluded that we are in these widows' debt; I agree. I want to see that debt paid before we expend a penny on commemorating victory. Will not such celebrations otherwise have a very hollow ring?
The problem is not so much money as a bureaucratic preoccupation with precedent. The incontrovertible evidence from the War Pensions Agency is that as things stand 99 out of 100 war widows decline to take the financial risk of remarrying. To grant them pensions for life regardless of remarriage would not only be widely acclaimed as an honourable and humane enhancement, it would be cost-neutral. As regards service widows, it bears repeating that those presently 1035 disadvantaged by comparison with younger British service widows and those of comparable allied pension schemes, are already over 75 years of age.
What is being proposed by the Officers Pensions Society and the War Widows Association of Great Britain, backed by the 132-strong Confederation of British Service and Ex-Service Organisations, is that these widows, in the evening of their lives, should not be deprived of pensions paid to their younger colleagues simply because improvements introduced in the 1970s were not applied retrospectively. Bearing in mind their age, it could hardly be represented as an open-ended commitment.
The noble Lord, Lord Freyberg, has most eloquently urged us to recognise our debt to the past. My upbringing and training as a former naval person stresses that to settle debts immediately was a matter of honour. It disturbs me profoundly that this debt has lain unpaid for so long. I urge the Government, even at this late hour, to look again at the glaring anomalies that affect the pensions of our service and war widows and to take appropriate and vigorous action.
§ 7.27 p.m.
§ Baroness Strange
My Lords, your Lordships will be relieved to know that, coming at the end of a very long debate on an important Bill in which everything has already been said, I shall be even briefer than usual. I have been struggling for some time to read this Bill and was not surprised when my right honourable friend the Secretary of State, Mr. Peter Lilley, said that this is a very complicated Bill and difficult to understand. My noble friend the Minister has also tried to explain it to us, and although both he and his team of civil servants swung a strong beam of light on it, with their lucid explanations, it was rather like a sun's ray traversing the murky depths at the bottom of the sea.
As far as I could ascertain from my late night sessions of reading, the Bill is mainly to set in motion the establishment of private occupational pensions with their concomitant funds, which are to be regulated by trustees in such a way that the Maxwell scandal of disbursed pension funds shall never occur again.
Even so, I could still have resisted the temptation to speak —never in my case a very strong one—if the noble Lord, Lord Freyberg, had not made such an excellent, well researched and moving maiden speech on the subject of war widows. I am aware that it is not up to speakers other than the one immediately following to congratulate maiden speakers, even if one has known them all their life, so I shall reserve my heartfelt congratulations for a written note.
As your Lordships will be well aware, I have an interest to declare, being president of the War Widows Association of Great Britain. Although not a pecuniary interest, I have to admit that my connection with all these brave and lovely ladies is one I much treasure in my heart. My noble friend the Minister—who is not in his place but will no doubt read my speech in Hansard—has been kind enough to receive some of us in his office. He has also broken bread with these ladies 1036 in my house, so he is not only aware, as I am, of their quality and courage, but he also shares with me their friendship.
We contend that the war widows' pension, either paid by the Department of Social Security or by the Ministry of Defence or both, should be regarded as compensation for a life given in the service of this country and therefore inviolate. It should not be considered as maintenance and removed on remarriage. We are campaigning, with the help of 132 members of the Confederation of British Service and Ex-Service Organisations, and in particular of the Officers Pensions Society, for this principle to be accepted: that the war widows' pension should be seen as compensation to the widow for the life lost in the service of our country, and not as maintenance, and should therefore remain with her for life, whether she remarries or not.
In this year of tribute and promise, 50 years after the end of a terrible war, when all the jubilations and fireworks have died down and become a rosy memory, let us contribute a more lasting expression of our thanksgiving. None of these steadfast ladies can ever forget their husbands, whom they loved and lost in the service of their country. Let us not forget them.
§ 7.31 p.m.
§ Lord Pearson of Rannoch
My Lords, I hope I may be forgiven if I intervene very briefly before we come to the closing speeches from the Front Benches. I regret that I have not been here for the whole debate because I felt I should attend an important meeting of your Lordships' Select Committee on the European Communities, which started at 4.15 p.m. and lasted for some two hours. I particularly regret that my absence prevented me from hearing the speech of the noble Lord, Lord Stallard, who I believe may have advanced a view which I wish to support. It is a view which was first put forward this afternoon by the noble Baroness, Lady Seear. I regret to see that she is not in her place and I hope that it will not come as too much of a shock to her when she reads my words in Hansard to learn that I strongly support that part of her speech.
Other noble Lords may have made the point in question when I was out of the Chamber, but it was certainly made forcefully and with great eloquence by my noble friend Lord Braine of Wheatley. Indeed, I have nothing really to add to what he said.
I refer, of course, to the manifest unfairness which is suffered by some 400,000 of our pensioners who have gone to live overseas, especially in South Africa and former Commonwealth countries, often after gallant service to this country. The fact that their pensions are not index-linked is morally indefensible and must no longer be tolerated. I trust that my noble friend will be able to assure us that the comparatively small sum of perhaps £250 million a year will in future be found to correct such an obvious injustice.
I trust that my noble friend will also be able to reassure the noble Lord, Lord Freyberg, on the points that he made about war widows' pensions—another obvious injustice which the noble Lord expressed in a truly remarkable maiden speech. Perhaps I may be allowed to join other noble Lords in congratulating the 1037 noble Lord, Lord Freyberg, on his first contribution in your Lordships' House. It was exceptionally well delivered, absolutely honest and, I trust, absolutely irresistible.
Apart from that, I wish my noble friend well with his Bill. I will do what I can to support him in the eventual Divisions, provided that he can help me and other noble Lords with the points that I have made.
§ 7.33 p.m.
§ Lord Ezra
My Lords, in coming to the end of this long but productive debate, it is worth reminding ourselves that, although this Bill is called the Pensions Bill, in fact it is limited to two aspects of that problem, both of which can be said to be reactive: reaction to the Maxwell affair—the bulk of the Bill is concerned with increased security for occupational pension funds—and reaction to the ruling of the European Court of Justice on the equal treatment of men and women in pension schemes. That is what the Bill is about. In a way, it is a pity that the Bill is not wider ranging, but we must recognise that that is what we have been presented with.
During the debate three additional specific issues have been raised about which many of your Lordships feel strongly. I am certain that suitable amendments will be presented in Committee and subsequently on issues which are not directly relevant to the two main aspects of the Bill. I refer to the treatment of women on divorce, which the noble Baroness, Lady Young, so clearly exposed; the question of the war and service widows, with which the noble Lord, Lord Freyberg, dealt so effectively in his excellent maiden speech; and the question of the expatriate pensioners in Commonwealth countries. I think that we all hope that when the Bill finally emerges from your Lordships' House it will contain additional provisions on those three issues.
What the Bill does not tackle are some of the wider issues such as the demographic developments, the way in which people are likely to live and work in the future, and the long-term viability of pension arrangements. The Bill is not concerned with that, but a number of your Lordships touched on those issues, in particular the noble Lords, Lord Desai and Lord Skidelsky, and my noble friend Lady Seear. I hope that we shall be able to return to those matters so that this Bill can be encompassed within a wider debate.
The noble Lord, Lord Desai, mentioned the problem of personal pensions. They have recently been in the news because of the over-selling or mis-selling of those schemes. As I understand it, that issue is the subject of an inquiry by the Securities and Investments Board. I have no doubt that when its report emerges we shall have an opportunity to debate it. Indeed, there might even be legislation on the subject. Therefore, we should await the publication of that report and not bring that issue into this debate.
I should like to concentrate particularly on the question of security and to refer to some of the important points that have been made in our debate. Starting with the Occupational Pensions Regulatory Authority, I am on the side of those who have expressed the view that it should be stronger and more proactive. My noble friend Lady Seear mentioned that, as did the 1038 noble Baroness, Lady Hollis, and many others. It is an issue that we must grasp firmly. It does not seem sensible for the future to have what appears to be a fairly reactive body. While we are at it, we might as well have a really strong regulatory authority.
I fully support the fact that the authority will be a statutory body, not a self-regulatory body. However, because of that, I support the view of those who feel that it should be paid for out of public funds. We must make it absolutely clear beyond any doubt at all that it is a statutory body, financed publicly. It seems perfectly logical that that should be done in view of the fact that the Occupational Pensions Board, which is now to be wound up and replaced by the new body, was paid for in that way, as the noble Baroness, Lady Hollis, pointed out. I find it regrettable that there is no statement of the functions of that body. I should have thought that that was of great importance and that it should not be left to regulations.
Furthermore, I agree entirely with the view expressed by the noble Lord, Lord Haskel, that the regulatory body should issue a code of practice. It is wrong that a code of practice should somehow be allowed simply to emerge over the years as the authority intervenes to deal with particular issues. This is such an important area and we already know so much about it that the first task that I should like to see given to the new authority is the preparation of a code of practice.
I turn from the regulatory authority to the minimum solvency requirement, about which there has been much debate and concern. I was struck by the intervention of the noble Earl, Lord Buckinghamshire, who pointed out that we would do better to rename it a "minimum funding requirement" because that is what it is. The trouble about using a term such as "solvency", particularly for those who are not skilled in this, which would be the majority of the population, is that it gives the impression that all eventualities would be covered. When one talks about an enterprise being solvent, that is what one means. So if we apply the term "solvency" to a pension fund, that is the impression that it will create. But that is not what it does or is intended to do. It is intended to create a minimum amount of solvency. I believe that minimum funding would be better. We would all understand what that meant.
As the noble Earl said, it is a matter of debate as to how large proportionately that funding should be. We must be wary of the fact that, if it is made too onerous on employers, that could limit the scope of the funds. That must be looked at carefully but, above all, we must make it clear to everyone what we mean by the term.
I turn next to the subject of the trustees, because that is obviously one of the most important aspects of the Bill. I believe that we would all agree that it is absolutely right that trustees' functions and responsibilities should be defined clearly. I share the view of my noble friend Lady Seear, the noble Baroness, Lady Hollis, and others, that the number of employee trustees should be increased beyond that stated in the Bill. I agree with the view expressed by the noble Lord, Lord Dean of Harptree, that all trustees are equal when it comes to it, because they all have an obligation to run the fund properly. That is true: 1039 nevertheless, in these matters the perception is important. It would be perceived to be a more satisfactory arrangement were there at least 50 per cent. of employee trustees.
I am chairman of a company which has a pension fund of about £25 million. In the light of the Maxwell affair, we, like many others, started to look again at our arrangements. We reconstituted our trustee committee. We have now two representatives of the employers, two of the employees, who are selected by the employees, one pensioner and one expert whom we brought in from outside. We thought that a good mix: we have an external view of the thing; we have a pensioner, two employees and two representatives of the employers. We have now had the arrangement in operation for about a year, and experience has shown us that it works perfectly well. Such a mix is highly desirable.
I agree strongly with those who have expressed a view in favour of the external custody of assets. That is an important issue. Of course there are many funds which are managed externally anyway, so the assets will be held outside. But, in those cases where there is internal management of funds, the issue of the custody of assets is of great importance.
Compensation is the last aspect with which I should like to deal. The way it is worded in the Bill is too limited. As the noble Baroness, Lady Hollis, pointed out, under the proposed arrangements, nothing could have been done to compensate the Daily Mirror pensioners because the enterprise did not go into liquidation. However, there was of course misuse of funds. So I believe that we should broaden the terms somewhat. No doubt there will be amendments to that effect.
I should like to end on the wider issue which a number of Lords mentioned. It is true that we now live in an age when most people will go through many forms of employment. I happen to have been one of those who, as will be exceptional in the future, spent 35 years in a single employment. That could not conceivably happen again in my industry, because it no longer exists. It was the nationalised coal industry. That sort of period of tenure in a business is most unlikely to recur. Most people will have many forms of employment. They may unfortunately have periods of unemployment; they may have periods of employment abroad; they may have periods of self employment; and they may have periods during which they have a multiplicity of employments. So flexibility of employment has to be met by flexibility of pension arrangements.
Of course that might lead to the view that pensions should become increasingly private pensions, because that type of flexibility already exists. I do not agree with that. I believe that people should be able to choose. Occupational pensions have an attraction. After all, if properly administered, as we hope they all will be after this, they hold out a greater degree of security because the pension is related to final salary, whereas in a private scheme one does not know what one might end up with. It depends upon the state of investment of the fund during the period.
1040 There should be a degree of flexibility and choice as between flexible occupational schemes, which can be more easily moved around, and flexible private schemes. I hope that on some future occasion we may be able to return to the issue. In the meantime, if the Bill is strengthened in the ways that have been suggested during the debate, and if those additional specific issues are incorporated, the Bill will turn out to be a good one in dealing with the problems that it addresses.
§ 7.47 p.m.
§ Baroness Turner of Camden
My Lords, this has been a long and interesting debate. Perhaps I too may start by expressing my appreciation of the maiden speech made by the noble Lord, Lord Freyberg, on the important issue of service pensions for widows. I am sure that we shall be returning to that issue in Committee.
As has already been said, the Bill was intended originally to provide greater security for pension scheme members in the wake of the Maxwell scandal. That scandal, which had a traumatic effect upon the whole pensions world, led to the committee established under the chairmanship of Professor Goode and to the set of recommendations contained in his report. Much of the Bill is based upon the recommendations of that report. We on our side of the House support the Goode report, but we have some misgivings about the Bill as a whole.
First, I shall say a word or two about what I believe to be the main thrust of government policy. I am still a believer in the legislation which emerged from the 1970s consensus—the legislation which established two-tier pension provision, the first tier being provided by the basic state pension, and the second tier by SERPS or by an occupational scheme good enough to match up to SERPS, and to provide pensions at least at the level of the guaranteed minimum pension. Most of them of course provided, and still do provide, a great deal more than that.
SERPS represented the first real attempt to ensure that the poorly paid—workers with a chequered work pattern, many of them women—had the chance of getting an earnings-related pension, something which those in better paid jobs had long regarded as part of their salary package. As we know, the Government's obsession with personal pensions led to a fragmentation of that structure, with many people opting out, not just of SERPS but of good occupational schemes, into personal pensions. It is now generally acknowledged that for many people those were disastrously wrong decisions and the regulatory mechanisms in the industry, led by SIB, are now having to deal with that.
I have a certain personal interest as chair of the PIA Ombudsman Council. I can tell the House that we are expecting a large number of complaints which will have to be dealt with some time later this year.
At present we have no real idea how much work there will be, but we know that there will be a great deal. Perhaps I shall be told that it is not relevant to the Bill before the House. Nevertheless, it is an important part of the background. The Maxwell scandal had the effect of causing some employees to question their 1041 occupational schemes. Some of those doubts led them inadvisedly to take out personal pensions when they would have been better off remaining with their occupational schemes.
It is important that faith in occupational provision is restored. I hope that the Bill will go some way towards doing that. We on this side of the House are well aware that it is a question of achieving the right balance. There must be sufficient by way of safeguards for members but, since the provision of occupational schemes is voluntary, we should not have so many regulations and restrictions that employers either do not provide schemes, or discontinue them, or change from final salary schemes, which despite problems are probably the best way of providing for staff, to money-purchase, which has less certainty with regard to the final outcome. We should look carefully at the regulatory mechanisms provided in the Bill.
Part I provides an occupational pensions regulatory authority. I welcome that development. For many years I was a member of the Occupational Pensions Board. While the board did a great deal of useful work, in particular in the reports that it prepared, it had a strictly limited function. People thought that it had a great deal more power and authority than it had. It had no overall monitoring role with regard to pensions as a whole. It had no whistle-blowing role. Strictly speaking, its main role was as a guardian of the guaranteed minimum pension. I am therefore glad that we are to have a regulatory authority in place of the OPB. However, I hope that the expertise that has been developed by OPB staff will not be lost. That expertise will be most useful to the new regulatory body.
I note, however, that the new body will not have an overall monitoring role. There should be an inspectorate capable of making spot checks and identifying any problems in advance. Malpractice could remain undiscovered for a long time and by the time the whistle is blown much damage may have been done. I share the views of the noble Lord, Lord Ezra, in wishing to see a pro-active regulatory body.
Presumably, the composition of the board is a matter entirely for the Secretary of State. However, I hope that there will be employee-union representation as there was on the OPB. Of course, there should be people who are pensions professionals, but the interests of the consumers, who in this case are employees, should be properly represented.
The same considerations apply with regard to the compensation board. I welcome the development, but I too have some anxieties about the provisions of Clause 74. It seems that compensation entitlement will arise only in the event of the insolvency of the employer. As has already been said, if such conditions had existed at the time of the Maxwell scandal the pension scheme members could not have claimed compensation because the Mirror Group was not insolvent. I am sure that few of those who believe that the Bill is providing security against a similar scandal understand that that is the situation if the Bill leaves the House unamended.
I am sure that it will not surprise the House to know that both unions and employers, represented by the CBI, agree on one point: they believe that the cost of the 1042 regulatory and compensation schemes should be borne by public funds. They believe so because they consider that properly managed pension provision is in the public sinterest—as it clearly is. Of course, one of the ways of increasing a feeling of confidence and security in pension schemes is by ensuring that they are clearly administered in favour of employees. The unions will say that pensions are deferred pay, and that view is held by many employees. They believe pension funds to be their money held in trust for them. Therefore, the appointment of trustees is important and was dealt with by Goode. His report recommended that one-third of the trustees in final salary schemes should come from the employees. The unions believe, and I agree, that a majority of the trustees should come from the workforce and should include pensioner trustees.
However, they are only too well aware that a Maxwell-type employer would be capable of intimidating employee trustees, in particular when employment has generally become less secure. Unions believe, and I agree, that trustees elected by the workforce must have some protection against victimisation. They point to the type of protection now available to health and safety representatives as a model of what should be done here.
There is also a general agreement that trustees must be suitably trained. I support that view most strongly. Suitable facilities and time off with pay should be provided. I am in favour of making training arrangements compulsory. Incidentally, I am a little concerned about the responsibilities placed on trustees and the fines and penalties envisaged. People may be put off from acting as trustees because of what they perceive to be the risks involved. I hope that we shall look in a little more detail at those provisions in Committee.
I wish to turn to minimum solvency standards and the GMP. I have grave doubts about what is proposed. The guaranteed minimum pension is an individual guarantee to the individual employee. Moreover, it is fully index-linked. The minimum solvency standard, about which questions have already been raised, is intended as a guarantee to a scheme as a whole and not to individual members of that scheme. Moreover, the MSR test is not really a solvency test. Anxieties have been voiced by the actuarial profession and were voiced again tonight by the noble Earl, Lord Buckinghamshire. He feared that members will be asked to sign certificates ostensibly guaranteeing solvency, whereas they will be doing nothing of the kind. Members of schemes will thus believe that there is a guarantee of complete solvency, whereas that may not be the case. It has been proposed—and was proposed again today—that "minimum funding requirement" would be better terminology.
We regret that the Government appear to have watered down the recommendations of the Goode Committee in this respect, producing provisions which could perhaps be worse than nothing. The GMP would have been lost to individuals and the MSR would give a false sense of security. That is an issue to which we must return in Committee.
I wish to spend a little time on Clause 66 because it has been brought to my attention that it could entail a worsening of existing conditions. Clause 66 of the Bill 1043 could worsen the position of many existing pensioners if their occupational pension scheme winds up. The reason is that their future pension increases, which usually rank near the top of the priority queue would, under the clause, have to rank at the bottom, together with increases for active and deferred members. I understand that hundreds of pension schemes are wound up and a number are not fully solvent. Therefore, many thousands of people will receive significantly lower benefits. Perhaps that is another issue that we can explore further in Committee.
In view of developments during the past year or so, another aspect that surprises me is the fact that the Government still appear to be giving extra encouragement to personal pensions. There seems general agreement that people in good occupational pension schemes are not best served by opting for a private personal pension. The whole issue is giving the self-regulatory mechanisms in the financial services industry a great deal of trouble. Yet of course it was the Government's fault; they encouraged people to leave occupational schemes and to take up personal pensions. I well remember the advertising campaigns at the time when people were being encouraged to liberate themselves from occupational schemes. It is therefore surprising that the Government are utilising this Bill to give further encouragement to personal pensions. Many people, in particular those approaching retirement, would be better off remaining in SERPS. Yet here we have age-related rebates specifically designed to get more people into the personal pensions market.
We then come to the aspects of the Bill which are of particular concern to women. They have been covered extensively in the debate and I shall not go over the whole issue again. My noble friend Lady Lockwood, in particular, paid a great deal of attention to the excellent research documents produced by the Equal Opportunities Commission. But the EOC has made the point that for many women extending the period which they must work from 60 to 65 before qualifying for a state pension will mean an absolute loss of pension benefits. After the age of 60, few women are able to acquire or maintain well-paid employment. If they do not, they positively lose. That is particularly true of women who have been acting as carers for disabled members of their family. I should have preferred a decade of choice from 60 to 70 when individuals would be able either to opt to continue to work or to retire, depending on a number of personal factors.
In relation to divorce, it is true that Goode did not make any specific recommendations but one in three marriages now ends in divorce and it is clearly a major problem. Increasingly, large numbers of women are finding themselves in late middle age with no prospects other than continuous reliance on state benefits
. As long ago as 1976 the Occupational Pensions Board recommended that courts be given the right to make decisions about the division of assets represented by a pension scheme. But the Government are apparently maintaining that more research is needed. But it has all been done over and over again, as the noble Baroness, Lady Young, indicated in her speech. The Pensions 1044 Management Institute is the latest organisation to undertake research on the issue. It has made a series of recommendations. I have received a number of letters from women who feel that they have been very badly done by as a result of divorce and clearly there is a case for remedying an injustice. Again, that is something to which we shall surely return in Committee.
Finally, there is another group of disadvantaged people on whose behalf I have received letters. I am referring to spouses of individuals taken into residential care. I understand—and several noble Lords have already mentioned this—that if a husband is taken into care, the whole of his occupational pension is taken and set against the cost of providing that care. That leaves his wife with nothing. One woman who wrote to me in that situation says that she would have been better off had she been widowed since, under her husband's occupational pension scheme, she would have been entitled to a widow's pension. That surely cannot be right and we shall seek to return to that in Committee.
However, there is much in the Bill with which we are in agreement. As it makes its way through this House, I hope that we shall be able to persuade your Lordships and perhaps even the Government that further improvements are necessary and fully justified.
§ 8.2 p.m.
§ Lord Mackay of Ardbrecknish
My Lords, we have certainly had an interesting debate this afternoon. We have had a bit of a preliminary canter around the field and I am sure that we have some very interesting days ahead in Committee, on Report and perhaps even at Third Reading. I am sure that your Lordships will understand that unless all noble Lords wish to stay here until midnight—and I am sure that that is not the intention of the new regime which is supposed to look at the hours that we sit and such matters—I shall not be able to cover all points that have been raised in the course of the debate. However, I suspect that we shall return in Committee to many of the points raised and we shall then be able to deal with them in detail.
That does not prevent me from mentioning the quite splendid maiden speech made by the noble Lord, Lord Freyberg. I congratulate him greatly. I have not been in your Lordships' House that long that I cannot remember making my maiden speech from the Back-Benches on this side of the House. Although I had had some experience of the other place, when I made my maiden speech here I was quite glad that I had a Bench in front of me so that noble Lords could not see that there was a certain degree of shaking at my knees.
The noble Lord took as his subject how we treat war widows. He covered both the MoD occupational pension schemes and the widows pensions dealt with under the War Pensions Organisation, for which I am directly responsible. Therefore, I can see that at some stage in the future the noble Lord and I will rejoin the debate on that issue. Having listened to him, I shall certainly make sure that I am well briefed for that encounter.
I believe that it is said that imitation is the sincerest form of flattery. The noble Lord should certainly be flattered because a number of your Lordships imitated 1045 the noble Lord, Lord Freyberg, and raised the question of widows pensions. My noble friend Lady Strange raised that matter and I see that she is wearing the insignia of her office as president of the War Widows Association.
My noble friend Lord Boyd-Carpenter made a very valid point when he said that war widows' pensions and similar pensions should be more substantial than the generality of benefits. Indeed, that is what the scheme provides. A war widow's pension stands at £140 per week, which is more than double the rate for national insurance widows' pensions, and in addition it is tax free.
My noble friend Lord Ashbourne mentioned a problem about which I know because the war widows themselves have talked to me about it; namely, the situation where a war widow marries and the pension ceases. That position is not unique to this scheme. In fact, it encompasses all schemes in the public sector and, indeed, some occupational schemes because the intention of those schemes is to look after widows while they are widows. But I am sure that we shall return to that issue when noble Lords use their ingenuity and table amendments in that regard.
The other issue which is not in the Bill, but which was well trailed, was the subject of overseas frozen pensions. I have no doubt that we shall return to that also in some detail. However, as is so often the case, my noble friend Lord Skidelsky was absolutely right to point out that the state retirement pension scheme is a pay-as-you-go scheme. It is not in any way like occupational schemes where people pay in and they therefore have rights afterwards which follow them wherever they are in the world. United Kingdom pensions have been payable anywhere in the world since 1955 at the normal rate of payment when the person leaves the United Kingdom to retire to live abroad. Uprated pensions are paid only in those countries with which we have a reciprocal social security agreement providing for that annual pension increase and in those countries of the European Economic Area. As I say, we shall return to that matter. I see that my noble friend Lord Braine of Wheatley has lost none of his ability, which I well remember from the other place, to beat Ministers over the head with the issues about which he feels strongly. However, I must tell my noble friend, and other noble Lords, that the cost would be £230 million. That is a quarter of a billion pounds. The demands on taxpayers' money are many and varied. There are many good causes, some of which have been rehearsed this afternoon. I have yet to be convinced that it would be a priority to spend a quarter of a billion pounds helping those people who had decided to retire abroad, knowing exactly what the rules were, over and above some of the other demands for increased government expenditure which come before your Lordships' House.
§ Lord Pearson of Rannoch
My Lords, I am grateful to my noble friend. In considering the other burdens on the British Exchequer, would my noble friend put the 1046 recent contribution to the European Community in the same sort of category as these eminently deserving war widows? Where would he stand on that comparison?
§ Lord Mackay of Ardbrecknish
I thought that only the noble Lord, Lord Bruce of Donington, had an original mind on those matters but it seems to have been left, for the moment, in the capable hands of my noble friend. Governments have to look at all their obligations. As a member of the European Union we have an obligation to make payments. I am sure that my noble friend knows that those payments are considerably lower than those that we should have had to make were it not for the endeavours of my noble friend Lady Thatcher, and also those of my right honourable friend the Prime Minister at the Edinburgh summit.
I return to some of the subjects raised in the debate. The question of pensions on divorce is an extremely difficult issue. In England and Wales, the courts are to have regard to the value to each of the parties of any benefit, which includes pension benefit, which the parties to the divorce will lose the opportunity to acquire. In Scotland, pension rights are specifically provided for as part of matrimonial property to be divided between the parties to the divorce. But it is still not possible actually to divide the pension rights as such. I believe that that is probably what many noble Lords were asking me to do.
The Pension Law Review Committee looked at the issue and underlined the fact that it was difficult. I know that some noble Lords will say that it is always the refuge of a Minister who is not very keen to do something to say that it is very difficult. However, it is very difficult. We have set up a project conducted by the Social and Community Research Planning Organisation, an independent research institute. It will interview a sample of 2,750 women with a booster sample of 500 recent divorcees. It will interview the husbands of married women in a sample of 400 and about 900 solicitors to obtain information on a representative sample of recent divorce cases.
From that research, we shall be able to draw conclusions about the size of the problem and, indeed, how it is resolved at present. There are ways of resolving it; for example, by moving capital about in lieu of the pension loss to the wife, and it is usually the wife. I can assure noble Lords—I shall, perhaps, go into the matter in more detail in Committee—that we take the issue very seriously. Indeed, I do not have to be persuaded as I know someone who is caught in one of the various scenarios painted by noble Lords.
I turn now to that portion of the Bill which equalises the state pension retirement age to 65 for men and women in the year 2020 and which starts in the year 2010. There was some discussion—indeed the noble Baroness, Lady Hollis, started it—as to why we needed to do so. I must point out to the noble Baroness that most countries are facing a reduction in what is called the "support ratio" (the ratio of the number of people retired to the number of people in the workforce) because people are living longer and also because birth rates are falling. 1047 We already have a higher proportion of elderly people than most other countries. Currently, we have the second worst support ratio in the European Union. There are differences in the size and the timing of the increases and the proportion of elderly people in different countries. Before the noble Baroness rushes to find the piece of paper on which she based her observation, as she pointed out by the middle of the next century the UK will be relatively better placed. However, it seems fairly certain that, by then, all the OECD countries will be in a similar position and will all be making changes. Certainly, Japan, Germany and the United States have already taken action to raise their state pension ages. All those countries are wealthier in GDP per-head terms than the United Kingdom. At the risk of boring your Lordships, I must say that I believe that the figures involved are the key to the whole issue because they underpin the Government's argument.
The number of people over state pension age in 1991 totalled 10.4 million. In the year 2010 the figure will be 11.7 million; in 2020, 13.5 million; in 2030, 15.8 million; in 2040, 16.3 million; and in 2050, 15.8 million—a steady increase in the number of retired people. The population of working age does the reverse and declines. The figure in 1991 was 34.4 million. In 2010 it will be 36.2 million. After that the decline sets in. By the year 2030 we have a figure of 33.7 million and by 2050 we are down to 32 million. As a result, the important support ratio, which was 3.3 million in 1991, reduces to 3.1 million in the year 2010, to 2.7 million in 2020, to 2.1 million in 2030 and to 2 million in 2050. The steps that we are taking will mean that, instead of being 2.7 million in 2020, the last figure will be 3.2 million, and instead of being 2.1 million in 2030 the figure will be 2.6 million. Finally, instead of being 2 million in 2050 the figure will be 2.4 million.
We believe that it is very sensible to look ahead, albeit a long way ahead. I suspect that one of the few noble Lords who will be around to see if we are right will be the noble Lord, Lord Freyberg. By my calculations I do not think that that will be possible for most of us. However, we have a responsibility to people in the next century to ensure that we do not pretend that we can run a pay-as-you-go system which is affordable. I mentioned other countries and we are moving in that direction. I see that the noble Baroness wishes to intervene. I give way.
§ Baroness Hollis of Heigham
My Lords, I am much obliged. The Minister challenged the figures, which I happen to have with me. Does the Minister agree with the following figures for the numbers of pensioners aged over 65 per 100 workers—that, effectively, is the support ratio: 15 to 64—for the years 2025 to 2030? For example, France has a ratio of 36, Germany has a ratio of 43, Italy and Belgium have a ratio of over 35, Denmark has a ratio of 37, and the UK has a ratio of 31. In other words, we will have, as at 2025 to 2030, one 1048 of the best support ratios in Europe and in the OECD. I would be happy to give your Lordships the benefit of the full range of figures if they have the patience for them.
§ Lord Mackay of Ardbrecknish
My Lords, I believe I said before the noble Baroness interrupted me that I freely admitted that the UK would be relatively better placed by the middle of the next century. That is the point and it presumes that there will be no movement in those other countries. In any case, while I accept that looking at other countries is important—and, indeed, I am about to do so—one also has to look at the support ratios inside one's own country because it is to one's own future taxpayers that the pensioners of those decades will have to look for their pension.
The argument has led Australia, for example, to raise the retirement age for women to 65 and it has done so much sooner than the UK. The same position applies to Austria. The retirement age in Canada is already set at 65. Denmark has a retirement age of 67, whereas Finland is at 65, and France has a retirement age of 60 and does not seem to have any intention of moving. Germany has a retirement age of 65 as, indeed, has Greece. Iceland has a retirement age of 67, with Ireland having a retirement age of 65 and Italy with retirement ages of 61 and 56 and intending to move to 65 and 60—that is, if a government ever lasts long enough to bring it about.
Luxembourg has a retirement age of 65, New Zealand has a retirement age of 62 going to 65. In Portugal, the female retirement age is 62½ and will be increased to 65, while Spain and Sweden have retirement ages of 65 with Switzerland having retirement ages of 65 and 62. Finally, Turkey has retirement ages of 60 and 55, but I am not sure whether we want our pension provision to be compared to that of Turkey. We are moving to 65. Therefore, I do not believe that we are in very bad company in doing so.
The noble Baroness also argued that perhaps we should allow for GDP growth and that we do not actually have to do this. However, all the calculations suggest that to go to the age of 60 would be expensive. I am very uncertain as to whether or not that is Labour Party policy. I listened very carefully to what their Commission on Social Justice said:We do not think it is a priority for present or future public expenditure to reduce the age at which men can claim the basic pension".That tends to suggest, although it is perhaps somewhat convoluted, that they do not propose to go to the age of 60. However, if we go to 60, it will cost the taxpayer £7 billion. But I freely admit that if we go to 65 it will not cost the Treasury anything because the Treasury only exists as a collecting agency. It will actually save taxpayers £5 billion. Therefore, there are some considerable savings to be gained by moving to the age of 65.
I should like to go into further detail on the matter, but I cannot do so because I want to turn to other parts of the Bill. I should like to address the very good points made by the noble Baroness, Lady Lockwood, about the position of women. I would not argue at all with the statistical picture that the noble Baroness painted. 1049 However, for a number of reasons—for example, because the reduced rate option phases out, because SERPS matures, because of the effect of home responsibility protection on women's situations, and because an increasing proportion of women will be able to take up and develop occupational pension schemes, when we come all that way forward the position will be considerably better for women than it is today. I am sure that everyone is absolutely in favour of that prospect.
Some of my noble friends asked about the home responsibility payment. Perhaps I may underline the fact that it is already available to protect the basic retirement pensions of people who have caring responsibilities. Most commonly, it is the wife who stays at home to look after the children or the woman who stays at home to look after an elderly relative. That entitles them to a pension.
§ Lord Boyd-Carpenter
My Lords, before my noble friend leaves the equalisation of pension ages, will he consider answering the question that I put to him during my speech? Given that the whole operation takes 25 years, I asked if there was any understanding with the Opposition that, if they came into power, they would let it continue in that way.
§ Lord Mackay of Ardbrecknish
My Lords, I cannot honestly say to my noble friend that there is an understanding, but, as I mentioned, I referred to the Commission for Social Justice. It will be interesting to find out in Committee where the Opposition stand.
I turn to the first part of the Bill, which concerns personal pensions and occupational pensions and, if you like, deals with the post-Maxwell situation. The noble Baroness, Lady Dean of Thornton-le-Fylde, perhaps more than anyone else, covered the traumatic events that had occurred to many people as a result of the activities of the late Robert Maxwell. I never met him, though I was given one opportunity by his sycophants to meet the great man. That was the sole opportunity I had to receive the greatest flash of wisdom I had ever received in my life! However, I decided it would stand me in far better stead if I declined the invitation to press the flesh, keeping one hand firmly over my money, I suspect. I have two friends whose views of Mr. Maxwell resulted in their receiving writs for some half a million pounds to try to stop them disclosing those views. What they said could not even have been described as disclosing 1 per cent. of what they could have said in truth.
However, we cannot of course consider one part of this Bill and say, "That would have helped in the Maxwell situation". One must look at the whole Bill and at all the various steps in the Bill: the trustees, the role of the actuaries and the auditors, OPRA, the compensation fund and the minimum solvency requirement. We must consider all those matters together. But, undoubtedly, if the employer is solvent he will be required to keep the scheme fully funded. My understanding is that that is what is happening in the MGN scheme, which is being refinanced by the employer. Where a scheme winds up in deficit, the debt is still on the employer, but only if he is insolvent does 1050 the need for compensation arise. However, that compensation must be based on fraud, theft or misappropriation only. I shall leave it at that.
A number of speakers referred to the figure of one-third of trustees on the board and suggested that they might prefer a figure of 50 per cent. I think we have the right balance but clearly we shall have to have a debate on that. One of my noble friends behind me underlined my next point. I too wish to emphasise it. There is a duty on all the trustees to look after the funds. They are not just there to look after their own interests, so to speak, or the interests of the group from whom they are drawn. They are there to look after all the funds.
My noble friend Lord Buckinghamshire made a number of interesting points. We shall look forward to hearing his comments in Committee. He referred to trustees. He was concerned that they should not have unfettered power to set a schedule of contributions in default of agreement. I must tell my noble friend that that is not the intention. We do not wish to put employers in a position where they can be forced to fund their schemes above the statutory minimum solvency level, although of course we hope and believe that many sponsoring employers will wish to do that. There was concern about the "whistle blowing", if I may use that expression as a form of shorthand. My noble friend Lord Dean of Harptree and others asked whether it was only the actuaries and auditors who could blow the whistle. The answer to that is "no"; anyone involved in a pension fund can blow the whistle. The difference is that actuaries and auditors have a duty imposed on them to blow the whistle. That, of course, is an important duty placed on those people who I imagine are closest to the scene of the action in most pension funds.
As regards minimum solvency requirement, I have no doubt that we will have an interesting debate on that. I noted without surprise that there was some suggestion that we might not have the name quite right. However, our concern has been to devise a consistent basis for valuing scheme liabilities as a measure of the adequacy of pension funds to meet their liabilities, and as a basis for assessing matters such as minimum contributions. In considering what should be the appropriate valuation basis, we have borne in mind the need to define an appropriate level of security for members' pensions, and for an entitlement, without actually imposing unnecessarily high costs on employers, which might have led to a significant reduction in the level of occupational pension provision. We must always remember that, if we want to encourage occupational pensions and to encourage employers to have them, we must not make the rules governing them so difficult that employers are frightened to become involved in them.
Following the detailed analysis we made of that subject, and the consultations which we had, my right honourable friend Peter Lilley announced details of our conclusions on 8th December. I am pleased to say that they have not been criticised by the pensions board of the Institute of Actuaries or indeed by the Faculty of Actuaries. Some noble Lords asked me about the valuation method for the minimum solvency. I accept that the method of valuing liabilities and assets is of central importance. However, given that this is a new 1051 area of statutory involvement, it is important that we have flexibility to respond rapidly to any practical difficulties or changing economic circumstances. We therefore propose that details of the actuarial valuation methods should be set out in a mixture of secondary legislation and professional guidance. We shall of course consult on how that should be brought about.
I was asked questions about the powers and duties of OPRA. Some noble Lords felt that they were not defined in the Bill. I must say that they are there. Each obligation placed on a scheme carries a power for OPRA to enforce it and the Bill sets out in full OPRA's structures, powers and the sanctions available to it. Allied to that, there were concerns that OPRA would not be independent or effective. I must tell the House that OPRA will be a statutory regulator appointed by the Secretary of State and accountable to Parliament. That is not self-regulation. The levy will be set by the Secretary of State and not by the schemes or the employers. We are committed to ensuring that OPRA is properly resourced in order to be fully effective, to be able to recruit staff directly and to be able to respond to the demands placed upon it.
I would say to those noble Lords who raised the following matter that most of the functions of the Occupational Pension Board will transfer to the Department of Social Security and not to OPRA. Therefore it is not logical to say that because the Government fund the OPB they should continue to fund OPRA. It seems to me that there are many taxpayers who are not members of occupational schemes. To ask them, through their taxes, to pay for OPRA, is not right. I think it is right that the pensions system itself ought to pay for OPRA.
The noble Baroness, Lady Turner, in her closing remarks asked me whether there would be representatives of employers and employees on the board. The Bill requires two of the members to be appointed after consultation with employer and employee associations. A number of noble Lords, including the noble Lord, Lord Marsh, and the noble Baroness, Lady Dean, asked me about custodians. We accepted the PLRC recommendation that it would not be appropriate to require pension schemes to use independent custodians. The use of an independent custodian is no guarantee against wrong-doing. There is a danger that a statutory obligation to place assets with them may give the semblance of protection without the reality. I understand that Mr. Maxwell's assets were with a custodian but he was still able to get at them. I believe that to be the case. For many schemes, especially the smaller ones, that might be inappropriate, but of course we shall have a discussion about that. Your Lordships will be happy to hear that I certainly do not have a totally closed mind on that matter and I will listen to the arguments that are put forward. However, 1052 for the moment we think that it is an unnecessary restriction for us to impose on all schemes, although many of them follow that procedure.
My noble friend Lord Buckinghamshire asked me about the level of compensation for money purchase schemes. He suggested it was more generous than for salary related schemes and he asked why we tilt the playing field. We have reconsidered the level of compensation payable to money purchase schemes in the light of comments we have received since the White Paper was issued. So as to bring them more into line with salary related schemes, money purchase schemes will receive the lower of 90 per cent. of the loss or the amount required to restore a scheme's assets to 90 per cent. of cash equivalents. Our intention is to make provision for this in regulations. For salary related schemes, the level of compensation paid will be the lower of 90 per cent. of the missing assets or the amount required to restore a scheme to a funding level of 90 per cent. based on the minimum solvency requirement. If 90 per cent. of the loss were to be met in all cases this would result in well-funded schemes potentially being restored to a position of surplus through less well-funded schemes paying the levy.
I have taken up enough time, and we shall return to most of the issues. I shall conclude by moving on from the last point that I made. A number of noble Lords opposite seem to feel that the Government favour one form of pension provision over another. That is not the case. We are firmly in favour of funded pension provision. We have no intention of encouraging one form of scheme over another. We recognise that different schemes suit different people and the different circumstances in which people spend their working lives. Employers have to be free to decide what form of scheme to set up while employees must be free to decide whether or not to join that scheme. For all those people who do not have an opportunity to join an occupational pension scheme it would not be right to take away their right to have appropriate personal pension schemes. We believe that those provide a valuable option for many people. There is no intention of tilting the field.
What is required—as everybody said, it is a complicated issue—is that people take the matter seriously and take advice. Due to my involvement in the Bill, at Christmas time I summoned my three children separately before me and asked them whether they had made pension arrangements for themselves and their spouses. They were more interested in whether I had made pension arrangements for myself.
This is an important issue. I believe that what we propose in the Bill will improve the position on occupational pensions and will make sure that our state pension is affordable into the next century. I commend the Bill to the House.
On Question, Bill read a second time, and committed to a Committee of the Whole House.
House adjourned at twenty-eight minutes before nine o'clock.