HL Deb 27 May 2002 vol 635 cc1039-42
Lord Alexander of Weedon

asked Her Majesty's Government:

What is the future of "defined benefit" occupational pension schemes and the effect that Financial Reporting Standard 17 has on such schemes.

The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Hollis of Heigham)

My Lords, defined benefit occupational pension schemes will remain an important element in the retirement provision of millions of people for the foreseeable future, but there has been a long-standing trend from defined benefit to defined contribution provision. Many factors have increased the cost and risk borne by employers offering defined benefit occupational pension schemes. I regret to say that the effects of FRS 17 cannot be separated from the other factors.

Lord Alexander of Weedon

I am grateful to the Minister for that Answer. Is she aware that John Monks of the Trades Union Congress and Frank Field, Member of Parliament, have both expressed their real concern about the accelerated decline of final salary pension schemes? Is she further aware that both the National Association of Pension Funds Ltd and the Confederation of British Industry have said that FRS 17 is accelerating that trend? Does she not intend to implement what she said on 15th May: that we should move towards the equalisation of accounting standards over three years on the European standard? Given that those warnings were in place, why was FRS 17 introduced? Why did we not move to the European standard immediately?

Baroness Hollis of Heigham

My Lords, I hope that I can remember all of those questions. If, in the move from defined benefit to defined contribution schemes, the rate of contribution remains the same—which, of course, it usually does not—over time and over the same number of years the return should be equally appropriate. The problem with the move from defined benefit to defined contribution schemes, as the NAPF statistics show, is that finance directors and companies are using it as an excuse to cut the employer's contribution—effectively halving it from about 12 per cent to 5 per cent. That is what is making defined contribution schemes such a comparatively bad buy.

I agree with the noble Lord on FRS 17 standards. My right honourable friend the Secretary of State has made clear that he thinks it unreasonable that we should be operating a standard different from that of Europe, or indeed from that of the United States. We are concerned that given that the accountancy staff who were responsible for FRS 17 are now running the international accountancy body, it is likely that any move will be towards making the British standard European and American-wide, rather than the other way around. I do not understand why we do not propose to publish both sets of statistics, so that we can see both the current capacity to meet long-term liabilities and the smoothing effect on those liabilities of FRS 17. That may be a way both to give a better picture of a pension company's liabilities and responsibilities and to ensure that we have proper transparency.

Baroness Turner of Camden

My Lords, is it not time for a complete review of pensions policy? Future generations of pensioners may not have the occupational pensions that they once anticipated and the anticipated take-up of stakeholder pensions has not occurred. Should we not reconsider the situation? There may be far greater reliance on state benefits in future than has been anticipated.

Baroness Hollis of Heigham

My Lords, I think that most of your Lordships would agree that the present problems in the pension industry are compounded by three different factors, one of which is longevity. My noble friend is right. We must ensure that people are aware that they cannot work for 30 or 40 years and then enjoy a comfortable pension retirement for a further 40 years without increasing their savings ratio. The medium-term problem is clearly what has happened on the stock market, which has wiped one-third or so off the value of pension funds. I suspect that if the FTSE were now trading in the 6,500 plus range, we should not have the problems that we currently face. The shorter-term problem is, as the noble Lord identified in his Question, FRS 17. But at the end of the day, it is companies that close and change schemes, not accountancy standards.

Earl Russell

My Lords, can the Minister confirm that FRS 17 is the responsibility of the British Accounting Standards Board? Who appoints the members of that board? To whom are they accountable? Have the Government made any representations on the matter? We on these Benches understand the case for an Accounting Standards Board that is independent of government, but it should be answerable to someone and it should be possible to find out to whom.

Baroness Hollis of Heigham

My Lords, the accountancy standards body is independent and, as far as I know, is accountable to its membership. The noble Lord is right: my right honourable friend the Secretary of State has made strong representations on the matter to the board. I cite his words from Hansard: I have told the Accounting Standards Board that I think that FRS 17 is exacerbating an already difficult situation. I find it difficult to understand why we have an accounting standard that is not shared by other countries"— such as— the United States … and I have suggested to the board that it might be better for everyone concerned if we had a standard that allowed companies to look at their pension funds over a period of years rather than taking a snapshot decision that could be grossly misleading".—[Official Report, 20/5/02; col. 5.] I am sure that his views are echoed by your Lordships.

Baroness Noakes

My Lords, can the Minister name a government policy that would make it likely that companies will retain defined benefit schemes in the face of all the pressure to close them down?

Baroness Hollis of Heigham

My Lords, it is for companies to determine what pension scheme they offer, if, indeed, they offer a scheme. However, the point is that defined benefit schemes, as the noble Baroness knows, reward those who have high salary progression and long job tenure; they redistribute upwards. Middle-class, better educated and—often—white men do well out of such schemes. Defined contribution schemes benefit other people more effectively.

Baroness Greengross

My Lords, can the Minister say whether the Government are reconsidering the idea of compulsory saving for pensions?

Baroness Hollis of Heigham

My Lords, I do not know where that story came from at the weekend. There has been extensive consultation on whether pension saving should be compulsory. The noble Baroness will know as well as anybody in the House that pension saving is already compulsory for anybody in a PAYE scheme. The problem, with which we would all identify, is to find an appropriate response for those who are self-employed. They are least likely to have pension provision, and they regard their business as their pension. I am not sure that there is an easy answer to that problem. However, the Government keep the situation under review and continue to consult.

Lord Davies of Coity

My Lords, my noble friend the Minister said that two of the major problems were the state of the Stock Exchange and the fact that people live longer. We must, of course, deal with those circumstances. We also know that many employers are dispensing with final salary schemes. Does my noble friend agree that, given all those factors, we should rethink our state pension scheme, if we are to ensure that future pensioners will not live in poverty?

Baroness Hollis of Heigham

My Lords, our state pension scheme—the retirement pension scheme and the additional pension schemes introduced by the Government—are designed to help those who currently have no pension. My noble friend will know that the state second pension rewards those who are disabled, have broken work records or are carers. As a result, a carer who has worked for 40 years will get an extra £40 or so on top of their state pension.

My noble friend also knows that the stakeholder pension—contrary to what was said by my noble friend Lady Turner of Camden—is proving successful. Some 815,000 individual stakeholder pensions have been sold, and 750,000 more people are saving as compared to the number for this time last year. My noble friend will also know that, at the moment, someone with a modest occupational pension of £100 per month is no better off than if they were on state benefits. The pension credit ensures that they will be £60 a month better off. The Government are tackling a range of issues associated with pension poverty, particularly poverty among women in old age.

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