Occupational Pensions

HL Deb 11 June 2003 vol 649 cc199-216

3.15 p.m.

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

My Lords, with the leave of the House, I shall now repeat a Statement made in another place by my right honourable friend the Secretary of State for Work and Pensions. The Statement is as follows:

"With permission, Mr Speaker, I wish to make a Statement on action that the Government propose to take on occupational pensions following the Green Paper.

"Our proposals build on the historic strength of the United Kingdom's voluntary system—the partnership between government, individuals and employers—which has seen pensioner incomes rise faster than average earnings during the past 20 years, but which now faces real challenges as people are living longer at a time when birth rates are falling. Although the UK is well placed, compared to other countries, to deal with that, more still needs to be done. People need to be able to plan for their retirement and make informed choices about how and when to save and for how long they work, so that they get the income in retirement that they expect.

"We will make further announcements in due course on: the suite of Sandler products; a better deal for those who take their state pension later; and the proposals outlined in the tax simplification review. But today I want to focus on occupational pensions. They are under pressure now and we need to take early action.

"So I am setting out a balanced package of reform that better focuses regulation on the things about which people are most worried, so that we can cut burdens on business and increase member confidence in pensions. We will strengthen the protection of pension rights that people have built up, to ensure that rights promised will be rights delivered. Getting that balance right means taking a tough look at areas where regulation has grown out of all proportion. It also means taking action to deal with the demands of an increasingly dynamic economy, in which companies are taken over and people move between jobs more frequently.

"In February we tackled the challenge of two-tier workforces, to extend protection of pension rights to new starts working in many previously public enterprises. But it must be wrong that solely because of a takeover, workers in any private company have their rights scrapped. That is why I can announce that we are extending that same TUPE protection of pensions to private sector transfers.

"We will insist that where pension rights have been established the new employer will need to match employee contributions, up to 6 per cent, into a stakeholder pension or offer an equivalent alternative. That is a fair adjustment. It builds confidence in pensions and reflects company best practice.

"I am clear that in a voluntary system such protection of rights must be balanced with measures that make it easier for companies to set up and run good schemes for their employees. As I have stressed before: 'Pensions simplification has to be at the heart of any strategy to encourage greater pension provision'.

In a voluntary system we must be mindful of the costs for providers. Over the years, regulation has built up, often for the best of intentions, into a layer cake of complexity. That cannot be right. If we are to make the voluntary system work more effectively, we need to ensure that regulation is well targeted and effective. That is why today I can confirm that we will be driving ahead with measures to cut regulations and costs on companies running schemes.

"We will replace the minimum funding requirement with scheme-specific funding arrangements. We will simplify and consolidate legislation in key areas to make it easier to administer pension schemes. Taking account of consultation responses, we will go further than we signalled in the Green Paper. We will radically reform Section 67 of the Pensions Act 1995 to give schemes more freedom to adapt to changing circumstances without closing or even having to wind up.

"I am also advancing a raft of specific simplification measures, such as streamlining the requirements on member-nominated trustees and improving dispute procedures, ending the requirement to offer AVCs, and less bureaucratic reporting arrangements.

"I have received submissions—from the Pickering review and from others—that we should abolish compulsory inflation indexation because the requirements are too onerous and expensive. While they make some important points about knock-on effects of costs putting schemes at risk, I do not believe that we should do away with indexation.

"However, guaranteed indexation of five per cent was proposed in 1995 when market long-term expectations of inflation were at five per cent. Today, because of the stable macro-economic framework the Government have put in place, inflation has been driven down to average just 2.4 per cent over the year since 1997. That means we are effectively forcing purchase of full inflation cover, something which may be disproportionately expensive. I therefore propose that the cap on mandatory indexation will now be set at 2.5 per cent, giving schemes and their members more flexibility to agree together on the form of pension that suits them best—and easing funding pressures.

"There will be no effect on the value of today's pensioners' rights. It is a measure for future accruals only, to give more freedom to design schemes in the most sensible way. We will keep survivors' benefits—to make any change there would have a bad effect on women's pension prospects in particular. But with increased flexibility we need to make sure that employees' rights are protected without employers winding up their schemes as a result. So I can announce today that we will set up a new, proactive pensions regulator to focus on tackling fraud, bad governance and poor administration. It will adopt a proportionate approach—making sure that members are protected, while reducing burdens on well-run schemes.

"Pensions are a voluntary partnership and it is for workers and employers to decide what type of scheme suits them best. We have seen welcome examples in recent months of employers and trade unions deciding together how best to ensure continuing high quality provision. We set out in the Green Paper a proposal to require employers to consult scheme members before making changes. I can now confirm that, working with the Secretary of State for Trade and Industry, I will be taking this into effect to strengthen partnership in pensions.

"But examples of good practice are too often overshadowed by cases where employers have gone back on promises, causing anxiety. People also worry about the get-out clause which lets solvent companies which could afford to keep their pension scheme running wind it up with inadequate compensation. In the cases where firms have done this it has inflicted damage on confidence in the whole system. People worry that other schemes will follow suit. We need to act to make sure that a pension promise made by employers is a pension promise honoured by employers.

"We will therefore strengthen member protection where solvent employers decide to wind up their pension scheme. I have placed in the House draft regulations to apply to schemes that are winding up from today. So, as from now trustees will have the power to make solvent employers who choose to wind up their schemes buy out members' accrued rights in full. This will greatly increase security for members of solvent schemes.

"But there is one further issue we must tackle. Sometimes, when firms go bust, the money is not there to meet pension commitments. Recent cases have shown the terrible injustice when this happens and I believe that the public are right to demand action. We should not accept that just because a firm goes out of business workers can find that a pension they have saved for all their working life is worth next to nothing. Our Green Paper set out options for sharing out assets more fairly. Today I can announce that we will change the priority order to give greater weight to those who have been in the scheme longest. We will lay draft regulations shortly. I hope that the honourable Members for Havant and Northavon will welcome the cross-party agreement on this point.

"But we need to go further. Ever since I started looking at this I have asked, if people expect their holiday or motor insurance to be covered if a firm goes bust, then why not cover for something as important as a pension? We are therefore going to legislate to set up a pensions protection fund. This fund will take over the schemes of insolvent companies to ensure not only that pensions in payment are protected but that those still working can be sure of getting 90 per cent of what they were promised. It will be paid for by a fixed-rate levy and an additional risk-related premium which, together with a salary cap, will minimise perverse incentives and moral hazard. The pension protection fund will be a non-government body. It will meet its obligations through the power to set and vary the level of charge without recourse to public funds. Taken with the other measures this is a big extension of pension security, for the first time guaranteeing protection if a company scheme goes bust.

"To conclude, I have always said that my aim is to build a wide and deep consensus in this country that embraces employers, employees and pensioners. This is a balanced package to reduce the costs and complexity of regulation, making it easier for employers to run schemes while in return making sure pensions promised are pensions delivered. Many of the proposals will require legislation which the Government will bring forward as soon as parliamentary time allows. These measures will protect the rights of millions of pensioners and employees across the country".

My Lords, that concludes the Statement. I commend it to the House

3.26 p.m.

Lord Higgins

My Lords, the House will be grateful to the noble Baroness for repeating the Statement made in another place.

The Statement is clearly important. The reality is that there is a crisis in pensions provision, both in the state and in the private sector. The Government have remained remarkably complacent on the issue. They have published their Green Paper, but not provided time, either in this House or another place, for it to be debated. The reality is this: having moved the pensions Minister into a Labour Party job, he has still not been replaced after two months. That reflects the general attitude of the Government to the importance of the issues. None the less the Statement is welcome in a number of respects, even though its central provision is, in a sense, a council of despair because it is insuring for failure.

The crisis is due to some extent to measures beyond the Government's control. However, the crisis is significantly due to measures that the Government have themselves taken—most notoriously the raid on the ACT pensions fund—which have generated a general crisis of confidence in pensions and savings. The savings ratio has halved since this Government came to office.

However, I begin by welcoming the proposal to change from the minimum funding requirement to a scheme-specific situation. I welcome the scheme for making it easier for companies to adapt to changed circumstances without closing or winding up a scheme—something which noble Lords on these Benches have been advocating. I add a particular welcome to the proposals not to force company schemes to introduce AVC arrangements. I have spent many hours trying to sort out problems relating to Equitable Life—many AVCs were in Equitable Life—and was unbelievably frustrated by the fact that trustees cannot give advice to those who were affected without incurring criminal charges.

We shall examine with care the proposal for a new pro-active pensions regulator. Regarding the proposals on winding up, I shall deal, first, with those on solvent companies where the Government are proposing that trustees will have powers to buy out accrued pension rights in full. Clearly, there has been abuse in this area. We shall need to examine the proposals in detail when the legislation is brought forward, but my initial feeling is that that is also welcome. Looking overall at the Statement's proposals, can the noble Baroness tell us whether she thinks that they will accelerate or slow down the closure of final salary schemes to new members?

Regarding the winding up of companies that have gone bust and the question of sharing the assets more fairly, I believe it is right that the question should be over how long a person has been in a scheme, rather than his age. When calculating how long a person has been in a scheme, will allowance be made for the fact that he may have been in another scheme which has been merged with his own? Will the whole of that period be taken into account? Moreover, if there has been a merger, will account be taken of the fact that the amount of surplus or deficit in the two merged funds may not be the same? How will that be dealt with fairly?

The central part of the Government's proposals has two sections. On the one hand, we have the proposal for an insurance scheme for occupational pensions, and, on the other, the proposal on inflation. The Government are seeking to ameliorate the crisis that has arisen, to a significant extent, as a result of their own policies.

It is proposed that there should he an insurance scheme, but one that will incur costs to pensioners. A number of important issues arise in that respect. First, there is the risk of moral hazard—the question of whether an insurance scheme exists. Trustees and companies will be rather more inclined to take risks than would otherwise be the case. Secondly, there is the question of whether costs will tend to fall on prudent and well-managed schemes to cover the failures of less well-managed schemes.

The proposal is strange in one respect. There is to be a levy at a fixed rate with a risk premium and a salary cap. I do not understand what is meant by those expressions. At all events, in plain, simple terms. it is the equivalent of a tax. But it will then go into a fund. The problem is that we cannot be assured—certainly, the American experience does not reassure us—that the scheme will remain solvent. The Government use the word "guarantee" although it is linked with insurance, but there can only be a guarantee if the Government stand behind the scheme at the end of the day. To the extent that the contributions are effectively a tax, I am not entirely clear why the scheme has been designed in such a way that it is effectively an independent, free-standing organisation without government backing. There are real problems with that side of the proposals. As I said, the Government are insuring for the fact that companies may fail against a background in which the situation has deteriorated so much in recent years that such a scheme is now felt to be necessary.

There is another side to the coin. In order to reduce the costs to companies providing this insurance, and bearing in mind the difficulties that I have already outlined, it is proposed to reduce the present inflation protection afforded to many people in company schemes. At present, it is either the rate of inflation or a maximum of 5 per cent, whichever is the lower. The Government propose to get rid of the 5 per cent limit on the extraordinary argument that we can be reassured that, as inflation is now down to 2.5 per cent, we need not worry about it going up to 5 per cent. That protection is being removed. If the Government were to guarantee that inflation will never go over 2.5 per cent, there would be no loss to individuals. I do not know, although perhaps the noble Baroness can enlighten us, whether the Government propose to say that inflation will not go over 2.5 per cent.

In order to balance the insurance scheme, the Government are reducing the benefits that many pensioners enjoy at present. That is unsatisfactory. Incidentally, the Statement is wrong when it says that at present companies are effectively forced to purchase a full inflation cover; that is not so. They are forced to cover it up to 5 per cent in making their calculations as to what the contribution should be.

In making his Statement in another place the Secretary of State said that he hoped we could move towards consensus. I have indicated that there are a number of areas that we can welcome, but there are others that will require extremely careful consideration. The noble Baroness and I, after three or four different pensions Bills of one sort or another, have always sought to improve them and reach consensus. If legislation is introduced in the autumn and appears first in the other place, I do not doubt that the Government will, again, have a heavy programme. They will not scrutinise it properly in the same way as happened with the previous pensions Bill, and we shall be left to clear up the mess.

None the less, these are important proposals. At least, finally, the Government have recognised that there is a crisis in pension provision. These measures deal only with the private rather than the public sector. Much more needs to be done about state pensions, as virtually every interest group in the country has said. This is an important issue. We look forward to debating it further with the Government.

3.25 p.m.

Lord Oakeshott of Seagrove Bay

My Lords, I start with a welcome for five of the announcements we have just heard—extending TUPE protection to private sector transfers; replacing the MFR with scheme-specific arrangements; setting up a new, more active pensions regulator; restricting solvent employer windups; and, most important, changing the priority order to protect long-serving employees when a pension fund winds up. All those changes make good sense and show the value of cross-party agreement.

I focus today on the proposed new pensions protection fund and declare my interest as a pension fund investment manager since 1976. I regret to have to say that this do-it-yourself scheme is a cruel deception. As usual in the big questions in pensions policy, the Government are sticking thin plaster over a gaping wound. Pensioners in defaulting schemes will get not a penny from the Government, nor are the Government prepared to act as a guarantor of last resort as they do in the Pool Re scheme, which covers buildings against terrorist attack.

In the worst pensions funding crisis in British history, this scheme just reshuffles pension funds' existing resources and forces solvent funds of employers who have faced up to their responsibilities to bail out the laggards that companies have been unwilling or unable to support. It will drive another nail into the coffin of defined benefit schemes. It is one thing to ask responsible employers to make sacrifices and run risks to protect their own schemes; it is quite another to force them, if they maintain a scheme, to sign a blank cheque to fill black holes in their competitors' funds. In America, the model for the Government's plan—the Federal Pension Benefit Guaranty Corporation—has enjoyed more than quarter of a century of mainly strong stock markets, but it is still more than 5 million US dollars in deficit. That is a stark warning that I do not have time to go into now. But take it from me—it is a warning of the dangers we now face. The corporation concludes that there is only a 30 per cent chance of its being in surplus in 10 years' time, and states that its, current challenges may require a policy response to rescue the financial strength of the pension insurance system".

Our Government have chosen to follow that crumbling American model, with one crucial difference. In America everyone knows that the government stand behind the FPBGC. It has the right to borrow from the Treasury. The chairman is the Secretary of Labor and the other two directors are the Secretaries of Commerce and the Treasury. The President of the United States appoints its advisory committee of nine members.

If the Government really mean business, why are Andrew Smith, Patricia Hewitt and Gordon Brown not prepared to be directors of a similar British fund? The pensions Minister could hardly be chairman. There would have been no board meeting for the past two months. New biographical details would have been sent out more often than annual reports.

The problem with the scheme is who decides which funds have to pay the risk-based extra premiums and how much. What will it cost? Who will insure the insurers? How will its funds be managed? The comparison that the Government make with holidays and car insurance is nonsensical. If a travel firm or a motor insurer goes bust, it is easy to assess the loss. One can buy one's holiday or insurance policy somewhere else next year. Pensions are an enormous, long-term commitment. Any insurance scheme must involve considerable systemic risks and a completely different scale of problem in fixing premiums.

From these Benches we respect the Government's good intentions, but they are no substitute for the big decisions and backing from the Treasury that are needed to make pension schemes safe.

I have a final question for the noble Baroness on another topic. Six months after the pensions Green Paper was published, the Government can say only, We will come forward with a further announcement in due course", on the tax simplification proposals. When will they admit what everyone in British business and the pensions industry knows, and what must have been the overwhelming message of the responses to the Green Paper—that their proposed £1.4 million snapshot valuation of people's pension fund rights when they retire, with a 65 per cent tax rate above that cap, will hit hundreds of thousands of managers and professionals, not the 5,000 people claimed by the Treasury?

Will the Government also confirm, after their evasive answer to my written Question last week, that the £1.4 million ceiling for tax relief will apply equally to everyone in the public as well as the private sectors? The rules must be the same for all, no matter how mighty their office.

3.40 p.m.

Baroness Hollis of Heigham

My Lords, I am sure that it was disguised, but I suspect that the noble Lord, Lord Oakeshott, welcomes this Statement, along with the noble Lord, Lord Higgins. I turn first to the points made by the noble Lord, Lord Higgins. I cannot resist challenging one political point. As part of his opening peroration, he said that we were ensuring failure. No, we are ensuring confidence in saving for retirement so that people are willing to save more or work longer. Those are our objectives and, by any honest, honourable and objective test, this action plan will address those two objectives. That is what stands behind our concerns.

The noble Lord, Lord Higgins, made some specific points. He asked whether I believed that our proposals would accelerate or slow down the closure of DB schemes to new members. It is a difficult line to draw because, as he will respect, we are striking a balance because pension promise is voluntary. On the one hand, we want greater protection for members who have forgone their savings. On the other hand, given that the employer is required to stand behind the promise, we want to ensure that such burdens of regulation are not so onerous that we encourage employers to vote with their feet. That is a dilemma we all understand and share.

I hope that, especially with regard to points I shall go on to make, we have made it sufficiently attractive that nothing we are currently doing should encourage employers to close DB schemes. I hope that many more will continue to keep them open. However, if they offer defined contribution schemes to their members, that can be a satisfactory alternative if. and only if, the employer's contribution remains at roughly the same level as would have gone into DB schemes. The noble Lord, Lord Higgins, knows as well as I and other noble Lords that the problem is not so much the move from DB to DC schemes but that when it happens, employer's contributions halve from an average of 12 per cent to 6 per cent. That is why they have often proved to be a relatively poor deal for employees.

The noble Lord asked about the merger of two schemes, which he has also asked me about in a private context. My understanding is that the answer depends upon the terms of the arrangement of bringing the two schemes together operated by trustees, but I need to take further advice. If he would like to give me the details, I shall give him a more full reply and also place it in the Library. My understanding is that it depends on the terms and conditions of the trustees' arrangements when the two schemes came together.

The noble Lords, Lord Higgins and Lord Oakeshott, then developed their arguments about insurance, the pension protection scheme, and questions of risk and moral hazard. As the noble Lord, Lord Higgins, identified, the pension protection fund will have two elements, basically a per capita element on schemes funded by employers and a risk levy associated with a degree of underfunding so that those companies most at risk of defaulting make a proportionately higher contribution to the pensions protection fund. That is right. At the end of the clay, insurance is inevitably pooled risk. We should all accept that when one chooses an insurance scheme, there will be occasions on which good funds are cross-subsidising poorer funds.

None the less, the experience in the United States is positive. Despite the suggestion of the noble Lord, Lord Oakeshott, it is not the case that the American Government stand behind the scheme in the sense of making good any funding deficit. The American scheme is 90 per cent funded and has approximately 25 billion dollars' worth of assets even after a fairly difficult stock market and recent experience of companies defaulting. That shows it is reasonably healthy.

The question behind the one asked, which, in all integrity, I put back to both noble Lords, is that if they are calling for the Government to underwrite the scheme, they are basically saying that taxpayers should underwrite pension promises that are a private arrangement between employers and employees. The implication of that is twofold. First, one would probably increase the risk of moral hazard because instead of pension schemes being policed by their peers, so to speak, they would know that a bad scheme winding up and possibly going into default was able to draw upon the Government. There is no government money apart from that provided by taxpayers, which brings me to the second implication of what the noble Lords are saying.

Taxpayers who may not be in occupational pension schemes—they may be self-employed and have access to no such scheme—would be asked to cross-subsidise those who are in schemes that, even after winding up, are relatively attractive to their own situation. I am not sure that, on reflection, that is a form of redistribution that noble Lords, especially on the Liberal Democrat Benches, really want to sign up to. I hope that that reflection occurs.

The noble Lord, Lord Higgins, pressed me about the limited RPI and price indexation. He is quite right. What we are doing is reducing our estimate of the inflation that companies need to make to provide against indexation from 5 per cent to 2.5 per cent. I am sure that he will know that, since 1997, the average rate of inflation has been about 2.4 per cent., below the 2.5 per cent we are talking about, and that all the Treasury and European forecasts suggest that it may fall even lower. Having said that, the noble Lord may be less aware of this statistic: our research suggests that the RPI alignment of 5 per cent is costing providers of DB schemes 23 per cent of their costs. By reducing, the figure to 2.5 per cent, we will reduce that 23 per cent by 4 per cent. That is not such a significant change as he indicated, but it allows us to float the cost of the levy so that the overall package, as he will know from the brief statement at the end, will be broadly neutral.

I am sure that the noble Lord, Lord Higgins, would be the first to complain if, as a result of the package that we are putting before your Lordships today, the cost to business grew exponentially. As a result, we believe that most people would be willing to trade a modest reduction in indexation against a huge leap forward in security, which is what I hope our propositions today, when delivered in legislation, will guarantee.

3.48 p.m.

Lord Marsh

My Lords, noble Lords on these Benches have a particular problem. We had no advance notice of any Statement. However, that is a problem that we should pursue through the usual channels, rather than now.

We are dealing with a major and complex issue, especially as regards the Government's Statement—which, if I may say so, was delivered at a pretty fast pace. In my view, it is impossible to treat it seriously and discuss it properly in as quick a time as this. I query the extent to which the Minister appeared not to be drawing the line on the key issue; namely, that pension schemes of the type that we are discussing belong to those who contribute to them, both employers and employees. They do not belong to successive governments.

Does the Minister agree that this particular pension problem is the result of a combination of factors over a long period of time that began to emerge under the previous government, who did nothing about the problem? Does the Minister further agree that the strength of pension funds does not depend upon the fluctuations in share prices when we start to talk about what has recently happened to the market; it is overwhelmingly dependent upon income stream? The present Government destroyed that stream when they decided to raid the funds to the tune of £5 billion a year, which presumably means to date about £30 billion in total. That turned yesterday's problem into today's crisis.

The one point I make—and I shall sit down after this, because it is not possible to reply to the Statement, as it was too difficult to absorb—is that it is crucial that governments, of both sides, do not walk away with the idea that they carry no blame whatsoever for the present situation, about which they had a great deal of warning.

Baroness Hollis of Heigham

My Lords, on the last point, I am disappointed that the noble Lord, Lord Marsh, whose expertise on pensions I much respect, sees fit to revisit ACT issues. I would expect it from the noble Lord, Lord Higgins, but not from the Cross Benches. I am also intrigued that when talking about ACT and £5 billion the noble Lord never brigades this, as the critics never do, with the offset in corporation tax which occurred at the same time, such that as far as I am aware we have the most supportive corporation tax regime in the OECD, and certainly in Europe. It is never mentioned. Funny that.

The noble Lord made a point about my speed of delivery with regard to the Statement and particularly the action plan, for which I apologise. But the noble Lord will be aware that the Secretary of State delivered the Statement to the House of Commons at 12.30 p.m. today, over three hours ago, and from the time he rose to make it the action plan introduced in it was available to all Members of your Lordships' House in the Printed Paper Office. Three hours is not a bad run at it, although I accept that the matter is very complicated and will require the continuous and ongoing attention of your Lordships in the future.

Lord Barnett

My Lords, my noble friend will be aware that the Select Committee on Economic Affairs in this House is looking at the economic aspects of ageing. Her Secretary of State will give evidence in a few weeks' time. Therefore, I do not want to take up—indeed, one could not—the whole of such a major Statement as she has just made.

In answer to a question, my noble friend mentioned the serious point about giving confidence to employees to save for retirement. Does she accept that such confidence can be given in the long term only if there is all-party agreement on the kind of pensions system we are putting in place? I was sorry that both the noble Lord, Lord Marsh, who I never suspect of these things, and the noble Lord, Lord Higgins, tended to make one or two party political points, which are not appropriate on this occasion if we are to achieve that cross-party agreement.

My noble friend talked about the noble Lord, Lord Higgins, seeming to argue that the taxpayer would have to subsidise employees and employers in pension schemes. I am sure that that was not what he intended, and I see him shaking his head in agreement. But how does my noble friend think one can give a total guarantee to any pension scheme, in order to give confidence to employees, without at least a backstop of a government guarantee of some kind?

Baroness Hollis of Heigham

My Lords, at the core of this matter is the fact that pensions are a voluntary partnership between employers and employees. It is for the trustees of the companies concerned, operating in future under the broad-brush regime to be established by the new kind of regulator, with the professional advice of actuaries and so on, to introduce into their schemes arrangements for the levy on employers and employees which will make the schemes financially viable according to scheme-specific funding.

Over and beyond that, we have told employers "If, however, your company"—and we all know which company we are referring to—"is fully solvent and walks away, as from today you may not walk away without making your liabilities fully paid up". We are also saying to employees, who may be worried that the company's pension fund may become insolvent, that we have rearranged the order of wind-up priorities, and that we have also introduced, through the pension protection fund, a levy, policed by the industry and provided by the industry, which should meet its obligations. We have also done other things to encourage security, from TUPE arrangements to cash equivalent transfer values for people who have been in schemes for a very short period of time, and so on.

What we are telling employees is "Because this is a voluntary arrangement into which you have entered with your employer, we cannot protect you against depredations resulting from what may happen to the stock market". We all know that if the stock market index were at 6,000, or something like that, this dimension of the debate would lack much of its urgency.

What we can do, as the Government, is to try to get the balance right. On the one hand, we can try to ensure that employers continue to provide such schemes. Also, through the proposals that I have outlined—the new kind of regulators, the enhanced role and training for trustees, the pension protection fund. the full pay-out requirements for solvent companies and the like—we can say "We will give you best security, provided employer and employee meet their obligations". If an employer fails to do so, we have these insurance networks in place.

I was asked whether the Government would act as standby. I have already addressed that point, and we may simply have to disagree on it.

Lord Crickhowell

My Lords, the Statement was about a complex package of protections, insurance and guarantees. The sums involved in totality must be very large. What estimate have the Government made of the total cost impact of this package on industry—employers and employees? The noble Baroness the Minister surely cannot be saying that it is all covered by a relaxation of the indexation allowance.

If estimates have been made, will the Government publish them? These are very big costs which will fall on industry, and they will have an impact on industry's ability to fund pension schemes in the future.

Baroness Hollis of Heigham

My Lords, broadly, the answer is in the annex—"Summary of funding and administrative savings and costs"—to the document. We estimate that the scheme costs may go up by between £300 million and £500 million and the savings will be of the same order. It is cost-neutral, because we are not just talking about LPI, which is only a proportion of it. We are also talking about significant administrative savings in Section 67, the arrangement of AVCs and quite a lot of the other "techie" aspects of pension handling which produce such a high cost to employers. Our best estimate, in good faith, is that this will be broadly cost neutral to industry as a whole.

Baroness Turner of Camden

My Lords, I thank my noble friend the Minister for introducing the Statement. It should be warmly welcomed, because it shows that the Government are making a real attempt to deal with what a number of us regard as a crisis in pension provision.

There are a number of matters that we need to discuss in much greater detail when we have had the opportunity to look at what might be called the small print of what the Government now propose.

If I understood my noble friend correctly, she said that the intention was to offer full TUPE protection to pensions in the event of mergers and take-overs. If that is the case, it should be very much welcomed, because the unions have been asking for that for a considerable time.

As for the pension protection fund, we should like the opportunity to debate it in more detail, because a number of noble Lords, including the noble Lord, Lord Higgins, have raised some very pertinent points about it. When there was some discussion of the Green Paper among those of us who are interested in pensions, it was suggested that a scheme providing some sort of insurance or backup cover for final salary pensions in the event of insolvency was likely to get off the ground or be welcomed only if the Government stood behind it. This is a problem that we shall have to look at when we have the opportunity to discuss the matter in more detail.

My noble friend did not say much about stakeholder pension provision. Employers have only to offer access; they are not bound to make any contribution. Probably for that reason, the take-up of stakeholder pensions has been rather disappointing. Can my noble friend tell us a little more about that?

Generally speaking, this indicates that the Government are making an attempt to deal with what is a very real problem in pension provision. As my noble friend knows, I am a great supporter of final salary schemes, which were one of the great successes of the last century. Because of those schemes, many retirees today are enjoying far more comfortable retirements than they might otherwise have done. Indeed, perhaps their retirements are more comfortable than some people may have in the future. Everything possible should be done to encourage employers to maintain final salary schemes, and even to put them into operation where they do not have them. They provide a means of ensuring that people enjoy a more comfortable retirement.

However, compulsory payments into employer schemes, which were suggested in one of the papers we discussed recently, would not be welcomed by scheme members unless they were sure that the investment they were making was sufficiently secure. That is why I welcome the steps being taken by the Government in that direction, but we need to discuss them in much more detail. I hope that we shall have the opportunity to do so.

Baroness Hollis of Heigham

My Lords, I am grateful to my noble friend for her comments. Speaking as a former member of the Occupational Pensions Regulatory Authority, she has great experience in this field, in particular its regulatory aspects. I thank her especially for her comments about TUPE. Along with other noble Lords, my noble friend has called for the Government to stand behind the pension protection fund. I continue to put it to noble Lords that, aside from all the issues regarding taxpayers' responsibility, that would seem to increase the risk of moral hazard rather than to reduce it.

Her substantive point concerned stakeholders. Of course she is right to say that although a substantial and valuable number of people have taken up stakeholder schemes—some 1.25 million or thereabouts—it is obvious that for many companies the schemes have not been delivered; that is, they have become shelved schemes. Although I do not know whether the statistics I received a few months ago are still up to date, they revealed the difficulty that, in a stakeholder scheme where the employer did not make a contribution, take-up stood at only around 13 per cent. Where the employer contributed to such a scheme, the take-up was in the order of 83 per cent. The moral here is that it is not the stakeholder framework that is at issue; rather it is ensuring that employers within a voluntary partnership scheme recognise what I believe to be their moral obligation to meet the future pension needs of their employees.

I think that those were the major issues raised by my noble friend, but I am sure that we shall continue the debate on these matters.

Baroness Barker

My Lords, in the short time available this afternoon I have been able to read through the report. I cannot help but reflect that it may be a new Labour attempt to avert a general strike such as those taking place across the rest of the continent. How times have changed.

Does the noble Baroness agree that the main driver for pension reform is informed individuals within schemes? While many proposals in the paper aim towards that end—increasing the power of individuals to change—has she noted that the complexity of contracting-out regulations was cited in the Green Paper as a major barrier to individuals' understanding of the workings of their pension schemes? Can she illustrate further than the points made in the report the steps the Government envisage taking to simplify the contracting-out regulations and when we are likely to see those changes come about?

Baroness Hollis of Heigham

My Lords, I am sorry to disappoint the noble Baroness, Lady Barker. I cannot give her the information she has asked for because we have not yet worked through a timetable of the proposals or, indeed, their full content.

The noble Baroness was absolutely right to point out that pensions, in particular for women, are workplace-driven and therefore information-driven. I am sure that she will welcome many of the proposals set out in the Green Paper to ensure that employers will take a much more proactive view to ensure that people are made aware of the virtues of the schemes.

I do not want to take up the time of noble Lords, but I shall make a brief point. I was shocked when I encountered a company running a scheme which required a 2.5 per cent contribution from the employee and 12.5 per cent from the employer, and only 47 per cent of the women employees belonged to it. That is foolish by anyone's standards. So much work has to be done in this area.

I return to the particular point raised by the noble Baroness on contracting-out arrangements. We shall come back to her when our own thinking is clear on this front.

Lord Brookman

My Lords, when I woke this morning, I was feeling pretty chuffed. I read the Western Mail, in which the headline told of success for Cardiff steelworkers and for the union I worked for in representing their interests. The article went on to state that there was an argument for "natural justice" for the Allied Steel and Wire workers. That statement came from a senior departmental source.

This is a practical situation. Here we have a works that closed down some 12 months ago. It has been purchased by a Spanish steel manufacturer and will reopen later in the year. Will TUPE regulations pertain there? My noble friend stated at the Dispatch Box that this is a forward programme, which implies that any law would not be retrospective for those workers who unfortunately and tragically have lost their rights and pension rights over a number of years. What is the position for the people at Allied Steel and Wire, a company that is to be taken over, but which will have had a gap of over 12 months since it was closed?

Baroness Hollis of Heigham

My Lords, I wish that I could help my noble friend, but I am afraid that I cannot do so. TUPE does not pertain in that situation because, as my noble friend rightly anticipated, these proposals are not retrospective. Aside from all else, the pension protection fund does not yet exist. So I am very sorry, but I cannot give my noble friend the assurance that he would like.

Lord Hayhoe

My Lords, are any public service pension schemes to be affected in any way by what is being proposed? If not, does that mean that the existing inflation-proofing for public sector schemes will continue and that the 2.5 per cent limit announced will not apply? In other words, will the whole of the public service pension provision be insulated from what is being announced today? Does not that make public service employment extremely attractive for young people?

Baroness Hollis of Heigham

My Lords, that is such a broad-brush question, it is not answerable in the form put to me by the noble Lord. I say that in part because we are dealing with some pension schemes that are funded, some that are pay-as-you-go, some—as is the case for the Civil Service—that are non-contributory but are paid for through adjusted salary arrangements, some of which are contributory, some run by government, some by local authorities and some by other public service boards. Given all the variables, in almost each of those schemes different rules will apply.

Earl Russell

My Lords, rather than gilding my noble friend's lily, may I ask the Minister to take a more wide-angled view and consider the change in the ratio between people's earning lives and their pensionable lives? Fifty years ago, when the school leaving age was 14, it was possible to have a 50-year earning life and a five-year pension life; that is, 10 years' worth of earnings for each year of pension. Today, people often work between the ages of 30 to 50 years, resulting in less than one year's earnings for each year of pension. Does she agree that the solutions to that change go far beyond pensions policy alone? Will she also bear in mind, when considering the difficulties encountered by the young in entering the labour market, the cruel costs of extending higher education to 50 per cent of the age group and the cost of legislation on age discrimination?

Baroness Hollis of Heigham

My Lords, the noble Earl, Lord Russell, is absolutely right to say that pensions policies formulated when women derived their pensions from their husbands and those husbands could expect a working life of at least 40 years at 40 hours a week in a fairly stable company, or often in the public sector, are no longer valid because that period is over. That is due in part to the extended education age, but also in part to the very good reason that people are living longer.

There is a bundle of responses for the noble Lord. In a more limited sense, our action plan addresses ways in which to encourage people through our age-positive programmes and the like to continue working after the age of 65—indeed, to remain in the labour market from 55 years old onwards. We are not saying that we want to raise the age at which the state pension is paid, but we are saying that one of the biggest problems is not that people are not working beyond the age of 65, but that those aged between 55 and 65 who could and should be in the labour market because they have something to offer and they want to work are too often dropping out. We are finding throughout Europe that people are dropping out of the labour market at a younger age while living longer. It is a longevity issue that we have to address.

In our proposals we are encouraging people very positively to work not only to the age of 65, but beyond, if they wish and need to. We are making generous increments in terms of the deferred state pension so that they can work. People will be able to run their occupational pensions alongside part-time working. A substantive point is that more generally we have a transitional generation. I accept that in future in a family there will be not just the expectation that two will depend on the pension of one, but crucially that we have to encourage all people, women as well as men, to carry their own pension into retirement. If they do so, as I hope they will, as a result we shall have pension prosperity for them as a family and also for them as individuals. Individuals and not families will have to carry pension responsibility over the longer term if we are going to achieve the prosperity that we want everyone to enjoy. I am sure that we all share the noble Lord's perception.