Pensions Bill

Public Bill Committee, 7 February 2008.

Clause 68

Andrew Selous (Conservative, South West Bedfordshire)

I beg to move amendment No. 158, in clause 68, page 32, line 4, at end insert—

‘(1A) In section 1 (meaning of “stakeholder pension scheme”), omit subsections (7) and (8).’.

Let me welcome you back to the Chair, Sir Nicholas. We also welcome my hon. Friend the Member for Rochford and Southend, East to the Committee. I would like to put on record all Members’ sympathy for the Minister for Pensions Reform, who is not with us due to a family bereavement.

Clause 68 brings in necessary reforms to stakeholder pension schemes, principally to remove the statutory duty on employers to have a designated stakeholder pension scheme in the light of the introduction of personal accounts though the Bill. We support what clause 68 seeks to do because the pensions landscape will have moved on and stakeholder pension schemes will not be necessary in the way that they once were.

Genuine and understandable concerns have been expressed, however, about what will happen to existing stakeholder schemes, particularly in 2017. In the early evidence sessions of the Committee, Tim Jones and the Minister for Pensions Reform both said they were keen to look at whether the personal accounts trustee corporation would be able to allow transfers out of personal accounts, probably in around 2017. We understand the reason for that. One very good reason is that there could be hundreds of thousands of very small personal account pots, perhaps belonging to foreign workers who have been in this country for a matter of months and have returned to their home country and are never going to come back. The personal accounts trustee corporation will be forced to maintain those small accounts for all time if there is not the option to transfer out.

The concern is that these transfers-out may end up being pushed on to the existing stakeholder pension schemes because current legislation, which is not being rescinded, prevents the winding down of these stakeholder pension schemes, even if the stakeholder provider might not want to keep them going. Clause 68 would force stakeholder pension schemes to accept transfers-in of possibly large numbers of very small amounts. There is concern that this may lead to an increase in the charges stakeholder pension schemes.

Such charges were initially brought in and capped at 1.5 per cent. for an initial 10-year period. I am sure the Minister will tell us this when he responds, but my understanding is that 2017, when we are looking at the potential for transferring out, will be beyond that 10-year period in most cases. Therefore, the stakeholder schemes will have the option—and indeed they might be forced—to increase charges to cope with the administration of perhaps a very large number of small pension accounts being forcibly transferred in.

This could have serious consequences for the existing members of those stakeholder pension schemes, who might find their returns to be less than expected because of higher levels of charges being imposed on them because of these transfers-in, which clause 68 currently allows.

Julie Kirkbride (Conservative, Bromsgrove)

My hon. Friend is clearly very knowledgeable about these matters. Will he help the Committee by explaining what he thinks is the rationale behind requiring this move out of personal accounts and into stakeholders? Why stakeholders; why not some other vehicle? What is the rationale for doing it this way, because I completely take on board his concerns about the downside of this particular move?

Andrew Selous (Conservative, South West Bedfordshire)

I thank my hon. Friend for that intervention. My understanding is that personal account holders will not be forced to transfer into stakeholder schemes specifically, but the point is rather that these stakeholder schemes will be unable to refuse to accept these many small pension pots. Account holders can choose to take their personal accounts elsewhere, so they will have that choice.

What I am arguing for, in amendment No. 158, is giving stakeholder schemes the freedom to operate that any other pension provider would ordinarily have. Clause 68 really seems to be dumping obligations on stakeholder providers quite unfairly, and in a way that could be prejudicial to the existing members of those stakeholder schemes.

Amendment No. 158 would remove the obligation on stakeholder providers to accept transfer values and give them the discretionary freedom to determine whether or not it would be viable to accept certain low-value funds. They might very well decide that they are quite happy to accept these personal account transfers—they could be very keen to receive them—but, given that stakeholder pensions were legislated for and brought into being by this Government, we are concerned that the providers of these schemes should be treated fairly going forward. I know that we are talking about events that are some way off, but it is important to raise this issue now, and I look forward to hearing what the Minister will say about these issues.

James Plaskitt (Labour, Warwick and Leamington)

Good morning to you, Sir Nicholas. It is a pleasure to be serving under your chairmanship again. May I express my thanks to the hon. Member for South-West Bedfordshire and my sympathy for the Minister for Pensions Reform, who is obviously unable to be with us today for sad reasons? May I also welcome the hon. Member for Rochford and Southend, East? It is nice to know that our Committee’s deliberations are attracting new members because of the reputation that our proceedings are earning.

I turn now to the amendment that the hon. Member for South-West Bedfordshire has moved. I understand why he is raising the issue, but I think that there is a danger that he is over-anticipating—and potentially inflating—the problem that he sees. I will explain why a moment. I fear also that, by seeking to head off the problem that he anticipates, he is possibly inadvertently suggesting something that would be harmful to the existing rules for stakeholder pensions. By potentially inflating the scale of the problem, he could be causing a problem somewhere else. Let me go into that in more detail and try to explain why I have that view and why I hope that he will not press the amendment to a Division.

As the hon. Gentleman said, the amendment would remove two important conditions that define a stakeholder scheme: flexibility and portability. It would mean that stakeholder pension scheme members would no longer be able to pay money into their pension when it suited them, subject to the £20 minimum contribution limit provided for in existing regulations. That possibility is important because it enables people who have irregular or intermittent employment patterns to save when they are able to do so. The amendment would also remove people’s entitlement to transfer other pension rights into their stakeholder scheme, thus consolidating small pension savings that they might have elsewhere.

Both the flexibility to make payments and the ability to transfer pension funds would instead fall to the discretion of the pension provider, who could therefore make substantial changes to the current position. That would affect all those people who had bought the products on the understanding that their stakeholder pensions would continue to provide a flexible and portable pension vehicle. That would be a significant number of people, given that 3.9 million stakeholder contracts have been taken out since April 2001 and there are just under 2 million active members. The potential knock-on effect to existing holders of stakeholder pensions would therefore not be insignificant.

Andrew Selous (Conservative, South West Bedfordshire)

The case that I was making was slightly different to the one that the Minister is rebutting. I am purely arguing for stakeholder providers to have some flexibility. We know that by law they cannot close the schemes down; I am not seeking to change that. For anyone who wants to stay in a stakeholder and pay money into it, that will be absolutely secure. I am just saying that the providers of the stakeholder schemes, who have done a useful, necessary job and have obligations going forward, should not be forced to accept business that might be uneconomical, and which might have a much better home somewhere else.

James Plaskitt (Labour, Warwick and Leamington)

But the problem is that the hon. Gentleman would do that by removing some of the current conditions of the stakeholder scheme, which could have other consequences. That is why I urge him not to press the amendment to a Division. I also urge that he does not do so for a second reason. In 2017, we will undertake a review of the prohibition on transfers into and out of the personal accounts pension scheme. It is obviously not possible at this stage to anticipate what will come out of that review, but I think that he understands the reasons why it is there.

I understand the concerns that have been raised about the possible knock-on effect on stakeholder pensions should that review recommend lifting the ban on transfers out of personal accounts. Clearly any recommendations that come out of the 2017 review will be carefully considered by the Government at the time, including any potential consequences for other forms of pension provision.

I will expand on the problems that the hon. Gentleman cited. There is the question of whether everyone with small pots will want to make transfers. A lot of people might conclude that they are happy to leave them where they are because they might come back to them to make further contributions in the future. They will therefore not see the necessity of relocating those pots. They might also have other vehicles that are not necessarily stakeholder schemes to which they can relocate the pots. They would be able to consider or make a transfer into a stakeholder pension only if they already had a stakeholder pension.

As the possibilities are widened, the scale of the potential problems that the hon. Gentleman anticipates are reduced. It makes more sense to wait until the 2017 review, when the scale and nature of the issue will be more apparent. That review will take into account, in considering whether to lift the option on transfers out, the potential impact on other funds to which those pots might be transferred.

Andrew Selous (Conservative, South West Bedfordshire)

Perhaps if I had let the Minister carry on, he would have answered the point that I was going to make. Can he reassure the Committee that, following the 2017 review, if there were serious negative consequences for existing stakeholder schemes—we all want them to be successful—they would be dealt with by regulation or some other means to ensure that whatever was proposed was not too injurious to the stakeholders?

James Plaskitt (Labour, Warwick and Leamington)

I am not sure what the hon. Gentleman means, but the issue will clearly have to be considered. If there were a serious consideration in 2017 that the restriction on transfers out would be removed, questions would have to be asked about the consequences, not just on the stakeholder schemes, but across the whole pension provision market. It will not be possible to begin to make any sort of judgment about either the scale or the nature of that until we have got to 2017 and those funds have been in place for five years.

Julie Kirkbride (Conservative, Bromsgrove)

Is the Minister saying that those people could be in the stakeholder scheme already, but that they will be in a company that then takes out a personal account and therefore that they will have two schemes that they might want to consolidate into one? I am trying to work this out. Are existing stakeholders involved, or people who do not have a stakeholder pension and want to buy one, because they want to transfer it to a personal account? I am just a bit confused about who those people are.

James Plaskitt (Labour, Warwick and Leamington)

It is not quite as complicated as the hon. Lady thinks. First, we have to remember the criteria about qualifying schemes. It may well be the case that perhaps all the existing stakeholder schemes will qualify under the Bill as qualifying schemes. There is sometimes misapprehension about whether auto-enrolment applies only to the new brand of personal schemes that the trustee board will bring into existence. A range of schemes could qualify. So I do not think that people will be forced into a couple of schemes, which is what the hon. Lady was suggesting. I hope that she is reassured by that.

I am arguing that it is not desirable to promote the changes that the amendment seeks, because they have other consequences that we do not want. I also think the amendment is driven by over-concern about the scale of the challenge that might be presented. This is all very conditional on what happens in 2017. Mindful of these real issues, the sensible thing to do is to wait for the 2017 review and see what decisions are made at that point in respect of whether the opt-out and the restriction on taking funds out of such schemes are lifted. With those reassurances, I hope the hon. Gentleman will agree to withdraw the amendment.

Andrew Selous (Conservative, South West Bedfordshire)

I note what the Minister has said about other possible consequences of amendment No. 158. As my hon. Friend the Member for Eastbourne said—and as he often says to the Committee—we do not have all the clever people that the Minister has working behind the scenes, so he may well be right that there are perhaps other consequences. In the light of that and the commitment that he has given to the Committee to consider what he described as the real issues that relate to stakeholders in 2017, and the fact that he said that he would be mindful of those issues in any proposed solution, I beg to ask leave to withdraw the amendment.

Andrew Selous (Conservative, South West Bedfordshire)

I beg to move amendment No. 182, in clause 68, page 32, line 24, leave out ‘regular intervals’ and insert ‘intervals of less than one year’.

This is a probing amendment: I want to find out exactly what is meant by the phrase “regular intervals”, which is used twice in subsection (4). It just struck me that it might be possible for unscrupulous employers to try to keep their employees in a stakeholder scheme by saying: “Don’t worry, contributions are being made at regular intervals”, when that interval is every decade or every fifteen years. A regular interval might not be often, but it could be as regular as every week, every month or every year. It is probably unlikely that anyone would seek to do that, but there are employers of all different types and characteristics and “regular” is a vague word, so I would like a decision to be taken on it and look forward to what the Minister has to say.

Danny Alexander (Liberal Democrat, Inverness, Nairn, Badenoch and Strathspey)

It is a pleasure to be here in Committee again today; I apologise for being slightly late. I would like to pass on my good wishes to the Minister for Pensions Reform and welcome the hon. Member for Rochford and Southend, East to the Committee. He has been here for only a short period, but I am none the less grateful that the Committee’s deliberations are attracting new interest even as we reach the latter stages of the Bill.

This is a very simple probing amendment, but it makes an important point, because the phrase “regular intervals” is obviously open to interpretation. It is clearly right to ask the Minister to clarify the position to ensure that employees cannot reschedule payments to very long intervals to avoid the obligation to make auto-enrolled contributions or for employers to ask them to do so. The one-year interval suggested in the amendment seems a sensible limit—it would certainly be hard to describe making a contribution less than once a year as regular—so I look forward to the Minister’s clarification.

James Plaskitt (Labour, Warwick and Leamington)

I am grateful to hon. Gentlemen for speaking to the amendment, because it gives me the opportunity to provide the clarification that they seek, and it is important that I do so. But there is a very good reason why that word is used, and I will try to explain it. Clause 68 will amend section 3 of the Welfare Reform and Pensions Act 1999 to end the current stakeholder pension employer designation requirements when the new personal account provisions take effect. All the existing employer designation requirements will cease, except one transitional provision that relates to the payroll deduction facility.

Employees have bought their stakeholder pensions on the understanding that they can benefit from that payroll deduction facility. Employees who are paying into their stakeholder pensions via the their employers’ payroll when these reforms take place will continue to be able to benefit from that arrangement. It is right that they should continue to be able to make such payments for as long as they are employed by their employers or until they stop making contributions via the payroll.

The amendment would change the criterion that sets out when an employee is no longer able to benefit from the transitional provision. Instead of the provision ending when the employee stopped making regular contributions, it would happen when the employee stopped making contributions at intervals of less than one year. The explanatory note to the amendment states that its purpose is to “prevent employees from rescheduling”—[Interruption.]If the hon. Member for South-West Bedfordshire wants to intervene, that is fine—otherwise, I am just getting barracked.

Andrew Selous (Conservative, South West Bedfordshire)

I am not quite sure at what point the Minister’s note was written for him. There was a mistake in the explanatory note, which has now been corrected, so the version before us says “employer,” not “employee.”

James Plaskitt (Labour, Warwick and Leamington)

I see the point that the hon. Gentleman is making, but I am quoting his explanatory note, which states:

“to prevent employers from rescheduling payments to very long intervals to avoid the requirement to make auto enrolled personal account contributions.”

Just for clarity, he is talking about the potential for an unscrupulous employer to go for very long payment intervals. I entirely understand; I have not misunderstood him.

There should be no easy way out for employers who do not wish to fulfil their duties under this legislation, and I want to make clear that stakeholder pensions are not one of those routes. An employer who wishes to continue to run a stakeholder scheme must ensure that it is a qualifying scheme that meets the policy requirements set out in the Bill, which may require an increase in their contributions to the scheme. If the scheme does not qualify, the employer must provide an alternative arrangement that does and enrol the eligible job holder into that scheme.

If a job holder does not wish to participate in pension savings, they do not have to. That is as true for personal accounts as it is for stakeholders. Once enrolled, the job holder can opt out of the scheme and will receive a refund if any payroll deductions have been made during the opted-out period. So the only way that a job holder could avoid being automatically enrolled is if they were already a member of a qualifying scheme. If the job holder were a member of a stakeholder scheme that met the quality requirements, he or she would not be automatically enrolled. If the job holder then wanted to reschedule their payments, their employer might permit that as long as the total employer and job holder contributions made were equivalent to 8 per cent. of the job holder’s qualifying earnings over the pay reference period.

Danny Alexander (Liberal Democrat, Inverness, Nairn, Badenoch and Strathspey)

I understand what the Minister is saying. The 3 per cent. figure applies whatever the period of time, so if an employer has to pay their 3 per cent. for a whole year at once, that is the same as paying 12 monthly payments throughout the year. However, what he says raises a further concern in that another option could be open to unscrupulous employers, of whom we know there are very few, but there is a risk none the less. If an employee opts out of being automatically enrolled, they might have a stakeholder scheme into which the employer, if he chooses, could make a lesser contribution on a voluntary basis.

James Plaskitt (Labour, Warwick and Leamington)

The test still applies in respect of any scheme—it must meet the qualifying criteria for auto-enrolment—so I am not sure that that problem exists. I want to reassure the hon. Gentleman about the unscrupulous employer. The interaction between the 8 per cent. total requirement and the pay reference period will prevent anyone from going through the loophole that the hon. Member for South-West Bedfordshire had in mind when moving the amendment.

In short, rescheduling payments in stakeholder schemes could not help a job holder to avoid being automatically enrolled or help employers evade their duties. The provisions in the Bill mean that employers will ensure eligible job holders are in a qualifying scheme receiving minimum contributions and that job holders remain in that scheme paying contributions unless they decide to opt out. So there is a belt-and-braces provision within the legislation, but I appreciate his raising the issue, because it gives me a chance to clarify that and to reassure him sufficiently, I hope, to enable him to withdraw the amendment.

Andrew Selous (Conservative, South West Bedfordshire)

I am reassured by what the Minister has said about payments being made equivalent to 8 per cent. of qualifying earnings over the pay reference period. Put together, that is satisfactory. That was not clear to me in the Bill, but the Minister’s explanation has been helpful, so I beg to ask leave to withdraw the amendment.

Clause 69

Andrew Selous (Conservative, South West Bedfordshire)

I beg to move amendment No. 185, in clause 69, page 33, line 20, leave out ‘whether oral or’.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss amendment No. 186, in clause 69, page 33, line 29, leave out ‘whether it is oral or’.

Andrew Selous (Conservative, South West Bedfordshire)

Clause 69 is a veritable dictionary of definitions of different terms, which is very helpful. Words need to have precise meanings that we all understand when we are passing legislation, so it is certainly a helpful clause from that point of view. This is purely a probing amendment; note the word “probe” rather than “prove”, which may have been there originally, that comment is just to help the Minister in case he is working from an old brief. It is just to tease out exactly what an oral contract of employment might be, particularly one that is implied. In my naivety, I had thought that all contracts of employment would be in writing, express and quite clear, but that is clearly not the case; I have obviously led a more sheltered life than I had realised. It seems to conjure up all sorts of possibilities, so can the Minister paint in some of the detail on what types of contract of employment we are talking about being expressed or implied, particularly oral?

Danny Alexander (Liberal Democrat, Inverness, Nairn, Badenoch and Strathspey)

The amendment raises an important point. I appreciate the hon. Gentleman making the point that this is a probing amendment and it will be interesting to hear the Minister’s response. The reference to oral contracts in the Bill is important to retain. Particularly among the target group, who are working for low incomes perhaps in several different jobs who we have rightly worked on at various stages of the Bill, there are circumstances where some will be left out of the scheme because their are earnings are below the qualifying limit, which is a point that I made earlier in the Bill. They may not have what hon. Members on the Committee would regard as a written contract, which we would have with our staff—well, many Members would—or whatever, none the less, an oral contract would be regarded as a contract of employment. Certainly in Scots law there is strong protection for oral contracts and I know that that is what the Bill seeks to do. There are precedents for written contracts being required; the Employment Rights Act 1996 requires that the case of money being deducted from a salary must be in written contract. I can see the hon. Gentleman’s point in relation to central costs, but none the less it is important from the point of view of giving the maximum possibility for people in the target group to benefit from personal accounts that the provision that the amendment seeks in a probing nature to delete is retained in the Bill.

James Plaskitt (Labour, Warwick and Leamington)

I was interested to hear the hon. Member for South-West Bedfordshire declare how possibly sheltered his life had been. It is a fact of the matter, as the hon. Member for Inverness, Nairn, Badenoch and Strathspey pointed out, that there are a great many oral contracts in existence, certainly non-written formal employment contracts. As Members of Parliament we do not have formal written contracts, which is a point that we will come to later in the Bill and I am sure that we are all looking forward to that. As the hon. Member for South-West Bedfordshire says, clause 69 provides an array of definitions. I will take the opportunity now to respond to his specific points about oral contracts, while fully appreciating that the amendment is of a probing nature. A contract exists when it is written down or when an individual is told by someone offering work to start work on a given date for a set rate of pay, which in itself constitutes an oral contract. In an ideal world, of course, a contract would be written so that both parties were fully aware of the terms and conditions of employment, and the majority are.

However, we know that there are people without written contracts and we do not want to exclude them from the reforms. I know the hon. Gentleman does not want to do that either. The fact that someone may not have a piece of paper does not mean that he or she is not entitled to employment rights, and those extend beyond pension issues into other employment issues. The amendments would simply enable employers to avoid the duties established in the Bill by using an oral contract in place of a written contract. Obviously, that would not be right, because these reforms are about extending workplace pension saving with a minimum employer contribution to as many individuals as possible. The hon. Member for Inverness, Nairn, Badenoch and Strathspey is right to say that there are likely to be many in the target group with oral contracts.

Andrew Selous (Conservative, South West Bedfordshire)

It genuinely is a probing amendment, and that clarification is useful. I was interested in the hon. Gentleman’s definition of an oral contract as one where somebody was told to do some work at a particular point. Could the employer get out of having a contract by saying, “I would like my house cleaned, but I will leave the time up to you, as long as it gets done,” without giving a particular start date? Would that avoid an oral contract, by the Minister’s definition?

James Plaskitt (Labour, Warwick and Leamington)

I am no expert on oral contracts, but I suspect not. As I understand it, once an engagement has taken place between employer and employee, a function has started, and payments are being made in respect of that activity, an oral contract has commenced. If that is incorrect, I will let the hon. Gentleman know, but that is my understanding at this point.

Danny Alexander (Liberal Democrat, Inverness, Nairn, Badenoch and Strathspey)

For clarification, there are many people in my constituency who work in the tourism industry. In some cases, what happens is that one applies for a job, interviews for the job, agrees to start the job on Monday, working four days a week at x rate of pay, and does so. Custom and practice means that what one has is therefore a contract of employment. Although it is not written down, that is a legally binding arrangement, to which all employment laws should apply.

James Plaskitt (Labour, Warwick and Leamington)

I think we have reached broad agreement on what constitutes an oral contract, and I hope with that reassurance the hon. Gentleman will agree to withdraw the amendment.

Andrew Selous (Conservative, South West Bedfordshire)

Without further ado, I beg to ask leave to withdraw the amendment.

Clause 71

Andrew Selous (Conservative, South West Bedfordshire)

I want to take the opportunity in the stand part debate to ask the Minister what estimates, if any, the Government have made about the cost to their own payroll of the provisions in the Bill. There is also the issue of local Government staff, who are obviously not in Crown employment, and that of bonuses to Crown employees, in which form considerable sums are paid from time to time, which we know will be subject to the 3 per cent. employer contribution.

It may be that I have missed it. I looked through the impact assessment quite carefully, to see if I could determine the Bill’s impact on the Exchequer as far as Crown employees are concerned. I appreciate that it is a few years off. I am not looking for detailed figures down to the last pounds and pence, but it would be useful to know that some of the clever people in the Treasury or elsewhere, to whom my hon. Friend the Member for Eastbourne often refers, are at least running their slide rules across the Bill’s implications for the public purse.

James Plaskitt (Labour, Warwick and Leamington)

I would seek some clarification from the hon. Gentleman. He may wish to intervene on me again. There are two issues he may be getting at, and while I listened carefully to what he said, it was not quite clear which of those two issues it was. One would be the potential implication if he sees the clause resulting somehow in additional auto-enrolment into schemes. I am not sure if he does mean that, because all of the existing public sector schemes will satisfy the qualifying criteria, or whether he means the cost to the exchequer of revisions to public sector pension as a result of the reforms that have taken place. If he wants to intervene I might be able to be more assistance to him.

Andrew Selous (Conservative, South West Bedfordshire)

It was kind of the Minister to seek further clarification. He has in part answered my query. If he has just said that all Crown employees are already fully covered, I think that does go some way to answering my question. There is the question of bonuses. One reads quite regularly of high flying members of the public service being given large bonuses. The Child Support Agency senior staff were given bonuses quite recently, just to quote one example.

In an earlier provision we put into law that bonuses commissions will be part of the contribution that makes up personal accounts. It may be that this is already covered because public sector pensions for Crown employees are so wonderful anyway that it does not apply. I thought it would be remiss to go through clause 71 without at least probing the Minister and asking for some clarification.

James Plaskitt (Labour, Warwick and Leamington)

I am a little clearer as to the direction he is seeking to take. I think he will be aware that there is a great deal of public sector pension reform taking place. He will know that there are new schemes for teachers that have been in operation since January of last year, and a new scheme for civil servants, which he referred to, which was introduced in July of last year. From April this year a new scheme for the NHS comes into effect and in due course there will be a new scheme for local government workers as well. He will know that the thrust of all these reforms is to ensure affordability to the public purse of all of these schemes. He will have seen the long-term public finance report that the Government published in December 2006, which confirms that expenditure on public service pension provision across the board remains sustainable over the next 50-year period. That includes and anticipates the impact of bonus payments, for example.

The Government’s assessment of the cost of these schemes and their sustainability over the foreseeable future has therefore been clearly assessed, with actuarial evidence behind it. I hope he will accept this.

Andrew Selous (Conservative, South West Bedfordshire)

Just to be absolutely clear, is the Minister is saying that pensions for Crown employees are so good that they are well above the levels of contribution of the personal accounts scheme? If so, the personal accounts scheme will not apply at all to Crown employees within the salary bands we are talking about.

James Plaskitt (Labour, Warwick and Leamington)

My understanding of the great bulk of the schemes that are currently in existence in the public sector is that they would not have a difficulty meeting the qualifying criteria, though I do not have the opportunity to go over every single conceivable little corner of the public sector to be sure about that. I have looked at the terms of all of the existing ones in which most people are enrolled and they satisfy the criteria. Now he has come back to the first of the two things he raised, I do not think the financial impact of this clause will be at all significant.

Danny Alexander (Liberal Democrat, Inverness, Nairn, Badenoch and Strathspey)

The Minister is right in that respect, given that the implied employer contribution for High Court judges is 31 per cent., for Members of Parliament it is about 25 per cent. and for senior civil servants it is also in the low 20 per cent. region. Is he worried that the advent of personal accounts is likely to lead to levelling-down for these levels of contribution?

James Plaskitt (Labour, Warwick and Leamington)

We have had a very lengthy discussion about levelling-down already. As the hon. Member knows, there are clear criteria that the Government seeks to apply to the public sector pension provision, one of which, most importantly, is affordability.

Any changes that are to be made to employer or employee contributions within the schemes will be made in the light of those criteria. For example, the cost-sharing and capping arrangements that have been introduced may in future have an effect on the employer or employee contributions. The governing criteria are the long-term sustainability of the schemes and the fact that they give decent value to the taxpayer. The effect of the proposal will not be a significant driver of any of those changes, although such changes may take place, but I think it will be for other reasons.

Danny Alexander (Liberal Democrat, Inverness, Nairn, Badenoch and Strathspey)

The Minister is right to make the point about affordability. Presumably, he is unworried by the recent conclusion of an independent body—the Institute for Fiscal Studies—that unfunded liabilities in the public sector pension arrangements at present amount to about £700 billion.

James Plaskitt (Labour, Warwick and Leamington)

As I suspect the hon. Gentleman knows, that assessment depends on the basis on which it is calculated—a variety of numbers can be used. Indeed, I have seen some figures that suggest that the unfunded liability is even larger than the figure he cited. He must carefully consider the assumptions that have been made in calculating the figures, from which he will see that the higher numbers, including the figure he gave, are not assessed simply on the basis of pension payable to known individuals who will receive them.

The larger figures take into account all those who are currently in employment who are potentially building pension pots and assume that they will always be in employment and in the public sector, therefore all their pot will be in the public sector. But one cannot make such an assumption, because employees may not stay in the public sector. The kind of assessment to which the hon. Gentleman refers on future unfunded liability could have been made at any stage at any time in the past in respect of public sector pension liability. It would always have produced a large number if it had been calculated on the criteria that he cited and always have looked scary but we have never hit a point when it has become unfundable, unsustainable or overly burdensome.

I caution the hon. Gentleman on waving the big numbers around. He should first check on the assumptions that lie behind them and bear in mind that historically it has always been possible to carry out such an exercise. It does not mean as much as some of those who wave the numbers around imply. The key test is whether the schemes are sustainable over the long-term period of 50 years or so. The hon. Gentleman has the Government’s published information on that, and it has actuarial support behind it. I hope he will therefore support clause stand part.

Clause 72

Andrew Selous (Conservative, South West Bedfordshire)

I beg to move amendment No. 183, in clause 72, page 34, line 41, at end add

‘or a Member of the House of Lords.’.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss amendment

No. 184, in clause 73, page 35, line 7, at end insert—

‘(c) who is employed by a Member of Parliament.’.

Andrew Selous (Conservative, South West Bedfordshire)

Amendment No. 184 also relates to clause 73, so I hope you will not rule me out of order, Sir Nicholas, if I touch on the provisions of that clause. For the record, the explanatory note should say “probe” rather than “prove”. I entirely blame my handwriting for that mistake. The fault is all mine, not the excellent staff who assist Opposition Members in tabling amendments.

I refer to both clauses; I understand the distinction between people who work for the House authorities—some are in this room—and staff who are employed by Members of Parliament, but I want to know the position of Members’ staff. We are all small employers in our own right as Members of Parliament. There are some good aspects to that, in that we are not isolated from some of the matters that hundreds of thousands of small employers have to deal with up and down the country.

I am not arguing that we should be isolated from that or financially insulated from the provisions of this Bill. I am interested to know what the effect would be on staff employed by Members of the House of Lords and Members of the House of Commons. My amendment by implication does come to finance as well. If we are going to have take it on the chin, it will have financial implications for salary levels. I am not sure whether the Treasury would be minded to increase the grant to the House of Commons Commission so that the employer contribution could be paid.

I am not expecting the Minister to have a full answer at his fingertips but it would be useful if he could say something.

Danny Alexander (Liberal Democrat, Inverness, Nairn, Badenoch and Strathspey)

I appreciate that these are probing amendments but they are probing at a point that all Members of the Committee and those who work for us would regard as interesting and significant so I am grateful to the hon. Member for South-West Bedfordshire for introducing the argument.

As Members know, staff of MPs as opposed to staff of the House have the opportunity to take part in the Portcullis pension plan. I assume, though I would be grateful for the Minister’s clarification, that the auto-enrolment provisions in the Bill would apply equally to that scheme, or relevant improvements would be made to ensure that it qualified. It is important to ensure that the benefits of automatic enrolment do apply to the two groups of people highlighted by these amendments. I look forward to the Minister’s agreement with that point.

James Plaskitt (Labour, Warwick and Leamington)

The House of Lords and the House of Commons employ permanent fixed-term casual and freelance workers who are all employed under a worker’s contract. Clause 72 confirms that those people who work under a contract for the corporate officer of the House of Lords are workers for the purposes of these reforms. Similarly, clause 73 confirms that those people who are appointed by the House of Commons Commission or members of the Speaker’s personal staff are workers for the purposes of these reforms.

The corporate office of the House of Lords and the House of Commons Commission respectively are bound by the employer duty automatically to enrol these job-holders into a qualifying workplace pension scheme. We must not confuse these workers with those who are directly employed by peers of Members of Parliament.

The key point is that the provisions of this Bill already cover those people already employed by peers and Members of Parliament. Anyone directly employed by a peer or Member of Parliament that has job-holder status—that is, a worker between the age of 16 and 75 with qualifying earnings—would be entitled to participate in workplace pension saving with the minimum contribution from their employer.

A peer or Member of Parliament with such a job-holder would need to engage with a suitable scheme into which to enrol job-holders. A peer or Member of Parliament who employs a job-holder between the narrower band of age 22 to state pension age would have automatically to enrol that job-holder.

I hope that provides clarification and that the hon. Member will feel able to withdraw his amendment.

Andrew Selous (Conservative, South West Bedfordshire)

Yes, I am grateful for that clarification from the Minister. It was a probing amendment as I stated at the beginning. I beg leave to ask to withdraw the amendment.

Nigel Waterson (Conservative, Eastbourne)

On a point of order, Mrs. Anderson. It is a great pleasure to have you back in the Chair. You were in the Chair on 29 January when I raised in the Committee the issue of the Government’s promised amendments on the financial assistance scheme. In the light of this morning’s Court of Appeal judgment—the Government lost, again, and were heavily criticised by the Lords Justices—it is particularly relevant that we find out how the drafting is coming along.

While I am about it, could I also ask where we are with the draft regulations? Any would be nice. I do not think that we have seen a single line of draft regulations, yet the Bill is peppered with clauses calling for regulations. Perhaps the Minister could help me out as I have given him prior warning of this point of order.

Janet Anderson (Labour, Rossendale and Darwen)

The hon. Gentleman would agree that that is more a question to the Minister than a point of order. Does the Minister wish to respond?

James Plaskitt (Labour, Warwick and Leamington)

I am grateful to the hon. Member for Eastbourne for giving me notice of his point of order. I will respond in a little detail because I know that he wants clarification on this and I will try to give it.

In oral evidence to the Committee on 17 January, my hon. and learned Friend the Minister for Pensions Reform said that we were focused on delivering the package of improvements to the financial assistance scheme as quickly as possible and that, to that end, we would be looking to use existing powers to make changes by regulations, wherever possible.

My hon. and learned Friend said that as a first step we would be bringing forward a set of regulations in March to increase payments to 90 per cent. from the current 80 per cent., and from normal retirement age. He proposed a short two-week consultation, subject to the views of Opposition Members and others. We are grateful that that has subsequently been agreed.

Those regulations are currently being drafted and the supporting explanations are being prepared. We expect the two-week consultation period on them to begin on 6 March. During that period, we will conduct face-to-face consultation with key stakeholders, including trade unions and members of the Pensions Action Group.

In the meantime, we will today be tabling a new clause to the Bill. This will extend the definition of those who can qualify for the FAS to include those whose schemes are still winding up, but who would otherwise have received their benefits in full from the scheme. This is necessary because to take over all members’ assets, we will need the power to make FAS payments to them so that we can pay them what they would have expected to receive from their scheme. There will be an opportunity to consider the matter in more detail when we discuss this new clause after the forthcoming short recess.

In the letter sent to all Members last Friday, my hon. and learned Friend said that we were considering where other small adjustments might be needed to existing powers to deliver all elements of the package of improvements to FAS, and that there might be a need for a few further changes to be made via the Bill, when it goes to the other place for consideration. However, the vast majority of the changes necessary to deliver the package can be made via regulations.

We intend to publish a further set of draft regulations before the end of March, which will make provision for other key elements of the package, such as early retirement on ill-health grounds. There will be a final package of regulations later in the year to deliver the remaining parts of the package that will move us to a position in which financial assistance payments are calculated on a basis that is broadly comparable with the Pension Protection Fund.

I hope that that provides a thorough answer on the matter of regulations in respect of the FAS and other parts of the Bill. I can tell the hon. Member for Eastbourne that we are discussing—and even considering—the content of those with the Personal Accounts Delivery Authority, and it is quite right that we should do so. They will therefore be brought forward as soon as is practically possible.

Finally, the hon. Gentleman’s interpretation of the court judgment was a bit slanted. If he looks at the judgment in detail, he will see that there is very much support for the Government’s position with respect to many of the matters under consideration. With regard to the rest of it, we are considering leave to appeal at the moment.

Nigel Waterson (Conservative, Eastbourne)

Further to that point of order, Mrs. Anderson. May I just clarify one point? The Minister says that he is going to table a new clause today. The House is not sitting tomorrow, or indeed next week, so I assume that that clause will not be printed until we return after the break. It will therefore probably not be debateable until the Thursday of the week after next, at the earliest. Will the Minister undertake to let all members of the Committee know—

Janet Anderson (Labour, Rossendale and Darwen)

Order. It is my understanding that if the new clause is tabled today, it will be printed tomorrow, so it will be available. It is clear from the Minister’s very detailed response that there will be the opportunity to have this discussion after the short break, so I think that we should move on.

Clause 74

Andrew Selous (Conservative, South West Bedfordshire)

I beg to move amendment No. 6, in clause 74, page 35, line 21, at end insert—

‘( ) subsection (1) shall not apply to any member of the reserve forces who is paid for more than six months in any three-year period.’.

I welcome you back to the Chair for our afternoon sitting, Mrs. Anderson.

I do not think that I technically have to declare an interest, in that I am not currently a member of the reserve forces, but I was for 12 years, in an earlier life. When I served, the role of territorial soldiers, the Royal Naval Reserve forces and the Royal Auxiliary Air Force was somewhat quieter than it is today. It is no secret that our reserve forces are much more of an integral part of the combined efforts of our armed services across the world at the moment. Not all members of the Committee might be aware that territorial soldiers are serving in Iraq and Afghanistan. However, it is really on the issue on the length of time for which many of our reserve forces are serving that I have tabled the amendment.

When I joined the Territorial Army back in 1980, one classically did a night a week, a weekend a month, and perhaps two weeks’ annual continuous training a year—if one was really keen, one would go on a few extra courses—and that was it. Of course, one understood that the pay did not come with pension contributions, and that was not a problem.

My friends who are still Territorials tell me that there are many territorial soldiers and members of other reserve forces who serve for quite long periods—tours of six months or more are not unusual—and come back for perhaps a short time before going out again. It is no secret that the regular forces are short of people to fill those places, so our three armed services rely very heavily on the reserves. I really just want to challenge and probe the Minister as to whether he and his officials should perhaps go back and speak to colleagues in the Ministry of Defence, re-examine this issue, and get some exact statistics and figures on the number of reserve forces personnel who are serving on extended tours of duty, and perhaps back-to-back tours of duty.

There are people who make more or less a full-time career out of being a reserve soldier. They might come back to do something else for a while, but then their camaraderie, or whatever campaign is being fought throughout the world, calls them back. That situation might continue for very many years. The years could mount up until suddenly they take stock of their financial situation and realise that the work for which they have earned their income for many years has not represented pensionable service, although their colleagues in the regular forces have been amassing nice pension contributions during their service.

All that I am really saying to the Minister is that the world has changed and there is now a much greater length of service. The whole issue of the military covenant is quite rightly under discussion. He might be familiar with the phrase “one Army” with regard to the Territorials and full-time Regular Army. Although this is the classic position, it might perhaps need to be revisited, so I would ask him to consider that. If he cannot come forward with a proposal now, I would ask him to go back to the Department and consult with Defence Ministers and with the wider reserve forces community on this issue, and perhaps give us further thoughts on the matter on Report.

Danny Alexander (Liberal Democrat, Inverness, Nairn, Badenoch and Strathspey)

It is a pleasure to be back under your chairmanship, Mrs. Anderson.

I echo the comments made by the hon. Member for Eastbourne about the financial assistance scheme. I do not wish to reopen that debate, but it is important that we proceed quickly to a resolution on that important subject.

Nigel Waterson (Conservative, Eastbourne)

And the Government did lose.

Danny Alexander (Liberal Democrat, Inverness, Nairn, Badenoch and Strathspey)

Indeed. As the hon. Gentleman says, there was a further defeat for the Government in a series of defeats that should lead to prompt action.

The amendment tabled by the hon. Member for South-West Bedfordshire addresses an important point that has been raised by Territorials in my constituency. As he said, Territorials, on average, are now expected to spend a great deal more time on active service than in the past. That potentially changes the nature of our obligations towards them, including in the area of pensions. Those people might choose to be automatically enrolled in pension schemes in their regular employment, but it is important to ensure that the Government meet their pensions obligations to people who now spend a good deal more time on active duty than six months every three years.

Andrew Selous (Conservative, South West Bedfordshire)

I am sure that the hon. Gentleman will know from Territorials in his constituency that some of them do not have another job while they are serving. They might have worked as a security guard for a while, but give that up to go on a six-month tour. They might go on a back-to-back or extended tour. They therefore accrue no pension contributions at home from any other job.

Danny Alexander (Liberal Democrat, Inverness, Nairn, Badenoch and Strathspey)

The hon. Gentleman is exactly right, and that is my experience. We are particularly keen for those people who move from job to job, or might not be employed during those periods, to be supported by the Bill. They should be part of the target group. The Minister’s response, which I look forward to hearing, is important for ensuring that those people are properly served in the pension world, given the service that they are giving their country as Territorials.

James Plaskitt (Labour, Warwick and Leamington)

This is an important matter, and I am grateful to the hon. Member for South-West Bedfordshire for tabling the amendment. I certainly respect his experience.

The clause confirms that some members of the reserve forces and cadet forces volunteers do not come within the definition of “Crown employment”, as set out in clause 71, which we considered this morning. The amendment would bring within the scope of the Bill’s provisions on employer duty reservists who are paid for at least six months’ service in any three-year period. Reservists who attend intermittent periods of weekend training and an annual camp might fall in that group.

I am sympathetic to the spirit behind the amendment, but I shall explain why we do not think that it is necessary. The Ministry of Defence already routinely enrols members of the armed forces and reservists who are mobilised, or take on a full-time reserve service commitment, in a defined benefit pension scheme.

Andrew Selous (Conservative, South West Bedfordshire)

It is important to be clear about the language involved. There is a difference between a reservist and a territorial soldier. A reservist is someone who has been in the regular forces and has an ongoing commitment afterwards, but I am really talking about Territorials. I am sure that the Minister is coming to that issue.

James Plaskitt (Labour, Warwick and Leamington)

The Minister is fully aware of the distinction, and the hon. Gentleman rightly anticipates that I am about to deal with that point. I am just being complete for the record. I wanted to make it clear that reservists who are mobilised or take on a full-time reserve service commitment are enrolled into the defined benefit scheme.

Furthermore, we may reasonably expect non-mobilised reservists and cadet force volunteers to be in civilian employment—the same goes for most of those in the Territorial Army—through which they will have the same right to workplace pension saving as any other worker as a consequence of the Bill. The commitment is there for those who have an extensive engagement with the armed forces—they are enrolled and, incidentally, none has opted out—but for other categories of people, most will be deriving the bulk of their income from other sources and will be automatically enrolled through their other employment, rather than through very short periods of spasmodic engagement with the armed forces. We would certainly want everyone in that category to be covered by the Bill, but it is likely that they will be covered by another route.

I want to draw the Committee’s attention to our plans for an important change in the way the armed forces are to be treated by the Bill. Members of the forces occupy a special position in law. Many employment law remedies, such as unfair dismissal, do not apply to the armed forces and we need to avoid any potential for confusion. Therefore, after very full consideration and consultation with the Ministry of Defence, we have decided that bringing the armed forces within the scope of the employment right created by this Bill would be inappropriate.

Our policy intention is therefore to remove the armed and reserve forces from the scope of this Bill in their entirety. I want to reassure the Committee that that does not mean that we will be treating members of the armed forces less favourably in any respect. As I have already explained, the Ministry of Defence already automatically enrols members of the armed forces as a matter of routine. This includes reservists who are mobilised or have taken on a full-time reserve commitment. All those people become members of a non-contributory defined benefit scheme. Unlike the arrangements for other public servants, the Ministry of Defence has no record of anyone ever opting out of the scheme. Naturally there will be a further opportunity to debate this issue in more detail once the Government amendment to achieve our aim is tabled and before us.

It might be helpful at this point if I clarify the position for cadet force adult volunteers. These people offer their time and effort without receiving a wage or pension contributions, although they might receive recompense for attendance. As such, they do not have access to pension savings in respect of their voluntary work. While we recognise the important contribution of these volunteers, which supports the Government's policy of engaging with young people, and the responsibilities involved when working with them, we do not believe that this voluntary service should attract pension provision when there is a reasonable expectation that such individuals will be saving separately by means of other employment, and as such will be automatically enrolled into a scheme. Having made this decision, it seems sensible to make it clear that such individuals are not to be brought within pension provision in respect of their voluntary work within the forces.

The hon. Member for South-West Bedfordshire has raised an important point and given me the opportunity to clarify the situation. With those reassurances, I hope that he will be able to withdraw the amendment.

Andrew Selous (Conservative, South West Bedfordshire)

I have listened carefully to the Minister. I do not doubt his good will and good intentions when he says that he is going to table an amendment to take all the armed forces out of the Bill. He spoke about those who serve with the regular forces and about reservists and then, if I heard him correctly, he said that most Territorials will have the opportunity through their workplace to save. However, he did not address the point that I specifically raised about those people, many of whom I served alongside—I remember well their lifestyle and employment history.

It strikes me that in the same chapter of this Bill we have a clause about agency workers. The TUC, quite rightly, has been standing up for the rights of agency workers. It might be an odd term, but, in a sense, this is another group of agency workers who are putting their lives on the line. I had not decided to force a vote, but I am not satisfied with what I have heard from the Minister.

James Plaskitt (Labour, Warwick and Leamington)

Let me try to help out the hon. Gentleman. I reiterate that the reason why we take our position is because normal employment rights do not apply to the armed forces, save in respect of anti-discrimination measures, as he knows from his experience. All other normal rights, such as unfair dismissal, do not apply. There is no dispute about that, or pressure to alter it, because of the unique role, terms of engagement and demands placed upon those people. The hon. Gentleman quite reasonably made all those points.

If we were to include the armed forces in this measure, we would run against the understanding that normal employment rights do not apply. The idea of automatic enrolment is another normal employment right. For the sake of consistency, it is better to be clear that this does not extend to the armed forces. It would be inconsistent to make a special arrangement for the group of people about whom he talks, given that the armed forces as a whole are not going to be included because of their special employment status. That would be odd, because the group about which he talks will, for the most part, have alternative employment and will be automatically enrolled. I want the landscape to be consistent.

It is not that we are trying to do down, or to be unreasonable towards, the armed forces. They have very good schemes that more than adequately meet the qualifying criteria. The issue will not arise because we want to treat it separately to keep this consistent with every other aspect of employment rights. I hope that helps.

Andrew Selous (Conservative, South West Bedfordshire)

I am grateful to the Minister, but I do not fully accept the logic of his argument. I understand that serving regular forces or Territorials do not have normal employment rights in terms of how they conduct themselves. That would obviously not be appropriate, but I am not sure that the analogy can correctly extend to pension contributions.

While I accept the Minister’s argument about normal employment rights, there is an issue about this group of people. The Minister seems to be sticking to his argument that all the Territorials have other jobs through which they can auto-enrol. My point is that there are some who treat being a Territorial as their main form of employment. They might have very casual employment outside the Territorial Army when they are back in the UK for perhaps quite long periods when they are in their 20s or early 30s. It does not seem right to say that there is a blanket exemption.

James Plaskitt (Labour, Warwick and Leamington)

Let me try to reassure the hon. Gentleman further. We are not trying to be unreasonable towards the group of people whose interests he is speaking up for perfectly reasonably.

There is a further important problem that the hon. Gentleman needs to consider when he decides whether to press his amendment to a Division. TA members are volunteers. Volunteers cannot be jobholders within the definitional terms of the Bill—they are not an employee and not a worker. Given that we have already accepted the definition of jobholder, it would be difficult to get a TA volunteer into the terms of the Bill. It would be hard to make the hon. Gentleman’s proposal fit with every other aspect of the provision.

Andrew Selous (Conservative, South West Bedfordshire)

Again, I hear what the Minister says. He has a brief and a position that he is doing his best to advance, but I do not accept the logic of his argument. Once people put on the Queen’s uniform as a reserve soldier, sailor or member of the Royal Air Force, they are a jobholder. It would be easy to amend the definition in the Bill. Those people are certainly subject to the full demands of military law the moment that they walk through the door and put on the uniform.

Auto-enrolment will not be forced on anyone. People will have the option to say no. I have not been reassured by what I have heard. If there were enough members of the regular forces, for whom the Government would be paying pension contributions anyway, the Government would be paying this money as a matter of course. There are long periods of reserve service because the regular forces are under strength at the moment, and I will press the amendment to a Division.

Clause 77

Clause 78

Nigel Waterson (Conservative, Eastbourne)

I am happy to relieve my hon. and gallant Friend the Member for South-West Bedfordshire—Captain Selous—and to take on the arguments about a new set of issues.

This is our first sniff of the simplification—or deregulation, as it is sometimes called—agenda. We shall hear much more about that in a later sitting when we debate our new clauses relating to conditional indexation, for example, so I will hold my fire on many of the issues until then.

The Department commissioned an independent report on deregulation from Chris Lewin and Ed Sweeney some time ago. They published their report on 25 July 2007. The Government subsequently issued their own detailed comments on the Lewin-Sweeney document.

Of course, I pay tribute to Chris Lewin and Ed Sweeney for their labours—they obviously expended a lot of time and effort—but it is interesting that on some of the key questions they were unable even to agree among themselves. In some ways, what we have is a fairly timid report with some fairly timid recommendations about deregulation. With all due respect, the Government’s own timidity about deregulation builds on that.

Why does that matter? It matters because those of us who still believe that the best way forward for many people is defined-benefit schemes are prepared to try almost anything that might encourage a sponsoring employer to continue providing a DB scheme open to both new members and existing members. We know there has been a gentle trend of decline in defined-benefit membership since, if I remember rightly, the late 1960s. On this Government’s watch, that decline has speeded up dramatically, and bodies that should know what they are talking about—such as the Association of Consulting Actuaries—are warning all of us that a second or third wave of companies might get out of the DB business in the near future unless they are thrown a lifeline. I do not wish to reopen the levelling down argument which we have exhaustively investigated in previous debates, but the crunch moment for many of them may come in 2012, or whenever the system of personal accounts comes in.

The smokescreen of having a Government-sponsored, Government-backed scheme, albeit with only a 3 per cent. employer contribution, might encourage some employers—and I am not necessarily talking about unscrupulous employers—to say to their employees, “We are not going to carry on with our own scheme; here is a Government scheme. It’s perfectly okay. Why don’t you enrol in that?” We know from the National Association of Pension Funds that the average employer contribution in traditional DB schemes is about 16 per cent. That is going to make a very significant difference to people’s outcomes for retirement. The onus is on us, on both sides of the Committee, to grab any passing suggestion which can make it easier for these employers to keep going.

I recently had a trip to the Netherlands, about which I will say much more when we talk about conditional indexation. I went there to find out why they have something like 94 per cent. of all employees in DB schemes. It is absolutely incredible. What are they doing right that we are not doing? It is always difficult to export and import ways of doing things from one country to another, although there are a lot of similarities between what we do and what they do in the Netherlands. What they do is to build flexibility into the system, making it more attractive for employers to keep on with proper DB schemes. Lewin and Sweeney’s starting point, which we accept as common ground for us and the Government—and, I suspect, for the Liberal Democrats as well—is that accrued rights should be protected. Any rights acquired up to this date should be left alone.

Lewin and Sweeney said that risk sharing should be facilitated, and I think that is important, so that we get a third way—to coin a phrase—between DB schemes and straightforward DC schemes where the whole risk is put on to the employee rather than the employer. Their review has some interesting things to say about other issues, particularly principles-based legislation, which is a big topic, and perhaps not one for today. There is the abiding problem of section 67 of the Pensions Act 1995, about which debate rages as to whether it stops employers changing some of the terms of existing pension schemes.

I may be wrong, but I think the Government’s default position on this is that section 67 does not stop people doing these things, which might be worth doing. It seems to me that as long as many employers think that—presumably on the basis of the legal advice they are getting, since I know we lawyers are always ultra-cautious in these matters—then perhaps we should be doing something about section 67. There is also talk about statutory override, but a new clause deals with that so I shall return to the subject later. One recommendation was for a change in the law on pension and divorce, hence clause 78—a clause of one and a quarter lines but of substantial significance.

I mosied down to the Library to dig out a volume called “Jackson’s Matrimonial Finance and Taxation”, which gives some useful background. I hope that there is not an eighth edition; the seventh is the best I can do. The authors make the point that pension rights are nowadays one of the most valuable assets to be argued about between the parties on divorce. When it comes to dividing the matrimonial assets, the pension is more important than ever. In Brooks v. Brooks, a famous case, many of those issues were addressed, and much dissatisfaction was expressed about the existing state of the law.

The view has been expressed that as a matter of common law the courts still had some power to offset—I think that was the expression—pension rights versus other rights. For instance, if the husband—almost invariably it is the husband—had built up a substantial pension pot, the wife might get more of the equity in the house. In the Brooks case, the House of Lords decided that there was such a jurisdiction. It was the Pensions Act 1995—as a fresh-faced young Back Bencher, I had the privilege to serve as a member of the Committee that considered that legislation—that first gave the courts the power to attach or earmark part of all of a pension or a commuted lump sum. That came into effect in 1996. Under the Welfare Reform and Pensions Act 1999, which came into effect in 2000, the concept of pension sharing replaced that of pension splitting.

The issue has been round for some time, but one of the difficulties is apparently the concept of protected or safeguarded rights within pension funds. The Government’s position was given in the deregulatory review of private pensions. The review stated:

“There are concerns about the complexity of the requirements and the different treatment of pension credit rights. The Government agreed that some of the requirements are unnecessary and, at the next suitable opportunity, will repeal the legislative requirements relating to safeguarded rights.”

The review continued:

“The Government’s proposals in this area were warmly welcomed by all the correspondents who raised the issue.”

Pausing there for a moment, it is interesting to note that I have not seen any briefing notes or evidence from any outside bodies opposing the provision—nor have I seen any that support it. I can only assume that a veil of silence has fallen over the proposal, which must mean that everyone is happy with it. If I get a sack full of letters as a result of this speech, we will know differently. The review went on to say that

“The abolition of safeguarded rights will be taken forward in the Pensions Bill.”

That is exactly what is happening.

According to the explanatory notes,

“Where, on divorce or dissolution of a civil partnership, rights to a person”—

to a pension—

“are shared under the mechanism in Chapter 1 of WRPA 1999, and those rights include contracted-out rights, the law as it stands treats the contracted-out rights in a different way from the other shared rights. They are known as ‘safeguarded rights’ and are subject to various restrictions.”

Clause 78 and schedule 8 would abolish those restrictions completely, after which

“shared rights that derive from contracted-out rights will be treated in the same way as other shared rights.”

That seems to be the right way forward.

I believe that some 10,000 pension sharing orders are made every year and in the impact assessment the Government estimate that between 4,000 and 5,000 will be affected by the change. From what I can gather, it is something that the courts would welcome, as would many of the couples involved in these difficult divorces. Assuming that my understanding of the thrust of the modest little clause is correct this side of the Committee welcomes the proposal.

James Plaskitt (Labour, Warwick and Leamington)

I am grateful to the hon. Gentleman for supporting the clause in that way. It abolishes safeguarded rights and as such is part of what will be a rolling review of the pensions regulations designed to achieve a degree of deregulation. He will of course know, having seen the Lewin and Sweeney report, that there is no magic bullet that will achieve the deregulation that we want. It is an exercise that needs to take place over time, looking at all aspects of existing pension regulations. A number of measures that we can take to achieve deregulation now appear in the Bill. This is one of them and there are others that we will debate either today or in later sittings. The hon. Gentleman is perfectly right to identify that as one of those deregulatory steps and I am pleased that he welcomes it. As he says, when a divorcing couple or civil partners who are dissolving their relationship—it does include that—seek a final financial settlement the court must take into account the value of any pensions held by either party to the divorce or partnership dissolution. One of the options open to the court is to make a pension-sharing order.

When a divorced scheme member’s sharable pension rights include contracted-out rights, the former spouse’s share of those rights is know as the safeguarded rights, and those rights are subject to a detailed regulatory regime, similar to but not the same as the rules for contracted-out rights from which they are derived.

We have received representations, both as part of the deregulatory review of private pensions and also prior to the review, that safeguarded rights serve no useful purpose, that they restrict the options available to the member and just add administrative complications to pension schemes. We have been persuaded by those arguments and have taken the opportunity to bring forward the clause and to remove safeguarded rights. That is a useful, and I am pleased to hear a supported, step towards the process of deregulation.

Nigel Waterson (Conservative, Eastbourne)

One likes to think that the concept of safeguarded rights was introduced originally for some purpose. Has the Minister been able to identify who or what it was meant to protect at the time, or has it been a complete misnomer from the start?

James Plaskitt (Labour, Warwick and Leamington)

Safeguarded rights were introduced for contracted-out benefits—derived from the national insurance rebate—to protect public funds. Therefore, safeguarded rights were created to protect the national insurance rebate when contracted-out rights were shared between the parties to a marriage or a civil partnership. They were broadly intended to reflect contracted-out rights and to ensure that those rights were securely protected and used for their intended purpose, that is to provide an income in retirement. When they were introduced it was thought that they provided additional protection to pension credit members, but since they do not require a minimum level of payment that is not in fact the case. They were introduced for good reasons but have proved to be unnecessarily bureaucratic and that is why we brought forward the proposal to abolish them. I am pleased that the hon. Gentleman supports that and I hope that it will therefore become part of the Bill.

Clause 79

Danny Alexander (Liberal Democrat, Inverness, Nairn, Badenoch and Strathspey)

First, I want to echo some of the comment made by the hon. Member for Eastbourne about both the importance of the deregulatory review and the work that came out of that, and of the deregulatory agenda more generally, aimed at protecting, where possible, existing defined benefit schemes. Some of the matters that we will come to discuss, particularly under the new clauses, are ones for which I have considerable sympathy.

However, I would be grateful for a bit more information from the Minister on the evidence base for the Government’s decision to include the provision to reduce the cap on growth funds for deferred members of certain occupational pension schemes from 5 per cent. to 2.5 per cent. Obviously, the main argument in favour of clause 79 and the associated schedule 2 is that it will provide support for the remaining defined benefit schemes. That certainly has been the representation made to the Committee by organisations such as the National Association of Pension Funds and the Engineering Employers Federation, which made the point both in its evidence and the briefings it supplied.

I would like to know what evidence the Minister has that this will do something to slow the closure of defined benefit schemes. It is interesting to look at what the independent reviewer said around this idea.

“We are not inclined to recommend a change in approach to the revaluation requirements for deferred benefits. Although there will be some cost savings for final salary schemes (partially offset by extra administrative costs due to the need to revalue two separate tranches of benefit at separate rates) these would be made entirely through reduction in the value of the benefits of those who leave the scheme before pension age. We have seen no evidence that this change would ease administration, encourage risk sharing or slow closure of final salary schemes.”

That is a fairly strong view from the people the Government asked to conduct the independent review into deregulation. I would be interested to hear on what basis the Government and their officials reached the opposite conclusion, which led to the inclusion of this provision in the Bill.

Certainly, representations from other organisations—I particularly draw the Committee’s attention to the TUC and to Unite in this context—suggested that what this provision could potentially mean is a significant erosion of some members’ benefits. Depending on the measure that is used, inflation is currently running at around 4 per cent., which would mean that deferred pensions would be worth 1.5 per cent. less per year in real terms at the moment, if this arrangement applied now. Over a long period, if those arrangements were maintained—the Minister will no doubt draw attention to the Government’s inflation target and so on—this could amount to deferred pensioners, perhaps those who deferred a long time in advance of retirement age, losing quite a considerable proportion of the benefits they would have expected to receive.

As with many other provisions in the pension system, there is currently, therefore, a risk. I wonder to what extent the Government have evaluated the possibility that this change could potentially have a significant effect, particularly on women pensioners. Women pensioners suffer from a number of different aspects of our pension system and I would like to hear from the Minister that the impact on women is something he has particularly taken into account in considering and bringing forward the proposed change.

To quote the independent reviewers again:

“Although available data is patchy, it seems to us that women could be proportionately affected by a reduction in the cap, because they are more likely to earn pension benefits early in their careers and then leave the workforce for periods of time to undertake caring responsibilities.”

Clearly, in the Bill that went on to become the Pensions Act 2007, the Government made the argument that at least some of the changes that they were bringing forward were there to support and advance the position of women pensioners. Though the Bill did not go as far as some of the amendments tabled by my hon. Friend the Member for Yeovil (Mr. Laws) at that time, we did welcome the progress that was made. There is a concern, however, that the current Bill—subject to what the Minister has to say in response about the evidence he has looked at in relation to the impact on women pensioners—is actually sending some quite mixed messages.

The argument, which has some force, that has been advanced particularly by the NAPF is that the measures contained in the clause and in schedule 2 are necessary to help protect existing defined benefit schemes. The representation from the TUC has suggested that this change might, in some circumstances, encourage employers to close high-quality existing schemes, saying:

“The statutory revaluation cap also provides protection for current employees in defined benefit pensions, not least when employers make changes to schemes. If for example a scheme was closed to future accruals, all the existing members would be treated as deferred members with their benefits adjusted for inflation up to statutory cap.”

In other words, if the scheme is closed and people are therefore able to apply the lower cap that is proposed, there is a potential advantage to employers of closing the scheme. That is the TUC's argument. I wish to hear what consideration the Minister has given to that important point, because it needs to be thought through properly before the item we are discussing is put on the statute book.

Finally, I should like to hear the Minister’s answer on this complicated issue, about which there are arguments on both sides. I wish to be reassured that the impact that the provision may have on young people's incentive to save was considered properly by the Government when drafting the clause. Clearly, in the modern labour market, we all know—I guess that Members of Parliament are more conscious of it than most—that there is no such thing as a job for life. [Interruption.] Perhaps the Minister thinks there is; perhaps the hon. Member for Eastbourne does. People often move from job to job and might have several jobs—or even two, three, four, five or six jobs in a year—and under the Bill there will be the opportunity for automatic enrolment in respect of every one of those jobs, because having left an employer and moved to other employment, people are therefore deferred in the context of earlier employment. What impact does the Minister think the reduction in the cap would have on the incentives for people to join pension schemes throughout their lives, given that doing so could result in a reduction of the benefits that they could receive from the pension schemes from earlier periods of employment?

I should be interested to hear the Minister's answers to all those important questions, before we move on and agree to the clause standing part of the Bill.

Nigel Waterson (Conservative, Eastbourne)

I suppose that the hon. Member for Inverness, Nairn, Badenoch and Strathspey should know about having more than one job, because not only is he trying to shadow the Department that it is possible for 40 per cent. of all Government spending, but he is also chief of staff to his new party leader. Clearly, he is a renaissance man. However, I do not agree with him. I do not agree with the TUC, either, which was wrong to throw its toys out of the pram when this proposal surfaced. We Conservatives were quick to support the Government on this matter, but we said, in other ways, that they should be going further and faster.

The TUC needs to take a trip to Holland, because the unions there are closely involved in running the big sectoral defined benefit schemes and are totally on the same page as employers’ organisations on how such things are run and on having flexibility built in. People like those at the TUC need to get on board with the idea that it is about having a choice between having a Rolls-Royce pension and, perhaps, a Jaguar or even a Volvo one, if that is their tipple. However, if people insist on a Rolls-Royce pension, they may have no such scheme at all and may end up with an employer reverting to a simple defined contribution scheme or, when the day dawns, pointing his employees towards the personal accounts with their 3 per cent. employer contributions. So there are some real dangers of people, such as those in the TUC, overplaying their hand. All credit to Ministers for at least coming up with this brand of risk sharing and flexibility.

I commend the hon. Member for Inverness, Nairn, Badenoch and Strathspey for picking a quote out of the Lewin and Sweeney report that sounded clear-cut and black and white on the issue, but it seems to me that the more relevant quote from their report is this:

“Once again, we find good arguments on either side of this question.”

That is very much in the mode in which they discuss almost everything in the report. I do not criticise them, in that they were coming at the issue from different directions. They are both experienced men with a lot of expertise, but they simply could not agree on some of the fundamental issues.

Danny Alexander (Liberal Democrat, Inverness, Nairn, Badenoch and Strathspey)

The hon. Gentleman is right in what he points out about the report. The purpose of what I said was simply to hear from the Government the reasons why they had decided to come down on one side of the argument rather than another when the independent reviewers had not been able to do so.

Nigel Waterson (Conservative, Eastbourne)

It certainly was not the conclusions of Sweeney and Lewin that persuaded the Government to do anything specific. In a masterpiece of draftsmanship, they finally came up with this immortal line. As the hon. Gentleman accurately said, they did not recommend a reduction in the cap, but they concluded by saying that they would

“understand if Government took the view that, when looking at the package as a whole, a reduction in the cap from 5 per cent. to 2.5 per cent. was one of the measures needed”.

If I was a Minister receiving that report, I would probably be tearing my hair out. [Interruption.] The Minister has been, obviously, or somebody has. It seems strange to produce a report with so few firm conclusions. Perhaps that illustrates the minefield that we are in at the moment, but let me be absolutely clear about this. We think that the prize is to retain and encourage DB schemes, which will always produce the best possible retirement income, broadly speaking, for individuals—much better, let it be said, than personal accounts and significantly better, on average, than DC schemes.

Again, to their credit the Government, in their own conclusion, said:

“The Government remains concerned about the continuing decline in occupational pension provision and that, if nothing is done, the decline will continue...It is clear that there is no single ‘magic bullet’, or, as this consultation has shown, ‘a consensus option’.”

We agree with all of that. There is no single magic bullet, but there is a package of different things, some of which are in the Bill but some of which are not yet, that we think could give the necessary impetus to DB schemes for the future.

As I understand it, the measure is meant to take effect from January 2009 and will affect only rights accrued after that date. The basic principle, which I think is common ground, is that any rights accrued before this legislation will not be touched at all. The Government estimate that

“a reduction in the cap would deliver potential savings for employers of up to £250 million...a year”,

possibly rising to as much as £400 million a year. That is worth having in what is a difficult environment for companies running these schemes.

I totally agree with the NAPF. When it commented on this aspect of the Bill when it was published, it described it as “an important first step”. We agree. We also agreed with Pensions Week when it said:

“Most notable by its absence in the bill was any conclusion over the industry’s proposals for risk-sharing strategies.”

James Plaskitt (Labour, Warwick and Leamington)

This has been a helpful debate on an important change that the clause introduces. I am grateful to the hon. Member for Eastbourne for his expression of support for it. My problem with the approach of the hon. Member for Inverness, Nairn, Badenoch and Strathspey is that he has taken this entirely in isolation, and based his criticisms of it as through it were a stand-alone change. It needs to be seen in the context of everything else that is happening. The reform is part of a broad package. That is what Turner asked us to do; it is what everyone has understood needs to be done. For example, the hon. Gentleman tried to argue that this specific form would in some way be particularly disadvantageous to women. He should bear in mind the whole package.

For example, we have already made changes, which will apply in due course, to the number of years required to qualify for a state pension. The main beneficiaries of that reform are women. The majority of those in the income bracket who will, we hope, become participating members of the new personal schemes introduced by the Bill will also be women. The net effect of all the measures being taken will be substantially to improve the pension position of women in the future. I suggest that the hon. Gentleman should bear all of these things in mind, because this is part of making a sustainable whole.

Danny Alexander (Liberal Democrat, Inverness, Nairn, Badenoch and Strathspey)

I think that I acknowledged, in what I said earlier, that the measures taken in the previous Pensions Bill, as well as the personal accounts, will have benefits for women. My intent was not necessarily to criticise these arrangements, but to probe the Minister’s evidence base on aspects of the clause, so that the Committee can be assured that all potential criticisms have been looked into in deciding to bring the measure forward.

James Plaskitt (Labour, Warwick and Leamington)

I am coming to that. I understand that the hon. Gentleman wants to know the evidence base, and I will come to it in detail in a moment. I wanted to reassure him on the broader context. One thing on which we all agree is that good quality occupational pension provision has to be encouraged. Traditionally, in our country, such provision has tended to be made up of defined-benefit, often final salary, schemes. However, due to a combination of factors such as high life expectancy and lower investment returns, the cost to sponsoring employers of running defined-benefit schemes has increased significantly over recent years. Mainly as a result of these cost pressures, we have seen a decline in the number of schemes which are open to current and new employees.

While the Government have no power to control many of the underlying cost factors, what we can do is review legislation which affects occupational pension schemes, and seek wherever possible to minimise the cost burdens arising from such provision. If a member leaves an occupational scheme before reaching pensionable age, the pension rights which have been left behind in the scheme—the deferred rights—can be undermined by inflation if no revaluation increases are provided by the scheme over the period of deferral. That is why schemes are required to award a minimum level of revaluation on such rights. When in the 1980s the statutory revaluation requirement was introduced for deferred pensions, it was recognised that it would be counter-productive and wrong to impose a potentially unlimited cost burden on schemes.

The balance of member protection and scheme affordability was set by requiring schemes to revalue deferred pension rights by the rate of inflation over the period of deferral, or by 5 per cent. per annum, whichever is less. When the 5 per cent. cap was set, inflation was running at a significantly higher level than it is now. In fact, over the previous five years, it had averaged almost 9 per cent. In other words, the balance was struck such that there was no expectation that schemes would have to protect deferred pensions fully against inflation. Due, however, to the sustained reduction in inflation in recent years, that is now the effect of the 5 per cent. cap. The similar cap which applies to the limited price indexation requirement on pensions in payment has already been reduced to 2.5 per cent. per annum, and bringing the revaluation cap into line with this figure was one of the proposals considered as part of the recent deregulatory review of private pensions. We think that it is sensible to include this reform in a package of measures to help employers to continue to provide occupational pension schemes for their work forces.

In judging that a reduction in the revaluation cap is now appropriate, the Government are clear that pension rights that have already accrued—this point was made by the hon. Member for Eastbourne—should not in any be affected by the introduction of the lower 2.5 per cent. cap. We have drafted the legislation carefully to make sure that that is absolutely clear.

The Committee will have noted that schedule 2 makes equivalent changes to the provisions of the Pension Protection Fund, so that the shape of PPF compensation continues to reflect the statutory requirements of the pension scheme. It would be perverse for a compensation scheme to offer better benefits than those that a person would have expected from their own pension scheme.

The hon. Member for Inverness, Nairn, Badenoch and Strathspey asked for specific evidence. Let me share with him the extent of support for this measure, the endorsements that it has received and the reasons why it has been endorsed. For example, this clause is specifically endorsed by the National Association of Pension Funds, the Association of British Insurers, the Engineering Employers Federation and the Co-op Group.

In endorsing the clause, the EEF said that the reduction in the cap would

“make it more likely that those schemes that have been closed to new members will decide to remain open for future accruals to existing members”.

I think that the hon. Member for Inverness, Nairn, Badenoch and Strathspey would like to see that happen and there is evidence, from those in the field, that that would be the effect.

The CBI also gave us a little more insight in this area. If the hon. Member for Inverness, Nairn, Badenoch and Strathspey does not mind, I will share with him the full extent of their support for the measure, because what the CBI said is interesting in the context of the way that the hon. Gentleman spoke. The CBI told us:

“Firms have faced an escalating burden of cost in running DB schemes over the past decade, resulting from longer lives and higher regulatory costs. Where appropriate, it is right to reduce these burdens to improve scheme health. The proposals to amend the limited price indexation (LPI) cap to 2.5% for deferred members...is therefore welcome. As this is a forward-looking measure, scheme members will know from the outset what rate of revaluation their savings will have and will not be “unfairly” re-valued. Reduction to 2.5% is also appropriate to delivering the original intention of the legislation - limited price indexation - in the current the economic climate.”

I hope that the hon. Member for Inverness, Nairn, Badenoch and Strathspey will accept those arguments. This is a measure that reflects today’s lower inflation environment and it is part of a package of wider deregulatory measures. We hope and believe that it will help employers to maintain defined benefit occupational pension provision into the future. Therefore, I hope that the hon. Gentleman will support this clause.

Clause 80 - None

Nigel Waterson (Conservative, Eastbourne)

This is another slightly “techie”, or technical, point, but we think that it is an important one. It ties in with another Bill that is going through Parliament at the moment, the National Insurance Contributions Bill, and also with the question of flat-rating of the state second pension, or S2P.

In fairness, the Government have always made it clear that it is their intention in the long run that S2P should cease to be earnings-related and instead will become a flat-rate scheme, based on earnings at the low earnings threshold. In its report, the Pensions Commission said that, as part of the “package”—I think that it is very important to keep that word “package” at the forefront of our minds—that it recommended, that this process should be accelerated and that S2P should become flat-rate by around 2030.

I am trying to deal with this issue as briefly as I can, but some of it is a bit complicated. The Pensions Act 2007—I am sure if the Minister keeps up, he will get there in the end.

James Plaskitt (Labour, Warwick and Leamington)

I have been there before.

Nigel Waterson (Conservative, Eastbourne)

He has been there before and he has the T-shirt.

The Pensions Act 2007 accelerated this flat-rating even further and again, that is all fairly clear. Where things started to unravel was the Budget last year when we had the harmonisation of the national insurance contributions upper earnings limit, the UEL to the initiates, and the threshold at which higher rate income tax becomes payable. The Pensions Policy Institute, God bless it, pointed out that the effect of this would be an increase in the value of the state second pension built up by higher earners running counter to the flat rate in contention.

However somebody in the Treasury failed to spot this consequence until the pre-Budget report in October when they announced that the introduction of the upper accrual point, or UAP, was brought forward to April 2009. With great energy, my hon. Friend the Member for South-West Hertfordshire and my hon. Friend the Member for Putney, in deliberations on the National Insurance Contributions Bill, have been trying to nail down various things—why this was not spotted, why it happened in the first place and how many people lose out as a result.

I think I am right in saying, though I have been unable to find the exact reference today, that in the Red Book there was a figure of £4 billion allocated against this change, which presumably was to be paid by somebody. It is difficult to avoid the conclusion that this is yet another stealth tax on middle England, because people are paying contributions, but will not get anything in return. So by aligning national insurance with income tax in this way, the Government have imposed another stealth tax. Contributions that were once made towards earnings-related benefits now contribute towards precisely nothing, they are just contributions to the Exchequer.

Her Majesty’s Revenue and Customs’ impact assessment pointed out at the time that 2.1 million people with income above the UEL are contracted out of S2P and went on to say,

“These individuals will either see a reduction in their take-home pay, as they will get a lower rebate on their national insurance contributions than would otherwise have been the case, or a reduction in the money that goes into their pension scheme.”

As I say, my hon. Friends working on the other Bill have been trying very hard to establish just how many people are affected in this way.

The key point—I do not want to take overlong on this clause—is that this change was a key component in the overall package post-Turner, following the recommendations of the Pensions Commission. As we have said on other issues in this Committee, any attempts to unpick the basic package, on which there is a broad political consensus, and indeed a consensus outside politics, is a dangerous way to go. The whole package was a complex business of give and take in all sorts of ways, but as my hon. Friend the Member for Putney made clear in the debates in Committee on the National Insurance Contributions Bill,

“Our concerns related to the fact that this was the “take” part of that package, and there was a big question mark over the “give” part, which was the re-establishment of the earnings link.”——[Official Report, National Insurance Contributions Public Bill Committee, 15 January 2008; c. 52.]

That is the most important point here because the Government seem happy to fiddle with the flat rating issue, changing what was in the Turner package. We will have the opportunity later, because I have put down a new clause about it to press the Government again as to when they do expect to restore the link between average earnings and the basic state pension. It may be something the Minister can put us out of our misery on now and tell us what is the current intention of the Government.

Danny Alexander (Liberal Democrat, Inverness, Nairn, Badenoch and Strathspey)

I just want to echo one or two of the hon. Member for Eastbourne’s points because there is a package involved here. It was always the intention—particularly in the Turner package but also, as has been discussed, under the previous Pensions Bill—that the flat rating would very much be a development that would go alongside the uprating of the basic state pension in line with earnings.

As the explanatory notes make clear for this clause, the reference year is expected to be 2012. It is expected, although not yet certain, that the uprating in line with earnings would start from 2012, but the Government have given themselves a degree of flexibility to change that so that it might be at any time up until during the next Parliament before that particular change commences.

We have argued from these Benches that the 2012 date is, in itself, too late; that improvement should start as soon as possible. However, if there is to be a clear sense that this particular measure is going to take effect from 2012 then, equally, it needs to be the case that the uprating in line with earnings, to match it alongside, is going to take place from 2012 as well. The Minister’s reassurance on that basic point, which is pretty fundamental to this part of the Bill, would be gratefully received by the Committee.

James Plaskitt (Labour, Warwick and Leamington)

I am grateful that the hon. Member for Inverness, Nairn, Badenoch and Strathspey acknowledged that there is a package of notice to be considered here, as I was encouraging him to do so in the previous debate. Part of the package—aside from what the Bill is doing—is the very extensive reform taking place to the state pension. He will also know, as was also acknowledged by the hon. Member for Eastbourne, that a considerable part of that is the extensive reform of the state second pension. Having simplified future rights to the state second pension, clause 80 and schedule 3 of this Bill go a step further. These provisions enable us to simplify past accrued pension rights.

Put simply, the key proposal is—for people retiring after 2020—to bring forward the calculation that would currently occur at state pension age. In doing this, any and all accruals of additional state pension up to 2012—be they accrued rights to graduated retirement benefit, SERPS and/or S2P and contracted-out equivalents—would be rolled up into a single cash value amount. This amount would then be revalued annually in line with earnings during a person’s working life. As a result of this, people will be able to work out much more easily what state pension they can look forward to and, subsequently, be better able to plan appropriately for their retirement.

I would like to bring to the Committee’s attention that we still wish to bring forward amendments to this part of the Bill to simplify the contracted out deductions payable as part of this consolidation. The required amendments are technical and therefore demand very careful drafting, but I can confirm that we will bring these forward as soon as possible.

I would like to reassure hon. Members that I intend to provide them with a comprehensive fact sheet—I know they will look forward to this—setting out all the details of what is being proposed here, hopefully in the most digestible manner possible. I will do that in time for the amendments that I have just referred to.

Nigel Waterson (Conservative, Eastbourne)

I do not want to end the sitting on a churlish note, but would it not have been much more helpful to produce the amendments in a fact sheet in time for this debate?

James Plaskitt (Labour, Warwick and Leamington)

As I have said, the amendments are highly technical. Given that these changes are still some way off before they come in, and there will therefore be further opportunities to consider this during the passage of the Bill, we will bring that amendment forward before the consideration of the Bill is complete. When we supply him with his very useful fact sheet the hon. Gentleman will see the complexity of this and the importance, therefore, of spending time on it to get it absolutely right. We want to achieve a simplification of a state second pension system here. The parts of the S2P that we are dealing with have accumulated a lot of changes over the years. It is a complex task to achieve simplicity, as it often is in Government.

Danny Alexander (Liberal Democrat, Inverness, Nairn, Badenoch and Strathspey)

The Minister is right. Simplicity is an objective much sought after and rarely achieved. We are all full of excitement about the fact sheet. [ Interruption. ] I note the whole Committee is full of excitement about the prospect of a fact sheet.

Andrew Selous (Conservative, South West Bedfordshire)

Recess reading.

Danny Alexander (Liberal Democrat, Inverness, Nairn, Badenoch and Strathspey)

Indeed. Could the Minister confirm whether he expects these amendments to be brought forward in time for them to be considered during the passage of the Bill in the Commons or whether he expects those to be a matter to be slowly debated in another place?

James Plaskitt (Labour, Warwick and Leamington)

All I can say is that we will do our best. I cannot I give an undertaking.

Turning to the point the hon. Member for Eastbourne focused on at some length, the changes announced in the PBR and the points he made in respect of the upper-earnings limit on national insurance contributions and his suggestion that there is a stealth tax hidden in here. I will try to persuade him that that is not the case.

The May 2006 White Paper announced our intention to convert the earnings-related state second pension into a flat-rate top-up to the basic state pension. The process would commence around 2012 and is expected to be finished by 2030. Changes to the tax and national insurance thresholds announced in Budget 2007 have the knock-on effects of extending this transition and of high earners gaining entitlement to more state second pension compared to the position outlined in the White Paper. Measures announced in the pre-Budget report subsequently are consistent with the original intention stated in the White Paper. To keep within our original timetable we are bringing forward to 2009 a key feature of the White Paper proposals, a cap on accruals. To add clarification from the Pensions Policy Institute, which I think the hon. Member for Eastbourne prayed in aid to support his own argument. Responding to this point, it said:

“While this may sound like a significant policy change, widely reported to save the Exchequer £2 billion, it in fact refers to a technical change introduced to restore the flat-rating of S2P back towards the path originally envisaged in the Pensions Act 2007.”

They went to explain that,

“from 2012, S2P will be payable on the same earnings as originally envisaged in the Pensions Act 2007, becoming flat rate around 2030.”

It is a matter of keeping faith with the intentions as originally set out. With that, I hope there will be support for this to be included in the Bill.

Clause 81

Nigel Waterson (Conservative, Eastbourne)

I hope that I will not detain the Committee long on clause 81 which we also welcome. Consensus seems to be back on the menu.

This arose out of the creation of the pension credit system and the ruling that anyone 65 or over is not assessed on a weekly basis, as was the case with minimum income guarantee. There is no responsibility on pensions to report changes in income on a weekly basis. Instead, this is normally assessed on a five-yearly period with automatic uprating during the lifetime of the assessment. The policy assumption being that they are very unlikely to have any changes in their incomes over the age of 65.

What clause 81 is doing—and it is very welcome—is to say that those 75 and over will be given an indefinite assessed income period. Instead of having the intrusion, complications and confusion of a five-year assessment they will run on the existing basis. Presumably, there will still be an underlying obligation if they have a great windfall or something to inform the pensions service, but beyond that they will not be troubled. I can do no better than quote with approval the comment of Age Concern when they said:

“This proposal makes good sense and will be welcomed by people over 75 who will be able to look forward to a guaranteed income without having to go through a reassessment process. However, it is very important that people understand the system and know to ask for a reassessment if their financial situation changes and they become entitled to extra money”.

So we will endorse that and support the thrust of the clause.

James Plaskitt (Labour, Warwick and Leamington)

Thank you, Mrs. Anderson. I am grateful to the hon. Member for his support for this clause, which is an important one.

Assessed income periods are, as he says, a key feature of pension credit. They were introduced to remove the weekly means test for pensioners aged 65 and over. An assessed income period is currently a specific period of up to 5 years, during which time the customer does not have to report changes to their retirement provision, broadly their income from capital, annuities and retirement pension. When the assessed income period comes to an end, customers need to provide evidence and information on their current income and capital—in the same way as they do at the start of a claim—before another can be set.

The effect of subsection (2) of the clause is that claimants aged 75 or over will be generally be given an indefinite assessed income period. This will remove the need for those customers to provide evidence and information every five years on their retirement provision once this has taken effect. From age 75 people's retirement income—as the hon. Member for Eastbourne said—tends, broadly, to be more stable. Most people by the time they reach that age will generally have converted any pension pots into an annual income.

Subsection (4) of the clause will apply where an assessed income period is brought to an end by the expiry of a period of five years or more and the claimant is aged 80 or over. Again, generally the assessed income period will be extended indefinitely.

Subsection (5) makes some explicit provision about the commencement of the earlier subsections but, broadly, the changes will apply from 6 April 2009.

Subsection (6) is important—it is the sunset provision. The new provision inserted by Subsection (4) covers those people already in receipt of pension credit who have an assessed income period at the point of introduction. The provision only needs to be in place to cover these customers for a maximum of five years—therefore it will cease to have effect on 6 April 2014, five years after its initial introduction.

The effect of clause 81 is to introduce a significant easement targeted at those most elderly pensioners who are unlikely to have any significant changes to their income and capital, and who may be worried about the impact of small fluctuations in those things on their benefit payments. Their responsibility to inform us of major changes, as the hon. Member for Eastbourne says, of course remains.

However, it is worth clarifying that these pensioners will still be able to request a review of their claim should their retirement income or capital reduce. So I am grateful for these words of support and I hope the Committee will agree that this clause be part of the Bill.