Pensions Bill [Lords]

Public Bill Committee, 14 July 2011.

Steve Webb (Liberal Democrat, Thornbury and Yate)

I beg to move,

That if, on Tuesday 19 July, references to specific times in the Standing Orders of this House apply as if that day were a Wednesday, the Order of the Committee of 5 July shall be amended as follows—

(1) in paragraph (1)(e) leave out ‘10.30 am and 4.00 pm’ and insert ‘9.00 am and 1.30 pm’;

(2) in paragraph (3) leave out ‘7.00 pm’ and insert ‘4.30 pm’.

Good morning, Mr Brady. I hope that the motion will be one of the less contentious elements of the day. As the Committee will be aware, Tuesday 19 July is the last sitting day of the House before the summer recess. In the event that the House decides to run Wednesday hours rather than the usual Tuesday hours, if we do not change our sitting times we will be sitting well beyond the rising of the House. Much as I would be happy to do that, not everyone else might be, so in the event that the House decides that its sitting hours will be as per a Wednesday, as a concession I suggest that we amend our sitting hours as set out on the amendment paper.

New Clause 6 - Fees and charges

Graham Brady (Conservative, Altrincham and Sale West)

I remind the Committee that with this we are considering new clause 10—UK personal pension schemes: additional protection—

‘(1) The Pensions Act 2008 is amended as follows.

(2) In section 26(4)(b), at end insert “, ensuring they are protected to the same level as stakeholder terms and conditions.”’.

Steve Webb (Liberal Democrat, Thornbury and Yate)

I am grateful to the hon. Member for Erith and Thamesmead for tabling new clauses 6 and 10, because they give us the opportunity consider the important issue of charges. I am sure that the hon. Lady will be with us soon. She made some important points, as did the hon. Member for Leeds West, about how charges can have a big impact on the pensions that people receive. Indeed, it is little understood that a seemingly innocuous charge—what is 1.5% between friends?—cumulated during 40 years of a pension can take a large slug of the final pension. Therefore, even relatively small differences in charges can make a big difference. Given that, ideally, we want as much money as possible going into pensions not charges, it is entirely proper that the new clauses were tabled. I do not believe that either of them would do what it says on the tin or would achieve what they are meant to achieve but, in the spirit in which they were tabled, I shall respond positively.

New clause 6 suggests that, when the employer is choosing a scheme for auto-enrolment, he should take into account the level of charges. Obviously, we hope that employer would do that anyway. The practical impact of the new clause is not clear— what the penalty would be if they did not do that; whether we would fine employers who did not take account of charges. However, I agree that the level of charges is important. Likewise, new clause 10 refers to the stakeholder terms and conditions. That is partly to do with charges but, if we were to accept the new clause, we would have to consider issues such as lifestyling and transfers, which are part of the stakeholder terms and conditions, so it is much broader than only the issue of charges. However, as I said on Tuesday, I am keen to respond positively to such important matters.

Broadly speaking in respect of charges, the Government have ensured that there is a low-cost, good value-for-money provider in the market, which is NEST. Its charging structure is a contribution charge on the way in of just below 2%, and a 0.3% annual management charge. It is estimated that, on average, that will work out at about a 0.5% AMC over the lifetime of a pension, which is clearly well below stakeholder levels and many of the products in the market. However, it might not be the lowest and obviously employers will want to examine charges when considering how best to fulfil their duties under auto-enrolment.

The Department for Work and Pensions has down its own research on such matters, but at present the market is already operating below the 1.5% stakeholder price cap. In fact, a stakeholder cap set at a 1.5% level would rarely bite. The Department’s charges survey conducted in 2009 showed that the level of charge for workplace personal pensions is lower than 1% for more than half the schemes and, in regard to default options in occupational pension schemes, our research found that most AMCs were between 0.4% and 0.6%, and no charges higher than 0.9% were recorded.

I have referred specifically to default funds, and they are an important part of the charging debate. In other words, auto-enrolment inertia means that most people will not be making active choices. They will be put into a scheme and will stay there, because they will not get round to getting out. As for which fund and set of charges that they face, many people—most people, according to evidence on auto-enrolment around the world—will end up in the default fund, because, by definition, not being in the default fund depends on an active choice. The characteristics of the default fund are therefore crucial.

The Department is in the process of issuing guidance on what default funds should look like, and it specifically says that we need transparency in relation to charges. We anticipate that there will be a very competitive market, certainly for the larger firms. We already know that the staging process brings in the largest firms first, and there will be a lot of competition for this new growth in the pensions industry. We anticipate that the presence of NEST in the market will bring charges down, which is welcome. Therefore, we do not think there is a particular issue on charges with the larger firms.

The question then is whether the smaller or medium-size employer is vulnerable to high charges. It is important to remember that part of the reason why the market has not hitherto provided for such firms and their employees—at all in many cases—is because they are not profitable. Going to a one-person engineering firm in the west midlands and trying to sell it a pension is a very expensive thing to do. If that one employee is not particularly well paid, the charges or the percentage of a low wage are not very much at all.

It is therefore unlikely that an individual small employer will have what someone described to me the other day as a man in a shiny suit turning up and saying, “I’ve got this wonderful pension” and so on. It could happen, but we think that the smallest firms will get the letter from the regulator and they will see NEST flagged. Those who are not very interested in all this pensions stuff will go for NEST or will make a relatively simple choice. On the whole, because of the costs involved, they will not have a sales force turning up and spending time selling them a product. Therefore, we think the risks of people facing high charges in practice are limited. Importantly, we have powers under the Pensions Act 2008 to cap charges that are excessive, and the industry knows that we have such powers.

In principle, we believe that competitive forces will bring charges down, certainly for the larger firms. Many smaller firms will end up with NEST, and the costs of selling to such firms will mean that a high-cost provider is unlikely to spend money sending a salesman to them. However, it is important that we are not complacent. I therefore welcome both new clauses, which put the issue on the agenda.

The issue of what are charitably called active member discounts or deferred member penalties was raised on Tuesday. That is to say, once the firm is no longer interested in me, because I work for somebody else, it jacks up the charges. I heard recently of a leading member of a financial institution, who had only just discovered how much the active member discount or deferred member penalties were on his own pension. He had not realised, since he left the firm that he had worked for, how much the charges had gone up. Again, we insist on transparency of costs and charges in default fund guidance. Our power to cap charges relates only to active members in qualifying schemes, but there is an issue about whether charge-capping powers should also extend to deferred members.

Rachel Reeves (Labour, Leeds West)

We shall come on to the issue about transfers in and out of NEST in later amendments. However, if we were able to transfer money into pensions, into NEST, we would get round some of the problems of deferred member surcharges. We would not have to endure the high fees, because we could transfer the money into a lower-fee, lower-charging pension. I wonder whether we could think about the two amendments together in that respect.

Steve Webb (Liberal Democrat, Thornbury and Yate)

The hon. Lady is entirely right. The issue of charges is tied up inextricably with the issue of transfers into NEST specifically, but transfers more generally. For example, in some countries when someone leaves a firm, the default position is to either transfer the money into a new scheme or into some other product, or they actively choose to remain in the old scheme. That might be one way of addressing the matter.

Earlier this year, the Department issued a call for evidence on regulatory differences between defined contribution trust-based and contract-based pensions, focusing on short service refunds. Under current rules, in one sort of pension someone who has worked for a firm for a short time and has a small pot can get that money back, but in another sort the money remains stuck. The question is whether that is right. Our response is that we should do something about short service refunds, because that money is taken out of pensions, but disentangling that bit of the puzzle raises wider issues about transfers, including transfers into NEST.

We propose to publish in the autumn a document about transfers that will partly deal with the issue of deferred member penalties, because, as the hon. Lady said, if we can do something about transfers, the issue of people becoming stuck with a previous employer and having their charges jacked up will be much less significant. We will come on to NEST shortly, but I will continue to reflect on the issue of deferred member penalties, which the Department is considering in the context of its wider work on transfers.

We might ask why we do not just have a charge cap, but going straight in with one is not as straightforward as it sounds. New clause 10 implies using the stakeholder cap, but the difficulty is that that cap relates only to annual management charges, whereas actual charges might be a contribution charge—as for NEST—and the annual management charge. Thought would therefore have to be given to how the cap applied to schemes with different combinations of charges, to how those charges were converted to a standard metric and to how charges are sometimes higher because they relate to payment for a service.

Someone with a more sophisticated pension—raspberry ripple rather than vanilla, in my description—might pay more for it, but might receive a knickerbocker glory at the end. The analogy is slightly tenuous—we will come on to frozen assets in a minute. It should be possible for someone to choose a product that is more expensive, provided they are aware of that, to get back something that they want, such as active management. We would not therefore want to ban charges above a certain level, but such charges would be applied only to default funds. I could continue about the many permutations of how caps, such as the simple version in new clause 10 of using the stakeholder cap, would work in practice.

Rachel Reeves (Labour, Leeds West)

Have the caps on charges in stakeholder pensions worked or have they resulted in the problems that the Minister described with his ice cream analogy? At times, his speech sounded a little like one made by my hon. Friend the Member for Edinburgh East.

Steve Webb (Liberal Democrat, Thornbury and Yate)

I take that as a compliment.

There is evidence that the stakeholder charge caps have had a downward impact on the market, and we think that NEST will do the same. As I have said, the Government specified that the stakeholder cap applied only to annual management charges. The difficulty with auto-enrolment is that people will be auto-enrolled into existing schemes, as well as into new ones, that have a variety of charging structures. For example, if we are not careful we might set an AMC cap, but if people have only the AMC, NEST would fall foul of that, because NEST includes a contribution cost. We would have to think about how to convert a contribution charge into an AMC, which might create new rigidities.

The thrust of what I am saying is that I am very sympathetic to the points raised by the hon. Members for Erith and Thamesmead and for Leeds West. I will certainly reflect further, not least as part of our work on transfers, on what they have both said about active member discounts, but neither new clause would achieve quite what is intended.

As I said, possibly before the hon. Member for Erith and Thamesmead came in, the danger of new clause 6 is that it would put a duty on firms to have regard to charges. That raises questions about what to do with firms that do not have regard to charges and whether they would be fined for going into high-cost pensions, as the fear is that they might go into high-cost pensions unwittingly. Therefore, I am not sure that new clause 6 would have the desired effect.

New clause 10 proposes the stakeholder model, but that does not read across neatly to auto-enrolment, because the stakeholder cap is only about AMCs, and the auto-enrolment world has different combinations of charges. The stakeholder cap has several other characteristics, such as lifestyling and rules on transfers, which we do not necessarily want to transfer lock, stock and barrel into auto-enrolment. New clause 10 is therefore probably too prescriptive.

Rachel Reeves (Labour, Leeds West)

Before the Minister finishes, one of the issues that my hon. Friend the Member for Erith and Thamesmead and I raised was the fear of mis-selling. What would happen to the credibility of automatic enrolment—not NEST—if people were enrolled into schemes that were not suitable for them because much of their contributions were eaten up by charges? Have he and his Department considered that matter in relation to the importance of some sort of CAP?

Steve Webb (Liberal Democrat, Thornbury and Yate)

I thought I had addressed that point—the risk is small. On the whole, many people will be beating a path to the doors of the big firms, trying to offer them the best deals. Such firms will have access to the best advice and so on. However, trying to sell a pension to a firm that has only one or two employees is an incredibly expensive thing to do. On average, workers in small firms are more likely to be lower-paid, because of the auto-enrolment population. With the commission that the pensions industry gets, even with several per cent. on a low wage, it would take an awfully long time even to recoup the costs of the hours spent selling the product, the journey to the factory and so on.

We think, therefore, that the risks are limited, but I reassure the hon. Lady that we are not complacent. We will monitor the market as it develops, starting with the big firms and gradually working down to the smaller ones. We will keep an active eye on all this, but I am happy to reflect further on some of the points that have been made. The new clauses do not quite do the job, but I am grateful to both hon. Members for raising these important issues.

Teresa Pearce (Labour, Erith and Thamesmead)

First, I apologise for being late—it seems that being late for everything is my routine this week.

I said on Tuesday that I would press new clause 6 to a vote, but in light of what the Minister has said, I am quite reassured. As has been said, the amendments relate to fees and consumer protection. One of my themes in our discussions is my concern about the reputation of the pensions industry. There is inertia when people have to opt in to a pension scheme. They might feel unsure about whether pensions are for them and whether they can be trusted, and that is one of the barriers that stop people making that leap. Auto-enrolment is one way round that problem, but increasing confidence is another, and the more open fees and consumer protection are, the more people will be reassured.

I was interested in the Minister’s comments about a man in a shiny suit and an employer with one employee. In relation to NEST, the Work and Pensions Committee heard that the current pensions industry is uninterested in the types of people whom we are trying to help, because such people have what the industry calls “unattractive lives”, which is harsh. I am reassured by the Minister’s comments, so I beg to ask leave to withdraw the motion.

New Clause 7 - Transfers

Teresa Pearce (Labour, Erith and Thamesmead)

I beg to move, That the clause be read a Second time.

Graham Brady (Conservative, Altrincham and Sale West)

With this it will be convenient to discuss new clause 9—Contribution limits—

‘(1) The Pensions Act 2008 is amended as follows.

(2) omit section 70 (Contribution Limits).’.

Teresa Pearce (Labour, Erith and Thamesmead)

Me again!

New clause 7 relates to transfers in and out of schemes, which has been discussed before and is a concern to everyone. New clause 9 is probing, because I wanted to amend provisions relating to contribution limits somewhere in the Bill, but could not find anywhere suitable, so I proposed the new clause in this part. I am aware, however, that if it were accepted, and it amended the Pensions Act 2008, that would result in far more consequences than we intend here.

The auto-enrolment review last October recommended that the Government remove the annual contribution limit for NEST from 2017. The recommendation said that it should be clear in the legislation that that will happen, but it is not in the Bill, which is why I am trying to include new clause 9, so that we can discuss the Government’s thinking on the matter.

I would like to see the cap on contributions removed for a number of reasons. It would mean that more people will save more money for their pension, which is exactly what we are trying to achieve. That has to be good. Especially in light of our earlier discussions about the increase in the women’s state pension age and the burden on future generations, which I heard described yesterday as “intergenerational fairness”, if we are trying to encourage people to save more for their pensions, a relatively low cap would work against that. We should encourage people to save as much as possible.

The other problem with the cap for NEST is that anyone who wants to make contributions slightly above that limit would have to find another vehicle in which to put money. That would be the time when they come across the man in the shiny suit. Which? has told us that research found that 52% of people would be more put off saving by that barrier and the hassle of opening a secondary pension plan.

The cap would also make it more complex for consumers, employers and the NEST scheme. If people had a one-off bonus or another source of income that they want to put into NEST, they might breach the limit. That would make the situation more complicated for the rest of the year, and there would be extra admin hassle for employers.

I understand that there was quite a bit of pressure on the Department regarding that issue, particularly from the Association of British Insurers. I believe that a number of us have seen an e-mail from the ABI that says that the Department feels under pressure to look at the NEST contribution limit. The annual limit is designed to focus NEST on its target market of individuals who the existing industry currently finds difficult to serve. It also says that the Department is concerned that the limit will not be as effective as it could be in achieving the policy intention. The ABI says that it would like feedback. I am interested in what the Minister has to say about that, because many people are concerned. There could be thinking that a solution to that will be found in time, if not now. That is why I have tabled new clause 9.

New clause 7 is about transfers in and out. Regarding whether there should a waiting period of three months, two months, one month or no month and whether the earnings limit should be lower, many of the Minister’s reasons for not reducing the waiting period or the earnings limit were because we would end up with tiny amounts of money and it would be unworkable. However, if people have an ability to transfer in and out of NEST, all those arguments would dissipate.

My parliamentary researcher, who is from Adelaide, is always going on about her “super”. She told me earlier this week that when she was a student, she had many jobs in bars and restaurants. She has tiny pots of money from that, which have been put into her “super”. She can roll them all up and they are worth something now, whereas they would have been worth virtually nothing.

We heard earlier in the week that people move between employers about 11 times on average, and I think that will increase—there is no longer a job for life, or any guarantee that when someone goes into a career they will stay in that. People have portfolio careers, where they move from one career to another. Anything that makes it clear to people that a pension is worth having and allows them to see the pot growing must be a move towards what we are trying to achieve with the Bill.

Last year’s review recommended:

“Government and regulators should review as a matter of some urgency how to ensure that it is more straightforward for people to move their pension pot with them as they move employer, so that by the time of the 2017 review the more general issue of pension transfers has been addressed and NEST is able to receive transers in and pay transfers out.”

The Bill is trying to get NEST up and running. Once that is achieved, and people can see that it runs well and the industry adjusts to NEST being a player in the industry, it may be easier to make those changes.

There is resistance to NEST in the industry. It is seen as a Government-sponsored player, which will create an unfair playing field. As I said earlier, industry as a whole has been uninterested in the people and small employers we are discussing, but that does not mean that the Government should also be uninterested—in fact, those are the very people and businesses in which they should be interested. Not being able to transfer small amounts of money—NEST’s target audience are people who will have small amounts of money, given the nature of their earnings—will make that target audience think that saving in NEST is not worth while.

The fact that people will talk to each other will make it more difficult to encourage them to participate in the scheme. People will be in a pub, and someone may say that they are about to be auto-enrolled into a pension scheme, and someone else may say, “It’s not worth it. I worked somewhere for a little while and I have just seen that it is only worth this much. I wish I hadn’t done it; I could have done more with that money.” That sort of negative story will sweep through communities and work forces, and will mean that more people than we would hope opt out.

We want everyone to automatically enter the scheme. If people can be auto-enrolled and then opt out at a later date, they may later have a chat with someone who says, “It’s not worth it; I’ve got this pot from my previous employer but it is worth nothing. I would rather have had that money for Christmas.” People might start opting out, and that will put a burden on employers. I would be interested to hear what the Minister has to say on the matter. I know from what he has said previously that he is sympathetic to my point, but it is about whether there will be an announcement after the Committee has finished its deliberations, or whether we might hear an announcement now.

Sheila Gilmore (Labour, Edinburgh East)

Both issues about NEST—which are linked—are important and I appreciate what my hon. Friend said about wanting to get answers rather than a definitive decision at this stage. The importance of NEST is, was and hopefully will be to enable people who have not had the opportunity to contribute to a good pension scheme over many years to be covered. For obvious reasons, a lot of pension providers have not been particularly interested in the customer group that we are discussing, and to a large extent one can understand that. It is not a particularly profitable activity; it is more complex administratively and the return is not particularly great. Had the industry been able to deal with that client group, no doubt it would have done so because it is always looking for new business.

I have probably said this before, but I will say it again: my experience of paying into some of the products offered by insurance companies—such as when I became at least technically self-employed within a law firm—was that the product was not very good. We need NEST, and we want to make it possible for people to get the best out of it.

I was struck by the fact that the Johnson review, which we have talked about in relation to other issues and which has been relied on by the Government, made a specific recommendation about the contribution cap. It recommended not only that we consider lifting or removing the contribution cap, but that the Government should legislate to remove it now. That is rather more specific than we might have expected, and I presume there was a good reason for thinking that it would be wise to legislate now, rather than wait to see how things work out towards 2017 and do something about it then. The review does not require the cap to be removed at this stage, but that would allow us to be clear about what will happen in the future.

As Which? and the report have said, there are administrative difficulties for employers with the cap. It might create a situation where somebody found that they were in danger of exceeding the limit in a given year and so might have to suspend contributions so that they did not exceed the limit. That is an unnecessary administrative complication, which could be avoided if there was not a cap. If someone had a higher level of earnings for a particular reason in a particular year, removing the cap would make it possible for those additional contributions to be made, because contributions are limited under the cap to £4,271, which is not a large amount.

Of course, many people who are in a position to make larger contributions, and whose employers are in a position to assist them with that, will already be in adequate pension schemes. Indeed, they will be the ones that will not even be considering using NEST. There may well be employers in the middle who do not want to set up a scheme, perhaps because they only have a few employees, but who might in any given year be paying someone slightly more than the cap.

Rachel Reeves (Labour, Leeds West)

We have spoken a lot during this Committee about the signals that are being sent to people about the nudge into a pension scheme or the nudge not to enrol. Does my hon. Friend think that a signal is being sent with the contribution limit that that is all that they need to save to get a decent pension in retirement? In reality, if someone is earning £35,000 or £40,000, to have anything like their standard of living they would need to be saving much more than the contribution limit would allow them to.

Sheila Gilmore (Labour, Edinburgh East)

I thank my hon. Friend for her intervention. The Johnson report was concerned that the cap sends an unhelpful message to employees that that level of saving will be adequate for their future. Clearly, the report took that into account in its recommendations. It clearly has not been the Government’s intention—otherwise it would have been in the Bill—to take up that recommendation. It would be interesting to know why and what the future intentions are. Does the Minister, in principle, agree that we should remove the contribution cap when we come back to this issue in the future? How will that be addressed once the roll-out is complete and we are ready to move on to the next phase?

On transfers, there is a long history in pensions of the vexed question of small amounts of pension that are accrued in various places. I take on board the points that the Minister made in response to the previous set of amendments on looking again at whether it is desirable for people to be able to take out money on a short-service basis. In the past, it was much easier than it is now for someone to take their superannuation if they had one. It was extremely commonplace for women to do that, not so much if they were getting married, but if they were leaving employment when they had their first child. It is attractive to get a lump sum at that stage.

Harriett Baldwin (Conservative, West Worcestershire)

I thank my colleague from the Work and Pensions Committee, the hon. Member for Erith and Thamesmead, for tabling these new clauses, which will lead to an interesting discussion. Does the hon. Member for Edinburgh East agree that the fundamental issue of NEST is that it is a state-subsidised competitor in a well-established industry in the United Kingdom? We support it, because it deals with a market failure. However, some of her arguments would encroach on what is already a well-established market.

Sheila Gilmore (Labour, Edinburgh East)

As the hon. Lady said, there is indeed market failure. The contribution cap is slightly more relevant than transfers into competition with other parts of the industry. Widespread concerns have been expressed about the market and whether it really does offer a product and a facility for the lower-paid. We would not support NEST if we did not agree that the market has failed in that respect. If people were covered by NEST but wanted to make other savings and find another product, the complications that would accrue would be unduly complex and could lead to their not sourcing such facilities. They might not have the confidence to take such action or they might decide that the effort was not worth while. Moreover, fees and charges could be affected if a person had some provision through NEST and then took up an additional provision elsewhere. Such a system is not particularly efficient for a relatively low earner and, as a result, a relatively low saver.

As for transfers, in the past people used to take the money. It was an attractive option, especially for many women at that time in the lives. However, later they had a big hole in their pension provision. People were then prevented from taking such action so easily. Having bits and pieces all over the place is not necessarily the best means of being aware of what the pension cover will be in later life or being able to access it at the time.

Rachel Reeves (Labour, Leeds West)

One problem is that people do not know what their pensions will be when they retire. The complexity of both the state pension system and occupational pensions means that money comes from different sources and has been accrued in different ways. One of the results of people changing their jobs is the different pots of money and the fact that there is no one statement to say how much they have saved. Does my hon. Friend agree that if money could be transferred in and out of NEST, people could accumulate one pot of money? There would be better clarity about what is put aside for retirement and people would know what more needs to be done if they want to realise the standard of living they are looking forward to in retirement.

Sheila Gilmore (Labour, Edinburgh East)

I thank my hon. Friend for her intervention. I agree that it would be more straightforward for people if they could organise matters in that way. However, NEST might become an unreasonable competitor in the sector. As people’s working lives become more stable and they have an opportunity to enter a better or more consistent pension scheme not through an organisation such as NEST, they might want to take out their NEST contributions and put them into the new scheme.

As other members of the Committee get their family involved in the debate, I must say how interesting it is when something esoteric is related to ordinary people, although whether my family is ordinary is another matter. It has been seven years since one of my sons graduated, and he has not had a permanent job. I am pleased that he has not lain in bed watching daytime television because that would be extremely disappointing. He has had several different jobs, such as agency work, sometimes over lengthy periods—nearly a year in some cases. He worked for an MP for six months. He has worked in a school for the past two years, and he is about to go back into training, hopefully to become a qualified teacher. In that seven years, therefore, he has done various different jobs and through the work in the school he has had a bit of pension contribution, but only in that two-year period. If he had been accruing bits and pieces in NEST through his previous agency work, he would have had that as well, and it would have been helpful to consolidate it.

If my son achieves his ambition and not only completes his teacher training but gets a job—which is not always guaranteed, in my recent experience of people qualifying—then had he had those bits of pensions, it would make sense to bring them together. That need not be in NEST, but they ought to be brought together—he could take what he might have accrued in NEST into a teachers’ pension scheme, and bring them together in that way. So it can work in both directions.

A lot of young people are in a similar position to my son, which is quite concerning, because I worked out that at that age his father had already been contributing to a pension scheme for six years, and he has been in that scheme throughout his working life. To be in a stable job for all that time is either very boring or very fortunate, but it is a considerable difference from approaching your late 20s and being unprovided for—that is a matter of concern, which is why all the provisions are so important.

We have talked a lot in this Committee about women, and a work pattern that was perhaps more traditional for women in the past. Many of us chose to have a more varied career path, for different reasons, which were often to do with child care but not exclusively so. Such a pattern might increasingly affect not only the unqualified or less qualified but those who have attempted to get themselves on the qualified career path.

I very much support the idea of removing the contribution cap and I am interested in the Minister’s proposals, as well as in the Government proposals for transfers and in how soon it will be possible to enable people to transfer in and out of NEST, making it a much more effective vehicle for people’s future pension provision.

Rachel Reeves (Labour, Leeds West)

It is a pleasure, Mr Brady, to serve under your chairmanship this evening. The day has gone quickly! I meant this morning, but that is not a reflection on the speech of my hon. Friend the Member for Edinburgh East, but on me entirely.

Malcolm Wicks (Labour, Croydon North)

A clue about the timing of the day is that we have not even had our elevenses.

Rachel Reeves (Labour, Leeds West)

And I know that all members of the Committee are looking forward to their Fry’s Five Boys at 10.30 or 11 o’clock this morning.

I thank all my hon. Friends for their contributions this morning but, in particular, my hon. Friend the Member for Erith and Thamesmead for tabling the new clauses, which are to do with the operation of NEST. With the roll-out due to start next year, it is important to let NEST get under way as currently designed, but it is also important to debate the two issues currently earmarked for the 2017 review. I support the hon. Lady in principle on both new clauses: the first would allow transfers into and out of NEST, and the second would remove the existing cap on contributions into NEST.

NEST is not currently set up to facilitate transfers into and out of the scheme. As my hon. Friends the Members for Erith and Thamesmead and for Edinburgh East said, people can end up with a number of small pension pots which, individually, are too small to buy a meaningful annuity. The Johnson review stated:

“Facilitating transfers is, in our opinion, critical to the success of the reforms. In a world where automatic enrolment makes pension saving a norm, including for low earners and people who move jobs frequently, there is a much higher risk that an individual’s pension savings becomes fragmented in a number of small pots. The inability to easily see a complete picture of the extent of pension saving could act as a disincentive to save more, and having pension saving spread into…small pots may make it more difficult for an individual to access their savings on retirement.”

Those are important points made by Johnson and his colleagues who worked on the review on making auto-enrolment work.

During the debates on other aspects of auto-enrolment, we talked at length about the average number of jobs that people hold during their working life. We heard again this morning some stories about the propensity of people to move jobs. We know that the median number of jobs is 11 and that around 25% of people will change jobs between 11 and 15 times in their working life. My hon. Friend the Member for Nottingham South has emphasised that the number of jobs is likely to increase rather than fall in the future. Of course, some people will change jobs more than 15 times. Depending on the rules of individual schemes and how long people are required to work before they can join a scheme, it is likely that low-paid and part-time employees and people who move a lot in the first five, 10 or 15 years of earning will build up pension entitlement in different ways.

Let us look at the example of a woman on £11,000 a year, which is half of women’s average earnings. With a typical defined-contribution scheme, that woman may have between £1,000 and £1,200 a year in a pot for each year in a job. If she has five or six different jobs, she could have between £1,000 and £3,000 built up in each pot, depending on the rules of her scheme.

The question is what happens to those different pots of money. Without being able to transfer them, if the woman cannot trivially commute and she is handling pots of £3,000 each, she will get something between £1 and £4 a week from each of those small pots in retirement. They are what the pensions advisory service refers to as orphan assets, because it is often difficult to turn them into pensions later. Hypothetically, a woman may end up with £20,000 or £25,000 in her NEST pot, and then have three, four or five other pots of £3,000, £2,000 or £1,000, and either lose all those small pots, or at least not be able to turn them into a pension because she cannot bundle them together and get a meaningful annuity.

I accept that NEST was designed in that way—I hear the points made by the hon. Member for West Worcestershire—to ensure that it does not unduly impact private pension schemes. Indeed, some argue that there might be an exodus of funds out of insurance company-run pension schemes, which could have a detrimental impact on employees remaining within non-NEST schemes. No one would want to see that happen, but there are real reasons, as we have discussed previously, why NEST is to be created. There is some sort of market failure, which means that the people who most need pensions are often not provided for under the functioning of the current market. Savings, even those that are too small to interest pension companies, are swept up in all that. It is in no one’s interest, whether insurance companies, employers or employees, for individuals to have many small pots of money. Data from Her Majesty’s Revenue and Customs indicate that 10 million individuals own personal pensions and annuities. Around 40% of people have £10,000 or less saved in personal pension plans, which is often insufficient to buy a meaningful annuity.

The Johnson review noted that respondents have commented that the cost of administering a pension pot of ex-employees did not vary much with the size of the pot—one respondee said that administration costs were around £15 a year, regardless of the size of the pot—and that over time, the cumulative cost would eat into the value of a small pot in a way that it does not for a larger one. Money in small pots is likely to be eroded at a greater pace than money in a larger pot. The key priority must now be to allow NEST to get under way in 2012, but I support the Johnson review’s recommendation that

“Government and regulators should review as a matter of some urgency how to ensure that it is more straightforward for people to move their pension pot with them as they move employer, so that by the time of the 2017 review the more general issue of pension transfers has been addressed and NEST is able to receive transfers in and pay transfers out.”

That is important, and builds on the intervention by the hon. Member for West Worcestershire that the issue is not just about money going into NEST. Transfers will be able to come out of NEST, and the money can move with employees as they move between jobs. Some of those jobs may have automatic enrolment of employees into NEST, but others may have occupational or insurance-based schemes. It would not necessarily mean money flowing just into NEST; it would mean money moving the other way as well, especially if the industry rises to the challenge of designing pensions for people with a variety of backgrounds and career paths.

I turn to new clause 9 and the cap on contributions. As my hon. Friends the Members for Erith and Thamesmead and for Edinburgh East said, the Johnson review recommended that the Government should legislate now to remove the limits for NEST from 2017, but that recommendation is not in the Bill. Will the Minister explain the decision not to take forward that specific recommendation?

As we know, contributions into NEST are currently limited to around £4,721 a year at today’s prices. That was to ensure that NEST is focused on employees with low and medium incomes. However, I accept Consumer Focus’s argument that the practical implications of the limit, coupled with the minimum contributions of 8%, could deny people on modest incomes access to NEST on the full range of their salary. Consumer Focus argues that the existence of a hard limit on contributions means that employees whose qualifying earnings fluctuate —my hon. Friend the Member for Edinburgh East made this point eloquently—and might exceed that limit may be automatically enrolled into an alternative scheme to avoid risk of non-compliance, even if the employee and employer would prefer to use NEST. The alternative is to automatically enrol them into NEST, not on their full earnings, but just on the band of earnings. Consumer Focus says that

“the only option open would be to enrol the higher-earning employee into NEST and into a second top-up scheme for earnings above the NEST cap”.

Beyond that, the cap has the potential to deter people from saving more money.

Which? research has shown that 52% of people would be put off saving more by the hassle of finding and opening a secondary pension plan if they reached their contribution limit. Overall, 70% of the people surveyed agreed that there should be flexibility about how much can be paid into NEST. Which? is making compelling arguments for removal of the cap, and indeed the intention has always been that it will be removed in 2017.

The Johnson review concluded that

“the cap is probably appropriate whilst NEST is being established and employers are making their initial choices about pension provision. However, once the reforms are bedded in, we feel very strongly that the cap should be removed to facilitate greater flexibility for savers”.

It went on to recommend that the Government legislate for removal of the cap on contributions in 2017. Had they done that in the Bill, I would have supported them, and I am sorry that they have not done so. How does the Minister expect to move forward?

I congratulate my hon. Friend the Member for Erith and Thamesmead on instigating the debate on these two new clauses.

Steve Webb (Liberal Democrat, Thornbury and Yate)

Again, as with the last group of new clauses, I congratulate the hon. Member for Erith and Thamesmead on giving us the opportunity to discuss some important issues concerning auto-enrolment and NEST. We have had a worthwhile debate to fill the time before elevenses.

The new clauses raise two issues. The first is the rules on transfers in and out of NEST. For the record, it is not strictly true that no transfers are permitted in or out. Transfers into NEST are permitted for pension credit members, which is not-for-benefit pension credit when there is pension-sharing on divorce. Split pensions on divorce can be transferred into NEST. Transfers in are also permitted for what are delightfully called pre-vested rights when someone has not worked for an employer for long and wants to consolidate pension saving. Such transfers are allowed in limited circumstances, just as there are circumstances in which transfers out are permitted in certain situations. It is fair to say, however, that in general such transfers are not permitted under the rules.

Stephen Lloyd (Liberal Democrat, Eastbourne)

Does my hon. Friend agree that these matters will be kept under review over the next few years? The Department may look at making transfers easier, perhaps not now, but it will retain an open mind.

Steve Webb (Liberal Democrat, Thornbury and Yate)

Indeed. As I said a moment ago, in the autumn we plan to produce a broader document on transfers. Broadly speaking, the goal has to be to have “one big pot”, to use the phrase of the hon. Member for Leeds West. There is much rich jargon—orphan assets, stranded pots and so on—but the idea is to enable people to consolidate their pension assets, be aware of them and get best value for money. Doing that in as painless a way as possible has to be the goal.

As always with pensions, the more this issue is considered, the less straightforward it becomes. I will give one example. Suppose there was a presumption that a person’s money always followed them, and that they would gradually built up a bigger and bigger pot. What would happen if they moved from a firm with a relatively low-cost pension scheme to one with a high-cost scheme? It might be in their financial interest not to consolidate their previous pension into the new scheme, because even with active member discounts and so on the previous pension may still do better than the new one. Should there be a default system for moving, or a system of advice? We will have to wrestle with such matters, but I agree with my hon. Friend and with the hon. Member for Leeds West that ideally, the goal must be not to have lots of stranded pots, but to have one big pot, good value for money and an awareness of pension savings.

Rachel Reeves (Labour, Leeds West)

I understand that point, and in some instances, if a person has been in a good pension scheme it might make sense to leave the money in that. Does the Minister agree, however, that it would be better for people to at least have the option to either leave their money in the original pension scheme or take it with them?

Steve Webb (Liberal Democrat, Thornbury and Yate)

Well, in general, people have that option except with regard to NEST—we will come on to that because NEST is a special case. Although people do, in general, have that option, they often choose not to use it or the amounts involved are below the limits required. Although there is no legal barrier, a scheme might refuse to accept a transfer in of a very small pot.

I am delighted that the hon. Lady now endorses the findings in the Johnson review, but we must bear in mind that its remit was quite narrow. It was about making auto-enrolment work, not about the whole pensions landscape or transfers as a whole. One of my worries about picking out a little bit from that, such as short-service refund or transfers into NEST, is that we may suffer from what I call the curse of incrementalism. We do everything with the best of intentions and fiddle with a bit of the system in a way that we think will make it better, but we do not think through the knock-on effects on the rest of the system. In our autumn paper—which I am bigging up; I know that my officials are looking forward to delivering on the promises I am making—we will try to look at the system as a whole, including NEST and its place in the wider pensions universe. We need something that works across the system as a whole and that is what I am trying to achieve.

As my hon. Friend the Member for West Worcestershire rightly pointed out, NEST is a very special creature. It would not exist if the market worked, and it has been created to ensure that when we place a duty on firms, they have somewhere to fulfil it. It is, however, a state-subsidised competitor to private enterprise, and under EU legislation we have to justify subsidising a competitor to the private sector. We justify the subsidy principally on the basis of the public service duty—NEST has to accept people for whom it will make a loss, and that is a justification for subsidy. One way we were able to give reassurance that state aid was justified was by NEST being constrained in terms of transfers and the contribution cap. One option would be to immediately lift both those things, but we would potentially face a legal challenge. I know it is not the proposition, but if we lifted those constraints straight away, at the very least we would be challenged in the EU on a state aid case, because we would essentially have subsidised a competitor with unlimited transfers in and unlimited contributions, and we would be vulnerable.

The second option suggested by Johnson is that we announce and legislate now that in five years’ time the caps will go. However, that brings me to my point about not wanting to pre-empt our wider decisions about the transfer infrastructure, not only for NEST, but for trust-based DC, occupational DC, group personal pensions, defined-benefits and so on, and about how all those interact. Rather than pick a bit out—legislate for a bit in the Bill—we want to take a broader look at the whole thing.

Harriett Baldwin (Conservative, West Worcestershire)

Will the Minister clarify that once the initial loan to NEST is repaid, state aid issues will no longer apply to NEST?

Steve Webb (Liberal Democrat, Thornbury and Yate)

There is a famous internet acronym, IANAL, which stands for “I am not a lawyer”; I preface my remarks with that. However, my understanding is that the state subsidy to NEST is based on the loan being at the rate at which the Government borrow rather than at market loan rates. I understand that the loan will take the best part of two decades to pay off. Lawyers might argue that other forms of subsidy are implicit—that, for example, the regulator will mention NEST in the letter. Once we are out of the loan period, if we argue that NEST is simply another competitor, other competitors might say, “Well, you can’t mention NEST in your letters, because that’s not fair.”

In principle, my hon. Friend is broadly right. The key point is the public service duty, which, as it stands, will go on for ever. NEST will always be obliged to take anyone, including loss-making people, and it will be the only one obliged to do so. Future Governments may want to deliver the public service duty in another way. My hon. Friend is right, however, that the key point is that the loan is subsidised—that is the state aid. The quid pro quo for that is the public service duty.

NEST has a specific purpose, and benefits have arisen from the constrained environment in which it operates. The fact that it knows that it is aiming at its target market has caused it to innovate for that market in a way that the financial services industry has not. For example, because almost one in four people whom we auto-enrol will be twenty-somethings, NEST has had to think far harder than anyone else about what the right pension regime for such people looks like. We might imagine ex ante that young people would be comfortable with risk, saying, “Stick it all on Bolivian futures. I don’t care if it goes up or down because it will be 40 or 50 years before I retire and it’ll all be right by then.” But NEST has carried out a lot of market research and found the opposite; if we take money off a 22-year-old, and when they come back the actual cash amount has gone down, we have lost them. It is very damaging. Perhaps counter-intuitively, NEST’s judgment on the lifestyling and profiling of its investments is that in the early years its staff will be cautious with the investment, to get it going so that a return can be seen. Then they will go for higher-risk, higher-return before easing off again later on.

NEST has had to be constrained and focused on its target market, so it has innovated. The iPhone app and so on, focus on the new market. Because of the cap, it has had to work out how to deliver for the smallest firms, which will make up a large proportion of the number of employers, if not necessarily the total proportion of businesses. Although I have no doubt that if NEST’s chief executive, Tim Jones, gave evidence to the Select Committee, he would reflect on the constraints and frustrations that NEST faces, such constraints have had beneficial effects for society, consumers and the trust’s target market. Those have been very welcome.

Another point is that the scheme is not quite as binding and constrained as it appears. The constraint was £3,600 in the contribution limit; it is now £4,200. People might be earning £58,000 and contributing 8% above the floor, and only just be hitting the cap—obviously, if people are in schemes that put in 10% or 12%, the wage figure will come down.

Some of the Labour party’s comments have related to people on average wages, and on £30,000 or £40,000. However, when considering auto-enrolment, it is important to remember that such people are not the principal focus of the policy. When we were discussing waiting periods and thresholds, we were talking about people on £8,000, £9,000 and £10,000. For those people, the concept of putting £4,000 into a pension scheme is beyond the dreams of avarice. It is worth keeping the matter in perspective.

Rachel Reeves (Labour, Leeds West)

In thinking about the employer who is choosing which scheme to automatically enrol employees into, as most firms employ people on a variety of different wages, are we in danger of creating too much complexity for employers in saying that they should automatically enrol some of their staff into NEST but that that will not be suitable for the rest of the staff? Some employers will have to make two decisions—one for higher-paid and one for lower-paid members of staff.

Steve Webb (Liberal Democrat, Thornbury and Yate)

I do not dispute that there is an element of truth in that, but there is a risk of overstating it because, on the whole, people on higher earnings in the firm will be more likely to have pension arrangements. From talking to the financial services industry, our sense is that many companies see themselves as partners with NEST. Although some see NEST as an upstart rival, there are quite a few others that I would describe— at the risk of being sued; no, I cannot be sued in Parliament—as the more mature players in the market, and they see NEST as a partner.

Company X might go to a firm and say, “You have existing pension arrangements for some of your workers with us. Do you want to complement that with NEST, perhaps for newer employees or lower-paid workers? Perhaps we could also progress employees from NEST into our scheme.” Having two sets of pension arrangements might therefore become more common, and that might be what firms go for to fulfil their auto-enrolment duties. It is worth bearing in mind that many people who will be auto-enrolled are those in one-employee firms or micro-firms, and those individuals are the target market.

Rachel Reeves (Labour, Leeds West)

I recognise what the Minister is saying about many pension providers seeing themselves as partners with NEST. Employers might say that for the first two years they would automatically enrol lower-paid members of staff into NEST, and the lower-paid members of staff would hope to become higher-paid members of staff and the people who have worked for the employer for a year or two would hope to continue to do so for a long period. However, because of transfers in and out, coupled with the contribution cap, there is an issue about people who are in NEST for a while and then move into an all-singing, all-dancing scheme, in that there will be different pots of money. That could be avoided if everyone went into either one or the other.

Steve Webb (Liberal Democrat, Thornbury and Yate)

The hon. Lady risks being inconsistent. She has said that she understands the need to have caps on NEST, at least during the transitional period, but the problem that she has just described will happen, because of the policy that she supports. The idea of having a cap on NEST is not ours; it is a Labour policy, because the 2008 Act provided for a cap on NEST and a ban on transfers. I am confused about what she is now saying, because we are hearing the opposite of the arguments that we heard at the time of the 2008 Act, and it feels as if it were a Government policy.

The hon. Lady is fond of talking about consensus, and she regularly accuses me of breaking the consensus. Auto-enrolment was designed to keep employers, employees, the financial services industry and consumer groups on board, and it was a very delicately put together compromise, as she has said. Part of the deal was that the financial services industry should co-exist with a state-subsidised competitor, and the understanding was that, despite being subsidised, it would have its own market niche. Our position is that that arrangement should be kept in place during the roll-out.

I have no problem with our having a statutory duty to start a review by 2017, and I am very sympathetic to the Johnson review’s suggestion that, at that point, we should have a hard look at the issues of caps and transfers. Transfers should be seen in the round. It is not just a NEST issue; it is a much bigger issue. We shall consider transfers and publish our thoughts later in the year. A contribution cap would be very unsettling for the market. The hon. Lady regularly quotes Turner, but that report was seven years ago. If I stand up in Committee and say, on the brink of auto-enrolment coming in, that we will knock the caps off in a few years’ time, one can imagine the bedlam that would be created. We want to get auto-enrolment going now and to have a period of stability, and that is the challenge that we face.

Transfers and the cap are important issues. On transfers, I should flag that the Secretary of State already has the power, under section 71 of the 2008 Act, to amend the transfer restrictions for NEST. We are concerned that an additional power, as in new clause 7, which seems to do the same thing, could lead to confusion and ambiguity. Leaving aside the point about NEST’s core market, my principal point is that we want to look at transfers in the round and not just tweak NEST. In terms of the cap, in my judgment the focus on the target market has been right. The cap will be reviewed and we will certainly look at whether it should go. However, at this stage, we do not want to unsettle the whole process. We want NEST to focus on its target market. We want to get auto-enrolment going and we want to make it a success. Further changes to the rules around NEST probably would not help. I am grateful to the hon. Member for Erith and Thamesmead for raising both issues, but I urge her not to press the new clauses.

Teresa Pearce (Labour, Erith and Thamesmead)

I thank all the Committee members who have contributed to this debate—it is important—and I thank the Minister for his reassurances. As I said at the beginning, I was quite aware that new clause 9 did far more than I ever would want it to do, but I needed to get it in somewhere so that we could talk about it. I am therefore happy not to press new clause 9.

On new clause 7, I was interested in what the Minister said about NEST being a Labour Government policy. Although the shadow Minister and I were not part of the previous Government, we are both proud that it was a Labour policy. We have said repeatedly throughout our debates that we think on the whole it is a good idea, but the point of this Committee is to try to make it the best idea it could possibly be. That is why the amendments have been tabled.

I was also interested in what the Minister said about NEST being quite innovative and about thinking things through in a different way. One of the things that came up when we visited was our assumption that a young person in NEST would automatically be in a more risky fund, and it would not matter if the fund dipped, because they would have longer for it to rise again. That is what anybody who is familiar with pensions would look at. However, the people at NEST were quite firm that it would do exactly the reverse. As the Minister has said, a young person in NEST can actually be put in a low-return, low-risk fund. The thinking is that if a 23-year-old in the fund looks at it a year later and sees that it is not doing very well because it is a high-risk fund, we will lose them for ever. The point about NEST is to get people in early to save for a long time and to encourage that attitude. When we went to NEST, it was very interesting to hear that. It shows that we must not have preconceived ideas about any of this, because it is all completely new.

I understand completely what the Minister says about state subsidy, but one of the most important things about NEST is to make sure that it does what we intend it to do not just for the sake of future pensioners, but because it is funded by Government loan. The issues that we have been talking about this morning are important, because the biggest threat to NEST is insufficient membership. If people cannot see that NEST is of benefit to them, it could have insufficient membership, which would put at risk not only the Government loan but people’s faith in the scheme in future. That is my concern, and for that reason it is important to be able to move pots of money in and out. I very much look forward to the autumn statement. The Work and Pensions Committee might report on some of these issues, so I will meet fellow members of that Committee again. I am happy not to press new clause 7 to a Division, and I look forward to the statement in the autumn, which I hope will give us some satisfaction.

I beg to ask leave to withdraw the motion.

New Clause 8 - Information about pensions

Teresa Pearce (Labour, Erith and Thamesmead)

I beg to move, That the clause be read a Second time.

New clause 8 is relatively simple and will not take a huge amount of debate. One of my concerns, which I have raised on a number of occasions, is that to get people to do something that they had not considered doing—for example, go into a pension scheme—they need as much information as possible. People need to have misconceptions swept away, and the way to do that is to have clear information. It is not only about the employees; it is about the employers as well, because in the future there will be—I am sure we will get them—numerous letters in our postbags from small employers who see this as a problem for them. The more information that can be given to people and the more it can be made clear that this is a benefit for employees and employers and good working relations between the two, the better.

One of the reasons I tabled the new clause is because, although people are auto-enrolled at three months, they can enrol from day one if they wish, but I am concerned that people will not be aware of that. If, at some future point, pots of money can be moved from one fund to another—I hope that will come to fruition—it will be important for people to enrol as soon as possible. I am worried that they will not be told that by their employer, or that they will not know, or that they will get wrong information from their friends in the pub.

For those reasons, I want to see the Government ensure that there is an easy-to-understand single place where all that relevant information is. It could be web-based. I am impressed with the NEST website, which is all in plain language, simple to understand and has examples of types of people, so that everyone can look and see someone similar to them and how it will affect them. NEST, as has been said, is only one player in the field. We need to build on what has happened there. The Government need to have something, whether it is part of DirectGov or something else, to ensure that people have the right information, so that they do not hear things from their friends in the pub and get convinced that this is not for them.

This is an absolute sea change in pensions for low and middle earners. I welcome it. I hope it works. For people to be informed and to be able to make informed judgments is the most important thing. I look to the Government to ensure that that happens.

Rachel Reeves (Labour, Leeds West)

I thank my hon. Friend the Member for Erith and Thamesmead for tabling this new clause, which raises the issue of communicating auto-enrolment and NEST to employers and employees. I know that the Federation of Small Businesses has raised the issue of ensuring that employers, particularly small and micro-businesses, which have little experience of pensions, have the information that they need, particularly given the level of fines for non-compliance. The new clause would particularly benefit the smallest of businesses.

The Government and the Pensions Regulator must ensure that small employers in particular are aware of the new requirements on them that the Bill creates. To make auto-enrolment work, what funds will be available to ensure that the proper scale of communication and guidance is in place for employers and employees in advance of auto-enrolment being rolled out? Who is principally responsible for getting that information out there: is it NEST, the Pensions Regulator or the DWP?

Having spent such an enjoyable time together in this room going through the Bill, I know that we are all well versed in auto-enrolment, state pension ages, Pensions Commission reports and the Johnson review. We also know that many people outside this room, despite clamouring to get copies of Hansard, are less aware of the subject, particularly small businesses which are more interested in making widgets than providing pensions. It is important that we do everything we can to make it as simple as possible. Communication is an important part of that, if we are to achieve the objectives of auto-enrolment, which intends to get some 7 million people saving who are not currently doing so.

The new clause discusses “a single place” for relevant information. What steps is the Minister taking to ensure that auto-enrolment, as well as the time scale over which it will be carried out, will be clearly publicised to relevant employers and employees? Clearly, the roll-out of auto-enrolment means that it is big businesses that will be automatically enrolled first, so we have a chance to get to the smaller businesses and the micro-businesses.

Andrew Bingham (Conservative, High Peak)

I do not know whether the hon. Lady is aware of it, but the NEST website, which employers and employees can sign up to, is a fantastic online facility that enables people to learn about their pension investments. In terms of general awareness, I have spoken to NEST and they are coming to my constituency in September to do a seminar for small businesses explaining what it is all about. The help is there if we ask for it.

Rachel Reeves (Labour, Leeds West)

I thank the hon. Gentleman for his intervention. I know that he is particularly concerned that small businesses are advised appropriately, and I am pleased that he has encouraged NEST to visit his constituency to help them. That would benefit small businesses in all our constituencies. The NEST website, and its communication, is excellent, but people need to know that the site is there and relevant to them in order to visit it. Automatic enrolment will not impact small businesses for a couple of years or more. In time, hopefully some small businesses will go to the NEST website to find out what it has to offer, but how can we be more proactive in telling them? Road shows and so on are a good way to do that, but I wonder what other ideas the Minister has about how to be as effective as possible.

We highlighted, in relation to clause 1, the confusion that some people have about their state pension age and the impact of the changes in the pipeline. Given the vast changes that automatic enrolment brings, the onus is on the Department. I recognise the difficulty of changing departmental websites and so on. However, how can we put all the information people need in a single place, and how do we signpost people to that information?

Looking from an employee perspective, how do we ensure that people are aware of the three-month waiting period proposed in the Bill, and that individuals have the right to opt in during the first three months when their employer operates the waiting period? How do we ensure that that right is meaningful? In order for it to be so, employees must know that they can opt in and have full information available so that they can make an informed decision on whether it is in their interest to opt in during a waiting period. If they think it is in their interest they must have the information to enable them to exercise that right. How does the Minister envisage communication with employees—informing them about automatic enrolment, whether it is the best option for them and how they can exercise the right to enrol voluntarily during a waiting period—will take place?

I believe that a single hub of information could be an important step in ensuring that the right to opt in is taken up by as many jobholders as want to. Obviously not all will, but if they are given the information they can make a more informed decision.

To sum up, we have had a useful debate about making automatic enrolment and NEST work, and about ensuring that employers and employees get the information that they need. I think a hub of information would be beneficial, but if we proactively target small and micro-businesses and employees with little experience of pensions then automatic enrolment could be the success that it should be. It could also build the confidence of small businesses that do not have much experience of pensions and are perhaps worried about complying with legislation of which they have little knowledge. How does the Minister think we might address those issues to make it as simple as possible for them?

Steve Webb (Liberal Democrat, Thornbury and Yate)

I hope to offer a fulsome response to the amendment, which is valuable and on the important issue of communications. I am not sure that we need a statutory duty to have a set of information on a website because the goal of our communications strategy is clearly much broader than that. One of the issues with websites is that you have to know to go to them, as the hon. Lady said. While we need a repository of information available, we need to do much more to be proactive in communicating to people the information that they need.

10.25 am

Steve Webb (Liberal Democrat, Thornbury and Yate)

Good afternoon, Miss Clark. We were discussing information about pensions for employers and employees, particularly in the context of auto-enrolment. As I said this morning, I very much welcome the opportunity to discuss these important questions. For reasons that I shall come to later, I am not sure that new clause 8 delivers what one would want, but the matters are none the less important and I am happy to address them.

For those who seek it, there certainly needs to be a place where people can find pensions information. The principal place for that is the Government’s website Directgov, which gives information about all pensions, both state and private, and includes signposting to other sources of information if necessary. However, I repeat what I said this morning: the problem with information is that people have to know that they want or need it, and they need to know where to go. It is not sufficient to make it available; we have to direct people to it, even tailoring information for the individual, rather than merely using websites for people to use online—if they know how to use them.

The hon. Member for Erith and Thamesmead and others properly asked what the Government are doing to ensure that people know more about pensions, particularly in the context of auto-enrolment. For employers, the principal duty will fall on the Pensions Regulator. It is the regulator that has the compliance duty. The regulator will alert firms 12 months before the staging date that they will have that duty in a year’s time, and will contact them again nearer the time. We are already working with the regulator, which is now talking to firms and testing materials.

We will supply the employer with templates and literature so that, for example, the small manufacturer mentioned this morning who does not want to be engaged in this will be able to download standard literature that can be sent to employees in fulfilment of that duty. Even though auto-enrolment is more than a year away, the detailed guide that the regulator has already published on its website has been downloaded more than 20,000 times. I hope that is 20,000 firms rather than one person having trouble with his computer.

The idea is that the regulator will be proactive in communicating with firms. The regulator has an up and running telephone helpline for those with inquiries. Employers often ask what they should tell their employees. The Department for Work and Pensions is developing an information package that employers can make available to employees in the workplace, and we are doing some of that material on a range of employers. We are seized of the need to give firms good information.

We believe that individuals, too, need good information. The Government will be spending in the order of £10 million on communications. It will be done in stages. In the early stages, the emphasis will be on selling the notion of how important it is to save—not necessarily saving for pensions but sowing the seeds. We will start that work this autumn to get the idea into people’s minds. We shall be saying simple things such as, “You can probably expect to have 20 years in retirement.” We will not be saying, “You’re going to live until 97.23 years” or whatever it is; we want to give people a feel for it so that they say, “Twenty years in retirement? Gosh, is it as long as that?” We shall be saying that the basic pension will pay for the basics of life, but that if people want more they will have to save. We will be trying to communicate those simple messages.

In the new year, we will gradually build up the auto-enrolment link communications. It is a partnership. We have already heard of the excellent work being done by the National Employment Savings Trust through its website and its communications strategy. The private pensions industry will be doing the same. We will be working with the Pensions Regulator and undertaking work ourselves. Some of this will be done online. For example, if “pensions” is entered into Google it will not be my face that pops up but something far more enticing—information about auto-enrolment. [Interruption.] For a small fee, perhaps. It will be a web-based solution, after all.

The idea is that people will be directed to information. The point of the exercise in the build-up to auto-enrolment in summer 2012 and beyond is that there will be a cumulative effect. Obviously, a lot of the work force will not be able to enrol until some years later, so we have to target communication. We know the large firms that will be the first to be auto-enrolled and so can focus on them in our strategy.

Briefly, I flag a little-heralded organisation called TPAS—the Pensions Advisory Service—which, although I never thought I would say these words, could be regarded as part of the big society. It is Government-funded but also involves voluntary experts answering phone calls and helping with technical pensions questions. I visited TPAS recently and it is a superb organisation. I say to all hon. Members on the Committee that if constituents have a difficult pensions question, it is always worth giving them the phone number for TPAS, which can often give some very specific information.

I had a question about trivial commutation from a constituent and thought, “Oh my goodness, what shall I do?” I rang TPAS—I did not admit who I was—and it was brilliant. The chap on the phone said, “Yes, I know the chap who wrote the legislation, I will give him a call,” and I quickly got the answer that I needed. I do not suppose someone would always get such service, but the general point is that we are working in partnership with TPAS and with the Money Advice Service, which is what the Consumer Financial Education Body or CFEB has now become. We are working in partnership with such organisations to provide what is called in the trade a seamless customer journey, by which we mean everything from expert help for people who have complex queries to basic information. We are putting money into call-centre capacity so that people have places to phone.

The strategy will be a mixture of general publicity and awareness about the need to save and tailored information, through the Pensions Regulator for employers, and NEST, the pensions industry and Government reaching out to individuals. In principle, the idea is fairly simple: many people do not have a pension, they need to save more for their old age and this is a scheme to overcome the hassle. Inevitably, however, if we are not careful, pensions can be complex. We have issued a leaflet this week about language, again echoing and complementary to some of NEST’s work on using simple language to communicate. So I absolutely accept the need for communication.

New clause 8 would give us a statutory duty to have one place for all the things that someone could ever possibly want to know about pensions, but even if we had that, we would not be satisfied because we do need to do a lot more as well. We do not want only to stick the information somewhere and say, “Go and find it.” We need to reach out to people and to be proactive, to help firms and individuals.

Lilian Greenwood (Labour, Nottingham South)

I thank the Minister for setting out the strategy to ensure that people understand the importance of a pension and why they should be involved. What discussions has he had with the TUC or other unions? Often, in my experience, in the workplace people turn to their trade union for advice, and unions can be a good source of advice on pensions issues.

Steve Webb (Liberal Democrat, Thornbury and Yate)

I have been struck by the engagement we have had with consumer groups, Which? and trade unions. Yesterday afternoon, I attended part of a meeting we had in the Department on communication strategy, and the TUC was represented. Obviously, we have entirely common interests in ensuring that trade union members and others are properly informed. I assure the hon. Member for Erith and Thamesmead that we want to make the system work, and we will co-operate with valued organisations such as trade unions to that effect. I welcome the chance to answer questions about the issues, which are important, and although a statutory duty of the sort described is not necessary, I thank the hon. Lady for moving the new clause.

Teresa Pearce (Labour, Erith and Thamesmead)

I am interested in what the Minister said, and we are clearly all speaking the same language. We want NEST to be a success, we want people to take part in it and we want it to be as simple as we hope it can be, in particular for small employers. The new system will be a challenge for them and if we hold their hand along the way, it should be more problem-free. With that in mind, I beg to ask leave to withdraw the motion.

Clause 15 - Indexation and revaluation

Steve Webb (Liberal Democrat, Thornbury and Yate)

I beg to move amendment 38, in clause 15, page 10, line 24, at end insert—

‘( ) Schedule 3 to the 1993 Act (which sets out methods for revaluing accrued benefits for the purposes of section 84 of the 1993 Act) is amended as follows.

( ) After paragraph 1(4) insert—

“(5) The sub-paragraphs above are subject to sub-paragraph (6).

(6) If paragraph 2A applies to the pension or other benefit, the final salary method is to apply the requirement of the rules of the scheme mentioned in paragraph 2A(1).”

( ) After paragraph 2 insert—

2A (1) This paragraph applies to the pension or other benefit if the rules of the scheme under which it is payable contain a requirement that the accrued benefit be revalued by adding to the accrued benefit an amount of at least the relevant amount.

(2) “The accrued benefit” has the same meaning as in paragraph 1.

(3) “The relevant amount” means the amount which, ignoring paragraph 1(5) and (6), would be the additional amount specified in paragraph 1(1A), (1B), (1C) or (1D) (as the case may be) were the appropriate higher revaluation percentage and the appropriate lower revaluation percentage to be determined on the following basis.

(4) The higher revaluation percentage and the lower revaluation percentage for the revaluation period mentioned in paragraph 2(7) are to be taken to be the percentages which would have been specified in the Secretary of State’s order—

(a) had the following been substituted for paragraph 2(3)(a)—

(a) the percentage increase in the retail prices index for the reference period in relation to the revaluation period (“the inflation percentage”), and”,

(b) had, in paragraph 2(3A)(a), the words “the percentage which appears to the Secretary of State to be” been omitted,

(c) had paragraph 2(4) been omitted,

(d) had, in paragraph 2(5), the words “sub-paragraph (3)(a)” been substituted for “that sub-paragraph”,

(e) had, in paragraph (b) of the definitions of “the higher maximum rate” and “the lower maximum rate” in paragraph 2(6), the words “retail prices index” been substituted for “general level of prices”, and

(f) had the following been inserted after paragraph 2(6)—

(6A) In this paragraph “retail prices index” means—

(a) the general index of retail prices (for all items) published by the Statistics Board (or any predecessor), or

(b) where that index is not published for a month, any substituted index or figures published by the Board (or any predecessor).””’.

Katy Clark (Labour, North Ayrshire and Arran)

With this it will be convenient to discuss Government amendments 39 to 43.

Steve Webb (Liberal Democrat, Thornbury and Yate)

We are now in part 3 of the Bill, which deals with a range of issues, one of which is the measurement of inflation for pension purposes. Clause 15 relates to the use of the consumer prices index for the indexation of pensions in payment, and it relates to particular sorts of schemes. If satisfactory to you, Miss Clark, and to other hon. Members, I suggest that we discuss the merits—or otherwise—of CPI when we discuss the next group of amendments, which includes clause stand part and new clause 11. I will therefore restrict my remarks to amendments 38 to 43 and the specific technical issue of the CPI underpin. I will discuss CPI more substantively when we debate the next group of amendments.

As the Committee will know, the Government have a role in setting a floor for the indexation and revaluation of occupational pension rights. They decided last summer that the measure of inflation used should be CPI and not the retail prices index—we will discuss the reasons behind that decision when we debate the next group of amendments. By and large, that has a substantial beneficial effect on company pension schemes because their liabilities are reduced if they are able to use CPI. There are, however, pension schemes that have the words “retail prices index” hard-wired into their rules.

If CPI is set as the minimum, in times when CPI is higher than RPI—such as in September 2009—we could have a scheme that was, to use a colloquial phrase, one of the good guys. The problem with that is that someone providing what I suspect Labour Members would regard as good revaluation—RPI every year—could find that the cost of indexation had actually increased. Not only would they have to pay RPI every year, but in years when CPI exceeds RPI, they would have to pay CPI. Perversely, we have given those people who would use RPI anyway an extra cost, and that was never our intention.

That is called the CPI underpin. The risk is that if we do not do something, CPI will be applied even when it is bigger than RPI. That was not the intention. Clause 15 states that it will be good enough for schemes to index payments by RPI and that the Government are not going to come back and say, “But CPI is higher this year, so you must use that over and above RPI.”

We consulted on that issue. People often say that Governments do not listen to consultation, but one point that came out of the consultation and was raised in the House of Lords was, “That’s fine for indexation, but what about revaluation?” In other words, indexation happens once someone has retired regarding how their pension is increased, as dealt with in clause 15, but revaluation happens once someone leaves a scheme, up to pension age. We have not tackled a possible CPI underpin for revaluation.

Potentially, that does not matter much. Revaluation can take place over a period of many years, and although CPI might be higher in the odd year, over a run of five or 10 years, the overall impact of CPI as against RPI will almost invariably show the RPI number to be bigger. For someone who has many years of revaluation, that is immaterial. There could be circumstances, however, where someone’s revaluation period, over the whole revaluation linked to CPI, would be greater than RPI. That was never our intention. Amendment 38 and associated amendments deal with that by saying that if revaluation is by RPI, that will be good enough. The Government will not insist on CPI revaluation, even if that would have been higher.

Malcolm Wicks (Labour, Croydon North)

I am carefully following the Minister’s argument, which seems sensible. Will he confirm, as I think he has implied, that the main debate about CPI and RPI will take place a little later? Does he plan to refer to the impact assessment released by his Department on 12 July entitled “Impact of the move to CPI for Occupational Pensions”, so that we can better understand the respective impact of revaluation and indexation, not only on the pension funds about which he is so concerned, but on the pensioners about whom most of the Committee are concerned?

Steve Webb (Liberal Democrat, Thornbury and Yate)

Yes.

We consulted on a range of issues including the CPI underpin. That consultation ended in March and we published our response on 16 June. We had over 150 responses—somebody reads these documents, which is good. Many of those responses were detailed and technical, but the issue of CPI underpin and revaluation attracted the most comments. There were already concerns that the CPI underpin provision in the Bill is too restrictive and does not help when companies are restructuring. We have sought to respond positively on those issues.

We have listened to the consultation. The amendment will add to schedule 3 of the Pension Schemes Act 1993 a new method of calculating a revaluation, which means that schemes can continue calculating revaluations using RPI. As for the linked amendments and making the application of the CPI underpin to pensions in payment easier, we accept that our original plans were too restrictive so, in response to the consultation, the test now targets whether RPI-based increases have actually been paid, not simply whether the rules require them. The advice that we have received is that that will make life easier for schemes, which want to do RPI. That is fine by us. The other issue is transfers, and we do not want the possibility of a CPI underpin to become a barrier to scheme restructuring, so the amendments ensure that the provision to address the underpin problem survives a transfer if the result is that the member has received RPI-based increases since the start of 2011 and will continue.

I will come to the substantive issue about the CPI in a moment, but I hope that I have assured the Committee that the specific amendments deal with an unintended consequence of the CPI, which is that we do not want to put an inadvertent additional burden on schemes which want to do RPI revaluation or RPI indexation. I commend the amendments to the Committee.

Katy Clark (Labour, North Ayrshire and Arran)

With this it will be convenient to discuss new clause 11—Triennial Report—

‘(1) The Secretary of State must publish a triennial report about the impact of CPI on accrued benefits and pensions.

(2) The report required under subsection (1) must, in particular, include an assessment of the impact of the measure on—

(a) scheme members;

(b) employers;

(c) tax-payers; and

(d) pension protection fund levy-payers.’.

Rachel Reeves (Labour, Leeds West)

The new clause calls for a triennial report to assess the impact of using the consumer prices index as the measure of inflation. It is a probing amendment to discuss the changes in the Bill. It seeks that assessment from, among others, pension scheme members, employers, taxpayers and Pension Protection Fund levy payers, and would be an opportunity to reflect on the RPI-CPI switch. We have been clear in debates on benefit uprating that we do not support the decision to adopt permanently the consumer prices index as currently constructed for the determination of benefit uprating and of pension revaluation and indexation. While we support the use of CPI, not RPI, in the short term as a means to reduce the deficit, we do not believe that, on a permanent basis, it is the right way to uprate pensions or other benefits.

Making a permanent change from the use of the retail prices index to the consumer prices index with the impact being felt even after the deficit is long gone is an ideologically driven move that we do not support. While I agree that we need to get the economy back on track and to reduce the deficit, it makes no sense that pensioners and those on the lowest incomes who are least able to bear the burden will be punished by such a change, even when our economy is back on track and the deficit has been eliminated.

Harriett Baldwin (Conservative, West Worcestershire)

If the triennial report were published in 2014, and it showed a difference between the two approaches, would the Labour party propose in its manifesto for 2015 a reversion to RPI?

Rachel Reeves (Labour, Leeds West)

In the same way as I would not expect the hon. Lady’s party to publish its manifesto for the 2015 election, we will not say what we will be putting in our manifesto. [ Interruption.] If any hon. Member wants to make an intervention, I shall be happy to give way.

Steve Webb (Liberal Democrat, Thornbury and Yate)

The hon. Lady says that she supports CPI if we are broke, but not on principle. On principle, she believes that we should use RPI revaluation. Why cannot she tell us now that that is the principle she will apply in 2015, or does she believe that she might not adopt her principle in practice?

Rachel Reeves (Labour, Leeds West)

There are two points that we need to consider. First, as the Minister knows, there are moves to reform the consumer prices index to include housing costs, so we would want to consider that. Secondly, we have said that we support the use of CPI as a means to reduce the budget deficit, and we do not know what the financial and economic circumstances will be at the next election. For those reasons, we will not be writing our manifesto for the next election now. However, I can be clear that we do not think that CPI is the most appropriate way of uprating pensions and other benefits.

As Committee members know, the PPF is funded by levy payers rather than taxpayers. The Minister said earlier that, after consultation, the override for occupational pensions was not applied by the Government, so why are the Government going ahead with moving from RPI to CPI for the PPF, rather than allowing the board of the PPF to make that decision about the right way to uprate pension payments for those in the PPF?

The Minister will know that, last year, the PPF was in surplus by £396 million, so why is a change needed to the way in which the PPF makes payments? In addition, he will know that pensions paid by the PPF that are not already in payment are reduced by 10%. Does he think it is right—on top of the 10% reduction to which pensions already paid are subject—to further reduce the pensions of people who might, if they were in an occupational pension scheme, have looked forward to RPI uprating if they had stayed with their employer and if their employer had not gone bust?

It is our understanding of the process and legislation that we do not need amendments to the Bill to secure changes to the way in which PPF payments are uprated in future. The issue of uprating pensions, including the basic state pension, state second pension, public sector and occupational pensions is determined annually through statutory instruments. These are now undertaken by the increase in the general level of prices, which is generally not specified to be RPI or CPI, or indeed any other measure. Therefore, a future Secretary of State could take a different view on the most appropriate measure of the increase in the general level of prices without the need to change primary legislation.

The situation with regard to the PPF is similar. Clause 15 removes reference to the RPI and substitutes

“the general level of prices in Great Britain”.

However, that does not lock in the CPI for all time, so we do not in principle object to that change.

The change to uprating the various facets of pensions by CPI, subject to statutory powers, will, as we know, have a significant impact, particularly over time. On average, the RPI is 0.83 percentage points higher than the CPI. So, in any given year, benefits linked to CPI will give people 0.3% less income. The CPI figure for the year to September 2010—for the last round of uprating—was 3.1%. The equivalent RPI figure is 4.6%, so the difference at the moment between the two indices that we are considering is 1.5 percentage points. If the Government make this a permanent change, experts estimate that that change could cost pensioners between 15% and 20% of their retirement income. Indeed, in his report, Lord Hutton stated:

“This change in the indexation measure”—

from RPI to CPI—

“may have reduced the value of benefits to scheme members by around 15% on average. When this change is combined with other reforms to date across the major schemes the value to current members of reformed schemes with CPI indexation is, on average, around 25% less than the pre-reform schemes with RPI indexation.”

We have accepted that for the basic state pension and for other benefits, this is a necessary move for a time-limited period for deficit reduction purposes. For private sector occupational schemes, the extent to which the CPI ends up being used for revaluation and indexation depends on the scheme rules, and we support the Government in not pursuing the override. Nevertheless, the updated impact assessment produced by the Department in February shows that the total cost of the reduction in the anticipated value of members’ pension rights, including the stop and flow of pensions, is £86 billion. That is not a deficit reduction saving, but an almost equal and opposite benefit for sponsoring employers, and there are consequential benefits to the Pension Protection Fund and levy payers. The Pensions Policy Institute has calculated that for public sector workers, the switch could cost a median earner 4% a year at age 75 and 8% a year at age 85. A deferred member of an occupational scheme who withdraws at age 40 could have their starting pension income reduced by around 20% by age 65.

Whether the CPI should be the primary measure of inflation is still a subject of much debate. The UK Statistics Authority has suggested that it should be used, but only when the index of owner-occupied housing costs is included, which is not now. The Royal Statistical Society has questioned whether the coverage of the CPI makes it appropriate for all purposes. On noting that the CPI’s methodology has many supporters, the RSS questions whether the comprehensive use of the geometric mean at the lowest level of aggregation is the best approach for products for which consumers are typically slow to substitute expensive outfits, brands or varieties for cheaper ones. It said:

“While the consumer price index (CPI) is acceptable for macroeconomic purposes and for international comparisons within the EU we do not believe its coverage is generally appropriate for inflation compensation purposes”,

including for pensions and payment.

Lilian Greenwood (Labour, Nottingham South)

Does my hon. Friend share my concern that pensioners are potentially even less likely to substitute with lower-priced goods when prices change?

Rachel Reeves (Labour, Leeds West)

I do not know of evidence that suggests one way or another, but older people might have more entrenched spending patterns and may find it hard to travel to different shops to access differently priced goods. There are also wider issues about what measure of inflation is more suitable for pensioners. While the Pensions Minister has said that he thinks that the CPI is a more appropriate measure of inflation for pensioners, many, including Age UK, disagree.

Harriett Baldwin (Conservative, West Worcestershire)

I thank the hon. Lady for delivering a well-researched argument. I believe that she used to be at the Bank of England. Will she clarify for the Committee which inflation index the Bank is supposed to target and which index the Bank’s pension scheme uses for its members and ex-members?

Rachel Reeves (Labour, Leeds West)

My pension has now transferred to the scheme that we have here, but my understanding is that the Bank of England is continuing to use the RPI measure, presumably because it thinks that that is more appropriate for uprating pensions. That is consistent with what the Royal Statistical Society is saying, that while the CPI is acceptable for macro-economic purposes, its coverage is not appropriate for inflation compensation purposes. That is why the Bank uses one measure for targeting inflation but another for inflation compensation purposes. That seems to be an entirely consistent view. However, having transferred my pension, I do not benefit from the more generous uprating of pensions.

Alok Sharma (Conservative, Reading West)

The hon. Lady is making an interesting case. May I take her back to what the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown), the former Prime Minister and a former Chancellor, said in his pre-Budget report in 2003? On the CPI measure of inflation, he said:

“It is more reliable because, taking account of spending by all consumers, this consumer prices index gives a better measure than the old RPIX measure of spending patterns.”—[Official Report, 10 December 2003; Vol. 415, c. 1063.]

The right hon. Gentleman led the Labour party for some years and was a Labour Chancellor of the Exchequer. Is the hon. Lady saying that she now disagrees with what he said then?

Rachel Reeves (Labour, Leeds West)

Spending matters are different from inflation compensation, as I am sure the hon. Gentleman will understand. I again go back to what the Royal Statistical Society has said:

“while the consumer price index (CPI) is acceptable for macroeconomic purposes and for international comparisons”—

so the targeting of the CPI by the Bank of England is appropriate—the coverage for inflation compensation purposes is not sufficient. [Interruption.] The hon. Gentleman shakes his head. I am happy to take further interventions, if he wants to continue the discussion, but it is difficult to respond when I do not know why he is shaking his head.

As I am sure hon. Members understand, there are two differences between the RPI and the CPI. The first relates to coverage. The CPI does not include housing costs—not only mortgage payments, but household insurance, council tax and other measures associated with living in a home, which most people do even if they have no mortgage. The second difference is between the use of the arithmetic and the geometric mean. If the hon. Gentleman does not wish to intervene on that point, I shall continue.

The Government have made a virtue of using the same measure of inflation for both purposes, but is it necessarily right to make one index as relevant to pensioners and those on benefits as to macroeconomic management? Age UK has created what it calls a silver retail prices index that better reflects pensioners’ spending patterns and, therefore, the inflation rate for pensioners. That measure of inflation differs from others because pensioners have different spending patterns from other groups. The Minister says that the CPI is more appropriate for pensioners than the RPI, but Age UK has specifically looked at how older people spend their money and, on its measure, those aged over 55 have experienced price rises almost 2 percentage points above that suggested by the headline RPI figures since the beginning of 2008, rising to 4 percentage points for those aged over 75.

That pattern is not surprising, because we all know that older people spend a higher proportion of their income on energy costs and food, the prices of which have been rising at a faster rate in the past few years. To change from the RPI to the CPI when pensioners face higher inflation compared with the overall RPI, let alone with the CPI, seems particularly unfair to them. If the Government want a measure of inflation that is more appropriate to pensioners, they should consider the evidence from Age UK and others showing that, rather than being lower than the RPI, inflation for older people is usually higher.

The gap between real and headline inflation for older people over that period has cost the average 60-year-old £620 a year, and that figure rises to more than £700 for someone aged between 65 and 69. That is mainly down to the different impact that fuel and energy price increases, reductions in savings rates, increases in mortgage interest payments and so on have on older versus younger people’s spending power.

I have tabled the new clause because, as the change has such profound consequences, the Government should certainly monitor and consider its impact. We oppose making a commitment to a long-term change, when there is no settled view on the CPI index as it is currently constructed. Given the long-term nature of pensions policy, we should move away from the status quo only with caution and after having made a full analysis, which we are still lacking.

We should also consider the expectations built into the current system, not least those of millions of workers who believe that they have been unfairly dealt with over the change from the RPI to the CPI. They believed that they had built up accrued rights to a pension that would be uprated in line with the RPI rather than with the lower CPI. The Minister has said that

“a pension promise made should be a pension promise kept”,

but many people feel that that promise is not being kept. The new clause seeks only an ongoing basis for analysing the consequences of the shift from the RPI to the CPI. It also carries with it the statement that we do not want to commit ourselves to the CPI index permanently. I hope that the Government will at least agree to look at the impact of that switch on pensioners and their living standards.

Malcolm Wicks (Labour, Croydon North)

I rise to support my hon. Friend’s authoritative statement. I will speak at greater length later, on the Pension Protection Fund clause, but I have some questions for the Minister. I suppose the fundamental point is that there is a perfectly proper discussion to be had about the measurement and technical appraisal of inflation. How do we measure inflation for people whom we rather quaintly refer to as pensioners? Interestingly, when we meet fathers and mothers, we do not call them child benefit recipients, so it is curious that a whole group of our society is named after the social security benefit that they receive. I shall put that to one side, but I may use the term later to show my inconsistency on the matter. On measuring inflation, my colleague has expressed concern about the effect of rising gas and electricity prices on many elderly people. We should discuss such matters authoritatively and see whether there might be better measures in future.

No doubt later the Minister will wax eloquent and, as usual, very technical about the superiority of CPI over RPI, but if CPI gave more generous pensions to elderly people than RPI, would he be supporting it? It beggars belief that he would say, “Well, actually, in recent years CPI has been a percentage point or so more and is likely to be so in future. That’s rather good for elderly people, because they will get greater pensions. I am so technically committed to the measure that I have fought the good fight with the Treasury. I have found the extra millions for state pensions and I have recommended using CPI.”

The fact is that the Minister will present his good, academic, technical appraisal of CPI—the glory surrounding it and the halo over it—because actually it is meaner, in terms of pension beneficiaries in most years, than RPI. That is the reality of the matter. I shall not be surprised if the Minister has a good argument against me, because he argues well. However, I use the phrase again: it beggars belief.

Alok Sharma rose—

Malcolm Wicks (Labour, Croydon North)

I will give way, although I am keen that Government Members scrutinise this Government and not only the previous Labour one. However, if the hon. Gentleman has a relevant contribution to make, we look forward to hearing it.

Alok Sharma (Conservative, Reading West)

I thank the right hon. Gentleman. He has described CPI as “meaner” than RPI. What does he believe will be the overall funding difference in pensions as a result of using CPI rather than RPI?

Malcolm Wicks (Labour, Croydon North)

I think it is significant. The question is, faced with the deficit, which the hon. Gentleman is keen to discuss, too, but it is good to draw him out on pensions on this occasion, who should shoulder the burden? By adopting CPI, we are saying that many of our elderly people, many of whom are on low incomes and low occupational pensions, should shoulder a disproportionate burden. [ Interruption. ] Is the hon. Member for Nuneaton going to mutter to himself or would he like to make a contribution to our debate? No, he is reluctant to share his mutterings with the Committee, which is unfortunate.

Compare the situation with our famous bankers, or the pension entitlements of chairs and chief executives of top FTSE 100 companies. Will their pensions decline in real terms as the pensions of most working people will decline if we move permanently to CPI? The hon. Member for Reading West thinks that it is fair that the bankers should pay what pensions they want and that his constituents should have to shoulder this huge burden, but that is for him to defend to the electorate.

Alok Sharma (Conservative, Reading West)

Will the right hon. Gentleman give way?

Malcolm Wicks (Labour, Croydon North)

Is it about the Labour party or the Government?

Alok Sharma (Conservative, Reading West)

I do not think that I have mentioned the bankers at all, but the right hon. Gentleman is obviously keen to do so. I return to my question, which he did not answer. What is the difference in the funding? It would be very nice if he gave us a number—a round number would be helpful, but a number would be useful.

Malcolm Wicks (Labour, Croydon North)

I suppose it would be a round number and it would be a significant one. However, I no longer have the support of the civil service in these matters, and no doubt the Minister will have that figure in his pocket to alarm us with—to his great joy, because he does not think that we can afford to pay proper pensions.

I referred earlier to the Minister’s document, which I have only just come across—I do not know whether it has been circulated to the Committee—on the impact of the move to CPI for occupational pensions.

Steve Webb (Liberal Democrat, Thornbury and Yate)

On 12 July, I tabled a written statement announcing publication, which made it available to the whole House.

Malcolm Wicks (Labour, Croydon North)

That is good, but it could be argued that it should be on the Table as it is a very relevant document.

Steve Webb (Liberal Democrat, Thornbury and Yate)

It is.

Malcolm Wicks (Labour, Croydon North)

In which case, the Minister will have read it, so will he explain two things? The first is table 2 —he knows it well, but it is on page 9—and the assumptions about the proportion of schemes with particular indexation and revaluation rules. I find that table slightly complicated, but clearly it shows that a significant number of schemes have rules stating that RPI should rule the waves. I cannot work out whether it is 25%, or 25% plus 51%. I have seen an estimate that perhaps 80% of schemes or something of that order are still pursuing RPI, so many schemes will continue in that way. I give him notice that it is relevant to the PPF argument, when it will not apply, and I will raise that later. I should be grateful if the Minister will talk to us about that in plain arithmetic.

The Minister has touched on table 3 over the page, but will he explain at slightly greater length the two issues: revaluation, which is important, and indexation going forward? When looking at that table, will he also ensure that I understand it properly? These things may be complicated, but when it refers to a decline in liabilities of 20% or so for both men and women, does that mean that over time their real pension, compared with what it would have been under RPI, will decline by 20%? That seems to be the common-sense interpretation, but sometimes it is not as simple as that. That would seem to accord with the shadow Minister’s figures. No one knows what will happen to RPI and CPI, but we are talking about substantial declines from the status quo in what people’s occupational pensions will be in future.

Does the Minister agree that this is the big pension story of this Parliament in terms of the impact on people’s real living standards in both the state sector and the occupational sector when it applies there? I concede that it does not always apply. That is the big, big story, because if people over their lifetime as pensioners—I have used the term—see declines of 20%, when the large number of pennies and pounds drops, they will be shocked. They will understand that this is the great controversy of this Parliament when it comes to pensions.

Steve Webb (Liberal Democrat, Thornbury and Yate)

It is a pleasure to respond to the debate. We aired the issues extensively in the debate on the revaluation order, but since then we have published a revised impact assessment. The hon. Member for Leeds West quoted the February impact assessment, and I remind the House that we published it on 12 July. It indicated a slightly lower impact on pensions. The hon. Lady quoted a figure of £86 billion, but the revised impact assessment, which is based on fresh research and further detailed changes, reduces that estimate to £73 billion. That is still a lot of money, but I wanted to put on the record the fact that the estimate has been reduced in the most recent impact assessment.

As we are discussing the fundamental issue of CPI and RPI, it is worth reminding the Committee why we are here. When we were elected in May 2010, indexation of pensions and benefits that had taken place a month earlier was based on inflation in the year to September 2009. That was a peculiar year, because the RPI was negative and the CPI was positive.

One of my first duties as a Minister was to reply to angry letters—I do not get many of them now, obviously—asking, “Why has my SERPS pension been frozen?” or, “Why has my company pension been frozen?” or, “Why has my public sector pension been frozen?” My answer was, “Don’t you realise that inflation was negative?” Funnily enough, I could not sign those letters with a straight face, because I am yet to meet anyone who thinks that the movement in the retail prices index in the 12 months to September 2009 was an accurate measurement of the inflation that those folks had experienced.

Rachel Reeves (Labour, Leeds West)

Does the Minister think that the inflation experienced by pensioners is currently above or below both the RPI and the CPI measures of inflation?

Steve Webb (Liberal Democrat, Thornbury and Yate)

I think it is pretty clear that it is above those measures at the moment. Given the basket of goods that pensioners spend their money on and what has happened to food and fuel prices, it would be hard to maintain that inflation is not higher. There are other periods when the opposite is true. The hon. Lady quoted the Age UK silver RPI, which covers a limited time period, but over a two-decade time period, there is no systematic difference between pensioner inflation and non-pensioner inflation. Clearly there are times, as now, when pensioner inflation may be higher because of the basket of goods impact, but there are times when it is lower. There is no evidence of a systematic difference.

Rachel Reeves (Labour, Leeds West)

If the Minister recognises that pensioner inflation is currently higher than both RPI and CPI, is this the right time to reduce how pensions will be uprated to below the RPI measure?

Steve Webb (Liberal Democrat, Thornbury and Yate)

The hon. Lady’s logic is that when pensioner inflation is above the revaluation rate, we should use pensioner inflation, and when it is below, we should use general inflation. [ Interruption. ] If it is her policy that under Labour pensions would always be indexed by pensioner inflation, even when that was lower than RPI and CPI, as it sometimes is, that would be a bold statement. She would be saying that sometimes pensions would go up by less than the rate of inflation. That is worth the Committee knowing.

Rachel Reeves (Labour, Leeds West)

My question was whether the Minister thinks that this is the right time to reduce the uprating. If he thinks that on average the two rates are the same, but that currently the pensioner inflation rate is higher than both RPI and CPI, is this the right time to reduce how pensions are uprated?

Steve Webb (Liberal Democrat, Thornbury and Yate)

This has the feeling of one of those things where it would never be the right time for Labour. To give an example, would it have been the right time, as per the spending plans we inherited, to slash the cold weather payment from £25 when it is freezing to £8.50?

Chris Evans (Labour, Islwyn)

I find that offensive. The Government cut the winter fuel payment for the most vulnerable pensioners. The hon. Member for Reading West shakes his head—

Katy Clark (Labour, North Ayrshire and Arran)

Order. Will the Minister respond?

Steve Webb (Liberal Democrat, Thornbury and Yate)

I understand that when he stood for election, the hon. Gentleman did not look at the spending plans he was standing on, which cut the winter fuel allowance.

Katy Clark (Labour, North Ayrshire and Arran)

Order. Will the Minister respond in the context of this clause?

Steve Webb (Liberal Democrat, Thornbury and Yate)

The question was whether this is the right time to move to what we believe is a better measure of inflation. The point was made that this is a difficult time for pensioners. The point I was trying to make on the cold weather payment was that it would have been exactly the wrong time had we not been doing other things such as reversing the planned cuts to the cold weather payment.

The issue of how much pensioners spend on fuel has been raised. As part of our policies, including the CPI switch, we targeted additional help at the most vulnerable pensioners. That was not the 60-year-old higher rate taxpayer who gets the winter fuel payment, but the cold weather payment recipient—the poorest pensioner, disabled person or family with young children. We trebled Labour’s planned level of payment. Every penny of that money was money well spent.

Rachel Reeves (Labour, Leeds West)

Does the Minister think that pensioners this year will get more or less than they did last year with the combination of the winter fuel allowance and the cold weather payment?

Steve Webb (Liberal Democrat, Thornbury and Yate)

It depends on how cold the winter is. Cold weather payments are triggered by weeks of temperatures below freezing. I do know that when it is freezing cold, we will be putting in the money. We put £400 million into cold weather payments this winter, as against about £130 million that would have been paid.

Sheila Gilmore (Labour, Edinburgh East)

The Minister is making a statement today, and he has made it on previous occasions. Is that not different from a projection for the future made at a time when it had not been decided whether there would be cold weather payments and at what level they would be set? The Minister is of a view that he knew what mind an incoming Labour Government would have had.

Steve Webb (Liberal Democrat, Thornbury and Yate)

To explain to the hon. Lady, Governments publish spending plans beyond the current year and those plans are based on policies. The Department for Work and Pensions published spending plans that went well into this Parliament. We know the basis on which those plans were constructed, which was that a temporary pre-election increase in the winter fuel payment would be reversed, and that cold weather payments would be cut.

I will return to the clause. When we came to power, RPI was clearly not doing the job for which it was intended, and it was swamped by mortgage interest payments—the right hon. Member for Croydon North offended me grievously by suggesting that we would not have looked at this issue had CPI been higher than RPI.

Harriett Baldwin (Conservative, West Worcestershire)

Will the Minister confirm that one of his first acts was to ensure that the state pension was increased by a triple lock of the higher of CPI, average earnings or 2.5%?

Steve Webb (Liberal Democrat, Thornbury and Yate)

My hon. Friend is right, and that point is germane to the discussions we will come on to about people who will get smaller increases than they would have done by using CPI, but bigger increases in the basic state pension. For the record, we estimate that anybody with a pension of £800 or less a month will do better through the combination of the triple lock and CPI than they would have done under a continuation of previous policies. It is true that people with large occupational pensions will get smaller increases than they would have done, but I regard the combined impact of our provisions as relatively progressive, which I am sure will go down well with the Labour party.

On the basket of goods in the index, we want something that is fit for purpose. The problem with RPI based on mortgage interest is that most pensioners do not pay mortgages any more—the percentage varies a little bit, but it is a minority sport. When interest rates are falling, as they did dramatically in the year before September 2009, that creates a double whammy for pensioners. Not only does headline RPI fall or go negative and they receive no increase in their pension, but their rate of savings falls at the same time. As the hon. Member for Leeds West said, just at the point that pensioners need extra help, we kick them in the teeth by not measuring inflation appropriately.

There is a strong case on the basis of the basket of goods, but I will also mention that the much-hallowed RPI deliberately and specifically excludes the poorest quarter of pensioners. The idea that RPI is the best possible way of indexing pensions, even when it excludes the spending patterns of the poorest pensioners about whom we are most concerned, seems a bit odd.

There is a discussion about CPI, and CPI including owner-occupier housing costs—just for the record, the hon. Member for Leeds West might have been understood to say that housing costs are not in the CPI. Rent, which for many pensioners is more important than mortgage interest, is in the CPI, and it is important to put that on the record. Owner-occupier housing costs are not incorporated, and the CPI advisory committee has looked at how those might be included. Interestingly, it rejected the idea of simply plonking in mortgage interest payments, which is how it is done using RPI. However, it is doing a detailed programme of work, which I believe will conclude over the next year or two, to look at ways of including owner-occupier housing costs. I have repeatedly said on the record that we will look at that programme once we have it—we cannot do that now because it does not exist—and see whether that would be a more appropriate measure. We are entirely open to the possibility of finding a good way of including owner-occupier housing costs.

The second fundamental problem with RPI over CPI is the substitution effect. It is the argument that, when prices change, people change their behaviour. For example, rather than buying best cuts of meat, people might buy cheaper cuts of meat or shop at a cheaper supermarket. People change their behaviour, so the impact of price changes will depend on how people respond. The Institute for Fiscal Studies looked at the substitution effect in the CPI, not the RPI, and said that it was “a sound rationale for the change”. In other words, its judgment, that of the RSS to which the hon. Lady referred, and that of several people is that RPI “arguably overstates inflation” because it does not take account of the substitution effect.

We are using a more robust, accurate measure of inflation in CPI. We are open to new measures, which is why reference is not made to the consumer prices index. We do not want to go through such matters again, but each year—and slightly in relation to new clause 11—we have an uprating order, an uprating statement for debate in the House and regulations introduced under the affirmative procedure to give us an annual chance to debate the impact of CPI.

However, we have produced a detailed analysis of such matters. I often consider that we go the extra mile. I am referring to the third version of the impact assessment. I cannot think of the number of hours we have spent on providing Parliament with accurate information about the impact of CPI. Because most of the impact of CPI on occupational pension schemes is about the accumulated liabilities, not the future impact—for reasons I shall explain—it will not change very much if we published a report in three years’ time.

Rachel Reeves (Labour, Leeds West)

One reason why the Department has had to publish three impact assessments is that, each time it published one, the figures changed by several billion pounds. It is not a matter of its wanting to give more information, but that it cannot get the information right.

Steve Webb (Liberal Democrat, Thornbury and Yate)

We sometimes make mistakes.

Rachel Reeves (Labour, Leeds West)

Three times.

Steve Webb (Liberal Democrat, Thornbury and Yate)

No, not three times.

One of the main reasons why the numbers are different in the most recent impact assessments is that we have done what the Committee is asking us to do, and have carried out detailed fieldwork research on occupational pension schemes. We quickly discovered that they all have different rules. The assessment is a detailed, thorough piece of work, tables 2 and 3 of which I shall refer to in response to the right hon. Member for Croydon North. I hope that the Committee will welcome the fact that, rather than say, “We shall not give you an impact assessment for six months because we have not done the fieldwork,” we give an early estimate and update it in light of fresh research, which is what we have done.

In response to the right hon. Gentleman’s specific questions about tables 2 and 3, table 2 splits the 100% of occupational pension schemes into four groups. That is based on whether the revaluation of the entitlement of people who leave the scheme before pension age is on RPI or the statutory basis, CPI, and whether the pensions in payment are indexed according to RPI or the statutory basis, CPI. The numbers in the cells add up with a bit of rounding to 99%—the universe of 100%. He quoted the 80% figure, which was our original estimate. If he adds up the two numbers in the first row—indexation based on RPI, regardless of the revaluation—he will see that it adds up to 76%. We had previously estimated 80%, so notwithstanding what the hon. Member for Leeds West said, I think that is pretty good. We had an initial estimate before the field research of dozens of pension schemes, and we came out with 76%, not 80%.

As for the 51%, we are discussing a percentage of schemes, not a percentage of members, and if we picked a scheme at random, the most likely scheme would be one in which, when pensions are in payment, they are linked to RPI, but when the scheme revalues past service up to pension age, it will do so by CPI. Under the 25% figure, both of those processes are done by RPI.

Malcolm Wicks (Labour, Croydon North)

Am I right or wrong in thinking that it is the revaluation that has the most significant impact on the pension paid? Obviously, it depends, but I shall let the Minister respond.

Steve Webb (Liberal Democrat, Thornbury and Yate)

It is the most significant in the sense that, as the right hon. Gentleman will see from the table, three quarters of schemes are using RPI for indexation. It is the revaluation that matters most because more schemes are linked to the statutory minimum for revaluation than for indexation. However, for any given individual, if the person worked for the same employer up to pension age, it does not matter at all because there is no revaluation, because the person is still in employment. It will depend on when the person leaves the firm and so on. In a sense, what the right hon. Gentleman says is true: the indexation change has less impact because three quarters of the schemes use RPI at the moment anyway. I hope that clarifies his questions on table 2.

Table 3 is, in a sense, the analogue of table 2. It takes each of those four cells, and each of the columns in table 2, bar the first one, matches up to one of the cells in table 2, which gives us a subdivision for men and women, although, as the right hon. Gentleman will see from the table, the numbers for men and women are not really very different. It tells us about the impact—on average—of the schemes on the different sorts of arrangements.

For example, in the final column, we have what we call RPI RPI schemes—schemes that revalue by and index by RPI, which is about a quarter of the universe, as it were. Actually, without clause 15, which does the CPI underpin, we have slightly increased liabilities, but essentially it is zero. In the second column, in which we have the most common sort of scheme, the RPI indexation has no effect, but the revaluation does, and that is where the 16% reduction is. Just to clarify the right hon. Gentleman’s question, it is the reduction in pension scheme liabilities. The impact on individuals will vary enormously according to age, length of service and so on. We have used a stylised individual to get to those figures, but the answer will be different for every individual. However, on average, that is the answer to the question.

Malcolm Wicks (Labour, Croydon North)

I think I understand it so far, but will the Minister say more about the impact on the individual? Obviously, it depends, but there must be some average figures—median figures—for men and women. To what extent is their pension going to be reduced? That is what I am interested in.

Steve Webb (Liberal Democrat, Thornbury and Yate)

Well, these are the average figures. They are averages for men and averages for women.

Malcolm Wicks (Labour, Croydon North)

So, 20%?

Steve Webb (Liberal Democrat, Thornbury and Yate)

Over the course of a retirement, not at the point of retirement. This is to do with a discounted stream of liability. It does not directly translate into a pounds and pence at the point of retirement figure. It is discounted to give us a lump sum value, and it is in terms of the impact on the scheme.

Malcolm Wicks (Labour, Croydon North)

I think it is important for us, Parliament and the public to understand this. Earlier, in the Minister’s very authoritative, interesting and technical appraisal of CPI against RPI, we got the impression that it was about swings and roundabouts and that it depends on the year and so on. However, is he now saying that, on average for men and women over a lifetime, their pensions will be one fifth lower than they would have been if he was not proposing this reduction?

Steve Webb (Liberal Democrat, Thornbury and Yate)

No, I am not saying that.

Malcolm Wicks (Labour, Croydon North)

What are you saying?

Steve Webb (Liberal Democrat, Thornbury and Yate)

What I am saying is that he will see there are four columns beyond the first one, and we divide the pensions universe into those four columns. Half of all schemes are in the second, substantive column—column three. A quarter of all schemes are in the final column where there is no impact, so it is not correct to say that there is an average 20%. If we happen to have CPI and CPI, a person gets done by both, as it were. If someone gets done by CPI on revaluation and CPI on indexation, and they are an average person leaving the scheme 15 years before the end on an average income with average characteristics, it might be a 20% impact over the course of their retirement. So it is an average worst-case scenario; that column applies to less than one in five schemes. These are averages.

Malcolm Wicks rose—

Steve Webb (Liberal Democrat, Thornbury and Yate)

Let me continue for a second. I am not denying that if we take £73 billion at net present value out of the long-term liabilities of occupational pension schemes, some people will see significantly lower occupational pensions than they would have done. I am presenting the figures. The right hon. Gentleman keeps trying to get me to say it: these are the figures for the impact on the liabilities of the scheme.

I will address some of the other points.

Malcolm Wicks (Labour, Croydon North)

Can I just—

Steve Webb (Liberal Democrat, Thornbury and Yate)

No. I think we have drilled this one to death.

Malcolm Wicks (Labour, Croydon North)

Well, I thought this was scrutiny, Chair. It will be recorded that the Minister is not giving way.

Steve Webb (Liberal Democrat, Thornbury and Yate)

I am not giving way. I am trying to address a number of questions that the right hon. Gentleman and others have asked. If he still thinks I have not addressed them, he can obviously come back.

The right hon. Gentleman was concerned—I think the hon. Member for Leeds West asked about this—about the use of the CPI for the Pension Protection Fund, which we may come on to in a separate clause. The board of the Pension Protection Fund does not have discretion to make up the rules; it implements the statutory rules of the fund. It would be very odd to say to the PPF, “But, guys, pick your own inflation rate.” The Chancellor of the Exchequer has indicated that for the purposes of indexing social security benefits, state earnings-related pensions and linked occupational pensions, we are going to use CPI extensively and pretty comprehensively through Government. To then say that the Pension Protection Fund down in Croydon can measure inflation differently, even though it was set up by the pensions legislation that the right hon. Gentleman was involved in, would seem inconsistent.

Rachel Reeves (Labour, Leeds West)

As I said, the Pension Protection Fund was in surplus of, I think, about £396 million last year. This year, it will reduce its levy by £120 million due to the shift from the RPI to the CPI alone, and £600 million overall. The PPF clearly does not need to be made financially viable. The levy is paid by levy payers, not taxpayers, so it is different from state pensions. I wonder why the Minister feels the need to change that.

Steve Webb (Liberal Democrat, Thornbury and Yate)

We are back in the Opposition’s blind spot here, saying that burdens on business is somehow free money, and that if the hit is on the taxpayer, perhaps we will rig the inflation measure for a few years and then go back to a proper one, and if pension schemes will pay the money, who cares?

Rachel Reeves (Labour, Leeds West)

Will the Minister give way?

Steve Webb (Liberal Democrat, Thornbury and Yate)

Bear with me a second; I am responding to the previous point. As we have applied the CPI to the PPF, and because of other changes—the PPF sets its levy based on a range of considerations, but the hon. Lady is right in saying that that is a substantive one—the PPF has saved pension schemes, which means employers and pension scheme members, because they are not separate entities, £120 million. That is either £120 million more that can go into pensions, of the sort that I assume the hon. Lady would approve of, or £120 million that British business does not have to find, which can help it through the recession. The suggestion that somehow, because it is not the taxpayer, it is of no great material importance seems extraordinary.

Rachel Reeves (Labour, Leeds West)

We managed to have a good scrutiny of Government policy this morning. The Minister seems to be trying this afternoon to put words in the mouths of Opposition politicians that they frankly have not said. He decided not to override occupational pension schemes, which I believe is the right thing to do. However, as a result, many pension schemes will continue to pay out under the RPI. Does he consider that to be a big cost to business? That shows a failure to understand its concerns, yet the Minister seems to think that I do not understand.

The PPF levy is reducing by £480 million this year, without the £120 million, but I believe that the PPF levy is reducing by £600 million. Perhaps the Minister can give us the figures of this year’s reduction in the PPF levy. What is due to the shift from RPI to CPI, and what is for other purposes? My understanding is that that levy is falling anyway, so the burden on business is falling.

Steve Webb (Liberal Democrat, Thornbury and Yate)

I am sure that I will be corrected if I am wrong. My recollection is that the levy is falling from £720 million to £600 million, so it is falling by £120 million a year. I do not believe the PPF has published a breakdown of the factors behind that, although CPI is clearly significant. I cannot give a figure for the split because I do not think the PPF has published one. However, it would be fair to say that the chances are it will be a pretty big impact, which I think is entirely welcome. The fact that pension schemes will not have to find that money is good news for the schemes, employers and their members.

It is important to note that the PPF was set up to reflect the statutory minima. If we are putting CPI in as the minimum, it would be very odd indeed to have a pension compensation arrangement that is more generous than some of the schemes that it is providing insurance for, in terms of indexation or revaluation. We will discuss PPF in more detail, but the fundamental point that we risk losing sight of in the whole debate is that we have a statutory duty to define the general increase in the price level. We must do so properly. We cannot say, “We know that inflation is really the RPI, but because we are broke, we are going to pick a different number for a few years. We can’t even promise in four years’ time that we won’t be broke, so we will go on fiddling the inflation numbers until we have some money, and then we will do proper inflation protection.” That seems to me the unprincipled approach.

The principled approach seems to be to take a look at the detailed, careful statistical work that has been done on the better measure of inflation. People imply that the CPI is some number that someone wrote on the back of a fag packet. The amount of meticulous, careful statistical work that goes into creating the Bank of England’s headline measure of inflation is extraordinary and well beyond me. To then say that it does not measure inflation properly is extraordinary. Our judgment is that across the board, for indexing benefits, tax credits, public sector pensions and state earnings-related pensions, we need to have a consistent measure of inflation, properly constructed, with a basket of goods that works and which properly reacts to price changes. That is what we believe the CPI does, but we do not have a closed mind on the matter. If the experts come back to us and say that we can do a better CPI that includes owner-occupied costs in a new way, we will certainly look at doing so.

Lilian Greenwood (Labour, Nottingham South)

If the CPI is so perfect a measure of price inflation, why when the Minister constructed the triple lock did he not choose to use CPI or average earnings? He also put in an underpinning of 2.5%. What was the thinking behind that?

Steve Webb (Liberal Democrat, Thornbury and Yate)

Yes. 75p.

Lilian Greenwood (Labour, Nottingham South)

So it is political.

Steve Webb (Liberal Democrat, Thornbury and Yate)

I think the point about the triple lock is that there are essentially three basings on which one might set the state pension. First, where is it relative to people who are in work? What are we doing for pensioners? For 30 years pensioners were left behind and we have done something about that. Secondly, does it keep pace with the cost of living? We have taken a judgment on how that is best measured. Thirdly, do we want to insult people by giving them pennies? Unlike the previous Government, we decided not to do that. If that is political, I plead guilty.

Alok Sharma (Conservative, Reading West)

It appears from the debate that the Opposition are against the triple lock. Perhaps the shadow Minister will discuss that in her summing up.

Steve Webb (Liberal Democrat, Thornbury and Yate)

I have to say to my hon. Friend that I have not the faintest idea what the Opposition are for or against; the truth is that they have not either at this point, but I am sure it will become apparent.

Malcolm Wicks (Labour, Croydon North)

Will the Minister give way?

Steve Webb (Liberal Democrat, Thornbury and Yate)

Is it on pensions?

Malcolm Wicks (Labour, Croydon North)

I usually talk about pensions; the Opposition talk about Mr Gordon Brown and the Labour Government.

For the education of new Government Members, will the Minister confirm my historical memory that it was Mrs Thatcher’s Conservative Government who broke the index link between pensions and wages? There is a certain amount of humbug coming from a particular quarter of the Committee Room.

Katy Clark (Labour, North Ayrshire and Arran)

Order. May I ask the Minister to respond in the context of the clause that we are debating?

Steve Webb (Liberal Democrat, Thornbury and Yate)

I certainly will. Simply to say, when judging the most appropriate form of indexation and the principles on which that should be done, one should look at what people do rather than what they say.

The goal of measuring the general increase in the price level is to protect people against inflation. We believe the CPI is a good way of doing that. It has a better basket of goods, which better fits the retired population in particular, and the statistical advisers agree that it responds better on the substitution effect. We could produce another report in three years’ time, but I doubt very much that it would say anything terribly different. The impact assessment is thorough on those points. We have an annual uprating statement, which we debate every year, so I am not convinced that we need yet another report in three years’ time. I therefore urge my colleagues to reject the new clause and support clause 15.

Rachel Reeves (Labour, Leeds West)

I found the tone of the debate on the probing new clause disappointing, both from the Minister and from some hon. Members on the Opposition Benches. The point of Committee is to scrutinise the Bill; the point of the new clause is to scrutinise the shift from the RPI to the CPI. We might have done that in a way that produced more light than steam.

The Minister said that the Government would have looked at the shift from the RPI to the CPI whether or not financial savings were to be made in the measure. Like my right hon. Friend the Member for Croydon North, I find that quite incredible, because the shift was part of the package of measures to save money in the welfare budget. There is nothing wrong with trying to save money, but the Minister should at least be honest about why the Government are pursuing the policy. He can hide behind his briefings and his special cases, but in reality, the measures will cause pensioners to be worse off in future. People contributing to pensions will get lower pensions in retirement than before, including those who have been paying in to pensions thinking that they would be uprated by the retail prices index, who now find that they will be uprated by the consumer prices index. The provision would be laughed out of court by every pensioner who knows the reality of their level of inflation. The cost of their shopping and utility bills is going up and up, and the shift from the RPI to the CPI does nothing to help them. As my right hon. Friend said, the Minister is pursuing these policies because they are meaner. That is why the Government are supporting them.

Steve Webb (Liberal Democrat, Thornbury and Yate)

Is the hon. Lady dangling a carrot of pensioner price indexation in front of the nation’s pensioners, or is it just for effect?

Rachel Reeves (Labour, Leeds West)

As I said to the hon. Member for West Worcestershire, Labour, like the Liberal Democrats, or the Conservatives—[ Interruption. ] If the Minister wants to intervene again—I have accepted every intervention—I am happy to take it, but if he wants to mutter from his seat, that is his prerogative.

Alok Sharma (Conservative, Reading West)

From what the hon. Lady is saying, it is clear that she has no policy at all. If she has, perhaps she should spit it out. The Minister has raised a clear issue, and we would all like a response to it. Will the hon. Lady address that point?

Katy Clark (Labour, North Ayrshire and Arran)

I remind the shadow Minister that she must respond in the context of this clause.

Rachel Reeves (Labour, Leeds West)

And I have every intention of doing so. We all know that the point of a scrutiny Committee is to scrutinise the Government’s legislation. As much as those on the Government Benches would like to scrutinise Labour policy, that is not the purpose of this Committee. [ Interruption. ] The hon. Member for Reading West mutters and shakes his head, but unless he knows something that I do not, the point of these Committees, as I am sure the Chair would agree, is to scrutinise Government legislation on a number of areas. Whether it is automatic enrolment or the state pension age, it has been the Opposition that have put down alternatives and set out other ways of doing things that are fairer to both existing and future pensioners.

Marcus Jones (Conservative, Nuneaton)

Will the hon. Lady give way?

Rachel Reeves (Labour, Leeds West)

I will in a moment. The real loss of the four days we have spent in Committee so far is that the transitional arrangements that the Government promised to the 500,000 women most impacted by this Bill have not been debated or discussed. The Government have put nothing forward, despite their promises on Second Reading.

Marcus Jones (Conservative, Nuneaton)

The hon. Lady talks about fairness. I accept what she is saying of us as a Government being fair to pensioners. Does she not also think that there is a real implication in this on future generations? We have to be fair, when thinking about these policies, to future generations—our children and their children—and what they will have to face going forward.

Rachel Reeves (Labour, Leeds West)

I am at a loss to understand why the Government are switching from RPI. Are they doing it to save money, as I believe, or are they doing it because they believe that it is the right form of inflation? Is the hon. Gentleman supporting the shift from RPI because it is a cost-saving measure, or is he supporting it because he believes that it is a better measure of inflation?

Marcus Jones (Conservative, Nuneaton)

Will the hon. Lady give way?

Rachel Reeves (Labour, Leeds West)

With pleasure.

Marcus Jones (Conservative, Nuneaton)

I address the shadow Minister’s comments by saying that I made that point because I have a conscience in relation to my children and their children, while trying to be fair to the current cohort of pensioners and our generation as we go forward into that period of life.

Rachel Reeves (Labour, Leeds West)

It would have been nice to hear a bit more of the hon. Gentleman’s conscience, as well as the rest of Government Members’ consciences, throughout the four days we have had in Committee, particularly on the 500,000 women who will have to wait up to two years longer. The hon. Gentleman shakes his head and raises his eyebrows, but we have heard nothing from him on that point.

Katy Clark (Labour, North Ayrshire and Arran)

Order. I remind both hon. Members that they must address the clause, not other matters that were debated earlier.

Marcus Jones (Conservative, Nuneaton)

On a point of order, Miss Clark. At that point I did not shake my head. I want that put on the record.

Katy Clark (Labour, North Ayrshire and Arran)

I do not know whether the hon. Gentleman shook his head or not. The hon. Member for Leeds West made her contribution, which is on the record, and the hon. Gentleman has put his position on the record. That draws a line under the matter.

Rachel Reeves (Labour, Leeds West)

I am sorry if I upset the hon. Gentleman by suggesting that he shook his head. I will not do so in future.

It is difficult to understand whether the Government are changing from RPI to CPI because they think it is a cost-saving measure, which would be legitimate, or because they think it is a better measure of inflation. We all want fairness between generations and intragenerational fairness but, as my right hon. Friend the Member for Croydon North asked, is it fair that those receiving pensions and other welfare benefits are so disproportionately impacted by the changes, while the bankers have received a tax cut this year?

The reason why the Government do not want to have a triennial review of the evidence is that they know it would reveal that pensioners are worse off because of the proposals—by up to 15%, as Lord Hutton has suggested, or even by up to 20% or 25%—in relation to not only their state pensions, but to the PPF and their occupational pensions. Pensioners are worse off because of the shift from the RPI to the CPI, and the Minister and Government Members know it. Some of them may think that it is a fairer measure of inflation, but I do not know a single pensioner who agrees with them.

Clause 16 - Pension compensation: annual increases in periodic compensation

Steve Webb (Liberal Democrat, Thornbury and Yate)

We now come on to the Pension Protection Fund. I do not know whether the father of it is in our midst—as ever, success has many parents, but I acknowledge the contribution made by the right hon. Member for Croydon North. I do not know if the headquarters of the PPF is physically in his constituency, but if not, it is not far from it. I know that he takes a close interest in the PPF, and I look forward to his contribution.

I remind the Committee that the PPF provides help to members of failed defined-benefit occupational pension schemes. The system works like this: compensation derived from pensionable service on or after 6 April 1997 is increased each year to take account of inflation, subject to a maximum 2.5% cap. Clause 16 will amend provisions on the indexation of compensation payments. It replaces references to RPI with references to the “general level of prices”. The Secretary of State will decide how that is determined but, as we have just discussed, the current intention is to use the CPI.

Rather than rehearse again all the arguments about the CPI, I will simply state that the clause will bring the PPF into line with statutory indexation for occupational pensions, which is the obvious thing to do. It would be inappropriate to use a different inflation measure for PPF compensation, which helps members of failed defined-benefit occupational schemes, than the measure that is used in the legislation governing ongoing pension schemes. I commend the clause to the Committee.

Malcolm Wicks (Labour, Croydon North)

The Minister has made a brief, but useful, introduction to an important subject. I should put a clarification on the record about how, when the Bill establishing the Pension Protection Fund was given Royal Assent, the decision was made to locate it in Croydon. My hands were nowhere near it; the decision was made by officials, partly because Croydon is usefully about halfway, by train, between the DWP and the Pensions Regulator in Brighton. It was nothing to do with me, and my officials were not very astute, because it is in Croydon Central rather than Croydon North.

As a prelude, it might be helpful briefly to remind the Committee why the PPF and its small brother or sister, the financial assistance scheme, were established. Before the Pensions Act 2004, there was a growing scandal in this country, about which all parties were concerned and which was championed by many colleagues from both sides of the House. Companies were going bust with defined-benefit or so-called final salary schemes, with the consequence that, through no fault of the workers or the existing pensioners, people risked losing not all—I will not exaggerate—but a very large proportion of their pension, perhaps receiving only 20% or 30% rather than 100% of it. Many workers and pensioners lobbied Parliament and it was a great cause célèbre, if that is not the wrong phrase.

The real hero was Ian McCartney, the Pensions Minister, who was very much seized by the issue and was determined to do something about it. Therefore, although the DNA test would show some paternity on my part, I would not want to claim the credit. Therefore, although the DNA test would show some paternity on my part, I would not want to claim the credit. However, I am proud that Parliament legislated for the Pension Protection Fund.

Briefly, the PPF delivers—the Minister will correct me if I am out of date of this—90% of what the pension entitlement would have been for existing employees, and 100% of the pension for existing pensioners. However, that is subject to a cap, so that those who would have not large pensions, but pensions above a certain level would get only a certain amount; the Minister may have the figures with him now. That led to some aggrievement, but by and large it was a sensible approach.

The way in which it is funded, which is not without difficulty or controversy, as we have already heard, is by imposing a levy on DB or the so-called final-salary schemes. In a sense, as an insurance premium, those people would have to pay a certain risk-based amount. I am a bit out of date on how that risk basis is worked out, but it is risk-based. A well funded scheme would still pay a levy, but a smaller amount than a scheme that looked slightly risky.

The levy is a burden on those schemes, particularly when, as we know, final-salary schemes are in significant decline. More and more companies are announcing that, certainly for new recruits, the DB scheme no longer exists. Imposing a levy on a declining sector is not without grave difficulty, which I acknowledge. However, when schemes go bust, they often leave behind considerable assets, which, although not enough to pay their pension liabilities, are taken in by the PPF and invested, and some of the beneficiaries will be paid from that income.

Andrew Bingham (Conservative, High Peak)

The right hon. Gentleman is giving quite a good commentary on the history of the PPF, and he may have forgotten that I met him about five or six years ago with a group from the Turner and Newall scheme in my constituency.

This is slightly off of what we are discussing, but I hope the Chair will give me a bit of licence. The right hon. Gentleman talks about the level of compensation. We have acknowledged, however, that there is still a group in the PPF—the early retirees—some of whom, because of when they retired, the conditions of the PPF and the cap, are still experiencing losses of up to 70%. The Minister knows that because we have discussed it, and I will want to continue harping on about it for the rest of this Parliament, even though I am aware of the difficulties of dealing with that problem.

Malcolm Wicks (Labour, Croydon North)

Yes, I am aware of that. It was not 100% satisfactory to all those who should have benefitted. Also, the PPF went forward from the relevant date, but there was the issue of companies that had already gone bust, and those people cried and shouted the loudest to Parliament, and rightly so. After some delay—I recall that the Treasury was not too keen—the financial assistance scheme was born to provide some benefits, paid for by the Exchequer, not levy payers, to those people.

Now, institutionally, I understand that the PPF has taken in the FAS. It is not an amalgamation, so the two are actuarially separate, which is wholly appropriate. I do not have the latest figures, but my understanding from the report is that up to the end of March 2010, 341 schemes were in the PPF, covering about 193,000 members. However, the scheme is fairly fast-moving, and those numbers will now be larger. If we link them to the numbers affected by the FAS, I think the PPF told me—I am not sure whether this is current or very soon—that about half a million people would be covered by the PPF or the FAS. That may be going forward a little bit, but not too far. If I have that wrong, I am happy to be corrected.

By putting forward such pension arithmetic, I am showing that the PPF and the FAS are helping a considerable number of people who are now receiving at least a reasonably significant pension whereas, before the legislation and the establishment of the fund, they would have received a small pension.

We are talking about people who have had a lot of anxiety in their lives about companies going bust and who, for several years, were fearful that they were losing a significant proportion of their pension. They include people—the hon. Gentleman has just referred to this—who still consider that they are not receiving their full dues. Such people are not vulnerable, but they make up a group of people for whom we should have some regard. It is in that context that we need to ask the Minister why the move from RPI to CPI—not the CBI, which I expect would oppose my proposals—should apply to the PPF. The hon. Gentleman more than alluded to it earlier; he said that it was Government policy and that, of course, such issues should apply to the PPF. He is not the libertarian who I used to know in the Opposition days, such thoughts show that he is a bit of a centralist.

I hope that I have shown my understanding of the funding basis of the PPF and that we need to nurture the institution carefully in future, not least because of the decline of final salary schemes. Nevertheless, I am not convinced that the PPF could not have afforded to have kept RPI for such a group of people who have been badly treated in the past—if I can describe them that way. Reporting on progress during the year, the chief executive’s review for the past financial year 2009-10 stated:

“Our deficit of the previous year has been replaced by a reserve of almost £400 million, equivalent to a funding level of 103 per cent.”

That is testimony to the good stewardship of the PPF, and seems relatively healthy. When that report was produced, the assets of the PPF were some £4.5 billion. I believe that they might now be nearer £7 billion, but the Minister may be able to correct me. I am not being silly. There are huge liabilities, too, and we have to be careful. However, I am not convinced that such action was necessary, except to impose a central edict, to say to the board, “It is not up to you to make up your mind as stewards. We, the Government, say that you have to move to CPI.”

Marcus Jones (Conservative, Nuneaton)

I follow the right hon. Gentleman’s argument, but is it fair that people in the fund receive uprating with RPI, when the people contributing towards the fund through the levy on their pension schemes are only being uprated by CPI?

Malcolm Wicks (Labour, Croydon North)

That seems like quite a good question. I am trying to be generous before I let the hon. Gentleman down. There are two flaws in his argument. First, as we have learnt from my exchange with the Minister, many people in DB schemes will continue to benefit from RPI. He said that he was proud of the fact that 76% was close to 80%. I thought that it was pretty good. If 70% to 80% of existing DB scheme members will still benefit from RPI, that slightly undermines the argument of the hon. Member for Nuneaton. That is a pity, as it sounded good as a question.

Secondly, given how many DB schemes are uprated with RPI, many of the schemes that the PPF beneficiaries come from would have been in RPI-uprated schemes, but they went bust. If companies had not gone bust, going forward they may well have benefited from RPI and—in plain English—better, higher pensions. Now, because of a central edict, their PPF pension will be uprated—I think we agree that it might vary from year to year—at a lower rate. So I think that is why I am not entirely taken with the question, although for a while I thought it sounded pretty impressive.

Why did not the Minister and the Treasury leave the decision to the PPF board? Here we are, supposedly in an era of the new localism—I will not go on about the big society in case those who feel a bit tired at the moment totally slumber—where we no longer have the central state and we let key institutions make decisions. We established the PPF board as an independent board, which has great expertise. Its members are the stewards of the PPF and the funding. Why did we not say to them, “This is the Government’s view, but it is up to you; you’re the board; you have to make this decision”? Who knows what decision they would have made?

Steve Webb (Liberal Democrat, Thornbury and Yate)

Will the right hon. Gentleman give way?

Malcolm Wicks (Labour, Croydon North)

May I just continue, and then of course I will give way, because I am more generous at giving way than the Minister at the moment?

It is interesting that the Government at one stage considered whether to introduce legislation that would directly override the rules of individual schemes. It says here “(a statutory override)” just to help us remember. However, the Government decided against it, which slightly undermines my central edict point. It is good that you changed your mind—why did you? Not you, Miss Clark—I am sure you never change your mind, although we all do sometimes. Why did the Minister change his mind? Because it would

“represent an unwarranted interference in the rights of employers and trustees to manage their financial affairs.”

If we are saying that the Government have changed their mind and we will leave it to the trustees to decide, are not, in a sense, the PPF board the trustees? They, not the Minister, have the responsibility to manage the affairs of the PPF. Why not trust the board? Why not believe in independence?

Steve Webb (Liberal Democrat, Thornbury and Yate)

The right hon. Gentleman was behind the legislation that brought this measure into practice. If he thought that we should trust the board and give it discretion, why did he give it absolutely no discretion on the way in which the benefits of the PPF are calculated, which he now thinks we should do for the first time?

Malcolm Wicks (Labour, Croydon North)

Well, in terms of establishing the PPF and the difficult decision to impose a new levy, it was felt that we could not give everyone the pension to which they were entitled. We had to have the cap on the amounts of pensions paid out, if that is what the Minister is referring to. Now that the PPF board is established—alive—and rather successful in Croydon, it has to produce annual reports. It has a director of finance or whatever the title might be, an independent chair and a chief executive. Why not trust them to make the decision? However, the Government did not trust them to make the decision, so may I ask the Minister whether the board was consulted and what was the result of that?

It is interesting that in the impact statement, which was on the table—I am sorry to have missed the purple one; the one that I have did not have a purple cover, so I did not spot it—we are told about the options that were considered, and then we had stakeholders’ views. That is an extraordinary word that we use—stakeholders.

“Initial feedback suggests the following positions of key stakeholders:

Members of affected schemes and their representatives oppose the change to CPI as it will lead to lower payments in the future”

Well, they got that right.

“Trade Unions. Opposed.

Pensions Professionals. Neutral.”

I never found them neutral myself.

“Also, the Board of the Pension Protection Fund is neutral—the change is a matter of Government policy.”

Or so they say.

So, in terms of stakeholders, the only stakeholder view that has been taken into account is the Treasury’s, which I think speaks volumes. That is disappointing in relation to the independence of the Pension Protection Fund board.

I want to ask the Minister about the impact of the measure, because he has spoken often about the needs of pension schemes, but he is a little less sure to tell us about the effects on pension beneficiaries. I quizzed him a little on that slightly obscure table, but I think that I have got it now. It shows that in future, many pension beneficiaries might be 16% worse off under CPI than if we did not agree the legislation.

The PPF relates to a different population of people. Will the Minister give us figures—average figures, perhaps—to show how the move to the CPI will affect, I believe adversely, the pension incomes of that group? In addition, will he give us figures for the financial assistance scheme? I do not think that such figures were spelt out clearly in the impact assessment. The key impact to assess is that on the citizen in the FAS and the PPF. In other words, what will be the average loss of pension—not just for one year, but going forward? Any information would be gratefully received.

To restate the case, in the past, people have had periods of grave uncertainty and anxiety about their DB or final-salary schemes—I use that term, but I know that such schemes are not always final-salary. People have had a tough time, and we have conceded that they do not always get the pension to which they think they are entitled because we had to impose particular limits. Is this really the group on whom to impose by edict a meaner regime than the current one? That is my main argument.

The PPF has been a success story. I am not cavalier about the future difficulties of matching liabilities to income, which we must consider carefully, but so far, so good. The PPF has done a good job. It appears to be helping a couple of hundreds of thousands of people, if not now, very soon. Such people are not always the richest in our society and they have had a tough and anxious time. As we scrutinise the clause, we should consider carefully whether the Government have got the measure right or wrong.

Steve Webb (Liberal Democrat, Thornbury and Yate)

I certainly join in paying tribute to all those who played a part in creating the PPF and the financial assistance scheme. I like to think that those of us who were in opposition managed to drag the Government kicking and screaming into doing something about the problem when, for many years, they declined to do anything at all. We welcome the eventual introduction of the financial assistance scheme and its subsequent improvement, which followed further pressure, and the PPF, too.

I entirely agree that the PPF has been a worthwhile addition to the pensions architecture. All those involved can be justifiably proud. I put on record my appreciation of the work of the PPF and the security that it provides to tens of thousands of people. We have some figures: we currently estimate that approximately 75,000 people are receiving or will receive PPF compensation; another 208,000 are in assessment; a further 17,000 receive FAS benefits; and another 150,000 will get help. If we add all those together, we get to 400,000-odd. Obviously, we do not know what the future holds, but it is striking that new schemes seem to turn up at our door all the time. Even under the FAS, we still find new ones, so we do not know where we will end up on all that.

The fundamental question on the clause is whether Croydon is an island—if I can put it that way—more than just a traffic island, perhaps. Should we use one measure of inflation in Croydon and a different measure everywhere else? I do not see any justification for doing so.

Rachel Reeves (Labour, Leeds West)

Will the Minister give way?

Steve Webb (Liberal Democrat, Thornbury and Yate)

I was trying to lighten the tone slightly, but I shall give way.

Rachel Reeves (Labour, Leeds West)

What proportion of people receiving their pension through the PPF would have had their pensions uprated by the RPI rather than the CPI if their firm had not gone bust?

Steve Webb (Liberal Democrat, Thornbury and Yate)

We know that schemes that go into PPF are not like the average scheme. To the extent that they are broadly like the average scheme, they will mirror the numbers in table 2, which we were just talking about. In other words, some three quarters of them will have had RPI indexation.

The immediate reaction by the right hon. Member for Croydon North to the question from my hon. Friend the Member for Nuneaton was the correct one, in that it was a very good question. Why should schemes that are paying CPI benefits to their members pay insurance for RPI protection for their members? That is a strange concept, which seems somewhat inconsistent. We and the right hon. Gentleman recognise that PPF is not trying to put people exactly where they would have been. It is trying to provide a measure of security, hence the 90%, the cap and the standardisation of terms in the PPF. When someone goes into the PPF, they do not get exactly what their scheme would have provided on their scheme’s rules. They get, essentially, a safety-net scheme. That is why using CPI as part of that is the consistent thing to do.

The right hon. Gentleman suggested that the board should have discretion, which I find baffling. He and his colleagues created the Pension Protection Fund. The board’s job is to implement the Pensions Act 2004 and to run the Pension Protection Fund according to rules set down by Parliament. Why today we should suddenly decide to give them discretion on how to measure inflation is entirely beyond me. The board has an important job to do and it has lots of decisions to make that are rightly independent of the Government. We do not tell it what its investment strategy should be. It decides how to measure risk for the risk-based premium. Those are the operational things, but the policy is for the Government to decide. As the right hon. Gentleman said, the PPF was consulted by officials before the announcement was made. Its view, as registered in the document that he quoted from, is that it is a matter of Government policy how inflation is measured for PPF purposes. It said that its role is to implement the Government’s policy.

The right hon. Gentleman asked about the impact of the CPI switch on PPF members. That will clearly vary hugely between individuals. At an aggregate level, we estimate a reduction of £500 million in the liabilities of the PPF in net present value. I hope that answers that question. He also asked about the management’s assets. On 31 May, they were £6.6 billion, to update the Committee. To return to my figures on membership of the financial assistance scheme, the 150,000 includes the 17,000 currently in payment, just in case there was any confusion.

I am not sure that there is an awful lot more I can add. The right hon. Gentleman is making a plea for the PPF to use a different measure of inflation. The point of the exercise is to protect against losses in standard of living because of inflation. If the Government think that inflation is better measured through CPI and they do that across millions of people for social security benefits, pensions and all the rest, to do something different in Croydon because the cost falls on pension fund levy payers rather than on taxpayers seems not to be coherent.

Malcolm Wicks (Labour, Croydon North)

I really must introduce the Minister to Croydon at some stage; he might then speak more generously about it.

This idea that I am asking for something especially for Croydon is a jokey shorthand. We have already discussed the reality that many DB schemes will still have RPI in the future. It is not as if this is just for the PPF. This will be in line with the many trustees of schemes that will keep RPI. The Minister mentioned the £500 million figure, but how does that translate into pension reductions for those who should be benefiting from PPF and FAS?

Steve Webb (Liberal Democrat, Thornbury and Yate)

On the right hon. Gentleman’s first point, on the measurement of inflation in the PPF, it is true that there will be a lot of DB schemes paying RPI increases. I come back to the point that the PPF was never supposed to mirror the scheme that someone came from; it was supposed to be a safety net. In designing the safety net, we have standard features, essentially. Given that we are requiring occupational schemes to do CPI or better, it would be odd to require the PPF to do RPI. That would be an enhancement, rather than a standard feature, for some schemes, which would be an odd feature for a protection regime.

In terms of the impact on individual scheme members, one of the difficulties is that it will not only vary hugely between individuals anyway, as per the previous clause, but that will be compounded by its depending on what they would have got under the terms of the scheme they came from, which will be unique to every individual. I cannot give him a single number, but I hope that I have given him an order of magnitude: in aggregate, the loss in net present value of PPF members from CPI is £500 million. I cannot give him a meaningful average—although, clearly, one could divide the total figure by the number of people—or a weekly pounds and pence figure.

Malcolm Wicks (Labour, Croydon North)

Would the Minister concede the irony of the situation? Some seven years ago, he was standing in a Committee of this kind urging us to be more generous with the PPF and the FAS and to find more money to help those people—not a bad argument at the time—whereas now he will take £500 million out of the scheme to the disbenefit of those who we are trying to help.

Steve Webb (Liberal Democrat, Thornbury and Yate)

The crucial issue is that the scheme is set up to protect people against inflation, but the right hon. Gentleman is urging us to use inconsistent measures of inflation in two parts of what we do. It is not about waking up one morning and deciding that we want to be mean or generous; it is about coherent legislation. The right hon. Gentleman knows that the legislation requires us to protect against inflation. In one part of the public sphere, we have judged that we will use CPI. To apply something else to another part because we will not be paying for it but someone else will be and so that is okay seems wrong.

We have given the issues a good airing, and I commend the clause to the Committee.

Clause 17 - Indexation requirements for cash balance benefits

Steve Webb (Liberal Democrat, Thornbury and Yate)

I beg to move amendment 10, in clause 17, page 13, line 23, after ‘period’, insert ‘on or after that day’.

Katy Clark (Labour, North Ayrshire and Arran)

With this it will be convenient to discuss Government amendments 11 to 14.

Steve Webb (Liberal Democrat, Thornbury and Yate)

The clause deals with a category of pensions known as cash balance schemes. I must explain what clause 17 does before I explain why we want to change it, so I hope that will obviate the Committee’s need for a separate clause stand part debate.

A cash balance scheme is rather unusual. Traditionally, one assumes that a pension scheme either provides a percentage of salary or is a pot of money invested in the stock market. With a cash balance scheme, however, someone will get a certain amount of cash and the amount of pension it converts into depends on such things as annuity rates at the time, so it provides a measure of pension guarantee but not complete certainty, somewhere between DB and DC in the spectrum of risk. Historically, with cash balance schemes, when the pension pot is converted into an annuity there has been an obligation to buy an indexed annuity. In fact, however, some such schemes could be regarded as having the character more of a DC scheme than a DB scheme. The clause is about whether cash balance schemes require mandatory indexation.

To give the Committee a feel for the scale of the situation, there are currently about 80,000 members of cash balance schemes in the UK and—compared with about 53,000 DC schemes and about 6,000 DB schemes—there are about 2,000 hybrid schemes, in which older cash benefit schemes are generally included. The number of such schemes is likely to grow in the coming years as schemes are opened to new members and there is accrual.

The change included in the clause is not intended to affect the overall value of an individual’s accrued pension. What will happen is that the member, not the scheme, will pay for the indexation benefit through a lowering of the starting annuity rate. As when buying a normal annuity, an individual can choose a level annuity or an indexed annuity that starts at a lower level, but gets higher depending on the inflation rate. In that scenario, if a member chooses to take an annuity without indexation, the pension would at first be paid at a higher flat rate, but its relative value would decline over time.

Section 51 of the Pensions Act 1995 sets out the indexation requirements for occupational pension schemes. The clause amends that section so that, for schemes that can take advantage of the relaxed requirements, an annuity or pension paid from the scheme no longer has to include limited price indexation, which will give scheme members greater choice.

I can feel an intervention coming on, with someone asking about schemes with a guaranteed conversion rate, but I will pre-empt that intervention. The Committee will be reassured to know that, under the clause, cash balance schemes that offer a guaranteed rate of conversion or a guarantee to calculate the pension as a proportion of the accrued sum are excluded from the relaxation of the indexation requirement, because such schemes promise a particular rate to their members and that needs to be funded. For the record, cash balance schemes which are or have been contracted out on a defined-benefit basis will not be affected by the clause unless the only period of such contracting out was before April 1997.

The group of Government amendments will make minor and technical changes to clarify the operation of the clause in relation to cash balance schemes that include periods before 6 April 1997, where the scheme has contracted out of the state additional pension system in relation to an earner’s employment. The amendments will ensure that the indexation requirement continues to apply to schemes that were or are contracted out on a defined-benefit basis after 6 April 1997. As my note states, that “limits potential for confusion”, which might otherwise have arisen. If the amendments are not made, schemes might be prevented from taking advantage of the relaxed indexation requirements if they had been contracted out before 6 April 1997 on a defined-benefit basis. The amendments deal with that potential policy confusion and will restore the policy intent of the clause, which, as it gives scheme members new choices, will be generally welcomed and I commend them to the Committee.

Clause 18 - Pension Protection Fund

Steve Webb (Liberal Democrat, Thornbury and Yate)

The clause puts into effect schedule 4, which will make a range of technical changes to the arrangements for the Pension Protection Fund. They include: in paragraphs 1 to 13 of schedule 4, on requirements to obtain actuarial valuations; in paragraphs 14 to 16, on the requirement to obtain protected benefits quotations; in paragraph 17, on the removal of restriction on transfer notices; in paragraph 18, on changes to the negative resolution for subordinate legislation in the area; in paragraphs 19 and 20, on the changes for pension credit members, which is to do with pension sharing on divorce; in paragraphs 21 to 36, on the postponement of compensation; and in paragraph 37, on the calculation of compensation and what are the admissible rules. The changes are technical, and I am happy to respond to any questions on any details of them.

Clause 19 - Financial assistance scheme: transfer of assets

Steve Webb (Liberal Democrat, Thornbury and Yate)

There is an issue that is important for me to put on the record. Much of the legislation relates to Great Britain only, but some of it relates to the United Kingdom. The way it works is that sometimes we legislate for the whole United Kingdom, and other times we legislate for Great Britain, and Northern Ireland copies across what we do. I want to tell the Committee, which I believe I am under a duty to do, that while the Bill will generally extend to Great Britain, since pensions and social security are transferred matters in Northern Ireland, there are exceptions, including clause 19, which is why I am making this statement now. The exceptions where the provisions of the Bill will extend to Northern Ireland are clauses 19 and 20, which relate to the financial assistance scheme, and clause 25 and parts of schedule 5, which relate to judicial pensions. A legislative consent motion was required to allow those provisions to extend to Northern Ireland, and the Northern Ireland Assembly debated and approved such a motion on 21 March.

New Clause 12 - Occupational pensions schemes (investment)

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I beg to move, That the clause be read a Second time.

My hon. Friend the Member for Edinburgh East will be greatly relieved to see me standing on my feet at this point, although she may wish to contribute later. I am conscious of the time, so I will not speak at great length on the new clause. However, there are a number of issues that I would like to put on the record.

All of us are concerned—we have heard a great deal of consensus on that, if I may use that word again—with the principle of auto-enrolment. We all want to ensure that the scheme goes ahead as smoothly as possible and gives comfort to as many people as possible that it will be of benefit to them in their later years, when they have ceased working. One of the potential effects of auto-enrolment will be a reliance of an estimated 5 million to 8 million individuals on the capital markets for the distribution of pension schemes on reaching retirement age. It is vital to analyse the current system of how pension funds are structured and how they operate, to ensure that the increasing number of people who depend on such funds are protected from risk.

This is a probing amendment, as I am sure the Minister appreciates. I am also sure he understands that I am keen to hear what he has to say. That will become clear when he hears the specifics that I am calling for. What Ministers say on the record may give clarification and comfort for those who must interpret legislation at various stages. The amendment calls for a review, or at least clarification, of the current legal obligations on those who manage people’s savings in funds to work towards and to protect their best interests.

The Minister is well aware that pension fund trustees are subject to stringent obligations known as fiduciary duties, which require them to act in the best interests of members. However, those are common law duties, so they are not specifically spelled out in statute. All hon. Members will have received information from the FairPensions campaign, which highlights that one consequence has been significant and growing confusion about the nature and scope of those duties. If that is considered alongside the predicted effect of auto-enrolment, it is crucial that the notion of fiduciary duty is understood and applied properly to ensure good investment outcomes for all such funds and trusts.

My main point is that legal clarification of those fiduciary duties would be helpful in any event, but would also help to lay the foundations for building confidence in pensions generally, and specifically auto-enrolment. Those duties exist to ensure that those entrusted to act on behalf of others do not abuse the trust placed in them to further their own ends. As a result, fiduciaries have a duty of loyalty that requires them to put the best interests of their beneficiaries first, and to avoid any conflict between that duty and their own self-interest. Yet there is concern that that core protective purpose seems increasingly to have been subsumed into a mythical notion of a single fiduciary duty to maximise returns. It is perhaps being interpreted too narrowly as short-term out-performance of the market instead of longer-term benefits. I tabled the amendment because it is right to probe further the extent to which this is a problem, and to look for ways in which the duty can be clarified.

It has been argued that at best there is confusion about the issue, with a propensity of fund and trust managers seeming to look for short-term gains, and that at worst there are questions about the boundaries of where their duties lie. My concern is that many trustees and managers are either afraid or unwilling to consider the wider impact of long-term risks and factors, such as climate change or systemic financial risk, that would impact on their portfolios, but perhaps cannot be easily quantified in the short term.

Such factors may have a significant impact on investment outcomes, particularly for younger pension savers with long time horizons. We have only to look back at the Deepwater Horizon disaster at this time last year to realise the potential risks to savings and pensions that stem from short-termism in trust and fund management. Before the disaster, BP was the largest dividend payer in the UK, but in the subsequent period, it had to suspend its dividend payments, and when they resumed they were half their previous level. It is important to register the significance of that. BP had been warned about its poor record of health and safety in the past, and greater acknowledgment of long-term social and environmental risks on behalf of trust and fund managers could have resulted in greater pressure on BP to correct those health and safety problems and, by implication, perhaps limited or avoided the disaster last summer.

The Bill has been debated in another place, and Lord Freud acknowledged that there were important issues in relation to BP. He said:

“There has been a consensus in many previous debates on social and environmental issues that companies perform better when their activities are monitored by shareholders…One has only to look at what happened to BP last year with Deepwater Horizon to see that a greater concern, and perhaps some pressure on the BP board by its shareholders in relation to environmental issues, might have been especially valuable to the company.”—[Official Report, House of Lords, 15 March 2011; Vol. 726, c. 27-28.]

In the aftermath of the financial crisis, pension funds lost, on average, 17% of their value. It is now widely accepted that institutional investors did not do enough to challenge risky strategies in the banks that they owned, which would have protected their members from such impacts.

We need a proper understanding of the law, which, arguably, requires trustees to have regard to wider factors. Yet many trustees continue to believe that to do so would be a breach of their fiduciary obligations and they might therefore be exposed to the risk of being sued. Such matters must be clarified. From that perspective, we argue that there should be a greater acknowledgement of the importance of environmental, social and governance risks and factors in fiduciary obligations.

It can also be argued that acknowledging the potential harm and damage of risks is, or should be, part of the fiduciary obligation of protecting the interests of pension fund beneficiaries. Company directors are already required, in fulfilling their duty to promote the success of their company, to have regard to long-term and wider issues, such as environmental and social impacts. Those provisions were introduced by the Companies Act 2006 and were based on the principle of enlightened shareholder value. It is reasonable to suggest that we should have similar provisions, or at least a similar interpretation, in relation to pension funds.

The problem is that shareholders themselves are not subject to those parallel provisions, and many continue to believe that the law prohibits them taking a similarly enlightened approach. It is therefore unsurprising that the progress generated by the 2006 Act has been disappointing, and directors report feeling under increasing pressure from their investors to maximise short-term returns. In one study, some 78% said that they would prioritise wider issues, even if doing so meant sacrificing longer-term business success. That is a particular issue in relation to pension funds. Essentially, I am calling for the Minister to provide information on what he might be able to do to give a legal clarification of the meaning of fiduciary duty. Such a clarification would align that duty with the interests of the millions of savers who are soon to be auto-enrolled.

We might align fiduciary duty and the interests of savers across the UK through greater integration of environmental, social and governance factors on behalf of fund managers. That view is backed up by empirical evidence that has been provided to hon. Members by the FairPensions campaign, which has shown that the incorporation of those risk factors can reduce risk without damaging levels of returns. I have been very supportive of and take a great interest in the mutual sector and ethical investments. However, I do not suggest in the new clause that we move towards solely ethical investments, although I might do so personally. I was interested to see that the report suggests that the historical performance of the eight largest US mutual funds compared with the eight largest responsible funds, as they have been described, shows that funds that chose to incorporate and integrate environmental, social and governance factors delivered higher risk-adjusted returns over both one-year and three-year periods.

In addition, a United Nations Environment Programme report, which used a range of methods including benchmarking, scenario analysis and case studies, concluded that

“there is robust evidence that ESG issues affect shareholder value in both the short and long term.”

It also stated:

“The impact of ESG issues on share price can be valued and quantified.”

The FairPensions document concluded that there is no robust evidence that prudent ESG integration is damaging to returns.

I therefore ask the Minister to say what his Government intend to do to address the problem that has been identified. With the legal understanding of fiduciary obligation and duty, many fund managers are unwilling to accommodate or integrate ESG into their portfolio or model at present. I am sure that the Minister will share my principles. When the Pensions Bill comes into effect, I would like to see us move away—the term “nudge” has been used a great deal in the Committee, and a firm nudge from the Minister would be fine—from short-termism in the attitudes of some towards pension and trust fund management, and for those obligations to be clarified to protect the interests of millions of savers across the UK. I am sure that the Minister will share those principles. For that reason, I tabled the new clause to ensure that we get clarification on the record, and I look forward to hearing what the Minister has to say.

Sheila Gilmore (Labour, Edinburgh East)

I will not take up the Committee’s time by repeating the excellent presentation of the clause made by my hon. Friend the Member for Kilmarnock and Loudoun—she made the case extremely well. In recent years, pension schemes have become highly important players in the financial market. They are important for the stability of parts of our economy, and for those individuals who come to depend on the outcome of investments for their future. Anyone who is a member of a pension scheme is reliant on the good and forward thinking of those who are trustees of those schemes. People often assume that things will go well and that there will be no problems because it is such a basic issue. Obviously, at times there have been difficulties with unwise investments, or investments that people—both members of a pension scheme and people in the wider society who are not members of a scheme—might feel was undesirable. A lot of pension scheme members would be concerned to find out that their scheme was investing in some questionable activities, both because of the risk to their investment and because they want to feel that investments are being made responsibly in a broader sense. There are some big campaigning issues at the moment, and people talk about things such as tar sands investment, which a lot of people think is environmental vandalism in certain countries of the world. It would be desirable to feel that one’s pension fund trustees were taking such matters into account.

As my hon. Friend said, there is no reason to suppose that by taking such matters fully into account, a worse outcome will necessarily be produced. In some cases it might take slightly longer, but people will still get the returns they need with less risk and—hopefully—a more ethical view of how investments are carried out. That can be only to the good of us all.

Rachel Reeves (Labour, Leeds West)

I start by thanking my hon. Friends the Members for Kilmarnock and Loudoun and for Edinburgh East for tabling the new clause, but I will not rehearse their comments as I entirely agree with them. I want to talk about another aspect that has been touched on rather less—that of long-term value rather than short-term reward, and the role of pension funds and the importance of fiduciary duty in terms of creating that long-term value. I shall then refer briefly to how NEST, in particular, has risen to the challenge of being a good fiduciary and of designing products that match the concerns of consumers. On governance, we all agree that part of the cause of the financial crisis was seeking short-term profit rather than long-term value in financial services; looking to the next quarterly return and trying to please the City with great profit numbers, even if those profits were superficial in their nature and turned out to be huge losses, which were picked up by the taxpayer.

The pension fund sector has a big role to play in restoring trust, and bringing to our financial markets a greater long-term perspective rather than a short-term, profit-seeking element, which has been the cause of at least some part of the financial crisis from which we are still recovering. There is also the broader issue of trust that does not relate just to the financial crisis. Clearly, the financial crisis has created a huge deficit in the trust that people put in financial markets, banks and financial institutions, and I include pensions in that group, too. But the erosion of trust did not start with the financial crisis, particularly in pensions. I draw attention to past pension crises, whether with the other media tycoon, Maxwell, or Equitable Life.

Marcus Jones (Conservative, Nuneaton)

The hon. Lady talks about the erosion of the public’s trust in pensions. Does she agree that one of the biggest erosions of the public’s trust in pension provision was when the right hon. Member for Kirkcaldy and Cowdenbeath raided people’s pension funds by taxing them so aggressively?

Rachel Reeves (Labour, Leeds West)

The new clause is about the ethnical, social and governance way in which pension funds are managed, so the hon. Gentleman’s question is not particularly relevant. However, he will know that his Government do not have proposals to reinstate tax relief on dividends. If we can end this day by having a thoughtful debate, we could contribute something—

Marcus Jones (Conservative, Nuneaton)

Will the hon. Lady give way?

Rachel Reeves (Labour, Leeds West)

I want to give way to as many members of the Committee as possible, but in the spirit of the amendment, I want a debate that is specifically about ESG issues. It is fitting that we give due consideration to them.

Marcus Jones (Conservative, Nuneaton)

I was saying in relation to the new clause that the more we tax pensions, make it difficult for people to build up good pension pots and make it difficult for pension funds, surely the more that they will take high-level, short-term risks, as the Opposition have mentioned, to maximise the pension funds for the investors for whom they work.

Rachel Reeves (Labour, Leeds West)

I am sure that the hon. Gentleman has read new clause 12 and will know that it centres on the way in which pension funds are governed and the steps taken to exercise their fiduciary duty. The Government are not planning to reverse the changes to the way in which pension dividends are taxed. He will have seen the answer to a parliamentary question that I asked of the Treasury about tax relief on pensions and will know that two thirds of it go to top tax rate payers, and that overall it is worth about £20 billion a year. Pensions are still subject to generous treatment under the tax system.

I want to focus specifically on the fiduciary duties of our pension funds and how they can be better exercised in the interests of both the pensions industry and the people saving for pensions. It is in the wider interest of the economy to rebuild the trust that has been eroded because of the mis-selling scandals that I have mentioned and the financial crisis that we are still recovering from. A key part of rebuilding the economy involves looking at the role that financial services play in the economy, whether it is the banks that have been nationalised or part-nationalised, or whether it is the pension funds that play such a huge role in investing our money on our behalf. If we are to avoid a financial crisis occurring again, we need to think hard about the role of the financial services in supporting the wider economy, and corporate governance is key to that.

We have all seen the figures showing that £1 in every £7 or £8 invested in the UK stock market is invested via our pension funds. We can see from those figures the leverage that our money in our pension funds has. If that power is exercised, the pension funds and we as contributors could make a huge difference and reward long-term value rather than short-term profit-seeking, which turns out to be anything other than profit in the long run, as we have seen in the crisis.

The issue of fiduciary duty is key. My hon. Friends for Kilmarnock and Loudoun and for Edinburgh East mentioned the exercise of fiduciary duty. The FairPensions report states that there is a myth among trustees

“of a single…‘fiduciary duty to maximise returns’”.

That is often interpreted narrowly as short-term out-performance of the market. FairPensions and many of us recognise that that is not what fiduciary duty means. FairPensions goes on to say that in its experience this can make trustees afraid or unwilling to consider wider or longer-term factors such as climate change. That is in the context of what I am saying about the long-term factors of systemic financial risk.

I do not think that fiduciary duty is wrong. Fiduciary duty is the right thing, which we need. It is how it is interpreted by pension fund trustees that is the issue. The Minister’s reflections on what fiduciary duty means in relation to pension trustees would be valuable in terms of setting the record straight and perhaps giving guidance and clarity to trustees who make such important decisions on our behalf. They have the power in financial markets to make a difference for good and to change the way that financial markets reward success.

I said that I also want to touch on NEST and how it is approaching the issue of fiduciary duty. Research by NEST was mentioned earlier by the Minister in relation to automatic enrolment. NEST’s research on its target market shows that financial return is not the only interest of potential members of NEST, who have demonstrated a clear preference for financial protection and security above potential returns. So I come back to the issue of what fiduciary duty is. It is not simply about maximising short-term return but about ensuring financial protection, particularly for the people who have that as a higher stated preference. The risk and the return are more finely balanced for many people, including the people whom NEST regards as its target market. Above the returns for more risky investments, many of the client group that NEST is hoping to attract are looking for that protection and security. Hence, the portfolio allocations in the NEST default fund are designed to meet the requirements of that target market.

NEST research also shows a substantial demand for ethical investment decisions, of the sort mentioned by my hon. Friends the Members for Kilmarnock and Loudoun and for Edinburgh East. Such research means that NEST has signed up to the UN principles for responsible investment, and we all welcome that decision. Its stance on the issue is to be applauded and will, ultimately, drive up standards throughout the industry, in terms of the types of investments made by other pension funds. The new clause would provide similarly for pension trusts and clarify the duties on trustees of schemes. It is important to have this discussion and to get the Minister’s response because I know, from the Adjournment debate in December, that he feels strongly about the issue, so putting it on the record again is useful.

The new clause would ensure that pension fund trustees take into account the environmental, social and governance issues that are relevant to the long-term health of a pension fund, which is what is important in the context of the fiduciary duty of pension trustees—much more so than for speculative investments with shorter-term outlooks than a pension fund usually has. Those environmental and social considerations are undoubtedly relevant to the long-term interests of savers, and my hon. Friends mentioned examples such as the tar sands. Clearly, a pension fund trustee must think about the long-term viability and coherence of business strategies when investing, much more so than when only seeking short-term returns. Again, it is important that the fiduciary duty of pension fund trustees is interpreted with the long-term interests of the people contributing in mind.

I am grateful to my hon. Friends for tabling the new clause, and I look forward to hearing the Minister’s response, because I know the subject is one he cares about and wants to see dealt with better.

Steve Webb (Liberal Democrat, Thornbury and Yate)

I very much want to respond in the spirit in which the new clause was tabled and in which other hon. Members have spoken. I welcome the opportunity to discuss the issues again, and to put some comments on the record.

I was slightly horrified when the hon. Lady said that what Ministers say in Committee is given a certain amount of weight, given everything I have said in the past four days, but we will give it a go. I want to say carefully and specifically, on the record, that we as a Government are very sympathetic to many of her arguments, that we fully support the highest standards of corporate governance and ethical behaviour, and that we agree that a socially responsible investment strategy is a sound choice for pension schemes. I am happy to put that on the record and, indeed, to go slightly further—making some in the room a bit more nervous perhaps—and to state categorically that it is not the duty of trustees simply to maximise short-term returns. That is not what fiduciary duty means. She is quite right that that can be the danger.

It is important to flag the many players in this space. Trustees are very important, but we also have employers, fund managers and advisers. The danger is that if we focus on one bit of the jigsaw, we will miss where the real action is. For example, for fund managers who live or die by their performance in the league table, me standing in this room on a Thursday afternoon and saying, “You don’t have to worry about all these short-term returns,” will only have them replying, “Yes, well, that’s for the birds—we’ll lose business if we don’t maximise short-term returns.” So we need to provide systematically for the entire chain—trustees, schemes, investment managers and corporate behaviour. One of the paradoxes is that the people who own the shares and could in theory cast the votes at annual general meetings and so on are often several steps removed from the beneficiaries of the pension fund, for example. A lot of interconnections make getting to the right people quite a challenge.

I accept that the amendment was probing, but one of our reservations would be that it would only apply to occupational pension funds—which is what the Bill is about—and not to other sorts of investors, such as insurance companies that provide pensions, which could create an unevenness. The hon. Member for Leeds West might argue that that is not to the detriment of those included, but we want to take an holistic approach. The Department for Business, Innovation and Skills has set up a review under John Kay, who, if I remember correctly, is the founder and director of the Institute for Fiscal Studies. His review of equity markets and long-term decision making—we have talked about short-termism—is due to publish its findings in summer 2012, and it will specifically consider the issues of investment governance raised by the new clause. I would rather not prejudge the findings of that review, and I will be careful that any solutions that we find do not put conditions that are not imposed on other investment vehicles on pension schemes. However, we will work closely with BIS to support the review, and we will want to consider the issues again once its recommendations are known.

Hon. Members have mentioned the work of FairPensions. I think that I am on record for paying tribute to its work, which goes beyond the fairly simplistic notions of ethical investment—we can all remember from decades gone by the boycotting of South Africa—to a sophisticated assessment of the notion of fiduciary duty, what it does and does not mean, and why taking a broader approach may be in a scheme’s interest. I take that point, and we have invited one of the leading members of FairPensions to attend our departmental trustees’ meetings. I meet pension fund trustees regularly, and we have invited FairPensions to be represented in an individual capacity at those meetings to ensure that when we talk to pension fund trustees, we have that perspective in the room. I hope that will be seen as a positive action. Also, both the hon. Member for Leeds West and I attended the launch of the newly founded all-party group on socially responsible investment in the House, which was technically the second launch of the report that we have been talking about. I am happy to continue engaging FairPensions and hon. Members on the important issues.

I echo the comments made by the hon. Member for Leeds West on the role of NEST. We have heard in our debates a number of examples of the way in which NEST is a leader of innovation in its general approach to investment. I welcome its signing up to the UN principles and the specific offer of an ethical investment fund. Although “ethical investment” and “long-termism” are not the same thing, they are clearly connected. It will be interesting to see how far people, when they sign up with NEST, actively opt for the specifically ethical options. I hope that will raise the bar, because people who are competing with NEST will have to say, “Maybe we have to offer that sort of thing.” A general raising of standards in the area would be valuable.

The hon. Lady talked about recent trends in the financial markets. Some of the issues that we are talking about predate the crash. The example of tar sands and BP bring them to the fore. As she says, BP was, if I remember correctly, the biggest dividend payer into pension funds. It shows that when things go wrong, there can be a big impact on pension funds. Therefore, a trustee looking at their fiduciary duty will be absolutely right to look at the companies that they are investing in and the companies’ environmental, social and governance practices, and to ask searching questions.

We want to see people who own British industry, in many cases indirectly, exercise control and influence. It is a paradox. Many of those who indirectly own such companies would want to see them acting with more environmental awareness or become more ethically attractive. Yet, somehow their voices are never heard when the companies make their decisions. They are important ongoing issues. I think the previous Government would accept that they had reached the end of the road on considering such issues, but we certainly think there is more to be done. That is why we look forward to the results of the Kay review, and why I certainly will continue to have an active dialogue with FairPensions and all those concerned with making sure that pensions are a force for good, not just for the their individual members, but for the wider society. While I do not think that the new clause will be helpful, because it singles out one particular bit of the market, I welcome the chance to debate the issues, and I thank the hon. Member for Kilmarnock and Loudoun for putting it on our agenda today.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I thank my hon. Friend the Member for Edinburgh East, my hon. Friend the shadow Minister and the Minister for their contributions to this debate. I have listened carefully to what the Minister said. I thank him and—this might be one of the few occasions—agree with much of what he has said. It is useful to hear that the review will report in the not-too-distant future, about a year from now. That gives us the opportunity to continue to press the case where necessary, and I am sure that hon. Members will do so.

It is also important to have on record the Minister’s words in relation to the duties. I hope that people out there will read the record if there is any dubiety and take from it what they need to do the right thing, which is essentially what we are discussing. The hon. Members who have spoken have identified the feelings of pension fund members. They often feel somewhat detached and as though their views and interests are not necessarily being represented as they would wish. In the aftermath of the financial crisis, I think that many more people are now seeking not only responsible and ethical investments but also a greater say in the process. I therefore welcome the Minister’s words and will not seek to press the new clause to a vote. I beg to ask leave to withdraw the motion.

Clause 25 - Contributions towards cost of judicial pensions etc

Steve Webb (Liberal Democrat, Thornbury and Yate)

This is probably the last substantive clause that we will consider, and I will deal with it briefly. The judicial pension scheme is a bit of an anomaly among public sector pensions. We have been discussing with our constituents who are nurses, teachers, police officers or various other kinds of public servant how much they must put into their public sector pensions and the additional amounts that might be required, but I think that many of us were surprised to discover that judges do not have to pay anything for their own pensions, and that the small contribution that they do make pays only for survivors’ benefits, for example. We feel that that is now indefensible, especially as the cost of providing those benefits has risen considerably. Clause 25 provides a power to introduce contributions towards the cost of judicial pensions. Judicial pension schemes are unfunded, as are many public sector pension schemes.

Who will be affected by the clause? The pension scheme under the relevant Act applies to salaried judicial office holders first appointed to office from March 1995 and those in other judicial pension schemes who have transferred their benefits into the JUPRA scheme, as it is known, currently the main judicial pension scheme. Although clause 25 amends the current judicial pension scheme, several other judicial pension schemes remain in existence, and we will make the same amendments to them. Consequently, schedule 5 inserts provisions into other relevant Acts such as the well-known District Judges (Magistrates’ Courts) Pensions Act (Northern Ireland) 1960.

On the principle of the clause, the contribution rates that we impose will be set through secondary legislation, consistent with the approach taken to contributions towards the cost of dependants’ pensions. To give a feel for the scale, in 2009-10, judges paid £4.3 million for dependants’ benefits into their pension schemes, whereas the taxpayer paid £84 million. Contributions will be taken only during the period in which the judge accrues pension benefits, so if the judge retires, resigns or is removed from office during that period, contributions will stop being taken from the date that he or she leaves office. The savings on pension costs will make an important contribution to overall spending review economies, deficit reduction and—dare I say it—fairness, and are in line with wider public service pension measures.

Malcolm Wicks (Labour, Croydon North)

Are judges’ pensions uprated by RPI or CPI? Whatever the answer is, are there any changes afoot?

Steve Webb (Liberal Democrat, Thornbury and Yate)

To the extent that they are linked to statutory provisions—for example, public service pensions are generally linked to the increase in the earnings-related state pension, which is now indexed by CPI—judges’ pensions, the right hon. Gentleman will be pleased to know, as they are not in Croydon, will be increased in line with CPI. With that, I commend clause 25 to the Committee.

Clause 30 - Short title

Steve Webb (Liberal Democrat, Thornbury and Yate)

I beg to move amendment 15, in clause 30, page 19, line 20, leave out subsection (2).

We are very much on the home straight. Members will know that amendment 15 removes what is called the privilege amendment, which was inserted in the Bill because it started in the House of Lords. It is normal practice to put the privilege amendment into the Bill in the Lords and to withdraw it in the Commons.

Steve Webb (Liberal Democrat, Thornbury and Yate)

On a point of order, Miss Clark. I will take this opportunity to say some words of thanks. First, I thank you and Mr Brady. We know that it has not been a good time for him. We are grateful for our chance to serve under you and for your generous chairing, which has allowed some broad discussions, which is very much the point of the Committee. We had another two sittings available to us on Tuesday, if anyone had wanted to raise any other issues, but we have not been taken up on that. We have, however, had a full and thorough discussion on the key points of division between us, as well as on the common ground. It is appropriate that we ended on some common ground on socially responsible investment. There are a number of issues where we have found common cause.

I want to thank those who put the Bill together—the many unseen officials, some of whom are with us and some of whom are not, including the specialist lawyers who write the legislation and the officials for whom every one of these clauses is a labour of love. It is astonishing for me, as a Minister doing his first Bill, to see how much work goes on behind the scenes to produce an Act of Parliament. I am enormously grateful to the officials and the experts who have put this together, not least for those who have thrown paper aeroplanes with answers to difficult questions at the relevant moment.

I want to thank the members of the Committee. I am grateful for the input of coalition Government Members, because they have a lot of expertise. Many of my hon. Friends have written to me about important issues and have shared their insights with me in discussion and have intervened during the course of the debate. I am grateful to them. Their commendable restraint means that we might get to go home. I am also grateful to the invisible Whip, who has used her characteristic charm to get us through on time.

I am also grateful to Opposition Members. They have raised some important issues. We have heard a lot about their family members. I feel like I almost know the mum of the hon. Member for Islwyn. He has not followed up on his offer to send me her date of birth, but I would happily send her a birthday card if we get there. We heard about the sister of the hon. Member for Erith and Thamesmead, who I hope will have been forgiven for her indiscretions. We heard about the son of the hon. Member for Edinburgh East, who we have been assured is not a layabout. He has been working hard; he just does not have much of a pension yet. We heard about the mum of the hon. Member for Leeds West. A little bit of me wishes she was not born in spring 1954.

Rachel Reeves (Labour, Leeds West)

So does she.

Steve Webb (Liberal Democrat, Thornbury and Yate)

The process has been valuable. I thank Back-Bench Opposition Members, too. They have had the greater freedom to raise special issues, table new clauses and draw attention to important matters. I was interested to learn of the professional background of several members of the Committee, such as the hon. Member for Erith and Thamesmead and her tax expertise, and the fact that the hon. Member for Islwyn used to have a shiny suit and sell pensions. We now understand matters a lot better.

As for the unseen hands who help the work of the Committee, we are obviously grateful to the Clerk to the Committee who has seen us through our processes, as we are to the Hansard writers who might have struggled occasionally to keep up with the flow of pensions jargon, but who coped very well. I thank the police officers who have helped us and, on occasion, the work experience people; I am sure that one or two of them who came into the room were under age. We will resume our debates on the Bill in the autumn, but on a personal note I join my hon. Friends in wishing the hon. Member for Leeds West well in her preparations for her wedding later in the summer. I give her our best wishes.

Rachel Reeves (Labour, Leeds West)

I am pleased to finish a day early, so that I can devote my time to wedding cakes and flower arranging, which are my main pursuits when I am not considering state pension age and fiduciary duties. I thank Mr Brady and Miss Clark for their excellent chairing of the Committee. This is my first Committee, and I have much appreciated their patience and support during the past two weeks. I also thank Ms Toft, the other Clerks to the Committee, the Doorkeepers and the officials. I might not agree with all of their labours of love, but I recognise the work that goes into putting together a Bill.

I want to thank those groups that have sent briefings to the Opposition. We do not have people passing us pieces of paper, so it is useful that FairPensions, Age UK, Saga, the National Association of Pension Funds, the Federation of Small Businesses and many others have briefed us so well ahead of our sittings. I thank Government Members. The hon. Member for High Peak spoke about small businesses and the difference that his experience of visiting NEST has made. The hon. Member for Eastbourne spoke about his hope and expectation of the Minister coming forward with support for 500,000 women—Mrs Reeves, included. I thank him for his expectation and hope that it will be fulfilled. The hon. Member for Reading West has certainly stretched the field of debate. If his questions have not all been germane, they have been of interest to the Committee.

As for members of the Opposition, I thank my Whip who has made sure that we have all been present and, by and large, have voted the right way. I also thank her for her contributions to the debate on the state pension age. As a Whip, she did not have the opportunity to speak on Second Reading, but she has more than made up for that in Committee. It took a lot of arm-twisting for my right hon. Friend the Member for Croydon North to become a member of the Committee, but I am glad that it paid off. We are unanimous about his contributions not only on NEST, but longevity and the Pension Protection Fund, which he has done much to support, as well as for reminding us when we become close to elevenses that it is time to break and eat the Five Boys chocolate bar to which we have all looked forward.

I thank my hon. Friends the Members for Edinburgh East and for Kilmarnock and Loudoun for their contributions to the debate on fiduciary duties as well as on auto-enrolment and women affected by the state pension age. I should not forget the hon. Member for Arfon. He is not in Committee at the moment, but his contribution to the debate on carers brought much value to our proceedings. Like the Minister, I feel that I know members of the family of the hon. Member for Islwyn extremely well. If they are ever in Parliament, we might even recognise them. My hon. Friend the Member for Erith and Thamesmead has probably tabled more amendments than the rest of us put together, so I give her huge thanks for raising the important issues of auto-enrolment and pension credits.