Pension Schemes (Conversion of Guaranteed Minimum Pensions) Bill
Friday 26th November 2021
(2 years, 12 months ago)
Commons ChamberRead Full debate Pension Schemes (Conversion of Guaranteed Minimum Pensions) Act 2022 Read Hansard Text Watch Debate Read Debate Ministerial Extracts
Margaret Ferrier (Rutherglen and Hamilton West) (Ind)
I beg to move, That the Bill be now read a Second time.
First, I want to congratulate the right hon. Member for North Somerset (Dr Fox) on the progression of his Down Syndrome Bill, which I very much support.
My Bill makes changes to the legislation governing the way occupational pension schemes can convert guaranteed minimum pensions into other scheme benefits. The Bill is very technical looking, but it is extremely important. It will help occupational pension schemes to correct a basic issue of men and women being treated differently in those schemes because of the impact of having a guaranteed minimum pension. It will help enable pension schemes to ensure that people do not receive less pension income than they would have received if they had been the opposite sex. In other words, it will help schemes to correct a situation that has been judged since 1990 to be fundamentally unfair.
Guaranteed minimum pensions, or GMPs, are the minimum pension that certain occupational pension schemes have to provide to their members. This applies to occupational pensions contracted out of the additional state pension between April 1978 and April 1997. It ensures that members receive a broadly similar amount of pension income in retirement as they would have received had they not been contracted out.
However, guaranteed minimum pensions differ for men and women, reflecting historical differences of treatment in the pension systems based on sex. People with the same employment history can have different amounts of guaranteed minimum pension depending on whether are men or women, even if they do exactly the same job for the same time at the same salary. It is not even as straightforward as men getting higher guaranteed minimum pensions than women; in fact, both men and women can lose out on pension as a result of their sex.
Successive UK Governments have made it clear since 1990 that occupational pension schemes need to equalise pensions to correct for these effects of guaranteed minimum pensions. In 2018, a High Court judgment confirmed that occupational pension schemes must equalise pensions to address these differences. Speaking as someone who has worked and built up occupational pensions of my own, it seems wrong that people can lose out on even a small amount of pension income purely because of these differences. Occupational pension schemes are therefore required to do something called equalisation—going back and correcting people’s overall pension to ensure that it is not lower than it would have been had the person been of the opposite sex.
Tom Randall (Gedling) (Con)
I thank the hon. Lady for bringing the Bill forward. She is talking about the history of this technically complex issue, which goes back to 1990. Does she agree that the changes introduced by the Bill are well overdue and that, by bringing it forward, we will get the change that we should have had a long time ago?
Margaret Ferrier
The hon. Member is spot on; the change is well overdue. I will come to that, and I am sure that the Minister will answer that point too. I think the pension schemes have found some difficulties; as I say, I will come to that.
It is important to be clear that no one will have money taken away from them as a result of the Bill when pensions are equalised. If it turns out that someone is entitled to more guaranteed minimum pension than they would be entitled to if they were the opposite sex, nothing happens; that advantage is not taken away. The Bill seeks only to increase pension income for those already losing out because of their sex due to the nuances of having a guaranteed minimum pension. It is also important to be clear that this is not about giving anyone extra pension that they are not entitled to; it is simply about making sure that no one loses out on pension income as a result of their sex.
If one person has a smaller guaranteed minimum pension than another purely because the first person is male and the second female, their overall pension entitlement needs to be corrected. However, correcting people’s pensions in this way is proving a very slow process, as the hon. Member for Gedling (Tom Randall) said. The Department for Work and Pensions, working with the pensions industry, tried to cut through the complexity by offering a methodology, set out in guidance, for pension schemes to use. The methodology involved converting the guaranteed minimum pension into what I will call normal scheme benefits, using existing legislation already on the statute book.
The industry agrees that this is a sensible approach, but has pointed out that the legislation supporting the conversion process contains some uncertainties that it believes will expose it to legal risk and potential accusations of not equalising correctly. For example, the way survivor benefits are treated in the conversion legislation needs to be clarified. The industry has pointed out that legal requirements for survivor benefits when guaranteed minimum pensions are converted are not sufficiently clear. Survivor benefits are the benefits paid out to a scheme member’s widow, widower or surviving civil partner when the member passes away, and are therefore extremely important.
Equalising someone’s pension to take account of the differences that arise because they had a guaranteed minimum pension is, as I have said, very important, but schemes need clarity and legal certainty before they are able to proceed with this essential process. That is what the measures in my Bill seek to provide. Similarly, before converting guaranteed minimum pensions, pension schemes are required to get the consent of the sponsoring employer that finds the scheme. That sounds entirely reasonable, since after all the sponsoring employer has invested a lot of money in the scheme to ensure that its employees have a decent retirement income.
Unfortunately, that is not as straightforward as we might expect because the current legislation does not cover all situations, such as where the original sponsoring employer is no longer in business. As a result of this lack of clarity in the legislation, some pension schemes have held off equalising for these effects of guaranteed minimum pensions. This Bill will help with that by rectifying those uncertainties and clarifying the legislation that schemes will use if they follow the methodology set out in the Department for Work and Pensions guidance.
I should make it clear to the House at this point that the Bill does not impose any new costs or requirements on occupational pension schemes or their sponsoring employers. Affected occupational schemes have known that they need to equalise pensions for the effect of guaranteed minimum pension for many years and should have been planning accordingly. The Bill will simply help pension schemes to do exactly what they need to do to stop people losing out.
I have engaged with representatives from the pensions industry, who welcome the provisions. The industry has long lobbied for the clarifications in this Bill to be made. I should hope that all here recognise the Under-Secretary of State for Work and Pensions, the hon. Member for Hexham (Guy Opperman) sitting opposite me today; I am delighted to say that the Government have decided to support my Bill. It is good to be working with the Government to make things easier for pension schemes.
John Lamont (Berwickshire, Roxburgh and Selkirk) (Con)
I congratulate the hon. Lady on bringing forward this Bill. She is speaking extremely well on a very technical area of pensions law. On the devolution point, she will know that Stormont has agreed to deal with the same issue, which is devolved to Stormont, through this Bill. Does she agree that that is a good example of where this Parliament and the devolved Parliaments can work together to achieve a desired positive outcome?
Margaret Ferrier
I thank the hon. Member; I am not sure I agree wholeheartedly with all his intervention, but the Bill extends to England, Wales and Scotland, and Northern Ireland, as he mentioned, has asked to be covered by it as well. This particular Bill extends to the whole UK and I am happy that it includes Scotland as well, unlike the Bill of the right hon. Member for North Somerset, which only covers England. As I said, it is good to be working with the Government to make things easier for pension schemes in fulfilling their obligations to their members and to ensure that benefits are paid correctly to members of occupational pension schemes.
I will not take up a lot of time, because the hon. Member for Meriden (Saqib Bhatti) is looking to give his Bill a Second Reading as well. But before I finish, there are quite a number of people on the DWP team who I would like to thank as they have helped me considerably: Narinder Clarke, Anna Smith-Spark, Gareth Thomas, Katy Marcus, Maria Burgess and David Brown. Of course I also thank my parliamentary assistant Kim Glendenning, who has helped me considerably in pulling all this together, the Pensions and Lifetime Savings Association and the Minister.
Mrs Natalie Elphicke (Dover) (Con)
I warmly thank the hon. Member for Rutherglen and Hamilton West (Margaret Ferrier) for bringing this issue to our attention today through the excellent proposals in her Bill, and for her clear explanation of this very technical matter, its impact on people and why it matters—particularly to women in the workplace, but also to others who do not experience equity and fairness. Her remarks brought to life the fact that equal pay must also mean equal pensions, and that complexity in this matter must be no excuse for not ending up with the right result for people who are due their pensions.
There have been huge changes in pensions over recent decades—certainly in almost every year of my working life—and it is welcome that compulsory pensions are now part of employment rights. However, because of those changes and people’s changing work practices, which mean that they may be in and out of several pension schemes within their working life, there needs to be even greater focus on securing the best possible protection for any changes to pension calculations before they become due. Buy-in and buy-out schemes and other pensions management processes feature more and more as companies experience increasing pressure on their own accounts, and over their accountability for the management of pensions.
I have a constituent who has an occupational pension, and he has heroically battled with referrals to the pensions ombudsman and the FCA for many years over a matter relating to the conversion of a minimum pension floor. The pension had two elements: a minimum guaranteed pension floor and an assessed projected income, in the usual way of pensions. I recall when my constituent first showed me his original pension statement, which said, in absolutely clear and unequivocal words, that the pension would not be less than a specified amount per year. Separately, the same statement expressed the projected value of the pension. Somewhat surprisingly, in my view, the Pensions Regulator has found that, in essence, because that pension statement did not use the word “guarantee”, the words “the pension will not be less than x” did not represent a guaranteed pension amount. I ask the hon. Lady and my hon. Friend the Minister to look again at the definition of guaranteed minimum pensions, particularly in schemes established before the Pension Schemes Act 1993.
I also made a referral to the FCA about mis-selling, and it said that it did not have responsibility for pension buy-out arrangements. It seems to me that we have made great strides in stopping small-print explanations—such that anyone who looked at the small print would have realised that even if the statement said they would get a certain amount, that might change—and mis-selling in many areas of financial services. There seems, however, still to be a gap in pensions protection that leaves individuals such as my constituent rightly angry and disappointed. There can be nothing plainer, it seems to me, than a formal statement saying “You will receive x a year”. That is not a qualified statement, and we must not let people get away with the small print.
My constituent was absolutely right to feel angry and disappointed in this case, but it highlights a wider issue of equity and fairness in relation to conversions from one scheme to another, and other pension changes. There must be no possibility of discrimination when it comes to converting such schemes, and greater safeguards are vital in this regard. It is not allowed to dock pay for work already done or to cut holiday or other entitlements, and stronger protection may be required for pension rights. The fact that these accrue in the future does not make them any less important than what people are paid today.
I recognise that company schemes are set up over a long period of time, and many set up a long time ago now need to be dealt with differently. Where they are problematic for companies, some may find themselves unable to operate without making substantial changes to assessing how the pensions are dealt with. Recent changes to the calculation and treatment of future pension obligations in company accounts have created additional and specific responsibilities, but also severe and significant pressures. I hope that the Minister and the hon. Member for Rutherglen and Hamilton West will agree that any such changes to pension rights must have at their heart equity and fairness. It is part of the basic corporate responsibility that we should and do expect of companies operating all such schemes.
Suzanne Webb (Stourbridge) (Con)
As time is tight, I will keep this very short. I wanted to have the opportunity to thank my friend the hon. Member for Rutherglen and Hamilton West (Margaret Ferrier) for all the hard work she has been doing. I welcome the Bill that she has put forward. Experts welcome the Bill, which will clarify and streamline the primary legislation on GMP conversion. It will make the whole process of equalising using GMP conversion easier. For that reason, I welcome the Bill and will be supporting it.
Sally-Ann Hart (Hastings and Rye) (Con)
Today, I welcome the private Member’s Bill introduced by the hon. Member for Rutherglen and Hamilton West (Margaret Ferrier). It is very commendable. On 29 May 1970, the Equal Pay Act gained Royal Assent. With its passing, this House took an important and laudable step towards ensuring the equal treatment of men and women in the workplace and our society more generally. Since the Act’s passing and its later commencement in 1975, even greater strides, both de facto and de jure, have been taken towards gender equality, but as colleagues will know, much work remains to be done to that end. We all have responsibility as lawmakers to strive towards it continuously, through pieces of legislation substantial, modest or otherwise. The Bill can rightly be seen as a means to do that. Specifically, it will help right a historical oversight by making important clarifications in relation to pension schemes and guaranteed minimum pensions.
The historical oversight has been explained comprehen- sively —I will not go into that—but we see that it has its roots in the state earnings-related pension scheme that was introduced in April 1978, as well as the Pension Schemes Act 1993, which required GMPs effectively to be calculated on a fairly unequal and unfair basis. It has ultimately meant that the age at which GMPs could be calculated and the rate at which benefits built up were different for men and women. It is far from clear which sex received the greater total benefit as a result of this discrepancy, primarily as related advantages fluctuate over time. Whether it is men or women who benefit, such equality cannot be considered just.
There have been consultations over time about guaranteed minimum pension schemes and how equalisation in occupation schemes should be looked at. There was a consultation and proposal in 2012, and another in 2016-17. Compared with the 2012 consultation and methodology, the Department for Work and Pensions stated that there was broad agreement that the newer method was a distinct improvement and offered a relatively simple way to convert GMPs into ordinary scheme benefits, thus ensuring equality across the board and assisting the industry to deliver the change without policies being excessively onerous. That development was welcome, but concerns have continued to be raised by the industry that existing legislation is unclear in some areas, including, for example, that it fails to provide for circumstances in which the scheme’s sponsoring employer no longer exists and therefore cannot consent to a proposed conversion exercise as per the methodology.
For the full benefits of the 2016-2017 proposal on methodology to be secured in the relevant regulations, including the positive results for equality of outcomes for the sexes, these concerns must be properly addressed in legislation, and that is what the Bill seeks to do. As I understand it, the Bill will make it clear that the legislation applies to survivors as well as earners; provide for a power to set out in the regulations the conditions that must be met in relation to survivor’s benefit; provide for a power to set out in regulations detail about who must consent to the GMP conversion; and remove the requirement to notify and inform HMRC.
The Bill has been welcomed by industry leaders for covering key areas where clarification is most needed, which will in turn make the important process of equalising benefits using GMP conversion easier. With this positive impact on the industry in mind, and given the broader message that it sends out—that the equality of the sexes is important in all legislative matters, both significant and modest—I welcome the Bill, which is worthy of support from across the House.
Mr Richard Holden (North West Durham) (Con)
I pay tribute to the hon. Member for Rutherglen and Hamilton West (Margaret Ferrier) for bringing this Bill to the House. As she mentioned, it will introduce a well overdue change. As hon. Members have reflected, given the passing of the Equal Pay Act 1970 and the fact that this matter has been highlighted as a major issue since 1990, it is not before time.
The hon. Lady said in her opening speech that the current situation seems wrong. Well, I think it definitely is wrong. I am so glad that she has introduced this legislation, because the subject of pensions is not talked about often enough in this House. The impact that pensions can have on people’s long-term prosperity is immense, especially in old age, and too many constituents in places such as North West Durham really do feel that there is a pensions divide.
Further to what the hon. Lady is doing today, I want to speak more broadly to the Treasury Bench about pensions. The change implemented through this Bill was recommended back in 1990. Several years ago, the auto-enrolment review of 2017 recommended that auto-enrolment be extended to 18 to 21-year-olds, as people are currently auto-enrolled only after the age of 22. That change would be hugely beneficial, particularly to constituents of mine, who start work at 18 at a far higher rate than the national average. Those 45 to 50 years of compound interest on four years of extra auto-enrolment could make an enormous difference to their income in later life.
Auto-enrolment schemes currently kick in only when someone is earning over £6,000 or so a year in a job. Many of my constituents, particularly women, have multiple jobs, and may work only 10 hours a week in them.
The Parliamentary Under-Secretary of State for Work and Pensions (Guy Opperman)
I am grateful to my hon. Friend for making that point. I will answer in a bit more detail in my closing remarks, but let me say that I endorse entirely his argument in favour of the 2017 auto-enrolment review, and the fact that expansion of automatic enrolment will unquestionably assist those in low-income areas, including those who have multiple jobs. With respect, it will be a progressive and good thing to do, but I will address the point more in my closing remarks.
Mr Holden
I thank the Minister for that intervention.
Some of the changes, particularly the lowering of the earnings threshold, could be introduced in secondary legislation, but primary legislation will be required to extend the auto-enrolment to 18 to 21-year-olds; I should let the Minister know that I have a date for a ten-minute rule Bill in the new year to do just that.
I very much hope that the Government will look at lowering the threshold. Low-paid women with multiple jobs in particular could be missing out on many thousands of pounds going into their pension pots. Low-paid women with multiple jobs in particular are potentially missing out on many thousands of pounds going into their pension pots due to issues around auto-enrolment. It is another inequality in the system that, as the hon. Member for Rutherglen and Hamilton West mentioned, tends to affect women disproportionately.
Margaret Ferrier
I just want to clarify that the rules around guaranteed minimum pensions are very complicated, so both men and women can lose out if pensions are not equalised because of indexation and revaluation. I am sure the Minister will cover that in his closing speech, but it is about two people. Sometimes women can have a higher pension and then the man will overtake it, or vice versa, because of the different ages of retiral. I just wanted to make it clear that both sexes can lose out.
Mr Holden
That is an incredibly important point. Both sexes can lose out and that is another element with auto-enrolment. There will be men in part-time work, maybe with caring responsibilities, who will also be in a similar situation.
The Minister has been a real reformer and is reforming an awful lot. I know there is a lot more to do. I encourage him to think broadly and work with Members across the House to continue the great reforming work he is doing. It has been great to see him working with the hon. Member for Rutherglen and Hamilton West. I hope to work with him in the future as I start to push for further reforms.
Tom Randall (Gedling) (Con)
As legislators, we look at the proposed legislation before us when we are preparing to speak in debates. As I was preparing to speak in the previous debate, I picked up the Down Syndrome Bill and, from the face of the Bill, was able to very quickly glean what it was about and understand its general thrust. As I picked up this Bill to prepare, however, I read that
“GMP conversion” means—
(i) the amendment of a scheme in relation to an
earner who was alive immediately before the
conversion date so that it no longer contains the
rules specified in sections 13(1)(a) and (b) and
17(1)”.
I am glad we have got that cleared up. So I congratulate the hon. Member for Rutherglen and Hamilton West (Margaret Ferrier) on not only introducing the Bill, but bringing it to life and explaining it in a way that this pensions layman was able to understand. I feel that I have made much more progress in the last half an hour than I have in the last few days of trying to get to grips with the Bill.
As I understand it—as I say, I claim to be no expert in this field—what we are seeing today is the end of a very long journey towards equality which we should have addressed before now, but better late than never. As I understand it, the old state pension had a number of elements to it, including a contracted-out part where one could obtain an occupational pension scheme that had a guaranteed minimum pension. Because of the way that the guaranteed minimum pension was calculated, there were various inequalities, including differentiation on a person’s sex and age as existed at that time. That has been corrected to some extent following the 1990 court case—it is bizarre that it has taken so long for us to get to this stage—but I understand that the industry has a number of concerns that are still extant with the existing legislation, including how conversion applies to survivor benefits, the element that can be inherited by a member’s widow. It does not provide for circumstances in which a scheme’s sponsoring employer no longer exists and cannot consent to a proposed conversion exercise, and also in terms of requiring schemes to notify HMRC that they have carried out the conversion exercise.
I understand that the Bill will
“Clarify that the legislation applies to survivors as well as earners.
Provide for a power to set out in regulations the conditions that must be met in
relation to survivors’ benefits.
Provide for a power to set out in regulations detail about who must consent to the conversion.
Remove the requirement to notify HMRC.”
It is a technical piece of legislation, but it will, I hope, bring us to the end of a long road. I congratulate the hon. Member for Rutherglen and Hamilton West on introducing it and explaining it so cogently to us laymen, and I look forward to seeing it on the statute book very soon.
Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)
I congratulate the hon. Member for Rutherglen and Hamilton West (Margaret Ferrier) on presenting this Bill. As the public probably know, Members have huge discretion in respect of what legislation to choose when they are successful in the private Members’ ballot, and I think everyone here today is personally very grateful to the hon. Lady for using her success in the ballot to propose these measures.
We face significant challenges in the world of pensions, whether they relate to the viability of schemes, the future of auto-enrolment—which was mentioned by the hon. Member for North West Durham (Mr Holden)—the threat posed by scams or the recent growth in pensioner poverty, which is a worrying trend. However, while we invest our efforts to confront those challenges, it is only right that, when possible, we seek to take the relatively more straightforward steps that will help us to correct problems in the pensions sector, and work with the pensions industry to deliver the best possible outcomes for our constituents. That is why, I am happy to say, we support the Bill in principle.
This is a sensible Bill, designed to streamline and clarify legislation on converting guaranteed minimum pensions in order to equalise benefits between men and women in accordance with the Equalities Act 2010 and following the High Court judgment relating to the Lloyds Banking Group schemes in 2018. The hon. Member for Rutherglen and Hamilton West made a very good speech outlining that case: it might sound technical to some, but I think that she explained it very clearly.
I know from my conversations with representatives of the sector that converting GMPs into other scheme benefits on a value basis like this is the preferred way of addressing equalisation, rather than the costly and often complex dual-records approaches. However, we recognise that there are problems that have remained unresolved since GMP conversion was first in legislation. As the hon. Member for Rutherglen and Hamilton West explained, they relate to the lack of clarity on whether the legislation applies to survivors as well as earners, and the lack of provision for circumstances in which the scheme’s sponsoring employer no longer exists and is unable to consent to the conversion exercise. Her Bill addresses those problems in a simple and practical manner, and I have noted the support that it has received from the pensions industry. The head of GMP equalisation at Lane Clark & Peacock—a friend of many of us—has said that it will
“make the whole process of equalising benefits using GMP conversion easier.”
The last Labour Government made clear their belief that we needed to equalise GMPs, and the Bill is an important step towards ensuring that everyone enjoys dignity and security in retirement. We should be doing everything possible to help the pensions industry to fulfil what are now its legal duties to deliver GMP equalisation, and that includes supporting the Bill. I see no reason why Members in any part of the House would not wish to see these flaws addressed, and I sincerely hope that the Bill is able to proceed to its Committee stage. I repeat our support for it, and commend the hon. Member for Rutherglen and Hamilton West for choosing to introduce it today.
The Parliamentary Under-Secretary of State for Work and Pensions (Guy Opperman)
It is a privilege and an honour to address the House on behalf of the Government, and to set out our position on this small but very important Bill.
Let me first congratulate the hon. Member for Rutherglen and Hamilton West (Margaret Ferrier) on her success in the ballot, because without the ballot she could not have presented any piece of legislation. It is important for people to understand that. I also congratulate her on the massive support—of which the hon. Member for Stalybridge and Hyde (Jonathan Reynolds) spoke eloquently—that she has managed to garner across the sector for a piece of amending legislation to address a small, discrete but genuinely important measure, and on the way in which she introduced the debate. She is right, and the hon. Member for Gedling (Tom Randall) is right: this is not simple stuff. It is technical, but it matters tremendously. She set out, with great eloquence and fairness, the background to the problem and how her three-clause Bill will address it. She brought to the attention of the House the need for schemes to make progress with the equalisation of scheme benefits to take account of the unequal effect of guaranteed minimum pensions. She set out why this issue is of paramount importance and how the House can help to clarify the legislation, and I can confirm that the Government will support the Bill.
As we all know, there are 13 days a year on which we consider private Members’ Bills. Some of those days are interesting, to put it charitably, in that the Bills will not necessarily be supported by the Government or even the Opposition on many occasions. Points of great importance are raised but the Bills do not go forward with the will of the House. However, that is not like today. Today is a very special day, and I cannot overstate the sense of genuine achievement that Members across the House should feel about the progress of the Down Syndrome Bill. Anybody who was in the Chamber to hear what was said will have been utterly moved and taken away by the wisdom and significance of the speeches and the differences that that Bill will make. We have now come to a very different Bill, but it is no less important.
I am now—I believe—on my fifth pensions Bill, Madam Deputy Speaker. As a former Pensions Minister, you were one of the architects of automatic enrolment, which my hon. Friend the Member for North West Durham (Mr Holden) so eloquently—
Sally-Ann Hart
My hon. Friend said that he is on his fifth pensions Bill. Is it right that pensioners are better off now than they were 10 or 15 years ago?
Guy Opperman
In a whole host of ways, the answer is yes. The state pension, by reason of the triple lock, is now £2,050 higher than it was prior to the introduction of the triple lock in 2010. There is automatic enrolment, and it would be fair for me to give a quick history of that because we have the esteemed former Minister in the Chair. Automatic enrolment was conceived by the Labour Government and the Turner commission. It was introduced by the coalition Government in 2012. Without a shadow of doubt, it has been utterly transformational. For example, 6,000 constituents of my hon. Friend the Member for North West Durham are saving the 8% thanks to the 1,580 employers in his constituency who support that. He made a very telling point about the 2017 automatic enrolment review, and given that he raised it—not for the first time— I will finish this point on automatic enrolment and the importance of this change before I go on to GMPs.
I am proud to say that the success of the provision now means that 10.5 million employees have been automatically enrolled into a workplace pension by more than 1.8 million employers. It was specifically designed by the Labour Government and brought in by various other Governments to help groups who historically have been less likely to save, particularly women, low earners and young people—this goes to the point made by my hon. Friend the Member for Hastings and Rye (Sally-Ann Hart). It has helped many in those groups to begin to save into a pension for the very first time. Workplace pension participation among eligible employees has grown to 88% overall compared with 55% in 2012. The proportion for women and young earners was less than 40% in 2012; it is now above 80%.
There is more that we can do, and we very much hope we will, and we recognise that challenges remain. Our ambition, as my hon. Friend the Member for North West Durham set out in relation to the 2017 review of automatic enrolment, is to enable people to save more and start saving earlier. Abolishing the lower earnings limit for contributions and reducing the age for being automatically enrolled to 18 in the mid-2020s will benefit younger people, the low-paid and part-time workers as they will receive contributions from their employer from the very first pound earned. I want to stress that as a Government, we remain utterly committed to those measures. I have been clear that the implementation will be subject to the learnings that take place from the 2018 and 2019 contribution increases. That is significant and it is important that that is done.
Mr Holden
The Minister is being generous with his time and in his remarks about me too. The Government have said that they will bring forward legislation to make sure that that happens. Does he have a timetable for that?
Guy Opperman
My hon. Friend tempts me to make commitments that I am unable to make. The Government have said that they will introduce the measure by the mid-2020s. It requires primary legislation and there is no doubt that there have been issues in its introduction because of the 2018 and 2019 increases. The impact of Brexit and the pandemic also clearly makes it more complicated to introduce such changes for employers.
It is still several years until the next general election, perhaps as much as two and a half years. My hon. Friend will be aware that the Government have to go through various processes to bring forward future legislation, including a Queen’s Speech setting out the Bills that will be brought forward in the third and fourth Sessions. He makes an eloquent point, however, as he always does—I assure the House that he is a massive improvement on the previous occupant of North West Durham, my neighbouring constituency—which I am certain will be heard not just on the Treasury Bench by the assiduous Whip, who is noting down his every word, but all the way in the Treasury, where I know he is making the case.
The practical reality is that the Bill of the hon. Member for Rutherglen and Hamilton West proposes a technical change. I will try to set out the position, which genuinely dates back to the 1970s and the last days of the Callaghan Government. Guaranteed minimum pensions were introduced to help employees to save affordably for an income in retirement, which is clearly a great concept. The state pension used to be made up of two parts: the flat rate basic state pension and the earnings-related additional state pension.
The flat rate state pension was simply funded through national insurance and paid at the full rate to those with sufficient qualifying years of NI contributions or pro rata for those with a partial record. The earnings-related additional state pension, also known as the state second pension or state earnings-related pension scheme, was linked to a person’s earnings. National insurance contributions were paid by an employee and their employer and gave the employee the right to an additional earnings-related state pension.
Many employers, however, were already offering their workers company pension schemes, so many people were building up an occupational pension and an earnings-related additional state pension. That was rightly thought to be overly onerous and potentially unaffordable for employers and employees. In effect, it was seen as a double provision and immensely overcomplicated.
To clarify the situation, the Callaghan Government introduced the system of contracting out and the provision of guaranteed minimum pensions in 1978. At that time, although I realise it may be hard to believe after hearing the description in the opening speech, that was considered a simplification. How they work is not simple, but I will attempt to explain it to the House to put it on the record, particularly for usage in Committee.
Employers who sponsored a salary related scheme were allowed to contract out their occupational pension schemes from the earnings-related additional state pension. Because employees in contracted-out employment were taken out of the additional state pension, the employer and pension scheme members paid lower national insurance contributions. Salary related contracted-out occupational pension schemes were required to take on the responsibility for paying their members the GMP as part of the occupational pension from the scheme.
The intention was that, on reaching retirement age, the amount of guaranteed minimum pension that the individual member would have built up would be broadly equivalent in value to the additional state pension that they would have received. However, the guaranteed minimum pension was literally that—a minimum.
Most employees would also have built up an occupational pension, but the scheme pension could not be lower than the guaranteed minimum. In addition, widows, widowers and surviving civil partners of members with a GMP received valuable survivor benefit rights—this goes to the point raised by several colleagues about ongoing survivor rights. Some of the technical details are complicated, but the crux of the idea is simple: rather than paying additional NI to the state to build up additional state pension, people built up a similar amount of occupational pension through a workplace pension scheme. The workplace pension scheme ultimately, of course, became automatic enrolment, as the Deputy Speaker, the right hon. Member for Doncaster Central (Dame Rosie Winterton), knows. The system ran in this way from 1978 to 1997.
Although the basic idea was simple, the technical details were extremely complex. I will not take the House through all the complexities, but, for example, GMPs can be subject to both revaluation and indexation. They are revalued before coming into payment to ensure they are protected against inflation, but once in payment any GMP accrued between 1988 and 1997 must also be protected against inflation, through indexation. Although revaluation and indexation are both intended to protect against the effects of inflation, the rates of revaluation and indexation are not the same, and, as the hon. Member for Rutherglen and Hamilton West set out, the reality is that men and women with the same employment history could receive different GMPs. That is what we seek to address.
So the GMPs were abolished in 1997. The whole system of contracting out was finally ended in 2016, with the introduction by the Conservative Government of the new state pension. But of course many of the people who worked between 1978 and 1997 still have a right to a GMP. We are talking about a significant number of our constituents—this is a very large figure. Some will already be retired, but some are still working. There have been a variety of court cases on this, which I am not going to go through in copious detail, but the first key one was something that has affected this House and all matters of state pensions dramatically since 1990. I refer to the European Court of Justice ruling in the case of Barber. It ruled that pensions were deferred pay and, as such, must be treated and paid equally to men and women. The Barber judgment was not specifically about GMPs but it meant that the impact of the differing rules for men and women had to be corrected. When we have come to a decision, as we have in his House on multiple occasions, about the state pension age correction exercise and the increases from 60 to 65 and 66, it can be traced back to the Barber judgment and the equality legislation that followed thereafter.
The House has already heard that the ECJ subsequently made the Allonby judgment, which enables schemes to use a scenario to work out whether someone has lost out or not, rather than being dependent on having a member of the opposite sex in the scheme to compare against. The Government are clear that in light of the Barber judgment, and subsequent decisions, including the Allonby judgment, occupational pension schemes need to equalise pensions, taking account of the effect of GMPs. Subsequently, the UK passed the Equality Act 2010, which also requires equal treatment between men and women for all pension accrued from the date of the Barber judgment. As has been said on several occasions, the Department for Work and Pensions has attempted, under successive Governments, to try to fix this problem without primary legislation. It is totally right that that there was a consultation, following which guidance was published. However, as the hon. Lady rightly set out in opening, it is simply not the case that all schemes can proceed on the basis of the guidance that has been prepared. The reality therefore is that schemes need to equalise the amount of pension their members receive to correct for the problems caused by the complex rules and the differences in retirement income these rules produce. This process is known as “equalisation”. How an occupational pension scheme corrects members’ pensions is up to the individual scheme, provided it is done properly. There are various methods of equalising that occupational pension schemes can use. However, the process can be very complicated and is specific to the individual scheme, and there are a lot of schemes. Some schemes have already felt very nervous and they have been concerned not just by the costs and the complexity, but by the judicial process that could follow and the perceived uncertainty about exactly how to undertake the process and be sure that they have met their legal obligations. As a result, as she set out, many schemes have still not equalised for the effects of GMPs.
What the Bill does is key. It makes it clear how the conversion legislation applies to people who are survivors, as well as to the earners. It also gives the Government the ability to set out in regulations the details of how survivor benefits will work for surviving spouses or civil partners of people with guaranteed minimum pensions. As my hon. Friend the Member for Berwickshire, Roxburgh and Selkirk (John Lamont)—who represents a constituency across the Border from me that includes Jedburgh and Galashiels—said, it is a piece of legislation that applies throughout the United Kingdom, and clause 2 includes specific regulations in relation to Northern Ireland that were requested by the Stormont Government.
Clauses 1 and 2 both clearly state that converted schemes must provide survivor benefits. One of the key purposes of the Bill is to make it easier for pension schemes to know the right amount that survivor benefit schemes using the conversion legislation must pay. The Bill also gives the Government the ability to set out in regulations details about who must consent to the conversion of guaranteed minimum benefits. Finally, the Bill removes the requirement to notify HMRC once a scheme has converted its guaranteed minimum pensions.
I opened by saying that debates on private Members’ Bills can be significant and serious days, and I genuinely appreciate the contributions that we have heard from a variety of colleagues. I thank my hon. Friend the Member for Stourbridge (Suzanne Webb) for her enthusiastic but pithy support, and my hon. Friend the Member for Hastings and Rye for an eloquent speech that set out in great detail her grasp of the issue. As always, my hon. Friend the Member for North West Durham is never backwards in coming forward on so many different issues, including his passion for automatic enrolment.
My hon. Friend the Member for Dover (Mrs Elphicke) raised a number of points and spoke with great experience. I am not of the view that this very specific Bill on very specific points would address the individual problems that she raised regarding her constituent, but I am happy for her to write to me about the issue and I will give her a detailed reply to confirm whether it is within the scope of the Bill. I suspect that it is not, but I want to be absolutely sure when I reply to her, which I will do prior to our entering Committee so that the House can be clear.
I cannot stress what a wonderful campaigner and asset to the House my hon. Friend the Member for Gedling is. He has made a tremendous impact through the work that he has done. It is great to see him here, and an honour and privilege to answer some of his points.
The hon. Member for Stalybridge and Hyde and I have clashed before—I think that this is our fourth Bill—but it is great that he and the House are in full support of this one.
The Department for Work and Pensions is attempting to make pensions safer, better and greener. We are doing a huge amount, including: the Pension Schemes Act 2021, with collective defined contributions, which will provide the third way of pensions; the pensions dashboard, which will be like a banking app that brings our pensions to our mobile phones, iPads and laptops, so that we have total access and knowledge of what we have; the reforms and support of defined benefit; action to prevent the investment scams that we know are out there and are trying to stop; the huge work that we are doing to develop on the environmental, social, and governance reforms that we introduced after the 2017 elections; and putting pensions at the heart of climate change by building on the work of COP26, and being the first country in the world to introduce climate-related financial disclosure, giving consumers—all our constituents —full understanding of what is being invested in on their behalf through pensions.
With respect, although this is a smaller Bill than the 125 clauses of the Pension Schemes Bill that we took through the House earlier this year, it affects a significant number of our constituents and I am genuinely keen to progress it. I can therefore confirm that it is with pleasure that I give the Government’s backing to the hon. Member for Rutherglen and Hamilton West, her Bill and the work that she has done. Excellent points have been made in debate that I will discuss in more detail in Committee. If I have missed any particular points, I will endeavour to write to colleagues in the intervening period. The Government support the Bill. We wish it well in Committee. I want to take the time to thank the hon. Lady, because it is not easy dealing with a highly technical and difficult Bill such as this. She should be very proud of the way she ensured that she got cross-party support and then introduced the Bill and outlined its provisions with great eloquence. I thank her for all the work that she has done.
Margaret Ferrier
I thank the Minister for his support in this important matter. He touched on the ballot for private Members’ Bills. I was delighted to be one of the successful 20; I am sure any Member who puts in for the ballot is keen to come out as one of those 20. I am grateful to all Members who have spoken today for their valuable contributions: the hon. Members for Stourbridge (Suzanne Webb), for Hastings and Rye (Sally-Ann Hart), for North West Durham (Mr Holden), for Gedling (Tom Randall), for Dover (Mrs Elphicke), for Stalybridge and Hyde (Jonathan Reynolds) and for Berwickshire, Roxburgh and Selkirk (John Lamont).
Correcting this basic issue of men and women being treated differently in these schemes because of the impact of having a guaranteed minimum pension that affects their hard-earned pension income is important. Although the Bill is small and technical, we should not underestimate its value. It should help schemes to use the guaranteed minimum pension conversion legislation to provide equality for affected pension scheme members by bringing much needed clarity for the industry that administers them. I am heartened and grateful that there is clear cross-party agreement on this issue, and I very much look forward to taking the Bill through its remaining stages.
Question put and agreed to.
Bill accordingly read a Second time; to stand committed to a Public Bill Committee (Standing Order No. 63).
Pension Schemes (Conversion of Guaranteed Minimum Pensions) Bill (Morning sitting)
Wednesday 2nd February 2022
(2 years, 9 months ago)
Public Bill CommitteesRead Full debate Pension Schemes (Conversion of Guaranteed Minimum Pensions) Act 2022 Read Hansard Text Read Debate Ministerial Extracts
The Chair
My selection of grouping for today’s sitting is available online and in the room. No amendments were tabled. We will have a single debate covering all three clauses of the Bill. The formal decisions on the clauses will be taken without further debate at the end.
Clause 1
Conversion of guaranteed minimum pensions
Margaret Ferrier (Rutherglen and Hamilton West) (Ind)
It is a pleasure to serve under your chairmanship, Mr Efford. I am grateful to you and to Committee members for joining me today to look at the detail of this legislation, which, as I said on Second Reading, is very technical in appearance but has a clear and simple purpose.
The Bill will help occupational pension schemes to convert guaranteed minimum pensions, at the same time correcting the basic issue of men and women being treated differently in those schemes because of the impact of having a guaranteed minimum pension. This will ensure that people do not receive less pension income than they would have received had they been of the opposite sex. In other words, the Bill will help schemes to correct a situation that has been judged since 1990 to be fundamentally unfair.
On Second Reading, I was delighted to hear the Under-Secretary of State for Work and Pensions, the hon. Member for Hexham, and the hon. Member for Stalybridge and Hyde (Jonathan Reynolds) voice their support for the Bill. The hon. Member for Stalybridge and Hyde said,
“We should be doing everything possible to help the pensions industry to fulfil what are now its legal duties to deliver GMP equalisation, and that includes supporting the Bill.”—[Official Report, 26 November 2021; Vol. 704, c. 622.]
The Minister helpfully gave a brief history of guaranteed minimum pensions in his speech on Second Reading, but because of the technical nature of the Bill, it is necessary to give some background today.
The state pension used to be made up of two parts: the flat rate basic state pension and the earnings-related additional state pension. However, as many employees were already members of occupational pension schemes provided by their employer, building up an earnings-related additional state pension as well as an occupational pension was seen to be dual provision, so from April 1978 to April 1997, legislation allowed employers sponsoring a salary-related occupational pension scheme to contract out their pension scheme from the earnings-related additional state pension; in return, the scheme was obliged to pay a guaranteed minimum pension to its members. The intention was that the GMP would be broadly equivalent in value to the additional state pension forgone. In a contracted-out scheme, because the scheme was paying the equivalent of the additional state pension, both the employer and the contracted-out pension scheme members paid lower national insurance contributions.
The GMP rules are set out in legislation. GMPs include important rights to survivor benefits, which I will touch on later. However, the way that GMPs work means that men and women in a scheme with the same pay and service history can end up receiving different amounts of GMP. That is obviously not right and needs to be corrected. It is not even as simple as women losing out on GMPs compared with men. Because the rules around GMPs are very complicated, both men and women can lose out.
The requirement to provide equal pensions for men and women in relation to pension benefits accrued since 17 May 1990 is set out in UK legislation—currently through the Equality Act 2010—and has been as far back as 1995 through section 62 of the Pensions Act 1995. Occupational pension schemes with GMPs are therefore required to equalise people’s pensions to correct for the effect of unequal GMPs for pensions accrued since 17 May 1990. That was confirmed by the 2018 judgment of the High Court in the Lloyds Banking Group Pensions Trustees Ltd case. However, as anyone who has had any involvement with this aspect of occupational pension schemes can tell you, equalising pensions to correct for the effects of differences in GMPs is not a simple process.
The Department for Work and Pensions worked closely with representatives from the pensions industry to develop user guidance on a methodology for equalisation, which was published in 2019. The methodology set out in the guidance involves converting the guaranteed minimum pension into other pension benefits that are not bound by the same complex rules as guaranteed minimum pensions. A person’s overall pension income from their occupational pension scheme can then be more easily corrected for the effect of the differences in retirement income for men and women that the complex guaranteed minimum pensions rules produce. The methodology uses what is known as GMP conversion, or the conversion of guaranteed minimum pensions. The law around conversion of GMPs is set out in the Pension Schemes Act 1993.
As ever with pensions, things are rarely straightforward, and true to type this aspect of pensions legislation is not simple. The pensions industry has long expressed concern that the conversion provisions in the 1993 Act contain uncertainties that could expose occupational pension schemes to legal risks if it is used to correct members’ pensions for the differences caused by the complex rules around guaranteed minimum pensions. Because it is about people’s pension income, it is very important that occupational pension schemes have the clarity they need if they are to be able to use GMP conversion to meet their legal requirement to equalise. Clause 1 clarifies and amends the conversion provisions in the 1993 Act to ensure that pension schemes have the clarity they need to use these provisions. It makes consequential amendments to other pensions legislation.
The pensions industry has expressed concern about certain areas of the guaranteed minimum pension conversion legislation. First, the industry is concerned that conversion legislation is unclear as to whether and how conversion applies to survivor benefits. Survivor benefits are extremely important to many people and are a key part of the concept of the guaranteed minimum pension. If a person has a guaranteed minimum pension, after their death a portion of that pension must be paid to their widow, widower or surviving civil partner. It is often a crucial source of income for someone who has been bereaved, and many people greatly value the knowledge that their surviving spouse or civil partner will receive some pension income in the event that they pass away. Providing financial security for those we leave behind is important to many of us.
Less emotive, but equally important, the pension industry is concerned that the conversion legislation does not make it clear what to do in circumstances where the identity of the sponsoring employer is not clear. The legislation requires an occupational pension scheme’s sponsoring employer to give its consent before the scheme converts guaranteed minimum pensions into other scheme benefits. However, the existing legislation does not cover some increasingly common employer circumstances. For example, if there were multiple sponsoring employers in the same pension scheme and one had ceased to exist, the scheme would have no means of getting the consent of all the sponsoring employers. It is unclear what the legislation requires in such cases.
Finally, the 1993 legislation requires occupational pension schemes to notify Her Majesty’s Revenue and Customs that they have carried out a conversion exercise. However, the introduction of the new state pension means that HMRC does not need to be informed about GMP conversion, because the new state pension no longer contains any kind of contracted-out provisions. That may seem trivial compared with survivor benefits providing a pension income to a person’s survivor, but it results in a lot of unnecessary paperwork for both occupational pension schemes and HMRC.
Clause 1 clarifies the legislation to address these concerns. In subsections (2) to (4), it clarifies both the application of GMP conversion to GMPs paid to a member’s spouse or civil partner, and how survivor benefits must work once an earner’s GMPs have been converted. The clause makes it clear that the GMP conversion legislation can be applied to persons who are survivors at the time of the conversion as well as to the actual earners, and ensures the legislation is consistent in how it refers to that.
Subsection (4) removes the detailed and arguably unclear text in the 1993 Act about what survivor benefits following GMP conversion must look like. Instead, subsection (3)(c) contains a power to set out in regulations the conditions that must be met in relation to survivor benefits following GMP conversion. That means that the Secretary of State for Work and Pensions is being given the power to set out in regulations conditions governing how, when a member’s GMP has been converted, the converted pension must provide for survivor benefits to be paid to a deceased member’s widow, widower or surviving civil partner. That is appropriate because these issues are very technical and detailed. It is obviously extremely important when dealing with something as complex and emotive as the calculation and payment of survivor benefits from former GMPs now converted into other scheme benefits that the issues are considered in detail. The regulations will be able to set out a clear framework for the provision of survivor benefits after the conversion has taken place.
The other great advantage of regulations, of course, is that the Government can hold a full consultation on draft regulations before they are laid before the House. That will ensure that scheme members, scheme trustees, scheme administrators and anyone else with an interest in GMP conversion and/or the survivor benefits to be provided—many people in the UK, I am sure—can comment on, review and suggest changes to the draft regulations before they are finalised. As the content of the regulations will obviously be a matter for the Government, I hope that the Minister will discuss that further as and when he speaks in support of the Bill.
Subsection (5)(a) removes the reference to “The employer” where the 1993 Act requires
“The employer…to consent to the GMP conversion”.
As I said, this is to resolve the currently unsolvable situation that schemes can find themselves in whereby they want to convert GMPs and then equalise people’s pensions to ensure that everyone gets the pension income they are entitled to, but they find themselves unable to do so, for example because one of the sponsoring employers has ceased to exist or it is not clear whose consent is required.
Such problems are not particularly unusual for occupational pension schemes. Pension schemes have very long lifespans, and it is not difficult to see how a scheme set up in the 1980s may no longer be sponsored by the same employer. Subsection (5)(a) therefore replaces the term “The employer” with
“Each relevant person (if any)”.
Clause 1 then gives the Secretary of State for Work and Pensions the power to set conditions in regulations in order to identify “relevant persons”. Again, I expect that the regulations will be technical and detailed, so that they give more clarity than the existing primary legislation. Making such technical and detailed provisions in regulations is quite normal in occupational pensions legislation. As I have already explained, it is very important to ensure that those whose consent is required can be identified. By proposing to give the Government this power, I am holding them to consult on the conditions that will apply to identify “relevant persons”. It is important that the affected members, trustees, administrators and, of course, employers themselves are able to comment on and make suggestions about the Government’s proposed conditions before they are laid before the House.
Clause 1(5)(d) removes the requirement for pension schemes to notify HMRC when they carry out a GMP conversion exercise. As I said, that information is no longer needed by HMRC. It costs schemes time and money to notify HMRC, it costs HMRC time and money to process the notifications, and there is no need beyond the current requirement in the 1993 Act for any of that time and money to be spent.
In addition, subsections (6) to (12) make some consequential amendments to the Pension Schemes Act 1993, the Pensions Act 2007, the Marriage (Same Sex Couples) Act 2013 and the Pension Schemes Act 2015 to take account of the changes I have described.
The hon. Member for Gedling (Tom Randall) said on Second Reading that the Bill is “very technical”. I hope my speeches then and now have clarified what the very complex-looking clause 1 actually does.
Clause 2 replicates clause 1 but for the parallel Northern Ireland legislation. It does everything clause 1 does, but for occupational pension schemes in Northern Ireland. To be strictly accurate, I should say that clause 2 does not quite do everything clause 1 does, as it does not contain amendments equivalent to those made in clause 1(11) and (12) to the Marriage (Same Sex Couples) Act 2013 or the Pension Schemes Act 2015. That is because they are consequential, tidying-up amendments. Clause 1(11) amends a provision that is in primary legislation for England, Wales and Scotland, but in secondary legislation for Northern Ireland, so any equivalent amendment for Northern Ireland would also be made in secondary legislation; and subsection (12) refers to legislation that extends a provision for England and Wales to Scotland, so is not relevant to Northern Ireland.
Rather than going through the entire clause again, I should perhaps explain why clause 2 is concerned with Northern Ireland. As hon. Members may know, private pension legislation is a devolved matter for the Northern Ireland Assembly. However, the convention is that the Northern Ireland Assembly makes pension legislation that mirrors the law in England, Wales and Scotland. It would therefore seem entirely sensible to ensure that pension schemes do not have to operate two different systems depending on whether someone is in Belfast, Birmingham, Bannockburn or Bangor. On this occasion, because of time pressures, the Northern Ireland Executive asked for Northern Ireland to be included in the Bill by amending the relevant parts of Northern Ireland’s pensions legislation. The Northern Ireland Assembly has passed a legislative consent motion agreeing that the UK Parliament can legislate on the matters contained in clause 2.
Clause 3 is known as a “back of the Bill clause”. It sets out vital but standard information on how clauses 1 and 2 are to be brought into legal effect. It also sets out the territorial extent of each clause. Importantly, the cluse also enables the Secretary of State to make transitional or saving provision in regulations in connection with the coming into force of clause 1, and for the Department for Communities in Northern Ireland to make transitional or saving provision by order in connection with the coming into force of clause 2. This will enable provision to be made about pension schemes that have already used the conversion legislation or are in the process of doing so when the amendments come into force, to ensure the amendments do not affect what has already been done under the current legislation.
Successive UK Governments since 1990 have made it clear that occupational pension schemes need to equalise pensions to correct for these effects of guaranteed minimum pensions. It seems wrong that people can lose out on even a small amount of pension income purely because of those differences. That is why I am extremely pleased and proud that my Bill will help schemes which want to use GMP conversion to correct for the effects of this issue. I am delighted by the cross-party support I have received again today.
Matt Rodda (Reading East) (Lab)
It is a pleasure to serve under your chairmanship, Mr Efford. I thank the hon. Member for Rutherglen and Hamilton West for her work on this important Bill. As has been said, the Bill has potential repercussions for millions of people’s pensions. We support the measures to simplify a complicated system and make it much fairer.
I will use my time today to ask a series of questions, which I hope the Minister will address. In particular, I want to ask him about communication, consultation, the requirement to notify HMRC and the wider imbalances between men’s and women’s pensions.
On communication, I have a fundamental question. How have the changes been communicated to those affected? Obviously, we are dealing with a large number of people, going back to the cohort who have been saving for their pensions from 1978. I am afraid that the Government do not have a good track record of communicating changes to the state pension. According to many commentators, previous changes to the pension age were poorly communicated, and more recently the Government have been criticised for their work on sorting out the state pension underpayment crisis. I realise that the Minister is trying to address that. The public deserve reassurance on those issues.
The Parliamentary Under-Secretary of State for Work and Pensions (Guy Opperman)
It is a pleasure to serve under your chairmanship, Mr Efford. I thank the hon. Member for Rutherglen and Hamilton West for the hard work she has put in to bring this private Member’s Bill to this stage. Introducing a private Member’s Bill is never easy. It is sometimes arcane and convoluted, but her Bill is genuinely making a fundamental difference to this country and to many of our constituents, and it applies across this country.
As I indicated on Second Reading—colleagues should take it as read that I repeat the entirety of my long speech on Second Reading, albeit I will not do so today—this is a small, discrete but very important piece of legislation and the Government definitely support it. The hon. Member for Rutherglen and Hamilton West outlined the details of the Bill, but I will briefly touch on a couple of key points that I hope will answer some of the points raised by the hon. Member for Reading East.
Clause 1 ensures that occupational pension schemes in England, Wales and Scotland have greater clarity about how to convert GMPs into other scheme benefits, which gives an opportunity to equalise their members’ pensions to correct for the unequal effect of GMPs. Colleagues will understand that Parliament moves quite slowly in some respects, but this problem dates back to 1978 and the last days of the Callaghan Government, so our resolving it is overdue. Clause 2 would achieve the same for occupational pension schemes in Northern Ireland.
Correcting for the unequal effects of GMP is necessary, fair and right. It is important that pension schemes that choose to equalise as part of a conversion exercise are able to do so as easily as possible and are confident that the requirements they are complying with are robust and unambiguous. That is what the Bill delivers.
Clause 1 makes it clear that the conversion legislation can be applied to a person who is a survivor at the time of the conversion and ensures the legislation refers consistently to this group. It also provides the means to set conditions on the survivor benefits provided by the scheme following conversion of a member’s GMP. Those changes are important because survivor benefits provide a crucial source of income to widows, widowers and survivors in civil partnerships. For many people, the knowledge that their surviving spouse or civil partner will receive a portion of their pension is highly reassuring.
Let me be very clear: we will consult on those matters. There will be a full consultation among industry to which, obviously, opposition parties and all parts of industry can make representations; there will then follow regulations, which will be debated in this House.
Clause 1 also makes important changes to the existing legislation requiring the scheme’s sponsoring employers to consent before guaranteed minimum pensions are converted to other scheme benefits. As the hon. Member for Rutherglen and Hamilton West outlined, the current legislation creates difficulties for some schemes—self-evidently so when, with the passage of time, an employer has ceased to exist. That is a significant problem. It will therefore help schemes if the legislation is amended, and we do so very much as a result of representation from schemes. Clause 1 therefore removes the requirement for the employer to consent to GMP conversion, and replaces it with a requirement for each relevant person to consent. That, with respect, is unquestionably the right way forward.
Finally, clause 1 also removes the need for pension schemes to inform HMRC when they carry out a conversion exercise. That is because the new state pension does not contain any kind of provision for contracting out, and HMRC no longer has any use for or interest in this information—indeed, it has been asking schemes not to send it in. The clause is, with respect, an excellent example of the simplification and reduction of needless bureaucracy in action—bureaucracy that otherwise would fall upon scheme members and HMRC, which is funded by taxpayers.
Clause 2 closely mirrors clause 1 to amend the law of Northern Ireland. I am devasted that the hon. Member for Strangford is not here to intervene on me, but I have raised this with him in the past and he is very supportive of the measures. It is certainly the case that these necessary changes should be made in one fell swoop across the United Kingdom. I am pleased to confirm that on 24 January the Northern Ireland Assembly passed a motion to consent to the inclusion of the provisions for Northern Ireland in the Bill.
The Bill is an excellent step towards helping pension schemes to confidently correct for the unequal effects of guaranteed minimum pensions. I suggest that the hon. Member for Rutherglen and Hamilton East has received support for her Bill in this House because it is clearly necessary.
The hon. Member for Reading East raised a number of particular points, and I will write to him with more detail. On gender inequality, he will understand that the Turner commission was set up under the Labour Government by Tony Blair specifically to address fundamental gender inequality. It resulted in the cross-party success story that is automatic enrolment, which has seen female private pensions saving go from approximately 35% in 2012 to well over 80% in 2019-20. The specific provisions on RAS—relief at source—are a matter for the Treasury, which I understand is consulting on and looking at them on an ongoing basis.
I repeat that these matters will all be consulted on in the appropriate way, and that there will be regulations that will be debated by the House in the usual way. It is unquestionably the case that this will be treated like a normal Act of Parliament, with all due representations.
I thank colleagues for the collaborative way in which they have addressed a long-standing problem that is technical but necessary to resolve, and that impacts so many of our constituents up and down the country.
Finally, I was asked whether the Bill means some people will lose money. The specific answer to that is no: no one will see their pension rights reduced when their pension is corrected for the effects of the rules around GMP. Pension schemes will correct for the effects of GMP rules only by increasing people’s pensions to the higher amount.
With that, I thank the hon. Member for Rutherglen and Hamilton West. I look forward to following the Bill through its remaining parliamentary stages in the other place and back in this place.
Margaret Ferrier
I thank all those who have contributed to this short, constructive debate and all Members who agreed to serve on the Committee. I also thank all those who contributed more widely to the small but incredibly important changes made by the Bill, and ask that everyone continues that cross-party support until we get the Bill over the line. I also thank the Minister for his support throughout, and I thank the hon. Member for Reading East.
Question put and agreed to.
Clause 1 accordingly ordered to stand part of the Bill.
Clauses 2 and 3 ordered to stand part of the Bill.
Bill to be reported, without amendment.
Pension Schemes (Conversion of Guaranteed Minimum Pensions) Bill
Friday 25th February 2022
(2 years, 9 months ago)
Commons ChamberRead Full debate Pension Schemes (Conversion of Guaranteed Minimum Pensions) Act 2022 Read Hansard Text Watch Debate Read Debate Ministerial Extracts
Margaret Ferrier (Rutherglen and Hamilton West) (Ind)
I beg to move, That the Bill be now read the Third time.
As I said on Second Reading, the Bill will help occupational pension schemes correct a basic issue of men and women being treated differently in contracted-out defined benefit occupational pension schemes because of the impact of having a guaranteed minimum pension, or GMP. It will help pension schemes to meet their legal obligations and ensure that people do not receive less pension income than they would have done had they been the opposite sex. In other words, it will help schemes to correct a situation that is fundamentally unfair.
I am proud to have brought the Bill before the House. I was delighted to hear the Under-Secretary of State for Work and Pensions, the hon. Member for Hexham (Guy Opperman) announce on Second Reading that the Government would support it. The support that the Bill has attracted from across the House is testament to both its importance and its essential simplicity. It makes a few changes to pensions legislation that will help occupational pension schemes to resolve a long-term issue of unequal treatment.
The pensions industry has itself been asking for the measures in this Bill, and as a result of those measures, schemes will be better able to use the GMP conversion process to correct for the differences in pension outcomes for men and women that have arisen as a result of GMPs. It is very pleasing that hon. Members from across the House have recognised and responded to this need.
For the benefit of those who were not present for the previous stages of this Bill, I will give a short recap of its background and purpose. GMPs are the minimum pension that certain occupational pension schemes must provide to their members. Occupational pension schemes that were contracted out of the additional state pension on a salary-related basis between April 1978 and April 1997 are required to pay their members GMPs as a floor that the occupational pension cannot fall below. The intention was that when reaching the age at which GMPs become payable, the amount of GMP that a member of a contracted-out scheme would have accrued would be broadly similar in value to the additional state pension they would have received if they had not been contracted out. Rather than paying a higher rate of national insurance contributions to build up rights to additional state pension, members of salary-related contracted-out schemes built up rights to a GMP.
However, the way that GMPs were accrued by people means that they differ for men and women, due to historical differences of treatment in the pensions system based on people’s sex. People with the same employment history can therefore have different amounts of GMP depending on whether they are a man or a woman, even if they do exactly the same job for the same length of time at the same salary. Both men and women can lose out on pension income in retirement as a result of their sex: it is not as simple as one sex losing out consistently over the other. I have discussed this issue in this House several times now, and I still find it difficult to believe that people can lose out on even a small amount of pension income purely because of these differences.
Fortunately, successive UK Governments have made clear for over three decades that occupational pension schemes need to equalise pensions accrued since then to correct for these effects of GMPs. The High Court confirmed in 2018 that occupational pension schemes must equalise pensions accrued since 17 May 1990 to address the effects of those differences. Occupational pension schemes are therefore required to undertake a process known as GMP equalisation, correcting people’s overall pensions to ensure that they are not lower than they would have been had the person been of the opposite sex. That is why the Department for Work and Pensions published a suggested methodology based on the overall value of the pension, which relies on the process of converting GMPs to normal scheme benefits. It is elements of this process that the Bill before us addresses.
Unfortunately, correcting people’s pensions in this way is proving a very slow process. There are a number of ways in which the task of GMP equalisation could be approached. One way, for example, would be to look at the pension in each year and compare what a man and a woman would have received, and pay the higher of the two. The problem with this approach is that it would result in members getting more overall than either a man or a woman would have received before the equalisation process. This would have been prohibitively expensive for schemes, and would in itself be unfair.
The DWP, working with the pensions industry, proposed a methodology based on the overall value of the pension, set out in guidance for pension schemes to use. This methodology involved converting the GMP into normal scheme benefits using the existing legislative framework. The industry agrees with that approach, but is worried that the current legislation that supports the conversion process has some gaps that the industry believes will leave it exposed to legal risk or potential accusations that it has not equalised correctly.
For example, we need to clarify the way in which survivor benefits are treated in the conversion legislation. The industry has pointed out that the legal requirements for survivor benefits when GMPs are converted are not clear enough. Survivor benefits are the benefits paid out to a scheme member’s widow, widower, or surviving civil partner when the member dies. Schemes need legal certainty and a clear framework before they can move forward with this process. This Bill seeks to provide that essential certainty to schemes.
Virginia Crosbie (Ynys Môn) (Con)
In the last 10 years since it was introduced, the automatic enrolment scheme has enabled 4,000 of my constituents on Ynys Môn to establish a pension. I congratulate the hon. Member on this important Bill. Does she agree that it addresses uncertainties in the current legislation and removes the risk of misapplication?
Margaret Ferrier
I thank the hon. Member for her intervention and I absolutely agree. This Bill is set to remove those uncertainties so that these occupational schemes can get on with the equalisation process that they have always known they should be carrying out anyway.
The Bill removes the text in the Pension Schemes Act 1993 that sets out what survivor benefits following GMP conversion must look like, and replaces it with a power to set out those conditions in regulations. When this provision was discussed in Committee, I asked the Under-Secretary of State for Work and Pensions, the hon. Member for Hexham (Guy Opperman) to confirm that the Government would consult on the content of those regulations. I am pleased to say that he agreed to that.
Before converting GMPs, pension schemes are required to get the consent of the sponsoring employer that funds the scheme, which might look to be reasonable, considering that the sponsoring employer has invested a lot of money to ensure that scheme members receive a decent retirement income. Unfortunately, it is not that straightforward, because current legislation does not account for all possible situations, such as where the original sponsoring employer is no longer in business. Again, the Bill removes the requirement for employer consent in the Pension Schemes Act 1993 and replaces it with a power to set out in regulations the details of the relevant persons who must consent to the conversion. I am again pleased to say that the Minister confirmed in Committee that the Government would also consult on the content of those regulations.
Finally, the Bill removes the requirement that pension schemes have to notify Her Majesty’s Revenue and Customs when they carry out a GMP conversion exercise. In Committee, the hon. Member for Reading East (Matt Rodda) very reasonably asked what checks would be in place if HMRC no longer had to be notified that people’s GMPs have been converted into other scheme benefits. I would like to reassure the hon. Member that the removal of the requirement that a scheme must notify HMRC if it converts GMP rights into other rights was requested by HMRC. The notification requirement was not a check by HMRC on whether an individual scheme had carried out a GMP conversion correctly. Responsibility for the accuracy of the conversion lies with the pension scheme’s trustees, and they must take advice on certain matters from the scheme actuary.
The requirement to notify HMRC if a conversion has been carried out is simply a legacy of the time when members of occupational pension schemes paid a lower rate of national insurance if they were contracted out. Because both the employer and the scheme members were paying lower national insurance contributions, HMRC used to need to keep detailed records of all contracted-out schemes. However, when contracting out ended for all occupational pension schemes in April 2016, with the introduction of the new state pension, employers and members no longer paid a lower level of national insurance. HMRC therefore no longer needs to be notified.
As this information is no longer required by HMRC, from 2019 it has said to schemes that it no longer requires them to notify it if GMP conversion has been carried out. However, because it is still a requirement of the Pension Schemes Act 1993, schemes should normally still submit such information to HMRC, despite its having no use or need for it. As I said, it costs schemes time and money to notify HMRC, it costs HMRC time and money to process the notifications, and there is no need beyond the current requirement in the 1993 Act for any of this time and money to be spent.
I reiterate to the House that the Bill does not impose any new costs or requirements on occupational pension schemes or their sponsoring employers. As I said, affected schemes have known that they need to equalise pensions for the effect of GMP for many years, and they should have been planning for equalisation. The Bill will simply help pension schemes that decide to use GMP conversion to do what they need to do to ensure payments are fair. I have engaged positively with representatives from the pensions industry, who have long called for these changes and welcome the Bill’s provisions. I am extremely pleased and proud that my Bill will help schemes that want to use GMP conversion to correct for the effects of this issue, and I am delighted by the cross-party support I have received so far and again today.
Darren Henry (Broxtowe) (Con)
I congratulate the hon. Member for Rutherglen and Hamilton West (Margaret Ferrier) on bringing forward this Bill and I thank her for allowing me to participate in her debate.
Pensions are integral to our society; they are a means whereby individuals can reap the benefits of their hard work throughout their life, in old age. When someone reaches an age where they are no longer earning, they need an income to survive, and this is where a pension kicks in. It is a payment that, we hope, allows a retired individual to have economic freedom. It is a point in our lives we should all be looking forward to. People often fall into the trap of thinking that they are able to save enough money to comfortably live when they are no longer earning. Unfortunately, a lot of the time they do not save enough to enjoy the standard of living they hoped for in retirement.
A state pension is a great starting point but if, like me, they want to enjoy the luxuries of old age, they would need to think about investing in a pension scheme. It is a long-term savings plan with additional benefits. There are many benefits of pension schemes such as tax relief, contributions made by the employer and tax-free lump sums when the person retires. If they pay contributions into a pension scheme, some of the money that they would have had to pay the Government in tax is in fact paid into the pension instead. The employer may match or pay more than the person contributes to the pension scheme. That is money that they would not have gained had they put their money into a savings account. Finally, they will usually be able to take up to a quarter of their pension savings as a tax-free sum.
Having expressed the importance of pensions, it is integral that both men and women can benefit from them equally. That is why I am very pleased that hon. Lady has brought this Bill to the House. It is recognised that there were disparities between pensions on the basis of sex, as a result of differences in retirement age. As she mentioned, a GMP is a pension that a workplace normally provides, and it applies only to people who contracted out of the additional state pension scheme. A GMP is usually the same, if not more, than the additional state pension had the person not contracted out of it. Previous legislation required GMPs to be determined on an unequal basis. A woman’s GMP is normally accrued at a greater rate than that of a man, to ensure that there is recognition of a woman’s working life being five years shorter than that of a man.
It is important to understand the terms “revaluation” and “indexation”. Revaluation is an increase in the value of someone’s pension before they start drawing it, whereas indexation is the rise in value of their pension while they draw it. The Government have set a rate of revaluation that schemes can use at 3.5% and there is a minimum indexation rate of 3%. Therefore, some pension schemes’ revaluation rate is higher than their indexation rate. Women used to have an earlier retirement age, and therefore they were getting indexation while men were receiving revaluation. In this instance, a woman would usually get a higher pension rate until they started claiming their pension, which would remove their revaluation rise and replace it with an indexation rise, whereas a male would be entitled to a revaluation rate for a further five years until their rate, too, was switched to an indexation rate.
Schemes are required to remedy that through equalisation, but it has never been clear how to go about that. The Bill seeks to clarify that. The current situation is the perfect example of de facto change but not necessarily de jure change. The Bill clarifies that the legislation is to remedy the disparity as it applies to survivors as well as earners. That is important, because the sad reality is that it is common for individuals to become widowed and it is vital that the surviving spouse can claim the disparity for which the deceased spouse was eligible.
The Bill provides a power to set out in regulations the conditions that must be met in relation to the survivor’s benefits, making it clearer and easier for survivors to claim the remedy. It provides for a power to set out in regulations detail about who must consent to the conversion, giving further clarification on what is needed to claim the remedy. Finally, it will remove the requirement to notify HMRC. I am told that HMRC needs to be notified but may not be doing anything with that information. It therefore makes sense to remove that bit of red tape which, in practice, makes no material difference.
My constituents in Broxtowe will benefit from the Bill, which will allow them remedy on the disparity to which they are entitled. That will be achieved by removing red tape around pension regulation and providing further clarity. Through that, we will ensure that more individuals understand the logistics of their pensions. It should not be necessary to be an expert in finance to understand the rights and responsibilities that come with pensions, and I hope that these changes will go some way towards beginning to make that happen. I congratulate the hon. Member for Rutherglen and Hamilton West (Margaret Ferrier) on introducing the Bill.
Claire Coutinho (East Surrey) (Con)
This is the second time in a week that we have seen important changes to regulation in insurance and pensions that will have a meaningful impact on the country. Last week, we reformed Solvency II, which will unlock billions of pounds of investment, and now we have this Bill, which is a long-overdue step towards equality between the sexes in occupational pensions. I firmly congratulate the hon. Member for Rutherglen and Hamilton West (Margaret Ferrier) and my good friend the indomitable pensions Minister on this smart and thoughtful Bill.
Sally-Ann Hart (Hastings and Rye) (Con)
I congratulate the hon. Member for Rutherglen and Hamilton West (Margaret Ferrier) on successfully bringing forward this well-considered Bill and for so excellently and comprehensively explaining why we need it.
When the Equal Pay Act gained Royal Assent on 29 May 1970, the House took an all-important step towards ensuring the equal treatment of the sexes in the workplace. It also sent a broader message about the United Kingdom’s societal values. Since the Act’s commencement in 1975, even greater strides have been taken towards ensuring gender equality. However, as I am sure colleagues agree, much work remains to be done to that end.
As lawmakers, we in this House all have a responsibility to strive continuously towards the goal of gender equality through legislation, whether modest, substantial or otherwise, and the Bill can rightly be seen as a means of doing that. Specifically, it will right a historical oversight by making crucial clarifications in relation to guaranteed minimum pensions equalisation and pension schemes.
Madam Deputy Speaker, you can see that I am holding a wonderful speech that I have criss-crossed out because I do not think I need to go through all of that detail—we also have other people who wish to speak and other Bills to consider. However, proposals and methodology brought in during 2016 and 2017 should be secured in relevant regulations, including the positive impact that they would have on the equality of outcome for the sexes. These concerns must be properly addressed in legislation, and that is what the Bill rightly seeks to do. It has also been welcomed by leaders across industry as covering key areas where clarification is most needed, which will make the important process of equalising benefits using GMP conversion easier.
Bearing that positive reception from industry in mind, and given the broader message that it sends about the importance of the equality of the sexes in legislative matters both significant and modest, I strongly welcome the Bill and offer it my wholehearted support.
Peter Gibson (Darlington) (Con)
It is a privilege to follow my hon. Friend the Member for Hastings and Rye (Sally-Ann Hart).
Let me begin by congratulating my friend the hon. Member for Rutherglen and Hamilton West (Margaret Ferrier). I know only too well what a privilege it is to be successful in the ballot, and I congratulate her on guiding this Bill through its legislative journey. It is commendable that it deals with such an important issue, and I am pleased to be able to speak about it today.
I am also delighted that the Bill extends to England, Wales and Scotland, and that Northern Ireland has asked to be covered by it as well. That is another great benefit for our United Kingdom. There were, at the final count in 2015, about 8 million people across the United Kingdom with contracted-out memberships, and the Bill has the potential to benefit those 8 million people. I cannot imagine a reason why anyone in the House would not be in favour of that.
The Bill relates specifically to the issue of guaranteed minimum pensions, but pensions have been on the agenda in the House on a number of occasions in recent weeks. I was pleased to speak in a recent Westminster Hall debate hosted by my hon. Friend the Member for Grantham and Stamford (Gareth Davies), and my hon. Friend the Member for North West Durham (Mr Holden) is leading a sterling campaign to extend auto-enrolment to many more people, which would be a fantastic way to level up throughout our United Kingdom and ensure that trillions more go into our pension pots, thus ensuring that the poorest in society have a more secure future. I would welcome the Minister’s comments on that, as I know he is a champion for pensioners. I also know that he would like an opportunity, when he winds up the debate, to highlight the £1.8 billion-worth of unclaimed pension credit pots out there, which could serve as vital assistance to pensioners in our constituencies. But let me return to the specific issue of the Bill, as opposed to wider pension benefits.
This Bill will make the process of equalising with the use of guaranteed minimum pensions easier, and it is worthy of the support of all of us in the House. I look forward to seeing it pass its Third Reading today, and congratulate the hon. Member for Rutherglen and Hamilton West once again on her efforts.
Saqib Bhatti (Meriden) (Con)
I will keep my remarks brief, because I know that there are many good speeches still to come. Let me first refer the House to my entry in the Register of Members’ Financial Interests: I am a practising chartered accountant, and also the chair of the all-party parliamentary group on small and micro business.
I thank the hon. Member for Rutherglen and Hamilton West (Margaret Ferrier) for introducing an excellent Bill which will achieve a great deal. As a practising accountant who had to live through the introduction of auto-enrolment, I have a love-hate relationship with it, and with pensions, although of course I see the fantastic benefit that they bring. Recent figures show that in my constituency alone, more than 22,000 employees in 1,830 businesses across Meriden have automatically enrolled. That scheme is a great achievement, providing security and a pot of money for people to rely on when they retire. Hopefully they will look back at us for many decades to come, and thank us for taking the measures that we have taken.
Speaking as the chair of the APPG, I hope the Minister will assure me that, as pension changes occur—I am sure he has already envisaged them—there will be consultation with businesses, because small and micro businesses often feel that they are not part of the conversation. That said, when auto-enrolment was introduced, the SME sector was quite relieved by the consultations that took place. That also showed that the Government can introduce good legislation with good IT systems behind it, as we have also seen recently with the furlough scheme, in respect of which I was involved in getting my clients on with real-time information.
The Bill is excellent and is what I call an equaliser Bill, quite rightly bringing women on a par with men. There are many other things to achieve on that journey but I wholeheartedly support this legislation. I congratulate the hon. Member for Rutherglen and Hamilton West on her cross-party thinking. As we have seen in recent week, great things can be achieved when the House comes together in unity. I thank her and the Minister for all their work.
Ms Karen Buck (Westminster North) (Lab)
I congratulate the hon. Member for Rutherglen and Hamilton West (Margaret Ferrier) on introducing the Bill, which the Opposition are pleased to support, as we were at previous stages. As the hon. Lady and others have said, it will help occupational pension schemes to correct the basic issue of men and women being treated differently in those schemes because of the impact of a guaranteed minimum pension. It will also help pension schemes to ensure that people do not receive less pension income than they would have received had they been of the opposite sex. As the hon. Lady and others have said, the legislation has been welcomed throughout the industry and there is broad consensus that it is the right thing to do.
We should do all we can to help the pensions industry to fulfil what is now its legal duty to deliver guaranteed minimum pension equalisation, which includes supporting the Bill. In Committee, my hon. Friend the Member for Reading East (Matt Rodda) made clear our support for the Bill while making some general points and asking questions about the Government’s approach to communications in respect of this legislation and pensions more generally. He gently pointed out that the Government do not have an unsullied record when it comes to communication and he wanted to know a bit more about the Minister’s plans in that regard. I think the Minister was going to write to him but am not sure whether that has happened; perhaps the Minister could say a couple of words about the Government’s plans to ensure the effective communication of the message.
I reinforce our view that there must be a commitment in the Bill to a full and timely consultation with experts, the industry and others before the introduction of regulations. That consultation should address the conditions that must be met in respect of survivors’ benefits and the details about who must consent to the conversion. We asked in Committee what kind of instrument will be used to introduce the regulations and sought reassurance that parliamentarians will be able adequately to scrutinise the changes. We also asked about the requirement to notify HMRC, about which we have now heard more, which has helpfully clarified that point.
On the wider issues of gender inequality, GMP equalisation is only one way in which imbalances between men’s and women’s pensions need to be addressed. We need reassurance that the Government will commit to continuing to ensure that all aspects of gender inequality in pensions are looked at, because we know that the pensions gender gap is around double the pay gap and that small changes at the early stages of somebody’s pension career can have large repercussions.
In summary, we support the efforts in the Bill to tidy the legislation and make it easier for schemes to convert guaranteed minimum pension rights into ordinary scheme benefits. The Minister may wish to address the few important issues to be resolved, but they certainly do not distract from the Bill’s overall value and we look forward to it passing swiftly through its final stages.
The Parliamentary Under-Secretary of State for Work and Pensions (Guy Opperman)
The Government propose to transform United Kingdom pensions. We are making them safer, better and greener and the Bill is a further way forward. I am grateful to the hon. Member for Rutherglen and Hamilton West (Margaret Ferrier) for introducing the Bill and for the support of the official Opposition and other political parties.
Let me briefly address the three points raised by the hon. Member for Westminster North (Ms Buck) on behalf of Her Majesty’s Opposition. I assure her that there will be full consultation on the legislation. There will also be broad communication, but I will write to her on that point and place a copy of the letter in the Commons Library and the House of Lords Library so that all peers and Members can see it.
In respect of gender inequality, the hon. Lady will be aware that successive Governments have concluded that the way ahead on that is automatic enrolment—that is the greatest change. There is no doubt that automatic enrolment has transformed saving in this country. For example, in terms of workplace pensions, women were at less than 40% in 2012 and are now at more than 80%, and young people aged between 22 and 29 were at less than 40% and are now at 80%.
Mr Richard Holden (North West Durham) (Con)
I agree with the Minister and welcome the Bill from the hon. Member for Rutherglen and Hamilton West (Margaret Ferrier). It is a great Bill and part of the reforms to pensions that the Government are making. As the Minister mentioned auto-enrolment, can he enlighten me on the Government’s position on my Bill, which is scheduled for later today, on expanding auto-enrolment to under-22s and part-time workers, particularly women as he just mentioned?
Guy Opperman
I will deal with that point, because it is relevant to this Bill and to the consideration of the House later. As my hon. Friend will understand, we are in the latter part of this parliamentary Session. It is the end of February and the Queen’s Speech will come, in all probability—obviously I cannot commit, but it is usually—on the second Wednesday in May, so the House has a relatively limited period of time.
The hon. Lady’s Bill had its Second Reading in November. It required a Committee stage in the House of Commons, then it had to come back for Report and Third Reading. It has not even gone to the other place for consideration. It will only just get under the line, although I am sure that the other place will be keen to accept it. The reality is that there is no real way for my hon. Friend’s Bill to get through this House and the House of Lords in the time allowed, and that is the requirement of private Members’ Bills of the nature of his and all others, to be fair.
I can confirm, however, that the Government remain committed to the 2017 automatic enrolment review. It remains the case that we will, in the fullness of time, bring forward or support legislation to take the matter forward. My hon. Friend will have to bear with me. He and I have had ample conversations. I am so pleased that he is my neighbour—a great improvement on the previous one. He is a doughty campaigner for his constituents and he is right to make this particular case.
I thank my hon. Friends the Members for East Surrey (Claire Coutinho), for Broxtowe (Darren Henry), for Hastings and Rye (Sally-Ann Hart), for Darlington (Peter Gibson) and for Meriden (Saqib Bhatti) who all supported the Bill and spoke extremely well and eloquently about these matters. I will not repeat my entire Second Reading speech, which lasted for, I think, nearly an hour, and of which I know all hon. Members enjoyed every word.
The greatest hits of pensions are often underrated in my experience, but the points that I made then should be repeated as if I were to speak for the next hour. We are correcting a simplification that was brought in by the last days of Mr Callaghan’s Labour Government in 1978. It is an utterly vital piece of legislation that addresses everything from survivor benefits to reforms in relation to HMRC and the need to get proper equalisation. To be utterly clear, all parties will benefit from this and there is no loser by reason of the Bill.
It is absolutely to the credit of the hon. Member for Rutherglen and Hamilton West that she has successfully brought the Bill forward on a cross-party basis and navigated its passage. She should be very proud of her work. I am delighted to restate that the Government support the Bill. We continue to support it in this House and will support it in the House of Lords. I wish it every success as it travels on to another place.
Margaret Ferrier
With the leave of the House, I thank the Minister for his support today and throughout each stage of the Bill. I also thank all hon. Members who have spoken and who have intervened on Third Reading including the hon. Members for Ynys Môn (Virginia Crosbie), for Broxtowe (Darren Henry), for East Surrey (Claire Coutinho), for Hastings and Rye (Sally-Ann Hart), for Darlington (Peter Gibson) and for Meriden (Saqib Bhatti).
I also take the opportunity to thank the team at the DWP for all their assistance throughout to get to this stage and for their expertise in helping me to understand more of what I was talking about. It has been a privilege to have the opportunity to take a private Member’s Bill through the House, and I encourage all hon. Members to enter the ballot when it comes round again. A private Member’s Bill slot is highly sought after, and it has been a great experience. I look forward to watching the Bill pass through the other place and into law, and I greatly look forward to seeing some of my constituents, and constituents across the UK, finally receive the equalised pension income to which they have been entitled for service since 1990.
Question put and agreed to.
Bill accordingly read the Third time and passed.
Pension Schemes (Conversion of Guaranteed Minimum Pensions) Bill
Monday 28th February 2022
(2 years, 8 months ago)
Lords ChamberRead Full debate Pension Schemes (Conversion of Guaranteed Minimum Pensions) Act 2022 Read Hansard Text
Pension Schemes (Conversion of Guaranteed Minimum Pensions) Bill
Friday 25th March 2022
(2 years, 8 months ago)
Lords ChamberRead Full debate Pension Schemes (Conversion of Guaranteed Minimum Pensions) Act 2022 Read Hansard Text Read Debate Ministerial Extracts
Baroness Redfern (Con)
My Lords, it is with great pleasure that I am able to take the Pension Schemes (Conversion of Guaranteed Minimum Pensions) Bill through this House. It gathered a lot of support in the other place and I am hopeful that it will have a similarly positive reception here.
In 2019, during the debate on the Guaranteed Minimum Pension Increase Order, the noble Baroness, Lady Drake, asked:
“Will the Government press ahead with their planned changes to GMP conversion?”—[Official Report, 14/2/19, col. 1956.]
In the same debate, Lord McKenzie also asked about guaranteed minimum pension equalisation and conversion. I am very sad to say that Lord McKenzie is no longer with us; he is truly missed in this place. I know that he would have been here today to take part in this debate. The next year, during the Guaranteed Minimum Pension Increase Order 2020 debate, the noble Baroness, Lady Sherlock, asked a similar question and referred back to the original question posed by the noble Baroness, Lady Drake. As a Back-Bencher, I cannot speak for the Government, but I think that the Bill may go some way to answering the question posed by the noble Baronesses and the late noble Lord.
I begin by setting out what guaranteed minimum pensions are and why schemes may wish to convert them at all. The noble Baroness, Lady Drake, will have little to learn from what I have to say, as would the noble Baroness, Lady Sherlock, who I know would have been here but is suffering from Covid.
The Bill will help occupational pension schemes to correct a basic issue of unfairness. It will make it easier for occupational pension schemes to correct people’s pensions to ensure that they do not receive less pension income as a result of the guaranteed minimum pension legislation than they would have done if they had been the opposite sex. In other words, it will help schemes to correct a situation which is fundamentally unfair and which has been agreed to be unfair since 1990.
Guaranteed minimum pensions—GMPs, as they are usually called—were a feature of the UK’s pension system in the late 1970s, 1980s and 1990s. The detail behind the way in which GMPs work is extremely complex, but the basic premise is very simple. An employer who sponsored a defined benefit occupational pension scheme could contract it out of the additional state pension. For service between April 1978 and April 1997, the scheme was required to pay the members a GMP. The intention was that, on reaching pension age, the amount of GMP that an individual member would have built up would be broadly equivalent in value to the additional state pension that they would have received had they not been contracted out.
GMPs have some important features. The GMP legislation requires the payment of a survivor benefit to an affected member’s surviving spouse or civil partner in the event of the member’s death—something which is of great comfort to many people. I will talk about survivor benefits in more detail in a moment.
As well as survivor benefits, GMPs also have indexation and revaluation requirements set out in law. Where these apply, this means that the GMP has to be increased to provide some protection against the effect of inflation. However, as can be the case with pension entitlements, the GMP rules reflect the different values of the past. Men and women qualified for them at different ages and, to reflect this, they also built up at different rates.
The cumulative effect of these different rules is that a man and a woman could start work for the same employer for the same pay and conditions on the same day, work for the same length of time and leave that job at the same time, but, because of the impact of the GMP rules, they may receive different amounts of pension in retirement. Both men and women can lose out on pension income in retirement as a result of their sex. It is not as simple as one sex losing out consistently over another. GMPs were abolished for future service in 1997 and a rather simpler system for salary-related, contracted-out occupational pension schemes was brought in. Contracting out was abolished entirely in 2016. However, millions of people in the UK have GMPs built up during a lifetime of hard work.
It seems difficult to believe now that GMP rules could create different outcomes for men and women. In fact, it was difficult to believe at the time. In May 1990, the European Court of Justice ruled that pensions are deferred pay and, as such, must not differentiate between men and women. In the UK, the Equality Act 2010 requires equal treatment between men and women for all pensions accrued from the date of that judgment. Occupational pension schemes are therefore required to equalise pensions to correct for the unequal effect of GMPs from May 1990 onwards. A UK Supreme Court judgment in the Lloyd’s case in 2018 also put it beyond doubt that the affected schemes must go back and equalise people’s pensions for the period from 1990 to 1997 to correct the differences caused by the GMP rules.
As some of us here may be beginning to suspect, however, equalising people’s pensions for that period to correct the differences caused by the GMP rules is even more difficult than it sounds. Equalising a pension to correct the differences caused by the GMP rules means that affected pension schemes must go back and correct a person’s overall pension if it is lower, because of the effect of those rules, than it would have been had the person been of the opposite sex. I assure noble Lords that this does not mean taking money away from some people and giving it to others. If it turns out that someone is entitled to more guaranteed minimum pension than if they were of the opposite sex, nothing happens; that advantage is not taken away. It simply means that the scheme needs to increase pensions in some cases where people are losing out because of the way in which the GMP rules work.
However, equalising people’s pensions in this way is proving a slow process. As we have heard, some Members of this House have been talking about this issue for several years. Following the Equality Act 2010, the Department for Work and Pensions tried to help schemes struggling to work out how to equalise pensions to correct the effect of the GMP rules. The department worked closely with the pensions industry. As a result, in 2016, it proposed a methodology for pension schemes to use. This methodology involved converting the GMP into what could be termed “normal scheme benefits”—that is, pension benefits not subject to the complex GMP rules that created the differences in the first place—and carrying out conversions using existing legislation set out in the Pension Schemes Act 1993. Following consultation, the Department for Work and Pensions published guidance on this methodology in 2019. The industry agreed that the proposed methodology was a sensible approach. A member’s converted benefits must be at least equivalent to the value of the benefits pre conversion and must provide a survivor benefit in the light of the valuable survivor benefits that were included in GMPs.
However, the pensions industry has also pointed out that the legislation supporting the conversion process contains some uncertainties that it believes will expose it to legal risk and potential accusations of not equalising correctly. That is why this Bill seeks to amend and clarify the conversion legislation set out in the 1993 Act so that affected pension schemes can better use it to meet their obligation to equalise for the effect of the GMP rules. It does—I very much hope and believe this —exactly what the noble Baronesses, Lady Sherlock and Lady Drake, have been calling for for several years and which the much-respected Lord McKenzie called for.
For example, the way in which survivor benefits are treated in the conversion legislation needs to be clarified. The industry has pointed out that legal requirements around survivor benefits when GMPs are converted are not sufficiently clear in the current legislation. As I mentioned earlier, survivor benefits are the benefits paid out to a scheme member’s widow, widower or surviving civil partner when the member dies; they are therefore extremely important. It matters hugely to many people that their husband, wife or civil partner is protected financially in the event that they pass away. This Bill therefore amends the provisions governing how survivor benefits must be paid after a scheme has converted the member’s GMP.
Similarly, before converting GMP, pension schemes are required to get the consent of the sponsoring employer who funds the scheme. This might look reasonable, considering that the employer has invested a lot of money to ensure that scheme members receive a decent retirement income. Unfortunately, it is not that straightforward, however, because the current legislation does not cover all situations; for example, where the original sponsoring employer is no longer in business.
Finally, the Bill removes the requirement that schemes must notify Her Majesty’s Revenue & Customs when they carry out a GMP conversion exercise. HMRC does not want or need this information; indeed, it has issued guidance asking schemes not to submit it. As it costs schemes money to submit this information, it seems sensible to simply remove the requirement, saving both parties time and money better spent elsewhere.
I should briefly make it clear to the House that this Bill does not ask schemes to do anything new or unexpected; nor does it impose any new costs or requirements on occupational pension schemes or their employers. Affected occupational pension schemes have known that they need to equalise pensions for the effect of GMP inequalities for many years. They should have planned accordingly. The methodology and guidance published by the DWP can help schemes to do this, although it is for the trustees of each scheme to decide which methodology is most appropriate for their scheme. This Bill simply helps pension schemes to use the legislation underlying the department’s methodology and guidance with more certainty in order to correct the effects of a long-standing inequality in the pensions system.
As we have heard, this Bill has been called for in this House for several years. I am delighted to present it for debate today. I beg to move.
Lord Davies of Brixton (Lab)
My Lords, I thank the noble Baroness, Lady Redfern, for her detailed and clarifying introduction to the Bill. It is a complicated subject but she made an excellent job of providing the necessary clarification for your Lordships. I do not want to get into the detail of these proposals except in one respect, but I do want to put them in the context of pensions policy as a whole.
If I was asked whether I welcomed the Bill, I would be equivocal, because it is a recognition of the failure of a policy which is dear to my heart. The policy of better pensions, introduced in 1978, with all employees receiving an earnings-related pension from the state or a substitute scheme from the employer, was good and in advance of its time. We should not forget that. To a large extent, the introduction of the new state pension was only possible because of the success of the state earnings-related pension scheme.
I will resist the temptation to wander down memory lane, but I was in at the birth of contracting out. I was a member of the occupational pension board. We set out the rules by which contracting out should operate. We spent a great deal of time assessing how guaranteed minimum pensions should work. It is always worth making the point that they became extremely complex largely because of the industry demanding particular provisions. The idea was simple, but it became more and more complex as further demands were placed on it by the pensions industry, and there is a certain ruefulness when the pensions industry then complains about how complex it is. The complexity was largely brought about by the industry itself.
Contracting out was an essential element of the state earnings-related pension scheme, but that is history now. I accept that, but we have these leftovers, the GMPs, which potentially will be with us for many years. With the possibility of survivor benefits being paid in respect of GMPs, it could be decades into the future.
This Bill is essentially about a process. It is not about the principle of conversion, which is already being built into the legislation. Instead, it facilitates the process of conversion. Conversion has come to the fore because of the need to equalise benefits in respect of GMPs. It is not the GMPs that must be equalised but the benefits in excess of GMPs, adding complexity on to complexity. The principle of conversion was seen as a particular method of achieving equalisation, but they are separate.
There is the possibly, rarely taken, I am told, of the dual records approach, whereby each scheme keeps a record for each member, whether they are a man or a woman, and each year it pays the higher pension. Schemes were not keen on using that approach because it meant that members ended up with more pension. From their perspective, the members might have thought it was a good idea to have dual records and best-of year-by-by-year schemes against that approach, and if pushed, I see their point. However, it is important to understand that this arrangement is for the benefit of schemes and their administration. It is difficult to argue that there is much in here which is of benefit to members, which is my major concern.
As I said, the ship has sailed. The problem with the Bill for me is that how it operates in practice depends on material outside its scope. It depends principally on the detailed guidance which has been issued by the DWP, as well as professional practice, because at the heart of conversion is this concept of actuarial equivalence. The legislation and the DWP guidance say nothing about what is meant by actuarial equivalence, and it is in effect left to the actuarial profession, but it is a key issue. We are legislating for something which is effectively outside the control of the law. It is down to the actuaries to assess how that works in practice.
I do not want to be difficult on this Bill, and I will certainly not oppose it. Given the problems we have with the legislative timetable, if we were to make an amendment to it in Committee, it would crush its opportunity of getting through. But we must look in detail at how the Bill works with the underlying guidance and actuarial practice in Committee, when we can press the Government to ensure that members do not lose out.
In that context, my concern, which I am not sure can be handled in this Bill, is that the proposal for conversion is made by the trustees. They must consult the employers but there is no requirement for any consultation with the members. In the pensions legislation, there is a requirement that if you make a major change to a pension scheme, there must be a process of consultation, but on this change, there is no requirement for that level of consultation. That concerns me. It might be argued that the members are not losing out, since they are getting benefits the actuarial equivalent of which is worth the same to the member before and after. However, there is a change in the structure of the benefits being provided, and that potentially is of value to members, even if the monetary value is the same.
Therefore, there is a key issue here. I do not want to delay the Bill, since so much work has gone into preparing it, but I am concerned that the people who appear to be left out of considering these issues are the members being affected. It is not enough to say, “Well, they’re getting something which is actuarially equivalent.” We must think about that in a way which has not so far been reflected in the discussions on the Bill.
Baroness Wheatcroft (CB)
My Lords, I welcome the Bill and thank the noble Baroness, Lady Redfern, for introducing it. As a pensions amateur sandwiched between two pensions professionals—the noble Lord, Lord Davies, and the noble Baroness, Lady Drake—I will keep my remarks brief.
I wanted to speak about the Bill because it is about equalities, and I like equalities that work both ways: not just treating women equally but, on the occasions when they should be levelled up, treating men equally to women. It is not often that we have the opportunity to do that, but in this Bill we do. As the noble Baroness, Lady Redfern, pointed out, nobody will lose as a result of the Bill. People will only gain, and that is to be welcomed.
However, I have questions. The legislation that gives rise to this—the need for equal treatment—came about in 1990. It is fair to ask why it has taken quite so long to get to this position. During that period, there has been a question mark over survivor benefits which this Bill now finally seeks to deal with, but one of the important things about pensions is that there should be a degree of certainty. As people plan for retirement and old age, it is imperative that they be able to look ahead and see what their income might be. I am told that this Bill affects millions of people. As a result of this, they will still not be able to look at what their future pension is and plan for it.
So I ask the Minister whether there is a way in which a deadline could have been imposed to make it clearer for people, so that they can have some idea now of the effect that equalisation will have on the pension they are looking forward to—or should it remain that pension schemes just wait and wait, leaving people in limbo, unable to plan for their future?
Many times, as she introduced the Bill, the noble Baroness referred to how complex it is. That is true: you only have to look at it; it is a small Bill, but it is certainly not simple. So finally, I make a plea—I am not alone in this, and it has been done many times—for simplification of pensions. How can people look ahead and plan if the legislation is so complicated that even the professionals cannot make sense of it? Many pension professionals still scratch their heads about how the lifetime limit, for instance, will impact people, and we have seen how the tax issue can cause all sorts of unwanted anomalies to pensions. My final plea to the Minister is to please look at pensions simplification, and perhaps a little more effectively than we did with tax simplification.
Baroness Drake (Lab)
My Lords, I refer to my register of interests, in particular my position as a pension scheme trustee. I support the Bill, which clarifies legislation that enables occupational pension schemes to convert guaranteed minimum pension benefits into other scheme benefits. I congratulate Margaret Ferrier MP, and the noble Baroness, Lady Redfern, who is sponsoring the Bill through the House. This is not an easy issue to pick up and run with, and I compliment the noble Baroness on her speech; it was quite a tour de force on this very technical issue.
How to resolve guaranteed minimum pension equalisation has remained unsettled for 32 years. Although it is very important, the longevity of the issue bears a resemblance to the Schleswig–Holstein question, about which Lord Palmerston said: “Only three people have ever really understood the Schleswig–Holstein business—the prince consort, who died; a German professor, who has gone mad; and I, who have forgotten.” However, having listened to my noble friend Lord Davies, he has confirmed that certain actuaries still have a long memory on the detail of this issue. For lots of other people, it is a mystery lost in the 32-year mists of time.
The GMP equalisation issue arises because, from 1978 to 2002, the state pension had two parts: the basic state pension and the state earnings-related pension, which was known as SERPS. Employers with salary-related pension schemes could contract their employees out of SERPS, so that the employers and employees paid lower national insurance contributions, but the employers remained obliged to provide a guaranteed minimum pension similar to that which would have accrued under SERPS, if the employee had not been contracted out. That the state pension age for women was 60 and for men was 65, at the time, led to some unequal outcomes, the description of which I will leave in Schleswig-Holstein, but the noble Baroness, Lady Redfern, and the Lords Library have done an admirable job in describing how those inequalities occurred.
A decision of the European Court of Justice that occupational pensions constitute deferred pay meant that, from 1990, these unequal pay outcomes had to be addressed. That decision was confirmed by the High Court in 2018; hence the 32-year history we are trying to address. Over many years, pension schemes have sought legal certainty on how to implement GMP equalisation, but the Government have sought to rely on guidance—presumably because of their own liability concerns about being firm and fast in addressing the issue.
There are a number of ways in which schemes can equalise benefits for the differences in outcomes between men and women. As referred to by the noble Baroness, Lady Wheatcroft, the unequal impact of this can affect men as well as women. In 2016, following a government consultation on a proposal to convert guaranteed minimum pensions into scheme benefits under the provisions in an amended Pension Schemes Act 1993, many respondents still expressed concern about the lack of legal certainty in certain respects.
The Government support this Bill, as I do, which amends GMP conversion legislation for schemes that want to use the conversion method of equalisation and makes it easier to use. Guy Opperman, the Minister in the other place, said:
“What the Bill does is key. It … gives the Government the ability to set out in regulations the details of how survivor benefits will work for surviving spouses or civil partners of people with guaranteed minimum pensions”
and
“who must consent to the conversion of guaranteed minimum benefits”,—[Official Report, Commons, 26/11/21; col. 627.]
when the scheme’s sponsoring employer no longer exists—normally, the employer has to consent.
I support the Bill but have three questions that seek clarity—they are not rowing against the intent of the Bill—that I would like to put to the Minister. Given the Government’s and respondents’ previous reservations about the conversion methodology and what was permissible under the Pension Schemes Act 1993, what confidence does the DWP have that this Bill will now provide legal certainty? Are there any implications for the Pension Protection Fund arising from GMP equalisation, in respect of scheme members who have entered the PPF, who are in schemes in PPF assessment or schemes that might go into PPF assessment in the future, where equalisation issues have been in play?
Finally, there is an important outstanding problem that needs addressing, although it is not in itself a reason not to support the Bill: the lack of clarity on the tax implications of GMP conversion. GMP equalisation could bring negative tax penalties for some scheme members, where an increase to pension benefit or the value of a past transfer payment flowing from equalisation impacts an individual’s annual allowance or lifetime allowance position, and therefore potentially exposes them to a greater tax bill.
Such individuals will have planned their pension savings in good faith, in adherence to the tax rules, unaware of potential retrospective adjustments to their benefits from GMP equalisation and the impact on their tax position. The Minister kindly wrote to my noble friend Lady Sherlock recently, advising that:
“The tax position regarding the conversion method is potentially more complex than other methods. This is because the conversion method can change the form of a member’s benefits and therefore its effects may have a wider impact. More detailed work is being done by HMRC to understand the tax issues associated with the conversion method. HMRC is working closely on this with its industry working group.”
Can I push the Minister to give further reassurance on this matter, given the potential for unfairness to arise from the tax rules, and to give an indication of how soon an answer can be expected? Something of a precedent was set quite recently when the tax rules were favourably adjusted for public sector workers whose pension benefits were retrospectively enhanced to address age discrimination.
Those are my three questions, but the noble Baroness, Lady Redfern, very kindly referred to the wonderful Lord McKenzie of Luton, and I have not had a chance to comment on him in this House. I remember on my second day in this House, I was proverbially pinned against the wall by him. He said, “You’re working on the Equitable Life compensation Bill because I know you’re going to know about guaranteed annuity rates.” I thought gosh and said okay. I assured him that I had many other qualifications and many other interests but I would work with him on it, and that was the start of a very strong working relationship over 10 years in this House. I personally, let alone the House, sadly miss the quality of the contribution he brought on these issues.
Baroness Merron (Lab)
My Lords, I congratulate the noble Baroness, Lady Redfern, on introducing this important Bill. I am particularly grateful for the clarity with which she simplified the complexities. Noble Lords will realise that I am but a stand-in for my excellent noble friend Lady Sherlock, to whom we send our best wishes for a full and speedy recovery. I hope I will do justice to her today.
As we have heard, guaranteed minimum pensions are a legacy arrangement for pension schemes which contracted out of the state pension between 1978 and 1997. Their aim was to ensure that when someone who contracted out reached pension age their guaranteed minimum pension would at least equate to what they would have got in additional state pension.
However, as we have heard in this very informed debate, the saga of GMPs has been long and winding. A series of court judgments has established that men and women must be treated equally in relation to GMPs. That may sound obvious but is actually very complicated because it is quite possible that, in practice, a man and a woman who had the same working history could end up with different GMPs. There are all kinds of issues. The difference in the state pension age meant that women’s pensions accrued more quickly. Revaluation and indexation of GMPs affected men and women differently, and then there is a whole set of complexities around survivor benefits.
GMPs are a legacy issue and contracting out has been abolished, but the historic issues remain, as my noble friend Lord Davies pointed out. The DWP has tried to sort this out without legislating. It consulted and published guidance, but it has never provided sufficient clarity and certainty to draw a line under the issue. It is up to each occupational pension scheme how it goes about equalisation within the law and guidance, but there are still too may risks facing schemes trying to work out how to deal with this, so the Bill seeks to address the legal uncertainty that current legislation can pose when pension schemes seek to adopt a process for addressing equalisation of guaranteed minimum pensions.
As the noble Baroness, Lady Wheatcroft, so correctly said, this is about equality. I am grateful to her for emphasising the need for certainty and simplification, which chimed with the comments made by my noble friend Lady Drake, who rightly reminded your Lordships’ House that pensions are deferred pay. Indeed, they should be as understandable and certain as we expect pay to be.
The noble Baroness, Lady Redfern, has helpfully set out the main aims of the Bill and I confirm the support of these Benches. However, I have some questions. It would be helpful to know what consultation has gone on with the industry about the provisions of the Bill. Can the Minister tell the House whether the Government have taken legal advice that gives them confidence that, if this Bill is passed, there will finally be sufficient legal certainty for occupational schemes which adopt an approach to equalisation within the law and guidance? This is a crucial question because the legal position has continued to evolve. During the debate last year on the order uprating GMPs, my noble friend Lady Sherlock raised the November 2020 Lloyds case, which has been referred to in this debate, when the High Court ruled that formerly contracted-out schemes owed a duty to members with GMPs who had exercised their statutory rights to transfer out benefits to equalise those benefits for the unequal effect of GMPs. She asked the Minister whether the Government planned to issue any further guidance and support to pension schemes in the light of that judgment. In a letter following that debate dated 11 March 2021, the Minister said that the Government had published guidance on the method for equalising pensions for the effect of GMPs and did not think anything further was needed. Will this Bill have any impact on those who have transferred out? Is the Minister still confident that there is sufficient legal certainty for schemes in dealing with this situation?
My noble friend Lady Drake raised the issue that GMP equalisation can have negative tax penalties for some scheme members where any increase to their pension or past transfer penalty flowing from equalisation impacts their annual allowance or lifetime allowance position. I realise that HMRC has published guidance for pension schemes on the tax implications of adjustment payments made as a result of equalising benefits. However, it is extremely complicated, especially in relation to the tax position of the conversion method. The Minister said in a letter after the last GMP uprating debate that more work is being done by HMRC to understand the tax issues associated with the conversion method and that it is working with its industry working group, so my noble friend’s question is a good one. When can we expect to have an answer? After all, it would be a shame if we were to pass a Bill designed to sort this problem out once and for all only to be left with uncertainty in relation to tax matters.
My noble friend Lady Drake asked a number of pertinent questions today. There was one that I particularly wish to emphasise. It was about what happens to people whose pensions schemes are in the Pension Protection Fund—that is, what would happen to people who are due an equalisation who are either in the PPF or on their way in. This is a particularly important question. If it turns out that the Bill should have covered this but has not, I hope that the Minister will assure your Lordships’ House that a way will be found to address it before the Bill becomes law.
Finally, I shall say a word about what happens next with this Bill. The Pensions Minister, Guy Opperman, indicated his support for it, for which we are grateful, but he also said at Third Reading in the other place:
“The reality is that there is no real way for my hon. Friend’s Bill to get through this House and the House of Lords in the time allowed”.—[Official Report, Commons, 25/2/22; col. 659.]
I am hoping this is no longer the Government’s view. Can the noble Baroness tell your Lordships’ House whether the Government believe that the Bill could reach the statute book during this parliamentary Session and, if so, what it will take to get it there?
Having asked the Government repeatedly for legal certainty, we hope that it may finally come through this Private Member’s Bill. I congratulate Margaret Ferrier MP on bringing this Bill through the Commons and the noble Baroness, Lady Redfern, on bringing it to us. I am pleased to offer our support.
The Parliamentary Under-Secretary of State, Foreign, Commonwealth and Development Office and Department for Work and Pensions (Baroness Stedman-Scott) (Con)
My Lords, I first congratulate my noble friend Lady Redfern on the excellent way she introduced this debate. My noble friend has brought to the attention of the House and explained very clearly the need for occupational pension schemes to correct the issue of men and women being treated differently because of the impact of having a guaranteed minimum pension.
As my noble friend reminded us, Members of the House have been calling for this legislation for several years now. I am delighted to say that I can finally give the noble Baronesses, Lady Drake and Lady Sherlock, the assurance that they have been seeking. This Bill, admirably, makes the requested changes to the guaranteed minimum pension conversion legislation and has the full backing of Her Majesty’s Government. I am deeply sad, however, that Lord McKenzie of Luton is not here to see the Bill being debated today; I know that he was a great advocate of this change. I am sure that the whole House will join me in endorsing the tribute that the noble Baroness, Lady Drake, paid to him; he was outstanding in his field and is greatly missed.
My noble friend has set out very clearly and concisely what guaranteed minimum pensions are, why an occupational pension scheme might want to convert them into other scheme benefits and why this Bill is so helpful. I will therefore limit myself to recapping the issue in brief. Guaranteed minimum pensions, or GMPs, were built up in the UK’s occupational pension system between 1978 and 1997. During this period, occupational pension schemes could contract out of the additional state pension; in return, they were required to provide their members with a GMP. As it sounds, this was a guaranteed minimum level of pension with important rights attached, including revaluation, post-1988 indexation and survivor benefits.
The rules for GMPs are subtly different for women and men. For example, women can start receiving their GMP at age 60, while men have to wait until 65. This has resulted in complex differences in the amount of GMP a man and a woman can receive. So complicated are these differences, indeed, that overall, both men and women can in fact lose out, depending on individual circumstances. The key issue being addressed dates back to May 1990, when the European Court of Justice ruled that pensions are deferred pay and must therefore be paid equally to men and to women. The Lloyds case at the UK Supreme Court in 2017 put beyond doubt the question of whether the effects of the GMP rules must be equalised. If a member of a UK pension scheme has GMPs for the period May 1990 to April 1997, their pension needs to be equalised for the negative effect of any differences created by the GMP rules.
It is up to pension schemes themselves to decide how best pensions should be equalised. Individual pension scheme trustees will know more about their members and their scheme rules than government does. However, equalisation is not exactly an easy thing to undertake; we are, after all, talking about complex scheme rules and pensions legislation as they apply to GMPs accrued in the 1990s. Unsurprisingly, therefore, schemes did look to government for help.
My department worked with the pension industry to develop a suggested methodology that uses GMP conversion, and published guidance to help schemes. The basic idea is that schemes can use existing GMP conversion legislation set out in the Pension Schemes Act 1993 to convert the GMP part of the pension into other pension benefits to which the complex GMP rules no longer apply. The whole pension can therefore be equalised to correct for the effects of the GMP rules.
Although this methodology was welcomed by the pensions industry when the guidance was published in 2019, industry also pointed out that the conversion legislation set out in the Pension Schemes Act 1993 is unclear in places. This means that some pension schemes have been unwilling to use it to convert their members’ GMPs in order to fulfil their requirement to equalise. The pensions industry has therefore called on the Government to make amendments to the GMP conversion legislation. These amendments would go a long way to giving schemes more certainty over what they need to do to meet the legal requirements of GMP conversion, and would therefore make it a lot easier for schemes to equalise benefits as part of a GMP conversion exercise. It is these amendments, I should add, to which the noble Baronesses, Lady Drake and Lady Sherlock, referred in previous debates.
The pensions industry has two significant areas of concern about the conversion legislation: first, how survivor benefits must be provided by the scheme once the GMP has been converted, and whether survivor benefits themselves can be converted. Many pension lawyers argue that it is currently unclear exactly how the conversion legislation applies to people who are survivors at the time of the conversion, as well as to the actual earners. Secondly, the pension industry has some concerns as to who exactly needs to consent to a GMP conversion exercise being carried out. The legislation in the 1993 Act specifies “the employer” in relation to the occupational pension scheme, but the identity of this entity may be uncertain given that 30 years may have elapsed since the GMP was accrued.
The Bill before us today responds to these calls from the pensions industry to bring clarity to the GMP conversion legislation. It addresses all of these points and also includes a further amendment requested by Her Majesty’s Revenue & Customs, which saves time and money for both pension schemes and HMRC.
I will speak first about the changes to how the conversion legislation treats survivor benefits. This Bill amends the Pension Schemes Act 1993 to make it clear that the conversion legislation can be applied to someone who is a survivor at the time of the conversion. The Bill also removes the existing legislation setting out what GMP survivor benefits are to be paid when a member’s GMP has been converted, and replaces it with a power for the Secretary of State for Work and Pensions to set out conditions for these benefits in regulations. I today reiterate what my fellow Minister at the Department for Work and Pensions said in the other place: the Government will consult fully on the drafting of these regulations.
These changes are important—survivor benefits provide a crucial source of income to widows, widowers and survivors of civil partnerships. To many people, the knowledge that their surviving spouse or civil partner will receive a portion of their pension is hugely reassuring. It is therefore vital that pension schemes are absolutely clear how survivor benefits must be treated when GMPs are converted, and what survivor benefits must be paid after conversion has been carried out.
Turning to the pensions industry’s concern about how to identify “the employer”, the Bill removes the term “the employer” and replaces it with a requirement for “each relevant person” to consent before a GMP conversion exercise is carried out. Relevant persons will then be defined in regulations.
Finally, both the administrators of occupational pension schemes and officials in HMRC will be delighted to see that the Bill removes the requirement to notify HMRC when a scheme converts its GMPs. In 2019, HMRC published guidance for formerly contracted-out schemes, which made it clear that it no longer required schemes to notify it if GMP conversion had been carried out. However, because this is still a requirement of the Pension Schemes Act 1993, many schemes do still submit this information to HMRC, despite HMRC having no use or need for it. I should be clear at this point that the notification requirement in the 1993 Act did not function as a check by HMRC that a scheme had carried out GMP conversion correctly, or indeed at all; it was simply a notification of facts, which is no longer needed by HMRC.
I shall sum up why Her Majesty’s Government support the Bill. It is with real pleasure that I am able to give the Government’s backing to the Bill that my noble friend Lady Redfern has brought before us for discussion today. It is another significant step in clearing the path for schemes to meet their legal obligation and to equalise for the effects of GMPs. It will be welcomed by the industry, pension scheme trustees and of course the members who stand to benefit from the equalisation of pension benefits.
Some excellent points have been made in this debate, and I am immensely grateful to noble Lords for their interest and insights. Again, I am very sorry that Lord McKenzie is not here today to be part of this debate and see this Bill go through.
I shall deal with some of the specific points raised by noble Lords. The noble Lord, Lord Davies, asked why there is no requirement for consultation with members. When the trustees of a scheme decide to use GMP conversion to convert GMPs into ordinary scheme benefits, they are required to take all reasonable steps to consult in advance the people whose GMPs will be converted. The noble Lord asked about government guidance. We will revisit the guidance following the passage of the Bill and update it to reflect recent developments, including this legislation.
I wholeheartedly agree with the noble Baroness, Lady Wheatcroft, about equality going both ways. That is something that in my role as Minister for Equalities I intend to do. She asked, quite understandably, why it has taken so long to get to this position. The Government have been clear that, in light of the Barber judgment of 17 May 1990, occupational pension schemes need to equalise pensions accrued from that date to take account of the unequal effect of guaranteed minimum pensions. The High Court judgment in 2018 put beyond doubt that occupational pension schemes must equalise pensions to address these inequalities.
The noble Baroness, Lady Wheatcroft, raised the issue of the content of the survivor benefit regulations. The honourable Member for Rutherglen and Hamilton West’s Bill generously gives the Government the ability to set out in regulations the details of how survivor benefits will work for the surviving spouses or civil partners of people with guaranteed minimum pensions. The Government are aware of how important survivor benefits can be, as I have said. We will therefore work with the pensions industry on the details and then consult on the draft regulations. The noble Baroness asked how many people are affected. I can confirm that there were around 8 million people with contracted-out memberships at the final count in 2015.
The noble Baroness, Lady Drake, asked what the implications are for members in PPF assessment or those who might go in. I thank her for raising the question of whether there are any implications for schemes going into the Pension Protection Fund, and I will write to her and place a copy of the letter in the Library.
The noble Baroness, Lady Drake, asked whether the Bill would give schemes the legal certainty that they have been seeking in order to enable them to use GMP conversions to meet their equalisation obligations. The Government are confident that the Bill and the regulations that will be made if it is passed will address the concerns that the industry has raised. It will give the schemes the certainty that they have been seeking.
We should give our best wishes to the noble Baroness, Lady Sherlock. I will confirm to her that her colleague, the noble Baroness, Lady Merron, has done an admirable job in representing her.
The noble Baroness, Lady Merron, asked about the tax impacts and what HMRC is doing—specifically, when will HMRC provide guidance on the tax position? HMRC will publish supplementary guidance in the coming weeks on the tax implications of conversion as well as highlighting to industry where tax issues could arise for certain types of member. HMRC is working with industry, DWP and Her Majesty’s Treasury to determine the appropriate outcome and treatment for those affected by conversion as well as the scope and timing for any legislative changes.
The noble Baroness asked me if we could get the Bill through and what it would take. It would take the Bill having its Second Reading approved and no amendments being tabled. That is why it is important that I and my colleagues work hard, in the short period we have, to ensure that all questions are answered. As to that, I give the undertaking, which I have given on numerous occasions, that we stand ready and the door is open to do that in the time available.
The noble Baroness, Lady Merron, asked if the Bill would have an impact on those who have transferred out. Trustees will need to revisit past statutory transfers and assess what steps they should take in relation to members who transferred their benefits out of the scheme without being equalised for the effect of the GMP rules. Trustees of occupational pension schemes will have to make their own decisions, and different schemes are likely to have different approaches. Trustees will need to take advice on how they should approach unequalised transfers.
The noble Baroness asked whether the Bill should have covered the position on members in the PPF or who might go in. I have given the answer to the noble Baroness, Lady Drake, that we will write, and the noble Baroness, Lady Merron, will receive a copy of that letter.
The noble Baroness, Lady Merron, asked about reaching the statute book, and I think I have answered that question. She asked what consultation there had been with the industry. I am happy to confirm that we have had extensive consultation with the industry through the GMP equalisation industry and government working group.
Ensuring that no one loses out on pension income as a result of the complicated rules around guaranteed minimum pensions is important, and this Bill will help occupational pension schemes to better achieve that.
Baroness Redfern (Con)
My Lords, I thank the noble Lord, Lord Davies, and the noble Baronesses, Lady Wheatcroft and Lady Drake, for their contributions today. In particular I thank my noble friend Lady Stedman-Scott and the noble Baroness, Lady Merron, for their support for the Bill. I thank the staff who have so ably guided me through the Bill. I particularly thank Margaret Ferrier, who very ably steered it through the other place so that it might be debated here today.
Correcting this basic issue of financial differences in people’s hard-earned pension income is important. I am heartened and grateful to see that there is clear cross-party agreement on this issue. I beg to move.
Pension Schemes (Conversion of Guaranteed Minimum Pensions) Bill
Thursday 7th April 2022
(2 years, 7 months ago)
Lords ChamberRead Full debate Pension Schemes (Conversion of Guaranteed Minimum Pensions) Act 2022 Read Hansard Text
Baroness Redfern (Con)
My Lords, I understand that no amendments have been set down to the Bill and that no noble Lord has indicated a wish to move a manuscript amendment or to speak in Committee. Unless, therefore, any noble Lord objects, I beg to move that the order of commitment be discharged.
Motion agreed.
Pension Schemes (Conversion of Guaranteed Minimum Pensions) Bill
Wednesday 27th April 2022
(2 years, 6 months ago)
Lords ChamberRead Full debate Pension Schemes (Conversion of Guaranteed Minimum Pensions) Act 2022 Read Hansard Text
Baroness Redfern (Con)
My Lords, I wish to emphasise again that this is a rather technical Bill, which has been made easier because some noble Lords here in the House today are very knowledgeable in this area. Those who spoke during the progress of the Bill have made it very clear that this is an important and long-awaited Bill. There cannot be many Private Members’ Bills that have been repeatedly called for in other debates over the course of several years.
This Bill was expertly presented and taken through the other place by Margaret Ferrier. I thank her, the departmental officials and my right honourable friend the Minister for Pensions for all the work that was done to get this Bill to this place. Though it might look complex as a piece of legislation, the Bill has a simple purpose of helping pension schemes meet their legal obligations. Specifically, it will help occupational pension schemes use the GMP conversion to correct the issue of men and women being treated differently in formerly contracted out defined benefit occupational pension schemes because of the impact of having a guaranteed minimum pension.
It is therefore with very great pleasure that I stand here today to present this Bill as it reaches its final stage in this House.
Baroness Sherlock (Lab)
My Lords, I briefly pay tribute to all involved in this Bill, including Margaret Ferrier MP, who steered it through the other place, and the noble Baroness, Lady Redfern, who has done the same for us here.
As the noble Baroness said, my noble friend Lady Drake and I can now stop badgering the Minister for a Bill on GMP equalisation. Although the Government Whips never did come through with government time, I commend the DWP for its wholehearted support of a Private Member’s Bill that happened to cover just the right territory at just the right time.
Baroness Scott of Bybrook (Con)
My Lords, I must again thank my noble friend Lady Redfern for presenting this Bill so ably today. I am pleased to be to here to give my support, and that of the Government, to the Bill. It is an important step towards schemes finally laying to rest the issue of the unequal effect of guaranteed minimum pensions. I pay tribute to my noble friend for her stewardship of the Bill and to other noble Lords who have contributed their views during its passage through the House.
I pay tribute to the late Lord McKenzie of Luton. I am saddened that he is not here to see this Bill through today, and I know that many others here feel the same way.
It is also right that we acknowledge and thank Members of the other place for their contribution. Margaret Ferrier, the honourable Member for Rutherglen and Hamilton West, took the Bill through. It is down to her, and to my noble friend Lady Redfern, that we have the Bill in front of us now. I also thank the Members in the other place who contributed to the debates on the Bill. The cross-party support the Bill has achieved in both Houses shows the long-standing commitment of Members to resolve this issue. This Bill will now provide the industry with the legal clarity it has been seeking in relation to GMP conversion legislation. Once again, I thank my noble friend Lady Redfern and express my and the Government’s strong support for the Bill.