(13 years, 8 months ago)
Grand CommitteeRead Hansard Text Read Debate Ministerial Extracts
The Deputy Chairman of Committees (Lord Geddes)
My Lords, as is usual on these occasions, I must remind the Committee that, if there is a Division in the Chamber while we are sitting, the Committee will adjourn as soon as the Division Bells are rung and resume after approximately 10 minutes.
Clause 10 : Certification that alternative to quality requirement is satisfied
Amendment 42
Lord McKenzie of Luton
Lord McKenzie of Luton
My Lords, I shall also speak to Amendment 43. Concerns about levelling down have been raised throughout the development of the auto-enrolment proposals. In an attempt to predict the likely occurrence of this, a range of interested parties, including the DWP, have carried out surveys. The Johnson report summarises its view on the position on page 63. It says that,
“taken as a whole, the bulk of evidence suggests only limited reductions in pension contributions as a result of the reforms. Surveys by Fidelity, Capita Hartshead and the CBI consistently report that around seven in ten employers are not planning to revise or reduce their current levels of provision, and the National Association of Pension Funds found only three per cent of employers planning to reduce contributions for existing members”.
The thrust of this is to be broadly welcomed, but we accept that differing definitions of qualifying earnings and perhaps more traditional definitions of pensionable pay can add to uncertainty, although I believe that the previous Government made it clear that it was the quantum of contributions rather than the basis of calculation that was important. This issue prompted the search for a process of certification that allows an employer to certify overall that schemes satisfy the relevant quality criteria for defined contribution schemes. That in theory avoids the necessity of demonstrating in respect of each employee by detailed calculation that the minimum contribution on the basis of qualifying earnings as defined in the Bill has been met. That is easier said than done. I recall a number of meetings with stakeholders trying to unlock this conundrum of wanting to encourage employers to stay with existing but quality schemes on the one hand but being reassured that auto-enrolment worked for all, especially those who had been shut out of pension savings in the past.
Clause 10 introduces an alternative requirement to the quality requirement set down in existing legislation that will enable a scheme to be used for auto-enrolment. It is to this that Amendments 42 and 43 relate. The Bill states:
“In prescribing an alternative requirement … the Secretary of State must be satisfied that, in all or most cases, a scheme will be able to satisfy the requirement only if … for a majority of individual relevant jobholders, and … all relevant jobholders taken together”,
the relevant quality requirements in respect of employer and total contributions are met. Our amendment would require the Secretary of State to be satisfied in respect of all cases and for more than a majority of individual relevant jobholders. We have defined this as 95 per cent or all routinely.
My first question to the Minister is why the Secretary of State cannot seek to be satisfied in respect of all cases for which an alternative requirement is prescribed. What are the sort of exceptions considered desirable or acceptable, and why?
My second question relates to new subsection (2A). The alternative requirement needs to ensure that for all jobholders or a cohort—the relevant jobholders—sufficient employer and overall contributions are paid to satisfy the relevant quality requirement. However, it also requires this to be the case for individual relevant jobholders, but only for a majority of them—50 per cent plus one. Clearly, this could lead to significant numbers of individuals missing out. The aggregate requirement could be met by more generous contributions for some jobholders with less than qualifying amounts for others.
The Delegated Powers and Regulatory Reform Committee refers to this as a significant power, as, indeed, it is. We are obviously aware of the proposed certification model on which the DWP is working. The Minister may want to update us on progress. The proposal is based on employee’s pensionable pay from pound one and has three steps: a 9 per cent minimum for each jobholder; an 8 per cent minimum for each jobholder where pensionable pay in aggregate equals at least 85 per cent of total pay; and 7 per cent for each jobholder where 100 per cent of pay is pensionable. It is understood that this may give some 92 per cent coverage, but the Minister might like to explain precisely what this coverage is. What analysis has been undertaken of the 8 per cent who presumably would not, on an individual basis, have a minimum contribution paid on their behalf?
However, our focus is not only on how this particular scheme would work; it is crucially on the powers that it is proposed to enshrine in primary legislation. Should a Secretary of State be so minded—I certainly do not contend that this is the case at present—an alternative requirement could allow nearly half of all jobholders to be short-changed. This is simply not acceptable to us and we urge the Minister most strongly to look at these powers again. I beg to move.
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud)
My Lords, I thank the noble Lord, Lord McKenzie, for his amendments to Clause 10. These amendments would require the Secretary of State, before making regulations on certification, to be satisfied that in every scheme at least 95 per cent of individuals would receive contributions no less than the statutory minimum. It is my understanding that these amendments may have been introduced to seek assurances that individuals will not potentially lose out under the proposed certification arrangements. The noble Lord made that clear in his remarks. I very much share his concern. That is why we have developed a certification test that balances simplicity with safeguards. The high-level certification requirements in Clause 10 will allow for a straightforward test of scheme quality to be set out in regulations for employers who calculate their pension contributions on basic pay rather than qualifying earnings but offer good-quality money purchase pension schemes. These employers will be able to demonstrate that their schemes meet the minimum quality requirements.
It might help if I briefly describe the certification test in the form that it is envisaged it will take in regulations. Contributions start from pound one and the test itself is based on three graduated tiers. Setting the first tier of the certification test at 9 per cent of basic pay provides a straightforward benchmark for schemes. We expect that a contribution of 9 per cent of basic pay will be a better deal than 8 per cent of qualifying earnings for 95 per cent of individuals who work in the private sector and who are eligible for automatic enrolment. Employers who make slightly lower contributions of 8 per cent or 7 per cent of basic pay will be able to certify that contributions must be based on a set ratio of pensionable pay to total pay. In the latter case, all pay must be pensionable. Employers using certification will be able to increase their contributions gradually. The precise details of how this will work will be set out in secondary legislation.
We worked collaboratively with key stakeholders, including the National Association of Pension Funds, the Association of British Insurers, the Confederation of British Industry, the Society of Pension Consultants, accountants and lawyers in designing the certification model. Employers and trade unions have broadly welcomed the certification arrangements as a pragmatic solution to a difficult problem. I hope that we have managed to unlock the conundrum referred to by the noble Lord, Lord McKenzie.
In designing the certification model, we addressed two risks: first, that there would be a significant detriment to individuals; and, secondly, that any certification test would be too complex. It is important that we get the balance right, as we do not want to encourage employers to level down to the statutory minimum, resulting in lower contributions for many of their workers. To protect individuals, the certification test broadly equates to the statutory minimum quality requirements for money purchase schemes: a contribution equivalent to 8 per cent of qualifying earnings. However, it uses basic pay from pound one rather than qualifying earnings. Basic pay is the key to simplification and to risk, as it varies across employers. Based on the analysis that underpins the certification model, we estimate that, for more than 90 per cent of people employed in the private sector who are eligible for automatic enrolment, basic pay is greater than or equal to qualifying earnings—I hope that that answers the question posed by the noble Lord, Lord McKenzie. That is because the basic pay calculation is made from pound one, rather than on just a band of earnings. In view of this, we believe that many people will get higher contributions under basic pay. We can monitor and mitigate the risk to individuals and take action if necessary. The bigger risk here is levelling down.
The amendment would require the Secretary of State, before introducing certification in regulations, to be satisfied that for every relevant scheme 95 per cent of the individual jobholders receive at least minimum-level contributions. We would not be able to regulate for the certification test that we currently envisage, which has been welcomed by employers and key stakeholders. In effect, we would be back to square one and would have recreated the conundrum. To make regulations, the Secretary of State would have to introduce a test that required the individual checking of each jobholder’s contribution records. That would make the test more complicated. Alternatively, he would have to set a much higher bar. Employers have told us that the former would impose an unacceptable burden and they would seriously consider levelling down to the legal minimum.
We are aware of the risk of individuals losing out, as the noble Lord pointed out. We have made a commitment to fully evaluating the effects and implementation of the reforms. This will include a proportionate check to ensure that the regulations are operating as expected and that there are no unintended consequences for individuals, employers or industry as a result of the reforms. To minimise the number of individuals losing out, we will monitor trends in the various components that make up an individual’s wage packet in our annual surveys. The data will enable us to monitor trends in pay and reward packages to identify any significant shift in earnings patterns. Our data collection enables us to monitor pay patterns by firm size, occupation and industrial sector. If the data suggest that self-certification is being abused, or more individuals than expected are losing out, the Secretary of State will have the power to tighten or repeal the legislation.
The noble Lord asked about clarity and what Clause 10 means by “a majority”. In this case, a majority means 50 per cent plus. However, the analysis on which the certification model was developed suggests that we can surpass this and other conditions. As I said, we estimate that, for 90 per cent of people employed in the private sector, basic pay is greater than or equal to qualifying earnings.
I believe that we have the right balance that allows an administrative easement for employers and provides safeguards for individuals. I hope that this will go some way towards reassuring the noble Lord, Lord McKenzie. I therefore urge him to withdraw his amendment.
Lord McKenzie of Luton
My Lords, I am grateful to the Minister for his explanation of what is proposed for the certification model, its monitoring and the follow-up work that will be done. However, our basic concern is not the certification model, which has been worked up and, I accept, will be taken forward, but what is in primary legislation about what a Secretary of State can do. As it is written, a Secretary of State could bring forward alternative regulations that meant that only 50 per cent plus one of individual relevant jobholders would be provided for as they should be. It is the broad nature of the primary power that is our main cause of concern. It is a very wide power. What is to stop a Secretary of State bringing forward alternative models?
Lord Freud
I need to answer that, as it is clearly the noble Lord’s core question. The Bill circumscribes the Secretary of State’s powers by providing that, when prescribing certification requirements in regulations, the Secretary of State must be satisfied that, first, in respect of all or most cases, the total contributions paid by the employer and the jobholder together will not be less than if the scheme had met the relevant quality requirement; and, secondly, this must be the case both for a majority of the jobholders in a scheme and for all the jobholders in a scheme taken together.
Lord McKenzie of Luton
My Lords, I am grateful for that, but it does not help me. My problem is that there might be arrangements whereby some of the relevant jobholders—under the provision, you can choose what cohort of jobholders you want to look at; it is not all employees at any one time—could be well provided for and others not. The second part of the test, which looks in aggregate, would be met; all you have to do to satisfy the first part is for 50 per cent plus one of the individuals to be covered. Unless I am misreading that, and I do not think that I am, that is our bone of contention.
Lord Freud
I can give the noble Lord some reassurance. The regulations are affirmative, so we will have the opportunity to debate them at that point.
Lord McKenzie of Luton
With great respect to the Minister, I have trotted that one out myself a number of times. As we know full well, we cannot amend affirmative regulations, although they give an opportunity for debate.
This is a serious issue and a potential loophole in the legislation. I do not suggest for a moment that the Minister or his current colleagues would seek to exploit it; I accept that they are focused on working up a practical scheme. However, this is too wide a power to be left in primary legislation. I urge the Minister to reflect on that and perhaps discuss it with his colleagues to see whether it could be narrowed. We would be more reassured if the terms of the certification model were placed in primary legislation. We do not think that that is necessarily a perfect fit, but it would be a good deal better than the very wide discretion that the Secretary of State will have at present. I accept that that is not in the Government’s thinking at the moment, given the model that is being developed.
I am reassured about the monitoring of the model to be undertaken. I will need to read the record, but I thought that the Minister was saying that we could still end up with 10 per cent of people in schemes who would not fall within its ambit. If that is right, 10 per cent is a big chunk of the people whom we are trying to get into pensions saving. On that point, unless the Minister has anything further to say, I am happy to read the record, because I know that we will come back to this point on Report.
I seriously urge the Minister to consider my first point, because it is a serious problem with the clause and one that we want to follow through. Having said that, I am grateful for the information that the Minister has provided and beg leave to withdraw the amendment.
Lord Freud
“( ) In section 32 of the 2008 Act (power to modify by resolution) in subsection (1)(b) for the words after “the scheme” substitute “to satisfy—
(i) the requirements contained in section 20(1),(ii) those requirements as modified under section 24(1)(a), or(iii) a requirement prescribed under section 28(2)(b).””
Lord Freud
My Lords, I shall speak also to government Amendment 45. The backdrop to many of the measures set out in Part 2 of the Bill is to provide employers with greater flexibility and to ease their burdens. These amendments continue that practice.
With regard to Clause 10, Amendment 44 introduces an amendment into Section 32 of the Pensions Act 2008. The purpose of the amendment is to make it easier for employers, in collaboration with their scheme trustees or managers, to make certain improvements to their occupational money purchase pension scheme and some hybrids to meet the requirements of a certification test. The modification powers in Section 32, as amended by Clause 12, enable trustees or managers to make certain improvements to their scheme by resolution with the employer’s consent to comply with the automatic enrolment requirements. Amendment 44 extends this facility to employers using certification.
Self-certification will provide employers with a straightforward way of ensuring that their money purchase pension scheme satisfies the relevant quality requirements. Employers intending to use self-certification will need to ensure that their scheme satisfies the relevant requirements both at the outset and on an ongoing basis. We have just debated the self-certification option. The point is that this amendment will make it easier for employers, in liaison with their trustees, to make improvements to their schemes in order to comply with the automatic enrolment requirements.
Government Amendment 45 is a technical amendment to Section 30 of the Pensions Act 2008. Section 30 allows employers who are using defined benefit and hybrid schemes to defer the automatic enrolment date for jobholders when certain conditions are satisfied. Where certain conditions cease to be satisfied during the transitional period, the employer must ensure that the jobholder is enrolled into an alternative scheme.
At present, the Pensions Act 2008 restricts the employer to using either another defined benefit or hybrid scheme, or a money purchase scheme, as the alternative scheme. The amendment provides employers using defined benefit or hybrid schemes with greater flexibility around their choice of an alternative automatic enrolment scheme. It will allow employers to choose to enrol jobholders into a personal pension scheme. This is in line with the original policy intent of giving employers maximum flexibility.
Under the amendment, we intend to amend the automatic enrolment regulations to ensure that an employer who intends to use a personal pension scheme for this purpose provides the jobholder with information about the scheme. This mirrors the existing arrangements for money purchase schemes and therefore provides parity. As has already been mentioned, the amendment will ease burdens on employers and provide them with greater flexibility.
To address the concern about whether employers might abuse these amendments, we will monitor trends along with pay and reward packages. If we identify that employers are manipulating the test, the Secretary of State has the power to strengthen the test or, as a last resort, to repeal the legislation. I beg to move.
Baroness Drake
My Lords, as anticipated by the Minister, I rise to express reservations about government Amendment 44, which continues to give rise to the anxieties expressed by my noble friend Lord McKenzie. While on the face of it the amendment appears to be somewhat benign, aimed at improving the drafting of the Bill, on more detailed reading it raises anxieties, certainly in my mind. As I understand it, this amendment would allow trustees to change pension scheme rules to enable their employers to meet the regulatory test set by the Secretary of State for the alternative requirement for certifying that their scheme meets the qualifying earnings contribution standard—the alternative requirement regulatory test, which my noble friend Lord McKenzie was addressing in Amendments 42 and 43.
My anxieties are twofold and I will try not to be too technical in addressing them. First, the intention behind the regulatory test for the alternative certification to the normal statutory quality requirement was, I believe, to assist good employers who run good schemes but who use a definition of pay for pension purposes other than earnings. However, either their scheme meets the test or it does not. An assessment against that proposition should stand or fall on its own merits. Having made the concession of an alternative qualification test, surely one cannot allow scheme trustees to change their scheme rules in order that the alternative regulatory test is met. That strikes me as changing the original intention of the alternative test and encouraging arbitrage by bad employers, particularly if that regulatory test is weakened, because if a bad employer—and I know that good employers will not do this—can see the benefit of redistributing pay between base pay and other elements of earnings, they may be able to avoid paying contributions on a segment or proportion of members of their workforce. If we have good employers—and the primary intention of this regulatory test is to allow them to show that they are good employers—I do not see why the proposition cannot stand or fall on that basis and why we need to allow subsequent amendments to the scheme rules.
Secondly, the Bill allows for the regulatory test, as my noble friend Lord McKenzie has said, to make an assessment for an employer’s workforce as to whether it meets the contribution requirement at the aggregate level. However, it allows simply for an assessment for a majority of employees at the individual level and, in that way, the regulatory test can still be met. This amendment appears on the face of it to allow trustees to change their scheme rules, with the effect that some individuals are made worse off, under both the scheme rules and the statutory provisions, because no one has disputed that it is possible for some individuals—maybe up to 5 per cent or more, even on the Government’s own arguments—to be excluded from a contribution to which they might have had access if the statutory provisions had been strictly applied. However, we now find the situation where a group of individuals could be made worse off—not only under the statutory provisions but also under their scheme rules—but where an employer can still meet the regulatory test.
I am also concerned that this regulatory test could be made weaker. The consultation on the regulatory test, as outlined by the Minister, has not concluded. We know that it is ongoing, so we do not know what will eventually be brought forward in the regulations. If the regulatory test becomes weaker, the problem could become worse, because there is an even greater incentive to change the scheme rules to take advantage of that regulatory test. Therefore, I have reservations.
Lord Freud
My Lords, I thank the noble Baroness, Lady Drake, for pinpointing her concerns around this. Let me try to address those issues. It is important that we try to disentangle the concerns surrounding the previous amendment from this amendment, which represents a fairly technical and, I will argue, wholly benign approach. Clearly this must be done by trustees who have a duty to pensioners and future pensioners. They can change the rules only to facilitate automatic enrolment or to raise the contribution rate to comply with relevant scheme quality requirements, and those changes can be made only with the consent of the employer. So it is an upwards-only adjustment in practice under this amendment—I am not talking about the issues that we discussed under the previous amendment. The trustees must consider the interests of existing members in that decision.
On whether employers will be able to manipulate the certification requirements by transferring workers from one tier of the test to another, which is behind the noble Baroness’s concern, we want to encourage employers wherever possible to retain their existing schemes, which in many cases will have been structured to suit the profile of their workforce and their business model. That flexibility is important to employers. We are therefore making it easier for them, in liaison with their trustees, to meet the automatic enrolment requirements by means such as the self-certification test for money purchase schemes and hybrids.
If a large employer wanted to take advantage of the greater flexibility of the first tier of the test—the 9 per cent contribution tier—it would have to consult the workers if the scheme on offer was an occupational pension and doing so meant a rise in contribution for workers. Any change resulting in a reduction in the amount of employer contribution in respect of a money purchase occupational scheme would require larger employers to consult their affected workers. Employers using contract-based schemes to discharge their enrolment duties would have to alter the individual contracts.
Let me briefly recap the Government’s case for making the amendments. The amendment relating to Section 32 of the Pensions Act 2008 will make it easier for employers and trustees to make improvements to their schemes so that they meet the requirements of the self-certification test. The amendment to Section 30 of the Pensions Act 2008 will give employers greater flexibility where the transitional arrangements for defined benefit and hybrid schemes cease to apply. In such cases, the amendment will allow employers to use personal pension schemes, as well as money purchase, defined benefit and hybrid schemes, as replacement schemes. These two minor and technical amendments will provide employers with greater flexibility.
Lord Freud
“Arrangements where transitional conditions cease to be satisfied
In section 30(5) of the 2008 Act after “money purchase scheme” insert “or personal pension scheme”.”
“Power of trustees to allow early access to lump sums
After section 32 of the 2008 Act (power of trustees to modify by resolution) insert—“32A Power of trustees to allow early access to lump sums
Providing that the jobholder has at least £10,000 in his or her pension scheme, upon application to the trustees of the qualifying scheme or automatic enrolment scheme a jobholder may withdraw up to 25% of the total sum accrued at the time of the application in the jobholder’s NEST.””
Lord McKenzie of Luton
The amendment is not moved, although I think that my noble friend Lady Hollis wants to bring it back on Report.
Baroness Turner of Camden
Baroness Turner of Camden
My Lords, my amendments are an attempt to deal with the Government’s intention to replace the retail prices index with the consumer prices index as the indexation for pensions in payment. That was raised on Second Reading, and I am sure that everyone is aware that a lot of people have already voiced opposition to that because it is felt that people will suffer very much in their expectation—mostly people who are already receiving pensions.
I understand that people in the public sector have already received notification that they will be receiving the lower amount rather than an increase in line with the retail prices index. A number of them feel very angry about it. My own sister, who is a retired teacher, has phoned up to complain to me about it, and I am not surprised. I have already read quite a lot of material from the TUC, which supports the view that it is not fair. That view has also been expressed extensively by Saga, which has been writing to a number of people on the Committee about the Bill, and I support what it has been doing.
The situation regarding public sector workers is that although there is a lot of talk about public sector pensions being gold-plated and so on, many people working in the public sector do not get paid large amounts of money. Women in the public sector are usually on salaries of between £4,000 and £5,000, and even the loss of a relatively small amount of money means quite a bit to people at that sort of pension level.
With regard to the private sector, the Government have been instructing the pension providers that they have to inform their pensioners that in future the increases will be in relation to the consumer prices index rather than the retail prices index, and their obligation is simply to notify people that that will be their situation. I believe that that has already happened in the private sector. I understand, however, although I am not sure, that if your pension is provided on contract and the contract provides for retail prices index increases, that will not be interfered with by the Government’s new ruling.
One of the reasons why people feel it is so unfair is that we are now in a situation where inflation is running at 4 per cent and everyone expects it to go up—the papers are full of information about how we can expect the cost living to rise substantially—and at the same time many of the people in this category, who were advised to save and have been saving, find that their savings are not worth what they once thought they were, because there has been nothing much by way of interest on their savings. Many of these older people feel that they are losing out twice; they are not getting what they expected with the retail prices index increases, while at the same time the savings that they have been prudentially putting aside are not going to produce the kind of increases or support that they had expected to receive. For those reasons, both Saga and the TUC have been pressing for this to be reviewed. The situation is not fair, and I hope that the Government will be prepared to look sympathetically at their request.
With regard to Amendment 48A, with which my two amendments are grouped, I understand that my noble friends Lord McKenzie and Lady Drake are anxious to soften the blow a bit by providing for the whole thing to be reviewed. I understand that and I respect what they are trying to do. Nevertheless, I want the Government to look again at the whole issue of the retail prices index, as there is a lot of concern about it. I beg to move.
Lord Boswell of Aynho
My Lords, I oppose the amendment. I should perhaps declare that I, too, have members of my family—two daughters, in fact—who are in public sector pension schemes, and of course one hears comments of the sort that have been honourably and properly recorded by the noble Baroness. There are many people in the private sector who for a variety of reasons, not necessarily where their schemes have collapsed into the Pension Protection Fund, are feeling some stress as well. That needs to be said.
I would just say that although I did not respond to the Minister on his remarkable presentation last night with regard to the social security uprating orders, I was actually convinced by it, which I am not wholly sure that I had been until he gave that presentation. It is a change that we have to make, particularly bearing in mind that there are alternative arrangements for retirement pensions which will meet the triple test and will accelerate state retirement pension levels rather faster than the CPI.
I will make one further comment on Amendment 48A and the scheme proposed by the noble Lord, Lord McKenzie of Luton. I understand the motivation, but it is asking for a report on one-hand clapping, as the Zen Buddhists would say. It would be better expressed if it called for a report on the relative impact of the use of the CPI and of the retail prices index. We would then have some measure of comparison. As all noble Lords are aware, historically the CPI has run ahead of the RPI. My noble friend last night made representations about why this was overstating the problem and arguably would overcompensate recipients.
That leads me to make a technical comment of my own, to which my noble friend may want to respond. As one takes the heat off the RPI, it will become less immediately salient, although it will still be used and reportable for a number of purposes. As that happens, given the types of interaction and substitution effects that were rehearsed last night, it may be that it will cease to be of quite the utility that it was. Somewhere at the back of my mind—I must say it while I remember it, and hope that I still can—are my scribbled lecture notes of 45 years ago that I took on the Laspeyres and Paasche indices, and on all the different impacts of these complications. I implore noble Lords not to ask me to explain to the Committee how they work, but I will make the point that as we shift the emphasis to the CPI—that will surely be an irreversible shift, and I have given reasons for supporting the concept—the RPI will move out of focus and could become distorted in the uses for which it is still employed. Perhaps the Minister will give me some assurance that it will retain its integrity even if it is not being used for these uprating purposes.
Lord McKenzie of Luton
My Lords, I will speak to Amendment 48A in this group. I start by acknowledging the criticism made by the noble Lord, Lord Boswell, of the drafting; I very much take his point. I am also intrigued that he can read his notes after 45 years. I struggled today to read the notes that I made yesterday.
Amendment 48A calls for a triennial report to assess the impact of using the consumer prices index as the measure of inflation. It seeks that assessment from, among others, pension scheme members, employers, taxpayers and PPF levy payers. It is an opportunity to reflect on what has become known as the RPI/CPI switch. We stated in the other place, and again in our debate yesterday on benefit uprating, that we cannot support the decision to adopt on a permanent basis the CPI as currently constructed for the determination of benefit uprating and of pension revaluation and indexation. However, if our understanding of the process and legislation is correct, we do not need more amendments to the Bill to secure any change in future—which may help my noble friend Lady Turner. Issues of uprating pensions, including the BSP, S2P, public sector pensions and occupational pensions, are determined annually. These are undertaken by the increase in the general level of prices, which is generally not specified to be RPI or CPI, or indeed any other measure. Therefore, if I am right, a future Secretary of State could take a different view on the most appropriate measure of the increase in the general level of prices, and without the need to change primary legislation. The situation with regard to the PPF is similar. Clause 15 removes references to the retail prices index and substitutes,
“the general level of prices in Great Britain”.
But that does not lock in the CPI for all time. If I am wrong on that, perhaps the Minister will let us know, because we might want to table further amendments on Report. That runs also for the provisions of Clause 14, which my noble friend has addressed.
The change to uprating the various facets of pensions by CPI—subject to statutory caps—will, as we know, have a significant impact, particularly over time. We obviously accept that for the basic state pension, where we support the re-linking to earnings, which will provide the long-term determination of the basic state pension. For private sector occupational schemes, the extent to which the CPI ends up being used for revaluation and indexation depends on the scheme rules, and we support the Government in not pursuing the override. Nevertheless, the updated impact assessment produced by the DWP in February shows that the total cost in terms of reduction in the anticipated value of members’ pension rights—including the stock as well as the flow of pensions—is something like £86 billion, which is a considerable sum. This is not a deficit-reduction saving; it is an almost equal and opposite benefit for sponsoring employers, and there are consequential benefits to the PPF and levy payers.
Lord Freud
My Lords, I thank the noble Baroness, Lady Turner, and the noble Lord, Lord McKenzie, for their amendments, which I will address in detail in a moment. Before I do, I would like to set the context.
The legislation covering statutory increases to private sector occupational pensions requires the Secretary of State to make a judgment about the increase in the general level of prices in Great Britain up to the end of September each year. This judgment forms the basis of an annual order setting minimum statutory indexation and revaluation percentages to be used by occupational pension schemes in the next calendar year. As noted yesterday by the noble Lord, Lord McKenzie, the revaluation order was laid in December last year and the order providing for public sector pension increases will be laid shortly. They are not the subject of the Bill.
Clause 14 could best be described as technical and consequential. It makes changes to important but relatively minor provisions. I know that many noble Lords hold strong views on the Government’s decision to use CPI; it was the topic of extensive debate on Second Reading, and it was discussed at length yesterday. In response to the question of the noble Lord, Lord McKenzie, about how much the hands of a future Secretary of State are tied, I can let him know that he is correct in his presumption that the Secretary of State can take a different view and go back to RPI without a Bill if that is their decision. The CPI is a matter of coalition policy now.
It is not my intention to labour any further the methodology or our reasons for adopting the CPI. I think that that is now a matter of record. I will just pick up the noble Lord on one little point that I cannot resist: he asked whether people really substitute. I tried to explain yesterday how there has been extensive research into whether the practice matches the theory, and the research has all come out to say yes, it does. That is how I respond to that point.
Lord McKenzie of Luton
That was not my own judgment; I am not a statistician. It was the Royal Statistical Society that raised that issue.
Lord Freud
I am most pleased to take this opportunity to inform the Royal Statistical Society of the results of extensive research, which I know it will take into its considerations when it looks at this again.
I think that it would help if I set out exactly what Clause 14 does and why. It does two things. First, it addresses some peripheral references to RPI in occupational pension legislation that need to be removed or amended to ensure that the Government’s decision to use CPI as the best measure of inflation is applied consistently from now on. Secondly, it addresses the so-called “CPI underpin” issue. That arises where a scheme carries on increasing pensions in payment by the RPI. As the statutory minimum is calculated by reference to the CPI, such schemes would be required to track both the CPI and RPI and pay the higher, a bit like the old escalator in the funhouse in Tivoli in Copenhagen. We have made it very clear that statutory increases are minima, and we do not want to discourage schemes from making higher increases. Consequently, the clause before us ensures that schemes that continue to increase by reference to RPI are not subject to this funhouse ratchet effect.
The first reference to RPI is in Section 84 of the Pension Schemes Act 1993. This is a fairly obscure provision that caters for special arrangements in schemes which provide full uncapped revaluation on the whole pension including the guaranteed minimum pension. Clause 14(1) to (3) replaces the explicit reference to RPI in Section 84 with a requirement that these schemes must maintain the value of the pension in line with the rise in the general level of prices. This ensures that Section 84 provides for uprating in the same way as the other pension legislation.
The noble Baroness’s first amendment, reinserting a reference to RPI, effectively does nothing more than revert Section 84(5) to what it already says. It will certainly not restore RPI indexation or revaluation more generally.
The second reference we are addressing in Clause 14 is in Section 40 of the Welfare Reform and Pensions Act 1999. This concerns the indexation of pension credit benefits, which are pension rights deriving from a pension sharing order made as part of a divorce settlement. Clause 14(6) to (8) replaces the existing reference to RPI with a cross-reference to the inflation percentage adopted by the Secretary of State for the purpose of the annual revaluation order. The remaining part of the clause concerns Section 51 of the Pensions Act 1995. Section 51 sets out the requirements for indexation of pensions in payment.
The amendments to Section 51 of the Pensions Act 1995 in Clause 14 will also ensure that where schemes continue to increase pensions by RPI they need not carry out an annual comparison of the RPI increase required under the scheme rules and the statutory increase using CPI and pay the higher of the two. If a scheme increases pensions by reference to RPI, and has done so since the start of January 2011, then it will escape the statutory requirements of Section 51(2). This deals with the CPI underpin issue to which I referred earlier.
The amendments in Clause 14 also make amendments to ensure that Section 51(3) continues to apply as intended now we are using the CPI to measure inflation. Section 51(3) exempts schemes from the statutory indexation requirement where they increase pensions in payment at least by capped RPI measured over an annual period defined in their rules. Inflation for statutory indexation is measured at 30 September, but some schemes want to continue measuring at a different time and that is fine—Section 51(3) currently allows them to do that. The clause has the effect that if schemes increase by CPI, RPI or a combination of the two under their rules, they will continue to be exempt from the statutory indexation requirements. At the moment it is only schemes with RPI rules that would be exempt. All we are doing is making sure that an existing provision, which is very convenient for a number of schemes, is carried forward into a world where some or all pensions in payment will be increased by reference to CPI as well as RPI.
I am afraid that the noble Baroness’s second amendment would undo the part of the clause that allows schemes that increase by reference to CPI to use their own inflation reference period. Again, it will do nothing to restore RPI indexation or revaluation more generally. For that reason, and for the reasons that I set out earlier in respect of Amendment 47, I urge the noble Baroness not to press her amendments.
On Amendment 48A, I stress again that deciding the increase in the general level of prices is an annual duty, and that as the Government have made clear many times over, we believe that the CPI is the most appropriate measure. Publishing a triennial report on the impact of using the CPI will not change that. That is not to say that we are not interested or do not care about the impact—of course we do—but it is important to look at the broader context, not one part of the picture in isolation.
We are also mindful of the impact on private sector pension schemes and their members. That is why we issued a consultation paper in December about the impact of using the CPI on private sector occupational pension schemes. That consultation finished on 2 March and we are currently considering the responses. The noble Lord, Lord McKenzie, has asked when we will be able to share those responses. I can only ask him to show us a little more patience. I think that we have around 150 submissions, and some of them are extremely detailed and complex. We are also conducting social research to investigate the impact of the change from RPI to CPI for statutory revaluation and indexation of private sector pensions. We hope to publish findings from this research before summer.
Baroness Turner of Camden
I thank the Minister for that detailed response. My aim in putting down the amendments was to give voice to a lot of the opposition that has been voiced to me in the letters and complaints that I have received after people have been notified that they are likely to have a different arrangement with regard to indexation from what they have hitherto expected. There is a lot of anger about it, so I put the amendments down. I am not exactly committed to the wording, but I wanted very much to voice that opposition and to say that the people concerned have real worries about what will happen to them and their pensions in future.
I also thank my noble friend Lord McKenzie for what he had to say in support of his amendment. In default of getting anything like my amendment on to the statute book, his amendment seems very worthwhile because it means that the situation has to be reviewed and there is an attempt to ensure that what has happened is placed under survey at intervals. If it seems to be what you might call a soft answer, at least it is an improvement on what people think that they are facing in future.
I will read carefully what the Minister has said. I found it interesting that modifications can be made, surveys are conducted and so on. That is very useful and I will look at it carefully.
Lord McKenzie of Luton
Before my colleague withdraws her amendment, and I certainly do not intend to press mine, it seems a bit hard for the Government to say that their policy is fully evidence-based when they are only just gathering the responses to the survey and will take some while to analyse the consequences. The survey of the consequences of the switch to CPI for occupational schemes is an important one, and one might have hoped that the Government would wait for that analysis and research before they committed to the switch long-term.
Lord Freud
The consultation exercise informs how we do these things in some detail in regulatory terms, but it does not affect the decision and direction of travel.
Baroness Drake
(c) the amount available must be no less than that available on the open market option.”
Baroness Drake
My Lords, this is a probing amendment to understand fully the implications for scheme members in cash balance schemes that are not contracted out or where members have not accrued benefits on a contracted-out basis. This clause removes the requirement to index pensions that come into payment at a future date under cash balance schemes.
I have two concerns. In the first instance, cash balance schemes usually fall into one of two types. The first is cash balance with guaranteed conversion terms, whereby the pension pot at retirement is defined, based on the proportion of salary set aside each year and the guaranteed rate of interest earned, and the pot is converted to pension on guaranteed terms that are set by the scheme at an agreed point before retirement. Once in payment, the amount of pension is guaranteed. The second type is a cash balance scheme with open market annuity, whereby the pot is converted to pension on open market annuity rates and, once in payment, the amount of pension is guaranteed.
My concern is that, under the open market option, an individual has a choice between a level and an indexed pension, whereas the effect of the clause—on first reading of the Bill—could require an individual in a cash balance scheme to accept conversion of their savings pot into a pension on terms that were potentially less favourable than those available on the open market option, given that they could not have access to an indexed pension. Hence my amendment, which seeks, on removal of the indexing requirements, to anchor the conversion rates in cash balance schemes to being no less favourable than those available on the open market.
My second concern arises from the removal of the indexation requirements from cash balance schemes that are not contracted out, as the Bill states. Given the Government’s aspirations to accelerate the integration of the basic state pension and the state second pension into a single state pension, which will result in all schemes being contracted in, what would be the implications for scheme members who had not yet converted their assured sums into pension from their previously contracted-out cash balance schemes but had a reasonable expectation of indexation? I beg to move.
Lord Freud
My Lords, the amendment would require that an annuity without indexation bought by a cash balance scheme member or the pension provided by the scheme must be no less than that available on the open market option. In moving the amendment, the noble Baroness, Lady Drake, raises an important issue.
It is important that individuals can shop around to get the best type of annuity for them at the best available rate. This will affect their level of income for the rest of their lives. This clause, which gives members of cash balance schemes more choice about the shape of the income that they take in retirement, will support this. However, in compelling members to take a pension of no less than that available on the open market option, there arises a practical difficulty.
Annuity pricing is now highly individualised. Most providers offer rates by postcode. Enhanced and impaired life annuities also offer significantly higher rates for those with health conditions or lifestyles that are likely to reduce their life expectancy. This makes it difficult to establish what the right open market rate for comparison should be and very difficult for schemes to establish a workable process to find out what a member is likely to be offered on the open market.
In addition, different types of annuity offer different starting payments. For example, an individual might wish to buy an annuity with a guarantee period. This is likely to give a slightly lower payment, but it gives the member a guarantee that the annuity will continue to be paid if they die before the end of the guarantee period. This is unlikely to represent the best available rate on the market, but is it right to deprive the individual of this choice? For these reasons, I believe that any amendment of this nature would be unenforceable and, as a consequence, unworkable in practice.
I would like to pick up one of the questions that the noble Baroness asked with reference to further reforms to the state pension. It is too soon to speculate about those—certainly, it is too soon for me to speculate about them. We believe that it would be too difficult in practice for schemes to separate out periods of contracted-out service. The same scheme member may have periods of contracted-out and non-contracted-out service. There is also a danger of the possible franking of one benefit against increases to another. All those schemes that have been contracted out on a defined contribution basis no longer have to provide an indexed annuity. Schemes that are contracted out on a defined benefit basis, either where a guaranteed minimum pension is payable or on a reference scheme test basis, have to provide indexation to the relevant level. With that explanation, I urge the noble Baroness to withdraw the amendment.
Baroness Drake
I thank the Minister for that response. I have sympathy with what he says because I would be the last person to want to discourage cash balance schemes, as they allow for a degree of sharing and in today’s world one does not want to discourage that. I can see the compelling argument and I understand the point about the annuity pricing market becoming more individualised, which makes it difficult to establish an open market comparator, especially where a scheme may be wanting to set conversion terms. However, I remain concerned, as it is desirable for individuals to have the choice to access indexing, otherwise they are denied an opportunity to lay off some of their inflation risk. Given that in a DC world they bear so much risk, it would be a little sad if the unintended consequence of this Bill was to deprive to a greater extent than currently exists a group of people who would otherwise have exercised an option to go for indexing and to give themselves some protection against inflation.
I did not expect the Minister to speculate on future state pension arrangements, but I flagged up the issue as sometimes these things are forgotten. Those who have worked with me will know that I consistently flag up the impact of removing contracting out from the system, not least in public service pension schemes. Having said that, I beg leave to withdraw the amendment.
Lord McKenzie of Luton
Lord McKenzie of Luton
My Lords, I wish to speak briefly to Amendment 48C. I stress that it is simply a probing amendment designed to get a better understanding of what the alternative to obtaining a current actuarial valuation will entail.
Currently, determination of the funding position has to be underpinned by a fresh actuarial valuation. This supports the decision of whether the board must accept responsibility for the scheme. Perhaps the Minister can say a little more about the circumstances when the alternative approach is expected to come into play and the type and range of information that might be used in place of the actuarial valuation. The provisions in new subsection (5C) require the board of the PPF to issue a statement setting out how it will make determinations. Can the Minister give us a flavour of what the statement is likely to include? To what extent is it envisaged that reliance would be placed on third-party data? Generally, what level of assurance will be looked for in the use of such data?
I should stress that the purpose of this is not in any way to challenge the proposals but just to get a broader understanding of what is envisaged. It is presumed that these arrangements have been positively sought by the PPF and will help its operational efficiency. I am a fan of the PPF. When we discussed some SIs last week, I took the opportunity to say that the PPF has made a considerable contribution to the current pensions landscape. It is a very professional organisation and it is in that spirit that I move this amendment. I beg to move.
Baroness Garden of Frognal
My Lords, I will first speak to the government Amendments in this group and then respond to the amendment tabled by the noble Lord, Lord McKenzie. Clause 17 and Schedule 4 make a number of amendments to legislation in the Pensions Act 2004 and the Pensions Act 2008 that governs the operation of the Pension Protection Fund. They have been developed with the Pension Protection Fund and reflect the experience gained in the light of live running since April 2005.
Paragraphs 20 to 26 of Schedule 4 replace an existing regulation-making power within paragraph 25A of Schedule 7 to the Pensions Act 2004. Regulations made under the new powers would enable a person to postpone payment of their pension compensation past their normal pension age. Paragraphs 27 to 33 of Schedule 4 make amendments to the Pensions Act 2008 in parallel to those in paragraphs 20 to 26.
Regulations made under the new powers would enable a person who is entitled to pension compensation by virtue of pension compensation sharing to choose to receive compensation from a later date than normal benefit age. To explain further—in response to the noble Lord—for someone who chooses to postpone payment of pension compensation, three things would happen. First, the pension compensation cap would apply as at the time the person first becomes entitled to pension compensation, which would be their normal pension age. Secondly, revaluation would apply up to a member’s normal pension age. Thirdly, the board of the Pension Protection Fund would provide an appropriate increase in pension compensation when it comes into payment, calculated on an actuarial basis to take account of the postponement of the start of payment.
Amendments 49 to 52 amend the legislation in Schedule 4 dealing with the commutation of pension compensation. We intend to use these powers to make regulations to provide a person with the option to commute a portion of their pension compensation for a lump sum at the end of a period of postponement.
This group of amendments enables the Government to make regulations that will provide people with an additional flexibility. Current legislation already allows a person to decide to commute to a lump sum part of their pension compensation. All in all, this provides a person in the Pension Protection Fund with a good deal of flexibility to decide how and when to take their pension compensation.
I turn now to the amendment in the name of the noble Lord, Lord McKenzie, about funding determinations to be made by the board of the Pension Protection Fund and the degree of reliance on independently assured data. For a scheme undergoing assessment for entry to the Pension Protection Fund, an actuarial valuation of a scheme’s assets and protected liabilities under Section 143 of the Pensions Act 2004 will no longer be required in all cases. A scheme’s protected liability is the cost of providing benefits equivalent to pension compensation, any non-pension liabilities of the scheme and the estimated cost of winding up the scheme. Instead, the board of the Pension Protection Fund will have the power to determine whether a Section 143 valuation scheme is required or whether it can use other information that it has in order to decide whether the scheme should transfer into the Pension Protection Fund.
Practical experience since the Pension Protection Fund opened for business in April 2005 has shown that in a number of cases there is already sufficient independent information held about a scheme to allow the funding position to be accurately assessed without requiring a fresh actuarial evaluation. For example, a valuation by an actuary under Section 179 of the Pensions Act 2004, undertaken for the purposes of calculating a scheme’s pension protection levy, may be used. These changes will avoid schemes incurring the expense of an actuarial valuation where one is not necessary for a fair decision to be made.
The noble Lord is concerned to protect the interests of members of schemes that will not undergo full actuarial valuation under Section 143. I should make it clear that the Government are not intending to change outcomes for members; rather, these changes are intended to avoid costs where they are not necessary to ensure fair outcomes for members.
New Section 143(5)(c) requires the board of the PPF to set out how it will make determinations when it does not commission a full actuarial valuation. This statement will have to take account of any requirement set out in regulations under Section 143(4). We expect the PPF to set out examples of the sort of information and methodology that it would use in place of a full actuarial valuation in this statement so that it is clear how a meaningful judgment of a scheme’s funding position at the assessment date—that is, the date when the scheme began assessment for PPF—was made.
The Government have no problem with requiring the PPF to make evidence-based decisions. Indeed, the board of the PPF is clear that it will be appropriate not to commission a full valuation only where there is adequate alternative evidence. However, I suggest that the more appropriate place to detail any legislative requirements for that evidence is in regulations under subsection (4) rather than in the Bill. As an example of when an alternative determination would be used, it would be where a scheme was very clearly underfunded on the basis of existing information but not where there may be some doubt about it.
I welcome the noble Lord’s interest in the changes to requirements to undertake actuarial valuations in all cases where a scheme is being assessed for entry to the Pension Protection Fund, but I hope that the explanation that I have given is sufficient for him to withdraw his amendment and that the Committee will be prepared to accept government Amendments 49 to 52.
Lord McKenzie of Luton
My Lords, I thank the Minister for her full response to my amendment. Indeed, I welcome her to her first session at the Dispatch Box on pension issues—the first of many, I am sure. The explanation that she has provided in response to my amendment is totally satisfactory. I think that I understand it fully and it has been a helpful clarification of what is in the Bill. The government amendments are a sign of the growing practical experience and maturity of the organisation. I have no particular points to raise and am happy to support the amendments. I beg leave to withdraw the amendment.
Lord Freud
“In paragraph 24(1) (commutation of periodic compensation) for “becomes payable” substitute “commences”.”
“( ) In sub-paragraph (5)—
(a) in paragraph (a) for the second “the” substitute “each”,(b) omit the “and” at the end of that paragraph, and(c) after paragraph (b) insert—“(c) for the purposes of sub-paragraph (2), the definition of “underlying rate” in the case of periodic compensation under paragraph 5, 8, 11 or 15 applies as if the reference in paragraph (b) of the definition to the amount mentioned in sub-paragraph (3)(aa) of the paragraph in question was a reference to that amount reduced by the commutation percentage, and(d) that amount (as so reduced) is attributable to post-1997 service and pre-1997 service in the same proportions as that amount would have been so attributable had no part of the periodic compensation been commuted.””
“In paragraph 9(1) (commutation of periodic compensation) for “becomes payable” substitute “commences”.”
“( ) In sub-paragraph (7)—
(a) after “references in” insert “paragraph (a) of”, and(b) at the end insert “(and paragraph (aa) of the definition applies accordingly).””
Lord German
“Occupational Pension Schemes (Investment) Regulations 2005
(1) The Secretary of State must publish guidance for occupational pension schemes on the implementation of regulation 2(3) of the Occupational Pension Schemes (Investment) Regulations 2005 (statement of investment principles).
(2) In particular, such guidance must cover the type of information which may be provided under—
(a) regulation 2(3)(b)(vi) (the extent (if at all) to which environmental, social and ethical considerations are taken into account in the selection, retention and realisation of investments), and(b) regulation 2(3)(c), (the fund’s policy (if any) in relation to the exercise of rights including voting rights, attaching to their investments).”
Lord German
My Lords, I shall speak also to Amendments 54 and 54A. The first two of these amendments are identical because they relate to two different sets of regulations. In that respect they could be seen as the same, but they relate to two sets of existing regulations. All three are probing amendments because I want to see the Government’s view on these matters, which are important to pension fund members.
The amendments seek to do two things. First, they suggest guidance to help pension funds ensure that they are meeting the spirit of the law, not just the letter, when it comes to explaining their policy on environmental, social and governance issues, and on the exercise of shareholder rights. It is now 10 years since these rights were written in to law. There is a need to go beyond the generic statements that characterise many statements of investment principles to ensure that funds’ policies give their members meaningful information.
Secondly, the amendments suggest enhanced reporting on how these policies have been implemented in practice. I am grateful for the research by FairPensions and others which suggests that general statements to the effect that ESG issues are taken into account are not always matched by effective implementation. In addition, members can find it very difficult to acquire information about the exercise of shareholder rights attaching to their savings—for instance, information on how their fund voted on a particular shareholder resolution. The stewardship code makes it clear that asset managers should disclose their voting records. It also makes it clear that asset owners have a role to play in ensuring effective stewardship. If the purpose of stewardship is to ensure that the assets of the ultimate owners are safeguarded, there must be accountability to these owners on how stewardship responsibilities are being exercised.
Asset manager disclosure alone will not achieve this. Pension funds also need to play their part. There is no reason why this should amount to a huge increase in red tape. In many cases, the pension fund would need only to provide a link on its website to its asset managers’ disclosures. This would be a very small additional burden on funds, but an enormous improvement in accountability for members, whose money ultimately is at stake. The problem is that often funds state simply that decisions are delegated to fund managers, with no transparency about the managers’ voting intentions. Examples have been given to me of funds that do just that. Funds often direct members to their statement of investment principles, which is unlikely to provide any useful information that has been requested on any matter.
The third problem is that funds often respond as though taking into account an environmental issue, which might be the one being questioned, is in opposition to their fiduciary duty to maximise returns—even though the matter in question is solely business-focused, they are being asked only for disclosures about the financial risks associated with the projects, and the questions are backed by a number of institutional investors. This betrays a continued misunderstanding of responsible investment, and of the ways in which environmental, social and governance issues can be material to financial returns. Members increasingly bear the investment risk associated with their pension savings, and should have corresponding rights to scrutinise the management of that risk. This is particularly important given the growth of DC schemes.
There is an increasing consensus that social and environmental considerations are financially material. That is why a report from the United Nations Environment Programme finance initiative highlighted the reasons why trustees are required by law to take advice from investment consultants when preparing their SIPs. The report suggests that a tick-box mentality on the part of these investment consultants is a key reason for the inadequacy of current disclosures. Many consultants still regard the ESG as a client-driven, ethical preference and do not consider that they have a proactive responsibility to raise these issues with pension fund clients.
The amendments require the Government simply to provide guidance. While I appreciate that they have the power to provide guidance, I question whether they should provide guidance rather than simply have the power to provide it, and what matters might be included in that guidance—for example, a generic statement might say that the fact that a fund takes ESG issues into account will not normally meet the spirit of the law; that the statement should relate to the fund’s particular approach to circumstances and issues at stake; and that it describes elements of a best practice statement on social, environment and ethical issues. There are a range of areas that could be included in such guidance. The elements of a best practice statement on the exercise of shareholder rights, for example, might include whether it is the fund’s policy to vote all shares held; whether the fund delegates voting decisions to asset managers; and, if so, details of any specific instructions given to the asset managers, or the circumstances under which the fund reserves the right to make voting decisions itself. The fund’s policy on dealing with any member inquiries, of course, is particularly important as we move forward in this area.
We do not accept that the inadequate application of existing requirements makes for more prolific and prescriptive regulations. We do believe that there is a sensible approach to a set of guidance which will make the role of the fund, and the fund members, more important. We recognise that that guidance would not strictly require primary legislation, and so these amendments are probing in their character.
Finally, part of the purpose of public disclosure is to ensure better accountability to ultimate owners. The average pension saver cannot be expected to know which asset manager their pension fund uses. If only the asset manager discloses, the net improvement in transparency for the saver at the end of the investment chain is likely to be small. In most cases we think that all that would be required is for pension funds to provide that link to their asset manager’s disclosures, probably on their websites. In other words, members should be signposted to the relevant information. On the basis that this set of information would benefit transparency of process and put some flesh on the bones of the existing legislation, I beg to move.
Lord Boswell of Aynho
I rise very briefly to support my noble friend Lord German, or at least his line of thinking. I have perhaps one qualification or addition to the presentation that he has given, in relation to the role of trustees. I have already declared to the Committee my interest as a pension trustee. I can assure the Committee that my colleagues and I are taking an interest in the matter of ethical and otherwise acceptable investment schemes as part of our dialogue with the fund managers who represent us and the interests of beneficiaries. I think that a little more could have been said about the role of trustees as a necessary link, in most cases, between the former employees and the beneficiaries on the one hand and the investment managers on the other. This is something that we should all be in, and nobody should cop out of it.
My second and perhaps also substantive point is to support my noble friend’s observations about the business utility of all this. I think that the Committee will know that I have a background in a number of issues connected, for example, with disability and other aspects of diversity. In dealing with the private sector I have found over the years that, on the whole, those businesses that take a mature view and consider their long-term interests actually understand the business case for awareness of these considerations. They are not after the big buck. Their reputation and their business attractiveness benefit, with a long-term beneficial result.
When George Cox was chief executive of the Institute of Directors, I remember doing a number of presentations with him on disability issues. He used to come up with the deathless phrase, “We do this kind of thing because we are the kind of company we are”. That seems to me a very good motto. That is the kind of company that as a trustee I would like to invest in, and that as a beneficiary I would like to feel that my trustees and my investment managers were steering me towards. I do not think that this is a matter of political contention; I think that my noble friend has been right to ventilate it.
Baroness Drake
My Lords, I have considerable sympathy with the amendment moved by the noble Lord, Lord German. Notwithstanding the impact of the events of 2008-09 on regulators around the world, which are no doubt focused much more acutely on governance, with the shift from defined benefit to defined contribution pension provision, which the noble Lord referred to, and the imminence of auto-enrolment, the design of the default investment funds and the investment principles surrounding them are going to gain more attention. The issue of how shareholders, particularly institutional shareholders, approach their responsibilities as owners of assets is coming under increasing scrutiny by the Government, regulators, the members of pension schemes and those who discharge fiduciary duties on their behalf.
Corporate governance, principles of stewardship and interactions between institutional shareholders and companies are increasingly considered as a coherent whole in exercising ownership rights. As the noble Lord said, defined contribution schemes in money purchase and in personal pension schemes in future shift the risk on to the individual. Although the Myners principles have improved decision-making, achieving best practice in the investment governance of pension schemes—both trust-based and, particularly, contract-based, which I will come back to—still poses a challenge.
We have seen evidence of that concern in the Pensions Regulator’s recently published consultation on investment governance in DC schemes, which included a table of accountabilities. The table aims to define and clarify the roles and responsibilities of each decision-maker in each part of the investment governance chain, but I read it again last night and, unless I missed this, it does not refer explicitly to social and ethical considerations or to exercising voting rights. Close to my heart, NEST, and its predecessor PADA, published their own document on exercising responsible ownership in a low-charge scheme. Discharging this governance in the context of maintaining low charges is equally important.
As the noble Lord, Lord German, referred to, the Financial Reporting Council published the UK stewardship code in July 2010, which is designed to lay out the responsibilities of institutional investors as shareholders and provide guidance as to how those responsibilities might be met. Pension fund trustees are strongly encouraged to report how they have complied with that code. As a conscientious pension fund trustee, I have attempted to do just that, and my own experience suggests—here I concur with the noble Lord, Lord German—that if the code is to bite, trustees will need a great deal more guidance on how to comply with it if box-ticking is not to continue to be the method of compliance with these standards.
The Occupational Pension Schemes Investment Regulations, which the amendment refers to, say clearly that when setting out their statement of investment principles, trustees should identify,
“the extent (if at all) to which social, environmental or ethical considerations are taken into account in the selection, retention and realisation of investments; and … their policy (if any) in relation to the exercise of the rights (including voting rights) attaching to the investments”.
It is clear that this is an area where guidance and best practice are growing in importance. Because of the political risk that Governments face, with the biggest experience of asymmetrical paternalism that we are about to see, I bet my bottom dollar that this will grow and grow. If you transfer responsibility to the individual, politically Governments have a responsibility to ensure that government frameworks are up to the job.
Clearly, there are issues around how trustees can fulfil these responsibilities. One issue that we must address—I will not dodge it—is how one can be an effective, active asset owner while maintaining low charges, and how one can effectively monitor stewardship policy when one selects passive funds. Although I am absolutely committed to the highest level of governance at every stage of the investment chain, and believe that the ability of trustees to discharge their disclosure requirements in electronic form will help, these things must always be proportionate, because in a DC world it is the individual who bears the charges. I would not want a scenario in which we say that the good news is that we have gold-plated system of governance on disclosure, but the bad news is that it will cost X per cent. Therefore, we need to look at how all the players, including the fund managers, can raise the overall level of governance.
I come back to the providers of contract-based pensions. With the shift away from DB to DC, we are seeing a big shift away from trust-based DC to contract-based provision. Therefore, if we talk only of a model for how the trustees will discharge their governance function in this area, we will miss an ever-growing part of the pension provision market. A big issue, with which I know others are concerned, is who in a contract-based provision world should accept the fiduciary responsibility of designing the default fund or deciding how investment governance should be discharged. This takes us into areas where the Pensions Regulator has no reach. The guidance and regulatory framework must catch up with the shift from trust-based to contract-based provision, because in a contract-based provision world there are no trustees, unless there is a master trust, on whom to place clearly the fiduciary duty. It is clear that the Government will need to look both to the Pensions Regulator and to the FSA or their successors to raise the governance standards in the way that the noble Lord, Lord German, seeks through his amendments.
Lord Freud
My Lords, I thank the noble Lords, Lord German and Lord Stoneham, for tabling these three amendments. They encourage trustees and managers of occupational and stakeholder pension schemes to engage more fully with environmental, social and ethical considerations in the selection and retention of their investments. These are important issues. They resonate with me personally. I remember writing many a happy Lex column in the 1980s on the structural issue. The issue is the separation of the responsibilities of ownership and the attraction of investment returns in the marketplace. Trying to get them back together has proved very difficult. A lot of effort has been thrown at it in the past decade, with the Myners principles and the IGG.
The amendments would have a similar effect on the trustees and managers of occupational and stakeholder pension schemes. Therefore, we should look at the amendments together. There has been a consensus in many previous debates on social and environmental issues that companies perform better when their activities are monitored by shareholders. Therefore, it is important for pension funds and their investment managers to be transparent in publishing their approaches to such issues in their statements of investment principles. That is why this Government, like the previous Government, have been open to suggestions on how to improve this process. In the end, it is a matter for managers and trustees to determine the level at which they engage and what is appropriate for them. It is a statement of the obvious that small schemes, in particular, may not be able to take account of governance issues to the extent that large schemes can.
Lord German
My Lords, I thank my noble friend for those comments. I dread to think of the asymmetric paternalism to which we keep referring. We shall probably have to continue to do so now, because if I can interpret my noble friend’s final remarks as meaning that he and the Government will give active consideration to the sorts of guidance that might help the companies, pension funds and their members to achieve the goals that we have elaborated on, I am very grateful indeed.
As the noble Baroness said, the move from pension trustees to contract-based schemes with trustees will change the fabric of the pension world. I hope that the pension fund for which I am a trustee has sought to get these matters dealt with more swiftly. However, given my own experience, I am not certain that the regulations as framed guarantee that members will get access to all the information on voting rights. I am grateful for my noble friend’s comments, which I will take in the spirit that I described. On that basis, I beg leave to withdraw the amendment.
Lord Mackay of Clashfern
“(4A) The appropriate Minister must not make regulations under this section where the effect of those regulations is either—
(a) to impose an obligation on the person who would be the recipient of the relevant benefits to make a contribution to the cost of those benefits, when there was no such obligation in the person’s original contract of service as a judge; or(b) to increase the level of any such contribution to a higher level than that specified in that person’s original contract of service, except where the increase is in accordance with the terms of that person’s original contract of service and the increase is authorised in line with the consumer price index.(4B) Where the appropriate Minister makes regulations in breach of subsection (4A), those regulations shall be void and of no effect only to the extent that they are in breach of subsection (4A), or consequential on such a breach.”
Lord Mackay of Clashfern
My Lords, this amendment, which bears my name as well as more distinguished names, seeks to follow up the point that I made at Second Reading about the situation of the judiciary in relation to their terms of service. My submission was, and is, that it is a principle of our constitution as it has evolved that the terms of service of a judicial officer shall not be changed to his or her disadvantage during their term of office. In response to that, the Minister who was then replying—not my noble friend Lord McNally but the noble Lord, Lord Freud—said that judges are subject to tax. Of course, but that is not a part of their terms of reference. The arrangements for taxing judicial remuneration and emoluments are absolutely free of any restriction of the kind for which I am arguing.
Secondly, the Minister said that there is already a provision for deduction in respect of dependants’ benefits. However, that is expressly provided for in Section 9 of the 1993 Act, but that makes no provision for any kind of deduction in respect of the judge’s own pension. That is sought to be introduced here for the first time. Undoubtedly, it is a provision adverse to the judge in respect of the terms of service that he undertook.
In this connection, one has to remember that, generally speaking, a judge takes office until he reaches the retiring age, when he must demit office. Apart from that, he is entitled to remain in office on the terms on which he was appointed, subject, of course, to upward changes that may be made during that time. However, in my submission, nothing adverse to his terms of service is appropriate. That does not mean that judges should not be called on to take part in any kind of tax regime that deals with the present situation. Tax is completely free as far as this restriction is concerned. In my submission, this restriction applies to the terms of service of the judiciary and I believe that it is sound. Apart from anything else, I have tried to demonstrate that from the fact that, when I introduced the 1992 Bill, which became the 1993 Act, we made it clear that it did not apply to persons already in appointment unless they elected to join the new scheme of the 1993 Act.
I believe that this restriction is generally recognised. For example, the Latimer House principles embody this situation. Perhaps I may illustrate the point by quoting from the constitutions of some Commonwealth countries. Section 125(2) of the constitution of India states:
“Provided that neither the privileges nor the allowances of a Judge nor his rights in respect of leave of absence or pension shall be varied to his disadvantage after his appointment”.
One can understand the importance of that in the constitution of India, where judges have played a very important part in the development of the rights and privileges of that great country. Article III, Section 1 of the constitution of the United States states:
“Judges … shall … receive for their Services a Compensation which shall not be diminished during their Continuance in Office”.
The constitution of Ireland states:
“The remuneration of a judge shall not be reduced during his continuance in office”.
Incidentally, in 2009 the Irish Government introduced a levy in respect of public service. However, they exempted judges from the levy because of this provision in their constitution. Article 176 of the constitution of South Africa, where judges again played an important part in the development of the country, states:
“The salaries, allowances and benefits of judges may not be reduced”.
Our amendment simply gives effect to that. It does not mean that judges are exempt from anything else, but it does mean that their terms of service cannot be altered to their detriment during their service. I am not arguing that new judges should not be subject to this provision. That is a separate matter, which has to do with recruitment—I am glad that I take no responsibility any more for that. I am arguing only that judges already appointed and presently in service should not have their terms of service as judges altered to their detriment during that service.
Our amendment allows also for an upgrading of the contributions in accordance with a formula. We are not wedded to any particular formula. The provision would be useful in the future and would avoid the need to make a lot of different orders. It would also mean that people would know, when they took office, what the position would be.
This is an important aspect of the constitution. The noble and learned Baroness, Lady Hale, speaking in the House of Lords in a case against the Attorney-General of Trinidad and Tobago, recognised that the security of emoluments is an important guarantee of the independence of the judiciary. I beg to move.
Baroness Murphy
My Lords, I added my name to the amendment. First, I declare my total lack of personal interest in the matter. I am not a judge, I am not married to a judge and I have no judges in my family. However, I do count many judges among my friends. I have often been up before judges—in a professional capacity, I hasten to add. As a result, I have developed an enormous admiration for the judiciary of this country. The quality of their decision-making, their willingness to be unpopular and their independence from the subtle and not-so-subtle pressures of the Executive are qualities that we should treasure.
What is proposed in Clause 24 is a short-term crowd pleaser that will have an impact far beyond what is presumed. It is in direct contravention of internationally agreed guidelines on the protection of the independence of the judiciary, as the noble and learned Lord, Lord Mackay of Clashfern, so eloquently outlined.
Let us face it, these proposals could lead to a judicial pay cut in real terms of up to 10 per cent. I realise that there may well be little sympathy around the House for what I am saying, in the light of the fact that many people in the public and private sectors are taking serious pay cuts and we are debating how pensions will be arranged in the future. It is difficult, but this is a very particular case. The Government’s impact assessment acknowledges that the key risks are that the impacts of this measure are as yet unknown—as are the cumulative effects of existing and future policy decisions about judges’ pay and pensions—that the assumed behavioural response that it would make no difference to recruitment might not apply and that the measure may lead to negative impacts on judicial recruitment, retention and performance.
I wish to deviate slightly from this issue. Research carried out in 2008 by Professor Dame Hazel Genn of University College London found that senior practitioners—solicitors and barristers—are deterred from applying for judicial roles, temporarily or permanently, by practical issues relating to judicial working conditions that include not only geographical and jurisdictional deployment of the senior judiciary but their salary, workload, location, support, patterns of working and general flexibility. We know that it is difficult enough to persuade a top commercial QC earning £2 million a year to accept a judicial appointment, but frankly they are not the judges whom I am worried about. I am far more worried about those lawyers, barristers and especially solicitors, many of whom are women or from ethnic minorities, who cannot see the advantages of entering the judiciary now because of the poor working environment and rewards, but who are attracted to the pension arrangements that would allow them to retire after 20 years. I remind noble Lords that this is not a job that you can enter as an apprentice; you must be a mature and experienced person in the first place.
People say that the arrangements are generous, but they are actually nothing like as generous as for those who remain as solicitors or barristers. There is the difficulty that when practitioners are at their highest earning potential, say in their 40s, they are obliged to seek part-time judicial experience if they want to progress up the ladder. Few are persuaded now. What will this sudden drop in take-home pay do to the application level? It is not the money alone; it is the signal of being undervalued by an Executive looking for PR advantage, but these numbers will make precious little difference to this nation’s debt.
At a time when we are beginning to see the fruits of the work of the Judicial Appointments Commission in appointing more women and people from ethnic minorities, under the admirable chairmanship of the noble Baroness, Lady Prashar, it seems particularly insensitive to throw a spanner in the works with this unnecessary piece of legislation. The experience needed for a High Court post means that only 20 per cent of the pool of eligible senior lawyers are women and only 5 per cent are people from a black or other ethnic minority background. However, boosting numbers of women and other groups is not just a matter of time and a growing pool. One big disincentive is the earnings cut when becoming a member of the judiciary. People marry later, and people in their 50s still have significant financial commitments until late on—commitments to children do not go away.
Let us think back to the last time the Executive attempted to cut judicial salaries. It resulted, among other things, in the following judges’ memorandum and the eventual restoration of salaries. It stated:
“It is we think beyond question that the judges are not in the position occupied by Civil Servants. They are appointed to hold particular offices of dignity and exceptional importance. They occupy a vital place in the Constitution of this country ... It has for over two centuries been considered essential that their security and independence should be accounted inviolate ... In this matter, our country has set an example to the world, and we believe that the respect felt by the people for an English Judge has been partly due to his unique position, a feeling which will survive with difficulty if his salary can be reduced or if he were an ordinary salaried servant of the Crown”.
Clause 24 raises serious concerns in my mind about placing the power to alter judicial pay of sitting judges after appointment in the hands of the Executive. This should be a matter of concern among those who take an interest in judicial independence. There has been little notice of or consultation on that, or any serious look at the real impact.
It is also unclear whether the proposal would impact on the maximum contribution into the judicial additional voluntary contribution scheme, which currently has a 15 per cent ceiling on contributions, with resulting loss of pension in old age as well as lost salary during service. I ask about that because it is especially important for young judges who might not have acquired pensions in earlier parts of their career. If the proposed statutory contributions reduced the amount that one could make voluntarily, it might well significantly reduce the pension available under the voluntary scheme. I hope that the Minister can clarify that for me.
When any judge accepts appointment, the basis for that appointment is that, however successful the individual may have been in his or her previous career, he or she may never return to it. Financial security and pension provision are an essential part of the decision whether to accept appointment. That is particularly the case with the 52 masters who are on the lowest salary band of the judiciary. They earn the same as a basic NHS consultant salary or approximately two-thirds of what a family GP earns. They are not generously paid for the level of responsibility that they carry and many will not serve 20 years to maximise their pension.
I echo what the noble and learned Lord, Lord Mackay of Clashfern, said about the internationally accepted constitutional safeguards for judicial independence since at least the Act of Settlement in 1701, with restrictions on post hoc adverse variation of judicial terms of service. Those were incorporated into Latimer House guidelines in 2003 and repeated in the Bangalore principles and implementation measures published by the UN-sponsored Judicial Integrity Group in 2010. Then there is the draft Universal Declaration on the Independence of Justice by the UN, also known as the Singhvi declaration, and the Universal Charter of the Judge, approved by the International Association of Judges on 17 November 1999. I could go on: there were also the Council of Europe recommendations, the Consultative Council of European Judges’ opinion and the Burgh House principles. There are clearly numerous guidelines about maintaining the independence of the judiciary by not varying their terms and conditions of service after appointment.
The present judiciary had a legitimate expectation when accepting offers of appointment that their pension arrangements would not be adversely changed after appointment. It would be wrong and damaging to our international reputation for this country not to respect that principle.
Finally, I pray in aid the report of the noble Lord, Lord Hutton, which was published earlier this week. He states at page 146, paragraph 6.92:
“The protections might also cover the extent to which there might be limitations on adjustments to existing judicial pensions to meet international conventions for protecting judicial remuneration, while also having regard to factors such as increases in the value of pensions from increasing longevity”.
In summary, Clause 24 will affect a modest number of people seriously and adversely and contravenes our international agreements on judicial pensions. We are not saying that people who are appointed in future could not make further contributions, but they would be appointed knowing that that was the case. I strongly support the amendment in the name of the noble and learned Lord, Lord Mackay of Clashfern.
Baroness Butler-Sloss
My Lords, I have wondered whether to speak on this amendment. First, perhaps, I should apologise to the noble and learned Lord, Lord Mackay of Clashfern, and to the Committee for arriving late. I had not appreciated that Amendment 55 was up on the monitor, but I came in as soon as I could.
I must declare an interest, not only as a former senior judge but also as someone whose father was a High Court judge, so I have spent my entire legal life in the shadow of the judiciary. I strongly support not only the noble and learned Lord, Lord Mackay of Clashfern, but particularly the noble Baroness, Lady Murphy, who made points that are really worth taking into account. It is not so much the senior judiciary—there are probably not more than 110 to 120 of them—as the middle-ranking judiciary who ought to be considered. They labour in the fields, with not particularly generous salaries, as the noble Baroness, Lady Murphy, said. I would add to her Queen’s Bench masters the judges of the various tribunals, who are crucial to the administration of justice in the tribunals; the district judges in the magistrates’ courts; and the district judges across the country trying civil and family work. They are a very important part of the judiciary. Many of them accepted a reduction of income. It is not only the top incomes that senior QCs can make that are reduced, as the people taking these middle-ranking posts also earn reasonable incomes. Almost every person who becomes a judge takes a cut in income.
People generally become judges because they feel that they ought to be paying back to society what they have gained by being barristers and solicitors. It is an important part of the judiciary that they are there to serve the public. They are a special group of people in the country. They are significantly independent and they have to remain independent to be able to challenge the Government in the courts. The Administrative Court is a thorn in the flesh of every Government, of whichever political persuasion. I believe that there is a book called “Looking Over Your Shoulder at the Administrative Court”, which trains new civil servants to cope with the slings and arrows of not so much outrageous fortune as the decisions of the Administrative Court.
I think that the public and perhaps noble Lords ought to remember that our judiciary is not only significantly independent but significantly incorruptible. Since I have left being a judge, I have been on parliamentary visits to various countries. In one of the eastern European countries that had been under the control of communism, I was told by one of the Ministers that the corruption of their judges was the most worrying part about their efforts to improve their country to meet the requirements of the European Community. My husband was a judge in Kenya at one time, under the ODA system, and I was told by my friends who were in the law in Kenya about the judges whom they knew to be corrupt. Eighteen were sacked at one time and my particular friend said that that was not all who should have been sacked. Very recently I was at one of the IPU meetings here in this building. I was talking about human rights and two Kenyan lawyers got up and said, “What do we do about the corruption of our judiciary?”. Forgive me for saying this as a former judge—since I no longer sit, I think that I can say it safely—but we are lucky in our judiciary. What the Government are proposing is in effect to break the contracts of the existing judiciary by substituting something else by statute.
I am well aware that everyone in the pensions system is going to suffer and I well understand people asking why the judiciary should be immune from the suffering of the public. So far as the future is concerned, as the noble and learned Lord, Lord Mackay of Clashfern, said, I express no view. It may well be entirely appropriate that the judiciary of the future should be asked to make the contributions that it has not been asked to make in the past; if I may say so, the Government ought just to think of the points that the noble Baroness, Lady Murphy, has made about that. However, breaking the existing contracts of existing judges who have given up their practices as barristers and solicitors to serve the community under a certain arrangement, where you take on that job without making a contribution, is something that the Government ought to think about long and hard. I very much support the amendment.
Lord Scott of Foscote
My Lords, I express my complete agreement with what has been said to your Lordships by the noble and learned Lord, Lord Mackay of Clashfern, the noble and learned Baroness, Lady Butler-Sloss, and the noble Baroness, Lady Murphy. I want to add a brief word on the nature of the judiciary in this country, which your Lordships will have to take into account in considering this amendment. I declare my own interest: I have been in the law for the whole of my working life, 23 years as a barrister and then 26 as a judge.
The judiciary in this country, and in many Commonwealth countries that have followed our system, is unusual in that it is not a profession that people decide to enter when they are at law school or when they leave law school. A number of continental countries have judiciaries of that sort: you decide that you want to go into the judiciary; you make an application; you become a member of some tribunal, whatever the country may be; if you are good, you work your way up the ladder; and then eventually you become a judge in a senior court. We do not do that.
The bulk of the judiciary in this country—perhaps all of them, barring a few who come from legal academia—come from the ranks of practising lawyers. As practising lawyers, they have a structure in their careers. If they stay in their firms, they can build up provision for their families and of course for themselves when they retire, and they can hope to leave something to their children. They can hope for affluence as the result of a successful professional career. In the old days, there would come a point in that professional career when the individual would get a tap on the shoulder and someone would say, “Now, would you consider becoming a judge?”. Now they have to apply, but I do not believe that that makes a significant difference to the type of people who become judges or to the stage of their career when that happens.
As has been said, an element of belief in public service influences the choice. If lawyers stay in their professions, they will have the expectation and hope—sometimes realised, sometimes not—of reaching comfortable affluence for their old age. When they enter the judiciary, it is and always has been a significant feature of the terms on which they enter that they will look towards a pension for themselves, and for their widow if they leave one, after service of an appropriate number of years on the Bench.
If there is a movement of the sort indicated by Clause 24 of the Bill, which establishes the ability of the Executive to alter to an individual’s disadvantage the terms under which they joined the judiciary—the terms on which they supposed that they would be able to rely for the purpose of building up whatever was necessary for a reasonably affluent old age and retirement—there is a danger that that may affect the type of judiciary that we have. It may affect the willingness of people to accept the degree of adoption of service as opposed to self-aggrandisement that is a feature of almost everybody’s decision to apply for—or previously to accept—a position on the Bench.
The noble and learned Lord, Lord Mackay of Clashfern, made the point strongly that for statute to interfere with the contractual terms of appointment is a very strong thing that must be carefully justified. In addition, I respectfully suggest that it is likely in the long run to change the nature of the judiciary in this country, to the disadvantage of us all. I support the amendment on that ground in particular.
Lord Falconer of Thoroton
My Lords, the amendment is in my name also. It is intended to prevent a fundamental break with the constitutional principle that we have adopted to protect the independence of the judiciary. We are talking about 800 or 900 people in all. The idea that the proposal would have a significant impact on the economy of the country is overstated.
The principle was clearly put by the noble and learned Lord, Lord Mackay of Clashfern, in the Second Reading debate on the Bill. He said:
“The principle that a serving judge shall not have his terms of service adversely affected without his consent during his term of service is a fundamental principle, part of the rule of law and internationally recognised. It has been followed by Governments in this country, so far as I know, as far back as I can tell”.—[Official Report, 15/2/11; col. 634.]
I agree with that; it is a brilliant statement of the position in relation to the terms and conditions of judges.
The amendment would give effect to principles agreed internationally—including by the United Kingdom—on the independence of judges, best expressed recently in the Bangalore principles, to which the United Kingdom is a signatory. The principles state:
“A judge shall not only be free from inappropriate connections with, and influence by, the executive and legislative branches of government, but must also appear to a reasonable observer to be free therefrom”.
It is important to emphasise what the consequence of Clause 24 will be. It will allow the Executive, first, to introduce contributions by a serving judge in respect of his or her pension. That is something that the Executive cannot currently do. Secondly, it allows the Executive in future, without the consent of the relevant judge, to increase the amount of those contributions without reference to any index or to any precedent contractual terms.
I invite noble Lords to consider the Bangalore principles again. Do the proposals give the Executive an inappropriate influence, or the appearance thereof, on what judges do? I say without a shadow of doubt that if, as Lord Chancellor, I had been asked to advise another country on these terms, I would have regarded them as an obvious breach of the principle enunciated by the noble and learned Lord, Lord Mackay of Clashfern, and in the Bangalore principles that the United Kingdom helped to draft, adheres to and promotes throughout the world.
If we are serious about the rule of law, we must preserve the independence of the judiciary. The noble and learned Lord, Lord Mackay of Clashfern, is right to say that if the provision goes forward in this form, it would be the first time—in my experience—we had broken our constitutional principle of not giving the Executive the power, by waving a wand, to say, for example, “We will reduce the judiciary’s terms”. We incorporated in the Senior Courts Act 1981 a provision that prevents the Executive from reducing judges’ pay to reflect in principle the substance of the memorandum that the noble Baroness, Lady Murphy, read out. That is why the noble and learned Lord, Lord Mackay of Clashfern, indicated at Second Reading that the pension changes that he introduced in 1993 could apply only to new judges. There is nothing to prevent the state from extracting significantly reduced terms from new judges, if that is what it wants to do, to show that we are all in this together. However, the one thing that I respectfully ask the Executive not to do is to introduce a power that means that they can hold the sword of Damocles over the judges and reduce their terms and conditions with a click of the fingers if the judges—as a group or individually—do something that they do not like. It would be a significant breach of the constitutional principle to which we have adhered for as long as I can remember and which records show to be the case. Therefore, I respectfully ask the Executive to think very carefully about the damage that they would do to our constitution with this rather mild-looking provision. I support the noble and learned Lord, Lord Mackay of Clashfern, and the noble Baroness, Lady Murphy.
Lord Stoneham of Droxford
My Lords, as a new Member of the House I am somewhat in awe of speaking against a very formidable lawyers’ lobby, although I am married to a solicitor. However, I am delighted to be the only person—it seems—to come to the assistance of my long-standing noble friend Lord McNally. I am reluctant to suggest that the esteemed noble and learned Lord, Lord Mackay, is the shop steward of judges, but I am less reluctant to hold back in respect of the noble and learned Lord, Lord Falconer, who has form in this respect.
Despite the assurances of the noble and learned Lord, Lord Mackay, that judges are not outside the tax system, noble Lords on this side of the Committee will remember the noble and learned Lord, Lord Falconer, defending judges being a special case in not having the tax-free limit imposed on their pension funds. The judges’ pension scheme is very generous. The formula is 20 out of 40 contributions: a judge on £170,000 will get a pension of £85,000 after 20 years’ contributions. This is on top of the provision that they will have made earlier in their careers. Most critically, the value of the contribution paid by the state is 32.6 per cent.
At Second Reading, two arguments were used against changing this very generous benefit. The first argument, put by the noble and learned Lord, Lord Mackay, was that we will undermine the excellence of our judicial system. I am sure that nobody wants that. The second argument, which has been emphasised today, is that we will break the spirit of the legislation that says that any salary payable to judges may be increased but never reduced. I would like to deal with both these arguments.
Nobody in this House would want to undermine the excellence of our judiciary. However, by accepting that the change can be applied to new judges, the amendment would abandon that concern as it would defend only sitting judges. The fact is that everyone in the outside world is having their pension schemes adjusted as defined benefit schemes prove too expensive, too beneficial and simply not sustainable. It is not easy for anyone. I accept the argument that judges cannot go back, but many people who face the prospect of losing their defined benefit scheme if they move jobs cannot go back either. There is a strong argument there.
Barristers 20 years ago were dependent on Equitable Life for their pensions, and the current judges’ scheme must seem more attractive to aspiring judges. The man on the Clapham omnibus will find it perverse if judges are not required to make some adjustment to the cost of their increasingly generous relative pension scheme, provided that everyone else in the public sector is doing so and they are doing it because they want to retain their defined benefit scheme. We know how defined benefit schemes have ended, and not only for new entrants in the private sector; many in existing schemes have lost them in mid-career. This was really the whole point of the Hutton report.
Lord Falconer of Thoroton
I apologise for rising again, but I should have made a declaration of interest; I made it at Second Reading but I should make it here, too. I was Lord Chancellor—I do not know whether anyone noticed—and therefore am covered by the judicial pension arrangements. However, none of this would affect me. Secondly and separately, I have close relatives who in future might be affected by this. I apologise profusely to the Committee for not making that declaration before. I also apologise if I have to leave before the end of the Front-Bench speeches. I hope that I will be able to hear them but I am also supposed to be in the main Chamber for the Fixed-term Parliaments Bill.
Lord McAvoy
My Lords, I rise as a former Unite shop steward to come to the rescue of my trade union colleagues among the legal fraternity. I am impressed by the campaign launched by my fraternal trade union colleagues. The noble and learned Lord, Lord Mackay of Clashfern, would have made a wonderful shop steward in Unite.
I started off by listening to the point, the sums and the principle. I am sure that it was not organised, but the turnout of legal colleagues had perhaps a whiff of vested interests about it—legitimate vested interests, but vested interests nevertheless. The more that I listened and thought about it, though, the more I thought that there is a trade union principle involved in this that has led me to support the amendment. That principle is that when you come to an agreement with your employer, it should not be changed in this manner. I hope that my saying this does not result in any more furniture being damaged but there is a principle here, a wonderful trade union principle, and I am delighted to be able to support my comrades.
Lord McKenzie of Luton
My Lords, I was going to be simply in listening mode on this, awaiting the wisdom of the Minister, with a few questions that may or may not be helpful but with a few comments as well.
I shall start with a point that I raised with my noble and learned friend Lord Falconer just before our proceedings about the precise wording of the amendment. We would not be happy with anything that linked any change to the CPI. We are having a broader debate about that switch and there is an issue, were there to be progress on putting in place a structure like this, about whether that should be linked to some sort of price base or to factors relating to longevity. That is a point of detail.
What we have in the Bill is a framework opportunity. The Minister can tell us about what specifically is currently proposed in respect of that. Can he say anything about the process of making regulations? The Bill just says:
“The appropriate Minister may, by regulations made with the concurrence of the Treasury, make provision”.
Is it envisaged that there would be some parliamentary process attached to that? Yes; he is nodding. I would hope that there would be, but how would that proceed? The point about any changes to the pension arrangements possibly being a slippery slope to undermining the judiciary is one that we need to be mindful of. I accept that, although we do not need to see it as the overriding point. If changes were to be a sort of Trojan horse, though, we would all deplore that.
I was going to raise the issue that the noble Lord, Lord Stoneham, raised—he made the point very effectively—about what counts as a diminution in the terms of service of a member of the judiciary in circumstances where the benefit of the pension, because of longevity, is actually increasing. There is a point there that needs to be answered. I can see that that itself creates difficulties. If you have a judge who has served for 20 years, longevity projections 20 years ago would have been quite different from what they are now; if you have someone who is new in post, that is potentially a different issue. That is a reasonable point. If you are looking at a reduction in someone’s terms of service, if you have a component that is improving in terms of the value of the pension, could you, at least in theory, net them off?
The movers of the amendment seem to have accepted the principle of some change to the pension arrangements because it would relate to new appointments. I wonder whether there are issues about what it would mean for a profession where you basically have two different sets of terms and conditions. Is that a particularly healthy position to end up in?
I wonder whether in all of this there is some sort of process of discussion to try to reach agreement on the way forward which current members of the judiciary would feel comfortable with; or will it always be the position whereby current judges will simply put up the shutters and say, “We don’t have to do this because we have a contract that says you can’t do it”—if that is what the contract says? As has been said, across the public sector people are taking pay cuts and facing large-scale redundancies and increases in contributions to their pensions, and it seems difficult for the judiciary, notwithstanding the constitutional arguments, potentially to be seen as standing aside from that. We should be eternally thankful for our judiciary in this country; they have a quality and integrity, and the public generally support them. However, is there not a risk that if you hold out on this, the trust and standing of judges might be undermined?
I have another point on which I should caution noble and learned Lords, although I hesitate to do so. I accept entirely the argument that judges have given up high-flying careers and high earnings because they want to put something back. That is a motivating force. However, you could say that equally of many others in the public sector. In our schools, how many first-rate, first-class teachers have given up or never pursued high-flying careers in the City because they had a passion, wanted to teach and put something back? I am sure that that is true in respect of the judiciary, but I caution against advancing that as part of the noble and learned Lord’s argument.
Does the Minister accept that the amendment would break the contract arrangements for existing judges, because that is the bone of contention here? Is that not the slippery slope towards undermining the independence of the judiciary? If he does not accept that analysis, it would helpful if he explained, from the Government’s point of view, why he does not. If we are in an environment where it is accepted, because we are all in this together, that there should be provision for new judges to make a contribution, it would be entirely reasonable for those provisions to be constrained in terms of how they might be used so that the floodgates are not opened with a fear that the measures could be used arbitrarily. I am sure that all sorts of legal remedies could be advanced, should the Government seek to do that. However, some sort of constraint would not be unreasonable.
Is there not, in all of this, some process for trying to achieve agreement with existing judges to participate and come into the fold on some basis, rather than have this stand-off and all the negative connotations that that entails? I should be interested to hear the Minister’s responses.
The Minister of State, Ministry of Justice (Lord McNally)
My Lords, as always, this has been an interesting debate. It is always difficult to respond to the noble and learned Lord, Lord Mackay, because his wonderful accent means that if he read from the telephone book it would sound like he was reading tablets of stone. Nevertheless, I may have to challenge him before the end of my remarks. The noble Baroness, Lady Murphy, was almost unique in her contribution, until the 7th cavalry arrived in the shape of the noble Lord, Lord Stoneham, but she at least is a friend of judges. She was quick on the attack by calling the government plans a “short-term crowd pleaser”, and saying that the Executive were looking for short-term advantages and imposing a real-terms pay cut of 10 per cent.
Running through many of the contributions has been an “Apocalypse Now” threat that does not stand up against the content of the proposal. I listened to what the noble Baroness said about women and about black and other ethnic minorities in the judiciary. I am the diversity Minister at the MoJ. Having looked at the problem of diversity in the judiciary, I honestly do not think that a modest request for contribution to pensions is the real problem about the disgraceful level of employment of women and other groups in the judiciary. I assure her that I am in close touch with Dame Hazel Genn and the noble Baronesses, Lady Neuberger and Lady Prashar, on those issues.
We went right back to 1701 to find the threat to our judiciary. The noble and learned Baroness, Lady Butler-Sloss, is not only a judge but the daughter of a judge. She made a moving appeal for the middle ranking judiciary—the toilers in the field, as she put it. Nobody challenges the fact that we have a judiciary motivated by public service, independent and incorruptible. I believe, and the past 10 months have deepened my conviction, that we are extremely lucky in our judiciary. Again, the arguments deployed do not bear close examination against the Government’s modest proposals. I also have to disagree with the noble and learned Lord, Lord Scott. I do not think that the proposal will affect those applying for the Bench.
I understand why the noble and learned Lord, Lord Falconer, is not here. We are not arguing that the contributions will have a significant impact on the economy. Of course not; the numbers are not large enough. I will not even try to suggest that we are all in this together, but I take up the point made by the noble Lord, Lord McKenzie: before fighting this to the last ditch, the judiciary should look at their reputation in appearing to fight so hard on a matter of self-interest—even if dressed up in constitutional garb—when others much less well equipped to do so, as the noble Lord, Lord Stoneham, said, are having to face serious sacrifice.
I take up the challenge of the noble and learned Lord, Lord Falconer: is what we are proposing reasonable? I believe that the vast majority of people in this country would find what we are doing reasonable. To suggest that the Government are somehow threatening the independence of the judiciary or the rule of law is not sensible. There is no sword of Damocles or anything like it. I urge the judiciary not to cry wolf too loud on this.
I turn to the noble Lord, Lord McAvoy. My goodness, I am sorry that we are in the Moses Room, because his intervention deserved a much wider audience. I thought that he was going to say that even his old colleagues in the Unite shop stewards’ movement would have blushed at some of the arguments deployed today, but as he rises ever higher in the hierarchy of this House by defending its institutions, it did not surprise me when he intervened on the side of the judges.
I am grateful to the noble Lord, Lord Stoneham, for his intervention. Judges’ pensions are extremely generous: 648 former judicial officeholders receive a pension of between £40,000 and £70,000; 23 former judicial officeholders receive a pension of between £100,000 and £110,000. The average annual pension across the judiciary is just over £41,000. That is not at the lower end of the mass of our society.
That is why the noble Lord, Lord McKenzie, was quite right to warn about reputational risk. I do not believe that this is a slippery slope. I do not believe that it is a reputational risk. On the specific point of how we would handle the powers of the Bill, regulations would be brought forward by statutory instrument subject to negative resolution.
The noble Lord asked me: what is our response to the amendment? I have to tell your Lordships that we believe that it is simply incorrect to assert that the clause could have any impact on judicial independence or raise any concerns about judges’ terms of service. This measure is part of a wider action aimed at ensuring that public service pension provision remains fair and affordable. The Government will not do anything to undermine judicial independence and the rule of law, which is of fundamental constitutional importance. The measures will not affect the pension entitlement of judicial members in any way. Once a member of a judicial pension scheme satisfies the provisions regarding entitlement under the particular scheme, they will still be entitled to their pension benefits, which will not be affected by the contributions they have made. The aim of the measure is that the contributions, when payable, will go towards the cost of the scheme overall—a situation which, as the noble Lord, Lord Stoneham, pointed out, is not enjoyed by many people in many other pension schemes.
The principle that serving judges must pay contributions out of their salary towards the cost of pension provision is already well established. I am pleased to note that the amendment does not object to the principle of taking personal contributions from judges. To take the Judicial Pensions and Retirement Act 1993, which provides the main scheme referred to by the noble and learned Lord, Lord Mackay, members of that scheme pay contributions towards the cost of dependant benefits. That is provided for by Section 9. When the provision was implemented under the Judicial Pensions (Contributions) Regulations 1995, it applied to all those who held qualifying judicial office under the scheme at that time. There were no exceptions for serving judicial officeholders.
The inability of the Government to reduce judges’ pay is seen as an important element of judicial independence by a number of international agreements and recommendations, which have been referred to in the debate by several speakers—the fear being that in some parts of the world, judicial salaries may be reduced if justices do not make the right rulings. I am sure that none of us would seriously suggest that we are in danger of that in this country.
However, that aside, as a matter of ordinary language it would not be usual for a requirement to pay a contribution to a pension scheme to be characterised as a reduction of salary; gross levels of payment to judges will remain unaffected by this measure. Crucially, it would not be correct to assert that the Executive will establish and vary the level of personal judicial pension contributions because the rate at which such contributions will be taken will be set by secondary legislation and so will be subject to the scrutiny and will of Parliament.
Furthermore, this measure does not contravene the letter or the spirit of statutory provisions covering judicial salary protection. Just as it would be incorrect to assert that this measure could impact on judicial independence, so it would be wrong to state that it is inconsistent with the terms of appointment of judicial officeholders. The entitlement to, and benefits derived from, a judicial pension are set out in legislation. Judges’ terms of appointment do not add to, or repeal, the provisions of judicial pensions legislation and do not, therefore, provide any independent source of “right” to the maintenance of the present legislative arrangements in respect of those already appointed to qualifying judicial office.
Any expectation that Parliament may not legislate to alter judicial pension schemes enshrined in legislation cannot be right, particularly when the proposed measures are designed to ensure that such schemes remain affordable and are proposed as part of a consistent range of measures regarding public service pension schemes as a whole. Concerns about judicial independence and judges’ terms of service with regard to this measure are, therefore, unfounded.
It is important to be clear that this measure will apply to judicial officeholders in post in April 2012. However, I should also emphasise a point made by my noble friend Lord Freud during the Second Reading of this Bill; that is, that contributions will only be taken during the period in which an individual judge is accruing pension benefits. For those judges already entitled to a full pension before implementation in April 2012, contributions will not be taken from their salary. Those judges who have part completed their full accrual period before April 2012 will pay contributions only for the outstanding balance of that period. The value of the pension benefits accrued up to the point of introduction of the measure will be unaffected.
At the spending review, the coalition Government took the tough decision to put the economy back on a sustainable footing. To do this they had to consider carefully where spending could be reduced and where costs could be rebalanced to reduce the burden to taxpayers. The noble Baroness, Lady Murphy, called in aid the noble Lord, Lord Hutton, and so do I, for he states clearly that there is a strong case in the short term for increasing the contributions to meet the costs of providing these pensions. This is what we are doing. It is right that judges should begin to contribute towards their own pensions just as other public service pension scheme members will be expected to contribute more.
There are currently around 2,200 salaried judges. Of these, around 200 are estimated to have already accrued a full pension and so would not make personal pension contributions. Therefore, the requirement to pay personal pension contributions will apply to approximately 2,000 salaried judges when it is introduced.
On average, in recent years, around 120 salaried judges have joined the judiciary each year. To restrict the introduction of personal contributions only to new judges appointed from April 2012 would, therefore, either not allow us to make the level of short-term savings on judicial pensions costs which we need to seek in tackling the deficit, or would require an extremely high level of contribution by new judges to help cover the costs of existing judges’ pensions. There is, anyway, as I hope I have made clear, no justification for restricting the measure in this way.
As I said, I will not try to persuade noble Lords that we are all in this together but it would be widely misunderstood if judges seemed to opt themselves out of the realities faced by the rest of the population.
Baroness Murphy
Before the Minister sits down, will he clarify the point about the judicial additional voluntary contributions scheme? I believe that at the moment individuals can exercise their right to add up to 15 per cent. What impact would this new proposal have on the ability of individuals who have a relatively short time to make their contributions before retirement to add to that scheme?
Lord McNally
I apologise if I am wrong on this, and I will write to the noble Baroness, but I believe that the 15 per cent right will be retained and judges will be able to make voluntary contributions, as they do now. I should have asked the noble and learned Lord to withdraw his amendment, even if he intends to return to the fray on Report.
Lord Mackay of Clashfern
My Lords, I need not make a premature decision on that. I will certainly withdraw the amendment, but I will say one or two things about the speeches that we heard. I am grateful to all noble Lords who contributed. It was good to have the support of the noble Lord, Lord McAvoy, who shares something of my accent, though possibly not everything.
My only point at Second Reading concerned the terms of service. The noble Lord, Lord Stoneham, must have been thinking of somebody else when he said that at Second Reading I referred to the quality of the judiciary. I do not think that I did. At Second Reading, I made the point that when I introduced the 1992 Bill that became the 1993 Act, I faced a terrific barrage concerning the effect this would have on the judiciary of the future. Fortunately, Parliament as a whole decided that the gloomy forecast was not correct. I think that I am right in saying that nobody, looking back, would say now that it was correct. The quality of the judiciary has remained very high. However, I did not make the point about the quality of the judiciary: other noble Lords did. I restricted myself to saying that, in accordance with our understanding of the constitution, the terms of service of a serving judge cannot be altered adversely during his term of service.
The noble Lord, Lord Stoneham, referred to contracts being changed with changing circumstances. Of course, most employees are in a situation where their contract has a definite time. The contract will run for that time and, unless there is agreement, it will be very difficult to change it. Judges' terms of service are until retirement because of the security of tenure that the Act of Settlement gave them. There is no question in my mind that we have thought for many years now that the terms of service of judges needed to be set out in statute. In 1993, we set out new terms that applied only to new judges: that is to say, judges appointed after the Act came into effect.
The noble Lord, Lord McNally, said that the 1995 regulations applied to everybody without exception. With the greatest respect, that is not correct. The 1995 regulations applied only to the arrangements under the 1995 Act, which applied only to those appointed after the Act came into effect. The main regulations came into effect on the same day as the Act. Therefore, the regulations were in place when the Act came into effect. Judges who were serving before 31 March of whatever year it was—I think it was 1995—were not subject to the arrangements. They had the opportunity of opting in to the 1993 Act arrangements, but were not obliged to do so, and a number of serving judges still have a retirement age that is different from that laid down in the 1993 Act.
The noble and learned Lord, Lord Falconer, said that he had an interest in this matter which he should declare. I made it absolutely clear—I thought that I had done so originally, but perhaps I did not do so today—that I was the Lord Chancellor for a while, including at the time the 1993 Act came into force, as well as when it was being brought through Parliament. I was also a judge in the Supreme Court in Scotland and a Lord of Appeal in Ordinary. But so far as I know, I have no financial interest in this whatever, and I am certainly not a spokesman for the judiciary—not at all. The judiciary must speak for themselves, though they cannot speak for themselves in this House any longer as serving judges are not allowed to speak here. Therefore, they will have to speak to the Minister for themselves, and I have no doubt that they will have an opportunity to do that. I am not privy to the sort of consultations they may have, although I have heard a little about it. I will have to leave being a spokesman for the judiciary to others; it is certainly nothing to do with me.
I appreciate the difficulty we are in in the present situation. I can see that everyone is required to make sacrifices. Of course, that is something that one can do under the tax regime. I am not confident enough to suggest how this could be done, but I feel certain that the tax regime is pretty flexible in getting money out of people. So there is no question that tax could be used; it does not infringe the terms of service of the individual. When there was a general reduction in the salary of public servants in the Republic of Ireland, the judiciary was expressly excluded for the reason that the constitution had that arrangement in it. I agree that longevity is an important part of the value of a pension but the terms of service here are perfectly clear, as set out in the 1993 Act. My point is that this is a breach of the general understanding of our constitutional arrangement that a judge’s terms of service should not be altered adversely during his period of service. Of course, I shall withdraw the amendment. Whether I return to it may depend on a variety of circumstances which I am not in a position to control at the moment.
Lord Boswell of Aynho
“Gender recognition
Notwithstanding the other provisions of this Act, those persons living within their acquired gender within the terms of the Gender Recognition Act 2004 for a period of two years before the passage of that Act, or who have received a full gender recognition certificate under the terms of that Act within a period of two years after its coming into effect, are deemed always to have lived in their acquired gender for the purposes of calculation of state pension and other provisions of this Act, provided that this is not to their detriment in entitlement to those benefits and other provisions.”
Lord Boswell of Aynho
I am conscious of the hour and will try to be as succinct as I can. The Committee will know that I served previously for 23 years as the Member of Parliament for Daventry, and would not wish me to rehearse too many experiences from that time. However, I would say that this is one of the perhaps two handfuls of cases that I encountered as a constituency Member which struck me as having a particular interest or relevance, which influenced my subsequent actions and interests and in which I became personally involved. It is for that reason that I have brought forward this amendment.
I refer to the situation of a then constituent who was well known to me, who is now a senior and respected member of her local community, having transgendered from being a male and having in that capacity been a senior civil servant—and therefore well able to write a brief for me on this subject, though she is not the sort to do so in this case. I know that the Minister is aware of her identity, as is my successor as the Member of Parliament for Daventry, with whom I have discussed this case and who was enthusiastic that I should take it forward. We happened to discuss it by chance, and I said, “Ah, the Pensions Bill is on; a new clause will be following immediately, because we ought to chase this”.
The background to this situation, which involves the comparatively small number of people in this country who are transgendered, perhaps 5,000 or something of that order, was an adverse judgment of the European Court of Human Rights against the UK for not really handling the problem. It is a matter, both in the application of the judgment and more generally, that continues to attract its attention. Purely by coincidence, I happened to notice as the result of some representations that I had this week by e-mail, that the ECHR is going heavy on Lithuania, which has a rather more punitive attitude than the United Kingdom has ever typically shown on the matter. The issue is not about punitive intervention; rather, it is essentially about the lack of a legal regime and, to some extent, a lack of interest in handling our problem.
The previous Administration rightly sought to respond to the ECHR judgment by introducing a Gender Recognition Bill. Because of my involvement with those issues, I volunteered to lead for my own party in the Standing Committee and the detailed consideration of that Bill. I found the situation fascinating and complex, although there was a wide measure of consensus across the committee. These are complex and sensitive issues for the people involved. People often get the wrong end of the stick if they have had no interest or involvement in this area; they get confused by issues of surgery and so forth. Those matters were rehearsed at some length and in some depth in the committee.
The criterion under which we were operating was living in the acquired gender as the main test, rather than some purely mechanical procedure, and proof that that had been taking place for a substantial period of time and had not been reversed and was not equivocal. Under the 2004 Act, that led the individual involved to have the right to apply for an interim, and then for a final, gender recognition certificate.
I should make the point that this is substantially a matter of law, and it would have been nice if the Ministry of Justice, in the shape of my noble friend Lord McNally, had stayed behind. I am sure that my noble friend Lord Freud will want to have consultations with the Ministry of Justice—indeed, I hope that in formulating his response to this he has done so—because it is primarily an issue of law and legal status.
There were some difficulties, and therefore there is only a limited amount of retrospectivity. If I may give an example from outside this context in relation to registrations of birth, there was an understandable reluctance to tear up the birth registration if someone had altered gender, and special provisions were made for the registrar to record separately any subsequent applications and the grant of gender recognition certificates. We cannot unwrite the past or the previous gender—perhaps some of the people involved would not wish to do so—but we record as we move on.
As I said to the committee, there was a strong emphasis on law and a tacit understanding that, once the certificate had been given, that would alter the legal status, but it did not convey benefits retrospectively back to the cradle in the new acquired gender. It would be fair to say, with no disrespect to either Ministers or officials from the Department for Work and Pensions in their briefing on the Bill, that the provisions for pensions and state benefits were grafted on. It would also be fair to say that Members of the committee like myself did not focus as intensely on them as we did on some of the other issues that we had already debated.
Baroness Drake
My Lords, I am very sympathetic to the amendment, which draws attention to the need to bring a practical resolution for those individuals who have not been able to benefit fully from the Gender Recognition Act 2004. I compliment the noble Lord, Lord Boswell, on raising the matter, because the issues facing transgendered people are considered too infrequently. They will appreciate the fact that their concerns are being recognised in the amendment and in the debate.
As noble Lords said, the welcome introduction of the gender recognition certificate in 2005 meant that individuals for the first time could have their acquired gender formally recognised. However, as with all changes of this type, some individuals are caught in the transition process and risk losing out. As the noble Lord, Lord Boswell, indicated, there are no official data on the size of the transgender population, so it is difficult to quantify the number of individuals who would benefit from a resolution in the manner of the amendment. However, it is clear that the number of individuals is likely to be very small. Therefore, it is unlikely to make a substantial financial difference to government expenditure, although it will do for the individuals concerned.
The Gender Recognition Act 2004, which was introduced in 2005, brought in the official process to recognise gender change. For those who transitioned prior to 2005, there was no official recognition of their change in gender, although the DWP, to the extent that it could use its discretion, was often sympathetic in allowing the change to be recognised in some circumstances. Since the introduction of the gender recognition certificate, an individual with such a certificate is are treated as though that is their natal gender. The amendment seeks to ensure that those who transitioned prior to the implementation of the provisions, and those who did so immediately after the Act came into effect, are not disadvantaged.
The primary beneficiaries of the amendment would be male-to-female transgendered people who reached female state pension age before 2007. At present, they are unable to claim their state pension for that initial period. For example, a male-to-female transgendered person who turned 60 in 2005 but got a gender recognition certificate only in 2007 would not have received the state pension until they gained the certificate in 2007. Therefore, they feel that they lost two years of state pension provision given their acquisition of the female gender. Also, as we know, the women's state pension would have been based on a lower number of working years—39 years for women as against 44 for men. The amount that would have been accrued and credited, as well as the time at which it was paid out, would have been different.
The noble Lord recognises in his amendment that there could be losers. Female-to-male transgendered persons would face the reverse issue to the one that I described for male-to-female transgendered people. The aim of the amendment is to ensure that there are no losers. It seeks to implement the provisions to the detriment of no one. I do not know whether the Minister will pick up on that point. It is a not unreasonable position because those most affected, who will be small in number, would have been near to pension age and would have had less time to adjust to the implications of that.
There will be other issues, such as those relating to divorce. When one partner wishes to transition with a gender recognition certificate, the couple cannot legally remain married. They must divorce and become civil partners. That could create winners and losers. The noble Lord, Lord Boswell, is right to say that what he aspires to achieve in the amendment should not be done in a way that is detrimental to the entitlement of anyone affected. I commend the noble Lord for addressing the sense of unfairness to a small group of individuals, and I join him in urging the Minister to address it.
Lord Freud
My Lords, the amendment seeks to provide a remedy for a group of older transsexual people who have missed out on full state pension rights because the Gender Recognition Act does not allow for retrospective legal recognition of a person’s acquired gender. This is a very complicated area, as my noble friend Lord Boswell pointed out. He spared us some of the detail when he introduced the amendment, but I should take a little time to outline the issue and give him the up-to-date information on the current position.
A transsexual person is someone who desires to live their life permanently in the opposite sex to that which they were assigned at birth; although “assigned” might be the wrong word. This desire often stems from a medical condition called gender dysphoria. The Gender Recognition Act, effective from April 2005, allows transsexual people, through the granting of certificates, to gain recognition of their acquired gender for all legal purposes. It covers only people who have suffered from gender dysphoria.
It is a general principle of our legal system that the laws relating to legal status should have only prospective effect. This ensures legal certainty and clarity. There was no reason to depart from this principle when the Gender Recognition Act was introduced, as my noble friend will be fully aware. Although the Act established future rights, a question remained over the past.
The position on the equal treatment rights of transsexual people for periods before 2005 was tested in the domestic and European courts. In 2006, the European Court of Justice held that it was discriminatory not to have had a means of recognising a person’s acquired gender, for social security purposes, prior to the introduction of the Gender Recognition Act. However, importantly, the court left it up to the UK Government to set the conditions for granting equal treatment for periods prior to the introduction of the Gender Recognition Act in 2005. The European Court clearly considered that it provided adequate cover for periods after that date.
Perhaps I may give my noble friend more up-to-date figures than those he might have. Records held by HMRC suggest that around 750 people in the UK are likely to gain from the European Court ruling, compared with the figure of 50 that he imagined. Under that ruling, where a person is successful in their equal treatment claim, we would need to make increased state payments on the basis that they had foregone all entitlement from the age of 60 or the date of surgery, if that was later. The costs of making such payments would amount to somewhere between £9 million and £38 million over the lifetime of the award. One can recognise the level of uncertainty surrounding that wide spread.
Lord Boswell of Aynho
My Lords, I am grateful to the Minister for his response, the detail that he has been able to bring to the current situation, his explanation of some of the difficulties that go even further than those that I had anticipated or scoped, and his sensitivity in dealing with the matter. I do not think that anyone would have expected a knock-down, one-off answer today, but we have had some encouragement on the commitment to having a specialist team to deal with the issue of equal treatment. I give a personal commitment to provide any assistance that the Minister might want on this, because I am happy to continue my interest in this area in any way that would be useful to a resolution. None of us wants serial legislation to clear up each case. It would be better to get an agreed understanding, and the Minister has perhaps given us the basis for that. I am grateful to him and I beg leave to withdraw the amendment.
Lord Boswell of Aynho
“Objectives of the Pensions Regulator
(1) Section 5 of the Pensions Act 2004 (regulator’s objectives) is amended as follows.
(2) At the end of subsection (1), insert—
“(e) to promote the provision of good pensions and to ensure their health and longevity.””
Lord Boswell of Aynho
My Lords, I will be even briefer on this amendment, having regard to the hour and the common wish to finish.
This amendment arose as the result of an approach that I received from the National Association of Pension Funds. The intention of the new clause would be to put what I might call a forward gear into the work of the Pensions Regulator. As I have explained to the Committee in the past, I have quite a lot of people in my family with a background in education. My wife for one would always say, “Emphasise the positive, don’t go around looking at the negative”. That is a good maxim for this Committee.
At the moment, as the NAPF reasonably reminds us, the Pensions Regulator has three basic statutory objectives, all of which are, at least to some extent, slightly passive, although I do not mean that they are improper: first, to protect the benefits of members of work-based pension schemes, which is hugely important; secondly, to promote the good administration of work-based pension schemes, which is also important, although administration is something that serves rather than being the main driver of the event; and, thirdly, to reduce the risk of situations arising that might lead to claims for compensation from the Pension Protection Fund. At the moment there is an interest in preventing that getting out of hand; we have discussed the levy and the burden on pension funds and, indirectly, on contributors of all kinds. No one is arguing that those objectives are wrong, but the NAPF’s concern, which I warm to, is that the last obligation—trying to avoid benefit run-off—is beginning to dominate the regulator’s activities. The overall work of the regulator is insufficiently focused on the continuation of good-quality workplace pensions. It is in the interests of the NAPF and of everyone across the Committee that that should be sustained.
What is proposed here is a simple provision that would give us a positive forward gear to promote the provision of good pensions and to ensure their health and longevity. Nobody here would dissent from that. Arguably, large parts of the Bill, particularly in relation to the NEST scheme, are focused on it, and it would be helpful to have the Minister's response in due course. He will recognise a probing amendment when he sees one. I am not committed to the exact wording, nor to the vehicle involved: but I hope that somehow we will be able to signal that the focus should be on supporting, sustaining and maintaining the positive, rather than on simply cleaning up the mess where things go wrong.
I will take one final shot. Perhaps the Minister would report on any elements of deregulation or decluttering of the business obligation that he has undertaken within the spirit of BIS’s one-in, one-out approach. That would be helpful. I beg to move.
Lord McKenzie of Luton
My Lords, I will be brief. I understand the thrust of the amendment. However, I have some concerns, mainly over the wording. To place on the regulator an objective to ensure the health and longevity of good pensions is stretching a point. The regulator is focused on workplace pensions. As written, “pensions” could range over a raft of different situations, including contract-based ones as well as DB ones.
From my experience, I challenge the assertion that the regulator is overly focused on protecting the PPF. Perhaps it is easy to forget the circumstances of 2004, when DB schemes were dropping out of the system like flies. The regulator's role then made a real difference. I recall also that over the past 18 months to two years there have been constant challenges to the regulator on the grounds that requirements under recovery plans were too severe. The regulator responded in a very effective way, being clear about what flexibility there was in the system but also recognising that what was important to DB schemes was the employer covenant. Unlike insurance-based contractor arrangements, these entities are capitalised and support the provision of annuities or whatever else through that structure. For DB schemes, it is the undertaking of the employer and sponsor that is the driver. Therefore, the regulator's role in holding them to account is good.
No one would object to anyone’s role in promoting the provision of good pensions. However, in this case I would not impose the obligation to ensure their health and longevity, because these will depend on a whole raft of things, not least the commercial situation of the sponsor and what their future may be. The regulator has played an important role, and I will be interested to hear if the Minister has any proposals to change their current remit and focus.
Lord Freud
My Lords, we have reached the last amendment in Committee on the Pensions Bill with a little nostalgia—and perhaps with relief for some. I will deal with my noble friend Lord Boswell’s amendment on the objectives of the Pensions Regulator, and will start by providing some background. Many noble Lords will be aware that Parliament legislated, through the Pensions Act 2004, to establish an independent, risk-based Pensions Regulator whose job was to regulate work-based pension schemes based in the UK. The Act gave the Pensions Regulator his main statutory objectives. These include protecting the benefits of members of work-based pension schemes and limiting calls on the Pension Protection Fund. Noble Lords may be interested to know that, in its 2007 report on the Pensions Regulator’s progress in establishing a regulatory approach, the National Audit Office found that the objectives provided a sound framework for pensions regulation.
Some of us may also be aware that the NAPF, in its 2010 report Vision for Pensions, recommended that the regulator’s activities should be reoriented. They proposed that this should be done by giving the regulator a new objective, to promote good pension provision and to ensure their health and longevity. My noble friend is well aware of the interests of the NAPF in this area, given the nature of this amendment.
Lord Boswell of Aynho
I am grateful to my noble friend for the way in which he has answered this question. I have been around for a year or two and have seen a ministerial brief or two. I am not entirely surprised, although mildly disappointed, at the nature of his comments. We understand the difficulties, including the substantive one of confusing people or in any way removing the focus on the important background work of securing a properly funded and safe pensions industry. I am glad on his behalf that the Minister has assumed for himself the role of the forward gear, because he is the best possible bully pulpit for all this. The essence of this should be collaboration and discussion between representatives of the industry, employers, staff and the department to facilitate a good outcome.
In conclusion, this has been the first Committee that I have attended in this place. I am grateful to my noble friend for his responses, but in the same breath I apply that gratitude to noble Lords opposite, including the noble Lord, Lord McKenzie of Luton, and others. I have found this procedure enlightening and positive, and on the whole it has done some good. I am grateful specifically for my noble friend’s response, and beg leave to withdraw the amendment.