Defined-benefit Pension Schemes
(6 years, 5 months ago)
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Laura Smith (Crewe and Nantwich) (Lab)
I beg to move,
That this House has considered protecting defined-benefit pension schemes.
It is a pleasure to serve under your chairmanship, Mr Hollobone, and to introduce this important debate. I welcome my hon. Friend the Member for Birmingham, Erdington (Jack Dromey) and the Minister; their presence underlines the importance of this issue.
There are few more precious assets than a pension. Pensions are not benefits; they are deferred wages deducted from the previous earnings of responsible working people who decided to save diligently during their working life, in return for financial security in retirement. As we all know, the funds that are made up of those savings invest huge amounts in our economy, as well as providing for our pensioners in retirement. Dignity in later life is something that every Member present values immensely. We should all feel duty-bound to do everything we possibly can to guarantee that for each and every pensioner in our country, without exception.
Let me begin by stating from the outset that I am no expert on pensions. I have called this debate because it is of the utmost importance to workers in my constituency. I believe that will be the case for all Members here today. It is incumbent on us all to develop our understanding of the key issues to ensure that the livelihoods of pensioners up and down our country are safeguarded, and to ensure dignity in later life for all.
Providing our pensioners with an income that they can live on comfortably is a key pillar of dignity in later life. The fight against pensioner poverty must therefore include a determined effort to provide the highest quality pensions in the most secure and sustainable way. Defined-benefit pension schemes have offered some workers precisely that for many years. The attractiveness of an affordable scheme that enables them to plan their retirement by knowing in advance precisely how much they will be paid is undoubtedly a key factor for many workers when choosing their employer. If we are to encourage more workers to save, responsible choices must be rewarded. Any pension fund deficits that arise are certainly not the fault of the scheme member, who has simply chosen to sacrifice pay today for pension tomorrow so that they have an adequate income after they retire. We must certainly avoid sending any message that deters current and future generations of workers from saving for retirement.
This issue is particularly topical in my constituency. Not only are many workers affected by the recent collapse of Carillion; more than 1,000 workers at Bentley Motors are in discussions with their employer about the future, and potential closure, of their DB scheme. Former Rolls-Royce employees, some of whom have been paying into the scheme for almost 50 years, face the prospect of serious financial hardship in retirement, with the potential to lose hundreds of thousands of pounds. The younger workers in the scheme stand to lose the most. I will come on to intergenerational unfairness towards the end of my speech, but I would welcome a commitment from the Minister to discuss this particular case with me in the near future, to see what support he can give to scheme members in Crewe and Nantwich.
Auto-enrolment has been a success in that it has increased the number of workers saving for retirement, so I applaud the Government’s continued efforts in that respect. However, auto-enrolment cannot be seen by employers as a retreat in which they can hide from their responsibilities under existing DB schemes. DB schemes appear to be working well—the Minister said so in his address to the TUC earlier this year. He also said that where employers can, they should continue their responsibilities. I wholeheartedly agree with him. Research by Mercer published earlier this month suggested that DB pension deficits at FTSE 350 organisations have more than halved since January. In 2015, FTSE 100 companies paid around five times as much in dividends as they did in contributions to their DB pension schemes.
The Green Paper that the Government published last year states that in 2015, companies with a DB pension scheme deficit paid out £53 billion in dividends—25% more than their disclosed deficits. It therefore seems logical to conclude that those companies have the ability immediately to repair their pension scheme deficits by feeding dividends into deficit repair contributions.
I do not pretend that there are no issues with individual DB schemes, but in aggregate such schemes do not appear to be inherently unaffordable. We must remember that they provide decent, good-value pensions. Defined-contribution schemes require much larger contributions to have a realistic chance of providing benefits equivalent to those paid by DB schemes. The value of the pot in a DB scheme is far higher in nearly every case, and both scheme members and their employer will have paid less for it.
There also appears to be an issue with overly risk-averse assumptions threatening DB schemes. Pensions Regulator guidance allows schemes to base the discount rate on the rate of return that assets held by the fund are expected to generate over the lifetime of the scheme, yet trustees seem reluctant to use that method. There is concern that the corporate failure of Carillion will create an even more risk-averse climate.
Dr David Drew (Stroud) (Lab/Co-op)
I apologise for missing the start of my hon. Friend’s excellent speech. Does she agree that one of the issues is that the Pensions Regulator is unaccountable? I have had a particular issue given what has happened post-Carillion, and I have been trying to find out how the Pensions Regulator makes decisions, which is not at all clear. Does she agree that that needs to be brought up in this place so that there can be proper accountability?
Laura Smith
I thank my hon. Friend for making that point. From my conversation with the Minister before the debate, I am sure he will be happy to talk about that in his speech and when he meets the Pensions Regulator.
The Green Paper shows that there has been a clear decline in gilt yields over the past two decades. The public sector trade union, Unison, is of the view that most schemes that did not hedge their risk should seriously consider using that discount rate method.
Jim Shannon (Strangford) (DUP)
I congratulate the hon. Lady on bringing this matter to the Chamber. On average, people believe that their living expenses will account for 34% of their pension, yet they will actually account for 49%. Does she agree that more should be done to ensure that people make the most of pension schemes by paying in themselves? I think that is the thrust of what she is saying—that individuals should make more effort rather than relying on employer contributions, which in many cases have been found to be suspect.
Laura Smith
I apologise to the hon. Gentleman—it was hard to hear him because of the sound of the fans. I will come on to those points.
Basing assumptions on gilts may artificially inflate deficits and future service costs for the sponsoring employer and scheme members. That may lead to the unnecessary closure of schemes to new members and future benefit accrual. Unison’s experience is that some employers would rather pay more and use the increase in costs as an excuse to close their DB scheme, saving money by transferring members into a DC scheme with lower employer contributions, which results in reduced pension benefits for scheme members.
Not only are DB schemes desirable, but they can be affordable and good value for money. We should do everything we can to protect them. The Government’s role should be to provide an adequate regulatory framework, meaningful enforcement and appropriate incentives to help encourage sound decision making and ultimately to provide decent pensions. I welcome the Government’s White Paper and the regulator’s ambition to be clearer, quicker and tougher.
I hope that the Minister can provide me with a little more clarity or reassurance about three issues. First, there appears to be no new relief for employers struggling with DB liabilities. Although I welcome the suggestion that there should be penalties for directors who do not take sufficient care of scheme members’ interests, without support for struggling employers, tougher rules may simply incentivise more of them to close DB schemes in favour of DC schemes with inferior pensions for workers. Secondly, what additional resources are being provided to ensure TPR has the capability and capacity to effectively regulate the sector?
Thirdly, encouraging consolidation over alternative options would not prioritise the protection of members’ benefits, which should be the Government’s primary focus. I understand that insurance buy-out remains the best solution for guaranteeing member benefits in DB schemes. Securing member benefits should be paramount. With an insurer, members are almost certain to receive their benefits in full. The Association of British Insurers believes that prices are the best consultants have ever seen, and that that option is available to smaller schemes.
Although I understand there is a need to provide options for employers that simply cannot secure a buy-out, any new framework should not incentivise consolidation purely on the basis that it is a cheaper option. The risk of investment failure was highlighted by the Pension Protection Fund in a submission to the Select Committee on Work and Pensions. In the absence of a substantive employer, the security of members is entirely dependent on the investment performance of the fund and the associated buffer. Consolidation is therefore less secure than buy-out, and profit withdrawal in years of good investment returns may lead to scheme failure by preventing a strong build-up of reserves.
Consolidation also means that risk, rather than being dispersed across several schemes, becomes focused on one investment strategy. Different consolidators may be inclined to pursue the same investment strategy, resulting in a high correlation of risk in the DB sector. Obviously, that may lead to all schemes failing at the same time. I am also concerned that younger members may shoulder the risk of commercial consolidators collapsing. We should not pursue any policy that leads to greater intergenerational unfairness.
To put it plainly, I am concerned that the option to consolidate or transfer into a super-fund may be seen by some employers as another bolthole to escape their liabilities on the cheap.
Julian Knight (Solihull) (Con)
I thank the hon. Lady for securing this important debate. She is making a very good speech in many respects, but one of the concerns about DB schemes is that some that have existed for a long time have few members but a large legacy. A scheme may have only 100 employees, for example, but a very large legacy behind it. I wonder whether she recognises that super-consolidation may be an option for such schemes.
Laura Smith
I touched on why I have concerns about that.
As I said, securing member benefits should be paramount. What reassurance can the Minister give me that the eventual framework will ensure that employers’ decisions are focused on that objective? If an employer has the means to get a buy-out and that is the best way to guarantee scheme members’ benefits, it should get a buy-out. We need a framework that incentivises decision making on that basis.
Will any legislation that is enacted be applied retrospectively to cover commercial consolidators formed in the intervening period? I am concerned that a two-tier system of regulation would provide loopholes for those willing to exploit them. Directors of sponsoring employers must have personal liability—there must be criminal offences and heavy fines.
I support the White Paper’s push for clearer, quicker and tougher regulation. I commend the Minister’s efforts and I hope that the White Paper leads to measures that further protect defined-benefit pensions. However, I remain concerned that over-zealous prudence and assumptions threaten otherwise affordable DB schemes. There should be additional support and relief for struggling schemes. I would like to be confident that TPR will be given the resources it needs to have the capability and capacity to regulate effectively in the light of any changes. I am concerned that consolidation—although it may be the best option for some schemes—will be seen as an acceptable cheaper option that does not prioritise protecting scheme members’ benefits when more secure alternatives, such as buy-out, are available and within the means of the employer.
We must endeavour to build a framework that incentivises workers to save responsibly and deters directors from behaving irresponsibly. Paying dividends must not be prioritised at the expense of protecting pensions. I would be grateful if the Minister responded to the issues I have outlined and committed to looking into the ongoing matter at Bentley Motors, which is of concern to more than 1,000 people in Crewe and Nantwich who work for the company, and to working with me to promote a dialogue that has the protection of scheme members’ benefits at its heart.
Several hon. Members rose—
Mr Philip Hollobone (in the Chair)
Order. The debate can last until 5.30 pm. I advise Members that we expect a Division at about 5 o’clock, in which case the debate will be extended by 15 minutes. If there is no Division, I am due to call the Front-Bench spokespeople at 5.08 pm, with the guideline limits being five minutes for the Scottish National party, five minutes for Her Majesty’s Opposition and 10 minutes for the Minister, leaving Laura Smith two or three minutes to sum up the debate.
There are four speakers seeking to catch my eye, one of whom has left the Chamber. We will start with Paul Masterton.
Paul Masterton (East Renfrewshire) (Con)
It is a pleasure to serve under your chairmanship, Mr Hollobone. I refer the House to my entry in the Register of Members’ Financial Interests. For the 10 years before I was elected, I was a pensions specialist solicitor. I must say to the hon. Member for Crewe and Nantwich (Laura Smith) that, for someone who claims not to be an expert, she demonstrated an incredible grasp of the key issues in a good opening speech, which certainly puts me to shame.
When we talk about protecting DB schemes, it is worth remembering that the fiduciary duty on the part of trustees is to protect the benefits already built up. Their responsibility is to ensure that the benefits accrued can be paid, not to ensure that an employer continues with ongoing DB provision. That is fundamentally an employment matter. On many occasions, the best way to protect DB benefits is to reduce future accrual, to close the scheme or—in the most nuclear option—to tip the employer into insolvency and have the scheme move into the Pension Protection Fund, so we must be careful about what we mean by protecting DB benefits and DB schemes.
It goes without saying that DB schemes face major challenges, and the Government have recognised that through the Green Paper and then the White Paper. When the Green Paper came out, I was not sure whether I agreed with the statement that DB schemes were not largely unaffordable simply due to my case load in the office at that time. Generally, the system works well for most employers, but we need a tougher approach for those failing to act responsibly.
I am pleased that the regulator was granted many of the powers it sought, because one of my big frustrations in practice was that it was largely toothless. It would send a lot of letters and have conference calls. Those who were really unfortunate would be dragged down to Brighton for an awful meeting where nothing really happened.
The Parliamentary Under-Secretary of State for Work and Pensions (Guy Opperman)
My hon. Friend will be pleased to know that I am not being dragged but going voluntarily down to Brighton, where the Pensions Regulator is based, this Thursday for a proper five-hour sit-down. In that, I will certainly take up some of the concerns of the hon. Member for Crewe and Nantwich (Laura Smith).
Paul Masterton
I am pleased to hear that, because the Pensions Regulator performs a vital role in overseeing occupational pension schemes. One of the big frustrations on the trustee side—not usually on the employer side—was that the regulator did not seem to have the time or resources to get stuck in or do anything serious to encourage or require an employer to change course. Some of the suggested improvements are very good.
In the past, pension schemes operated in a world of high interest rates and good equity returns. We now live in a different world. Investment decisions reflect ongoing uncertainty and volatility, which has led to widespread de-risking and a preference for investing in bonds and gilts. That has been a huge loss to the UK economy, with funding being taken out of equities. We could do more to look at how to unlock some of the vast sums that sit behind pension schemes.
Julian Knight
Does my hon. Friend share my frustration that often UK infrastructure is owned by overseas pension schemes and that, despite exhortations from the Government for schemes to invest more in the UK and in these stable, high-producing assets, they still seem reluctant to do so?
Paul Masterton
I do. Big pension funds—Canadian pension schemes and many others—invest a lot, and those investment projects provide good returns. We could unlock huge amounts of money.
Final salary pension schemes will end up in one of two places. They will either be successful and be bought out with an insurance company or fail and end up in the PPF. The hon. Member for Crewe and Nantwich was right that deficits have been pushed up by low gilt yields and low interest rates. Many employers, pushed by their trustees, and to a certain extent by the regulator, have prudent assumptions in their valuation setting, which increases the amount they have to pay in. That can provide a false picture of the deficit, but it does match the reality of trying to buy on the market. There is flexibility in the system, and one thing the regulator is looking at is being more akin to employer affordability in the valuation assumption setting, which should help with some of these problems.
Fundamentally, this drives to a system that is completely linked to the employer covenant. The stronger the employer, the more flexibility there is, which gives much more leverage to play around with assumptions. A weak employer cannot afford to take as much risk, so it is much tighter with its assumptions. That pushes the deficit up, which means more money has to be paid in. It is a self-perpetuating cycle where the weakest schemes, which need the greatest support, do not get it. They need the breathing space, but they have to pay high levels of deficit repair contributions. As my hon. Friend the Member for Solihull (Julian Knight) said, we should consider that many such schemes are legacy schemes, predominantly in old-school manufacturing industries, and many of those companies are shells of what they were in the ’70s and ’80s when their schemes were brought in. Those employers already provide weak covenants, and that situation may only get worse as we move forward.
It is remarkable that “The Purple Book” from the PPF estimates that 3 million DB members have only a 50% chance of seeing their benefits paid in full. The PPF is a fantastic lifeboat scheme to ensure that people still get decent payment of pensions, but we do not really want people to be reliant on it.
I disagree with the hon. Lady about consolidation. What the Government have been looking to do on that is sensible. Lack of scale is crucial. Two thirds of the UK’s defined-benefit schemes have fewer than 1,000 members, and small schemes cannot access the same sophisticated investment opportunities as bigger schemes. Even costs such as advisory fees, accountancy fees, actuarial fees and legal fees are disproportionately high for small schemes. There is a good place for consolidation, but she is right to worry about governance and ensuring that we do not go from a situation under an employer scheme with high levels of governance to one under a bigger scheme where that gets lost. That can probably be worked through in a scheme’s design and set-up. Ultimately, the solution to protecting DB schemes is not governmental but in the economy and the strength of the sponsor or, where available, the parent company. One of the big difficulties is volatility and the lack of certainty around risk.
The Government continue to take steps to pick apart the issues faced by the DB sector. They are doing good work, but fundamentally we need a clear understanding that governance, funding and covenants are intrinsically linked. I look forward to hearing the good story the Minister has to tell on what the Government are doing.
Justin Madders (Ellesmere Port and Neston) (Lab)
It is a pleasure to serve under your chairmanship, Mr Hollobone. I congratulate my hon. Friend the Member for Crewe and Nantwich (Laura Smith) on securing the debate and the excellent way in which she introduced it. Once again, she has proved to be a formidable advocate for her constituents. I do not intend to cover the same ground but will instead raise an issue facing one of my constituents that also affects thousands of members of defined-benefit pension schemes who are not entitled to any protection against rises in the cost of living.
My constituent, Mr Thorpe, is one of a significant number of members of the Foster Wheeler defined-benefit pension plan. Members of the scheme have received no increase in their pensions since 2002. This issue is not restricted to a single scheme—those with defined-benefit pensions accrued before 1997 are not entitled to any statutory inflation protection. While many enjoy discretionary increases, about 100,000 pre-1997 pensions receive no increase, because before then any increases were based on the rules of the scheme only. That remains the position for pensions earned before that date.
If the rules provide for increases, whether fixed rate or index-linked, they must continue to be paid. However, in the same way, if a scheme does not make such provision, none will be paid. In a number of schemes, increases are paid at the discretion of either the trustees or the employer, which leaves the living standards of thousands of people in our country not protected by law but subject to the discretion of others.
To illustrate the impact, Mr Thorpe provided me with a simple calculation based on the case of a fellow Foster Wheeler pensioner. We will say that this chap is called John. He retired in 2002 at the age of 60 and his pension at the age of retirement was £10,000 per annum. In 2017, when he was aged 75, the purchasing power of that pension was down to £5,600 per annum. By 2027, when he is aged 85, the purchasing power of John’s pension is likely to be less than £3,000 per annum—a 70% fall in the value of the pension over the course of his retirement. That has an impact on only a relatively small number of pensioners who paid into their pensions during a specific period of time but, as I hope I have illustrated, it has a massive impact on those individuals.
We face a situation not unlike that of the Women Against State Pension Inequality Campaign, in which people find themselves at a disadvantage simply because they were born in a particular timeframe or had worked prior to the introduction of particular legislation. When I wrote to the Minister, his response stated that he did not think that it would be right
“to consider retrospective changes to the rules on indexation”.
Given that the analysis by the House of Commons Library found that in 2015 FTSE 100 companies paid five times as much in dividends as they did in contributions to defined-benefit pension schemes, will he look again at what seems to be a very unfair situation? Employers should have a duty to do right by their employees and pensioners before they consider rewarding shareholders.
My constituent, Mr Thorpe, states that research indicates that the cost of inflation protecting the Foster Wheeler pre-1997 pensioners would be around £1 million per 1% awarded. That is a modest and sustainable cost for a fund with a value of almost £3 billion. Thousands of pre-1997 pensioners were extremely disappointed to see that the White Paper does not propose any solutions to that issue. As my hon. Friend the Member for Crewe and Nantwich said, pensions are deferred pay. Nobody would argue that it is sustainable or equitable for someone to have no pay rises related to the cost of living for a 25-year period or possibly longer. What does that say to the next generation of pensioners about the necessity of saving for their retirement? It is hardly an encouragement to them to save for their old age. In conclusion, I ask the Minister to look again at this issue.
Julian Knight (Solihull) (Con)
It is a pleasure to serve under your chairmanship, Mr Hollobone. I congratulate the hon. Member for Crewe and Nantwich (Laura Smith) on securing this important debate. I was heartened by it. I had thought that cross-party working and the recognition that we are all trying to do something in a positive space had been lost to a certain extent, but her speech was incredibly positive in that regard. I am sure the Front-Bench speaker, the hon. Member for Birmingham, Erdington (Jack Dromey), will reflect that later. I also want to say that the speech by my hon. Friend the Member for East Renfrewshire (Paul Masterton) was the speech I wanted to give. We have just been discussing that. It was absolutely top drawer and very thoughtful.
My career as a financial journalist spanned what I would call the sharp decline of private workplace DB schemes. I remember all too well speaking to people at the Allied Steel and Wire steelworks in Cardiff, who had effectively lost their pensions when their company was wound up almost overnight. The same was true for Maersk, probably one of the worst examples of corporate acts in this country in the last generation. Under the laws at the time, retired members were understandably protected first, which meant that those who were even just a few weeks from retirement ended up with virtually nothing. I can remember the heartbreak in their voices.
That decline comes from many issues. In that instance, it came from poor company governance and the fact that the economics of DB schemes have been fundamentally undermined over time through demographics and investment returns. Frankly, for the last 15 years, DB schemes have been effectively dead in terms of new members for the private sector. They have existed in the public sector and have morphed and developed over time—we will see how that goes and whether the current models are sustainable.
In response to those issues at Maersk and ASW, we had the Pensions Act 2004, which helped to set up the PPF. Mr Rubenstein’s management of that has been pretty exceptional. The PPF has been well managed, but frankly it can take only so much. A lifeboat can take only so many passengers. The difficulty is, as my hon. Friend the Member for East Renfrewshire noted, that 3 million members face potentially only a 50% chance of having their pension. The more we load into a lifeboat and the greater the burden on other funds, the more likely they are to collapse in turn.
We need a longer-term solution, and we need to focus on the 2,000 schemes with fewer than 100 members. I believe conversion is a good idea. However, I take the point of the hon. Member for Crewe and Nantwich that perhaps the current models of conversion, which to a certain extent are zombie funds, are not the way we want to go. What we need is to transfer to scale, so that the returns come through back office. More than that, potentially, there is my big idea—I have written to the Minister about this before and he will not be particularly surprised that I mention it—of rebasing some work-based pensions over time, so that we end up putting everything on a sustainable footing. We could also adapt schemes to the modern world in terms of spousal pensions and, I would suggest, the potential provision of social care.
The tail is wagging the dog. We have a statutory architecture built for a system where people had jobs for life and DB schemes were ongoing entities. For increasing numbers of schemes, retired and deferred members far outweigh active members. Employers are not members, and members are not employees. In that context, the direct link between the employer and the scheme makes diminishing sense. Of the £80 billion or so paid into workplace pensions, around three quarters of which is in respect of DB schemes, nearly half goes to the public sector, yet active membership of DB schemes is now down to just 7 million workers and is falling daily.
We need to break the link. First, we should establish a universal benefit structure, or a kind of common denominator pension, based on a common structure—for example, a one-sixtieth or one-eightieth scheme, with 50% spousal pension and consumer prices index inflation-proofing up to 5%. We would then go through the time-consuming and laborious process of valuing existing DB schemes by reference to that universal scheme on an actuarially neutral basis. For example, in my 20s I contributed a negligible amount into a final salary pension scheme on a one-fiftieth accrual basis. As a result, I was guaranteed a pension of nearly £4,000, with RPI and a two-thirds widow’s pension. The scheme is now in the PPF, but that is because the promises were far too great for the contribution levels.
It would have been better if, at an earlier stage, those considerable benefits had been converted to, say, a £5,000 pension in a new scheme. People would not lose their pension initially, and hopefully not at all. Instead, it would be simplified and moved on to a surer footing. That is one point for the hon. Member for Crewe and Nantwich, who talked about consolidation schemes. We could invest in very large schemes indeed. Some of the governance in some of the smaller schemes with fewer than 100 members is frankly very amateur. It is pitiful and almost mothballed.
If we were to have larger schemes, privately run by something such as a type of National Employment Savings Trust, with Government involvement on the board and oversight by regulators, we could move to a situation where we all feel more invested and know exactly what we are getting. Crucially, we could rebase to enable us to provide better futures for spouses.
Another area I will mention is that we could offer a social care option. If I had a very large scheme involving maybe 500,000 to 1 million members, I would have the scale to offer a social care option. I could say to someone, “At the moment you will get a pension of £10,000 per year. What we will do is to give you a pension of £8,000 per year, but we will invest through our scheme, because we have scale and can do so.”
Julian Knight
I apologise. We were so rudely interrupted by the Liberal Democrats.
The effective remodelling of these almost-zombie DB schemes could be a means by which we ostensibly kick-start a different approach to social care and allow people to choose whether to supplement their social care in the long term by actively deciding to put away a certain amount of pension in order to receive a certain amount of social care insurance. There are all sorts of options for that.
I conclude by saying that the Green Paper and White Paper were refreshing and thoughtful. We have an opportunity to do something that the Turner report did not do—it dealt mostly with public finances and the state pension—which is to shift the balance and the focus on to private sector workplace pension schemes. We need them to play a role, but we also need to repair the problems of the past.
Mr Philip Hollobone (in the Chair)
We now come to the first of the Front-Bench speeches. The new finish time for the debate, because of the Division, is 5.40 pm.
Mhairi Black (Paisley and Renfrewshire South) (SNP)
It is a pleasure to serve under your chairmanship, Mr Hollobone. First, I congratulate the hon. Member for Crewe and Nantwich (Laura Smith) on bringing to Westminster Hall such an important debate and such a good-natured debate—it feels like a while since we have had one of those in this place.
There is agreement. Everyone recognises that DB schemes have been in decline for the past 15 years. I would like to give a bit of perspective on the numbers. The 1.3 million active, contributing members of private sector DB schemes account for only about 10% of the total 13.5 million private sector DB memberships. That gives people an idea of just what the burden is on those who have not yet retired under these schemes.
I also agree that there are many factors as to why DB schemes have declined as they have. There have been umpteen tax and regulatory changes and legislative changes. There have been changes in the financial market; there was the financial crisis in 2008. Ultimately people are living longer, which has a huge impact on pensions in general.
I was very happy when I read in the Green Paper the Government saying that DB pensions are certainly not unaffordable. It is a case of being realistic and seeing what we can do. Pensions have not always worked out as planned, as I have seen since I have been looking at and working on pensions. However, it is good that the Green Paper said that the evidence in relation to unaffordability was far from conclusive.
The hon. Member for Solihull (Julian Knight) explained something really well in saying how we can rebuild, restructure and consolidate these things to have a realistic and practical approach to how to answer some of the questions that are being flung up. I will explain where the scepticism comes from. He used a phrase that stuck out when he said that we need to know “exactly what we are getting”. I think that is all that anyone ever looks for when it comes to dealing with their pension, but unfortunately the goalposts continually move. That is the problem with pensions in general, not only DB schemes, just now. The goalposts are constantly moving, so it does not matter whether it is five years or 30 years down the line; people will probably have a very different deal from the one that they signed up to.
Let me give an example as to why it is right to be sceptical of some of these companies. In 2015, FTSE 100 companies paid about five times as much in dividends as they did in contributions to their DB pension schemes. The 56 FTSE 100 companies with a DB pension scheme deficit paid 25% more in dividends. Therefore, in theory, these companies would have the ability to repair immediately their pension scheme deficits were they to feed their dividends into deficit repair contributions.
I was very grateful to see the Government set out in the White Paper an approach that would involve enforcing a stricter body of regulation—tougher rules, tougher legislation, proactive powers—so that the Pensions Regulator could intervene quickly and effectively. All those things are tremendous steps in the right direction. However, if we recognise the reality of what the financial market is like just now, failures such as Carillion, BHS and even, more recently, Toys “R” Us show that this situation can become very toxic very quickly.
It is clear that the UK Government did not have a robust enough system to protect savers. What we are seeing now is only the start of steps in the right direction—towards having a robust enough system. As we know, the loss of pension savings can shatter an entire life in the days when people should be enjoying life most. We have to take this issue really seriously, which is why one of the disappointments of the White Paper was that at no point did it mention Brexit. We will probably all have differing views as to what Brexit will mean for the UK. Brexit could well be the answer to pensions; it could solve everything, but I still think it is right for us to see some detail of it or some Government predictions. What effect will this really big change have practically on our pensions day to day? For an entire White Paper not even to mention Brexit stood out.
Just now, 300,000 more pensioners are in poverty. That is the first sustained increase in pensioner poverty in 20 years. The UK has a wider than average gender pensions gap. We see that with things such as the WASPI Campaign and throughout all the different aspects of pensions policy. As I have said, the publication of the White Paper is welcome, but a sense of urgency seems to be lacking in this Tory UK Government. The Department for Work and Pensions itself has said that the legislation needed to enact the new regime will not be ready until, at the earliest, 2019-20. That means that until then unscrupulous businesses seeking to avoid their pension obligations might find it easier to do so.
I will conclude my remarks with something that I have said many times. The Minister is probably fed up of hearing us ask for this, but the SNP has long called for the establishment of an independent pensions commission, so that we can take a step back from pensions and look at the issue holistically and from a totally fresh point of view in order to see whether we can do anything radically different. That said, I think the Government are heading in the right direction, so I hope that they reflect on the comments made today.
Jack Dromey (Birmingham, Erdington) (Lab)
It is a pleasure to serve under your chairmanship, Mr Hollobone. First, I congratulate my hon. Friend the Member for Crewe and Nantwich (Laura Smith). She is a great champion of her constituency, and Bentley workers will be proud of her for bringing their cause to Parliament today.
I dealt 40 years ago with Rolls-Royce—the Mulliner Park Ward factory in Hythe Road on the Park Royal estate. The craftsmen were outstanding. They were the salt of the earth. They were highly skilled, producing cars that were quite remarkable. Since the move to Crewe, it has been generally a successful company, but right now, 1,200 members of the DB fund face an absolutely unacceptable threat to their future pension entitlements. These people have a minimum service of 16 years and a maximum of 47 years. I share their sense of anger at what is happening.
Former employees of Rolls-Royce Motors, which was then sold to Volkswagen, now face serious financial hardship in retirement. They will potentially lose tens of thousands of pounds. Although the Crewe site has received billions in investment, the DB fund has moved from surplus to deficit in the time of its ownership by Volkswagen. Volkswagen remains the parent company, with ultimate responsibility. Would it treat its employees in Wolfsburg in that way? I very much doubt it.
Negotiations continue at Bentley. I urge the company to move, and to move substantially, at the next stages, because the levels achieved thus far through the negotiations go nowhere near the losses that many will suffer. In particular, young workers in the scheme will suffer very badly indeed.
Sadly, what is happening at Bentley is a symbol of the wider problem of decline in DB schemes. The percentage of DB pension schemes open to new members fell from 43% in 2006 to 13% in 2015. The number of DB schemes in the UK will shrink to less than a fifth of current levels over the next quarter of a century, according to predictions by Hymans Robertson.
In a very positive speech by the Pensions Minister to the Trades Union Congress conference on pensions, he argued—I think he was right—that DB provision was working well and employers should seek to continue their responsibilities to their employees by maintaining good DB schemes. Would that more employers heeded that advice.
It is absolutely wrong for wealthy companies, with well-funded DB schemes, which many of them have, to look to close those and move to DC pensions purely to transfer the risk from the employer to the employee. That is all the more wrong when we look at the data released in June, which showed that among FTSE 100 companies, DB pension schemes have reached 100% funding and, among all private sector DB pensions, they are 98% funded. Clearly, the majority of DB schemes remain healthy and sustainable. Companies should look to do the best by their workers, and the best pension for their workers is a DB pension. They should, therefore, continue to accept their responsibilities and, I stress again, not simply transfer them on to the backs of their employees.
There are wider consequences to the decline of DB. The erosion of good, well-funded DB schemes has left few workers with a solid final salary pension scheme guaranteed to provide them with an income until they die. The UK has the fourth highest share of pensioner household income received from private pensions and other forms of capital, such as home ownership. As the prevalence of DB schemes and the rate of home ownership fall rapidly, however, the next generation will face considerable financial challenges, including in retirement.
Auto-enrolment has been introduced in parallel to what has happened to DB. It was a triumph by a Labour Government, and I warmly welcome the continuity of policy under this Government. Auto-enrolment has seen 9.7 million more people in pension schemes, saving for retirement. While that move has been immensely positive, it has meant more workers saving into DC schemes. We do not want to see that posed against good DB schemes—on the contrary.
A Pensions Policy Institute report in 2016 found that the median saving of DC scheme members could yield only £3,000 a year as an annuity, which is not a lot of money to live on in retirement. The contrast between historical, good DB schemes and many of the current DC schemes is stark indeed. More work needs to be done, therefore, to improve the adequacy of returns on DC savings, including by looking in more depth at costs and charges.
Collective defined-contribution schemes are an important alternative to the current DC world. While not as secure as traditional DB, CDC provides workers with the opportunity to share the risk associated with their pension investments, as well as the ambition of an income in retirement, which DC can never do. Royal Mail and the Communication Workers Union—to their great credit—have been working to form an agreement, which would be the first CDC scheme in the UK. That would forge a new and exciting pathway to a better pension for Royal Mail’s 142,000 workers.
We look forward to continuing to work with the Pensions Minister and the Government on the passage of the necessary secondary legislation, to enable CDC schemes to be formed, and to work with Royal Mail and the CWU to ensure the best possible scheme for their workers is put in place as quickly as possible. That is a landmark development. It opens up immense opportunities at the next stages. We will encourage many employers—including on a sectoral basis—to take that path. I stress again, if DC is not as good as DB, CDC is a damn sight better than ordinary DC schemes, but—the evidence overwhelmingly shows—still not as good as good DB schemes. We therefore do not want one to be posed against the other. This is a new option and alternative, developed in particular circumstances, which we think others will follow at the next stages.
If responsibility falls on employers, there is also a responsibility on Government. I agree with the tone of this debate and some of the comments made. The DB White Paper is a step in the right direction—no doubt—in seeking to live up to the challenge of protecting good DB schemes, and ensuring they continue to thrive and maintain their members’ benefits.
I welcome a number of the proposals in the White Paper, such as criminal sanctions for directors neglecting pensions schemes. However, my hon. Friend the Member for Crewe and Nantwich was right to question precisely how that would work for potential incomes, given unforeseen circumstances. I welcome the proposals for stronger powers for the Pensions Regulator, with which we had a constructive meeting here last week. I welcome the proposals for clearer standards on scheme funding and for scheme consolidation. I think the hon. Member for Solihull (Julian Knight) is right that consolidation and, therefore, economies of scale, offer significant prospects at the next stages. I welcome the moves towards cost transparency.
However, there are concerns about the White Paper, for example, the reluctance, at this stage, to build on voluntary clearance and corporate takeovers. We recently had the scandal of the hostile takeover of GKN by Melrose. The issue of 50-50 member nominated trustees should have been in the White Paper, but it was not. It remains a strong ambition of the Labour party. We hoped to see stronger commitments to mandatory cost transparency for trustees in DB schemes. Another concern was the review of the Pension Regulator’s valuation procedure and some of the problems that emerged, for example, over the rather conservative interpretation in the universities, which made it more difficult to reach a settlement in that dispute.
There is much in the White Paper that is good and that we welcome. We have ambitions, however, at the next stages. Employers and Government have responsibilities. The most reliable route to a secure and sustainable retirement remains a DB pension. I say to Bentley, workers are the beating heart of any company. Bentley and other wealthy and prestigious companies need to look again at how they treat workers, who are essential to the success of their companies, and investigate every possible route to keeping their DB pension scheme open. That is why I strongly urge Bentley to think again. Bentley—of all companies—should be ashamed of itself for behaving this way in relation to its workers’ pensions.
The Parliamentary Under-Secretary of State for Work and Pensions (Guy Opperman)
It is a pleasure to serve under your chairmanship, Mr Hollobone. I thank the hon. Member for Crewe and Nantwich (Laura Smith) for three things: first, for bringing this important debate forward; secondly, for entitling the debate, “Protecting defined-benefit schemes,” when we have a White Paper on that exact point, which allows me to address that; and thirdly, for being complimentary and measured in the way that she approached a serious problem for her constituents.
It has been an interesting week in Parliament. Two Cabinet Ministers have resigned, Donald Trump is President and arrives in this country on Thursday, and a Conservative Minister has received not one, but two compliments for a speech at TUC house. I do not know which is the more remarkable of those events. I greatly enjoyed my time at TUC towers. I made it out alive and look forward to the return invite from the comrades, when they want me to further elucidate the way ahead. It was an honour to speak at Congress House. I genuinely wanted to do it and I would welcome the opportunity to return.
The debates gives me the opportunity to talk about defined benefits in the round. I will then try to address all the individual points raised. The DB schemes provide an important source of income in the retirement plans of millions of people. In the private sector alone, 10.5 million members rely on such schemes, with around £1.5 trillion-worth of assets under management. That helps to fuel the UK economy, whether through corporate bonds, Government bonds or equities.
We fundamentally believe that the system is working well in the majority of cases for the employers, the trustees and, importantly, the scheme members. I stress, however, that while we already have a robust and resilient system of pensions protection in place in the United Kingdom, we want it to work in the interests of everyone. While it is not always possible to get that balance right, nor to prevent insolvency, where insolvency occurs we should never forget that we have the Pension Protection Fund, set up in 2005 and taken forward under successive Governments. It has utterly transformed the landscape for so many people who would have been desperately vulnerable and affected previously. For the avoidance of doubt among everyone reading the debate, the PPF compensation scheme ensures that individuals receive at least 90% of their pension benefits.[Official Report, 9 October 2018, Vol. 647, c. 1MC.]
To ensure that the DB system is sustainable in the long term and future-proof, we have addressed the key challenges and opportunities in our 2017 Green Paper and published our White Paper, as I said earlier, which sets out our conclusions, which effectively fall into three core areas: increasing member protection, improving scheme funding and exploring options around consolidation.
The key proposals strengthen the Pensions Regulator’s powers, as set out in the Government’s manifesto, and give the regulator new powers to punish those who deliberately put their pension schemes at risk. For the worst offenders, that could mean criminal sanctions.
We will strengthen the system that enables the regulator to oversee corporate transactions, which will mean that it will be aware of more types of transactions, and will find out about them earlier, so that it can intervene at the right time. It will also mean that employers must explain how they have taken account of their pensions in relevant corporate transactions.
On corporations and dividends, which the hon. Member for Paisley and Renfrewshire South (Mhairi Black) raised, she will be aware that although we are not against a healthy company paying out dividends, the Department for Business, Energy and Industrial Strategy is undertaking a consultation on insolvency and corporate governance specifically. That ongoing consultation looks at how the framework of distributable profits could be improved. That Department will respond in due course—my expectation is that that will probably be in September.
I take issue with the hon. Lady’s point on pensioner poverty, as I think I have done before. In the 1970s, pensioner poverty was at 40%. It is now down to 16%—close to historical lows. That is clearly still too high, but it is a dramatic improvement on the previous position.
On scheme funding, defined-benefit pension trustees must report their funding position to the regulator. The Pensions Regulator can use anti-avoidance powers, including contribution notices and financial support directives. We accept that that process has to be improved—there is no doubt about that—so there will be clearer requirements and more explicit accountability, which should lead to positive changes in behaviour among employers and trustees. We will give the regulator the power to enforce clearer funding standards and to take action if trustees or sponsor employers fail to comply.
The regulator will produce a revised DB funding code for public consultation, which will be clearer about some key issues that cause confusion. The trustees will also be required to appoint a chair who must submit a chair’s statement with the scheme’s triennial valuation. We will work with the regulator and others to consider what can be done to promote greater transparency of costs in DB schemes and to support trustees in communicating more clearly with their members on scheme funding issues.
On consolidation, benefits of scale can help schemes to reduce costs per member, improve governance and enable access to more effective investment strategies. There are already several ways for DB schemes to consolidate, such as DB master trusts, which the hon. Member for Birmingham, Erdington (Jack Dromey) and I debated earlier. As the White Paper announced, we are considering ways to raise awareness of the benefits of consolidation among employers and trustees. In addition, the industry is actively looking at ways to innovate and is proposing new models of consolidation such as super-funds, as hon. Members will be aware.
I stress that the White Paper made it clear that consolidation must be done in a safe way, which is why we are looking to introduce clear parameters within which those vehicles can operate, as well as a supporting authorisation and supervisory regime. Any transfer to a consolidator would require the consent of the transferring scheme’s trustees, who would need to take a considered view, along with the sponsoring employer, on whether consolidation could improve outcomes for their members.
I will try to address some of the key points of the debate. In relation to collective defined-contribution schemes, which were raised by the hon. Member for Birmingham, Erdington, it is right to say that the Government are open to working together with the Communication Workers Union and the Royal Mail, which I have met together, and to say that I have been impressed by how much they are joined at the hip. We wish to assist them in finding a way forward to CDCs. Everybody understands that there is a way to go, but they are clearly an option. We will continue to assist by way of Government time.
The hon. Member for Crewe and Nantwich raised the issue of the regulator’s powers and whether it had the capacity to take them forward. I should make it clear that it will have an additional £3 million of funding to boost its frontline resource, which will result in more than 40 new members of staff. It is taking on more cases, and its proactive work has increased by 90% this year. It has made four successful prosecutions for non-provision of information, and has secured more than £1 billion in settlement through the use of anti-avoidance powers, including cases such as BHS, which secured £363 million, and Lehman Brothers, which secured £184 million. It has also prosecuted a number of scammers and the like.
There were a couple of other quick points. The hon. Member for Strangford (Jim Shannon) wanted more contributions to be made, and auto-enrolment is clearly the answer to that. The hon. Member for Stroud (Dr Drew) wanted greater accountability for the Pensions Regulator, and I will write to him about that.
It is fair to say that my hon. Friend the Member for East Renfrewshire (Paul Masterton) is the No. 1 pensions expert in the House of Commons. He is very much after my job and I accept the challenge. I agree with a great deal of what he said. Likewise, my hon. Friend the Member for Solihull (Julian Knight) made a superb speech. He has bitten off an awful lot if he is going to solve social care on the back of a pensions revision, because that is a mighty challenge.
The hon. Member for Ellesmere Port and Neston (Justin Madders) is aware of the letter I wrote to him about Foster Wheeler. As for several other similar schemes in relation to pre-1997 indexation, I stand by that letter. We do not propose to intervene in a matter that is between the company and the individual employee. Clearly, however, I am happy to discuss that further with him.
I believe I have answered most of the points that were made. Clearly, this is a consultation. The White Paper is detailed and sets out comprehensively what we are trying to do, but we do not necessarily think that everything in it is perfect. We want to get people’s views and opinions, and I value the opportunity to briefly sketch out some of the key points. I want the case of the hon. Member for Crewe and Nantwich to be made in future. I will take the product of this debate to the Pensions Regulator when I spend the afternoon in Brighton on Thursday. I thank her for her time and for securing the debate.
Laura Smith
I thank hon. Members for attending this important debate. It is great to hear the Minister respond to the issues that I raised, and I thank him, especially for agreeing to meet me to discuss the ongoing issues at Bentley Motors. I also thank the hon. Member for Birmingham, Erdington (Jack Dromey) for his detailed response and for his continued efforts. I know he will continue to keep a close eye on the issue and to hold the Government to account.
Sustainable options need to be made available for smaller schemes, and I welcome some of the ambitious plans that the Minister and other hon. Members have clearly set out. My point was not that the policy should not be pursued, but that proper safeguards should be put in place to ensure that employers consider all the available options with a single focus on protecting the benefits for scheme members.
The debate has demonstrated that there is much common ground when it comes to defined-benefit pension schemes, which I welcome. I am also pleased that there has been great continuity of policy from the last Labour Government, which I hope continues.
The contributions of hon. Members have been interesting and informative. It is an incredibly complex topic, and it is incumbent on all of us to learn from each other and from the wealth of experience and expertise outside of this place to ensure that the Government pursue an evidence-based approach to protecting pension benefits for all our constituents.
Question put and agreed to.
Resolved,
That this House has considered protecting defined-benefit pension schemes.