Collective Defined Contribution Pension Schemes

1st reading: House of Commons
Wednesday 17th October 2018 Commons Chamber

Motion for leave to bring in a Bill (Standing Order No.23)

12:43

[Paul Masterton (East Renfrewshire) (Con)]

I beg to move,

That leave be given to bring in a Bill to enable the establishment of collective defined contribution pension schemes; and for connected purposes.

Having worked as a solicitor specialising in pensions law for the best part of a decade before being elected to represent East Renfrewshire—yes, that was as exciting as it sounds—and as a member of the all-party group on pensions, I believe that the pension system is one of this country’s great achievements. Throughout the decades, both state and workplace pensions have existed to provide for people’s retirement, and to give them a comfortable and dignified later life. But over that long history there have also been times of great change. As circumstances change, as we live longer, and as new models and new approaches develop, the way we make that provision for people’s retirement has changed. This Bill is about the dry business of reform of private pensions and fiscal stability in a globalised complex business environment, but it is also about the 140,000 men and women working for Royal Mail across the United Kingdom, including the 143 in East Renfrewshire who serve more than 30,000 households from delivery offices in Barrhead, Clarkston and Newton Mearns, and ensuring that they get the best possible outcome in retirement.

Royal Mail currently operates a defined-benefit scheme, but as life expectancies have risen and the regulatory burden has increased, the risks and volatility inherent in a defined-benefit scheme, which provides a guaranteed level of benefits on retirement, are increasingly unaffordable. At the same time, defined-contribution schemes, in which the level of retirement provision is linked to the “pot” saved during the accumulation phase, shift pretty much the entire burden of risk towards the employee. For some time, the industry has toyed with a middle way. That is what the Bill is about.

Royal Mail and the Communication Workers Union have agreed in principle to introduce for the first time in the UK a new kind of pension scheme: a collective defined-contribution scheme, or CDC. The fact that this innovative development has come as a result of co-operation between employer and union is a testament to the power of constructive industrial relations in benefiting company and workforce. As a Scottish Conservative, I know that constructive action is more effective than needless confrontation, and the work of Royal Mail and the CWU in developing the CDC proposal bears that out. Indeed, I hope that this kind of positive employer behaviour and positive trade unionism can serve as an example to businesses and trade unions up and down the country. I have been greatly impressed by the modern, proactive approach to the issue taken by the CWU, and its work does the union great credit.

CDCs claim the much needed middle ground between defined-benefit schemes and defined-contribution schemes, balancing in a slightly more even way the risks, rights and responsibilities between employer and employee. That should mean higher-quality pensions that are affordable and sustainable for all involved. Although contributions, rather than benefits, are defined in CDCs, their collective aspect means that risks arising from matters such as longevity, investment and inflation are shared collectively, rather than borne by each individual member.

In an age of increased flexibility and choice, the flip from passive saver to engaged retiree can be difficult and the choice of retirement products confusing. Traditionally, annuities have offered poor value, while drawdown provides higher returns and is less reliant on market conditions at one snapshot, but the individual bears the ongoing investment risk and could exhaust their pot if they miscalculate their own longevity. If someone has a defined-contribution scheme, they effectively act as their own actuary and investment consultant or—more likely—they take a very low level of guidance on approaching retirement, having spent their entire working life invested in a default fund. That affects the level of their retirement saving.

Supporters of CDC schemes argue that they can deliver higher returns than traditional money-purchase schemes for the same level of contributions, partly because CDC pension pots would not need to take as cautious an investment approach as those in more conventional defined-contribution schemes. The need to de-risk in the years leading up to retirement to protect against a sudden drop in pot value is removed in a collective scheme. A report by the Work and Pensions Committee, which has joined the growing calls from employers, unions and others for action to allow CDCs to be established, has said that such enhanced freedom of investment could also benefit the wider economy, as CDC schemes invest more heavily in more innovative firms. It is clear that CDCs would offer major advantages for employees, compared with defined-contribution pensions. Understandably, unions and workers oppose the closure of defined-benefit schemes, but the reality is that were they to continue to open, many employers would go under and jobs would be lost.

In my seven years in practice, I advised a range of employers and trustee boards on the closure of dozens of schemes. In every case, the company in question made the same justification: the defined-benefit scheme was unaffordable and unsustainable in terms of cost and risk. Many such schemes are wholly legacy arrangements, often found in the industries least able to sustain them. Likewise, we must not ignore the fact that when a defined-benefit scheme becomes more and more of a burden on an employer, it restricts what else that employer can do. It is a drag on investment and a drag on the economy. Deficit-repair contributions and high levels of ongoing pensionable salary contributions reduce the ability to invest and to increase pay.

We need a solution that works for both employee and employer, and that is what I believe CDCs such as the one proposed by Royal Mail and the CWU to be. It would share the risks in a way that is fair and responsible. People might wonder why CDCs have not already taken off, why Royal Mail has not just gone ahead already or, indeed, why half the major employers in the UK are not rushing to set up CDC schemes. The reason is quite simply that they are not really possible under the current legislative framework. Innovative schemes of this kind cannot operate in the UK without primary legislation. Because of the way parts of the framework work, particularly in relation to the statutory funding regime, an attempt to establish a CDC would run into all kinds of practical difficulties.

There have been calls to use the Pension Schemes Act 2015 or the Pensions Act 2011 to introduce CDCs, but those pieces of legislation are bound up with various other issues. I firmly believe that the best approach is to introduce clear primary legislation specifically aimed at the introduction of CDCs of the kind proposed by Royal Mail and the CWU.

CDC pension schemes already operate in countries such as the Netherlands, Canada and Denmark, and we can learn from that experience—both good and bad. I am pleased that the UK Government have recognised that. The UK Government’s pension reforms, and automatic enrolment in particular, have been hugely successful, and I am glad that the Government have recognised that the introduction of these innovative and desirable pension schemes would build on that great success, but they are not a silver bullet. There are questions and considerations regarding the practical operation and scheme design, but that is not a reason simply to sit on our hands when employers and employee representative bodies wish to look seriously as this option for workplace pension saving. We should not be fooled into thinking that they are a magic solution to all problems—they are not—but they are a serious, credible and valid option that this Government should legislate to permit.

I very much welcome the announcement by the pensions Minister of a consultation this autumn on the introduction of CDC pensions—although I did kind of expect it to have been brought forward already—and I hope that the Government can make progress on that consultation as soon as possible. I hope that, by bringing in this Bill today, I can help to encourage that process along and give the Minister a helpful nudge along the way.

As a Conservative, I do not believe that we should allow the state and regulation to get in the way of employers and employees working together to develop an innovative solution that works to their mutual benefit. We should institute this common-sense, free market reform, so that this union-backed solution to a 21st century business problem can progress. [Interruption.]

[Mr Speaker]

Order. The hon. Member for Bexhill and Battle (Huw Merriman) was not seeking to contribute on this matter, was he?

[Huw Merriman (Bexhill and Battle) (Con)]

indicated dissent.

[Mr Speaker]

No. The hon. Gentleman was just taking some exercise. We are very grateful to him—[Interruption.] The hon. Member for Vale of Clwyd (Chris Ruane) says that he is standing up for himself. Well, people often do not know whether or not I am standing up.

Question put and agreed to.

Ordered,

That Paul Masterton, John Lamont, Kirstene Hair, Nigel Mills, Richard Graham and Frank Field present the Bill.

Paul Masterton accordingly presented the Bill.

Bill read the First time; to be read a Second time on Friday 23 November, and to be printed (Bill 274).

[Yvette Cooper (Normanton, Pontefract and Castleford) (Lab)]

On a point of order, Mr Speaker. In the urgent question on clinical waste incineration yesterday, in response to my question, the Minister for Health, the hon. Member for North East Cambridgeshire (Stephen Barclay), assured me that the TUPE process was being pursued for my constituents in Normanton where they have lost the contract for NHS waste. However, I have heard from some of those constituents today that they have been told that they will not be TUPE-ed and that no process is being followed. This is clearly a very serious concern, given that we would expect there to be both legal and moral obligations towards hardworking staff who have great expertise and experience in waste management. Have you heard anything from the Department of Health and Social Care or the Minister about changing the answer that I was given yesterday, or about anything that has changed since?

[Mr Speaker]

I am very grateful to the right hon. Lady for her point of order. The short answer is that, no, I have had no indication that a Minister intends to come to the House to correct the record. As she will be well aware, every Member of this House, including every Minister, is responsible for the accuracy of what he or she says in this place. If it is thought that an error has been made, it is the responsibility of the erring Member to put the record straight. May I politely suggest that the right hon. Lady seeks to engage with the Minister today? She may well find that that provides some satisfaction. If that turns out not to be the case, I know of no Member more versatile and experienced in this place in ensuring that what she wants to be aired in the Chamber is aired in the Chamber. This matter will have to be resolved sooner rather than later—either privately or publicly. I hope that that is helpful to her.

[Nick Thomas-Symonds (Torfaen) (Lab)]

On a point of order, Mr Speaker. Since I came into this House, I have campaigned on greater access to off-patent drugs for people with the most serious conditions. In recent years, the drug repurposing group has produced a very important report on this, and many people are waiting to see whether the Government will act on its recommendations. I put in a written question to the Secretary of State for Health and Social Care, and the response I got was simply that there would be a Government response in due course. That was disappointing to many people. Mr Speaker, can you advise me on how I might get a more precise answer to the question?

[Mr Speaker]

Well, the opportunities available to the hon. Gentleman are very real. [Interruption.] They are almost endless, as the hon. Member for Vale of Clwyd (Chris Ruane) chunters from a sedentary position with due mindfulness of what he speaks. First, the hon. Member for Torfaen (Nick Thomas-Symonds) can table further questions to try to extract the information that he seeks and, secondly, if he is still dissatisfied he can of course seek an Adjournment debate on the matter. Who knows? He might find that his application for an Adjournment debate, which would give him an opportunity for concentrated focus on the subject and engagement with the responsible Minister, would bear fruit. I think we will leave it there for now. I hope that that is helpful to the hon. Gentleman and that he feels enlightened and inspired.