Pension Schemes (Conversion of Guaranteed Minimum Pensions) Bill
Friday 25th March 2022
(2 years, 8 months ago)
Lords ChamberPension Schemes (Conversion of Guaranteed Minimum Pensions) Act 2022 View all Pension Schemes (Conversion of Guaranteed Minimum Pensions) Act 2022 Debates Read Hansard Text Read Debate Ministerial Extracts
Baroness Redfern (Con)
My Lords, it is with great pleasure that I am able to take the Pension Schemes (Conversion of Guaranteed Minimum Pensions) Bill through this House. It gathered a lot of support in the other place and I am hopeful that it will have a similarly positive reception here.
In 2019, during the debate on the Guaranteed Minimum Pension Increase Order, the noble Baroness, Lady Drake, asked:
“Will the Government press ahead with their planned changes to GMP conversion?”—[Official Report, 14/2/19, col. 1956.]
In the same debate, Lord McKenzie also asked about guaranteed minimum pension equalisation and conversion. I am very sad to say that Lord McKenzie is no longer with us; he is truly missed in this place. I know that he would have been here today to take part in this debate. The next year, during the Guaranteed Minimum Pension Increase Order 2020 debate, the noble Baroness, Lady Sherlock, asked a similar question and referred back to the original question posed by the noble Baroness, Lady Drake. As a Back-Bencher, I cannot speak for the Government, but I think that the Bill may go some way to answering the question posed by the noble Baronesses and the late noble Lord.
I begin by setting out what guaranteed minimum pensions are and why schemes may wish to convert them at all. The noble Baroness, Lady Drake, will have little to learn from what I have to say, as would the noble Baroness, Lady Sherlock, who I know would have been here but is suffering from Covid.
The Bill will help occupational pension schemes to correct a basic issue of unfairness. It will make it easier for occupational pension schemes to correct people’s pensions to ensure that they do not receive less pension income as a result of the guaranteed minimum pension legislation than they would have done if they had been the opposite sex. In other words, it will help schemes to correct a situation which is fundamentally unfair and which has been agreed to be unfair since 1990.
Guaranteed minimum pensions—GMPs, as they are usually called—were a feature of the UK’s pension system in the late 1970s, 1980s and 1990s. The detail behind the way in which GMPs work is extremely complex, but the basic premise is very simple. An employer who sponsored a defined benefit occupational pension scheme could contract it out of the additional state pension. For service between April 1978 and April 1997, the scheme was required to pay the members a GMP. The intention was that, on reaching pension age, the amount of GMP that an individual member would have built up would be broadly equivalent in value to the additional state pension that they would have received had they not been contracted out.
GMPs have some important features. The GMP legislation requires the payment of a survivor benefit to an affected member’s surviving spouse or civil partner in the event of the member’s death—something which is of great comfort to many people. I will talk about survivor benefits in more detail in a moment.
As well as survivor benefits, GMPs also have indexation and revaluation requirements set out in law. Where these apply, this means that the GMP has to be increased to provide some protection against the effect of inflation. However, as can be the case with pension entitlements, the GMP rules reflect the different values of the past. Men and women qualified for them at different ages and, to reflect this, they also built up at different rates.
The cumulative effect of these different rules is that a man and a woman could start work for the same employer for the same pay and conditions on the same day, work for the same length of time and leave that job at the same time, but, because of the impact of the GMP rules, they may receive different amounts of pension in retirement. Both men and women can lose out on pension income in retirement as a result of their sex. It is not as simple as one sex losing out consistently over another. GMPs were abolished for future service in 1997 and a rather simpler system for salary-related, contracted-out occupational pension schemes was brought in. Contracting out was abolished entirely in 2016. However, millions of people in the UK have GMPs built up during a lifetime of hard work.
It seems difficult to believe now that GMP rules could create different outcomes for men and women. In fact, it was difficult to believe at the time. In May 1990, the European Court of Justice ruled that pensions are deferred pay and, as such, must not differentiate between men and women. In the UK, the Equality Act 2010 requires equal treatment between men and women for all pensions accrued from the date of that judgment. Occupational pension schemes are therefore required to equalise pensions to correct for the unequal effect of GMPs from May 1990 onwards. A UK Supreme Court judgment in the Lloyd’s case in 2018 also put it beyond doubt that the affected schemes must go back and equalise people’s pensions for the period from 1990 to 1997 to correct the differences caused by the GMP rules.
As some of us here may be beginning to suspect, however, equalising people’s pensions for that period to correct the differences caused by the GMP rules is even more difficult than it sounds. Equalising a pension to correct the differences caused by the GMP rules means that affected pension schemes must go back and correct a person’s overall pension if it is lower, because of the effect of those rules, than it would have been had the person been of the opposite sex. I assure noble Lords that this does not mean taking money away from some people and giving it to others. If it turns out that someone is entitled to more guaranteed minimum pension than if they were of the opposite sex, nothing happens; that advantage is not taken away. It simply means that the scheme needs to increase pensions in some cases where people are losing out because of the way in which the GMP rules work.
However, equalising people’s pensions in this way is proving a slow process. As we have heard, some Members of this House have been talking about this issue for several years. Following the Equality Act 2010, the Department for Work and Pensions tried to help schemes struggling to work out how to equalise pensions to correct the effect of the GMP rules. The department worked closely with the pensions industry. As a result, in 2016, it proposed a methodology for pension schemes to use. This methodology involved converting the GMP into what could be termed “normal scheme benefits”—that is, pension benefits not subject to the complex GMP rules that created the differences in the first place—and carrying out conversions using existing legislation set out in the Pension Schemes Act 1993. Following consultation, the Department for Work and Pensions published guidance on this methodology in 2019. The industry agreed that the proposed methodology was a sensible approach. A member’s converted benefits must be at least equivalent to the value of the benefits pre conversion and must provide a survivor benefit in the light of the valuable survivor benefits that were included in GMPs.
However, the pensions industry has also pointed out that the legislation supporting the conversion process contains some uncertainties that it believes will expose it to legal risk and potential accusations of not equalising correctly. That is why this Bill seeks to amend and clarify the conversion legislation set out in the 1993 Act so that affected pension schemes can better use it to meet their obligation to equalise for the effect of the GMP rules. It does—I very much hope and believe this —exactly what the noble Baronesses, Lady Sherlock and Lady Drake, have been calling for for several years and which the much-respected Lord McKenzie called for.
For example, the way in which survivor benefits are treated in the conversion legislation needs to be clarified. The industry has pointed out that legal requirements around survivor benefits when GMPs are converted are not sufficiently clear in the current legislation. As I mentioned earlier, survivor benefits are the benefits paid out to a scheme member’s widow, widower or surviving civil partner when the member dies; they are therefore extremely important. It matters hugely to many people that their husband, wife or civil partner is protected financially in the event that they pass away. This Bill therefore amends the provisions governing how survivor benefits must be paid after a scheme has converted the member’s GMP.
Similarly, before converting GMP, pension schemes are required to get the consent of the sponsoring employer who funds the scheme. This might look reasonable, considering that the employer has invested a lot of money to ensure that scheme members receive a decent retirement income. Unfortunately, it is not that straightforward, however, because the current legislation does not cover all situations; for example, where the original sponsoring employer is no longer in business.
Finally, the Bill removes the requirement that schemes must notify Her Majesty’s Revenue & Customs when they carry out a GMP conversion exercise. HMRC does not want or need this information; indeed, it has issued guidance asking schemes not to submit it. As it costs schemes money to submit this information, it seems sensible to simply remove the requirement, saving both parties time and money better spent elsewhere.
I should briefly make it clear to the House that this Bill does not ask schemes to do anything new or unexpected; nor does it impose any new costs or requirements on occupational pension schemes or their employers. Affected occupational pension schemes have known that they need to equalise pensions for the effect of GMP inequalities for many years. They should have planned accordingly. The methodology and guidance published by the DWP can help schemes to do this, although it is for the trustees of each scheme to decide which methodology is most appropriate for their scheme. This Bill simply helps pension schemes to use the legislation underlying the department’s methodology and guidance with more certainty in order to correct the effects of a long-standing inequality in the pensions system.
As we have heard, this Bill has been called for in this House for several years. I am delighted to present it for debate today. I beg to move.
Lord Davies of Brixton (Lab)
My Lords, I thank the noble Baroness, Lady Redfern, for her detailed and clarifying introduction to the Bill. It is a complicated subject but she made an excellent job of providing the necessary clarification for your Lordships. I do not want to get into the detail of these proposals except in one respect, but I do want to put them in the context of pensions policy as a whole.
If I was asked whether I welcomed the Bill, I would be equivocal, because it is a recognition of the failure of a policy which is dear to my heart. The policy of better pensions, introduced in 1978, with all employees receiving an earnings-related pension from the state or a substitute scheme from the employer, was good and in advance of its time. We should not forget that. To a large extent, the introduction of the new state pension was only possible because of the success of the state earnings-related pension scheme.
I will resist the temptation to wander down memory lane, but I was in at the birth of contracting out. I was a member of the occupational pension board. We set out the rules by which contracting out should operate. We spent a great deal of time assessing how guaranteed minimum pensions should work. It is always worth making the point that they became extremely complex largely because of the industry demanding particular provisions. The idea was simple, but it became more and more complex as further demands were placed on it by the pensions industry, and there is a certain ruefulness when the pensions industry then complains about how complex it is. The complexity was largely brought about by the industry itself.
Contracting out was an essential element of the state earnings-related pension scheme, but that is history now. I accept that, but we have these leftovers, the GMPs, which potentially will be with us for many years. With the possibility of survivor benefits being paid in respect of GMPs, it could be decades into the future.
This Bill is essentially about a process. It is not about the principle of conversion, which is already being built into the legislation. Instead, it facilitates the process of conversion. Conversion has come to the fore because of the need to equalise benefits in respect of GMPs. It is not the GMPs that must be equalised but the benefits in excess of GMPs, adding complexity on to complexity. The principle of conversion was seen as a particular method of achieving equalisation, but they are separate.
There is the possibly, rarely taken, I am told, of the dual records approach, whereby each scheme keeps a record for each member, whether they are a man or a woman, and each year it pays the higher pension. Schemes were not keen on using that approach because it meant that members ended up with more pension. From their perspective, the members might have thought it was a good idea to have dual records and best-of year-by-by-year schemes against that approach, and if pushed, I see their point. However, it is important to understand that this arrangement is for the benefit of schemes and their administration. It is difficult to argue that there is much in here which is of benefit to members, which is my major concern.
As I said, the ship has sailed. The problem with the Bill for me is that how it operates in practice depends on material outside its scope. It depends principally on the detailed guidance which has been issued by the DWP, as well as professional practice, because at the heart of conversion is this concept of actuarial equivalence. The legislation and the DWP guidance say nothing about what is meant by actuarial equivalence, and it is in effect left to the actuarial profession, but it is a key issue. We are legislating for something which is effectively outside the control of the law. It is down to the actuaries to assess how that works in practice.
I do not want to be difficult on this Bill, and I will certainly not oppose it. Given the problems we have with the legislative timetable, if we were to make an amendment to it in Committee, it would crush its opportunity of getting through. But we must look in detail at how the Bill works with the underlying guidance and actuarial practice in Committee, when we can press the Government to ensure that members do not lose out.
In that context, my concern, which I am not sure can be handled in this Bill, is that the proposal for conversion is made by the trustees. They must consult the employers but there is no requirement for any consultation with the members. In the pensions legislation, there is a requirement that if you make a major change to a pension scheme, there must be a process of consultation, but on this change, there is no requirement for that level of consultation. That concerns me. It might be argued that the members are not losing out, since they are getting benefits the actuarial equivalent of which is worth the same to the member before and after. However, there is a change in the structure of the benefits being provided, and that potentially is of value to members, even if the monetary value is the same.
Therefore, there is a key issue here. I do not want to delay the Bill, since so much work has gone into preparing it, but I am concerned that the people who appear to be left out of considering these issues are the members being affected. It is not enough to say, “Well, they’re getting something which is actuarially equivalent.” We must think about that in a way which has not so far been reflected in the discussions on the Bill.
Baroness Wheatcroft (CB)
My Lords, I welcome the Bill and thank the noble Baroness, Lady Redfern, for introducing it. As a pensions amateur sandwiched between two pensions professionals—the noble Lord, Lord Davies, and the noble Baroness, Lady Drake—I will keep my remarks brief.
I wanted to speak about the Bill because it is about equalities, and I like equalities that work both ways: not just treating women equally but, on the occasions when they should be levelled up, treating men equally to women. It is not often that we have the opportunity to do that, but in this Bill we do. As the noble Baroness, Lady Redfern, pointed out, nobody will lose as a result of the Bill. People will only gain, and that is to be welcomed.
However, I have questions. The legislation that gives rise to this—the need for equal treatment—came about in 1990. It is fair to ask why it has taken quite so long to get to this position. During that period, there has been a question mark over survivor benefits which this Bill now finally seeks to deal with, but one of the important things about pensions is that there should be a degree of certainty. As people plan for retirement and old age, it is imperative that they be able to look ahead and see what their income might be. I am told that this Bill affects millions of people. As a result of this, they will still not be able to look at what their future pension is and plan for it.
So I ask the Minister whether there is a way in which a deadline could have been imposed to make it clearer for people, so that they can have some idea now of the effect that equalisation will have on the pension they are looking forward to—or should it remain that pension schemes just wait and wait, leaving people in limbo, unable to plan for their future?
Many times, as she introduced the Bill, the noble Baroness referred to how complex it is. That is true: you only have to look at it; it is a small Bill, but it is certainly not simple. So finally, I make a plea—I am not alone in this, and it has been done many times—for simplification of pensions. How can people look ahead and plan if the legislation is so complicated that even the professionals cannot make sense of it? Many pension professionals still scratch their heads about how the lifetime limit, for instance, will impact people, and we have seen how the tax issue can cause all sorts of unwanted anomalies to pensions. My final plea to the Minister is to please look at pensions simplification, and perhaps a little more effectively than we did with tax simplification.
Baroness Drake (Lab)
My Lords, I refer to my register of interests, in particular my position as a pension scheme trustee. I support the Bill, which clarifies legislation that enables occupational pension schemes to convert guaranteed minimum pension benefits into other scheme benefits. I congratulate Margaret Ferrier MP, and the noble Baroness, Lady Redfern, who is sponsoring the Bill through the House. This is not an easy issue to pick up and run with, and I compliment the noble Baroness on her speech; it was quite a tour de force on this very technical issue.
How to resolve guaranteed minimum pension equalisation has remained unsettled for 32 years. Although it is very important, the longevity of the issue bears a resemblance to the Schleswig–Holstein question, about which Lord Palmerston said: “Only three people have ever really understood the Schleswig–Holstein business—the prince consort, who died; a German professor, who has gone mad; and I, who have forgotten.” However, having listened to my noble friend Lord Davies, he has confirmed that certain actuaries still have a long memory on the detail of this issue. For lots of other people, it is a mystery lost in the 32-year mists of time.
The GMP equalisation issue arises because, from 1978 to 2002, the state pension had two parts: the basic state pension and the state earnings-related pension, which was known as SERPS. Employers with salary-related pension schemes could contract their employees out of SERPS, so that the employers and employees paid lower national insurance contributions, but the employers remained obliged to provide a guaranteed minimum pension similar to that which would have accrued under SERPS, if the employee had not been contracted out. That the state pension age for women was 60 and for men was 65, at the time, led to some unequal outcomes, the description of which I will leave in Schleswig-Holstein, but the noble Baroness, Lady Redfern, and the Lords Library have done an admirable job in describing how those inequalities occurred.
A decision of the European Court of Justice that occupational pensions constitute deferred pay meant that, from 1990, these unequal pay outcomes had to be addressed. That decision was confirmed by the High Court in 2018; hence the 32-year history we are trying to address. Over many years, pension schemes have sought legal certainty on how to implement GMP equalisation, but the Government have sought to rely on guidance—presumably because of their own liability concerns about being firm and fast in addressing the issue.
There are a number of ways in which schemes can equalise benefits for the differences in outcomes between men and women. As referred to by the noble Baroness, Lady Wheatcroft, the unequal impact of this can affect men as well as women. In 2016, following a government consultation on a proposal to convert guaranteed minimum pensions into scheme benefits under the provisions in an amended Pension Schemes Act 1993, many respondents still expressed concern about the lack of legal certainty in certain respects.
The Government support this Bill, as I do, which amends GMP conversion legislation for schemes that want to use the conversion method of equalisation and makes it easier to use. Guy Opperman, the Minister in the other place, said:
“What the Bill does is key. It … gives the Government the ability to set out in regulations the details of how survivor benefits will work for surviving spouses or civil partners of people with guaranteed minimum pensions”
and
“who must consent to the conversion of guaranteed minimum benefits”,—[Official Report, Commons, 26/11/21; col. 627.]
when the scheme’s sponsoring employer no longer exists—normally, the employer has to consent.
I support the Bill but have three questions that seek clarity—they are not rowing against the intent of the Bill—that I would like to put to the Minister. Given the Government’s and respondents’ previous reservations about the conversion methodology and what was permissible under the Pension Schemes Act 1993, what confidence does the DWP have that this Bill will now provide legal certainty? Are there any implications for the Pension Protection Fund arising from GMP equalisation, in respect of scheme members who have entered the PPF, who are in schemes in PPF assessment or schemes that might go into PPF assessment in the future, where equalisation issues have been in play?
Finally, there is an important outstanding problem that needs addressing, although it is not in itself a reason not to support the Bill: the lack of clarity on the tax implications of GMP conversion. GMP equalisation could bring negative tax penalties for some scheme members, where an increase to pension benefit or the value of a past transfer payment flowing from equalisation impacts an individual’s annual allowance or lifetime allowance position, and therefore potentially exposes them to a greater tax bill.
Such individuals will have planned their pension savings in good faith, in adherence to the tax rules, unaware of potential retrospective adjustments to their benefits from GMP equalisation and the impact on their tax position. The Minister kindly wrote to my noble friend Lady Sherlock recently, advising that:
“The tax position regarding the conversion method is potentially more complex than other methods. This is because the conversion method can change the form of a member’s benefits and therefore its effects may have a wider impact. More detailed work is being done by HMRC to understand the tax issues associated with the conversion method. HMRC is working closely on this with its industry working group.”
Can I push the Minister to give further reassurance on this matter, given the potential for unfairness to arise from the tax rules, and to give an indication of how soon an answer can be expected? Something of a precedent was set quite recently when the tax rules were favourably adjusted for public sector workers whose pension benefits were retrospectively enhanced to address age discrimination.
Those are my three questions, but the noble Baroness, Lady Redfern, very kindly referred to the wonderful Lord McKenzie of Luton, and I have not had a chance to comment on him in this House. I remember on my second day in this House, I was proverbially pinned against the wall by him. He said, “You’re working on the Equitable Life compensation Bill because I know you’re going to know about guaranteed annuity rates.” I thought gosh and said okay. I assured him that I had many other qualifications and many other interests but I would work with him on it, and that was the start of a very strong working relationship over 10 years in this House. I personally, let alone the House, sadly miss the quality of the contribution he brought on these issues.
Baroness Merron (Lab)
My Lords, I congratulate the noble Baroness, Lady Redfern, on introducing this important Bill. I am particularly grateful for the clarity with which she simplified the complexities. Noble Lords will realise that I am but a stand-in for my excellent noble friend Lady Sherlock, to whom we send our best wishes for a full and speedy recovery. I hope I will do justice to her today.
As we have heard, guaranteed minimum pensions are a legacy arrangement for pension schemes which contracted out of the state pension between 1978 and 1997. Their aim was to ensure that when someone who contracted out reached pension age their guaranteed minimum pension would at least equate to what they would have got in additional state pension.
However, as we have heard in this very informed debate, the saga of GMPs has been long and winding. A series of court judgments has established that men and women must be treated equally in relation to GMPs. That may sound obvious but is actually very complicated because it is quite possible that, in practice, a man and a woman who had the same working history could end up with different GMPs. There are all kinds of issues. The difference in the state pension age meant that women’s pensions accrued more quickly. Revaluation and indexation of GMPs affected men and women differently, and then there is a whole set of complexities around survivor benefits.
GMPs are a legacy issue and contracting out has been abolished, but the historic issues remain, as my noble friend Lord Davies pointed out. The DWP has tried to sort this out without legislating. It consulted and published guidance, but it has never provided sufficient clarity and certainty to draw a line under the issue. It is up to each occupational pension scheme how it goes about equalisation within the law and guidance, but there are still too may risks facing schemes trying to work out how to deal with this, so the Bill seeks to address the legal uncertainty that current legislation can pose when pension schemes seek to adopt a process for addressing equalisation of guaranteed minimum pensions.
As the noble Baroness, Lady Wheatcroft, so correctly said, this is about equality. I am grateful to her for emphasising the need for certainty and simplification, which chimed with the comments made by my noble friend Lady Drake, who rightly reminded your Lordships’ House that pensions are deferred pay. Indeed, they should be as understandable and certain as we expect pay to be.
The noble Baroness, Lady Redfern, has helpfully set out the main aims of the Bill and I confirm the support of these Benches. However, I have some questions. It would be helpful to know what consultation has gone on with the industry about the provisions of the Bill. Can the Minister tell the House whether the Government have taken legal advice that gives them confidence that, if this Bill is passed, there will finally be sufficient legal certainty for occupational schemes which adopt an approach to equalisation within the law and guidance? This is a crucial question because the legal position has continued to evolve. During the debate last year on the order uprating GMPs, my noble friend Lady Sherlock raised the November 2020 Lloyds case, which has been referred to in this debate, when the High Court ruled that formerly contracted-out schemes owed a duty to members with GMPs who had exercised their statutory rights to transfer out benefits to equalise those benefits for the unequal effect of GMPs. She asked the Minister whether the Government planned to issue any further guidance and support to pension schemes in the light of that judgment. In a letter following that debate dated 11 March 2021, the Minister said that the Government had published guidance on the method for equalising pensions for the effect of GMPs and did not think anything further was needed. Will this Bill have any impact on those who have transferred out? Is the Minister still confident that there is sufficient legal certainty for schemes in dealing with this situation?
My noble friend Lady Drake raised the issue that GMP equalisation can have negative tax penalties for some scheme members where any increase to their pension or past transfer penalty flowing from equalisation impacts their annual allowance or lifetime allowance position. I realise that HMRC has published guidance for pension schemes on the tax implications of adjustment payments made as a result of equalising benefits. However, it is extremely complicated, especially in relation to the tax position of the conversion method. The Minister said in a letter after the last GMP uprating debate that more work is being done by HMRC to understand the tax issues associated with the conversion method and that it is working with its industry working group, so my noble friend’s question is a good one. When can we expect to have an answer? After all, it would be a shame if we were to pass a Bill designed to sort this problem out once and for all only to be left with uncertainty in relation to tax matters.
My noble friend Lady Drake asked a number of pertinent questions today. There was one that I particularly wish to emphasise. It was about what happens to people whose pensions schemes are in the Pension Protection Fund—that is, what would happen to people who are due an equalisation who are either in the PPF or on their way in. This is a particularly important question. If it turns out that the Bill should have covered this but has not, I hope that the Minister will assure your Lordships’ House that a way will be found to address it before the Bill becomes law.
Finally, I shall say a word about what happens next with this Bill. The Pensions Minister, Guy Opperman, indicated his support for it, for which we are grateful, but he also said at Third Reading in the other place:
“The reality is that there is no real way for my hon. Friend’s Bill to get through this House and the House of Lords in the time allowed”.—[Official Report, Commons, 25/2/22; col. 659.]
I am hoping this is no longer the Government’s view. Can the noble Baroness tell your Lordships’ House whether the Government believe that the Bill could reach the statute book during this parliamentary Session and, if so, what it will take to get it there?
Having asked the Government repeatedly for legal certainty, we hope that it may finally come through this Private Member’s Bill. I congratulate Margaret Ferrier MP on bringing this Bill through the Commons and the noble Baroness, Lady Redfern, on bringing it to us. I am pleased to offer our support.
The Parliamentary Under-Secretary of State, Foreign, Commonwealth and Development Office and Department for Work and Pensions (Baroness Stedman-Scott) (Con)
My Lords, I first congratulate my noble friend Lady Redfern on the excellent way she introduced this debate. My noble friend has brought to the attention of the House and explained very clearly the need for occupational pension schemes to correct the issue of men and women being treated differently because of the impact of having a guaranteed minimum pension.
As my noble friend reminded us, Members of the House have been calling for this legislation for several years now. I am delighted to say that I can finally give the noble Baronesses, Lady Drake and Lady Sherlock, the assurance that they have been seeking. This Bill, admirably, makes the requested changes to the guaranteed minimum pension conversion legislation and has the full backing of Her Majesty’s Government. I am deeply sad, however, that Lord McKenzie of Luton is not here to see the Bill being debated today; I know that he was a great advocate of this change. I am sure that the whole House will join me in endorsing the tribute that the noble Baroness, Lady Drake, paid to him; he was outstanding in his field and is greatly missed.
My noble friend has set out very clearly and concisely what guaranteed minimum pensions are, why an occupational pension scheme might want to convert them into other scheme benefits and why this Bill is so helpful. I will therefore limit myself to recapping the issue in brief. Guaranteed minimum pensions, or GMPs, were built up in the UK’s occupational pension system between 1978 and 1997. During this period, occupational pension schemes could contract out of the additional state pension; in return, they were required to provide their members with a GMP. As it sounds, this was a guaranteed minimum level of pension with important rights attached, including revaluation, post-1988 indexation and survivor benefits.
The rules for GMPs are subtly different for women and men. For example, women can start receiving their GMP at age 60, while men have to wait until 65. This has resulted in complex differences in the amount of GMP a man and a woman can receive. So complicated are these differences, indeed, that overall, both men and women can in fact lose out, depending on individual circumstances. The key issue being addressed dates back to May 1990, when the European Court of Justice ruled that pensions are deferred pay and must therefore be paid equally to men and to women. The Lloyds case at the UK Supreme Court in 2017 put beyond doubt the question of whether the effects of the GMP rules must be equalised. If a member of a UK pension scheme has GMPs for the period May 1990 to April 1997, their pension needs to be equalised for the negative effect of any differences created by the GMP rules.
It is up to pension schemes themselves to decide how best pensions should be equalised. Individual pension scheme trustees will know more about their members and their scheme rules than government does. However, equalisation is not exactly an easy thing to undertake; we are, after all, talking about complex scheme rules and pensions legislation as they apply to GMPs accrued in the 1990s. Unsurprisingly, therefore, schemes did look to government for help.
My department worked with the pension industry to develop a suggested methodology that uses GMP conversion, and published guidance to help schemes. The basic idea is that schemes can use existing GMP conversion legislation set out in the Pension Schemes Act 1993 to convert the GMP part of the pension into other pension benefits to which the complex GMP rules no longer apply. The whole pension can therefore be equalised to correct for the effects of the GMP rules.
Although this methodology was welcomed by the pensions industry when the guidance was published in 2019, industry also pointed out that the conversion legislation set out in the Pension Schemes Act 1993 is unclear in places. This means that some pension schemes have been unwilling to use it to convert their members’ GMPs in order to fulfil their requirement to equalise. The pensions industry has therefore called on the Government to make amendments to the GMP conversion legislation. These amendments would go a long way to giving schemes more certainty over what they need to do to meet the legal requirements of GMP conversion, and would therefore make it a lot easier for schemes to equalise benefits as part of a GMP conversion exercise. It is these amendments, I should add, to which the noble Baronesses, Lady Drake and Lady Sherlock, referred in previous debates.
The pensions industry has two significant areas of concern about the conversion legislation: first, how survivor benefits must be provided by the scheme once the GMP has been converted, and whether survivor benefits themselves can be converted. Many pension lawyers argue that it is currently unclear exactly how the conversion legislation applies to people who are survivors at the time of the conversion, as well as to the actual earners. Secondly, the pension industry has some concerns as to who exactly needs to consent to a GMP conversion exercise being carried out. The legislation in the 1993 Act specifies “the employer” in relation to the occupational pension scheme, but the identity of this entity may be uncertain given that 30 years may have elapsed since the GMP was accrued.
The Bill before us today responds to these calls from the pensions industry to bring clarity to the GMP conversion legislation. It addresses all of these points and also includes a further amendment requested by Her Majesty’s Revenue & Customs, which saves time and money for both pension schemes and HMRC.
I will speak first about the changes to how the conversion legislation treats survivor benefits. This Bill amends the Pension Schemes Act 1993 to make it clear that the conversion legislation can be applied to someone who is a survivor at the time of the conversion. The Bill also removes the existing legislation setting out what GMP survivor benefits are to be paid when a member’s GMP has been converted, and replaces it with a power for the Secretary of State for Work and Pensions to set out conditions for these benefits in regulations. I today reiterate what my fellow Minister at the Department for Work and Pensions said in the other place: the Government will consult fully on the drafting of these regulations.
These changes are important—survivor benefits provide a crucial source of income to widows, widowers and survivors of civil partnerships. To many people, the knowledge that their surviving spouse or civil partner will receive a portion of their pension is hugely reassuring. It is therefore vital that pension schemes are absolutely clear how survivor benefits must be treated when GMPs are converted, and what survivor benefits must be paid after conversion has been carried out.
Turning to the pensions industry’s concern about how to identify “the employer”, the Bill removes the term “the employer” and replaces it with a requirement for “each relevant person” to consent before a GMP conversion exercise is carried out. Relevant persons will then be defined in regulations.
Finally, both the administrators of occupational pension schemes and officials in HMRC will be delighted to see that the Bill removes the requirement to notify HMRC when a scheme converts its GMPs. In 2019, HMRC published guidance for formerly contracted-out schemes, which made it clear that it no longer required schemes to notify it if GMP conversion had been carried out. However, because this is still a requirement of the Pension Schemes Act 1993, many schemes do still submit this information to HMRC, despite HMRC having no use or need for it. I should be clear at this point that the notification requirement in the 1993 Act did not function as a check by HMRC that a scheme had carried out GMP conversion correctly, or indeed at all; it was simply a notification of facts, which is no longer needed by HMRC.
I shall sum up why Her Majesty’s Government support the Bill. It is with real pleasure that I am able to give the Government’s backing to the Bill that my noble friend Lady Redfern has brought before us for discussion today. It is another significant step in clearing the path for schemes to meet their legal obligation and to equalise for the effects of GMPs. It will be welcomed by the industry, pension scheme trustees and of course the members who stand to benefit from the equalisation of pension benefits.
Some excellent points have been made in this debate, and I am immensely grateful to noble Lords for their interest and insights. Again, I am very sorry that Lord McKenzie is not here today to be part of this debate and see this Bill go through.
I shall deal with some of the specific points raised by noble Lords. The noble Lord, Lord Davies, asked why there is no requirement for consultation with members. When the trustees of a scheme decide to use GMP conversion to convert GMPs into ordinary scheme benefits, they are required to take all reasonable steps to consult in advance the people whose GMPs will be converted. The noble Lord asked about government guidance. We will revisit the guidance following the passage of the Bill and update it to reflect recent developments, including this legislation.
I wholeheartedly agree with the noble Baroness, Lady Wheatcroft, about equality going both ways. That is something that in my role as Minister for Equalities I intend to do. She asked, quite understandably, why it has taken so long to get to this position. The Government have been clear that, in light of the Barber judgment of 17 May 1990, occupational pension schemes need to equalise pensions accrued from that date to take account of the unequal effect of guaranteed minimum pensions. The High Court judgment in 2018 put beyond doubt that occupational pension schemes must equalise pensions to address these inequalities.
The noble Baroness, Lady Wheatcroft, raised the issue of the content of the survivor benefit regulations. The honourable Member for Rutherglen and Hamilton West’s Bill generously gives the Government the ability to set out in regulations the details of how survivor benefits will work for the surviving spouses or civil partners of people with guaranteed minimum pensions. The Government are aware of how important survivor benefits can be, as I have said. We will therefore work with the pensions industry on the details and then consult on the draft regulations. The noble Baroness asked how many people are affected. I can confirm that there were around 8 million people with contracted-out memberships at the final count in 2015.
The noble Baroness, Lady Drake, asked what the implications are for members in PPF assessment or those who might go in. I thank her for raising the question of whether there are any implications for schemes going into the Pension Protection Fund, and I will write to her and place a copy of the letter in the Library.
The noble Baroness, Lady Drake, asked whether the Bill would give schemes the legal certainty that they have been seeking in order to enable them to use GMP conversions to meet their equalisation obligations. The Government are confident that the Bill and the regulations that will be made if it is passed will address the concerns that the industry has raised. It will give the schemes the certainty that they have been seeking.
We should give our best wishes to the noble Baroness, Lady Sherlock. I will confirm to her that her colleague, the noble Baroness, Lady Merron, has done an admirable job in representing her.
The noble Baroness, Lady Merron, asked about the tax impacts and what HMRC is doing—specifically, when will HMRC provide guidance on the tax position? HMRC will publish supplementary guidance in the coming weeks on the tax implications of conversion as well as highlighting to industry where tax issues could arise for certain types of member. HMRC is working with industry, DWP and Her Majesty’s Treasury to determine the appropriate outcome and treatment for those affected by conversion as well as the scope and timing for any legislative changes.
The noble Baroness asked me if we could get the Bill through and what it would take. It would take the Bill having its Second Reading approved and no amendments being tabled. That is why it is important that I and my colleagues work hard, in the short period we have, to ensure that all questions are answered. As to that, I give the undertaking, which I have given on numerous occasions, that we stand ready and the door is open to do that in the time available.
The noble Baroness, Lady Merron, asked if the Bill would have an impact on those who have transferred out. Trustees will need to revisit past statutory transfers and assess what steps they should take in relation to members who transferred their benefits out of the scheme without being equalised for the effect of the GMP rules. Trustees of occupational pension schemes will have to make their own decisions, and different schemes are likely to have different approaches. Trustees will need to take advice on how they should approach unequalised transfers.
The noble Baroness asked whether the Bill should have covered the position on members in the PPF or who might go in. I have given the answer to the noble Baroness, Lady Drake, that we will write, and the noble Baroness, Lady Merron, will receive a copy of that letter.
The noble Baroness, Lady Merron, asked about reaching the statute book, and I think I have answered that question. She asked what consultation there had been with the industry. I am happy to confirm that we have had extensive consultation with the industry through the GMP equalisation industry and government working group.
Ensuring that no one loses out on pension income as a result of the complicated rules around guaranteed minimum pensions is important, and this Bill will help occupational pension schemes to better achieve that.
Baroness Redfern (Con)
My Lords, I thank the noble Lord, Lord Davies, and the noble Baronesses, Lady Wheatcroft and Lady Drake, for their contributions today. In particular I thank my noble friend Lady Stedman-Scott and the noble Baroness, Lady Merron, for their support for the Bill. I thank the staff who have so ably guided me through the Bill. I particularly thank Margaret Ferrier, who very ably steered it through the other place so that it might be debated here today.
Correcting this basic issue of financial differences in people’s hard-earned pension income is important. I am heartened and grateful to see that there is clear cross-party agreement on this issue. I beg to move.