Pension Schemes Bill

Lord Holmes of Richmond Excerpts

Wednesday 7th January 2015 Lords Chamber

Moved by

[Lord Holmes of Richmond]

22A: Clause 43, page 18, line 11, at end insert “, unless that pension (or that part of a pension) is a cash balance benefit within the meaning of section 51ZB of this Act.”

[Lord Holmes of Richmond (Con)]

My Lords, it is always a pleasure to speak about pensions. As we have heard today, the Bill provides an opportunity to discuss some really chunky issues in the arena of pensions in terms of guidance, trustee powers, investments and so on. It also gives us an opportunity to look at details and minutiae and perhaps, not to put it too bluntly, to clear some horsemeat out of the statutory food chain. I hope that that is what my amendments might achieve today.

I shall focus on Clause 43 and the whole question of indexation and its inconsistent application to specific types of pension schemes. As you would imagine—it is to do with pensions, after all—it is complicated and detailed and makes your head hurt. I will not go into the minutiae today; if I may, I will write to the Minister with the detailed background to my amendment. Effectively, I would like to achieve consistency across the application of indexation to particular types of pension scheme. To give some history to this, the 1995 Act required certain occupational pension schemes to have indexation applied. Over the years the type of indexation has changed, but for the purpose of this debate we should just consider it to be limited price indexation, or LPI. The 2004 Act removed that obligation for money purchase schemes. The 2011 Act followed on by removing that obligation for cash balance pots. So far, so good.

Unfortunately, there is what I would describe as quite a curious kicker in the 2011 Act: if you have a cash balance pot in a scheme that is contracted out, LPI increases will have to be applied to that, and a member will have to take LPI increases whether or not they want them. If I were a member in such a situation and I were contracted out, I would be forced to take limited price indexation increases, whether or not I wanted them. If I were contracted out for a period and then contracted back in, I would still be forced to take LPI increases, whether or not I wanted them.

Perhaps even more curiously, if I were a member of the scheme, cash balance pot in hand, and I had never been contracted out, but another member, most likely unknown to me and potentially even at a different time from when I was a member of the scheme, was contracted out, I would still be forced to take LPI increases. Even more bizarrely, perhaps, if that member then left the scheme, transferred out or died, I would then get the opportunity to choose whether or not I wanted LPI increases. It seems curious that one’s decisions over one’s pension pot can be so influenced by an unknown other who just happens to have been a member of the scheme and contracted out at a particular time, and difficult to believe that this could ever have been the policy intention. It probably underscores yet again the point that pretty much anything to do with pensions is complicated.

The complication is further added to because it is not possible to remove this horsemeat from the statutory process with regulations. It requires primary legislation. It is why, when Clause 43 was first proposed, there was—I would not go so far as to say excitement—a lot of interest in whether this clause would in fact close this loophole. It gets close but unfortunately again the problem comes whereby, for future cash balance pots, LPI will not have to be applied. Job done? Sadly not. It still leaves a toxic tail that any benefits or rights accrued between 1997 and whatever the commencement date of this Bill is still require LPI increases to be applied, whether the person wants them or not.

On one level I am not suggesting that it is a bad thing of itself for people to have to take inflation-linked increasing annuities. Perhaps it is overly paternalistic to force this; certainly it is inconsistent when you look at the treatment of cash balance pots and money purchase benefits, when in many ways it is really difficult to get a cigarette paper between those benefits, but that is the case as it stands and is set out in Clause 43.

So to my amendments. Amendment 22A would posit a regulatory-making power within the Act which would enable this to be put right. It would also give the space for people to consider whether there was potentially any sirloin within the horsemeat. I do not think there is. Others may, particularly if they focus on rights that have been achieved while that individual member was actually contracted out. I do not think that gets across the line. I think Amendment 22B is far more to the purpose, whereby a new Clause 43 would address this problem, not least through proposed new subsection (9), which would take us absolutely to these sunny uplands which everybody would desire where there is consistency across the treatment of benefits, whichever pot you may have—cash balance or money purchase.

I considered tabling an Amendment 22C—it could best be described as the whole cash balance hog—whereby you would scrub out the end of new Section 51(5B)(c) and replace that with some wording which would in effect state that it was down to the member to choose, irrespective of their contracting out. It would be for the member to decide whether they wanted LPI increases on their pension pot at that point. This seems clear; this seems consistent. Perhaps, and this is the reason why I decided not to table the amendment, it may be too big a leap at this stage but I certainly urge my noble friend the Minister to strongly consider the amendments, not least Amendment 22B. We have had horsemeat; we have had a sliver—perhaps—of sirloin; we have had the whole cash balance hog, at which point I beg to move.

[Lord Bourne of Aberystwyth]

My Lords, first, I thank my noble friend Lord Holmes for sharing his concerns with us. He is very much the Desert Orchid of the Government Back Benches. He steered us to removing some horsemeat from the food chain in a typically earthy metaphor, although he got mixed up later with “sunny uplands”. However, I will do what I can.

I confirm that the Government are aware of this issue, and we have some sympathy with the points that my noble friend made and the anomalies that he has highlighted. The requirement to index cash balance benefits was removed by the Pensions Act 2011, as he rightly stated, in response to representations from the pensions industry. It was pointed out that the requirement to index money purchase benefits was removed in 2005, and cash balance benefits are very similar in that entitlement is generally based on calculation of a lump sum rather than an income stream. Therefore it was a relatively easy decision to follow suit with cash balance benefits when the opportunity arose. However, the decision was made at that time that we would not disturb contracted-out schemes—they are subject to their own requirements. That was for very good and very technical reasons.

We now accept that in theory that means that there could be members with rights to cash balance benefits that still have to be indexed, and that might be because another totally unconnected member has some contracted-out pension rights somewhere in the same scheme. That does seem odd, but to be honest we have not received any specific representations and we do not know of any particular case of concern. If the noble Lord can bring forward any specific examples of schemes or individuals who have suffered detriment as a result of this issue, it would clearly support the case for change that he has eloquently set out.

We are aware that the Association of Pension Lawyers is also championing this issue but, as I say, until we know the size of the problem, or indeed if there is a problem in the sense of whether there are people suffering detriment, it is difficult to know how to deal with it and what form that action should take, whether it is through this legislation or elsewhere. We need to take account of the changes coming up in April because they will give members more say in how they spend their pension money, so some of the people caught in the situation at the moment could, arguably, decide to take a lump sum then reinvest that in an annuity without the indexation requirement, although admittedly, there will be problems with taxation at the highest level there, according to that particular taxpayer. As I said, if my noble friend Lord Holmes is able to come up with some specific examples of concern, I hope that we will be able to have a continuing dialogue with him and other noble Lords on this subject. However, in the mean time I respectfully ask him to withdraw his amendment.

[Lord Holmes of Richmond]

I am grateful to my noble friend for that response. I will be happy to provide some examples from my time in practice as a pensions lawyer—a number of examples immediately spring to mind. However, so as not to detain us this evening I will be happy to write to my noble friend with details of those.

This is not the greatest issue on the planet and will not make a huge difference to pensions as we know them, but there are a significant number of situations where it bites and impacts. I cannot envisage a downside to making this change, which is not that tricky to bring about. It needs to be done through primary legislation and this is an ideal, opportune moment to do it.

I accept the point on the changes this April, in that if members take pre-crystallised benefits there is a potential route around that. However, even taking that on board, there is still a significant enough issue that it is very much worth looking at this clause and what we might be able to do. I will be very happy to provide that information and to carry on the dialogue with my noble friend. At this stage, I beg leave to withdraw the amendment.

Amendment 22A withdrawn.