Defined-benefit Pension Schemes

Laura Smith Excerpts

Tuesday 10th July 2018 Westminster Hall

[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—]

--- Later in 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.