Pensions Bill [HL]

Lord Boswell of Aynho Excerpts

Tuesday 15th March 2011 Grand Committee

[Baroness Turner of Camden]

My Lords, my amendments are an attempt to deal with the Government’s intention to replace the retail prices index with the consumer prices index as the indexation for pensions in payment. That was raised on Second Reading, and I am sure that everyone is aware that a lot of people have already voiced opposition to that because it is felt that people will suffer very much in their expectation—mostly people who are already receiving pensions.

I understand that people in the public sector have already received notification that they will be receiving the lower amount rather than an increase in line with the retail prices index. A number of them feel very angry about it. My own sister, who is a retired teacher, has phoned up to complain to me about it, and I am not surprised. I have already read quite a lot of material from the TUC, which supports the view that it is not fair. That view has also been expressed extensively by Saga, which has been writing to a number of people on the Committee about the Bill, and I support what it has been doing.

The situation regarding public sector workers is that although there is a lot of talk about public sector pensions being gold-plated and so on, many people working in the public sector do not get paid large amounts of money. Women in the public sector are usually on salaries of between £4,000 and £5,000, and even the loss of a relatively small amount of money means quite a bit to people at that sort of pension level.

With regard to the private sector, the Government have been instructing the pension providers that they have to inform their pensioners that in future the increases will be in relation to the consumer prices index rather than the retail prices index, and their obligation is simply to notify people that that will be their situation. I believe that that has already happened in the private sector. I understand, however, although I am not sure, that if your pension is provided on contract and the contract provides for retail prices index increases, that will not be interfered with by the Government’s new ruling.

One of the reasons why people feel it is so unfair is that we are now in a situation where inflation is running at 4 per cent and everyone expects it to go up—the papers are full of information about how we can expect the cost living to rise substantially—and at the same time many of the people in this category, who were advised to save and have been saving, find that their savings are not worth what they once thought they were, because there has been nothing much by way of interest on their savings. Many of these older people feel that they are losing out twice; they are not getting what they expected with the retail prices index increases, while at the same time the savings that they have been prudentially putting aside are not going to produce the kind of increases or support that they had expected to receive. For those reasons, both Saga and the TUC have been pressing for this to be reviewed. The situation is not fair, and I hope that the Government will be prepared to look sympathetically at their request.

With regard to Amendment 48A, with which my two amendments are grouped, I understand that my noble friends Lord McKenzie and Lady Drake are anxious to soften the blow a bit by providing for the whole thing to be reviewed. I understand that and I respect what they are trying to do. Nevertheless, I want the Government to look again at the whole issue of the retail prices index, as there is a lot of concern about it. I beg to move.

[Lord Boswell of Aynho]

My Lords, I oppose the amendment. I should perhaps declare that I, too, have members of my family—two daughters, in fact—who are in public sector pension schemes, and of course one hears comments of the sort that have been honourably and properly recorded by the noble Baroness. There are many people in the private sector who for a variety of reasons, not necessarily where their schemes have collapsed into the Pension Protection Fund, are feeling some stress as well. That needs to be said.

I would just say that although I did not respond to the Minister on his remarkable presentation last night with regard to the social security uprating orders, I was actually convinced by it, which I am not wholly sure that I had been until he gave that presentation. It is a change that we have to make, particularly bearing in mind that there are alternative arrangements for retirement pensions which will meet the triple test and will accelerate state retirement pension levels rather faster than the CPI.

I will make one further comment on Amendment 48A and the scheme proposed by the noble Lord, Lord McKenzie of Luton. I understand the motivation, but it is asking for a report on one-hand clapping, as the Zen Buddhists would say. It would be better expressed if it called for a report on the relative impact of the use of the CPI and of the retail prices index. We would then have some measure of comparison. As all noble Lords are aware, historically the CPI has run ahead of the RPI. My noble friend last night made representations about why this was overstating the problem and arguably would overcompensate recipients.

That leads me to make a technical comment of my own, to which my noble friend may want to respond. As one takes the heat off the RPI, it will become less immediately salient, although it will still be used and reportable for a number of purposes. As that happens, given the types of interaction and substitution effects that were rehearsed last night, it may be that it will cease to be of quite the utility that it was. Somewhere at the back of my mind—I must say it while I remember it, and hope that I still can—are my scribbled lecture notes of 45 years ago that I took on the Laspeyres and Paasche indices, and on all the different impacts of these complications. I implore noble Lords not to ask me to explain to the Committee how they work, but I will make the point that as we shift the emphasis to the CPI—that will surely be an irreversible shift, and I have given reasons for supporting the concept—the RPI will move out of focus and could become distorted in the uses for which it is still employed. Perhaps the Minister will give me some assurance that it will retain its integrity even if it is not being used for these uprating purposes.

[Lord McKenzie of Luton]

My Lords, I will speak to Amendment 48A in this group. I start by acknowledging the criticism made by the noble Lord, Lord Boswell, of the drafting; I very much take his point. I am also intrigued that he can read his notes after 45 years. I struggled today to read the notes that I made yesterday.

Amendment 48A calls for a triennial report to assess the impact of using the consumer prices index as the measure of inflation. It seeks that assessment from, among others, pension scheme members, employers, taxpayers and PPF levy payers. It is an opportunity to reflect on what has become known as the RPI/CPI switch. We stated in the other place, and again in our debate yesterday on benefit uprating, that we cannot support the decision to adopt on a permanent basis the CPI as currently constructed for the determination of benefit uprating and of pension revaluation and indexation. However, if our understanding of the process and legislation is correct, we do not need more amendments to the Bill to secure any change in future—which may help my noble friend Lady Turner. Issues of uprating pensions, including the BSP, S2P, public sector pensions and occupational pensions, are determined annually. These are undertaken by the increase in the general level of prices, which is generally not specified to be RPI or CPI, or indeed any other measure. Therefore, if I am right, a future Secretary of State could take a different view on the most appropriate measure of the increase in the general level of prices, and without the need to change primary legislation. The situation with regard to the PPF is similar. Clause 15 removes references to the retail prices index and substitutes,

“the general level of prices in Great Britain”.

But that does not lock in the CPI for all time. If I am wrong on that, perhaps the Minister will let us know, because we might want to table further amendments on Report. That runs also for the provisions of Clause 14, which my noble friend has addressed.

The change to uprating the various facets of pensions by CPI—subject to statutory caps—will, as we know, have a significant impact, particularly over time. We obviously accept that for the basic state pension, where we support the re-linking to earnings, which will provide the long-term determination of the basic state pension. For private sector occupational schemes, the extent to which the CPI ends up being used for revaluation and indexation depends on the scheme rules, and we support the Government in not pursuing the override. Nevertheless, the updated impact assessment produced by the DWP in February shows that the total cost in terms of reduction in the anticipated value of members’ pension rights—including the stock as well as the flow of pensions—is something like £86 billion, which is a considerable sum. This is not a deficit-reduction saving; it is an almost equal and opposite benefit for sponsoring employers, and there are consequential benefits to the PPF and levy payers.

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[Lord Boswell of Aynho]

I rise very briefly to support my noble friend Lord German, or at least his line of thinking. I have perhaps one qualification or addition to the presentation that he has given, in relation to the role of trustees. I have already declared to the Committee my interest as a pension trustee. I can assure the Committee that my colleagues and I are taking an interest in the matter of ethical and otherwise acceptable investment schemes as part of our dialogue with the fund managers who represent us and the interests of beneficiaries. I think that a little more could have been said about the role of trustees as a necessary link, in most cases, between the former employees and the beneficiaries on the one hand and the investment managers on the other. This is something that we should all be in, and nobody should cop out of it.

My second and perhaps also substantive point is to support my noble friend’s observations about the business utility of all this. I think that the Committee will know that I have a background in a number of issues connected, for example, with disability and other aspects of diversity. In dealing with the private sector I have found over the years that, on the whole, those businesses that take a mature view and consider their long-term interests actually understand the business case for awareness of these considerations. They are not after the big buck. Their reputation and their business attractiveness benefit, with a long-term beneficial result.

When George Cox was chief executive of the Institute of Directors, I remember doing a number of presentations with him on disability issues. He used to come up with the deathless phrase, “We do this kind of thing because we are the kind of company we are”. That seems to me a very good motto. That is the kind of company that as a trustee I would like to invest in, and that as a beneficiary I would like to feel that my trustees and my investment managers were steering me towards. I do not think that this is a matter of political contention; I think that my noble friend has been right to ventilate it.

[Baroness Drake]

My Lords, I have considerable sympathy with the amendment moved by the noble Lord, Lord German. Notwithstanding the impact of the events of 2008-09 on regulators around the world, which are no doubt focused much more acutely on governance, with the shift from defined benefit to defined contribution pension provision, which the noble Lord referred to, and the imminence of auto-enrolment, the design of the default investment funds and the investment principles surrounding them are going to gain more attention. The issue of how shareholders, particularly institutional shareholders, approach their responsibilities as owners of assets is coming under increasing scrutiny by the Government, regulators, the members of pension schemes and those who discharge fiduciary duties on their behalf.

Corporate governance, principles of stewardship and interactions between institutional shareholders and companies are increasingly considered as a coherent whole in exercising ownership rights. As the noble Lord said, defined contribution schemes in money purchase and in personal pension schemes in future shift the risk on to the individual. Although the Myners principles have improved decision-making, achieving best practice in the investment governance of pension schemes—both trust-based and, particularly, contract-based, which I will come back to—still poses a challenge.

We have seen evidence of that concern in the Pensions Regulator’s recently published consultation on investment governance in DC schemes, which included a table of accountabilities. The table aims to define and clarify the roles and responsibilities of each decision-maker in each part of the investment governance chain, but I read it again last night and, unless I missed this, it does not refer explicitly to social and ethical considerations or to exercising voting rights. Close to my heart, NEST, and its predecessor PADA, published their own document on exercising responsible ownership in a low-charge scheme. Discharging this governance in the context of maintaining low charges is equally important.

As the noble Lord, Lord German, referred to, the Financial Reporting Council published the UK stewardship code in July 2010, which is designed to lay out the responsibilities of institutional investors as shareholders and provide guidance as to how those responsibilities might be met. Pension fund trustees are strongly encouraged to report how they have complied with that code. As a conscientious pension fund trustee, I have attempted to do just that, and my own experience suggests—here I concur with the noble Lord, Lord German—that if the code is to bite, trustees will need a great deal more guidance on how to comply with it if box-ticking is not to continue to be the method of compliance with these standards.

The Occupational Pension Schemes Investment Regulations, which the amendment refers to, say clearly that when setting out their statement of investment principles, trustees should identify,

“the extent (if at all) to which social, environmental or ethical considerations are taken into account in the selection, retention and realisation of investments; and … their policy (if any) in relation to the exercise of the rights (including voting rights) attaching to the investments”.

It is clear that this is an area where guidance and best practice are growing in importance. Because of the political risk that Governments face, with the biggest experience of asymmetrical paternalism that we are about to see, I bet my bottom dollar that this will grow and grow. If you transfer responsibility to the individual, politically Governments have a responsibility to ensure that government frameworks are up to the job.

Clearly, there are issues around how trustees can fulfil these responsibilities. One issue that we must address—I will not dodge it—is how one can be an effective, active asset owner while maintaining low charges, and how one can effectively monitor stewardship policy when one selects passive funds. Although I am absolutely committed to the highest level of governance at every stage of the investment chain, and believe that the ability of trustees to discharge their disclosure requirements in electronic form will help, these things must always be proportionate, because in a DC world it is the individual who bears the charges. I would not want a scenario in which we say that the good news is that we have gold-plated system of governance on disclosure, but the bad news is that it will cost X per cent. Therefore, we need to look at how all the players, including the fund managers, can raise the overall level of governance.

I come back to the providers of contract-based pensions. With the shift away from DB to DC, we are seeing a big shift away from trust-based DC to contract-based provision. Therefore, if we talk only of a model for how the trustees will discharge their governance function in this area, we will miss an ever-growing part of the pension provision market. A big issue, with which I know others are concerned, is who in a contract-based provision world should accept the fiduciary responsibility of designing the default fund or deciding how investment governance should be discharged. This takes us into areas where the Pensions Regulator has no reach. The guidance and regulatory framework must catch up with the shift from trust-based to contract-based provision, because in a contract-based provision world there are no trustees, unless there is a master trust, on whom to place clearly the fiduciary duty. It is clear that the Government will need to look both to the Pensions Regulator and to the FSA or their successors to raise the governance standards in the way that the noble Lord, Lord German, seeks through his amendments.

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Moved by

[Lord Boswell of Aynho]

56: After Clause 26, insert the following new Clause—
“Gender recognition
Notwithstanding the other provisions of this Act, those persons living within their acquired gender within the terms of the Gender Recognition Act 2004 for a period of two years before the passage of that Act, or who have received a full gender recognition certificate under the terms of that Act within a period of two years after its coming into effect, are deemed always to have lived in their acquired gender for the purposes of calculation of state pension and other provisions of this Act, provided that this is not to their detriment in entitlement to those benefits and other provisions.”

[Lord Boswell of Aynho]

I am conscious of the hour and will try to be as succinct as I can. The Committee will know that I served previously for 23 years as the Member of Parliament for Daventry, and would not wish me to rehearse too many experiences from that time. However, I would say that this is one of the perhaps two handfuls of cases that I encountered as a constituency Member which struck me as having a particular interest or relevance, which influenced my subsequent actions and interests and in which I became personally involved. It is for that reason that I have brought forward this amendment.

I refer to the situation of a then constituent who was well known to me, who is now a senior and respected member of her local community, having transgendered from being a male and having in that capacity been a senior civil servant—and therefore well able to write a brief for me on this subject, though she is not the sort to do so in this case. I know that the Minister is aware of her identity, as is my successor as the Member of Parliament for Daventry, with whom I have discussed this case and who was enthusiastic that I should take it forward. We happened to discuss it by chance, and I said, “Ah, the Pensions Bill is on; a new clause will be following immediately, because we ought to chase this”.

The background to this situation, which involves the comparatively small number of people in this country who are transgendered, perhaps 5,000 or something of that order, was an adverse judgment of the European Court of Human Rights against the UK for not really handling the problem. It is a matter, both in the application of the judgment and more generally, that continues to attract its attention. Purely by coincidence, I happened to notice as the result of some representations that I had this week by e-mail, that the ECHR is going heavy on Lithuania, which has a rather more punitive attitude than the United Kingdom has ever typically shown on the matter. The issue is not about punitive intervention; rather, it is essentially about the lack of a legal regime and, to some extent, a lack of interest in handling our problem.

The previous Administration rightly sought to respond to the ECHR judgment by introducing a Gender Recognition Bill. Because of my involvement with those issues, I volunteered to lead for my own party in the Standing Committee and the detailed consideration of that Bill. I found the situation fascinating and complex, although there was a wide measure of consensus across the committee. These are complex and sensitive issues for the people involved. People often get the wrong end of the stick if they have had no interest or involvement in this area; they get confused by issues of surgery and so forth. Those matters were rehearsed at some length and in some depth in the committee.

The criterion under which we were operating was living in the acquired gender as the main test, rather than some purely mechanical procedure, and proof that that had been taking place for a substantial period of time and had not been reversed and was not equivocal. Under the 2004 Act, that led the individual involved to have the right to apply for an interim, and then for a final, gender recognition certificate.

I should make the point that this is substantially a matter of law, and it would have been nice if the Ministry of Justice, in the shape of my noble friend Lord McNally, had stayed behind. I am sure that my noble friend Lord Freud will want to have consultations with the Ministry of Justice—indeed, I hope that in formulating his response to this he has done so—because it is primarily an issue of law and legal status.

There were some difficulties, and therefore there is only a limited amount of retrospectivity. If I may give an example from outside this context in relation to registrations of birth, there was an understandable reluctance to tear up the birth registration if someone had altered gender, and special provisions were made for the registrar to record separately any subsequent applications and the grant of gender recognition certificates. We cannot unwrite the past or the previous gender—perhaps some of the people involved would not wish to do so—but we record as we move on.

As I said to the committee, there was a strong emphasis on law and a tacit understanding that, once the certificate had been given, that would alter the legal status, but it did not convey benefits retrospectively back to the cradle in the new acquired gender. It would be fair to say, with no disrespect to either Ministers or officials from the Department for Work and Pensions in their briefing on the Bill, that the provisions for pensions and state benefits were grafted on. It would also be fair to say that Members of the committee like myself did not focus as intensely on them as we did on some of the other issues that we had already debated.

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I know that one of my noble friend’s purposes in raising this issue was to get a full update on the current situation, and I hope that I have provided that, as well as some encouragement that many transsexuals in this position will see an improvement as a result of this process. As a result of the efforts of the team that we are assembling to sort out the matter, I therefore urge my noble friend to withdraw his amendment.

[Lord Boswell of Aynho]

My Lords, I am grateful to the Minister for his response, the detail that he has been able to bring to the current situation, his explanation of some of the difficulties that go even further than those that I had anticipated or scoped, and his sensitivity in dealing with the matter. I do not think that anyone would have expected a knock-down, one-off answer today, but we have had some encouragement on the commitment to having a specialist team to deal with the issue of equal treatment. I give a personal commitment to provide any assistance that the Minister might want on this, because I am happy to continue my interest in this area in any way that would be useful to a resolution. None of us wants serial legislation to clear up each case. It would be better to get an agreed understanding, and the Minister has perhaps given us the basis for that. I am grateful to him and I beg leave to withdraw the amendment.

Amendment 56 withdrawn.

Moved by

[Lord Boswell of Aynho]

57: After Clause 26, insert the following new Clause—
“Objectives of the Pensions Regulator
(1) Section 5 of the Pensions Act 2004 (regulator’s objectives) is amended as follows.
(2) At the end of subsection (1), insert—
“(e) to promote the provision of good pensions and to ensure their health and longevity.””

[Lord Boswell of Aynho]

My Lords, I will be even briefer on this amendment, having regard to the hour and the common wish to finish.

This amendment arose as the result of an approach that I received from the National Association of Pension Funds. The intention of the new clause would be to put what I might call a forward gear into the work of the Pensions Regulator. As I have explained to the Committee in the past, I have quite a lot of people in my family with a background in education. My wife for one would always say, “Emphasise the positive, don’t go around looking at the negative”. That is a good maxim for this Committee.

At the moment, as the NAPF reasonably reminds us, the Pensions Regulator has three basic statutory objectives, all of which are, at least to some extent, slightly passive, although I do not mean that they are improper: first, to protect the benefits of members of work-based pension schemes, which is hugely important; secondly, to promote the good administration of work-based pension schemes, which is also important, although administration is something that serves rather than being the main driver of the event; and, thirdly, to reduce the risk of situations arising that might lead to claims for compensation from the Pension Protection Fund. At the moment there is an interest in preventing that getting out of hand; we have discussed the levy and the burden on pension funds and, indirectly, on contributors of all kinds. No one is arguing that those objectives are wrong, but the NAPF’s concern, which I warm to, is that the last obligation—trying to avoid benefit run-off—is beginning to dominate the regulator’s activities. The overall work of the regulator is insufficiently focused on the continuation of good-quality workplace pensions. It is in the interests of the NAPF and of everyone across the Committee that that should be sustained.

What is proposed here is a simple provision that would give us a positive forward gear to promote the provision of good pensions and to ensure their health and longevity. Nobody here would dissent from that. Arguably, large parts of the Bill, particularly in relation to the NEST scheme, are focused on it, and it would be helpful to have the Minister's response in due course. He will recognise a probing amendment when he sees one. I am not committed to the exact wording, nor to the vehicle involved: but I hope that somehow we will be able to signal that the focus should be on supporting, sustaining and maintaining the positive, rather than on simply cleaning up the mess where things go wrong.

I will take one final shot. Perhaps the Minister would report on any elements of deregulation or decluttering of the business obligation that he has undertaken within the spirit of BIS’s one-in, one-out approach. That would be helpful. I beg to move.

[Lord McKenzie of Luton]

My Lords, I will be brief. I understand the thrust of the amendment. However, I have some concerns, mainly over the wording. To place on the regulator an objective to ensure the health and longevity of good pensions is stretching a point. The regulator is focused on workplace pensions. As written, “pensions” could range over a raft of different situations, including contract-based ones as well as DB ones.

From my experience, I challenge the assertion that the regulator is overly focused on protecting the PPF. Perhaps it is easy to forget the circumstances of 2004, when DB schemes were dropping out of the system like flies. The regulator's role then made a real difference. I recall also that over the past 18 months to two years there have been constant challenges to the regulator on the grounds that requirements under recovery plans were too severe. The regulator responded in a very effective way, being clear about what flexibility there was in the system but also recognising that what was important to DB schemes was the employer covenant. Unlike insurance-based contractor arrangements, these entities are capitalised and support the provision of annuities or whatever else through that structure. For DB schemes, it is the undertaking of the employer and sponsor that is the driver. Therefore, the regulator's role in holding them to account is good.

No one would object to anyone’s role in promoting the provision of good pensions. However, in this case I would not impose the obligation to ensure their health and longevity, because these will depend on a whole raft of things, not least the commercial situation of the sponsor and what their future may be. The regulator has played an important role, and I will be interested to hear if the Minister has any proposals to change their current remit and focus.

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The Government have made a clear commitment to, and have a comprehensive plan of action for, reinvigorating private pension saving. I hope that I have provided my noble friend with sufficient reassurance on this and have sufficiently illustrated the potential problems of the proposed amendment—in their direction, if not in their exact composition. I beg my noble friend to withdraw it.

[Lord Boswell of Aynho]

I am grateful to my noble friend for the way in which he has answered this question. I have been around for a year or two and have seen a ministerial brief or two. I am not entirely surprised, although mildly disappointed, at the nature of his comments. We understand the difficulties, including the substantive one of confusing people or in any way removing the focus on the important background work of securing a properly funded and safe pensions industry. I am glad on his behalf that the Minister has assumed for himself the role of the forward gear, because he is the best possible bully pulpit for all this. The essence of this should be collaboration and discussion between representatives of the industry, employers, staff and the department to facilitate a good outcome.

In conclusion, this has been the first Committee that I have attended in this place. I am grateful to my noble friend for his responses, but in the same breath I apply that gratitude to noble Lords opposite, including the noble Lord, Lord McKenzie of Luton, and others. I have found this procedure enlightening and positive, and on the whole it has done some good. I am grateful specifically for my noble friend’s response, and beg leave to withdraw the amendment.

Amendment 57 withdrawn.