Pensions Bill [HL]

Lord McKenzie of Luton Excerpts

Tuesday 15th March 2011 Grand Committee

Moved by

[Lord McKenzie of Luton]

42: Clause 10, page 9, line 3, leave out “or most”

[Lord McKenzie of Luton]

My Lords, I shall also speak to Amendment 43. Concerns about levelling down have been raised throughout the development of the auto-enrolment proposals. In an attempt to predict the likely occurrence of this, a range of interested parties, including the DWP, have carried out surveys. The Johnson report summarises its view on the position on page 63. It says that,

“taken as a whole, the bulk of evidence suggests only limited reductions in pension contributions as a result of the reforms. Surveys by Fidelity, Capita Hartshead and the CBI consistently report that around seven in ten employers are not planning to revise or reduce their current levels of provision, and the National Association of Pension Funds found only three per cent of employers planning to reduce contributions for existing members”.

The thrust of this is to be broadly welcomed, but we accept that differing definitions of qualifying earnings and perhaps more traditional definitions of pensionable pay can add to uncertainty, although I believe that the previous Government made it clear that it was the quantum of contributions rather than the basis of calculation that was important. This issue prompted the search for a process of certification that allows an employer to certify overall that schemes satisfy the relevant quality criteria for defined contribution schemes. That in theory avoids the necessity of demonstrating in respect of each employee by detailed calculation that the minimum contribution on the basis of qualifying earnings as defined in the Bill has been met. That is easier said than done. I recall a number of meetings with stakeholders trying to unlock this conundrum of wanting to encourage employers to stay with existing but quality schemes on the one hand but being reassured that auto-enrolment worked for all, especially those who had been shut out of pension savings in the past.

Clause 10 introduces an alternative requirement to the quality requirement set down in existing legislation that will enable a scheme to be used for auto-enrolment. It is to this that Amendments 42 and 43 relate. The Bill states:

“In prescribing an alternative requirement … the Secretary of State must be satisfied that, in all or most cases, a scheme will be able to satisfy the requirement only if … for a majority of individual relevant jobholders, and … all relevant jobholders taken together”,

the relevant quality requirements in respect of employer and total contributions are met. Our amendment would require the Secretary of State to be satisfied in respect of all cases and for more than a majority of individual relevant jobholders. We have defined this as 95 per cent or all routinely.

My first question to the Minister is why the Secretary of State cannot seek to be satisfied in respect of all cases for which an alternative requirement is prescribed. What are the sort of exceptions considered desirable or acceptable, and why?

My second question relates to new subsection (2A). The alternative requirement needs to ensure that for all jobholders or a cohort—the relevant jobholders—sufficient employer and overall contributions are paid to satisfy the relevant quality requirement. However, it also requires this to be the case for individual relevant jobholders, but only for a majority of them—50 per cent plus one. Clearly, this could lead to significant numbers of individuals missing out. The aggregate requirement could be met by more generous contributions for some jobholders with less than qualifying amounts for others.

The Delegated Powers and Regulatory Reform Committee refers to this as a significant power, as, indeed, it is. We are obviously aware of the proposed certification model on which the DWP is working. The Minister may want to update us on progress. The proposal is based on employee’s pensionable pay from pound one and has three steps: a 9 per cent minimum for each jobholder; an 8 per cent minimum for each jobholder where pensionable pay in aggregate equals at least 85 per cent of total pay; and 7 per cent for each jobholder where 100 per cent of pay is pensionable. It is understood that this may give some 92 per cent coverage, but the Minister might like to explain precisely what this coverage is. What analysis has been undertaken of the 8 per cent who presumably would not, on an individual basis, have a minimum contribution paid on their behalf?

However, our focus is not only on how this particular scheme would work; it is crucially on the powers that it is proposed to enshrine in primary legislation. Should a Secretary of State be so minded—I certainly do not contend that this is the case at present—an alternative requirement could allow nearly half of all jobholders to be short-changed. This is simply not acceptable to us and we urge the Minister most strongly to look at these powers again. I beg to move.

[The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud)]

My Lords, I thank the noble Lord, Lord McKenzie, for his amendments to Clause 10. These amendments would require the Secretary of State, before making regulations on certification, to be satisfied that in every scheme at least 95 per cent of individuals would receive contributions no less than the statutory minimum. It is my understanding that these amendments may have been introduced to seek assurances that individuals will not potentially lose out under the proposed certification arrangements. The noble Lord made that clear in his remarks. I very much share his concern. That is why we have developed a certification test that balances simplicity with safeguards. The high-level certification requirements in Clause 10 will allow for a straightforward test of scheme quality to be set out in regulations for employers who calculate their pension contributions on basic pay rather than qualifying earnings but offer good-quality money purchase pension schemes. These employers will be able to demonstrate that their schemes meet the minimum quality requirements.

It might help if I briefly describe the certification test in the form that it is envisaged it will take in regulations. Contributions start from pound one and the test itself is based on three graduated tiers. Setting the first tier of the certification test at 9 per cent of basic pay provides a straightforward benchmark for schemes. We expect that a contribution of 9 per cent of basic pay will be a better deal than 8 per cent of qualifying earnings for 95 per cent of individuals who work in the private sector and who are eligible for automatic enrolment. Employers who make slightly lower contributions of 8 per cent or 7 per cent of basic pay will be able to certify that contributions must be based on a set ratio of pensionable pay to total pay. In the latter case, all pay must be pensionable. Employers using certification will be able to increase their contributions gradually. The precise details of how this will work will be set out in secondary legislation.

We worked collaboratively with key stakeholders, including the National Association of Pension Funds, the Association of British Insurers, the Confederation of British Industry, the Society of Pension Consultants, accountants and lawyers in designing the certification model. Employers and trade unions have broadly welcomed the certification arrangements as a pragmatic solution to a difficult problem. I hope that we have managed to unlock the conundrum referred to by the noble Lord, Lord McKenzie.

In designing the certification model, we addressed two risks: first, that there would be a significant detriment to individuals; and, secondly, that any certification test would be too complex. It is important that we get the balance right, as we do not want to encourage employers to level down to the statutory minimum, resulting in lower contributions for many of their workers. To protect individuals, the certification test broadly equates to the statutory minimum quality requirements for money purchase schemes: a contribution equivalent to 8 per cent of qualifying earnings. However, it uses basic pay from pound one rather than qualifying earnings. Basic pay is the key to simplification and to risk, as it varies across employers. Based on the analysis that underpins the certification model, we estimate that, for more than 90 per cent of people employed in the private sector who are eligible for automatic enrolment, basic pay is greater than or equal to qualifying earnings—I hope that that answers the question posed by the noble Lord, Lord McKenzie. That is because the basic pay calculation is made from pound one, rather than on just a band of earnings. In view of this, we believe that many people will get higher contributions under basic pay. We can monitor and mitigate the risk to individuals and take action if necessary. The bigger risk here is levelling down.

The amendment would require the Secretary of State, before introducing certification in regulations, to be satisfied that for every relevant scheme 95 per cent of the individual jobholders receive at least minimum-level contributions. We would not be able to regulate for the certification test that we currently envisage, which has been welcomed by employers and key stakeholders. In effect, we would be back to square one and would have recreated the conundrum. To make regulations, the Secretary of State would have to introduce a test that required the individual checking of each jobholder’s contribution records. That would make the test more complicated. Alternatively, he would have to set a much higher bar. Employers have told us that the former would impose an unacceptable burden and they would seriously consider levelling down to the legal minimum.

We are aware of the risk of individuals losing out, as the noble Lord pointed out. We have made a commitment to fully evaluating the effects and implementation of the reforms. This will include a proportionate check to ensure that the regulations are operating as expected and that there are no unintended consequences for individuals, employers or industry as a result of the reforms. To minimise the number of individuals losing out, we will monitor trends in the various components that make up an individual’s wage packet in our annual surveys. The data will enable us to monitor trends in pay and reward packages to identify any significant shift in earnings patterns. Our data collection enables us to monitor pay patterns by firm size, occupation and industrial sector. If the data suggest that self-certification is being abused, or more individuals than expected are losing out, the Secretary of State will have the power to tighten or repeal the legislation.

The noble Lord asked about clarity and what Clause 10 means by “a majority”. In this case, a majority means 50 per cent plus. However, the analysis on which the certification model was developed suggests that we can surpass this and other conditions. As I said, we estimate that, for 90 per cent of people employed in the private sector, basic pay is greater than or equal to qualifying earnings.

I believe that we have the right balance that allows an administrative easement for employers and provides safeguards for individuals. I hope that this will go some way towards reassuring the noble Lord, Lord McKenzie. I therefore urge him to withdraw his amendment.

[Lord McKenzie of Luton]

My Lords, I am grateful to the Minister for his explanation of what is proposed for the certification model, its monitoring and the follow-up work that will be done. However, our basic concern is not the certification model, which has been worked up and, I accept, will be taken forward, but what is in primary legislation about what a Secretary of State can do. As it is written, a Secretary of State could bring forward alternative regulations that meant that only 50 per cent plus one of individual relevant jobholders would be provided for as they should be. It is the broad nature of the primary power that is our main cause of concern. It is a very wide power. What is to stop a Secretary of State bringing forward alternative models?

[Lord Freud]

I need to answer that, as it is clearly the noble Lord’s core question. The Bill circumscribes the Secretary of State’s powers by providing that, when prescribing certification requirements in regulations, the Secretary of State must be satisfied that, first, in respect of all or most cases, the total contributions paid by the employer and the jobholder together will not be less than if the scheme had met the relevant quality requirement; and, secondly, this must be the case both for a majority of the jobholders in a scheme and for all the jobholders in a scheme taken together.

[Lord McKenzie of Luton]

My Lords, I am grateful for that, but it does not help me. My problem is that there might be arrangements whereby some of the relevant jobholders—under the provision, you can choose what cohort of jobholders you want to look at; it is not all employees at any one time—could be well provided for and others not. The second part of the test, which looks in aggregate, would be met; all you have to do to satisfy the first part is for 50 per cent plus one of the individuals to be covered. Unless I am misreading that, and I do not think that I am, that is our bone of contention.

[Lord Freud]

I can give the noble Lord some reassurance. The regulations are affirmative, so we will have the opportunity to debate them at that point.

[Lord McKenzie of Luton]

With great respect to the Minister, I have trotted that one out myself a number of times. As we know full well, we cannot amend affirmative regulations, although they give an opportunity for debate.

This is a serious issue and a potential loophole in the legislation. I do not suggest for a moment that the Minister or his current colleagues would seek to exploit it; I accept that they are focused on working up a practical scheme. However, this is too wide a power to be left in primary legislation. I urge the Minister to reflect on that and perhaps discuss it with his colleagues to see whether it could be narrowed. We would be more reassured if the terms of the certification model were placed in primary legislation. We do not think that that is necessarily a perfect fit, but it would be a good deal better than the very wide discretion that the Secretary of State will have at present. I accept that that is not in the Government’s thinking at the moment, given the model that is being developed.

I am reassured about the monitoring of the model to be undertaken. I will need to read the record, but I thought that the Minister was saying that we could still end up with 10 per cent of people in schemes who would not fall within its ambit. If that is right, 10 per cent is a big chunk of the people whom we are trying to get into pensions saving. On that point, unless the Minister has anything further to say, I am happy to read the record, because I know that we will come back to this point on Report.

I seriously urge the Minister to consider my first point, because it is a serious problem with the clause and one that we want to follow through. Having said that, I am grateful for the information that the Minister has provided and beg leave to withdraw the amendment.

Amendment 42 withdrawn.

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46: After Clause 12, insert the following new Clause—
“Power of trustees to allow early access to lump sums
After section 32 of the 2008 Act (power of trustees to modify by resolution) insert—“32A Power of trustees to allow early access to lump sums
Providing that the jobholder has at least £10,000 in his or her pension scheme, upon application to the trustees of the qualifying scheme or automatic enrolment scheme a jobholder may withdraw up to 25% of the total sum accrued at the time of the application in the jobholder’s NEST.””

[Lord McKenzie of Luton]

The amendment is not moved, although I think that my noble friend Lady Hollis wants to bring it back on Report.

Amendment 46 not moved.

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[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 Freud]

My Lords, I thank the noble Baroness, Lady Turner, and the noble Lord, Lord McKenzie, for their amendments, which I will address in detail in a moment. Before I do, I would like to set the context.

The legislation covering statutory increases to private sector occupational pensions requires the Secretary of State to make a judgment about the increase in the general level of prices in Great Britain up to the end of September each year. This judgment forms the basis of an annual order setting minimum statutory indexation and revaluation percentages to be used by occupational pension schemes in the next calendar year. As noted yesterday by the noble Lord, Lord McKenzie, the revaluation order was laid in December last year and the order providing for public sector pension increases will be laid shortly. They are not the subject of the Bill.

Clause 14 could best be described as technical and consequential. It makes changes to important but relatively minor provisions. I know that many noble Lords hold strong views on the Government’s decision to use CPI; it was the topic of extensive debate on Second Reading, and it was discussed at length yesterday. In response to the question of the noble Lord, Lord McKenzie, about how much the hands of a future Secretary of State are tied, I can let him know that he is correct in his presumption that the Secretary of State can take a different view and go back to RPI without a Bill if that is their decision. The CPI is a matter of coalition policy now.

It is not my intention to labour any further the methodology or our reasons for adopting the CPI. I think that that is now a matter of record. I will just pick up the noble Lord on one little point that I cannot resist: he asked whether people really substitute. I tried to explain yesterday how there has been extensive research into whether the practice matches the theory, and the research has all come out to say yes, it does. That is how I respond to that point.

[Lord McKenzie of Luton]

That was not my own judgment; I am not a statistician. It was the Royal Statistical Society that raised that issue.

[Lord Freud]

I am most pleased to take this opportunity to inform the Royal Statistical Society of the results of extensive research, which I know it will take into its considerations when it looks at this again.

I think that it would help if I set out exactly what Clause 14 does and why. It does two things. First, it addresses some peripheral references to RPI in occupational pension legislation that need to be removed or amended to ensure that the Government’s decision to use CPI as the best measure of inflation is applied consistently from now on. Secondly, it addresses the so-called “CPI underpin” issue. That arises where a scheme carries on increasing pensions in payment by the RPI. As the statutory minimum is calculated by reference to the CPI, such schemes would be required to track both the CPI and RPI and pay the higher, a bit like the old escalator in the funhouse in Tivoli in Copenhagen. We have made it very clear that statutory increases are minima, and we do not want to discourage schemes from making higher increases. Consequently, the clause before us ensures that schemes that continue to increase by reference to RPI are not subject to this funhouse ratchet effect.

The first reference to RPI is in Section 84 of the Pension Schemes Act 1993. This is a fairly obscure provision that caters for special arrangements in schemes which provide full uncapped revaluation on the whole pension including the guaranteed minimum pension. Clause 14(1) to (3) replaces the explicit reference to RPI in Section 84 with a requirement that these schemes must maintain the value of the pension in line with the rise in the general level of prices. This ensures that Section 84 provides for uprating in the same way as the other pension legislation.

The noble Baroness’s first amendment, reinserting a reference to RPI, effectively does nothing more than revert Section 84(5) to what it already says. It will certainly not restore RPI indexation or revaluation more generally.

The second reference we are addressing in Clause 14 is in Section 40 of the Welfare Reform and Pensions Act 1999. This concerns the indexation of pension credit benefits, which are pension rights deriving from a pension sharing order made as part of a divorce settlement. Clause 14(6) to (8) replaces the existing reference to RPI with a cross-reference to the inflation percentage adopted by the Secretary of State for the purpose of the annual revaluation order. The remaining part of the clause concerns Section 51 of the Pensions Act 1995. Section 51 sets out the requirements for indexation of pensions in payment.

The amendments to Section 51 of the Pensions Act 1995 in Clause 14 will also ensure that where schemes continue to increase pensions by RPI they need not carry out an annual comparison of the RPI increase required under the scheme rules and the statutory increase using CPI and pay the higher of the two. If a scheme increases pensions by reference to RPI, and has done so since the start of January 2011, then it will escape the statutory requirements of Section 51(2). This deals with the CPI underpin issue to which I referred earlier.

The amendments in Clause 14 also make amendments to ensure that Section 51(3) continues to apply as intended now we are using the CPI to measure inflation. Section 51(3) exempts schemes from the statutory indexation requirement where they increase pensions in payment at least by capped RPI measured over an annual period defined in their rules. Inflation for statutory indexation is measured at 30 September, but some schemes want to continue measuring at a different time and that is fine—Section 51(3) currently allows them to do that. The clause has the effect that if schemes increase by CPI, RPI or a combination of the two under their rules, they will continue to be exempt from the statutory indexation requirements. At the moment it is only schemes with RPI rules that would be exempt. All we are doing is making sure that an existing provision, which is very convenient for a number of schemes, is carried forward into a world where some or all pensions in payment will be increased by reference to CPI as well as RPI.

I am afraid that the noble Baroness’s second amendment would undo the part of the clause that allows schemes that increase by reference to CPI to use their own inflation reference period. Again, it will do nothing to restore RPI indexation or revaluation more generally. For that reason, and for the reasons that I set out earlier in respect of Amendment 47, I urge the noble Baroness not to press her amendments.

On Amendment 48A, I stress again that deciding the increase in the general level of prices is an annual duty, and that as the Government have made clear many times over, we believe that the CPI is the most appropriate measure. Publishing a triennial report on the impact of using the CPI will not change that. That is not to say that we are not interested or do not care about the impact—of course we do—but it is important to look at the broader context, not one part of the picture in isolation.

We are also mindful of the impact on private sector pension schemes and their members. That is why we issued a consultation paper in December about the impact of using the CPI on private sector occupational pension schemes. That consultation finished on 2 March and we are currently considering the responses. The noble Lord, Lord McKenzie, has asked when we will be able to share those responses. I can only ask him to show us a little more patience. I think that we have around 150 submissions, and some of them are extremely detailed and complex. We are also conducting social research to investigate the impact of the change from RPI to CPI for statutory revaluation and indexation of private sector pensions. We hope to publish findings from this research before summer.

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[Baroness Turner of Camden]

I thank the Minister for that detailed response. My aim in putting down the amendments was to give voice to a lot of the opposition that has been voiced to me in the letters and complaints that I have received after people have been notified that they are likely to have a different arrangement with regard to indexation from what they have hitherto expected. There is a lot of anger about it, so I put the amendments down. I am not exactly committed to the wording, but I wanted very much to voice that opposition and to say that the people concerned have real worries about what will happen to them and their pensions in future.

I also thank my noble friend Lord McKenzie for what he had to say in support of his amendment. In default of getting anything like my amendment on to the statute book, his amendment seems very worthwhile because it means that the situation has to be reviewed and there is an attempt to ensure that what has happened is placed under survey at intervals. If it seems to be what you might call a soft answer, at least it is an improvement on what people think that they are facing in future.

I will read carefully what the Minister has said. I found it interesting that modifications can be made, surveys are conducted and so on. That is very useful and I will look at it carefully.

[Lord McKenzie of Luton]

Before my colleague withdraws her amendment, and I certainly do not intend to press mine, it seems a bit hard for the Government to say that their policy is fully evidence-based when they are only just gathering the responses to the survey and will take some while to analyse the consequences. The survey of the consequences of the switch to CPI for occupational schemes is an important one, and one might have hoped that the Government would wait for that analysis and research before they committed to the switch long-term.

[Lord Freud]

The consultation exercise informs how we do these things in some detail in regulatory terms, but it does not affect the decision and direction of travel.

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Moved by

[Lord McKenzie of Luton]

48C: Schedule 4, page 24, line 8, after “(2)(a)” insert “and, in particular, what reliance will be sought from independently assured data”

[Lord McKenzie of Luton]

My Lords, I wish to speak briefly to Amendment 48C. I stress that it is simply a probing amendment designed to get a better understanding of what the alternative to obtaining a current actuarial valuation will entail.

Currently, determination of the funding position has to be underpinned by a fresh actuarial valuation. This supports the decision of whether the board must accept responsibility for the scheme. Perhaps the Minister can say a little more about the circumstances when the alternative approach is expected to come into play and the type and range of information that might be used in place of the actuarial valuation. The provisions in new subsection (5C) require the board of the PPF to issue a statement setting out how it will make determinations. Can the Minister give us a flavour of what the statement is likely to include? To what extent is it envisaged that reliance would be placed on third-party data? Generally, what level of assurance will be looked for in the use of such data?

I should stress that the purpose of this is not in any way to challenge the proposals but just to get a broader understanding of what is envisaged. It is presumed that these arrangements have been positively sought by the PPF and will help its operational efficiency. I am a fan of the PPF. When we discussed some SIs last week, I took the opportunity to say that the PPF has made a considerable contribution to the current pensions landscape. It is a very professional organisation and it is in that spirit that I move this amendment. I beg to move.

[Baroness Garden of Frognal]

My Lords, I will first speak to the government Amendments in this group and then respond to the amendment tabled by the noble Lord, Lord McKenzie. Clause 17 and Schedule 4 make a number of amendments to legislation in the Pensions Act 2004 and the Pensions Act 2008 that governs the operation of the Pension Protection Fund. They have been developed with the Pension Protection Fund and reflect the experience gained in the light of live running since April 2005.

Paragraphs 20 to 26 of Schedule 4 replace an existing regulation-making power within paragraph 25A of Schedule 7 to the Pensions Act 2004. Regulations made under the new powers would enable a person to postpone payment of their pension compensation past their normal pension age. Paragraphs 27 to 33 of Schedule 4 make amendments to the Pensions Act 2008 in parallel to those in paragraphs 20 to 26.

Regulations made under the new powers would enable a person who is entitled to pension compensation by virtue of pension compensation sharing to choose to receive compensation from a later date than normal benefit age. To explain further—in response to the noble Lord—for someone who chooses to postpone payment of pension compensation, three things would happen. First, the pension compensation cap would apply as at the time the person first becomes entitled to pension compensation, which would be their normal pension age. Secondly, revaluation would apply up to a member’s normal pension age. Thirdly, the board of the Pension Protection Fund would provide an appropriate increase in pension compensation when it comes into payment, calculated on an actuarial basis to take account of the postponement of the start of payment.

Amendments 49 to 52 amend the legislation in Schedule 4 dealing with the commutation of pension compensation. We intend to use these powers to make regulations to provide a person with the option to commute a portion of their pension compensation for a lump sum at the end of a period of postponement.

This group of amendments enables the Government to make regulations that will provide people with an additional flexibility. Current legislation already allows a person to decide to commute to a lump sum part of their pension compensation. All in all, this provides a person in the Pension Protection Fund with a good deal of flexibility to decide how and when to take their pension compensation.

I turn now to the amendment in the name of the noble Lord, Lord McKenzie, about funding determinations to be made by the board of the Pension Protection Fund and the degree of reliance on independently assured data. For a scheme undergoing assessment for entry to the Pension Protection Fund, an actuarial valuation of a scheme’s assets and protected liabilities under Section 143 of the Pensions Act 2004 will no longer be required in all cases. A scheme’s protected liability is the cost of providing benefits equivalent to pension compensation, any non-pension liabilities of the scheme and the estimated cost of winding up the scheme. Instead, the board of the Pension Protection Fund will have the power to determine whether a Section 143 valuation scheme is required or whether it can use other information that it has in order to decide whether the scheme should transfer into the Pension Protection Fund.

Practical experience since the Pension Protection Fund opened for business in April 2005 has shown that in a number of cases there is already sufficient independent information held about a scheme to allow the funding position to be accurately assessed without requiring a fresh actuarial evaluation. For example, a valuation by an actuary under Section 179 of the Pensions Act 2004, undertaken for the purposes of calculating a scheme’s pension protection levy, may be used. These changes will avoid schemes incurring the expense of an actuarial valuation where one is not necessary for a fair decision to be made.

The noble Lord is concerned to protect the interests of members of schemes that will not undergo full actuarial valuation under Section 143. I should make it clear that the Government are not intending to change outcomes for members; rather, these changes are intended to avoid costs where they are not necessary to ensure fair outcomes for members.

New Section 143(5)(c) requires the board of the PPF to set out how it will make determinations when it does not commission a full actuarial valuation. This statement will have to take account of any requirement set out in regulations under Section 143(4). We expect the PPF to set out examples of the sort of information and methodology that it would use in place of a full actuarial valuation in this statement so that it is clear how a meaningful judgment of a scheme’s funding position at the assessment date—that is, the date when the scheme began assessment for PPF—was made.

The Government have no problem with requiring the PPF to make evidence-based decisions. Indeed, the board of the PPF is clear that it will be appropriate not to commission a full valuation only where there is adequate alternative evidence. However, I suggest that the more appropriate place to detail any legislative requirements for that evidence is in regulations under subsection (4) rather than in the Bill. As an example of when an alternative determination would be used, it would be where a scheme was very clearly underfunded on the basis of existing information but not where there may be some doubt about it.

I welcome the noble Lord’s interest in the changes to requirements to undertake actuarial valuations in all cases where a scheme is being assessed for entry to the Pension Protection Fund, but I hope that the explanation that I have given is sufficient for him to withdraw his amendment and that the Committee will be prepared to accept government Amendments 49 to 52.

[Lord McKenzie of Luton]

My Lords, I thank the Minister for her full response to my amendment. Indeed, I welcome her to her first session at the Dispatch Box on pension issues—the first of many, I am sure. The explanation that she has provided in response to my amendment is totally satisfactory. I think that I understand it fully and it has been a helpful clarification of what is in the Bill. The government amendments are a sign of the growing practical experience and maturity of the organisation. I have no particular points to raise and am happy to support the amendments. I beg leave to withdraw the amendment.

Amendment 48C withdrawn.

--- Later in debate ---

[Lord McAvoy]

My Lords, I rise as a former Unite shop steward to come to the rescue of my trade union colleagues among the legal fraternity. I am impressed by the campaign launched by my fraternal trade union colleagues. The noble and learned Lord, Lord Mackay of Clashfern, would have made a wonderful shop steward in Unite.

I started off by listening to the point, the sums and the principle. I am sure that it was not organised, but the turnout of legal colleagues had perhaps a whiff of vested interests about it—legitimate vested interests, but vested interests nevertheless. The more that I listened and thought about it, though, the more I thought that there is a trade union principle involved in this that has led me to support the amendment. That principle is that when you come to an agreement with your employer, it should not be changed in this manner. I hope that my saying this does not result in any more furniture being damaged but there is a principle here, a wonderful trade union principle, and I am delighted to be able to support my comrades.

[Lord McKenzie of Luton]

My Lords, I was going to be simply in listening mode on this, awaiting the wisdom of the Minister, with a few questions that may or may not be helpful but with a few comments as well.

I shall start with a point that I raised with my noble and learned friend Lord Falconer just before our proceedings about the precise wording of the amendment. We would not be happy with anything that linked any change to the CPI. We are having a broader debate about that switch and there is an issue, were there to be progress on putting in place a structure like this, about whether that should be linked to some sort of price base or to factors relating to longevity. That is a point of detail.

What we have in the Bill is a framework opportunity. The Minister can tell us about what specifically is currently proposed in respect of that. Can he say anything about the process of making regulations? The Bill just says:

“The appropriate Minister may, by regulations made with the concurrence of the Treasury, make provision”.

Is it envisaged that there would be some parliamentary process attached to that? Yes; he is nodding. I would hope that there would be, but how would that proceed? The point about any changes to the pension arrangements possibly being a slippery slope to undermining the judiciary is one that we need to be mindful of. I accept that, although we do not need to see it as the overriding point. If changes were to be a sort of Trojan horse, though, we would all deplore that.

I was going to raise the issue that the noble Lord, Lord Stoneham, raised—he made the point very effectively—about what counts as a diminution in the terms of service of a member of the judiciary in circumstances where the benefit of the pension, because of longevity, is actually increasing. There is a point there that needs to be answered. I can see that that itself creates difficulties. If you have a judge who has served for 20 years, longevity projections 20 years ago would have been quite different from what they are now; if you have someone who is new in post, that is potentially a different issue. That is a reasonable point. If you are looking at a reduction in someone’s terms of service, if you have a component that is improving in terms of the value of the pension, could you, at least in theory, net them off?

The movers of the amendment seem to have accepted the principle of some change to the pension arrangements because it would relate to new appointments. I wonder whether there are issues about what it would mean for a profession where you basically have two different sets of terms and conditions. Is that a particularly healthy position to end up in?

I wonder whether in all of this there is some sort of process of discussion to try to reach agreement on the way forward which current members of the judiciary would feel comfortable with; or will it always be the position whereby current judges will simply put up the shutters and say, “We don’t have to do this because we have a contract that says you can’t do it”—if that is what the contract says? As has been said, across the public sector people are taking pay cuts and facing large-scale redundancies and increases in contributions to their pensions, and it seems difficult for the judiciary, notwithstanding the constitutional arguments, potentially to be seen as standing aside from that. We should be eternally thankful for our judiciary in this country; they have a quality and integrity, and the public generally support them. However, is there not a risk that if you hold out on this, the trust and standing of judges might be undermined?

I have another point on which I should caution noble and learned Lords, although I hesitate to do so. I accept entirely the argument that judges have given up high-flying careers and high earnings because they want to put something back. That is a motivating force. However, you could say that equally of many others in the public sector. In our schools, how many first-rate, first-class teachers have given up or never pursued high-flying careers in the City because they had a passion, wanted to teach and put something back? I am sure that that is true in respect of the judiciary, but I caution against advancing that as part of the noble and learned Lord’s argument.

Does the Minister accept that the amendment would break the contract arrangements for existing judges, because that is the bone of contention here? Is that not the slippery slope towards undermining the independence of the judiciary? If he does not accept that analysis, it would helpful if he explained, from the Government’s point of view, why he does not. If we are in an environment where it is accepted, because we are all in this together, that there should be provision for new judges to make a contribution, it would be entirely reasonable for those provisions to be constrained in terms of how they might be used so that the floodgates are not opened with a fear that the measures could be used arbitrarily. I am sure that all sorts of legal remedies could be advanced, should the Government seek to do that. However, some sort of constraint would not be unreasonable.

Is there not, in all of this, some process for trying to achieve agreement with existing judges to participate and come into the fold on some basis, rather than have this stand-off and all the negative connotations that that entails? I should be interested to hear the Minister’s responses.

--- Later in debate ---

[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.

[Lord Freud]

My Lords, we have reached the last amendment in Committee on the Pensions Bill with a little nostalgia—and perhaps with relief for some. I will deal with my noble friend Lord Boswell’s amendment on the objectives of the Pensions Regulator, and will start by providing some background. Many noble Lords will be aware that Parliament legislated, through the Pensions Act 2004, to establish an independent, risk-based Pensions Regulator whose job was to regulate work-based pension schemes based in the UK. The Act gave the Pensions Regulator his main statutory objectives. These include protecting the benefits of members of work-based pension schemes and limiting calls on the Pension Protection Fund. Noble Lords may be interested to know that, in its 2007 report on the Pensions Regulator’s progress in establishing a regulatory approach, the National Audit Office found that the objectives provided a sound framework for pensions regulation.

Some of us may also be aware that the NAPF, in its 2010 report Vision for Pensions, recommended that the regulator’s activities should be reoriented. They proposed that this should be done by giving the regulator a new objective, to promote good pension provision and to ensure their health and longevity. My noble friend is well aware of the interests of the NAPF in this area, given the nature of this amendment.