Pension Schemes (Conversion of Guaranteed Minimum Pensions) Bill

Richard Holden Excerpts

2nd reading
Friday 26th November 2021 Commons Chamber

[Mr Richard Holden (North West Durham) (Con)]

I pay tribute to the hon. Member for Rutherglen and Hamilton West (Margaret Ferrier) for bringing this Bill to the House. As she mentioned, it will introduce a well overdue change. As hon. Members have reflected, given the passing of the Equal Pay Act 1970 and the fact that this matter has been highlighted as a major issue since 1990, it is not before time.

The hon. Lady said in her opening speech that the current situation seems wrong. Well, I think it definitely is wrong. I am so glad that she has introduced this legislation, because the subject of pensions is not talked about often enough in this House. The impact that pensions can have on people’s long-term prosperity is immense, especially in old age, and too many constituents in places such as North West Durham really do feel that there is a pensions divide.

Further to what the hon. Lady is doing today, I want to speak more broadly to the Treasury Bench about pensions. The change implemented through this Bill was recommended back in 1990. Several years ago, the auto-enrolment review of 2017 recommended that auto-enrolment be extended to 18 to 21-year-olds, as people are currently auto-enrolled only after the age of 22. That change would be hugely beneficial, particularly to constituents of mine, who start work at 18 at a far higher rate than the national average. Those 45 to 50 years of compound interest on four years of extra auto-enrolment could make an enormous difference to their income in later life.

Auto-enrolment schemes currently kick in only when someone is earning over £6,000 or so a year in a job. Many of my constituents, particularly women, have multiple jobs, and may work only 10 hours a week in them.

[The Parliamentary Under-Secretary of State for Work and Pensions (Guy Opperman)]

I am grateful to my hon. Friend for making that point. I will answer in a bit more detail in my closing remarks, but let me say that I endorse entirely his argument in favour of the 2017 auto-enrolment review, and the fact that expansion of automatic enrolment will unquestionably assist those in low-income areas, including those who have multiple jobs. With respect, it will be a progressive and good thing to do, but I will address the point more in my closing remarks.

[Mr Holden]

I thank the Minister for that intervention.

Some of the changes, particularly the lowering of the earnings threshold, could be introduced in secondary legislation, but primary legislation will be required to extend the auto-enrolment to 18 to 21-year-olds; I should let the Minister know that I have a date for a ten-minute rule Bill in the new year to do just that.

I very much hope that the Government will look at lowering the threshold. Low-paid women with multiple jobs in particular could be missing out on many thousands of pounds going into their pension pots. Low-paid women with multiple jobs in particular are potentially missing out on many thousands of pounds going into their pension pots due to issues around auto-enrolment. It is another inequality in the system that, as the hon. Member for Rutherglen and Hamilton West mentioned, tends to affect women disproportionately.

[Margaret Ferrier]

I just want to clarify that the rules around guaranteed minimum pensions are very complicated, so both men and women can lose out if pensions are not equalised because of indexation and revaluation. I am sure the Minister will cover that in his closing speech, but it is about two people. Sometimes women can have a higher pension and then the man will overtake it, or vice versa, because of the different ages of retiral. I just wanted to make it clear that both sexes can lose out.

[Mr Holden]

That is an incredibly important point. Both sexes can lose out and that is another element with auto-enrolment. There will be men in part-time work, maybe with caring responsibilities, who will also be in a similar situation.

The Minister has been a real reformer and is reforming an awful lot. I know there is a lot more to do. I encourage him to think broadly and work with Members across the House to continue the great reforming work he is doing. It has been great to see him working with the hon. Member for Rutherglen and Hamilton West. I hope to work with him in the future as I start to push for further reforms.

--- Later in debate ---

[Guy Opperman]

In a whole host of ways, the answer is yes. The state pension, by reason of the triple lock, is now £2,050 higher than it was prior to the introduction of the triple lock in 2010. There is automatic enrolment, and it would be fair for me to give a quick history of that because we have the esteemed former Minister in the Chair. Automatic enrolment was conceived by the Labour Government and the Turner commission. It was introduced by the coalition Government in 2012. Without a shadow of doubt, it has been utterly transformational. For example, 6,000 constituents of my hon. Friend the Member for North West Durham are saving the 8% thanks to the 1,580 employers in his constituency who support that. He made a very telling point about the 2017 automatic enrolment review, and given that he raised it—not for the first time— I will finish this point on automatic enrolment and the importance of this change before I go on to GMPs.

I am proud to say that the success of the provision now means that 10.5 million employees have been automatically enrolled into a workplace pension by more than 1.8 million employers. It was specifically designed by the Labour Government and brought in by various other Governments to help groups who historically have been less likely to save, particularly women, low earners and young people—this goes to the point made by my hon. Friend the Member for Hastings and Rye (Sally-Ann Hart). It has helped many in those groups to begin to save into a pension for the very first time. Workplace pension participation among eligible employees has grown to 88% overall compared with 55% in 2012. The proportion for women and young earners was less than 40% in 2012; it is now above 80%.

There is more that we can do, and we very much hope we will, and we recognise that challenges remain. Our ambition, as my hon. Friend the Member for North West Durham set out in relation to the 2017 review of automatic enrolment, is to enable people to save more and start saving earlier. Abolishing the lower earnings limit for contributions and reducing the age for being automatically enrolled to 18 in the mid-2020s will benefit younger people, the low-paid and part-time workers as they will receive contributions from their employer from the very first pound earned. I want to stress that as a Government, we remain utterly committed to those measures. I have been clear that the implementation will be subject to the learnings that take place from the 2018 and 2019 contribution increases. That is significant and it is important that that is done.

[Mr Holden]

The Minister is being generous with his time and in his remarks about me too. The Government have said that they will bring forward legislation to make sure that that happens. Does he have a timetable for that?

[Guy Opperman]

My hon. Friend tempts me to make commitments that I am unable to make. The Government have said that they will introduce the measure by the mid-2020s. It requires primary legislation and there is no doubt that there have been issues in its introduction because of the 2018 and 2019 increases. The impact of Brexit and the pandemic also clearly makes it more complicated to introduce such changes for employers.

It is still several years until the next general election, perhaps as much as two and a half years. My hon. Friend will be aware that the Government have to go through various processes to bring forward future legislation, including a Queen’s Speech setting out the Bills that will be brought forward in the third and fourth Sessions. He makes an eloquent point, however, as he always does—I assure the House that he is a massive improvement on the previous occupant of North West Durham, my neighbouring constituency—which I am certain will be heard not just on the Treasury Bench by the assiduous Whip, who is noting down his every word, but all the way in the Treasury, where I know he is making the case.

The practical reality is that the Bill of the hon. Member for Rutherglen and Hamilton West proposes a technical change. I will try to set out the position, which genuinely dates back to the 1970s and the last days of the Callaghan Government. Guaranteed minimum pensions were introduced to help employees to save affordably for an income in retirement, which is clearly a great concept. The state pension used to be made up of two parts: the flat rate basic state pension and the earnings-related additional state pension.

The flat rate state pension was simply funded through national insurance and paid at the full rate to those with sufficient qualifying years of NI contributions or pro rata for those with a partial record. The earnings-related additional state pension, also known as the state second pension or state earnings-related pension scheme, was linked to a person’s earnings. National insurance contributions were paid by an employee and their employer and gave the employee the right to an additional earnings-related state pension.

Many employers, however, were already offering their workers company pension schemes, so many people were building up an occupational pension and an earnings-related additional state pension. That was rightly thought to be overly onerous and potentially unaffordable for employers and employees. In effect, it was seen as a double provision and immensely overcomplicated.

To clarify the situation, the Callaghan Government introduced the system of contracting out and the provision of guaranteed minimum pensions in 1978. At that time, although I realise it may be hard to believe after hearing the description in the opening speech, that was considered a simplification. How they work is not simple, but I will attempt to explain it to the House to put it on the record, particularly for usage in Committee.

Employers who sponsored a salary related scheme were allowed to contract out their occupational pension schemes from the earnings-related additional state pension. Because employees in contracted-out employment were taken out of the additional state pension, the employer and pension scheme members paid lower national insurance contributions. Salary related contracted-out occupational pension schemes were required to take on the responsibility for paying their members the GMP as part of the occupational pension from the scheme.

The intention was that, on reaching retirement age, the amount of guaranteed minimum pension that the individual member would have built up would be broadly equivalent in value to the additional state pension that they would have received. However, the guaranteed minimum pension was literally that—a minimum.

Most employees would also have built up an occupational pension, but the scheme pension could not be lower than the guaranteed minimum. In addition, widows, widowers and surviving civil partners of members with a GMP received valuable survivor benefit rights—this goes to the point raised by several colleagues about ongoing survivor rights. Some of the technical details are complicated, but the crux of the idea is simple: rather than paying additional NI to the state to build up additional state pension, people built up a similar amount of occupational pension through a workplace pension scheme. The workplace pension scheme ultimately, of course, became automatic enrolment, as the Deputy Speaker, the right hon. Member for Doncaster Central (Dame Rosie Winterton), knows. The system ran in this way from 1978 to 1997.

Although the basic idea was simple, the technical details were extremely complex. I will not take the House through all the complexities, but, for example, GMPs can be subject to both revaluation and indexation. They are revalued before coming into payment to ensure they are protected against inflation, but once in payment any GMP accrued between 1988 and 1997 must also be protected against inflation, through indexation. Although revaluation and indexation are both intended to protect against the effects of inflation, the rates of revaluation and indexation are not the same, and, as the hon. Member for Rutherglen and Hamilton West set out, the reality is that men and women with the same employment history could receive different GMPs. That is what we seek to address.

So the GMPs were abolished in 1997. The whole system of contracting out was finally ended in 2016, with the introduction by the Conservative Government of the new state pension. But of course many of the people who worked between 1978 and 1997 still have a right to a GMP. We are talking about a significant number of our constituents—this is a very large figure. Some will already be retired, but some are still working. There have been a variety of court cases on this, which I am not going to go through in copious detail, but the first key one was something that has affected this House and all matters of state pensions dramatically since 1990. I refer to the European Court of Justice ruling in the case of Barber. It ruled that pensions were deferred pay and, as such, must be treated and paid equally to men and women. The Barber judgment was not specifically about GMPs but it meant that the impact of the differing rules for men and women had to be corrected. When we have come to a decision, as we have in his House on multiple occasions, about the state pension age correction exercise and the increases from 60 to 65 and 66, it can be traced back to the Barber judgment and the equality legislation that followed thereafter.

The House has already heard that the ECJ subsequently made the Allonby judgment, which enables schemes to use a scenario to work out whether someone has lost out or not, rather than being dependent on having a member of the opposite sex in the scheme to compare against. The Government are clear that in light of the Barber judgment, and subsequent decisions, including the Allonby judgment, occupational pension schemes need to equalise pensions, taking account of the effect of GMPs. Subsequently, the UK passed the Equality Act 2010, which also requires equal treatment between men and women for all pension accrued from the date of the Barber judgment. As has been said on several occasions, the Department for Work and Pensions has attempted, under successive Governments, to try to fix this problem without primary legislation. It is totally right that that there was a consultation, following which guidance was published. However, as the hon. Lady rightly set out in opening, it is simply not the case that all schemes can proceed on the basis of the guidance that has been prepared. The reality therefore is that schemes need to equalise the amount of pension their members receive to correct for the problems caused by the complex rules and the differences in retirement income these rules produce. This process is known as “equalisation”. How an occupational pension scheme corrects members’ pensions is up to the individual scheme, provided it is done properly. There are various methods of equalising that occupational pension schemes can use. However, the process can be very complicated and is specific to the individual scheme, and there are a lot of schemes. Some schemes have already felt very nervous and they have been concerned not just by the costs and the complexity, but by the judicial process that could follow and the perceived uncertainty about exactly how to undertake the process and be sure that they have met their legal obligations. As a result, as she set out, many schemes have still not equalised for the effects of GMPs.

What the Bill does is key. It makes it clear how the conversion legislation applies to people who are survivors, as well as to the earners. It also gives the Government the ability to set out in regulations the details of how survivor benefits will work for surviving spouses or civil partners of people with guaranteed minimum pensions. As my hon. Friend the Member for Berwickshire, Roxburgh and Selkirk (John Lamont)—who represents a constituency across the Border from me that includes Jedburgh and Galashiels—said, it is a piece of legislation that applies throughout the United Kingdom, and clause 2 includes specific regulations in relation to Northern Ireland that were requested by the Stormont Government.

Clauses 1 and 2 both clearly state that converted schemes must provide survivor benefits. One of the key purposes of the Bill is to make it easier for pension schemes to know the right amount that survivor benefit schemes using the conversion legislation must pay. The Bill also gives the Government the ability to set out in regulations details about who must consent to the conversion of guaranteed minimum benefits. Finally, the Bill removes the requirement to notify HMRC once a scheme has converted its guaranteed minimum pensions.

I opened by saying that debates on private Members’ Bills can be significant and serious days, and I genuinely appreciate the contributions that we have heard from a variety of colleagues. I thank my hon. Friend the Member for Stourbridge (Suzanne Webb) for her enthusiastic but pithy support, and my hon. Friend the Member for Hastings and Rye for an eloquent speech that set out in great detail her grasp of the issue. As always, my hon. Friend the Member for North West Durham is never backwards in coming forward on so many different issues, including his passion for automatic enrolment.

My hon. Friend the Member for Dover (Mrs Elphicke) raised a number of points and spoke with great experience. I am not of the view that this very specific Bill on very specific points would address the individual problems that she raised regarding her constituent, but I am happy for her to write to me about the issue and I will give her a detailed reply to confirm whether it is within the scope of the Bill. I suspect that it is not, but I want to be absolutely sure when I reply to her, which I will do prior to our entering Committee so that the House can be clear.

I cannot stress what a wonderful campaigner and asset to the House my hon. Friend the Member for Gedling is. He has made a tremendous impact through the work that he has done. It is great to see him here, and an honour and privilege to answer some of his points.

The hon. Member for Stalybridge and Hyde and I have clashed before—I think that this is our fourth Bill—but it is great that he and the House are in full support of this one.

The Department for Work and Pensions is attempting to make pensions safer, better and greener. We are doing a huge amount, including: the Pension Schemes Act 2021, with collective defined contributions, which will provide the third way of pensions; the pensions dashboard, which will be like a banking app that brings our pensions to our mobile phones, iPads and laptops, so that we have total access and knowledge of what we have; the reforms and support of defined benefit; action to prevent the investment scams that we know are out there and are trying to stop; the huge work that we are doing to develop on the environmental, social, and governance reforms that we introduced after the 2017 elections; and putting pensions at the heart of climate change by building on the work of COP26, and being the first country in the world to introduce climate-related financial disclosure, giving consumers—all our constituents —full understanding of what is being invested in on their behalf through pensions.

With respect, although this is a smaller Bill than the 125 clauses of the Pension Schemes Bill that we took through the House earlier this year, it affects a significant number of our constituents and I am genuinely keen to progress it. I can therefore confirm that it is with pleasure that I give the Government’s backing to the hon. Member for Rutherglen and Hamilton West, her Bill and the work that she has done. Excellent points have been made in debate that I will discuss in more detail in Committee. If I have missed any particular points, I will endeavour to write to colleagues in the intervening period. The Government support the Bill. We wish it well in Committee. I want to take the time to thank the hon. Lady, because it is not easy dealing with a highly technical and difficult Bill such as this. She should be very proud of the way she ensured that she got cross-party support and then introduced the Bill and outlined its provisions with great eloquence. I thank her for all the work that she has done.