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Pensions Bill

I hope that the Committee will resist these amendments. The present situation has been shaped by two pieces of legislation: the Pensions Acts of 1995 and 2004. In the debatesin 1994, the Government of the day introducedthe minimum funding requirement. I led for the Opposition on that Bill. All of us knew exactly what MFR meant. It was a funding level that would generate a 50 per cent probability of meeting the pension promise if the company folded. The professional organisations, the trades unions and all of those who lobbied us at the time—and certainly the politicians, led, I believe, by the then Pensions Minister, William Hague, in the other place—knew well what MFR entailed. Precisely because of our worries, which were shared at the time by the Liberal Democrat Benches, including the late Lord Russell and the noble Lord, Lord Goodhart, we tabled an opposition amendment to introduce, as my noble friend mentioned, a central discontinuance fund—a PPF—on the ground that risk pooled is risk reduced. Although some of the finest economists in the country, including my noble friends Lord Eatwell, Lord Desai and Lord Peston, spoke to and supported that amendment, and argued for not only its social justice virtues but its economic virtues, we could not persuade the Government to support it. I have to say that in my reading of the ombudsman’s report on those debates, I did not fully recognise her account of them. I choose my words with care. The problems of MFR were concealed for a few years by rising stock markets, until severe falls from 2000 on, together with statistics about longevity, started a chain of events that led to the PPF in the 2004 legislation. With the genuinely constructive help of noble Lords opposite, to whom I am grateful—I pay tribute in particular to the noble Baroness, Lady Noakes, the noble Lords, Lord Oakeshott, Lord Fowler and Lord Skelmersdale, and, above all, the noble Lord, Lord Higgins—we in this House came up with a scheme, the PPF, which continues to win plaudits. We all recognised that the failure of visionin 1994-95 and the failure to set up a central discontinuance fund had to be made good. We did that co-operatively by a levy on future schemes. The question that we then faced was: what about the schemes that had failed before PPF? I refer in particular to the period since the coming into effect of MFR in the 1995 Act—to those schemes from, say, 1997 onwards. No one, but no one, believed—this point was well made by my noble friend Lord Howarth—that because of MFR or a couple of leaflets from theDSS, the Government were now committed to underwriting £900 billion in the occupational pension industry. If people had believed that on the basis of MFR and DWP/DSS leaflets—they did not—no employer would have needed adequately to fund their schemes, no trustee would have worried about what might happen and no trade union would ever have needed to press for better funding. Why would they bother? Talk about moral hazard. Of course they did not believe that, of course they did not act on that as though they had believed it and of course all parties and all players sought in different ways to meet the obligations of their pensions promise. I do not accept, and I do not really believe that anyone in this Chamber accepts, that the Government have any legal responsibility for commercial failure—for companies that failed adequately to fund their schemes. This involved the playing out of a calculated risk that the Government of the day in the 1995 legislation embodied in the MFR by coming up against commercial failure and at the same time refusingto underpin it with our request for a central discontinuance fund. If the Government have no legal responsibility, did—or do—they have a moral responsibility? Not really, but they should promote benevolent public policy because people at the time did what we as a society wanted them to do—build a pension. We cannot retrospectively introduce a levy on the industry as though in effect the 1994 central discontinuance fund was in existence and working. The only alternative was to turn to the taxpayer, which involved asking taxpayers, including many low-paid, part-time women who have no occupational pensions at all, to insure the occupational pensionsof those who had them—occupational pensions, incidentally, that had already received a substantial taxpayers’ contribution through tax relief and a substantial employers’ contribution. The contribution of employees in many if not all final salary schemes would be, I guess, about one-third of its final worth. Was it right to ask someone earning £10,000 ayear without a penny of savings to cross-subsidise someone with earnings of, in some cases, four times that? Would we accept the same principle in the travel industry, so that it had a general levy on each person in the population rather than simply, as with PPF, holidaymakers taking out relevant insurance? It is because of that dilemma that, as a society, we wish to be seen to be supporting people who are doing what we wish them to do—that is, saving—but we must also recognise that in the funding of the scheme some people did not have the opportunities that those in the PPF now have to enjoy the benefit of a forward-looking levy. In 2004 we devised FAS. I am the first to admit that we devised it in this House rather than the other place as the Bill went through various stages. Again, the Opposition played a genuinely valuable and constructive role, which I much appreciated, in what were admittedly daunting circumstances. We all shared the common objective—I believe that that is the phrase used by the noble Lord, Lord Oakeshott—but there was some concern about some of the structures involved. It was always intended that FAS would be paid for by some people who had no pensions at all. As a result, the claims should not be paid at the same rate as with the PPF, which was funded by the industry; in other words, at 80 per cent in FAS rather than 90 per cent in PPF. We understood that very clearly in 2004. In 2004 it was also understood in our debates that additional money would be made available, but only as the scale of need became clear. What stopped us being able to assess that was dirty data. The bulkof potential claims on FAS came from deferred pensioners—people who had worked for companies for three or five years and had since moved on once, twice or three times. Employers and trustees may have weak or incomplete records of contributions, age profiles, length of stay and so on; some companies—for example, asbestos-related companies—may have changed hands several times. The dirty data problem means that it has taken longer than anyone would wish to get the flow of payments going. I was taken aback, when meeting some of the companies and trade unions involved at the time, by how little responsible individuals associated with their companies knew about their pensioner profiles and what the implications would be for FAS. It was always understood that the precise structural links between FAS and PPF would be revisited at a later date; at one stage I even suggested that that might be seven or 10 years down the line. That additional money has been forthcoming from the Treasury, which I am delighted about. I firmly believe that the Government’s approach is the right and decent one. Of course it would be nice if FAS could be made financially more generous still, but only if we are willing to ask those without pensions to finance that generosity. Of course we want the Government to move faster on pension payouts but, believe me, it is not the professional Civil Service that is being incompetent; the problem is due to the unbelievably amateur record-keeping of some of the companies and trustees involved. Finally, as DB schemes close, DC schemes will cover more pension arrangements, including personal accounts. Is anyone today suggesting that if the Government encouraged people into personal accounts, as we will, with an opt-out arrangement rather than opt in, as we will, they will have some legal or moral obligation to guarantee those investments—investments in and disinvestments out—to insure against the risks of inflation, annuity rates or projected longevity rates? I think not. What security, as my noble friends said, are we willing to offer Equitable Life policyholders? Pensions are volatile. Final salary schemes carry a risk associated with the viability of the company and the PPF now will pool the risk on that. DC schemes—money-purchase schemes—carry a much greater risk of full exposure to the markets, and we are doing nothing at all about that. I am not persuaded—I feel even more strongly, having listened to the noble Lord, Lord Turnbull—that there were genuinely freebie assets out there; I refer to assets that are corralled to improve the conditions of FAS. The ABI, the noble Lord, Lord Turnbull, and pension professionals have poured cold water on that. Those assets are already built into the cash flow of major companies. For those in DC schemes, an 80 per cent guarantee of core pension, which is what FAS offers, must look pretty enviable. I understand that there is a review of unclaimed assets in lieu, which should report in July. If thereare any such unclaimed assets, or if the industry voluntarily wishes to contribute to FAS, as the 2004 legislation made clear it should be encouraged to do, that would be fine. But, in practice, a lifeboat scheme would turn out to be a government loan, interestfree, without, I suspect, much possibility of repayment—in other words, a covert taxpayers’ additional contribution to FAS. That is what is being proposed here, and we should face up to that. I am not persuaded, in all the circumstances that I have outlined, that it would be right, fair or proper for all the parties concerned to go down that path. I shall therefore oppose the amendments.