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Pensions Bill

moved Amendment No. 124: 124: After Clause 88, insert the following new Clause— ““Conditional indexed schemes (1) Schedule (Provision for conditionally indexed arrangements etc) which amends— (a) section 84 and Schedule 3 to the Pension Schemes Act 1993 (c. 48) (basis of revaluation), (b) section 180 of the Pension Schemes Act 1993 (definition of normal pension age), (c) section 51 of the Pensions Act 1995 (c. 26) (annual increase in rate of pension), (d) section 67 of the Pensions Act 1995 (restriction on powers to alter schemes), and (e) Schedule 7 to the Pensions Act 2004 (c. 35) (pension compensation provisions), has effect. (2) The amendments made by Schedule 2A do not apply in relation to any scheme or arrangement which was in existence prior to the coming into force of this section. (3) In this section, ““conditional indexation”” relates to benefits provided by a conditionally indexed scheme. (4) For the purposes of this section and any regulations made under it, a ““conditionally indexed scheme”” is an occupational pension scheme within the meaning of section 1 of the Pension Schemes Act 1993 which— (a) was established after the coming into force of this section, (b) is not a money purchase scheme as defined by section 181(1) of the Pension Schemes Act 1993, (c) provides that the future indexation of pensions both in deferment and in payment (at least the minimum rate required under section 84 of and Schedule 3 to the Pension Schemes Act 1993 or section 51 of the Pensions Act 1995, as relevant, as if those sections applied to conditionally indexed schemes) is funded in accordance with Part 3 of the Pensions Act 2004, but is not a liability of that scheme such as to create an accrued right or entitlement for or in respect of a member unless and until it is awarded by the trustees or managers in accordance with such terms and conditions as may be prescribed, (d) complies with methods and assumptions prescribed for the setting of normal pension age, and (e) complies with such other requirements as may be prescribed.”” The noble Baroness said: I shall speak also to Amendment No. 130. These amendments provide for conditional indexation, and I am sure that noble Lords will be aware of this concept from the extensive briefing provided on it by the Association of Consulting Actuaries, which has been tirelessly developing it. The background to the amendments is the disastrous decline of private sector pension provision, and in particular private sector defined benefit pension provision. We could, as we have done in the past, spend several hours debating the causes of this decline, but I am going to exercise considerable self-restraint and confine myself to the fact of it. Let me remind the Committee that since 1995, the number of employee members of private sector defined benefit schemes open to new entrants has declined from 5 million to 900,000. The direction of travel is clear: it is not stable, as the Government sometimes like to suggest, but is still going down. Without action from the Government, we can expect to consign defined benefit provision in the private sector to the history books. The focus of the Bill is on bringing the majority of the workforce into employment-based pension provision, and the personal accounts scheme, which could well be the dominant scheme under auto-enrolment, will be a money purchase scheme. Even on the most favourable assumptions, an employee enrolled into the personal accounts scheme would be likely to have a pension in retirement that is less than that of an employee retiring in a defined benefits scheme. But this Bill does absolutely nothing to encourage private sector employers to continue with their defined benefit schemes, and certainly would not induce a single employer to consider starting one. These amendments are designed as a modest contribution to keeping defined benefit schemes in existence. Conditional indexation attacks one of the features of the rules for defined benefit schemes which apply in the UK, but practically nowhere else in the world. It is an absolute requirement in the UK that both deferred pensions and pensions in payment have to be uprated in line with inflation. If we look to international experience, some such as Ireland compulsorily index deferred pensions, and some such as Germany compulsorily index pensions in payment, but only the UK does both. This is one of the drivers of the cost problem with defined benefit schemes, and let there be no doubt that there is a cost problem for them in the UK—ask any finance director about that. Conditional indexation is based on the method of providing pensions in the Netherlands. It is a form of risk sharing, because while the employer is expected to fund the scheme to accommodate the indexation of benefits, the award of indexation would be conditional on the actual level of funding in the scheme. If there was a deficit in the scheme, the indexation would be forgone until there was a surplus, when the first call on that surplus would be the restoration of deferred or lost indexation rights. Employers with a defined benefit scheme often face a funding nightmare. They are struggling to fund ongoing pension accrual, which is tending to increase, as well as funding emerging deficits, which come inter alia from improving longevity. But indexation of benefits is also a major driver of the liabilities of defined pension schemes, and conditional indexation is one way of helping employers to not only control the costs overall but make them more stable and not subject to being ramped up as soon as deficits emerge. The version of conditional indexation pursued by the Association of Consulting Actuaries is based on career average earnings, which has a further advantage for employers of making the costs more predictable and hence manageable. Some may say that these would be unfair to employees, and certainly compared with existing DB schemes employees would bear some of the risk. But money purchase arrangements, which this Bill will enshrine as the standard form of private sector pension provision, do not share risk at all—all of it is borne by the employee. Conditional indexation provides a middle way between the full rigours of a defined benefit provision as we currently define it in the UK and money purchase, but it is much closer to defined benefit provision in substance, and the employer in particular will still be expected to fund for indexation. Evidence from the Netherlands is that it does work. Where indexation has been passed for some years, it has generally been restored. It is not a charter for unscrupulous employers. Instead, it may encourage more employers to start defined benefit schemes or to keep existing ones going on a conditionally indexed basis. The possibilities offered by these amendments would be restricted to the future only, and would not affect accrued rights. Employee organisations that fear conditional indexation on the basis that it will become the norm for future benefit accrual really need to balance the possibility against the increasing likelihood that no form of deferred benefit accrual may be available in the future. Rather, I hope that employee organisations will see conditional indexation as a lifeline for the preservation, or possibly even the creation, of some form of defined benefit provision. The Lewin and Sweeney deregulatory review of private pensions last year floated a lot of ideas about flexibility but the Government did not do anything about it until they started a consultation last month. Those in the pensions industry to whom we have spoken do not expect the Government’s consultation to produce any firm conclusions at an early stage. The Government say that they want to examine the scope for flexibility but there is no commitment in their document to delivering flexibility. Even if the Government decide eventually that they want to pursue flexibility, there is no certainty that any space will be found for a further pensions Bill in the next Session—especially as by the time this Bill is enacted there will have been three pensions Bills in five years—and it would be a shame to lose the opportunity of this Bill. I understand that to legislate prospectively for a wider range of flexibility may require the creation of delegated legislation powers which go beyond even those which the Government are seeking in relation to the regulator’s powers in Amendment No. 130EW, to which we will come in due course. We do not have the drafting resources available to us to draft flexibility amendments ourselves, but if the Government were minded to go down that route to create a platform for flexibility going forward, we would be prepared to work with them to allow flexible schemes to emerge. But, if we cannot achieve full flexibility powers in the Bill, it would not be right to let this opportunity pass without including the solution that the Association of Consulting Actuaries has put so much time and effort into. The amendments in this group have, to use the words of the editor of the Evening Standard, been, "““tested … almost to destruction in two years of debate and consultation within the pensions industry””." They allow only new schemes to use conditional indexation and represent a workable and practical solution going forward. The CBI supports the amendments. Employers may not be queuing up for the opportunity to introduce conditional indexation, but if it is available and if it saves or creates only one defined benefit scheme, surely it would be worth it. We have learnt throughout the Committee that the Minister favours flexibility. I hope that he is in a mood to put that flexibility to good use on these amendments. I beg to move.