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Fourth Standing Committee on Delegated Legislation
Thursday 15 July 2004
[Mr. Martin Caton in the Chair]
Occupational Pension Schemes
(Winding Up) (Amendment) Regulations 2004
9.55 am
Mr. Steve Webb (Northavon) (LD): I beg to move,
That the Committee has considered the Occupational Pension Schemes (Winding Up) (Amendment) Regulations 2004 (S.I. 2004, No. 1140).
As you know, Mr. Caton, in the strange way of this House, I have to move that the Committee has considered the regulations, despite having prayed against them. There has been some question as to why. We prayed against the regulations on 22 April—we are debating these matters promptly—because the change is important and would have gone through on the nod. Indeed, it has gone through without anyone nodding at all and gone into law.
We think that this is such an important issue—it was debated in the House over 18 months—that we should see where the Government have ended up with their consideration of these matters, not least because the regulations before us are different from the proposals in their consultation document within the previous year. Indeed, I have rather more sympathy with what was in that document than with what resulted from it—these regulations. I shall clarify what I think the regulations are about because, if I am on the wrong track, that will save us all a lot of time.
We are in the territory of an occupational pension scheme that is wound up and the money must be divided up. When there is enough money for everyone, there is no problem and the order in which that is done does not matter because everyone gets their money. However, increasingly of late, schemes have been wound up without there being enough money to meet the full liabilities and there has been a fight over who gets the inadequate pieces of the cake.
The Pensions Act 1995, as amended in 1996, proposed a priority order on wind-up and that priority order, with which the Committee will be familiar, was that the proceeds of additional voluntary contributions would take first priority; then any pensions in payment, excluding increases; contracted-out benefits; indexation of pensions in payment; indexation of contracted-out benefits; and finally—this is the critical point—everyone else, essentially people who are not yet drawing pensions and the indexation of those rights.
That meant that in some high-profile cases such as Allied Steel and Wire in Cardiff and Sheerness, workers were at the end of the queue because there was not enough money in the pot. There was enough to pay the pensions in payment and to buy out indexed annuities to cover the pensions in payment, but after
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that and the charges for winding up, the remainder gave the workers very little. Some workers, as the hon. Member for Cardiff, West (Kevin Brennan) has told the House, lost 85 per cent. of their pensions. We all accept that that is unacceptable.
The Government were right to want to do something about that. Some people criticised them for simply coming up with different ways of carving up an inadequate pot, which is unfair. When the pot is inadequate, we can argue that the Government's dividend tax credit changes made those deficits worse, but there must be a rule for when there is an inadequate pot and we want a fair rule, not an unfair rule, for carving it up. I have no problem with the decision to consider the matter and to come up with an alternative way.
I was quite encouraged when the Government produced proposals in their White Paper to change the priority order. They also produced draft regulations—the predecessor to the regulations before us—in October 2003. They proposed a revised priority order with additional voluntary contributions again at the top and pension benefits without indexation again second, so that was no different. However, before the indexation of pension benefits, there were two new categories: pension rights of non-pensioners, first for those with long service and, secondly, for those with shorter service.
Following those categories were indexation of pensions, indexation of non-pensioner long-service benefits and indexation of non-pensioner short-service benefits. I supported those draft regulations. If someone has been in a scheme for 40 years, not only are almost all their pension rights in that one scheme, but they are almost certainly of an age when it is too late to make any other provision. Therefore, those people should have priority over two other groups—the indexation of pensioner benefits, which is in the regulations before us, and people who either have just joined the scheme or who, even if they lose their pension rights—unfortunately, someone has to lose some of their pension rights—still have the rest of their lives to do something about it. As I so often say, the Government got it right. Their proposal to consider length of service was right.
I was rather surprised when the Government came back with these regulations, under which they have ditched the idea of relating the priority order to length of service. Why did they do that? It was startling when the Secretary of State announced to the House that the scheme was
''impracticable, as many schemes do not keep the data needed to impose''
the new priority order. That came as a shock. His explanation was even more puzzling, and it is worth quoting parts of it, as they are important to this discussion:
''They do not hold the information on how long people have been members''.
The Secretary of State said that pension schemes do not know how long people have been members. If that is true, it is astonishing. I hope the Minister can give us some evidence for that assertion. However, it gets worse. The Secretary of State said that
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''they cannot tell the difference between someone who has been a member for a short time with a high rate of contributions and someone who has been a member for a longer time with a lower rate of contributions.''—[Official Report, 24 February 2004; Vol. 418, c. 214.]
That just does not make sense. He suggested that one cannot know whether a pot of money is made up of a small number of years multiplied by a big contribution or a big number of years multiplied by a small contribution. That would be true of a defined contribution pension—it is just a pot of money, and one cannot necessarily tell what went into producing it—but we are dealing with defined benefit, not defined contribution, pensions. I wonder whether the Secretary of State was confused when he made that comment, as a final salary scheme would need to know how long a member had been in the scheme to work out their pension. How could it operate without knowing that?
One commentator—a chap called Chris Martin, managing director of Independent Trustees Services—commented on the Secretary of State's position. An article in Pensions Week in March 2004 says:
''Martin, who acts for many wound-up schemes, even suggested that Smith''—
the Secretary of State—
''had reached his conclusion having confused defined benefit and defined contribution schemes.''
Far be it from me to suggest that the Secretary of State is confused, but I hope that the Minister can explain his comment that schemes cannot tell the difference between a small number of years at a big contribution and a big number of years at a small contribution. That is not how final salary schemes work. They have to know how long a member has been in the scheme to work out their benefit. If schemes have the data on how long somebody has been a member, why could not the Government have gone with their draft priority order rather than the final one, which is before us today?
There may be other reasons for not going with the draft. It is suggested by some in the industry that it would be more complicated. I do not doubt that, but justice is complicated and fairness difficult. It is fairer to do something more, and that was obviously the Government's original intention. I wonder whether they were scared off by the industry saying, ''You talk the language of simplification, yet these draft proposals will make it all more complicated and we will not wear that.'' Perhaps the Government backed off. The argument about not having the information simply does not stand up. It would be appalling if it were true, but I have my doubts about that.
Obviously, the regulations are substandard, as they do not distinguish between the long-service person who could lose practically everything and the person who has just joined and who, even if they were to lose everything, would still have time to do something about it. Having said that, I would say that prioritising the basic pensions of workers over the indexation of pensions is a step in the right direction. It would be an unpalatable choice to have to make, but we do not object to the direction of travel—we simply think that we have not gone far enough.
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In drawing my remarks together, I wish to ask the Minister a further question about how the priority winding-up order in the regulations, which I believe will run through to 2007, relates to the pension protection fund, which will be introduced in 2005. I am not clear about whether there will be circumstances post-PPF in which the regulations still apply. One relevant example would be an employer who was just about solvent but who would go into insolvency if the shortfall in the scheme was made up. The employer therefore would not make up the shortfall and the scheme would close underfunded. The regulations might apply, but the scheme would not go into the PPF because it would not involve a case of insolvency. Is that a possible circumstance? The Committee needs to know the relevance of the regulations.
Why have the Government made the regulations apply through to 2007 when underfunded wind-ups from 2005 will come under a different regime anyway? Are we talking about cases of the sort that I just mentioned or are there others? Clearly, in assessing the regulations, we need to know what cases they will apply to in the short term, but also in the longer term.
I look forward to hearing what the hon. Member for Eastbourne (Mr. Waterson) and the Minister have to say to explain why the proposals before us are substantially different from those that were consulted on. No one objects when consultation produces an outcome that is different from what we began with—that is not inherently bad—but when it produces something that, in my judgment, is inferior to what we started with, the House should be given an explanation. That is why we sought this debate.
I am disappointed that it has taken quite so long for the powers that be, or the usual channels, to ensure that we have our debate, but at least it is finally taking place. I look forward to the Minister telling us how we got to where we are today.
10.6 am
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