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At first glance one might think that actuarial equivalence would produce a no-cost result and therefore the employer has no interest in the matter. However, it is important to recognise that GMP conversion will incur immediate administration costs and possibly some benefit costs as well, depending on how the scheme is restructured. We should also remember that the employer will have entered into sponsorship of a good-quality occupational scheme on an entirely voluntary basis. All costs of the scheme are ultimately brought to bear on the sponsoring employer, and we believe it is essential that GMP conversion should go ahead only where the employer is satisfied with the proposed arrangements. However, I am conscious that that reply deals only with part of the point that has been raised and does not specifically address the issue of schemes that are in wind-up. If I may, I will reflect on what the noble Baroness said and write specifically on that, because I realise that I have given her an incomplete answer.
10.45 pm
Baroness Noakes: I am grateful for the Minister’s response. I will consider what he has said today and look forward to his further written thoughts. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Baroness Noakes moved Amendment No. 44:
“(4) A GMP conversion is deemed to have taken place after an adjustment occurs as specified in subsection (3).”
The noble Baroness said: This is another probing amendment to Clause 14. It adds a new subsection to new Section 24F of the 1993 Pensions Act, which deals with regulations in respect of transfers out. Under subsection (3) the trustees can, when a member seeks to transfer his rights out of a scheme, adjust a guaranteed cash equivalent as if the scheme had been converted. There is no problem with that. However, the Law Society of Scotland points out that the section does not say that that is to be treated as a conversion; indeed, the section seems to consign the member’s rights to some form of limbo. The amendment would make it clear that the procedure has the same legal consequences as if conversion had taken place. I beg to move.
Lord McKenzie of Luton: The amendment covers the issues of individual conversion on transfer. Noble Lords will be aware that the restrictions associated with GMPs mean that it can be difficult for a member to transfer his rights to a new scheme of his choice; for example, when starting work with a new employer. New Section 24F(3) provides a facility for a scheme to adjust a member’s guaranteed cash equivalent to a transfer value, with his consent, to remove the GMP and avoid these problems. That can apply even though the scheme is not undergoing GMP conversion for its membership generally. This is intended to be an easement providing greater flexibility and choice for individuals.
The amendment would deem a GMP conversion to have taken place where the provision under new Section 24F(3) is used. We believe that this is already implicit within the draft legislation. I hope that that reassurance will convince the noble Baroness that the amendment is therefore unnecessary. We believe that proper reading of the legislation would say that that is inevitably the position.
Baroness Noakes: I am less clear that relying on something that is implicit is an adequate response to the point raised in the amendment, but I am happy to have discussions on that offline before Report. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Baroness Noakes moved Amendment No. 45:
The amendment of a scheme in respect of those earners in relation to whom the conditions specified in section 24B are satisfied shall extinguish the earner’s accrued rights to guaranteed minimum pensions under that scheme.”
The noble Baroness said: The Committee will be relieved to know that this is the last of the amendments that have been suggested to us by the Law Society of Scotland, also in relation to Clause 14. Amendment No. 45 inserts a new Section 24GA into the Pensions Act 1993. The new section says that when a scheme has been amended under these new provisions it has the effect of extinguishing the owner’s rights to the guaranteed minimum pension under that scheme. Of course that is what Clause 14 is all about, but it did not appear to say so, so we have tabled the amendment for the avoidance of doubt. I hope the Minister will not simply say to me that it is all implicit. I beg to move.
Lord McKenzie of Luton: The amendment is concerned to ensure that, after GMP conversion, schemes do not find themselves retaining a liability in respect of the GMP. Obviously such an outcome would be quite wrong, as each individual member would already have received full value for their pre-conversion rights, including the GMP, in the award of their post-conversion benefits. One might say that it would be a “double whammy” on the scheme. I am happy to say that the existing draft legislation will not and could not lead to that outcome. The GMP will be converted into ordinary scheme benefits, and the GMP will cease to exist after conversion, making the amendment unnecessary. I hope that is the reassurance the noble Baroness is looking for.
Baroness Noakes: I think that that was a variant on “implicit”, but I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord McKenzie of Luton moved Amendment No. 46:
(a) a person has been in receipt of a guaranteed minimum pension and a Category A or Category B retirement pension,(b) the guaranteed minimum pension has been increased in accordance with section 15(1) of the Pension Schemes Act 1993 (c.48) or the Category A or Category B retirement pension has been increased in accordance with paragraph 5 of Schedule 5 to the SSCBA (increase of pension where commencement of guaranteed minimum pension postponed),(c) the pension scheme under which the guaranteed minimum pension is paid is subject to GMP conversion (within the meaning of section 24A of the Pension Schemes Act 1993 (c.48) inserted by subsection (3) above), and(d) an order under section 150(2) of the Administration Act would have applied to the person in respect of the increase mentioned in paragraph (b) above but for the scheme having been subject to GMP conversion.(9) The person’s Category A or Category B retirement pension shall be increased by the amount by which it would have increased as a result of the order.
(10) In section 186 of the Pension Schemes Act 1993 (c.48) (parliamentary control of orders and regulations)—
The noble Lord said: The amendment is to Clause 14, the provision allowing contracted-out defined benefit occupational pension schemes to convert their liability for a guaranteed minimum pension—the GMP—into normal scheme benefits, by way of actuarial equivalence. The amendment covers two different issues, and I shall cover the simpler matter first.
Subsection (10) requires regulations made under new Section 24B(5) to be subject to the affirmative procedure. Under Clause 14, a scheme may offer any structure of benefits in exchange for the GMP, but it must continue to provide a survivor benefit for a widow, widower and surviving civil partner. This requirement is in proposed new Section 24B(5), which also allows for secondary legislation to lay down the circumstances under which a survivor benefit has to be paid. It is our intention to replicate, as far as is sensible, the current requirements on GMP inheritance.
It was intended that this secondary legislation would be made under the negative resolution procedure. However, in its report on the Bill, the Delegated Powers and Regulatory Reform Committee has said that it believes that the secondary legislation on this matter should be made by the affirmative procedure. We are pleased to accept the committee’s suggestion, which the amendment implements.
Subsections (8) and (9) cover a rather more complicated issue. They are needed to prevent some people losing money as a result of the conversion of their guaranteed minimum pensions under Clause 14. This is a technical area and, despite the hour, I hope that the Committee will bear with me as I explain.
Where a person defers taking his guaranteed minimum pension, it is increased. These increases are known as increments and the scheme concerned has partially to index these increments. Once the GMP is in payment, it has to be increased to offer some protection against inflation.
A similar provision is made on the state additional pension, payable during the GMP period of 1978 to 1997 SERPS. However, with respect to SERPS, the increments are fully, rather than partially, indexed. To prevent someone who was contracted out from being treated less favourably than a person who was contracted in, the difference between the partial indexation on the GMP increments paid by the scheme and the full indexation paid to a person contracted in to SERPS is paid as an increase to the individual’s state retirement pension.
I would like to introduce Members of the Committee to the PUCODI; it sounds like something from “Call My Bluff”, but it is the payable uprated contracted-out deduction increment.
Having explained the background, I can now inform the Committee of the purpose of the amendment. Where a scheme member is in receipt of GMP increments, and the scheme decides to convert his GMP, actuarial equivalence will ensure that he is given the value of those increments as well as the value of the future indexation payable by the scheme. However, without subsections (8) and (9) in the amendment, the individual will lose entitlement to future increases to his PUCODI—the payment from DWP. This is because entitlement to a PUCODI is based on the payment of a GMP and, on conversion, the GMP disappears. These subsections will prevent someone in receipt of a GMP increment from losing future increases to his PUCODI if his scheme decides to convert his GMP into scheme benefits.
I am conscious that this has been a somewhat long explanation at this time of night for such a short amendment, but I hope that the Committee will see the benefit. I beg to move.
Lord Oakeshott of Seagrove Bay: That was a most impressive performance and I think that it is time the Minister took his PUCODI home to bed with him.
On Question, amendment agreed to.
Clause 14, as amended, agreed to.
Baroness Noakes moved Amendment No. 47:
(a) in paragraph (a), at end of sub-paragraph (ii) insert “together with his recommendation as to whether there should be an alteration in either or both of those percentages and if so what alteration is required”,(b) omit paragraph (b).“(3) If the Secretary of State lays a report under subsection (1) in which the Government Actuary or the Deputy Government Actuary recommends that there should be an alteration in either or both of the percentages mentioned in section 41(1A) and (1B), the Secretary of State shall prepare and lay before each House of Parliament with the report the draft of an order making that alteration; and if the draft is approved by resolution of each House, the Secretary of State shall make the order in the form of the draft.”
The noble Baroness said: The amendment would add a new clause after Clause 14. The new clause would amend Section 42 of the Pensions Schemes Act 1993, as subsequently amended.
Section 42 deals with the review and alteration of contracted out rebates for salary-related occupational pension schemes. Under Section 42(1)(a), at intervals of not more than five years, the Government Actuary has to report on any changes since his last report in the cost of providing actuarially equivalent benefits where schemes are contracted out of the GMP. That report has to be laid before Parliament. Under Section 42(1)(b), the Secretary of State lays another report, this time giving his view, in the light of the Government Actuary's report, as to whether the contracted out rebate percentages should be altered.
When a private-sector occupational scheme is contracted out, the Government transfer some of their long-term benefits risk. The Government pay for this through the contracted-out rebate. It is clear that the risk and the rebate are intended to be actuarially equivalent, because that is what the Government Actuary is required to report on.
There would be no problem if the Government accepted the Government Actuary's report or even increased the rebate following representation made by pension providers, but that is not what the Government did last year when the previous contracted-out rebate order was laid. Before the previous order, national insurance contributions were reduced by 5.1 per cent of earnings between the thresholds. The Government Actuary recommended 5.8 per cent. Others represented that the figure should be even higher than that; for example, the National Federation of Pension Funds recommended 8 per cent. What did the Government do? They increased the rebate only very slightly to 5.3 per cent.
They did not do this on the basis of any actuarial principle, but used what the Minister’s predecessor called a “cost-neutral approach”. There was no cost neutrality in it at all; it was a blatant move by the Treasury to hang on to as much national insurance contribution income as possible regardless of the fact that the private sector schemes would face yet a further hit. The fig leaf was the fact that the Government were considering the proposals in the report of the Pensions Commission, but they never satisfactorily explained why that meant that they should short-change pension schemes, and therefore employers, yet again.
It was clear from that episode that the Government could not be trusted to make a rational and principled decision on contracted-out rebates. They ignored the Government Actuary then and would doubtless do so again whenever the Treasury’s coffers were under pressure. Accordingly, my amendment would remove the Government’s discretion and require the Government to lay an order implementing the Government Actuary’s recommendation. If the Government had principled views, they would be able to make them known to the Government Actuary during consultation. Clearly, it would still be open to Parliament to refuse to approve such an order, but I do not think that the Government would seek that outcome.
Since the Government have chosen to continue with contracting out for defined benefit schemes, it would not be sensible to continue to expose those schemes to decisions on the rebate being taken on non-actuarial grounds. I beg to move.
Lord Oakeshott of Seagrove Bay: We support the amendment. The Government did not behave properly on the previous occasion that this happened. This is yet another example of a situation where it is not right to leave the Government with flexibility.
Lord McKenzie of Luton: I am grateful to the noble Baroness, Lady Noakes, for the chance to address this important issue. The amendment would impose an additional and explicit requirement on the Government Actuary, which, if accepted, would shift much of the responsibility for recommending to Parliament the level of rebate rates for contracted out salary-related schemes from the Secretary of State to the Government Actuary. It may be helpful, therefore, if I explain a little about the legislative provisions that are in place to ensure that the level of rebate is reviewed and subjected to parliamentary scrutiny at least once every five years. These provisions include a requirement for the Secretary of State to lay before each House of Parliament a report which includes a statement about any changes to the existing rebate rates that he considers are needed. The report takes account of the accompanying Government Actuary’s report to Parliament, which sets out any changes in the various factors that affect the cost of providing benefits of a value that is broadly equivalent to those given up in the additional state pension. Put simply, the legislation requires that the Secretary of State recommend to each House of Parliament the changes to existing rebate rates that he considers are needed and that this recommendation give due consideration to the report of the Government Actuary.
This amendment would bind Ministers to accept the recommendation of the Government Actuary and in doing so extend the statutory responsibilities of the Government Actuary. These are currently to provide an independent report to Parliament on the assessment of the cost of providing benefits of an actuarial value equivalent to that of the state benefits forgone by those who are contracting out. As is appropriate to the Government Actuary’s role, the report is confined to actuarial matters. The actuary’s report is prepared after full public consultation and due consideration of the responses to that consultation. As with all advice from civil servants, Ministers are obliged to give fair consideration and due weight to this informed and impartial report to Parliament. However, as is rightly the case, it is for Ministers to take decisions on the level of rebate in the light of other relevant considerations and advice and it would therefore be inappropriate to fetter ministerial decision-making by removing Ministers’ ability to determine the level of the rebate in the light of the broader public policy context and having regard to the prevailing and anticipated fiscal situation. The Government Actuary could not be expected to take a view on such matters on behalf of the Government of the day and it would not be reasonable to expect him to.
I do not doubt that the noble Baroness is thoroughly convinced by that argument and will happily withdraw her amendment.
Baroness Noakes: Let me be clear: the only reason why I shall withdraw the amendment is because it is 11 o’clock and time that we all went home to bed. The Minister will not expect me to say that I was convinced one jot by that explanation. I think that he can expect to revisit this at Report. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Baroness Morgan of Drefelin: I beg to move that the House do now resume.
Moved accordingly, and, on Question, Motion agreed to.
- House adjourned at 11.02 pm
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