Pensions Reform

It is a genuine pleasure to follow the hon. Member for Hemel Hempstead (Mike Penning). We speak fairly regularly and I know that he is an extremely hard-working constituency Member. Regardless of party affiliation, I support him in that. His constituents are lucky to have him. I want to follow on from the points that he raised. I want to make two points. The first is about the big macro-economic and financial pressures on pensions and pensions policy—and particularly on occupational pension schemes in the UK and also throughout the developed world. The second point, which was raised by the hon. Gentleman and other hon. Members, is the very real effect that those pressures are having on a number of my constituents, and, as the debate has shown, a number of other hon. Members’ constituents, in terms of compromising and sometimes ending completely the planning that they have undertaken for their retirement. In the post-1945 period, companies provided an element of security for workers with regard to provision in retirement. Defined benefit pension schemes helped to inject both motivation and loyalty into the work force. In the relatively stable environment of the post-war period, that was entirely feasible. Risks associated with planning for retirement through a defined benefit scheme were borne almost solely by the employer. If a defined benefit scheme fell short, the employer topped it up. That warm and cosy scenario for occupational pensions has been put under severe strain over the past two decades or so for a number of reasons. First, the growing stock market and rising pension fund surpluses in the 1980s enabled the Conservative Governments of the time to impose greater costs on pension schemes—for example, by taxing pension fund surpluses under the misapprehension that pension fund surpluses were a cash cow that could be milked for ever. Secondly, the 1980s saw a break with the link between pensions and earnings, because the Conservative Government of the time made a political judgment—incorrectly as it turned out—that those in work had generously funded company pensions and would not have to rely on state provision. Thirdly, the unemployment policies of the Tory years resulted in high levels of redundancies and factory closures, which, paradoxically, had a positive effect on pension fund surpluses. That was partly because there was a receipt from the sale of capital assets and partly because the number of early leavers from schemes meant a sharp reduction in scheme liabilities. Fourthly, during a period of a historically strong stock market performance, many companies took pension fund contribution holidays. That trend had extremely adverse effects when the markets corrected themselves after 2000. On the back of lower stock market performance, companies redirected investment decisions for pension funds towards Government bonds. That trend has been accelerated by the fact that the Pension Protection Fund has charged risk-rated premiums, which in turn has encouraged a move into low-risk assets such as bonds. Over the past few years, that has depressed yields and reduced the ability of pension funds to recover from their deficit position. I acknowledge the tension that exists between ensuring that high-return, high-risk investments do not jeopardise the long-term financial situation of schemes, and allowing recovery to take place quickly. However, I would be grateful if the Minister could say in his winding-up speech whether his Department will look again at whether the PPF could change that rule in relation to risk-related premiums. Underpinning those developments have been the strong forces of globalisation and demographic change. The opening up of international markets and the rise of the electronic economy mean that companies have become ever-more powerful and are able to transfer operations anywhere on earth in order to secure a more effective rate of return. The culmination of those forces has meant that companies providing occupational pension schemes have sought to transfer the risk of providing pensions away from themselves and towards their employees and Government. Given the growing power of companies, they have been able to achieve that with some success and in recent years there has been a reduction in the number of defined benefit schemes on offer. That trend has been accelerated by a wholly inappropriate accounting scheme. FRS 17 could almost be seen as the last nail in the coffin for decent occupational pension schemes. I should point out that I am a member of the Institute of Chartered Accountants in England and Wales. FRS 17 has good intentions in that it tries to push forward the correct principle that a pension fund and its assets and liabilities should be an integral part of a company’s financial position. However, the fact that surpluses or deficits in the pension scheme are recognised in full on a firm’s balance sheet has meant significantly greater volatility, with adverse effects on pension schemes. All those factors have meant that companies have had an appropriate environment in which to try to transfer the risk of planning for the retirement of their work force away from themselves and towards employees and Government. Perhaps more than any thing else, that is a vivid example of companies in the modern era becoming possibly more powerful than Governments.