John Robertson (Glasgow, Anniesland): I am pleased to have an opportunity to contribute to this excellent debate. Let me first congratulate the Government-surprisingly-on the measures they have introduced to help pensioners. As my constituency contains a higher percentage of over-60s than any other part of Europe, pensions have a special meaning for me. I congratulate the Government on the minimum income guarantee, the pension credit and free eye tests, to name but three of many useful measures.

The hon. Member for Gosport (Mr. Viggers), who is unfortunately not here now, said he wanted to be part of a reforming party. Perhaps he should cross the Floor, for he will certainly not achieve that on the Conservative Benches.

What concerns me, however, is ensuring that the pensioners of the future do not fall into poverty. For the benefit of those who have heard part of this speech before, I shall concentrate on final salary pension schemes, and discuss ways in which the Government can try to protect employees as more and more companies-sadly-end such schemes.

A final salary pension scheme is a defined benefit scheme guaranteed to pay a person who retires a pension based on that person’s final salary. It allows people to plan for the future: they know exactly how much money they will have, where it will come from and, if it is index-linked, by how much it will increase. Membership of such schemes has declined in recent years, but final salary pensions are still the dominant type of occupational pension. The problem is that the schemes have become more expensive for employers, for a number of reasons. As has been said, there are demographic factors such as the increase in life expectancy. Other factors are policy changes, such as the introduction of the minimum funding requirement and FRS 17, and economic events such as the fall in stock market returns.

Those economic conditions and policy changes have had an enormous impact on employers who used to offer final salary schemes. We need to consider how the Government can instigate policy changes to remove some of the pressure. I fear that if we do not remedy the problem now, the full impact will not be felt for 20 or 30 years.

The alternative being adopted by companies is a defined contribution or money purchase scheme that transfers any investment risk to the individual and away from the company. If the stock market underperforms, the employee’s pension is likely to be smaller than it would have been under a final salary scheme. Pensioners in my constituency, and those approaching pension age, will want to know exactly what they will receive. They do not want to be involved in a gamble or a lottery, in which they buy the right ticket on a Saturday if they are lucky.

The TUC has conducted some interesting research whose compelling results illustrate the difference in employer contribution rates between the two types of scheme. For example, in the case of someone earning the average wage, the difference accrued in one year is more than £2,000-or £40 a week. Nearly half the companies running defined contribution pension schemes put in 5 per cent. or less of employees’ salaries. In a typical final salary scheme, companies contribute 10 per cent. or more. According to the National Association of Pension Funds, the long-term average employer contribution to a final salary scheme is 15 per cent., while the average employer contribution in a defined contribution scheme is a mere 6 per cent. Without final salary pension schemes, retired workers could be 30 per cent. worse off.

A vast number of companies have closed their final salary schemes to new employees, citing the aforementioned factors individually or collectively. BT closed its pension scheme-as a member of that scheme, I declare an interest-to new employees on 1 April. I do not know whether the fact that it was April Fool’s day was a coincidence. Many others, such as HSBC, Marks and Spencer, Abbey National and Barclays-all reputable companies-have also closed their schemes. Some companies, notably Iceland, the Caparo Group, and Ernst & Young, have even closed their schemes to existing employees, and I fear that that may become commonplace. I will say a bit more about Ernst & Young later.

Bob Spink (Castle Point): Does the hon. Gentleman accept that the suspension of final salary schemes by companies has been caused in part by the £5 billion tax that was imposed by the Labour Government, which caused the returns on those companies’ investments to fall?

John Robertson: I thank the hon. Gentleman for that contribution. I shall completely ignore it, as I should. I will say, however, that many withdrawals of money and opt-outs happened when his party was in power.

David Taylor: Will not my hon. Friend be relieved when that particular example being used by the Opposition crawls out of the Chamber and dies? It is a very minor matter compared with the cost to 10 million pensioners of the breaking of the link by Mrs. Thatcher in 1980, which costs them a minimum £15 billion a year. Would my hon. Friend agree that the hon. Member for Castle Point (Bob Spink) should be ashamed of that?

John Robertson: If the hon. Gentleman is not ashamed, he certainly should be.

With money purchase schemes, the size of an individual’s pension pot on retirement determines the size of the pension. If the individual has not put in enough, or if investment returns have been poor, there may not be enough to fund a decent pension. At the moment, that situation is made immeasurably worse by the very high price of annuities. The law currently obliges people to use their pension fund to buy an annuity.

If we look up annuity rates in the financial pages of the newspapers, we find that, to buy a half-decent pension at the moment, someone would need an absolutely huge pot of money. For example, for someone to obtain a retirement income of £10,000 a year, and a half pension for their partner should they die first, plus inflation-proofing of up to 5 per cent. a year, they would need a pension pot of at least £250,000. For the vast majority of people, that is a non-starter. The pension industry is currently saying that, to ensure a reasonably decent pension, we need to save between 20 and 25 per cent. of our salary for the whole of our working life. For all but the very rich, that is just not feasible.

There are also implications for employee relations in the closure of final salary schemes. While it may not be a breach of contract to close a final salary scheme, it could be regarded as the breaking of an implicit promise in the employer-employee relationship. Apart from the obvious damage to the commitment that employees have to their company, the loss of a guaranteed pension and reduced contributions may increase wage demands as employees seek to maximise their pensions. A disturbing tendency is also emerging-directors are keeping their own final salary schemes while removing them from their employees. That must be stopped. I ask the Minister to ensure that, if there is no law to cover this, there will be in future. There cannot be one law for directors and no law for employees.

The unions are very concerned about the dangers of closing final salary schemes, and I pay tribute to Amicus and Connect, the union for professionals in communications-I draw to the House’s attention the disclosure of my membership of Connect in the Register of Members’ Interests-for the work that they have been doing to inform people of why final salary schemes are needed and must be brought back. Earlier, I mentioned that Ernst & Young was one of the employers who had closed the scheme to existing employees. This company has now been forced to reopen the scheme owing to the sheer pressure that it faced from its employees. Do we really want to go down the industrial action road? Who would win in those circumstances? I also have to ask how the company can go back into a final salary scheme once it has come out of it.

The problem with the minimum funding requirement is twofold. First, the test for the schemes is too onerous. Secondly, a scheme that is fully funded under the MFR rules-one that can meet its pension obligations-is in fact overfunded. In other words, the MFR is too cautious. It might seem absurd to make that statement, but actually it is not. Under the MFR rules, schemes have to be returned to fully funded status within a fairly short time-now 10 years. The only way that can happen is through employers making sizeable payments to their pension schemes. That is the nature of the second problem, because it places the onus on employers to make up the shortfall, although in many cases the shortfall is really nothing of the kind.

Another problem is FRS17. This is a new accounting convention, designed to force companies to show any shortfall in their pension scheme funding as a liability on their balance sheet. I disagree with some of my colleagues on this, because I do not agree with the measure. We should either modify it or get rid of it. It is supposed to aid transparency in company accounts, but all it does is add the money in one fell swoop to the liability of a company. That can drastically affect the company’s share price, which can also have a knock-on effect.

Funded pensions are important to every person, not only in the Chamber but in the whole of Britain. This is not an issue to be taken lightly, and it is certainly not an issue on which to score points. I have tried not to do that. The Government are trying hard, and they have gone a long way, but-as my colleagues have said-there is still a lot to do.

Filed under: speeches by admin