Baroness Sherlock (Lab)

I thank my noble friend Lord Davies for introducing his amendment and for the history lesson. It is living history, but he always has the edge on me because he goes back to 1975, and at that point I was more interested in boys and make-up, so I simply cannot compete, I confess, on that front. The reality is that this Government have to start in 2026 and where we are now, so we have to address what the right thing to do now is for the DB pension universe and for the schemes in general. I can totally understand why my noble friend has introduced this amendment. Members of some schemes are concerned about the impact of inflation on their retirement incomes, and I am sympathetic. We have been around this in previous groups. This amendment would remove references to 6 April 1997 as the start date for the legal requirement on schemes to pay annual increases on pensions in payment. Obviously, as my noble friend indicated, legislation requires increases on DB pensions in payment to be done only from 6 April 1997. That has been a pretty long-standing framework which reflects the balance that Parliament judged appropriate at the time between member protection and affordability for schemes and employers. These changes are normally not backdated; they are normally brought in prospectively. Most schemes already provide indexation on pre-1997 pensions, either because it is required under the scheme rules or because they choose to award discretionary increases. The Pensions Regulator has done some analysis and is doing more work on this. The latest analysis indicates that practices differ, but many schemes have a track record of awarding such increases. However, imposing a legal requirement on schemes now to pay indexation on pre-1997 benefits would create costs that schemes and employers may simply not have planned for. These costs may well not have been factored into the original funding assumptions or contribution rates. For some schemes and employers, these additional unplanned costs could be unaffordable and could put the scheme’s long-term security at risk. Many employers are working towards buyout to secure members’ benefits permanently. Decisions on discretionary increases must be considered carefully between trustees and employers against their endgame objective. The reality is that the rules for DB pension schemes inevitably involve striking a balance between the level and security of members’ benefits and affordability for employers. But minimum requirements have to be appropriate for all DB schemes and their sponsoring employers. A strong, solvent employer is essential for a scheme’s long-term financial stability, and that gives members the best protection that they will receive their promised benefits for life, as the employer is ultimately responsible for funding the scheme. Any change to that statutory minimum indexation has to work across the full range of DB schemes. This amendment would increase liabilities for all schemes, regardless of their funding position or governance arrangements. While some schemes and employers may be able to afford increasing benefits in this way, others will not. The way DB schemes are managed and funded since the 1995 Act was introduced has changed, but the basic principle remains that we cannot increase scheme costs on previously accrued rights beyond what some schemes might be able to bear or that many employers will be willing to fund, and that remains as true now as it was then. Our view is that schemes’ trustees and the sponsoring employer have a far better understanding than the Government of their scheme’s financial position, their funding requirements, their long-term plans and therefore what they can and cannot afford. They are also best placed to consider the effect of inflation on their members benefits when making decisions about indexation. The regulator has already been clear that trustees should consider the scheme’s history of awarding discretionary increases when making decisions about indexation payments. We discussed earlier in Committee the Government’s reforms on surplus extraction. They will allow more trustees of well-funded DB schemes to share surplus with employers to deliver better outcomes for members. As part of any agreement to release surplus funds to the employer, trustees will be better placed to negotiate additional benefits for members, which could include discretionary indexation. Although I understand the case my noble friend is making—I regret that I cannot make him and the noble Baroness, Lady Altmann, as happy as they wish—I hope that, for all the reasons I have outlined, he feels able to withdraw his amendment.