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Column Number: 583
Standing Committee B
Thursday 1 April 2004
(Afternoon)
[Mr. James Cran in the Chair]
2 pm
The Chairman: It may be for the convenience of the Committee if I explain about the tabling of amendments between now and when we return to Committee on Tuesday 20 April. Any amendments or new clauses tabled today will appear in print on blue pages tomorrow. Any amendments or new clauses received by the Public Bill Office up to and including Thursday 15 April will be printed and appear on blue pages on Friday 16 April. Any amendments or new clauses tabled on Friday 16 April will be printed and appear on blue pages on Monday 19 April. Anything that has appeared in print on or before Monday 19 April may be included in the Chairman's selection of amendments for debate on Tuesday 20 April.
Clause 138 ordered to stand part of the Bill.
Clause 139
Amounts to be raised by the pension
protection levies
Mr. Nigel Waterson (Eastbourne) (Con): I beg to move amendment No. 360, in
clause 139, page 85, line 36, leave out '50%' and insert '75%'.
Thank you for clarifying matters, Mr. Cran, although it has risked ruining my Easter recess. There is nothing more encouraging—or, rather, enervating—than to be involved in Committee matters when everyone else has been allowed to go home.
Under clause 139, as we can tell at a glance from subsection (3), the levy must be based on at least 50 per cent. of the amount raised by the risk-based pension protection levy. Judging from the Minister's previous comments, I am knocking or pushing at an open door—whichever is the right expression—because he has made a great deal of saying that the Government's policy is that most of the levy should be calculated on a risk base.
I hope that it will not cause pain to Labour Members to know that the amendment is supported by the National Association of Pension Funds, which has a slight genuine interest in the Bill. I am sure that some hon. Members who are new to occupational pensions, as opposed to the public benefit system, may not be aware of the association's crucial role in such matters. It is comforting to know that it is alongside us in such amendments.
The Minister for Pensions (Malcolm Wicks): I think that you challenged the association a bit.
Mr. Waterson: I am not saying that the NAPF gets everything right nor am I saying that the Minister gets everything wrong. Obviously, there must be a bit of give and take. The amendment would simply replace
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50 per cent. with 75 per cent. We want to make it sure that the overwhelming majority of the levy is risk based. As we said, there are various reasons for such action. Such a measure is only fair on well run businesses and schemes. It would also help to tackle the problem of moral hazard. When I first became familiar with such matters, I was not sure what that meant, but I now have a more clear understanding of it and it is much less interesting than I first thought.
There is an incentive to encourage employers to fund their schemes to the best of their ability if the risk-based element is as high as possible—at least 75 per cent. or preferably 90 per cent. plus, if that can be arranged. I shall cite a couple of examples of reputable companies, which have similar worries to ours and those of the NAPF. British Telecom has already been mentioned, and its defined benefit pension scheme is the largest in the United Kingdom. Its assets are worth £26 billion. It has 180,000 pensioners, 100,000 deferred pensioners and 87,000 active members. As the Committee would expect, it is a well run and responsibly funded scheme.
BT supports the idea of a pension protection fund but, as it says, it needs to be proportionate and certain. It is trying to avoid wild variations year on year, such as the FRS 17 valuations, and says that the levy cannot be so large that it places such an additional burden on schemes judged to be underfunded that it exacerbates existing problems. To put that in context, and assuming the flat-rate levy in the first year and the £300 million to £350 million per annum cost of running the fund, BT calculates that it would pay out £12 million in the flat-rate levy. It commented on the 50 per cent. risk-based proposal, and clearly there will be year-on-year variations in how much it will be required to pay. BT points out that it was suggested in The Times recently that it might have to pay up to £100 million a year. By any stretch of the imagination, we are talking about big players, at the top end of the best kind of employers, with the most responsible attitudes to pension provision.
Mr. Steve Webb (Northavon) (LD): Does the hon. Gentleman accept that there is a paradox in the case of a scheme such as BT's? If we demand a high proportion of the total premium to be risk based, which is what I want, but the Government insist that the risk-based element is based only on the underfunding risk, BT, with potentially colossal underfunding because of the snapshot way of measuring it, could find itself paying more until such time that the Government add the insolvency risk. That is another reason why we need to get on and establish the thing in full.
Mr. Waterson: I would not disagree with a word of that. It is not just the insolvency risk, but the risk profile of the investments that a company chooses to make. I have no doubt that BT's approach to all these matters is praiseworthy and an example to other schemes. Sadly, I expect that several schemes do not come up to its high standards. However, the bigger the schemes are, the harder they fall. If it happens to be a big scheme and, because of the rollercoaster nature of equity markets, it has a large paper deficit, it could end up paying extremely high amounts. At the moment,
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there is even talk of schemes paying £100 million a year.
BT came to talk to me and it made a plea. A view of risk analysis needs to reflect the fact that companies such as BT take a long-term approach to risk. It hopes that that will also be the attitude of the PPF. It thinks that that means using a funding risk-analysis approach via an actuarial valuation, rather than a volatile accounting valuation approach—that is, FRS 17—or commercial rating levels applied to companies, or second-guessing asset mixes against scheme profiles. What are the Minister's comments on that? These are serious people who know what they are talking about. Their briefing says that there should be no risk at all to company or fund, but there will probably be a large paper deficit, although that is not mentioned in the briefing.
That leads me to another major employer, and an issue to which we referred on Second Reading. I am keen to get the Minister's input, as I really do not know the answer to it. The Times recently referred to another issue, under the heading ''M&S leads pension bond rush''—a headline that seems a little over-excited when compared with article that follows. This was the news that Marks & Spencer has a £1 million black hole, as the newspapers would call it, or deficit, as we should refer to it, in the pension scheme. It was hoping to tackle at least part of that with a bond issue of £400 million. The article suggests that for larger companies, for which that could be a cost-effective way of raising money, M&S will set a trend. The Minister may remember that on Second Reading I said that that is another disparity between smaller, less well run and less well funded schemes, which cannot do that, and the very big companies, which can.
If companies such as M&S do that kind of thing, does that count in reducing their underfunding? Will it have a direct effect on the amount of levy they pay? I assume that M&S would take such action for the best possible reasons—we would expect that—but also because it will save it money on the levy. I assume that the answer to my question is yes, but I have seen the speculation in the press. It would help if the Minister gave a distinctive answer.
One final example is Allied Domecq, which is a large company that is entirely signed up to the concept of a safety net for pensioners that is established in legislation. However, it has serious concerns about the mechanics of the scheme's funding. It says:
''We are not aware that any large employers' pension fund has failed to deliver the pension benefits anticipated by its members.''
That relates to something that I said this morning. It is interesting that so far that has happened to smaller schemes and smaller companies. Of course, I am not talking down the real hardship and anxiety that such circumstances cause to the members.
Allied Domecq has 58,000 members, almost half of whom are currently enjoying pensions that are largely funded by the company's contributions. It thinks that it is inequitable that the burden of funding the PPF should
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''fall disproportionately on large employers such as ourselves.''
It makes the obvious point, which cannot be gainsaid by the Minister, that the flat-rate element impacts
''on companies with large numbers of scheme members and''
will
''unfairly penalise pension funds established for lower paid employees relative to pension funds where the employees enjoy higher levels of pay''.
It is also concerned about the risk-related element, because it might focus exclusively on a scheme's PPF funding level.
Allied Domecq proposes two things: first, that
''the flat rate element of the PPF levy be based on the total PPF liabilities of each scheme (rather than the number of members)'',
and, secondly, that the
''board be required, as a minimum, to ensure that the risk of default by the sponsoring company is fully factored into the calculation of the risk based levy together with the scheme funding level in respect of its PPF liabilities.''
Those are sensible proposals. Although that is not the way the Government are planning to go—at least, not in respect of the first proposal—I am interested to hear the Minister's objections, if he has any.
I return, finally, to the moral hazard. As the CBI pointed out, the idea of a PPF
''could encourage less scrupulous employers to act in an imprudent manner . . . a company might fund at too low a level or might be tempted to hold a higher risk portfolio than appropriate'',
which is why the risk profile of a given pension fund must be built in. The CBI also says that the PPF could result in
''reduced vigilance by trustees . . . excessive benefit promises by employers . . . companies or trustees granting benefit improvements just before insolvency . . . deliberate underfunding of schemes''
and
''providers of capital increasingly shunning companies with defined benefit plans.''
In case anyone thinks that some of that is a bit far-fetched, one of the features of the US scene in recent years, which I learnt from no less a person than Mr. Kandarian, is that where a company is facing difficulties, it is all too easy to make employees much enhanced pension promises instead of giving them a significant pay rise. That is done on the basis that the problem is being shoved into the future, and everybody knows that if the company goes out of business, those promises will be redeemed by the Pension Benefit Guaranty Corporation. That seems to be a feature in negotiations between employees and trade unions in what I call the smokestack industries. An additional twist in the US scene is the crystallisation of certain rights on the part of workers when a plant or company goes out of business. That is already a problem in the US. If we are, as Ministers say, trying to draw on their experience, that is a good example of where we should take careful note. It is perfectly sensible to require that a minimum of 75 per cent. is risk based, on the basis that Ministers are saying that most of the levy should be calculated in that way in any case.
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2.15 pm
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