Pensions Bill

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Malcolm Wicks: Given the hon. Gentleman's broad support for the PPF—I think that that is his position at the moment, on Thursday—does he regard that as a stealth tax, even though the figure that he quoted is wildly inaccurate?

Mr. Waterson: It is certainly an additional requirement for companies, and possibly, through companies, on their members. I am trying to pin the Minister down on his estimates of the cost of the scheme. Contrary to what the Government suggest, Watson Wyatt, the leading actuaries, reckon that the average administration costs for a company scheme are, at present, £90 a member. Mr. John Ralfe, famous for his connection with the Boots pension fund, said that the scheme needed £600 million from FTSE 100 companies alone; otherwise, it could go bust. Have the Government any revised estimates of the total cost of the scheme?

2.30 pm

Another way of looking at the issue, which I developed the other day in connection with other parts of the Bill, is to compare the experiences of the UK with those of countries such as Germany and Sweden, which approach the matter differently. For example, in Germany, the PSVaG, as it is called, raises an equivalent levy on 40,000 companies. It passes the levy along to 62 private sector insurance companies. The 28-year average levy is 0.22 per cent. of gross liabilities. Assuming gross UK pension liabilities of £650 billion to £750 billion, that would equate to an annual PPF levy of between £1.4 and £1.6 billion.

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Let us compare that to the situation in Sweden. It has something called the FPG, which is a mutual scheme run by big companies in the private sector. Again, levies are 0.2 per cent of gross liabilities. It actually makes a profit. According to my calculation, the equivalent would produce a UK levy of between £1.2 billion and £1.4 billion.

The PBGC, as we know, has negative cash flow, and the situation is expected to worsen this year. To regain neutral ongoing cash flow, levies would have to triple from $948 million in 2003. If that were to happen, that would represent 0.19 per cent. of gross liabilities of $1.5 trillion dollars. Again, the equivalent rate in the UK would be premium or levy of between £1.2 and £1.4 billion.

Those are just three comparisons, but they all suggest that the ongoing cost to the PPF could be three or four times the figure quoted by the UK Government. Surely the Minister must give some credence to the views of someone such as John Ralfe, who knows a great deal about how occupational pension schemes work in this country.

Malcolm Wicks: Of course I take advice from outside experts very seriously, but on this occasion they are wrong, and it is important to say so. The figures cited are not at all relevant to the British experience.

As we have heard, the amendment would result in the levy ceiling being set at no more than £600 million for the first financial year following the initial period. The amendment would not have the intended effect, for reasons that I will explain. First, let me set out how the levy ceiling will work. The responsibility for setting the levy ceiling will rest with the Secretary of State, who will need the approval of the Treasury. I do not know whether, should there ever be a different Government, the Conservatives would say that the Treasury should not be involved. We might seek clarification on that subject, just out of philosophical interest.

The levy ceiling will be set only once before the introduction of the pension protection levies. The Secretary of State will not set a new levy ceiling for each financial year. Instead, regulations will set out the levy ceiling, which the Secretary of State will be required to uprate annually by the general increase in earnings.

The levy ceiling will be set with the anticipated PPF costs in mind. We have set out in the regulatory impact assessment that the anticipated year-on-year costs of the PPF meeting its liabilities will be some £300 million. Our intention is that the levy ceiling will be set at twice that amount—in other words, at £600 million—going forward. It is only during the period of the initial levy that the levy ceiling will not apply. That is because the Secretary of State will be responsible for setting the rate of the initial levy.

However, during the transitional period, and for the first year after the transitional period, regulations will allow the levy ceiling to be lowered. The purpose of the power is to restrict the amount that the board may raise in the transition period, when it may not be in a position to implement a full risk-based approach. As a

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result the amendment would have no effect, as the levy ceiling is likely to be less in the first year than the £600 million levy ceiling that will apply going forward.

Instead, we envisage the levy ceiling being set at a reduced level of about £300 million for the first year of the transition period. In addition, the PPF board will be required to consult before setting the pension protection levies for the first financial year following the initial levy period, as set out in clause 138. That will ensure that any levy structure that the PPF board proposes to impose will take into account the views and needs of pension schemes and sponsoring employers.

Mr. Webb: I am aware that we have not reached clause 142, which deals with the transitional period, but the Minister has been talking about the transitional period and the initial period. Will he clarify, for my benefit if for no one else's, how the initial period and the transitional period relate to each other?

Malcolm Wicks: By the initial period I mean the first year—we anticipate that it will be a year—when the flat-rate levy, of 50 per cent. of the likely levy for the next year, will apply. That will be non-risk based, as we have discussed. There will then be a transitional period, as we develop the risk-based levy. I think that I gave some figures this morning to suggest that the full development, or roll-out, of the risk-based approach to every scheme will be complete by 2009.

We have included in clause 140 a provision to enable the Secretary of State, with the approval of the Treasury, to increase the levy ceiling, should that be required. Any increase in the levy ceiling above the general increase in earnings could be considered only once the board had consulted its stakeholders and made a recommendation to the Secretary of State.

We are confident that the provisions that we have established for the setting of the levy ceiling and future protection levies are both appropriate and sufficient. It would be unusual to state a figure for the levy ceiling in primary legislation, particularly when further provisions in the Bill enable it to be modified. We therefore do not consider it necessary to state the amount of the levy ceiling in the Bill.

Mr. Webb: I hope by this question to avoid a stand part debate, unless any other hon. Member wants one. I do not really understand the philosophy of the levy ceiling. We have heard all through our discussion about the arm's-length nature of the board, and that there would be a cap on the increase in the levy from one year to the next. Is the levy ceiling to be set at double what might the levy might be, just in case? If a cap is placed on the amount by which the levy can go up from one year to the next, I do not understand why there is a need for a levy ceiling at all.

Malcolm Wicks: In calculating the costs at £300 million a year, our methodology was based on actuarial modelling of PPF finances over the next 20 years, but updated to take account of current market conditions and the decisions taken on the precise nature of the PPF compensation payable. If the hon. Gentleman wants further detail from me about

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our thinking on the £600 million, I may need to write to him.

However, I want to assure business that there are parameters around the level that can be set for the levy. It is sensible to set a ceiling over and above the initial £300 million. If I can give the hon. Gentleman more arithmetic about that, I shall do so. We wanted to be prudent about the ways in which the levy could be increased. Hence the idea of the cap at twice the initial amount, and the idea that it will go up by only 25 per cent. in any one year.

I remind the Committee of something that is sometimes forgotten in discussion: when we are talking about the finances of the PPF we refer, perfectly properly, to the levy; however, we should include in the equation the fact that when, sadly, companies go bust, the PPF has the power to take over their assets—and, certainly in the American case, those can become considerable over time. I think that the Pension Benefit Guaranty Corporation is, in that sense, almost the largest pension fund in the United States; it can be compared with perhaps two schemes in California. We hope that it will not be like that in Britain, because we do not want companies to fail. However, the assets part of the equation is considerable.

With those assurances, and my offer to provide such further details as I can, I hope that the hon. Gentleman will withdraw the amendment.

Mr. Waterson: I am happy with much of what the Minister said, although I think that he got things slightly inverted on his last point. The PBGC has so many assets—the Minister quickly touched on this—only because so many schemes have gone bust. So, by definition, the assets that get folded into the PPF will be insufficient to meet schemes' obligations—or am I missing something massively important?

That brings us to the subject of the incredibly expensive purchase of annuities, which is one of the things gobbling up the assets that remain in schemes.

Malcolm Wicks: By definition, a company that has come into the PPF's warm embrace must be in trouble. It will have gone bust, and there will be a big gap between assets and liabilities. In a sense, the PPF has at least two sources of funds to meet ongoing pension liabilities: the levy that comes in every year, and the income from the assets that it will invest with suitable advice from outside organisations.

 

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Prepared 1 April 2004