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Session 2005 - 06
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Standing Committee Debates

Draft Pensions Act 2004
(PPF Payments and FAS Payments) (Consequential Provisions) Order 2006

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First Standing Committee on Delegated Legislation

The Committee consisted of the following Members:


Mr. Christopher Chope

Afriyie, Adam (Windsor) (Con)
Alexander, Danny (Inverness, Nairn, Badenoch and Strathspey) (LD)
†Berry, Roger (Kingswood) (Lab)
†Heppell, Mr. John (Vice-Chamberlain of Her Majesty’s Household)
†Johnson, Ms Diana R. (Kingston upon Hull, North) (Lab)
†Keeble, Ms Sally (Northampton, North) (Lab)
†Laws, Mr. David (Yeovil) (LD)
†McDonnell, John (Hayes and Harlington) (Lab)
†Newmark, Mr. Brooks (Braintree) (Con)
†Prosser, Gwyn (Dover) (Lab)
†Stoate, Dr. Howard (Dartford) (Lab)
†Timms, Mr. Stephen (Minister for Pensions Reform)
†Waltho, Lynda (Stourbridge) (Lab)
†Waterson, Mr. Nigel (Eastbourne) (Con)
†Watkinson, Angela (Upminster) (Con)
†Wright, Mr. Iain (Hartlepool) (Lab)
†Wright, Jeremy (Rugby and Kenilworth) (Con)
Gosia McBride, Committee Clerk

† attended the Committee

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Monday 30 January 2006

[Mr. Christopher Chope in the Chair]

Draft Pensions Act 2004
(PPF Payments and FAS Payments) (Consequential Provisions) Order 2006

4.30 pm

The Minister for Pensions Reform (Mr. Stephen Timms): I beg to move,

    That the Committee has considered the draft Pensions Act 2004 (PPF Payments and FAS Payments) (Consequential Provisions) Order 2006.

The Chairman: With this it will be convenient to consider the draft Pension Protection Fund (Pension Compensation Cap) Order 2006.

Mr. Timms: I bid you a warm welcome to your role as Chairman of the Committee, Mr. Chope. The Pension Protection Fund, which became operational on 6 April 2005, was created under the Pensions Act 2004 to provide compensation to members of defined-benefit occupational pension schemes if their employer becomes insolvent and the scheme is funded below a certain level. Before compensation is payable, a scheme must go through an assessment period of at least 12 months to determine whether the PPF should assume responsibility for the scheme and replace members’ pensions and benefits with PPF compensation payments.

Occupational pensions are taken into account in calculating entitlement to social security benefits, such as pension credit. If a member’s occupational pension is replaced by PPF payments, as legislation currently stands those payments would not be taken into account. The first order inserts PPF payments and their definition into existing regulation-making powers in the appropriate Acts, to enable negative regulations to be made to provide for PPF payments to be taken into account in calculating incapacity benefit, contribution-based jobseeker’s allowance, pension credit and dependency increases in respect of incapacity benefit, maternity allowance, state pensions, carer’s allowance and severe disablement allowance.

Amendments to other benefits regulations are being taken forward separately by negative amending regulations where there are already sufficient powers without the requirement to amend primary legislation. Those benefits include housing benefit, council tax benefit, income support and income-based jobseeker’s allowance.

The financial assistance scheme became operational on 1 September 2005 and made its first payments last month. Owing to the structure of payments from the
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FAS—most payments will not be made until the recipient reaches the age of 65—the same range of powers does not need to be amended.

Mr. Nigel Waterson (Eastbourne) (Con): I thought that I would intervene at this point so that the Minister’s officials could produce the answer to my question by the time the debate finishes. Can he confirm how many payments have been made to individuals to date under the FAS?

Mr. Timms: Fifteen people have received payments so far. That is a rather small number, but it will rise quite rapidly over coming months.

The order amends only the primary legislation for contribution-based jobseeker’s allowance in respect of the FAS, adding a definition of, and including, FAS payments in the list of payments in respect of which prescribed deductions may be made within the contribution element of jobseeker’s allowance. Regulations relating to the FAS and its treatment for pension credit were laid separately and came into force on 18 December 2005. The order ensures that people in receipt of PPF or FAS payments are treated for the purposes of income-related and contributory benefits in the same way as people in receipt of occupational pensions.

The second order before us uprates the compensation cap in line with the increase in average earnings as required by paragraph 27 of schedule 7 to the 2004 Act. The compensation cap applies only to those members who are below their scheme’s normal pension age immediately before their employer’s insolvency event and who are then entitled to the 90 per cent. level of compensation when they retire. The current cap is £27,777.78. Once the 90 per cent. rule is applied, that equates to £25,000—a rounder number—at age 65. The 2004 Act requires the compensation cap to increase from 1 April in line with any increase in average earnings during the previous tax year. The average earnings, measured and published by the Office for National Statistics for 2004-05, show a total earnings increase of 4.2 per cent. That provides an uprated cap of £28,944.45, which, applying the 90 per cent. rule, equates to £26,050.01 at age 65. That uprated cap will apply to members who first became entitled to compensation at the 90 per cent. level on or after 1 April 2006.

The order provides individuals who would be entitled to a capped level of compensation with the assurance that it is being maintained in line with the increase in earnings. I am content that these orders are compatible with the human rights convention and ensure that members who receive PPF and FAS compensation payments are treated fairly. I commend them to the Committee.

4.36 pm

Mr. Waterson: It is a great pleasure to be serving under your chairmanship, Mr. Chope. I hope that it will not be put too much to the test this afternoon.

I am grateful, as always, to the Minister for taking us through the reasoning behind the two orders. I begin with the less controversial of the two, the
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compensation cap order. My heart always goes out to the unfortunate officials who have to draft explanatory memorandums. At the back of their mind there must always be the suspicion that nobody ever reads them but that someone like me may pick through them and find what appears to be a massively incompatible pair of reasons.

Paragraph 4.2 gives what I think is the honest reason behind the cap, something we spent many happy hours debating when the Pensions Bill was going through Committee. It says in fairly bald terms:

    “The provision of a compensation cap is one of a number of measures introduced to limit the level of expenditure of the Pension Protection Fund against the level of income generated by way of the levies charged to eligible schemes.”

That is patently an honest explanation. We started off with the brave new world introduced by the Bill and the Pension Protection Fund, which was going to provide a guarantee for people’s pensions. What we have seen since is a gradual whittling away of the extent of that guarantee: the 90 per cent. for people still in work, the cap itself, and, of course, the Government have given themselves the power to reduce benefits in due course if the funds are not available in the PPF.

Paragraph 4.3 gives a wholly different explanation and one that surfaced during the Committee stage, rather interestingly. The order is in fact a way of encouraging those who are entitled to pensions above the cap level, fat cats presumably,

    “to become more involved in scheme matters and help reduce the risk of the scheme entering the Pension Protection Fund.”

That provoked a hollow laugh at the time and we are no more convinced as time has gone on, but who are we to argue against increasing the cap, which we argued against having at all on at least one occasion during the Bill’s consideration?

Rather more controversial is the PPF payments and FAS payments consequential provisions order. On one level it all seems perfectly reasonable. Of course these payments should be treated in the same way as occupational pension payments are normally treated in terms of being taken into account for state pension credit, council tax benefit and the list of other benefits set out in the order and in the explanatory note. The problem with the legislation, however, is that there is a cap and a power to reduce benefits. There could well be a gap between what people would have received by way of occupational pensions and what they would actually get from the PPF.

It becomes even more difficult than that when one considers the terms of the FAS. When the FAS was pulled out of a hat in May 2004—14 May, I think—the Government were facing defeat on their Bill. The first thing produced was the amount of money involved—£400 million, or £20 million a year over 20 years. That figure has not changed from that day to this but everything else has, including the number of people who are likely to call upon the FAS because they have lost all or large parts of their pension entitlement.

At the time, the official Opposition proposed that something like what became the financial assistance
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scheme should be set up in parallel to the Pension Protection Fund and should be administered by the same people who administer the PPF itself. The Government went the other way, however, and set up a new, different organisation, based in York, which administers the FAS as a separate entity. Why did they do that? The main reason is straightforward: the benefits under the FAS are likely to be significantly lower than those payable under the PPF. As time goes on, it becomes increasingly obvious to everybody that £400 million is nothing like enough to cover the claims falling on the FAS. Those benefits will decline rather than increase.

There is likely to be a big gulf between the amount that people were expecting to receive from their occupational pension if everything had gone to plan, and the amounts they are going to get under the FAS. “Going to get” is the important phrase, because, as the Minister conceded, so far only 15 people have received payments under the FAS. That is a massive advance on the 13 people, the last figure in the public domain for those who had received payments under the scheme. If that rate of advance carries on, it will build up a head of steam. Who knows? It is conceivable that some younger members of the Committee will still be in public life when the 70,000 or 80,000 people who may have claims on the FAS receive their payments.

It is a scandal that a scheme that was announced in May 2004 is only now making a handful of payments. Many hard cases are involved. Some people are terminally ill, others have died and many face penury, yet still these payments are taking for ever to come out of the FAS. Paragraph 7(3) of the explanatory memorandum states that

    “FAS payments will not begin until a recipient’s 65th birthday.”

However, in many of the schemes, the retirement age was earlier than 65. The paragraph makes the point that in theory the FAS payments can be made early on the ground of ill health to people under 65 if they are terminally ill and unlikely to live for longer than six months. I would like to believe—I hope it is the case—that among the lucky 15 there were people in that category who were fast-tracked to get their payments. The Minister may be able to give me that information today, but if not perhaps he will write to me and to other members of the Committee in due course.

The background of the regulations, which seem unexceptional, is the massive unfairness of the FAS, the fact that even under the PPF there are limits on the benefits to be paid, and the incredible slowness of payments being made under the FAS since it was announced. I will not invite my hon. Friends to vote against these orders, but suggest instead that they abstain.

4.44 pm

Mr. David Laws (Yeovil) (LD): I welcome you to the Chair, Mr. Chope. I thank the Minister for his comments on the proposals. We have no comments to make on the first order in respect of the interaction between income-related and contributory benefits and the financial assistance scheme and the Pension Protection Fund. However, I ask the Minister to
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address two points in respect of the second order. First, does he have an update—a latest estimate—on the proportion of people who will be affected by the PPF cap? Has it changed significantly from the estimate that the Department gave when the issue was first debated? Does he have an up-to-date estimate of the cost saving to the scheme from maintaining the PPF cap at its present index level? Secondly, given the controversy about PPF costs and the concerns in some parts of the business community about the burden of PPF costs, do the Government have any intention at any stage of reviewing the 90 per cent. threshold as opposed to the cap figure itself?

4.46 pm

Mr. Brooks Newmark (Braintree) (Con): I, too, thank the Minister for his opening comments. I should like briefly to comment on the amendment to the Social Security Contributions and Benefits Act 1992, which will be made under article 2, the schedule to the order. The amendment to section 30DD of the 1992 Act will allow Pension Protection Fund payments to be offset against entitlement to incapacity benefit, in the same manner that pension payments are offset. A constituent of mine recently and fortuitously brought to my attention a potential problem with the application of section 30DD, and I hope that we can use this opportunity to rectify it.

Section 30DD is silent about whether gross or net income should be taken into account when calculating incapacity benefit entitlements. I shall quote briefly from a decision by a social security commissioner on that point. With a certain amount of regret, he concluded that the gross figure is correct in law. However, he said that, in framing section 30DD of the 1992 Act,

    “it is perhaps regrettable that Parliament did not make what I have found to be its intention clearer.”

His rather charitable comment was that

    “the differences between the treatment of income in different parts of this social security legislation are also, to say the least, untidy.”

I have already written to the Secretary of State for Work and Pensions about that issue, but I get nervous when I read ombudsman decisions that express regret at the requirement to guess Parliament’s intention.

The order should be explicit about the use of gross or net pension income when calculating incapacity benefit entitlement. I hope that the Minister will use this opportunity to clarify the situation.

4.48 pm

Mr. Timms: I am grateful to the hon. Members for Eastbourne (Mr. Waterson) and for Yeovil (Mr. Laws) for their lack of opposition to the orders. I welcome that, and from everybody’s point of view, they have both taken helpful steps. The hon. Member for Eastbourne enlivened his contribution by accusing the Government of a scandal over the time that it has taken to set up the financial assistance scheme. I want to refute that, because it is quite wrong.

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It is true, as the hon. Gentleman said, that the scheme was announced in May 2004, but from his observation of such matters over some time, he will know that setting up a system that can reliably pay out weekly sums of money ultimately to about 15,000 people takes some time. It is important that the work is done thoroughly, the systems are reliable, and we can be confident that the system will dependably pay out the right sums of money. I am confident that that is the case, thanks to the work that has gone into setting up the scheme. To have gone from announcement to scheme in operation in about 18 months—as we did—is a significant achievement on the part of those who did the work. It is, of course, entirely on track with the intentions that were announced at the outset. There was no delay. The scheme was set up on time. It is wholly inappropriate to refer to a scandal.

The first 15 individuals to benefit from help from the FAS have all been members of the ASW Cardiff scheme, who have reached the age of 65 and for whom trustees have requested such a payment. We have not as yet received a request for initial payments from trustees for anyone who is terminally ill and as soon as we receive such requests from trustees we will be able to respond promptly, thanks to the progress that has been made in setting up the scheme.

The hon. Member for Yeovil asked me a number of questions about what would happen if some of the assumptions were changed. It was calculated during the Committee stage of the Pensions Bill that, if the cap were removed, the cost, which at that stage was thought to be about £300 million, would increase by £10 million. That gives an indication of the proportionate increase in the overall cost that would follow if the cap were removed.

It is important to draw attention to the moral hazard point, which the hon. Member for Eastbourne rather dismissed in his remarks. It is an important point. Individuals, particularly senior individuals in an organisation, should be motivated to keep the scheme out of the PPF and should not have an incentive to manoeuvre the scheme into the PPF, perhaps shortly after their own departure or something like that. The arrangements that are in place, including the cap, are very helpful in that respect. The cap is targeted at higher earners, people who are more likely to be influential in the organisation. Median earnings in the UK in 2004 were just over £22,000 a year. The cap has therefore been set above that, which is an appropriate place at which to set it.

I do not have a figure at the moment for the proportion of scheme members that I would expect to be affected by the cap. I can certainly have a look to see what we can find on that and give the hon. Gentleman an answer to that question. He asked whether we are looking at changing the arrangements for the cap. The PPF is new. The policy is new. We are evaluating the policy as we go on, including the policy on the cap. We have not initiated any specific work around any of those issues, but certainly we are keeping an eye on
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things as they progress. So far I am broadly happy with the way in which most of the arrangements are working.

The hon. Member for Braintree (Mr. Newmark) asked about section 30DD of the Social Security Contributions and Benefits Act 1992. The section closely followed the legislation that has applied to jobseeker’s allowance for many years and long-standing case law established that the gross figure applies to JSA. That was confirmed by the case law to which he referred for incapacity benefit. I gathered from what he said that he has written to the Secretary of State on that point. No doubt my right hon. Friend’s reply will cover it more fully. That is the background to our position.

I hope that I have covered the points raised in the debate. I welcome the fact that the Committee supports the proposals. I can now add to what I said
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earlier when I did not have the information at my fingertips and reply to the hon. Member for Yeovil: the cap is expected not to affect more than 2 per cent. of all scheme members in the PPF.

Question put and agreed to.


    That the Committee has considered the draft Pensions Act 2004 (PPF Payments and FAS Payments) (Consequential Provisions) Order 2006.

Draft Pension Protection Fund (Pension
Compensation Cap) Order 2006


    That the Committee has considered the draft Pension Protection Fund (Pension Compensation Cap) Order 2006.—[Mr. Timms.]

Committee rose at four minutes to Five o’clock.


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