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Standing Committee Debates

Draft Pension Protection Fund (Risk-based Pension Protection Levy) Regulations 2006

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Second Standing Committee on Delegated Legislation

The Committee consisted of the following Members:


Mr. Mike Hancock

†Alexander, Danny (Inverness, Nairn, Badenoch and Strathspey) (LD)
Clark, Greg (Tunbridge Wells) (Con)
†Duddridge, James (Rochford and Southend, East) (Con)
†Flello, Mr. Robert (Stoke-on-Trent, South) (Lab)
Gummer, Mr. John (Suffolk, Coastal) (Con)
†Hall, Patrick (Bedford) (Lab)
†Heppell, Mr. John (Vice-Chamberlain of Her Majesty’s Household)
†Johnson, Ms Diana R. (Kingston upon Hull, North) (Lab)
Laws, Mr. David (Yeovil) (LD)
†McGovern, Mr. Jim (Dundee, West) (Lab)
†Marris, Rob (Wolverhampton, South-West) (Lab)
†Strang, Dr. Gavin (Edinburgh, East) (Lab)
†Timms, Mr. Stephen (Minister for Pensions Reform)
†Truswell, Mr. Paul (Pudsey) (Lab)
†Waterson, Mr. Nigel (Eastbourne) (Con)
†Watkinson, Angela (Upminster) (Con)
†Whitehead, Dr. Alan (Southampton, Test) (Lab)
Mark Etherton, Committee Clerk

† attended the Committee

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Monday 13 February 2006

[Mr. Mike Hancock in the Chair]

Draft Pension Protection Fund (Risk-based Pension Protection Levy) Regulations 2006

4.30 pm

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

    That the Committee has considered the draft Pension Protection Fund (Risk-based Pension Protection Levy) Regulations 2006.

I begin, Mr. Hancock, by welcoming you to the Chair. I know of your interest in pension protection matters in Portsmouth and throughout the country, and I am delighted that you are in charge of our proceedings.

The regulations will enable the Pension Protection Fund, when calculating the risk-based protection levy, to take account of arrangements that would release cash into pension schemes in cases of employer insolvency. A large number of respondents requested the change in response to the PPF’s consultation exercise, and the term being used to describe the change is “contingent assets”.

Before explaining how contingent assets will be treated, I shall briefly run through some of the background to the regulations. The PPF funds its compensation payments through a compulsory annual levy on eligible schemes. The Pensions Act 2004 requires the board to set both a scheme-based and a risk-based levy. The legislation stipulates the factors that the board must take into account and those that it may take into account when calculating each of them.

The risk-based levy must be assessed by reference to the level of a scheme’s underfunding and the risk of a scheme’s employer entering insolvency. The scheme-based levy must take account of the level of a scheme’s liabilities. The risk-based levy is much more important. The 2004 Act requires the board to aim to collect at least 80 per cent. of the total amount raised through the risk-based levy. That will ensure that the levies give due recognition to well run and well funded schemes with strong sponsoring employers.

The 2004 Act provides only a broad framework. The PPF is responsible for the detail. That independency is crucial, because the PPF has the expertise necessary to address technical questions. The PPF published its first proposals in July 2005. At that time, it opened a 12-week consultation period, to which more than 200 responses were received. It published its final proposals in December 2005.

That final document shows that the PPF had listened carefully to the views and concerns expressed, and the revised proposals have been widely welcomed. The key changes include reducing the cap on the overall amount payable by any one scheme to 0.5 per
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cent. of the scheme’s overall liabilities; increasing the number of risk bands from 10 to 100; and extending the deadline for the submission of information to the board, which is now 31 March.

One change is particularly important. The PPF amended its methodology to provide powerful incentives for schemes to improve their funding position and so reduce the risk-based levy that they would pay. If that approach proves successful, it could reduce the overall amount that the fund would need to collect in the coming financial year.

There are three key strands to the change. First, no risk-based levy will be payable at all by schemes that are more than 125 per cent. funded. Secondly, the board has made it clear that it will take account of any additional contributions made since the scheme’s last formal valuation. Thirdly, the board will take account of the existence of contingent assets. It is the last of those modifications that is the subject of the statutory instrument—indeed, is it the only one that needs a regulatory change.

Contingent assets are not recognised in the normal valuation of a scheme’s assets. They are an arrangement that will release assets into the scheme upon the insolvency of the sponsoring employer. The PPF will consider three key types of contingent assets. First, a parent company may give a guarantee that if a subsidiary that is also a scheme-sponsoring employer enters insolvency, the parent company will pay a set amount of money into the scheme. Secondly and alternatively, the sponsoring employer may ring-fence particular assets such as property or machinery so that if the employer does become insolvent those assets will revert to the scheme.

Thirdly, a contingent asset may given by a third party, typically a bank or insurance company. It is akin to insurance, whereby a premium is paid to the third party so that should the sponsoring employer become insolvent, a sum is paid to the scheme. Such arrangements have generally been used by employers to provide security for the scheme. They are often quicker and cheaper than making large cash payments directly to the scheme. Their existence will reduce the risk that the scheme poses to the PPF. It is therefore right that the PPF should take account of them.

The PPF has proposed to reflect contingent assets in its risk-based levy calculation by deducting the value of the arrangements from a scheme’s actual underfunding. However, it has recognised that it needs to consider the true value of such arrangements—the extent to which they reduce the risk posed—to the PPF. For example, will the contingent asset be paid in circumstances in which the PPF must assume responsibility for the scheme? If the answer is no, or not always, the arrangement clearly has a reduced value. The PPF has also recognised that there is a risk that contingent assets will not be paid out in practice. For example, can the PPF effectively enforce a guarantee given by an overseas company?

To minimise such concerns, the PPF has set out guidelines and provided standard documentation. That will ensure that the arrangements cover the same circumstances as those in which the PPF must become
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involved with a scheme. To ensure enforceability, for example, the PPF requires guarantors to be based in an Organisation for Economic Co-operation and Development country. If the contingent assets do not meet the standards set down, the PPF will not consider them. To take account of the risk posed by a guarantor’s insolvency, the value of any parent-company guarantees will be reduced in accordance with the likelihood of the parent becoming insolvent.

The regulations allow the PPF to take account of contingent assets as it considers appropriate. In line with other provisions in the Act, however, the regulations do not prescribe what the PPF must do in taking those assets into account; rather, they provide a framework that allows the PPF to propose and consult on the detail. However, the overall effect is clear: where a scheme has contingent assets, its risk-based levy will be reduced to meet the requirements set by the PPF. The fund’s proposals have been well received, and I commend them to the Committee.

4.38 pm

Mr. Nigel Waterson (Eastbourne) (Con): It is, as always, a pleasure to be under your chairmanship, Mr. Hancock. It might be worth pointing out at this early stage that I need not detain you or the Committee long. The Minister’s introduction was efficient, as usual. I am glad that he caught his plane and got here on time, because he will be here for the votes on the monumental business on the Floor of the House later.

The Chairman: Order. Now we will fly back to today’s business.

Mr. Waterson: We will fly back to today’s business very rapidly—on a plane that works.

My hon. Friends and I are the last people on earth who would oppose the regulations. From the start of the debate on the Pensions Act, we argued vociferously for an all-singing, all-dancing risk-based levy to be put in place when the PPF was created. Why did we do that? As I am sure the Minister and his officials did, I took the trouble to go to Washington to meet representatives of the Pension Benefit Guaranty Corporation, on which the PPF is loosely based, although I use the word “loosely” advisedly. They told us that the one thing that we had to have from the outset was a fully risk-based levy and that the corporation had eternally regretted not having got that right when it was set up 30 years ago.

We see the proposals as a useful but modest loosening of the current regulations, and I shall certainly not press my hon. Friends to vote against them. Indeed, we should vote for them because they are sensible and, importantly, respond to the views that business expressed in the consultation. The Minister would be disappointed, however, if I did not have a few little quibbles, and I have two or three things to say to place the matter in context. Although the regulations are sensible and allow some flexibility, I am sure that the Minister will agree that they apply primarily to large, well placed companies. Those alternative methods of funding pension deficits will not be easily available, if at all, to smaller companies,
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particularly struggling ones, and certainly not those that the PPF will be most concerned about becoming its customers. That is a key issue.

Arrangements such as letters of credit or parental guarantees are matters for large companies or conglomerates. The Minister touched on the issue—I will be interested to see what happens in practice—of parent companies in other countries giving such guarantees. For example, would those parent companies be required to set aside funds in that other country?

One of the biggest problem cases currently hanging over the PPF like the sword of Damocles is that of Turner and Newell. It was the parent company, Federal Mogul, based in the USA, that had the major problem, and it was therefore unable to tackle a large pension deficit. Other technical legal issues remain, but I guess that they fall outside the scope of the regulations.

The differences that the regulations might make are dwarfed by the current turmoil in the gilts market. It would be interesting to hear from the Minister, either now or in writing, if he knows of any estimates about the enormity of the problems caused by companies with growing rather than shrinking deficits resulting from the current position of the gilts market. That tends to dwarf some of the problems that the regulations are trying to tackle.

Another major concern is the upper limit on the overall cost of the PPF levy to British business. The original figure, debated at great length during the Committee stage of the Pensions Bill, was a maximum of £300 million a year. That was recently increased by the PPF, which indicated that the total levies on companies in 2006–07 would be about £575 million, which nearly doubles the likely burden on British business.

As if that were not bad enough, only the other day the Minister announced that there would an upper limit for 2006–07 of £775 million. That is a worrying development. Mr. John Cridland, the deputy director general of the CBI, said about the original £300 million figure:

    “Business saw that sum as a price worth paying to protect scheme members’ benefits, but the potential for an increase to £775m in the first year of operation would be wholly unacceptable to UK firms.”

Mr. Cridland went on to say—this is quite serious because the support of business for the PPF has always been crucial to the Government’s strategy:

    “Many now view the additional cost of the PPF as little more than a tax on their pension scheme, and fear that total annual costs could continue to spiral.”

He concluded:

    “Where is the logic in paying so many millions into a fund that the vast majority of companies will never need, when they could instead be using some of that money to reduce their pension scheme deficit instead?”

I think that the CBI raises an important concern. Will the Minister say whether that £775 million figure is likely to remain, or whether he envisages an even larger one for 2007–08 or 2008–09? Clearly, British business
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and its responsible spokesman are concerned that the costs of the PPF are beginning to outweigh the likely benefits.

Having put all that into context, it seems that the regulations will produce flexibility, which will help some companies and pension funds, and that, after all, is the purpose of the regulations. We therefore support them.

4.45 pm

Danny Alexander (Inverness, Nairn, Badenoch and Strathspey) (LD): It is a pleasure to serve under your chairmanship again, Mr. Hancock. I am grateful to the Minister for setting out the purpose of the regulations so clearly.

It is worth saying from the outset that we Liberal Democrats welcome and support the establishment of the PPF. We share the comments that have been made about the sensible way that the PPF appears to be going about its business so far, not least because it has undertaken a wide range of consultation with business and appears to be listening to the views that it is receiving through that consultation. The regulations are, in part, a response to those views. That background provides us with a welcome context for the regulations. As the Minister rightly said, the risk-based levy is much the more important of the two levies that the PPF is able to charge.

The Minister mentioned two sorts of contingent assets that could be taken into account under the regulations: those of a parent company overseas and ring-fenced assets, such as property. There may be more examples. I should be interested in hearing in a little more detail about how the regulations and the PPF would work in relation to overseas parent companies, and how it would assess the risk of such a company not meeting its commitment or becoming insolvent. Those considerations are pertinent to the regulations. We would not wish the PPF to take on board promises made by overseas parent companies without measuring properly the risk that there may be some problem in the long run with those commitments being met, should other problems arise.

Mr. Waterson: A further thought has occurred to me in the past couple of minutes. Suppose an American parent company became subject to the PBGC—the equivalent of the PPF—would there be a need for some kind of arrangement between the two bodies on how to allocate the risk and the losses between them?

Danny Alexander: The hon. Gentleman makes a good point that I shall throw back at the Minister to answer in his closing remarks, because it seems pertinent.

I share the hon. Gentleman’s concerns about the overall cost of the PPF. What does the Minister regard as the overall cost, year on year, to business? He said that it should, with these regulations, be possible to reduce that cost by taking additional factors into account. I should be interested to know what forecasts or predictions he might care to make about that.

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It is worth pointing out that although the PPF has been set up, positively, to ensure that, should pension schemes in future have problems, their members can be protected, the fate of the PPF’s sister scheme—the financial assistance scheme to help those people whose pension schemes have already faced problems—is by no means such a positive story. Concerns have been raised before about that. I should be interested to know whether the Minister has any further updates on that front.

By and large, as it has been said, the regulations have been well received by business; they are a sensible, positive addition to the regulatory framework of the PPF and I welcome them.

4.49 pm

Rob Marris (Wolverhampton, South-West) (Lab): I welcome you to the chair, Mr. Hancock.

I have some points to make that are, perhaps, more prosaic and may come from a misunderstanding of what the Pensions Act 2004 covers. First, I note that the regulations will only apply to Great Britain. Perhaps the Minister could explain why they do not apply to Northern Ireland. It may be because the 2004 Act does not apply there. That seems to be a gap.

Secondly, the two Opposition spokesmen raised a point about the double counting of guarantees. If a parent company’s guarantee of its offspring company’s potential pension liabilities were taken into account in setting the magnitude of the levy, I should be concerned lest there was double counting of guarantees. If one parent company guaranteed several subsidiary companies, we could inadvertently set the levy too low if we thought that the source of external funding from the parent company was greater; for example, where two of the offspring companies both got into difficulties with their own pension schemes and sought to draw on the same guarantee. It is a domestic echo of the point that has been raised about the USA guarantee scheme in the United Kingdom, or the Great Britain guarantee scheme.

Thirdly, I hope that the Minister can explain why the explanatory memorandum, which I realise does not directly form part of the regulations, says:

    “A Regulatory Impact Assessment has not been prepared for this instrument as it has no impact on business, charities or voluntary bodies.”

I can see an argument that it has no adverse effect on such organisations, but to say that it has “no impact” strikes me as slightly confusing. The regulations are being introduced precisely because they have an impact. Clearly, business has had its concerns adequately dealt with by the Government; otherwise many business people who had concerns would be in the Public Gallery. I congratulate the Minister on that.

Fourthly, paragraph 8.2 of the explanatory memorandum states:

    “There is no impact on the public sector.”

I might be misunderstanding things or have a lack of knowledge about what happens under the 2004 Act. Let us, however, consider the local government pension scheme. It is an underfunded scheme, which I think consists of 89 sister schemes around the country.
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Some of them are in difficulty and others, such as the excellent west midlands urban scheme administered by Wolverhampton city council, are in fine shape and win all kinds of awards.

It seems that if those funded schemes were part of the system, the changes to the way in which risks are assessed in relation to the levy would have an impact in the public sector. On the other hand, if funded schemes in the public sector are not part of the Pension Protection Fund and the levy making, it seems slightly strange to have funded schemes that will not be given protection by the PPF. One therefore assumes that such schemes would receive that protection from central Government. That is a slight anomaly, and I hope that the Minister can clear it up.

4.52 pm

The Minister for Pensions Reform (Mr. Stephen Timms): I am grateful for the general support for the regulations, and I will briefly respond to the points that have been made.

The hon. Member for Eastbourne (Mr. Waterson) mentioned that the arrangements are likely to be of particular benefit to large companies, but I am unsure whether that is necessarily true. I know that the charity sector very much welcomes the change. As one would anticipate, some charities have significant contingent assets that they can put forward, and they will find the measure particularly helpful. In addition, smaller companies may well have a factory, or some equipment or machinery of which they could take advantage. I do not think that his point was entirely correct.

The hon. Gentleman asked about what is happening in the gilts market, which is probably slightly outside the scope of today’s discussion. We are keeping an eye on that, as indeed is the Treasury. I think I am right in saying that the remit for the Debt Management Office for the coming year is currently under consideration. I know that that is awaited with interest.

The hon. Gentleman made some criticism of the level of the PPF levy. He is right to say that the regulatory impact assessment for the Pensions Bill referred to a figure of £300 million. He will also know that many people were saying that the figure would be a good deal higher than the £575 million announced in December. The difference between the two sums was down to changes that have occurred since the original calculation was made in 2003. I am thinking of two particular factors: increased longevity expectations and changes in interest rates.

Mr. Waterson: Before the Minister slightly rewrites history, I must say that almost everybody, including Conservative Members, was saying that the figure was wrong and that the real level would be much higher. The only people who did not agree with that position throughout the entire passage of the Bill were the Ministers.

Mr. Timms: I simply make the point to the hon. Gentleman that if he were to re-examine and redo the calculation on the basis of the current values of
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longevity expectations and interest rates, he would arrive, almost exactly, at the figure announced in December.

The announcement of the levy ceiling is not in any sense bad news. The hon. Gentleman accurately quotes some of the points that were made, but some misunderstanding exists. The figure represents the ceiling in the 2004 Act beyond which the levy will not be permitted to increase in future; in fact, I hope that the amount of the levy will fall in future.

The 2004 Act requires an upper limit, and we have set it at £775 million. That will not affect anything in 2006–07 because the PPF can increase only by 25 per cent. per year. Only in the following year could it have an impact. That figure should be taken as reassurance that there is a ceiling on the levy, rather than an additional worry. It was simply a question of determining the headroom for the PPF to set a levy on the basis of its judgment of the economic circumstances and to provide reassurance to those who will pay it.

The hon. Member for Inverness, Nairn, Badenoch and Strathspey (Danny Alexander) asked about the arrangements for overseas companies. In my opening remarks, I said that the guarantor has to be in an OECD country so that the legal framework provides what we need. The guarantee must be to the pension scheme and it must guarantee a fixed monetary amount, a specified percentage funding level or full section 75 buy-out debt.

The insolvency risk of the guarantor, which was raised in the debate, will be measured by Dun and Bradstreet. Clearly, there could be a risk of the guarantor becoming insolvent and being unable to pay the amount it has guaranteed. To allow for that, the PPF will adjust the value given to the contingent asset in accordance with the likelihood of the sponsoring employer becoming insolvent. In that way, we can factor in the risks that there could be, with the provision of that term guaranteed.

My hon. Friend the Member for Wolverhampton, South-West (Rob Marris) asked about the lack of a regulatory impact assessment. However, as he indicated, what this statutory instrument changes is only positive from the point of view of those who will pay the levy. There will be some companies for which it has no benefit and others for which it is a very welcome change, but there are none for which it is an adverse step. We published a regulatory impact assessment with the levy ceiling order, and we shall have the opportunity to come back to that when we debate the relevant statutory instrument.

As I think my hon. Friend was anticipating, local government schemes and funded public sector schemes are exempt from the PPF because of their relationship with the Government; there did not seem much value in effectively recycling funding through the public sector.

The relevant Minister will introduce parallel regulations for Northern Ireland in due course.

I make a further point in response to the question of how parent companies will be assessed. As I said, Dun and Bradstreet will assess the insolvency risk, as it does
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for PPF member companies. On the PPF website, there are more details about how that is going to work; essentially, the value attributed to the contingent assets will be reduced in line with the insolvency risk and that calculation will be looked at again each year to make sure that it is kept up to date with changing circumstances.

The hon. Member for Inverness, Nairn, Badenoch and Strathspey asked about the financial assistance scheme. We had some exchanges about that in Committee a week or two ago. I say to him what I said on the Floor of the House: something in excess of 150 schemes have now qualified for the financial assistance
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scheme, but only a small number of those have provided the data that allow for interim payments and, ultimately, full payments, to be made. That is where the bottleneck is at the moment. I shall work to ensure that we receive a great deal more data from those schemes in the coming weeks, so that many more people can receive the payments that they are waiting for.

Question put and agreed to.


    That the Committee has considered the draft Pension Protection Fund (Risk-based Pension Protection Levy) Regulations 2006.

Committee rose at Five o’clock.


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