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Public Bill Committee Debates

Draft Occupational Pension Schemes (Levies) (Amendment) Regulations 2007

The Committee consisted of the following Members:

Chairman: Miss Anne Begg
Alexander, Danny (Inverness, Nairn, Badenoch and Strathspey) (LD)
Clarke, Mr. Kenneth (Rushcliffe) (Con)
Cox, Mr. Geoffrey (Torridge and West Devon) (Con)
Crabb, Mr. Stephen (Preseli Pembrokeshire) (Con)
Flynn, Paul (Newport, West) (Lab)
Hall, Patrick (Bedford) (Lab)
Heppell, Mr. John (Vice-Chamberlain of Her Majesty's Household)
Joyce, Mr. Eric (Falkirk) (Lab)
Keen, Alan (Feltham and Heston) (Lab/Co-op)
Lancaster, Mr. Mark (North-East Milton Keynes) (Con)
Laws, Mr. David (Yeovil) (LD)
Mullin, Mr. Chris (Sunderland, South) (Lab)
Purnell, James (Minister for Pensions Reform)
Stoate, Dr. Howard (Dartford) (Lab)
Tami, Mark (Alyn and Deeside) (Lab)
Taylor, Ms Dari (Stockton, South) (Lab)
Waterson, Mr. Nigel (Eastbourne) (Con)
Gordon Clarke, Committee Clerk
† attended the Committee

Eleventh Delegated Legislation Committee

Wednesday 14 March 2007

[Miss Anne Begg in the Chair]

Draft Occupational Pension Schemes (Levies) (Amendment) Regulations 2007

2.30 pm
The Minister for Pensions Reform (James Purnell): I beg to move,
That the Committee has considered the draft Occupational Pension Schemes (Levies) (Amendment) Regulations 2007.
The Chairman: With this it will be convenient to consider the draft Occupational Pension Schemes (Levy Ceiling) Order 2007 and the draft Pension Protection Fund (Pension Compensation Cap) Order 2007.
James Purnell: I warmly welcome you to the Chair, Miss Begg. This is the first time that I have had the chance to serve under your chairmanship, and it is a pleasure to do so.
As hon. Members will know, the Pension Protection Fund provides compensation to members of eligible defined-benefit and hybrid occupational pension schemes where three conditions apply: first, an employer has experienced a qualifying insolvency event; secondly, there is no possibility of a scheme rescue; and thirdly, there are insufficient assets in the scheme to pay benefits at PPF compensation levels.
The PPF provides two levels of compensation. First, for individuals who have reached their scheme’s normal pension age or, irrespective of age, are already in receipt of either a survivor’s pension or a pension on the grounds of ill health, the PPF will pay the 100 per cent. level of compensation, subject to PPF rules. Secondly, for the majority of people below their scheme’s normal pension age, the PPF will pay the 90 per cent. level of compensation, subject to the compensation cap and compensation rules.
PPF compensation is funded in three ways. The first is by means of levies charged to all eligible occupational pension schemes. That is the bulk of what we are debating. Secondly, the compensation is funded by assets remaining in schemes that transfer to the PPF at the end of an assessment period. Thirdly, it is funded by the investment returns on each of those—that is, on the levies and on the assets.
To date, three schemes, covering a total of 275 people, have transferred into the PPF. Sixty-six people are currently in receipt of compensation payments, which average £3,700 a year. The PPF has just made a fourth payment to those people. A further 209 people will receive compensation when they reach their normal pension age.
At the end of February 2007, there were 147 schemes, covering a total of just over 100,000 members, in a PPF assessment period. We expect a further 80 schemes to enter an assessment period in each of the next two financial years, with 65 of those schemes transferring to the PPF by the end of 2007-08.
The Occupational Pension Schemes (Levies) (Amendment) Regulations 2007 remove references to the PPF ombudsman from the Occupational Pension Schemes (Levies) Regulations 2005. The regulations also amend that statutory instrument so that it includes the rates for the administration levy for the financial year ending 31 March 2008.
The PPF ombudsman provides a dispute process that will in time enable interested parties to seek a review of certain key decisions by the PPF. Those are called reviewable matters and are set out in schedule 9 to the Pensions Act 2004. In addition, there is a right of complaint, in cases of alleged maladministration, against the PPF. There is a two-stage internal process, and if people are not content, they can refer their case to the PPF ombudsman.
Mr. Nigel Waterson (Eastbourne) (Con) rose—
James Purnell: I am happy to give way to the hon. Gentleman, who was scarred by the Bill in question.
Mr. Waterson: This is a bit like a stroll down memory lane. How many cases have been referred to the PPF ombudsman?
James Purnell: I do not believe that any have been, but I shall correct myself if that turns out to be wrong. The whole point of the amendment is that there has been little need for the PPF ombudsman and we therefore do not need to collect the levy. That is why we propose a change.
The ombudsman was initially funded from money provided by Parliament, but the levy may be raised by the Secretary of State to recover his expenditure in respect of the PPF ombudsman. As I say, for the second year running no PPF levy has been raised. That is because the amount needed for the ombudsman for 2007-08 is expected to be extremely small, and in the interests of cost-effectiveness we propose to recoup costs incurred during 2007-08 in subsequent years. The move was welcomed by those who responded to the consultation on these regulations.
On the administration levy, the regulations substitute new sums to be used in calculating the amount payable in respect of the levy for the financial year ending 31 March 2008. For the first two years of the PPF—2005-06 and 2006-07—the administration levy was set at a rate to recoup £15 million a year. The changes that we are introducing will increase that to £20 million a year. It is worth putting that amount in context. It is less than 0.1 per cent. of the amount that companies are investing in their pension schemes—we are talking about 0.06 per cent. of that sum. That is a reasonable amount to give people the security that they need for retirement.
The PPF estimates that its running costs will increase from £12.4 million in 2006-07 to £14.2 million in 2007-08 as it moves out of its start-up phase towards full operation, with substantial numbers of schemes completing the assessment process and transferring into the PPF.
In addition, depreciation has increased from £300,000 in 2006-07 to £1.1 million in 2007-08. The amounts represent the depreciation incurred in respect of capital assets that the PPF has acquired since April 2005. The overall increase is partly due to more staff being needed to carry out the PPF’s functions. They will deal with more schemes coming into the assessment period and the transition of some of those schemes into compensation. They will also support the levy calculation process, invoice and collect levies, and develop the research modelling capabilities of the PPF.
There was also a shortfall in levy collection in 2005-06 and 2006-07, which has partly led to the increase in the levy for 2007-08. It was due to the poor quality of pension schemes data held in the past and to changes in the number and size of schemes eligible to pay the levy. Although the levy was set at £15 million, to date £13 million has been invoiced and £12 million collected for 2005-06. We estimate that about the same amount will be collected in 2006-07. Hon. Members might be reassured by the fact that the quality of the data is improving significantly, and we anticipate more accurate levy collection forecasts in future.
Mr. David Laws (Yeovil) (LD): Will the Minister say a little more about which aspect of the data was particularly deficient in the first year, causing the amount collected to undershoot? What has now improved?
James Purnell: I understand that we calculate the levy by working out how much money is needed and dividing that by the number of members that we calculate there are. We estimated both the number of members and the number of schemes incorrectly, thus less was collected than was expected. As we get better data, we will be able to make those calculations more effectively. I hope that that reassures the hon. Gentleman.
The increase in the rate for calculating the administration levy also includes the costs incurred by the Department for Work and Pensions in setting up the PPF. Those costs amount to £2.2 million a year, with depreciation of £900,000 on assets that the DWP purchased as part of setting up the PPF. Those costs are being recovered over three years and figure in the finances that we are discussing. This is the final year in which they are being recovered.
The Pension Protection Fund (Pension Compensation Cap) Order 2007 refers to the cap on the level of compensation that is applied to scheme members who are below their scheme’s normal pension age immediately before the employer’s insolvency event. Those members are entitled to 90 per cent. of the compensation level when they retire, and the PPF estimates that fewer than 2 per cent. of scheme members are affected by the cap.
The current compensation cap is set at £28,944.45, and when calculating a member’s compensation entitlement the cap is applied before the compensation is reduced to 90 per cent. That provides that the total value of compensation payments to members below the normal pension age does not exceed £26,050.01 a year at age 65.
As required under paragraph 27 of schedule 7 to the Pensions Act 2004, the order uprates the compensation cap in line with the increase in the general level of earnings in the previous tax year—[Interruption.] I can tell that I am fascinating Opposition Members. Average earnings, as measured by the average earnings index and published by the Office for National Statistics, increased by 3.4 per cent. in the 2005-06 tax year. Applying that percentage to the current compensation cap will provide an uprated cap of £29,928.56. When the 90 per cent. level is applied, the maximum compensation is £26,935.70. The uprated cap will apply to members who first become entitled to compensation on 1 April 2007, and the order ensures that the level of compensation is maintained in line with the increase in earnings.
The final instrument that we are debating is the Occupational Pension Schemes (Levy Ceiling) Order 2007. The levy ceiling is one of two statutory controls on the pension protection levy. The pension protection levy estimate for 2007-08 is £675 million and, again, it is worth putting that in context. It is only 2 per cent. of the amount that companies invest in their pension schemes. The PPF levy—in effect, the insurance for the whole sector—is 2 per cent. of the amount that they invest in their pension schemes, which we believe is a reasonable contribution in return for security for their members.
Mr. Waterson: That is the second or third time that the Minister has referred to the costs of the PPF as being a modest percentage of what the sponsoring companies that are members of the scheme or that run pension schemes are paying towards pensions, but it is still money that could paid into pension schemes if it were not paid to the PPF. I would not like the Minister to go too far down that road, because I am not sure that it is wholly sensible to look at it as a percentage of contributions to pension schemes throughout the corporate world.
James Purnell: I take it that the hon. Gentleman supports the PPF, and insurance to cover companies that become insolvent without adequate protection. The Liberal Democrats certainly support that. He is not quite nodding his assent, but I believe that the Conservative party’s position has been to support the PPF. I think that having this level of contribution is appropriate, so that people know that the PPF is standing behind their scheme if their company becomes insolvent.
The reason why I make that point is that there is some focus on the level of the PPF levy. I think that it is worth putting the matter in the context of the contribution that companies are making to their pension schemes, increasing their levels of solvency after the passing of the Pensions Act 2004 and often making up for lower contributions made in previous years and decades.
The ceiling restricts the amount of the levy that can be charged by the PPF. That is the first control on its expenditure. The second control is that there can be only a 25 per cent. increase in the amount that the levy can raise in any one year. So there are two controls—the ceiling and the maximum limit of 25 per cent.
Mr. Waterson: Is the Minister not forgetting the third control that in principle, according to the legislation, the PPF has the power to reduce benefits pay?
James Purnell: That is right, but I think that it is a slightly separate point. I am talking about the controls on the levy amount that the PPF can charge in any one year. Parliament has not said that we will make that decision; it will be for the PPF to make it. However, as the hon. Gentleman will know from his membership of the Committee on the Pensions Act 2004, there are two controls. First, we set an overall ceiling every year, and secondly, we say that the amount cannot be increased by more than 25 per cent. in any one year. I think that the point that he is making is about what would happen if there were a long-term affordability issue because many schemes were coming into the PPF.
The current levy ceiling was set at £775 million in 2006-07. As required by section 178(1) of the Pensions Act 2004, the draft Occupational Pension Schemes (Levy Ceiling) Order 2007 uprates the levy ceiling by 3.8 per cent., in line with the general level of earnings in Great Britain in the period of 12 months ending with 31 July in the previous financial year.
The order specifies the levy ceiling figure to be imposed on the pension protection levies for the year beginning 1 April 2007 as £804.45 million. However, because the 25 per cent. rule restricting the growth of the levy does not come into force until 2008-09, the draft order needs to be read in conjunction with the Pension Protection Fund (Levy Ceiling) Regulations 2006, which set a modified levy ceiling of £718.75 million—an amount that is 25 per cent. higher than the estimated £575 million levy for 2006-07.
I can confirm that I am satisfied that the orders are compatible with the European convention on human rights. They are important measures for us to pass. They provide the PPF board with an appropriate amount of funding; ensure that the compensation cap is uprated in line with earnings; and set a levy ceiling that safeguards the PPF’s independence and financial flexibility, while providing reassurance to business. I commend all three statutory instruments to the Committee.
2.49 pm
Mr. Waterson: I join in welcoming you, Miss Begg, to the Chair this afternoon. I am happy to do my bit to provide temporary shelter for Government Members from the blandishments of their Whips on the main business in the House today.
Mr. Laws: And former Chancellors.
Mr. Waterson: And a former Chancellor, who made a cameo appearance, although it was no less important for that.
May I begin with perhaps the least controversial of the three orders—the draft Pension Protection Fund (Pension Compensation Cap) Order 2007? As the Minister has fairly exhaustively explained, all that the order does is increase the level of the cap setout originally in the 2004 legislation, in line with earnings. The current cap is £28,944, and it will rise to £29,928.
I should make one point. A myth propagated during the passage of the 2004 legislation is still enshrined in paragraph 4.6 of the explanatory memorandum:
“The level of the compensation cap has been set to encourage scheme members, in particular those with high earnings, to become more involved in scheme matters and help reduce the risk of the scheme entering the PPF.”
I always felt that that was an extremely artificial way of explaining away what is in fact the fairly mean-spirited and redistributory approach of having the cap in the first place. Those of us who were recently lobbied by a delegation from Turner and Newell, for example, will know the slightly perverse effects of the cap and other parts of the PPF regulations as they apply to individuals in the real world. Beyond that, as I said, all that the order does is increase the cap in line with earnings.
The draft Occupational Pension Schemes (Levies) (Amendment) Regulations 2007 are relatively uncontroversial. The reference to the PPF ombudsman’s levy, as the Minister explained, will be removed in the interests of clarity and no levy will be collected in 2007-08, because the PPF ombudsman has not exactly been overwhelmed by references.
I take the credit. Those of us who were on the Committee for the latest Pensions Bill will remember the reference to the golden rivet. My golden rivet on the 2004 legislation was to say that instead of having two completely separate ombudspersons, causing a growth in the ombudsperson population, we should give the job of PPF ombudsman to the existing pensions ombudsman. I bumped into him the other day, and he told me—I am sure that it is a matter of public record—that he has just had his first case as the PPF ombudsman. How right we were not to set up a completely new office and a completely new ombudsman, with a completely different budget and a whole support network, to wait for that first case to come through the door. Let us hope that it is not the harbinger of many more. It is therefore absolutely right for the levy to be removed from hard-pressed companies for the foreseeable future.
The Department has published on its website the response to its consultation on the order. I should like to pick out a couple of points. The consultation document says:
“Respondents welcomed the removal of references to the pension protection fund ombudsman’s levy from the levies regulations”,
which I have commended. It continues:
“The majority of respondents commented that the Government had not provided any justification for the increase in the administration levy for 2007-08.”
The Government response, which the Minister echoed in introducing the order, was that the PPF’s running costs are set to increase from £12.4 million in 2006-07 to £14.2 million in 2007-08, plus depreciation of £1.1 million. Will he go a little bit further than telling us that that is a modest proportion of the overall amounts involved, and tell us why the running costs should increase in that way? It seems to me that the fact that a lot of the original costs of setting up the PPF were front-loaded should mean that the costs go down rather than up over time. The response also mentions a shortfall from the proposed administration levy collection in 2005-06 and 2006-07.
The consultation document goes on to say:
“Some respondents commented that the ability of companies to increase prices in general is restricted by market concerns and that the same principles should apply to the PPF.”
The Government response seems to deal with a different issue, but it would be interesting to hear whether the Minister has any view whether market concern should have an effect on the different levies taken by the PPF.
I will dwell longest on the draft Occupational Pension Schemes (Levies) (Amendment) Regulations 2007. As the Minister rightly said, that order has provoked the most comment in recent months. I am pleased to have a helpful note from the Pension Protection Fund itself. It says that the levy ceiling is the upper limit on the annual levy that it can seek to collect. However, the PPF board has discretion in setting the actual level of the levy in any given year. The order raises the existing levy ceiling in line with earnings to give a ceiling figure of £804.45 million—an increase of 3.8 per cent. The note says, with admirable understatement:
“What adds an element of confusion is that the Pensions Act also prevents the Board from raising the levy by more than 25% from one year to the next.”
Again, that point was made by the Minister in his introduction. The note also says:
“This creates an effective ceiling for 2007-08 of £718.75m.”
It goes on to state:
“The Order before the House on 14 March is therefore a relatively academic exercise but is important in the long term as the two methods of calculating the levy ceiling interact over time.”
The board intends to collect £675 million in 2007-08. That sum is said to reflect the projected risk, which is important, and the fact that it is to help reduce the PPF’s current deficit. Some questions reasonably arise here. In 2006-07, the PPF had originally aimed to collect £575 million, but it is now likely to collect about £300 million. As the Minister suggested, unless I am doing him a disservice and he was addressing a subtly different point, that shortfall did not arise simply because the numbers of scheme members were not available.
James Purnell: That was the point about the calculation of the administration levy.
Mr. Waterson: I was right, the Minister was making a subtly different point, and I am grateful for that clarification.
On the main levy—if I can call it that—the PPF collected less money than it originally anticipated because of market movements, improvements in the quality of data and direct action by schemes to reduce their risk, and because it fixed the distribution of the levy between all schemes to provide greater certainty on the amount of levy payable in the first year of introduction.
The PPF went on to say that if markets had moved in the opposite direction, schemes could have ended up paying more than £575 million. Again, will the Minister say how likely it is that the PPF will collect its estimate for the coming year, and how much it intends to collect from British industry?
The PPF goes on to state:
“This year the £675m has been fixed earlier to minimise the risks of pension schemes overpaying levy charges, and the PPF not collecting enough. This will ensure that the PPF collects a levy closer to its estimate than last year.”
Again, it will be interesting to know whether the Minister and the PPF believe that the reasons for the under-collection last year will affect the collection this year, or indeed whether there will be an over collection for similar reasons.
The PPF briefing goes on to state:
“Therefore, although the intended levy for 2007/08 at £675m is £100m higher than that intended for 2006/07 at £575m (with around £300m collected), the average across the two years is around £488m per annum.”
The PPF talks about some disquiet in the media about the projections, but I will come to that in a moment.
When the PPF board published its levy estimate last December, it made the point that it helped to make up for an under-collection as well as providing greater security. The Financial Times, among others, was not impressed. It stated:
“Although the £675 million levy budgeted for 2007-08 is twice the amount being raised this year, this understates the overall increase for most individual schemes. The PPF’s risk-based charge will increase four-fold in 2007-08, hitting the weakest companies hardest. The overall increase is largest for the weakest companies, which are least able to afford it”.
It went on to say:
“It is not sustainable for the PPF to impose an ever higher rate on an ever shrinking base of weaker companies ... We should not be surprised that cracks are starting to show”.
That sort of comment is a real worry.
Another worry is the views of people at the CBI. Susan Anderson, the CBI’s director of human resources policy, said:
“Many companies are struggling to meet the cost of their liabilities. They need to be reassured that in future the cost of the levy to business will be kept under control”.
Although I am an enormous fan of Lawrence Churchill, the comment of his quoted at the same time smacked of a certain insouciance; he said that of course, if people only paid half of what we needed last year, it is a natural consequence that they have to pay more this year.
Let us never forget—I am rising to the point made by the Minister in response to an intervention—that when we set up the PPF, we supported the concept. We had reservations about some of its design, but we supported the principle in the 2004 legislation. Yet the PPF was set up on the basis that the long-term levy would be £300 million a year or thereabouts. British industry has worked on that basis; at that level, the whole package was said at the time to be cost-neutral. Now, British industry is looking not simply at a levy that has risen sharply in a very short time, but at a certain volatility. That is the last thing that industry needs in trying to calculate its contribution to the PPF.
I will touch on one other aspect arising from the order: the effect of the recent decision of the European Court of Justice in the Allied Steel and Wire case. On1 February, Professional Pensions said:
“The Pension Protection Fund could go bust within two years if the High Court”,
to which the matter has now been referred,
“decides it must provide full compensation for scheme members ... The warning came after the European Court of Justice ruled that the UK’s pension protection failed to safeguard thousands of Allied Steel and Wire workers”.
Pension Capital Strategies managing director Charles Cowling said:
“It is clear that the European Court believes that the UK’s Financial Assistance Scheme and, quite possibly, the PPF do not provide adequate protection to members of UK pension schemes”.
The Minister has had quite some time now to reflect on the ECJ decision. It would be interesting to hear his developed thoughts on what, if any, the longer-term implications are for the PPF and its long-term viability.
There are serious questions to be asked, as there were at the time of the legislation—there have been since, and they will no doubt continue—about the level of levy taken by the PPF, its projected increases and where we go from here. We will continue to raise those concerns and to seek answers from both the PPF and the Government on how they see the levy developing in the coming years.
Finally, this is happening without any massively important company scheme going bust. We are not talking about British Airways or another major company that could have a devastating effect on the PPF; we are simply talking about the PPF, in its early days, taking on a relatively modest number of schemes and therefore pensioners. Looking ahead in the crystal ball, one might be more concerned. Having said that, I do not intend to press for a Division, but I hope that the Minister has some good answers to what I think are some serious questions.
3.5 pm
Paul Flynn (Newport, West) (Lab): The hon. Member for Eastbourne knows that he is hardly in a position to press for a Division, because his right hon. and hon. Friends have taken the decision to depart. We should concentrate on the sombre note on which he concluded, because there is a law of unintended consequences. Rightly, there was universal support for helping the unfortunate pensioners and future pensioners who were caught in the scheme. However, we should look at what is likely to happen, and it is more likely than not that a major company will find itself in a difficult position.
The Chairman: We are not debating the whys and wherefores of the pension protection fund, purely the orders before us. Perhaps the hon. Member for Newport, West might wish to arrange an Adjournment debate in which to explore the other issues.
3.7 pm
Mr. Laws: I welcome you to the Chair, Miss Begg. We support the orders, so I can be brief, as usual. You have indicated that you want to focus the debate firmly on the three orders. The first of the three questions that I wish to put to the Minister is about the wider context. There is a concern that the debates and disputes about pension compensation, relating not only to pension compensation covered by the existing PPF, but to the challenges that have been made in the European Court of Justice and the judicial review, could have an impact on the future level of the PPF levy, as the hon. Member for Eastbourne said.
The Government’s response to the judicial review is a piece of the jigsaw that does not yet inform the debate. I understand that they are going to make a decision on whether they are going to appeal against the judicial review’s finding of maladministration before 4 o’clock this afternoon. It will be interesting to hear what the Government’s decision is, because for them to accept the judicial review finding of maladministration would be to imply that there will be further compensation payments of the type to which the hon. Gentleman alluded. People are concerned that that will fall directly on the PPF levy. It would helpful if the Minister could bring us up to date on whether the Government are accepting the finding of maladministration. Given the passage quoted by, and the concerns of, the hon. Member for Eastbourne, will the Minister comment on whether those matters are likely to affect the PPF levy at some stage?
My second question relates to one raised by the hon. Gentleman. He talked about the difference between the amount that the PPF levy was expected to raise in its first year, the amount that it actually raised and the amount that it will raise in 2007-08. He and the Minister mentioned that the levy raised only£324 million in the first year, which was much lower than expected, and that it is expected to raise £675 million in 2007-08.
The hon. Member for Eastbourne read out some of the reasons that have been given by the PPF for the gap between the expectation and the out-turn in the first year. He mentioned factors such as market movements in asset prices. I do not know whether the lower than expected level of risk that was found in the schemes is one of the major reasons. Market movements would obviously have an impact on that. I apologise to the Minister if the answer to this is already on the record, but have the Government or the PPF given any breakdown of the proportion of the gap that is accounted for by each of those factors? That would be particularly interesting, to understand not only what has happened, but the level of uncertainty about the future.
The hon. Member for Eastbourne tried to tempt the Minister into giving us a band of possible out-turns for 2007-08. It would be interesting to know whether the Minister thinks that the reasons for the variation in the first year will mean that the level of uncertainty will decrease, or that there will still be a yo-yo effect, whereby people discover that they are paying only a few hundred million one year, which increases to a multiple of that amount in the second year.
The hon. Member for Eastbourne raised a concern about the excessive levy that might fall on some of the most marginal schemes as a result of the PPF levy being lower than predicted because some schemes prove to be more robust than expected. His concern was that that could put pressure on struggling schemes. A Government policy change that is designed to protect pensions could end up putting undue pressure on the most marginal funds. It would be useful to hear the Government’s view on that and whether they expect the PPF levy to come down in a few years’ time to the type of figure that the hon. Gentleman mentioned, which was the original expectation.
In the consultation, a lot of people wanted to know the likely level of the administration levy in the future. The Minister said that it has risen from £15 million in the first couple of years to £20 million this year. Is that likely to be the peak of the cycle? Will there be any possibility of indicating on a formal basis the likely administration levy?
We should like to put on record our praise for those in the PPF who have been responsible for managing the process so far. We know that it is fraught with all sorts of risks and that it requires a balancing act between providing good pension protection and not undermining the schemes that we are trying to protect. We have been reassured of the competence of the people who run the PPF in the conversations that we have had with them and we are aware of the difficult trade-offs that they have made so far. As the hon. Member for Newport, West indicated, that is no guarantee that it will all be easy riding in future, particularly if the economy undergoes a huge downturn. However, I think that it is worth putting on the record that so far they seem to be doing a very good job in striking a balance on those particularly difficult issues.
3.15 pm
James Purnell: We have had a good, if relatively succinct debate, which I am sure is welcomed by hon. Members on both sides of the Committee. I shall start by echoing the point that the hon. Member for Yeovil ended on. The Committee should send its thanks and appreciation to Lawrence Churchill and his staff at the PPF, who, in a short amount of time, have established people’s confidence. They are doing a complicated and important job in an effective and forward-looking way. When we had this debate in 2003-04, some people questioned whether that could be done. I think that the PPF has been effective and gone a good way to addressing those concerns, but as my hon. Friend the Member for Newport, West said, we must continue to scrutinise that task carefully.
When providing such taxpayer-funded guarantees we must guard against moral hazard and ensure that pension providers bear the responsibility for managing their schemes, as they are required to do under the law. That is an important consideration for us when debating such matters. We must get the balance right between protecting members and what the taxpayer and the schemes themselves can afford. There is, of course, a category difference between the PPF and the financial assistance scheme. The latter is funded by taxpayers, whereas the former is funded by the schemes themselves, through an insurance system—essentially, people insure themselves against future risk. That is an important difference.
That is why the PPF needs to be seen in conjunction with the pensions regulator. My hon. Friend’s concerns, which were echoed by some Opposition Members, would be greater if the pension regulator could not ensure that schemes are funded properly, which reduces the likelihood and ability of companies to pass off schemes on to the PPF. We have that double lock—the pensions regulator, which can take very tough measures to ensure adequacy of funding, and the PPF, which we can fall back on in extreme circumstances.
On the detailed points, the question about whether the cap should be there at all has been asked a number of times. We have gone round that argument many times. It is there for two reasons. First, we need to control the cost to schemes of providing that level of compensation. Of course, the higher the compensation, the higher the levy would have to be every year. Secondly, we need to create, as we said, a modest incentive for senior people in companies to scrutinise their schemes and to avoid any perverse incentive to manoeuvre a scheme into the PPF.
On appeals, the judicial review and the ECJ case, I do not want to get myself into trouble with the courts so I cannot prejudge what we are planning to say. Of course, the Government have said throughout that we have sympathy for those who have lost their pensions as a result of companies going insolvent and schemes being under-funded. However, the fears to which the hon. Member for Eastbourne referred were based on the possibility that the ECJ could have found that Governments are required to protect pensions in full. That requirement would have cast a shadow over the PPF because it would have meant that the level of funding of the levy would have had to be extremely high to guarantee people that amount of funding. However, the ECJ case found that Governments are not required to do that or to protect benefits in full. That has put the PPF on a strong legal basis.
Mr. Laws: I understand the sensitivity about the legal issues, but is the Minister saying that the Government have not yet made any announcement as to whether they intend to appeal? I understood that they had only until 4 pm today to make that announcement.
James Purnell: The hon. Gentleman will have seen that I have been sitting here for the last 50 minutes, so I am not sure what stage the judicial process has reached. The decision is taking place this afternoon, but I simply do not know whether it has been made, and clearly it would be inappropriate for me to prejudge it.
Mr. Laws: I could go on longer.
James Purnell: That is a credible threat, I am afraid, so I shall speed up.
As I have said, we are considering the Government’s policy in the light of the ECJ scheme and we will come back to the House before the conclusion of the Pensions Bill.
The hon. Member for Eastbourne mentioned the future collection of the PPF levy. These are early days for the PPF. The levy scaling factor, which was the key fact in the variability of the amount that was collected versus the amount that was predicted, was set before data was collected, which was relevant to the out-turn. This year, as he said, it will be set much earlier and therefore we will be able to set the levy scaling factor on the basis of much more information—for example, after schemes have returned funding information and the PPF has collected insolvency risk forms. Therefore, we think that that means that there is less potential for variability in future years.
The hon. Members for Eastbourne and for Yeovil raised the danger that this levy would force schemes into administration, thus becoming a self-perpetuating prophecy. We do not have any evidence of that happening yet, and both the PPF and the Government are keenly aware of that issue. It is exactly why the PPF set the risk-based elements of this process in balance and also set a cap on the amount that can be charged on any one scheme. That cap is set very carefully each year, to ensure that we get the balance right between, on the one hand, charging people who are risking more, so that there is an incentive for people to reduce their risk and manage it better, and, on the other hand, ensuring that no one is charged so much that it becomes an unbearable burden.
The main point that is worth bearing in mind is that the amount in question is 2 per cent. of the overall amount that people are putting into their schemes. Therefore, if any businesses have to make significant decisions as a result of this, it is because the amount that they are putting into their schemes is often to make up for previous levels of under-contribution, and indeed often to make up for holidays in the 1980s.
Mr. Laws: I can see the last page of the Minister’s brief hovering into view. Before he concludes will he clarify that, notwithstanding the uncertainty about the legal situation, even if the Government decide to offer more generous compensation to those people who have not been properly covered by the financial assistance scheme, there is no intention of funding that compensation through a higher PPF levy in the future?
James Purnell: Our point has always been that, whatever other routes of funding there were, whether it be unclaimed pension assets or not annuitising, the levels of compensation that people were asking for meant that, in the end, those roads led back to the taxpayer. We are always happy to listen to other suggestions, but in this matter we have had to balance our sympathy for people who have lost their pension against what we can properly expect the taxpayer to bear. That was clearly the way forward that was outlined as part of the 2004 Act—that the PPF would be funded by levy on companies and the FAS would be funded by the taxpayer. Nothing has changed.
I was also asked whether we could set out the difference in the amounts collected by the different key strands. I understand that that was published in the PPF accounts, which explain the relative contributions of each factor in under-collection. I am sure that the hon. Gentleman has read it and it has just slipped his memory, as it did mine when he mentioned it.
The PPF has moved from its initial set-up to having to assess a significant number of schemes, and it has had to go through assessment periods that are not just back-of-the-envelope exercises. As anyone who has examined the Turner and Newell case, for example, will know, these exercises involve significant business transactions. These are important decisions for the people involved and it is right that they should be taken on the basis of proper expertise. Therefore, having this small increase in the administrative levy is a measure that we think is acceptable. I reassure the hon. Gentleman that we will keep a close eye on that and that we will continue to work with the PPF to ensure that it is run efficiently and effectively and that the levy is minimised, because we must use businesses’ money effectively, in the same way that we would use taxpayers’ money. I commend the orders to the Committee.
Question put and agreed to.
That the Committee has considered the Draft Occupational Pension Schemes (Levies) (Amendment) Regulations 2007.

Draft Occupational Pension Schemes (Levy Ceiling) Order 2007

That the Committee has considered the draft Occupational Pension Schemes (Levy Ceiling) Order 2007.—[ James Purnell.]

Draft Pension Protection Fund (Pension Compensation Cap) Order 2007

That the Committee has considered the draft Pension Protection Fund (Pension Compensation Cap) Order 2007.—[ James Purnell.]
Committee rose at twenty-six minutes past Three o’clock.

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