The
Committee consisted of the following
Members:
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 schemes normal pension age or, irrespective of
age, are already in receipt of either a survivors 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 schemes 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 thosethat 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.
Those 275 people are the first
tranche of what will almost certainly be tens of thousands of people
who over time will be protected by the PPF. Indeed, the PPF
and the pensions regulator have recently published their Purple
Book or, to give it the snappy official title, DB
pensions universe risk profile, which says that 12.5 million
members of schemes are eligible for PPF protection. Even if the actual
number of people is lower than thatbecause many people will be
members of more than one defined-benefit schemeit is still a
very significant
number.
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
PPF2005-06 and 2006-07the 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 schemeswe 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 PPFs 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 schemes normal pension age immediately
before the employers 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
members 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 levyin
effect, the insurance for the whole sectoris 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
partys 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 controlsthe 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
millionan 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 PPFs 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 ordersthe 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
ombudsmans 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 meI am sure that it is a matter of public
recordthat 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
ombudsmans 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 PPFs
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
millionan 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 PPFs 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 levyif I can
call it thatthe 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 PPFs 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 CBIs
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 forgetI am
rising to the point made by the Minister in response to an
interventionthat 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 UKs
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 UKs 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
legislationthere have been since, and they will no doubt
continueabout 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.
Unfortunately, when we create
solutions to problems, we do not always diminish the problem but
increase it. One of the dangers is that we take the full responsibility
for a failed scheme away from those who run schemesthe
companies themselves and their trustees. They are not in a position now
of knowing that it is up to them to ensure that a scheme is funded
properly or, in the case of the trustees, whether it is being run
properly. Taking away some of the responsibility from companies and
trustees who know that free insurance paid for by the taxpayer is
available is likely to lead to the failure of more schemes. We might
well see a mushrooming of the number of pensioners who left in failed
schemes and who will require money in the future. The scheme could run
to a level at which the state is the major provider of pension
liabilities, which is unsustainable. We have had free insurance for the
farming industry for a long time, but not for any other industry. Free
insurance cannot be sustained for hundreds or thousands of companies,
particularly if a major company finds itself underfunded and
broke.
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
Governments 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 reviews finding of maladministration before 4
oclock this afternoon. It will be interesting to hear what the
Governments 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?
Some Labour
Members have tabled amendments to the Pensions Bill for its Report
stage. They are seeking to extend PPF benefits to people who might
otherwise be covered by the financial assistance scheme. The concern is
that if PPF benefits are paid to those individualsa measure
that the Liberal Democrats supporttheir cost might fall
directly on the levy. It would be useful for the Minister to clarify
that matter.
My understanding is that even if the Government agree to pay PPF
benefits to people who might be in the financial assistance scheme,
they do not intend for that to be covered by the PPF levy. Instead, it
would have to be covered by moneys from the Exchequerout of the
Chancellor of the Exchequers generosityor in some other
way, as the hon. Member for Eastbourne mentioned. It is difficult to
consider the PPF levy without knowing what the Government intend to do
about the judicial review and the wider issue of compensation. Will
they clarify the decision that they have reached? Will they also
clarify whether the nature of any pension compensation that is paid in
future to people who would at the moment be within the FAS could have
an impact on the PPF levy? I assume that the answer is no, but it would
be useful to have it on the record so that those people who have
concerns similar to those raised by the hon. Gentleman will not need to
worry so much.
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 Governments 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 peoples 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
systemessentially, 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. Friends 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 lockthe 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 Governments 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 informationfor 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 Ministers
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
Actthat 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.
Resolved,
That
the Committee has considered the Draft Occupational Pension Schemes
(Levies) (Amendment) Regulations 2007.
Draft Occupational Pension Schemes
(Levy Ceiling) Order
2007
Resolved,
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
Resolved,
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
oclock.