House of Commons
|Session 2007 - 08|
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Public Bill Committee Debates
Draft Occupational Pension Schemes (Levy Ceiling) Order 2008
The Committee consisted of the following Members:
David Slater, Martin Gaunt, Committee Clerks
attended the Committee
Second Delegated Legislation Committee
Monday 17 March 2008
[Sir Nicholas Winterton in the Chair]
Draft Occupational Pension Schemes (Levy Ceiling) Order 2008
Andrew Mackinlay (Thurrock) (Lab): On a point of order, Sir Nicholas. Twice I have been to the Vote Office to ask for the papers relating to the Committee, but I have been given only one of the three instruments. I am not making that up.
The Chairman: I suspect that the papers may well be on the table in front of the hon. Member. I have consulted the Clerk and I do not believe that there is any problem with the availability of the papers. All three were scheduled to be debated, so if the hon. Member confirms that the Vote Office or wherever he went to find the papers was not able to provide them, we can make inquiries.
That the Committee has considered the draft Occupational Pension Schemes (Levy Ceiling) Order 2008.
The Chairman: With this it will be convenient to consider the draft Pension Protection Fund (Pension Compensation Cap) Order 2008 and the draft Occupational Pension Schemes (Levies) (Amendment) Regulations 2008.
Mr. O'Brien: I welcome you to the Chair, Sir Nicholas. I am sure that under your firm but fair chairmanship the Committee will do good business.
When the 2007 versions of these instruments were debated around this time last year, three schemes with a total of 275 people had been transferred into the Pension Protection Fund. At the beginning of March this year, 21 schemes had been transferred into the fund; and 9,000 scheme members receive either PPF compensation or are due to receive it in future. By the end of March, the PPF estimates that 50 schemes will have transferred in, and that it will provide protection to 18,000 people. Those increases are testament to the need for the PPF and the importance of its creation.
Andrew Selous (South-West Bedfordshire) (Con): When the Minister said by the end of March, did he mean March 2008 or March 2009?
Mr. O'Brien: I meant by the end of March 2008. As I said, the increases are testament to the importance of the creation of the PPF.
On the draft Occupation Pension Schemes (Levy Ceiling) Order 2008, the pension protection levy is the responsibility of the board of the Pension Protection Fund. It is one of the ways in which the compensation
Members will be aware that the board of the PPF has determined that it needs to collect £675 million for 2007-08 through the pension protection levy to ensure the secure funding of peoples compensation. The board has also announced that it intends to hold the levy stable for the next three financial years, subject to indexation against earnings and there being no significant changes to the level of risk that the PPF faces. This is in response to requests from levy payers for more certainty about the size of the pension protection levy. I suspect that I am already dealing with some of the questions that the hon. Member for South-West Bedfordshire was about to ask me.
Having dealt with the overall level of the levy, we turn to the individual compensation caps in the draft Pension Protection Fund (Pension Compensation Cap) Order 2008. A cap on the level of PPF compensation is applied to those scheme members who are below their schemes normal pension age immediately before the employers insolvency event. Those members are entitled to the 90 per cent. level of compensation when they retirethey get 90 per cent. of what they would previously have got.
The compensation cap for 2007-08 is £29,928.56 at age 65. When calculating a members compensation entitlement, the PPF applies the cap before compensation is reduced to the 90 per cent. level, which has an important effect; it means that the total value of compensation payments for members below normal pension age does not exceed the 2007-08 figure of £26,935.70 a year at age 65. That amount is adjusted depending on age to ensure that the actuarial value of the compensation package remains the same.
Under the Pensions Act 2004, increases to the compensation cap are linked to increases in the general level of earnings. To increase the current compensation cap for 2008-09, we must consider average earnings, as measured by the average earnings index and published by the Office for National Statistics in the 2006-07 tax year, which shows an increase of 3.1 per cent. An increase in the current compensation cap of 3.1 per cent. gives a cap of £30,856.35 for the 2008-09 tax year, which means that the total value of compensation payments for members below normal pension age shall not exceed £27.770.72 for the new tax year. Those are the key figures that we shall bring in by the order.
The new cap will apply to members who first become entitled to compensation at the 90 per cent. level on or after 1 April 2008. The draft pension compensation cap order ensures that the level of the compensation cap is maintained in line with the increase in earnings, as required under the Pensions Act 2004.
Andrew Mackinlay (Thurrock) (Lab): I have listened carefully to the Minister and it seems that he has called us here this afternoon because it is imperative that this should be done by 1 April, for the next financial year. What I am bewildered aboutand he may be able to help me with thisis the fact that the explanatory notes state that the geographic extent for two of the three orders is Great Britain while, in relation to the other order, a further measure will be brought forward for Northern Ireland. If a separate measure has to be brought forward for Northern Ireland, I assume that it will be introduced in the House rather than in the Northern Ireland Assembly. Will we be able to do that by 1 April 2008? If the order is good for the rest of the jurisdiction, what is the Northern Ireland situation?
Mr. O'Brien: My hon. Friend makes an interesting point about Northern Ireland. I am assured by officials that we are considering the position in relation to that. We want to ensure that there is agreement and that all these levels are acceptable. I see no reason why there would not be agreement and I am assured by my officials that the situation regarding Northern Ireland will be resolved.
Andrew Mackinlay: With the greatest of respect to my hon. and learned Friend, there are the hallmarks of sloppiness in relation to this. Perhaps I am at fault in not being fully cognisant of what we are going to consider this afternoon; I have already complained that there are only three orders, and having done some homework on the matter in the following minutes, it seems that there should be a fourth order relating to Northern Ireland and that hon. Members will have to meet again. The timetable is very limited and it seems that the Government have overlooked something. The jurisdiction certainly covers Scotland, Wales and England so I assume it isI use the word for the want of a better terman imperial Westminster function. I notice one of the explanatory documents lists those consulted, which includes the two Assemblies and the Northern Ireland Executive. We need to know what is happening.
The Chairman: May I suggest that the right hon. Member for Bracknell intervenes, as it may give the officials time to provide the Minister with the answer?
The matter concerning Northern Ireland is immensely serious. Those of us who take a close interest in Northern Ireland are conscious that the Province should never be seen as a second-class part of the United Kingdom. As the hon. Member for Thurrock has said, the orders are time sensitive, so can we have an assurance from the Minister that they will be in place for Northern Ireland and the rest of the United Kingdom before the deadline on 1 April?
Mr. O'Brien: I cannot give the right hon. Gentleman that assurance because the orders will not be passed in this place; I understand that they will have to be resolved in Northern Ireland. He will need to seek reassurance in Northern Ireland that the matter will be dealt with in the appropriate way and at the appropriate time. I hope that deals with the points made, but I am happy for my hon. Friend to ask a further question.
Andrew Mackinlay: I am pleased to have that assurance, but only one of the three explanatory memorandums refers to Northern Ireland; the others just say Great Britain. The explanatory memorandum on the Occupational Pension Schemes (Levies) (Amendment) Regulations 2008 has a list of those consulted that includes the appropriate Northern Ireland Ministry, and the Scottish and Welsh Assemblies. I cannot think why the explanatory memorandums are different for the other two orders. I accept what the Minister says if he is absolutely certain about it, but I am genuinely surprised that this competence was devolved to Stormont but not to the Scottish Parliament. However, if that is so, so be it.
Mr. O'Brien: I am grateful to my hon. Friend for that intervention. I can tell him only what I am advised: Northern Ireland has been consulted on all three orders together and, in any event, we always consult with Northern Ireland on these matters. However, particular matters also have to be resolved by Northern Ireland itself. The issue that he mentions has to be dealt with in Northern Ireland, so I hope that the matter is now resolved.
I now move on to the final instrument, which could well be the most controversial: the draft Occupational Pension Schemes (Levies) (Amendment) Regulations 2008. Those regulations relate to the PPF administration levy, which funds the day-to-day running costs of the PPF. They substitute new amounts to be used in calculating the amount payable in respect of the PPF administration levy for the financial year starting 1 April 2008. The administration levy for 2008-09 has been set to recoup £22 million, a £2 million increase on the £20 million set last year.
I want to explain why we believe that the increase is appropriate. The proposed rates help to recover a collection shortfall of £2.7 million that has built up since the PPF was established. The £22 million also reflects the increased running costs of the fund, as a growing number of schemes undertake the assessment process and transfer to it. I have already noted how the number of schemes within the PPF has grown. That growth of course will bring with it additional costs to the fund.
We recognise that, as more schemes enter the PPF, the cost of administering compensation will become an increasing proportion of the administration levy, so to combat that we have recently laid before Parliament the Pension Protection Fund (Prescribed Payments) Regulations 2008. Those regulations will allow the costs of administering compensation to be paid from the Pension Protection Fund itself from 1 April 2008. That means that the administration levy will no longer be inflated by those amounts, which are estimated at £2 million for 2008-09.
That is consistent with industry practice, where similar costs are generally met from the assets of defined benefit occupational pension schemes. The regulations have been welcomed by consultation respondents, including the National Association of Pension Funds. I assure the Committee that the PPF will ensure that those costs are shown clearly in its annual report and accounts for 2008-09 and onwards. That will ensure appropriate transparency in making the administrative costs of the PPF publicly known.
The PPF administration levy is intended to reach a fair balance between the burdens on levy payersall the people, after all, who pay into a pension, which in due course pays a levy into the pension protection fundand the ability of the PPF to carry out its statutory duties. We shall however continue to work with the PPF to ensure that levy payers get due value for money.
In contrast to previous regulations, the figures in the measures before the Committee will apply to all future years unless there are further amendments. That means that regulations will not be brought forward in future unless a change in the levy is required.
Perhaps I may give a further short explanation of why there was a deficit in some of the payments. When the levying was carried out by the PPF, the view taken by a number of those who were subject to the levy was that they did not accept some of the risk assessments that were carried out on their pension funds. They began to challenge some of the levy figures. When further information was provided by those pension funds to those who were assessing the levels of the levy, it was accepted that some of the risk factors in the levy might have been set too high. That resulted in a reduction in what was assessed for some of the levies.
That happened reasonably extensively. Not all pension funds queried the levy, but a number did. The result was a shortfall on the amount that was expected to go into the fund, and, of course, on the amount that went into the administration fund. Therefore, that shortfall is now being made up by the levy during the course of this year. We hope that, in due course, we will be in a position where the fund is where it was expected to be and that the administration is able to be appropriately funded as a result.
I emphasise, because it is important that I do so, that, in the sense of a pension fund, there is no deficit to be in any way concerned about. The PPF is managing its affairs well and we believe that it is inspiring great confidence among those who run defined benefit schemes. In recent years, since the PPF was set up, there has been an increasing view that it is an essential part of the apparatus of ensuring confidence in the future of peoples pensions.
The PPF has been a very important part of the broad range of reforms that we have carried out in relation to pensions. Indeed, I would add that, if one takes together what we have done in setting up the PPF, our performance on state pensions and the way that we have set up the pensions regulator, all those measures have led to a greater degree of confidence in pensions. I might also add that we have resolved the issues related to the financial assistance scheme. So the levy and the rules related to ithaving caps on the levy and making
In addition, I would like to confirm that I am satisfied that the statutory instruments that we are discussing are compatible with the European convention on human rights.
The three statutory instruments before the Committee provide that the PPF compensation cap and the levy ceiling are uprated in line with increases in average earnings and that the administrative functions of the PPF are properly funded, so that the PPF can carry out the important task that Parliament has given it. Therefore, I commend these orders and the regulations to the Committee.
Andrew Selous: Thank you, Sir Nicholas, and it is a pleasure to serve under your chairmanship again. I am sure that, for both the Minister and myself, it seems just a moment ago that we had the pleasure of serving under you for some considerable period of time when we were considering the Pensions Bill, in a room very close to where we are sitting now.
There are three important orders before the Committee today. It is important that we go through them. The official Opposition will certainly not be opposing them. However, I have a series of questions for the Minister. It is important to remember that the costs on defined benefit schemes generally are extremely high and it is vital that this Committee ensures that there are no additional costs; we must ensure that not one penny more than is necessary is levied on the remaining defined benefit schemes, such is the pressure that they have been under recently.
I would like to extend my sympathies to the hon. Member for Thurrock for the fact that he was not able to get the papers that he wanted from the Vote Office. In defence of the Vote Office, I would just say that, when I went there last week, I was able to get those papers. Clearly, there is an issue, because the papers should be available to all hon. Members. However, I would just like to put it on the record that I was able to get the relevant papers in order to prepare for the Committee.
Andrew Mackinlay: Perhaps I was too testing and perhaps I owe an apology to the Vote Office; for the record, I unreservedly apologise. I say that because I asked for the bundle of these papers twice and it is clearly down to me ultimately to use due diligence to see that I receive the correct papers. However, I must say that that was the patternnot being able to get the papersand it is irritating to be put on the Committee at short notice and to find that this should happen.
Andrew Selous: Thank you, Sir Nicholas. I think that all members of the Committee recognise the great diligence that the hon. Member for Thurrock shows in all proceedings in this House, and we are all grateful for that, not least, I am sure, the Minister.
The sums involved in the draft Occupational Pension Schemes (Levy Ceiling) Order 2008 make it the most significant measure before us. It is worth winding the clock back to look at what happened in 2006-07. The PPF aimed to raise £500 million for the scheme, but in fact it raised only £271 million. Perhaps the Minister will correct me if that figure is wrongit is the information that I was given. That £271 million is a little under half the estimate that the levy ceiling order aimed to raise in 2006-07. How close are we to raising the £675 million that the PPF aimed to raise under a similar order in 2007-08? In the Committee that debated similar measures last year, we were assured that the amount raised would be much closer to the estimate. None of us would expect the PPF to hit the figure exactly, but it is legitimate to hope that the amount raised next year is nearer to the estimate than in 2006-07. Will the Minister say something about that? He has told us that the estimate is £675 million for 2008-09, which is the same as last year. Will he say what degree of confidence he has that the amount raised will be close to that figure, given what happened in 2006-07?
The measures are important. We must ensure that the amounts raised by pension schemes and the businesses that provide the few remaining defined benefit schemes to their members have minimum volatility. Businesses need to plan with some degree of certaintyit is an uncertain world for them anyway because of huge rises in energy costs and other such things, so it is important for them to have greater certainty in the future. I look forward to what the Minister has to say in respect of those questions on the levy ceiling order.
The Minister told the Committee that the draft Pension Protection Fund (Pension Compensation Cap) Order 2008 is an indexing of the cap from the 2006-07 earnings figures, which were 3.1 per cent. It is worth putting on record that the retail prices index is 4.1 per cent., so the indexation is running behind the current level of inflation according to the Governments figures. Given that the order simply increases by the amount of earnings for the previous financial year, is it not possible to have some form of mechanism by which that happens automatically? Do we need an annual order if all it does is increase by the earnings growth in the previous financial year? The £30,856.35 will clearly be more than enough for most scheme members and, indeed, it will be less than some scheme members would otherwise have received.
As the hon. Member for Thurrock properly spotted, there were provisions relating to Northern Ireland regarding the draft Occupational Pension Schemes (Levies) (Amendment) Regulations 2008. I have some questions for the Minister on the variability of the administration costs, which are raised for the running of the PPF by the regulations. As I said, it is important that not a penny more is taken from defined benefit schemes than is absolutely necessary. As I understand it, last year we were told that the estimated amount to be taken for 2007-08 was £14.2 million, but the Minister told us today that the current estimate is £17.7 million, which is an increase of 25 per cent. on last years figure. As I have said, that is money that would otherwise have gone into the beleaguered defined benefit schemes. What degree of reassurance can the Minister give the Committee that there will be more accurate estimates of the figures?
I think that last year it was established in this Committee that several of the costs in the earlier years related to the establishment of the PPF office; there was some expectation that the cost level might drop in time. I should be grateful if the Minister could give some reassurance to those people who will be studying the report of the Committee and hoping for some certainty about future costs.
Greg Mulholland (Leeds, North-West) (LD): I want to be brief, and first to thank the Minister and his officials for making a quite complex set of orders seem quite human. The way in which they were explained was very useful.
The Liberal Democrats do not oppose the orders. We all agree that the important thing is to give peoplebusinesses, funds, the individuals who are affected and the taxpayerconfidence in the schemes. Also, there is a need for clarity, so that people understand the effect of the changes.
The hon. Member for South-West Bedfordshire has touched on all the points that I wanted to make, but I should like to add to one, which related to the 3.1 per cent. figure in the Pension Protection Fund (Pension Compensation Cap) Order 2008. The explanation is probably simple, but I was slightly confused by the difference between that and the 3.6 per cent. figure. It might be accounted for by the fact that one order relates to the period ending in April and the other to the period ending in July.
I was more concernedthis strengthens the point made by the hon. Member for South-West Bedfordshireabout whether the 3.1 per cent. figure should be more in the region of 4.1 to 4.2 per cent. I should be very happy if the Minister could clarify that.
Mr. O'Brien: Let me begin by dealing with some of the points raised by the hon. Member for South-West Bedfordshire. The PPF set the levy estimate for 2007-08 at £675 million. The number of invoices issued for that year was 6,786, to a total value of £476.1 million, and £334 million has already been collected in the 2007-08 levy year. There were 832 invoices, totalling £86.7 million, outstanding after 28 daysthey just had not been paid yet. Of those, 271, amounting to £42.9 million, were blocked owing to queries being raised.
That all relates to the way in which the PPF issues a levy on a particular pension fund. The pension fund must then either make the paymentas many of them door say that the basis on which the PPF has calculated the levy is wrong. The calculation of the levy is based on a standard figure that is applied to all the pension funds; in addition, the majority of the levy is calculated by reference to the level of the perceived risk that a pension fund might call on the PPF.
Although the PPF employs external experts to assess the value of individual levies, they can only do that assessment based on the information that they have from the pension fund. When the pension funds get their levy, they look at the basis of calculation and some of them say, Well, we dont agree that the level of risk inherent in our pension fund is as high as suggested, so the levy shouldnt be as high as suggested,
Among those who receive invoices, which are payable after 28 days, a number of pension funds end up querying the level that has been ascribed to them, usually in relation to the level of risk. That is a legitimate exercise, but for the PPF it is a somewhat difficult one because it means that if the PPF levies a certain amount and a number of invoices are successfully queried, it will receive less in return than it initially thought that it would, as has been the case in previous years.
The PPF is now aware that that situation is likely to happen, and it can take it into account when assessing the levy because it can identify roughly what percentage of payments it will get back. It is not an exact science; it is an estimate, which is somewhat reliant on the pension funds that will not challenge the figures making their payments within the 28 days. Nobody quarrels with those who challenge the figuresby and large, many of them do sobut the PPF must then make an anticipated collection, which may not be the same as it has levied.
The PPF anticipates collecting between £575 million and £625 million, even though it has issued invoices for above that figure. However, there is no general risk to the PPF as required funding levels have been met, which is an important point. The schemes have proved that they are funded to the correct level, so there is no problem with the PPF; it is properly funded and that is not an issue. The issue is whether the whole levy will be paid at exactly the rate at which the invoices are issued.
When invoices are issued, it is anticipated that some of the pension funds will challenge them and that can be taken into consideration. The PPF cannot predict which ones will do so, but most people would recognise that the ones that are likely to are those whose levy is higher than anticipated, based on their own view.
Andrew Selous: I am grateful to the Minister because he has given us a lot of useful and important extra information. I would like to ask one final question, which I think that he has already answered, but which is so important that I would like to ask it again. Is he saying that it does not really matter that in 2006-07 the PPF only raised under half of what it estimated, as further analysis by the pension schemes and the PPF is reaching a more precise figure for the correct premium that must be paid into the PPF scheme to ensure that it is properly funded? I think that that is what he has just said, but I would be grateful if he would elaborate on that point.
Mr. O'Brien: I would not go so far as to say that it does not matterit matters, but not in a way that should cause any great concern. Such issues are anticipated, in relation to the amount that pension funds will pay on the levy. When we started the PPF, educated guesswork was about all that we could look for, because we did not know the extent to which pension funds would dispute the amounts levied. Now that we have been running the PPF for several years, it
Back in 2006-07, the PPF had to deal with issues about employers responding to incentives to reduce their risk. They would receive a levy and realise that as a result, they were assessed for a particular reason as having a higher risk than they assumed. They could deal with the assessment in several ways: they could challenge the level of risk, or they could say, We pay a higher levy because we do this, in a particular way, but well change it, which is what they have done. They have then gone back and said, We have changed that so you dont have to levy us at such a high risk.
Schemes also provided much more up-to-date information. Initially, back in 2006-07, when schemes were considering matters, they provided fairly basic information, assuming that it would not have much impact. As soon as they got a high levy, however, they decided that supplying more information might influence the amount that they paid. There were also issues relating to movements in the financial markets: if a pension fund invested in a particular way and it had an adverse reaction, that would affect the level of risk. We have gone through a teething period with the PPF, trying to deal with the issues that were going to arise. We could predict that they would be issues, but not their precise nature and the way in which they would develop as the PPF became older and more mature. We are now in a better position to judge the situation, and over the coming years we will be able to refine PPF levies much more effectively.
As I said in my opening statement, the aim is to try to secure three years of stability. There is no guarantee, because the situation depends on how the market works, but the PPF will try to maintain reasonable levels of stability. It is important to stress that that does not mean, however, that all levy payers circumstances will remain as they are; any change may well affect the way in which the levy must be paid.
The hon. Member for South-West Bedfordshire asked whether an annual order for the cap on compensation is necessary, given that we know what it will be. That is a perfectly fair question. We made the annual order a requirement through primary legislation to give some confidence and security to those who would be levied that Parliament would exercise some scrutiny of the situation. I do not know, because I have not read all the debates that took place at the time, but I suspect that the hon. Gentlemans predecessors took the view that it would be better for Parliament to keep a close eye on the levy changes, and that the best way of doing so would be to have an annual order. I suspect that that was partly the reason, but stakeholders would also want to be reassured that Parliament will not just allow the figures to rise. It is all about confidence. However, given that we now know roughly the likely levels of levy payments and caps, the stakeholders can look forward to a bit more stability in the coming couple of years.
The hon. Gentleman asked about the accuracy of the estimated figures and whether costs, particularly in respect of the administration levy, would drop off over time. It is difficult to predict that. Obviously, the PPF had considerable set-up costs initially. In the first few years, costs had to be met, but when managed over a longer time they will not be so great. However, the number of individuals receiving payments from the PPF is increasing, and that will obviously have an effect on the amount of administration that must be carried out.
However, there will presumably come a point at which the sheer number of people is not the determining factorthe increased number will not require much additional administrative cost, because the administration will have been set up to manage the increase. At that point, there should be a drop in the administrative cost per individual receiving compensation from the PPF. I do not know at what point that will occur, but I am sure that the PPF has carried out some estimates. If the hon. Gentleman wishes to discuss the matter with the PPF, I am sure that it will welcome a meeting with him.
The hon. Member for Leeds, North-West asked about the various levels and whether the differences relate to April and July. I am informed that that they do. As for his other point, I shall give him a full explanation. Paragraph 27 of schedule 7 to the Pensions Act 2004 provides that the Secretary of State must make an order to increase the amount of compensation cap if, on a review under section 148(2) of the Social Security Administration Act 1992, he concludes that the general level of earnings obtaining in this country exceeds the general level at the end of the period taken into account for the last review under that section. Paragraph 27 of schedule 7 to the Act requires that the increase is to have effect from 1 April next, following the end of the tax year to which the review relates. That accounts for the 3.1 per cent. increase under the compensation cap order. The uprating of the levy ceiling is achieved by the
I have explained the detail but, in essence, the hon. Member for Leeds, North-West had the basic point right. I hope that I have reassured him. The reason that we used those particular figures rather than the current figures is that we are required to use those figures under the statutory regulations. Having answered those points, I hope that the Committee will approve the three important orders.
Question put and agreed to.
That the Committee has considered the draft Occupational Pension Schemes (Levy Ceiling) Order 2008.
DRAFT PENSION PROTECTION FUND (PENSION COMPENSATION CAP) ORDER 2008
That the Committee has considered the draft Pension Protection Fund (Pension Compensation Cap) Order 2008.[Mr. OBrien.]
DRAFT OCCUPATIONAL PENSION SCHEME OCCUPATIONAL PENSION SCHEMES (LEVIES) (AMENDMENT) REGULATIONS 2008
That the Committee has considered the draft Occupational Pension Schemes (Levies) (Amendment) Regulations 2008.[Mr. OBrien.]
Committee rose at twenty minutes past Five oclock.
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