The
Committee consisted of the following
Members:
Baron,
Mr. John
(Billericay)
(Con)
Bottomley,
Peter
(Worthing, West)
(Con)
Browne,
Des
(Kilmarnock and Loudoun)
(Lab)
Clark,
Ms Katy
(North Ayrshire and Arran)
(Lab)
Curry,
Mr. David
(Skipton and Ripon)
(Con)
Havard,
Mr. Dai
(Merthyr Tydfil and Rhymney)
(Lab)
Jones,
Helen
(Warrington, North)
(Lab)
Kidney,
Mr. David
(Stafford)
(Lab)
MacShane,
Mr. Denis
(Rotherham)
(Lab)
Miller,
Andrew
(Ellesmere Port and Neston)
(Lab)
Morgan,
Julie
(Cardiff, North)
(Lab)
Ottaway,
Richard
(Croydon, South)
(Con)
Rowen,
Paul
(Rochdale) (LD)
Waterson,
Mr. Nigel
(Eastbourne)
(Con)
Webb,
Steve
(Northavon)
(LD)
Winterton,
Ms Rosie
(Minister for Pensions and the Ageing
Society)Gosia McBride,
Committee Clerk
attended
the Committee
Thirteenth
Delegated Legislation
Committee
Wednesday 18
March
2009
[Mr.
Mike Weir in the
Chair]
Draft
Occupational Pension Schemes (Levy Ceiling) Order
2009
2.30
pm
The
Minister for Pensions and the Ageing Society (Ms Rosie
Winterton): I beg to move,
That the
Committee has considered the draft Occupational Pension Schemes (Levy
Ceiling) Order
2009.
The
Chairman: With this it will be convenient to consider the
draft Pension Protection Fund (Pension Compensation Cap) Order
2009.
Ms
Winterton: It is a pleasure to serve under your
chairmanship, Mr. Weir.
In 2002, the
Government recognised that members of defined-benefit occupational
pension schemes had little protection if their sponsoring employer
failed. That is why we used the Pensions Act 2004 to establish the
Pension Protection Fund, a statutory fund that protects members of
defined-benefit occupational pension schemes. The PPF pays a statutory
level of compensation if: the sponsoring employer of the scheme
experiences what is called a qualifying insolvency eventfor
example, the company enters administration; there is no possibility of
a scheme rescue; and there are insufficient assets in the scheme to pay
benefits at PPF compensation levels. The fund is administered by the
board of the PPF, which is a public corporation.
The PPF is
funded from three sources: the assets of pension schemes that transfer
to it; a levy charged on the schemes protected by it; and investment
returns on those assets. The PPF ensures that members of eligible
defined-benefit schemes still receive a meaningful income in place of
the pension that they worked for and would have received had their
employer not experienced a qualifying insolvency event and the fund of
which they are a member is unable to pay benefits at PPF
levels.
The
Purple Book published by the PPF and the pensions
regulator in December 2008 estimates that approximately 7,400 private
sector defined-benefit schemes are protected by the PPF, covering some
12 million people. Since 2005, 112 schemes have been assessed by the
PPF following an employer insolvency event. At the end of February,
8,215 former scheme members were receiving compensation at an average
cost of £4,000, or £4 million a
month.
As
I have said, the pension protection levy is the responsibility of the
board of the PPF. The levy ceiling is one of the statutory controls on
the pension protection levy. Rather than set the rate of the levy, the
ceiling restricts the amount that the board can raise in any one year.
The levy ceiling for 2008-09 was set at £833 million.
Under the 2004 Act, the levy ceiling is increased annually in line with
increases in the general level of earnings in Great Britain, using the
rate for the 12-month period to
31 July in the previous financial year. The draft order therefore
uprates the levy ceiling by 3.6 per cent., bringing it to
£863,412,967.
That does
not mean that the levy will increase to the ceiling. The board of the
PPF is responsible for setting the actual levy for any year but must
not set one that is above the levy ceiling. The board understands the
pressures businesses are under in the present economic climate and
committed in August 2007 to set a levy estimate of £675 million
for the following three years, indexed to earnings and subject to there
being no change in long-term risk. The PPF has kept that commitment and
announced that it will only increase this years levy estimate
in line with earnings, which means that for 2009-10 the levy estimate
will be £700 million. However, the annual increases in the
ceiling will ensure that after 2009-10 the board of the PPF can
increase the levy to the ceiling levy, if it considers it
appropriate.
I
shall now turn to the draft Pension Protection Fund (Pension
Compensation Cap) Order 2009. A cap on the level of pension protection
fund compensation is applied to scheme members below their
schemes normal pension age at the point immediately before the
employers insolvency event. The members are entitled to the
90 per cent. compensation level when they retire. Under the
Pensions Act 2004, increases in the compensation cap are linked to
increases in the general level of earnings. To increase the
compensation cap for 2009-10, we must consider average earnings in
Great Britain, measured by the average earnings index and published by
the Office for National Statistics, in the 2007-08 tax year. That shows
an increase of 3.5 per cent., which gives a new cap of
£31,936.32 for the 2009-10 tax year. That means that the total
value of compensation payments for members below normal pension age
shall not exceed £28,742.69 for the new tax year. The new cap
will apply to members who first become entitled to 90 per cent.
compensation on or after 1 April 2009. The 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 2004
Act.
I am
satisfied that the statutory instruments are compatible with the
European convention on human rights. They provide that the Pension
Protection Fund compensation cap and levy ceiling are uprated in line
with increases in average earnings. In these difficult times, the
Pension Protection Fund offers security to 12 million
members of defined-benefit pension schemes. The orders ensure that that
remains key to our strategy for ensuring that savers have confidence in
the security of their pension savings. I commend the orders to the
Committee.
2.37
pm
Mr.
Nigel Waterson (Eastbourne) (Con): I echo the
Ministers remarks about it being a pleasure to serve under your
chairmanship, Mr. Weir. It is the first time that I have
done so.
I have very
little to say about the draft Pension Protection Fund (Pension
Compensation Cap) Order 2009, as it merely increases the compensation
cap in line with earnings, as the Minister explained with her habitual
clarity. It occurs to me that, if the RBS pension scheme had ended up
in the PPF, there would not be all this fuss about Sir Fred Goodwin,
because he would be looking at a pension of £28,000 a year, as
opposed to a week or an hour.
Peter
Bottomley (Worthing, West) (Con): He would not, because
the scheme pays out only when people reach the normal retirement age,
which 50 is
not.
Mr.
Waterson: My hon. Friend is absolutely right. It is
another reason why one wonders whether life would have been a lot
simpler had the PPF been involved. But it was not, and Sir Fred is
still playing golfas far as I am
aware.
The
main discussion is about the levy ceiling order, which, as the Minister
explained, will increase the level of the ceiling and not that of the
levy to be collected in the coming year by the PPF. The ceiling will
end up at £863 million, or
thereabouts.
Peter
Bottomley: I was wrong. If one retires before the normal
retirement age, 90 per cent. is the maximum, I
think.
Mr.
Waterson: I do not think that we need to dwell for too
long on Sir Fred Goodwin, but on reflection, I am sure that I was
right, and my hon. Friend was indeed wrong. It was good of him to
fess up to it so
quickly.
Peter
Bottomley: Im not the Prime
Minister.
Mr.
Waterson: Of course, apologies are all the rage at the
moment, with one notable
exception.
There
is huge pressure on pension schemes, which means that there will be
steadily growing pressure on the Pension Protection Fund. Some of us
were involved in debates on the Pensions Act 2004, but this is the
first time that the 2004 architecture of pension protection is being
properly tested by market conditions. The PPF has confirmed that the
aggregate funding position of the 7,800 DB schemes was an estimated
deficit of £218 billion at the end of February. That
is a very significant increase, even on the previous month.
When
discussing the level of the levy ceiling, we should ask what are the
implications of the current conditions for the PPF in the round and for
the setting of the levy. We know that in 2005-06, in its first year of
operation, the levy was actually £138 million, even though it
was supposed to be £150 million. The Committee that considered
the 2004 Act was assured that it would be £300 million in a
normal year. We have come quite a long way since then: for 2009-10, we
are looking at a figure of £700 million, which is a good deal
more than double the original
estimate.
In
that Committee, I pressed the right hon. Member for Croydon, North
(Malcolm Wicks), then the Minister responsible, on whether the PPF was
to be regarded and treated as a pension fund or an insurance scheme.
His answer was that it was to be treated as neither and that it was a
compensation scheme, which is a different animal. Ministers need to
think about the implications of that for the PPF. Is it exempt from the
normal laws of economic and financial gravity? How should we look at
liquidity and solvency in relation to the
PPF?
The
excellent first chairman of the PPF, Lawrence Churchill, recently said
in the annual report and
accounts:
Complexity
and volatility have been hallmarks of the past year as the turbulence
in global markets put the UK economy under significant stress. In such
times, the need for a resilient system of pension protection is keenly
felt but sponsoring employers find the levies more
daunting.
That is the central
challenge encapsulated in the order. The Minister said that the PPF is
committed to keeping the levy on the scheme stable from 2008-09 to
2010-11, but she had a get-out clausethat that was subject to
there being no significant change to the level of risk faced. Even if
the Government do not use that get-out clause, they are perfectly
entitled, as she said, to go above the current level up to the ceiling
thereafter. I will talk in a minute about the longer-term calculations
of risk that the PPF has
undertaken.
The
worry, of course, is that according to some studies approximately
32,000 UK businesses are likely to become insolvent this year and next
year, and a significant minority of those will be sponsoring DB
schemes. We have already seen companies such as Woolworths, Lehman
Brothers and Nortel go into the PPF and, no doubt, a significant number
of others will do likewise. We recognise what the Government have tried
to achieve and hope that they achieve it, but the introduction of
quantitative easing at this time does not help. It has a double effect:
first, it sends pensions deficitson paper, at
leastsoaring again and, secondly, it has a significant knock-on
effect on annuity rates. That could be beyond the scope of this debate,
but we need to recognize that such factors increase the possibility of
default by sponsoring companies and pension funds, and increase the
potential size of any default, should companies or funds end up in the
arms of the PPF. Very early in its life, the PPF took on the Rover
group pension fund, and I have already mentioned that the levy has
risen even since 2005-06 to more than twice the cost that was envisaged
when the Act was passed in
2004.
I now come
to some of the safety valves that were built into the legislation to
try to assist the PPF in difficult times. As Lawrence Churchill said
recently, the PPF was not designed just for good times but, in many
ways, perhaps more for bad times. We need to keep that in context. The
safety valves that we built into the legislation were as follows.
First, the levy can be increased. I have already explainedthis
is common ground with the Minister and the PPFthat because of
the economic situation, that is not ideal. Secondly, the fund can
reduce the amount of indexation and revaluation for compensation
levels, although that is something that it is not proposing, at least
at the moment. In extremis, it can ask the Secretary of State to permit
compensation levels to be reduced, and it can also take out commercial
loans, up to certain limits. We have not heard about any of those as
yet, but some flexibilities were built into the system right at the
start, and we will have to see to what extent they may be needed in the
medium term.
Two
academics, Anthony Neuberger and David McCarthy, published an article
in 2005 about the likely burdens on the PPF in Fiscal Studies.
They concluded:
There
is a significant chance that these
claims
on
the
PPF
will
be so large that the PPF will default on its liabilities, leaving the
Government with no option but to bail it out. The cause of this problem
is the double impact of a fall in equity prices on the PPF: it makes
sponsor firms more likely to default, and it makes defaulted plans more
likely to be underfunded.
Those are two of the
huge risks that have to be calculated. Lawrence Churchill and his team
have spent a lot of time and effort going into what they call their
long-term risk model, which is based on stochastic
modelling
methods. I was rather hoping that the Minister might explain that in
more detail, but perhaps she will come back to it. Seeing the bemused
look on the face of my hon. Friend the Member for Billericay
(Mr. Baron), the Conservative Whip, may I point out that
there is a helpful footnote to the document, which says that stochastic
means
being or
having a random
variable?
Not
a lot of people know that. However, I would have thought that if ever
there was a random variable, it is in these calculations.
I have
already touched on the issue of underfunding and the effects, possibly
unintended, of quantitative easing at the moment. There is also an
issue about a potentially shrinking pool of contributing companies. The
TUC, in its evidence to the Work and Pensions Committee in June last
year, made that point and
said:
Over
time, as the bulk buy-out market evolves, the number of schemes in the
PPF sphere will
reduce.
That
is only one reason of several I can think of to explain why the pool of
people paying the levy may go down. If we are not careful, there will
be fewer and fewer responsible companies struggling in difficult
economic times paying higher and higher
levies.
That
has brought forth a series of organisations making demands on the
Government about the future of the PPF. Several of them have called for
the levy to continue to be frozen beyond the three-year period. That is
something that I think they should be looking at very closely indeed.
In the foreseeable future, during a recession, it will be difficult to
justify putting up the levy at all, but certainly not by any more than
the increase in earnings. When we all meet here in about a
years time, Mr. Weir, we will find that deflation
has had its effect on earnings and that any increase on the basis of
that formula will be very modest.
The Society
of Pension Consultants has called for a commitment from the Government
to stand behind the PPF financially. The National Association of
Pension Funds has said something similar. In fact, it said
that
we must make
sure it does not undermine current pension provision by placing too
great a burden on well-funded schemes, especially where they are backed
by a strong
company.
To
give more certainty to pension schemes, we believe the aggregate levy
should be capped at a fixed and specified level close to the current
levy. The Government should assume responsibility for costs above
current levy levels and should also be the ultimate guarantor of the
PPF.
That
raises interesting questions, which I do not want to delve into too
deeply, but part of the debate in 2004 was about the extent to which
the PPF was closely modelled on the Pension Benefit Guarantee
Corporation, which had been going in the USA for some 30 years at that
stage. When the 2004 Act was published, I went to Washington and met a
bunch of people, including those running the PBGC. Although the formal
position that the federal Government had no strict obligation to bail
out the PBGC if it got into trouble, was clear, I did not meet anyone
of any political persuasion who did not think that the federal
Government would have to bail it out if it got into trouble. Its
deficit has been ballooning in recent years. To what extent have the
Minister and her colleagues in the DWP and, indeed, the Treasury been
looking at that question?
I raised the
issue with the House of Commons Library, and asked about the effect on
Government accounting of the Government taking such a step. It
said:
Government
guarantees to the private sector have...generally been treated as
contingent liabilities in the past, provided independent auditors view
the likelihood of the guarantees being realised as
remote...contingent liabilities are not included in public sector
net
debt.
It
is interesting and slightly surprising that if the Government stood
behind the PPF, that would not affect the Governments accounts,
but so much else is off-balance sheet these days, so perhaps one should
not be surprised. Without wanting to draw the Minister into too many
specifics, it would be interesting to know whether the issue is being
discussed in Government circles. May I make a couple of other points
about liquidity and cash flow for the PPF?