The Minister for Pensions and the Ageing Society (Ms Rosie Winterton): I beg to move,

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 event—for 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 year’s 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 scheme’s normal pension age at the point immediately before the employer’s 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.

Mr. Nigel Waterson (Eastbourne) (Con): I echo the Minister’s 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 golf—as 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: I’m 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:

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 clause—that 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 deficits—on paper, at least—soaring 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 explained—this is common ground with the Minister and the PPF—that 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:

on the PPF—

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

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:

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 year’s 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

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:

It is interesting and slightly surprising that if the Government stood behind the PPF, that would not affect the Government’s 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?