The
Committee consisted of the following
Members:
Chairman:
Mr.
Graham Brady
Baron,
Mr. John
(Billericay)
(Con)
Clapham,
Mr. Michael
(Barnsley, West and Penistone)
(Lab)
Cousins,
Jim
(Newcastle upon Tyne, Central)
(Lab)
Eagle,
Angela
(Minister for Pensions and the Ageing
Society)
Etherington,
Bill
(Sunderland, North)
(Lab)
Flint,
Caroline
(Don Valley)
(Lab)
Hodgson,
Mrs. Sharon
(Gateshead, East and Washington, West)
(Lab)
Hollobone,
Mr. Philip
(Kettering)
(Con)
Marsden,
Mr. Gordon
(Blackpool, South)
(Lab)
Mudie,
Mr. George
(Leeds, East)
(Lab)
Osborne,
Sandra
(Ayr, Carrick and Cumnock)
(Lab)
Pritchard,
Mark
(The Wrekin)
(Con)
Rowen,
Paul
(Rochdale)
(LD)
Tyrie,
Mr. Andrew
(Chichester)
(Con)
Waterson,
Mr. Nigel
(Eastbourne)
(Con)
Webb,
Steve
(Northavon) (LD)
Mark
Oxborough, Committee Clerk
attended the Committee
Tenth
Delegated Legislation Committee
Wednesday 10
February
[Mr.
Graham Brady in the
Chair]
Draft
Occupational Pension Schemes (Levy Ceiling) Order
2010
2.30
pm
The
Minister for Pensions and the Ageing Society (Angela
Eagle): I beg to
move,
That
the Committee has considered the draft Occupational Pension Schemes
(Levy Ceiling) Order
2010.
The
Chairman: With this it will convenient to consider the
draft Pension Protection Fund (Pension Compensation Cap) Order
2010.
Angela
Eagle: Mr. Brady, I look forward to serving
under your chairmanship. I think this is the first occasion I have done
so, but I am sure there will be many more.
The debate is
of a technical nature and allows for the annual uprating of the orders.
The purpose of the levy ceiling is to reassure business that the levies
cannot increase without any form of restraint and to ensure that the
Pension Protection Fund remains financially independent and
sufficiently flexible to cope with any economic shocks. The use of the
compensation cap is one of a number of measures to help to control PPF
expenditure and to enable its sustainability. The compensation cap
encourages those who have an influence over a pension scheme to ensure
that the scheme does not enter into the PPF.
In 2010, the
Government recognised that members of defined benefit occupational
pension schemes were under-protected if their sponsoring employer
failed. In the Pension Act 2004, they established the Pension
Protection Fund, which ensures that members of eligible defined benefit
schemes still receive a meaningful income in place of the pension they
would have received had their employer not gone into insolvency and
their scheme was unable to pay benefits at PPF levels. Without the PPF,
these members would have received very little, if any, of the pension
they were expecting on retirement and into which they had contributed
for much of their working life.
Since 2005,
181 schemes have been assessed by the PPF following an employer
insolvency event. At present, 363 schemes with about 203,000 members
are being assessed. As of the end of December 2009, 109 schemes had
transferred into the PPF and more than 32,800 people were either
receiving pension protection for compensation or were due to receive it
in future. The average yearly payment per person is about
£4,000.
I
am sure that in these difficult economic times, the 12
million people protected by the PPF will be particularly glad to know
of its existence and the protection that it offers. I know that the
Committee will also be keen to understand that the PPF is fulfilling
its statutory purpose and that it will continue to be able to pay
compensation going forward. With about £3.7 billion under
management, and a levy intended to raise £720 million in
2010-11,
there is no doubt that the PPF has the liquidity to pay a monthly
compensation bill of about £6.5 million. Importantly, even under
the most taxing economic scenarios that we have tested, the PPF could
continue to pay compensation for 25 years into the future, but it is
right that we should be vigilant, and we and the PPF continue to
monitor its
position.
Let
me now turn to the first instrument for debate, the Occupational
Pension Schemes (Levy Ceiling) Order 2010. 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; it restricts the amount that the board can raise in any one year,
rather than setting the rate of the levy. The levy ceiling for 2009-10
was set at £863 million. Under the Pensions Act 2004, the levy
ceiling is increased annually in line with increases in the general
level of earnings in Great Britain for the 12 month period to 31 July
in the previous financial
year.
The
order uprates the levy ceiling by 0.9 per cent, bringing it to
£871 million. That does not mean that the levy will increase to
the ceiling, as that is the maximum amount. The board of the PPF is
responsible for setting the levy for any one year, but it must not set
one that is above the levy ceiling. The board understands the pressures
on businesses in the current economic climate and their concerns about
increases in the contributions they are required to make to the
fund.
In
August 2007, the board therefore made a commitment to set a levy
estimate of £675 million for the following three years, indexed
to earnings, subject to there being no change in long-term risk. The
PPF has kept this commitment and announced that it will only increase
this years levy estimate by earnings, which means that for
2010-11, the levy estimate will be £720 million, which is well
below the ceiling that we are discussing today. However, the annual
increases in the ceiling ensure that after 2010-11, the board of the
PPF could increase the levy up to the ceiling if it considered that
appropriate, subject to a statutory 25 per cent. limit on the
year-on-year
increase.
Turning
to the second draft order, a cap on the level of PPF compensation is
applied to 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 retire. Under the Pensions Act 2004, increases in
the compensation cap are indexed to increases in the general level of
earnings.
To
increase the compensation cap for 2010-11, we must consider average
earnings in Great Britain as measured by the average earnings index and
published by the Office for National Statistics for the 2008-09 tax
year. That shows an increase of 3.5 per cent., which gives a new cap of
£33,054.09 for the 2010-11 tax year. That means that the total
value of compensation payments for members below normal pension age
will not exceed £29,748.68 for the new tax year. The new cap
will apply to members who first become entitled to compensation at the
90 per cent. level on or after 1 April 2010. 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 primary
legislationthe 2004 Act. I hope that, given that explanation,
hon. Members will be happy to approve the
orders.
2.37
pm
Mr.
Nigel Waterson (Eastbourne) (Con): It is a great pleasure
to serve under your chairmanship, Mr. Brady. I hope that we
shall not detain you too long, although I cannot speak for the hon.
Member for Northavon, of course.
The draft
orders are relatively uncontroversial. Recently, for the first time,
the 2004 architecture that was set up to protect pensionsthe
regulator, the PPF and so onhas come under significant
pressure, and it is important that we take the opportunity to review
where we stand. I was slightly taken aback a few months ago when the
PPF issued a press release proudly announcing that the 100th scheme had
joined the PPF. That is a bit like a local authority issuing a press
release saying that it has had its 100th car crash that year. One has
to avoid triumphalism about the
PPF.
This
is an opportunity also to pay tribute to Mr. Lawrence
Churchill, who has been extremely effective as the first chairman of
the Pension Protection Fund. Leaving behind that challenge, he is now
going on to the even greater challenge of running the new personal
accounts or NESTNational Employment Savings
Trustsystem. We wish him well in
that.
As
the Minister rightly said, the levy ceiling will rise under the draft
order to £871 million. I think that I am right in saying that,
according to the primary legislation, the Government would have to come
back to Parliament if they wished to increase that ceiling, but of
course what they are actually talking about is a levy pitched at
£720 million plus the increase for earnings. Quite rightly, the
PPF has frozen the levy in recent times. It is important to register
the concerns of business organisations up and down the land that that
should continue to be the case. We do not wish to impose an unnecessary
additional burden on businesses that are struggling to do the right
thing, to run their pension schemes and their businesses and to do so
without undue expense as a result of the 2004
Act.
Mr.
Philip Hollobone (Kettering) (Con): I am listening to my
hon. Friends speech with great interest and admire what he is
saying, but should we not set the matter in context? It was the present
Government who, in 1997, decided to assault the UKs pension
funds, which at that time were the best value in Europe. Ever since,
pensioners in this country have been struggling with their incomes,
because this Government have denied their pension funds the tax credits
they had before
1997.
Mr.
Waterson: I am grateful to my hon. Friend for those
comments. It is certainly true that a system that had worked extremely
well until 1997 took a real battering in 1997 and thereafter. That was
partly due to other factors, but in huge measure anything that went
wrong with pension funds was made infinitely worse by the then
Chancellors tax raid on pensions, which some experts reckon has
now stripped £150 billion from pension funds. I am therefore
delighted that my hon. Friend the shadow Chancellor has committed the
next Conservative Government to reversing the effects of that raid on
pension funds.
Steve
Webb (Northavon) (LD): The financial position of
occupational pension funds is clearly crucial to the statutory
instruments. Given the vast sums of money
that the changes described have taken out of pension schemes, where will
the vast sums needed to reverse that come
from?
Mr.
Waterson: I am pleased to say that finer minds than mine
are working on that problem at this very moment, and I am sure that the
answer will become apparent very soon. I am surprised that the Liberal
Democrats wish to ally themselves with the Government, who have made
such a huge negative impact on pension savings. I am relieved that
reality has at last begun to impinge on the Liberal
Democratsamong other pledges, they have dropped universal
citizens pensions. If I have that wrong, no doubt the hon.
Gentleman will intervene again.
Mr.
Hollobone: I am most grateful to my hon. Friend for
mentioning the Liberal Democrats becausewithout straying too
far from the subject of pensions, Mr. BradyI think
they want to change council tax policy to have an income tax levy,
which will adversely impact pensioners, who will end up paying far more
for where they live than they do now.
The
Chairman: Order. I think that is probably a little wide of
the topic before us.
Mr.
Waterson: I had an uncanny feeling that you would say
something along those lines, Mr. Brady, but my hon.
Friends point is well taken and is now a matter of
record.
May I ask the
Minister two or three questions and make a couple of observations on
these otherwise fairly uncontroversial regulations? As she knows,
recently organisations such as the National Association of Pension
Funds, have pressed the Government to seek a role as the ultimate
guarantor of the PPF. The Government studiously avoided giving any kind
of Treasury guarantee in the 2004 legislation, in the scrutiny of which
some of us had the honour and privilege to be involved. Has the
Governments thinking on that changed at all?
I have made
this point many times before, but it deserves repetition: setting a
limit of £720 million is wise. We do not wish to place too great
a burden on well funded schemes with a strong sponsor covenant. The
volatility of the levies individual schemes receive remains an issue
for many businesses. We know that the PPF is, rightly, reviewing the
future development of the levy and trying to make it a more
sophisticated operation. I can understand why, in the early stages, it
was a relatively blunt instrument but it is important that it becomes
much more attuned to the individual circumstances of the individual
schemes. A high-level steering group of senior stakeholders is looking
at the project and we hope that some proposals will emerge from the PPF
in the next few
months.
The
PPFs latest annual report, published in November and with which
I am sure you are familiar, Mr. Brady, shows in chart 5 that
the funding position is returning to balance on all but the most
pessimistic of scenarios. Of course, under this Government, it is
always wise to have the most pessimistic of scenarios in mind. That
funding position raises the question whether the PPF should continue
raising £720 million, uprated for earnings, per annum through
the levy, or whether there could be room for reductions in the
foreseeable future.
The CBI put an
interesting point to me. Assuming that the levy ceiling is about
increasing the cap on the total levy collected in line with average
earnings, and given that the PPF levies money from private sector
companies and their employees, should the Government not increase the
levy in line with private sector earnings only? We know from the latest
earnings surveys that public sector earnings have overtaken those in
the private sector. That has all sorts of implications, not least for
public sector pensions, and it might well have implications for the
orders. It would be fascinating to hear the Ministers private
thoughts on that subject.
I have made
the point about business competitiveness. I emphasise that we must not
put extra burdens on successful businesses that are struggling to
maintain their pension
schemes.
The
draft Pension Protection Fund (Pension Compensation Cap) Order 2010 is
a routine instrument to uprate the PPF cap in line with earnings, up to
a figure of £33,054, 90 per cent. of which is the relevant
figure for compensation. The order is uncontroversial; it simply
maintains the existing capping arrangements. It is worth bearing in
mind, however, that when the PPF was set up under the 2004 Act, a
series of safety valves was put in place: one was to increase the levy
and another was to reduce the benefits paid under the scheme. It would
be interesting to hear from the Minister whether any consideration has
been given to using those various safety valves, given the huge extra
pressure now on the
PPF.
During
the passage of what became the Pensions Act 2004, we debated
at length the British Airways scenario. The BA pension fund deficit of
approximately £2.7 billion dwarfs the capitalisation of the
entire companyI believe that that is the latest figure, but I
could be wrong. We debated what would happen if such a company went
into the arms of the PPF. An interesting feature of the banking crisis,
to which the Government contributed so much, is that in keeping the
Royal Bank of Scotland afloat we ended up with the huge problem of Sir
Fred Goodwins pension. If RBS had gone bust and its pension
scheme gone into the PPF, Sir Fred would have faced a ceiling of
£29,748 on his pension. How history could have been
rewritten.
Finally,
pension scheme managers would, on the whole, welcome greater certainty
about the overall quantum of the levy and of the individual levies on
their own schemes. I hope that as the work of the PPF becomes ever more
sophisticated, such certainty will become increasingly possible.
Broadly, however, we have no problems with the orders and we have not
the slightest intention of voting against
them.
2.48
pm