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Session 2009 - 10
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General Committee Debates
Delegated Legislation Committee Debates



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 year’s 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 scheme’s normal pension age immediately before the employer’s 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 legislation—the 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 pensions—the regulator, the PPF and so on—has 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 NEST—National Employment Savings Trust—system. 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. Friend’s 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 UK’s 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 Chancellor’s 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 Democrats—among 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 because—without straying too far from the subject of pensions, Mr. Brady—I 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. Friend’s 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 Government’s 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 PPF’s 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 Minister’s 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 company—I 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 Goodwin’s 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
 
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