Draft Occupational Pension Schemes (Levies) (Amendment) Regulations 2010 Draft Pensions Regulator (Contribution Notices) (Sum Specified Following Transfer) Regulations 2010

The Committee consisted of the following Members:

Chair: Mr George Howarth 

† Brazier, Mr Julian (Canterbury) (Con) 

† Bridgen, Andrew (North West Leicestershire) (Con) 

† Brine, Mr Steve (Winchester) (Con) 

† Bruce, Fiona (Congleton) (Con) 

† Buckland, Mr Robert (South Swindon) (Con) 

† Burns, Conor (Bournemouth West) (Con) 

† Eagle, Ms Angela (Wallasey) (Lab) 

† Hodgson, Mrs Sharon (Washington and Sunderland West) (Lab) 

† Lloyd, Stephen (Eastbourne) (LD) 

Mahmood, Mr Khalid (Birmingham, Perry Barr) (Lab) 

Paisley, Ian (North Antrim) (DUP) 

† Perkins, Toby (Chesterfield) (Lab) 

† Selous, Andrew (South West Bedfordshire) (Con) 

† Smith, Miss Chloe (Norwich North) (Con) 

† Soulsby, Sir Peter (Leicester South) (Lab) 

† Webb, Steve (Minister of State, Department for Work and Pensions)  

† Wilson, Phil (Sedgefield) (Lab) 

† Wood, Mike (Batley and Spen) (Lab) 

Eliot Barrass, Committee Clerk

† attended the Committee

Second Delegated Legislation Committee 

Tuesday 13 July 2010  

[Mr George Howarth in the Chair] 

Draft Occupational Pension Schemes (Levies) (Amendment) Regulations 2010

4.30 pm 

The Minister of State, Department for Work and Pensions (Steve Webb):  I beg to move, 

That the Committee has considered the draft Occupational Pension Schemes (Levies) (Amendment) Regulations 2010. 

The Chair:  With this it will be convenient to consider the Draft Pensions Regulator (Contribution Notices) (Sum Specified following Transfer) Regulations 2010. 

Steve Webb:  Good afternoon, Mr Howarth, and welcome to our debate on two sets of draft regulations, which were laid on 1 and 2 March respectively. 

The Government are committed to encouraging a savings culture, an important part of which is giving people the confidence to save into pensions through an effective protection regime. As the Committee will know, Parliament legislated, with cross-party support, for a new regime by creating the Pension Protection Fund and the pensions regulator. I am pleased to say that those bodies are delivering better protection for scheme members, helping to renew confidence. Through the two sets of draft regulations, which the previous Government consulted on and, indeed, tabled, the United Kingdom Government will meet the requirements of a European Commission ruling and ensure that the protection regime operates effectively. 

The first set of draft regulations deal with the Pension Protection Fund and a state aid issue. I hope that members of the Committee will bear with me if I am somewhat careful in my replies to some detailed questions; it is because litigation is ongoing on the state aid issue. 

The PPF opened for business in 2005 to protect members of eligible pension schemes that are mostly final salary, defined-benefit schemes. It does so by paying compensation to scheme members where the sponsoring employer becomes insolvent, leaving their pension scheme underfunded. The cost of PPF compensation is financed through a pension protection levy on those eligible schemes and through residual assets of pension schemes transferring into the PPF. Schemes eligible for the PPF also pay an administration levy to meet the fund’s running costs. 

A small number of schemes are exempt from paying the PPF protection levy or the PPF administration levy. The members’ benefits in defined-benefit pension schemes that have a Crown guarantee do not require the protection of the PPF. The Crown guarantee in that instance is a promise given by a public authority to stand behind the liabilities of a pension scheme, should the scheme wind

up in deficit. The precise nature of the Crown guarantee and what it protects varies depending on the scheme and the promise given. 

In some cases, however, the Crown guarantee covers only a part of the scheme, certain members or certain benefits. Such schemes, which are known as partially guaranteed schemes, only pay an administration levy in respect of the part of the scheme that is not covered by the guarantee. Schemes where all members or benefits are covered by the Crown guarantee are not eligible for the PPF, so no levy at all is payable in respect of such schemes. However, it is important that the Government do not unduly distort competition in competitive markets through state aid. In many circumstances, Crown guarantees for pension schemes are not a problem, because the sponsoring employers do not operate as commercial undertakings in a competitive market. However, in 2009, the European Commission reported— 

Ms Angela Eagle (Wallasey) (Lab):  Before the Minister moves away from that point, will he assist the Committee by listing those schemes that are subject to a Crown guarantee, so that people can get their heads around that concept? It might aid the Committee’s understanding. 

Steve Webb:  I am very happy to give the Committee such a list. The significant point is that, whereas BT—the specific case that I am about to discuss—operates in a competitive environment, some of the other schemes where Crown guarantees apply are not in a competitive environment, so the issue of state aid does not arise. I shall come back to the hon. Lady shortly with a list of such schemes. 

A specific case has prompted the regulations. In 2009, the European Commission reported on an investigation into whether the Crown guarantee for certain liabilities that BT had to the pension scheme gave rise to an incompatible state aid. The Commission decided that non-payment of the PPF levies by the BT scheme could not be justified under EU rules because it relieved BT from charges that its competitors have to pay and was therefore state aid. As a result of that decision, the UK Government were required to cease the incompatible state aid and ensure that the scheme paid the full PPF levies. 

Following consultation on draft regulations last autumn, the previous Administration made regulations by negative resolution in February 2010 to remove the exemption from paying the PPF protection levy. Hon. Members may recall that that is the levy set by the board of the PPF and is intended to raise £720 million in the current financial year from all eligible schemes. The levy is one of the ways in which the PPF funds the compensation payments payable to members of schemes in the PPF. The first set of regulations will complete that action and remove the exemption from the PPF administration levy—a much smaller sum—where it gives rise to incompatible state aid. That second levy funds the running costs of the PPF and will raise a much lower amount—£22 million in 2010-11—from all eligible schemes. The regulations will complete the implementation of the commission’s decision. 

To recap, earlier this year the House approved regulations relating to the much larger protection levy as it relates to companies such as BT. Today we are doing the tidying-up exercise of dealing with the administration

levy, which is a much smaller sum. The regulations have already been accepted in principle by the House—the regulations complete the process. I should say that the Commission’s decision in respect of the BT pension scheme applies only to that scheme; however, the Commission will expect the UK Government to apply the same reasoning to schemes in a comparable legal situation where the facts are the same. Although the regulations principally affect BT, because of the history, in the event of another company finding itself in the same position, the same principles will apply. 

The second set of regulations relate to the powers of the pensions regulator, which was established under the Pensions Act 2004 as an arm’s length body responsible for regulating workplace pension schemes. It started operations in April 2005. Parliament, with cross-party support, gave the regulator powerful tools to address the danger of what is called avoidance activity. That is the risk of sponsoring employers deliberately manipulating their affairs to avoid their statutory debt to a pension scheme, leaving the Pension Protection Fund to pay compensation to scheme members—in other words, where there is insurance, they may try to make sure that someone else meets the cost. Such activity would have serious cost consequences for the schemes that remain responsible for paying the PPF levy. 

One of the regulator’s main powers to deal with avoidance activity is the contribution notice, which requires a company or an individual to make a cash contribution in respect of the scheme, up to the value of the employer’s total debt to the scheme. The grounds for using that power include circumstances where a sponsor employer has committed an act that is aimed at avoiding its liabilities to the pension scheme. 

The Pensions Act 2008 amended the contribution notice power to close a loophole. Broadly, the problem was that under the 2004 Act, the regulator could issue a notice only in relation to the scheme where which the act of avoidance occurred. A sponsor employer could avoid a contribution notice simply by transferring the members to another scheme. Requiring the employer to pay funds to the original scheme would not assist the transferred members, so a contribution notice might not be justified. Parliament agreed legislation, with support from all sides of the House, to permit the regulator to direct the notice to either the original or the new scheme. That means that the funds from a contribution notice follow the members. 

The draft regulations, which are required under the 2008 Act passed by the previous Administration, simply set out how the regulator must calculate the amount to be specified in a contribution notice where members are transferred from a defined-benefit scheme to a defined-contribution pension scheme. There are important safeguards, including that decisions to use the powers must be made by the regulator’s determinations panel, which is independent of the evidence-gathering part of the regulator. In my view there is no undue impact on business, and consultation responses supported this. The regulations will provide certainty for business on how the power works. 

The shadow Minister asked about other schemes that might be covered by a complete Crown guarantee. Some examples off the top of my head include the mineworkers’ pension scheme, the four railway pensions schemes, the Greenwich hospital scheme—obviously,

she will be familiar with that one—the National Library of Wales scheme and the National Museum of Wales scheme. Intriguingly, I am more than willing to write with a full list from my exhaustive knowledge of such schemes. I hope that that will be helpful. 

4.39 pm 

Ms Eagle:  I think this is the first time that I have attended a Committee with you in the Chair, Mr Howarth. It is very welcome to have a local Member of Parliament presiding over us today. 

I start by making a declaration of interest with respect to the first set of regulations. My civil partner is an employee of BT and, as such, is a member of one of its pension schemes.

The Minister has succinctly and helpfully set out the background to what I hope are non-contentious regulations. The two sets of regulations are quite different, but it is important that we have the chance to consider them. I have no intention of dividing the Committee on either. Mr Howarth, you may not be surprised about that, since on closer inspection, it is clear that I signed one and was involved in the detailed work to bring it about—a little consistency in life is usually important—and that my colleague Lord McKenzie was responsible for signing the other. Will the Minister give us an update on what has been going on while I have been away? I also intend to ask him some questions that I think will be helpful to those who read the record of these issues. 

The Minister is right to set out the background to the Draft Occupational Pension Schemes (Levies) (Amendment) Regulations 2010, which involve the smaller administration levy rather than the much larger PPF payment. He is also right to point out that that background really began in 1984 with the privatisation of BT. I think that section 68 of the Telecommunications Act 1984 is engaged here. If one looks at the chronology, the PPF was subsequently established with all-party support by the Pensions Act 2004. In my view, that does a superb job in seeking to regulate the complex area of pensions. Pensions are becoming more complex by the day with the different existences and the shift from DB to DC schemes. The law does a good job in trying to protect members’ interests. Their experience has some bearing on the second set of regulations, which I will tackle after I have asked a few questions about the first. 

First, is the Minister impressed with the work of the pensions regulator? I would be interested in his comments, as the new Pensions Minister, on that. The first set of regulations were the result of an EU investigation, which began in 2006, into unjustified state aids. That finished in 2008-09 and led to the creation of this set of regulations, the final piece of regulation to comply with the EU’s decision. 

The regulations do not apply to BT only; they are more generic, though they apply to the administration levies only. Will the Minister enlighten us on the circumstances in which the regulations may be called into use? Does he anticipate that the only trigger will be a European Commission pronouncement about unjustified state aid, or does he intend to be more proactive as a Minister in looking to pre-empt European Commission activity in that area? He gave us a few examples in his list of partial Crown guarantees. I am not sure that he gave us the whole list. It would be interesting to know

whether the Department has an entire list of partial Crown and total Crown guarantees for pension funds that it intends to keep an eye on. 

Steve Webb:  Given that, as the hon. Lady says, the report of our proceedings is monitored externally, it is important for the sake of clarity that the lists I mentioned are complete Crown guarantees. Those were the ones on the list. 

Ms Eagle:  Does the Minister therefore see a problem with partial Crown guarantees as well? If so, I think that a larger list of pension funds may be affected. It is important, for the understanding of the Committee, that we get on the record which pension funds those are. 

The regulations will allow for a partial in-year payment of the levy. Clearly, that is less important with the smaller administration levy than with the larger PPF levy. The regulations will allow a whole-year payment to be made even if they come into effect halfway through the year. We were slightly delayed in dealing with the regulations, so does that now mean that there is no issue with the financial year? Will BT have to pay the whole of the levy for 2009-10, or is it just paying forwards? Given the delay that we had in getting the regulations—the final piece of the jigsaw—before Parliament, it is not clear whether the problems with partial payment have been resolved by the time lag. 

The Minister said that the company involved has challenged the EU decision. When I last looked, the case was before the first level of the European Court. Can he give us any more information about its progress? More importantly, will he tell us more about what would happen in the event of a successful challenge to the European Commission’s decision, particularly with respect to repayment of levies already charged? I know that the regulations allow repayments, but I would be interested to hear the Minister say more about it, particularly about whether there is any limit on the number of years that could be repaid, as we know that EU legal challenges can go on for rather a long time. Will he also say something about the level of the administration levy? We always tried to keep it as stable as possible, and I am interested in whether he can give us an indication of the current Government’s intentions regarding the levies. 

The PPF is now administering the financial assistance scheme. Will the Minister provide a view on whether the costs for doing that can be separated, with no cross-subsidy between the two? Those who have to pay the levy, whether the administration levy or the PPF levy, wish to be reassured that there is no cross-subsidy in the moneys they paid to run the regulator between one sort of pension scheme and another, particularly between the FAS and the schemes that are still solvent. Finally, will the Minister say a few words before the spending review on his views about the PPF, and whether he is confident that he can ensure the preservation of the administrative capacity of that important organisation during the challenges ahead? 

I now move on to the Pensions Regulator (Contribution Notices) (Sum Specified following Transfer) Regulations 2010. Again, they derive from the regulator’s experience of looking at the potential loopholes in the organisations with which it was dealing. They aim to prevent, as the Minister rightly pointed out, the development of quite

sophisticated avoidance activity that seeks to freeload—that is the only way to describe it—on other people’s payments to the Pension Protection Fund. The regulator had come across some cases and did its best to prevent the development of loopholes, whereby companies that had seriously underfunded their pension schemes attempted to offload the liabilities on to the Pension Protection Fund for various nefarious purposes. 

Clearly, the capacity of the scheme and the levy system, which Parliament introduced in 2005, would be at stake if the regulator were unable to prevent the growth of freeloading by those seeking to avoid their pension responsibilities by offloading them on to the PPF and schemes that are doing the right thing. The pensions regulator requested extra anti-avoidance powers from the previous Government because of the appearance—I say no more than that—of avoidance activities. As the Minister pointed out, those activities involved the bulk transfer of members from one pension scheme, to which the contribution could apply, to another, which made it difficult for the pensions regulator to allow the contribution notice to follow the members. That loophole clearly needed to be closed and I was pleased that we were able to develop the regulations to do so at the request of the pensions regulator.

How many contribution notices, if any, has the pensions regulator issued since the election? What is the evidence that the closed loophole will deter bad behaviour? Is the pensions regulator contemplating closing other loopholes? The key to minimising the effects of, or preventing, this type of avoidance activity is to be eternally vigilant. Is the Minister convinced that, in the straitened times we face in this age of austerity, the pensions regulator is confident that it has kept, and will be able to keep, its eye on the ball? Pensions liabilities can mean large costs for some companies, and I know that the Minister agrees that it is important that we ensure that those that have taken on or acquired liabilities are not allowed, almost as a matter of choice, to escape them. 

Will the Minister also say something about the change to the definition of indexation from the retail prices index to the consumer prices index? Will it have any implications for the level of the PPF levies or the administration levy? It takes huge amounts of money—up to £100 billion—directly out of the pensions assets of employees. 

To sum up, the Government are right to proceed with both statutory instruments. I do not think that anyone who wishes to ensure that the pensions promise is tied in and believed more would oppose either. I do not propose to divide the Committee and I will be interested to hear the Minister’s responses to my questions. 

4.53 pm 

Fiona Bruce (Congleton) (Con):  My question relates to the shadow Minister’s very first question. The Minister has kindly agreed to provide a list of schemes with a Crown guarantee and I am interested in the rationale behind their application: is it the case that they do not function in a competitive market, or is there a broader reason for them? 

4.54 pm 

Steve Webb:  I am grateful to the hon. Member for Wallasey and my hon. Friend the Member for Congleton for their comments, questions and support for the regulations. 

The shadow Minister asked if I am impressed by the work of the pensions regulator. I very much support its work. It is an arm’s-length body, so it has a proper degree of independence from Government. The crucial thing about it, however, is that, where it is succeeding, schemes that pay the PPF levy and honour their obligations do not have to pay extra levies to make up for people who are trying to avoid their liabilities. When the regulator ensures that companies are funding their schemes at an adequate level—albeit on a scheme-specific basis and with flexibility—it is protecting the interests of all those paying pension protection levies who have ongoing liabilities. That is entirely appropriate and important work, and I pay tribute to the regulator for doing it. 

The hon. Lady asked whether there were other schemes that may be affected lurking out there. As far as we are aware, there are not. Obviously, the regulations have been written in a general way, but they clearly refer to schemes with a partial Crown guarantee operating in a competitive environment—a pretty unusual combination. If she knows of any other schemes in the same circumstances, I would be grateful if she told me. We do not anticipate this situation arising again— 

Ms Eagle  rose—  

Steve Webb:  I fear the hon. Lady is about to tell me of a scheme that we missed. We have written the regulations clearly because the issues of principle at work here would apply in similar cases as well. 

Ms Eagle:  I was wondering in what category Royal Mail would find itself if it were privatised by the current Government. If the Minister does not know the answer off the top of his head, will he write to me? I assure him that if there is another scheme out there, somebody will find it and report it to the EU Commission. 

Steve Webb:  Indeed, so the work may be done for us. On the Royal Mail, it would depend on the settlement at the point of privatisation and what guarantees were given. Obviously, I cannot speculate about what those would be. 

Ms Eagle:  It is certainly true that, if Royal Mail were privatised in certain ways, its very large pension fund could easily find itself in this category. 

Steve Webb:  I cannot speculate on the terms on which any privatisation would take place. The regulations we are debating today will apply consistently to any scheme that satisfies the tests, is operating in a competitive environment and has a partial—I stress “partial”—Crown guarantee. 

The hon. Lady asked about the timing. The regulations would require BT to pay the administration levy for the whole of financial year 2010-11, and the scheme is liable in EU law to pay for the years dating back to when it first became eligible. The PPF will set the administration levy level for 2011-12 early next year—obviously, it has not been set yet. She asked if the levy was being used to cross-subsidise the administration of the financial assistance scheme. The PPF levy is used solely for the purposes of the PPF. 

Ms Eagle:  On the cross-subsidy question, when I was the Minister, I found that, although I was satisfied that that was true, there was always scepticism among pension schemes, particularly those that had to pay the PPF levy. Transparency and openness on that point are important, so that the schemes that have to pay the levy can be confident that there is no cross-subsidy and we can show that that is the case. It is not about the current Minister—or me, when I had the privilege to do the job that he now has the privilege to do—being assured. There was scepticism “out there”—if I can put it that way—particularly on the part of those companies paying the levy in difficult times. Does he have any observations on how to bolster confidence that there is no cross-subsidy? 

Steve Webb:  I hope my assurances are sufficient to bolster confidence. 

Ms Eagle:  Oh yes, of course. 

Steve Webb:  I am grateful for the hon. Lady’s reassurance. It is worth remembering that the scale of the financial assistance scheme is a far smaller, so we are talking about a smaller scale of activity. The PPF levy is used for the PPF, which is what it is meant for. 

The hon. Lady asked about the court case and BT. There are two issues: first, as I mentioned earlier, the trustee of the BT pension scheme has instigated proceedings in the High Court to obtain clarification on the scope of the guarantee—appropriately, that started this morning, which is partly why I have to be careful about what I say. Secondly, BT brought an action against the European Commission, seeking to annul its decision. That case will be heard in due course by the Court of First Instance. In the event of that court, or the European Court of Justice on appeal, annulling the Commission’s original decision on the BT pension scheme, the PPF would have the power to review any decision it takes—pursuant to the draft regulations—to impose a full levy on the scheme. That is an update on BT and the legal action. 

Moving on to the other regulations, the hon. Lady asked about the use so far of contribution notices. As I understand it, the regulator has used the power on contribution notices only once. She will be aware that the regulator has a range of powers, and the goal is not to have to use them. The ideal situation is that people are aware of the regulator’s powers and realise that the regulator is prepared to use them and, therefore, they act accordingly. These are very much last resort measures. 

The hon. Lady asked if the regulator is planning other measures. I suspect that is what gets the regulator out of bed in the morning, although I cannot speculate. The goal of making sure that pension schemes honour their obligations and are adequately funded is constant and ongoing work. The Department, as the hon. Lady knows, is in close contact with the regulator, who none the less acts independently. These matters are kept under constant review, but I am not aware of specific proposals due to be brought forward. 

The hon. Lady also asked about the change from RPI to CPI indexation. The Pension Protection Fund, like any other scheme, will have to take account of that change, which will clearly affect costs and liabilities. The PPF will want to review its levies in the light of the

impact that change has on the overall funding position of a scheme. However, that is a matter for the PPF within the statutory framework we have established for it. 

Ms Eagle:  Does the hon. Gentleman agree that the change from RPI to CPI indexation implies a very large reduction in the liabilities of existing pension schemes, because the benefits and the definition of indexation have been made much less generous? That therefore implies major reductions in the administration and PPF levies. 

Steve Webb:  It is for the PPF, not for me, to set the levy, taking account of its future liabilities, which will obviously be affected by the change to CPI indexation. It is worth point out that the scope of the impact of the change to CPI indexation s not as comprehensive as some said. In the wider pensions world, there is, for example, a cap on the indexation duty, such as a cap of 2.5% on some liabilities. Since both CPI and RPI currently exceed 2.5%, it does not matter which index is used for simple statutory indexation—the indexing is still 2.5%. In addition, the requirement to index only applies to certain portions of liabilities, and there is nothing retrospective about the change—the indexation of deferred entitlements will remain based on the RPI up to the point of change; the changes will only apply thereafter. Having said that, there will be an impact on the future liabilities of the PPF. When the PPF board sets its levies it will take account of that, along with all the other factors. 

Ms Eagle:  It is important that the PPF has to make those calculations. It has a direct bearing on the cost to those who pay the compulsory levies—the administration levy as well as the PPF levy. Will the Minister tell us the calculation he made before making the announcement about the reduction in liabilities that the shift from RPI to CPI will cause? 

Steve Webb:  I assume the hon. Lady is asking about the PPF. The impact on the change in indexation will vary from scheme to scheme, from member to member, according to, for example, how much of their working life is covered by rights already accrued under the RPI regime. We have done no specific calculation for the PPF. That is for the board of the PPF to do, and I strongly suspect that it will take it a bit of time, as it is obviously a complex matter. 

As the hon. Lady says, CPI indexation will result in lower increases in general in pensions in payment, which, other things being equal, will tend to reduce the PPF levies. On the other hand, there might be lots of other factors at work. We cannot say unambiguously that levies will go down. If they did, as she rightly said, it would reduce the burden on other schemes and other

employers who want to keep their final salary schemes going or who have outstanding liabilities. I am sure she would welcome that. 

Ms Eagle  rose—  

The Chair:  Order. Before the hon. Lady intervenes, could I just say that the point we have been exploring is straying rather far from the statutory instruments before the Committee? The Minister has responded, but I hope that we do not develop that point too far. 

Steve Webb:  Thank you, Mr. Howarth. As you say, I have sought to respond to the issues as they have been raised. Obviously as things stand the legislation relating to the PPF and the FAS still specifies the RPI. We will bring forward legislation to deal with that as soon as we can. 

Both orders tidy up arrangements which the House has already agreed. BT is the example in the first set of regulations, but it is not purely about BT. The instrument deals with the administration levy in a way that is consistent with the way in which we have already dealt with the pension protection levy. It is a tidying up exercise in a much smaller part of the system. The second set of regulations ensures that the regulator can use effectively the powers that Parliament intended him to have. 

I realise that I have not dealt with the question asked by my hon. Friend the Member for Congleton about some of the schemes that I listed. Obviously each has a unique history, but there has often been state involvement in industries such as mining and railways. When the status of an industry or the position of employers has changed, the state has sometimes provided some form of guarantee, perhaps as reassurance to the work force at the time—indeed, the hon. Member for Wallasey mentioned the Post Office and the Royal Mail, which might be an issue in future. In each case there is a specific reason why some sort of Crown guarantee has been given. I hope that I have responded to all the questions now, and I commend the regulations to the Committee. 

Question put and agreed to.  

Resolved,  

That the Committee has considered the Draft Occupational Pension Schemes (Levies) (Amendment) Regulations 2010. 

Draft Pensions Regulator (Contribution Notices) (Sum Specified Following Transfer) Regulations 2010

Resolved,  

That the Committee has considered the draft Pensions Regulator (Contribution Notices) (Sum Specified following Transfer) Regulations 2010.—(Steve Webb.)  

5.7 pm 

Committee rose.