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General Committee Debates
Delegated Legislation Committee Debates
|©Parliamentary copyright||Prepared 15th March 2011|
Publications on the internet
General Committee Debates
Delegated Legislation Committee Debates
Draft Pension Protection Fund (Pension Compensation Cap) Order 2011
The Committee consisted of the following Members:
Rhiannon Hollis, Committee Clerk
† attended the Committee
The Chair: With this it will be convenient to consider the draft Financial Assistance Scheme (Revaluation and Indexation Amendments) Regulations 2011 and the draft Occupational Pension Schemes (Levy Ceiling) Order 2011.
I shall start with the two measures that relate to the Pension Protection Fund: the levy ceiling order and the pension compensation cap order. As the Committee knows, the compensation provided by the PPF is in part funded by a levy. That is paid by schemes eligible for the protection provided by the PPF. The level of the levy is the responsibility of the PPF board, but the Pensions Act 2004 imposes a levy ceiling, restricting the amount that the board may raise through the levy in any year. As I am sure all members of the Committee know, the current ceiling is £871,183,684.
The levy ceiling order increases the ceiling for the year beginning 1 April 2011. The way in which the increase is calculated is governed by the 2004 Act, which says that the increase must be in line with increases in the general level of earnings in Great Britain. In this case, the rate is the one published by the Office for National Statistics for the year ending 31 July 2010. The order therefore increases the levy ceiling by 2.4%, increasing it to £892,092,092 for the year beginning 1 April 2011. For clarity, I remind the Committee that that does not mean that the levy will be £892 million; rather, that is the ceiling. The PPF has estimated that for the period concerned, it will collect a pension protection levy of only about £600 million. The Committee will be pleased to know that the levy for the coming year is about £100 million less than it was the year before.
I shall move on to the PPF pension compensation cap order. The pension compensation of anyone who enters the PPF before they reach their normal pension age can be capped. The compensation cap for the year beginning 1 April 2010 is £33,054.09. However, anyone under normal pension age receives compensation at the 90% rate. That means that their cap is currently 90% of that figure—£29,748.68. The order increases that cap for the year beginning 1 April 2011 in line with the general level of earnings in Great Britain for the year ending 31 March 2010. The order therefore increases
I come now to the financial assistance scheme revaluation and indexation amendments regulations. Many members of the Committee will be familiar with the FAS and its complex genesis. The FAS exists to provide financial help to members of qualifying pension schemes who face significant losses because their scheme is wound up underfunded. Assistance is also payable to the survivor of a pension scheme member and to certain surviving dependants. Unlike the PPF, which is the subject of the other two draft measures, the FAS is mainly funded by the taxpayer. However, both mechanisms are managed by the PPF board.
To update the Committee, as of 31 January there were 1,001 FAS-qualifying schemes and approximately 16,000 people receiving FAS payments. Many more members of those schemes will receive help as they enter retirement in the coming years. So far, the FAS has paid out approximately £126 million in assistance. In 2009-10 alone, it paid out a total of nearly £34 million. We estimate that that will increase to some £44 million this year.
As hon. Members will be aware, the current incarnation of the FAS is based on the commitment to extend the scheme announced in December 2007. That commitment meant that the FAS would help more members and give them more money. The extension provided qualifying members with 90% of their accrued pension at the date of commencement of winding up, revalued to their retirement date, subject to a cap. It also committed the FAS to provide some protection against price inflation once assistance came into payment through the payment of indexation on rights accrued after 1997, although the announcement did not explicitly say what measure of inflation would be used.
The number of schemes that have been helped has steadily increased since the December 2007 announcement. In March 2008, 710 schemes qualified for help. As I advised the Committee, there has been an increase in notifications to the scheme manager, so a total of 1,001 schemes have successfully qualified for assistance.
The changes being made to the FAS revaluation indexation rules are the consequence of a wider decision. The Chancellor announced in June last year that the Government intended to use the consumer prices index to uprate benefits, tax credits and public service pensions. In July of that year, I announced that the CPI would be used also in determining increases for all occupational pensions and payments by the PPF and the FAS. The FAS will continue to provide an appropriate level of help to members who have lost out on some of their pensions, including protection against consumer price inflation. It will continue to be broadly in line with the help provided by the PPF.
The House has discussed at length the use of the RPI and CPI. I shall touch on those briefly, but I shall not rehearse our debates on the uprating orders. Our decision to use a different inflation measure from the RPI was based on our belief that a better measure was available. First, the CPI takes account of consumers trading down to cheaper goods when prices rise; it reflects the basic budgeting changes that people make, but the RPI
I do not contend that the CPI is a good index or that the RPI is a bad one. However, regardless of whether the RPI would result in higher or lower increases, I believe that the CPI is a more appropriate measure of price inflation. Increases in line with the growth of the CPI will therefore protect the value of members’ assistance.
I turn to some points of detail. The regulations change the inflation measure specified in the FAS regulations from the RPI to the general level of prices. As a result, accrued pensions will be revalued by the RPI for the period before 31 March this year, and by reference to the CPI after that date, subject to the 5% cap. On indexation, rights accrued after 1997 and applied on 1 January 2012 can be based on increases in the CPI subject to the current cap of 2.5%. I note in parenthesis that as CPI and the RPI are both above 2.5%, it is likely to make no difference to the January 2012 indexation. The CPI can be used also for the annual increase to the FAS cap that will be applied in April.
Committee members may have noted that the measures do not mention the CPI. They refer to the general level of prices. That is because there are a number of different indices for measuring inflation, and we do not want to have to amend the orders again if, for example, the CPI changes its name or if a more appropriate indexation is found. We have adopted the more general term, which is consistent with that used in occupational pensions legislation. However, as I announced last year, we intend to use the CPI. If in future we want to use a different inflation measure, we will of course consult on our proposals.
The measures will ensure that the FAS payments continue to be protected against inflation in a way that is reasonable and appropriate. In my view, they are compatible with the European convention on human rights. I commend them to the Committee.
Rachel Reeves (Leeds West) (Lab): I thank the Minister for the details he has given the Committee. I believe this is the last time that questions about the Pension Protection Fund will be debated in Committee, so I want to put on the record a few things about it. The Minister will know that some 55,000 people have benefited from the PPF, that 212 schemes are currently part of it and that £236 million has been paid in compensation to scheme members. Scheme members range in age from four to 105, and I know that the PPF makes a substantial difference to people’s lives. Schemes include Woolworths, MG Rover, Nortel, and Turner and Newall. The people in those schemes would all have had much lower pensions were it not for the PPF.
I welcome the creation of the PPF and the Government’s continuing commitment to it. Without it, scheme members would have had very little if any of the pensions that they were expecting on retirement, to which they had contributed for much of their working lives. It is a double whammy for them to lose their job and then their pension.
I have a couple of specific questions for the Minister. The PPF is a great success, with 10 schemes having just transferred into it and some 409 schemes and 200,000 members now in the assessment stage. What lessons can we learn about the assessment stage and how long it takes for a scheme to come into the PPF? Last month, the PPF announced that there would be a new levy framework for 2012-13. Does the Minister think that the ceiling we are debating today will make a material difference to the pension that people receive from the PPF?
Will the Minister confirm how many people are affected by the cap? The PPF told me that it is in the order of 60, but last week in the other place Lord Freud said that the figure was closer to 90. More generally, how much worse off will recipients be on average if the clauses in the Pensions Bill go ahead with the shift from RPI to CPI inflation? We have seen estimates of a 15% reduction in occupational pensions. Is that replicated in the PPF as well?
Moving on to the financial assistance scheme, this measure is one of several signalling that millions of pensioners will see the value of their pensions fall every year because of the shift from RPI to CPI. The Minister said that we will not rehearse the debates we had in the Chamber on this issue, but let me just make a few points for the record. Making a permanent change from RPI to CPI, the impact of which will be felt long after the deficit is gone, is an ideologically driven move that the Opposition do not support. If this were a time-limited change ensuring that benefits will not fall behind earnings over the next few years, we would, as the Minister knows, consider it. We agree that we need to reduce the deficit, but why are we ensuring through these changes that those in receipt of a pension under the financial assistance scheme carry on bearing the cost of deficit reduction long after the deficit is gone?
As the Minister knows, RPI is between 0.5 and 0.7 percentage points higher on average than the CPI, so in any given year pensions linked to CPI will give people less income. The CPI figure for the year to September 2010 is 3.1%; the equivalent for RPI is 4.6%—a difference of 1.5 percentage points and a big difference for pensioners who rely on the state pension or the financial scheme.
The Department for Work and Pensions estimates an £83 billion fall in the value of occupational pensions over the next 15 years as a result of the shift from RPI to CPI. For the 2 million members of defined-benefit schemes, this is broadly the same as a pay cut of between £2,250 and £2,500 a year. What would be the equivalent figure for those members benefiting from the FAS? I hope the Minister can answer that today.
Estimates of the long-term losses provide clear evidence that long after the deficit has gone, pensioners will be worse off. The Government are already hitting pensioners with the increase in VAT, and the Pensions Bill means that women in their late-50s approaching retirement will have to wait for up to an extra two years until they get their state pension, so that is another hit to pensioners.
On accrued rights, during the consultation FAS members felt that the switch to CPI undermined commitments made by the previous Labour Government regarding the level of assistance the FAS would pay. Some FAS members believe they have a legitimate expectation of
“We are very clear that all accrued rights should be honoured: a pension promise made should be a pension promise kept. Therefore we would not make any changes to pension rights that have already been built up.”
Does he feel that accrued rights are being protected with these changes? I am not convinced that CPI is a more appropriate measure than RPI, as the Minister seems to think. For pensioners and low-income families, the average inflation rate is more than RPI and CPI, because of the additional money that low-income families and pensioners spend on food and fuel. The Royal Statistical Society says:
“While the consumer price index (CPI) is acceptable for macroeconomic purposes and for international comparisons within the EU we do not believe its coverage is generally appropriate for inflation compensation purposes.”
“the Government should retain the Retail Price Index as the main measure to be used where pensions and state benefits are linked to price increases. We do not agree that the Consumer Price Index is a more appropriate measure of pensioners’ costs than the RPI and we are concerned that over time it will reduce the income levels of many older people.”
“According to Age UK’s silver retail prices index, the impact of inflation on those in later life is far greater than estimated by official measures. For example, since the beginning of 2008, those aged over 55 have experienced price rises at almost two percentage points above that suggested by headline RPI figures, rising to four percentage points for those over 75.”—[Official Report, House of Lords, 15 February 2011; Vol. 725, c. 598.]
I have some specific questions. What will be the cost of the provisions for FAS members? What will be the difference in overall incomes due to the shift from RPI to CPI? During the consultation, one member expressed concern
Steve Webb: I am grateful to the hon. Lady for her support for the work of the Pension Protection Fund. She was right to place on the record what an important initiative it is. It was introduced under the auspices of the Pensions Act 2004, which I remember spending many happy hours scrutinising. It rightly had all-party support and the previous Administration deserve credit for introducing it.
The hon. Lady asked about the process known as the assessment period. Lessons are being learnt continually about that. One of the problems about the assessment period is that schemes often have dodgy records. A well
I am pleased to say that the PPF is making progress on that. The time taken to wind up schemes is being improved and the pension regulator is being proactive on it. The regulator is working hard to get trustees to see the importance of good record keeping. Obviously, we do not have a crystal ball to foretell which future schemes will come under the PPF’s ambit, so the regulator is working proactively to try to make sure that schemes have good records so that the assessment process, should it happen, can take place as swiftly as possible. There is always room for progress on the issue, but I believe that progress is being made.
The hon. Lady asked whether the levy ceiling contained in the regulations will have an impact on the levy’s new structure, particularly the role of the risk-based levy. The levy ceiling simply gives what they call in the trade a quantum—a maximum amount. In practice, as I have mentioned, the proposed levy for next year is more than £0.25 billion below the levy ceiling, so we do not anticipate that the level of the ceiling will have any impact on the proposed new structure of the levy.
The hon. Lady asked for clarification on how many people were caught by the cap. It has been a few days since my noble Friend Lord Freud gave an answer in the other place, but now, hot off the press, we have an even more up-to-date response. As of 28 February 2011, 95 scheme members who were receiving compensation were affected by the cap.
Jenny Willott (Cardiff Central) (LD): Will the Minister clarify whether there is a difference between the cap amount that applies to those under the financial assistance scheme and that which applies to those covered by the PPF fund? He has kindly given clear figures for the PPF, but not for the FAS. Will he also clarify whether the cap remains the same for those FAS members who already receive their pensions and whose payments are up to the cap, and for those who will receive pension payments for the first time this year but who are already at the cap? Will both groups receive the same amount?
Steve Webb: I am grateful to my hon. Friend. As she says, there are differences between the cap regimes for the PPF and the FAS, one of which is the indexation process. The FAS is, essentially, a backward-looking scheme, so it looks at schemes in which the insolvency event took place before 2004. If I recall correctly, the 2004 Act took the decision that the cap would be indexed on a prices basis. The PPF cap, on the other hand, is earnings indexed, because the relevant schemes have been live since the PPF was set up. The levy is coming in on an ongoing basis, so the indexation rules are different. I will return in a moment to the detailed points that my hon. Friend has raised regarding new entrants to the scheme.
Turning to the FAS questions that the hon. Member for Leeds West has raised, she said—as did the right hon. Member for East Ham (Stephen Timms) during our debate in the Chamber on 17 February—that the move to CPI is ideological. As I said in response, I have never heard the use of the geometric mean described as ideological before. Neither the RPI nor the CPI is perfect, but we have to judge which is the better fit. I recall vividly receiving many angry letters after April 2010 asking why people’s state earnings-related pension scheme pensions and their public sector pensions had been frozen in April 2010, and the answer was that the RPI was negative in the year to September 2009. I have yet to meet a pensioner who thinks that their inflation rate was negative in the year to September 2009.
Steve Webb: Clearly, all these decisions are taken in the context of the fiscal position. Rather than picking a number out of thin air and saying that we can save some money, however, we have a statutory duty to link the real value of these thresholds and benefits to the general increase in prices. We have looked, in the context of the current fiscal position, at the most appropriate measure. The example that I have given regarding September 2009 was fresh in our minds in the summer of 2010 when that decision was taken.
Steve Webb: The central assumption, if I remember correctly, is a 0.87 percentage point difference on average, although that varies a lot from year to year. That is significant. In four or five of the past 20 years, CPI has been bigger in the year to September, which is the one that is used for indexation, and therefore the profile of indexation better fits pensioner inflation experiences. Clearly, everyone would rather have a big increase than a small one, but we also want an increase that matches when people experience the inflation.
The point about the year to September 2009 is that the RPI was negative not because pensioners had not experienced inflation, but because mortgage rates had fallen rapidly. I do not see the connection between pensioner price inflation, for which we are supposed to be compensating, and big falls in mortgage rates. Indeed, for pensioners, big falls in mortgage rates tend to go hand in hand with big falls in savings rates, and they are bad news. Just at the point that pensioners are suffering a loss in savings income we hit them with a zero inflation rise, which does not seem right to me.
The hon. Member for Leeds West has asked about the impact of the difference on the financial assistance scheme. We estimate that over the lifetime of the FAS it will be about 10% on the liabilities; I believe that my noble Friend Lord Freud has given that figure in the other place. The impact on each individual will be different, because it has an impact on indexation and on revaluation, and therefore the exact impact on every individual depends on how old they are. We expect the long-term Exchequer effect to be about 10%.
The hon. Lady has asked about accrued rights, and I take that very seriously. People accrued rights under the FAS, and she will have noticed that in my introductory remarks I said that all the revaluation up to March of this year stands. We are not revisiting past revaluations and saying that we have decided that inflation was different for history; we are saying that the best measure of inflation for the future is CPI. I stress that there is nothing retrospective about this. Every revaluation to date and every indexation to date of pensions in payment stands, but we have a duty to look at the general increase in price levels as most appropriately measured, especially under these regulations.
Steve Webb: The sequence of events is that if people leave the scheme or the insolvency event takes place before pension age, it is revalued until the point when it is drawn and subsequently indexed in payment. We are not touching any of the valuations that have taken place up to the present day. We are changing the way in which future revaluations happen, which will be in line with the best measure of inflation in our judgment. That has always been the position. Clearly, a question exists about FAS, because the FAS legislation specified RPI. Future Parliaments have to look at legislation and decide whether that was the right way to do it, which is what these regulations are about.
Jenny Willott: Could the Minister say whether or not the Government have considered looking at the indexation rights for those in the financial assistance scheme who were in a pension scheme that allowed for indexation prior to 1997? Although the FAS specifically says that there can only be indexation post-1997, there are a number of schemes in FAS where the rights of the members include indexation rights prior to 1997. Have the Government considered that issue?
Steve Webb: No, we have not. The principle behind the FAS was never to exactly replicate the specific provisions of each individual scheme. It took the accrued rights at the point of the insolvency event and applied FAS rules thereafter. One of the reasons for that was the issue of diversity and complexity. One of the problems that we have already found is that the complexity and diversity of schemes slows the whole process down. I know that my hon. Friend has worked closely with the Allied Steel and Wire workers and other people in her Cardiff, Central constituency. However, one thing we found was that people wanted things to move on quickly. When people have lost their job and lost their pension, as the hon. Member for Leeds West said, they want us to get on with things. There are problems with FAS using scheme-specific pre-1997 accruals and so on, which were not statutory—that is the key point here. One of the problems is that every scheme will be different and it will just be very complicated to deal with them all differently. FAS is a safety-net scheme. So the judgment was taken that FAS would not provide pre-1997 indexation, because that was not a statutory requirement from schemes.
Further to my hon. Friend’s question about FAS caps, the FAS cap itself is not actually set in annual orders. That was why I did not specifically mention it
Steve Webb: No. I am saying that the cap that prevails at that time is applied once, and then it is subject to indexation in respect of post-1997 service only. So there is a cap. It bites once, according to whatever it happens to be at that point in time, and it is then indexed thereafter. That is the way that the process works.
The hon. Member for Leeds West raised the issue of pensioner inflation. She quoted the Age UK silver retail prices report and she quoted figures for the period from 2008 to 2010. I have looked at that report and she did not quote figures for the period from 2004 to 2008. Age UK draws a silver graph and another graph, and the two are virtually indistinguishable over that four-year period. I fully accept that, over a two-year period, there will be times when pensioner inflation is higher, and over other two-year periods there will be times when pensioner inflation is lower. I asked for statistics over a long run—over a 20-year period—and there is no evidence that in the long run pensioner inflation is higher on average.
If one thinks about it, there is no self-evident reason why the things that pensioners buy should have little ticking inflation time bombs inside them. It would be strange if that were the case. The hon. Lady is an economist. One could write a textbook on the economic implications of the presumption that pensioners’ goods are more inflationary.
My point is that one could pick any two-year period to find examples to show pensioner inflation that is different to the average. There are bound to be examples. However, over the long run I do not think that there is any factual basis for the hon. Lady’s claim.
Rachel Reeves: Thinking about it for two seconds, one might think that technological sectors, such as electronics, have lower levels of inflation and one would not expect that pensioners would spend such a high proportion of their income on the goods that those sectors produce as younger people would. So there might be reasons why there is higher pensioner inflation. Would the Minister concede that?
Steve Webb: There might be, although presumably one could then argue, “Pensioners tend to spend more of their time at home, so they’ll want a better telly and so they’ll spend more money”. One could speculate on all these things. My point is that the evidence—the factual evidence collected over 20 years—does not substantiate that claim. The hon. Lady could pick a random two-year period to show something, but I could pick a two-year period where the opposite would be true.
Finally, the hon. Lady asked about the impact on means-tested benefits. We are over-indexing the pension credit, so we are linking the pension credit to earnings and earnings rise faster than prices. Clearly, therefore, any price-indexed benefit over time might mean at the margins that there will be slightly more expenditure on means-tested benefits. The impact will be relatively modest. We have not made estimates of the impact, but because we are earnings-indexing the pension credit it stands to reason that anything—whether it is CPI-linked or RPI-linked—will have a slight tendency, as people get older, to be drawn within the scope of means-tested benefits.
Drawing those threads together, we are proud to confirm our support for the ongoing work of the pension protection fund. We value the work of the board and the security that that gives to occupational pensioners. We also stand by our commitment to the financial assistance scheme—more than 1,000 schemes, as the hon. Lady said, for people from age four to 104 to receive pensions that they might not otherwise have got. We assure campaigners that we intend to stick to the scheme in the future.
|©Parliamentary copyright||Prepared 15th March 2011|