Pensions Bill

Written evidence from the Group Trustees of the Manweb Group of the Electricity Supply Pension Scheme (PB 60)

 

Public Bill Committee – Pensions Bill: submission on proposed statutory override for Protected Persons Regulations

I write on behalf of the Group Trustees of the Manweb Group of the Electricity Supply Pension Scheme (the "Scheme") to set out our formal submission to the Public Bill Committee in relation to the Pensions Bill [1] and, in particular, on its potential impact on Protected Persons (those members of the Electricity Supply Pension Scheme who are entitled to additional pension protection following privatisation under the under the Electricity (Protected Persons) (England and Wales) Pension Regulations (SI 1990/346)).

By way of background, as at 30 September 2012, the Scheme had assets of £883m and a membership of 6,628, comprising 4,343 pensioners, 1,154 deferred members and 1,131 active members. Of the active members, 955 were Protected Persons, and 176 were non-protected.

Submission

This submission is made specifically in relation to clause 24(2) and Schedule 14 of the Bill [2] , which would enable sponsoring employers of contracted-out pension schemes to change the rules of those schemes to adjust members’ future pension accrual or contributions, in order to take into account the loss of an employer’s rebated National Insurance contributions upon the abolition of contracting-out. Clause 24(3) of the Bill contains a regulation-making power, however, which would allow the exclusion of certain descriptions of scheme from the power.

The Trustees’ very strong view is that there should not be a statutory employer override to the Protected Persons Regulations, for the reasons set out below, and that the Government should ensure that this is reflected either by amendment to the Bill or by a commitment to use the regulation-making power accordingly.

Legitimate expectations

Clause 41(2) (d) of the Electricity Supply Pension Scheme ("ESPS") provides that in relation to any Group, any amendment to the ESPS shall be void to the extent that it would otherwise increase the contributions of, or reduce the prospective benefits available to, any Protected Person, unless the change is approved by at least two-thirds of such members. This provision reflects the requirements of the Regulations [3] .

As was stated in Parliament during the progress of the Bill that became the Electricity Act 1989 [4] , the Protected Persons provisions followed a Government White Paper commitment that privatisation would not affect the benefits payable to members of the industry’s pension schemes, and a principle that can be traced back to the "no worsenment" provisions of the Electricity Act 1947. The relevant extract from Hansard goes on to explain how the drafting of the Protected Persons provisions followed "long and detailed consultations with the industry and trade unions".

Any change to allow a statutory override in relation to Protected Persons would therefore involve overriding fundamental and well-established provisions. We do not consider that a sufficient case has been made for changing such a crucial protection under the ESPS and the privatisation legislation. Protected members will have planned for the future on the basis of the existing statutory protections to their contributions and benefits. To override the Protected Persons regime in this way would defeat the legitimate expectations of a large number of members and, we submit, be wholly disproportionate (the specific impact on members and employers is considered further below).

In addition, such a change would suggest that changes to the taxation or national insurance regimes can, in principle, be regarded as justification for allowing employers to unilaterally amend Protected Persons’ pension contributions or benefits. This would be inconsistent with the reasons behind protection having been granted, and with individual members’ longstanding reliance on those provisions.

The relative impact on members and employers

Paragraph 13 of the Impact Assessment to the recent DWP consultation on a statutory override for Protected Persons [5] acknowledged that if a statutory override is introduced, then any changes made "are likely to be detrimental to members’ workplace pension income". The illustrative outcomes in Annex D to that consultation, suggesting potential accrual rate reduction from 1/60th to 1/70th or increases in member contributions of approximately 2.7% of pensionable pay, would on any measure be significant for the individuals affected.

In contrast, the Trustees consider that in the context of the electricity industry as a whole, the potential additional cost to employers, namely 3.4% of affected employee earnings between the Secondary Threshold and the Upper Accrual Point, is reasonable and affordable. The industry is, and can be expected to remain, cash-generative, and of course has access to revenues from electricity consumers. Any impact on employer cost as a result of increased scheme liabilities should also be seen in context: as the Impact Assessment to the DWP consultation suggested [6] , routine movements in bond yields can cause a much bigger change to a pension scheme’s financial position than the loss of contracted-out rebates would.

It is also important to emphasise that Protected Person costs will, by their nature, diminish over time. In the Manweb Group of the ESPS, the number of Protected Persons fell from 1,190 to 955 between 30 September 2009 and 30 September 2012, and this attrition rate can be expected to continue. Given that the abolition of contracting-out is not planned to take effect until April 2016, the impact on employers at that stage (which needs to be weighed against the significant impact on individual Protected Persons who remain) should not be overstated.

Employee relations concerns

We note the argument, canvassed by DWP and others, that there would be employee relations issues if no statutory override is granted. This is based on the premise that protected and non-protected members could be subject to different outcomes as a result of the abolition of contracting-out rebates.

However, both within the Manweb Group and the ESPS as a whole, the co-existence of members with and without protected rights has been a feature of the regulatory framework since 1990. The concerns attributed to employers around communicating or managing different rights, and the suggestion in the DWP materials [7] that not overriding Protected Persons rules would "raise an issue for those employers of… sectionalised schemes with different benefit structures for different groups of employees", would seem to be misplaced. Nor do we agree with the assumption, made at paragraph 49 of DWP’s Impact Assessment and said to be derived from discussions with potentially affected employers, that "employers would not have a differential treatment for protected and non-protected persons."

Lastly, there is an assumption in some quarters (see e.g. paragraph 18 of the DWP consultation) that Protected Persons are a minority of employees and that if there was no override, there would be difficult issues in communicating with the ‘majority’ of employees who would then face an increase in workplace pension costs. However, such an assumption is not borne out in relation to the Manweb Group. As we stated at the beginning of this letter, at 30 September 2012, the Scheme had 1,131 active members, of whom 955 (or 84%) were Protected Persons.

Given that the vast majority of active members are themselves protected, we would argue that the existence of a statutory override, rather than the absence of one, would be more likely to trigger difficult communications issues with the majority of employees.

Non protected persons

In this submission we have concentrated on the position of those members who are Protected Persons, as they comprise the vast majority of the remaining active members of the Scheme. However, the non-protected members have the same expectations and aspirations as their protected colleagues.

Clause 41(2) (e) of the ESPS contains an identical provision to that of Clause 41(2) (d), but for non protected members. So, in relation to any Group, any amendment to the ESPS is void to the extent that it would otherwise increase the contributions of, or reduce the prospective benefits available to, any member who is not a Protected Person, unless the change is approved by at least two-thirds of such members.

We would submit that if any change in the law were to permit the employer to either increase contributions or reduce the benefits of these members, there is no justification for it to override the mechanism which the ESPS already provides for dealing with proposals of this nature. We therefore consider that it would be appropriate for an amendment to the Bill, or drafting under the regulation-making power, to reflect this.

Summary

We note that in the eighth sitting of the Committee on 4th July, the Minister confirmed that the Government is still to finalise its position on the extension of the statutory override to Protected Persons. He also confirmed that Committee’s acceptance of the general power would not preclude regulations from dealing with the issue, following the conclusion of the Government’s deliberations.

Our view is that it is neither fair nor appropriate for legislation to be introduced which would allow employers to override the Protected Persons Regulations to change scheme benefits for members who are Protected Persons. The Trustees are not persuaded of any compelling reason to abandon the essential principles behind the Protected Persons regime. We submit that the actual rights and expectations of all parties would be best preserved by fully maintaining the existing protection.

The pension schemes carried forward from the publicly owned electricity industry in 1990 were, and are, contributory schemes supported by real assets. The current schemes are the successors of the schemes provided on the creation of the electricity boards on nationalisation and for much of their existence, participation for many staff, including protected persons, was a compulsory condition of employment.

We therefore submit to the Committee that it is unacceptable for the present Government to override a promise given in statutory form by a previous government as part of the discussions and negotiations held in the last 1980s prior to the enactment of the Electricity Act 1989 and its coming into effect in April 1990.

July 2013