Pension Schemes Bill

Written evidence submitted by the British Airline Pilots’ Association (PS 06)

Introduction

1.1 The caps placed on compensation when a pension scheme is placed into the Pension Protection Fund (PPF) have an onerous effect on a number of our members, and other professional workers, who have contributed large amounts to the schemes. We would urge the committee to investigate how an amendment to this Bill could be used to relieve this unfair situation by restricting the cap to ‘moral hazard’ cases, or at least significantly increasing the cap.

1.2 This matter is of topical importance as there has been press speculation that a scheme affecting some of our members may enter the PPF. We have no knowledge as to whether this speculation is accurate, but if it were, than the issues raised in this evidence will be very apposite.

Background

2.1 Schedule 7 of the Pensions Act 2004 sets out the basis on which the Pension Protection Fund pays compensation where a pension scheme becomes insolvent following the insolvency of the sponsoring employer, and the scheme is transferred to the PPF. It identifies the people to whom compensation is payable, the basis on which compensation is calculated, and the limits on the compensation that is paid.

2.2 So far as the limits are concerned, in broad terms:

a. Compensation is calculated as 100% of the entitlements of members who had already retired over the scheme's normal pension age when the scheme entered into a PPF assessment period, or who had retired on the grounds of ill-health, and 100% of the entitlements of family members who are entitled to benefits through such members;

b. For other members compensation is calculated as 90% of the members' entitlements;

c. In both cases, the requirements for inflationary pension increases are as specified in the schedule, and that might be at a lower rate than the increases provided for under the rules of the scheme in question; and

d. Except in the case of members and their family who are entitled to 100% of the scheme entitlements, a cap is applied to the benefits that the PPF can pay.

2.3 The cap is set annually by Orders made by the Secretary of State. It increases in line with the general level of earnings. It varies according to the age of the person concerned. Currently, for a 65-year-old the cap is £36,401.19. The cap is applied before the 90% entitlement is calculated, which in effect means that the compensation which a 65-year-old may receive is limited to £32,761.07 (i.e. 90% of the cap).

2.4 The cap was amended by the Pensions Act 2014 so that a higher limit applies if the person concerned had 20 years' or more pensionable service in the scheme: it increases by 3% for each complete year of pensionable service over 20, subject to an overall maximum of twice the standard cap. This amendment, introduced by Section 50 and Schedule 20 of the Pensions Act 2014, has not yet been brought into force.

2.5 The cap does not affect many people; however the impact of the cap on individuals can be catastrophic. It bites if a member had a lengthy period of pensionable service (and therefore a scheme entitlement equal to a greater proportion of final pensionable salary), or if they have a relatively high salary (and therefore a scheme entitlement equal to a proportion of a higher amount).

2.6 BALPA represents pilots who have lost more than 50% of their expected pension, and others who will suffer a substantial loss over their retirement due to a combination of the cap and lower indexation of pensions in payment. This includes a number of former BMI – British Midland pilots whose pension scheme was entered into the PPF fund when the company was bought by International Airlines Group (IAG), the owners of British Airways, in 2012.

Previous consideration of the limits on PPF compensation

3.1 The limits applicable to PPF compensation were discussed at length in Standing Committee B when the Pensions Act 2004 was considered by Parliament. The then Pensions Minister (Malcolm Wicks) explained that:

3.2 The cost issue is important, but the greatest risk to the pension protection fund is, without question, moral hazard-that those with the ability to influence the way in which a pension scheme is run will take less care than they otherwise would because of the new PPF. Scheme decision makers might deliberately undertake certain activities or fail to take action if they know that the PPF will step in 100 per cent. They may make risky investment decisions or not adequately fund their schemes, especially if their employer is in difficulty and they have to make hard choices about where to put the money. Also, others with influence may be less inclined to intervene if they, or their members, will not lose out. We are concerned about moral hazard.

[Official Report, Standing Committee B, 30 March 2004; c. 486.]

3.3 It is clearly important to ensure that people in a position to influence the way in which a pension scheme is run do not manipulate it (or the finances of the sponsoring employer) with a view to benefitting themselves at the expense of the PPF. But imposing a cap on compensation is not the appropriate way to do so because it does not distinguish between members who are entitled to a pension above the level of the cap and who are able to influence the company, and those who are entitled to the same pension but are not in a position of influence. There are other provisions in the Act that deal with "moral hazard" including:

a. Section 38, which enables the Pensions Regulator to require a person to provide additional funds for a scheme if he or she has done something (or failed to do something) which is materially detrimental to the scheme or which reduces the liability of the sponsor to make good any deficit;

b. Section 52, which enables the Regulator to reverse any transaction at an undervalue that reduces the assets of a scheme, where the transaction took place within two years of the sponsor's insolvency;

c. Paragraph 35 of Schedule 7 which says that any rule changes that increase benefits that were made within three years of PPF assessment are to be disregarded;

d. The same paragraph also requires recent discretionary increases to be disregarded;

e. More generally, the Regulator has the power to impose a civil penalty (i.e. a fine) or to ban a person from being a trustee if he or she contravenes any pension legislation or ignores an instruction from the Regulator (an "improvement notice").

3.4 A cap is too blunt an instrument to ensure that people with influence do not act in a manner designed to game the PPF. It hits people who do not have any such influence as well. Concerns about possible misconduct should be specifically addressed at the conduct that causes concern.

3.5 The operation of the cap was also considered in Committee when the last Pensions Bill was before Parliament. The Minister explained that the cap affects less than 1% of people receiving PPF payments, but a need was seen to protect members with pensionable service in excess of 20 years without benefitting:

... the fat cats at the top.

[Official Report, Public Bill Committee 11 July 2013; c. 422]

Conclusion

4.1 We do not represent "the fat cats at the top." We represent pilots who have worked hard and contributed huge amounts to their pension schemes. We think the original, well-meaning intent to prevent wrong-doing has resulted in unfair and unjust unintended consequences.

4.2 We would urge the committee to consider these points during the Bill’s passage through the House. We believe there may be legislative solutions to these areas which Members may be able to offer as amendments to the Bill.

4.3 BALPA is happy to provide further information and detail to supplement this evidence if we are able to do so.

October 2014