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Pensions Bill

The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Hollis of Heigham): My Lords, I beg to move that this Bill be now read a second time.

Most people can expect 20 to 25 years of retirement, and life expectancy grows around a year every decade. Today a quarter of all women will probably live to 93. If those years are to be rich and fulfilling, while in work we need to plan how much to save and when to retire. That means that our pensions, the main vehicle of our retirement income, must be reliable—because they will be relied on.

Between 1979 and 1997 average pensioner incomes grew by 64 per cent in real terms under all governments compared with 36 per cent growth of real average earnings—nearly twice as much. However, while the incomes of the richest fifth of pensioner couples grew by 80 per cent, that of the poorest fifth grew by only 34 per cent, lagging behind the growth in real earnings.

Since 1997, as a Government we have done much for those poorer pensioners who inevitably depend on state pensions. Increases in the basic state pension, the introduction of state second pension and the wraparound of pension credit have all helped to ensure that, compared with the 1997 situation, in 2004–05 the poorest third of pensioner households will be on average £1,750 better off a year in real terms—or an extra £33 a week.

However, our levers for those pensioners with higher incomes and private pensions, even though they may be far short of full prosperity, are less direct. The combination of falling stock markets and falling employer contributions with which to meet increased longevity has destabilised the final salary pension promise. The task of the state is—by encouragement, regulation and reward—to secure the framework of occupational pensions, especially final salary schemes.

In spring 2002, the then Secretary of State for Social Security asked Alan Pickering to look at how the administration of occupational pension schemes could be simplified. Ron Sandler was jointly commissioned by the Chancellor of the Exchequer and the Secretary of State to review retail savings in the same period. A quinquennial review of the Occupational Pensions Regulatory Authority (OPRA) and a National Audit Office value-for-money study into how OPRA worked also took place during 2002.

The outcomes of all those separate reviews show that major themes for pension reform were emerging—reflected in the series of Green and White Papers published by the Government and informed by some 800 responses to its consultation exercise—culminating in today's Bill, which I would now, with your Lordships' permission, like briefly to describe.

Our aim of increased security begins with the replacement, in Part 1, of OPRA with a new non-departmental public body—the pensions regulator. The new regulator will focus on protecting the benefits
 
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of members of work-based pension schemes, concentrating its effort on schemes where it assesses that there is a high risk of fraud, bad governance or poor administration. It is risk focused.

The pensions regulator will inherit OPRA's current powers as well as having a range of new or increased powers that will assist in fulfilling its objective of protecting member's benefits. New powers will include issuing notices that require schemes to take specific action to remedy identified problems within a specified timescale. Failure to comply with such a notice may result in civil penalty.

In addition, the new regulator will also have the ability to freeze a scheme for up to six months in certain circumstances—which is an important new power—thus protecting members' benefits and scheme assets while investigations take place.

There will be an extension to the existing whistle-blowing responsibilities. Currently, that duty applies only to auditors and actuaries. The statutory whistle-blowing obligations will expand to include trustees, fund managers, employers, scheme administrators and independent financial advisers. A separate determinations panel appointed by the regulator would help to ensure that procedures are fair.

Many of the new regulatory functions will be exercisable only by the determinations panel, which is, so to speak, the judicial arm of the regulator. The panel will have power to impose fines for specified acts or omissions. There will be one significant government amendment to Part 1. As I speak, I hope to indicate where the Government will be coming back with amendments, and I am confident that we will lay them in good time.

There will be one significant government amendment to Part 1, which would ensure that the regulator has the necessary powers to combat the practice of pensions' liberation. There will also be amendments to ensure the proper functioning of the regulator's duty to protect the pension protection fund from abuse.

Part 2 of the Bill will establish a brand new compensation scheme called the pension protection fund, which will be run by an independent board to strengthen member security by protecting the pension promise. It will provide compensation in two areas. First, the PPF will ensure that where a company with a defined benefit (DB) pension scheme becomes insolvent and its pension fund is not sufficiently funded—if it is sufficiently funded, there will obviously be a buy-out into annuities—members can be reassured that they will still receive the core of the benefits to which they are entitled.

That will be achieved by providing compensation covering 100 per cent of the original pension promise, subject to PPF rules, for people who have reached the scheme's pension age and to those who are already receiving either survivor's benefits or their own pension on the grounds of ill health. People below that age will receive 90 per cent, subject to PPF rules, up to a maximum capped level of £25,000.
 
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Secondly, the PPF board will also take over the existing responsibilities of the Pensions Compensation Board and can compensate members of both DB and defined contribution (DC) schemes in cases of fraud and misappropriation.

The PPF will be funded by a levy that will be split into three parts. The first part will be the pension protection levy, of which one element will be based on scheme factors, such as the number of members and the balance between active and retired members. The other element will be based on risk factors that are linked to the level of underfunding and other risk factors. In order to reassure levy payers that costs will be minimised for good employers with well funded schemes, the risk-based element will constitute at least 50 per cent of the total charge and will be introduced in due course.

The second part will be the administration levy that will cover the set-up and ongoing costs of the PPF and the PPF ombudsman who will deal with appeals. Finally, the fraud compensation levy will, as now, cover and be paid for by both defined benefit and defined contribution schemes if and when a case of fraud occurs. Since 1997, I think that there have been only three such cases, which suggests that some of the procedures that were set up by the 1995 Act have worked effectively.

The PPF has been designed so that government funding is not required. The fund can, within reason, control its own income through the levy and its own liabilities to ensure that it has enough funds to pay out compensation and reassure its members that they are sufficiently protected. In order to strengthen the level of support that is provided to certain groups, ensure the smooth running of the fund and to clarify the governance arrangements, some additional amendments on the PPF will be tabled and debated in due course.

Those amendments will ensure that the PPF makes effective provision for certain groups, such as divorcees and those with short periods of service. They will also enable the PPF to take account of insurance contracts that are taken out by schemes in an individual's name and will align the priority order on scheme wind-up with the PPF provisions. An amendment will require the board to verify notices that are issued by an insolvency practitioner. Further amendments will mean that the costs of the PPF ombudsman are funded from the levy on eligible pension schemes rather than from a grant in aid and will give the Council on Tribunals oversight of appropriate PPF appeals. There will also be some minor technical and consequential amendments to this and other parts of the Bill, and minor amendments to align with tax changes and the European directive on occupational pensions.

Part 3 will introduce new scheme funding requirements that will replace the minimum funding requirement (MFR) for defined benefit pension schemes. As your Lordships will know, the MFR was introduced by the 1995 Act. It was a one-size-fits-all arrangement. With your Lordships' agreement, we will be replacing that with a scheme-specific approach.
 
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This is a widely welcomed deregulatory reform, which has been developed through extensive consultation with the pensions industry, employers, the actuarial profession and representatives of consumer groups. As I say, there will be scheme-specific funding, which has been almost universally welcomed.

Under the new arrangements, trustees will be required to ensure that an appropriate funding strategy is in place to provide for the benefits promised by the scheme and to put a recovery plan in place where a valuation shows that there is a shortfall. To help trustees fulfil their new responsibilities, the regulator will issue a code of practice to give them practical guidance on their duties and responsibilities in relation to the funding of their schemes.

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