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Todays regulations include a further protective measure to deter trustees who are allowed to purchase annuities from buying annuities with enhanced annual increases. Currently, the FAS calculates a top-up payable for life, based in most cases on the annuity rate that will come into payment at the members normal retirement age. Thus, if an indexed annuity is secured that starts at a lower initial rate than a flat-rate annuity, the member will stand to receive a higher amount of assistance than he would have done had a flat-rate annuity been secured. Given the relatively low position that general indexation occupies in the priority order for non-pensioner members, we would not expect trustees in most circumstances to secure deferred annuities with annual increases. However, scheme rules may allow trustees broad discretion over purchasing increases, and we understand that trustees are not always bound to match the way in which assets have been allocated under the priority order when purchasing annuities. For these reasons, we do not believe that current legislative powers are sufficient to control selection against the FAS.
Allowing trustees to purchase generous indexation would increase the FAS assistance payable and increase the costs of the FAS as currently configured and therefore affect the capacity of the Government to deliver increased benefits in response to the Young review. Under the proposed change to the FAS, the scheme manager will be given the necessary powers to redetermine the annuity rate in cases where that annuity rate has been secured with annual increases that he considers to be unreasonable. We believe that this should deter trustees from playing the system and taking advantage of the money the taxpayer is committing through the FAS to secure unreasonable increases for their members. The regulations also introduce a number of amendments linked to the calculation of FAS payments, the recovery of overpayments and the provision of information. These are necessary to provide essential clarification of certain aspects of the FAS, and to ensure that it operates effectively.
Much criticism of the FAS has focused on the number of people whom we are currently paying. Too few commentators acknowledge that the main barrier to making more payments is not the Financial Assistance Scheme operational unit but getting the right information from trustees.
Despite those difficulties, the operational unit has received and dealt with almost 400 applications from pension schemes and, as of 7 December this year, 3,540 cases were in payment and a further 1,223 members had been assessed and are likely to become eligible for payment once they reach 65. Those payments are making a real difference to the lives of people, many of whom had given up any hope of enjoying the retirement for which they had saved.
I remind the Committee that, despite press criticism, FAS has received favourable comments from pension scheme members who had despaired of
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I acknowledge that, in its earliest days, legitimate questions were raised about whether FAS was delivering the outcomes we had hoped for. Those questions have now been scotched. I emphasise once again the professionalism and commitment of FAS operational unit staff in working with schemes that may have inadequate records and where members may have long since abandoned hope of seeing anything of their pension. I can assure the Committee that the operational unit is already working closely with trustees to ensure that schemes that benefit from changes to the rules relating to scheme eligibility can provide the necessary data and supporting information to the FAS operational unit as quickly as possible.
The regulations ensure that the FAS continues to operate effectively and provides assistance to more of those scheme members who face the most significant losses. In my view, the regulations are compatible with the European Convention on Human Rights, and I therefore commend them to the House. I beg to move.
Moved, That the Grand Committee do report to the House that it has considered the Financial Assistance Scheme (Miscellaneous Amendments) Regulations 2007. [3rd Report from the Statutory Instruments Committee].(Lord McKenzie of Luton.)
Lord Skelmersdale: The Grand Committeethis very large Grand Committeewill be grateful to the Minister for introducing the order, which gives effect to yet more changes to the FAS announced during the Budget in March this year.
Towards the end of his comments, the Minister told us of the grateful recipients of FAS money. We can all understand that, but we must remember that the Government set up FAS in the first place in response to a threatened rebellion from their Back Benchers in another place, who knew then that a large number of pensioners had been misadvised over many years to invest in a pension, only to find that their pension fund was bankrupt and that they would get nothing.
Added to thatI cannot resist saying this, and I am sure the Minister expects itwas the Prime Minister's first Budget, which removed £5 billion a year from the pension savings of all pensioners. In the spirit that is supposed to surround Christmas, I am
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When we were discussing what became the Pensions Act 2004, it was believed that about 66,000 people had lost all or most of their pensions. The Government inserted a new clause in that Act to cover members of qualifying defined benefit occupational pensions schemes which started to wind up between 1 January 1997 and 5 April 2005. All this, and the scheme as it has developed, is very well explained in the Explanatory Memorandum, so I will not weary the Committee with it. However, I would make the point that only £400 million was originally set aside to pay the pensions in question, which would amount to only 80 per cent of the core pension, or £12,000, whichever was the higher.
The term core pension was invented by the Government. It amounts to about 60 per cent of the money value of the expected pension. Since this has reduced to 80 per cent the net result is around half the expected final pension. Even if the money had been sufficient to achieve this, which it soon proved not to be, the amount of pension an individual would receive was to be far short of what they could expect had their scheme not wound up, and hence not fall within the remit of the financial assistance scheme. Over and above this, no payment would be made if the amount due was less than £10 a weekI assume for rather shaky administrative reasons. Why are they shaky? It is because state benefits often pay out less than £10 a week. This order removes this de minimis amount, which begs a question. Of the current recipientsI believe that the Minister gave the figure of 3,540how many get £10 or less a week? While we are at it, I know that in February this year, payments were being made to only 950 people, so I congratulate the staff of the FAS on acting on information received from trustees at last in a prompt and proper manner.
I cannot help wondering whether doing away with the de minimis amount altogether is entirely sensible. The sum of £10 will make a significant difference to the income of many of the pensioners involved, with which I am sure that the Minister would agree, but would 50p or £1? I recall that everyone has complained aboutbut no one has done anything aboutthe 25p a week allowance for state pension recipients more than 80 years old. I am awaiting the Governments announcement on this, although I might die before I get it.
Be that as it may, my party said at the time that the original £400 million over 20 years was not nearly enough. When a couple of years later it came to light that the number of potentially eligible payments under the FAS was more like 125,000, we were proved right. All parties, not least the pensioners action
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Over the past two years pressure has continued to grow. In his last Budget, the Chancellor announced yet another increase in the FAS pot; another £5.7 billion over the new 60-year life of the scheme. These figures are my appreciation, because I cannot work out whether it has become a cumulative amount or whether there is another method of calculation. I am sure that the Minister, having a background as an accountant, will be able to answer me on that. Whatever the amount isI expect, with a bit of luck, that we will get the answer soonthis total pot would be spent on giving all qualifying members a maximum of 80 per cent of their core expected pension or £26,000 a year indexed, as we have just heard, to todays cash value. This is very curious terminology.
People do not expect the core, but they will get it none the less. Even after the Budget announcement, we have seen angry, naked pensioners demonstrating about this. As the Minister knows, they want 90 per cent of their pension, so that it would equate with pensions paid out under the Pension Protection Fund where there is no core pension arrangement. The Budget announcement, and now this order, constitute a ratcheting up of the FAS pot. The £400 million to be spent over 20 years does not stand up in comparison with £1.9 billion over 60 years, both in cash terms. None the less it is not muchaveraging out at just over £31.5 million a year at todays prices.
During our discussions on this years Pensions Bill, Ministers conceded that yet more money could be found by means of the better use of assets of the failed schemes, and if that transpired, the Government would match these amounts pound for pound. They set up, as the noble Lord said, the Young review to investigate. The Minister has commented on the press reports in the past 10 days or so. I am delighted to find out that within the next four or five daysanyway, by close of play on Tuesday, I assumethe Young report will be published, and we will see what truth there was in the press that a row has been going on over the matching of the funding.
Lastly, I have to go back to the core and expected pension because the Explanatory Notes both confuse and conflict the two terms. I should be grateful to have definitions for both terms on the record. Having said all that, I welcome the order, as do tens of thousands of pensioners, but I must warn the Minister that he will be brought to the Dispatch Box again, no doubt kicking and screaming, to produce an even fairer version of the FAS. For how long will we have this annual ritual?
Lord Oakeshott of Seagrove Bay: It is a great pleasure to follow the noble Lord, Lord Skelmersdale, the self-described gentle bullyI think I have heard him say thatand to agree with many but not all of his points. I should be interested if the Minister could tell us who the two anonymous people areFAS campaigners are happy to operate under their own namesbut rather like them, we on these Benches are grateful for small mercies. To that extent we welcome the order as far as it goes. Clearly there are some serious questions to ask about the operation of the FAS and where it is now.
First, there has been a great deal of talklet us be clear that it is a con trickabout the concept of a core pension that has been invented by the Government. Whether it is 80 per cent or 90 per cent of this entirely fictional figure, can I ask the Minister straight out what is the difference between core pension, as the Government define it and the level of benefits to which pensioners would be entitled under the PPF, which is the policy that we on these Benches put forward clearly in our manifesto at the previous election? We are still putting that forward, and would like to know what typically, on average, the difference is. If the Minister is talking about 80 per cent or 90 per cent of core pension, what percentage is that typically of PPF benefits? The debate will be much more honest and open if we can all agree on a definition of that.
Secondly, my colleague, Danny Alexander from the Commons and I were at the vigil outside Downing Street the other night, as I know was the Minister responsible for pensions reform. The people who were there are disgusted by the treatment they have received from this Government. They were kind enough to give me a T-shirt as I passed yesterday. I am glad that I did not have to wear it outside Downing Street on that cold night. I was a little tempted to wear it here today, but my Chief Whip dissuaded me. The Minister should be under no illusions about the deep disgust felt not just by pensioners but by many of us on these Benches.
It is welcome news that the Young report is about to be dragged kicking and screaming into the light. Following the question asked by the noble Lord, Lord Skelmersdale, what does early next week mean? Will the report be published by Tuesday, before the House breaks up? Will there be an opportunity for a debate or a Statement? Surely by now, after the Prime Minister spoke yesterday, the Government have decided what they will do and how that will be properly discussed.
On the administration of the payments, surely by now the Government can see that it makes much more sense to let the PPF, which is a highly efficient, well organised and well established operation, administer the payments under the FAS. We on these Benches argued right at the beginning in 2004, when the Bill was going through the House, how much simpler it would have been if that had been done. It is not too late to do it now. The PPF management has confirmed to my colleague Danny Alexander and me that it is fully able and willing to do that. Will the
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In the Commons, the Minister for Pension Reform sneered at the Sunday Torygraph, as he called it. We have had a few cheap cracks at the expense of the press today. The Sunday Telegraph, among other newspapers, has run a splendid campaign under the editorship of Patience Wheatcroft, who is sadly no longer there, and Liam Halligan. Both have great expertise in these matters and a very strong interest and feeling for the pensioners who have been done. It ill becomes the Government to sneer at newspapers that have exposed the Governments really very sad record on this issue. It would be better if the Government focused on getting payments and justice to these people rather than sniping in that way.
We look forward to the report next week, I hope, before we break up. Again, the Minister in the Commons said that he would be happy to have discussions with members of other parties about whether we should say something over Christmas or whether it would be better to wait until the House returned. We would prefer it to be done next week, and if more money can be found, that money should get through to members as soon as possible.
I have a simple question for the Minister, because he was kind enough to give me a Parliamentary Answer a few months ago to the effect that, in the next 10 years, simply bringing up FAS benefits to PPF levels would cost between £15 million and £20 million a year. What is his latest update on those figures? On that basis, how many minutesI use the word minutes advisedlyof taxpayers funds pouring down the Northern Rock plughole would it take to give the FAS pensioners PPF-level benefits?
I end by asking the Minister whether he has read the excellent publication, Pensions Week, this week? On the front page, under the heading ABI calls for saver trusts in government, Maggie Craig, the director of life and savings at the Association of British Insurers, was quoted as saying that,
Drawing on research conducted for the Department for Work and Pensions, that found 51% of people did not trust the government on pensions, Craig said a huge amount of work needed to be done to improve understanding and confidence.
Frankly, given the way in which the Government have treated the members of the FAS and the robbed pensioners there, I am amazed that nearly half of them have some trust in the Government. I would have thought that the figure would have been much lower, and the Government should accept at last that when they are trying to bring in a scheme to enrol vast numbers of people in this country into saving for a pension, they should at least give justice to the people who have been waiting and sort this problem out once and for all.
Lord McKenzie of Luton: I think I detected a welcome for the regulations in both those contributions, even though there were some reiterated concerns about what has gone before and what may or may not follow.
The noble Lord, Lord Skelmersdale, asked about the withdrawal of payable tax credits from pension schemes and what impact I thought that that would have on failed pension schemes. We have debated this endlessly, as the noble Lord knows. The reality is that that change to the tax system was accompanied by other structural changes to corporation tax, including the reduction of the main rate by 2 per cent and, subsequently, 1 per cent. It looks as though the noble Lord is
Lord McKenzie of Luton: Okay. That structural change in the tax system was particularly focused on the regime which existed before the change, which in effect encouraged dividends rather than retentionone of the issues around an imputation system. It was therefore part of a package of measures to generally create more stability and a better structure for the UK corporate regime. That was part of building stability for the economy as a whole, and part of building a successful framework for corporate Britain. If you look at it in the round, that was the right decision. That reduction in corporation tax in itself gave companies a greater capacity to fund contributions to pension schemes.
I also remind the noble Lord that that structural change was partly something which his Government had done previously. The rate of imputation was always linked to the basic rate of tax and, as that changed, the imputation credit progressively reduced. Therefore, pension schemes under his Government had a progressively smaller payable tax credit to recover for their assets. That was done without any accompanying change in the rate of corporation tax. What really affected pension schemes, as we knowthe Turner commission has emphasised and validated thiswas growing longevity. The phrase of the noble Lord, Lord Turner, was the fools paradise of living with assumptions of asset returns which were not realistic in the long term. That was not helped by the regime which limited the extent to which surpluses could be built in funds, and gave rise to a whole raft of pension holidays under the regime which his Government set in train. A combination of issues affected defined benefit schemes. The experience of the UK is no different to what has happened elsewhere in the world. The demise of defined benefits schemes has been at an accelerated rate in the US compared to the UK. Does the noble Lord wish to intervene?
Lord Skelmersdale: Perhaps, in view of that very impressive but not very happy explanation, I should rephrase my question. Is the Minister saying that the whole packageI accept that it was a packagemade no difference to the income stream of pension
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Lord McKenzie of Luton: Whether it made any difference would depend on which timescale you made the judgment over. Clearly, when you move into an altered regime where the structure of the tax system is different, with lower rates but without the imputation repayable tax credits, all the various components of that would not necessarily have had the pluses and minuses for outcomes at the same point in time. If you look over a period, it was the right decision, and would therefore not have had any significant impact on the assets of pension schemes overall. If you looked at any particular year, whether it did or did not would depend on which year you chose. I do not believe that pursuing that point is genuinely productive in trying to fully understand what happened to schemes. That is very clear from the impressive Turner report which gave us the basis for the key changes that we made this year and will make next year. That was his judgment and the judgment of others as well.
On whether it is done progressively or not, the change made in 1997 was accompanied by a change in the rate of corporation tax. That effectively did not happen when the changes and reductions undertaken by his party took place generally, apart from one exception, with which I will not bore the Committee, when there was a change in the rate of corporation tax because there was a change in the rate of first-year allowances.
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