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19 Mar 2008 : Column GC37

Grand Committee

Wednesday, 19 March 2008.

The Committee met at quarter to four.

[The Deputy Chairman of Committees (BARONESS PITKEATHLEY) in the Chair.]

The Deputy Chairman of Committees (Baroness Pitkeathley): Before the Minister moves that the first statutory instrument be considered, I remind noble Lords that in the case of each statutory instrument the Motion before the Committee will be that the Committee do consider the statutory instrument in question. I should perhaps make it clear that the Motion to approve the statutory instrument will be moved in the Chamber in the usual way.

Pension Protection Fund (Pension Compensation Cap) Order 2008

3.46 pm

The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord McKenzie of Luton) rose to move, That the Grand Committee do report to the House that it has considered the Pension Protection Fund (Pension Compensation Cap) Order 2008.

The noble Lord said: I shall speak also to the Occupational Pension Schemes (Levies) (Amendment) Regulations 2008 and the Occupational Pension Schemes (Levy Ceiling) Order 2008.

Before turning to the detail of these instruments, I should like to take this opportunity to commend to noble Lords the work of the Pension Protection Fund. The work of Lawrence Churchill and Partha Dasgupta, the body’s chairman and chief executive respectively, and the board and staff of the PPF have within a short time established the PPF as a key and reputable financial institution. When we debated the 2007 versions of these instruments around this time last year, three schemes, with a total of 275 people, had transferred into the PPF. By the beginning of March this year, 21 schemes had transferred into the PPF, with around 9,000 people who are either receiving PPF compensation or due to receive it in the future. By the end of March, the PPF estimates that 50 schemes will have transferred in, providing compensation to 18,000 people. This increase in the numbers is testament to the efforts of the PPF and is welcomed, I am sure, by all Members of your Lordships' House.

I turn to the first instrument for debate: the Pension Protection Fund (Pension Compensation Cap) Order 2008. As noble Lords are aware, a cap on the level of compensation is applied to those scheme members who are below their scheme's normal pension age immediately before the employer's insolvency event. These members are entitled to the 90 per cent level of the compensation when they retire.

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The compensation cap for 2007-08 is £29,928.56 at age 65. When calculating a member's compensation entitlement, the PPF applies the cap before compensation is reduced to the 90 per cent level. This means that the total value of compensation payments for members below normal pension age does not exceed, for 2007-08, £26,935.70 a year at age 65. This amount is adjusted depending on age to ensure that the actuarial value of the compensation package remains the same.

Under the Pensions Act 2004, increases to the compensation cap are linked to increases in the general level of earnings. To increase the compensation cap for 2008-09 we must consider the general level of earnings in Britain. We use the average earnings index published by the Office for National Statistics each tax year. We concluded that there has been an increase of 3.1 per cent in the level of earnings. An increase to the current compensation cap of 3.1 per cent gives a cap of £30,856.35 for the 2008-09 tax year. This means that the total value of compensation payments for members below normal pension age shall not exceed £27,770.72 for the new tax year.

The new cap will apply to members who first become entitled to compensation at the 90 per cent level on or after 1 April 2008. The pension compensation cap order ensures that the level of the compensation cap is maintained in line with the increase in earnings as required under the Pensions Act 2004.

I shall now move on to the second instrument before us: the Occupational Pension Schemes (Levies) (Amendment) Regulations 2008. These regulations relate to the PPF administration levy which funds the day-to-day running costs of the PPF. The regulations substitute new amounts to be used in calculating the amount payable in respect of the PPF administration levy for the financial year starting 1 April 2008 and each financial year after that.

The administration levy for 2008-09 has been set to recoup £22 million, a £2 million increase on the £20 million set last year. I should like to explain to noble Lords why we believe this increase is appropriate. The proposed rates help to recover a collection shortfall of £2.7 million that has built up since the PPF was established. The £22 million also reflects the increased running costs of the PPF as a growing number of schemes undertake the assessment process and transfer into the PPF. I have noted how the number of schemes within the PPF has grown; this growth brings additional costs to the PPF.

We recognise that as more schemes enter the PPF, the cost of administering compensation becomes an increasing proportion of the administration levy. To combat this, we have recently laid the Pension Protection Fund (Prescribed Payments) Regulations 2008 before Parliament. These regulations will provide that the costs of administering compensation shall, from 1 April 2008, become payable from the Pension Protection Fund itself, meaning that the administration levy will no longer be inflated by these amounts—which are estimated at about £2 million in 2008-09. This is consistent with industry practice, where these costs are generally met from the assets of defined-benefit occupational pension schemes.

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These regulations have been welcomed by consultation respondents, including the NAPF. I would like to assure noble Lords that the PPF will ensure that these costs will be presented identifiably in its annual report and accounts for 2008-09 and onwards to ensure appropriate transparency for the administrative costs of the PPF.

The PPF administration levy will continue to fund those administrative costs that are not directly related to the mechanics of paying compensation; for example, the costs of calculating and collecting the PPF levy, the costs of managing the assessment process, and so on. The PPF administration levy strikes a fair balance between the burden on levy payers and the ability of the PPF to carry out its statutory duties. We will, however, continue to work with the PPF to ensure that levy payers get value for money.

In contrast to previous regulations, the figures in these amendments will apply to all future years unless amended further. This means that regulations will not be brought forward in future unless a change in the levy is required.

I turn, finally, to the Occupational Pension Schemes (Levy Ceiling) Order 2008. The pension protection levy is the responsibility of the board of the Pension Protection Fund. It is one of the ways in which the compensation that the PPF provides is paid for. The levy ceiling, the subject of this order, is one of the statutory controls on the pension protection levy. It puts a limit on the amount that the board can raise in any one year. The levy ceiling for 2007-08 was set at £804.45 million. Under the Pensions Act 2004, the levy ceiling is normally increased annually. The increase is usually in line with the general level of earnings in Great Britain in the period of 12 months ending with 31 July of the previous financial year. The Occupational Pension Schemes (Levy Ceiling) Order 2008 uprates the levy ceiling by 3.6 per cent so that the levy ceiling for the financial year ending 31 March 2009 is £833,410,200.

The board of the PPF has determined that it needs to collect £675 million for 2007-08 through the pension protection levy in order to ensure secure funding for people’s compensation. The board has also announced that it intends to hold the levy stable for the next three financial years subject to indexation against earnings and there being no significant changes to the level of risk that the PPF faces.

Finally, I should like to address a query raised in another place, where these instruments were debated on Monday, about the territorial extent of these instruments. Social security and pensions are transferred matters under the Northern Ireland Act 1998. The instruments therefore apply to Great Britain only, as required by Section 323 of the Pensions Act 2004. I understand that the Department for Social Development in Northern Ireland proposes to make corresponding statutory rules for Northern Ireland.

I confirm that I am satisfied that the statutory instruments before us are compatible with the rights in the European Convention on Human Rights. These three statutory instruments provide that the PPF

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compensation cap and levy ceiling are uprated in line with increases in average earnings and that the administrative functions of the PPF are properly funded so that it can carry out the important task that Parliament has given to it. I commend these orders and regulations to the Committee. I beg to move.

Moved, That the Grand Committee do report to the House that it has considered the Pension Protection Fund (Pension Compensation Cap) Order 2008. 12th report from the Joint Committee on Statutory Instruments.—(Lord McKenzie of Luton.)

Lord Skelmersdale: I am grateful to the Minister for introducing these three orders together—which, of course, is exactly what he and I debated at roughly this time last year. But I think that I will yet again have to make a suggestion, as I did on some uprating orders the other day, because the Minister has already given the answer to my first question, which was why the two inflation figures on the level of earnings were different; and obviously I use the term “inflation” somewhat loosely. He explains that the discrepancy of half of 1 per cent was due solely to the starting dates of the period under review for the two different orders. Would it not make sense, therefore, to alter things so that the same period is used for both the compensation cap and the levy? If the will is there, so are the means in the forthcoming Pensions Bill.

The Occupational Pension Schemes (Levy Ceiling) Order does just what the title implies: it sets a ceiling for the Pension Protection Fund—the statutory insurance scheme for direct-benefit pensions, as I like to call it—which, though young, is clearly settling down well. I agree with the Minister on his plaudits. The ceiling is the amount that the PPF may impose by way of insurance premiums. The ceiling was set at £773 million for the year ending 2007, against an estimated need of £575 million. The actual figures should have been produced by now, and it would be instructive to know how accurate those were. These are the figures that the Minister gave us in our debate last year. I ask that especially because last year he told us that there was a historical shortfall in collection during the first two years of the scheme. Has that been sorted out?

Last year the Minister also told us that, on 1 March 2007, three schemes totalling 275 people had been admitted, and that around 66 of those were being paid an average of £3,700 a year. There were 147 further schemes, covering 102,000 scheme members in the pipeline at that stage. The Minister has just told us that the current level of PPF involvement will be 50 schemes covering 18,000 members by the end of March. It seems to have taken quite a long time to get down from 147 schemes to 50 schemes, and I hope the Minister will say something about that when he replies. Clearly, the 147 further schemes that he mentioned on the previous occasion have not yet completed the process of coming into the PPF regime.

The Minister will not be surprised that the problems of Northern Rock figure quite highly this year. That bank is in a state that we would not like any firm with a pension scheme to be in. The 2006

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accounts noted a deficit in the DB scheme that must have become much worse since the bank’s collapse. Does the Minister expect the scheme to be a candidate for the PPF?

4 pm

Lastly, in the past two years, the stock market has bounced about like flotsam on the sea. Almost daily, we hear differing accounts of the surplus or deficit in pension schemes of billions of pounds in either direction. I am sure that the Minister will cross his heart and say that this has nothing to do with the Government, but I will take issue with him because it is. In the past, the Government have prided themselves on rising growth. They cannot very well duck responsibility now that their own forecast of growth in the economy has had to be downgraded by 75 basis points. The result of this is more DB schemes closing to new entrants and, inevitably, a longer queue to join the PPR.

In the Occupational Pension Schemes (Levy Ceiling) Order 2008, the levy consists of two parts: an administrative levy and a risk-based levy. Will the Minister be good enough to tell us how much the risk-based levy will be next year? Even better, will he write to the noble Lord, Lord Kirkwood, and me with the annual amounts of risk-based levy that have been raised so far? It seems obvious to me at least that, as the economy weakens, the risk to DB schemes will increase dramatically. There are already complaints from operators of schemes in deficit who feel they are being charged excessive amounts under the risk-based levy, and the firms who sponsor them and who are already financially weak are having to invest in their scheme’s deficit at the expense of their normal trading activities. This is not a happy situation.

The Minister made a point about Northern Ireland. I had the privilege of being a Minister in Northern Ireland some years ago, and I am well aware that the Northern Ireland statute book is on the whole sacred. I shall debate an order with another Minister early next week on legislation that is not as sacred as the Government like to make out. There will of course be a Northern Ireland order, and I suspect that it will cover points that are identical to those in the orders that we are discussing. Having said that, I do not object to the orders or regulations at all.

Lord Kirkwood of Kirkhope: I am privileged to follow the noble Lord, Lord Skelmersdale, in contributing to these important but slightly technical orders. I concur with much of what he said, but I have some questions for the Minister about the Pension Protection Fund.

I concur with the view that the Minister expressed right at the beginning that Mr Lawrence Churchill and his colleagues have done well. The Pension Protection Fund was set up under the 2004 Act and is a public corporation in its own right. It is possibly only about now that anyone could reasonably expect to get a feel for how the organisation is measuring up to the objectives that were set for it by Parliament in 2004. When the Minister replies, will he say a little more about exactly how the fund is measuring up to

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its responsibilities, particularly in relation to the global budget expectations? It has sources of income over and above the levies. First, it has recovered assets from insolvent employers; the last figures that I saw for last year showed that it had an income of something like £400 million from that source. Secondly, it has assets of schemes that are transferred in; the 2007 figures show that it has £400-odd million from that secondary source. Thirdly, it has investments and returns; the last calculation that I saw was that something like £5 billion in investments were anticipated to crystallise and be available to the fund by the end of the financial year 2008-09. It would be helpful to the Committee in contemplating these orders to get some feel for the updated figures. I guess that they will be audited to the end of March, but if the Minister has any 2008 rather than 2007 figures, that would assist our consideration of the orders.

A couple of other questions flow from some of the issues raised by the noble Lord, Lord Skelmersdale. First, I imagine that there have been staff increases over the last 12 months. I do not need to tell the Minister that the rest of the department is facing Gershon cuts, head-count restrictions and a whole series of other severe financial constraints. Do the Gershon efficiency savings apply to the PPF? Have staff increases occurred over the past 12 months? Are those due to stabilise or can he foresee them increasing in the period beyond which these orders cover?

The noble Lord, Lord Skelmersdale, referred to the fact that the financial context of these orders is very different from last year. It is not just Northern Rock but Bear Stearns and everything that goes with that. The Minister was careful to say that there is a proposal to freeze the levy for the next three years subject to an addition for inflation. He then said that it would not change unless there was a significant change to the long-term risk. I would like some idea of what that means. Let us suppose that the economy really goes upside down. None of us wishes that, but what is really meant by “significant change” to the long-term risk? If significant changes were to occur, I would like to know what they were. I would like an assurance that they would be discussed in the House in circumstances where the economy dictated that they should.

I was in the other place in 2004 when this legislation went through and I have a clear recollection that the Minister has the ability to override compensation payments and some other Pension Protection Fund benefits if he feels it is in the public interest to do so. I would like an assurance that those powers are still available to the Minister should he have to use them if the economic situation worsens in future.

As regards how the protection fund is operating overall, as the number of defined-benefit schemes decreases—I think that we are seeing that in the marketplace—the remaining schemes will obviously attract PPF levies. If there are a smaller number of them, the financial burden will become greater on those that are left. I would like an assurance that the Government have plans to ensure that if economic

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circumstances worsen severely in a short time, there will be a plan B to take account of the fact that this number will decrease and the burden may increase, and the fact that that might be inimical to the whole provision of occupational pension schemes in future.

I turn to the only order that I think is of any significance. The orders that deal with the levy ceiling and the cap are perfectly in order. They are automatic formulations that flow from the inflation figures. However, the Occupational Pension Schemes (Levies) (Amendment) Regulations are slightly more controversial simply because, if for no other reason, the increases that they suggest are in excess of inflation. The Minister sought to address that. I say by way of preamble that the consultation was an extremely good exercise. I commend and acknowledge the Government and department for doing that as it flushed out concerns that should be properly addressed. For example, my understanding is that the levy did not realise all that it was expected to in earlier years, particularly in the last financial year. As far as I can see that is because some of the scheme data were not good. I do not know what that means. Perhaps some of the scheme data were wrong or inaccurate or had to be reformulated in a way that made more sense in terms of the pension fund requirements. I would like further explanation on that. I believe that we were trying to raise £20 million but that we raised only £19 million. That seems to be attributed in some strange way to the incomplete data that were provided. Might that apply to occupational schemes in other ways? Is it a case of the Government shining a torch into corners and discovering that some of these schemes have, if I can use this colloquialism, some quite duff data? That would be a worry. If this is a symptom of a wider level of inaccuracy in the occupational pension scheme industry, Parliament might want to know more about it. I hope the Minister can reassure me about that.

There was an in-year increase of £1.5 million in PPF administration costs in 2007-08, as I read the orders. That has led to an anticipated deficit of around £2.7 million—the Minister said something about that—which has to be carried forward. It is not clear how that anticipated deficit arose. Maybe the levy was set at the wrong level, as I have explained. Maybe it was due to the additional recruitment of staff; if so, as I said, we should be told how many additional staff have been taken on. Maybe it was pay for the work involved in completing the schemes and the compensation process, which I understand takes as long as two years, a pretty challenging period of time to, effectively, wind up an occupational pension scheme. That is the target that was set for the PPF when it was established in 2004, and I get no sense from the orders of whether they have managed to keep the assessment of operations within that timescale. If they do not, that will cause additional costs. It would be helpful if we were told a little bit about the two-year assessment of operations to bring schemes into the Pension Protection Fund.

Having read what is available to the Committee, I am not sure what proportion of the proposed 2008-09 levy relates to final recovery by the DWP of set-up

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costs. The department made it plain that there would be a cost in setting this all up and that it would be clawed back over a period of years. This is the final year of the clawback of the set-up costs, but it is not clear what volume of money is involved because it is presumably non-recurrent. It would be good to know that.

I have a couple of other quick points to make before I sit down. I may have missed this, but I would like to know what has happened to the Occupational and Personal Pension Schemes (General Levy) (Amendment) Regulations. They apply on a wider scale to OPAS, the Pensions Regulator and the Pensions Ombudsman but the regulations should all be part and parcel of the same kind of consideration. Are they still in gestation, or have they already passed? The general levy regulations need to be considered in concert with the three orders that are with us today.

I have a slight problem with rounding errors. This was picked up in the consultation, and it has caused some problems in the recent past. Can we have some assurances that that difficulty has now been identified and dealt with? It could cause problems in the future if it were left to fester.

There is no real explanation of the process of management and scrutiny that leads to the additional costs that are levied by these orders. It is clear to me that the department and the National Audit Office are able to keep an eye on what is going on through annual reports and other reporting processes, but presumably the non-executive members of the Pension Protection Fund board have an explicit role to secure efficiency, transparency and clear checks on how the board is dealing with the public money that is invested in it to do its work.

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