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Lord Palmer: Before the Minister gets to his feet, I should also like to ask one more question. Obviously the order corrects a government mistake but what really worries me is that all these producers stand to lose 500 million renewable transport certificates according to the latest figures that I got this morning, which amounts to something in the region of £300 million. Will the Government compensate these growers? I hope that the Minister will give a categorical assurance

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as regards importing ethanol, particularly from South America. When we originally dreamed this up four years ago, it never crossed our mind that we would be cutting down the rainforest, growing sugar, making ethanol and shipping it half way round the world. It was absolute madness. I also look forward to hearing the answer that the Minister will give to the noble Earl.

Viscount Eccles: I think that only 8 per cent of our usage is domestically produced.

Lord Adonis: I am grateful to all noble Lords who have spoken. A large number of points have been raised and I may respond to some of them in writing. We have submitted further evidence to the Merits Committee. The noble Viscount, Lord Eccles, may be aware that I wrote to that committee on 27 February, and that we have been revising the impact assessment, which I hope has given him more information.

There is a big question and a number of little questions. I shall deal with a few of the little questions first. I welcome the noble Lord, Lord Oakeshott, to our debates. The proportion of UK biofuel coming from domestic feedstock is about 8 per cent at the moment. The noble Lord asked me what ester is. I am afraid that I am coming to the limits of my knowledge here but I am told that it is a chemical compound that mimics, or substitutes for, diesel. I say to the noble Earl that we cannot discriminate between different biofuels suppliers, which is why it is so important for us to ensure that we have a sustainable basis for production at the European and domestic levels. I again put on the record that I agree it is extremely unfortunate that the definition of “relevant hydrocarbon oil” in the 2007 order was inadequate for the purpose. It was precisely for that reason that we regarded it as our duty to come forward with this amendment as soon as we could in order to give the confidence that the noble Lord, Lord Palmer, and the noble Viscount seek as regards the future of the biofuels industry.

I think that I can respond fairly robustly to the major question that underpins the debate. It is not the case that we do not see a strong future for the biofuels industry: we do. Indeed, I have met the noble Lord, Lord Palmer, to discuss his interest in biofuel production, as well as quite a number of biofuel suppliers, and I know that they are doing good work. However, to balance the support and confidence that we must give to the biofuels industry with concerns about the environmental sustainability of certain biofuels, we asked Professor Ed Gallagher, the chair of the Renewable Fuels Agency, to look at the whole issue last year. He produced a report that runs to 90 pages and looks at a large number of the issues that have been raised in the debate.

I took the noble Viscount, Lord Eccles, to be criticising the Government for not supplying sufficient information to the Merits Committee. We took it for granted that the Gallagher report would be available to the committee; indeed, we supplied it. It is the most substantial and in-depth assessment that has been made of issues such as indirect land use and the sustainability of biofuels. Perhaps the most useful thing that I can do to indicate

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the Government’s stance is simply to quote from the Gallagher report and its conclusions, which, as I say, were published only last July and formed the basis of government policy on biofuels and the course that we are taking in the ongoing negotiations in Brussels.

In the report’s foreword, Professor Gallagher says:

“We cannot afford to abandon biofuels as part of a low carbon transport future. Equally, we cannot continue producing biofuels”—

“we” means not only UK producers but producers globally—

The report concluded:

“This review concludes that it should be possible to establish a genuinely sustainable industry provided that robust, comprehensive and mandatory sustainability standards are developed and implemented. It further concludes that the risks of indirect effects can be significantly reduced by ensuring that the production of feedstock for biofuels takes place on idle and marginal land and by encouraging technologies that utilise appropriate wastes and residues. A framework for such policies is proposed, but significant challenges remain in the detailed design, implementation and enforcement ... The RFA judgement, based upon the balance of evidence is that if all subsidies and other support for biofuels were removed entirely, this would reduce the capacity of the industry to respond to the challenges of transforming its supply chain and investing in advanced technologies. However, the rate of introduction of biofuels should be slowed until adequate controls are established”.

That is precisely the Government’s policy. It was precisely in response to those recommendations by Professor Gallagher—a good deal of the points raised by the noble Viscount are, as I say, addressed in the 90-page report—that we announced after careful consideration late last year our intention to slow down the rate of growth in the targets for biofuel, to achieve the 5 per cent target by 2013-14 rather than 2010-11, to remain committed in principle to more ambitious targets for 2020, and to have the EU review in 2013-14: all in the cause of establishing a firm and clear policy base on which we could reassure those who have expressed concerns about the environment and give confidence to biofuel producers that we remain committed to the progressive increase in the supply of biofuels—the present generation of biofuels as well as the second generation to which the noble Viscount referred. In doing that we also give confidence to the investors, who, as I well appreciate, are making significant investments in this area.

Lord Oakeshott of Seagrove Bay: I thank the Minister. He may recall that I raised the question of the commitment to the 2020 target. I listened carefully to him, and he said, “We remain committed in principle”. Perhaps he could explain the difference between being committed to a target and being committed to it in principle.

Lord Adonis: I was coming to that point in a moment with regard to the next steps that we will take.

In June this year we will submit an action plan to the European Commission containing indicative trajectories and plans for using biofuels to meet the 10 per cent target under the renewable energy directive, so we remain committed to that target. We have established a cross-sector stakeholder group to help to advise us on how we go forward, and will publicly consult on

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more detailed proposals later this year, including, I stress again, indicative trajectories of the growth of supply after 2013-14. Having met representatives of the industry over recent weeks, I know it is a concern of theirs that there should be a clear trajectory beyond 2013-14 for the growth in the supply of biofuels and it is our intention, when we submit our action plan to the Commission, to publish indicative trajectories beyond that year. The cross-sector stakeholder group, which includes leading biofuel suppliers as well as environmental groups, will be meeting from next month. I hope that, again, that will help us to establish a consensus on the way forward.

The development of the action plan that I have referred to should provide an opportunity for future debate, but also for greater investor certainty. With regard to the order we are debating today, however, I stress again to the Committee that if we do not support this amendment to the RTFO now, the discrepancy that has caused so much concern to suppliers will remain uncorrected. In effect, that would give fossil-fuel suppliers the opportunity to avoid the obligation in future through blending small quantities of biofuel with their fossil fuel. That outcome would damage both the biofuel industry and our efforts to tackle climate change. While we accept that we need to establish as soon as we reasonably can a clear trajectory for further development of biofuels beyond 2013-14, the order is necessary. As I say, it is part of a clear government policy for the development of biofuels. We could not have sought to address the underlying concerns and evidence more thoroughly than we did with the work of the Gallagher committee that was published last year; it is a comprehensive analysis that is informing our negotiating position in Brussels and has led to clear statements of policy that I believe give confidence to the industry about the development of biofuels over the next five years, while in the summer we will be publishing our further indicative trajectory for meeting the 10 per cent target. Taking all these factors into account, I think the order deserves the Committee’s support.

Viscount Eccles: Before the Minister sits down, I accept that that is the conclusion that Gallagher came to, but if you look at his terms of reference—which I am sure the Minister has—you see that he was asked to look at the issue on a global basis, and that is what he did. He did not study what was happening with sugar beet in East Anglia or what was happening about oilseed rape in Yorkshire. There was no UK focus. There is a question mark about tallow, which is not related to the same issues as the sustainability criteria for normal agricultural crops, but so far as I know there is no sustainability issue with UK-grown oilseed rape, nor with sugar beet. If there is, we should be told about it. If the Minister and his colleagues spend the next three years looking at the global issues, what will happen to the industry in the United Kingdom?

Lord Adonis: The point is that we cannot separate out the two because we cannot control where biofuels come from. As the noble Viscount rightly says, there are good and bad biofuels. I have met domestic suppliers of biofuels and I am persuaded that they come into

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the “good” category, but because we cannot control where those fuels come from and this is an international market, it is incumbent on us to see that, as we develop biofuel targets, they take proper account of sustainability concerns, including those about indirect land use. That is no reflection on the domestic suppliers, simply a statement of the necessity that we face to see that the industry as a whole is put on a sustainable basis if we are going to see the significant increase in biofuels that we want so that they can replace fossil fuels. They must do so on a basis that does not have unacceptable negative environmental impacts.

Motion agreed.

Occupational Pension Schemes (Levy Ceiling) Order 2009

Copy of the Order
7th Report from JCSI

Considered in Grand Committee

4.45 pm

Moved By Lord McKenzie of Luton

The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord McKenzie of Luton): In 2002, this Government recognised that members of defined-benefit occupational pension schemes were underprotected if their sponsoring employer failed. That is why we used the Pensions Act 2004 to establish the Pension Protection Fund. It is a statutory fund that protects members of defined-benefit occupational pension schemes and members of the defined-benefit parts of schemes that are a hybrid of defined-benefit and defined-contribution schemes.

The fund pays a statutory level of compensation if the sponsoring employer of the scheme experiences what is called a qualifying insolvency event, such as when a company enters administration; if there is no possibility of a scheme rescue; or if there are insufficient assets in the scheme to pay benefits at PPF compensation levels—broadly, 90 per cent for deferred and active members and 100 per cent for people over normal pension age.

The fund is administered by the board of the Pension Protection Fund, a public corporation. The fund is funded from three sources: the assets of pension schemes that transfer to it, including any recoveries from former employers; a levy charged on the schemes that are protected by it; and investment returns on those assets.

The Pension Protection Fund ensures that members of eligible defined-benefit schemes still receive a meaningful income in place of the pension they worked for and would have received had their employer not experienced a qualifying insolvency event, and the fund of which they are a member is unable to pay benefits at Pension Protection Fund levels.

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The “purple book” published by the Pension Protection Fund and the Pensions Regulator in December 2008 estimates that around 7,400 private sector defined-benefit schemes are protected by the Pension Protection Fund. Since 2005, 112 schemes have been assessed by the Pension Protection Fund following an employer insolvency event. A further 295 schemes, with around 134,000 members, are currently being assessed. At the end of February, 8,215 former scheme members were receiving compensation at an average cost of £4,000. A further 21,653 former scheme members are already due to receive compensation when they retire.

The Committee will be aware that when Members in another place considered these instruments last week, they spent some time discussing the impact of current economic conditions on the PPF. All sides recognised the valuable protection that the PPF offers to scheme members, and explored some important questions about what the future might hold with my right honourable friend the Minister for Pensions and the Ageing Society.

We should be vigilant to ensure that the PPF is able to continue to offer protection to members of defined-benefit pension schemes, and that we take steps to deal with threats to the PPF. That is why, for example, the Pensions Act 2008 extended the powers of the Pensions Regulator and, as the Committee will recall, we were concerned that new business models seeking to offer alternatives to insured buyouts of pension scheme liabilities highlighted the disproportionate risk to the PPF that could arise from mechanisms by which shell employers became sponsors of pension schemes. After careful scrutiny, Parliament agreed that powers were needed to deal with such risks.

Vigilance is needed, particularly in difficult economic times such as these when trustees or employers may well hear siren voices suggesting actions such as transferring pension schemes to shell employers as a way of evading liabilities or otherwise bypassing the controls set out in legislation to limit the PPF’s exposure to claims. The Government have made it clear that pension liabilities should generally be backed by substantive employers or by the regulatory capital held by insurance companies. The Committee will no doubt be glad to hear that the regulator is indeed prepared to act if it considers that trustees or employers are seeking to abuse the system.

I now turn to the draft Pension Protection Fund (Pension Compensation Cap) Order 2009, under which a cap on the level of the Pension Protection Fund compensation is applied to scheme members who are below their scheme’s normal pension age at the point immediately before the employer’s insolvency event. These members are entitled to the 90 per cent level of compensation when they retire.

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 2009-10, we must consider average earnings in Great Britain, as measured by the average earnings index and published by the Office for National Statistics in the 2007-08 tax year, which shows an increase of 3.5 per cent. Such an increase gives a new cap of £31,936.32 for the 2009-10 tax year. This means that

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the total value of compensation payments for members below normal pension age shall not exceed £28,742.69 for the new tax year. The new cap will apply to members who first became entitled to compensation at the 90 per cent level on or after 1 April 2009. The 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 now turn to the draft Occupational Pension Schemes (Levy Ceiling) Order 2009. The pension protection levy is the responsibility of the board of the Pension Protection Fund. The levy ceiling is one of the statutory controls on the pension protection levy. Rather than set the rate of the levy, it restricts the amount that the board can raise in any one year. The levy ceiling for 2008-09 was set at £833 million.

Under the Pensions Act 2004, the levy ceiling is increased annually in line with increases in the general level of earnings in Great Britain, using the rate for the 12-month period to 31 July in the previous financial year. The order before the Grand Committee uprates the levy ceiling by 3.6 per cent, bringing it to £863,412,967. This does not mean that the pension protection levy will increase to the ceiling. The board of the Pension Protection Fund is responsible for setting the actual levy for any year, but it must not set one that is above the levy ceiling. The board understands the pressures that businesses are under in the current economic climate. In August 2007, the board made a commitment to set a levy estimate of £675 million for the following three years, indexed to earnings, subject to there being no change in long-term risk. The PPF has kept this commitment, and announced that it will increase this year’s levy estimate only by earnings, which means that for 2009-10 the levy estimate will be £700 million. However, the annual increases in the ceiling ensure that, after 2009-10, the board of the PPF could in future increase the levy up to the levy ceiling if it considered it appropriate.

I confirm that I am satisfied that the statutory instruments before us are compatible with the European Convention on Human Rights. They provide that the Pension Protection Fund compensation cap and levy ceiling are uprated in line with increases in average earnings.

Lord Skelmersdale: The Grand Committee will be grateful for the Minister’s careful explanation of these two orders, especially the background to them. I have nothing to say about the background to these orders, but I might be tempted to say something when we get to the financial assistance scheme regulations.

As for as the compensation cap provision, it is one of those things that come along like trains every year; perhaps, after the last debate and Question Time, trains are not an appropriate metaphor. Anyway, they come every year and they do exactly the same thing; they uprate by the level of earnings in the previous tax year, as the Government are obliged to do by the Pensions Act 2004, as the Minister said. It is one of the many orders that cause the bee in my bonnet to buzz furiously. I have referred to my objective of downgrading affirmative instruments of this sort many times before; indeed I have given evidence to

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Select Committees from time to time, but I will not labour that point today, except to say that in 2004 we should have made the first order affirmative and subsequent ones negative. Alas, that option was not open to us then, although I am glad to say that the position has now changed, at least as far as the DWP is concerned, and I commend it for that.

All that I would say on that order is that it comes under the horticultural heading that I have referred to before of DDT which, parliamentarily speaking, stands for doing the decent thing. The main subject of this debate, therefore, is the levy ceiling order, as it was in another place last week. I suppose that I should not be surprised that in many cases in his explanation of that order, the Minister has rather shot my fox, but he was speaking so quickly that I did not quite take in the figures that he gave towards the end of his speech. I would be grateful if he would repeat them.

As a rather green participant in the debates on the Pensions Act 2004, I still like to think of the PPF as a statutory insurance scheme for the underfunded pensions schemes whose sponsoring employers go bust. I am aware, of course, that Ministers have always denied this and have said that it is not a pension fund either. It is technically a compensation scheme. To me that is semantics. To all intents and purposes, since it behaves like an insurance scheme, therefore to me it is an insurance scheme. Unusually, it is an insurance scheme with two premiums: one to run the fund and the second a risk-based premium on schemes. We are concerned today with the latter.

This risk premium, or rather the maximum amount that the fund can demand, has gone up by leaps and bounds since we first debated this annual order, and it is right that this is debated every year. For 2005-06, I seem to remember that the levy ceiling was set at £150 million. It has been raised again and again in subsequent years, and now, as the order makes clear, it stands at £863,412,967. I think that that is the exact figure, although the Minister faltered at that point in his speech. This seems to be a very precise sum. Will the Minister confirm that the odd pounds come about because of the increase in the average level of earnings of 3.6 per cent?

Having got that off my chest, this sum of £863-and-a-half-odd million is more than double what was expected when we debated the Bill; that is for the full year after the first year. At that point, it was expected to be some £300 million a year. The Committee will appreciate that that was in the boom years, which of course the then Chancellor of the Exchequer abolished, as he did the bust years. Hubris, we find, has descended on him now that he is Prime Minister.

Be that as it may, indeed is, the situation now is completely different. Unemployment is growing at the fastest pace ever recorded, and now, as the Minister told us last week, it stands at 2.03 million. Firms seem to be going to the wall almost daily—I hope that I am wrong about that—and I venture to suggest that most of them, if not all, will have underfunded pension schemes.

While I appreciate that the levy ceiling has never yet been breached, will this last, or will we see the ceiling increasing yet again to, say, £1 billion by the end of this

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decade, which is only 12 months or so away? The Minister made some reference to that in his speech. Or on the other hand, is he as confident as his colleague in another place on Wednesday last, who gave the impression that there was plenty of money in the fund. If so, is the ceiling too high, or is it precautionary? How is it arrived at? That is where the Minister shot my fox on the figures I was going to ask him about. Will he repeat how close to last year’s ceiling the levy has got? How many schemes currently are within the fund and how many are in the queue? He illustrated how they have changed in the past two years, but I wonder whether I am alone in seeing the absolute importance of comparing from year to year. As I said, I expect the situation to get a lot worse over the next few years.

5 pm

Lord Oakeshott of Seagrove Bay: I thank the Minister for the explanation of the changes. This is a timely moment to ask a few serious questions about the grave position in which the Pension Protection Fund finds itself. The most recent figures were that defined benefit pension schemes in this country, the universe which the Pension Protection Fund is set up to protect and the people who are paying the levies that we are discussing today, had a total deficit of £191 billion, which was up from £48.8 billion a year earlier. I remember well the passage of the then Pensions Bill 2004 when we debated these matters. I also remember well, in 2005, two academics, Anthony Neuberger and his colleague, David McCarthy, wrote an excellent and groundbreaking article in Fiscal Studieson the PPF. Their conclusion, with which I agreed at the time, was that there was a significant chance that the claims on the PPF,

It explained that when they go down, the black holes are bigger. In those debates, I challenged the Government—it was laughed off, but I ask them now whether they are equally confident—about whether the PPF would prove to be a leaky lifeboat sailing on uncharted seas. Never, in my darkest nightmares, did I fear that the economy and pension schemes would collapse in the way that they have over the past five years.

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