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In America, the model for the Pension Benefit Guarantee Corporation does not have an explicit government guarantee, but it has the US Secretary of the Treasury and the US Secretary of Labor sitting on its board. Everyone in America knows that that amounts to an American government guarantee. It is really a fiction for the Government to maintain, if they do, that this is an arm’s-length body. The cost of funding by the PPF levy is falling on an ever-smaller number of private sector defined benefit pension schemes, which are shrinking by the day. It is almost like an ever-bigger upturned pyramid resting on an ever-narrower base.

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Will the Minister review with his officials one specific and growing problem? In the past few months following the change in insolvency laws, there has been a great flood of pre-pack administrations in this country—phoenix administrations. He mentioned shuffling off pension liabilities. There is a rash of companies calling in the accountants and setting up a clever scheme whereby, in many cases, they shuffle off their pension fund and property liabilities. They then go into administration and come out again 10 minutes later with the same people in charge, having walked away from their pension liabilities. This serious abuse has developed in recent weeks. I have already taken it up in writing with the noble Lords, Lord Myners and Lord Mandelson, but there is a very significant pension involvement here and I hope that the Minister will also take it up with the noble Lord, Lord Mandelson, whose department is responsible. It is a matter of serious concern as it concerns not only getting rid of pension fund liabilities, but also, in the way it is operating in the commercial property market, it is gravely undermining pension funds and life insurance solvency because it undermines the rental income on which property portfolios depend.

I, too, looked at the report of the debate in the Commons on 18 March. A request was made then for the calculations that have been made and to which the Minister, the right honourable Rosie Winterton, referred. The calculations might better be called scenarios as to solvency under different conditions in the PPF. She gave an undertaking to put them in the Library in so far as they were not “commercially confidential”. I find it hard to see how calculations of that sort could be commercially confidential as they do not refer to individual firms. I hope, therefore, that the Minister can confirm that those forward calculations have now been placed in the Library so that we can all see them. This is a matter of great public concern. We need to see what the conditions and the assumptions are in order to hold a proper, open debate.

In the debate in the Commons, Ms Winterton talked about liquidity. That is not the point. No one is suggesting that the Pension Protection Fund or individual pension funds in this country are going to run out of cash in the near term. The issue for pension funds, which are very long term, is not liquidity because they are not going to run out of cash in the near term, but that they go bust when they cannot meet their liabilities over the long term. That is the problem which people are so concerned about, and is why these calculations are so important.

This is a very testing time for the economy, for pension funds and for the Pension Protection Fund. I encourage the Minister to be as open as possible in a debate that is very serious for the country as a whole.

Lord McKenzie of Luton: I thank both noble Lords who have spoken. The noble Lord, Lord Oakeshott, is right: these are serious times for pensions provision and important issues need to be addressed. I shall try to answer each of the questions that have been raised.

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The noble Lord, Lord Skelmersdale, made a point in passing about the affirmative nature of these orders. He will be aware that to change the current arrangements would need primary legislation, so it looks as though we will meet routinely on this matter.

Lord Skelmersdale: There has been no lack of pensions legislation in recent years.

Lord McKenzie of Luton: Indeed, although I do not think that anything is scheduled to be brought forward in the immediate future. The noble Lord asked me to confirm the numbers, and I am sorry if I went a little quickly earlier. Let me look first at the pension protection levy for 2008-09. It was set at £675 million, part of it as a risk-based assessment and part on a scheme basis at roughly an 80:20 split. In 2009-10, as I indicated, the proposal is for a £700 million levy that is designed to meet the commitment of the PPF to keep the levy in real terms, which is what it does. On the levy ceiling, in 2007-08 it was £804 million, in 2008-09 it was £833 million, and for 2009-10, as we have discussed, it is £863 million. I believe that the odd numbers at the end are derived just from the arithmetic of that percentage increase, but if they are other than that, I shall let the noble Lord know. He also asked about the levy ceiling in 2005-06. No levy ceiling was applied in the first year of the levy.

The noble Lord, Lord Oakeshott, raised important points about recent reports, the 7,800 series, and projections for scheme deficits. As he acknowledged, it is important that we look at those for the long term. Liquidity is the key issue for the Pension Protection Fund. As my colleague said in another place and as was touched on earlier, there is sufficient liquidity in the PPF, even testing it against some quite severe economic scenarios, to continue to pay benefits for many years to come—I think it is about 20 years.

On the request made of the Minister of State, when she said that she would consider what could be done, the data is driven by the PPF and we need to be mindful of its confidentiality, but we are in touch with the PPF to see how that matter might be taken forward.

The noble Lord, Lord Oakeshott, talked about pre-packs and the current trend. It is important to remember that pre-packs require the agreement of all creditors, including the pension scheme, but he is quite right that we need to ensure in all these things that the pension scheme should be treated fairly. He raised an issue that has been raised before: should the Government effectively underwrite the pension protection scheme? We do not believe that it is necessary to do that; we have not been asked to do that by the Pension Protection Fund itself. To underwrite it would be to move us away from the principle that the fund is funded by those who are protected by it. If we went to a government guarantee, we would be drawing other people in to underwrite it.

On the strength of the PPF and the role of the regulator—again, the noble Lord referred to the challenges that schemes and scheme sponsors face—the Pensions Regulator has made clear in a number of pronouncements recently that it is entirely appropriate for trustees to look at reasonable affordability when looking at recovery plans. He subsequently referred more specifically to

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the opportunities of back-end loading plans and, if necessary, lengthened loading plans, if that is what it takes to ensure that schemes are secure.

I have not dealt specifically with the point made by the noble Lord, Lord Skelmersdale, about the current economic situation, but I think that I have dealt with it in my response to the noble Lord, Lord Oakeshott. Currently, the PPF has about £3 billion in assets and is paying out £3.7 million a month in compensation. It was designed to work in a benign environment as well as in the downturn. On the basis of the analyses that have been undertaken, it has enough cash to continue to pay benefits for at least 25 years. Part of its assessment is to keep its promise that the levy should be kept whole in real terms.

Lord Skelmersdale: It should be kept what in real terms?

Lord McKenzie of Luton: It should be kept whole. Last year, it was £675 million. The Pension Protection Fund said that it would try to keep that level for three years, adjusted for changes in prices only.

Lord Oakeshott of Seagrove Bay: Perhaps I may raise one other point that I forgot to cover in my opening remarks. On one high-profile pension, does the Minister share my regret, for this purpose anyway, that the Royal Bank of Scotland did not go bust, unlike so many of its customers, so that Sir Fred Goodwin's pension could be limited to £27,700 a year, as it would have been if he had been in the PPF? Although I do not necessarily expect the Minister to comment on that, does he accept that I believe that there is ample evidence to stop Sir Fred Goodwin's pension now, not least the shocking revelations in the Sunday Times and the Observer at the weekend about misuse of shareholders’ and savers’ funds by Sir Fred and bullying of non-executive directors? That pension should be challenged in the courts and stopped on the grounds of improper authorisation, negligence and, very probably, fraud.

Lord McKenzie of Luton: I am sure the noble Lord will understand that that issue is way outside the matter that is before us today, and I am not briefed on all the detail behind it. In common with most people, one is gravely concerned about someone in those circumstances walking away with a pension fund at that level. I am advised that not all of it would come from a scheme that would be eligible for the PPF, so that would be outwith it in any event. The noble Lord is quite right that for a member of a scheme that went into the PPF and who retired early, if their normal retirement age was after the date on which the assessment was made, the cap would certainly kick in.

I told the noble Lord, Lord Skelmersdale, earlier that the levy was increased by reference to price, but it is not; it is increased by reference to earnings. I apologise for that.

Motion agreed.

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Pension Protection Fund (Pension Compensation Cap) Order 2009

Copy of the Order
7th Report from JCSI

Considered in Grand Committee

5.16 pm

Moved By Lord McKenzie of Luton

Motion agreed.

Financial Assistance Scheme and Incapacity Benefit (Miscellaneous Amendments) Regulations 2009

Copy of the Regulations
7th Report from JCSI

Considered in Grand Committee

5.17 pm

Moved By Lord McKenzie of Luton

The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord McKenzie of Luton): The draft regulations were laid on 11 February. The Financial Assistance Scheme—or the FAS, as I shall refer to it hereafter— offers help to certain people whose defined benefit occupational pension schemes have not provided them with the pension that they were expecting.

In December 2007, we announced a significant extension to the scheme, and noble Lords will recall considering two sets of regulations last year that implemented key elements of those changes. They will also recall that we decided to implement the December 2007 announcement in stages to give priority to the elements that offered the most help to FAS members. I am sure noble Lords will be pleased to know that, as a result of those changes, the FAS now makes payment at 90 per cent of a qualifying member’s expected pension, subject to a cap, from the normal retirement age, subject to a lower age limit of 60.

The FAS also allows early reduced payments on grounds of ill-health and includes certain schemes where the employer is still trading and solvent. As a result, a total of more than £50 million has been paid to 10,556 people so far. It is estimated that around 140,000 people will receive assistance from the FAS in the long term. However, we recognise the difficulties experienced by those who lost their pensions through no fault of their own, and the particular difficulties of pensioners who are unable work due to their ill-health.

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The FAS currently allows early access to actuarially reduced payments for members who are unable work and will continue to remain unable to work until their normal retirement age. The FAS also provides early unreduced access for members who are terminally ill and likely to die within six months. It should be noted that although the rules of many occupational pension schemes allow members to take their benefits before the normal retirement age where they are in ill-health, this facility is generally not available when a scheme has started to be wound up.

The draft regulations include some significant measures in response to representations that we received when we introduced the existing ill-health provisions that a small number of people with ill health leading to significantly reduced life expectancy could be excluded from early access to the FAS under the current provisions because they are more than five years away from their normal retirement age.

We have also responded to concerns raised by campaigners that the actuarial reduction in payments under the current ill health provisions are inappropriate where a person is likely to have a significantly shorter life expectancy due to their severe ill health. I am therefore pleased to present these draft regulations, which will provide for early unreduced access to FAS payments where a person is aged 55 or over and has a progressive disease from which death might reasonably be expected in five years. These payments will be known as severe ill health payments.

In developing a test to identify the people with severe ill health resulting in reduced life expectancy, we considered how best to focus on the people most in need of early payments of assistance. We concluded that the best way to achieve this is via a test in the form that,

This is a novel test that is without precedent in legislation, and we needed to check that it would be fair and operable.

During the development of the test, departmental medical advisers advised that it would be impractical to try and apply a test looking more than five years ahead, due to the lack of reliable survivability data and the need to take into account a large range of factors, such as lifestyle, which could influence a person’s longevity. A range of views were expressed in consultation responses. A number of responses urged the Government to set a test looking 10 years ahead, but they did not provide evidence that this test would be operable or fair. Other responses supported the Government’s approach. I thank all the respondents to the consultation, including private individuals, trade union representatives and members of the Pensions Action Group for their input.

I reassure noble Lords that we do not expect the life expectancy condition to set a cut and dried test. This is not a test of whether someone will die in five years, but one of whether their death within that time is a reasonable expectation. This wording does not mean that a doctor would have to confirm that the prognosis for a person was shorter than five years in order for that person to satisfy the test; rather, that the medical

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condition of the person is such that five years or less would be among the reasonable prognoses that a doctor could give for someone in their situation.

The Government have responded positively to concerns raised by stakeholders and campaigners that a small number of members, who have been severely ill for some time, have been disadvantaged because these provisions have not been a feature of the financial assistance scheme from its commencement. Draft Regulation 7, therefore, makes provisions to put such people back into the position that they would have been in if severe ill health payments had been available since May 2004, when the financial assistance scheme was first announced.

First, severe ill health payments can be paid for periods before the date of application in cases where a person can demonstrate that they would have met the qualifying conditions at an earlier date. This can apply even where a member has now reached their normal retirement age; they will be able to apply for earlier payment of severe ill health payments where they can demonstrate that they would have met the qualifying conditions at that earlier date.

Secondly, provision is made for survivors, or personal representatives, to apply for severe ill health payments for a past period on behalf of any member who would have met the qualifying conditions but who has, unfortunately, died before the regulations came into force.

Thirdly, a scheme member currently receiving reduced ill health payments will be allowed to apply for the new unreduced severe ill health payments where they believe that they would have met the qualifying conditions if the provisions had existed earlier.

I add that the provision to pay for a past period will not be a regular feature of the financial assistance scheme. We have included it solely to allow people to be reinstated into the position they would have been in if the provisions had been a feature of the financial assistance scheme from the outset. Therefore, applications for severe ill health payments for a past period will have to be made within one year of the regulations coming into force.

These regulations also make an amendment to the incapacity benefit regulations. Regulation 2 amends the incapacity benefit regulations to provide that financial assistance scheme payments are treated as pension payments for the purposes of that benefit. This means that half of any FAS payments in excess of £85 per week will be taken into account when calculating entitlement to incapacity benefit. However, this will not affect qualifying members who first became entitled to financial assistance before these regulations came into force.

Finally, noble Lords will be pleased to know that we hope to start making payments to those who qualify by the end of April, subject to the provision of relevant information from members and their medical practitioners. I commend the regulations to the Committee.

Lord Skelmersdale: I referred earlier to having been gently chided, during a previous debate on the financial assistance scheme, for going into a history of that scheme as I saw it. I am going to resist that temptation

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today, probably to the Minister’s pleasure. Suffice to say that the substance of the order is not like that of the scheme itself or the orders emanating from it, where the Government had to be led, kicking and screaming, to do anything at all. This order is a different ball game.

Last year’s order improved the financial assistance scheme yet again, that time to make payments available to people with terminal illnesses and those unable to work through illness up to five years before their normal retirement age. Naturally, their payments would be actuarily reduced at the time of first payment, and, presumably, after their retirement date as well—in other words, throughout their life. Perhaps the Minister will be able to confirm that.

It came to light, though, that there was a problem with a few people who would be excluded from that provision, being too young to qualify. I believe that they did not totally fulfil the illness criterion as set out in last year’s order. I would be grateful if the Minister will confirm that when winding up. The order corrects that in cases where people have significantly reduced life expectancy if they have attained the age of 55 and are suffering from an ailment—the Minister used a technical term that I am afraid I did not catch—of which the prognosis is that they will die within five years. Amazingly, such payments are not to be actuarily reduced. Is this not apples and pears? The long-term ill are to have actuarily reduced payments, under last year’s order, while payments to the longer-term terminally ill are to be paid without such a reduction. That raises a question that I hope the Minister will be able to answer: why?

The second question that arises is what happens when the unfortunate sufferer exceeds his life expectancy of five years. Doctors, after all, are not infallible, and medical science is improving all the time. Do the payments remain the same, suddenly become actuarily reduced or what? Will the recipient perhaps have to reapply? Incidentally, in the Minister’s closing words, when he said he hoped that the first payments would be made by the end of April this year, he did not comment on the fact that the individuals have to apply. That raises the question of how they apply and to whom. Given that when the five years is up they are, or will be by then, almost at, or near, death’s door, I hope that the payments will continue unaltered and unreapplied-for—what a horrible word—until death.

I also note the second part of this order, which says that the payments we are discussing are to be treated as pensions. That has two effects. The first is that if the individual has enough income, the FAS payments will be taxable. The other is that they will go to reduce any incapacity benefit that may have been in payment. Will the Minister reassure me that not only will no one be worse off financially as a result of this but in all cases they will have more money to live on in their declining years? If the answers to my questions are positive, as I hope they are, then this order makes beneficial improvements to the financial assistance scheme and deserves our full support.

Lord Oakeshott of Seagrove Bay: We welcome these regulations. In previous years, regulations of this kind meant that we felt we had to challenge the Government

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on the failings of the financial assistance scheme, which was a sorry saga for many years. That would not be appropriate today, now that we are in the mode of rejoicing over a sinner that repenteth. It is now in a good state. This is a welcome change, and I congratulate the Minister on it.

There is one question of detail. I understand that establishing an individual’s life expectancy in these difficult circumstances will be for the department’s medical advisers, so the regulation says, but the final decision rests with the FAS scheme manager. How do those two things square? Are there situations in which the financial assistance scheme manager will overrule the medical advisers? That would be quite difficult to assess. Is there an appeals process? It could be quite a stressful time. Perhaps the Minister would clarify those points. We believe that the provision applies to only a small number of people. Perhaps the Minister could give an estimate of how many people are affected. There has been serious injustice for a small number of people and we are glad that it has been rectified.

5.30 pm

Lord McKenzie of Luton: I am grateful to both noble Lords for their comments and their support for these proposals. The noble Lord, Lord Skelmersdale, pressed me on actuarially reduced amounts. For someone with ill health, early access to actuarially reduced amounts simply reflects the fact that having access to the arrangements earlier will enable them to have them for a longer period of their life. It is a technique which quite often applies. That is in contrast to someone who has the severe ill health payment, which is predicated on a person having a progressive illness with a life expectancy not exceeding five years. Therefore, not reducing the amount actuarially reflects the fact that they will have it for a shorter period. That is the difference.

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