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Mark Lazarowicz (Edinburgh North and Leith) (Lab/Co-op)
It is a pleasure to serve under your chairmanship, Mr Sanders.
The issue that I will address today is complex but it potentially directly affects many hundreds of people throughout the UK, including many people in the Edinburgh and Lothian area. In fact, one of my constituents is affected, and they have asked me to raise the issue in Parliament. I am glad to have this opportunity to do that, because the issue has wide implications beyond those who are directly affected by it.
The issue is complex, and I will therefore have to spend a bit of time setting out the background to it. I am sure that those hon. Members who are taking part in the debate will be familiar with the subject and its history, but many of those listening outside this place will not be so aware, so it will be helpful to set out some background.
Let me start with the history. BMI—British Midland Airways—was, as Members will know, a major UK airline. It operated from a number of UK airports, and that geographical spread across the UK is reflected in the Members who have shown a particular concern about the issue. They are from the Lothian area, from London, from Northern Ireland and from the east midlands itself, where the former headquarters of BMI was situated. I know that all of them have been in correspondence with Ministers over a considerable period.
As Members will also know, from about 2009 the airline went into a complex set of changes of ownership. Those changes were stimulated by a decision of the major shareholder and founder of the airline, Michael Bishop, who is now a Conservative peer, Lord Glendonbrook. He exercised an option that resulted in Lufthansa becoming the 100% shareholder of BMI. However, under UK pensions law, at least as applied by the Pensions Regulator at the time, that did not mean that Lufthansa took on any legal obligation to fund the BMI pension scheme.
In due course, Lufthansa decided to sell BMI. However, part of the condition of the sale that Lufthansa agreed with the International Airlines Group, of which British Airways is a major component, was that responsibility for the pension scheme should be removed from BMI. There was a solution proposed by Lufthansa initially, but it was not approved by the Pensions Regulator, for reasons that I will not dwell upon here; they are not directly relevant to the subject matter of the debate.
In any event, the outcome of all these comings and goings was that the BMI pension fund, and therefore the Pension Protection Fund, received £16 million from Lufthansa. In addition, Lufthansa provided a further £84 million to top up members’ benefits outside the PPF, even though it did not appear to have a legal obligation to do so.
Mr Iain McKenzie (Inverclyde) (Lab)
It is a pleasure to serve under your chairmanship today, Mr Sanders, and I congratulate my hon. Friend on securing this debate. Does it seem to him that that move in this takeover was a calculated one to strip 80% of the pension away from those long-serving employees?
Mark Lazarowicz
Well, that was certainly the outcome in many cases; that was what happened to the pension scheme members. Certainly, it was clear that part of the agreement that Lufthansa reached with the companies taking over the former BMI operation was that effectively the pension scheme responsibility would not go with the airline, which is very concerning and, as I have said, has much wider implications beyond the BMI pension scheme, although I am obviously concentrating on that today.
The arrangement by Lufthansa to top up members’ benefits outside the PPF seems, on the face of it, relatively generous. However, hundreds of staff in the BMI pension scheme will lose substantial sums in pension money, and I understand from the British Air Line Pilots Association that there are now some people in the Monarch Airlines pension fund who are in similar circumstances. Hundreds will lose out. At least 30 of the BMI pensioners and 13 Monarch members will lose more than 50% of their expected scheme pension, and that is taking account of the top-up payments from Lufthansa. Her Majesty’s Revenue and Customs has decided that although those top-up payments do not in any sense compensate for the full loss of pension entitlement, they must be taxed. That decision is wrong, and addressing it is the purpose of raising this issue today.
The tax treatment is, of course, intimately bound up with issues about the PPF, which is a wider problem that the Government also need to address. I will try to tackle both the immediate and the broader issue, in so far as I can in the time available this morning.
The Government response to the concerns that have been raised by a number of members of the BMI pension fund scheme has so far been, in general terms, one of sympathy. They are basically saying, “'Well, the tax rules are the tax rules and they must be applied, and that’s really all there is to it.” However, that is not in any sense a satisfactory response—not in the slightest. Ultimately, the tax rules are what Parliament—we as MPs, and our colleagues in the Lords—decide them to be, and the Government have frequently taken action to deal with other situations where the application of the tax law has seemed unfair or inequitable in its outcome.
For example, a couple of years ago the Government decided to impose VAT on building alterations to listed buildings. However, because that change would have hit churches and other places of worship particularly hard, the Government set up a special scheme to allow grants to be paid to those bodies to pay for the costs of extra VAT. When the Government want to find a way round the rules, they can do so.
On another pensions issue, a very relevant comparison can be made with the case of Equitable Life. In that case, although it appeared that the Government had no legal obligation to pay those people whose pensions had been hit by the Equitable Life fiasco, as a result of political pressure they of course set up a fund to pay out compensation—I think it is £1.5 billion in total—to Equitable Life policyholders, which Members across the House had called for. Of course, the payments to the Equitable Life pension holders will be tax-free, because the Government passed a law to say that that would be the case. Yet the Government are trying to distinguish between the logic behind the Equitable Life scheme decision, and that behind the BMI pension fund scheme decision.
In that context, I will quote a previous Minister, who told the House, or perhaps wrote in a letter—I am not entirely certain—that:
“Following an Independent Commission report, The Equitable Life Act”—
That is, the Equitable Life Pensions Act 2010—
“came into effect in December 2010 authorising the Government to make payments to the Equitable Life Payments Scheme. The Act provides that payments under the ELPS are tax free.”
He said, or implied, that there was a contrast with the BMI case, by going on to say:
“The £84 million payment made by Lufthansa is a voluntary payment intended to compensate BMI Pension Scheme members for the reduction in pension benefits they may face due to the BMI Pension Scheme entering the Pension Protection Fund. Where the payment is made into a registered pension scheme, it is subject to the registered pensions scheme tax legislation. As such, the payments will benefit from receiving tax relief when it is made, but that relief is subject to the normal limits within the annual and lifetime allowances. The ELPS payment and the payment made by Lufthansa are therefore fundamentally different and cannot be compared in this way.”
As I have pointed out, the two cases are “fundamentally different” because the Government passed legislation to make them fundamentally different, and not because they are, in essence, fundamentally different. These are both cases in which people lost out because of circumstances beyond their control, and we have a moral duty as Parliament and as Government to respect that in the case of the BMI pension fund holders as well as in the case of the Equitable Life pension fund holders, and indeed in other cases.
Dr Eilidh Whiteford (Banff and Buchan) (SNP)
I congratulate the hon. Gentleman on securing this important debate and I also apologise to him, because I will not be able to stay for the duration. He is making a really important point about the Lufthansa deal. I share his concern about the individuals affected, but does he agree that there are implications beyond this individual deal for staff of other companies that might seek to do copycat deals?
Mark Lazarowicz
Absolutely. I have made that point already and I will touch on it briefly again. Certainly, this raises much wider issues.
Just as the payments quite rightly made to the Equitable Life pension scheme members were compensation—they were not a direct benefit arising from the scheme—similarly, the BMI pension fund members have lost out through no fault of their own, and I believe they require better treatment. The Equitable Life experience shows that where the Government decide that they want, for political reasons, to compensate those who have suffered adversely through circumstances beyond their control, they can find a way to do so. I believe that they should do so for the BMI pension scheme members.
Mr Nigel Dodds (Belfast North) (DUP)
I, too, congratulate the hon. Gentleman. He is making a relevant and important point about the difference in how Equitable Life payments and these payments are treated for tax purposes. When I wrote on behalf of some people in my part of the world, in Northern Ireland, who are affected by this, the Financial Secretary to the Treasury wrote back:
“As I am sure you will appreciate, HM Revenue & Customs has to apply legislation consistently, and does not have discretion to waive rules passed by Parliament.”
We accept that entirely, but the hon. Member for Edinburgh North and Leith (Mark Lazarowicz) is right to say that the rules are what the Government and Parliament decide. In this case there is inequity and it needs to be addressed.
Mark Lazarowicz
I agree. That is precisely my point.
I ask the Minister to take a number of steps and, if she is not prepared to agree to them today, perhaps she will at least consider them and come back to hon. Members at a later stage.
First, it is right for the Government to ask HMRC to review the application of the tax rules in this case. The trustees of the BMI pension fund did lobby for the rules applying to the then annual allowance limits and the lifetime allowance rules to be disapplied in the case of the BMI scheme, because of the special circumstances of the scheme. I should not have thought that it was impossible for it to review the rules, given the special circumstances, notwithstanding the legislation that applies to pensions more generally.
Secondly, if HMRC will not review the position, I ask the Government to consider legislating to make a change for this particular case. Again, the Equitable Life scheme is a model that can be followed.
Cathy Jamieson (Kilmarnock and Loudoun) (Lab/Co-op)
Will my hon. Friend provide some clarification to help me with questions that I may later ask the Minister? I recall that he questioned a former Exchequer Secretary about this issue in Parliament, who offered to set out more detail in writing. Did my hon. Friend receive that information? Would anything that came out of that be helpful in this debate?
Mark Lazarowicz
The Minister sent me a letter that I think was received by all hon. Members who wrote to him about the issue. It was helpful, but I do not think it added anything particular with regard to the concerns that I am raising.
Thirdly, if the Government are not prepared to change the legislation, I ask them to consider making an additional one-off payment to the BMI pension fund scheme to allow payments to pension fund members to be topped up, to at least allow for the fact that tax has been taken off. A parallel to that is VAT on church buildings: although taxes were increased by the Government, a compensation scheme was set up to pay those churches, allowing them to pay the tax back to the Government. Things like that can be done when the Government want to.
Fourthly, I ask the Government to move ahead as quickly as possible with the proposals to allow an increased cap in the Pension Protection Fund for those with long service in the pension scheme. I am aware that this is a matter for the Department for Work and Pensions and that the relevant Minister has been pursuing it, but I hope that the Minister here today will urge her colleagues in that Department to introduce those changes speedily, to ensure that there is at least some benefit, hopefully to members of the BMI pension fund scheme, and to others, who are losing out because of the cap in the Pension Protection Fund provisions.
At a time of financial pressures, it might be said that it cannot be a priority for the Government to find money to top up pension payments to a group of workers who will have been relatively highly paid during their work life and will still receive a relatively high pension compared with the average paid for by the safety net of the Pension Protection Fund. I can see that argument being made. There might be those who are cynical and will say that, whereas millions were affected by the Equitable Life scheme, only a few hundred people spread across the country are affected here and that, bluntly, that is not going to make a difference in the general election next year. Indeed, that would be cynicism, because there is a matter of justice here: these people contributed to their pension over many years and are now going to receive much less than they expected.
To give an example of the sums lost, let me mention my constituent who raised the matter with me, no doubt because he is so concerned about what has happened. Even allowing for the Pension Protection Fund guarantee, he is facing a shortfall of £700,000 on his pension fund. He will receive about £134,000 from the Lufthansa scheme, so when allowing for the tax taken off the Lufthansa compensation, he will still be almost £600,000 worse off.
Let us bear in mind that the employer did not go bust, and the Pension Protection Fund had to bail out the pensions, as it was set up to do. In fact, the previous major shareholder sold his shareholding at a profit that some have estimated to be in excess of £200 million. He sold it to Lufthansa, which then sold the entire company—or most of it, to be precise: of course, bits of it were disposed elsewhere—to IAG. Lufthansa and IAG are both international airline companies whose fortunes go up and down but, bluntly, in most years their profits number in the hundreds of millions and billions of pounds and euros. These companies have not gone bust.
In the middle of all this activity, where some people and companies are making lots of money, the long-standing former staff of BMI are losing large parts of a pension for which they worked all their working life. Of course, through the levy they are paying to the Pension Protection Fund, other companies are paying the costs of compensation going to the scheme’s members, because the pension fund members are no longer receiving it from pension funds and, therefore, from the companies by which they were employed.
As I have said, there appears to be a similar development in the case of Monarch Airlines. Indeed, there is no reason in principle why this type of arrangement could not apply to other company pensions and to people at any income level, not just those who happen to be higher paid, as with members of the BMI pension fund.
Clearly, there is something wrong here, both in respect of the individuals affected by this case and what is happening more generally with regard to how the Pension Protection Fund scheme is used, and particularly in this case. The situation needs to be remedied. The Government need to act, not just for these pension scheme members, but to ensure that this practice is not taken up increasingly by other companies that see a way of escaping from their pension obligations when they choose to restructure or in other ways change the nature of their business and dispose of parts of their operations.
I have taken some time today, but this is an important issue, not just for those affected by these developments, but more widely. I hope that the Government will respond positively to the points that I have made.
Jim Shannon (Strangford) (DUP)
I appreciate the opportunity to make a small contribution to the debate, Mr Sanders.
I thank the hon. Member for Edinburgh North and Leith (Mark Lazarowicz) for bringing this matter forward. He clearly set out the scene for us all. Hon. Members are here because our constituents have expressed concern. We are aware of people from Northern Ireland who are equally disadvantaged because of what has taken place. This debate is of the utmost importance, because it deals with people’s futures and livelihoods. These are the kinds of issues that Members of Parliament ought to deliberate upon.
In 2012, the parent group of British Airways and Iberia, International Airlines Group, struck a deal with Lufthansa, the then parent group of BMI, to buy the company. The attraction of BMI lay in its control of 9% of the valuable slots at London Heathrow. That sets the scene. The matter then became difficult, and BMI employees found themselves disadvantaged. Originally, they thought the deal was a good one, but it clearly turned out not to be.
The deal saw former BMI staff lose £177 million from their pensions, because it was structured so that IAG could avoid taking on BMI’s final salary pension scheme, which was placed into the Pension Protection Fund. I am deeply disappointed that the Pension Protection Fund has not been able to act strongly on behalf of BMI staff. When the Minister replies, she may wish to address that issue.
That arrangement meant that about 3,700 BMI staff and pilots lost at least 10% of their savings, as the PPF pays only 90% of a pension, up to a maximum of £27,000 a year. The hon. Gentleman gave the example of just one person, which shows the magnitude of the figures.
Mark Lazarowicz
Perhaps I should explain that my understanding is that the Lufthansa compensation was graduated in such a way that those with the biggest pension losses got the least compensation. At the top end, only 10% or 20% of the losses were compensated for, and the rest was lost entirely. Those with long service suffered the worst.
Jim Shannon
I thank the hon. Gentleman for his explanation, which helps to clarify the matter.
As a good-will gesture, Lufthansa agreed to pay £84 million in compensation, which staff were offered as a one-off cash payment or which could be added to a defined contribution pension scheme. However, staff were then informed that any cash payments would be taxed. Clearly, there is an issue there. Lufthansa was also advised that it would not have to pay national insurance on cash payments, even though members of the BMI pension scheme were not direct employees of the German airline.
Understandably, that has caused a lot of frustration among former BMI employees. As far as they are concerned, they worked for x years and paid x into a pension scheme, which they are now entitled to, but because of dealings between the parent companies, they are now to lose out. We are here for justice and fair play for our constituents and for those who have been disadvantaged.
At the time, BALPA, the pilot’s union, said:
“Pilots in bmi are rightly outraged that their pensions are to be significantly reduced. These pilots have invested their careers in this airline, and a large proportion of their salary in its pension scheme.”
That is how its members felt, and they still feel that way, because the issue has not been sorted out.
The BMI Pensions Action Group was set up to seek justice for employees who were disadvantaged by the company buy-over. When the possibility of BMI’s sale first arose in autumn 2011, BALPA sought assurances, and reassuring noises were made by Lufthansa, which said that there was nothing to worry about, and the UK Pensions Regulator said it had powers to hold companies to account. Members of the scheme received no communications after December 2011, when Lufthansa said it was going to retain the pension obligation. Those in the scheme were led to believe that they were okay, but they clearly were not.
Mr McKenzie
The hon. Gentleman is making some good points. I am sure he will agree that the people involved have been shabbily treated. Here we see another example of people being asked to prepare for their retirement and old age, but when they near that point, their pension is ripped from their grasp. Perhaps the Minister could take the issue away—we are talking about 4,000 people, not 4 million—and look again at the issue of taxation being applied to what compensation people have received.
Jim Shannon
The hon. Gentleman’s point is clear. It is disgraceful that those whom we represent have been treated shabbily, to use his terminology. Like the hon. Member for Edinburgh North and Leith and my right hon. Friend the Member for Belfast North (Mr Dodds), I ask the Minister to review the situation, because we are talking about 4,000 employees. The Government did that for Equitable Life, even though they said they could not. Members asked in Westminster Hall for that to happen—every one of us here today was probably here for Equitable Life’s members, and we are here today for the 4,000 BMI workers who have been disadvantaged.
Mark Lazarowicz
The Minister might be nervous about how much we are asking to be given away, and it might assist her if I say that the 4,000 is the figure for all the scheme members, some of whom will have been below the Pension Protection Fund cap. All the members have an interest, and they all deserve justice of course, but those who have been particularly badly hit are relatively few in number.
Jim Shannon
The Minister has been listening intently to Members’ interventions, and we know that she takes all the detail on board and responds. We look forward to her response, and we hope we can get answers to the questions we are asking. If we do, that would be good news.
The Sunday Telegraph said BMI pensioners are facing a “double whammy”. They have not only lost out on payments, but now face tax and national insurance payments on what should be straightforward compensation. That is completely unacceptable, and I am glad that we have the opportunity today to say that on behalf of our constituents and those who have contacted us.
We are dealing with people’s livelihoods in what are difficult financial times. As the hon. Gentleman suggested in his intervention, the figures involved are not substantial financially, but they have an impact on a great many people. In some way, these 4,000 people are disadvantaged. They have conscientiously paid into a pension scheme, only to be told that they will not get as much as they were initially promised or what they are due. To top it off, when they were actually offered cash payments, they were told those would be subject to tax. They were almost dragged into the system, but they then found themselves in a difficult position. We must work with the unions to resolve these issues, because these people are being treated unjustly. There are also implications for other pension schemes.
In conclusion, I implore the Minister to take on board the comments made by the right hon. and hon. Members who have spoken and those who will speak later. On behalf of my constituents and other constituents in Northern Ireland, I ask the Minister to review the situation and give scheme members the moneys they should be getting. That is what justice cries for, and that is what we wish to see.
Graeme Morrice (Livingston) (Lab)
Thank you, Mr Sanders, but it is pronounced “Morris”, although “Morreece” sounds quite posh. As always, it is a pleasure to serve under your chairmanship. I congratulate my hon. Friend the Member for Edinburgh North and Leith (Mark Lazarowicz) on securing this important debate.
This issue remains unresolved, and it requires the Government’s attention. I hope that, through the debate, we can make progress for the sake of those affected. The plight of members of the British Midland Airways Ltd pension and life assurance scheme was first brought to my attention by a constituent, Mr Euen Harper of West Calder, who was a pilot. He worked hard over a number of years and conscientiously paid contributions into his pension, but he now faces a set of devastating consequences.
My constituent first expressed deep concern about the scheme back in 2012, when it was placed in the Pension Protection Fund following the decision to sell BMI to the International Airlines Group—a decision that, it should be noted, was between two fully solvent international corporations. That decision has had profound and adverse impacts on the expected pensions of the scheme’s 3,700 members, including those of current pensioners and widows, and it continues to have negative repercussions today.
The most significant of those is the tax treatment of the pension compensation fund offered by BMI’s parent company, Lufthansa. Members not only had to deal with losses to the pensions they worked so hard for, but face being penalised twice by HMRC’s decision to tax the compensation. Jim Snee, chairman of the BMI pensions action group, summarised the scenario that members find themselves in:
“We’ve lost £10, Lufthansa have offered £3 in compensation and HMRC want to tax us on even that small relief!”
The general secretary of the British Air Line Pilots Association, Jim McAuslan, also makes an important point when he refers to it as a double whammy. The decision has added yet another devastating setback to the members’ continuing struggle. I sympathise entirely with those affected and applaud the persistent campaigning of the pilots union and the BMI pensions action group. Indeed, without the action taken by such groups, and the efforts made by hon. Members present this morning, those affected would not have a political voice.
Before making my final point in this brief contribution, it is important to touch on some of the wider issues arising from the BMI pension scheme scandal. While I recognise that this debate is focused on the tax treatment element, the terrible situation faced by members highlights the need for a review of how failed pension schemes are dealt with. It is the view of my constituent and of the chairman of the BMI pensions action group that it is too easy for corporate companies to escape their pension responsibilities. Indeed, a similar situation is currently being experienced by members of the Monarch Airlines pension scheme after it was placed into the Pension Protection Fund this year. It appears that a dangerous precedent is emerging, as it is becoming more common for big corporate bodies to dump their pension scheme obligations. The Government and the Pensions Regulator must do more to ensure that companies cannot manoeuvre their pension scheme responsibilities to the Pension Protection Fund. It is simply wrong that hard-working, innocent members of pension schemes are penalised and that their employers can walk away.
What is evident from my constituent’s story, and that of many others across the country, is the unfairness of the whole situation. The unfairness is most evident among those long-serving members of staff who were due to receive more than £27,000 a year and have now lost 80% of their pension savings. The unfairness means that any chance that members had of receiving a reasonable form of compensation for their grievance has now been dashed. While the compensation offered by Lufthansa is welcome and the tax treatment of compensation for pension cases can be complex, the decision to subject the compensation offered to members of the BMI scheme to income tax is a further blow. It is for that reason that the Government must intervene to get justice for members of the scheme. I ask that BMI pension scheme members are granted the justice of tax-free compensation. I therefore call on the Government to use the powers available to apply discretion in this case. In the same way that the Government granted Equitable Life scheme members tax relief as it was considered the right thing to do, so the Government must do the same in this instance and disapply the rules in light of the treatment of those affected. At the very least, that is what the members of the scheme deserve. I look forward to the Minister’s response.
Finally, I again thank my hon. Friend for raising this important topic. For the sake of all affected, I hope that the matter is resolved speedily.
Mr Andrew Love (Edmonton) (Lab/Co-op)
As always, it is a great pleasure to serve under your chairmanship, Mr Sanders. I congratulate my hon. Friend the Member for Edinburgh North and Leith (Mark Lazarowicz) on securing this important debate.
My hon. Friend raises an important issue on behalf of the employees and pilots in his constituency who have suffered as a result of the collapse of the BMI pension scheme, which entered the Pension Protection Fund in 2012. He talked about the tax treatment of the beneficiaries of those assisted, although I am not sure that “beneficiaries” is the right word to use in this context. The so-called beneficiaries are penalised not only through the tax treatment but by the PPF’s complex rules, checks and balances, which do not operate optimally for this particular group of employees in this particular industry. In fact, they operate harshly.
For example, there is the case of the 51-year-old pilot, a father of three, who will see his pension cut by 44%; or the pilot who has flown for Monarch for nearly 30 years, contributing a significant amount to the company pension fund, who has seen his retirement fund slashed by almost £1.7 million; or the pilot who was just two and a half years away from his planned retirement when he was told that 50% had been wiped off his pension’s value and that a lump sum would not be forthcoming. I ask the Minister, or her colleagues in the Department for Work and Pensions, to take a fresh look at the rules under which the PPF operates. The rules are set by Parliament, and it is through Parliament that those who suffer rightly take up their cause to seek some measure of redress.
With the consent of the Chair, I hope to be able to open out the whole issue to critical scrutiny and to seek the Minister’s support for the difficulties that I shall illustrate and that other hon. Members have illustrated. The problem is not confined to participants in the failed BMI scheme: it looks as though it will also affect the 170 pilot participants and other Monarch ground staff participants in the Monarch Airlines pension fund, which has been under assessment by the PPF since last month. In all, the problem will affect around 300 people, and the problem ranges from the tax treatment of the pensions to the compensation caps operated by the PPF. I shall focus on the compensation cap as it affects the airline industry.
The PPF compensation caps are in place, as far as I understand it, for two main reasons. First, they protect the viability of the PPF itself. The PPF is funded mainly by a levy on its members. Hon. Members will be aware that it is not funded by the taxpayer and that whatever flexibility of treatment for those affected by pension fund collapses I argue for today will not result in any recourse to the taxpayer. I support in principle the concept of compensation caps in order to sustain the PPF, but they were not intended to bear down so harshly on a specific group of workers. Fortunately, those who are particularly adversely affected by the compensation cap are not vast in number. As was indicated earlier, some 3,000 or 4,000 members of the various schemes are affected, and of those some 300 are directly affected by the cap.
Secondly, the compensation cap relates to the concept of moral hazard. The PPF is not designed to be a backstop for those tempted to speculate on or gamble with pension money and then expect the PPF to pick up the bill if their risky ventures do not pay off. I understand and sympathise with that concept as it is right in principle, but why should those who are unable to affect the operation of the pension fund be penalised so harshly? I am not aware that any of the 300 people directly affected were in any way involved with the governance of the pension fund or with high-level business decisions inside the companies concerned, yet in terms of the benefits that they will receive they are being singled out for particularly harsh treatment.
Hon. Members might have noted something in common between the groups of participants adversely affected by those pension schemes: they work for airlines. That is related to the reason the compensation cap mechanism seems to operate so harshly. Thirty BMI pilot members of the scheme and 17 Monarch pilot members face losing more than 50% of the pension income they originally expected. The 67 Monarch pilots alone stand to lose, in aggregate, around £900,000 a year in lost pension, which is an average of £13,500 per pilot per year.
The way in which the PPF operates its cap appears to discriminate against those with shorter working careers: the earlier the retirement, the lower the annual cap is set; and higher compensation awards for long service only kick in after 21 years of pensionable service. The pension cap also operates in a way that is not helpful, given the typical career pattern of pilots in the aviation industry. Pilots normally start their careers in commercial aviation in their late 20s or early 30s, and the normal pension age for Monarch and other schemes is 55 for most pilots. They therefore have far less prospect of accumulating materially more than 20 years of pensionable service.
Only three of the 67 Monarch pilots affected by the cap, for example, have more than 25 years of pensionable service; none has 30 or more years. As a result, many of the 300, although beneficiaries no doubt of membership of the PPF, are left feeling that they have been short-changed and made to pay an unreasonable penalty for no other reason than the career path and pension arrangements available in the aircraft industry. Frankly, such matters are outside their control.
PPF regulations can and do change, often in the interests of equity. Will the Minister undertake to review the issue with her officials and the Department for Work and Pensions to see what can be done to provide a measure of easement? The Pension Schemes Bill is proceeding in another place, so that might be the mechanism through which Ministers choose to make such a change. If that is not possible, perhaps the appropriate Minister will write to me about adjusting the compensation cap, what flexibility the Government have and what amendments, if any, might ameliorate the harshness of existing arrangements. Alternatively, the Minister may ask the Department for Work and Pensions or the PPF to write to everyone taking part in the debate about what consideration the Government have given to the issue and what powers they have to adjust the compensation cap accordingly.
To return to those most severely affected by the compensation cap, the European Court of Justice has expressed the opinion that any compensation restrictions should not reduce the rights of members of an occupational pension scheme to below the 50% level required by the insolvency directive. Will the Minister outline the Government’s attitude to the Court’s judgment and whether as a result the PPF rules will be altered to comply with that view? If so, when?
I am grateful to you, Mr Sanders, for the latitude that you have shown. The matters that I have been discussing primarily relate to the Department for Work and Pensions, but they are the origin of the strong feeling among airline staff that they have been singled out for adverse treatment. I have raised the wider issues of compensation caps as they affect the airline industry, and I hope that the Minister will be able to give a response, or seek one from her colleagues in the Department for Work and Pensions, that will address the patent inequality of the way in which certain pension scheme members are treated under the PPF.
Cathy Jamieson (Kilmarnock and Loudoun) (Lab/Co-op)
It is a pleasure to be in the Chamber this morning, Mr Sanders, and to have you in the Chair once again.
I congratulate my hon. Friend the Member for Edinburgh North and Leith (Mark Lazarowicz) on bringing this important subject before Parliament. Many of us have received representations from our constituents—sometimes relatively small numbers of people in each constituency, but the matter is none the less an important one. It is useful to have the opportunity for a thoughtful debate.
My hon. Friends the Members for Livingston (Graeme Morrice), for Inverclyde (Mr McKenzie) and, most recently, for Edmonton (Mr Love) have given us a wider picture of the impact of the Pension Protection Fund and tax treatment decisions on the individuals concerned. The hon. Member for Strangford (Jim Shannon) also made a contribution, and the right hon. Member for Belfast North (Mr Dodds) and the hon. Member for Banff and Buchan (Dr Whiteford) intervened to make important points that I am sure the Minister will want to respond to as well.
As my hon. Friend the Member for Edinburgh North and Leith said in his opening remarks, many of the former BMI employees who were in the BMI pension scheme have suffered through no fault of their own. They engaged in good faith in the pension scheme, and the decisions taken were not of their making. We are in a quite different situation from some of the other resolutions that have had to come from the Pension Protection Fund, because this does not involve a company going into insolvency—the problem arose largely because the company was sold on. Consequently, the buyers did not have to take responsibility for the pension fund. Again, those are things completely outwith the control of the employees.
As has been acknowledged today, many people might think, “Well, these folks had relatively good jobs and they’ve been relatively well paid”, but there is absolutely nothing wrong with that. The fact that people have been in responsible, well paid jobs, contributing to their pensions in a decent pension scheme, does not mean that if things somehow change or go wrong they have any less right to justice in terms of what they receive in pension. That is the principled position. I fly fairly regularly up and down from Scotland, and I want to know that the people flying and crewing the planes that I travel in—the hon. Member for Strangford might be in a similar position—are well trained, well paid and well looked after for the important job that they do.
As I said, the problem we are discussing was not employer insolvency, as is normally the case when a scheme is transferred to the Pension Protection Fund. We have heard the figures, but the shareholder sold the shareholding for a considerable profit, estimated to be in excess of £200 million. The shareholding was sold on to Lufthansa, which this March announced an operating profit that had risen year on year by 62% to about €1 billion. We are definitely not talking about an insolvency scenario, which makes things a bit different.
We could look at how decisions were reached or how the Pensions Regulator operated, but we are where we are, and we now have to look at the various points that I am about to make to the Minister. What can be done to resolve the tax treatment issue amicably? Perhaps the Minister will answer my question when responding, but what would the financial implications be for the Treasury if it simply resolved the tax treatment in this case? In the global scheme of things, a relatively small number of people might be subject to such taxation, and in order to achieve some equity—my hon. Friend the Member for Edinburgh North and Leith and others have mentioned how the Equitable Life scenario was dealt with—can something more be done to help people?
Another important issue is that we would not want people already in detriment to suffer further detriment because of the taxation rules, which appears to be what has happened with the BMI pensioners. As has been mentioned, the top-up payments that were intended to reduce the detriment are now subject to tax. I am sure the Minister will come back and say, “The tax rules are the tax rules and they have to be implemented.” That is true, but the rules can be changed. In certain circumstances they have been changed and there have been different tax treatments. I have only recently finished dealing with the Taxation of Pensions Bill: we went through a whole Bill to ensure that the way certain things are treated in a tax context can be changed. Where there is a will, there can be a way. That is why I am interested to hear what the financial implications would be. If it is not a huge amount of money for the Exchequer, why can we not resolve the matter in an amicable way? I have a great deal of faith in the ingenuity of officials and Ministers when they want to do something, to go away and find some resources and a way of taking things forward. I hope that the Minister will do that today.
I come back to some of the issues that my hon. Friend the Member for Edinburgh North and Leith raised in his opening remarks. I want to put a number of points to the Minister. My hon. Friend asked the Government to look again and for the HMRC to review the application of the tax rules in this case with specific regard to the annual allowance that might result from the additional tax charge being levied. I would be interested to hear what the Minister is able to say about that.
In her intervention, the hon. Member for Banff and Buchan asked about the implications for copycat deals. Some of the points that my hon. Friend the Member for Edmonton raised are relevant to that. It would be unfortunate to say the least if other companies thought they could somehow avoid doing the right thing by their employees simply by going into the PPF, thereby leaving the problem for others to resolve. As has been said, this is not about increased resources having to come from the taxpayer; it is about the industry taking care of itself, but a degree of equity and fairness has to be looked at in the industry context. Will the Minister, along with her colleagues, look again at the PPF and the rules and ensure that there are no loopholes that incentivise that kind of behaviour, which we would not necessarily think to be a good thing? If HMRC can review that position, I hope the Government will consider the possibility of making necessary changes to the legislation, particularly to ensure that the pension holders affected are not left worse off than they thought they would be at the outset.
I heard my hon. Friend the Member for Edmonton comment on the situation of those in the Monarch Airlines scheme. I am grateful to him for bringing that to our attention in the detailed way he did. I was not fully aware of all those points, and I am sure that the Minister will respond to them. I hope that she will go back to her colleagues in the Department for Work and Pensions to look at the arrangements that have been made to see whether something can be brought forward, even at this late stage, to try to resolve the problems.
In conclusion, we have had a useful debate that has given us information and a number of points on the justice of the situation and the technical details of the taxation system. I particularly press the Minister on the tax treatment of the compensation payments because that is the responsibility of the Treasury, although I recognise that there are wider responsibilities within the DWP. I hope that she will go to her colleagues and assess what she can be done.
The Exchequer Secretary to the Treasury (Priti Patel)
It is a pleasure to serve under your chairmanship, Mr Sanders. I thank the hon. Member for Edinburgh North and Leith (Mark Lazarowicz) for raising this issue in a thoughtful and considered way. I also thank all others Members who have contributed to the debate. In addition to interventions, the hon. Members for Edmonton (Mr Love), for Strangford (Jim Shannon) and for Livingston (Graeme Morrice) made considered contributions.
It is fair to say that this is a serious and important issue. Members have rightfully raised their points and concerns on behalf of their constituents in a considered way. As the hon. Member for Kilmarnock and Loudoun (Cathy Jamieson) just said, these are serious concerns about people’s pensions. These individuals have done the right thing by saving and investing in their pensions. That is right and proper, and they have had the opportunity to do that through an employer’s scheme, which is to be commended. Not only the Government, but all Members are concerned when we hear about issues of this nature.
I start by putting the debate into context from a Treasury point of view. The subject reaches into the territory of the Department for Work and Pensions, and I will come on to that, but it would be helpful if I set out the facts of the case as they are known to the Treasury. Following the sale of BMI by Lufthansa, the BMI pension scheme was admitted to the Pension Protection Fund. Admittance to the PPF for a particular scheme is not a matter for Her Majesty’s Treasury, but for the PPF and the Pensions Regulator. Members will appreciate that I cannot comment on the details of that decision, but I will, as all Members here today have asked, follow up with the Department for Work and Pensions on that. I will also pick up on the point that the hon. Member for Edmonton made on the pensions cap. As he suggested, I will ask for a response on the points highlighted about the DWP, the cap and the Pensions Regulator to be sent to every Member who has contributed to today’s debate.
The PPF provides compensation to members of eligible defined benefit occupational pension schemes. The PPF provides two levels of compensation depending on a member’s circumstances at the time the scheme enters the fund assessment period. The first is for members who have reached their scheme’s normal pension age or are already in receipt of a survivor’s pension or a pension on the grounds of ill health. The second is for the majority of people below their scheme’s normal pension age. Those members are entitled to 90% of the compensation and are subject to the compensation cap, as has been outlined. The PPF rules and restrictions apply to all members, which means that they will not receive all the pension benefits they anticipated. However, while the PPF strives to award compensation fairly, compensation relating to pensionable service before April 1997 does not increase in line with inflation each year, so compensation may not equate to the full value members would have received had their scheme not been admitted to the PPF.
As has been discussed, to compensate BMI pension scheme members for the loss in expected benefits, Lufthansa offered to make an £84 million voluntary payment either as cash payments to the members or into another registered pension scheme on their behalf. The debate is about the tax treatment of that payment. Retirement benefits are subject to tax when they are received, so one would expect the £84 million payment to be taxed.
It may be helpful for me to set out how the tax treatment changes depending on how the payments are made. Where pension schemes can make cash payments to individuals, the tax legislation clearly sets out how those payments are taxed. Any one-off cash payment would be liable to income tax and national insurance contributions, as they are what are known as relevant benefits. It has been put that those payments cannot be subject to income tax and NICS because the members of the BMI scheme were not employed by Lufthansa. However, it is not because the payments are earnings that income tax would apply, but because they are deemed to be relevant benefits. Cash payments are subject to tax as relevant benefits when, for example, they are paid after retirement in connection with past service, as is the situation in the highlighted cases. Relevant benefits are taxable as employment income, and there does not need to be a direct link between the employer and the payee to establish relevant benefits. There is also no statutory requirement for the benefits to be financed by an employer of the beneficiaries. A scheme for the provision of relevant benefits to employees or former employees of an employer commercially linked to the one financing the benefits will be in the legislation for tax and national insurance contributions.
Where payments are made into a registered pension scheme on behalf of the individuals concerned, there will be a different tax treatment. Members would receive pensions tax relief on their share of the £84 million payment as well as the exemption from national insurance and income tax on the payment they would get with any contribution to a registered pension scheme.
However, the payment to a registered pension scheme could give rise to annual allowance or lifetime allowance charges. Let me explain that further. Pensions tax relief is one of the Government’s most expensive tax reliefs and the gross cost doubled from £17.5 billion in 2001-02 to £33 billion in 2010-11. The annual and lifetime allowance has been set to protect the public finances from that growing cost. However, the Government are still likely to forgo more than £36 billion in tax revenue this year and more than £39 billion in 2016-17.
The annual allowance is therefore designed to strike an appropriate balance between providing financial incentives to encourage and support saving for retirement and the fiscal risk to the Exchequer. Therefore, while there is no limit to the amount any individual may contribute to their pension scheme, there is a limit—the annual allowance—on the amount of tax relief those contributions can attract in any one year.
Tax relief is given on contributions up to £40,000 a year, but any contributions in excess of that limit will be subject to an annual allowance charge. To ease the impact of the annual allowance charge, the Government introduced a carry-forward facility, which allows individuals to make use of any unused annual allowances from the three previous years by offsetting them against excess savings. In many cases, that will result in there not being an annual allowance charge to pay.
As a result, the only people affected will be those whose pension savings over the past four tax years, including their share of the £84 million contribution, are worth more than £190,000 for 2014-15 or £180,000 for 2015-16. If an individual takes pension benefits valued at more than the lifetime allowance—currently set at £1.25 million—when they become entitled to those benefits, they will be liable for the lifetime allowance charge. The lifetime allowance charge is 25% if the excess is taken as a pension or 55% if it taken as a lump sum. As the allowance is set at those generous levels, that charge is likely to affect only a small number of people.
Cathy Jamieson
What estimate has the Treasury made of the number of people who are affected by the lifetime allowance charge and what income will the Exchequer receive as a result of collecting that charge?
Priti Patel
I will come on to that and address other Members’ points as well once I have made some progress. Some individuals may have existing enhanced or fixed protection, which means that they can test their pensions against the lifetime allowance at the time at which those protections were granted. That is subject to no further contributions being made to their pension schemes. As payments from the £84 million will be relievable contributions, members who have existing enhanced or fixed protection would lose those rights if the contribution was made to a defined contribution scheme. Again, only a small number of people will be affected by that.
Individuals will have a choice about how they access their share of the £84 million paid by Lufthansa to a defined contribution pension scheme on their behalf. From April 2015, individuals will be able to access the funds as a lump sum or as a series of payments or they can choose to purchase an annuity or draw-down product, provided that they are aged 55 or older. Alternatively, they could choose to transfer to a different pension arrangement. Payments on pensions will be subject to the individual’s marginal rate of income tax and no NICs will be payable.
I will come on to many of the points addressed in the debate. The hon. Member for Kilmarnock and Loudoun mentioned the costs for those affected. Those will depend on the precise circumstances and how payments are made. Such payments made direct to a scheme will be taxable, but the contributions will receive tax relief up to the normal limits. We do not have an estimate of the total cost to the Treasury should tax charges not be applied, but, as I said, that is dependent on the circumstances of how the payments are made.
The scheme was compared in a number of contributions to the Government’s approach in the one-off payments made under the Equitable Life payment scheme. It is worth highlighting that that scheme was established back in 2011 in response to the parliamentary ombudsman report that identified areas of Government maladministration in respect to the regulation of Equitable Life. The Government accepted the then ombudsman’s report and, as a result, made the ex-gratia payment for the loss stemming from what was Government maladministration at the time. The circumstances surrounding the loss of pensions relief for members of the BMI scheme is not owing to the Government’s maladministration and, therefore, it is not comparable in that sense at all.
The hon. Member for Edinburgh North and Leith as well as other Members touched on HMRC and reviewing rules relating to the annual allowance and lifetime allowance. As my hon. Friend the Financial Secretary has set out, HMRC must apply tax legislation consistently and it does not have discretion to waive tax charges intended by Parliament. The legislation is clear in respect of that: all new contributions into defined contribution schemes are tested against the annual allowance and all benefits are tested against the lifetime allowance.
It is fair to say that this is a complicated matter that is not at all comparable to Equitable Life. The Government are familiar with the case, which has been raised by many Members in the debate today as well as in previous representations.
Mark Lazarowicz
I accept that there is no direct parallel with Equitable Life except in the sense that the BMI pension fund members and others have also been the victims of a regulatory system that did not deliver what it ought to have done in some way. In recognition of that, they too deserve some action by Government. Tax treatment is one suggestion, but the House should be able to take forward other suggestions as well.
Priti Patel
The hon. Gentleman makes a valid point that we have an issue with regards to amending legislation that is meant to apply to all pension savers. We are obviously sympathetic and it is clear that the situation is not satisfactory. I will commit to taking away all the considerations and points raised and I intend to raise them directly with the Department for Work and Pensions, because what has happened and the effect that that has had on people is unacceptable. I am unable to be any more specific than that, because I am looking at this matter from the perspective of tax implications and not the overall implications, which would be done by the Department for Work and Pensions.
Finally, I will address a point made by the hon. Members for Livingston, for Banff and Buchan (Dr Whiteford) and for Kilmarnock and Loudoun about the Pensions Regulator and the PPF. I assure the House that the Pensions Regulator has the power to take action when it feels that there is deliberate manipulation in the affairs of an employer who is effectively seeking to walk away from their pensions liabilities. That is a valid point and the Pensions Regulator has powers to deal with that. It would be wrong for any organisation to seek to do that and it is solely for the Pensions Regulator to address that.
It is clearly not right to seek to offload pension obligations for the wrong reasons. The debate has highlighted that where individuals have done the right thing by seeking to save for the future by investing in their pensions, it is proper that we have the right safeguards in place. As I have said to all Members today, I will look to discuss this matter with the Department for Work and Pensions to see how we can take it further.