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The Minister for Pensions (Steve Webb)
I congratulate my constituency neighbour, my hon. Friend the Member for The Cotswolds (Geoffrey Clifton-Brown), on securing this important debate. As he knows, I have taken an interest in the issue, and I met his constituent Dr Nicholson with him in 2013. I have also had a number of meetings with hon. Members and scheme members.
It is important to say, for what it is worth, that I hugely sympathise with anybody who built up pension rights, was expecting a certain pension and then did not get it. Nothing I say subsequently about the Government’s position takes away from the fact that we are dealing with a very unsatisfactory situation that all of us would want to avoid.
Let me go through the points my hon. Friend raised and respond to them as best as I can. The first is the issue of what the legislation meant when it said that the value of accruals in the new scheme had to be “no less favourable”. The scheme people came out of was essentially a civil service-type scheme. That meant the new scheme had to enable people to go on building up benefits that were no less favourable; it did not mean that what was then a private company had its pension deficit, for example, underwritten by the taxpayer indefinitely—it could not have meant that.
Let us suppose that the trustees of a hypothetical privatised new scheme invested recklessly and generated a huge deficit, resulting in insolvency. Would the taxpayer be responsible for the trustees’ actions? Similarly, if investment returns went badly for that private company or other private companies, would the taxpayer be indefinitely on the hook for any deficit? Clearly, that is not what the law meant, and it is not our understanding of what it meant; indeed, the more one thinks about it, the more one sees that it could not have been what the law meant. The law was quite clear that people transferring across had to build up benefits on the same—no less favourable—basis as under the scheme they had left. That was the scheme that was set up, which complied with the legislation.
Geoffrey Clifton-Brown
I understand, and I agree with my right hon. Friend’s point. My point was that, at the time of transfer, the scheme was in surplus. Subsequently, the actuarial valuation proved that insufficient money had been transferred from the mother scheme to the daughter scheme. If insufficient money was transferred, the new scheme was never going to perform to the level the pensioners expected.
Steve Webb
Let me address that point. The first thing to say is that the trustees of the scheme the money went into agreed the transfer values. They could have said, “You’re not putting in enough money to reflect the benefits we are going to have to pay out,” but they signed off the transfer values at the time.
The notion of a surplus is strange, because this is an unfunded pension scheme until the point of transfer. It is just a liability on the Government’s books for decades to come. A flow of contributions has come in, and those are given a notional investment return in the Government books. The concept of a surplus is not what this means in plain language; it is not like the Government were sitting on a pot of money that they hid. Government accounting for public service unfunded pension schemes is very different from that for funded pension schemes, where a surplus has a real meaning. It sounds as though what we are talking about means something when it does not. This is about the way the Government accounts for public service unfunded schemes; it is not that money was held back.
A valuation was done on quite a prudent basis. If the money transferred across had been invested in quite a low-risk way, it would, at the point of transfer—that is the crucial point—have been enough to pay the liabilities that were transferred across. However, the world changed subsequently for this scheme and every other scheme: people started living longer, investment returns over time started falling and, as my hon. Friend said, accounting practices changed. All sorts of things changed, which meant that all sorts of private sector company pension schemes began to face bigger deficits. The AEA Technology pension scheme was not different or unique in that respect. The trustees accepted the transfer value, which was fair for the liabilities that were transferred across, even on a quite prudent basis.
Steve Webb
I wonder if I may make more progress, to be fair to my hon. Friend the Member for The Cotswolds, as I want to respond on a few points.
The money went across; the firm was then private. Clearly, the business went on trading for 15 years or so. An issue arises about whether it was a prosperous, expanding firm where something funny went on, or on the brink of insolvency. I want to clarify what went on; my hon. Friend referred to it in part. In November 2011, the company issued a trading statement saying its financial position was deteriorating, and it was discussing the situation with its banks. In April 2012, AEA Technology’s latest forecast indicated that the company would be insolvent on a cash-flow basis by June 2012.
It can be simultaneously true that a company is recruiting more people and that it has terrible cash-flow problems. If the point is reached where it cannot meet its liabilities, it becomes insolvent. To give a sense of scale, the deficit in the pension fund as of 2011, on a standard basis, was £315 million, and the company could not afford to pay £6 million towards it. That is how bad things had got. So on the notion that somehow that £315 million deficit, which was £450 million on a buy-out basis, was going to be cleared, that was not going to happen.
Pre-pack administration is controversial and difficult and happens only when the options are insolvency with jobs lost and the pension fund going to the PPF, or insolvency with jobs saved and the pension fund going to the PPF. That was the choice. In fact, because of the pre-pack, hundreds of jobs were saved. To make a comparison with a straight insolvency, I am advised that the scheme would have got about £1 million with a routine insolvency, but the pre-pack enabled it to get between £6 million and £8 million.
My hon. Friend is quite right: frankly, when a scheme is £300 million in deficit that will not make any difference, because it is going to end up in the PPF anyway, so the benefit is to the PPF and not the members. However, the Government do not encourage struggling firms to shovel their pension fund deficits off to the PPF and carry on trading. It is allowed only where insolvency is inevitable. Our judgment was that that was the state of the company at the time, and the goal was to save some jobs, because the scheme was going to end up in the PPF anyway.
My hon. Friend asked about PPF benefits, and he is right: it is a compensation scheme. It is not a pension scheme that replaces and mirrors the benefits that were to be provided in the scheme. The reason for that is that the money for the PPF comes from other pension schemes, so any improvement in the benefits under the PPF is a bigger levy on employers who run other pension schemes. We should bear in mind that it did not exist much more than a decade ago. When it was set up, it was decided that it would offer broad compensation—100% above pension age, and 90% below, and indexation post-1997. That is the statutory requirement; schemes must index post-1997, and not pre-1997, and that is why the PPF does so.
My hon. Friend asked whether, because the firm was privatised, it should be made a special case. Of course I sympathise, but on the other hand vast numbers of workers now work for private companies that were previously nationalised. If AEA Technology were to be declared a special case, the pension funds of all the people who used to work for BT or British Airways and all the privatised companies would have to have special arrangements, too, with huge cost implications.
The question about the advice note given at the time is important. I have read the GAD note, and its introduction says, at 1.1.3:
“The note is not intended to suggest that any one course of action is better than any other. This would depend on individual circumstances, and if you are unsure of the most suitable course of action you should seek Independent Financial Advice which would take into account your particular circumstances.”
That was the point of the note. People could leave the money where it was, transfer it across to the AEA scheme or take a personal pension transfer. The note was explicit from the start that it was not designed to lead people down a particular route. In a sense, from the Government’s point of view it did not matter. The Government were going to transfer across the cash value of the rights built up, so they did not care whether people transferred across. There would have been no reason for GAD to write a note designed to lead people to a particular outcome. It would cost the Government the same either way.
Sir Alan Haselhurst (Saffron Walden) (Con)
Does my right hon. Friend understand that the frustration of the pensioners and those of us trying to represent them is compounded by the fact that there seem to be different players in the game, including another Department? We are grateful to him for responding to the debate, but perhaps he could nudge the Department for Business, Innovation and Skills to reply to questions I tabled to try to get further answers for my constituents.
Steve Webb
I am very happy to ask colleagues at the Department to respond to my right hon. Friend’s questions. Obviously, as he said, the issue of PPF is a DWP responsibility, but insolvency policy—pre-packs and so on—is a BIS responsibility, and of course he should get prompt responses to his questions. If my hon. Friend the Member for Reading West still wants to intervene I am happy to give way.
Alok Sharma
I wanted to make the point that people affected by the scheme will be listening to the debate, and the bottom line for them is that what the Minister is saying—perhaps he will correct me if I am wrong—is that no compensation or redress will be forthcoming from the Government.
Steve Webb
Clearly, the Government have set up the Pension Protection Fund. As I have said, more than about 10 years ago, people in the situation we are talking about might have received a tiny fraction of the pension they had been going to get. In the present case, the base calculation for those over scheme pension age is 100%. I take the point about indexation, but it is 100%. It is 90% for those under scheme pension age. That is obviously still a significant part of their pension rights. Clearly, the reduction in indexation is important. I would not play that down.
The other thing to mention—my hon. Friend the Member for The Cotswolds did not refer to it—is that at the moment scheme benefits are capped. There is implicitly a salary cap—a cap on the amount of money that someone can get through the scheme. We legislated during this Parliament, with the support of my right hon. and hon. Friends, for that cap to be raised for long-serving employees. One reason I was keen to do that is if a relatively large pension through the PPF is capped, it may not be because the person in question was a ridiculously high earner; it could simply be because of very long service with that employer. I believe that that is so for many of my hon. Friend’s constituents.
I felt it was unjust that the cap applied quite as brutally as it does in those cases, so we are now working on the secondary legislation necessary to get the cap lifted. It will rise by 3% per year for each year above 20 years of service, so long-serving employees will get a higher cap. We are working on the measure, and if we can get it done this year, we will. I suspect that realistically we are probably looking at this time next year. However, I do not have a pot of money to offer beyond that. Clearly, the PPF is there for all employees of private sector companies.
Geoffrey Clifton-Brown
I am grateful to my right hon. Friend for that announcement, which I think affected scheme members will warmly welcome. I mentioned one other matter: being contracted out from the state pension scheme. Given what has happened to the poor people involved, is there any change that can be made, so that they could be considered contracted into the state pension scheme, and therefore receive additional state pension?
Steve Webb
The challenge is that the flip side of being contracted out is that both the employee and the employer paid a reduced rate of national insurance, so lower state benefits accrue, and the scheme essentially replaces part of the state benefit, up to a certain amount, often called a guaranteed minimum pension. The employee benefits from low contributions and has part of the state pension replaced by the scheme pension. I hesitate to say this definitively, but the vast majority of scheme members will certainly get at least the guaranteed minimum pension, I would expect, through the equivalent—through the PPF, now. I cannot swear that that will be true in every case. It will be very difficult to unwind all of that and to go back and say, “We offset your reduced NI, so we work out how much you and the employer saved by reduced NI; we take account of that and give you a bigger state pension and we net off the saving.” That would be a very complex calculation. I think there are occasions when this sort of thing gets unwound, but they are exceptional, and I would not want to raise my hon. Friend’s hopes.
I want to reiterate my sympathy. I believe that the Government transferred a fair amount of money across at the time and fulfilled their legal obligations to provide matching—at least as favourable—benefits. Obviously, we all regret where things ended up. I do not believe that the company was pressured into pre-pack administration. I believe that at the time that was done to save jobs, which it did. I am pleased that PPF exists to provide at least a safety net, and I hope that my hon. Friends will welcome the fact that we have done what we could to improve it during this Parliament. That will benefit a significant number of people who worked for AEA Technology and unfortunately will not get the full pension that they expected.