Mineworkers’ Pension Scheme

(Limited Text - Ministerial Extracts only)

Tuesday 5th December 2017 Westminster Hall

[The Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy (Richard Harrington)]

It is an honour to serve under your chairmanship for what I think is the first time, Mr Paisley—I hope it will not be the last—and I thank the hon. Member for Blaenau Gwent (Nick Smith) for securing this debate, and other hon. Members for their contributions.

Pensions are complex, and I asked to respond to this debate on behalf of the Government because I was previously the Pensions Minister. Although I was not involved specifically with this case, that role gave me—I hope—an understanding of all aspects of pension funds. The Philip Green case received a lot of publicity, and there are lots of other cases, but this is the first time that I have come across a pension fund in such a situation of surplus, compared with the usual story these days of low interest rates and low returns for investors.

In his eloquent speech, the hon. Gentleman asked whether there were other schemes of a similar nature, and the only one that I have come across—again, this was in my previous role—is the rail workers’ pension scheme, which, as I remember, was significantly in deficit all the time. I have not previously come across this type of circumstance, but if by chance I find other examples, I will meet or write to the hon. Gentleman.

I know that time is limited and the hon. Gentleman may want to respond to the debate, so I will do my best to keep within the time allowed. The mineworkers’ pension scheme is big—it has 177,000 members, pays pensions at an annual cost of more than £800 million, and has assets in excess of £11 billion. It is managed by the trustees. The Government’s role is as guarantor. Officials in the Department meet the trustees regularly to discuss the operation of the scheme. Many hon. Members, including my hon. Friend the Member for Mansfield (Ben Bradley), have also met those trustees—they seem rather more open to meeting than other trustees I have known, which is good. I have not had the chance to meet them, but if I had had, I certainly would have done.

When the scheme was set up in 1952, members contributed no more than 20p a week, and benefits were small. From 1975, contributions and benefits were linked to members’ salaries, with British Coal making up the difference. At privatisation, the Government took on the role of British Coal, and the scheme had a surplus in 1994, half of which was used to enhance members’ pensions immediately, with the other 50% payable to the guarantor. The Government of the day agreed to leave their share of the surplus in the scheme as an investment return. Those arrangements were agreed between the trustees and the Government in their role as guarantor—hence the mineworkers’ pension scheme of 1994. At that time, all parties believed the equal sharing to be a fair settlement—this arrangement did not come about in conflict or anything like that; it was agreed to be a fair way of proceeding. The Government receive their share not because of their guarantor status—that is a big issue in the financial world, because it allows a much greater risk profile than a normal pension fund could have—but also because of the contributions that they have made to the scheme to make up the pool of money. Again, neither of those points are particularly controversial in themselves.

The guarantee means, of course, that however bad the work of the trustees—it is not bad; please do not think I am saying that, but in theory the trustees could be really poor investors who did not do their job—the Government would have to stand by and underwrite the money to pay the pensions. That is what a guarantee would do. We see adverts all the time in which people are lent money with someone else guaranteeing it, but they do not quite say that the guarantor will pick up the bill if the person concerned does not pay. That principle is true in this case. It ensures that guaranteed pensions, including inflation increases, will always be paid, as long as the Government can pay—and hopefully that will be so for the rest of our lifetimes and many more to come.

It is indeed the case that early projections underestimated how well the scheme would perform. It was not expected to perform as well as it has.

[Jonathan Edwards]

How many times since the 1994 deal was struck have the Government had to step in with any cash to bankroll the scheme?

[Richard Harrington]

I think the implication of the hon. Gentleman’s question is that he knows the answer, which I do not, and that it is zero, but I should like to write to him formally, because I do not want to inadvertently mislead anyone. I do not have the information to hand, but if he will bear with me until later today, I shall make sure he gets a letter or email straight away. It is a reasonable question, but, if I may put words into his mouth—although one never should—I think he really means to say that the Government have never been called on to put money in. I think that is a reasonable assumption; the scheme is unlike others, in that respect. However, Governments get a reward, as anyone would, for risk, and just because things are working one way, that does not mean that they always have or always will. I think that most people would accept that. By the way, I heard nothing unreasonable in the speeches that hon. Members made during the debate. There is realism here; it is a question of judgment about what to do with the surplus.

Some hon. Members have argued that the Government are taking money from scheme members. I think the word “robbery” was used, which is a bit inflamed, but I know what it means—that it is something improper. Others say that the pensions would be higher if the Government did not take their share of the surplus. Both those views might be true, but they do not present the full picture, because pensions are paid according to the scheme rules, so that the sums due to scheme members would not change. They could potentially benefit from bigger bonuses if they had a greater share of surpluses, but in that environment the trustees’ investment strategy would be more risk-averse, and returns could be less than they currently are. In any event, would it be fair to ask taxpayers to take all the risk with none of the benefits?

The scheme has been a success, and at least the money is there.

[Chris Evans]

I just have a simple question: what is the cost to the guarantor, compared with the cost of the surplus? How much do the Government need in the pension fund to provide a guarantee on the pensions? Do we know the figure?

[Richard Harrington]

The cost to the guarantor is a contingent cost. It could, in theory, be all the money—the billions in the pension fund. That is the only answer I can give, because, of course, that is what a guarantee is. If one guarantees a loan to a bank, to use the analogy I gave before, it is the whole thing. If the person who has borrowed the money pays back 25% of it, the guarantor pays 75% of it. The principle is exactly the same. However, the scheme in question has been a success, and I would argue, and I think the trustees would agree, that it is the guarantee that made that possible. All the other pension funds—I dealt with quite a few in my previous job—buy very low-risk Government bonds, all the time. They do it because of fear; obviously, they have got to pay money out. With their fiduciary duty they cannot risk it. That is one of the reasons that British pension funds do not invest in infrastructure and similar things as much as we would like. They cannot risk the pensioners’ money, because of the need for returns. A guarantee on all pension funds would transform the whole pensions industry, but of course the Government would then have a contingent liability of I do not know how many billions.

[Gareth Snell (Stoke-on-Trent Central) (Lab/Co-op)]

I do not think anyone is arguing that the scheme has not been successful. I am a coalfield MP and have many constituents with long-term health conditions that are the effect of their jobs. My hon. Friends and I are saying that if the scheme has been successful, the success should be shared by the people who benefit from the scheme, and not necessarily by the Government, who have been involved in a technical role, as opposed to being an actual part of the scheme.

[Richard Harrington]

I hope that the hon. Gentleman understands that the role is more than technical. First, the Government have also contributed a lot to the scheme. Secondly, the guarantee is more than just technical; it is a golden guarantee. That is a good thing—I ask the House please not to think that I am saying it is not, but it is more than just technical. The fact that the guarantee has not been called on may make it look far less important than it is. I want hon. Members and others who listen to the debate to know that a lot of successful investments were made because the trustees have had the security of the knowledge that the Government are standing by.

Surpluses are calculated during scheme valuations, which happen every three years, by the Government actuary. That is not controversial. The trustees are invited to give their views before conclusions are reached. There have been eight such valuations. I have set out the benefits of the guarantee during good times, but we must bear in mind the fact that future outcomes are not known. There may be very bad times ahead in the pension world. I do not know, and I hope not. If things turn out to be disastrous, and if investments turn bad—Members may have been listening to debates in the House about the European Union, and who knows what will happen?—it is for the trustees to consider the situation. It is for that very reason that a lot of general pensions will hold surpluses. Any volatility going forward would certainly affect the amount of money in the scheme. Taxpayers would then bear that burden.

There was a valuation in 2013, and pensioners were paid a bonus—a new bonus of 4% was given in March 2014. The trustees have subsequently been able to award those bonuses, so it is not as if the surpluses just stay where they are. However, I accept that it is the trustees’ job to be prudent. They have a fiduciary duty to consider the position. I have not met the trustees, but I imagine that for that reason some of them would err on the side of caution and say, “We can’t distribute the money,” because that is their fiduciary duty. However, the bonuses that are paid are very important. It is one of those things. Current arrangements have certainly allowed the trustees to implement a high-risk investment strategy, but I want hon. Members to know that because of that strategy the typical pensioner receives a pension that is 33% higher in real terms than they would have with a normal Government bond-type of strategy. It is not as if they do not benefit from it. The strategy is backed up by the Government guarantee, which can be called on at any time, on demand, based on the ages of scheme members. We expect it to run for about another 60 years.

I accept the points that hon. Members have brought up, and am happy to meet and go into further detail or discuss new stuff. I am very open to representations. However, I have looked at the matter in the limited time I have had since I have been in the job, compared the scheme with others, tried to assess whether the risk element, the guarantee and compensation are fair in all ways—the hon. Member for Blaenau Gwent mentioned that quite a lot of aspects are fair—and I have reached the conclusion that the existing arrangements in this case remain fair to all parties.

Question put and agreed to.