Pension Protection Fund and Occupational Pension Schemes (Levy Ceiling) Order 2025

Baroness Altmann Excerpts

Wednesday 23rd April 2025 Grand Committee

[Baroness Altmann (Non-Afl)]

My Lords, first, I thank the noble Lord, Lord Davies of Brixton, for bringing this important matter to the attention of the Committee, notwithstanding the fact that the actual instrument that we are debating is not contentious. I thank the Minister and her officials for their engagement before this debate and for taking seriously some of the issues that we are expecting to hear about today. Of course, I also thank the Pension Protection Fund for its briefing note. I commend it on its excellent work and thank the staff for all that they have been doing to help those pensioners, or members of pension schemes, who are at a time of their lives when they are incredibly stressed—they will have seen their company go bust and feared what was going to happen to their future. At least we have in place a system which gives some comfort and underpin to the pension promises that they would otherwise be relying on, which could have disappeared were it not for the Pension Protection Fund and the way it has been managing its investments.

I share some of the concerns expressed by the noble Lord, Lord Davies. I point out that, although this is talking about the maximum levy that can be imposed, it has never been imposed in all the 20 years of the PPF’s existence. Yet, each year, the maximum levy keeps going up with average earnings; it was at 4% this year, after being some 8% the previous year, and it has to be reviewed every 12 months. That was born out of the origins of the Pension Protection Fund—and I know that, at the time, other noble Lords were with me in trying to help the Government of the day to understand what was happening to the current members of the Financial Assistance Scheme, which paved the way for the Pension Protection Fund, who have been paid out so well by the PPF.

Given the PPF’s robust financial position—partly as a result of the cap on benefits, as the noble Lord, Lord Davies, said, but also as a result of the investment management policies that it has put in place and maintained, which one must give them credit for—it would be really helpful, now that we have 20 years’ experience of the fund and seen the subsequent development of defined benefits scheme in this country, to consider the flexibility that we do not currently have in the levy-setting process. The Pensions Act 2004 could probably never envisage a situation, 20 years after its creation, where so many schemes had not called on the PPF, and so many employers had managed through all the different economic cycles to still fund their schemes and be heading toward buyout—which I will return to.

Section 177(5) of the Pensions Act 2004 says that the maximum year-on-year levy increase cannot exceed 25%, which has clearly meant that it is impossible to have a levy holiday. As these reserves have built up over time—thanks to the noble Lord, Lord Davies, I shall not refer to “surplus” because reserves is a much better word—the PPF and, I presume, the employers’ organisations, would have wished a significant reduction in the levy to be introduced, if not a zero levy. Yet that proved to be virtually impossible because of the fear that they could never put it up again. In practice, of course, a levy of zero could never be increased; you are stuck with it for the rest of time. I hope that the Minister will help us understand what considerations are being given to the flexibility that we have heard about, which the Government would, laudably, like to see, and whether a levy of zero is possible and whether the required law change might be in the scope of the Bill that we are all eagerly anticipating.

My second point, which again echoes the noble Lord, Lord Davies, is that I am seriously concerned by the lack of pre-1997 indexation. The Pension Protection Fund has an element of older members, many of whom had a significant accrual before 1997, and their own schemes may have had inflation linking. Not all did—it was not a legal requirement—but many schemes that I worked with from 2000 to 2004, before we had either the Financial Assistance Scheme or the Pension Protection Fund, had pre-1997 increases that were lost and will be lost for ever unless we change the legislation. I would be grateful for the Minister’s take on that.

I make a particular plea for the Financial Assistance Scheme to mirror, as it has done all along, any changes made to the Pension Protection Fund, because those are schemes that failed before the Pension Protection Fund started. By definition, a much greater percentage of its accruals will have been before 1997, so the issue is of even greater importance and will cause greater hardship for those members.

In addition—and the noble Lord, Lord Davies, mentioned this but did not really go into it—the Government’s desire to use pension assets for productive investment is one that I wholeheartedly share and would very much like to see progressed much further. But this is a classic example of assets that could be used for productive investment but that are not, partly because of the existence of the PPF and the regulator’s desire to protect against PPF entry, which has driven so many schemes to look to buy out. The extra restrictions on sponsors of defined benefit schemes have caused many employers to look to buy out, if they have not done so already. The expectation is that £300 billion of pension assets will be buying out over the next five years. Some 85% of all schemes are under £250 million; it is clear that there is money that could be used for productive investment.

I hope to get this on the record: before a buyout, the distribution of assets tends to be 70% in gilts and government bonds, and about 30% in corporate bonds. There is very little, if not any, in equity investment or productive investment. After buyout, that 70% in gilts and other sovereign-type debt falls to 10% or so, maybe 15% at the most, and corporates become 80% to 85%. There are clear and present dangers for the gilt market itself from this trend. Anything that we could do to halt the buyout, perhaps by encouraging consolidation or more of that money to go into productive investment, given our experience of the Pension Protection Fund so far, would be beneficial to both the Government’s aims for the economy and the wider pensions landscape. I hope that the Minister will be able to explain some of this thinking.

I wish to place on the parliamentary record my commendation of the work of both the Pensions Action Group and the “Stripped of our Pensions” campaign, which I worked on for many years with many good people to get to where we are now in terms of pension protection. I also laud in particular the work of the late Mr Peter Humphrey, who passed away just a few days ago and was one of the absolute leading stars of that campaign; he and his family lived and breathed pensions for so many other people. I hope that the Minister might join me in commending his work and that of so many others.