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

Baroness Sherlock Excerpts

Wednesday 23rd April 2025 Grand Committee

Finally, a tidal wave of growing defined contribution liabilities balances is just over the horizon, because people are not only living longer but facing extended periods of ill health. As a result, communication and financial planning will become more critical than ever. We hope that the pensions Bill will effectively address the changing dynamics of the pensions landscape and ensure that it evolves to meet these challenges. I look forward to the Minister’s responses.

[The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Sherlock) (Lab)]

My Lords, I thank my noble friend Lord Davies of Brixton for introducing this debate and all noble Lords who have contributed. I am particularly grateful to the noble Lord, Lord Palmer, for trying to call us back—however unsuccessfully—to debating the order on the Order Paper. The serious side of that, I am afraid, is that rarely will a Minister have been able to so profoundly disappoint so many people, on almost all fronts, in one single—I hope relatively brief—speech.

My noble friend has every right to want a general debate on this otherwise rather harmless order, but the timing of this debate means that I am not in a position to answer most of the questions that noble Lords asked. I suspect that they will not be surprised by that, even if they are disappointed. The reality, as I will explain, is that we are poised on a number of fronts to make both decisions and announcements in a timespan ranging from the near future to the coming months, so noble Lords will not have to hold their breath too long—but I fear they must do so just a little longer.

Just for the sake of order, I call your Lordships back briefly to what we are debating today. The levy ceiling order 2025 sets out the maximum amount that the Pension Protection Fund can collect from eligible schemes through its annual levy. It is worth briefly pausing to note that we are in the 20th anniversary year of the PPF. I know that some noble Lords were celebrating this not so long ago, when there was much talk of the comment made by Andrew Smith, the Secretary of State who oversaw its creation. He famously asked

“why, if people expect their holiday provider or motor insurer to be covered if the firm goes bust, there is no cover for something as important as an occupational pension”.—[Official Report, Commons, 11/6/03; col. 683.]

Looking back now, it is hard to believe that we did not have something like this then, but we do now and some of the people in this Room were behind us getting to this point. I commend that.

Before the PPF was established, if a DB scheme failed, of course, its members were at significant risk of losing their pensions and facing an uncertain retirement. I think that, from the comments today, we can all agree that, over the years, the PPF has built up a strong reputation, is respected by stakeholders and enjoys high levels of customer satisfaction. As we have heard in part, the PPF is primarily funded by a levy paid by eligible pension schemes over the years, but also by recoveries from insolvent employers, assets from failed pension schemes and returns on its investments. My noble friend Lady Drake made an important point about the shifting balance of both the source of those finances and how we look at that going forward.

To ensure that the PPF remains affordable, and to reassure levy payers, originally three constraints were placed on how the board sets the levy for each financial year: that it cannot be increased by more than 25% of the previous year’s levy; that the levy ceiling will set the maximum levy that the board can collect; and that at least 80% of the levy must be risk-based. The levy ceiling is uprated annually in line with earnings, the point of which is to ensure that it broadly aligns with the PPF’s potential liabilities. This financial year, the ceiling has been increased to approximately £1.4 billion, while the levy estimate is just £45 million. Of course, that increasing gap between the ceiling and the estimate reflects the fund’s strong financial position. As the PPF matures, it is reducing its dependence on the levy for funding and becoming more reliant on returns from its investments. That marks a significant step in the PPF’s journey towards long-term sustainability and financial resilience, ensuring that it can protect its members into the future. My noble friend Lord Davies made a point about how far that responsibility stretches—there will be members who will need support from the fund for many years to come.

I turn to points raised by noble Lords, in no particular order. The noble Viscount, Lord Younger, asked several important broad questions about the Government’s pensions strategy. To answer the last question first, he asked how the Government will ensure that authorities in the Local Government Pension Scheme have the right fiduciary expertise to invest in local infrastructure. The answer is that we will require LGPS administering authorities to work with strategic authorities to identify local investment opportunities suitable for pension funds. All 86 authorities will be required to delegate the management of their investments to pools regulated by the FCA, and that approach will create large pools of professionally managed capital, aligning with international best practice. These pools will be responsible for conducting due diligence on local investment proposals and deciding whether to invest. That ensures that investment decisions are taken by those with the appropriate professional expertise, and it will free up local pension committees to focus on developing their investment strategies.

The noble Viscount also asked how the PPF and DWP will work together to respond effectively to emerging challenges and opportunities—a point also raised by my noble friend Lord Davies. Here, both noble Lords were right to refer to the 2022 departmental review of the PPF led by Lesley Titcomb. Its recommendations have really helped to shape the way the PPF and the department have worked together to ensure that scheme members are protected into the future.

The noble Viscount asked the $64,000 question about recommendation 18 relating to the pension protection levy, a point raised, I think, by everybody—tutti. We announced back in January that we will give the PPF board greater flexibility to adjust the levy by removing the restriction that the levy cannot be increased beyond 25% on the previous year. That will enable the board not to collect a levy when it is not needed, thereby reducing costs for levy payers and potentially freeing up millions of pounds for investment. I hope that this will be broadly welcomed in the streets, if not just in Grand Committee.

This will require legislation. I am sorry to say to the noble Viscount and, indeed, the Committee that I am not in a position yet to confirm the legislative vehicle through which it will be delivered, but I assure him that we will legislate when parliamentary time allows. We will continue to work with the PPF to consider the reserve and ensure the fund’s resilience. That sounds like a terrible bit of government “I’m not going to tell you”, but the reality is that, as anyone who has been a Minister knows—that is at least two noble Lords in the Committee—there are clear protocols about the point at which Ministers are able to indicate whether parliamentary time has been approved, and there are things we have go through before we are in a position to do that. But, as soon as it is possible to inform Members, I will be very glad to do so.

More broadly, we continue to monitor the DB pension scheme landscape as it evolves. The noble Viscount asked whether we disagreed with any of the recommendations from the review, and the answer is that we do not. Some of them will be reflected in the upcoming pensions Bill, but many of them do not require legislation through the pensions Bill or anything else. Some have been overtaken by events and the department is working on some of them with the PPF to explore either them or related options.

Noble Lords, in particular the noble Baroness, Lady Altmann, referred to the reality that the universe of DB schemes is maturing and will become smaller over the next decade as well-funded schemes secure their legacy liabilities in the commercial market or choose to run on. She mentioned some of the implications of that. I assure her that DWP is working with the Treasury to better understand the implication of emerging market trends. Alongside the PPF, we continue to review whether further structural changes are needed to ensure that the pension protection levy remains aligned with the various schemes that the PPF protects.