Pension Schemes Bill

Debate between Baroness Warwick of Undercliffe and Lord McKenzie of Luton

Monday 12th January 2015 Lords Chamber

[Baroness Warwick of Undercliffe]

I do not think I should enter into a conversation about that and I do not think it is really relevant to this argument.

[Lord McKenzie of Luton]

My Lords, I thank the noble Lord, Lord Balfe, for giving us an opportunity to air this issue this evening and for organising a meeting with the Minister. I thank the Minister and his officials for participating in that meeting. No one can be comfortable with the position of employees in this situation, who approach retirement with a likely pension significantly below the expectation which is derived from an employer promise which can no longer be met. This is not diminished by the fact that, while the pension expectations would be well above average levels, they are commensurate with remuneration levels which reflect the skill of pilots and the responsible jobs they undertake. As we have heard, some 67 Monarch pilots will lose, in aggregate, some £900,000 a year in lost pension because of the operation of the PPF cap and other pilots are in a similar position.

We should acknowledge that the Pension Protection Fund introduced by the previous Government, but on a cross-party basis, protects millions of people throughout the UK, as we have heard, who belong to defined benefit pension schemes. According to the Purple Book, which monitors the risk of DB schemes, there are some 6,057 mostly private sector DB schemes covering more than 11 million scheme members with more than £1 trillion of assets. In broad terms, as we have heard, the fund takes over the responsibility of pension obligations in the event of employer insolvency, but it does not seek to replicate, in every respect, the employer promise. There is, in particular, a cap on levels of payment for those below normal retirement age when the scheme enters the PPF. This is a source of the problem we are discussing tonight.

We know that the PPF is a highly professional organisation dealing with a complex market situation with great skill. On recent data, some 745 schemes have been transferred, covering 217,000 members. Compensation paid to date amounts to £1.53 billion, but the average yearly payout is, as we have heard, some £3,500 only. Tens of thousands of people now receive compensation from the fund and hundreds of thousands will in the future, potentially making the difference between retirement in poverty and retirement in a degree of comfort. This may not be the occasion to discuss how the PPF will operate in shared risk schemes, but that is doubtless a matter we will return to at some stage.

The thrust of the amendment in the name of the noble Lord, Lord Balfe, is generally to improve the position of those whose compensation is limited by the cap. The position of those with significant pensionable service with one employer has already been improved under the Pensions Act 2014, but this does not cover pilots, who tend not to have pensionable service substantially in excess of 20 years. Of course, the origin of the cap was to address issues of moral hazard, as we have heard, but also to be some restraint on the overall costs of the arrangements—it is not just a moral hazard issue. It is accepted that the moral hazard is not present in the case of pilots and the amendments would not lead to 100% compensation. However, the amendments would not apply just to Monarch; we simply do not know who might be entering the scheme at some future date and therefore the costs associated with that. As an aside, I ask the Minister: if the levels of compensation were raised, what if anything would that mean for the arrangements entered into with Monarch that allow for continued trading? Would that arrangement have to be recast?

The bottom line is that amending the rules in the way suggested would lead to higher payouts from the PPF. That raises the question, as my noble friend Lady Warwick has made clear, of where the funding is going to come from. The answer, of course, is the levy, which ultimately feeds back to individual schemes and sponsoring employers. Although the amounts related to pilots may be relatively small in the context of the overall PPF scheme, we simply do not know how many more might be affected and what the overall costs would be. As I have just said, there was an attempt in the 2014 Act to ameliorate the effects of the cap for individuals whose pension entitlement was derived mainly from one source for at least 20 years, although this does not particularly help the matter in hand unless there were to be some recasting of the spread in coverage to affect it in a different way. However, presumably this would involve losers as well as gainers.

It seems that any improvement in the lot of the pilots who might find themselves in a similar position, now and in the future, would involve more resources for the PPF. So, while having great sympathy for those whose legitimate pension expectations have been significantly impaired, I do not think we have been presented with a compelling argument to make the specific changes that the amendments suggest. However, the Government may take the opportunity to reflect on and review how the cap is generally affecting entitlements, bearing in mind the need to ensure the sustainability of the PPF in the current, and future, DB environment.