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

Lord Davies of Brixton Excerpts

Wednesday 23rd April 2025 Grand Committee

Moved by

[Lord Davies of Brixton]

That the Grand Committee takes note of the Pension Protection Fund and Occupational Pension Schemes (Levy Ceiling) Order 2025, laid before the House on 3 February (SI 2025/103).

Relevant document: 18th Report from the Secondary Legislation Scrutiny Committee

[Lord Davies of Brixton (Lab)]

My Lords, this order is routine and has little practical impact on the PPF. It sets the potential cap on the levy, but the levy as is currently payable is only a small percentage of the cap, so in itself it is of no significance. However, having the order before us provides an opportunity to discuss the operation of what is becoming, a bit under the radar, one of the country’s biggest financial institutions, and one that is receiving increasing comment.

Those among us who feel a sense of déjà vu are right, as we had a similar debate almost exactly two years ago. There is an important difference, of course, in that the Front Benches have swapped places. I will not touch on the Financial Assistance Scheme—FAS—although it is worth saying that many of the same points will apply. But that will be a debate for another day.

The issues being discussed in the context of the Pension Protection Fund include the practical problem with the legislation preventing a zero levy. There is the issue of the Government’s general policies to increase productive investment by the pension universe as a whole. There is the issue, which has been raised, of fund consolidation and whether the PPF is a suitable vehicle for that. There are also the limits on the benefits that the PPF can pay. Noble Lords will be glad to know that I will not deal with the first three, although it is worth flagging them up. I will say a bit about the legislation, but my focus will be on the limit to the benefits payable to members of the PPF and what, if anything, could be done about it.

We have to thank the PPF for its extremely helpful briefing note. I do not think that anyone is here from the PPF, but one can always watch online nowadays, so I hope they are watching us. I emphasise that the briefing note was helpful and showed that the PPF was aware of and alive to the issues that I am raising, which is good to know. Having read through the fund’s annual report in preparation for this debate, I welcome its commitment to DEI policies and the requirements of climate change. It is worth putting that on record, because it is doing a great job.

In a sense, this debate is a taster for the forthcoming debates we will have on the pensions Bill. Perhaps the Minister can give us a slight hint about when and, as importantly, where we will get that Bill. But the one thing that we are almost certain to see in the Bill— because the Pensions Minister has said so—is some legislation on the calculation of the levy. I think the Minister has gone as far as is possible to say that that will be in the Bill.

However, there are other issues that can be raised in the context of the Bill. I give due warning: I think that there will be scope in the Bill to discuss the issue I am raising today—that of the increases in benefits for members of the PPF. We have not seen the Bill yet, including its Long Title and what will be in scope, but, given the issues that have already been mentioned as likely to be in the Bill, I think that it will provide an appropriate and important arena in which to discuss what I am going to raise in relation to benefit increases.

I shall make a point on the regulations and the zero levy. As I say, the Minister, Torsten Bell MP, has gone as far as he can. He mentioned the Government’s intention to allow the PPF greater flexibility in reducing the levy that it collects on pension schemes, particularly when it is not needed, but he went on to highlight the PPF’s critical role as a safety net for pension savers—on the one hand, seeking to avoid unnecessary levies on pension schemes, but, at the same time, with the intention of allowing pension scheme employers to invest, supporting savers in growth but recognising the need to maintain a secure PPF. He also drew attention to the PPF’s strong financial position. Can the Minister here tell us anything more specific about the proposals to introduce the regulations?

I move on to the PPF’s finances. I have here something in quotation marks; I think I am quoting the Minister. It says that the PPF is in “robust financial health”. In all the information that the PPF provides us with—it is a lot of information—there is a wonderful fan chart showing the future progress of the funding levels and its perception that, as things stand, those levels will continue to increase. It is already strong, and the prospects are that it is going to continue to increase over the coming 10 to 15 years.

So, an issue is bound to arise—people always raise it when they see that a pension fund has what people tend to refer to as a surplus; that is a questionable concept but people refer to surplus—which is that, if a surplus is there, people are always pretty keen to spend it on all sorts of things rather than on the prime purpose of any pension arrangement, which is obviously to provide benefits for the members. It is notable— I checked this in the annual report and accounts of the PPF—that it never actually uses “surplus” in this context. It quotes the Government’s use of the word, but the fund itself refers not to surpluses but to its reserves. That is a much more appropriate way of thinking about this. “Surplus” implies that you do not really need it, but a reserve is there for the purposes of the fund and to protect members’ benefits. It is much better to talk in terms of reserves rather than of surpluses.

It is worth recalling that, two years ago, when we last discussed this issue, we had just had the departmental review of the Pension Protection Fund, done jointly by officials of the department and the PPF. This was a particular recommendation:

“That the DWP and the PPF work together to understand the implications of the PPF’s funding position in light of expected future developments in the population of Defined Benefit (DB) pension schemes and plan well ahead for any legislative changes that might be needed; for example, to address what happens to any funding which is surplus to requirements”.


So, the departmental review uses “surplus”, which, as I have explained, I do not like, but it was asking what we are going to do about this level of reserves: is it the correct level of reserves or are there other ways in which this money could be implied?

The problem, of course, is that the legislation does not say anything at all about those resources. Given the PPF’s understandable policy of building up a substantial buffer, we have to give that issue some attention, particularly as the PPF’s figures show that buffer increasing year by year, as I said.

What could you do with it? I have seen one suggestion that it could go back to the employers, but I cannot see how that is practical. In a sense, it can go back to the employers by reducing the amount of the levy—that is for the PPF—but there is no way in which the actual cash could go back because many of the employers who paid it are no longer here and we are now in a different world compared to when the levy was being paid, up to 20 years ago. I do not think it is an option to make cash payments back to employers. The extent to which, by reducing the levy, employers have more cash in their hands is a separate issue.

It would be equally wrong, or even worse, for it to go to the Government, but that is what would happen as things stand. This is a fund, and if it ever ran out of people to pay—way in the future, of course, because we are already anticipating that benefits already in payment will still be in payment in 2100, so it is a long term—even the prospect of that money ultimately going to the Government is just wrong and it should be rejected explicitly. From my perspective, the obvious place where that money could be used is to improve the benefits for members.

There are, obviously, two ways in which members’ benefits can be increased. First, there is the 10% haircut, which is applied to members who join from deferment. Of course, those who are already receiving pensions from age, retirement or ill health get 100%, but the deferred suffer this blunt 10% haircut, which was introduced as part of the deal when the legislation was introduced. It is a real live issue: do we still need to apply that 10% haircut? You have a retention on insurance policies to reduce the premiums and to discourage people from making claims. I do not think that really applies. We have already got the levy down to minimal amounts, so we do not need it for that reason, and the idea that employers will behave recklessly in order that their ex-employees can get 100% rather than 90% benefits does not need to be taken seriously. The need for the haircut has clearly gone. It is there, but it is not needed. That is the first thing that you could do.

The second thing, and the one that perhaps gets most discussion, is providing better protection against inflation. That is the central issue that I am talking about. There is a very important distinction between what can be done under existing legislation and what would require additional legislation. That falls quite neatly into benefits accrued post 1997, where the fund has the power to make some discretionary increases. It has never exercised it, but it now says in its annual reports that it is an issue that it considers. It has always reached the conclusion that it will not make the increases, but it has the power. For pre-1997 benefits it has no right to make any increases and to do so would require legislation, which is where we come back to the pensions Bill. I very much hope that the provisions in the pensions Bill will at the very least give the PPF equivalent power to make discretionary increases for pre-1997 benefits, as it has the power to do for post-1997 benefits.

Until four or five years ago, the PPF operated in a period of relatively low inflation, so the issue did not bite so much—goodness me, I have spoken for 15 minutes already—but then we had three or four years of high rates of inflation. This had a significant impact on members’ benefits and a particularly severe impact on members with pre-1997 accruals, who got no increases. Their benefits have fallen in value by something like 40%. Benefits accrued after 1997 do get increases, but, because of the 2.5% cap on increases, the reduction they have suffered is significantly less but still material—in excess of a 20% cut. That is a reduction for ever; there is no way in which those reductions are made up subsequently, unless the PPF board were so to decide.

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[Baroness Drake (Lab)]

My Lords, I refer to my interest as a trustee of a defined benefit pension scheme. I thank my noble friend Lord Davies for facilitating this debate.

Two of the restrictions placed on the PPF by the Pensions Act 2004 are, first, the levy ceiling and, secondly, that any increase in the actual levy is limited to a 25% increase year on year. If the PPF sets a zero levy one year, it can never subsequently raise it because 25% of zero remains zero. Although the order that we are taking note of today increases the ceiling, in reality, the levy has been systematically falling as the PPF’s position has strengthened. That 25% limit, however, inhibits setting a very low levy: if economic circumstances change, it will take longer to raise that levy back to a material level.

The Government have said that they will consider legislative changes to make it easier to set a zero levy; I hope that the Minister can confirm that that is still the disposition of the Government. However, given the stronger funding position of the PPF and the prospect of the Government removing the 25% limit, the PPF board halved its £100 million levy estimate for 2025-26 to £45 million—its lowest ever. That is the point I want to take up in the rest of my contribution.

In its foreword to its levy policy statement, which sets out the £45 million, the PPF states:

“The likelihood of the PPF encountering significant funding problems in the future … is low and is expected to continue to reduce over time … if funding problems did arise, these could be resolved over a multi-year period with our investment returns likely to be the most significant contributor”.


Taking into account that level of confidence in the funding level and investment returns, and taking into account the £13.2 billion funding surplus—

[Lord Davies of Brixton (Lab)]

Reserves.

[Baroness Drake (Lab)]

Yes, reserves. Taking into account that and the levy reduction, it triggers the need to reflect that it is equally important to have regard to what is a fair striking of the balance between levy payer and member interests. This is the issue that I want to pause on, because it is something that the Government should reflect on—particularly regarding, as others have mentioned, the PPF indexation rules as they apply to compensation for service pre 1997.

As my noble friend Lord Davies set out, the Act sets the annual increase for PPF compensation in payment for pensionable service accrued after April 1997; that is set at the CPI and capped at 2.5%. However, that is the limit of the PPF’s power, which means that, for pension benefits accrued for service pre 1997, compensation payment does not increase at all—it just does not. No matter what the year or the economic circumstances, there are no means of increasing the compensation payments for pension benefits accrued prior to 1997. Over the period of retirement, particularly given recent high inflation, the rules on pre-1997 service compensation have had a significant, even acute, financial impact on those affected.

The PPF provided some information on the costs of improving compensation rules in a published letter in December 2024, in response to requests from the Commons Work and Pensions Select Committee. Unlike my noble friend, I shall, if I may, refer to some figures. Using those figures, if the Government allowed the PPF to apply prospectively CPI capped at 2.5% to pre-service compensation payments, it would increase liabilities by £2 billion, reducing the reserves from £13.2 billion to £11 billion but still keeping a 150% funding level even if that was done. However, for an ad hoc increase to the pre-1997 compensation payment, recognising that period of higher inflation we have been through, the figures would be significantly lower than those I have quoted.

As the noble Baroness, Lady Altmann, said, the rules set in 2004 were set cautiously because nobody was really clear on the level of schemes that would fall into the PPF. There was a lot questioning about the sustainability of the PPF; it is a compliment to the PPF that it has proved it is sustainable. So some of the rules were set very cautiously, but the PPF is now in a strong financial position, with some £32.2 billion of assets: £19 billion in liabilities and reserves of £13.2 billion. The risk of future claims has fallen, either because, as the noble Baroness, Lady Altmann, pointed out, there is a big shift to buyout, or because the funding of schemes is much stronger. The risks are falling correspondingly: the annual levy has declined from £648 million in 2023 to £45 million in 2025-26, with further reductions anticipated.

Not only has the levy in quantum declined hugely; the levy has also declined as a proportion of the PPF’s funding mix. Roughly one-third of the funding comes from the assets transferred to the PPF from those members’ pension schemes. Similarly, another third comes from the investment returned on assets, and 11% comes from assets recovered by the PPF on behalf of those schemes. Less than a quarter—23%—of the funding comes from the levy, and that is going to fall. However, the benefits of the PPF’s strong funding are deployed more to move the levy towards zero, and consideration is being given to abolishing the industry-funded PPF administration levy. This inevitably raises the question of fair balance between levy payer and member interest, particularly for pre-1997 service, as it is quite tough that there is no facility to improve those compensation payments and they never increase.

Like others, I absolutely support the Government’s priority to deliver growth, driving employer investment in their businesses. I also recognise that the PPF liabilities are captured in the whole of government accounts, which obviously introduces a sensitivity. I am not disregarding those issues, but I note that the PPF’s own three-year strategy has set a goal of working with government to progress a review of the indexing of compensation. There is a growing concern, given the level of funding and reserves, about the fact that, at the moment, service accrued pre 1997 can never be increased. It is something that starts to tilt a fair balance between levy payer and member interest. Although I recognise that these things are not easy, will the Government give further consideration to a fair striking of balance of interests?

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I thank noble Lords for the opportunity to respond to this wide-ranging debate on issues affecting our system. The Government are determined to make our pension system work as well as it can as part of our mission to shape the pension system to serve the interests of savers and pensioners, ensuring decent, secure retirement incomes for all. I hope that is a goal we can all get behind.

[Lord Davies of Brixton (Lab)]

I will not tire the patience of the Committee by giving the half of my speech that I had to drop when I introduced the debate. I shall just thank my noble friend the Minister for her reply. It was what had to be expected, and I understand the situation. We look forward to continuing these discussions in the pensions Bill, whenever it comes.

Motion agreed.