Financial Assistance Scheme (Increased Cap for Long Service) Regulations 2018

Debate between Lord McKenzie of Luton and Lord Jones

Monday 22nd January 2018 Lords Chamber

[Lord McKenzie of Luton (Lab)]

My Lords, I thank the noble Baroness, Lady Buscombe, for her clear introduction to these regulations. As we have heard, they will amend the legislation to allow the Financial Assistance Scheme to pay a higher amount of assistance to capped FAS members who have long service in a single pension scheme. They allow an increase in the cap by 3% for each year of pensionable service over 20 years up to a maximum of double the standard cap. This is in addition to the inflationary increase in the amount of the cap. As we have heard, a parallel change has been made to the PPF, although not by the use of regulations, with effect from April 2017 in line with the policy to align the two systems and following a government Statement on 15 September 2016.

FAS and its follow-up, the PPF, have been important mechanisms—I think this is a view that we share—to improve confidence in defined benefit schemes. They protect some 11 million in the UK who belong to such schemes. For FAS to be involved, a scheme must have commenced wind-up between 1 January 1997 and 6 April 2005; after these dates, individuals would look to the PPF. We introduced these schemes when in government and continue to support them.

FAS would generally meet 100% of entitlement for those having reached retirement age when wind-up commences; for those who have not done so, members would generally receive 90% of the expected pension accrued at the point that the scheme began to wind up, subject, of course, to the cap. From recollection, the expected and actual pension amounts for these purposes would not always coincide with scheme definitions. Could the Minister comment on how they might diverge at the current point?

Notwithstanding the 6 April 2005 date, we know that there can be a considerable lead time between commencement of wind-up assessment and entry into FAS. According to the most recent accounts—the Minister might be able to confirm this—in the year to 31 March 2016 there were still some 23 schemes that completed wind-up, with a total of £141 million of assets transferred to the Government. Incidentally, could the Minister remind us how the receipt of scheme assets, employer contributions and FAS payments are dealt with in the government accounts?

As we have heard, the PPF took over responsibility for the management of FAS in 2009. By the end of 2015-16, it had completed the transition of 1,027 schemes, with 155,000 individuals entitled to FAS assistance. This is an impressive level of support, without which thousands of individuals would have received or be entitled to little or nothing at retirement. At a time when we are debating in general the merits or otherwise of outsourcing, FAS is a worthy example of the state stepping in to support failures of private pension provision.

It was announced that, in 2016, FAS would be closed to new applications. While this would keep the scheme open some 10 years longer than originally planned, have the Government made any assessment of the number of individuals who would lose out as a result of such a decision and what the Government’s saving would be? Failure to access FAS might be laid at the door of trustees or scheme administrators, but any loss would be suffered by members. Is that fair? Would failure to seek access to FAS cause any restriction on access to social security benefits?

We have seen a copy of the Government’s response to the consultation on the increased cap proposals. One issue arising is whether there should be a definition in the regulations of pensionable service, as it would help avoid confusion where service was under another scheme and would be disallowed. The Government say that they are content to rely on information from trustees about pensionable service based on the definition of pensionable service contained in individual scheme rules, but one bugbear of the scheme, at least initially, was the poor quality of some of the data held by various schemes. What is the current situation in this regard, and what confidence is there across the board that scheme data are now more robust? In how many cases has the FAS scheme manager had to issue guidance to individual schemes, and on what points?

It seems that, despite the original intent, periods of service accrued in a member’s own right are to be aggregated with those arising under pension credit arrangements in determining long service. We do not oppose this, but, for the record, perhaps the Minister would expand on the potential stumbling block referred to in the documentation should the alternative position have been adopted. Further, we support the potential inclusion in the long service cap of those in receipt of a survivor’s pension but who do not have any pensionable service of their own.

The Explanatory Memorandum draws attention to the reference to the European Court of Justice in the case of Grenville Hampshire. This is a matter engaging EEC directive 80/987 and whether in the event of an insolvency every employee should, inter alia, receive no less than 50% of their expected pension benefits. From recollection, this matter has been around for a little while. Perhaps the Minister would update the House on the current state of affairs. The risk would be where the current cap is in play and would, I presume, be ameliorated by these regulations. Should the Secretary of State or the board of PPF not prevail, what are the consequences?

The caps on both FAS and the PPF were a mechanism to limit costs and to guard against excessive risk-taking, the latter potentially arising where decisions could risk insolvency of a company where there was no chance of a diminution in executive pensions because they would be wholly underwritten by FAS or the PPF—that is, the moral hazard position. In amending this approach, we are asked by the Minister to recognise the unfairness for those whose long service has been in a single pension scheme and where, without raising the cap by length of service, they would be in no better position than someone with equivalent pension entitlement levels but who could secure additional benefits in a new scheme. We recognise that position.

It is noted that no impact assessment is offered for these regulations, although reference is made to the impact assessment for the Pensions Act 2014. Will the Minister say why no such assessment has been prepared, particularly given that, for FAS, after asset transfers and recovery the net cost is met by the public purse? Under PPF, it is met by the levy on other DB schemes. A phone call to officials suggested an annual cost of £1.2 million a year—indeed, the noble Baroness confirmed that figure—and that some 290 members would benefit. Given the stop on further FAS transfers, this is a finite population. Other things being equal, we might question whether this is a priority at the present time, but alignment with PPF, prior deliberations and fairness lead us not to oppose but to support these provisions.

Having recognised the principle, the question arises as to the quantum of the relaxation—in other words, the 3% for each full year of pensionable service over 20 years, subject to the limit of double the standard cap. Will the Minister remind us of the basis on which this 3% is computed? It should be noted that, for the PPF, the increased cap for long service could increase levy payments by some £139 million in the period to 2030. Will the Minister tell us how many recipients are likely to be involved over that period?

These regs are about FAS, but we should not let the moment pass without making a general point about the pensions environment and the PPF. Not only has it to deal with BHS but, as the result of last week’s events, also Carillion. It is to be welcomed that the PPF is in robust health, with, I think, £4.1 billion in reserve, but there is obviously a limit to the strain it can take. Subject to all this, I support the regulations.

[Lord Jones (Lab)]

My Lords, like my noble friend at the Dispatch Box, the Minister is a master of detail and I thank her for her helpful introduction. However, since they refer to Wales as well as the rest of Britain, have these draft regulations any relevance to the steel-workers of Port Talbot at the previous Tata company? Indeed, do they in any way impinge upon the pensions entitlement of the remnant of the steel industry across Britain? It is not that one expects steel pensions to be sky-high, which the cap might anticipate. If the Minister can in any way make reference to the beleaguered steel industry, and in particular those steel-workers in the great Port Talbot works who are very anxious about their pensions, that would be helpful.