BMI Pension Fund Compensation

Andrew Love Excerpts

Wednesday 17th December 2014 Westminster Hall

[Mr Andrew Love (Edmonton) (Lab/Co-op)]

As always, it is a great pleasure to serve under your chairmanship, Mr Sanders. I congratulate my hon. Friend the Member for Edinburgh North and Leith (Mark Lazarowicz) on securing this important debate.

My hon. Friend raises an important issue on behalf of the employees and pilots in his constituency who have suffered as a result of the collapse of the BMI pension scheme, which entered the Pension Protection Fund in 2012. He talked about the tax treatment of the beneficiaries of those assisted, although I am not sure that “beneficiaries” is the right word to use in this context. The so-called beneficiaries are penalised not only through the tax treatment but by the PPF’s complex rules, checks and balances, which do not operate optimally for this particular group of employees in this particular industry. In fact, they operate harshly.

For example, there is the case of the 51-year-old pilot, a father of three, who will see his pension cut by 44%; or the pilot who has flown for Monarch for nearly 30 years, contributing a significant amount to the company pension fund, who has seen his retirement fund slashed by almost £1.7 million; or the pilot who was just two and a half years away from his planned retirement when he was told that 50% had been wiped off his pension’s value and that a lump sum would not be forthcoming. I ask the Minister, or her colleagues in the Department for Work and Pensions, to take a fresh look at the rules under which the PPF operates. The rules are set by Parliament, and it is through Parliament that those who suffer rightly take up their cause to seek some measure of redress.

With the consent of the Chair, I hope to be able to open out the whole issue to critical scrutiny and to seek the Minister’s support for the difficulties that I shall illustrate and that other hon. Members have illustrated. The problem is not confined to participants in the failed BMI scheme: it looks as though it will also affect the 170 pilot participants and other Monarch ground staff participants in the Monarch Airlines pension fund, which has been under assessment by the PPF since last month. In all, the problem will affect around 300 people, and the problem ranges from the tax treatment of the pensions to the compensation caps operated by the PPF. I shall focus on the compensation cap as it affects the airline industry.

The PPF compensation caps are in place, as far as I understand it, for two main reasons. First, they protect the viability of the PPF itself. The PPF is funded mainly by a levy on its members. Hon. Members will be aware that it is not funded by the taxpayer and that whatever flexibility of treatment for those affected by pension fund collapses I argue for today will not result in any recourse to the taxpayer. I support in principle the concept of compensation caps in order to sustain the PPF, but they were not intended to bear down so harshly on a specific group of workers. Fortunately, those who are particularly adversely affected by the compensation cap are not vast in number. As was indicated earlier, some 3,000 or 4,000 members of the various schemes are affected, and of those some 300 are directly affected by the cap.

Secondly, the compensation cap relates to the concept of moral hazard. The PPF is not designed to be a backstop for those tempted to speculate on or gamble with pension money and then expect the PPF to pick up the bill if their risky ventures do not pay off. I understand and sympathise with that concept as it is right in principle, but why should those who are unable to affect the operation of the pension fund be penalised so harshly? I am not aware that any of the 300 people directly affected were in any way involved with the governance of the pension fund or with high-level business decisions inside the companies concerned, yet in terms of the benefits that they will receive they are being singled out for particularly harsh treatment.

Hon. Members might have noted something in common between the groups of participants adversely affected by those pension schemes: they work for airlines. That is related to the reason the compensation cap mechanism seems to operate so harshly. Thirty BMI pilot members of the scheme and 17 Monarch pilot members face losing more than 50% of the pension income they originally expected. The 67 Monarch pilots alone stand to lose, in aggregate, around £900,000 a year in lost pension, which is an average of £13,500 per pilot per year.

The way in which the PPF operates its cap appears to discriminate against those with shorter working careers: the earlier the retirement, the lower the annual cap is set; and higher compensation awards for long service only kick in after 21 years of pensionable service. The pension cap also operates in a way that is not helpful, given the typical career pattern of pilots in the aviation industry. Pilots normally start their careers in commercial aviation in their late 20s or early 30s, and the normal pension age for Monarch and other schemes is 55 for most pilots. They therefore have far less prospect of accumulating materially more than 20 years of pensionable service.

Only three of the 67 Monarch pilots affected by the cap, for example, have more than 25 years of pensionable service; none has 30 or more years. As a result, many of the 300, although beneficiaries no doubt of membership of the PPF, are left feeling that they have been short-changed and made to pay an unreasonable penalty for no other reason than the career path and pension arrangements available in the aircraft industry. Frankly, such matters are outside their control.

PPF regulations can and do change, often in the interests of equity. Will the Minister undertake to review the issue with her officials and the Department for Work and Pensions to see what can be done to provide a measure of easement? The Pension Schemes Bill is proceeding in another place, so that might be the mechanism through which Ministers choose to make such a change. If that is not possible, perhaps the appropriate Minister will write to me about adjusting the compensation cap, what flexibility the Government have and what amendments, if any, might ameliorate the harshness of existing arrangements. Alternatively, the Minister may ask the Department for Work and Pensions or the PPF to write to everyone taking part in the debate about what consideration the Government have given to the issue and what powers they have to adjust the compensation cap accordingly.

To return to those most severely affected by the compensation cap, the European Court of Justice has expressed the opinion that any compensation restrictions should not reduce the rights of members of an occupational pension scheme to below the 50% level required by the insolvency directive. Will the Minister outline the Government’s attitude to the Court’s judgment and whether as a result the PPF rules will be altered to comply with that view? If so, when?

I am grateful to you, Mr Sanders, for the latitude that you have shown. The matters that I have been discussing primarily relate to the Department for Work and Pensions, but they are the origin of the strong feeling among airline staff that they have been singled out for adverse treatment. I have raised the wider issues of compensation caps as they affect the airline industry, and I hope that the Minister will be able to give a response, or seek one from her colleagues in the Department for Work and Pensions, that will address the patent inequality of the way in which certain pension scheme members are treated under the PPF.