Pension Protection Fund and Occupational Pension Schemes (Levy Ceiling) (No. 2) Order 2023

Baroness Drake Excerpts

Wednesday 26th April 2023 Grand Committee

[Lord Davies of Brixton (Lab)]

My Lords, this order is routine and has little practical impact on the PPF. The levy that is currently payable is only 16% of the cap set by the order. However, having it 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.

I have a particular interest as I like to think that the PPF, or at least the name, was my idea. Back in 1995, following the Maxwell scandal, I drafted a paper for the TUC that proposed, among other things, that there should be a central discontinuance fund that should be called—wait for it—the Pensions Protection Fund, or PPF. Of course, the proposal was not accepted at that time, but it was introduced subsequently in the Pensions Act 2004.

Before getting to the focus of my speech, I have a couple of questions. First, the Minister should provide the Committee with some explanation of the error that was made with this order. I am not trying to embarrass anyone, but it surely suggests excessive pressure on DWP staff, so the question is: has the situation been rectified?

Secondly, as was raised in the 30th report from the Secondary Legislation Scrutiny Committee, can the Minister tell us where we have got to in following the recommendations in the departmental review? I will highlight two recommendations from the review. First, recommendation 2 is 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”.

It is worth noting that the current legislation says nothing about what should happen to any assets that, in the event, are not needed to pay members’ benefits. Given the PPF’s policy of building up a substantial buffer that, even on its own figures, is unlikely to be needed, the question needs to be addressed.

Any money that is left over cannot go back to the employers, because things will have moved on and employers will have moved on. It also seems wrong that it should go to the Government. The only just solution is for it to be used, as far as possible, to provide benefits for members. In practice, this means that the buffer should not be excessive. In these circumstances, where there is no residual legatee, bigger is not necessarily better. It might be unjust, and its level therefore becomes not just a technical issue but an issue of fairness to members.

Recommendation 6 states:

“The PPF should consider how the Board could hear more directly about the member perspective to inform its deliberations”.


It should be a matter of concern that currently there is no formal procedure to reflect the interests of members. So what thought are the Government giving specifically to these two recommendations in the context of the review?

These two recommendations also bring me to focus on the central issue of my remarks: the impact of high rates of inflation on pensions in payment from the PPF and the scope for the fund’s assets to be used to protect their real value. The problem is that the limits on annual pension increases are severe in current circumstances: none at all for benefits accrued before 1997 and only 2.5% per annum for benefits accrued thereafter. Until recently, the PPF operated in a period of relatively low inflation. The problem of inflation has always been there, but it has become more salient now we have moved into a period of materially higher rates of inflation—most obviously in the current year, but the issue is not going to go away.

The net effect of these limits is that the real value of members’ pensions has been cut significantly. Pre-1997 benefits have already been cut by up to one-third, while benefits accrued after that date have fallen by up to one-sixth. It is important to understand that these are reductions so far; they are going to continue. There is bound to be another cut next January, which will be based on the level of inflation this coming May. It is potentially another 7% if we believe the OBR’s forecasts. In the longer term, I am a relative pessimist about inflation —but even optimists do not expect a return to CPI increases of 0% or even 2.5%. So the need to protect the real value of members’ benefits will only increase.

The reductions in the real value of members’ benefits must be seen in context: the funding position of the PPF, in its own words, is “strong”. As a result, the PPF levy has, quite rightly, been reduced and there are plans to reduce it further. I have no problem with that. According to the PPF’s latest annual report and accounts, the scheme held £39 billion in assets as at 31 March 2022. At that point, the PPF estimated that, of that figure, £11.7 billion—almost £12 billion—was in excess of what it needed to pay every current member and their dependants their compensation for life. This represented a funding ratio of 137.9%. I think that would be broadly recognised as going a bit beyond “strong”.

Given the experience of the last 12 months, it is likely that the position this March will be materially stronger. It also needs to be understood that these figures are already being calculated—I presume—on a prudent basis. The general practice is to undertake these valuations on a prudent basis. Unless the PPF advises me otherwise, I assume that this is the case here, so we have prudence placed on top of prudence.

The problem with all this is that PPF members have not shared the benefits of this strong funding position. Indeed, it is the reduction in the real value of their benefits that has been one of the contributing factors to the strong position. This situation is wrong and should be remedied as soon as possible. This will probably require legislation because the board of the PPF has limited ability to pay compensation over the levels set in the Pensions Act. The lack of increases for compensation in respect of pre-1997 service is devastating for the members who are affected, especially during the current cost of living crisis.

As well as the size of the impact, it is also important to appreciate the differential effect on various groups of members. Information released to the trade union Prospect through a freedom of information request shows that the lack of inflation protection for pre-1997 service disproportionately impacts women and older members. There is no rational justification for this discriminatory treatment. Ministers have sought to justify the discrimination by saying that there was no statutory right to increases before 1997—true, but there was no statutory right to have an occupational pension at all. The idea that the initial pension is the real benefit and the increases are an optional extra is fundamentally wrong.

In practice, the majority of pre-1997 scheme members were either accruing benefits to which they were entitled through RPI increases, typically capped at 5%, or were in the many schemes funded on the basis that such increases were going to be provided and members had a reasonable expectation of receiving them. In other words, such increases were part and parcel of the package of scheme benefits, and their effective exclusion from protection must be open to legal challenge. Such a challenge becomes more likely as higher rates of inflation persist. So we should, first, provide higher rates of protection to better reflect modern rates of inflation and, secondly, eliminate the arbitrary and unfair difference in treatment for compensation in respect of pre-1997 and post-1997 service.

On a Brexit note, it is a matter of much regret that the Retained EU Law (Revocation and Reform) Bill does not provide for the retention of the minimum levels of compensation established in the Hampshire and Bauer cases. When that Bill was debated in the Commons, a Minister even went so far as to state that the Hampshire case

“is a clear example of where an EU judgment conflicts with the United Kingdom Government’s policies”.—[Official Report, Commons, Retained EU Law (Revocation and Reform) Bill Committee, 22/11/22; col. 169.]

To conclude, is it the Government’s intention to cut the potential benefits that members might receive from the PPF to below the level to which they are entitled at present? I beg to move.

[Baroness Drake (Lab)]

My Lords, the PPF provides real support to some 295,000 pension scheme members who have entered it, including through the £1.1 billion paid out in compensation each year. It provides security to those in current DB schemes who may need to call on it in future. Add to those figures the Financial Assistance Scheme, which covers a further 150,000 members and, following the Pensions Act 2004, is administered by but not funded through the PPF, and we are providing a blanket of considerable security to heading for half a million people.

It is very important to remember that, before the 2004 Act, members could lose all or much of their pension savings when employers became insolvent or simply walked away from their liabilities. When the Labour Government created the PPF, there were many doomsayers who predicted that it would not be sustainable. In fact, the PPF has defied those doubters: it is financially resilient, has been well run, and has weathered the various economic storms that have occurred over the past 15 years.

--- Later in debate ---

The noble Baroness, Lady Drake, asked about DWP’s plans for improving transparency of the PPF’s funding and indeed the levy. The PPF publishes its annual report and accounts and consults on the basis on which it collects the levy. That is the answer I have, and I will consider that and look at Hansard later and see whether I can expand on it.

[Baroness Drake (Lab)]

I appreciate that there is a lot out there, but there are three elements: the scope for raising the levy, the compensation levels and the resilience of the PPF over time. Clearly, there is a sort of inflection point for revisiting and managing that. It was just about understanding that and getting more transparency around it.

[Viscount Younger of Leckie (Con)]

Absolutely. That plays well into what I said in that I will reflect on what I and the noble Baroness have said, and there may well be a letter coming to add to the one that I will send to my noble friend.

I will address a couple more questions before I wind up finally. The noble Baroness, Lady Drake, and indeed the noble Baroness, Lady Sherlock, asked whether the PPF is right to build reserves at a slower pace than it has been doing. It is a fair question but that is, as the noble Baroness will expect me to say, very much a matter for the PPF board.

On whether there will be an update on the levy discussions, I may have alluded to this earlier—it was raised not only by the noble Baroness, Lady Drake, but by my noble friend Lady Altmann and indeed the noble Baroness, Lady Sherlock. I will certainly happily make inquiries, and that will be an addition to the letter which is growing bigger by the moment. There may be some other questions that I have not answered, but I will certainly look very closely with my team at Hansard.

To conclude, again I thank the noble Lord, Lord Davies, for providing us with this opportunity to discuss the UK’s flexible and robust regime for funding and protecting defined benefit pensions, which, as was mentioned, is an important subject. This regime has enabled most schemes to weather the severe economic downturns following the crash in 2007-08—the financial crisis, I should better call it—and the Covid pandemic, as well as the prolonged period of historically low interest rates. In fact, the aggregate scheme funding position on a Pension Protection Fund basis improved from 83.4% on 31 March 2012 to 113.1% on 31 March 2022 —an interesting statistic to reflect on. These improvements to scheme funding mean that fewer and fewer members of DB schemes will require the safety net of the PPF. That is of course good news for members, who are increasingly likely to receive their full pension entitlement. This is progress indeed but there is more to do, although of course we cannot eliminate all risk. When employers become insolvent, the PPF continues to stand by as a well-funded and responsibly managed safety net.