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

Baroness Drake Excerpts

Wednesday 23rd April 2025 Grand Committee

[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?

[Lord Palmer of Childs Hill (LD)]

My Lords, I thank the noble Lord, Lord Davies, and the noble Baronesses, Lady Altmann and Lady Drake, for their contributions to this interesting evening. I bring fellow Peers back to the order before us—the Pension Protection Fund and Occupational Pension Schemes (Levy Ceiling) Order 2025—which is the basis for our discussion today, rather than the wide-ranging subjects we have dealt with.

The order says that the Pension Protection Fund levy cannot exceed £1.4 billion, but the Pension Protection Fund has announced that it plans a levy of no more than £45 million, as referred to by the noble Baroness, Lady Drake, and potentially of zero. I cite this from the 2025-26 plans of the Pension Protection Fund.

The background is that, when the PPF was created, the worry was that if things turned out badly and lots of underfunded DB pension schemes went bust, the hole in the PPF would be met by jacking up the levy on the sponsors of surviving DB pension schemes—in other words, the employers. Two protections for the employers were put in place: the levy cannot rise by more than 25% from one year to the next and it cannot exceed the levy ceiling, which is the number in this order.

What actually happened was that the levy grew for a while, though got nowhere near the ceiling, but then started to fall owing to a combination, as has been referred to, of good investment returns at the PPF, lower than expected numbers of insolvencies—which is great news—and improved scheme funding. That all gives rise to it being in “robust health”, as the noble Lord, Lord Davies, defined it, and the comments around surplus or reserves, which we are not to talk about.

I guess that the PPF would like to charge a zero levy but does not feel that it can; once it is zero it can never be reintroduced, because it cannot rise by more than 25%, and 25% of zero is zero. It has therefore been lobbying the DWP for a while to allow it to set a zero levy and still be able to bring it back later if, unhappily, things go wrong. I think it has won the argument and I hope that a measure to this effect will be included in the forthcoming pensions scheme Bill that has been referred to.

This order, which is what we are talking about, is a formality and the ceiling obviously does not bite in any conceivable world. Can the Government confirm that, following the success of the PPF, they plan to change the rules to make it possible—this is the important part—for the PPF to charge a zero levy? Other noble Lords have referred to this flexibility that is needed. I hope the Minister can give us a positive steer on that.