Pensions Bill [HL]

Baroness Garden of Frognal Excerpts

Tuesday 15th March 2011 Grand Committee

[Baroness Garden of Frognal]

My Lords, I will first speak to the government Amendments in this group and then respond to the amendment tabled by the noble Lord, Lord McKenzie. Clause 17 and Schedule 4 make a number of amendments to legislation in the Pensions Act 2004 and the Pensions Act 2008 that governs the operation of the Pension Protection Fund. They have been developed with the Pension Protection Fund and reflect the experience gained in the light of live running since April 2005.

Paragraphs 20 to 26 of Schedule 4 replace an existing regulation-making power within paragraph 25A of Schedule 7 to the Pensions Act 2004. Regulations made under the new powers would enable a person to postpone payment of their pension compensation past their normal pension age. Paragraphs 27 to 33 of Schedule 4 make amendments to the Pensions Act 2008 in parallel to those in paragraphs 20 to 26.

Regulations made under the new powers would enable a person who is entitled to pension compensation by virtue of pension compensation sharing to choose to receive compensation from a later date than normal benefit age. To explain further—in response to the noble Lord—for someone who chooses to postpone payment of pension compensation, three things would happen. First, the pension compensation cap would apply as at the time the person first becomes entitled to pension compensation, which would be their normal pension age. Secondly, revaluation would apply up to a member’s normal pension age. Thirdly, the board of the Pension Protection Fund would provide an appropriate increase in pension compensation when it comes into payment, calculated on an actuarial basis to take account of the postponement of the start of payment.

Amendments 49 to 52 amend the legislation in Schedule 4 dealing with the commutation of pension compensation. We intend to use these powers to make regulations to provide a person with the option to commute a portion of their pension compensation for a lump sum at the end of a period of postponement.

This group of amendments enables the Government to make regulations that will provide people with an additional flexibility. Current legislation already allows a person to decide to commute to a lump sum part of their pension compensation. All in all, this provides a person in the Pension Protection Fund with a good deal of flexibility to decide how and when to take their pension compensation.

I turn now to the amendment in the name of the noble Lord, Lord McKenzie, about funding determinations to be made by the board of the Pension Protection Fund and the degree of reliance on independently assured data. For a scheme undergoing assessment for entry to the Pension Protection Fund, an actuarial valuation of a scheme’s assets and protected liabilities under Section 143 of the Pensions Act 2004 will no longer be required in all cases. A scheme’s protected liability is the cost of providing benefits equivalent to pension compensation, any non-pension liabilities of the scheme and the estimated cost of winding up the scheme. Instead, the board of the Pension Protection Fund will have the power to determine whether a Section 143 valuation scheme is required or whether it can use other information that it has in order to decide whether the scheme should transfer into the Pension Protection Fund.

Practical experience since the Pension Protection Fund opened for business in April 2005 has shown that in a number of cases there is already sufficient independent information held about a scheme to allow the funding position to be accurately assessed without requiring a fresh actuarial evaluation. For example, a valuation by an actuary under Section 179 of the Pensions Act 2004, undertaken for the purposes of calculating a scheme’s pension protection levy, may be used. These changes will avoid schemes incurring the expense of an actuarial valuation where one is not necessary for a fair decision to be made.

The noble Lord is concerned to protect the interests of members of schemes that will not undergo full actuarial valuation under Section 143. I should make it clear that the Government are not intending to change outcomes for members; rather, these changes are intended to avoid costs where they are not necessary to ensure fair outcomes for members.

New Section 143(5)(c) requires the board of the PPF to set out how it will make determinations when it does not commission a full actuarial valuation. This statement will have to take account of any requirement set out in regulations under Section 143(4). We expect the PPF to set out examples of the sort of information and methodology that it would use in place of a full actuarial valuation in this statement so that it is clear how a meaningful judgment of a scheme’s funding position at the assessment date—that is, the date when the scheme began assessment for PPF—was made.

The Government have no problem with requiring the PPF to make evidence-based decisions. Indeed, the board of the PPF is clear that it will be appropriate not to commission a full valuation only where there is adequate alternative evidence. However, I suggest that the more appropriate place to detail any legislative requirements for that evidence is in regulations under subsection (4) rather than in the Bill. As an example of when an alternative determination would be used, it would be where a scheme was very clearly underfunded on the basis of existing information but not where there may be some doubt about it.

I welcome the noble Lord’s interest in the changes to requirements to undertake actuarial valuations in all cases where a scheme is being assessed for entry to the Pension Protection Fund, but I hope that the explanation that I have given is sufficient for him to withdraw his amendment and that the Committee will be prepared to accept government Amendments 49 to 52.

[Lord McKenzie of Luton]

My Lords, I thank the Minister for her full response to my amendment. Indeed, I welcome her to her first session at the Dispatch Box on pension issues—the first of many, I am sure. The explanation that she has provided in response to my amendment is totally satisfactory. I think that I understand it fully and it has been a helpful clarification of what is in the Bill. The government amendments are a sign of the growing practical experience and maturity of the organisation. I have no particular points to raise and am happy to support the amendments. I beg leave to withdraw the amendment.