AEA Technology Pension Scheme

Debate between Geoffrey Clifton-Brown and Steve Webb

Wednesday 18th March 2015 Westminster Hall

[The Minister for Pensions (Steve Webb)]

I congratulate my constituency neighbour, my hon. Friend the Member for The Cotswolds (Geoffrey Clifton-Brown), on securing this important debate. As he knows, I have taken an interest in the issue, and I met his constituent Dr Nicholson with him in 2013. I have also had a number of meetings with hon. Members and scheme members.

It is important to say, for what it is worth, that I hugely sympathise with anybody who built up pension rights, was expecting a certain pension and then did not get it. Nothing I say subsequently about the Government’s position takes away from the fact that we are dealing with a very unsatisfactory situation that all of us would want to avoid.

Let me go through the points my hon. Friend raised and respond to them as best as I can. The first is the issue of what the legislation meant when it said that the value of accruals in the new scheme had to be “no less favourable”. The scheme people came out of was essentially a civil service-type scheme. That meant the new scheme had to enable people to go on building up benefits that were no less favourable; it did not mean that what was then a private company had its pension deficit, for example, underwritten by the taxpayer indefinitely—it could not have meant that.

Let us suppose that the trustees of a hypothetical privatised new scheme invested recklessly and generated a huge deficit, resulting in insolvency. Would the taxpayer be responsible for the trustees’ actions? Similarly, if investment returns went badly for that private company or other private companies, would the taxpayer be indefinitely on the hook for any deficit? Clearly, that is not what the law meant, and it is not our understanding of what it meant; indeed, the more one thinks about it, the more one sees that it could not have been what the law meant. The law was quite clear that people transferring across had to build up benefits on the same—no less favourable—basis as under the scheme they had left. That was the scheme that was set up, which complied with the legislation.

[Geoffrey Clifton-Brown]

I understand, and I agree with my right hon. Friend’s point. My point was that, at the time of transfer, the scheme was in surplus. Subsequently, the actuarial valuation proved that insufficient money had been transferred from the mother scheme to the daughter scheme. If insufficient money was transferred, the new scheme was never going to perform to the level the pensioners expected.

[Steve Webb]

Let me address that point. The first thing to say is that the trustees of the scheme the money went into agreed the transfer values. They could have said, “You’re not putting in enough money to reflect the benefits we are going to have to pay out,” but they signed off the transfer values at the time.

The notion of a surplus is strange, because this is an unfunded pension scheme until the point of transfer. It is just a liability on the Government’s books for decades to come. A flow of contributions has come in, and those are given a notional investment return in the Government books. The concept of a surplus is not what this means in plain language; it is not like the Government were sitting on a pot of money that they hid. Government accounting for public service unfunded pension schemes is very different from that for funded pension schemes, where a surplus has a real meaning. It sounds as though what we are talking about means something when it does not. This is about the way the Government accounts for public service unfunded schemes; it is not that money was held back.

A valuation was done on quite a prudent basis. If the money transferred across had been invested in quite a low-risk way, it would, at the point of transfer—that is the crucial point—have been enough to pay the liabilities that were transferred across. However, the world changed subsequently for this scheme and every other scheme: people started living longer, investment returns over time started falling and, as my hon. Friend said, accounting practices changed. All sorts of things changed, which meant that all sorts of private sector company pension schemes began to face bigger deficits. The AEA Technology pension scheme was not different or unique in that respect. The trustees accepted the transfer value, which was fair for the liabilities that were transferred across, even on a quite prudent basis.

--- Later in debate ---

[Geoffrey Clifton-Brown]

I am grateful to my right hon. Friend for that announcement, which I think affected scheme members will warmly welcome. I mentioned one other matter: being contracted out from the state pension scheme. Given what has happened to the poor people involved, is there any change that can be made, so that they could be considered contracted into the state pension scheme, and therefore receive additional state pension?

[Steve Webb]

The challenge is that the flip side of being contracted out is that both the employee and the employer paid a reduced rate of national insurance, so lower state benefits accrue, and the scheme essentially replaces part of the state benefit, up to a certain amount, often called a guaranteed minimum pension. The employee benefits from low contributions and has part of the state pension replaced by the scheme pension. I hesitate to say this definitively, but the vast majority of scheme members will certainly get at least the guaranteed minimum pension, I would expect, through the equivalent—through the PPF, now. I cannot swear that that will be true in every case. It will be very difficult to unwind all of that and to go back and say, “We offset your reduced NI, so we work out how much you and the employer saved by reduced NI; we take account of that and give you a bigger state pension and we net off the saving.” That would be a very complex calculation. I think there are occasions when this sort of thing gets unwound, but they are exceptional, and I would not want to raise my hon. Friend’s hopes.

I want to reiterate my sympathy. I believe that the Government transferred a fair amount of money across at the time and fulfilled their legal obligations to provide matching—at least as favourable—benefits. Obviously, we all regret where things ended up. I do not believe that the company was pressured into pre-pack administration. I believe that at the time that was done to save jobs, which it did. I am pleased that PPF exists to provide at least a safety net, and I hope that my hon. Friends will welcome the fact that we have done what we could to improve it during this Parliament. That will benefit a significant number of people who worked for AEA Technology and unfortunately will not get the full pension that they expected.