Hoover Pension Fund Deficit

Gerald Jones Excerpts

Tuesday 11th June 2019 Westminster Hall

[Gerald Jones (Merthyr Tydfil and Rhymney) (Lab)]

I beg to move,

That this House has considered the Hoover pension fund deficit.

It is a pleasure to serve under your chairmanship, Mr Robertson. We are here to discuss the Hoover pension fund deficit, which was once a surplus of more than £100 million. Hundreds of former longstanding Hoover employees from my constituency and the surrounding area have faced appalling cuts to their well earned retirement money, and they deserve justice.

Like other prosperous UK pension schemes in the 1980s, the 1987 Hoover pension scheme, with 7,500 members, had a large surplus, which totalled £123 million in 1986. Changes to the pension scheme, withdrawals from the fund by Hoover to cover its financial difficulties, payments to the Government required by a short-sighted surplus tax implemented by the then Tory Government, and financial difficulties posed by the global financial downturn have resulted in the surplus shifting to become an overwhelming deficit. At the last valuation, in March 2016, it stood at approximately £500 million on a buy-out basis, and approximately £300 million with the Pension Protection Fund.

Hoover had long been in talks with the Pensions Regulator and the PPF to offload the deficit pension scheme, which it could no longer support without risking the company’s insolvency and the loss of the remaining employees’ jobs. The pension scheme is now transferred over to the PPF, after a regulated apportionment arrangement was agreed with Hoover, along with a 33% share in the business for the scheme, and a £60 million lump sum payment.

When the pension scheme entered the PPF, all Hoover employees in it who were still working and/or under the scheme’s retirement age, stopped gaining benefits. The annual value of those employees’ pensions, when they retire, was capped at the level for the scheme’s retirement age, which is 65. Retired employees now receive 90% of either the actual annual value of their pension, or 90% of the pension level for their age, whichever is lower. Those who have already retired from Hoover and are older than the retirement age have not had a cap on their pensions, but only the part of their pension funds earned after 1997 will be index-linked with inflation, which means that people who worked all or most of their careers with Hoover before that date are losing income because of inflation.

[Jim Shannon (Strangford) (DUP)]

As always, the hon. Gentleman is bringing an important issue to Westminster Hall. Does he agree that the fact that those still under retirement age could receive an immediate 10% cut in their pension pot, and that 7,500 members will be affected—5,319 pensioners and 2,184 who have deferred pensions—shows a need for the Government, and the Minister in particular, to step in and help not only those members but their families, who rely on the pension they paid into all their working lives?

[Gerald Jones]

I agree 100%. The hon. Gentleman outlines the fact that people yet to reach pension age will experience a 10% reduction, which will cause huge difficulty.

Unfortunately, the case of Hoover pensions is not an isolated one, and we have become used to hearing in recent months and years of cruel injustices suffered by former employees of British Coal, British Steel and BHS. The evidence also suggests that we are likely to see many more such cases in the future. Before I go into more detail, and pose questions for the Minister, I shall provide some background on the history of Hoover in Merthyr Tydfil and explain the financial background that has led to the unacceptable injustices that its former employees now face.

Hoover has been an important employer in Merthyr Tydfil and Rhymney for 71 years, since the Pentrebach factory was established in 1948 to make the well-known Hoover washing machine. Only about 300 people were employed at the factory when it opened, but over the following 20 years, because of product demand, the figure rose by the thousands. By the time of Hoover’s 25th anniversary in Merthyr in 1973, more than 5,000 people were employed at the site, all contributing to the company’s pension scheme. Counting the company’s Glasgow plant, Hoover’s British workforce once peaked at 16,500 people. At its peak, the Hoover factory was the largest employer in Merthyr Tydfil County Borough, providing much-needed employment opportunities for generations of local people formerly employed in the iron and coal industries for which Merthyr Tydfil is famous.

That proved to be the high point for the factory: in the 1990s, amid financial difficulties, Hoover was sold to the Italian manufacturer Candy, which over the next few years would decline to invest further in the company or its operations. Job cuts continued over the next 10 years and in 2009, 61 years after the factory opened, production stopped altogether. Since 2009, only 100 staff have remained employed at the Pentrebach factory, in the company’s warehousing, distribution and sales operations. However, in May 2019 Hoover took the decision to move 45 jobs from Pentrebach to its headquarters in Warrington, in a move to centralise its operations, leaving only 60 posts, primarily in distribution, at the Merthyr Tydfil site.

I want to give some background on how the company’s pension scheme arrived at the state it is in today. According to the Pensions Commission set up by the Labour Government in 2004, from 1974 until 2000 the average annual real return on UK equities was as high as 13%, with investments in pension schemes during that time allowing them to flourish and pension contribution rates to increase. However, by the early 1980s the Thatcher Government had become concerned that UK companies were using large contributions to their pension schemes to lower their liability for corporation tax during years of high profits. During that time of prosperous UK pension schemes, what the Conservative Government saw as surplus funds to be taxed in a period of high equity returns were, rather, risk barriers against years of low financial profit and the rising longevity of workforces, as well as a reserve for future workers’ pensions.

The Finance Act 1986, passed by the Tory Government, required companies’ pension funds to declare any surplus of 5% or more, and either remove it within five years or lose part of their tax-exempt status. Many companies made much lower pension contributions in the years after the 1986 Act came into law, but market returns during that time remained so positive that many companies still had large surpluses left in their pension funds. Various UK companies took pension contribution holidays or looked to make improvements to their pension schemes to eliminate the surplus. It was no different in the case of Hoover, which in 1986 looked to wind up the existing pension scheme and replace it with a new scheme with improved benefits for members.

At that time Hoover had 5,500 employees in the UK, half of whom were based in Merthyr Tydfil, and the company’s UK pension scheme had a surplus of approximately £123 million, as I have mentioned. It proposed to take £87 million from the surplus, of which £42 million would go towards improved pensions and £27 million to the company’s general fund, with £18 million to be taken by the Conservative Government under the Finance Act 1986. In 1993, Hoover moved £16.8 million from the surplus to its general fund. It denied that it was being used to cover the £20 million in losses that it suffered from its infamous “free flight” sales promotion—when it promised two free airline tickets to customers who purchased more than £100 worth of products—but said it was for the general financial stability of the company. Hoover accordingly paid £11.2 million in tax to the Government, again under the terms of the Finance Act 1986.

During the 1980s and 1990s, therefore, Hoover paid the Conservative Government a total of £29.2 million. As I have explained, the terms of the Finance Act 1986 were established based on the average annual return on UK equities being 13%, as it was between 1974 and 2000. The Pensions Commission reported a considerably lower long-term average of just over 5%. The Government were incredibly over-optimistic if they assumed that 13% returns could continue into the long term. That is another classic example of the short-sightedness of a Government who placed the employer first, ignoring the employee, thinking only of short-term gain and completely neglecting the long-term potential impact of a policy on hard-working people.

I want to highlight the case of one of my constituents who has had to bear the brunt of this mess: Mr Phillip Little. Mr Little worked at Hoover in Merthyr Tydfil for 35 years, working at several departments and in various jobs across the company over a long and dedicated career. When he took his pension at age 55, he faced an immediate loss of 47%, resulting from payment holidays and Government and company withdrawals from the scheme in previous years, following the Italian company Candy’s takeover of Hoover in the 1990s and its refusal to invest or contribute further to the company’s pension scheme. Now, with the Hoover pension scheme being transferred to the Pension Protection Fund, Mr Little has had to suffer a further 10% reduction in the value of his pension due to the rules and caps, meaning he has taken a hit of 57% in total, losing over half the total value of his pension.

I think we would all agree that nobody should have to make do with less than half the pension they rightfully earned from their decades of hard work. Having been looking forward to retirement after 35 years with the company, Mr Little is devastated, and feels as though, in his words, he has been “mugged” three times over by company withdrawals from the pension scheme, payments to the Government and latterly the scheme’s transfer to the PPF.

Mr Little is one of many hundreds of former long-standing Hoover employees in the Welsh valleys who have been told that the retirement money that they worked for decades to build up has had to take yet another cut and that there is nothing they can do about it. They have had to sit and watch as the company and Government take money from what was once a surplus fund and is now in hundreds of millions of pounds of debt, and their well-earned retirement has been taken away from them.

I ask the Minister how his Government can justify this legacy of the short-sighted and irresponsible actions of the 1980s Thatcher Government, which imposed the 1986 Act on hundreds of UK companies’ pension funds such as Hoover’s, thinking only of short-term gain. Will the Government now do what is right by the many hundreds of people, such as Phillip Little, who have seen their pensions hit over and over, and repay them with the money they took from the fund under that Finance Act, so that these hard-working people can have the retirement that they deserve and that they worked for decades to build?

In Labour’s 2017 manifesto, we committed to carrying out an immediate review of current pension surplus tax and sharing arrangements, since many of the people at companies across the UK affected by this, such as Hoover, British Coal and British Steel, do not have another private fund to fall back on. The Government must now follow suit. Will the Minister commit to at least reviewing these arrangements, and to giving justice to the many former Hoover employees in my constituency who have been robbed of the pensions they worked to build and on which, having left the workplace, they now depend?

[The Parliamentary Under-Secretary of State for Work and Pensions (Guy Opperman)]

I congratulate the hon. Member for Merthyr Tydfil and Rhymney (Gerald Jones) on his speech, and the hon. Member for Strangford (Jim Shannon) on his intervention in this debate. It is a pleasure to serve under your chairmanship, Mr Robertson.

I accept entirely that this is a sensitive and important matter that the House should debate in the context of the long-term viability of defined-benefit schemes—a matter of concern to the House and to our individual constituents up and down the country. In this particular case, we are concerned with the constituents of the hon. Member for Merthyr Tydfil and Rhymney and the members of the Hoover pension scheme, who feel very strongly about this issue. I hope that I will be able to reassure hon. Members that the Pensions Regulator has done everything in its power to achieve the best possible outcome within the current legislative framework.

I will start with defined benefit generally, and make the simple point that the majority of defined-benefit pension schemes in this country are run effectively. We are fortunate to have a robust and flexible system of pension protection in the United Kingdom. The Pensions Regulator, which is based out of Brighton and is obviously independent of Government—although I meet with it on a regular basis—has a range of powers to protect pension schemes and works closely with all involved.

For schemes where the employer goes insolvent, the Pension Protection Fund is there to help to protect the members. Anybody already in receipt of their pension will continue to be paid and other members will receive at least Pension Protection Fund compensation levels. However, we are in the process of reviewing the defined-benefit system; the hon. Gentleman will be aware of the defined benefit White Paper issued a little while ago and the proposals put forward for a future private pensions Act, which we hope to bring forward in this House in due course.

In respect of the Pension Protection Fund itself, I want to ensure that hon. Members fully grasp that the Pensions Regulator has done everything in its power as an independent regulator to achieve the best possible outcome for scheme members. The employer, the Pensions Regulator and the Pension Protection Fund have considered different solutions to address the scheme’s funding deficit. On 31 March 2016, that deficit was approximately £500 million. Given that that funding deficit was putting the solvency of the company and its pension scheme members at risk, the Pensions Regulator intervened.

Turning to the Pensions Regulator’s intervention, on 30 May 2017 it approved a proposal by the 1987 Hoover pension scheme. The approved plan, known as a regulated apportionment arrangement, helped to secure the future for UK employees and gave protection to the pension scheme. The Pensions Regulator agreed to the regulated apportionment arrangement only after ensuring that Hoover had met its very strict criteria. The agreed arrangement between the company and the Pensions Regulator secured a £60 million payment from Hoover into the Pension Protection Fund in May 2019. That lump sum is significantly higher than what it would have received had Hoover fallen into insolvency. In addition, as part of that arrangement the pension scheme would also receive shares representing a 33% stake in Hoover.

That balanced approach addressed the need to protect scheme members’ pensions while preserving jobs in the sector and in the hon. Gentleman’s constituency—a matter that I know he is passionate about. The trustees of the scheme acknowledged that it secured a significantly better outcome for the pension scheme than it would have received through the normal insolvency process, and the best achievable solution for the pension scheme given the circumstances.

Matters proceeded, and I will address the protection for pension scheme members. The Hoover pension scheme left the Pension Protection Fund assessment period and transferred into the Pension Protection Fund itself in May 2019. The hon. Gentleman will be aware that the Pension Protection Fund is effectively an independent lifeboat. It is a fund established to provide a meaningful level of compensation to members of private sector occupational defined-benefit pension schemes who have lost their pension as a result of employer insolvency or impending insolvency.

Crucially, the Pension Protection Fund is funded by a levy on all other defined-benefit schemes. The framework under which the Pension Protection Fund operates means that favouring any one group will place a corresponding burden and risks on other levy payers and Pension Protection Fund members. I accept that the hon. Gentleman sought to persuade me that we should make radical change to the Pension Protection Fund as a whole, but he and I need to agree something: the previous Labour Government, who were in charge between 1997 and 2010, had opportunities to correct many things, and one of the corrections they made was the creation of the Pension Protection Fund.

We must have a very robust discussion that makes it clear that, were the Pension Protection Fund not in existence, the situation for any scheme member facing this situation would be considerably worse. The Pension Protection Fund, set up in 2005, has transformed the landscape for many people who would otherwise have been left desperately vulnerable and considerably impoverished. It pays a guaranteed level of compensation that was not previously available to pension scheme members in similar circumstances.

Pension Protection Fund compensation guarantees 100% protection to members who are over their scheme’s normal pension age at the date of the employer’s insolvency or to members under normal pension age who retired on ill-health grounds. All other scheme members are paid compensation based on 90% of their pension, subject to a cap.

The Pension Protection Fund is largely seen as a success across all Governments, with respect, and has received strong cross-party support. While the hon. Gentleman is clearly right to champion his constituents’ cause, it is right that the House should celebrate the fact that, without the Pension Protection Fund, things would be considerably worse. Setting it up was a success of the last Labour Government, and it has been endorsed and supported by all other Governments since.

[Gerald Jones]

I appreciate the Minister’s point about the Pension Protection Fund and how different the situation would have been had it not intervened. However, the central point I was trying to get across was whether there is any opportunity to review the position of surpluses taken under that Finance Act by a previous Conservative Government, maybe not to fully reinstate what the pensioners have lost but to go some way towards defraying some of the difficulties that pensioners now face, in my constituency and beyond.

[Guy Opperman]

I will answer that with three points. The first is slightly political but has to be made, given the way that the hon. Gentleman put his case. There was an opportunity between 1997 and 2010 to make such a reform if that Labour Government wished to.

However, perhaps it would be appropriate to explain why we got into this situation. Clearly, this is a tax issue. The hon. Gentleman will understand that I am answering on behalf of the Department for Work and Pensions, but I will endeavour to do my best impersonation of Her Majesty’s Treasury and address this. The Treasury’s view is that the Finance Act 1986 addressed what were then considered to be excessive pension scheme surpluses, as there was an absence of clear rules on how surpluses should be dealt with. Pension schemes with funding in excess of a certain amount could reduce certain surpluses in a number of ways, including by suspending employer or employee contributions, making taxable payments back to the employer, improving member benefits or providing new benefits to members.

It was entirely a matter for the trustees and employers to decide which method of reducing the surplus to use. If, and only if, they chose to make a refund, the employer was liable to tax at 40% of the amount refunded, so as broadly to recover the tax relief previously given. Those laws on pension scheme surpluses were repealed in 2006, with the introduction of a new pensions tax regime. As to whether the Government can commit to reviewing the terms of the Act and possibly returning the money to the schemes, Her Majesty’s Treasury is clear that it is right and fair that everyone, whether individuals or businesses, must pay the tax that is due.

Before 1986, some employers could use surpluses as a way to avoid tax. They could pay contributions into the pension scheme and receive tax relief, then apply for a return of a surplus. There were no provisions for tax repayments on the return of a surplus. The 40% tax on a return of surplus was introduced in 1986 so as to broadly recover the tax relief previously given. It was not mandatory to return the surplus; a company could instead have a contribution holiday or improve member benefits.

To answer the hon. Gentleman’s point, it is not Her Majesty’s Treasury’s present intention to reform or reinstate anything relating to the situation under the Finance Act 1986, as he sought to persuade me to do. However, I will briefly explain the changes to improve scheme funding. The Pensions Regulator can track pension scheme funding and will react appropriately when there is a large funding deficit. The scheme funding measures proposed in our White Paper will ensure that trustees put in place a more robust plan to ensure that the statutory funding objective is achieved. We intend to use new and existing powers to be clearer in legislation about what is an appropriate length for the recovery plan when there is a funding deficit.

We will take steps to require trustees to explain to the Pensions Regulator their funding and investment strategy, how they intend to mitigate risks to the scheme funding position and how they are complying with funding standards in legislation. The changes are intended to support trustees in their decision making and to strengthen the Pension Regulator’s enforcement regime, to protect members, sponsors and the Pension Protection Fund from future shocks or events such as these. The system will retain some flexibility to ensure that sponsoring employers can balance their obligations to the pension schemes with business needs. The reality is that the Pension Protection Fund is a significant organisation with more than £30 billion of assets and responsibility for more than 236,000 pension scheme members, more than half of whom are current pensioners. It is able to cope with these schemes.

However, the hon. Gentleman and the hon. Member for Strangford, who has now left the Chamber, made points in respect of other cases, including British Coal, British Steel, BHS and others. I will return to those before I finish, because while the constituents of the hon. Member for Merthyr Tydfil and Rhymney would like to receive 100% of whatever they thought they were going to receive—no one disputes that—without the changes that successive Governments have brought in, their position would be considerably worse.

The reality of the situations that the hon. Gentleman outlined is that the difficulties that those companies have got into have been addressed, by and large—there have been some tweaks or changes to the way they have been treated, particularly in respect of British Steel—by the Pension Protection Fund stepping in, by way of introducing a levy on the defined-benefit schemes out there and ensuring that a substantial payment is made from a pension that otherwise would have been lost under the old law. That has been addressed by successive Governments. Clearly this is a matter of great import to his constituents, and I thank him for bringing it to the House. I hope I have addressed some of the points raised.

Question put and agreed to.