Financial Assistance Scheme (Increased Cap for Long Service) Regulations 2018

Lord McKenzie of Luton Excerpts

Monday 22nd January 2018 Lords Chamber

In conclusion, we remain committed to the principle of providing protection for members of pension schemes in the event of employer insolvency. The Government have listened carefully to stakeholders and the pension industry, and these regulations show that we are meeting our commitment to protect pension scheme members and make reforms where necessary. In my view, the provisions of the Financial Assistance Scheme (Increased Cap for Long Service) Regulations 2018 are compatible with the convention rights. I commend these regulations to the House.

[Lord McKenzie of Luton (Lab)]

My Lords, I thank the noble Baroness, Lady Buscombe, for her clear introduction to these regulations. As we have heard, they will amend the legislation to allow the Financial Assistance Scheme to pay a higher amount of assistance to capped FAS members who have long service in a single pension scheme. They allow an increase in the cap by 3% for each year of pensionable service over 20 years up to a maximum of double the standard cap. This is in addition to the inflationary increase in the amount of the cap. As we have heard, a parallel change has been made to the PPF, although not by the use of regulations, with effect from April 2017 in line with the policy to align the two systems and following a government Statement on 15 September 2016.

FAS and its follow-up, the PPF, have been important mechanisms—I think this is a view that we share—to improve confidence in defined benefit schemes. They protect some 11 million in the UK who belong to such schemes. For FAS to be involved, a scheme must have commenced wind-up between 1 January 1997 and 6 April 2005; after these dates, individuals would look to the PPF. We introduced these schemes when in government and continue to support them.

FAS would generally meet 100% of entitlement for those having reached retirement age when wind-up commences; for those who have not done so, members would generally receive 90% of the expected pension accrued at the point that the scheme began to wind up, subject, of course, to the cap. From recollection, the expected and actual pension amounts for these purposes would not always coincide with scheme definitions. Could the Minister comment on how they might diverge at the current point?

Notwithstanding the 6 April 2005 date, we know that there can be a considerable lead time between commencement of wind-up assessment and entry into FAS. According to the most recent accounts—the Minister might be able to confirm this—in the year to 31 March 2016 there were still some 23 schemes that completed wind-up, with a total of £141 million of assets transferred to the Government. Incidentally, could the Minister remind us how the receipt of scheme assets, employer contributions and FAS payments are dealt with in the government accounts?

As we have heard, the PPF took over responsibility for the management of FAS in 2009. By the end of 2015-16, it had completed the transition of 1,027 schemes, with 155,000 individuals entitled to FAS assistance. This is an impressive level of support, without which thousands of individuals would have received or be entitled to little or nothing at retirement. At a time when we are debating in general the merits or otherwise of outsourcing, FAS is a worthy example of the state stepping in to support failures of private pension provision.

It was announced that, in 2016, FAS would be closed to new applications. While this would keep the scheme open some 10 years longer than originally planned, have the Government made any assessment of the number of individuals who would lose out as a result of such a decision and what the Government’s saving would be? Failure to access FAS might be laid at the door of trustees or scheme administrators, but any loss would be suffered by members. Is that fair? Would failure to seek access to FAS cause any restriction on access to social security benefits?

We have seen a copy of the Government’s response to the consultation on the increased cap proposals. One issue arising is whether there should be a definition in the regulations of pensionable service, as it would help avoid confusion where service was under another scheme and would be disallowed. The Government say that they are content to rely on information from trustees about pensionable service based on the definition of pensionable service contained in individual scheme rules, but one bugbear of the scheme, at least initially, was the poor quality of some of the data held by various schemes. What is the current situation in this regard, and what confidence is there across the board that scheme data are now more robust? In how many cases has the FAS scheme manager had to issue guidance to individual schemes, and on what points?

It seems that, despite the original intent, periods of service accrued in a member’s own right are to be aggregated with those arising under pension credit arrangements in determining long service. We do not oppose this, but, for the record, perhaps the Minister would expand on the potential stumbling block referred to in the documentation should the alternative position have been adopted. Further, we support the potential inclusion in the long service cap of those in receipt of a survivor’s pension but who do not have any pensionable service of their own.

The Explanatory Memorandum draws attention to the reference to the European Court of Justice in the case of Grenville Hampshire. This is a matter engaging EEC directive 80/987 and whether in the event of an insolvency every employee should, inter alia, receive no less than 50% of their expected pension benefits. From recollection, this matter has been around for a little while. Perhaps the Minister would update the House on the current state of affairs. The risk would be where the current cap is in play and would, I presume, be ameliorated by these regulations. Should the Secretary of State or the board of PPF not prevail, what are the consequences?

The caps on both FAS and the PPF were a mechanism to limit costs and to guard against excessive risk-taking, the latter potentially arising where decisions could risk insolvency of a company where there was no chance of a diminution in executive pensions because they would be wholly underwritten by FAS or the PPF—that is, the moral hazard position. In amending this approach, we are asked by the Minister to recognise the unfairness for those whose long service has been in a single pension scheme and where, without raising the cap by length of service, they would be in no better position than someone with equivalent pension entitlement levels but who could secure additional benefits in a new scheme. We recognise that position.

It is noted that no impact assessment is offered for these regulations, although reference is made to the impact assessment for the Pensions Act 2014. Will the Minister say why no such assessment has been prepared, particularly given that, for FAS, after asset transfers and recovery the net cost is met by the public purse? Under PPF, it is met by the levy on other DB schemes. A phone call to officials suggested an annual cost of £1.2 million a year—indeed, the noble Baroness confirmed that figure—and that some 290 members would benefit. Given the stop on further FAS transfers, this is a finite population. Other things being equal, we might question whether this is a priority at the present time, but alignment with PPF, prior deliberations and fairness lead us not to oppose but to support these provisions.

Having recognised the principle, the question arises as to the quantum of the relaxation—in other words, the 3% for each full year of pensionable service over 20 years, subject to the limit of double the standard cap. Will the Minister remind us of the basis on which this 3% is computed? It should be noted that, for the PPF, the increased cap for long service could increase levy payments by some £139 million in the period to 2030. Will the Minister tell us how many recipients are likely to be involved over that period?

These regs are about FAS, but we should not let the moment pass without making a general point about the pensions environment and the PPF. Not only has it to deal with BHS but, as the result of last week’s events, also Carillion. It is to be welcomed that the PPF is in robust health, with, I think, £4.1 billion in reserve, but there is obviously a limit to the strain it can take. Subject to all this, I support the regulations.

[Lord Jones (Lab)]

My Lords, like my noble friend at the Dispatch Box, the Minister is a master of detail and I thank her for her helpful introduction. However, since they refer to Wales as well as the rest of Britain, have these draft regulations any relevance to the steel-workers of Port Talbot at the previous Tata company? Indeed, do they in any way impinge upon the pensions entitlement of the remnant of the steel industry across Britain? It is not that one expects steel pensions to be sky-high, which the cap might anticipate. If the Minister can in any way make reference to the beleaguered steel industry, and in particular those steel-workers in the great Port Talbot works who are very anxious about their pensions, that would be helpful.

--- Later in debate ---

The noble Lord, Lord Jones, asked about the impact on British Steel. There is no impact: these regulations do not impact on Tata or British Steel. The noble Lord, Lord McKenzie, also asked about the schemes left to transfer. FAS applies only to pension scheme members whose employers became insolvent before the existence of the PPF in April 2005, so the 2016 deadline still gave more than 10 years to transfer into FAS, which I hope noble Lords will agree is some considerable time.

[Lord McKenzie of Luton]

What struck me when I looked at the data was that for the last year, up to March 2016, there were still some 23 schemes transferred into FAS, notwithstanding that it was 10 years or more since the obligation to commence winding up. If I understand correctly and there were 23 schemes for that period, how many were left out of the subsequent period and have been chopped off? This is particularly an issue if the failure—if it is a failure—to pick up that detail was with the trustees or the scheme administrator, because the consequence would fall on the individual member of the scheme.

[Baroness Buscombe]

I understand the question posed by the noble Lord; indeed, when I was discussing this with officials, I was amazed that it took 10 years. To begin with, I could not understand why the scheme closed to new entrants as late as 2016. I cannot say whether the figure of 23 schemes is correct for the final year but I will check and respond to the noble Lord; I shall seek to find out how many were left out and how many individuals might thereby have lost out. I also have a little more information regarding Tata: because this provision applies to schemes wound up before 2005, it is relevant not to Tata but to the PPF scheme.

The noble Lord, Lord Kirkwood, asked why the Government have taken so long to introduce the long service cap. There have been significant reforms to pension legislation over the last few years, and the introduction of the FAS long service cap is the latest change in a programme of work to treat members of the FAS and PPF schemes more consistently. I hope the noble Lord will accept that pension legislation is complex. It was important that we consulted on draft FAS long service cap regulations to ensure that the legislation operated as intended and did not have any unintended consequences. As a result, December 2017 was the earliest that we could lay the regulations. I appreciate that members of the FAS will be frustrated by the perceived delay but we had a legal obligation to consult on the regulations. The public consultation helpfully identified some small changes that were required to ensure that the regulations operate as intended for eligible FAS members.

We also had to ensure—I think this brings us on to the next question posed by the noble Lord—that the costs were proportionate and to structure the long service cap to ensure that no further costs would be incurred. The noble Lord was very concerned about the administrative cost. I share that concern; it seems like an enormous amount of money for the relatively few people affected. At least I can confirm that the costs are less than had first been forecast. It would be fair to say from the department’s perspective that we are continually looking at where costs can be kept to a minimum, not least because those costs fall on the taxpayer.

While in the past there has been much criticism and scepticism around the introduction of digital systems to support more effective, efficient and cost-effective systems for the administration of such schemes, it is fair to say that systems are proving more robust as technology advances and becomes more understood by users. However, it is incumbent on all of us to keep an eye on that in terms of ensuring that we do all that we can to reduce costs. The trouble is that we are talking about checking records of individuals. That takes time and sometimes it is easier to do manually for such a small number of people. I accept the noble Lord’s point: in some ways, one might question whether it is simpler and more cost effective to do it manually. I take very much on board what he has said.

With regard to transaction costs, going on from what I have just said—sorry to string this out—the PPF, which administers the FAS, is currently in-sourcing member data from Capita. The FAS data is currently out of date, incomplete and often paper-based, requiring manual processing and checking, and that is not a one-off cost. We should continue to look at that and encourage those who administer the scheme to do the same, although I am sure they are cognisant of these considerable costs.

The regulations will ensure that individuals who have worked hard for a single employer for many years are not penalised by the cap. This group of savers have built up a large pension pot, not because they are high earners but because they have worked for one employer for the majority of their working lives and, as a result, will not have had the opportunity to secure additional income in retirement.

The decision to increase the total amount of assistance that this group can receive has not been taken lightly, as the Financial Assistance Scheme is funded by the taxpayer. As my noble friend Lady Altmann said, a considerable amount of consultation, lobbying, and so on, was undertaken to encourage the Government to introduce the regulations. But to leave the situation unchanged would create an inequitable situation where those with long service in the Pension Protection Fund were treated more favourably than those in the Financial Assistance Scheme and break our commitment made in another place on 15 September 2016.

I reassure all noble Lords that no new funding commitments have been or will be made in respect of the scheme. Since 2005, employer insolvencies have fallen under the jurisdiction of the Pension Protection Fund. Unlike the Financial Assistance Scheme, the Pension Protection Fund is mainly funded by an industry levy and is therefore not reliant on the public purse.

I believe that the correct balance has been struck between securing meaningful income in retirement for members compensated by the Financial Assistance Scheme and the cost to the taxpayer. I have outlined in detail the issues that the regulations will address and why the Government have decided to act. Now is the right time to correct this problem, and I ask that the Motion be approved.