Occupational Pension Schemes (Levy Ceiling) Order 2011

Lord Stoneham of Droxford Excerpts

Wednesday 9th March 2011 Grand Committee

[Lord McKenzie of Luton]

My Lords, I thank the Minister for his eloquence in introducing these orders. If I am not mistaken, the first two will no longer be subject to the affirmative procedure as a result of provisions in the Pensions Bill, so perhaps we must make the most of this occasion. Together with the levy ceiling earning percentage increase order, they set the compensation cap, as we have heard, limiting the amount of compensation payable by the PPF and the levy ceiling which controls the maximum amount of levy the PPF can charge pension schemes. As we heard, the levy ceiling for the year commencing 1 April 2011 is £892 million, which is comfortably above the proposed levy for that year, which the Minister told us is £600 million. In respect of that levy, I do not know whether the Minister is able to give us a split between the risk-based and scheme-based components. Could he take the opportunity to say something about collection rates and how we are doing in terms of collecting what we think is due?

The increase in the general level of earnings for the period 1 August 2009 to 31 July 2010 is 2.4 per cent. On the current compensation cap, the maximum level of compensation which is payable before applying the 90 per cent requirement is increased by 0.5 per cent to £33,219. In this case, the uprating is still by earnings but by reference to a different period.

We have no problem with these two orders, although, not surprisingly, they prompt wider questions. First, it is right to reflect on the importance of the PPF and how, alongside the Pensions Regulator, it has played an important role in ensuring some stability in a turbulent period for defined benefit schemes. It has ensured that something like 55,000 individuals already receive, or can expect to receive, a decent income in retirement which, because of the insolvency of their employers, they might otherwise not have achieved. From my experience, it is a highly professional organisation. According to the website, some 212 schemes are in the PPF at the moment and, as at January 2011, almost £236 million has been paid in compensation, with the oldest recipient being 105 and the youngest four.

Things seem to be in a far from steady state, with 10 schemes just transferred into the PPF and 409 schemes and 200,000 members in the assessment stage. Perhaps I can ask the Minister about the time taken for assessment. Clearly in some cases the assessment has not been completed within two years, although in the Pensions Bill we are considering removing the requirement for the assessment period to last for a minimum of 12 months. I accept that there is no inherent inconsistency between those two positions—we support that—but what are the barriers to speeding up the assessment process?

Given the levy ceiling we are discussing, perhaps we could get an update on the PPF’s exposure to the universe of eligible schemes. It would appear that before taking account of the RPI/CPI changes, the number of schemes in deficit and the aggregate deficit has declined over the past year. It is presumed, therefore, that the headway created by the levy ceiling is something with which the Minister is wholly content. In the past, the ability of the PPF to fund the consequences of a big influx of schemes was often called into question. I think that we responded robustly then and I imagine that the Minister is in a position to do at least that this afternoon, given the change in the background to those schemes. Can he say how many compensation payments are currently limited by the cap? I tried to get my mind round this issue—I am not sure that I have completely—but, going forward, what will be the relationship between the level of the cap and what would have been provided for by underlying schemes and the PPF arrangement? If the cap gets uprated by earnings, but compensation amounts going forward are uprated generally by earnings, because that is the nature of defined benefit schemes, and partly by reference to the CPI, is there potentially a divergence of the cap from underlying compensation which thereby would weaken its purpose?

The order concerning the financial assistance scheme puts into effect, as we have heard, the RPI/CPI switch for revaluation, indexation and annual increases in the maximum cap. The Minister will be aware that we have concerns about the switch to CPI, certainly as currently constructed, as an appropriate measure of inflation. Doubtless we will have a substantive debate on that in Committee next week and on subsequent occasions.

I share the Minister’s view that no index is perfect and I was interested in his example about the formula effect and switching. When he referred to it in the Chamber he spoke about moving from one kind of biscuit to another. I am comforted to know that we can go from one jammy dodger to another and we will be okay. It was good to hear about the work going on in the ONS.

As we have heard, FAS, unlike PPF, is funded by government—net of assets taken in, of course—and a reduction in costs can make a contribution to deficit reduction. We could, in principle, support this for a period, but there is a dearth of information about how much is involved and no impact assessment has been provided. Perhaps the Minister can help on that

I am aware that the final settlement for FAS arose from a tortuous process involving, among other things, legal action in the UK and in Europe. I presume that there is nothing in the CPI/RPI switch which could be said to negate that settlement. Perhaps the Minister can confirm that. I welcome the proposals dealt with in the Explanatory Notes to consolidate the FAS regulations.

For both FAS and PPF, before entry into the appropriate scheme there would have been a judgment of what an individual could have obtained in the market and whether FAS and PPF would provide a better outcome. This judgment, presumably, would have been made on the basis that FAS and PPF payments would be uprated by RPI. If this is not the case, is there the prospect that individuals will be worse off in retrospect because of the decisions made? What analysis have the Government made of this situation? If it is not to hand, perhaps the Minister will write to me.

Let me make one further point on the PPF levy. It appears that there is to be a new levy framework introduced in 2013. What can the Minister tell the Committee about this and what are the ramifications, if any, for the levy ceiling? I look forward to his responses in due course.

[Lord Stoneham of Droxford]

I support these regulations and I have only limited points to make on them. The role of the Pension Protection Fund is very important—all credit to the previous Government for introducing it—and we want to make sure that it is maintained and sustained. Obviously in the current environment the investment levels on the stock market have helped some of these schemes, but can the Minister give the Committee his view on how the economic situation is impinging on companies, particularly those on the borders of insolvency, and the pressures that that is likely to place on the fund over the next couple of years as we move, we hope, towards economic recovery?

I accept that we will be discussing the CPI issue in the coming week but I make the point that none of these indices is perfect; they measure inflation for all consumers on different bases. The Minister will perhaps answer this point more fully next week, but is any further research being done on the CPI to ensure that, as we are now moving towards using it more fully across a number of measures which affect pensioners particularly, we can make the index more representative of pensioners’ expenditure and fairer in the long term? I support the regulations.