AEA Technology Pension Scheme

Debate between Steve Webb and Lord Sharma

Wednesday 18th March 2015 Westminster Hall

[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.

[Alok Sharma]

Will the Minister give way?

[Steve Webb]

I wonder if I may make more progress, to be fair to my hon. Friend the Member for The Cotswolds, as I want to respond on a few points.

The money went across; the firm was then private. Clearly, the business went on trading for 15 years or so. An issue arises about whether it was a prosperous, expanding firm where something funny went on, or on the brink of insolvency. I want to clarify what went on; my hon. Friend referred to it in part. In November 2011, the company issued a trading statement saying its financial position was deteriorating, and it was discussing the situation with its banks. In April 2012, AEA Technology’s latest forecast indicated that the company would be insolvent on a cash-flow basis by June 2012.

It can be simultaneously true that a company is recruiting more people and that it has terrible cash-flow problems. If the point is reached where it cannot meet its liabilities, it becomes insolvent. To give a sense of scale, the deficit in the pension fund as of 2011, on a standard basis, was £315 million, and the company could not afford to pay £6 million towards it. That is how bad things had got. So on the notion that somehow that £315 million deficit, which was £450 million on a buy-out basis, was going to be cleared, that was not going to happen.

Pre-pack administration is controversial and difficult and happens only when the options are insolvency with jobs lost and the pension fund going to the PPF, or insolvency with jobs saved and the pension fund going to the PPF. That was the choice. In fact, because of the pre-pack, hundreds of jobs were saved. To make a comparison with a straight insolvency, I am advised that the scheme would have got about £1 million with a routine insolvency, but the pre-pack enabled it to get between £6 million and £8 million.

My hon. Friend is quite right: frankly, when a scheme is £300 million in deficit that will not make any difference, because it is going to end up in the PPF anyway, so the benefit is to the PPF and not the members. However, the Government do not encourage struggling firms to shovel their pension fund deficits off to the PPF and carry on trading. It is allowed only where insolvency is inevitable. Our judgment was that that was the state of the company at the time, and the goal was to save some jobs, because the scheme was going to end up in the PPF anyway.

My hon. Friend asked about PPF benefits, and he is right: it is a compensation scheme. It is not a pension scheme that replaces and mirrors the benefits that were to be provided in the scheme. The reason for that is that the money for the PPF comes from other pension schemes, so any improvement in the benefits under the PPF is a bigger levy on employers who run other pension schemes. We should bear in mind that it did not exist much more than a decade ago. When it was set up, it was decided that it would offer broad compensation—100% above pension age, and 90% below, and indexation post-1997. That is the statutory requirement; schemes must index post-1997, and not pre-1997, and that is why the PPF does so.

My hon. Friend asked whether, because the firm was privatised, it should be made a special case. Of course I sympathise, but on the other hand vast numbers of workers now work for private companies that were previously nationalised. If AEA Technology were to be declared a special case, the pension funds of all the people who used to work for BT or British Airways and all the privatised companies would have to have special arrangements, too, with huge cost implications.

The question about the advice note given at the time is important. I have read the GAD note, and its introduction says, at 1.1.3:

“The note is not intended to suggest that any one course of action is better than any other. This would depend on individual circumstances, and if you are unsure of the most suitable course of action you should seek Independent Financial Advice which would take into account your particular circumstances.”

That was the point of the note. People could leave the money where it was, transfer it across to the AEA scheme or take a personal pension transfer. The note was explicit from the start that it was not designed to lead people down a particular route. In a sense, from the Government’s point of view it did not matter. The Government were going to transfer across the cash value of the rights built up, so they did not care whether people transferred across. There would have been no reason for GAD to write a note designed to lead people to a particular outcome. It would cost the Government the same either way.

[Steve Webb]

I am very happy to ask colleagues at the Department to respond to my right hon. Friend’s questions. Obviously, as he said, the issue of PPF is a DWP responsibility, but insolvency policy—pre-packs and so on—is a BIS responsibility, and of course he should get prompt responses to his questions. If my hon. Friend the Member for Reading West still wants to intervene I am happy to give way.

[Alok Sharma]

I wanted to make the point that people affected by the scheme will be listening to the debate, and the bottom line for them is that what the Minister is saying—perhaps he will correct me if I am wrong—is that no compensation or redress will be forthcoming from the Government.

[Steve Webb]

Clearly, the Government have set up the Pension Protection Fund. As I have said, more than about 10 years ago, people in the situation we are talking about might have received a tiny fraction of the pension they had been going to get. In the present case, the base calculation for those over scheme pension age is 100%. I take the point about indexation, but it is 100%. It is 90% for those under scheme pension age. That is obviously still a significant part of their pension rights. Clearly, the reduction in indexation is important. I would not play that down.

The other thing to mention—my hon. Friend the Member for The Cotswolds did not refer to it—is that at the moment scheme benefits are capped. There is implicitly a salary cap—a cap on the amount of money that someone can get through the scheme. We legislated during this Parliament, with the support of my right hon. and hon. Friends, for that cap to be raised for long-serving employees. One reason I was keen to do that is if a relatively large pension through the PPF is capped, it may not be because the person in question was a ridiculously high earner; it could simply be because of very long service with that employer. I believe that that is so for many of my hon. Friend’s constituents.

I felt it was unjust that the cap applied quite as brutally as it does in those cases, so we are now working on the secondary legislation necessary to get the cap lifted. It will rise by 3% per year for each year above 20 years of service, so long-serving employees will get a higher cap. We are working on the measure, and if we can get it done this year, we will. I suspect that realistically we are probably looking at this time next year. However, I do not have a pot of money to offer beyond that. Clearly, the PPF is there for all employees of private sector companies.