Pensions Act 2004 (PPF Payments and FAS Payments) (Consequential Provisions) Order 2006

– in the House of Lords at 5:57 pm on 9th February 2006.

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Photo of Lord Evans of Temple Guiting Lord Evans of Temple Guiting Government Whip, Government Whip 5:57 pm, 9th February 2006

rose to move, That the draft order laid before the House on 9 January be approved [14th Report from the Joint Committee].

Photo of Lord Evans of Temple Guiting Lord Evans of Temple Guiting Government Whip, Government Whip

My Lords, in moving this order I shall speak also to the Pension Protection Fund (Pension Compensation Cap) Order 2006. I remind noble Lords that the Pension Protection Fund, or PPF, was created under the Pensions Act 2004 and began operating on 6 April 2005. The PPF was established to pay compensation to members of eligible defined-benefit pension schemes when there is a qualifying insolvency event in relation to the employer and where there are insufficient assets in the pension scheme to cover PPF levels of compensation.

Noble Lords will be aware that, when an employer has an insolvency event, an assessment period is triggered during which time the scheme's assets and liabilities are valued to determine whether the PPF should assume responsibility for the pension scheme. The assessment period must last at least 12 months meaning that the earliest date from which the PPF can pay compensation is 12 months from 6 April 2005. Noble Lords are all aware of the importance of the Pension Protection Fund and the Financial Assistance Scheme—or FAS, as I will refer to it during the course of this debate.

I turn to the first order before us today. The Pensions Act 2004 (PPF Payments and FAS Payments) (Consequential Provisions) Order will insert Pension Protection Fund payments, together with a definition of those payments, into existing regulation-making powers within a variety of Acts to enable income-related and contributory benefits to take into account the receipt of Pension Protection Fund payments by individuals when calculating the amount of benefit due in relation to contribution-based jobseeker's allowance, dependency increases in respect of incapacity benefit, maternity allowance, state pensions, carer's allowance and severe disablement allowance, incapacity benefit and state pension credit. In addition, Financial Assistance Scheme—FAS—payments are inserted into the Jobseekers Act 1995 so that they may be treated as income for the purposes of contributions-based jobseeker's allowance. The relevant powers are contained within Section 319(2)(a) of the Pensions Act 2004.

When a member's occupational pension is replaced by PPF or FAS payments, those payments will not impact on certain income-related and contributory benefits unless current legislation is amended. Amendments to other benefit regulations are being taken forward separately by negative amending regulations as certain existing Acts already provide sufficient powers to make the necessary amendments without the requirement to amend primary legislation powers. These include housing benefit, council tax benefit, income support, and income-based jobseeker's allowance.

The Financial Assistance Scheme was created to offer help to a number of people who have lost out on their defined-benefit pension scheme because their pension scheme was underfunded when it was wound up and their employer has been unable to make up the deficit. FAS became operational on 1 September 2005, and the first payments by FAS were made in December 2005. Because most FAS payments will not be made until the scheme members reach 65, only certain social security benefits need to be amended to take account of FAS payments. This order will amend the primary legislation for contribution-based jobseeker's allowance, by inserting a definition of FAS payments into regulation-making powers and by adding a reference to FAS payments in the list of payments in respect of where deductions are to be made within the contribution element of jobseeker's allowance.

Noble Lords may be aware that regulations relating to FAS and state pension credit came into force on 18 December 2005 to take account of FAS payments that came into force in December 2005. The order ensures that individuals in receipt of benefits and PPF or FAS payments are no better off than individuals in receipt of benefits and occupational pensions.

I shall now move on to the second instrument before us, the PPF (Pension Compensation Cap) Order 2006. This order follows the requirement in paragraph 27 of Schedule 7 to the Pensions Act 2004 to increase the amount of the compensation cap from 1 April 2006 in line with the increase in average earnings in the previous tax year. A compensation cap is applied to scheme members who are below the scheme's normal pension age at the start of the assessment period. These members are then eligible for a 90 per cent level of compensation when they retire.

The amount of the current compensation cap was set from 6 April 2005 using data for average earnings and income available up to April 2004. The cap was set at £27,777.78 and currently provides a maximum amount of compensation, once the 90 per cent rule is applied, of £25,000 at age 65. Total average earnings, as published by the Office for National Statistics, increased by 4.2 per cent for the 2004–05 financial year. Applying this 4.2 per cent increase to the current cap provides an increased cap of £28,944.45, which provides a maximum amount of compensation, once the 90 per cent rule is applied, of £26,050.01 at age 65. That level of compensation is appropriate only to those members who became entitled to its 90 per cent level on or after 1 April 2006. The order therefore ensures that the compensation gap is uprated in line with the increase in average earnings.

The two orders before us, which I am content are compatible with the human rights convention, ensure that compensation payments made to individuals out of the PPF are treated fairly and consistently with occupational pensions and earnings. I beg to move.

Moved, That the draft order laid before the House on 9 January be approved [14th Report from the Joint Committee].—(Lord Evans of Temple Guiting.)

Photo of Lord Skelmersdale Lord Skelmersdale Shadow Minister, Work & Pensions

My Lords, I am grateful to the Minister for his lucid explanation of the first two orders before us today. I, too, am happy to take them together.

Concerning the first order, it is clear that a PPF pension or an FAS compensation amount in payment is income in the same way that state or occupational pensions are. They are, therefore, not only taxable but can diminish the award of the social security benefits that the Minister mentioned. Yet the order does rather go over the top; it is a belt and braces approach par excellence. I cannot imagine, for example, that anyone receiving income from the fund or the FAS will be receiving maternity allowance. Why is it therefore included in the list that he has just given?

It is also worth noting that incapacity benefit is only reduced when a pension is in payment, not on any other occasion. Why, too, are state pensions on the Minister's list? These are paid as of right—that is, as long as sufficient national insurance contributions have been paid during a working life—and I see no reason why they should be reduced by virtue of receiving income from the PPF or FAS. Naturally, they would reduce any amount of pension credit payable. Part 3 of the schedule refers to that, and rightly so, but I should point out that it would be extremely rare for a payment from the FAS or PPF to be so low that any suggestion of pension credit would be considered. Can the Minister give examples of when and where that could happen?

For many years, people of pension age have been encouraged to continue their working lives. A pensioner who continues to put off claiming their state pension beyond the retirement age for it will earn increments of 10.4 per cent for every extra year that they work. Provision was made in the Pensions Act 2004—wrongly, in my view, as I said in debate on it—that the pension due on any extra years worked post retirement age could be commuted into a lump sum. There is, as far as I know, no provision for that within the PPF; neither would there be in the FAS, since that is pure compensation. I therefore ask: is it intended that a PPF pension will be paid irrespective of whether the potential recipient continues working, presumably in another job?

As for the pension compensation cap, the noble Lord, Lord Oakeshott, is too kind to criticise me when I describe most uprating statements as boring, which I do from time to time. My use of "boring" is perhaps a little eccentric: it is in the sense of "predictable". Governments have to uprate benefits every year; so, indeed, must they uprate the cap, though that is not by inflation but by earnings, should they exceed a certain amount in the previous year. As the Minister explained, that is why we have the second order. Even so, I am afraid I have a question on that too. Paragraph 4(3) of the Explanatory Note states that the level of compensation cap encourages scheme members to become more involved in scheme matters. Therefore, given the whole rationale of the scheme—that a pension scheme has entered the FAS by default—how can the level of the cap encourage members of defunct schemes to become so involved?

Photo of Lord Oakeshott of Seagrove Bay Lord Oakeshott of Seagrove Bay Spokesperson in the Lords, Treasury, Spokesperson in the Lords, Work & Pensions

My Lords, I am not sure that I quite followed the reference by the noble Lord, Lord Skelmersdale, to "boring", but in my case I certainly do not regard boring as a pejorative term. Indeed, the Government could do with being a lot more boring and a lot less frenetic in their activities, chopping and changing in all sorts of areas.

Moving on to the orders—I intend to take every opportunity that I can to keep speaking up in Parliament for the 85,000 members of collapsed pension schemes who have been shamefully let down by this Government with their pitiful £20 million a year Financial Assistance Scheme. The FAS is a cruel deception.

Is the Minister aware that even the National Association of Pension Funds last week said:

"The government's FAS is a half-hearted, inadequate patch-up job. There's a problem getting confidence back into pensions, and the impact of leaving 60,000 people with next to nothing is considerable"?

It added that the Government's commitment of £20 million a year was "vastly inadequate", and a

"fudge to cheaply buy off Labour backbenchers".

The National Association of Pension Funds is the leading independent body in this country.

How many people have now received payments from the FAS? The excellent Pensions Week, as part of its Campaign for Pensions Justice, reported on 23 January that at that stage only 13 people had actually received payments. What is the latest total? This Government loves targets. How many people do they expect will have received payments from the financial assistance scheme by the end of June this year and how many more by the end of the year?

We have no objection to the details of this order or to the PPF compensation cap uprating.

Photo of Lord Evans of Temple Guiting Lord Evans of Temple Guiting Government Whip, Government Whip

My Lords, I am grateful to both noble Lords who have contributed to this short discussion. The PPF has been heavily debated in both Houses from the passage of the Pensions Act 2004 until more recently in July 2005, when we debated regulations on ombudsman provisions and fraud compensation requirements before they came into force.

I am sure that all noble Lords will join me in supporting the aims of the PPF, to provide support to members who would otherwise lose out if the employer became insolvent and there were insufficient funds in the pension scheme. I note the comments made by the noble Lord, Lord Oakeshott, on this matter.

First, I thank noble Lords for welcoming the two orders. The order does not seek to take PPF compensation into account for payments of maternity allowance or state pensions themselves, but refers to adult dependency increase in relation to these benefits. We consider these amendments are necessary, as PPF compensation can be accessed from the age of 50. While we accept that the current number affected is not large, it is important to ensure consistency of treatment of PPF recipients, with the treatment of people in cases where payments of an occupational pension are made. In addition, we believe that the number of PPF compensation recipients will increase.

Since the national insurance scheme started in 1948, the availability of an increase of benefit in respect of a spouse has been subject to an earnings rule. The purpose of that is to provide a simple test of the extent to which the spouse is financially dependent on the benefit customer. Earnings include pensions paid by employers and from personal pensions, and will include PPF payments. It is conceivable that a claim can be made for an adult dependency increase in maternity allowance for a spouse who receives PPF payments, given that compensation can be payable from the age of 50. Dependency increases for state pensions cease to be payable when the spouse's earnings exceed a certain limit. The limits are £56.20 per week for 2005–06 if a married couple live together and £49.15 per week when a married couple live apart.

Incapacity benefit takes 50 per cent of occupational pension above £85 per week into account. Incapacity benefit will apply the same rules to PPF payments. However, if PPF payments are payable to a survivor, the entire payment, as with occupational pension, is disregarded. Similarly, state pension credit takes occupational pension income fully into account and will mirror that approach for PPF payments, having already done so for FAS payments.

If a member has only two years' service when the PPF assume responsibility for their scheme, their PPF payment may be quite small. Although a member has the option to swap this payment for a lump sum, they may wish to receive compensation as a regular income. The member may also be entitled to state pension credit; this order will enable their PPF payment to be treated in the same way as the occupational pension income would have been treated.

A question was asked by the noble Lord about the pension compensation cap order. This relates to the Pension Protection Fund. FAS applies to these schemes which began winding up between 1 January 1997 and 5 April 2005. PPF applies to those schemes whose sponsoring employers have an insolvency event on or after 6 April 2005. This order increases the Pension Protection Fund compensation cap, set last year in line with average earnings, in accordance with the requirements of the Pensions Act 2004. We believe that the compensation cap will both provide the necessary cost control and encourage members below normal pension age to maintain a vested interest in ensuring that their scheme remains solvent and out of PPF.

The noble Lord, Lord Oakeshott, said that when he last heard, FAS payments were being made to 13 people; he may be pleased to hear that we are currently making FAS payments to 15 people. We can make payments only to members of schemes who have provided us with the data we need to assess eligibility and calculate payments; to date, only two schemes have provided suitable data. We are confident that the number of payments will increase in February. We continue to work with schemes to get the information we need to make more payments. As usable data comes in, I expect the number of payments to rise significantly. It is vital that schemes supply data on their members without delay.

The noble Lord, Lord Skelmersdale, asked whether the PPF would continue to be paid when the member works in another job; the answer is yes. The noble Lord, Lord Oakeshott, asked whether the provision £400 million is enough. The Government have always said that the FAS will not give everyone all they want. The primary objective is to provide significant help to those who have lost the most and need help most urgently. As with all our spending plans, funding for the FAS will need to be reviewed in the next spending review, along with other spending priorities. These orders provide for the equal treatment of compensation payments in relation to state benefits, and ensure that the reduced level of compensation is maintained, in line with increases in average earnings. Again, I commend these orders to the House.

On Question, Motion agreed to.