Clause 137 - Pension protection levies

Pensions Bill – in a Public Bill Committee at 10:30 am on 1st April 2004.

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Photo of Steve Webb Steve Webb Shadow Secretary of State for Work and Pensions 10:30 am, 1st April 2004

I beg to move amendment No. 520, in

clause 137, page 84, line 3, leave out 'one or'.

Photo of Mr James Cran Mr James Cran Conservative, Beverley and Holderness

With this it will be convenient to discuss the following:

Amendment No. 521, in

clause 137, page 84, line 35, leave out paragraph (a).

Amendment No. 522, in

clause 137, page 84, line 36, leave out 'levy or'.

Amendment No. 523, in

clause 137, page 84, line 39, leave out 'levy or'.

Amendment No. 524, in

clause 137, page 84, line 40, leave out 'levy or'.

Amendment No. 525, in

clause 137, page 85, line 8, leave out 'a'.

Amendment No. 526, in

clause 137, page 85, line 8, leave out 'levy or'.

Photo of Steve Webb Steve Webb Shadow Secretary of State for Work and Pensions

Our discussion of this group of amendments can be brief. We will have a more substantive debate on the next group. This group addresses the components that will be in the levy after the initial period has passed. Not only should there be a risk-based element, which will happen in any case, but there should be a scheme-specific element immediately after the initial period. Schemes want certainty. They want to know where they stand with regard to the pension protection fund and the levy. They want to know the basis on which that will be calculated and how much they will have to pay. We have learned that under these proposals, schemes will not have certainty for many years. How long the initial period will last is not known; it could be one year, or it could be two.

As clause 137 stands, after up to two years the levy can be introduced, it can be risk-based—it can include certain sorts of risk but not others, which is the subject of the next group of amendments—and it can include scheme-specific characteristics, or they can be added at some point by the board. There will be a period when there could be one sort of levy and then another sort of levy; one bit of it would have to be in but another bit would not, and another bit might be amended in different ways. It could be constantly changing; the board has the power to muck about with the scheme every year. Schemes will get to the stage where they just want to know where they stand.

There could be a good case for having scheme-specific elements in the levy. Factors such as the earnings distribution of the work force covered, the mix of assets and liabilities in the scheme, and many of the things listed in subsection (4) may be relevant to the chances of the scheme making a claim on the fund, and to the size of the claim that it might make. It would be sensible to include such factors. Pension schemes want certainty about the levy. We are talking about at least two, if not three, years down the track, so when all those factors come in, it will be sensible to

deal with them together, so that schemes know where they stand. That is the point of this group of amendments.

Photo of Malcolm Wicks Malcolm Wicks Minister for pensions, Department for Work and Pensions

These amendments would require the PPF board to set both a scheme factors pension protection levy and a risk-based pension protection levy for each financial year following the initial period. The amendments would result in the board being unnecessarily constrained and unable to introduce the most appropriate levy rates and structures.

We consider both scheme factors and risk factors important and necessary for the calculation of a scheme's contribution to the PPF; I do not think that much divides us on that. The provisions in the Bill allow the board to set one or both of the pension protection levies, but emphasis is placed firmly on the use of risk factors. That is because the board must collect what it estimates to be at least 50 per cent. of the levies from the risk-based pension protection levy. The requirement for the board is set out in clause 139(3). Indeed, the board could decide to set a pension protection levy based purely on risk. However, if the amendment were made, the board could not do that. Amending the provision so that the board would ultimately be constrained in that way is both undesirable and unnecessary.

To require the board to set both pension protection levies would also cut across other provisions in the Bill. For example, the board can decide to set only a scheme factors pension protection levy if the amount that it expects to raise in a year is less than 10 per cent. of the levy ceiling for that year. That would apply only in very favourable circumstances, of course. For example, our regulatory impact assessment estimates that the annual amount that might be raised by the levies in any one year is £300 million. That would mean that the levy ceiling would be set at £600 million. This is hypothetical, but if the board needed to raise less than 10 per cent. of that amount in any one year—£60 million—it would have the freedom to do that on a scheme factors basis only. The framework that we are suggesting will ensure that the board does not have to put in place a complicated risk structure when it aims to collect a relatively small amount.

We feel that we have found a balance that allows the board the necessary and appropriate levels of flexibility while recognising the importance of risk-based factors in setting pension protection levies. It is important that we provide the board with the ability to determine the most effective levy rates and structures for both the PPF and businesses in future. I therefore urge the hon. Gentleman to withdraw his amendment.

Photo of Steve Webb Steve Webb Shadow Secretary of State for Work and Pensions

I am slightly puzzled by what the Minister says. There is a good case for a scheme-specific levy. To give just one example, part of the levy is an amount per scheme member, and that amount does not vary according to whether someone is a full-timer or a part-timer. Particular sorts of pension schemes—those of retailers, say—might have lots of part-time members. Therefore the levy, as a percentage of the payroll, would be much more significant, even though the members were not getting any more

protection out of the scheme, because it would be a smaller pension scheme. If we bring in a scheme-specific element to the levy, we deal with that sort of problem. That is why I think that a scheme-specific element would be good.

However, the thrust of my remarks has been that we want the risk-based element to be as big as possible. If the Minister is right to say that the amendments would make it more difficult for the risk-based element to be as high as we would like—and I am prepared to accept that—I suppose that is an unwarranted by-product of the amendment. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne

I beg to move amendment No. 215, in

clause 137, page 84, line 14, after 'liabilities', insert—

'(ia) the likelihood of an insolvency event occurring in relation to the employer in relation to a scheme,'

.

Photo of Mr James Cran Mr James Cran Conservative, Beverley and Holderness

With this it will be convenient to discuss amendment No. 216, in

clause 137, page 84, line 21, leave out paragraph (a).

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne

To some extent, these amendments mirror the previous group. They are intended to tease out the final shape of the risk-based levy. It makes sense to spell out as clearly as possible in the Bill how that levy should be made up, and the factors that should be part of it. Clearly, the details are for the future. However, there is a certain unease in the industry, and in industry generally, about the apparent lack of detail.

I have to confess that amendments Nos. 215 and 216 were inspired by the CBI. It says that it is concerned about continuing uncertainty as regards the fundamental structure of the levy and about whether insolvency risk will be included as a risk variable. Although it believes that insolvency risk should be incorporated, it recognises that there are practical issues around measuring insolvency risk and assessing asset allocation. It feels that the Government should be clear about those factors being part of the calculation of the levy. The CBI has strong concerns that those key decisions should not be left to a newly appointed pension protection fund board. The amendments would therefore ensure that the Government would take the decision about whether the risk-based elements of the levy will take account of insolvency risk and investment strategy, as well as underfunding.

In fairness, the fact sheets prepared by the Government on this subject are fairly reassuring. They make the point about drawing on the United States experience. I will return to that. The fact sheets refer to

''ensuring that risk-based factors will be the major component of our levy''.

That mirrors words that the Minister used. If by that the Government mean 50 per cent. or more, I suppose risk-based elements would be just about the major factor, but we will deal with that in relation to a different amendment. The fact sheets go on to say:

''The Bill specifies a number of factors that can be considered in assessing risk—scheme underfunding, credit-rating and investment strategy—and also leaves flexibility for the PPF board to add more.''

Having set out in the fact sheets the obvious bases for assessing risk, what does the Minister think are the additional bases that the PPF board might consider? What have Ministers got in mind?

The Government's fact sheet refers to the US experience. This is one issue on which it is quite instructive to consider the way in which the Pension Benefit Guaranty Corporation has been set up and developed. I just looked up my notes of a very friendly meeting I had with Mr. Steve Kandarian, the former executive director of the PBGC, when I was in Washington. Incidentally, I notice that he is giving a lecture at Imperial college on the Thursday of the week when we come back after the Easter recess. If the Whips are prepared to co-operate—neither of them is in the Room, which is helpful—we could ensure that our Thursday sitting finished in time for us to go on a bus, paid for by the Department, to listen to Mr. Kandarian. I certainly intend to attend. It will be extremely useful.

Mr. Kandarian made a variety of points, some of which I have covered, on different aspects of the Bill, but he was adamant that one of the main problems that the corporation faced—one of the reasons why it had a massive deficit and was under all that pressure—was that its premium, which is the equivalent of the levy, takes no account of creditworthiness or the risk attached to particular pension scheme investments. There is still a basic levy of $19, with an element for underfunding. Unlike the arrangements under the Bill, the US has no formal cap on the premium, but as we have heard, there is political influence in the direction of its not being set too high.

It is also instructive to consider the evidence given by Mr. Kandarian to a special committee of the US Senate. I do not know whether the Minister gave evidence to that committee. I have not yet been able to identify it on the internet, but perhaps I will. Mr. Kandarian said:

''When underfunded pension plans terminate, three groups can lose: participants can see their benefits reduced''—

clearly—

''other businesses can see their PBGC premiums go up, and ultimately Congress could call on the taxpayers to support the PBGC.''

It is important in everything that we are doing to remember those three potential payers in any such situation. He says later:

''When the PBGC takes over underfunded pension plans, financially healthy companies with better-funded pension plans end up making transfers to financially weak companies with chronically underfunded pension plans. If these transfers from strong to weak plans become too large, then over time strong companies with well-funded plans may elect to leave the system.''

That is an extremely perceptive comment, which we need to have in mind. It would be the ultimate irony—because irony seems to be the flavour of the morning—if we went to all this trouble to pass the Bill and it encouraged more employers to get out of that kind

of pension scheme. Mr. Kandarian mentioned the $11.3 billion loss in the last accounts, which is

''more than five times larger than any previous one-year loss in the agency's 29-year history.''

He also said:

''The title of this hearing asks whether America's pensions will be the next savings and loan crisis.''

There is a lot of interesting background, with which I will not weary the Committee, about the make-up of the claims in the PBGC. It is interesting that currently in this country the typical failed scheme is that of a smallish engineering company. We have not, thank goodness, seen any massive failures so far, although one occasionally hears of potential failures. However, the PBGC, as a much more mature scheme, is dominated in terms of money by airlines and steel companies. There has been an enormous peak and surge in claims in the past year or two. Mr. Kandarian says:

''At current premium levels, it would take about 12 years of premiums to cover just the claims from 2002.''

He continues:

''The premium—

the American version of the levy—

''has two parts: a flat-rate charge of $19 per participant and a variable-rate premium of 0.9 percent. of the dollar amount of a plan's underfunding, measured on a 'current liability' basis. As long as plans are at the 'full-funding limit', which generally means 90 percent. of current liability, they do not have to pay the variable-rate premium. That is why Bethlehem Steel, the largest claim in the history of the PBGC, paid no variable-rate premium for five years prior to termination, despite being drastically underfunded on a termination basis.''

I commend Mr. Kandarian's evidence, and his lecture in a couple of week's time, to the Committee. His evidence underlines the absolute need, from day one, for all the reasons that we have discussed—although we have had that debate and vote—for a proper, really sophisticated risk-based levy. It also underlines the real dangers that are faced if all the risks are not taken into account and made clear in the Bill. We have to look not just at the rather narrow version in the PBGC. The Americans bitterly regret that now, and there is a consensus that when the elections are over they will have to revisit it in legislation at some point, and they are only looking at the underfunding in a particular scheme. We will have to consider the creditworthiness of a company and the risk profile of the investments that a scheme chooses to make. Then we get into the moral hazard argument, on which I have a lot to say, but under a different group of amendments. These are important risk elements that need to be written and set in concrete; there should be a minimum set of risk elements in approaching the levy.

I should be interested to hear from the Minister why we cannot at least specify minimum types of risk in the legislation and what other risks he had in mind when he drafted the fact sheet.

Photo of Steve Webb Steve Webb Shadow Secretary of State for Work and Pensions 10:45 am, 1st April 2004

Mr. Cran, you will have observed that this group of amendments has the names of both principal Opposition parties appended to it. We, too, think that, when the risk-based levy comes in, the risks that it should take account of include not only the

underfunding of the scheme, but the risk of the employer going out of business and prompting a call on the fund. It is what a fellow Liberal Democrat, Basil Fawlty, would call a statement of the blindingly obvious, that claims on the fund are only made if the company is likely to go out of business. An underfunded scheme may never go anywhere near the pension protection fund, because underfunding does not of itself make a call on the fund. It is only the event of insolvency that prompts a call on the fund. It would be a topsy-turvy world if the ''risk-based premium'' did not include the risk of making a claim on the fund because of insolvency, which is what triggers a claim on the fund.

That is not an argument for not including an underfunding risk element as well, as that is the other side of the coin. However, it seems odd to give the board the power to introduce a risk-based premium that does not take account of the insolvency risk.

The effect of the amendments would be to move the insolvency risk into the part of the clause that details the things that the board must include, rather than those that it may include. Why is it where it is? I think that the Government will say that they might have trouble measuring insolvency risk. Clearly that is a key issue. A premium can only be assessed in terms of risk if there is some way of assessing the risk. If insolvency risk were unmeasurable, sticking it in this part of the Bill would not be much use.

However, it is important to make a distinction between the range of occupational pension schemes that we are talking about. While a lot of them may be for small companies where there is no credit rating, the big schemes, which will be putting in most of the money, will be operated by the type of companies who do have credit ratings. In other words, it would be a bogus argument against the amendment to say that because we cannot do an insolvency risk assessment for 150,000 companies we cannot do it at all. There could be an assessment of the insolvency risk of the big players, while the premium on the small players would not include an insolvency risk element if that was not considered measurable. I can see no argument against that. If we can get it right for the big players who are contributing the bulk of the premiums, ignoring the insolvency risk for the small players, for whom it may be difficult to measure anyway, may be something that we have to live with. That would still make things fairer.

One might think that fairness is an odd concept here, but the danger of an ''unfair'' levy is that it would drive the good guys out. To give one example, consider a company such as British Telecom. At one point last year it had, on the FRS 17 valuation, a scheme deficit of £6 billion. Nine months later the deficit was down to £3 billion. That is a company that is doing a great deal about its deficit. Nobody thought that BT would go bankrupt or make a claim on the PPF, yet if we do not pass the amendment its premium could relate wholly to the huge gap in the fund. So it could have faced a huge premium even though there was practically no chance that it would make a claim

on the fund. That seems to be totally irrational. I am aware that BT has closed its final salary scheme to new members, probably for a variety of reasons.

It is bad enough to have a flat-rate levy for two years, but when the levy becomes risk-based, if it does not reflect the true risk of companies making a call on the fund, such companies might well give up the ghost. The Minister said, ''Oh well, we are only talking about a tenner'', but for a big scheme, for which it may be possible to judge the insolvency risk, that is a lot of tenners if there is a negligible insolvency risk. We could be talking about millions of pounds. To expect such companies to pay millions of pounds in premiums when they pose no risk to the fund seems not merely unfair, but to have the potential to kill off the remaining final salary schemes for new entrants to large employers.

I wholeheartedly support the amendments. I agree that insolvency risk cannot be assessed for every company, but there is enough information to assess it for the big players, thereby creating fairness and avoiding counter-productive effects on the premium. Insolvency risk should be included.

Photo of Malcolm Wicks Malcolm Wicks Minister for pensions, Department for Work and Pensions

The hon. Member for Eastbourne is in burdens-on-business mode today, whereas on Tuesday he was more into saying that the PPF was not generous enough and that it should pay out more benefits—with, presumably, burdens on business. I am not sure that that is a consistent approach. However, to be generous, perhaps it is perfectly reasonable when dealing with probing amendments to be, if not all over the place, of two minds, to put it more delicately. Nevertheless, if we all go to the lecture on a bus, it should be a bendy bus for the hon. Gentleman's convenience.

Clause 137 sets out provisions for the pension protection levies, including the factors that the board can take account of in calculating them. The amendments would result in the board being required to take into account the likelihood of an insolvency event when calculating the risk-based part of the levies. The Government recognise the importance of a variety of risk factors in determining the likelihood of a scheme requiring PPF assistance, but we consider the funding of the scheme to be the most critical measure. We have therefore made it a requirement for the board to take account of such funding when it sets the levies.

The other risk factors that the board may take into account when setting the levies, such as insolvency risk or investment risk, are also important, which is why they are included in the Bill. We fully expect the board to use all the information available to it to make informed decisions about future pension protection levy structures.

Officials from my Department have been meeting with representatives from industry to discuss how insolvency risk might be taken into account when setting the levies. They will continue to work with the industry during the next few months to establish the information and processes currently available and to provide the board with various insolvency risk options. That will help to reduce the amount of time

the board spends establishing a measure of this nature and help it to hit the ground running. I hope that that answers the point raised by the hon. Member for Northavon. Although I cannot concede that it will be possible to include the risk element from day one—in April next year, I hope—we are doing a great deal of preparatory work.

Establishing the likelihood of an insolvency event is not as straightforward as it might seem, as there is no consistent, across-the-board method for doing so. For example, not all employers who sponsor a pension scheme have credit ratings. As such, it would be difficult to justify placing a requirement on the board to take that factor into account. Credit ratings are just one part of the answer to the hon. Gentleman's question about why the information is not available at present.

As I said, officials in my Department are working with industry to establish the options that might be available on insolvency risk. The board needs flexibility and independence when conducting its business. It must be able to determine a levy structure that best suits itself and sponsoring employers, within the framework set out in the Bill. The amendment would result in the board's being restricted in the way in which it sets future levy rates and structures. It would also require the board to take account of a risk factor for which a comprehensive measure is not yet available.

On other points, it would not be appropriate for me to name companies, but let us always remember that history, although not littered with examples, does offer several cases in this country and in the United States. Bethlehem Steel, which the hon. Gentleman mentioned, is a major example. There was a time when people said of that company, which I believe built much of the US navy in the second world war, that if it ever went out of business, the USA would. I shall not mention any British examples, but we all know of companies that not so long ago were guaranteed to last forever and did not. Sadly, that will be the case for some of the great names in British business during the next 10, 20 or 30 years. Hopefully, it will not be true of too many.

Photo of Steve Webb Steve Webb Shadow Secretary of State for Work and Pensions 11:00 am, 1st April 2004

That is clearly true, but a company does not turn overnight from being rock solid to being a basket case. As its condition becomes more serious and its insolvency risk increases, so should its premium. That is only right and proper. When a company looks rock solid, its premiums should be low, and when it is moving towards being a basket case, the risk of making a claim on the fund goes up, so that should be part of the process. The provision would not be in the Bill if the Minister did not think that that was true. The argument he has just made is not an argument against putting the insolvency risk into the levy, is it?

Photo of Malcolm Wicks Malcolm Wicks Minister for pensions, Department for Work and Pensions

Insolvency risk is one factor that the board will take into account.

Photo of Malcolm Wicks Malcolm Wicks Minister for pensions, Department for Work and Pensions

It is on the face of the Bill. We are discussing it with colleagues in industry so that we can present options to the board, and it can then make early decisions on the matter.

There is only one other point I would like to emphasise. The hon. Member for Eastbourne was helpful in reminding us of the American experience. We are learning lessons from the PBGC. I hope that Mr. Kandarian will have time to do other things occasionally before he takes up a business appointment. He has certainly been very generous with his time to myself, my colleagues in the Department and the hon. Gentleman, and no doubt to others. His lecture will be interesting and we should think about whether we can all attend that lecture, as long as no Opposition Members say, ''Will the hon. Gentleman give way?'' because that would be impolite to a visiting American.

We have learned lessons, and one key lesson is that we have to give the board flexibility. We are setting it at arm's length as a non-departmental public body; that is right and proper. There are constraints in the Bill—the Secretary of State has a role—but the board can raise the levy up to a ceiling. It has that flexibility. In the United States, the PBGC has to go cap-in-hand to Congress. Therefore, the levy has not been raised for a good number of years.

The second lesson is that the risk-based element has to be a substantial part of the levy—certainly more than 50 per cent. My guess would be that the board could determine that it would be much higher than that. I think that I am right in saying that the risk element for the PBGC in the United States is about 25 per cent. There is quite a measure of difference. Those are lessons we have learned by comparing and contrasting what we feel we need in the United Kingdom with the experience in the United States.

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne

I am still fairly wedded to the amendment. When the Minister was making his ironic comments at the beginning of his speech about burdens on business he got the whole point precisely wrong. It is because the good, well run businesses are so keen that the various elements of risk are carefully orchestrated and included from as near to the start as possible. They are the ones that will lose out if that does not happen. It is a question of reducing burdens on business, particularly good, well run businesses.

I am pleased with what the Minister says about the preparatory work that is going on. This is clearly one of a number of areas where it is important to carry business along with what is happening; long may those steps continue.

I have a slight concern that an element of self-fulfilling prophecy may be involved. The companies and schemes that are experiencing the most potential difficulties will end up paying a higher and higher levy, if the system works. That will add to their problems. One of the things that Mr. Kandarian was quite proud of when I saw him in Washington was the fact that he had started publishing a list of the 10 most underfunded schemes. That sends a real message to the markets about those companies. It is a bit of a nuclear option because it may shame companies if they

have the money—or access to it—to top up their pension funds, but for some it may be the coup de grace that drives them out of business altogether. Therefore it may not be an example to follow, but we will all get on that theoretical bus, bendy or otherwise, in a couple of Thursdays and go to hear what he has to say. Until then, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne

I beg to move amendment No. 359, in

clause 137, page 84, line 32, at end insert

'save that this levy shall not exceed the equivalent of £5 per member.'.

This is a fairly simple amendment. It is inspired by the NAPF—[Interruption.] Any mention of the NAPF sends the Parliamentary Private Secretary into paroxysms of laughter. The NAPF thinks that there is a lot to be said for setting the initial flat-rate levy at a low and specific rate—it suggests £5 per member—in order for it to benefit schemes with relatively large numbers of low-paid members. There is some merit in the amendment, and I should be interested to hear from the Minister why it is completely wrong-headed and impractical.

Photo of Malcolm Wicks Malcolm Wicks Minister for pensions, Department for Work and Pensions

Briefly, we have made calculations based on assumptions about what the PPF will need in its early years. In its first full year after the interim year, it will need about £300 million. We have said that we think that the board can cope financially with half that amount in the first year, and the arithmetic suggests £10 per member. Without that £10 per member, the board would not get off to the financial start that it needs. For that simple reason, we cannot agree with the NAPF's—sorry, the hon. Gentleman's—suggestion of a cheaper £5 option.

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Malcolm Wicks Malcolm Wicks Minister for pensions, Department for Work and Pensions

I beg to move amendment No. 498, in

clause 137, page 85, line 3, leave out 'is' and insert 'would be'.

Photo of Mr James Cran Mr James Cran Conservative, Beverley and Holderness

With this it will be convenient to discuss Government amendment No. 499.

Photo of Malcolm Wicks Malcolm Wicks Minister for pensions, Department for Work and Pensions

I ask the Committee to support the amendments because they are Government amendments, which we actually drafted one evening ourselves, as I recall.

The amendments are technical drafting amendments to clause 137, which provide for the imposition of levies relating to eligible pension schemes. The pension levies will comprise two parts: one levy will be based on scheme factors and one levy will be based on risk factors.

Subsection (4) provides that the board may take account of the total annual amount of pensionable earnings of active members of a scheme in calculating the scheme factors levy. That will enable the levy to reflect the size of scheme liabilities and therefore the

level of compensation that might be payable in respect of a scheme. For example, should the board choose to implement it, the provision would enable the levy structure to be adapted to reflect the differing liabilities of schemes with predominantly lower-paid workers.

The amendments refine the drafting of the definition of pensionable earnings used in clause 137 to ensure that it is workable in practice. It is therefore technical, and I urge hon. Members to accept the amendments.

Amendment agreed to.

Amendment made: No. 499, in

clause 137, page 85, line 5, after 'Schedule 7)' insert

'if he ceased to be an active member at the time by reference to which the factor within subsection (4)(b) is to be assessed'.—[Malcolm Wicks.]

Question proposed, That the clause, as amended, stand part of the Bill.

Photo of Adam Price Adam Price Spokesperson (Economy and Taxation; Education & Skills; Miner's Compensation; Regeneration; Trade & Industry)

I would like the Minister to clarify—at least in my mind if not in the minds of other Committee members—how the provisions of the clause relate to public service pension schemes. There has been some confusion about how the Bill relates to those schemes because my first assumption and that of many other members of the Committee was that the Bill referred exclusively to private sector defined benefit and hybrid schemes. However, it has emerged during our proceedings that it is relevant to public service pension schemes. In an earlier sitting, I asked mischievously whether the pension fund of the Financial Services Authority would come under the aegis of the new pensions regulator and the hon. Member for Northavon raised the wider issue of other public service pension schemes. The Minister was good enough to write to me on 24 March to confirm that the FSA, as another pensions regulator, will be regulated by the new pensions regulator. As it is an independent body, its public service pension scheme and its occupational pension scheme will be affected by the clause. It will have to pay the levy. Can the hon. Gentleman confirm whether that is the case?

There has been some confusion about the public service pension schemes that are not covered by Crown guarantee. I am talking about funded schemes as opposed to the large majority of public service pensions, which are unfunded. The civil service pension scheme and most of the NHS pension schemes are paid from the Government's current income rather than out of a separate pension fund. That is not true of all public service pension schemes.

Last week, the hon. Member for Tatton (Mr. Osborne) raised the issue of pension schemes of non-departmental public bodies and asked to what extent they would be covered by the PPF. The Minister cited as examples the Arts Council of England, the British Tourist Authority and the Medical Research Council, and said that they would have to pay the levy. There is certainly confusion about the extent to which public service pension schemes, which are funded, will have to pay the levy under the terms of the clause.

Photo of George Osborne George Osborne Shadow Minister (Treasury)

When I questioned the Minister about the matter, he did not seem clear about how much it would cost the taxpayer. He suggested in jest that the Arts Council of England could fund the levy by organising a rock opera or a rock ballet, but he could not identify the burden of levy on the taxpayer as well as on public services. I have yet to hear a good answer from the hon. Gentleman about the sums involved.

Photo of Adam Price Adam Price Spokesperson (Economy and Taxation; Education & Skills; Miner's Compensation; Regeneration; Trade & Industry)

Yes, indeed. Perhaps the Minister will do the hon. Member for Tatton the same courtesy and write to him about the costs to the taxpayer of the levy as well as to the Arts Council of England or punters of the ballet or rock extravaganza that he has in mind.

The Minister went on to say that, because the number of organisations involved and their staff members was relatively small, we were not talking about a large sum. Will he clarify whether, for example, the local government pension scheme would come under the terms of the PPF levy? Clearly, that is a large pension scheme and is essentially funded by local funds. It is backed by individual local funds in England and Wales, and there are separate provisions for Scottish local authorities. At the latest triennial valuation, the local government pension scheme in England and Wales had a deficit of £6.2 billion. We need to know whether that pension scheme will come under the terms of clause.

Clause 98 refers to eligibility. It simply states that an eligible scheme is

''an occupational pension scheme which—

(a) is not a money purchase scheme, and

(b) is not a prescribed scheme''.

Clause 241, which is about definitions, states that an occupational pension scheme

''has the meaning given by section 1 of the Pension Schemes Act 1993.''

That Act makes a distinction between public service pension schemes and occupational pension schemes thus: it states that a public service pension scheme is a subset of an occupational pension scheme.

My reading of the Bill as drafted is that schemes such as the university superannuation scheme and the local government pension scheme would have to pay the levy. Perhaps the Minister can point out where in the Bill those funded public service pension schemes are exempted from the responsibility and obligation of paying the levy.

On those public service pension schemes that the Minister has already admitted will have to pay for the levy, will he clarify the issue of insolvency? Many universities have substantial pension fund deficits for non-academic staff. For example, King's College London has a shortfall of £3.2 million in its pension fund, Bristol university has a pension fund deficit of £4 million and Nottingham and Sheffield have similar problems.

How will the risk-based levy be calculated for those public institutions? In the interests of equity and fairness, it would not be acceptable for there to be different standards for assessing the risk-based levy for

public institutions and for private sector bodies. Will there be another test—not for insolvency, but some other sort of test for public institutions? I particularly press the Minister for clarification on where in the Bill funded schemes in the public sector are exempted from paying the levy. I cannot find that at all.

Photo of Malcolm Wicks Malcolm Wicks Minister for pensions, Department for Work and Pensions 11:15 am, 1st April 2004

A little while ago, I promised to write to the hon. Gentleman and Committee members about this issue. I have not yet done so, and I apologise for that and for any confusion that that has caused. I will write as soon as possible. In our desire to cover some of the specific schemes mentioned, we are checking one or two facts, and that might be the reason for the delay. I apologise to the hon. Gentleman and to the Committee.

Essentially, the matter is clear: by definition, eligible schemes are those that could potentially benefit from PPF compensation. We are therefore talking about final salary or defined benefit schemes. Perhaps I should not speculate, but I have a feeling that there has been a movement towards defined contribution schemes in the university sector, so universities may not be included. However, we will clarify the issue in the much-promised letter.

The great bulk of those whom we understand to be public service employees will not be subject to the PPF because the Government stand behind them. In that sense—as a generalisation, but only as such—there is a divide between the public and private sectors. However, there are many exceptions. The only public sector schemes that would be covered by the PPF—I said that I was generalising just now—are those without a Crown guarantee. In other words, they could potentially need to call on the services of the PPF. Other defined benefit schemes not funded by a Crown guarantee are not covered.

The hon. Gentleman asked me where in the Bill it states who is in and who is out. That is not stated in the Bill; the exemptions will be in regulations under clause 98(1)(b). I promise that the hon. Gentleman will get a letter from me, but some things will be clarified in regulations.

Photo of George Osborne George Osborne Shadow Minister (Treasury)

If it is not too difficult a task, will the Minister set out in the notes that he provides to the Committee all the institutions or non-executive agencies that are not covered by a Crown guarantee so that we can see the kinds of bodies that this levy will be imposed upon? Will he also give an estimate of the cost of the levy to the Exchequer or the individual agencies?

Photo of Malcolm Wicks Malcolm Wicks Minister for pensions, Department for Work and Pensions

Let me just promise at this stage to do my best to give as much detail as possible in the letter. I will do my utmost to ensure that one or two of the institutions that have been mentioned are covered in it. I do not know whether there are technical reasons why providing a full list is difficult, but I will try to find out.

In an earlier debate, I waxed lyrical about ways in which the Arts Council, which will be subject to the PPF, might raise funds by staging an extravagant concert. I hope that I will be forgiven if at certain times in this Committee's proceedings I think about life in the terms of a Department for Culture, Media and

Sport Minister who goes to the ballet, watches important football matches and so on.

Question put and agreed to.

Clause 137, as amended, ordered to stand part of the Bill.