Clause 139 - Amounts to be raised by the pension

Pensions Bill – in a Public Bill Committee at 2:00 pm on 1st April 2004.

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Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne 2:00 pm, 1st April 2004

I beg to move amendment No. 360, in

clause 139, page 85, line 36, leave out '50%' and insert '75%'.

Thank you for clarifying matters, Mr. Cran, although it has risked ruining my Easter recess. There is nothing more encouraging—or, rather, enervating—than to be involved in Committee matters when everyone else has been allowed to go home.

Under clause 139, as we can tell at a glance from subsection (3), the levy must be based on at least 50 per cent. of the amount raised by the risk-based pension protection levy. Judging from the Minister's previous comments, I am knocking or pushing at an open door—whichever is the right expression—because he has made a great deal of saying that the Government's policy is that most of the levy should be calculated on a risk base.

I hope that it will not cause pain to Labour Members to know that the amendment is supported by the National Association of Pension Funds, which has a slight genuine interest in the Bill. I am sure that some hon. Members who are new to occupational pensions, as opposed to the public benefit system, may not be aware of the association's crucial role in such matters. It is comforting to know that it is alongside us in such amendments.

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

I think that you challenged the association a bit.

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne

I am not saying that the NAPF gets everything right nor am I saying that the Minister gets everything wrong. Obviously, there must be a bit of give and take. The amendment would simply replace

50 per cent. with 75 per cent. We want to make it sure that the overwhelming majority of the levy is risk based. As we said, there are various reasons for such action. Such a measure is only fair on well run businesses and schemes. It would also help to tackle the problem of moral hazard. When I first became familiar with such matters, I was not sure what that meant, but I now have a more clear understanding of it and it is much less interesting than I first thought.

There is an incentive to encourage employers to fund their schemes to the best of their ability if the risk-based element is as high as possible—at least 75 per cent. or preferably 90 per cent. plus, if that can be arranged. I shall cite a couple of examples of reputable companies, which have similar worries to ours and those of the NAPF. British Telecom has already been mentioned, and its defined benefit pension scheme is the largest in the United Kingdom. Its assets are worth £26 billion. It has 180,000 pensioners, 100,000 deferred pensioners and 87,000 active members. As the Committee would expect, it is a well run and responsibly funded scheme.

BT supports the idea of a pension protection fund but, as it says, it needs to be proportionate and certain. It is trying to avoid wild variations year on year, such as the FRS 17 valuations, and says that the levy cannot be so large that it places such an additional burden on schemes judged to be underfunded that it exacerbates existing problems. To put that in context, and assuming the flat-rate levy in the first year and the £300 million to £350 million per annum cost of running the fund, BT calculates that it would pay out £12 million in the flat-rate levy. It commented on the 50 per cent. risk-based proposal, and clearly there will be year-on-year variations in how much it will be required to pay. BT points out that it was suggested in The Times recently that it might have to pay up to £100 million a year. By any stretch of the imagination, we are talking about big players, at the top end of the best kind of employers, with the most responsible attitudes to pension provision.

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

Does the hon. Gentleman accept that there is a paradox in the case of a scheme such as BT's? If we demand a high proportion of the total premium to be risk based, which is what I want, but the Government insist that the risk-based element is based only on the underfunding risk, BT, with potentially colossal underfunding because of the snapshot way of measuring it, could find itself paying more until such time that the Government add the insolvency risk. That is another reason why we need to get on and establish the thing in full.

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne

I would not disagree with a word of that. It is not just the insolvency risk, but the risk profile of the investments that a company chooses to make. I have no doubt that BT's approach to all these matters is praiseworthy and an example to other schemes. Sadly, I expect that several schemes do not come up to its high standards. However, the bigger the schemes are, the harder they fall. If it happens to be a big scheme and, because of the rollercoaster nature of equity markets, it has a large paper deficit, it could end up paying extremely high amounts. At the moment,

there is even talk of schemes paying £100 million a year.

BT came to talk to me and it made a plea. A view of risk analysis needs to reflect the fact that companies such as BT take a long-term approach to risk. It hopes that that will also be the attitude of the PPF. It thinks that that means using a funding risk-analysis approach via an actuarial valuation, rather than a volatile accounting valuation approach—that is, FRS 17—or commercial rating levels applied to companies, or second-guessing asset mixes against scheme profiles. What are the Minister's comments on that? These are serious people who know what they are talking about. Their briefing says that there should be no risk at all to company or fund, but there will probably be a large paper deficit, although that is not mentioned in the briefing.

That leads me to another major employer, and an issue to which we referred on Second Reading. I am keen to get the Minister's input, as I really do not know the answer to it. The Times recently referred to another issue, under the heading ''M&S leads pension bond rush''—a headline that seems a little over-excited when compared with article that follows. This was the news that Marks & Spencer has a £1 million black hole, as the newspapers would call it, or deficit, as we should refer to it, in the pension scheme. It was hoping to tackle at least part of that with a bond issue of £400 million. The article suggests that for larger companies, for which that could be a cost-effective way of raising money, M&S will set a trend. The Minister may remember that on Second Reading I said that that is another disparity between smaller, less well run and less well funded schemes, which cannot do that, and the very big companies, which can.

If companies such as M&S do that kind of thing, does that count in reducing their underfunding? Will it have a direct effect on the amount of levy they pay? I assume that M&S would take such action for the best possible reasons—we would expect that—but also because it will save it money on the levy. I assume that the answer to my question is yes, but I have seen the speculation in the press. It would help if the Minister gave a distinctive answer.

One final example is Allied Domecq, which is a large company that is entirely signed up to the concept of a safety net for pensioners that is established in legislation. However, it has serious concerns about the mechanics of the scheme's funding. It says:

''We are not aware that any large employers' pension fund has failed to deliver the pension benefits anticipated by its members.''

That relates to something that I said this morning. It is interesting that so far that has happened to smaller schemes and smaller companies. Of course, I am not talking down the real hardship and anxiety that such circumstances cause to the members.

Allied Domecq has 58,000 members, almost half of whom are currently enjoying pensions that are largely funded by the company's contributions. It thinks that it is inequitable that the burden of funding the PPF should

''fall disproportionately on large employers such as ourselves.''

It makes the obvious point, which cannot be gainsaid by the Minister, that the flat-rate element impacts

''on companies with large numbers of scheme members and''

will

''unfairly penalise pension funds established for lower paid employees relative to pension funds where the employees enjoy higher levels of pay''.

It is also concerned about the risk-related element, because it might focus exclusively on a scheme's PPF funding level.

Allied Domecq proposes two things: first, that

''the flat rate element of the PPF levy be based on the total PPF liabilities of each scheme (rather than the number of members)'',

and, secondly, that the

''board be required, as a minimum, to ensure that the risk of default by the sponsoring company is fully factored into the calculation of the risk based levy together with the scheme funding level in respect of its PPF liabilities.''

Those are sensible proposals. Although that is not the way the Government are planning to go—at least, not in respect of the first proposal—I am interested to hear the Minister's objections, if he has any.

I return, finally, to the moral hazard. As the CBI pointed out, the idea of a PPF

''could encourage less scrupulous employers to act in an imprudent manner . . . a company might fund at too low a level or might be tempted to hold a higher risk portfolio than appropriate'',

which is why the risk profile of a given pension fund must be built in. The CBI also says that the PPF could result in

''reduced vigilance by trustees . . . excessive benefit promises by employers . . . companies or trustees granting benefit improvements just before insolvency . . . deliberate underfunding of schemes''

and

''providers of capital increasingly shunning companies with defined benefit plans.''

In case anyone thinks that some of that is a bit far-fetched, one of the features of the US scene in recent years, which I learnt from no less a person than Mr. Kandarian, is that where a company is facing difficulties, it is all too easy to make employees much enhanced pension promises instead of giving them a significant pay rise. That is done on the basis that the problem is being shoved into the future, and everybody knows that if the company goes out of business, those promises will be redeemed by the Pension Benefit Guaranty Corporation. That seems to be a feature in negotiations between employees and trade unions in what I call the smokestack industries. An additional twist in the US scene is the crystallisation of certain rights on the part of workers when a plant or company goes out of business. That is already a problem in the US. If we are, as Ministers say, trying to draw on their experience, that is a good example of where we should take careful note. It is perfectly sensible to require that a minimum of 75 per cent. is risk based, on the basis that Ministers are saying that most of the levy should be calculated in that way in any case.

Photo of Steve Webb Steve Webb Shadow Secretary of State for Work and Pensions 2:15 pm, 1st April 2004

I have some brief observations that are broadly in sympathy with what the hon. Member for Eastbourne (Mr. Waterson) said. He cited two high-profile schemes that illustrate a couple of issues raised by the PPF. I want the Minister to clarify the basis for the levy. The hon. Gentleman referred to the BT scheme. It told me that within one financial year its deficit—on the FRS 17 basis, I think—fluctuated by more than £3 billion. I hope that the Minister can confirm that the risk-based part of the levy will be raised on a more stable basis, such as actuarial valuation. However, what happens between actuarial valuations because it is my understanding that they are three yearly? We have discussed annual valuations, perhaps with the PPF board or the regulator in mind, but it is all getting a bit fuzzy—although that may be due to lunch. It would help if the Minister clarified how that will work.

The hon. Member for Eastbourne mentioned the M&S scheme. If it makes sense for companies to borrow money to reduce the deficit in their schemes, thereby lowering the risk-based premium because—to go back to an earlier point—that takes no account of the insolvency risk and takes into account only the deficit in the fund, there will be a bizarre non-economic incentive for companies to borrow lots more money so that they save money on their PPF levies, but put themselves in a more exposed financial position. Will that be the case? Will firms have an incentive to borrow a pound, put it in the fund and save themselves the PPF levy as a result, and yet thereby increase their financial insecurity because they are more in debt?

The nub of the amendment is what minimum proportion of the levy should be risk based. The Government are on shaky ground. Their argument for not introducing the risk-based levy initially is that they need lots of information, but the clause presumes that the risk-based levy is up and running. It presumes that they already have enough information and the argument is about what percentage of the total should be risk based. Once they have got the information, under what circumstances would the Government or the board not want to make the levy predominantly risk based?

It is clear that the Government's policy intention is that the levy should be predominantly risk-based, but they also want the board to be at arm's length. Do they have any means of requiring the board to make the risk-based levy a larger proportion of the total? That is an important point, and I would be grateful if the Minister commented on it. Although it is the Government's intention that the risk-based levy is a big proportion, the board might for some reason say, ''No, it will be 50 per cent.'' If the board thwarts the Government's policy objective, who wins? If we do not require a minimum of 75 per cent., do the Government have any power to say to the board, ''No, we think it should be more risk-based for wider economic reasons''? I do not think that they have that power.

Under what circumstances might the board want the risk-based levy to be less than 75 per cent.—or less than 100 per cent., frankly? As the Government are

broadly sympathetic to that outcome, do they have any levers to make the PPF board deliver that, or can the board do what it likes on that front once it is in existence?

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

The amendment is not dissimilar to others. The Government's approach is to set down the criteria that the new board will have to take into account, and to state very clearly that we need to get the balance right between the basic levy and the risk-based levy with an emphasis on the risk element. The Government's position is not to so prescribe the new fund that the board will not have the discretion that we believe it needs and deserves, if only to put some distance between itself and some of the difficulties that the Pension Benefit Guaranty Corporation ran into in the USA.

The hon. Member for Eastbourne said that he thought that by prescribing, or at least by using, 75 per cent. he was pushing at the door. In terms of trying to develop a soundtrack for this Committee, ''Knocking on Heaven's Door'' comes to mind. The hon. Member for Northavon (Mr. Webb) was very helpful with his Simon and Garfunkel offerings earlier, and I thought that my Parliamentary Private Secretary should apologise to the Committee for suggesting that the ''Sound of Silence'' would have been the appropriate track.

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

He withdraws his remark.

The hon. Member for Eastbourne is pushing at an open door in the sense that we think that the greater proportion of the levy should be risk based. However, we do not think that it would be sensible to so restrict the new board by saying that it must be at least x per cent. That is the only difference between us; it does not come down to much more than that.

It was mentioned that BT could pay about £100 million. Even those who are not very good at arithmetic must realise that if we are talking of raising £300 million in the first full year after the initial year, to somehow suggest that one of our British companies might contribute a third of that defies the rules. I am sure one of the lobbyists provided the hon. Member for Eastbourne with that absurd example. It is so absurd that it could not have come from the wise and hon. Gentleman. It is daft.

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

Well, there we go. We should not comment too much on what the figure might be for one company. A major company of that kind might pay a few million pounds initially. However, to suggest that it would be a third of the total would mean that we would soon end up with about fifty thirds adding up to the whole. We should ground the discussion in some common sense.

We do not want to prescribe to the board what the percentage break should be. Having consulted various stakeholders and relevant bodies, we consider that an appropriate split in due course could be—although it is up to the board—about an 80 per cent., 20 per cent. split in favour of risk factors.

The hon. Member for Northavon asked how we stop the board doing its own thing. It would be proper common sense and convention for it to listen to our debates, as it were, in retrospect—that is a bit of retrospectivity that I support—and read what this Committee says about the issue. If, in due course, something like 80:20 came about, we would not be surprised. The hon. Gentleman, who is amused by that piece of information, should realise that for us to suggest exactly what the circumstance might be in 2005–06 would be a bit ridiculous. I hope that that gives a steer as to our broad intention.

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

That is a helpful steer to the future. Will the Minister clarify why his preference is not for 100 per cent.?

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

It would be for the board to consider at any one time how large the greater proportion might be, and it might well be 100 per cent. I suppose that against that, one might take the view that all scheme members will potentially benefit one day, and they will certainly derive some sense of confidence and security with regard to their pension scheme from the fact that the PPF exists. It might be that some basic levy would, therefore, be appropriate, although I would not particularly want to prescribe that. The PPF will take a longer-term view. I assure the hon. Gentleman that that is one of the intentions behind the PPF. It is why, for example, the board will not be able to vary the levy by more than 25 per cent. in any one year. Perfectly appropriately, that will force the board to take a view.

I do not think that we should run through the whole high street of companies. I was asked about M&S and bonds—the name is Bond, St. Michael Bond, is a phrase that comes to mind; it is near Easter, Mr. Cran, so forgive us. If a company issues a bond and puts money into the pension fund, then, yes, all other things being equal, we would expect such investment to lead to a lower levy. That is probably the answer to the question.

On lower-paid employees, the ability to take account of the level of pensionable earnings of the active members of a scheme, which we allow for, will ensure that schemes with large numbers of low-paid members will not be penalised. I hope that that is reassuring.

On the point that the hon. Member for Northavon raised, the PPF board will consider valuations at a specified date. For example, if one scheme completed a valuation in March and another scheme did so in June, and the results were different because of the differing economic conditions, the board might take such differences into account.

The regulator will collect annual information to provide an updated position. The PPF can use that to take account of variations in scheme circumstances.

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne

I am grateful for the Minister's clarification on a couple of points, including the St. Michael one. I hope that the industry will take note. This was never more than a probing amendment. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 139 ordered to stand part of the Bill.