Clause 16 - Pension compensation: annual increases in periodic compensation

Pensions Bill [Lords] – in a Public Bill Committee at 2:15 pm on 14 July 2011.

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

Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions

We now come on to the Pension Protection Fund. I do not know whether the father of it is in our midst—as ever, success has many parents, but I acknowledge the contribution made by the right hon. Member for Croydon North. I do not know if the headquarters of the PPF is physically in his constituency, but if not, it is not far from it. I know that he takes a close interest in the PPF, and I look forward to his contribution.

I remind the Committee that the PPF provides help to members of failed defined-benefit occupational pension schemes. The system works like this: compensation derived from pensionable service on or after 6 April 1997 is increased each year to take account of inflation, subject to a maximum 2.5% cap. Clause 16 will amend provisions on the indexation of compensation payments.  It replaces references to RPI with references to the “general level of prices”. The Secretary of State will decide how that is determined but, as we have just discussed, the current intention is to use the CPI.

Rather than rehearse again all the arguments about the CPI, I will simply state that the clause will bring the PPF into line with statutory indexation for occupational pensions, which is the obvious thing to do. It would be inappropriate to use a different inflation measure for PPF compensation, which helps members of failed defined-benefit occupational schemes, than the measure that is used in the legislation governing ongoing pension schemes. I commend the clause to the Committee.

Photo of Malcolm Wicks Malcolm Wicks Labour, Croydon North

The Minister has made a brief, but useful, introduction to an important subject. I should put a clarification on the record about how, when the Bill establishing the Pension Protection Fund was given Royal Assent, the decision was made to locate it in Croydon. My hands were nowhere near it; the decision was made by officials, partly because Croydon is usefully about halfway, by train, between the DWP and the Pensions Regulator in Brighton. It was nothing to do with me, and my officials were not very astute, because it is in Croydon Central rather than Croydon North.

As a prelude, it might be helpful briefly to remind the Committee why the PPF and its small brother or sister, the financial assistance scheme, were established. Before the Pensions Act 2004, there was a growing scandal in this country, about which all parties were concerned and which was championed by many colleagues from both sides of the House. Companies were going bust with defined-benefit or so-called final salary schemes, with the consequence that, through no fault of the workers or the existing pensioners, people risked losing not all—I will not exaggerate—but a very large proportion of their pension, perhaps receiving only 20% or 30% rather than 100% of it. Many workers and pensioners lobbied Parliament and it was a great cause célèbre, if that is not the wrong phrase.

The real hero was Ian McCartney, the Pensions Minister, who was very much seized by the issue and was determined to do something about it. Therefore, although the DNA test would show some paternity on my part, I would not want to claim the credit. Therefore, although the DNA test would show some paternity on my part, I would not want to claim the credit. However, I am proud that Parliament legislated for the Pension Protection Fund.

Briefly, the PPF delivers—the Minister will correct me if I am out of date of this—90% of what the pension entitlement would have been for existing employees, and 100% of the pension for existing pensioners. However, that is subject to a cap, so that those who would have not large pensions, but pensions above a certain level would get only a certain amount; the Minister may have the figures with him now. That led to some aggrievement, but by and large it was a sensible approach.

The way in which it is funded, which is not without difficulty or controversy, as we have already heard, is by imposing a levy on DB or the so-called final-salary schemes. In a sense, as an insurance premium, those people would have to pay a certain risk-based amount. I am a bit out of date on how that risk basis is worked out, but it is risk-based. A well funded scheme would still pay a levy, but a smaller amount than a scheme that looked slightly risky.

The levy is a burden on those schemes, particularly when, as we know, final-salary schemes are in significant decline. More and more companies are announcing that, certainly for new recruits, the DB scheme no longer exists. Imposing a levy on a declining sector is not without grave difficulty, which I acknowledge. However, when schemes go bust, they often leave behind considerable assets, which, although not enough to pay their pension liabilities, are taken in by the PPF and invested, and some of the beneficiaries will be paid from that income.

Photo of Andrew Bingham Andrew Bingham Conservative, High Peak

The right hon. Gentleman is giving quite a good commentary on the history of the PPF, and he may have forgotten that I met him about five or six years ago with a group from the Turner and Newall scheme in my constituency.

This is slightly off of what we are discussing, but I hope the Chair will give me a bit of licence. The right hon. Gentleman talks about the level of compensation. We have acknowledged, however, that there is still a group in the PPF—the early retirees—some of whom, because of when they retired, the conditions of the PPF and the cap, are still experiencing losses of up to 70%. The Minister knows that because we have discussed it, and I will want to continue harping on about it for the rest of this Parliament, even though I am aware of the difficulties of dealing with that problem.

Photo of Malcolm Wicks Malcolm Wicks Labour, Croydon North

Yes, I am aware of that. It was not 100% satisfactory to all those who should have benefitted. Also, the PPF went forward from the relevant date, but there was the issue of companies that had already gone bust, and those people cried and shouted the loudest to Parliament, and rightly so. After some delay—I recall that the Treasury was not too keen—the financial assistance scheme was born to provide some benefits, paid for by the Exchequer, not levy payers, to those people.

Now, institutionally, I understand that the PPF has taken in the FAS. It is not an amalgamation, so the two are actuarially separate, which is wholly appropriate. I do not have the latest figures, but my understanding from the report is that up to the end of March 2010, 341 schemes were in the PPF, covering about 193,000 members. However, the scheme is fairly fast-moving, and those numbers will now be larger. If we link them to the numbers affected by the FAS, I think the PPF told me—I am not sure whether this is current or very soon—that about half a million people would be covered by the PPF or the FAS. That may be going forward a little bit, but not too far. If I have that wrong, I am happy to be corrected.

By putting forward such pension arithmetic, I am showing that the PPF and the FAS are helping a considerable number of people who are now receiving at least a reasonably significant pension whereas, before the legislation and the establishment of the fund, they would have received a small pension.

We are talking about people who have had a lot of anxiety in their lives about companies going bust and who, for several years, were fearful that they were losing a significant proportion of their pension. They include people—the hon. Gentleman has just referred to this—who still consider that they are not receiving their full dues.  Such people are not vulnerable, but they make up a group of people for whom we should have some regard. It is in that context that we need to ask the Minister why the move from RPI to CPI—not the CBI, which I expect would oppose my proposals—should apply to the PPF. The hon. Gentleman more than alluded to it earlier; he said that it was Government policy and that, of course, such issues should apply to the PPF. He is not the libertarian who I used to know in the Opposition days, such thoughts show that he is a bit of a centralist.

I hope that I have shown my understanding of the funding basis of the PPF and that we need to nurture the institution carefully in future, not least because of the decline of final salary schemes. Nevertheless, I am not convinced that the PPF could not have afforded to have kept RPI for such a group of people who have been badly treated in the past—if I can describe them that way. Reporting on progress during the year, the chief executive’s review for the past financial year 2009-10 stated:

“Our deficit of the previous year has been replaced by a reserve of almost £400 million, equivalent to a funding level of 103 per cent.”

That is testimony to the good stewardship of the PPF, and seems relatively healthy. When that report was produced, the assets of the PPF were some £4.5 billion. I believe that they might now be nearer £7 billion, but the Minister may be able to correct me. I am not being silly. There are huge liabilities, too, and we have to be careful. However, I am not convinced that such action was necessary, except to impose a central edict, to say to the board, “It is not up to you to make up your mind as stewards. We, the Government, say that you have to move to CPI.”

Photo of Marcus Jones Marcus Jones Conservative, Nuneaton 2:30, 14 July 2011

I follow the right hon. Gentleman’s argument, but is it fair that people in the fund receive uprating with RPI, when the people contributing towards the fund through the levy on their pension schemes are only being uprated by CPI?

Photo of Malcolm Wicks Malcolm Wicks Labour, Croydon North

That seems like quite a good question. I am trying to be generous before I let the hon. Gentleman down. There are two flaws in his argument. First, as we have learnt from my exchange with the Minister, many people in DB schemes will continue to benefit from RPI. He said that he was proud of the fact that 76% was close to 80%. I thought that it was pretty good. If 70% to 80% of existing DB scheme members will still benefit from RPI, that slightly undermines the argument of the hon. Member for Nuneaton. That is a pity, as it sounded good as a question.

Secondly, given how many DB schemes are uprated with RPI, many of the schemes that the PPF beneficiaries come from would have been in RPI-uprated schemes, but they went bust. If companies had not gone bust, going forward they may well have benefited from RPI and—in plain English—better, higher pensions. Now, because of a central edict, their PPF pension will be uprated—I think we agree that it might vary from year to year—at a lower rate. So I think that is why I am not entirely taken with the question, although for a while I thought it sounded pretty impressive.

Why did not the Minister and the Treasury leave the decision to the PPF board? Here we are, supposedly in an era of the new localism—I will not go on about the  big society in case those who feel a bit tired at the moment totally slumber—where we no longer have the central state and we let key institutions make decisions. We established the PPF board as an independent board, which has great expertise. Its members are the stewards of the PPF and the funding. Why did we not say to them, “This is the Government’s view, but it is up to you; you’re the board; you have to make this decision”? Who knows what decision they would have made?

Photo of Malcolm Wicks Malcolm Wicks Labour, Croydon North

May I just continue, and then of course I will give way, because I am more generous at giving way than the Minister at the moment?

It is interesting that the Government at one stage considered whether to introduce legislation that would directly override the rules of individual schemes. It says here “(a statutory override)” just to help us remember. However, the Government decided against it, which slightly undermines my central edict point. It is good that you changed your mind—why did you? Not you, Miss Clark—I am sure you never change your mind, although we all do sometimes. Why did the Minister change his mind? Because it would

“represent an unwarranted interference in the rights of employers and trustees to manage their financial affairs.”

If we are saying that the Government have changed their mind and we will leave it to the trustees to decide, are not, in a sense, the PPF board the trustees? They, not the Minister, have the responsibility to manage the affairs of the PPF. Why not trust the board? Why not believe in independence?

Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions

The right hon. Gentleman was behind the legislation that brought this measure into practice. If he thought that we should trust the board and give it discretion, why did he give it absolutely no discretion on the way in which the benefits of the PPF are calculated, which he now thinks we should do for the first time?

Photo of Malcolm Wicks Malcolm Wicks Labour, Croydon North

Well, in terms of establishing the PPF and the difficult decision to impose a new levy, it was felt that we could not give everyone the pension to which they were entitled. We had to have the cap on the amounts of pensions paid out, if that is what the Minister is referring to. Now that the PPF board is established—alive—and rather successful in Croydon, it has to produce annual reports. It has a director of finance or whatever the title might be, an independent chair and a chief executive. Why not trust them to make the decision? However, the Government did not trust them to make the decision, so may I ask the Minister whether the board was consulted and what was the result of that?

It is interesting that in the impact statement, which was on the table—I am sorry to have missed the purple one; the one that I have did not have a purple cover, so I did not spot it—we are told about the options that were considered, and then we had stakeholders’ views. That is an extraordinary word that we use—stakeholders.

“Initial feedback suggests the following positions of key stakeholders:

Members of affected schemes and their representatives oppose the change to CPI as it will lead to lower payments in the future”

Well, they got that right.

Trade Unions. Opposed.

Pensions Professionals. Neutral.”

I never found them neutral myself.

“Also, the Board of the Pension Protection Fund is neutral—the change is a matter of Government policy.”

Or so they say.

So, in terms of stakeholders, the only stakeholder view that has been taken into account is the Treasury’s, which I think speaks volumes. That is disappointing in relation to the independence of the Pension Protection Fund board.

I want to ask the Minister about the impact of the measure, because he has spoken often about the needs of pension schemes, but he is a little less sure to tell us about the effects on pension beneficiaries. I quizzed him a little on that slightly obscure table, but I think that I have got it now. It shows that in future, many pension beneficiaries might be 16% worse off under CPI than if we did not agree the legislation.

The PPF relates to a different population of people. Will the Minister give us figures—average figures, perhaps—to show how the move to the CPI will affect, I believe adversely, the pension incomes of that group? In addition, will he give us figures for the financial assistance scheme? I do not think that such figures were spelt out clearly in the impact assessment. The key impact to assess is that on the citizen in the FAS and the PPF. In other words, what will be the average loss of pension—not just for one year, but going forward? Any information would be gratefully received.

To restate the case, in the past, people have had periods of grave uncertainty and anxiety about their DB or final-salary schemes—I use that term, but I know that such schemes are not always final-salary. People have had a tough time, and we have conceded that they do not always get the pension to which they think they are entitled because we had to impose particular limits. Is this really the group on whom to impose by edict a meaner regime than the current one? That is my main argument.

The PPF has been a success story. I am not cavalier about the future difficulties of matching liabilities to income, which we must consider carefully, but so far, so good. The PPF has done a good job. It appears to be helping a couple of hundreds of thousands of people, if not now, very soon. Such people are not always the richest in our society and they have had a tough and anxious time. As we scrutinise the clause, we should consider carefully whether the Government have got the measure right or wrong.

Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions

I certainly join in paying tribute to all those who played a part in creating the PPF and the financial assistance scheme. I like to think that those of us who were in opposition managed to drag the Government kicking and screaming into doing something about the problem when, for many years, they declined to do anything at all. We welcome the eventual introduction of the financial assistance scheme and its subsequent improvement, which followed further pressure, and the PPF, too.

I entirely agree that the PPF has been a worthwhile addition to the pensions architecture. All those involved can be justifiably proud. I put on record my appreciation  of the work of the PPF and the security that it provides to tens of thousands of people. We have some figures: we currently estimate that approximately 75,000 people are receiving or will receive PPF compensation; another 208,000 are in assessment; a further 17,000 receive FAS benefits; and another 150,000 will get help. If we add all those together, we get to 400,000-odd. Obviously, we do not know what the future holds, but it is striking that new schemes seem to turn up at our door all the time. Even under the FAS, we still find new ones, so we do not know where we will end up on all that.

The fundamental question on the clause is whether Croydon is an island—if I can put it that way—more than just a traffic island, perhaps. Should we use one measure of inflation in Croydon and a different measure everywhere else? I do not see any justification for doing so.

Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions

I was trying to lighten the tone slightly, but I shall give way.

Photo of Rachel Reeves Rachel Reeves Shadow Minister (Work and Pensions)

What proportion of people receiving their pension through the PPF would have had their pensions uprated by the RPI rather than the CPI if their firm had not gone bust?

Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions 2:45, 14 July 2011

We know that schemes that go into PPF are not like the average scheme. To the extent that they are broadly like the average scheme, they will mirror the numbers in table 2, which we were just talking about. In other words, some three quarters of them will have had RPI indexation.

The immediate reaction by the right hon. Member for Croydon North to the question from my hon. Friend the Member for Nuneaton was the correct one, in that it was a very good question. Why should schemes that are paying CPI benefits to their members pay insurance for RPI protection for their members? That is a strange concept, which seems somewhat inconsistent. We and the right hon. Gentleman recognise that PPF is not trying to put people exactly where they would have been. It is trying to provide a measure of security, hence the 90%, the cap and the standardisation of terms in the PPF. When someone goes into the PPF, they do not get exactly what their scheme would have provided on their scheme’s rules. They get, essentially, a safety-net scheme. That is why using CPI as part of that is the consistent thing to do.

The right hon. Gentleman suggested that the board should have discretion, which I find baffling. He and his colleagues created the Pension Protection Fund. The board’s job is to implement the Pensions Act 2004 and to run the Pension Protection Fund according to rules set down by Parliament. Why today we should suddenly decide to give them discretion on how to measure inflation is entirely beyond me. The board has an important job to do and it has lots of decisions to make that are rightly independent of the Government. We do not tell it what its investment strategy should be. It decides how to measure risk for the risk-based premium. Those are the operational things, but the policy is for the Government to decide. As the right hon. Gentleman said, the PPF was consulted by officials before the announcement was  made. Its view, as registered in the document that he quoted from, is that it is a matter of Government policy how inflation is measured for PPF purposes. It said that its role is to implement the Government’s policy.

The right hon. Gentleman asked about the impact of the CPI switch on PPF members. That will clearly vary hugely between individuals. At an aggregate level, we estimate a reduction of £500 million in the liabilities of the PPF in net present value. I hope that answers that question. He also asked about the management’s assets. On 31 May, they were £6.6 billion, to update the Committee. To return to my figures on membership of the financial assistance scheme, the 150,000 includes the 17,000 currently in payment, just in case there was any confusion.

I am not sure that there is an awful lot more I can add. The right hon. Gentleman is making a plea for the PPF to use a different measure of inflation. The point of the exercise is to protect against losses in standard of living because of inflation. If the Government think that inflation is better measured through CPI and they do that across millions of people for social security benefits, pensions and all the rest, to do something different in Croydon because the cost falls on pension fund levy payers rather than on taxpayers seems not to be coherent.

Photo of Malcolm Wicks Malcolm Wicks Labour, Croydon North

I really must introduce the Minister to Croydon at some stage; he might then speak more generously about it.

This idea that I am asking for something especially for Croydon is a jokey shorthand. We have already discussed the reality that many DB schemes will still have RPI in the future. It is not as if this is just for the PPF. This will be in line with the many trustees of schemes that will keep RPI. The Minister mentioned the £500 million figure, but how does that translate into pension reductions for those who should be benefiting from PPF and FAS?

Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions

On the right hon. Gentleman’s first point, on the measurement of inflation in the PPF, it is true that there will be a lot of DB schemes paying RPI increases. I come back to the point that the PPF was never supposed to mirror the scheme that someone came from; it was supposed to be a safety net. In designing the safety net, we have standard features, essentially. Given that we are requiring occupational schemes to do CPI or better, it would be odd to require the PPF to do RPI. That would be an enhancement, rather than a standard feature, for some schemes, which would be an odd feature for a protection regime.

In terms of the impact on individual scheme members, one of the difficulties is that it will not only vary hugely between individuals anyway, as per the previous clause, but that will be compounded by its depending on what they would have got under the terms of the scheme they came from, which will be unique to every individual. I cannot give him a single number, but I hope that I have given him an order of magnitude: in aggregate, the loss in net present value of PPF members from CPI is £500 million. I cannot give him a meaningful average—although, clearly, one could divide the total figure by the number of people—or a weekly pounds and pence figure.

Photo of Malcolm Wicks Malcolm Wicks Labour, Croydon North

Would the Minister concede the irony of the situation? Some seven years ago, he was standing in a Committee of this kind urging us to be more generous with the PPF and the FAS and to find more money to help those people—not a bad argument at the time—whereas now he will take £500 million out of the scheme to the disbenefit of those who we are trying to help.

Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions

The crucial issue is that the scheme is set up to protect people against inflation, but the right hon. Gentleman is urging us to use inconsistent measures of inflation in two parts of what we do. It is not about waking up one morning and deciding that we want to be mean or generous; it is about coherent legislation. The right hon. Gentleman knows that the legislation requires us to protect against inflation. In one part of the public sphere, we have judged that we will use CPI. To apply something else to another part because we will not be paying for it but someone else will be and so that is okay seems wrong.

We have given the issues a good airing, and I commend the clause to the Committee.

Question put, That the clause stand part of the Bill.

The Committee divided: Ayes 11, Noes 6.

Division number 9 Decision Time — Clause 16 - Pension compensation: annual increases in periodic compensation

Aye: 11 MPs

No: 6 MPs

Aye: A-Z by last name

No: A-Z by last name

Question accordingly agreed to.

Clause 16 ordered to stand part of the Bill.