New Clause 9 - Pension Protection Fund: increased compensation cap for people with long service

Pensions Bill – in a Public Bill Committee at 4:15 pm on 11th July 2013.

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‘See Schedule [Pension Protection Fund: increased compensation cap for people with long service] for amendments increasing the Pension Protection Fund compensation cap for people with long pensionable service.’.—(Steve Webb.)

Brought up, and read the First time.

Photo of Anne Main Anne Main Conservative, St Albans

With this it will be convenient to discuss

Government new schedule 1—‘Pension Protection Fund: increased compensation cap for people with long service.

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

New clause 9 and new schedule 1 are examples of where, as a Minister, I have sought to listen to the concerns that both my hon. Friends on the Government side and, indeed, hon. Members from around the House, have brought to me on behalf of their constituents. I met with them in my office in the Department, I listened to their concerns and now we are here, amending the law of the land to try to deal with those concerns.

The new clause relates to the Pension Protection Fund cap. The issue here is that when people go for PPF assessment, those who are already over their scheme’s pension age get an uncapped pension, but those below that are subject to a cap.

The original thinking behind that cap was partly as a cost-control measure and partly to prevent moral hazard. The argument there was that if the rules stated that anybody who was drawing a pension would get that in full, even after an insolvency event, and the people who had not started to draw a pension would have to make do with what was left in the fund, there might be an incentive for those in the know at the top of a firm close to insolvency to retire and draw their pension before scheme pension age. Thereafter, they would always get a potentially large, uncapped pension for the rest of their life, while those who were not in the know, and perhaps soldiered on for a bit longer to keep the firm going, found that, after insolvency, because they were under scheme pension age, they got only the dregs of what was left. The previous Government therefore decided that there would be a cash cap on the amount that could be paid.

The basic cap was working as expected; it has been in place since 2004, it does control costs and it is part of the moral hazard regime. I should stress that it affects a relatively small percentage of individuals: less than 1% of those receiving payments. However, one of its consequences was a disproportionate effect on those with long service and, in a debate in Westminster Hall on the Visteon pension scheme for former Ford workers in December 2012, I announced that we were looking at the operation of the cap.

Those workers, and others, had made the point that those who had served for a long time could be above the cap not because they were—if you will allow me to use this colloquialism, Mrs Main—the fat cats at the top,  but simply because they had worked for the firm for a long time. Furthermore, someone who works for a firm for pretty much all their working life is unlikely to have any other pension, so any cap that applies to their PPF pension essentially caps their whole income as well as their widow or survivor’s pension. Some of these workers and other firms that people have come to see me about felt that the cap was having a disproportionate effect on a very small group—people who had been members of a scheme for a long time and who had had little or no opportunity to make up the shortfall from other sources.

New schedule 1, which is grouped with this new clause, inserts a new definition of the compensation cap into schedule 7 of the Pensions Act 2004. This is the schedule that deals with the calculation of compensation. It brings in a new compensation cap, which essentially will be based on an enhanced level for people who have served for more than 20 years. There is a figure for the cap which can be actuarially reduced for people who take early retirement. That will be increased and we envisage this to be by 3% for each year of service beyond 20. It is very much focused on those who have relatively high pensions. We are not talking about people on very low pensions, but about people who have worked for a firm for a long period and who have expectations about their pensions.

This new definition deals with members who will become entitled to compensation after the legislation comes into force. It provides for a standard cap to apply to anyone with 20 years’ service or less. I will give the Committee the figure: the standard cap applies to everyone at present and is £34,867 at the age of 65, but is reduced for earlier years. So where a person has been in a scheme for 21 years or more, the standard cap will be increased by 3% for each full year of service, to a maximum of double the standard cap. To clarify: we will bring forward further amendments to extend the scope of this.

The amendments before us now enable the Committee to consider this measure, which deals with those who come into the scheme after this legislation is in force. We also plan to pick up the people in the PPF already such as, I think, some of the Visteon workers. It will not be retrospective in the sense that we will not go back to all the past years and say: “We will increase the cap now. Had that rule been in force then you would have got a bigger pension”. But it will be prospective even to people already in the PPF and have had their pensions capped. So the new capping rules will be applied when this comes into force—our best estimate would be April 2015.

This change has been warmly welcomed. Dr Ros Altmann, who gave oral evidence to the Committee, said:

“It is only right the Government ensures better protection for long-serving members’ pensions.”

Tom McPhail, from Hargreaves Lansdown, whom the hon. Gentleman quoted, said:

“This will help to bolster confidence in the promises of under-funded final salary schemes and will reduce the risk of long-serving employees suffering catastrophic losses”.

Photo of Heather Wheeler Heather Wheeler Conservative, South Derbyshire

I congratulate the Minister on bringing in this new clause. I have had constituents who have been severely affected  by Bmibaby and we do not know what will happen with UK Coal going into administration. So this is great news for my constituents. Thank you very much.

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

I am grateful to my hon. Friend. As she says, a number of coal employees will have their pensions paid by the PPF. In due course a small number of them could potentially benefit from this measure, so I am grateful for her intervention. A point worth making is that this does not apply where schemes wind up outside the PPF. So if the scheme has, for example, gone through its PPF assessment process and ended up outside it because it was funded to above PPF levels, then the fact that PPF levels are now slightly bigger will not bring the schemes back in and there will not be payments from the PPF to those folk. I appreciate that this is a difficult position for them to be in, but it is very hard to see how we could pay PPF benefits to people who are not in the PPF.

To conclude: this has turned out to be pretty complicated to legislate on. It sounds as though all we are doing is changing the law on the cap, but because the PPF rules feed through into the whole priority order on winding up, it has turned out to be quite a complex legislative process. Therefore we have to legislate carefully.

To reply to my hon. Friend—I have suddenly become ludicrously well-informed—we think that 7,000 members of the UK Coal scheme will be eligible for compensation from the PPF. If there any capped members in the scheme, they will indeed be assessed on the same basis as anyone else. So if they meet the criteria for the improved cap, they will in due course benefit from it.

We have seen a practical example of the way in which the enhanced cap will help people who, while most would not say were poor, are certainly getting a pension well below what they had expected and are disproportionally affected because of their long service. I hope that the Committee will agree that this new clause and new schedule help to deal with those concerns.

Photo of Heather Wheeler Heather Wheeler Conservative, South Derbyshire

On that very point, it is not about just the pensions for the people who will be retiring immediately. It also has a knock-on effect on widows’ pensions, so it is hugely helpful. Thank you very much, Minister.

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

I am grateful to my hon. Friend. When an hon. Member came in with a constituent, I was struck by their saying, “It is not just my pension. I thought I had provided a certain standard of living for my wife should I predecease her, and it will now be much lower than I had thought.” I took that message to heart. Hopefully we have been able collectively to do some good this afternoon, and I commend the new clause and schedule to the Committee.

Photo of Gregg McClymont Gregg McClymont Shadow Minister (Work and Pensions)

The Minister will be delighted to learn that I too, and those on this side of the Committee, think that he and the Government are doing the right thing here. If I have said that the Minister was seeking the approbation of the Committee, I think that on the new clause he has it—it is unreservedly welcomed. Alongside that, however, I note that the Minister in earlier discussions repeatedly referred to the previous Labour Government, and I am sure he would accept  that one of the most significant things that that Government did was to create the Pension Protection Fund. We welcome the Minister taking it on further in this fashion.

Photo of Tom Blenkinsop Tom Blenkinsop Opposition Whip (Commons)

This is the first intervention I have made during the Committee, but I thought I would make it now. The Pension Protection Fund was fought for and won in the European Court of Human Rights by a Community trade union campaign, of which I was happy to be a part.

Photo of Gregg McClymont Gregg McClymont Shadow Minister (Work and Pensions)

I am sure that the Committee is delighted to have that on the record.

As I was saying, I think that the Minister has done the right thing here, and the Opposition certainly have no intention of opposing the new clause.

Question put and agreed to.

New clause 9 read a Second time, and added to the Bill.