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Marconi Pension Fund

– in Westminster Hall at 12:30 pm on 26th February 2008.

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Photo of George Howarth George Howarth Labour, Knowsley North and Sefton East 12:30 pm, 26th February 2008

What a pleasure it is to have the opportunity to raise this important issue in the debate today. There are concerns about the so-called defined benefit market and pension buy-outs. The Marconi/Telent pension fund involves an unusual approach by a Guernsey-based company, Pension Corporation, to buy out the whole company to achieve control of the pension fund. Why is that a potential problem? First, it allows for 93 per cent. of the buy-out to be funded on a conventional insurance buy-out basis.

Photo of Edward O'Hara Edward O'Hara Labour, Knowsley South

Before my hon. Friend moves on, it is worth noting that the value of the company is £200 million and the value of the pension fund is £3 billion. That shows the scale of the fund.

Photo of George Howarth George Howarth Labour, Knowsley North and Sefton East

Typically, my hon. Friend makes a strong point, and it raises a question: why is Pension Corporation interested in Marconi/Telent?

As I say, 93 per cent. of the buy-out is to be funded on a conventional insurance buy-out basis, which means that Pension Corporation cannot touch the funds for 12 years. However, questions arise as to how the remaining 7 per cent. of the buy-out is to be funded. If, as many people think will be the case, this shortfall is funded with riskier developments, what would happen if those riskier developments did not pay off? We have seen many examples of that happening and the people who end up suffering are the pension holders.

Similarly, if Pension Corporation exceeds 105 per cent. of the buy-out sum, the corporation has access to the escrow. For the benefit of clarity, I should say that an escrow is an arrangement whereby the employer pays funds into an account, which passes to the pension scheme under certain conditions, but is otherwise returned to the employer. Again, that raises the question of who owns the pension. Is it the pensioners, or is it the company seeking its assets?

Also, what happens after the first 12 years have passed? In the lifetime of a pension fund, that is not a huge amount of time for a well-managed fund. However, any losses during such a period—due to poor investments, for example—can seriously undermine the fund. Again, we have seen examples of that and they have always been to the detriment of the pension holders.

In my view, Pension Corporation's business model represents a serious potential conflict of interest. In November 2007, the pensions regulator determinations panel noted that the potential conflict of interest in this model was so compelling that it was not clear that it could be resolved. The chief executive of Pension Corporation, Mr. Edmund Truell, has rebutted that and argued that the company's model is a "hedge" against the "risk" of longevity. By that, I take it that he is referring to the fact that people are living longer and the actuarial arrangements in the fund do not cover that fully. However, to date no successful hedge of this kind has ever been operated. It would be exciting if the claim were true and we would avoid dampening innovation, but it is such a bold claim that it feels like the 21st century financial equivalent of a perpetual motion machine. If it does not work, how can pensioners' risks be mitigated?

E

Very well put, Mr Howarth.

If the telent fund didn't have a £500m escrow fund, then Pension Corporation wouldn't be interested in telent. They are like flies round a cow-pat. ( A previous attempt by an American hedge fund - "Fortress" - to gain control of the telent escrow fund was thwarted only by the opposition of a rival hedge fund - "Polygon". Would YOU want your pension fund controlled by an American hedge fund ?? )

According to Mr Truell's interview with the FT, Pension Corporation would consider moving our pension money out of high-security government gilts, and into short-term "notes", i.e. financial packages similar to those which caused the recent "sub-prime" scandal. Presumably the idea is to adopt a high-risk high-gain strategy, to try to get the funding level above 105%. Once this level is reached, they can legally help themselves to the escrow fund. However, if the higher risk strategy goes wrong, it is the pensioners and/or the PPF fund who will lose out.
Most pension fund members simply don't want to take risks with our pension fund, but then it doesn't seem to belong to us any more, even though it's our money.

Submitted by Edward Blackburn

Photo of Edward O'Hara Edward O'Hara Labour, Knowsley South

As my hon. Friend is quoting Mr. Truell, is he aware of another quotation from him? In Mr. Truell's own words, when Pension Corporation took over Threshers:

"We took a number of steps. We replaced the company's trustees with our own partners."

Does that sound rather ominous to my hon. Friend?

Photo of George Howarth George Howarth Labour, Knowsley North and Sefton East

My hon. Friend has again raised a very pertinent point, and I will cover that issue towards the end of my speech.

So strong are the concerns about the approach of Pension Corporation that a strong case is being put for an urgent review to clarify the regulatory framework for such developments and to identify any outstanding regulatory requirements, including the responsibilities of the Financial Services Authority and the pensions regulator. I have reason to believe that the TUC, among others, shares this concern.

It is also important that we should seek to close the so-called wind-up lump sum legal loophole, which is a very technical matter but one that has profound implications, particularly for low-paid and part-time workers, who are often from vulnerable groups or are women who are already very much at risk.

In addition, there is strong concern about the legal and regulatory issues that govern the relationships between members of schemes that are bought out and the insurance companies that eventually take over responsibility for them. My own trade union, Unite, which has many of the remaining 2,000 workers at Marconi within its membership, has made it clear that it has great concerns about what Pension Corporation is up to. A national officer of Unite, Peter Skyte, put it succinctly:

"The pension fund belongs to the present and former workforce and should not be used as a piggybank to be raided for short-term gain."

I have complete sympathy with that viewpoint.

Photo of Lindsay Hoyle Lindsay Hoyle Labour, Chorley

I thank my hon. Friend for securing the debate, because it is pertinent to the people who are represented here. I can see four MPs here—one from Coventry, two from Liverpool and me, the MP for Chorley—who have had or who still have in their constituency factories for Telent/Plessis/Marconi, whichever name people want to use.

This issue involves the pension fund. Fine words are not good enough; we need belt-and-braces legal protection to be put in place. I hope my hon. Friend agrees that that is what we need the Minister to reassure us about today.

Photo of George Howarth George Howarth Labour, Knowsley North and Sefton East

It is significant that my hon. Friends the Members for Chorley (Mr. Hoyle), for Knowsley, South (Mr. O'Hara) and for Coventry, South (Mr. Cunningham) are here, because we all have large numbers of Marconi pensioners among our constituents. I know that my hon. Friend the Member for Chorley has some current employees of the company among his, and I think that that is also the case for my hon. Friend the Member for Coventry, South. This issue is vital to a number of areas right across the country.

I want to conclude by putting some questions to my hon. and learned Friend the Minister. First, will he commit to a review of the regulatory regime governing schemes such as that of Pension Corporation? If so, will he take into account the following issues, which I believe should be covered by such a review?

The first issue is governance—that is, protecting the role of trustees, including member-nominated trustees, and ensuring that they have clear information and are involved early on and at every step in the process. It is essential that trustees are in a position to ask difficult questions and to get good advice.

Any such review also needs to take into account transparency. It goes without saying that without transparency there is no way that pension holders and those paying into a pension fund can know whether their investment is being properly managed.

There is also the issue of risks and protections for members' benefits—an enormous concern in undertakings of this kind, which are unproven and untested. Being positive, such undertakings could be called innovative, but there are also a number of risks involved and in those circumstances the protections against those risks are hugely important.

There is the issue of breaking the link between the employer and the pension scheme of its employees. Again, that is a large step to take and one that I believe should be considered by such a review of the regulatory regime.

Of course, there are the potential regulatory gaps. It is important that those gaps are properly reviewed and it is also important that, where such gaps exist, they are closed, so that pensions are much better protected.

Finally, specifically on Marconi, will my hon. and learned Friend put pressure on the pensions regulator to extend the remit of the independent trustees imposed on Pension Corporation, whose term is due to expire in April? That would maintain the protection available to pension holders, which the regulator saw as absolutely necessary as recently as last November.

This is an enormously important issue for those whose pensions will be affected by such schemes. I know that my hon. and learned Friend has concerns and that he took careful note of the issues that were raised in this regard when the Pensions Bill was considered in Committee. I hope that he can give us some reassurance that our fears will be dealt with adequately within the relevant regulatory arrangements.

Photo of Mike O'Brien Mike O'Brien Minister of State (Pension Reform), Department for Work and Pensions 12:40 pm, 26th February 2008

It is a great pleasure to respond to this important debate under your chairmanship, Mr. Marshall.

My right hon. Friend Mr. Howarth and other colleagues have raised an important issue in relation to Telent/Marconi. To lose one's pension is to suffer an injustice. Through the Pension Protection Fund and the pensions regulator, we have sought to renew confidence in pensions and we have resolved to maintain and deepen that confidence by being vigilant in the face of new challenges. It is incumbent on the Government to guard against any injustice, and my right hon. Friend has played his part by prompting this debate and raising concerns that an injustice might be done.

Let me set out why my right hon. Friend is right to say that this is an important issue, before explaining what I see as the emerging risks and setting out what I intend to do.

J

"It is incumbent on the Government to guard against any injustice"

Except of course the injustice done to half of the non-resident state pensioners. They have their pensions frozen, unlike the other half, who get the same annual indexation as resident pensioners.

Why do the government keep up this injustice? Most of those affected are citizens, and most live in old loyal Commonwealth countries.

Submitted by James nelson Read 4 more annotations

Photo of Lindsay Hoyle Lindsay Hoyle Labour, Chorley

I know that my hon. and learned Friend will deal with all the issues, but may I say that we are talking about past pensioners, current employees and future employees? We must also look after future employees, although I do not know whether my hon. and learned Friend can discuss that, too.

Photo of Mike O'Brien Mike O'Brien Minister of State (Pension Reform), Department for Work and Pensions

My hon. Friend is entirely right that we are talking about all three. However, we are talking about not just the pensioners at Telent, but how the financial services industry has decided to deal with pensions. What concerns me is that that seems to involve treating pensions as just another commodity.

P

"Treating the pension just like another commodity". A bit like how the Government has a £40 billion surplus in the National Insurance Fund (NIF) and instead of using it to provide...

Submitted by Peter Morris Continue reading

Photo of Edward O'Hara Edward O'Hara Labour, Knowsley South

To put it simply, does the Minister agree that instead of treating a pension as a trust to protect and grow for the benefit of the pensioners, the financial markets see it as an instrument for making profit?

Photo of Mike O'Brien Mike O'Brien Minister of State (Pension Reform), Department for Work and Pensions

That is exactly the concern. Until now, companies have broadly regarded pensions as a trust or, in the case of an insurance product, something that is backed by capital, and there has been a relationship with an employer or insurance-based capital backing. Pension Corporation has some very reputable people on its board and is backed by significant resources, and my concern is not so much that it is up to no good. The model that is being used raises concerns, however, about the future and about the possibility that pensions will be treated as just another commodity, with losses and gains being arrived at in a way that could put people at greater risk than they should be.

As I said, the Government want to establish confidence in pensions, and we also want to watch out for emerging risks in the financial services industry. I understand that Pension Corporation may still be discussing the Telent case with the regulator, so I will not comment too much on it. As I said, however, my concern is that the model that we are looking at could be used by less reliable parties than those running Pension Corporation, some of whom might not be UK based.

Mention has been made of the fact that Pension Corporation is based in the Channel Islands, although there is some regulatory control here. Organisations dealing in pensions could, however, be based elsewhere, in which case we would want substantial reassurance about their capacity to deal properly with pensions. The issue of people treating pensions as just another commodity—as something with which they can wheel and deal—is one that we need to approach with some caution.

The Telent case has alerted us to the scope for others to use such a business model, which may pose risks not only to the members of pension schemes, but to the PPF. I therefore welcome the support that came from across the pensions industry when the regulator installed independent trustees in the Telent scheme. Those trustees play a critical role in protecting members, and we must continue to support that important control and the regulator's ability to put independent trustees in place.

I hear what my right hon. Friend says about what will happen in April. The pensions regulator is independent, and it is important that the City and everyone else sees it as independent and as not susceptible to Government pressure or Government intervention in day-to-day decisions on issues such as this. As he said, there are concerns about what will happen after April, which pensioners have voiced directly to me. I will pass his comments to the regulator and ensure that it is aware of his concern.

Photo of George Howarth George Howarth Labour, Knowsley North and Sefton East

I am grateful to my hon. and learned Friend for that assurance. I recognise that the relationship between him and the pensions regulator is complicated, but people will be assured that the concern that has been expressed today will be passed on to the regulator.

Photo of Mike O'Brien Mike O'Brien Minister of State (Pension Reform), Department for Work and Pensions

I will certainly ensure that that is done and that the regulator is also made aware of the concerns that the Government have about protecting the scheme's future.

As I said, I welcome the support that has come from across the industry for the actions of the pensions regulator. When trustees find themselves in difficulty, they need to know that they are not alone. The regulator provides not only key information and support, but the capacity to intervene. Last week, in the Committee considering the Pensions Bill, I acknowledged the vital role played by the independent pensions regulator by strengthening its powers to install trustees, where that is in members' interests. That was an important step, but let me tell my right hon. Friend and other colleagues who are concerned about what is happening that it is a first step. I have asked officials at the Department for Work and Pensions to look urgently at what more can be done to maintain confidence and to signal to the City our concern about such models of pensions investment.

I want to consider the views of employers and pensions experts as we examine the options. I am ready to listen, but I also want to signal our willingness to act and to intervene, if necessary, by giving the regulator the legislative ability to deal with such issues.

Photo of George Howarth George Howarth Labour, Knowsley North and Sefton East

Again, I am grateful to my hon. and learned Friend for that assurance. Will he confirm that trade unions will be included in the definition of "experts"? He will readily acknowledge that they have a wealth of experience on, and knowledge of, the intricacies of pension funds.

Photo of Mike O'Brien Mike O'Brien Minister of State (Pension Reform), Department for Work and Pensions

I certainly recognise, and have valued, the contributions made by the TUC and a number of trade unions to the development of pensions policy. Clearly, particular trade unions have a deep vested interested in this issue—

Photo of Mike O'Brien Mike O'Brien Minister of State (Pension Reform), Department for Work and Pensions

A legitimate vested interest. However, there is also a wider interest, because the pension schemes of members working in other companies and organisations could also be affected by the development of a new model.

I want to ensure that the regulator has the right powers to protect people's pensions to ensure that confidence in pensions will be strengthened. Traditionally, and rightly, a pension has been backed by the covenant of a sponsoring employer, or by capital resources: that means an employer or capital standing behind the pension. In some new models emerging in the buy-out market, the security of an employer is taken away, but adequate capital has not been put in place to replace the certainty and security that the employer brings. That creates an asymmetry of risk—a business model where the provider benefits if all goes well, but scheme members or the PPF pick up the bill if things go badly.

It would not be fair to members, or to all those schemes that pay the PPF levy, if we allowed new business models to develop in which a provider assembled significant financial risk without having adequate structures in place to manage that risk. Traditionally, if trustees are confident in the employer, they can decide on a funding and investment strategy that reflects the employer's ability to underpin the risks undertaken. The employer will benefit from lower contributions if the risk pays off, but will pay more if the investments underperform. Under the regulatory regime with respect to insurance companies, they must back their investment, longevity and other risks with capital, so the capital or the employer must stand behind the pension, which provides important security for the members.

For those regulated by the FSA, the capital requirements are clear. Any new approaches to pension scheme risk management should have similar security. There should be capital or other supporting structures underpinning the risks. Where providers are based offshore—outside the UK regulatory regime—that causes concern. If it happens, we need further reassurance that appropriate controls are in place.

Photo of George Howarth George Howarth Labour, Knowsley North and Sefton East

My hon. and learned Friend has made a point about the need for capital standing behind the scheme to mitigate risks such as longevity or anticipated longevity, but is not that the problem—the loophole that is not covered by regulatory arrangements in schemes such as Pension Corporation's?

Photo of Mike O'Brien Mike O'Brien Minister of State (Pension Reform), Department for Work and Pensions

Of course, Pension Corporation will have its own view on that. As I have said, because there are some quite difficult legal and other issues, I do not want to comment too directly. I want to focus more on the model, and concerns could arise with the model of companies buying, perhaps, an under-priced company with a pension scheme, using either valuation or a bid from an insurance scheme to try to get a grip on the liabilities of the pension scheme and taking the surplus from it. That is essentially to treat the pension scheme merely as a commodity from which to seek a profit.

We need to be careful about our approach, because there are circumstances in which buy-outs are right and work, but there are others where they do not. However, it is important to tell trustees that they need to look carefully at the security of member benefits and involve the regulator early if they have concerns.

I am concerned that the intrinsic risks of the new business models present a real downside. Suppose that investments fail to perform as expected. If the link between the scheme and the employer has been severed without adequate capital being put in place to back the risks of the scheme, there might be no backstop to ensure that benefits will be paid as promised. In a worst-case scenario, the provider could be driven into insolvency and the scheme could enter the PPF with a funding deficit. That would mean scheme members receiving PPF compensation that was lower than the pensions that they had expected, the PPF having to cope with new costs and PPF levy payers—that is, continuing pension schemes—having to pay higher bills.

We cannot avoid every risk, but that does not mean that we should take reckless risks with members' benefits, or with the finances of the PPF. We need to look critically at new business models to ensure that we have the tools to manage risks proportionately. We should all recognise the potential of confidence and the dividend of stability in the pensions industry. However, I also want to emphasise that we recognise the importance of innovation in financial services. It is important that I say that.

I welcome the innovation that has flowered in the pensions industry in the past couple of years—greater competition, novel product development and, indeed, some of the buy-outs. There are clear benefits in some cases. Innovation can be good, but not all innovation is good, and supporting innovation generally should not mean condoning proposals that could be harmful to pension members' interests. For example, in another area of pensions policy, I had to judge yesterday whether it was the right time to allow new providers such as Brighton Rock to compete with the PPF by exempting schemes that have bought its products from paying PPF levies. I took the view strongly that this is not the right time to do that. For the moment, I believe that we need stability in the pensions market to strengthen confidence.

My right hon. Friend asked how we can ensure that regulation will be effective in relation to the new models. Paul Thornton's 2007 review of pensions institutions concluded that current arrangements are working well and made recommendations aimed at strengthening the system, including the relationship between the pensions regulator and the FSA. I am glad that both organisations have taken those recommendations seriously, but I also recognise that changing market environments prompt us to keep the boundary between their remits under review. We are considering whether change is required to clarify which body is responsible for regulating providers in the pension buy-out market.

I welcome innovation and recognise that we need to ensure that regulation keeps pace with a changing market. We are dealing with a fast-changing market, with new models in it. We will need to ensure that key risks are managed effectively by watching what is happening in the market, identifying the risks and being prepared to act early and quickly to demonstrate that the Government are prepared to deal with problems. I am willing to consult formally, and to bring amendments before Parliament to increase the regulator's powers, if that is the best way forward.

I have already demonstrated that willingness through the changes that I have made to the Pensions Bill as it has progressed through the House, increasing the abilities of the regulator to appoint trustees, as in the case raised by my right hon. Friend.

It may be appropriate to strengthen the regulator's anti-avoidance powers further, and I am prepared to consider that. Such powers need to be focused on dealing with a particular mischief. Where they are broad because they have to deal with a constantly adapting innovative sector, they need to be targeted by guidance. When the pensions regulator was created, there was concern in the City, but the regulator has done an excellent job of reassuring the City while tackling particular problems.

I have no wish to give the regulator unconstrained powers to reopen old wounds, but I cannot allow the development of business models that raise serious concerns. I know that well-intentioned legislation can bring undesirable consequences if it is not thought through effectively, and we recognise the importance of deregulation, which is why we set up a rolling deregulatory review to strip out unnecessary legislative requirements and costs, but I am keen to continue to discuss the issues to see whether, in the light of changing developments in the relevant area of the market, we need to take further steps in the coming weeks and months.

I want to hear the views of the financial services industry and the pensions industry, trustees, trade unions, employers and business. Our shared aim should be to ensure that pension promises are kept and pensioners are secure in retirement, and that we are in a position to build renewed confidence in UK pensions, for which all hon. Members have a responsibility, so as to protect, deepen and advance the circumstances in which pensioners today and in future—and indeed those who have already retired—can look forward with a degree of confidence and security.

J

You have linked to the wrong website for BrightonRock. The correct site is www.brightonrockgroup.co.uk.

This is the first of a new breed of pensions insurers which insure defined benefit pension schemes against the risk of sponsor failure. If a scheme sponsor fails, these new breed insurers will immediately annuitise pensions, paying them in full. Schemes with
this insurance may stay open to new entrants. This contrasts with the new bulk annuity companies -- which require schemes to terminate.

By removing the principal concern of trustees (the strength of the sponsor covenant)these new insurance companies will help stem – and could even reverse – the process of attrition of defined benefit pension schemes.

Submitted by Jonathan Hoffman Read 1 more annotation