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Pension Protection Fund

Volume 536: debated on Tuesday 22 November 2011

It is a pleasure to serve under your chairmanship, Mrs Brooke. I shall begin by drawing attention to my entry in the Register of Members’ Financial Interests, although I am not aware that any of the companies to which I am connected have any current business associated with any of the issues that I intend to raise. It is, however, important that I draw the entry to Members’ attention.

I am grateful for the opportunity to discuss important and unresolved issues in relation to the operation of the Pension Protection Fund and the financial assistance scheme, and their impact on a group of former employees of Allied Steel and Wire, a number of whom are my constituents. I want to begin by acknowledging the relentless work of Mr John Benson of the Pensions Action Group, and by thanking the chief executive officer of Saga, Ros Altmann, who has been a consistent supporter of the former workers, who have been stripped of their pensions through no fault of their own.

I would also like to thank my parliamentary colleagues, my hon. Friends the Members for Beckenham (Bob Stewart), for Sittingbourne and Sheppey (Gordon Henderson), who also has an ASW interest, for Vale of Glamorgan (Alun Cairns)—John Benson is one of his constituents—and for Montgomeryshire (Glyn Davies), as well as the right hon. Member for Dwyfor Meirionnydd (Mr Llwyd) and the hon. Members for Arfon (Hywel Williams) and for Cardiff West (Kevin Brennan), for attending the debate. We have discussed the issues with all of them over time. I should also like to mention the hon. Member for Cardiff Central (Jenny Willott), who is unable to attend the debate because of conflicting public duties, but who has been a consistent supporter of the workers.

Ever since the early part of the 20th century, Parliament has recognised the need to promote proper and adequate pension provision for those in their later years. We have seen the development of the state pension system and its refinement and adjustment in a variety of ways that still continue to this day. Overlaying that, Parliament has rightly encouraged people to make better provision for themselves through occupational or private pension routes. Again, we see that issue at the forefront of parliamentary debate. The Minister of State, Department for Work and Pensions, the hon. Member for Thornbury and Yate (Steve Webb), has responsibility for the latest Pensions Bill, which is currently in another place, and there has been legislation on pensions in this House on an almost annual basis in recent years.

On the 30th of this month, we anticipate a major public services strike because of Government plans to adjust the future pensions benefits of public sector workers. The merits of those arguments are matters for another debate, but what is undeniable is that the Minister and his colleagues in Government have been at pains to stress that, irrespective of the outcome of the negotiations, the current accrued pensions rights of all public sector workers will be honoured. The then Government made a similar pledge to Northern Rock workers when the bank was taken into public ownership in 2007, and matched that promise in respect of each of the other banks that have found themselves in the public sector.

The reason why such pledges are important is that the success of pension saving depends on the maintenance of trust—trust that, if someone makes regular contributions, they will in due course receive nothing less than the sum that has been promised to them. That trust was significantly shaken 20 years ago by revelations that Robert Maxwell had stolen £460 million from the pensions of Mirror Group Newspapers workers, which led to the establishment of the Occupational Pensions Regulatory Authority in 1995. From that time onwards, workers in company pension schemes had every reason to believe that their pensions would be safe. As Ros Altmann put it in a letter to the Financial Times some years ago:

“Members were told that their accrued pension rights were protected in law and that actuaries would calculate contributions, in line with the minimum funding requirement, to ensure adequate funding to pay the promised pensions.”

I congratulate the hon. Gentleman on securing this debate. He is making a powerful case. I support everything that he is doing and agree with all Members present that justice has to be done for this group of pensioners. I would also like to mention that the hon. Member for Newport West (Paul Flynn) is also present.

I apologise for failing to mention the hon. Member for Newport West (Paul Flynn). He regularly attends all such debates. I had presumed that he was present for the previous debate on Colombia, without realising that he also wished to contribute to this one. I am happy to put the record straight on that and to give credit to the right hon. Member for Dwyfor Meirionnydd and his colleague, the hon. Member for Arfon, for their support for the ASW workers.

Following on from the intervention of the right hon. Member for Dwyfor Meirionnydd (Mr Llwyd), many years ago, I met groups of people from ASW outside the National Assembly for Wales when they were explaining their case to Assembly Members. If we are going to have a successful pensions industry to which people are willing to contribute, we cannot let these things drift on for decades. This is not the only case, and I congratulate my hon. Friend on highlighting the issue.

I am grateful to my hon. Friend for that point and shall now endeavour to make some progress.

Ros Altmann’s letter continued:

“Literature from the government, the Financial Services Authority, the Occupational Pensions Regulatory Authority and everyone else contrasted the safety of final salary schemes with money purchase arrangements, where members’ pensions were not guaranteed”,

as we see from what happens on the stock market almost daily. That was the guarantee that ASW workers believed they had right up until July 2002, when the company went into liquidation. It was then that John Benson and his colleagues discovered that, despite years of parliamentary inquiry, debate and legislation on pensions, they were no better off than the MGN staff, whose pensions had been stolen. As Ros Altmann put it at the time:

“Simply to say it is a tragedy that thousands of people have had their pension expectations reduced is an insult to those who have suffered in this way. This is not an example of life’s unfairness; this is more like fraud. Other victims of mis-selling receive compensation. Having contributed their money loyally for 30 or 40 years, with the promise of a secure pension and no risk warning from anyone, many now find not that they will get a reduced pension but that they will get no pension at all.”

She went on to say that

“they would in fact have been better off throwing their contributions away, than putting them into their employer’s schemes. Is it any wonder that people are frightened of pensions and have lost confidence?”

The ASW scandal provoked a major campaign, which, as my hon. Friend has mentioned, began during his time at the Welsh Assembly. There was a call for action in this House and the workers were invited to No. 10 Downing street for tea and sympathy with Tony Blair, but more practical help was demanded by others in the House. I pay credit to the hon. Member for Cardiff West in that regard—he was certainly active on behalf of the pensioners—and to my good friend, the former Member for Eastbourne, Nigel Waterson, who played a leading role in supporting the workers and in highlighting the injustice of the situation. The Minister himself was also active and supportive in that debate. The campaign led to the establishment of the financial assistance scheme under the Pensions Act 2004.

At the time that the scheme was put in place, many believed that the outcome would guarantee 90% of expected pensions benefits for affected workers. I have read the parliamentary debates in which many members of the then Government expressed the joy with which workers would greet the news that 90% of their entitlements were safeguarded. Unfortunately, they were sold a line that was both simplistic and inaccurate.

Although schemes such as that for ASW provided up to 5% inflation proofing, the legislation cut it to 2.5%, less than half of the current level of inflation. Over time, that still further erodes the pension value and is further cut by the switch from RPI to CPI, which the Minister has also applied to the financial assistance scheme.

In parliamentary questions on 29 June 2009, one Member rightly exposed that deceit, although he was too courteous to suggest that the deception was in any way deliberate. He said:

“Does she”—

the then Secretary of State—

“accept that this 90 per cent. figure that she uses is highly misleading…because it is not just capped…there are big issues about the inflation protection? Does she accept that many pensioners will get much less than 90 per cent., and that over the years they will see annual falls in their real pensions? Will she look at those cases again?”—[Official Report, 29 June 2009; Vol. 495, c. 6.]

Of course, the hon. Member who was able to identify all those shortcomings is now the Minister himself. Let me make it clear that I am a strong admirer of the Minister. I believe that he is personally motivated to do all he can to help these cheated pensioners. I know that since the election he has met, on more than one occasion, with the ASW pensioners to examine any ways their plight can be alleviated. We are all aware of the difficult financial circumstances that the Government face. Nevertheless, Mr Benson and my constituents have pointed out to me that, in the run-up to the general election, both coalition parties heavily criticised the previous Labour Government for the shortcomings of this scheme. It was, therefore, a reasonable inference for them to draw that some action might be taken to address these failings if we were successful in the election.

The hon. Gentleman is making a very powerful point. Does he agree that these people feel so very angry because their limited indexation is now affected by the change from RPI to CPI, which will see them losing hundreds and thousands of pounds?

I highlighted the point in relation to RPI and CPI. I am endeavouring not to engage in a partisan debate, with the criticisms that I have made of my own side. However, I am bound to say that the fixed 2.5% inflation cap will have a much more marked effect than the CPI-RPI issue, even though I had mentioned it myself.

My constituents highlight the 100% pension protection that has been offered to the workers in the bailed-out banks. They point to the guarantee on accrued pension rights that are to be given to all public sector workers—rightly so—and the recent decision to extend those rights further, so that all workers who are retiring from the public sector in the next decade will see no change whatever in their future entitlements. They argue that, far from their situation improving, their pensions have actually worsened since 2010. Government—I use that generically, because I think it was prior to 2010—have lost their case on maladministration in the Court of Appeal, yet the recommendations made by the parliamentary ombudsman have not been honoured.

Having set out those criticisms, let me say that there are areas in which this situation could be improved. The Government should increase the inflation-linking cap. As I have indicated, the current 2.5% cap will seriously erode the pensions of affected people within just a few years, and that reduction is accentuated year-on-year moving forward. I know that the Minister understands that. As I have pointed out, he was the one who highlighted it two years ago. The Government should consider scheme-specific capping. The ASW scheme promised workers much greater inflation protection. Not only have we seen a reduction, but we have seen a reduction that, in contrast to the scheme that they had, is much less generous. The former Government removed the right of trustees to use deemed buyback after a number of schemes had taken that up. Permitting deemed buyback would assist FAS scheme members in future. The Minister could consider establishing a hardship fund for those worst affected.

The Minister has been examining the potential unwinding of annuity purchase. Annuity purchases have taken place with two major annuity providers, and I am aware that he met ASW workers as recently as 1 November to discuss the issue. Will he confirm the outcome of those discussions, with whom the discussions have taken place and whether any progress has been made?

Reduced early retirement pensions should also be permitted. There are a range of pensioners, including my own constituents, who are currently unemployed and cannot find work, yet cannot access their pension. Changing the rules would have no cost implications, because there would be an actuarial adjustment. I have a constituent who is in poor health. He could be considered for early retirement only if his doctor is prepared to say that he will die within five years. Those requirements seem excessive and wrong. Allowing early retirement, subject to actuarial revaluation, would seem fair.

Earlier today, I received an e-mail from one of my constituents, Mr Iain Kenworthy-Neale of Thornhill in Cardiff, entitled, “Fair Pensions for All”. I warn colleagues that they will all receive a similar e-mail shortly. He expresses support for the national strike on 30 November for fair pensions for all. He says that he is not impressed with the Government guaranteeing accrued pensions rights. He is not impressed with the Government maintaining current public sector provision for the next decade. He wants no change whatever in relation to public sector pensions, and he wants the Government to scrap their plans. However, Mr Kenworthy-Neale does not limit his views to public sector pensions. He also calls for all state pensions to be increased by £70 a week forthwith, and for every private sector employer to be compelled to pay pensions to their workers. He has asked for me to draw his demands to the attention of the Minister, and I am happy to do so.

In contrast, the demands of John Benson, the Pensions Action Group and all the former ASW workers at Cardiff and Sheerness are much more modest. They are merely looking for their pension promise, as underwritten by Government and regulators, to be met. I was pleased to stand with them at their protest at my party’s conference in Manchester in October. They are people of real dignity who have been badly let down by successive Governments. I hope that the Minister will be able to offer them today some light at the end of what seems a very dark tunnel.

I congratulate my hon. Friend the Member for Cardiff North (Jonathan Evans) on securing the debate and welcome the fact that a number of hon. Members have come to the Chamber to register their support for their constituents who have been affected in the way that he describes. He is right to pay tribute to those who have campaigned on the issue for a long time; I recall many such debates in previous Parliaments. The hon. Member for Cardiff West (Kevin Brennan) was certainly one of the principal campaigners on the issue, on behalf of his constituents. Indeed, Derek Wyatt, predecessor of my hon. Friend the Member for Sittingbourne and Sheppey (Gordon Henderson), campaigned on the issue during his time as a Member of the House, particularly with respect to the link with ASW Sheerness.

As my hon. Friend the Member for Cardiff North rightly said, my involvement goes back a long way. I recall going with Mr Andrew Parr, from ASW Sheerness, and Dr Ros Altmann, to whom my hon. Friend was absolutely right to pay tribute for her role in all this, to see the parliamentary ombudsman way back when. We sat down with the ombudsman and went through all the literature that people were provided with at the time, as well as the concerns about the way successive Governments had said, “No questions asked, company pensions are a good deal.” Essentially, they had said, “Go for it.” As my hon. Friend rightly says, some people lost out very badly. That is, in a sense, how the financial assistance scheme came about.

It is worth reflecting on the sequence of events and the creation of the Pension Protection Fund, and how the financial assistance scheme fits into that universe. The existence of the PPF is germane to my response to my hon. Friend. Rightly, people sometimes ask about what previous pensions Ministers got wrong. One thing that previous pensions Ministers got right was the creation of the PPF. Going forward, people in defined benefit pensions can know that the scheme is paying a levy, that there is a sort of collective insurance and that, essentially, those who see their company become insolvent can expect to receive 100% as pensioners, and 90% as active or deferred members of the scheme.

We can all take some reassurance from the fact that for the sort of scandals my hon. Friend describes—where Governments have encouraged people to save through workplace pensions and then they find that there is an insolvency event and they have lost not only their job, but their pension—there is now pretty good protection in place, although it is not total protection. Insurance schemes tend not to be total, but they are very significant.

One criterion for what we may or may not do with the financial assistance scheme is that I believe it would be wrong to take its principles beyond what the PPF provides. The PPF is a levy-based insurance scheme. It would seem to me to be wrong to say to people whose employers are paying an insurance premium that they will get less insurance cover than those who did not. It is not their fault that they did not, but it would seem to me that that is a logical and coherent position. If we create an insurance scheme and people pay for it, that is what we think is fair provision. Therefore, the financial assistance scheme should not be more generous than the PPF. That, therefore, is part of my initial response to my hon. Friend’s first point about the 2.5% inflation cap. I take his point that we live in times of high inflation, with the consumer prices index at 5.2%, or 5% as the most recent figure. However, if we were to lift the cap on the financial assistance scheme indexation, by corollary we would have to do so on the PPF indexation. If we did not, that would be odd, and we would probably be in court by the end of the day, I suspect. The PPF indexation is funded by the levy payers, so there could be a significant additional cost from removing that cap, which would have to be met by the firms in British industry today that are continuing to run quality pension schemes, or that continue to have liabilities under them. A challenge that we face is the balance between wanting good-quality pension protection and good-quality pension provision. Every time we put a new burden on those who provide final-salary and salary-related pensions, the danger is that another will say, “Forget this, that is just another cost and we will close it.” That is one of the trade-offs.

My hon. Friend mentioned the indexation provisions specific to the ASW scheme, which were relatively generous compared with some, but, to give a feel for the scale of what we might be talking about, if we were to provide indexation along the lines of the schemes that people were in previously, rather than at a general level, it is estimated that we would add about 30% to the cost. Just one of the things on his list would add significantly to the cost.

I did not intend to intervene, but as the Minister rightly says, in the past he and I were allies at times in working on the issue. We all accept that the deal that eventually happened was not what we would have liked to see, nor was it as adequate as we would have liked—he accepted that at the time—but does he not feel some responsibility at least not to make matters worse, which is what he is doing?

Let me come on to the CPI point, which is what I assume the hon. Gentleman is referring to. Clearly, the Government took a view in summer 2010 as to the measure of inflation that they would use to uprate benefits and tax credits. There is no perfect measure of inflation; clearly, each has its strengths and weaknesses. However, as a new Pensions Minister in 2010, I received angry letters from people asking why their state earnings-related pension scheme had been frozen. Obviously, “It wasn’t me, guv”, as it were, but their SERPS pension had been frozen because “inflation” in the year to September 2009, as measured by the retail prices index, was negative.

We had a bizarre situation. I have yet to meet a pensioner who felt that inflation was negative in the year to September 2009, but, because mortgage rates were falling dramatically, headline RPI inflation was negative and, therefore, people’s pensions were frozen in 2010. CPI would have given them an increase then.

The further paradox was that, at a time of falling interest rates when savings returns were falling—low interest rates are, on the whole, bad news for pensioners, who tend to be savers rather than borrowers—we were using a negative or a low measure of inflation. That did not seem a good fit to us, particularly for pensioners, so the Government took the view that they would measure inflation using the CPI for benefits, tax credits, state earnings-related pensions, the underpin for occupational pensions and, thereby, via SERPS, public-sector pensions, and the PPF. Having decided that that was what inflation was across whole swathes of the what the Government do, it would be odd to have an island where we measured inflation differently.

I fully accept that that reduces the value of the financial assistance scheme pensions—I cannot dispute that—but that was not the purpose of the exercise, and the effect was well down the track from the decision on the CPI. It would, however, have been incoherent to have said that inflation was something different for the financial assistance scheme.

I have met Pensions Action Group campaigners on a number of occasions over many years, as my hon. Friend the Member for Cardiff North said, and I have great respect for what he described as their dignity and for their perseverance in campaigning, which has got the financial assistance scheme to where it is. The switch to using the CPI has reduced the cost of the financial assistance scheme in the longer term—it has had no impact in the first couple of years because we are above the cap on either measure of inflation—but other factors have led us to spend more on the financial assistance scheme than we were budgeting for. Rather than looking at a budget line that allows me some slack, I am having to explain why I am overspending relative to the budget that I inherited. The reason for that is that new schemes come into the financial assistance scheme, or we get data for schemes that we knew were coming in but for which we did not know the details, and we tend to find out that we have greater liabilities, in particular in the short term, than we had thought.

Working out what we will spend on the financial assistance scheme is not a precise science, although it is getting more so. However, it would be wrong to think that somehow the budget line has some slack in it and that we can decide what to spend it on. On the contrary, I am having to make the case in Government that we have made promises to the financial assistance scheme that we need to keep. Therefore, we have to find extra money compared with what we budgeted for.

If my hon. Friend will forgive me, I will not, out of respect for my hon. Friend the Member for Cardiff North, who secured the debate, but only because I want to respond to his comments.

To be clear, it is not the case, therefore, that some financial slack is available for the financial assistance scheme.

My hon. Friend also mentioned deemed buy-back, which is complex, so I will not say, “Here is one I prepared earlier.” Essentially, deemed buy-back is treating the scheme as if it had not contracted out of SERPS. On the face of it, we would assume that that is better, but it turns out that the situation is rather more complicated than that. At the moment, people in the financial assistance scheme have a level of certainty: they know what the rules are and they know what 90% is and is not. I entirely accept my own point from a few years ago that we have to be careful when we say, “It’s 90%,” because clearly the matter is much more sophisticated than that and there are limits, as he rightly said. However, those people have the certainty of knowing what the scheme rules are. Under deemed buy-back, they would not have that certainty while some people would get more than 100% of their scheme pension and some people less.

Would there not be a responsibility on the trustees to form a view as to whether they wished to action that? My hon. Friend the Minister is indicating that some circumstances could be advantageous and others not, but that would be a judgment made in each case. Currently, no one can exercise such judgment.

The answer might be different for each individual rather than for each scheme. How would a trustee judge? If the trustees chose deemed buy-back for the scheme and we agreed with that, might they put some members in a worse position and others in a better? How would a trustee balance the different interests of the different members? This is complex.

The other thing about deemed buy-back is that under the financial assistance scheme there is some flexibility as to when the payments are made. My hon. Friend the Member for Cardiff North thinks that the ill-health provision is too rigid, but there is no ill-health early access to SERPS, so, again, the current system has a measure of flexibility that deemed buy-back would not have. Deemed buy-back, therefore, is complex and technical, and not a silver bullet. We have looked at it—in fact, we have looked at just about everything imaginable to try to find ways to provide better value to those individuals.

My hon. Friend mentioned annuities. All the way through, Dr Ros Altmann has argued that one reason that we did not get good value in the first place was that many of the schemes were annuitising, and if we had got in there quicker, we could have done better. That is absolutely right and why the so-called FAS 2 schemes, in which the Government have taken over the assets, have enabled us to improve to a baseline of 90% compared with what was previously on offer.

To try to take that further, I had a personal meeting with the chief executive of Legal & General—no reason why I should not mention it—which is far and away the company with the most of those books still going. He was content to transfer the schemes across to us on the basis of the book value in his annual accounts. His comment was, “I don’t want to profit from this, but I can’t show a loss, so it goes across at the book value.” I am not sure we have said this before, but Andy Young, who was involved in the Government Actuary’s Department and has been instrumental in all this, helped us considerably, of his own free will, to analyse all the facts and figures and so on. We have had discussions with the Government Actuary and with the Treasury. The short answer is that the book value of those contracts has already got the profit in it. Therefore, we take across something from which the profit has already been made, and the view of the Treasury, which I understand, is that there simply was not the confidence that we would get extra value—that the Government doing this would provide added value. In fact, there was a risk that we would be net losers.

I was keen to pursue that avenue and I hoped that it would provide a way for us to squeeze some extra money into the financial assistance scheme, but, unfortunately, it has proved fruitless. I am disappointed about that, which I told the Pensions Action Group members when I met them a few weeks ago. I was keen not to string them along. The very least that they are owed is a firm statement of the Government’s position. It was suggested that we might have a review, perhaps when the Government have more money, but I was keen not to create a false hope or an expectation, because those group members have been through so many stages. However, considering the state of the public finances, it would have been dishonest and dishonourable of me to suggest that we might find a little pot of money to address their concern.

As I hope is apparent from all that I have said today and through the months that I have dealt with the group, I have huge sympathy for the situation in which they find themselves, but I do not believe that I can offer any realistic prospect of improvements beyond the current financial assistance scheme.