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Financial Assistance Scheme (Miscellaneous Amendments) Regulations 2008

Volume 703: debated on Monday 7 July 2008

rose to move, That the draft regulations laid before the House on 18 June be approved.

The noble Lord said: My Lords, noble Lords will recall that the Financial Assistance Scheme, or FAS, offers help to certain people whose defined benefit occupational pension schemes have not provided them with the pension that they were expecting. The draft regulations before us contain further changes to bring about the reforms to the FAS that we announced last December. Noble Lords will recall considering regulations to bring in some of the changes in May and those are now being implemented. In those regulations, we included measures which would raise the assistance level from 80 to 90 per cent, and begin payments from an individual’s normal retirement age rather than age 65. I am pleased to say that increased FAS payments at 90 per cent began to be made on 21 June and we have made 1,257 top-up payments at the 90 per cent level as at the end of June. In the draft regulations now before the House, we include some significant measures which could not be included in the previous set because the policy needed more time in development and consideration.

On the early payments for those members unable to work due to ill health, the draft regulations provide for ill-health payments for members of FAS qualifying schemes, where the FAS scheme manager is satisfied that those members are not able to work due to ill health and are likely to continue to be unable to do so until their normal retirement age. The ill-health payments can be made from five years before the member’s normal retirement age, so that, for example, where the NRA is 62, eligibility would begin from age 57. We continue to discuss with stakeholders issues around the ill-health provision, but it is important that we get this enhancement to the FAS in place as soon as we can in order to get help to those affected.

On extending the FAS to members of schemes which wound up underfunded with a solvent employer, the draft regulations also include provisions to make members of certain pension schemes with solvent employers eligible for FAS. Our intention here is to enable pension schemes that started winding up with a solvent employer after 1 January 1997 but before the employer was required to meet the full buy-out cost to qualify for the FAS.

The Government would expect trustees to recover any debt they can from the employer before turning to the FAS for assistance. Given this, the regulations require the employer to have paid any debt to the scheme at the start of winding up, or to have had no debt to pay on wind-up. Following the consultation, we have included a provision to allow the FAS scheme manager discretion to treat the debt as having been paid where an appropriate portion was paid. Our intention here is to provide for schemes where, for example, the employer paid a significant majority of the debt owed but where the trustees did not consider it worth while to pursue the remaining debt to be included. We think that it is right to expect schemes first to pursue any debt owed by the employer before coming to the FAS for assistance. But where trustees have taken reasonable steps to secure the recovery of the debt, this gives the FAS scheme manager appropriate flexibility to include such schemes.

As for whether the Pension Protection Fund will be more closely involved in developing the new FAS arrangements, I mentioned that further regulations will be necessary to bring in the remainder of the changes to the FAS announced in December. One of those remaining changes concerns the transfer of assets from FAS qualifying schemes to the Government. In order for that process to be as efficient as possible, these draft regulations contain provisions for the PPF to provide advice, and to be involved in the process of managing schemes through the wind-up process and on to a stage where they are in a position to hand over their assets. I hope noble Lords will agree that the expertise that the PPF has built up since its inception will be invaluable in this task.

Given that the FAS will take in the assets of pension schemes that have not annuitised, we have included a measure in these draft regulations that allows the FAS scheme manager to direct pension scheme trustees in order to protect the value of the scheme assets. This is similar to an existing PPF power.

We have also included measures to speed up the process of making initial FAS payments—that is, payments made before the final FAS payment position is known—by removing the need for trustees to apply for them. The draft regulations retain the FAS scheme manager’s discretion to make initial payments but without the need for a request from the trustees to trigger consideration. We are also reducing the period allowed in existing regulations for trustees to supply scheme data from six months to three months. In addition, they would introduce appropriate timescales for producing information concerning the new ill-health payments.

Finally, the regulations include removing the option to apply for reinstatement into the state additional pension for those eligible for FAS. This will mean that any person qualifying for FAS will no longer meet the conditions for reinstatement into the state additional pension. The aim is to simplify matters by removing a step that not only delays the winding-up process but also offers uncertain outcomes for members. We are replacing this uncertainty with a guaranteed amount. Where someone has, before the commencement of the provisions, been offered the opportunity to be reinstated by their scheme, they will still be able to select this option.

I hope we can agree that the Government have so far made good on the promises made in the December announcement, with more than 1,200 people already being paid assistance to 90 per cent of the pension that they were expecting. With this second set of regulations we are maintaining the momentum to deliver key elements of the reforms to the benefit of many pension scheme members. Later this year, we intend to consult on further draft regulations to deliver the full package of changes. In addition, to support the changes we intend to make through regulations, we have tabled amendments to primary legislation through the current Pensions Bill. In my view, these draft regulations are compatible with the European Convention on Human Rights. I therefore commend them to the Committee.

Moved, That the draft regulations laid before the House on 18 June be approved. 23rd report from the Joint Committee on Statutory Instruments.—(Lord McKenzie of Luton.)

My Lords, this is the first opportunity that we have been given to debate these regulations, which are particularly important as the sooner payments get to the recipients, the better off they will be, especially as they will have been waiting years for their badly needed payments. Some will even have died. It is no recompense that their family may get some of their award.

These complicated regulations are stage two in a multipronged series to give effect to the expansion of the FAS announced by Written Ministerial Statement on 17 December last year, as the Minister said. It had taken five long years to bring the Government, kicking and screaming, to that point. The Explanatory Notes say in paragraph 7.3:

“From its inception the FAS has received significant public interest”.

That is a masterly understatement. I congratulate whoever drafted that sentence.

Unlike my noble friend Lord Taylor of Holbeach on the first set of these regulations, I will not chronicle the sorry history of the FAS from the Parliamentary Ombudsman’s report through to the action in the courts that brought the Government to that point. Suffice it to say that the amount of money that is now to be expended on the scheme—some £2.9 billion in net present-value terms—is a great deal better than the original proposal. However, will the Minister admit that this is a gross figure? Because all pensions count as taxable income, can he say what the figure is expected to be net of income tax at the current rates of 20 and 40 per cent? As I am dealing with general points, I suggested months ago that it would be both sensible and cost-saving to give the FAS over to be run by the PPF. Now that these regulations involve the PPF to a large extent, why will not the Secretary of State follow my advice?

As for the improvements made by the regulations, the biggest by far is the early payment of pension to those who retired sick before their normal retirement age. Many schemes taken over by the FAS will have paid pensions from that point, but the regulations propose that pension will be paid only from five years before a qualifying member's normal retirement age. Since the FAS rules only permit normal retirement age to be between 60 and 65 no matter what the ages actually were in the original pension scheme, the earliest that ill-health or early retirement benefits can be paid is at age 55, even though, as I said, the retirement may have been much earlier and the original pension scheme may have allowed pension to be paid from that earlier date. Why did the Government come to the decision that they have? Was it to save money, or for some other reason?

The Explanatory Notes give me the impression that this may—just may—be an interim decision. None the less, I am glad that these regulations cover it now, because the afflicted people are inevitably in straitened financial circumstances and may even have died before receiving anything at all. It is small recompense that their relatives may get a reduced amount. I would assume, too, that many are on state benefits of one sort or another. What does the Minister believe is the net cost of this provision? Also, can he tell me a little more about how the interim payments will work? There is great interest in this from the Pensions Action Group.

The regulations also allow certain schemes backed by solvent employers that started to wind up before 1997, before the employer was required to fund the full buy-out cost. Why was this date chosen?

As the Minister mentioned, the Government are now to take on the residual assets of pension schemes that come into the FAS. This was proposed by the Andrew Young review, and I can readily understand why. It is especially important that those assets are not run down prior to the schemes being accepted into the FAS. It is equally important that information held by the trustees should be given promptly to the FAS, especially when pension or ill health payments are already in payment before the scheme is accepted into the FAS. I approve of introducing timescales for this. Incidentally, I hope that such payments made from, say, the age of 45 will not be terminated by the Secretary of State.

Lastly, although I cannot find it in these regulations, I understand that FAS payments are to be increased not by earnings or even inflation but by 2.5 per cent annually. Can the Minister tell me whether this means an annual FAS uprating order, like the mesothelioma one, or will it be part of the general uprating order? I have made the point before that it would be sensible for all regularly updated benefits to be included in a single uprating order. Can the Minister tell me whether any serious consideration has been given to this, or must I live with the off-the-cuff answer that he has given me previously?

My Lords, it was at short notice that this business was slipped in last Thursday afternoon for discussion today, particularly given the long and sorry history of the Financial Assistance Scheme. I know that the Minister is busy, but he has the resources of the department behind him. Those of us on the opposition Benches, who are obviously also dealing actively with the Pensions Bill, find it hard work to have things done at such short notice. I know that the Government clearly want to get this done before the Recess, but the Recess dates have been known for many months.

As the Explanatory Memorandum makes clear, this set of regulations makes,

“provision for further elements of the package announced in December 2007”—

as the Minister said—

“such as early access to assistance on ill health grounds. There will be further Regulations to deliver the remaining parts of the package to move the FAS scheme to a position where assistance payments are calculated on a basis which is broadly comparable to that of the Pension Protection Fund”.

In normal circumstances, ill-health payments—or what would have been early retirement due to ill health—would have been subject to the rules and guidelines of individual schemes and trustee discretion. Why have the Government opted for an arbitrary figure? All I could see in the Explanatory Memorandum was that they think it is “appropriate”. The arbitrary figure of five years before normal retirement age could leave some very ill people worse off. Actuarial reductions would not be made in all cases under normal circumstances in those schemes. The House will therefore see that FAS members could be worse off under the current proposals.

A model of how a compensation package should be administered in the form of the Pension Protection Fund was noted in the Explanatory Memorandum. It will pay 100 per cent of benefits to any existing ill-health pensioners—there is probably none in the FAS yet. In the PPF, however, individuals can choose to draw that compensation before normal pension age. They must be at least 50, and payments are actuarially reduced to take account of the fact that compensation will be paid for longer. That is the case even where a person claims their pension early on ill-health grounds. Last year, a parliamentary Answer explained how this works: once the PPF has assumed responsibility for a scheme, any scheme member may take early payment of their compensation from age 50 subject to actuarial reduction.

Surely the FAS is also a compensation scheme, and there must be a strong case for it operating on similar grounds. What would be the cost of treating people retiring early through ill health in exactly the same way regardless of whether they are covered by the FAS or the PPF?

I am also grateful to that superb campaigner on behalf of all pensioners, Dr Ros Altman, for one or two further questions. First—the Minister touched on this—what is now the position of solvent employer schemes? In particular, how many will not qualify? Specifically, is the Desmond scheme in Northern Ireland now included?

Secondly, the annuity factors used by the Financial Assistance Scheme to convert transfers out of the scheme into equivalent pensions do not appear to have reflected the pensions being given up. The Government Actuary’s Department has used factors which seem to result in the assumed scheme pension being higher than it would actually have been. Therefore the FAS payments are lower. This may seem a technical point, but it could cost seriously ill people real money.

Moreover, why are the Government refusing to backdate payments for those who have already been ill for many years, only making payments from 2008 or when notified, whichever is later? The FAS seems to be taking the hardest line possible against such people. These are issues of ill health, which lies at the centre of this regulation.

Finally, why on earth has it taken so long to begin bringing together the administration of the Pension Protection Fund and that of the Financial Assistance Scheme? We on these Benches have been calling for that since the first Pensions Bill in 2004. We did not see the case for separate bodies then, and the dismal record of incompetence and delay by those administering the Financial Assistance Scheme since then has proved us right. These are enabling provisions. What will happen to bring the administration together, and when?

My Lords, I think I just discerned support for these regulations in all of that.

The noble Lord, Lord Oakeshott, is absolutely right that I should have covered the short notice in my opening remarks; I apologise. As he recognised, we want to get this through before the Summer Recess, so that we can begin to make the ill-health payments, in particular, as quickly as possible. I acknowledge that it is not always easy for the Opposition to deal with such matters quickly.

The noble Lord, Lord Skelmersdale, asked about costs and whether they were gross or net. They are gross costs: gross of tax and benefits. A net figure would be a discount of a quarter to a third of that gross figure; that is a ballpark figure. He also asked how interim payments would work for FAS ill-health claims. Interim payments on the grounds of ill health work in the same way as initial payments for FAS. They are appropriate when schemes have not completed wind-up and the final figures are not known. He also asked about annual upratings and FAS being increased by 2.5 per cent. These things are not included in the social security benefit order, so it is not in an uprating order. The 2.5 per cent he referred to relates to the cap on indexation, an outstanding issue that we will look at in later regulation.

Both noble Lords asked why the period for ill-health payments was five years. We understand, as noble Lords have done, that campaigners have called for more generous ill-health provision. We are sympathetic to campaigners’ concerns about ill-health benefits in a small number of particularly difficult cases. We continue to work closely with them to see if we can resolve the issues.

My Lords, the draft provisions provide for claims within five years of the normal retirement age. This goes beyond the commitment provided in December 2007 to provide help to members over 60; we have done more than we committed to at the time. This approach ensures that all members who meet the ill-health qualifying conditions have an opportunity to receive early, reduced ill-health payments in the five years before their normal retirement age. As I said, as part of the consultation we invited representations on behalf of any members who are unable to work due to ill health and who are not covered by our extended proposals. The noble Lord, Lord Skelmersdale, asked me about the full buy-out cost. I missed the full import of his question. Perhaps he will take the opportunity to ask it again when I have tried to deal with some of the other points that he raised.

The noble Lord, Lord Oakeshott, referred to annuity factors. They are used in the FAS to calculate the amount of annuity a member could have received if they had not taken their share of remaining scheme funds in some other way, such as a transfer value or a lump sum during wind-up. The factors seek to approximate as closely as possible the amount of annuity that the trustees could have purchased under bulk annuity terms for that amount of funds, so they need to be kept under regular review and updated as necessary to ensure that they are broadly in line with market rates. The Government Actuary’s Department recently produced revised draft factors, and we consulted the pensions industry before using them.

The noble Lord, Lord Oakeshott, also asked about the Desmond scheme. There are two kinds of situation here. One concerns solvent employers with schemes that are not fully funded, which arise from issues around buy-out arrangements and whether a full buy-out cost had to be applied. These regulations deal with those situations. The Desmond situation is where the employer has become insolvent but the wind-up of the scheme started later than April 2005. We need to deal with that in primary legislation and the relevant provisions are, or will be, in the Bill which we are discussing with great joy. We have identified three schemes in this latter category. Many more schemes were identified in the former category. I cannot put my hands on the relevant figure, but I am happy to write to the noble Lord, if that will help.

Both noble Lords asked why the PPF’s provisions could not be adopted more fully sooner. I remind them of the sequence of events. Andrew Young’s report charted the way forward for us. Part of his remit was to look at engagement with the PPF. Greater engagement with the PPF needs to be undertaken to see what expanded role it might undertake. We have given a power for it to provide advice. I hope that I have dealt with everything apart from the full buy-out cost, which the noble Lord raised. I missed the full import of his question. I hope that he will ask it again and I shall see whether I can help.

My Lords, the noble Lord did not answer my point regarding payments which were already being made for ill-health retirement from schemes before they were taken over by the FAS. There must be some. I hope that such payments will not be terminated by the scheme if they are already in payment. That is a rather more important question than the one about lump-sum payments.

My Lords, I can confirm that that is the position. If ill-health payments are being provided by the scheme, this measure would not disturb any of that. I hope that that reassures the noble Lord. I ask noble Lords to support the Motion.

On Question, Motion agreed to.