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Volume 707: debated on Thursday 29 January 2009


Asked By

To ask Her Majesty’s Government what assessment they have made of the recent report of the National Association of Pension Funds saying that a quarter of the firms surveyed may close their final salary pension schemes to existing members.

My Lords, the Government have taken a number of steps to support good quality pension provision and are committed to helping scheme sponsors through this difficult time. We will continue to work with groups representing pension schemes, employers and scheme members to consider what further steps can be taken to support schemes.

My Lords, I thank the Minister for the reply. I do not have any particular interest to declare but I do have small shareholdings in a number of FTSE 100 companies. Is the Minister aware that there has been publicity about the danger to pension schemes invested in these companies, not only from the authority quoted in the Question but also from Pension Capital Strategies, which says that if there is a collapse in corporate bond levels, the liabilities of firms such as British Airways, which was in the worst position, would increase to nearly two and a half times the company’s market value? What would be the position then for people in those pension schemes and for the shareholders?

My Lords, it is important that we focus on the fact that pension schemes are about long-term investment and that short-term fluctuations in markets have to be worked through in this context. In terms of the debt instruments that are out there and available to trustees—I think that that was the thrust of the noble Baroness’s point—we are aware that the Government are being pressed in relation to long-dated gilts, for example, to help support pension schemes. The UK Debt Management Office is consulting on supplementary methods of distributing gilts in the face of strong demand for long-dated, conventional and index-linked gilts. That consultation will inform the formulation of plans for gilt issuance during next year. It is important that we focus on the long term. In relation to schemes where employers do not survive and the schemes are underfunded, we have put in place the Pension Protection Fund, which makes sure that pensions are protected to a certain level.

My Lords, I declare an interest as a pension fund investment manager for the past 32 years. I point out to the noble Lord that the great shrinkage in the number of pension funds that were open and contributing to the Pension Protection Fund since it was set up in 2004 means that it will no longer be sustainable; there will be too few funds paying in and too many people needing to be rescued. Will the Minister revisit the exchanges in Committee between me and the noble Baroness, Lady Hollis, in 2004, and the assumptions that she said were being made about the rate at which pension funds and companies could go bust? After he looks at it, I hope the Government will conduct a review. Perhaps they will see that the disaster scenario has arrived.

My Lords, the Pension Protection Fund is designed to work both in a benign environment and in a downturn. The DWP, the PPF and the Pensions Regulator keep a watchful eye on these issues, and the PPF has tested its model against a range of scenarios, including very severe ones. The important point to remember about the PPF is that it is like a pension scheme: it pays out as and when sums fall due. Currently it is paying out about £3.7 million a month in compensation but has assets of £3 billion. So, even if the pay-outs were to increase significantly, the liquidity is there to support that for a considerable period of time.

My Lords, I declare an interest as chairman of the Conservative Party agents’ superannuation fund. I want to bring this back to final salary schemes. During the passage of the last Pensions Act these Benches proposed a number of amendments to bring in risk-sharing arrangements which were designed by the industry to give a future to such final salary schemes. Why were they rejected? Has not the inevitable happened?

My Lords, the amendments proposed by Members opposite were principally focused on conditional indexation schemes. Certainly, the consultation we undertook with stakeholders indicated that there was no great appetite for that—it would create a greater regulation, not less, and its impact on schemes would be quite limited. One of the strands of work we are undertaking at the moment is to look, together with the Pensions Regulator, at how we can better spread the word about flexibility on risk-sharing available within the existing framework. Along the way we also considered changes to mandatory indexation. However, there is no consensus around that; in particular, there is no consensus on whether it would really reinvigorate defined benefit schemes. I should make the point that when we are talking about risk-sharing, we are not talking about reducing risks but about changing the balance of risks between scheme sponsors and members. Therefore, it is important that we drive a consensus when changes are made.

My Lords, is not the truth of the matter that, as a result of the tax-and-spend policies of this Government, private and public sector final salary pension schemes are no longer affordable?

No, my Lords, I would not accept that proposition. Given the issues around longevity—which is probably the principal driver of this—and longer-term views of market returns from equities in particular, the challenges to defined benefit schemes are clearly increasing. That is happening not only in the UK but across the world. That is why we need to continue to engage and why we have engaged. We have reduced the revaluation cap to 2.5 per cent and the indexation cap to 2.5 per cent and frozen administration charges into the PPF and for the Pensions Regulator. We are helping where we can. We are looking at issues around Section 75, employer debt and statutory overrides whereby current scheme rules make it difficult to take advantage of these deregulatory matters. We are looking at Section 67, which is about future accrual. A big work programme is under way, and we are doing all that we can. However, the Government cannot stop the march of longevity. Well, they could, but I do not think that that would be a palatable policy initiative.