That the Grand Committee do report to the House that it has considered the Occupational Pension Schemes (Levy Ceiling) Order 2009.

Relevant Document: 7th Report from the Joint Committee on Statutory Instruments

In 2002, this Government recognised that members of defined-benefit occupational pension schemes were underprotected if their sponsoring employer failed. That is why we used the Pensions Act 2004 to establish the Pension Protection Fund. It is a statutory fund that protects members of defined-benefit occupational pension schemes and members of the defined-benefit parts of schemes that are a hybrid of defined-benefit and defined-contribution schemes.

The fund pays a statutory level of compensation if the sponsoring employer of the scheme experiences what is called a qualifying insolvency event, such as when a company enters administration; if there is no possibility of a scheme rescue; or if there are insufficient assets in the scheme to pay benefits at PPF compensation levels—broadly, 90 per cent for deferred and active members and 100 per cent for people over normal pension age.

The fund is administered by the board of the Pension Protection Fund, a public corporation. The fund is funded from three sources: the assets of pension schemes that transfer to it, including any recoveries from former employers; a levy charged on the schemes that are protected by it; and investment returns on those assets.

The Pension Protection Fund ensures that members of eligible defined-benefit schemes still receive a meaningful income in place of the pension they worked for and would have received had their employer not experienced a qualifying insolvency event, and the fund of which they are a member is unable to pay benefits at Pension Protection Fund levels.

The “purple book” published by the Pension Protection Fund and the Pensions Regulator in December 2008 estimates that around 7,400 private sector defined-benefit schemes are protected by the Pension Protection Fund. Since 2005, 112 schemes have been assessed by the Pension Protection Fund following an employer insolvency event. A further 295 schemes, with around 134,000 members, are currently being assessed. At the end of February, 8,215 former scheme members were receiving compensation at an average cost of £4,000. A further 21,653 former scheme members are already due to receive compensation when they retire.

The Committee will be aware that when Members in another place considered these instruments last week, they spent some time discussing the impact of current economic conditions on the PPF. All sides recognised the valuable protection that the PPF offers to scheme members, and explored some important questions about what the future might hold with my right honourable friend the Minister for Pensions and the Ageing Society.

We should be vigilant to ensure that the PPF is able to continue to offer protection to members of defined-benefit pension schemes, and that we take steps to deal with threats to the PPF. That is why, for example, the Pensions Act 2008 extended the powers of the Pensions Regulator and, as the Committee will recall, we were concerned that new business models seeking to offer alternatives to insured buyouts of pension scheme liabilities highlighted the disproportionate risk to the PPF that could arise from mechanisms by which shell employers became sponsors of pension schemes. After careful scrutiny, Parliament agreed that powers were needed to deal with such risks.

Vigilance is needed, particularly in difficult economic times such as these when trustees or employers may well hear siren voices suggesting actions such as transferring pension schemes to shell employers as a way of evading liabilities or otherwise bypassing the controls set out in legislation to limit the PPF’s exposure to claims. The Government have made it clear that pension liabilities should generally be backed by substantive employers or by the regulatory capital held by insurance companies. The Committee will no doubt be glad to hear that the regulator is indeed prepared to act if it considers that trustees or employers are seeking to abuse the system.

I now turn to the draft Pension Protection Fund (Pension Compensation Cap) Order 2009, under which a cap on the level of the Pension Protection Fund compensation is applied to scheme members who are below their scheme’s normal pension age at the point immediately before the employer’s insolvency event. These members are entitled to the 90 per cent level of compensation when they retire.

Under the Pensions Act 2004, increases to the compensation cap are linked to increases in the general level of earnings. To increase the compensation cap for 2009-10, we must consider average earnings in Great Britain, as measured by the average earnings index and published by the Office for National Statistics in the 2007-08 tax year, which shows an increase of 3.5 per cent. Such an increase gives a new cap of £31,936.32 for the 2009-10 tax year. This means that the total value of compensation payments for members below normal pension age shall not exceed £28,742.69 for the new tax year. The new cap will apply to members who first became entitled to compensation at the 90 per cent level on or after 1 April 2009. The order ensures that the level of the compensation cap is maintained in line with the increase in earnings, as required under the Pensions Act 2004.

I now turn to the draft Occupational Pension Schemes (Levy Ceiling) Order 2009. The pension protection levy is the responsibility of the board of the Pension Protection Fund. The levy ceiling is one of the statutory controls on the pension protection levy. Rather than set the rate of the levy, it restricts the amount that the board can raise in any one year. The levy ceiling for 2008-09 was set at £833 million.

Under the Pensions Act 2004, the levy ceiling is increased annually in line with increases in the general level of earnings in Great Britain, using the rate for the 12-month period to 31 July in the previous financial year. The order before the Grand Committee uprates the levy ceiling by 3.6 per cent, bringing it to £863,412,967. This does not mean that the pension protection levy will increase to the ceiling. The board of the Pension Protection Fund is responsible for setting the actual levy for any year, but it must not set one that is above the levy ceiling. The board understands the pressures that businesses are under in the current economic climate. In August 2007, the board made a commitment to set a levy estimate of £675 million for the following three years, indexed to earnings, subject to there being no change in long-term risk. The PPF has kept this commitment, and announced that it will increase this year’s levy estimate only by earnings, which means that for 2009-10 the levy estimate will be £700 million. However, the annual increases in the ceiling ensure that, after 2009-10, the board of the PPF could in future increase the levy up to the levy ceiling if it considered it appropriate.

I confirm that I am satisfied that the statutory instruments before us are compatible with the European Convention on Human Rights. They provide that the Pension Protection Fund compensation cap and levy ceiling are uprated in line with increases in average earnings.

The Grand Committee will be grateful for the Minister’s careful explanation of these two orders, especially the background to them. I have nothing to say about the background to these orders, but I might be tempted to say something when we get to the financial assistance scheme regulations.

As for as the compensation cap provision, it is one of those things that come along like trains every year; perhaps, after the last debate and Question Time, trains are not an appropriate metaphor. Anyway, they come every year and they do exactly the same thing; they uprate by the level of earnings in the previous tax year, as the Government are obliged to do by the Pensions Act 2004, as the Minister said. It is one of the many orders that cause the bee in my bonnet to buzz furiously. I have referred to my objective of downgrading affirmative instruments of this sort many times before; indeed I have given evidence to Select Committees from time to time, but I will not labour that point today, except to say that in 2004 we should have made the first order affirmative and subsequent ones negative. Alas, that option was not open to us then, although I am glad to say that the position has now changed, at least as far as the DWP is concerned, and I commend it for that.

All that I would say on that order is that it comes under the horticultural heading that I have referred to before of DDT which, parliamentarily speaking, stands for doing the decent thing. The main subject of this debate, therefore, is the levy ceiling order, as it was in another place last week. I suppose that I should not be surprised that in many cases in his explanation of that order, the Minister has rather shot my fox, but he was speaking so quickly that I did not quite take in the figures that he gave towards the end of his speech. I would be grateful if he would repeat them.

As a rather green participant in the debates on the Pensions Act 2004, I still like to think of the PPF as a statutory insurance scheme for the underfunded pensions schemes whose sponsoring employers go bust. I am aware, of course, that Ministers have always denied this and have said that it is not a pension fund either. It is technically a compensation scheme. To me that is semantics. To all intents and purposes, since it behaves like an insurance scheme, therefore to me it is an insurance scheme. Unusually, it is an insurance scheme with two premiums: one to run the fund and the second a risk-based premium on schemes. We are concerned today with the latter.

This risk premium, or rather the maximum amount that the fund can demand, has gone up by leaps and bounds since we first debated this annual order, and it is right that this is debated every year. For 2005-06, I seem to remember that the levy ceiling was set at £150 million. It has been raised again and again in subsequent years, and now, as the order makes clear, it stands at £863,412,967. I think that that is the exact figure, although the Minister faltered at that point in his speech. This seems to be a very precise sum. Will the Minister confirm that the odd pounds come about because of the increase in the average level of earnings of 3.6 per cent?

Having got that off my chest, this sum of £863-and-a-half-odd million is more than double what was expected when we debated the Bill; that is for the full year after the first year. At that point, it was expected to be some £300 million a year. The Committee will appreciate that that was in the boom years, which of course the then Chancellor of the Exchequer abolished, as he did the bust years. Hubris, we find, has descended on him now that he is Prime Minister.

Be that as it may, indeed is, the situation now is completely different. Unemployment is growing at the fastest pace ever recorded, and now, as the Minister told us last week, it stands at 2.03 million. Firms seem to be going to the wall almost daily—I hope that I am wrong about that—and I venture to suggest that most of them, if not all, will have underfunded pension schemes.

While I appreciate that the levy ceiling has never yet been breached, will this last, or will we see the ceiling increasing yet again to, say, £1 billion by the end of this decade, which is only 12 months or so away? The Minister made some reference to that in his speech. Or on the other hand, is he as confident as his colleague in another place on Wednesday last, who gave the impression that there was plenty of money in the fund. If so, is the ceiling too high, or is it precautionary? How is it arrived at? That is where the Minister shot my fox on the figures I was going to ask him about. Will he repeat how close to last year’s ceiling the levy has got? How many schemes currently are within the fund and how many are in the queue? He illustrated how they have changed in the past two years, but I wonder whether I am alone in seeing the absolute importance of comparing from year to year. As I said, I expect the situation to get a lot worse over the next few years.

I thank the Minister for the explanation of the changes. This is a timely moment to ask a few serious questions about the grave position in which the Pension Protection Fund finds itself. The most recent figures were that defined benefit pension schemes in this country, the universe which the Pension Protection Fund is set up to protect and the people who are paying the levies that we are discussing today, had a total deficit of £191 billion, which was up from £48.8 billion a year earlier. I remember well the passage of the then Pensions Bill 2004 when we debated these matters. I also remember well, in 2005, two academics, Anthony Neuberger and his colleague, David McCarthy, wrote an excellent and groundbreaking article in Fiscal Studies on the PPF. Their conclusion, with which I agreed at the time, was that there was a significant chance that the claims on the PPF,

“will be so large that the PPF will default on its liabilities, leaving the Government with no option but to bail it out. The cause of this problem is the double impact of a fall in equity prices on the PPF: it makes sponsor firms more likely to default, and it makes defaulting plans more likely to be underfunded”.

It explained that when they go down, the black holes are bigger. In those debates, I challenged the Government—it was laughed off, but I ask them now whether they are equally confident—about whether the PPF would prove to be a leaky lifeboat sailing on uncharted seas. Never, in my darkest nightmares, did I fear that the economy and pension schemes would collapse in the way that they have over the past five years.

In America, the model for the Pension Benefit Guarantee Corporation does not have an explicit government guarantee, but it has the US Secretary of the Treasury and the US Secretary of Labor sitting on its board. Everyone in America knows that that amounts to an American government guarantee. It is really a fiction for the Government to maintain, if they do, that this is an arm’s-length body. The cost of funding by the PPF levy is falling on an ever-smaller number of private sector defined benefit pension schemes, which are shrinking by the day. It is almost like an ever-bigger upturned pyramid resting on an ever-narrower base.

Will the Minister review with his officials one specific and growing problem? In the past few months following the change in insolvency laws, there has been a great flood of pre-pack administrations in this country—phoenix administrations. He mentioned shuffling off pension liabilities. There is a rash of companies calling in the accountants and setting up a clever scheme whereby, in many cases, they shuffle off their pension fund and property liabilities. They then go into administration and come out again 10 minutes later with the same people in charge, having walked away from their pension liabilities. This serious abuse has developed in recent weeks. I have already taken it up in writing with the noble Lords, Lord Myners and Lord Mandelson, but there is a very significant pension involvement here and I hope that the Minister will also take it up with the noble Lord, Lord Mandelson, whose department is responsible. It is a matter of serious concern as it concerns not only getting rid of pension fund liabilities, but also, in the way it is operating in the commercial property market, it is gravely undermining pension funds and life insurance solvency because it undermines the rental income on which property portfolios depend.

I, too, looked at the report of the debate in the Commons on 18 March. A request was made then for the calculations that have been made and to which the Minister, the right honourable Rosie Winterton, referred. The calculations might better be called scenarios as to solvency under different conditions in the PPF. She gave an undertaking to put them in the Library in so far as they were not “commercially confidential”. I find it hard to see how calculations of that sort could be commercially confidential as they do not refer to individual firms. I hope, therefore, that the Minister can confirm that those forward calculations have now been placed in the Library so that we can all see them. This is a matter of great public concern. We need to see what the conditions and the assumptions are in order to hold a proper, open debate.

In the debate in the Commons, Ms Winterton talked about liquidity. That is not the point. No one is suggesting that the Pension Protection Fund or individual pension funds in this country are going to run out of cash in the near term. The issue for pension funds, which are very long term, is not liquidity because they are not going to run out of cash in the near term, but that they go bust when they cannot meet their liabilities over the long term. That is the problem which people are so concerned about, and is why these calculations are so important.

This is a very testing time for the economy, for pension funds and for the Pension Protection Fund. I encourage the Minister to be as open as possible in a debate that is very serious for the country as a whole.

I thank both noble Lords who have spoken. The noble Lord, Lord Oakeshott, is right: these are serious times for pensions provision and important issues need to be addressed. I shall try to answer each of the questions that have been raised.

The noble Lord, Lord Skelmersdale, made a point in passing about the affirmative nature of these orders. He will be aware that to change the current arrangements would need primary legislation, so it looks as though we will meet routinely on this matter.

There has been no lack of pensions legislation in recent years.

Indeed, although I do not think that anything is scheduled to be brought forward in the immediate future. The noble Lord asked me to confirm the numbers, and I am sorry if I went a little quickly earlier. Let me look first at the pension protection levy for 2008-09. It was set at £675 million, part of it as a risk-based assessment and part on a scheme basis at roughly an 80:20 split. In 2009-10, as I indicated, the proposal is for a £700 million levy that is designed to meet the commitment of the PPF to keep the levy in real terms, which is what it does. On the levy ceiling, in 2007-08 it was £804 million, in 2008-09 it was £833 million, and for 2009-10, as we have discussed, it is £863 million. I believe that the odd numbers at the end are derived just from the arithmetic of that percentage increase, but if they are other than that, I shall let the noble Lord know. He also asked about the levy ceiling in 2005-06. No levy ceiling was applied in the first year of the levy.

The noble Lord, Lord Oakeshott, raised important points about recent reports, the 7,800 series, and projections for scheme deficits. As he acknowledged, it is important that we look at those for the long term. Liquidity is the key issue for the Pension Protection Fund. As my colleague said in another place and as was touched on earlier, there is sufficient liquidity in the PPF, even testing it against some quite severe economic scenarios, to continue to pay benefits for many years to come—I think it is about 20 years.

On the request made of the Minister of State, when she said that she would consider what could be done, the data is driven by the PPF and we need to be mindful of its confidentiality, but we are in touch with the PPF to see how that matter might be taken forward.

The noble Lord, Lord Oakeshott, talked about pre-packs and the current trend. It is important to remember that pre-packs require the agreement of all creditors, including the pension scheme, but he is quite right that we need to ensure in all these things that the pension scheme should be treated fairly. He raised an issue that has been raised before: should the Government effectively underwrite the pension protection scheme? We do not believe that it is necessary to do that; we have not been asked to do that by the Pension Protection Fund itself. To underwrite it would be to move us away from the principle that the fund is funded by those who are protected by it. If we went to a government guarantee, we would be drawing other people in to underwrite it.

On the strength of the PPF and the role of the regulator—again, the noble Lord referred to the challenges that schemes and scheme sponsors face—the Pensions Regulator has made clear in a number of pronouncements recently that it is entirely appropriate for trustees to look at reasonable affordability when looking at recovery plans. He subsequently referred more specifically to the opportunities of back-end loading plans and, if necessary, lengthened loading plans, if that is what it takes to ensure that schemes are secure.

I have not dealt specifically with the point made by the noble Lord, Lord Skelmersdale, about the current economic situation, but I think that I have dealt with it in my response to the noble Lord, Lord Oakeshott. Currently, the PPF has about £3 billion in assets and is paying out £3.7 million a month in compensation. It was designed to work in a benign environment as well as in the downturn. On the basis of the analyses that have been undertaken, it has enough cash to continue to pay benefits for at least 25 years. Part of its assessment is to keep its promise that the levy should be kept whole in real terms.

It should be kept what in real terms?

It should be kept whole. Last year, it was £675 million. The Pension Protection Fund said that it would try to keep that level for three years, adjusted for changes in prices only.

Perhaps I may raise one other point that I forgot to cover in my opening remarks. On one high-profile pension, does the Minister share my regret, for this purpose anyway, that the Royal Bank of Scotland did not go bust, unlike so many of its customers, so that Sir Fred Goodwin's pension could be limited to £27,700 a year, as it would have been if he had been in the PPF? Although I do not necessarily expect the Minister to comment on that, does he accept that I believe that there is ample evidence to stop Sir Fred Goodwin's pension now, not least the shocking revelations in the Sunday Times and the Observer at the weekend about misuse of shareholders’ and savers’ funds by Sir Fred and bullying of non-executive directors? That pension should be challenged in the courts and stopped on the grounds of improper authorisation, negligence and, very probably, fraud.

I am sure the noble Lord will understand that that issue is way outside the matter that is before us today, and I am not briefed on all the detail behind it. In common with most people, one is gravely concerned about someone in those circumstances walking away with a pension fund at that level. I am advised that not all of it would come from a scheme that would be eligible for the PPF, so that would be outwith it in any event. The noble Lord is quite right that for a member of a scheme that went into the PPF and who retired early, if their normal retirement age was after the date on which the assessment was made, the cap would certainly kick in.

I told the noble Lord, Lord Skelmersdale, earlier that the levy was increased by reference to price, but it is not; it is increased by reference to earnings. I apologise for that.