Motion to Approve
My Lords, many noble Lords will be familiar with the Financial Assistance Scheme, which makes payments to people who have lost all or part of their occupational pension because their pension scheme began to wind up underfunded. In December 2007, we announced a significant extension to the FAS, key elements of which have already been implemented. During February and March this year, the Government consulted on a set of draft regulations that implement further elements of the 2007 announcement and make changes to the administration of the FAS. I now bring these draft regulations before the House.
The draft regulations make a number of changes to both the structure of the assistance and the administration of the FAS. They will allow for the FAS to acknowledge where schemes had made provision to pay what used to be called an unmarried partner; that is, someone who while not married to the member—or now not in a civil partnership with them—was living with the member on the same basis. In order to qualify, the surviving partner must have been living with the deceased member before they died and be either nominated by the member or prove financial dependency or interdependency. Where the deceased member left both a spouse and a partner, the partner will be paid and not the spouse where, and only where, the member had nominated that partner.
The draft regulations will also allow for payments to be made to certain children and young adults who were financially dependent on the deceased member. Such payments continue up to the age of 16 and may continue to age 23 where the child remains in education or cannot work full time due to a disability.
On 1 January each year, assistance in payment, which relates to scheme rights accrued after April 1997, will be increased. That increase will be in line with the retail prices index up to a maximum of 2.5 per cent. If the retail prices index goes down or is at 0 per cent, there will be no increase applied for that year but the amount in payment will not be reduced.
Assistance is payable from the qualifying member’s normal retirement age. However, we are aware that some people may have accrued rights in their scheme to a different age—for instance, when a scheme changes its normal retirement age and someone is a member both before and after that date. These draft regulations will take this into account. Where their normal retirement age is after the date to which a part of their pension has accrued, that part of the expected pension will be actuarially uplifted. Where the normal retirement age falls before the date to which a part of their pension has accrued, that part of the expected pension will be actuarially reduced.
Currently, assistance tops up the pension provided by the scheme to 90 per cent of the person’s expected pension. The cap ensures that, where 90 per cent is higher than £26,000, assistance is limited so that the individual gets from the scheme and the FAS in total no more than that amount. These draft regulations will allow the £26,000 announced in March 2007 to increase annually in line with the retail prices index from April 2007, ensuring that the cap keeps pace with inflation. For anyone who was entitled to assistance from April 2007, the cap will be increased to £26,936. These are significant improvements in the structure of assistance payments and I hope that noble Lords will welcome them.
I will now cover certain issues which we need to address in the context of delivering these changes but which were not part of the 2007 announcement. First, there are schemes that paid what is known as a bridging pension. The commonest example is where a man retires at age 60 with a scheme pension that goes down at age 65 when his state pension begins. Some schemes, when buying the annuity, have flattened this bridge, if I may put it in that way, so that the annuity pays out the same amount over the person’s lifetime. However, we have been made aware that other schemes have bought annuities with the bridge intact. These regulations allow for assistance to mirror the annuity: where it has smoothed the reduction over the individual’s lifetime, the assistance will do the same; where the annuity retains the bridge, the assistance will reduce when the annuity goes down.
At present, the FAS takes no account of any increases in the scheme pension once assistance begins. When we decided to provide indexation on assistance, this oddity had to be corrected. Paying indexation in respect of the assistance only would mean those with a flat-rate pension getting less of an increase in total than someone whose scheme paid nothing. Therefore, the amount of pension brought to account in the assistance calculation will be the amount actually in payment, and any subsequent increase in the pension will also be brought to account.
The issue of taking account of payments made before the final entitlement is calculated also needs to be addressed. It can take a scheme some time to decide what it can pay a member from its remaining assets; until then, the scheme and the FAS can make payments on account of entitlement. Because the scheme normally pays an amount that it is reasonably sure is lower than the final amount, assistance may have been overpaid before the correct amount has been established. These regulations allow scheme payments to be brought to account when the final rate of assistance is being calculated. This means that, over the individual’s lifetime, the correct level of payments will be made.
The changes that I have described will apply in relation to a person’s entire period of entitlement to FAS payments. Many individuals already being paid now will find that their entitlement increases and, where this happens, they will be given payments for past periods. However, the way in which the various changes interact means that it is possible that in some cases entitlement goes down. Where this occurs and someone’s finalised entitlement had previously been determined, the current amount will remain in payment. This protection will also apply where a person’s initial payments have previously been protected. However, these arrangements will not apply to any other initial payment calculations. Secondly, protection will, in some cases, exist only for a limited period. In some cases, standard entitlement could go up—for instance, because of indexation—and this could result in that entitlement becoming higher than the protected amount. Where that happens, the higher amount will be paid.
These changes will require the FAS to collect different information, and these regulations make the necessary changes to the information regulations. They also make changes to the review and appeal regulations to allow for decisions to be challenged in these areas. Trustees will also be required to supply more details about the scheme and its expenditure—for example, information on current or contemplated legal proceedings—and to notify the FAS of any contemplated significant changes in the investment of the scheme’s assets.
I come now to operational changes. At present the FAS is administered—very well, I suggest—by DWP staff. However, the FAS will be undertaking broadly similar functions to those currently undertaken by the board of the Pension Protection Fund. It therefore seemed appropriate to have both systems managed by the PPF. These draft regulations confer the responsibility of managing the FAS on to the board of the PPF. Current FAS staff will be seconded for a temporary period to the board to provide continuity. The Government will continue to fully fund the FAS, none of whose costs will fall on the PPF levy payer.
This change requires certain other changes. These will allow the DWP to pay the board for its FAS-related work, allow the board to delegate its FAS work to its own staff and some of its work to a commercial provider, and give these people access to relevant DWP information. In addition, the board will have discretion to make payments to schemes in certain circumstances—for instance, where the scheme has run out of money and is unable to complete wind-up. The draft regulations also make certain minor changes that the experience of the FAS staff has shown would be helpful, such as allowing payments for periods other than monthly.
I shall revert to one matter that I have mentioned: I said that the payment for surviving children and young adults would be paid until age 16 unless the child had a disability or was in education. In fact, payments are made up to age 18 unless the child has a disability or is in education, in which case payment can continue until the age of 23.
Noble Lords have been very patient with me during what has been quite a technical explanation. The changes in the draft regulations offer significant improvements for many FAS members. In my view, these draft regulations are compatible with the European Convention on Human Rights and I commend them to the House.
My Lords, I declare an interest as chairman of the Conservative and Unionist Party Agents’ Superannuation Fund. I thank the Minister for introducing these regulations and for the detail in which he has explained the complexities of much of what is involved.
The consultation process earlier this year on these regulations was interesting. I understand that there were 148 respondents on the DWP website. Many individuals did not respond to the specific proposals but instead expressed their disagreement with the content of the Government’s announcement of December 2007. Does the Minister feel that the Government have done enough to adequately explain the proposal to those affected?
Of course, the Minister will be only too aware that the December 2007 announcement was consequent on the Young review, which was set up as a direct consequence of the Government sinking our lifeboat proposals in another place. The scheme at the time was bogged down and potential beneficiaries were denied access to those pensions to which they believed themselves entitled. The Minister will be aware that some died before receiving any money.
We note that these regulations bring into effect what we hope will be the last phase in the changes to the management of the scheme, making the board of the Pension Protection Fund the scheme manager. I note the arrangements for the transition for the FAS as described by the Minister.
We have repeatedly told the Government that they have failed properly to address the pension time bomb. The danger is of two-tier pension provision with unfunded public sector pensions paid for by taxpayers in the private sector, whose pensions face a continuing underfunding crisis. These regulations are hardly a brick in the wall of “Building Britain’s Future”. It is a future that looks increasingly bleak for many until we have a Government who can come clean about public finances and tell the truth about government spending plans.
From the moment of Gordon Brown’s first Budget, removing £5 billion a year in advance corporation tax, amounting to some £150 billion in total removed from private sector pension funds, he has mismanaged the pensions issue and let people down. If these regulations make some recompense, they are to be welcomed. Can the Minister give that assurance?
My Lords, I am happy to follow the noble Lord, Lord Taylor, again. I welcome these regulations. The Minister is right to be careful in the way in which he explains the changes from the Dispatch Box; although the regulations are technical, they have a dramatic effect on some of the pensions to which they relate.
The scheme that the Government laid out in December 2007 has been improved and these regulations improve it further, which is welcome. The consultation referred to by the noble Lord, Lord Taylor, was interesting, though; most people ended up by simply complaining that the Government had not gone far enough fast enough. Maybe that is why the consultation lasted only for six weeks, not 12; maybe the Government just thought that they would get another dose of the same if they continued the consultation for the usual period.
I hope that the upcoming so-called “winter package” regulations that remain to complete this December 2007 reform will have a proper consultation attached to them and that it will take 12 weeks. One of the things that should be canvassed in the course of that consultation period is the extent to which the Government may in future be prepared to look again at the generosity or otherwise of the totality of the scheme. It is obviously an improvement and it is welcome so far as it goes, but only when the Government take the transfer assets into their control will they be able to get a proper handle on exactly what the fund has available to it. At that point, they could consider the possibility of doing even better. Although the scheme is welcome and generous so far as it goes, it does not deal with the issue to the extent that some of the people who are affected by these defaults and company collapses would like to see. We must keep that point of view at the front of our mind in considering these regulations.
I would like to mention two other operational matters. There is some concern that, if the board of the Pension Protection Fund is managing these provisions, there needs to be a clear separation of responsibilities, particularly in relation to costs. I hope that the Minister will keep an eye on that. I think that this potential concern is understood, but I hope that it will be at the forefront of his mind as these matters are taken forward.
I also concur with the view expressed in the consultation that targets need to be agreed when the Pension Protection Fund board runs this scheme in terms of the time taken for payment. Targets to avoid undue delays are important and I encourage the Minister and the department, in introducing these regulations, to make sure that undue delay is avoided if at all possible.
In welcoming these regulations and the December 2007 package, I still think that it is open to the Government to keep the potential long-term generosity of this package under review, with the hope that, if the opportunity arises, it could be improved on even further in future.
My Lords, I again thank both noble Lords who have spoken and supported these regulations. Let me start with the point made by the noble Lord, Lord Kirkwood, about keeping the door open to changing or improving the settlement that was reached. The Government made it clear in 2007 that we considered that the revised scheme represented a generous and appropriate final settlement. We are satisfied that we are complying with our EU obligations in that regard. The net present value of the schemes taking account of these regulations is something like £3.5 billion—a not insignificant cost. The scheme is estimated to help and provide assistance to something like 140,000 individuals. As at 22 June, it had already paid some £64 million to some 12,000 members. A lot of work is going on; this is a very significant scheme. When the Government have completed it—there is one more set of regulations to come—we will actually have done more than we committed to doing in December 2007, particularly with regard to severe ill health.
I say to the noble Lord, Lord Taylor, that of course there are people who are not satisfied with this. One can understand it—they lost the expectation of a full pension and did not get it replicated in every detail. I acknowledge that that is concerning for them, but there has to be a balance. We never said that FAS or indeed PPF arrangements would replicate what individual schemes would otherwise have provided.
The noble Lord, Lord Taylor, gave us a mini-version of the Conservative tirade about pensioner apartheid. Let me be very clear: anybody who has analysed the evidence will see what is happening to defined benefit schemes and what has happened to pension provision in recent years. We know that longevity is increasing. For a long time, actuaries did not wake up sufficiently to what was happening to returns on asset values; they were overstated and it was assumed that they would remain that way for a long time. The noble Lord’s Government’s legislation on pensions in a sense forced pension holidays because it limited the extent of surpluses that could be left in funds. The repayable tax credit was part of a restructuring of the corporation tax system which was accompanied by a reduction in the rate of corporation tax. It was to do with moving further from an imputation system of corporation tax to, I suppose, a more classical system. That is what drove those changes.
Between 1979 and 1997, because of the interaction of the tax credit arrangements with the basic rate of income tax, the Conservative Government progressively reduced the value of that tax credit to pension schemes. I have forgotten the percentage, but it was something like 18 per cent over that period.
My Lords, that was to do with changes to the rate of income tax. Our adjustment was accompanied by changes in the rate of corporation tax that enabled and encouraged companies to continue to invest in their businesses so that, as their businesses grew, they could pay bigger dividends in the future.
In the three years immediately following that change, the value of pension schemes rocketed. What effectively did the damage was the dotcom collapse and what that did to equity values, not only in the UK but around the world. So we reject the contention that there was a raid, in the noble Lord’s terms, on pension schemes. That is not a fair analysis of what took place.
On public sector pensions, I understand that the noble Lord’s leader has proposals to produce a double whammy, with defined contributions in public sector schemes at the same time as having a “pay as you go” basis for existing pensions. Is that right? If so, it would be a very interesting development and, I suspect, a very costly one.
There have been amendments and changes to public sector pensions. The normal retirement age has been changed for new entrants and there have been changes to cost capping and cost sharing. The long-term financial projection over 50 or 60 years shows that those pensions remain affordable, going from around 1.5 per cent at the moment to up to 2 per cent of GDP. So, again, I reject the noble Lord’s assertions on that. However, I know that that is straying somewhat, as indeed did the noble Lord, from the regulations, which, despite some areas of disagreement, seem to be supported.