That the Grand Committee do report to the House that it has considered the Occupational Pension Schemes (Levy Ceiling) Order 2010.

My Lords, before I explain these orders, noble Lords may find it helpful if I say a little about the work of the PPF in the year since we last debated these orders.

As noble Lords are aware, the Pension Protection Fund protects members of defined-benefit occupational pension schemes and members of defined-benefit parts of hybrid defined-benefit and defined-contribution schemes. It pays a statutory level of compensation if the sponsoring employer of the scheme experiences what is called a qualifying insolvency event—for example, where a company enters administration, where there is no possibility of a scheme rescue or where there are insufficient assets in the scheme to pay benefits at PPF compensation levels—that is, 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, which is a public corporation.

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

Since 2005, 181 schemes have been assessed by the Pension Protection Fund following an employer insolvency event. At present 363 schemes, with around 203,000 members, are currently being assessed. As at the end of December 2009, 109 schemes had transferred into the PPF and over 32,800 people were either receiving PPF compensation or due to receive it in the future. The average yearly payment per person is around £4,000.

When the 2009 versions of these instruments were debated around this time last year, 74 schemes, with around 20,000 members, had transferred into the PPF, and 295 schemes, with around 134,000 members, were in assessment. This increase in numbers over the previous year shows the challenges that the PPF has had to face and the results of its efforts over the past year. The PPF’s contribution is welcomed, I am sure, by noble Lords. At these difficult times, I am sure that the 12 million people protected by the PPF will be particularly glad to know of its protection.

However, I know that noble Lords will also be keen to understand that the PPF is fulfilling its statutory purpose and that it will continue to be able to pay compensation going forward. Let me be clear on this: with around £3.7 billion under management, and a levy intended to raise £720 million in 2010-11, there is no doubt that the PPF has the liquidity to pay a monthly compensation bill of around £6.5 million.

Importantly, under even the most taxing economic scenarios that we have tested, the PPF could continue to pay compensation for at least 20 years into the future. However, it is right that we should be vigilant, and we and the PPF continue to monitor its position.

Despite the welcome news that the recovery has begun and that the UK is no longer in recession, we know that employers sponsoring defined-benefit pension schemes will continue to experience insolvency events, and the PPF will continue to play a vital role in supporting pensioners in retirement.

My Lords, these are pretty standard uprating orders but they give us an opportunity to discuss a consequence of Labour’s great recession that is often overlooked. When a company goes into insolvency, an employee does not just lose his job and his salary; he is also in danger of losing his pension entitlement. A record number of companies went into insolvency during the recession that we have just barely come out of—over 3,000 more than went bust in the previous recession in the 1990s. It is no surprise that the Pension Protection Fund website shows a record number of pension schemes seeking compensation. The list of transferred schemes is pretty bad, with a rise from 12 schemes in 2007 to 53 in 2008 and 41 in 2009, and, as the Minister informed us, the number of schemes still in the assessment period is much higher.

Ensuring that the Pension Protection Fund stays sufficiently funded to meet its commitments to these schemes is critical. I hope that the short-term cash flow problems that the recession caused are now over. However, the board of the fund has decided to amend its insolvency probabilities in order to take into account the effect of the economic climate on companies. The board notes that even companies regarded as low-risk have seen increased levels of failure, and previously healthy companies that survived the recession will now face the greatest increase in levies. These changes will not be implemented until the financial year 2011-12. Therefore, it is clear that the effect of Labour’s mismanagement of the economy will continue to be felt throughout the UK for many years to come.

However, the biggest elephant in the room whenever the health of the Pension Protection Fund is discussed continues to be the Royal Mail pension fund. We are fast approaching the date by which the revaluation of the scheme will have to be announced. Since the Prime Minister bottled the Postal Services Bill, postal workers across the country have been left in limbo, knowing that their scheme is running an unsustainable deficit that the Pension Protection Fund cannot possibly afford to compensate. The current problems that the PPF is facing as a consequence of the recession will be as nothing compared with the demands that will be placed on it if that scheme is forced into insolvency.

I hope that the Minister will be able to reassure us that his department has not just brushed that problem under the carpet until the election. Remaining in denial until May in the full knowledge that every delay to the necessary reforms will only make it harder in the long run would be deeply irresponsible. Are discussions with the Royal Mail pension plan ongoing, and are the Government still committed to implementing the Hooper review, with its plan for saving the pension fund, in full?

My Lords, this is an annual event. I think that we last discussed these orders about 10 and a half months ago. I am not going to make a party-political broadcast but, as the noble Lord, Lord Freud, said, this is an appropriate opportunity to ask one or two questions about the state of pension funds generally and about the PPF in particular.

I am sure that, as an accountant, the noble Lord, Lord McKenzie, will be able to help me. I am only an economist and statistician and I am afraid that, despite his kind letter and explanation, I am still struggling to understand exactly why one figure has gone up by 3.5 per cent while the other has gone up by 0.9 per cent. I understand that the 3.5 per cent is the increase in average earnings between March or April 2008—I am not sure which month was used—and March or April 2009. That is clear enough, but can the Minister tell me exactly what figure is being used for the 0.9 per cent? It relates to 31 July, but which year? I am still in the dark, so can he tell me which figure I should look up in the Labour statistics for that?

Last year, the noble Lord pointed out that the PPF was paying out £3.7 million a month in compensation. Today, he tells us that that figure has jumped to £6.5 million, so one sees how the pressures are building. He also said last year that, on the basis of the analysis that had been undertaken, the PPF had enough cash to continue to pay benefits for at least 25 years. However, this year he tells us that the calculation is now 20 years. Perhaps he can confirm that.

There is a more general point. We are talking here about very long-term liabilities and a long-term pension fund. It is the same sort of defence that one hears from the Government when one tries to raise serious questions about the long-term viability of public sector pension schemes. It is not a question of running out of cash in the short term but a question of these liabilities being properly provided for.

I have one or two more detailed questions on the PPF and the figures that have come from its very useful publication, the Purple Book. One should pay tribute to the PPF for the way that it reports properly and has built up in the Purple Book a good picture of pension funds in this country. Frankly, it was a scandal that this was never available before. The PPF is talking here about its sample of around 7,300 schemes. I am surprised that it says that open schemes still constitute 27 per cent of schemes. Could the noble Lord comment on this? For any of these questions, if he does not have the full answer, could he look into it and write to me? Admittedly, that figure is down from 31 per cent in 2008 and 36 per cent in 2007. It is not entirely clear from the way it is written whether that 27 per cent refers to schemes that are open to both new membership and new accrual. Could the Minister clarify that?

We also see that there has been a catastrophic decline in the funding position of the schemes that the PPF Purple Book refers to. Again, could the Minister confirm that? Aggregate funding on a Section 179 basis has gone down from a £12.3 billion surplus in March 2008 to a deficit of £200.6 billion in 2009. That is down from an even bigger surplus of £87.4 billion in March 2007. The full buy-out funding level is even worse, falling from 62.9 per cent in March 2008 to only 57.7 per cent in 2009. On the technical provisions basis, we are talking about a deficit that has gone up from £98 billion a year ago to £329 billion this year. For all that one fully accepts that there is no danger of the PPF running out of money in the short term, there is a good deal of evidence that the pressures are building. We will also come to the growing insolvency figures. When a company fails and the pension fund lands on the PPF, the size of the black hole in each case is likely to be much more.

There were over 50 per cent more liquidations in the third quarter of 2009 than at the low point in 2007. I say to the noble Lord, Lord Freud, that I am glad he is so sure that the recession has ended. We have had one-quarter of barely perceptible economic growth, which is well within the margin of error. I would not be at all sure that the recession has ended. It certainly has not ended as far as many of these hard-pressed manufacturing companies are concerned. This tends still to be the area where the big defined benefit schemes and liabilities are.

Those are my main questions. I will also ask about something I raised last year but is still a serious problem. As well as liquidations, what is the effect of the continuing tide of pre-pack administrations, by which companies get rid of the pension fund and some of their debts and start again, particularly in phoenix administrations? Are there figures from the last year for how many pension funds of companies in that category have been dumped on the PPF?

Finally, on risk reduction, we are told on page 20 of the Red Book that the total number of contingent assets—which are pledged by the company to help support the pension scheme; it is a perfectly sensible way of doing things—has risen by 30 per cent from 452 for the previous levy year to 587 for this year. What is the total value of those assets in each year?

My Lords, I thank noble Lords for their contributions. I am not sure that I heard from either noble Lord who spoke whether they support the orders.

Yes, we do.

I am delighted to hear that. A number of quite technical questions were raised and I shall to try to deal with as many of them as I can. On some, I shall definitely have to follow up.

The noble Lord, Lord Freud, talked about the mismanagement of the economy, which we do not accept for a moment. I stress to the noble Lord that the measures that this Government have implemented, which have taken us through the consequences of what has been a worldwide recession, were opposed by his party. If we had not taken the steps that we did to stabilise the banking system and put in the fiscal stimulus, matters would have been a great deal worse. Therefore, I do not accept the noble Lord’s proposition to start with.

I cannot let that pass. The mismanagement encompasses the whole period, not just the period of rescue. Running an economy at a level of gearing in both the private and the banking sector, which is what has happened, has left us in a much worse position than that of the bulk of European countries. That is a level of financial mismanagement which even the Minister, with his considerable expertise, would find it hard to argue his way out of.

My Lords, I remind the noble Lord that we are straying somewhat from the orders. Pretty much every time that we have talked about regulation and its scope, his party has argued for less onerous regulation across the banking system and across a whole range of other areas.

The noble Lord talked about people losing their jobs and being in danger of losing their pensions. In previous recessions, that is what happened. We now have the Pension Protection Fund; it did not exist before, and we had the interim arrangements around the FAS. The Pension Protection Fund means that if a person’s employer becomes insolvent and their scheme is underfunded, they can rely on a stream of income in retirement. That simply did not exist before.

The noble Lord talked about insolvency probabilities. This issue is still out for consultation. It is important that the PPF considers how best to assess this risk, but, at the end of the day, it is a matter for the PPF.

The noble Lord strayed rather ingeniously to get on to the future of Royal Mail under this order. That is obviously a matter for BIS, and the Pensions Regulator is responsible for regulating scheme funding. Royal Mail will submit valuation and recovery plans in the normal way, like every other pension scheme. Issues around the future of Royal Mail and the Hooper plan are not matters for our deliberations today.

The noble Lord, Lord Oakeshott, wanted clarification on the percentages and on where they were derived from. The 0.9 per cent relates to the 12 months ending July 2009; 3.5 per cent is the earnings factor for the 12 months ending April 2009. In fact, it may be 2008 rather than 2009, because the earnings factor is related to the year preceding the year with which we are dealing.

It is possibly still not crystal-clear to the Minister. Is it the whole year compared with the previous year, as opposed to a month? The percentage cannot have moved from 3.5 to 0.9 over those three months. Something is still not quite clear, I think.

I am sorry; it is for a whole year period. I will write to the noble Lord specifically to confirm that, but that is why.

The noble Lord asked about the PPF’s assessment, which was over 25 years but is now to be over 20 years. To be clear, the modelling still indicates a period over 25 years. I think that I said it would be at least 20—I was being conservative, with a small “c”, as ever on this. The modelling has now been reviewed by the National Audit Office in its positive report published last Friday.

The noble Lord referred to the PPF’s 7,800 series of reports. An updated report is issued today. I do not know whether he has seen it; it may be helpful if I update him on that. The aggregate funding position of the almost 7,400 schemes protected by the PPF is estimated to have worsened slightly over the month to a deficit of £51.9 billion at the end of January 2010—compared with a deficit of £32.6 billion at the end of November 2009—but the scheme funding is better than it was a year previously, when there was a deficit of £183.6 billion. I know that the noble Lord understands full well that those figures refer to a net of aggregates that swing around increases in asset values and changes in gilt yields and what they mean for liabilities.

The noble Lord asked about the 27 per cent of the sample that constitute open schemes and he wanted clarification on whether that meant open both to new members and to new accrual. I look for support from the back of the Room, but I am not getting it, so I shall have to write to the noble Lord.

On several of those points, I should be quite happy to have a written answer, if that suits the Minister.

I would prefer to do that because they are quite technical points—certainly those relating to the total value of contingency assets and an update on pre-pack schemes. Around the whole issue of buyouts, buy-ins and the raft of arrangements that may be in place, the market has generally cooled during the past year—perhaps not surprisingly. Subject to those detailed points, on which I owe the noble Lord, Lord Oakeshott, an answer, which I shall share with the noble Lord, Lord Freud, I commend the orders.