Motion to Approve
My Lords, as your Lordships are aware, the Financial Assistance Scheme is a result of the Government’s ongoing commitment to help those hit by the collapse of their occupational pension schemes. FAS is an important lifeline to those who have worked hard and saved for their retirement only to lose their pension when the employer hits hard times. It provides financial help to members of qualifying pension schemes who face significant losses because their scheme was underfunded when it began to wind up.
As noble Lords may be aware, FAS was first introduced in 2004. Since that time, we have continually expanded and broadened the help that it provides. The extensions to FAS announced in December 2007 were the outcome of recommendations made in the Financial Assistance Scheme review of assets—a review undertaken by Andrew Young of the Government Actuary’s Department—which examined options to generate the best value from assets remaining in FAS-qualifying schemes. Young recommended that the remaining scheme assets be transferred to government.
Implementing this recommendation fundamentally changes the structure of the FAS and the way in which it operates. With these regulations, the FAS moves from a scheme that provides only top-ups to reduced scheme pensions purchased as annuities into a system that, in some cases, is responsible for the payment of the whole pension.
Since the 2007 announcement, we have increased the proportion of expected pension covered by FAS from 80 to 90 per cent. We will increase in line with inflation those payments derived from post-1997 service, subject to a 2.5 per cent a year limit. We have also increased the cap on payments and allowed for this cap to be protected against inflation. We have provided early access to FAS payments for those who are unable to work due to ill health and we have made special provision for people who are in severe ill health. We have extended payments to survivors to include certain partners and dependent children. Finally, we have also extended the FAS to include certain schemes that have wound up underfunded where the employer is still solvent.
As at 28 February, FAS is paying assistance to more than 14,000 people and has paid £87 million in assistance. Around a further 136,000 people will be helped in years to come as they reach retirement age. In addition, these regulations will allow around 20,000 individuals whose shares of scheme assets would be worth more than the 90 per cent assistance to be paid through FAS. Last year, we also conferred management of FAS on the board of the Pension Protection Fund, a body that has, since 2005, developed considerable expertise in winding up pensions.
The draft regulations before the House today complete the implementation of the Young review’s recommendation that the assets remaining in FAS-qualifying pension schemes should be transferred to government to part fund the increased assistance promise. There are four key aspects to the draft regulations that I will focus on in this debate.
First, as part of the process to transfer the remaining estimated £1.7 billion of assets of relevant schemes to government, the draft regulations provide for assets to be valued before transfer. This valuation will also establish the share of assets relating to each relevant beneficiary so that members receive appropriate payments from FAS. Noble Lords will note that details of how this valuation should be conducted are not set out in the regulations. This actuarial guidance will be published separately, as is usual for such material. Draft guidance was published for consultation on 28 January. The consultation was primarily aimed at pension industry professionals and others with an interest in defined benefit occupational pension schemes. This consultation has now closed and we intend to publish final guidance as soon as possible after the draft regulations come into force.
The second key area to be introduced by the draft regulations relates to the way in which assistance payments will be calculated for members whose schemes will be transferring assets to government. These calculations are, I admit, very complex. Noble Lords will note that the regulations before them are significantly larger than those published for consultation. They have been expanded in response to consultation comments that the draft regulations might not capture all the sets of circumstances in which beneficiaries might find themselves when they move to FAS. In addition, it has been necessary to replicate the reconciliation provisions in each of the payment schedules to ensure that individuals receive the correct amount from their scheme and FAS, whatever their circumstances on transfer.
Where members are already receiving a pension from their scheme above standard assistance levels, we have sought to ensure that, wherever possible, payments will not go down once the scheme transfers full responsibility to FAS. Where members with high asset shares are not yet receiving payments from their scheme, assistance will be in line with standard FAS rules, but to the full value of their asset share. We considered paying all these members in line with normal assistance rules to provide a consistent approach to calculating all FAS payments. However, this would have meant that some members already receiving a pension from their scheme might have seen their payments reduce when FAS took over—this may have been where the scheme was paying a flat-rate pension but FAS would be providing a lower payment with some indexation. Stakeholders made strong representations to us that this was not acceptable. Therefore, the regulations provide for payments to those members already in receipt of a pension from their scheme to be made in line with scheme rules so that, wherever possible, payments will not reduce when FAS takes over.
Where members are not entitled to payments from their scheme when these regulations come into force, their FAS entitlement will be structured in line with the normal assistance rules. Furthermore, where the member is not receiving a scheme pension before their scheme’s assets transfer to government, the draft regulations will enable a qualifying member to commute part of their assistance for a lump sum. The amount that can be taken as a lump sum will be broadly in line with tax rules, though ultimately restricted to the amount of the member’s share of scheme assets.
The third key change relates to the reconciliation of FAS payments. The draft regulations amend existing provisions to enable the FAS manager to take into account all pension payments made from the start of wind-up and to make corresponding adjustments to FAS payments where necessary. This will ensure that all beneficiaries receive the correct amount from their scheme and from FAS from the start of wind-up onwards.
Fourthly, modifications have also been made to the FAS information, review and appeal provisions to accommodate the changes to assistance that I summarised earlier. To reduce the administrative burden on trustees and insurers, the FAS manager will now be allowed to waive any information required where they consider it appropriate. In addition, the draft regulations allow HMRC to share certain information with the FAS manager and its commercial provider, where that information is both relevant and necessary to FAS work.
Finally, we have made changes to statutory deadlines for the provision of information and to deadlines relating to applications for reviews of decisions. These changes take account of our experience to date in delivering FAS.
The draft regulations before your Lordships are the last legislative step in the delivery of the considerable extensions to FAS announced in December 2007. They will allow the transfer of an estimated £1.7 billion of remaining assets and expand the number of people who will be paid by FAS by some 20,000. The draft regulations represent an important part of the commitment that the Government have made to protecting members of pension schemes. They are compatible with the European Convention on Human Rights. I commend them to the House.
My Lords, I thank the Minister for introducing the draft regulations. As he noted, they are extremely long and complicated, and contain some very impressive formulae for valuations in every conceivable circumstance. I am glad, therefore, not only that there is a comprehensive Explanatory Memorandum but that the Joint Committee on Statutory Instruments has reported on the regulations and that they were debated yesterday in another place.
One point has been highlighted by this scrutiny: it is clear that FAS is to end up in a very different place from where it started. Some of the developments that we have observed during the past year were anticipated, as the Minister pointed out. When the primary legislation establishing the scheme was passed, it was clear that there would be some level of operational flexibility in order to respond to the challenges that the liquidised schemes were likely to throw up. However, as the Joint Committee’s report makes clear, we are now looking at a final scheme that is right on the acceptable edge of that flexibility.
The Government have gone to some pains to demonstrate that the regulations are empowered by the original Act, and I accept their concern that any more delay to the provisions might harm the pensioners whom the scheme was always intended to help. Since the end result of the regulations is the implementation of the Young review, hopefully ensuring not only that pensioners receive their entitlement but that assets are maximised to offset taxpayer liability, I will not stand in the Government’s way. However, I thank the Joint Committee for raising the matter. So much statutory legislation passes through this House—indeed, we seem to have considered a never-ending flood of statutory instruments in recent days—that it is very hard to perform the necessary checks and scrutiny that they deserve. The Joint Committee on Statutory Instruments and our own Committee on the Merits of Statutory Instruments do a sterling job of handling all these orders, and they were quite right to raise the matter.
The Minister in another place yesterday suggested that the regulations were the final piece of the jigsaw—the Minister here made the same point just now—and that, once they had been implemented and any minor changes made, it would be time for a consolidation of all the relevant legislation. Can the Minister expand a little on when he expects such consolidation to be possible? Pension regulation is always complicated. The matter is made much worse when it is scattered across multiple Acts and statutory instruments.
How will the regulations impact on the government account book? It appears that the total pension liability of affected pensioners is in the region of £3.5 billion, and that an estimated £l.7 billion of assets remain in the schemes to be used to offset this cost. How will these remaining assets be accounted for by the Government? Public sector net debt conveniently does not include future liabilities—something for which this Government must be rather grateful, given their inability to bring public sector pensions under control. Will these assets therefore be counted against the mountain of debt that this Government have built up, while the liability is to be consigned to the accounting equivalent of a black hole?
Finally, I note that, after several years of debate, the Government have finally accepted the last of the strong recommendations made by these Benches for the FAS to be rolled up into the PPF. On 6 June 2007, my noble friend Lord Skelmersdale, who was then the opposition spokesman for this department, won a vote on a large group of amendments to the Pensions Act 2007. The Government rejected those amendments when the Bill went to another place. There was a vigorous process of ping-pong, but we were unable to keep those changes in the Act.
The amendments not only guaranteed pensioners under the FAS 90 per cent of their liability—rather than the considerably smaller proportion the Government were offering—but also suggested the obvious good sense of rolling the FAS into the PPF and putting it under the management of the PPF board.
The Government accepted the 90 per cent figure a few years ago, and I am very pleased that the second of the recommendations in those amendments has now been accepted.
My Lords, I, too, thank the Minister for explaining this extremely complex instrument, I, too, note that the regulations are the last in a long list of changes and amendments that have been made to the Financial Assistance Scheme since it was established by the Pensions Act 2004. Their purpose, as I understand it, is to bring in the rest of the legislation that makes the FAS more generous in its payouts than was originally intended. As the Minister said, the main provision is for the transfer of defined benefit assets to the Secretary of State from about 450 qualifying schemes that have not yet completed wind-up, using the same kind of provisions that are used to transfer assets in PPF qualifying schemes to the PPF board.
We welcome these changes, which boost the level of support that people will receive under the FAS and bring it into line with PPF levels. We also welcome the Government's commitment, following their consultation on these regulations, to ensure that the FAS scheme manager provides details of members’ asset shares, together with a forecast of assistance and lump-sum entitlement to individuals shortly after their scheme assets transfer to government, with forecasts of assistance annually thereafter. It is important that scheme members finding themselves in this position are given an idea of the levels of assistance they are likely to receive to help them plan for their retirement.
One of the main concerns of the Pensions Action Group members and other FAS recipients is the level of compensation that they are likely to receive. The then Minister, Peter Hain, said in a Statement in another place in December 2007:
“All scheme members will be guaranteed 90 per cent. of their accrued pension at the date of commencement of wind-up, revalued to their retirement date”.—[Official Report, Commons, 17/12/07; col. 100WS.]
That is a point that the noble Lord, Lord Freud, just mentioned.
In addition, Mike O'Brien, as Pensions Minister during the Pensions Bill in 2007-08, said that,
“we guaranteed to provide a higher level of assistance, which was broadly comparable to the compensation paid by the Pension Protection Fund”.—[Official Report, Commons, Pensions Bill Committee, 19/2/08; col. 508.]
However, it is clear that most people affected do not get anything like 90 per cent; so should the Government's language not reflect this in order to avoid raising people's hopes?
The impact assessment says that,
“costs that a trustee incurs in providing information are likely to be recovered by the trustee from the pension scheme assets prior to their transfer to government”,
which means that,
“members’ asset shares may be reduced, however in many cases this will be offset for the member by an increase in FAS assistance (to a maximum of 90% level, subject to the FAS cap)”.
Concerns were raised in the consultation that in such small schemes the costs of preparing the assets for a transfer may erode funds to such an extent that there would be no additional value to be gained by transferring the assets. The impact assessment says that the Government do not hold detailed information on the numbers that might be affected. Will the Government monitor this issue, specifically to ensure that some people do not end up with smaller payouts under the new system?
I have just two more areas of concern. The first is about tax-free lump-sum payments, which will be limited to those who have accrued scheme benefits in their own right and have an asset share allocated to them that was “higher than nil”. It is available only if they were not being paid a pension already before the scheme assets were transferred to government and would be offered only when assistance first started to be paid. This lump sum would be a maximum of 25 per cent of the capital value of the pension and lump sum received, in line with the general tax rules for taking a tax-free lump sum from a private pension pot on retirement and converting the rest into an annuity. HMRC is to bring forward regulations to provide tax relief along these lines. However, this sum would be limited to the amount of the individual’s asset share. Most people responding to this question in the consultation thought that the FAS should allow for a lump sum to be taken at 25 per cent of the payment due, regardless of the individual’s asset share. The general feeling was that it was unfair to treat individuals differently based on the level of funding in their scheme. The Government decided to make no changes in this area, in spite of the strong feeling of the consultees. Will the Minister say why? Have estimates been made of how much of the cost would be brought forward if this were to be implemented? After all, the tax-free lump sum on retirement is very popular, particularly to pay off mortgages.
Finally, will the Minister elaborate on the report from the Joint Committee on Statutory Instruments on these regulations? The committee was unpersuaded by the department’s assertion that these arrangements fall clearly within the options set out by the Minister during the debates. I should be very grateful for a reply on that point.
My Lords, I am grateful to both noble Lords who have spoken in support of these proposals. The noble Lord, Lord Freud, referred to the work done by the JCSI and the Merits Committee. I support what he says, although sometimes it is a little painful to receive their reports if you are dealing with matters that are the subject of their scrutiny. But it is a valuable and important process and part of our proceedings.
The noble Lord asked about consolidation. We would not have wanted to consolidate these regulations until we had actually ceased to make all the changes. In a sense, the changes took place at various stages, because we wanted to proceed as quickly as we could as the policy developed to ensure that those changes that were most beneficial were dealt with first. That is why the sequence has taken place as it has. Now we have completed implementing the 2007 announcements, we will look to consolidate in the near future.
The noble Lord asked about the impact of what we are doing on government finances. We expect some schemes to be transferred soon, after the regulations come into force, in cases where full actuarial valuations are not required. However, we do not expect substantive assets to start transferring until early autumn. This is because in order to ensure accuracy the full valuation process will take some time—perhaps six months. We expect a good proportion of scheme assets to be transferred to government within two years. Completing the transfer of all schemes is expected to take around four years. Assets transferred will reduce government borrowing because they are transferred into the Consolidated Fund. The payments that are then made in successive years become a cost charged in those years. Those are the broad consequences of these proposals.
The noble Baroness, Lady Thomas, reverted to the issue around what 90 per cent means. There has been a misunderstanding about this, but I believe the Government have been clear throughout. The Government have guaranteed that FAS will provide 90 per cent of a member’s expected pension, subject to a cap. The expected pension is the member’s accrued pension as at the date wind-up starts, revalued at a standard rate to the member’s retirement date.
In some cases, this will not be the same as 90 per cent of what members would have expected at retirement. First, had the scheme not wound up, further contributions may have been due to the scheme before the member reached retirement. Secondly, the FAS applies its own revaluation rates from the date of wind-up to the member’s normal retirement age and these rates may be lower than those which would have been applied by the pension scheme, so differences could arise. In addition, the statutory indexation provided by FAS may not be as generous as that which would have been provided by the scheme. We have never said that it would replicate precisely 90 per cent subject to the cap of what members would have got had the scheme continued and remained in operation until their retirement.
The noble Baroness made reference to small payouts. The regulations are designed to ensure that no one gets less from FAS than they would have got from their scheme if it had wound up conventionally. Obviously, if there are examples of that which noble Lords come across, we would be happy to review that.
The noble Baroness talked about lump sums. Let me be clear that any FAS scheme member with a share of scheme assets who is not receiving a scheme pension when the scheme assets transfer to government will be able to take a lump sum upon retirement. The lump sum available will be broadly consistent with the normal tax rules, as the noble Baroness suggested, on a pension commencement lump sum. However, the amount will be restricted by the member’s asset share as it would be where a scheme in wind-up is underfunded. The FAS will not offer the opportunity to commute any payments to members who retire before their scheme transfers assets; where funding levels and legislation allow, their scheme should already have offered them the opportunity to commute part of their scheme pension when they reach retirement age.
As far as paying lump sums to everyone is concerned, the FAS will pay lump sums only where the assets of the pension scheme are sufficient. We have considered the arguments for allowing all FAS beneficiaries to access a lump sum in return for lower assistance payments. However, while in the long term this would be cost neutral, in the short term it would bring costs forward, and therefore there is an important consideration for the Government in that, which is why we have not gone down that route.
The noble Baroness made reference to the 450 schemes that are likely to transfer assets to government. I think that is the figure identified by the Young review and is the most up-to-date figure that we have. It might be helpful for noble Lords to have an update on scheme data. As at the end of January this year, 925 schemes are qualifying pension schemes for FAS purposes, 314 of them have wound up completely, 611 are in winding-up and another 192 are pursuing FAS qualifications. I think that is something like 1,100—perhaps a few less—which is broadly consistent with some of the earlier estimates that were made.
The noble Baroness made reference to the question of valuations on lump sums. The cost of FAS valuations will be broadly in line with the cost that schemes will incur if they were winding up normally, and we intend to provide lump sums in line with those that would have been available from an annuity.
The noble Baroness and the noble Lord, Lord Freud, made reference to unusual use of powers. The issue was put on the record in another place but I am happy to repeat it here. Perhaps it is appropriate that I do. It is a little complicated, but here goes:
“Section 286(1) of the Pensions Act 2004 confers wide power on the Secretary of State to make regulations to provide a financial assistance scheme. Section 286(3)(j) provides the power to apply parts 1 and 2 of the 2004 Act with modifications to the FAS. Section 161 in part 2, along with schedule 6, includes provisions in relation to transfer of assets to the board of the PPF. The draft regulations modify section 161 and schedule 6 for the purpose of the FAS to allow transfer of scheme assets to the Secretary of State”.
“The JCSI set out in its report that that may be an unusual or unexpected use of the power, because section 286(3)(c) confers an express power for regulations to provide for the transfer of property rights and liabilities to the scheme manager”.
As noble Lords are all aware, the FAS scheme manager is now the PPF, not the Secretary of State.
“The report suggests that to fall within the powers in the primary legislation, assets should be transferred to the scheme itself. However, unlike the PPF there is no scheme fund in which assets are held and then used to pay assistance … Instead, the FAS sets out who qualifies for assistance and how payments should be calculated. Funding for those payments is provided by the Secretary of State, directly out of the DWP budget. It is therefore appropriate that any funds brought in should be transferred to the Secretary of State and not the scheme manager. In practice, the funds will be transferred to the consolidated fund that the Government hold”,
as I outlined a moment ago.
“We took the view that the list in section 286(3) of the 2004 Act illustrates and amplifies how the power in section 286(1) could be used and it is not intended to be restrictive. When the clause was debated”—
in relation to the 2004 Act—
“it was not clear how the FAS would be delivered”.
The noble Lord, Lord Freud, made that point; it has evolved over a number of years.
“It was made clear then that there were a number of alternatives that would need to be considered. The clause was, therefore, widely drafted … and subject to an affirmative resolution … to allow additional scrutiny by Parliament when proper consideration had been given to … the matter ... Transfer of the assets to Government was one possibility, as was making the PPF the scheme manager. The provisions made in these draft regulations … sit squarely within that and we consider that they clearly fall within the provisions of the 2004 Act”.—[Official Report, Commons, Delegated Legislation Committee 24/3/10; col. 18.]
We therefore consider that the use of the modification power in this way could not be considered to be unusual or unexpected.
The noble Lord, Lord Freud, reminded us of a bit of the history of this with the debates that we had regarding the final destination of FAS. He is right that it was hotly contested; I was on the receiving end of some of that. However, I think we have ended up in a good place, and on that basis I am grateful for noble Lords’ support for the regulations.