My Lords, the Government recognise the importance of proper pension protection and are confident that the Pension Protection Fund will be able to make compensation payments now and in future. It has more than £23 billion worth of assets under management and a reserve of more than £4 billion. It is 116% funded; that is, it has 16% more money than it estimates it needs. That puts it in a strong position to face the future.
I welcome the Minister to the Dispatch Box for his first Question. Bearing in mind the numbers he gave us, and also that the current BHS episode affects 20,000 people, and the recent warning from PwC that our defined pension schemes have a total deficit of £710 billion, are the Government satisfied that the current regulation is good enough to prevent poorly run schemes having to be bailed out by well-run schemes, which is the whole purpose of the protection fund?
I am grateful to the noble Lord for his welcome. I think my career is on a downward spiral rather than an upward one. On British Home Stores, that pension scheme is now in the assessment period so far as the PPF is concerned. It is confident that, should BHS fall into the PPF, it has the resources to meet those obligations. On the very substantial figure that the noble Lord mentioned, that is a snapshot of all the liabilities of the defined benefit pension schemes were they all to have to buy annuities at the present moment. Of course, that is a volatile figure. When interest rates go down, the deficit goes up; should interest rates go up, the deficit would go down and in many cases disappear. One must look at this in the long term, with the volatility of the economic cycle taken into account. A pension fund is, after all, a long-term investment.
My Lords, does the Minister agree that, at present, the reported scale of pension fund deficits is hugely exaggerated because we have artificially low gilt yields rendering a discount rate of 3% or 3.5%, whereas typically investment fund returns are of the order of 5%? That is misleading. I hope the Government will consider introducing some measures to address this issue.
My noble friend is absolutely right that when gilt yields fall, the deficits go up. There is an international accounting standard, to which we are obliged to adhere, that indicates how the deficits are to be valued. As I said, they are volatile; should interest rates go up, the deficits would go down. But I am grateful to my noble friend for putting it in that broader context.
My Lords, at a time when most private sector companies have ended their final salary pension schemes—and, indeed, the Government have conducted very substantial reforms of public sector final salary schemes—is it appropriate that the Bank of England’s senior management scheme should be subsidised heavily, oblivious to the policies that the Bank of England is making, which affect people’s pensions?
Like the noble Lord, I saw the comment in today’s business news. It is worth remembering that at the beginning of the previous Parliament we asked the noble Lord, Lord Hutton, to conduct an independent review of public sector pensions. He recommended that defined benefit should remain the core principle of public sector pension schemes. That is the case with the Bank of England, as with the rest of the Civil Service. He also recommended that it should be based on a career average, rather than final salary, and made other recommendations about the appropriate contribution. It is important to distinguish this question from QE. QE has a number of impacts on all defined benefits but, in addition to increasing the deficit, one could argue that it has increased asset values, which has helped the pension funds, and has had a benign effect on the UK economy, from which the pension funds also benefit.
I think anybody who has read the Select Committee report on BHS, particularly an employee of BHS, will feel anger at the history of mismanagement of that company. As the noble Lord will know, there are a number of inquiries going on into that collapse: the Pensions Regulator is conducting an inquiry, the Serious Fraud Office is conducting an inquiry, and so is the Insolvency Service. So I think it makes sense to await the outcomes of those inquiries to see whether any fresh legislation is necessary to deal with any gaps there may be at the moment.
My Lords, can the Minister explain what the Government are doing about the potential for stranded assets, particularly investments in fossil fuels? Greenpeace produced a report yesterday which pointed out that, when you look at the growing interest in climate action, the lack of infrastructure for the development of fossil fuels actually means that a lot of pension funds could find that their assets have simply gone.
Perhaps I may push the Minister a little more. I totally accept that the value of pension funds goes up and down according to a number of factors, but recent statistics show that 56 of the FTSE 100 companies had a combined pension deficit of £42.3 billion, which was up from £25 billion in the previous year—so growing fairly steadily. Just last year those FTSE companies were able to pay out dividends of £53 billion—a sign of their success. Does the Minister think that those companies have the balance right between shareholders and employees? If not, will the Government consider doing something about it to ensure that their responsibilities are taken more seriously?
The important thing is that the pension funds are able to discharge their obligations to current and future pensioners. With regard to the broader issue that the right reverend Prelate raised, we keep under constant review the legislation concerning the PPF and, indeed, the impact on defined benefit schemes of the current interest rate regime. These things are kept under constant review, including the very valuable point he has just made.