Financial Assistance Scheme (Miscellaneous Provisions) Regulations 2008

16:11:00

The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord McKenzie of Luton)
rose to move, That the Grand Committee do report to the House that it has considered the Financial Assistance Scheme (Miscellaneous Provisions) Regulations 2008.

The noble Lord said: As noble Lords will recall, the financial assistance scheme—FAS—offers help to certain people whose benefit occupational pension schemes have not provided them with the pension that they were expecting. The regulations present the first key steps towards the delivery of the full package of reforms to the FAS that we announced in December last year.

As noble Lords may be aware, the December announcement covered changes to the structure of the FAS as well as to the benefits that will be paid. Where schemes were not already committed to buying annuities from insurers, we announced that the Government would take in the residual assets of those schemes and make associated payments as they fell due. Taking in those assets helps finance greater benefits to existing FAS members, which will be broadly comparable to those provided by the Pension Protection Fund. The residual assets will also help provide for assistance to be extended to those members of schemes connected to solvent employers.

In December, we guaranteed that all members would receive 90 per cent of their accrued pension, subject to the cap, instead of 80 per cent as before. We also said that we would pay assistance from a member’s normal retirement age, or 60 if their normal retirement age was earlier, rather than from 65. We said that certain members would be able to apply for early reduced payments on ill health grounds. We also committed to indexing FAS assistance broadly in line with PPF rules. We said that we would ensure that members whose scheme assets were taken into the Government would not be denied the lump sum that they could otherwise have expected to receive from those assets.

While some of those changes are relatively simple to deliver, others are complex. Earlier this year, I wrote to the noble Lords, Lord Skelmersdale and Lord Oakeshott, detailing our plans to deliver the reforms in phases to help ensure that changes are made as quickly as possible. First, the regulations before us today will implement the first two cornerstones of the reforms: payment at the 90 per cent rate and payment from the NRA. It is important to realise that for many current FAS recipients those changes alone will make FAS assistance broadly comparable to PPF compensation, but there is still some way to go to deliver the full reform package for all beneficiaries.

Next, I expect to bring a further package of regulations to your Lordships before the Summer Recess. That package will allow early access to payments on ill health grounds, subject to actuarial reduction, extend the scheme to certain solvent employer schemes and prepare the ground for further PPF involvement in designing and implementing the reformed scheme. Finally, by the end of this year, we intend to consult on further regulations to deliver the full package of changes. In addition, to support the changes that we intend to make through regulations, we also plan some amendments to primary legislation through the Pensions Bill.

16:15:00

I thank the FAS Operational Unit for its continuing work to deliver payments in a rapidly evolving environment. Your Lordships may recall some of the issues we have faced in the past whereby eligible FAS members have not received payment because information has not been provided to the Operational Unit by pension schemes. Your Lordships may also recall the review carried out last year by Mercer Human Resource Consulting, which reported that the process of gathering data to operate the FAS is fit for purpose and is managed in a satisfactory manner. That conclusion is ably supported by the number of payments now being made.

As of 9 May 2008, 5,531 beneficiaries are in receipt of FAS payments and a total of around £18.5 million has been paid to date. This is a step change in comparison to the position at the same time last year when around 1,100 people were in payment and around £4.4 million had been paid out. Passage of these regulations will help increase payments further. The operational unit has assessed more than 1,500 members who will be eligible for payment when they reach their NRA. Of these, more than 300 will be eligible for payment immediately when these draft regulations come into force. We estimate that some 5,000 people are currently between their NRA and 65, and thus stand to benefit in the coming months as their information is provided to us.

As well as delivering the 90 per cent rate from NRA, the draft regulations make a number of changes to FAS legislation to support those enhancements. Complementary changes are made to the Pensions Act 2007 to ensure that primary legislation is consistent with the changes we are making to secondary legislation. The draft regulations also include some amendments to FAS revaluation rules and transitional protection for certain members affected by those changes. Under current FAS rules, assistance payments are revalued to 65, regardless of the member’s NRA. Revaluation from NRA to 65 was a feature of the original FAS as we felt that it would be unfair to expect people to wait up to five years from their NRA to receive assistance without that assistance benefiting from some form of index-linking.

Under the changes to FAS made by these draft regulations, FAS payments will now be made from NRA or, if later, age 60. This means that assistance payments for some people already receiving FAS will be reassessed and new entitlements will be paid for the period from NRA. The bringing forward of payments for those members means that the period of revaluation will be shorter. In some cases, where there is a significant period between NRA and 65, the reduction of the period of revaluation may mean that ongoing payments will not increase significantly when payments are reassessed from 80 per cent to 90 per cent. In extreme cases, ongoing payments might even fall. However, any members in this position will receive significant payments to cover the period from their NRA.

The draft regulations also include related changes to the revaluation that applies to deferred members’ accrued pensions. In certain current cases, such revaluation can apply beyond the age of 65. Changes are made by the draft regulations to ensure that accrued pensions cannot revalue beyond that age. These changes might mean that some beneficiaries whose entitlement dates do not change may not see a significant increase in their ongoing payments. It is unlikely that such members will see their existing payments fall as a result of the changes. However, in the event that members might otherwise be in this position, the draft regulations provide transitional protection so that ongoing assistance payments for those who are already receiving FAS payments and whose entitlement date does not change will not reduce from the level currently in payment. The draft regulations also amend payment ages for certain FAS beneficiaries who qualify as a result of death benefits payable by qualifying schemes.

Depending on individual pension scheme rules, some spouses, unmarried partners or dependent children of members of pension schemes who die before the start of scheme wind-up qualify for pensions from their schemes. Under current FAS rules, such members, in common with other qualifying members, receive payment from age 65. In order to reflect the revised payment rules that will apply to other FAS members, such people will be eligible for payment from the later of 14 May 2004 and the date that they became eligible for payment under the qualifying scheme’s rules.

Some of these recipients may have qualified for payments as dependent children. Under typical pension scheme rules, payments to dependent children are made only until a fixed age; that is, 18 or until they leave full time education. To reflect such arrangements, the regulations specify that assistance payments to any such recipients end on the date that they would have stopped receiving their pension from their pension scheme.

As your Lordships may recall, opposition spokesmen in the other place agreed to proposals made by the Minister of State for Pensions for a written consultation period of two weeks for these regulations. This helped to facilitate their speedy implementation. We have published a full response to the issues raised during that consultation period, and two substantive matters were raised that may be of interest to your Lordships.

First, it was noted by some respondents that FAS payments will continue to be made only from 14 May 2004—the date FAS was first announced—even if members reached their NRA before that age. We continue to believe that it is right that FAS payments relate only to periods after the date FAS was first announced. And retaining the 14 May 2004 date assists in current administrative delivery and helps control costs. However, we will continue to consider this point before consulting on further draft regulations later this year.

Secondly, it was noted that the definition of NRA used in the draft regulations might not reflect members’ expectations of the age at which they would have been able to take some or all of their scheme pension. We will continue to consider the issues raised in relation to the definition of NRA in the context of achieving broad comparability with the PPF, subject to further consultation and draft regulations later in the year. However, we have retained the definition of NRA in the draft regulations to enable enhanced payments to be delivered as quickly as possible, using information already held by the operational unit.

We have built strongly on the foundations provided by the Young review. The announcement that we made in December will ensure all of the estimated 140,000 people who have suffered pension losses as a consequence  of their schemes winding up underfunded between 1 January 1997 and the advent of the Pension Protection Fund will receive benefits broadly comparable to the PPF. We are maintaining momentum by these regulations which will deliver key elements of the reforms to the immediate benefit of many members.

In my view, these regulations are compatible with the European Convention on Human Rights and I therefore commend them to the Committee. I beg to move.

Moved, that the Grand Committee do report to the House that it has considered the Financial Assistance Scheme (Miscellaneous Provisions) Regulations 2008. 18th report from the Joint Committee on Statutory Instruments.—(Lord McKenzie of Luton.)

Lord Taylor of Holbeach
I thank the Minister for his introduction of these regulations. I welcome the order as an important step in a five-year battle by 125,000 of the earliest victims of the Prime Minister’s economic incompetence to get as much as possible of the pensions they were due. Let me remind the Committee that during that time some died, others had to work beyond normal retirement age, sometimes with serious medical conditions, and all faced the prospect of penury.

I would not usually rehearse the history of this unhappy matter, but the circumstances surrounding it are exceptional. The measures in the regulations could have happened much earlier if the Government had not chosen to reject out of hand the Conservatives’ lifeboat fund amendments to the Pensions Act 2007, which your Lordships supported. Those amendments could have raised the compensation by the FAS to the 90 per cent offered by the Pensions Protection Fund. The treasury would have immediately made a loan to ensure that higher payments could be distributed as soon as possible. That loan would then have been paid back fully out of unclaimed assets, ensuring no cost to taxpayers.

What happened instead was the Government’s hurried announcement that unclaimed assets should be spent on youth centres, and that our policy was an unfunded spending commitment. The Lords amendment was duly rejected by another place on the grounds of financial privilege, and we in this House could not push the issue further.

It has taken nearly a year to happen, but once again the Government have adopted a Conservative policy to repair the disastrous consequences of Labour financial mismanagement. It has taken constant pressure from my party, and even more from dedicated lobby groups, before the Government have finally realised the scale of the problem. They have still not accepted their own part in its creation. The Prime Minister’s tax rise on pension funds, the department’s misleading leaflets, the Government’s refusal to accept the independent ombudsman’s report—they have denied it all, delaying and quibbling over every solution that has eventually been forced on them. They have had to accept that they grossly underestimated the number of people affected by the crisis that they have created. They had to commit to funding the FAS properly, and now, finally, they admit that everyone else was right all along and that they must compensate these pensioners adequately.

It is imperative that there are no more delays. Prior to last year’s election that never was, my party promised that, if we won, we would ensure within three months of taking office that payments reached those who were waiting. Will the Minister give us a clear idea of when the Government will implement this U-turn and when the pensioners will finally get what is due to them?

During the consultation on the regulations, questions were asked as to whether the Government would continue to hold the view that the FAS payments relate only to periods after the date on which the FAS was first announced. Although it has previously been made clear that enhanced payments would be made only for the period from 14 May 2004, the consultation document disclosed that the Government would continue to consider this point. Will the Minister expand on the department’s current thinking?

A number of respondents were also concerned about the implications of maintaining the existing definition of the normal retirement age in the draft regulations. It is possible that doing so will enable the enhanced payments to be delivered more quickly, easing the administrative burden. However, does the department have plans to alter the definition of the normal retirement age? If so, will the Minister elaborate on the process?

It is also worth taking a moment to consider the wider pensions picture. Although today’s measures repair the damage caused to individual families, the lasting impact of this sorry story on confidence in the pensions system still remains unknown. Years of headlines detailing pensioners battling with the Government to receive compensation will undoubtedly have influence on a younger generation’s investment habits. I fear that the consequences of the Government’s resistance to compensate these victims of the pensions crisis are far from over. It is therefore essential that we rebuild confidence in our pensions system and restore the prospect of security in retirement to millions of people.

Finally, I once more pay my respects to all the campaigners who have spent their time and money trying to get this Government to right their pension wrongs. For most, there will be few victory celebrations, but there will at least be the welcome satisfaction of at last receiving the compensation that they deserve.

Lord Newby
I am grateful to the Minister for his clear and comprehensive introduction to these extremely technical but very important regulations, and indeed to the noble Lord, Lord Taylor of Holbeach, for reminding us of the long and tortuous history that has led to them being prepared.

I think I can say that I feel fortunate not to have had to take part in all the debates in the past five years that finally led to the Statement on 17 December 2007. We on these Benches felt, as did the noble Lord, Lord Taylor, that the Government took a very long time to reach a sensible position. They have finally done so. The regulations and their provisions are long overdue, so we welcome them.

16:30:00

Lord McKenzie of Luton
I thank the Members who have welcomed the order, although that was wrapped around by some criticism and a review of the history as the noble Lord, Lord Taylor, saw it. I, too, acknowledge the effort that campaigners have put into what has been a very solid campaign, and I hope that, however we see the history of this matter, we agree that we have ended up in a good place. One of the challenges of government is dealing with public finances. The cash cost of where we ended up is some £12.5 billion and the net present value is around £2.9 billion, so this is a significant use of public resources.

The noble Lord, Lord Taylor, referred to financial mismanagement and economic incompetence. I reject those charges, of course. We have had debates in the past, particularly around these regulations, against the pensions backdrop. A good starting point for an objective and proper analysis of that are the reports of the noble Lord, Lord Turner, and his commission, which set out the real reasoning behind the challenges that the pensions industry has faced and faces in the future, such as issues of longevity and overestimating the long-term financial returns from investments. Those are the root causes of the situation we face.

There is a statistic, and if I can remember it rightly I will bore the Committee with it. I think it comes from Department for Work and Pensions statisticians, who estimated a possibility, or maybe a probability, that there is a person alive today aged 59, likely to be a woman, who could live to be 120.

Baroness Noakes
It is me.

Lord McKenzie of Luton
I hope the noble Baroness will live well beyond 120. Next year, that person would be entitled to their old-age pension halfway through their life. That starkly illustrates the challenges that not only state pension provision but private sector provision faces. Broadly, on the legislation that we debated last year, and we will shortly be debating the second Pensions Bill, there is a broad consensus underlying where we are heading on these matters.

The noble Lord, Lord Taylor, referred to the lifeboat fund. We do not resile from the criticism that we made at the time that, due to a technical matter, it was a rather leaky lifeboat. We went the right way to seeing how we could make better use of the assets in those schemes, and Andy Young’s report was helpful in enabling us to improve the package that we have reflected in part in these regulations.

The noble Lord asked about the timetable. I can best illustrate it as follows. In June this year, we hope to have these first regulations in force and the first payments at 90 per cent, and first payments from NRA or 60 rather than 65, will start to flow. By the end of July we expect the second regulations package to come into force, which will cover ill-health payments, certain solvent schemes being included in FAS and the groundwork for greater PPF involvement and speeding up payments. In August, we hope that the first of those ill-health payments will be flowing. By the end of the year, we propose to consult on further regulations to deliver the full December package. That will include the post-1997 indexation payment of FAS lump sums and the bringing of assets into government to enable these wider benefits to be provided. From April 2009, there will be a phased implementation of the full package. There is a lot of technical stuff that has to be addressed between now and getting that full package implemented, which is why we wanted to get these regulations under way as quickly as possible.

Lord Taylor of Holbeach
Is the Minister happy that that is the tightest possible timetable for implementation? It means, effectively, that there will be a 12-month delay before many people are fully in the scheme.

Lord McKenzie of Luton
As I indicated earlier, there is the prospect of several thousand people coming into the scheme much more quickly than that, because the 90 per cent payment and the NRA change will be important. This is a realistic and effective way to proceed. I stress that there are quite a lot of technical and operational issues here, and we need to make sure that we get it right. That is why it is right that we invested in setting up the FAS effectively right from the start. We were criticised at one stage about the funding that had gone in, in relation to the payments that were then flowing. Our point then—which is valid and important now—was that if we had not put that infrastructure in place, it would be even more challenging to get some of the subsequent improvements to the scheme properly in place. That is an effective timetable, and we are working to it.

The noble Lord asked about the May 2004 cut-off point. I touched on that in my opening remarks. It is right to retain it, because it is the date that the FAS was announced, but we will continue to consult. As I outlined, we have a number of consultations lined up for the future, and we will keep that under review. At the moment, we are sticking to that date. Similarly, in relation to the NRA, it is right to keep the definition that we have but to keep it under review to make sure that we have effectively covered all the reasonable and appropriate circumstances that exist. The challenges around those two areas emphasise how complex some of this is and why we need to take the appropriate time to make sure that it is absolutely right. I hope that I have dealt with the questions that have been raised. I am grateful for the support that the two opposition parties have given to the regulations.

On Question, Motion agreed to.