§ Malcolm Wicks
I beg to move Government amendment No. 101, in page 84, line 7, leave out 'for that period'.
§ Mr. Deputy Speaker (Sir Michael Lord)
With this we may take the following: Government amendments Nos. 102 and 103.
1055 Amendment No. 26, in page 232, line 15 schedule 7, leave out from 'means' to end of line 17 and insert '90 per cent.'.
Amendment No. 27, in page 232, line 24 schedule 7, leave out sub-paragraph (7).
Government amendment No. 144.
Amendment No. 28, in page 247, line 42 schedule 7, leave out '2.5 %' and insert '5 %'.
Amendment No. 31, in page 249, line 19 schedule 7, leave out paragraph 29.
§ Malcolm Wicks
First, I will deal with the Government amendments, which are all minor drafting amendments.
Amendments Nos. 101, 102 and 103 amend clause 125 on the payment of scheme benefits. Amendment No. 101 clarifies the wording of subsection (2). Amendment No. 102 ensures that the power to make regulations permitting postponement of a person's entitlement to a pension during the assessment period may also permit postponement of a person's entitlement to a lump sum from the scheme.
Amendment No. 103 provides a definition of the term "normal pension age" that is used in clause 125(4). Amendment No. 144 clarifies the drafting in paragraph 14 of schedule 7 regarding the calculation of the revaluation amount in determining entitlement to lump sum compensation under paragraph 14. I ask hon. Members to accept the Government amendments.
Amendment No. 26 would reduce the pension protection fund compensation from 100 per cent. to 90 per cent. for scheme members over normal pension age, members under normal pension age who receive a pension on the ground of ill health and those who receive survivors' benefits before the assessment date. The amendment would mean that everyone would get the 90 per cent. level of compensation.
Amendment No. 27 would increase the level of PPF compensation to 100 per cent. for those members under normal pension age at assessment date who had taken early retirement but not on the ground of ill health. Amendment No. 31 would remove the Secretary of State's power to vary the PPF compensation percentages.
When a scheme enters the PPF, the majority of those members who already receive their pension will get 100 per cent. compensation. We believe that there are compelling reasons why older people who are some way into their retirement, survivors who already receive benefits and those who have retired early on the ground of ill health should receive the 100 per cent. level of compensation. The hon. Member for Eastbourne (Mr. Waterson) will have to explain why he does not agree with that. Those people are significantly less likely to be able to find work again, and so, crucially, the current priority order rules fully protect them.
Amendment No. 26 would cut the benefits of existing pensioners if their scheme should enter the PPF by reducing the 100 per cent. level of compensation to 90 per cent. For the reasons that I have just outlined, we do 1056 not consider such an approach to be fair. We also believe that the arguments for less than 100 per cent compensation for those over normal pension age, survivors who already receive benefits and those who have retired on the ground of ill health are less relevant.
One of the purposes of the 90 per cent. level of compensation is to give an incentive to the employer, company decision makers and those with influence, most of whom are much more likely to be below the scheme's normal pension age and may have an interest in keeping their scheme out of the PPF.
§ Mr. Webb
I understand that the reason for the rule about people who are "retired" but under normal pension age is to try to stop people in the know getting 100 per cent. rather than 90 per cent. However, what about the innocent person under the normal pension age who draws a pension for reasons other than health grounds? Perhaps that person has taken an actuarially—I got into trouble for using that word yesterday—reduced pension. Why should not such people get 100 per cent. of that pension?
§ Malcolm Wicks
In taking this approach, we want to make the PPF regime as simple as possible so that it can be administered inexpensively. We are keen that those who are not of pensionable age should get 90 per cent. I accept that there is a broad-brush nature to this approach and—inevitably, I guess—some rough justice, but we do not want to get into a situation in which we have to assess individual entitlements in the way that the hon. Gentleman suggests.
The 90 per cent. level of compensation also prevents abuse from members taking early retirement other than on the ground of ill health, and guards against levy payers subsidising schemes that manipulate the rules to gain access to a 100 per cent. level of PPF compensation. If the PPF were to apply 100 per cent. compensation to those scheme members who have taken retirement early on grounds other than ill health, there would be an approximate increase to the PPF levies of £10 million per year. Therefore we should not favour a single percentage level for all, as that would unfairly cut the benefits of existing pensioners and remove an incentive for employers, company decision makers and influencers to keep their scheme out of the PPF.
Amendment No. 31 seeks to remove the Secretary of State's power to vary the levels of PPF compensation percentages. That would remove one of the checks and balances, albeit one that would be used only in the most extreme cases, but it would undermine levy payers' confidence in the sustainability of the PPF for the long term. Pension scheme members can have confidence in the protection that the new PPF will provide, but businesses also need to have confidence that checks and balances are built into the structure of the PPF to ensure that the cost of the levy cannot rise exponentially in the future.
§ Malcolm Wicks
It is a question of having the right number of checks and balances in the system, and we think that this is an important additional one.
§ Mr. Waterson
The Minister says that this measure would come into effect only in extreme circumstances, but presumably the only relevant circumstances—whether we characterise them as extreme or otherwise—would be that there was not enough money in the PPF. If the Government are intent on saying that they are not standing behind the PPF, surely those are the only possible circumstances. We can call them extreme or not, as the case may be, but whenever and however they arose, those would be the circumstances.
§ Malcolm Wicks
We are now rehearsing issues that we have rehearsed many times. The Government are confident that the way in which we are establishing the PPF, with the levy system and the ability of the board to increase the levy subject to certain limits—another check and balance—will give us a PPF that is properly funded and which can meet ongoing pension liabilities. We are obviously confident about that, but it is prudent to safeguard against extraordinary eventualities. That is why we are putting these checks and balances into the system. We can argue whether the figure should be 100 per cent. or 90 per cent., but one argument for the 90 per cent. is simply that those below retirement age are, by definition, in a better position to find new work and to supplement their retirement income than those who are above retirement age. This is obviously a broad-brush approach and there will be some rough justice, but the amendment would remove one of those checks and balances—albeit one that would, as I have said, be used only in the most extreme cases—which would undermine confidence.
The members of the PPF board will have the relevant expertise and information available to oversee the PPF's investment strategy and set the pension protection levies at appropriate levels to ensure that the PPF has sufficient funds to pay out compensation. It is important to point out that the PPF will have recourse to a number of measures that must be implemented before reduction of compensation can ever be an option. For example, the PPF will be able to raise the pension protection levies, reduce revaluation and indexation, or borrow commercially. In fact, the compensation percentages can be varied to below the level currently set out in schedule 7 only when revaluation and indexation have been reduced to nil.
The Secretary of State can make a reduction or an increase in compensation only if a recommendation to that effect is made by the board. The Secretary of State will give extremely careful consideration to any such proposal from the board, which can be made only following consultation. In addition, any change to the level of compensation would have to be subject to the affirmative resolution procedure. The clause makes it clear that indexation and revaluation must have been 1058 reduced to nil before the percentages of compensation payable by the board can be reduced below 100 per cent. to 90 per cent., and that indexation and revaluation cannot be reapplied unless those original percentages are in payment. I am sure that hon. Members will agree that a balance is needed between building in constraints to reassure levy payers that costs will not rise beyond control and allowing the PPF flexibility to raise the funds that it needs to reassure members that they are sufficiently protected. Let us not forget that paragraph 29 also provides for compensation percentages to be increased. Amendment No. 28 seeks to increase the cap on indexation to 5 per cent.
Legislation was introduced in April 1997 requiring certain occupational pension schemes to provide indexation capped at 5 per cent. on all pension accruals. This Bill seeks to reduce the indexation capped at 2.5 per cent. on all future accruals through clause 246, which relates to the annual increase in the rate of certain occupational pensions. Clause 247 is also relevant. It would therefore be inconsistent with other provisions in the Bill were the PPF to provide indexation greater than 2.5 per cent. By restricting the amount of indexation paid, the PPF is better able to predict its liabilities and plan ahead financially. In terms, that means that the PPF can provide consistent and meaningful compensation to scheme members.
Were indexation increased from 2.5 to 5 per cent. on all post-1997 accruals, we estimate that the PPF levies would increase by approximately £100 million per year. It is not clear to me whether that is a new spending commitment—the hon. Member for Eastbourne will wish to tell us. We must not lose sight of the fact that businesses must ultimately bear the burden of financing PPF levels of benefit, and although we aim to provide meaningful compensation, we must balance that with affordability. In addition, from 10 May 2004, as we know, the priority order has changed for schemes that wind up, giving greater priority to scheme members who are under normal pension age by dealing with them before the indexation of pensioner members. I ask the hon. Gentleman to consider withdrawing the amendments.
§ Mr. Waterson
Let me reassure the Minister that these are probing amendments, but what they are designed to probe is an important issue, which has emerged as a major theme in Committee and will certainly be a major theme on Third Reading—the difference between spin and reality as to the sort of guarantee or safety net that this Bill is supposed to deliver.
I was slightly amused in relation to two of the factors on which the Minister was trying to rely, in terms of availability of the right decision making and resources. First, there were the qualifications of members of the board. We have just had that debate. Let us hope that they are well qualified, as that will not be stated in the Bill. Secondly, he talked about commercial borrowing. I have not had time to look up the reference, but the Minister was pretty adamant in Committee that that would only be for relatively short-term cash-flow requirements, and that the PPF would not be expected to borrow massively on the markets. Indeed, it would be odd if it were being given that power without some sort of Treasury guarantee.
1059 That brings me on to my main point, before I deal with the specific amendments in more detail: there are only limited numbers of directions from which resources can come to the PPF. There are the assets that it may take over from schemes that, by definition, are short of assets, and the investment income that it makes from them. There is the levy income, which we know is reduced in the early stages in any event, certainly in the first year. There may be some short-term borrowing, but we can discount that. Certainly, no public money is to be made available, as I understand it. This is, then, an organisation with finite resources. I do not say that that is necessarily a bad thing, but it is the background against which the amendments must be examined.
I can say immediately that I have no difficulties with amendments Nos. 101, 102 and 103. Our proposal to substitute "90 per cent." for "100 per cent." is really an attempt to draw out the justification for the distinction between those who are not retired and those who are. I did not get to the bottom of that in Committee. One late entrant in the reasons race was that there would somehow be an effect on key decision makers who would otherwise go out of their way to arrange matters so that a particular company's pension scheme did not function properly. I must say that I think that a rather desperate argument. I do not see why there should be a distinction. Ideally all involved should receive 100 per cent., because the Government are offering a guarantee.
The Minister talks of rough justice. That brings me to the question of indexation, and the 2.5 versus 5 per cent. The Minister talks as if we were trying to do something new and different. All we are trying to do is reinsert the current 5 per cent. figure. We had a lengthy discussion of the issue in Committee. The 2.5 per cent. figure may be all right for the moment, while inflation is relatively low, but every time I pick up a newspaper I see talk of a sharp rise in inflation, mainly because of oil crises. No doubt the Chancellor himself is getting a bit worried. Why seek to reduce the existing figure to 2.5 per cent. at this stage of the game, when there seems to be a reasonable consensus—certainly in the industry—that 5 per cent. is sensible? The Minister has put it to me in terms of a public spending commitment, but I would put it the other way round. Given that the purpose of a Bill that has been allotted 22 sittings in Committee and three days on Report is to restore confidence in pensions, why should there be all this cheese paring in people's entitlements?
A closely related aspect is the cut-off date for pension increases. In its briefing, Age Concern has expressed its own worries. It says that the actuaries Lane Clark and Peacock and the Occupational Pensioners Alliance estimate that some pensioners may receive only 70 to 80 per cent. of their total pension promise under the PPF. It refers to pensioners who retired before 6 April 1997. It states:We believe the Bill should be changed so everyone can be entitled to 100 per cent. compensation".That is the point I am trying to make. I cannot see why there should be either the 90 versus 100 per cent. distinction or the little distinctions buried in the small 1060 print, not immediately visible to the average leisured reader, which will cheese pare away the amounts that people will receive in real life.
§ Mr. Webb
It would not be in the spirit of today's debate to carp at this juncture, but on the one hand the hon. Gentleman asks why everyone cannot have 100 per cent. compensation and 5 per cent. indexation, while on the other hand he has tabled amendments designed to cap the levy so that there is no burden on business. Surely the flip side of what he is demanding is an even greater burden on business about which, presumably, the Conservatives will be worried tomorrow. What is his position?
§ Mr. Waterson
Unlike the Liberal Democrats, we are concerned both about pensioners and about business and industry. We think that there is a balance to be struck. I said in Committee, and will repeat on Third Reading, that the Government approached the whole business the wrong way round. One reason why the Bill has been overshadowed by our earlier debate about the 60,000 people whom it would not compensate, many of whom may still not be compensated—we must await the small print—is that the Government were desperate to get the legislation on the statute book so that they could say that they had set up the PPF. What they should have done was take a more measured approach to the legislation, which presumably will be there for a long time, and initially tackle the problem of the people who have already lost out. The American scheme, which was a model for this scheme, did not pay out any moneys for several years, as I understand it, because it was building up its resources. I think that we will end up with a very rickety PPF in the early stages, potentially with claims waiting to fall upon it and insufficient resources to meet them.
That brings me neatly to the most important of this group of amendments, amendment No. 31, which relates to the Government's power, tucked away in paragraph 29 of schedule 7, to reduce payments. The Minister says, accurately if not fairly, that there is also the power to increase compensation. However, we are really talking about an overweening power of the Government to reduce payments. On the one hand, the Government say that they will provide a complete safety net, a guarantee for people in these pension schemes, so that if the unpleasant things that have happened to people in the past, particularly the recent past, happen again, people will be fully protected. However, on the other hand, they say in the small print that there are going to be caps, that there is a 90 per cent. figure for people who have not actually retired, that they are going to fiddle with the indexation, and that they will take the power to reduce the compensation and benefits paid under the legislation
It is no good the Minister saying, as he did, that the Government will use that power only in extreme circumstances. As I tried to point out in an intervention, I presume that the only circumstances in which that will happen will be when there are not enough resources in the fund. I cannot think of any other circumstances in which that will happen. That might be an extreme circumstance, but it is the only one that could, I imagine, prompt the operation of paragraph 29 of schedule 7. If the Government are really persisting with the notion 1061 that the PPF is a stand-alone fund with no Treasury backing and no Treasury guarantee, and that it will have to stand on its own feet, those are the circumstances that will prompt a reduction in benefits.
It is no good Ministers saying that they are providing a full guarantee and safety net. we visited the BBC website the other day, which said bluntly that people will get 90 per cent. if they are not retired and 100 per cent. if they are, with no qualification. We have had to write it a letter pointing out that that "ain't necessarily so". Ministers should be more up front. They were more up front in Committee, because they had no alternative, but we need to get the message across to people out there in the real world that this is not a full guarantee. To use the Minister's phrase again, there is an element of "rough justice". That is the point behind our probing amendments, and I commend them to the House.
§ Mr. Webb
This is an important group of amendments, despite the stage in the process of assessing the Bill that we have reached. As the Minister says, the Government amendments are largely technical. We have no problem with them.
I want to address two of the amendments of the hon. Member for Eastbourne (Mr. Waterson): amendments Nos. 27, on the issue of 90 per cent and 100 per cent., and 31. I am sure that the hon. Gentleman's notes said this, but he forgot to say that amendment No. 31 was a Liberal Democrat amendment in Committee. I take it that, imitation being the sincerest form of flattery, he has brought back our amendment as a Conservative one on Report. I have certainly not changed my view that amendment No. 31 is very necessary and goes to the heart of the Bill, because it essentially relates to the fact that the Government will not act as lender of last resort to the PPF, which will have to go elsewhere. I shall come to amendment No. 31 in a moment.
I deal first with amendment No. 27, which is on the issue of 90 per cent. and 100 per cent. One can see a certain amount of logic in saying that people who have already retired cannot do anything about their predicament. So if their employer becomes insolvent, the scheme does not have enough money and the pension protection fund takes over the scheme's liabilities, it is reasonable for retired members to expect to get their full pension because, essentially, there is nothing else they can do.
It is important to remember that even that statement needs qualifying. The question is—the Minister will doubtless intervene if I am wrong—100 per cent. of what? Even 100 per cent. will not necessarily constitute the entire pension that a person was expecting to get, and for two reasons. First, they will get 100 per cent. of the pension that they were expecting to get, excluding indexation for pre-1997 rights. In other words, even if the scheme of which they were a member offered them indexation on pre-1997 rights, the PPF will not. So there will be a set of people going into the PPF who will get a lower pension over time than they would have received had their existing scheme continued.
To some extent, this has been a theme of the day. Even now, to talk of guarantees and 100 per cent. is somewhat dangerous and potentially misleading. The literature 1062 that the Government send out to members of schemes who, in effect, will become members of PPF schemes will need to be explicit in pointing out that they will not get 100 per cent; otherwise, we could have a repetition of what happened with inherited SERPS—the state earnings-related pension scheme—whereby everybody in this place knew what had changed, but nobody else did. The official literature sent to SERPS members did not explain what had happened, and in the end the Government had to point out that people had been misinformed, and had to spend billions of pounds on putting matters right. Our discussions have given rise to one or two, albeit charitably intended, warnings. The Government need to look very carefully at the way in which they communicate with PPF scheme members. They need to realise that they will not necessarily get 100 per cent., if they were entitled to anything other than post-1997 indexation.
Moreover, such people will not get 100 per cent. anyway if, for example, their scheme includes particular provisions relating to survivor's benefits or to unmarried spouses. We touched on this issue in Committee, and I suggested then to the Minister that the PPF, which presumably will roll forward over decades, should be a forward-looking scheme that reflects best practice in the private sector, rather than a 1940s view of society. The 100 per cent. provision ought to match best practice in the occupational sector. For example, if a scheme provides for a surviving unmarried partner, the PPF should do the same.
§ Malcolm Wicks
It might help our deliberations on Report if the hon. Members for Northavon (Mr. Webb) and for Eastbourne (Mr. Waterson) cared to cost their proposals and to tell the House where the money would come from. I am advised that 100 per cent. compensation for all and indexation capped at 5 per cent. would add £200 million a year. Would the hon. Gentlemen raise the levy to raise that money, or would they make an Exchequer contribution? The House should know whether the Opposition do occasionally cost their proposals.
§ Mr. Webb
The Minister's intervention may well have been inspired, but it does not relate to anything that I have said so far. My point is that the terms "100 per cent." and "90 per cent." create a particular mental picture; indeed, that is what amendment No. 27 is all about. Those who listen to our deliberations—poor souls!—will get the impression that the PPF will provide full compensation. I have tried to illustrate through two particular cases that "100 per cent." does not mean 100 per cent., and it is very important that people should not get the impression that it does. Even raising the rate from 90 per cent. to 100 per cent. would not mean full compensation, because of the exceptions that I have mentioned.
Even if we were to raise the rate to 100 per cent., as amendment No. 26 would do, we would still not be providing full cover. But the key question, which amendment No. 27 addresses, is: who gets 90 per cent. and who gets 100 per cent.? We are agreed that people who have already retired will get 100 per cent., even though 100 per cent. is a rather limited concept. I am not uncomfortable about people who have not retired—they are still working—getting 90 per cent., but the nub 1063 of the amendment is about the people in between; that means people below the normal pension age of the scheme who might be drawing a pension. If the Bill is not altered as the amendment suggests, they will receive only 90 per cent. of their pension. The question is whether that is fair.
The Minister's response was that it was a moral hazard point—something that the Government appear to have been fond of during the Bill's passage. Sometimes it happens that a company director, perhaps in his early 60s and seeing that things are going wrong with the company, decides to retire, even though he has not reached the normal pension age of the scheme. He applies to the scheme for retirement benefits and then, mysteriously, the company winds up the next day. Lo and behold, he is in the 100 per cent. rather than the 90 per cent. camp. That would certainly apply under existing rules about wind-up. Before the PPF is introduced, such a person falls into the favoured rather than the unfavoured category. The Government appear to be saying that, to avoid that happening, they will treat anyone under the normal pension age—whether retired or not—as being in the 90 per cent. category.
The point that I put to the Minister in my intervention—I have to say that I was not convinced by his response—was that the provision amounted to a sledgehammer. I am not sure whether sledgehammers can catch rotten apples, but this one appears to be trying to catch the odd rotten apple, while at the same time hitting many deserving people. Leaving aside ill health—it is dealt with in a separate part of the Bill—it might affect people who, for perfectly good and proper reasons, have taken early retirement at an actuarially reduced level. They then find that that level of pension, already below the norm, is reduced by a further 10 per cent. As I understand it, that is what the Government's proposals will do. The people affected are living on pensions that are already fairly modest, perhaps because they have been drawn early on account of family circumstances.
Let me provide an example to explain why such people are important. Someone could take an early retirement pension to look after a spouse and become a carer. They need money to live on and they cannot wait until they are 65. They have to stop working so they draw an early retirement pension at, say, 62. If the firm goes to the wall, they may believe that the PPF into which their employer had paid PPF levies will provide them with insurance, effectively replacing the pension. However, the PPF may come along, under which they can be paid only 90 per cent., not 100 per cent. The critical point is that that will not apply just for one year, but for ever—an issue that has not emerged from our debate so far.
§ Malcolm Wicks
The hon. Gentleman seems to make no allowance for the fact that, where a company pension scheme goes bust and there are relatively few assets, people could be faced with receiving only 20 per cent. of their pension rights. Does the hon. Gentleman not agree 1064 that, if such people could receive 90 per cent. under the PPF, they might be rather pleased that we legislated to set it up?
§ Mr. Webb
I wonder whether the Minister has misunderstood me. My illustrative people are a man in his early 60s or a woman in her late 50s who give up work to become carers. When the firm goes to the wall, such people are, under the present regime with the present wind-up rules, in the privileged category that gets first call on the fund. The problem is that those people might get 100 per cent. and the workers next to nothing. If there is absolutely no money in the fund whatever, of course the Minister is right. Generally, however, those people will receive privileged treatment.
My key point is that the Government are using the rule pertaining to people below normal pension age as an anti-moral hazard point, thereby catching many deserving good people.
In all other parts of the Bill, the Government have introduced screeds of new clauses to deal with moral hazard. Instead of tarring everyone with the same brush, they have thought about how people might abuse the system, and defined very specifically what will not be allowed. For example, the Bill does not allow a person to set up a company with no assets to run a pension scheme, and then let that company become insolvent. The Bill explicitly prohibits that sort of moral hazard.
Why do the Government not deal with the rotten apples by inserting a clause to prevent people from retiring the day before a company goes bust? That would be my strategy, and it would not have the damaging effect on carers that the Government's strategy will.
Amendment No. 27 would protect the pension rights of what I imagine is a relatively small number of people, and is therefore desirable, but accepting it would mean that another anti-moral hazard provision would be needed. Perhaps the hon. Member for Eastbourne has something in mind: history shows that some people have abused the system by using their inside knowledge to put themselves in a favourable position just before a pension fund is wound up.
That outrage is clearly unacceptable, and a further anti-moral hazard provision is needed to prevent it. However, the Government's proposal is much too broad, because it includes many worthy and deserving people.
§ Mr. Waterson
Before the Bill even appeared, many industry experts told me that the key would be the anti-avoidance provisions that it contained. However, they have appeared only at the end of the Bill's passage through the House, and many have not been subject to proper consideration, either in Committee or on Report. Surely the right way to go about this matter is to consult the experts who might advise people how to get around the so-called moral hazard provisions. That would be preferable to the scatter-gun approach adopted by the Government.
§ Mr. Webb
That is an interesting question. Ironically, the Bill originally contained only one anti-moral hazard provision—the one that we are discussing now, which will catch many innocent people. All the other 1065 provisions were introduced at the last minute and, although I am sure that they are not merely an afterthought, their late appearance is rather worrying. But I do not want to go too far down that route.
I shall be interested to hear the Minister's response to this debate. I was a member of the Standing Committee, which did not consider this matter in any depth, and I do not think that I am repeating debates that have been held already on this point. There are deserving people in the middle group—the pre-pension age retired, not workers or retired people over pension age—who would benefit from amendment No. 27. At present, they are being harshly treated, and I am sympathetic to the amendment for that reason.
My main observations will concentrate on amendment No. 31, but I want to say a few words about amendment No. 28, which would replace the proposed 2.5 per cent. indexation level with a level of 5 per cent. The Minister said that that would not be possible as the Bill was premised on 2.5 per cent. indexation, but in fact it already contains a 5 per cent. indexation level in connection with revaluation. The Government seem to have forgotten to change that bit. They cannot argue that amendment No. 28 would not work because it is out of kilter with the rest of the Bill, or because inflation will be 2.5 per cent. always and for ever. The weakness of that argument is revealed by the fact that a figure of 5 per cent. already appears in the Bill.
Funnily enough—and I made this point in an earlier intervention on the hon. Member for Eastbourne—an argument for taking 5 per cent. down to 2.5 per cent. could be made on the basis that the Bill places a burden on final salary schemes, in the form of the PPF levy. The flip side of that is that it will reduce the burden on such schemes through retirement bendfits and indexation. The implication of amendment No. 28 is that the schemes would have to bear that burden but that they would not get the relief from it.
The Secretary of State asked whether it would not be better to accept a trade off and have safe company pensions—albeit with more limited indexation through the PPF—rather than unsafe ones, and that is quite a strong argument. However, the hon. Member for Eastbourne needs to explain how, if he wants 5 per cent. indexation, he would reconcile that with his other amendments that try to reduce the burden on the scheme.
My main concern is amendment No. 31, which is based on an amendment that we tabled in Committee. The hon. Member for Tatton (Mr. Osborne) made fun of the fact that we did not table very many amendments, but we tabled this one because we feel strongly about the issue. Amendment No. 31 would remove the Government's ability to undermine the PPF. Otherwise, it would not really be an insurance scheme, because the Government would be able to say, when the going got tough, that the benefits would be cut.
This point only dawned on me during the recent exchanges—I had thought that the only way in which the Government could undermine the PPF was through the draconian and extreme process of affirmative resolutions in both Houses of Parliament to cut the 100 per cent. and 90 per cent. benefits: I had forgotten that 1066 before we got to that stage, the Government could have undermined the PPF in other ways. That is why amendment No. 31 is necessary.
When times get hard, the PPF could put the levy up. It could also cut the indexation or the revalorisation, and that would mean a real cut in people's entitlements. I had thought, charitably, that the PPF was a strong guarantee of benefits, because although 100 per cent. did not quite mean 100 per cent. and 90 per cent. did not quite mean 90 per cent., only in extremis would the Government undermine the value of benefits. However, I had forgotten that the PPF, without recourse to this House, could cut indexation benefits. Why does that matter?
The cut might be only 2.5 per cent. and we might think that we could live with that. However, people—especially women—might typically be retired for 20 to 25 years and if the non-indexation were to take place over several years, pensions could be cut by 10 or 15 per cent. Indeed, if the fund were not restored, that reduction in benefits could continue for the rest of the recipients' lives.
When the Minister responds, I hope that he will tell us whether the PPF will be under any onus to restore lost indexation. Amendment No. 31 is about what will happen when times get tough and the indexation is knocked off. When times are good again, will the PPF be under an obligation to restore the indexation? People who pay the PPF levy through their employers will want to know what they can expect. Will the literature for the members of PPF schemes say that not only does 100 per cent. not actually mean 100 per cent., but the inflation protection may be undermined and never restored? If it does not say that, there is a danger that scheme members will be misled.
What should be the appropriate response from the PPF when things get tough? The first step would be to put up the levy. We have already discussed the cap on increases in the levy and that could put a financial pressure on the fund that it might have to respond to in other ways. The Minister said that paragraph 29 of schedule 7, which the amendment would delete, is necessary because the levy could rise "exponentially". But there is a cap, so there is a limit on how much the PPF board can respond to adverse circumstances by raising the levy.
If raising the levy does not deal with the financial shortfall, what would happen? In that case, the indexation or revalorisation would stop, and people would not have inflation protection. In other words, their pensions would be cut in real terms.
At that stage the Government say that the next thing that the board can do is to borrow money on the market. In Committee, we discussed whether that was a good idea and it struck me as absurd that because of their obsession with privatisation the Government would prefer the PPF board to borrow money from the private market, with all the associated risk premiums and profit margins, yet the Government could raise the money more cheaply so that the taxpayer obtained better value.
We would not necessarily want the PPF board constantly to have to come back to the Government, so it could perhaps borrow money for cash flow. I accept the arguments about the need for the board to be at arm's length from the Government, so we could allow it 1067 some day-to-day flexibility. However, it would be bad economics if, in the event of a serious financial crisis, such as a big steel company or a big airline going to the wall and making a large claim on the fund, the board responded by huge borrowing on the commercial markets. It would be bad public spending and the National Audit Office would probably have something to say about it.
None the less, the Government say that the board can borrow on those markets and having done so it will have recourse to paragraph 29 of schedule 7. When the Minister responds, will he tell us whether there will be a limit on the PPF's borrowing powers? Why does it need such powers? If the Government think that it should be able to borrow money, it should be able to borrow as much as it needs. Why are the Government allowing the PPF to cut back further on the 100 per cent. or the 90 per cent? If the Government accept the principle that the PPF can borrow, what limits do they have in mind?
Perhaps the Treasury view is that the debts of the PPF would be on the Government's balance sheet. Can the Minister tell us whether the Chancellor is worried that if the PPF borrows—because there is a financial mess—its debts will be on the public sector balance sheet and will feature in his borrowing figures? I presume that is why PPF borrowing is to be capped. If so, what would happen?
Let us suppose that all avenues have been tried: we have cut indexation; we have borrowed money; we have increased the levy up to the cap and there is still not enough. What would happen then? There are two options. The first is in the Bill; it would be to ask the House and the other place to approve a cut in the payout—to reduce the 100 per cent. to 90 per cent. or the 90 per cent. to 80 per cent., or whatever the figure happens to be.
People have been told not to worry because their pensions will be insured. The Secretary of State has told us that just as we can insure our holidays or our cars so, too, we can insure our pensions. But what sort of insurance company would say when someone made a claim, "Sorry, we're having a bad year and we're not going to pay you"? That would be outrageous and probably actionable. It would be wholly unacceptable for Direct Line to tell me, in response to a claim on my car insurance: "We're having a tough time. The roads have been icy lately so there have been a lot of claims. We can't increase premiums so we can pay you only 80 per cent. of the value of your car, not the 100 per cent. you were expecting." It would presumably be illegal to do that in the private sector, so why do the Government want such a power in the Bill?
What is the alternative? What should have been in the Bill? The Government should act as lender of last resort. They would not make a grant, nor would they bail out the PPF in the sense of handing over public money from the taxpayer, but would stand ready to lend. That is what happens in terrorism reinsurance. The Government want there to be a market, but as insurers would be subject to calamitous risks if they offered insurance against terrorism, the Government say, "Don't worry. You offer the insurance and we'll stand 1068 behind it. If necessary, we will lend money to make the market work." That is precisely what the Government should do in this case
When things get difficult for the PPF, which may happen not in year one, but decades down the line, the Government should be there to say, "You've tried putting up the levy as much as you can", perhaps to the ceiling, "You've got rid of indexation"—although I have some reservations about cutting benefits at all, because even cutting indexation benefits is the same as ringing up Direct Line to be told that it will not pay out, so I am more worried about that provision than when I started considering these proposals—"You've done all those things. You may even have done some borrowing, but things are still tough. Right, we can borrow money more cheaply than you can. We will lend to the fund to tide it over, but the money will be repaid."
I stress that the money would be repaid. It is not a public spending commitment, but a cash flow issue. Something calamitous could happen to the scheme. That happened in America, where big airlines and big steel companies became insolvent. We have been talking about steel companies today, so this is not far fetched. Such things can happen. We could experience a sectoral recession that hits an industry, causing a rush of claims on the fund. It would then be wrong to jack up the levy excessively on the firms that survive or to slash the pensions in payment to retired people.
The right thing for the Government to do would be to tide over the PPF. That would not be expensive; the Government would get back their money, because steel firms or airlines will not go to the wall every year. There will be good years and bad years, and the Government would see the PPF through the bad years. I simply cannot understand the point of paragraph 29 of schedule 7, unless the Chancellor is behind it, and I presume that he is because he does not want the borrowing to appear on his balance sheet. We fundamentally believe that this will not be a proper insurance scheme unless the Government stand behind it as lender of last resort.
To draw those threads together, we moved a similar amendment in Committee because we believe passionately that the Bill is fatally flawed: it will set up not a proper insurance scheme, but an insurance scheme with a hole in it. If people make a claim on the scheme in a good year, everything will be fine; but if they make a claim in a bad year, the insurer may turn round and say, "Sorry, we're not going to pay out." Given that we have discussed restoring confidence in pensions and that the PPF and the special financial assistance scheme are supposed to restore confidence, what will paragraph 29 of schedule 7 do? It will undermine confidence in pensions. It says, "You thought you were insured, but you weren't."
The history of pensions is that people are given promises and Governments tell them things, but when they go back to the Government, they are told, "We didn't mean it," "We meant something else," "We forgot to tell you," or "There's something in the small print." That is a dreadful basis on which to set up a shiny new scheme. Paragraph 29 of schedule 7 does not belong in the Bill. A better way forward would be for the Government to lend the money when things get difficult. That is why amendment No. 31 deserves the support of the House.
§ Malcolm Wicks
The hon. Member for Northavon (Mr. Webb), who has spoken for about half an hour, has a certain style. His style is to seek tot rubbish any decent, progressive and positive social reform that this Labour Government bring. With pension credit, he says that it is about stigma and complexity and, as a result, some of his own constituents will be put off claiming it. With the PPF, he pours circumstance on circumstance and absurd eventuality on eventuality to say that we will not be able to pay proper benefits. Of course, he was equally cynical about the assistance scheme that we introduced this afternoon. As I said, he has a certain style. It is cynical, pessimistic, negative and steering; it is about seeking to achieve the triumph of fear over hope. But we have seen through him and will not let him get away with it.
We have carefully costed the pension protection fund. We are determined that those of pensionable age will have 100 per cent. of pension rights. We are determined that the workers will get 90 per cent. We are determined that those who have to retire on ill-health grounds will get 100 per cent. We know how we will pay for it. We have learned the lessons from the Pension Benefit Guaranty Corporation—
It being Seven o'clock, the debate stood adjourned.
Debate to be resumed tomorrow.