INITIAL LEVY

HC Deb 20 May 2004 vol 421 cc1129-39

Mr. Waterson

I beg to move amendment No. 33, in page 105, line 5, after 'regulations', insert ', which shall be no earlier than the day on which the basis for calculating the risk-based levy in the first financial year after the initial period has been published.'.

Madam Deputy Speaker (Sylvia Heal)

With this it will be convenient to discuss the following amendments:

No. 34, in page 105, line 6, leave out '12' and insert '6'.

No. 35, in page 105, line 27,after 'liabilities', insert— '(ia) the likelihood of an insolvency event occurring in relation to the employer in relation to a scheme,'.

No. 36, in page 105, line 33, leave out paragraph (a).

No. 37, in page 107, line 10, leave out '50%' and insert '75%'.

No. 38, in page 107, line 43, at end insert 'save that in the first year, the levy ceiling will be no higher than £600 million'.

No. 39, in page 109, line 31, leave out from 'means' to end of line 33 and insert

'a period of time no longer than two years after the initial period begins.'.

No. 40, in page 109, line 41,at end insert— '() The trustees or managers of the scheme may charge a sum at least equivalent to the non-risked based amount of the levy to all scheme members.'.

Mr. Waterson

I shall be fairly brief as the amendments, almost without exception, echo equally important amendments that we moved in Committee—much good it did us then. They have to do with the nature of the levies, and especially the initial levy. The Government are moving, slowly, to a risk-based levy—and I shall say more about that on Third Reading—but they are opting for a flat-rate levy in the initial stages.

The amendments probe the matter from different directions. Amendment No. 33 would delay the start of the levy until the risk base had been established. Amendment No. 34 stipulates a shorter period for the initial levy. Amendments Nos. 35 and 36 deal with expanding the basis of the risk in the risk-based levy, and would give higher priority to the likelihood of an insolvency event relating to the sponsoring employer of a pension scheme.

Amendment No. 37 provides that the risk-based element of the levy, when it is finally sorted out, should be at least 75 per cent., rather than the 50 per cent. set out in the Bill. I think that the Minister said in Committee that that was Government's intention, but that he did not want to be tied down to it. We still think that it would be worth while to make it clear that far and away the greater proportion of the levy would be risk based.

Amendment No. 38 would place a cap on the initial levy of £600 million a year. Amendment No. 39 calls for a shorter period for the introduction of the risk-based levy. Its merits are fairly clear, and we debated the matter at length in Committee.

Amendment No. 40 raises the difficult issue of whether a sponsored scheme can pass on some or part of the levy to the members of that scheme. When we tabled the amendment in Committee, the Minister gave various reasons why it would not work, including that it would be difficult to administer. I understand that some schemes would face practical difficulties in finding the people to invoice. The Minister said that it could

result in a reduction in the level of income for current pensioner members".—[Official Report, Standing Committee B, 1 April 2004: c. 597.] He also thought that it might be unfair. I raised at length the situation of some companies that, for historical reasons, are now relatively small but have large numbers of pension members in their scheme. For example, Marconi, which has written to me on the issue, has 3,327 active members and 69,000 deferred and pension members, which is a ratio of more than 20:1. For a company like that, the levy will be a significant chunk off the bottom line.

In the debate, I also referred the Minister to the regulatory impact assessment on the Bill, which suggested—in the impenetrable language in which RIAs tend to be written—that it was envisaged that schemes would be able to pass on some or all of the levy to their members. However, the Minister was adamant that that was not the case. Imagine my surprise to read an answer given by Baroness Hollis in the other place in which she said that the requirement to pay the levy will fall on the trustees of the scheme, who will be left to judge how the levy charge could then be shared as they see fit among employers and employees as one of the overall pension costs."—[Official Report, House of Lords, 4 May 2004; Vol. 660, c. WA101.] Obviously the Government were in "being nice to business" mode on that particular day. She also talked of minimising the burden on schemes. My question is: who was right—the Minister in Committee or Baroness Hollis?

Mr. Webb

This is an important group of amendments, because the basis of the PPF levy is central to the nature of the scheme. I know that my noble Friends in the other place attach great importance to the PPF being a genuine insurance scheme, and therefore think that the levy should be a risk-based levy, preferably in its entirety and from day one. I therefore have much sympathy with some of the amendments in the group, especially amendment No. 37, which would raise the proportion of the levy that would be risk based.

The worry about amendment No. 33 is that there might be a delay in getting the scheme going. I think that I understand the effect the amendment would have, but if I misrepresent it I hope that the hon. Member for Eastbourne (Mr. Waterson) will correct me. His point is that a risk-based levy would need some tough arithmetic, some data gathering and some research—in other words, it would not be easy to implement and industry should be warned about that—and all that would need to be done before the initial levy was introduced. I am beginning to think that "half-baked" was a generous assessment of the Bill, but I shall return to that point on Third Reading. We certainly want to start providing the assistance as soon as possible, especially given the meagre level of benefits provided by the financial assistance scheme introduced yesterday. Any delay in the introduction of the full PPF could mean that some pensioners get not the 90 per cent. payable under the PPF but the lower rate payable—perhaps 65 per cent.—under the financial assistance scheme. Therefore, timing matters. Amendment No. 33 might introduce delay and that would be a worry. Any significant delay would be a cause of anxiety, especially to members of pension schemes whose companies were not financially strong.

Amendment No. 34 is in the same spirit and would shorten the period over which the initial non-risk-based levy would apply from 12 months to six. My concern is the practicality of changing the rate of the levy half way through a financial year. It could be done, but it would not assist firms in their financial planning. It would perhaps be better to do away with the concept of an initial levy and introduce the full scheme as quickly as possible.

2.15 pm

I support amendment No. 35. The risk-based levy has to be based on the underfunding in the fund, but that is all that it must include. The Bill says that it may also include insolvency risk and other risks, but that is not a requirement. What is the basis for a claim on the PPF? The first requirement will be an insolvency event, so it is bizarre that the PPF will not be required to base the risk-based levy on the risk of the very event that would trigger a claim. It is like providing car insurance without assessing the risk of the insured person having a crash. It is right to take account of insolvency risk, and amendment No. 35 would achieve that.

Another factor that should be included is size of firm. The Bill does not require the risk-based premium to take any account of the size of the firm, and that seems strange. Can the Minister advise the House of why that does not appear as a consideration? The risk of insolvency should be included from day one, and the only objection I can think of to that is how one would measure it. It is one thing to examine a large, blue chip FTSE-100 company and look at its credit rating and accounts, and reach a judgment. A lot of information is available about such firms, but in the case of a small firm with a one or two-member scheme, such as Wiggins Widgets—a mythical firm that I have used as an example in these debates—the finances would not be well known, and it would be difficult for the PPF to assess its insolvency risk.

If we were to accept amendment No. 35, it would not require the PPF board to perform an insolvency risk assessment of every employer—there are some 100,000. The PPF board would simply say that it would take account of insolvency risk as far as it was able to measure, without having to go to silly lengths for very small firms that would not have a credit rating or other information that could be used. I hope that the Minister will confirm that interpretation; if so, I certainly agree with the spirit of amendment No. 35,

Amendment No. 37 provides that the minimum risk-based levy should be 75 per cent., rather than the 50 per cent. that is assumed. I recall in Committee that the Government suggested that that was the sort of number they were thinking of.

Do we leave the PPF board the flexibility to ignore the Government? After all, the Minister told us constantly in Committee that he wants the PPF to be at arm's length from the Department. It would thus have the flexibility not to go above 50 per cent. even though the Government want 75 per cent.

That is rather odd. Surely, Parliament should be giving a clear steer to arm's length organisations whose actions have implications for the economy, the health of business and the funding of pension schemes. It is not good enough for the Minister to say that the PPF board can make up its own mind; the House should give it a stronger steer. A risk-based levy of 75 per cent. might not be enough; perhaps the figure should be 100 per cent.

A recent example shows why a large risk-based element is important—I think the hon. Member for Eastbourne hinted at it when he raised the Marconi case. What about schemes where a large number of members have very small pensions? Because the premium is based partly on membership and not solely on risk, there might be a temptation to get such people to leave the scheme. If the levy is not wholly risk based, there could be behavioural consequences. Has the Minister given any thought to the consequences of a membership-based levy?

In a large pension scheme, a "legacy" could have built up of former workers, many of whom have only small entitlements—for example, because they worked for the company a long time ago, before indexation rules and when salaries were low. If the levy is not fully risk based, the employer has an incentive to get rid of people with very small pension rights. The firm will realise that it is incurring a membership-based liability for each such person, and the danger is that they could be offered a buy-out, such as a defined contribution asset—something that was actuarially equivalent at the time, but that would give them less security in the future. Scheme members would need advice about whether to accept such an offer. After consulting people who run pension funds, I understand that that could happen, so it is a serious, practical point and I hope that the Minister will give me a response.

The point might not be important if only a few people were likely to be affected, but there must be many large schemes with many members with fairly small pensions, so unless we accept the amendment and, indeed, go further and make the levy entirely risk based, we shall have to pay money for every person in the scheme for every year that they are in the scheme until they reach pension age, which would cost a lot of money. Of course, it would also cost money to get rid of those people by giving them cash equivalents. I shall not labour the point, but will the Minister tell us whether the Department has thought through the possible effects of a membership-based levy over a long period?

We should like the 50 per cent. to be increased. Parliament should give a strong steer to the PPF board. My noble Friends in another place attach great importance to the issue and they want the Government to consider it in the later stages of the Bill.

Amendment No. 38 would put a £600 million cap on the levy in the first year of the PPF. Although the figure seems rather arbitrary, one can see the point that is being made. As the figure relates only to the first year, it would not need uprating. However, I understood that in the first year the levy would raise only about £300 million, or even less, so I am puzzled by the cautiousness of the cap. As the Minister pointed out earlier, the PPF will not be paying out anything in the first year; no schemes will yet have gone into it so no liabilities will have been incurred. As there will be no pensions in payment, there are unlikely to be any nasty shocks in year one.

Amendment No. 39 relates to our earlier arguments about the transitional period. I accept that these are probing amendments so I shall not be unduly critical, but amendment No. 39 would allow a two-year transition, while under other Conservative amendments either the scheme would not start until there was a risk-based levy or there would be a six-month transition period. If the Conservatives were actually in government, which permutation would they choose? Do they have a view on which of their amendments they support? I suspect not. However, as they have done the House a service by tabling amendments on these important issues, it would be unfair to criticise them for the fact that all the provisions are mutually inconsistent.

Amendment No. 40 deals with passing on the levy to scheme members, but I am not sure why we need such provision. Surely, an employer running a scheme who has to pay a levy to the PPF can do what they like. They can make the extra payment and negotiate with their employees, so there is no need for a statutory basis for passing on the levy. Whether employers pass on the levy will depend on the relative negotiating strength of the parties involved.

I should not want employers to be able to wave a big stick and say, "Look, we've got a statutory power and we can force you to pay the money". I should prefer things to be on a negotiated basis. Pensions are a key industrial relations issue. Only today, we read that the rail unions are talking about taking strike action over pensions, so anything that would make the pensions negotiating climate more adversarial—as the amendment would do—would be regrettable.

Many of the amendments raise important points. I welcome those that would not delay the scheme but would introduce the risk-based premium earlier and at greater length. However, some of them are probably unnecessary.

Malcolm Wicks

Clauses 157 and 164 set out the provisions relating to the initial levy and the pension protection levies. The amendments are aimed at amending the structure of the current provisions and altering the factors that the PPF board may take into account when setting future pension protection levy rates and structures. For clarity, I will deal with each clause in turn setting out the proposed amendments relating to it.

Clause 157 provides for the Secretary of State to set the initial levy rate and structure, with the approval of the Treasury. The initial period is needed in order to get the PPF up and running. That is because the information required to set in place a risk-based pension protection levy from the outset is not available. Amendment No. 33 would prevent the setting up of the PPF until it is in a position to establish the basis for the risk-based pension protection levy.

The amendment could have several implications. The setting up of the PPF could be postponed, which in turn would delay the vital protection for scheme members the PPF will provide; it could require the PPF board to set in place a risk-based levy structure based on incomplete information; or it could require employers to conduct an out-of-cycle PPF-style valuation, placing additional financial burdens on sponsoring employers. Alternatively, it could result in no levy being collected in the initial period, which could have financial implications for the PPF in future. It is not clear to me which of those intentions lies behind amendment No. 33.

2.30 pm

Amendment No. 34 would reduce the length of time that the initial period could be extended from 12 to six months. If we put in place a provision that can increase the period of the initial levy to more than 12 months, we have built in a contingency. Restricting that flexibility may impact on the setting of the pension protection levies in the year that follows the initial period, because, as a result of that restriction, the board may need to implement a further, simplified levy structure for the whole year following the initial levy. In addition, allowing the initial levy to apply for a period other than one that coincides with the end of a financial year would have implications on the setting of future pension protection levies, because the pension protection levies that immediately follow the initial levy operate in respect of financial years.

Clause 158 sets out the provisions that relate to the pension protection levies, including the factors that the board can take into account when calculating those levies. Amendment No. 35 would require the board to take account of the likelihood of an insolvency event occurring in relation to a scheme when it sets the risk-based pension protection levy. Amendment No. 36, if taken in isolation, would result in the board being unable to take account of the likelihood of an insolvency event occurring in relation to a scheme. However, we have assumed that that amendment was proposed in conjunction with and to complement amendment No. 35.

When setting the risk-based pension protection levy, the PPF board will be required to take account of the level of funding within a scheme, because we consider that underfunding is the most critical factor in determining whether a scheme may require PPF assistance. However, we recognise the importance of other risk factors, such as insolvency risk or investment strategy risk, when setting the pension protection levies, but it will be for the PPF board to determine if and how those other risks can be used. Officials in my Department are continuing to work with industry representatives to establish the most appropriate options available to the board in taking account of insolvency risk.

Mr. Webb

The Minister is generous in giving way. I have never heard him put it quite as starkly before that the Department considers that the underfunding level is the critical thing and that everything else is in a sense second order. That certainly mirrors the Bill's structure. However, for example, let us compare BT, which, on certain measures, has a socking great deficit but practically no chance of making a claim on the fund, with another scheme with a fairly small deficit but a really shaky company. It is the second company that will make a claim on the PPF, so why is the insolvency risk deemed to be second order?

Malcolm Wicks

I will not mention any company, but where a company is perfectly solid and judged by the board on different criteria, probably not just one, to be very solid—to use that non-technical description—it will do well out of the risk-based levy, so there should be no concern.

Kevin Brennan (Cardiff, West) (Lab)

Is not a possible danger of incorporating an insolvency risk into the levy that the PPF itself would participate in disseminating commercial information that could damage the business concerned in the markets?

Malcolm Wicks

A key point is that the levy can influence the behaviour of scheme sponsors to ensure adequate funding. The PPF must try to do that in many respects. The other risk factors are obviously desirable in relation to the one that I mention, and we assume that the PPF will include them in the levy's structure. However, it would be wholly desirable if the fact that such information becomes public—I guess that it will in a sense—encourages a scheme to fund itself properly.

Mr. Bill Tynan (Hamilton, South) (Lab)

It is obviously important that companies are not jeopardised because a levy is placed on them. Will my hon. Friend clarify the situation? Under the Bill, the PPF has to be mindful of the financial position, but it does not have to take that totally into account. Would it not be better if the PPF had to take account of a company's financial problems in a more structured way before it levied that company?

Malcolm Wicks

In those circumstances, the importance of the regulator will come into play. As my hon. Friend knows. as well as I do, from his service on the Standing Committee, we very much need to consider the PPF in tandem with the new regulator. The regulator's task is to act early where signs of risk arise and to try to ensure, using a range of powers from the relatively soft to the very tough, that company pension schemes come up to scratch. Obviously, in an ideal world, we would want as few companies as possible to pay the risk-based levy because we do not want too much risk to be placed on the PPF. If that came about, the levy for all companies could be relatively low, but that is probably an aspiration for the longer-term future.

Clause 160 sets out the provisions that relate to the amounts to be raised by the pension protection levies and the parameters within which the board may operate. Amendment No. 37 would require the PPF board to estimate that it would collect at least 75 per cent. of the pension protection levies via the risk-based levy. That would have an impact upon the PPF board's flexibility when setting and determining future pension protection levy rates and structures.

We consider that the Bill will restrict the PPF board adequately, while ensuring that the board has the freedom, flexibility and independence to set the most appropriate pension protection levy rates and structures in the future. However, we share with hon. Members a desire that the great majority of the levy in the transition period will be based on risk factors. As guidance to colleagues, we consider, after consulting stakeholders and other relevant bodies, that an appropriate split would be—this is a guideline—about 80:20 in favour of risk factors; but there will be flexibility and that will be a decision for the board, not for Ministers.

Mr. Webb

I shall endeavour not to intervene on the Minister again in the debate on this group of amendments, but I must have failed to make my point about what counts as risk, because the Minister's response was completely wrong. If the risk-based premium is based only on underfunding, a scheme such as BT's—a big, solid company but temporarily with a big deficit—will pay a socking great premium. He said that a solid company need have nothing to fear from a risk-based premium, but the Bill will allow the premium to be based only on underfunding risk, so such a company would be very heavily penalised.

Malcolm Wicks

I will not talk about any company in particular. When I used the word "solid", I was not talking about any company, whether solid or a bit soggy. Of course, while underfunding is absolutely crucial, other factors can be taken into account by the board. That comes back to the discussion that the hon. Gentleman hinted at earlier, but we think it important that the new PPF is at considerable arm's length from the Government. Obviously, we are accountable ultimately to the House, through the Secretary of State, but we are establishing a board that will have much expertise. People willing to serve on the board should have the appropriate flexibility, and new members of the board will want to read the reports of the considerations of the House on such matters.

Clause 161 sets out the provisions that relate to the levy ceiling in connection with the pension protection levies. The levy ceiling will be set by the Secretary of State, with the approval of the Treasury, and will restrict the PPF board from increasing the pension protection levies beyond a set amount. Under amendment No. 38, the Bill would set the levy ceiling at no more than £600 million for the first financial year following the initial period. The amendment would not have the desired effect, for the reasons that I shall now set out.

During the transitional period and the first year thereafter, provisions have been put in place to lower the levy ceiling. That is to restrict the board when setting pension protection levies during the transitional period, when the 25 per cent. yearly increase rule does not apply. The levy ceiling is therefore likely to be significantly lower in the first year after the initial period than the £600 million suggested in the amendment. In addition, it would be unusual to state a figure such as the levy ceiling in primary legislation, especially given that the Secretary of State will be required to make an order every year specifying the amount of the levy ceiling and that the Bill already provides for further provisions to modify the levy ceiling. We are confident that the provisions that we have put in place for the setting of the levy ceiling and future pension protection levies are both appropriate and sufficient. It is important to balance the needs for the PPF board to have the necessary flexibility and for the costs relating to the pension protection levies to be managed effectively.

Clause 163 sets out the provisions relating to the pension protection levies during the transitional period. The transitional period is needed because some of the information that we need to set up a risk-based pension protection levy from the outset is not available. The transitional period will allow the board to take a balanced approach to determine what information it has available and what information is necessary to implement the risk-based approach effectively. Amendment No. 39 would restrict the transitional period to two years and would have implications for the setting of future pension protection levies, because the information that the board needs to implement a risk-based pension protection levy will not be fully available from the outset. The amendment could therefore result in the board being required by the provisions of the Bill to implement a very simplified or inaccurate risk-based approach based on incomplete or out-of-date data. Alternatively, if the board decided that it needed to base its decisions on more complete information, additional financial burdens could be placed on employers, which would have to provide an out-of-cycle valuation because the board would need a completed PPF-style valuation to be able to determine accurately comprehensive risk-based pension protection levies.

The calculation, collection and recovery provisions relating to the initial levy and the pension protection levies are contained in clause 164. Amendment No. 40 would amend the clause by providing scheme trustees and managers with the power to recoup from all scheme members, whether active, pensioner or deferred members, the cost of at least the scheme factors element of the initial levy and the pension protection levies. Although we understand the intention behind the amendment, we must consider the implications. It could, for example, result in a reduction in the income of current pensioner members, or have an impact on future pension entitlements where there is no current pension in payment. Alternatively, it could allow pension scheme trustees and managers to invoice active and deferred members directly to request a contribution in respect of the pension protection levies. I am not sure that the hon. Member for Eastbourne (Mr. Waterson) wants that, and there would be a practical problem with doing so, as many schemes do not have up-to-date contact details for many deferred members. In addition, the amendment does not set a limit on the amount that can be recovered from the scheme member. Giving scheme trustees or managers such a power could result in members paying towards the risk-based element of the pension protection levies, which would be unfair because scheme members cannot influence how the scheme invests its funds or its financial state.

Because of the various implications that the proposed amendments have for the setting of the initial levy and the pension protection levy, I urge that they be withdrawn. At present, schemes would be allowed to draw the costs of the levy from current members, but that would involve a higher contribution. The scheme can make that judgment if it wishes to. However, such flexibility is altogether different from allowing via the Bill a levy to be imposed in such a way on deferred or retired members of a scheme.

2.45 pm

The hon. Member for Northavon (Mr. Webb) presented another scenario, his argument being essentially that the company or pension scheme might try to shift members away from the scheme by giving them a transfer value—getting rid of them simply to avoid paying the levy. I think that that is a little farfetched. The new full buy-out procedure for solvent employers means that no company could do that on the cheap. It would have to buy out fully the pension rights of the individuals' concerned, and, no doubt, incur many administrative and other costs in trying to do so. In addition, as we drive up standards of pensions literacy and as the trade unions continue to become more involved in pension issues, that scenario becomes even less likely to arise. None the less, we shall reflect on it.

I hope that in view of my assurances—perhaps explanations is a better word—the hon. Member for Eastbourne will withdraw his amendment.

Mr. Waterson

I am grateful to the Minister for his full explanations and for his confirmation that, in certain circumstances, schemes can recover some of the levy from active members. On that basis, I am happy to beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.