§ Amendment proposed [19 May]: Government amendment No. 101, in page 84, line 7, leave out 'for that period'.—[Malcolm Wicks.]1.34 pm
§ Question again proposed, That the amendment be made.
§ Mr. Speaker
I remind the House that with this we are discussing the following: Government amendments Nos. 102 and 103,
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, leave out sub-paragraph (7).
Government amendment No. 144,
Amendment No. 28, in page 247, line 42, leave out '2.5%' and insert '5 %'.
Amendment No. 31, in page 249, line 19, leave out paragraph 29.
§ The Minister for Pensions (Malcolm Wicks)
We were yesterday in the middle of an important debate on aspects of the pension protection fund. As I recall, as proceedings came to a halt I was gently advising the hon. Member for Northavon (Mr. Webb), in relation to important social reforms, that he should perhaps try to adopt a less pessimistic and cynical approach to what I regard as proper social advances. Although there are always difficult questions to ask and proper scrutiny is needed, we should not be in the business of trying to undermine confidence in important measures such as the pension protection fund.
In the course of yesterday's discussion, various detailed issues were raised, and I should like to reply to them in a little detail, notwithstanding the pressures on time this afternoon. I feel that some of the issues around the 100 per cent. compensation, as opposed to 90 per cent., were discussed in great detail in Committee, but I shall try to summarise some of the issues.
Hon. Members made various suggestions about changing the levels of compensation to be paid to those over and under a scheme's normal pension age. There were some calls for compensation to be increased to 100 per cent. of the PPF benefits for non-pensioners, and questions about levelling down to 90 per cent. for all. Before I begin a detailed response to the points made, I shall first remind Members why we are setting up the PPF. It is to guard against a situation in future where employers go bust, leaving pension schemes desperately underfunded and pension scheme members receiving 1119 only a small fraction of the pension that they were promised. From time to time, one or two hon. Members forget that important fact. We can argue about the respective merits of 100 per cent. and 90 per cent., or something in between, but many people, who after years of paying contributions would otherwise be left receiving only 20 or 30 per cent., will be grateful that Parliament has done its work to provide at least the 90 per cent. That is sometimes forgotten.
All things being equal, we would of course prefer to pay 100 per cent. to all, but some reduction in compensation is necessary to guard against the moral hazard of companies' taking advantage of PPF compensation and, of course, to control costs. By providing 90 per cent. compensation for those under a scheme's normal pension age, we are incentivising those who have the greatest influence over funding levels—such as high-paid directors—to keep the scheme out of PPF. That is an important element of the range of moral hazard provisions that the Bill now contains.
In designing the pension protection fund we have learned lessons from the Pension Benefit Guaranty Corporation in the United States. Yesterday, we discussed the admissible rules and the disregarding of rule changes in the previous three years, which are learned directly from the US experience. Like the US PBGC, the PPF will apply a benefit cap—in our case £25,000 for those below normal pension age. The 90 per cent. compensation level for those below normal pension age, too, builds on the US experience, where no such moral hazard provision exists, and where all scheme members are guaranteed 100 per cent. We do not want to take money away from people above normal pension age who are receiving their pension. Under our scheme, those who enter the PPF who are already above normal pension age and receiving their pension will receive 100 per cent. compensation and will not suddenly be left with a drop in their income. Surely that is sensible.
I should emphasise that, in designing the PPF, we have worked hard to balance the need to provide meaningful protection for scheme members with the need to ensure that the fund will be affordable. Hon. Members have suggested equalising compensation to 100 per cent. for all, but that would add an estimated £100 million to the levy each year. As I said to hon. Members yesterday—again, gently—they were not very forthcoming about the cost implications of their amendments, and it was not at all clear whether those costs would be met by increasing the levy or by the taxpayer.
§ Mr. Steve Webb (Northavon) (LD)
Perhaps, then, the Minister can assist the House by assessing the cost implication of a proposed reform. He says that the extra would be £100 million if everyone under normal pension age were to receive 100 per cent., but I made the distinction in my contribution yesterday between workers below pension age and retired people below pension age. Does he know how much of that £100 million relates to retired people—people who are drawing pensions below pension age? I imagine that that is a small fraction of the figure. My key point was that the anti-moral hazard measures will hit carers and 1120 others who have retired early for good reasons. There might be a better way of dealing with the moral hazard issue.
§ Malcolm Wicks
From memory, the figure is approximately £10 million, but if I have it badly wrong I shall write to the hon. Gentleman.
The hon. Gentleman asked about early retirees and whether the PPF compensation levels were unfair. We recognise that with any scheme such as this there will be aspects of rough justice, but we have taken the view that early retirees will be more likely than those over the normal pension age to be able to top up their income—for example, through part-time work. We recognise that that will not be true for those who retire early on grounds of ill health, so such people will receive 100 per cent. compensation if the board considers that the trustees made the ill-health award correctly.
If we did not apply the 90 per cent. figure to early retirees, new questions of moral hazard would be opened up. If early retirees also received 100 per cent., individuals could start taking early retirement with the sole intention of maximising their entitlement to PPF compensation. It would be hugely difficult to prevent this, as early retirement is not awarded in the same way as an ill health pension, so it would be more difficult for the PPF to police. Furthermore, there is also a cost implication in paying early retirees 100 per cent. compensation. Notwithstanding the moral hazard risk that I have described, we estimate that such a payment would require PPF levies to be increased by £10 million per annum.
On the power to vary compensation and levels of benefit, the hon. Member for Northavon—he features in our debates and in our thoughts—asked what extreme circumstances might lead to the board's making a recommendation to the Secretary of State. He inferred that as soon as a big scheme came into the PPF, compensation levels would immediately be reduced. We expect that the circumstances in which that might happen would be extraordinary rather than extreme. It is important to emphasise that if two or three big FTSE 100 companies go bust—in case any City editors are half-listening, I should repeat that this is an extraordinary, in extremis scenario—the PPF will take control of the pension assets. In the short to medium term, the PPF will therefore be very cash rich, so the circumstance described in which the PPF might "fall over" is simply not right. In such a scenario, the board will have no problem in paying benefits, but it will obviously want to consider the requirements of the long-term funding situation in order to reduce any deficit between assets and liabilities. In other words, the PPF is likely to be able to cope, even in the in extremis situation of two or three very large companies going bust.
In the very unlikely event that the board wanted to vary the level of compensation, it would have to consider raising the levy. Before a recommendation was made to the Secretary of State, the board would have to reduce indexation and revaluation to zero, which would significantly reduce liabilities. The board would also be required to consult. Any changes to the compensation percentages would of course be subject to the affirmative procedure. There is no need, therefore, for the Government to be a lender of last resort. If a large pension scheme comes into the PPF, this will not create 1121 a liquidity problem, as the assets of the scheme will be taken into the PPF. The scheme will of course be underfunded to some extent, and the PPF levy will ensure that, over time, the PPF is financed adequately to pay all its liabilities.
§ Mr. Geoffrey Clifton-Brown (Cotswold) (Con)
My neighbour the hon. Member for Stroud (Mr. Drew) has drawn the Minister's attention to the problems associated with the Lister-Petter pension scheme, and the Minister is indeed meeting the hon. Gentleman and some members of that scheme. The subsidiary went bust and the main company is still trading, yet pensioners in the subsidiary scheme seem not to be covered. Can the Minister clarify what is happening? If he cannot do so now, perhaps he will write to me if I first supply him with more details of that scheme.
§ Malcolm Wicks
It would be wrong of me to comment on a particular scheme because I do not know the circumstances, but if the hon. Gentleman sends me the information I shall consider it carefully and write to him. We have considered various moral hazard provisions, and we are fully aware of the danger that sophisticated company structures—involving parent companies and many subsidiaries—can lead to the dumping of pensions in one scheme, while the parent or subsidiary companies remain solvent. We are dealing with this issue in general terms, but I am grateful to the hon. Gentleman for raising it. We will deal with it in the way that we discussed.
§ Mr. Webb
The Minister is being very generous in giving way—he has clearly had a good night's sleep. No one is arguing that it is likely that the Government will have to be the lender of last resort, and he is right: if a large scheme goes down, a big pot of money goes into the PPF in the year in question, so there is no problem. However, the Government have included a "what if?" provision in schedule 7, with which amendment No. 31 deals, that creates a reserve power. My question is: what happens if the fund gets into a really difficult situation? The Minister says that that is not very likely, but he clearly concedes that it is possible; otherwise, such a power would not be included in the Bill. If such a situation is possible and that power could be exercised, surely it would be better for the Government to act as lender of last resort, rather than cutting benefits. So the question of the likelihood or otherwise of the scenario is not relevant; the Government have included the "what if?" provision in the Bill, so would not the alternative strategy be preferable?
§ Malcolm Wicks
As ever, I am in a generous mood, so I shall not point out that the hon. Gentleman is rather good at "what if?" scenarios. That can be helpful in testing things out, but occasionally it can prove somewhat absurd. It is right and proper that there should be no liability on the general taxpayer as regards the PPF, not least because many taxpayers are not in final salary pension schemes. We have therefore carefully costed likely liabilities to the PPF. Yes, we 1122 have built in certain provisions and safeguards, because it would be irresponsible to ask the House to support this Bill without building in anin extremis scenario.
§ Malcolm Wicks
Yes. In terms of national emergencies—perhaps this is not a very good comparison—it is right and proper that we plan for the most extraordinary things that might happen to our various institutions, or to the country as a whole. However, so far as such events are concerned, we are not talking about their likelihood. We are convinced that raising the levy by 25 per cent. a year to a cap of 100 per cent., along with the requirement to consult the Secretary of State on crucial matters, provides the necessary flexibility.
We have learned the lesson of the need for such flexibility from the United States. In discussing the American war on poverty and its relationship to this country, the great Professor Halsey of Oxford once spoke of ideas drifting across the Atlantic, soggy on arrival and of dubious utility. However, as a proponent of the special relationship, I should point out that this situation is very different; we have learned proper lessons from across the Atlantic. The fact that the board itself, subject to certain provisions, can raise the levy without having to come to Parliament—in the United States, Congress has to be consulted—is a very important flexibility.
I emphasise the point about assets because in this debate and the dubious comments occasionally made about the American Pension Benefit Guaranty Corporation, it is sometimes forgotten that the PBGC, despite the current financial difficulties, holds considerable assets. Notwithstanding anything else, those assets would enable it to meet its commitments for several decades. It is sometimes suggested that in an extreme scenario in which a particular company crashes, the PPF would be unable to operate, but in fact, considerable assets would go to the PPF. That point gets forgotten.
A recent Channel 4 documentary—the hon. Member for Northavon might have contributed to it—talked about the PBGC being on the verge of collapse. On watching that documentary, I thought that the merger of Channel 4 and Channel 5 had already taken place, such was the absurdity of the analysis offered by the young gentleman presenting it. He was riding a moped, and seemed to think that he was in a film with Sophia Loren.
May I move on to indexation? One of the amendments was designed to increase the cap on indexation to 5 per cent. As I have already explained, the Bill is designed to reduce the level of the indexation cap to 2.5 per cent. on all future accruals. By restricting the amount of indexation paid, the PPF is better able to predict its liabilities. It also means that the PPF will not end up paying more than some schemes are required to do. Furthermore, it avoids creating a further increase to the levy of around £100 million a year. If we add to that the proposal for 100 per cent. compensation for all, the amendments would effectively add an estimated £200 million to the levy each year.
Once again, I look to Conservative Front Benchers to intervene to explain their proposals. If they seriously believe in provisions that would add an extra 1123 £200 million a year, we need to know whether it is a proper spending commitment. It sounds like one. Are they saying that the taxpayer should fund the proposals or that the levy should be substantially increased? Or is it that they are thrashing around as ever without being clear where they are going—one way or the other?
§ Mr. Nigel Waterson (Eastbourne) (Con)
Given that the Minister provokes me and that the world's media are standing several deep in the Press Gallery, craning to hear our every word, let me make it clear that our probing amendments are designed to get the Minister to admit that what the Government are selling is not a total safety net. Indeed, the Minister just made the point—it will be interesting to read theHansard—that the reason for making reductions in indexation is to ensure that the PPF has enough money to pay people out. It is yet another example of cheese-paring the benefits to be paid to pensioners in order to make the scheme work in the first place. That is the point, and it is important that the public end up with a clear impression of what they are and are not getting with the scheme.
§ Malcolm Wicks
If we are cheese paring, there should presumably be more cheese and it has to be paid for. The hon. Gentleman has not answered my point. Is he making a spending commitment—I think he is—of £200 million a year? Is he telling industry to pay much more on the levy or saying that the taxpayer should subsidise it? I would be happy to give way again. Answer came there none. We are not cheese paring. Unlike in Monty Python, this is a cheese shop with a whole variety of cheeses—ample for everyone and ample to cover the liabilities on pensions that we are predicting. A further point is the impact that such a measure might have on schemes. If schemes followed suit, it would increase scheme liabilities and contribution levels, as well as a bigger hit on schemes via the levy.
The hon. Member for Northavon also asked about the consistency of 2.5 per cent. indexation with a revaluation cap of 5 per cent. There is no inconsistency. Pension schemes are required to revalue in line with the retail prices index with a cumulative cap of 5 per cent. The PPF revaluation maximum rate of 5 per cent. therefore mirrors the maximum rate in the Pension Schemes Act 1993 and, as with the PPF indexation, it is in line with the requirements of the schemes.
The Government have taken account of the recommendations made in the Pickering report regarding indexation and revaluation. While that report recommends a reduction in indexation, it specifically recommends that revaluation should remain unchanged. We followed that advice.
Finally, I should like to clarify the position on borrowing. I hope that my distinction between the cash flow position of the PPF and its funding position has already dealt with the doomsday scenario of the hon. Member for Northavon.[Interruption.] My speech writer is beginning to understand my approach to these matters. I should clarify that borrowing will be needed only in extreme cases where there is an exceptional cash flow need. That is most likely to happen at the outset, but even there, the PPF will collect the levy at least a 1124 year in advance of the PPF having to start paying any pensions. There will also be a limit, set through regulations, on the amount that the PPF can borrow.
§ Mr. Webb
It is not me who puts the provisions in the Bill; it is the Minister—or somebody. It is the Bill, not me, that gives the PPF the power to borrow money. It is the Bill that says that those circumstances may arise and that provision needs to be made for them. At that point, why is it better value for money for the taxpayer for the PPF to borrow privately at a higher interest rate than the Government could provide?
§ Malcolm Wicks
We covered that in Committee. We believe that the normal rules of borrowing should apply. I urge the hon. Gentleman—gently, as ever—not to adopt a doomsday scenario on this front. Like many of us, I am sure he has insurance against fire risk in his house, but it is unlikely that his house or my house will burn down. It is perfectly proper for the most difficult scenarios to be taken into account in legislation and to make provision for them. The PPF is a well developed, well-costed and evidence-based scheme, which we believe will stand the test of time. I hope that I have convinced the House that hon. Members should not press their amendments.
Amendment agreed to.
Amendments made. No. 102, in page 84, line 16, after 'pension' insert'or payment of a member's lump sum'.
No. 103, in page 84, line 19, at end insert—'(4A) For the purposes of subsection (4)—
- (a) "normal pension age", in relation to an eligible scheme and any pension or other benefit under it. means the age specified in the scheme rules as the earliest age at which the pension or other benefit becomes payable without actuarial adjustment (disregarding any scheme rule making special provision as to early payment on the grounds of ill health), and
- (b) where different ages are so specified in relation to different parts of a pension or other benefit—
- (i) subsection (4) has effect as if those parts were separate pensions or, as the case may be, benefits, and
- (ii) in relation to a part of a pension or other benefit, the reference in that subsection to normal pension age is to be read as a reference to the age specified in the scheme rules as the earliest age at which that part becomes so payable.(4B) In subsection (4A) "scheme rules" has the meaning given by section 134(7).'.—[Mr. Jim Murphy.]