HL Deb 24 June 2003 vol 650 cc12-4WA
Lord Oakeshott of Seagrove Bay

asked Her Majesty's Government:

Whether they will set out their assumptions and methods of calculating the cost of £340 million to £375 million, assuming a £40,000-£66,000 salary cap, to private sector employers of introducing the Pensions Protection Fund, as noted on page 41 of Working and saving for retirement: action on occupational pensions (Cm. 5835); and [HL3361]

With regard to the estimated cost of £340 million to £375 million to private sector employers of introducing the Pensions Protection Fund—

  1. (a) whether it is a one-off or annual cost;
  2. (b) whether it is for gross insurance premiums payable or net insurance premiums payable, or simply the extra administrative cost to the employers of the fund;
  3. (c) how many members of defined benefit schemes are employers expected to make payments to; and
  4. (d) what are estimated to be minimum and maximum payments into the fund per member. [HL3362]

Baroness Hollis of Heigham

The cost of £340 million to £375 million is the difference between the assets and the liabilities of the schemes taken over by the PPF in a year, using the following assumptions:

  1. (i) Data on the MFR funding levels of just over 1,000 schemes that had an MFR valuation with an effective date between April 1997 and April 2000 were used. Adjustments were made for each scheme in the sample in order to estimate the up-to-date funding position. The results were scaled up to the total for all private sector occupational pension schemes.
  2. (ii) The value of the liabilities if such schemes were to fall within the responsibility of the Pensions Protection Fund were estimated on a basis equivalent to midway between the current MFR basis and the full insurance buyout costs for the liabilities.
  3. (iii) The cost will obviously depend on the number of firms going insolvent. Allowance was made for the possibility of normal, poor and extreme years as far as bankruptcies are concerned, but on average over a 20-year period, the probabilities of a scheme becoming a liability of the PPF were assumed to be between about 0.3 per cent a year for large schemes and 1 per cent a year for small schemes. This assumed level of bankruptcy is cautious, especially given that it is very rare for large companies to go bankrupt.
  4. (iv) Allowance was made for the impact of the suggested salary cap using data on the earnings of occupational schemes members from the Family Resources Survey.

The cost of £340 million to £375 million is an estimated annual cost that represents the estimated overall annual levy needed to meet the benefit funding shortfall of schemes eligible for compensation from the PPF (see above). The flat-rate levy will be in respect of all members of defined benefit schemes (active, deferred members and pensioners), approximately 15 million members in total. The cost per individual member will be the flat-rate levy, with an additional cost depending on the level of underfunding in the scheme. All costs are gross of corporation tax.

Note:

As set out on page 41 of Working and saving for retirement: Action on occupational pensions, the estimated cost of £340 million to £375 million is based on a cap of £40,000-£60,000, not £40,000-£66,000, as cited in the Question.