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Financial Assistance Scheme (Miscellaneous Amendments) Regulations 2007

rose to move, That the Grand Committee do report to the House that it has considered the Financial Assistance Scheme (Miscellaneous Amendments) Regulations 2007. The noble Lord said: As Members of the Committee will recall, the Financial Assistance Scheme, which I shall refer to as FAS hereafter, offers help to people who have lost out on their defined benefit occupational pension because their scheme was underfunded when it wound up and the employer is insolvent or no longer exists. The regulations extend this definition further, as I shall go on to explain. In addition, FAS also provides assistance for surviving spouses and civil partners of qualifying members. It is funded by the taxpayer and administered by the Department for Work and Pensions via the FAS operational unit in York. Before discussing the regulations, I shall briefly mention the final report of the Young review, which has been the subject of much speculation over the past week. That review was charged with looking at whether better use could be made of the assets remaining in failed pension schemes to boost the level of FAS payments towards 90 per cent and whether some pension schemes, including those with employers which remain solvent and which are not covered by these or previous FAS regulations, should be admitted to the FAS. I appreciate that your Lordships are keen to see the Young review’s recommendations on these points, as are affected members. I confirm that the review’s report is now complete and we are currently considering both its contents and our response. The full report will be published early next week but as the Prime Minister announced during yesterday’s Prime Minister’s Questions, we are confident that we will be able to provide a 90 per cent guarantee. We will make a more detailed statement of our intentions alongside the publication of the Young report early next week. In the mean time the regulations will allow us to provide increased assistance to more members of more schemes while we bring forward changes arising from responses to the Young review’s recommendations. Before explaining what the regulations cover, I think it useful to remind noble Lords that before this Government introduced the Pensions Protection Fund and the FAS as part of the Pensions Act 2004 there was no help available for those who had lost out on their pension because their scheme had wound up underfunded with an insolvent employer. It is true that the FAS, as originally constituted, helped only those within three years of their normal retirement age on 14 May 2004 but in December last, we extended this help to members of qualifying pension schemes who were within 15 years of their scheme normal retirement age on 14 May 2004. This assistance was tapered depending on the member’s distance from normal retirement age. To put the scope of today’s regulations into context, I remind noble Lords that the original FAS would have helped just 15,000 people over its lifetime. Last year’s extension to FAS boosted the number helped to around 40,000 people and increased total funding for the FAS from £400 million to over £2 billion in cash terms. The regulations being discussed today will bring about a further significant extension to the scope of the FAS while we consider the final findings of the Young review, and round off the package of FAS measures announced in and subsequent to the Budget in March. This extension increases the Government’s commitment to the FAS to more than £8 billion in cash terms, and means that the FAS will now help about 130,000 people who have lost significant amounts of occupational pension due to employer insolvency. The regulations do away with tapers on assistance so that all qualifying members of qualifying schemes will be eligible for a top-up to 80 per cent of their expected core pension, subject to the cap at age 65. The regulations will get rid of the de minimis, which meant that FAS awards of less than £520 a year were not payable. They raise the level of the cap on assistance from £12,000 to £26,000 a year. On our plans for the cap, I am sure noble Lords will have recognised that, without indexation, the cap will mean that assistance due to members who will not reach 65 for some time will not retain value before coming into payment. The Government agree that it is not appropriate in the longer term for the FAS cap to remain static. On 21 May 2007, the Minister for Pensions Reform told the other place: ““We intend to ensure that the cap retains its value, even where assessments are made for members who will not be eligible for payment until many years into the future””.—[Official Report, Commons, 21/5/07; col. 1159W.] As relatively few members are affected by the increased cap, and as any significant effect of non-indexation will not bite for some time, it makes sense to defer associated changes to the cap to be considered alongside any other changes to the way in which assistance is calculated arising from the Young review of pension scheme assets. The amendments that we are proposing will also bring additional schemes, and their members, into the FAS. Following discussions with affected schemes, we believe that it is right to extend the FAS to members of pension schemes where the trustees believed that it was in the best interests of their members to reach a compromise agreement with the employer. Under these agreements, schemes accepted a lower amount than the full debt owed by the employer on the winding-up of their scheme in order not to tip that employer into insolvency. The regulations ensure that the trustees and employers of such schemes who have acted reasonably in reaching a compromise agreement will be helped. We have yet to receive data for all the schemes that might benefit from this change, but we believe that up to 13,500 members may qualify for assistance. Following an approach by an affected scheme, we have also amended regulations to allow certain small self-administered schemes, which were previously excluded, to be considered qualifying schemes for the FAS. The Committee will recognise the importance of preserving the assets in relevant schemes until we can bring forward regulations to implement changes arising from the Young review’s final recommendations. We have already implemented some protective measures. The halting annuitisation regulations, which came into effect on 26 September, seek to protect the funds in affected schemes by preventing trustees from purchasing annuities for nine months, except where trustees already have a binding commitment to purchase annuities before the regulations came into force or where they have the approval of the scheme manager. Today’s regulations include a further protective measure to deter trustees who are allowed to purchase annuities from buying annuities with enhanced annual increases. Currently, the FAS calculates a top-up payable for life, based in most cases on the annuity rate that will come into payment at the member’s normal retirement age. Thus, if an indexed annuity is secured that starts at a lower initial rate than a flat-rate annuity, the member will stand to receive a higher amount of assistance than he would have done had a flat-rate annuity been secured. Given the relatively low position that general indexation occupies in the priority order for non-pensioner members, we would not expect trustees in most circumstances to secure deferred annuities with annual increases. However, scheme rules may allow trustees broad discretion over purchasing increases, and we understand that trustees are not always bound to match the way in which assets have been allocated under the priority order when purchasing annuities. For these reasons, we do not believe that current legislative powers are sufficient to control selection against the FAS. Allowing trustees to purchase generous indexation would increase the FAS assistance payable and increase the costs of the FAS as currently configured and therefore affect the capacity of the Government to deliver increased benefits in response to the Young review. Under the proposed change to the FAS, the scheme manager will be given the necessary powers to re-determine the annuity rate in cases where that annuity rate has been secured with annual increases that he considers to be unreasonable. We believe that this should deter trustees from playing the system and taking advantage of the money the taxpayer is committing through the FAS to secure unreasonable increases for their members. The regulations also introduce a number of amendments linked to the calculation of FAS payments, the recovery of overpayments and the provision of information. These are necessary to provide essential clarification of certain aspects of the FAS, and to ensure that it operates effectively. Much criticism of the FAS has focused on the number of people whom we are currently paying. Too few commentators acknowledge that the main barrier to making more payments is not the Financial Assistance Scheme operational unit but getting the right information from trustees. Despite those difficulties, the operational unit has received and dealt with almost 400 applications from pension schemes and, as of 7 December this year, 3,540 cases were in payment and a further 1,223 members had been assessed and are likely to become eligible for payment once they reach 65. Those payments are making a real difference to the lives of people, many of whom had given up any hope of enjoying the retirement for which they had saved. I remind the Committee that, despite press criticism, FAS has received favourable comments from pension scheme members who had despaired of seeing anything from their pensions and who can now look forward to their old age with increased certainty. I am sure that the Committee will be interested in some of the reactions that we have had from people who thought that they had lost everything. They illustrate a different side of the story to the one that we are accustomed to hearing from more vocal campaigners and their supporters. They say, for example: ““After four long stressful years after retirement I can now look forward to the difference these payments will make to both my wife and I in our future every day needs””. ““It’s good to know that your department exists to help those of us caught up in these types of problems””. ““I am highly delighted with the way FAS Operational Unit handled the communication side and very pleased about the forthcoming payments””. I acknowledge that, in its earliest days, legitimate questions were raised about whether FAS was delivering the outcomes we had hoped for. Those questions have now been scotched. I emphasise once again the professionalism and commitment of FAS operational unit staff in working with schemes that may have inadequate records and where members may have long since abandoned hope of seeing anything of their pension. I can assure the Committee that the operational unit is already working closely with trustees to ensure that schemes that benefit from changes to the rules relating to scheme eligibility can provide the necessary data and supporting information to the FAS operational unit as quickly as possible. The regulations ensure that the FAS continues to operate effectively and provides assistance to more of those scheme members who face the most significant losses. In my view, the regulations are compatible with the European Convention on Human Rights, and I therefore commend them to the House. I beg to move. Moved, That the Grand Committee do report to the House that it has considered the European Communities (Definition of Treaties) (Agreement on Enlargement of the European Economic Area) Order 2007. [3rd Report from the Statutory Instruments Committee].—(Lord McKenzie of Luton.)