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Occupational Pension Schemes (Levy Ceiling) Order 2009

In 2002, this Government recognised that members of defined-benefit occupational pension schemes were underprotected if their sponsoring employer failed. That is why we used the Pensions Act 2004 to establish the Pension Protection Fund. It is a statutory fund that protects members of defined-benefit occupational pension schemes and members of the defined-benefit parts of schemes that are a hybrid of defined-benefit and defined-contribution schemes. The fund pays a statutory level of compensation if the sponsoring employer of the scheme experiences what is called a qualifying insolvency event, such as when a company enters administration; if there is no possibility of a scheme rescue; or if there are insufficient assets in the scheme to pay benefits at PPF compensation levels—broadly, 90 per cent for deferred and active members and 100 per cent for people over normal pension age. The fund is administered by the board of the Pension Protection Fund, a public corporation. The fund is funded from three sources: the assets of pension schemes that transfer to it, including any recoveries from former employers; a levy charged on the schemes that are protected by it; and investment returns on those assets. The Pension Protection Fund ensures that members of eligible defined-benefit schemes still receive a meaningful income in place of the pension they worked for and would have received had their employer not experienced a qualifying insolvency event, and the fund of which they are a member is unable to pay benefits at Pension Protection Fund levels. The "purple book" published by the Pension Protection Fund and the Pensions Regulator in December 2008 estimates that around 7,400 private sector defined-benefit schemes are protected by the Pension Protection Fund. Since 2005, 112 schemes have been assessed by the Pension Protection Fund following an employer insolvency event. A further 295 schemes, with around 134,000 members, are currently being assessed. At the end of February, 8,215 former scheme members were receiving compensation at an average cost of £4,000. A further 21,653 former scheme members are already due to receive compensation when they retire. The Committee will be aware that when Members in another place considered these instruments last week, they spent some time discussing the impact of current economic conditions on the PPF. All sides recognised the valuable protection that the PPF offers to scheme members, and explored some important questions about what the future might hold with my right honourable friend the Minister for Pensions and the Ageing Society. We should be vigilant to ensure that the PPF is able to continue to offer protection to members of defined-benefit pension schemes, and that we take steps to deal with threats to the PPF. That is why, for example, the Pensions Act 2008 extended the powers of the Pensions Regulator and, as the Committee will recall, we were concerned that new business models seeking to offer alternatives to insured buyouts of pension scheme liabilities highlighted the disproportionate risk to the PPF that could arise from mechanisms by which shell employers became sponsors of pension schemes. After careful scrutiny, Parliament agreed that powers were needed to deal with such risks. Vigilance is needed, particularly in difficult economic times such as these when trustees or employers may well hear siren voices suggesting actions such as transferring pension schemes to shell employers as a way of evading liabilities or otherwise bypassing the controls set out in legislation to limit the PPF’s exposure to claims. The Government have made it clear that pension liabilities should generally be backed by substantive employers or by the regulatory capital held by insurance companies. The Committee will no doubt be glad to hear that the regulator is indeed prepared to act if it considers that trustees or employers are seeking to abuse the system. I now turn to the draft Pension Protection Fund (Pension Compensation Cap) Order 2009, under which a cap on the level of the Pension Protection Fund compensation is applied to scheme members who are below their scheme’s normal pension age at the point immediately before the employer’s insolvency event. These members are entitled to the 90 per cent level of compensation when they retire. Under the Pensions Act 2004, increases to the compensation cap are linked to increases in the general level of earnings. To increase the compensation cap for 2009-10, we must consider average earnings in Great Britain, as measured by the average earnings index and published by the Office for National Statistics in the 2007-08 tax year, which shows an increase of 3.5 per cent. Such an increase gives a new cap of £31,936.32 for the 2009-10 tax year. This means that the total value of compensation payments for members below normal pension age shall not exceed £28,742.69 for the new tax year. The new cap will apply to members who first became entitled to compensation at the 90 per cent level on or after 1 April 2009. The order ensures that the level of the compensation cap is maintained in line with the increase in earnings, as required under the Pensions Act 2004. I now turn to the draft Occupational Pension Schemes (Levy Ceiling) Order 2009. The pension protection levy is the responsibility of the board of the Pension Protection Fund. The levy ceiling is one of the statutory controls on the pension protection levy. Rather than set the rate of the levy, it restricts the amount that the board can raise in any one year. The levy ceiling for 2008-09 was set at £833 million. Under the Pensions Act 2004, the levy ceiling is increased annually in line with increases in the general level of earnings in Great Britain, using the rate for the 12-month period to 31 July in the previous financial year. The order before the Grand Committee uprates the levy ceiling by 3.6 per cent, bringing it to £863,412,967. This does not mean that the pension protection levy will increase to the ceiling. The board of the Pension Protection Fund is responsible for setting the actual levy for any year, but it must not set one that is above the levy ceiling. The board understands the pressures that businesses are under in the current economic climate. In August 2007, the board made a commitment to set a levy estimate of £675 million for the following three years, indexed to earnings, subject to there being no change in long-term risk. The PPF has kept this commitment, and announced that it will increase this year’s levy estimate only by earnings, which means that for 2009-10 the levy estimate will be £700 million. However, the annual increases in the ceiling ensure that, after 2009-10, the board of the PPF could in future increase the levy up to the levy ceiling if it considered it appropriate. I confirm that I am satisfied that the statutory instruments before us are compatible with the European Convention on Human Rights. They provide that the Pension Protection Fund compensation cap and levy ceiling are uprated in line with increases in average earnings.