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Occupational Pension Schemes (Levy Ceiling) Order 2011

Yes, they are Office for National Statistics figures. I think that it is the average weekly earnings figure, which is the new figure that is updated from the annual earnings index—no, it is the general level of earnings. I turn now to the Financial Assistance Scheme (Revaluation and Indexation Amendments) Regulations 2011. Many noble Lords will be familiar with FAS; indeed, the noble Lord, Lord McKenzie of Luton, has in the past brought a number of sets of regulations on the scheme to this House and presented them most eloquently, despite the material. I hope that noble Lords will listen to me with the same patience that they extended to the noble Lord, Lord McKenzie. The scheme provides financial help to members of qualified pension schemes who face significant losses because their schemes wind up underfunded. It is mainly funded by the taxpayer. It has never been intended that FAS should replicate what might have been provided to members had their schemes wound up fully funded. Payments made by FAS have their value protected against price inflation through revaluation before payment begins and indexation after payment begins on rights accrued after 1997. This reflects the broader legislative position. The changes being made to the FAS revaluation and indexation rules by these draft regulations are a consequence of a wider decision. Noble Lords will know that the Government intend to use the consumer prices index—the CPI—as their general measure of inflation for a range of payments. These include state pensions, statutory minimum increases for private sector occupational pensions and increases to pension compensation payments made by the Pension Protection Fund. Much has been said about the move to the CPI since we announced our intentions. We are moving to using the CPI as we believe it is a more appropriate index, although we acknowledge that no index is perfect. Without going into the kind of elaborate detail that I think we may be going into in the next few days, let me summarise why it is the most appropriate index. The key difference between the RPI and the CPI is what is known as the ““formula effect””. Put simply, the CPI is calculated in such a way that it takes account effectively of consumers switching to substitute goods when prices rise. That consumers behave in this way is a cornerstone of economic theory, and it has been borne out by empirical research. Let me be clear that we are not talking about switching from rump steak to lamb shoulder, for example, but from rump steak that has seen a sharp increase in price to rump steak that has seen a lower one. The substitution effect is nothing more than that. This methodology is uncontroversial, and once we accept it as preferable to the RPI’s, which the Institute for Fiscal Studies and the Royal Statistical Society do, we have accounted for 60 per cent—two-thirds—of the historical gap between the CPI and the RPI and already the CPI becomes the more suitable index. We will have the opportunity to talk about this in great detail, although I will do so now if noble Lords want. There is another aspect of difference which is the much lower level of housing costs in the CPI than in the RPI. In the last years, mortgage interest’s effect on the RPI has caused it to fluctuate wildly. It has ranged from being dragged down by 2.76 percentage points to being pushed up by 1.51 percentage points. It is clearly a significant factor. But as noble Lords are aware, only 7 per cent of pensioners have a mortgage and many of those—the poorer ones in particular—are supported in their housing through the support for mortgage interest. So the exclusion of mortgage interest and the impact it can have on inflation seems the right course to take. That is the current position between CPI and RPI, but noble Lords will welcome the Office for National Statistics’ work on the exclusion of owner-occupied housing costs from the CPI. This may address some of the housing costs issues in years to come. The DWP and the Government as a whole will monitor this development very closely. Unless there is a whole range of questions on this, I shall not go on about it here and now. I shall close this section by saying that irrespective of whether the RPI would result in higher increases, if it does so, that may simply be—and we would argue that it is—because it is overstating inflation as people actually experience it. That means that the CPI is the right measure of inflation. Let us turn to the draft regulations before us. The regulations specifically change the inflation measure specified in the FAS regulations from the RPI to the general level of prices so that accrued pensions will be valued by reference to the RPI for periods before 31 March this year, subject to the cap, and can be revalued by reference to the CPI after that date, again subject to the cap. Indexation on rights accrued after 1997 applied on 31 January 2012 can be based on increases in the CPI, subject to the 2.5 per cent cap. The CPI can be used for the annual increase to the FAS cap that will be made in April 2011. Noble Lords may be wondering why the draft regulations specify the general level of prices instead of the CPI. There are a number of different indices used to measure inflation, and we do not want to have to amend these regulations if the CPI index changes its name, for instance, with a change in how it treats housing, or if there is a more appropriate index at a future date. Therefore, we have adopted the more general term used for occupational pension legislation. I hope that noble Lords will agree that this is a sensible precaution. However, I can confirm that it is our present intention to use the CPI. Should a more appropriate index be identified in the future then we will, of course, consult on any planned changes. In conclusion, these draft FAS regulations will ensure that FAS payments are protected against inflation in a reasonable way and in a more appropriate manner. In my view, all of the regulations before the Committee are compatible with the European Convention on Human Rights. I commend them to the Committee.