Pension Protection Fund (Pension Compensation Cap) Order 2007

rose to move, That the Grand Committee do report to the House that it has considered the Pension Protection Fund (Pension Compensation Cap)Order 2007. The noble Lord said: I shall speak also to the Occupational Pension Schemes (Levies)(Amendment) Regulations 2007 and the Occupational Pension Schemes (Levy Ceiling) Order 2007. As noble Lords will know, the Pension Protection Fund provides compensation to members of eligible defined benefit and hybrid occupational pension schemes where an employer has a qualifying insolvency event, there is no possibility of a scheme rescue, and there are insufficient assets in the scheme to pay benefits at PPF compensation levels. The PPF provides two levels of compensation: for individuals who have reached their scheme’s normal pension age or, irrespective of age, are either already in receipt of a survivor’s pension or a pension on the grounds of ill health. The PPF will pay the 100 per cent level of compensation subject to PPF rules; and for the majority of people below their scheme’s normal pension age, the PPF will pay the 90 per cent level of compensation subject to the compensation cap and PPF rules. PPF compensation is funded in three ways: by means of levies charged to all eligible occupational pension schemes, by assets remaining in schemes which transfer to the PPF at the end of an assessment period, and by the investment returns from each of these. To date, three schemes totalling 275 people have transferred into the PPF. Some 66 people are currently in receipt of compensation payments at an average of £3,700 a year. The PPF has just made a fourth payment to these people. A further 209 people will receive compensation when they reach their normal pension age. Those 275 people are the first of the thousands who will be protected by the PPF. Indeed the PPF and the Pensions Regulator have recently published the ““purple book””, or to give it its official title, the DB pensions universe risk profile, which indicates that 12.5 million members of schemes are eligible for PPF protection. Even if the actual number of people is lower because some will be members of more than one scheme, we are talking about a compensation scheme that protects a significant number of people. At the end of February 2007 there were 147 schemes covering a total of 102,000 scheme members in a PPF assessment period. We expect a further 80 schemes to enter an assessment period in each of the next two financial years, with65 of those schemes transferring into the PPF by the end of 2007-08. I turn now to the first order before the Committee, the pension compensation cap order. A cap on the level of compensation is applied to those scheme members who are below their scheme’s normal pension age immediately before the employer’s insolvency event. These members are entitled to the 90 per cent level of compensation when they retire. The current compensation cap is set at £28,944.45 at the age of 65. In calculating a member’s compensation entitlement, the cap is applied before compensation is reduced to the 90 per cent level. This provides that the total value of compensation payments for members below normal pension age does not exceed £26,050 a year at the age of 65. This amount is adjusted depending on age to ensurethat the actuarial value of the compensation package remains the same. As required under paragraph 27 of Schedule 7 to the Pensions Act 2004, the 2007 PPF pension compensation cap order uprates the level of the compensation cap from 1 April 2007 in line with the increase in the general level of earnings in the previous tax year. Average earnings, as measured by the Average Earnings Index and published by the Office for National Statistics, increased by 3.4 per cent in the 2005-06 tax year. Applying that percentage to the current compensation cap will provide an uprated cap of £29,928.56. When applying the 90 per cent provision to that uprated cap, it will provide, at age 65, a maximum level of compensation of £26,935.70. This uprated cap will apply to members who first become entitled to compensation at the 90 per cent level on or after1 April 2007. This order ensures that the level of the compensation cap is maintained in line with the increase in earnings. The Occupational Pension Schemes (Levies) (Amendment) Regulations 2007 remove references to the Pension Protection Fund Ombudsman from the Occupational Pension Schemes (Levies) Regulations 2005 for the purposes of clarity and cost effectiveness. The regulations also amend that statutory instrument so that it includes the rates for the administration levy for the financial year ending 31 March 2008. The Pension Protection Fund Ombudsman provides a dispute process that will enable interested parties to seek a review of certain key decisions by the PPF, called reviewable matters, which are set out in Schedule 9 to the Pensions Act 2004. In addition, there is a right of complaint in cases of alleged maladministration against the PPF. There is a two stage internal process with the PPF, and if people are not content, they can refer their case to the independent PPF Ombudsman. The Secretary of State initially funds the PPF Ombudsman’s work from money provided by Parliament. A levy may be raised by the Secretary of State to recover his expenditure in respect of the PPF Ombudsman, but for the second year running no PPF levy has been raised. This is because the amount needed for the PPF Ombudsman for 2007-08 is expected to be small and, in the interests of cost effectiveness, we propose to recoup costs incurred during 2007-08 in future years. This has been welcomed by those who responded to the consultation on this instrument. On the administration levy, these regulations substitute new amounts to be used in calculating the amount payable in respect of the PPF administration levy for the financial year ending 31 March 2008. For the first two years of the PPF—2005-06 and 2006-07—the administration levy was set at a rate to recoup £15 million a year. That will rise to £20 million a year. I should like to explain the reason for thisrise. The PPF estimates that its running costs will increase from £12.4 million in 2006-07 to £14.2 million for 2007-08, as it moves out of its start-up phase towards full operation, with substantial numbers of schemes completing the assessment process and transferring into the PPF itself. In addition, depreciation has increased from £0.3 million in 2006-07 to £1.1 million in 2007-08. These amounts represent the depreciation incurred in respect of capital assets the PPF acquired since they came into operation in April 2005. The increase is partly due to an increase in the staffing required to carry out the PPF’s functions for the long term. These staff will support those schemes in an assessment period and the transition of certain schemes into compensation, support the levy calculation process, invoice and collect levies, and develop the research and modelling capabilities of the PPF. There was also a shortfall in levy collection in 2005-06 and 2006-07, which has partly led to the increase in the levy for 2007-08. The collection figures for 2005-06 and 2006-07 are lower than estimated due to the poor quality of pension schemes’ data held in the past and changes in the number and size of schemes eligible to pay the levy. To date, £13 million has been invoiced and £12 million collected for 2005-06 and we estimate that around the same figure will be collected for 2006-07. Therefore, there is a small deficit to carry forward into future levy calculations. I reassure the Grand Committee that these data are significantly improving and we anticipate more accurate levy collection forecasts in future. Finally, the increase in the rate for calculating the administration levy also includes the amount of costs to the Department for Work and Pensions in setting up the PPF. These costs amount to £2.2 million a year, together with depreciation of £0.9 million on fixed assets purchased by the department as part of setting up the Pension Protection Fund, to be recovered over a three year period. The depreciation charge represents depreciation of the capital assets acquired by DWP before the PPF came into existence and is in addition to the charge referred to earlier on assets subsequently acquired by the PPF. The 2007-08 financial year is the final year of this three-year period and, therefore, administration levies in future years will no longer include these recoverable amounts.  I turn finally to the Occupational Pension Schemes (Levy Ceiling) Order 2007. The levy ceiling is one of two statutory controls on the pension protection levy. The pension protection levy estimate for 2007-08 is £675 million, which is only 2 per cent of the amount that companies are investing in pension schemes. We therefore think it is a very reasonable amount to give people the security that they need in retirement. The ceiling restricts the amount of the levy that can be charged by the PPF. The second control which comes into effect in 2008-09 is a maximum limit of25 per cent by which the levy can be raised in any one year. The current levy ceiling was set at £775 million for 2006-07. As required by Section 178(1) of the PensionsAct 2004, the Occupational Pension Schemes (Levy Ceiling) Order 2007 uprates the levy ceiling by 3.8 per cent, in line with the general level of earnings in Great Britain in the 12-month period ending 31 July in the previous financial year. The order specifies the levy ceiling figure to be imposed on the pension protection levies for the financial year beginning on 1 April 2007 as £804.45 million. However, because the 25 per cent rule restricting the growth of the levy does not come into force until 2008-09, the draft order needs to be read in conjunction with the Pension Protection Fund (Levy Ceiling) Regulations 2006 (SI 2006/2692), which sets a modified levy ceiling of £718.75m, 25 per cent higher than the estimated £575m levy for 2006/07. I can confirm that I am satisfied that the statutory instruments before us are compatible with the rights in the European Convention on Human Rights. The three statutory instruments before noble Lords provide that the compensation cap is uprated in line with the increase in average earnings, that the board of the PPF is properly funded to carry out the important task that Parliament has given it, and set a levy ceiling that safeguards the PPF’s independence and financial flexibility while providing the reassurance that business has asked for. I commend the orders to noble Lords. I beg to move. Moved, That the Grand Committee do report to the House that it has considered the Pension Protection Fund (Pension Compensation Cap)Order 2007.—(Lord McKenzie of Luton.)