Occupational Pension Schemes (Levy Ceiling) Order 2010

My Lords, before I explain these orders, noble Lords may find it helpful if I say a little about the work of the PPF in the year since we last debated these orders. As noble Lords are aware, the Pension Protection Fund protects members of defined-benefit occupational pension schemes and members of defined-benefit parts of hybrid defined-benefit and defined-contribution schemes. It pays a statutory level of compensation if the sponsoring employer of the scheme experiences what is called a qualifying insolvency event—for example, where a company enters administration, where there is no possibility of a scheme rescue or where there are insufficient assets in the scheme to pay benefits at PPF compensation levels—that is, 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, which is a public corporation. The Pension Protection 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 fund ensures that members of eligible defined-benefit schemes still receive a meaningful income in place of the pension they had worked for and would have received, had their employer not experienced a qualifying insolvency event and the fund of which they were a member not been unable to pay benefits at Pension Protection Fund levels. Since 2005, 181 schemes have been assessed by the Pension Protection Fund following an employer insolvency event. At present 363 schemes, with around 203,000 members, are currently being assessed. As at the end of December 2009, 109 schemes had transferred into the PPF and over 32,800 people were either receiving PPF compensation or due to receive it in the future. The average yearly payment per person is around £4,000. When the 2009 versions of these instruments were debated around this time last year, 74 schemes, with around 20,000 members, had transferred into the PPF, and 295 schemes, with around 134,000 members, were in assessment. This increase in numbers over the previous year shows the challenges that the PPF has had to face and the results of its efforts over the past year. The PPF’s contribution is welcomed, I am sure, by noble Lords. At these difficult times, I am sure that the 12 million people protected by the PPF will be particularly glad to know of its protection. However, I know that noble Lords will also be keen to understand that the PPF is fulfilling its statutory purpose and that it will continue to be able to pay compensation going forward. Let me be clear on this: with around £3.7 billion under management, and a levy intended to raise £720 million in 2010-11, there is no doubt that the PPF has the liquidity to pay a monthly compensation bill of around £6.5 million. Importantly, under even the most taxing economic scenarios that we have tested, the PPF could continue to pay compensation for at least 20 years into the future. However, it is right that we should be vigilant, and we and the PPF continue to monitor its position. Despite the welcome news that the recovery has begun and that the UK is no longer in recession, we know that employers sponsoring defined-benefit pension schemes will continue to experience insolvency events, and the PPF will continue to play a vital role in supporting pensioners in retirement. I turn to the first instrument for debate, the draft Pension Protection Fund (Pension Compensation Cap) Order 2010. A cap on the level of Pension Protection Fund compensation is applied to those 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 2010-11 we must consider average earnings in Great Britain, as measured by the average earnings index and published by the Office for National Statistics for the 2008-09 tax year. That shows an increase of 3.5 per cent. An increase of 3.5 per cent gives a new cap of £33,054.09 for the 2010-11 tax year. This means that the total value of compensation payments for members below normal pension age shall not exceed £29,748.68 for the new tax year. The new cap will apply to members who first become entitled to compensation at the 90 per cent level on or after 1 April 2010. The pension compensation cap 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 turn to the draft Occupational Pension Schemes (Levy Ceiling) Order 2010. 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 2009-10 was set at £863 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 0.9 per cent, bringing it to £871,183,684. That 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 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 that commitment and announced that it will increase this year's levy estimate only by earnings, which means that for 2010-11 the levy estimate will be £720 million. However, the annual increases in the ceiling ensure that after 2010-11 the board of the PPF could in future increase the levy up to the levy ceiling if it considered it appropriate, subject to a statutory 25 per cent limit on the year-on-year increase. 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 two statutory instruments before us provide that the Pension Protection Fund compensation cap and levy ceiling are uprated in line with increases in average earnings. I beg to move.