Financial Assistance Scheme (Miscellaneous Amendments) Regulations 2010

My Lords, I am grateful to both noble Lords who have spoken in support of these proposals. The noble Lord, Lord Freud, referred to the work done by the JCSI and the Merits Committee. I support what he says, although sometimes it is a little painful to receive their reports if you are dealing with matters that are the subject of their scrutiny. But it is a valuable and important process and part of our proceedings. The noble Lord asked about consolidation. We would not have wanted to consolidate these regulations until we had actually ceased to make all the changes. In a sense, the changes took place at various stages, because we wanted to proceed as quickly as we could as the policy developed to ensure that those changes that were most beneficial were dealt with first. That is why the sequence has taken place as it is. Now we have completed implementing the 2007 announcements, we will look to consolidate in the near future. The noble Lord asked about the impact of what we are doing on government finances. We expect some schemes to be transferred soon, after the regulations come into force, in cases where full actuarial valuations are not required. However, we do not expect substantive assets to start transferring until early autumn. This is because in order to ensure accuracy the full valuation process will take some time—perhaps six months. We expect a good proportion of scheme assets to be transferred to government within two years. Completing the transfer of all schemes is expected to take around four years. Assets transferred will reduce government borrowing because they are transferred into the Consolidated Fund. The payments that are then made in successive years become a cost charged in those years. Those are the broad consequences of these proposals. The noble Baroness, Lady Thomas, reverted to the issue around what 90 per cent means. There has been a misunderstanding about this, but I believe the Government have been clear throughout. The Government have guaranteed that FAS will provide 90 per cent of a member’s expected pension, subject to a cap. The expected pension is the member’s accrued pension as at the date wind-up starts, revalued at a standard rate to the member’s retirement date. In some cases, this will not be the same as 90 per cent of what members would have expected at retirement. First, had the scheme not wound up, further contributions may have been due to the scheme before the member reached retirement. Secondly, the FAS applies its own revaluation rates from the date of wind-up to the member’s normal retirement age and these rates may be lower than those which would have been applied by the pension scheme, so differences could arise. In addition, the statutory indexation provided by FAS may not be as generous as that which would have been provided by the scheme. We have never said that it would replicate precisely 90 per cent subject to the cap of what members would have got had the scheme continued and remained in operation until their retirement. The noble Baroness made reference to small payouts. The regulations are designed to ensure that no one gets less from FAS than they would have got from their scheme if it had wound up conventionally. Obviously, if there are examples of that which noble Lords come across, we would be happy to review that. The noble Baroness talked about lump sums. Let me be clear that any FAS scheme member with a share of scheme assets who is not receiving a scheme pension when the scheme assets transfer to government, will be able to take a lump sum upon retirement. The lump sum available will be broadly consistent with the normal tax rules, as the noble Baroness suggested, on a pension commencement lump sum. However, the amount will be restricted by the member’s asset share as it would be where a scheme in wind-up is underfunded. The FAS will not offer the opportunity to commute any payments to members who retire before their scheme transfers assets; where funding levels and legislation allow, their scheme should already have offered them the opportunity to commute part of their scheme pension when they reach retirement age. As far as paying lump sums to everyone is concerned, the FAS will pay lump sums only where the assets of the pension scheme are sufficient. We have considered the arguments for allowing all FAS beneficiaries to access a lump sum in return for lower assistance payments. However, while in the long term this would be cost neutral, in the short term it would bring costs forward, and therefore there is an important consideration for the Government in that, which is why we have not gone down that route. The noble Baroness made reference to the 450 schemes that are likely to transfer assets to government. I think that is the figure identified by the Young review and is the most up-to-date figure that we have. It might be helpful for noble Lords to have an update on scheme data. As at the end of January this year, 925 schemes are qualifying pension schemes for FAS purposes, 314 of them have wound up completely, 611 are in winding-up and another 192 are pursuing FAS qualifications. I think that is something like 1,100—perhaps a few less—which is broadly consistent with some of the earlier estimates that were made. The noble Baroness made reference to the question of valuations on lump sums. The cost of FAS valuations will be broadly in line with the cost that schemes will incur if they were winding up normally, and we intend to provide lump sums in line with those that would have been available from an annuity. The noble Baroness and the noble Lord, Lord Freud, made reference to unusual use of powers. The issue was put on the record in another place but I am happy to repeat it here. Perhaps it is appropriate that I do. It is a little complicated, but here goes: ""Section 286(1) of the Pensions Act 2004 confers wide power on the Secretary of State to make regulations to provide a financial assistance scheme. Section 286(3)(j) provides the power to apply parts 1 and 2 of the 2004 Act with modifications to the FAS. Section 161 in part 2, along with schedule 6, includes provisions in relation to transfer of assets to the board of the PPF. The draft regulations modify section 161 and schedule 6 for the purpose of the FAS to allow transfer of scheme assets to the Secretary of State"." It continues: ""The JCSI set out in its report that that may be an unusual or unexpected use of the power, because section 286(3)(c) confers an express power for regulations to provide for the transfer of property rights and liabilities to the scheme manager"." As noble Lords are all aware, the FAS scheme manager is now the PPF, not the Secretary of State. ""The report suggests that to fall within the powers in the primary legislation, assets should be transferred to the scheme itself. However, unlike the PPF there is no scheme fund in which assets are held and then used to pay assistance … Instead, the FAS sets out who qualifies for assistance and how payments should be calculated. Funding for those payments is provided by the Secretary of State, directly out of the DWP budget. It is therefore appropriate that any funds brought in should be transferred to the Secretary of State and not the scheme manager. In practice, the funds will be transferred to the consolidated fund that the Government hold"," as I outlined a moment ago. ""We took the view that the list in section 286(3) of the 2004 Act illustrates and amplifies how the power in section 286(1) could be used and it is not intended to be restrictive. When the clause was debated"—" in relation to the 2004 Act— ""it was not clear how the FAS would be delivered"." The noble Lord, Lord Freud, made that point; it has evolved over a number of years. ""It was made clear then that there were a number of alternatives that would need to be considered. The clause was, therefore, widely drafted … and subject to an affirmative resolution … to allow additional scrutiny by Parliament when proper consideration had been given to … the matter ... Transfer of the assets to Government was one possibility, as was making the PPF the scheme manager. The provisions made in these draft regulations ""… sit squarely within that and we consider that they clearly fall within the provisions of the 2004 Act".—[Official Report, Commons, 24/3/10; col. 18.]" We therefore consider that the use of the modification power in this way could not be considered to be unusual or unexpected. The noble Lord, Lord Freud, reminded us of a bit of the history of this with the debates that we had regarding the final destination of FAS. He is right that it was hotly contested; I was on the receiving end of some of that. However, I think we have ended up in a good place, and on that basis I am grateful for noble Lords’ support for the regulations. Motion agreed.