My Lords, I thank my noble friend Lord Balfe for so eloquently moving this amendment, and other noble Lords who have participated in this debate—the noble Lords, Lord Monks and Lord McKenzie, and the noble Baroness, Lady Warwick. I found the meeting very useful, and I assure the noble Lord, Lord Monks, that, as a former trade union member, I was certainly taking everything very seriously when he put forward the points that he made.
The amendment relates to the position of certain members of pension schemes that have entered the Pension Protection Fund. I am sure that we all have a great deal of sympathy with the situation that these people find themselves in. This amendment, which offers two alternative methods of changing the cap, very helpfully allows me to talk to the Committee briefly about the level of the PPF compensation cap. I understand that my noble friend’s principle is that he would like an increase in that cap to provide higher compensation to those who had accrued a relatively large pension, but who, because they had relatively short service in their scheme, will not be affected by the long-service cap amendments. I will therefore deal initially with that principle rather than concentrating on the actual effect of this amendment.
I start by making a small but perhaps important point: the loss of these pensions is not a consequence of the PPF cap. The fact is that the schemes were underfunded and could not meet the costs of the accrued pensions. Those pensions have already been lost. What we are discussing is the level of compensation that should be paid to the affected people.
The Pension Protection Fund does not replace lost benefits in full. That is not an uncommon approach; for example, deposits in banks are covered up to a limit of £85,000. The PPF pays compensation at the full rate of the pension in payment at the insolvency date to anyone over their normal pension age. Pilots as a group, with their relatively low pension age of 55, benefit from this, as more of them are likely to be over that threshold than if the scheme had a more usual pension age of 60 or 65. It is those below their normal pension age who have their compensation set at broadly 90% of the pension accrued at the insolvency date. Further, it is this group—those below their scheme’s normal pension age—who are affected by the compensation cap.
The current cap produces what many would think was rather a generous entitlement of £32,761 per year at the age of 65. The cap is of course reset for anyone who chooses to take their compensation at an age lower than 65, to reflect the longer period of payment. So a person with an unusual pension age of 55, such as pilots, would have a cap of £26,571 precisely. Noble Lords might also wish to be reminded that the Pensions Act 2014 contains provision for a long-service increase to the cap, which has been referred to during the debate, of 3% for each year of service above 20 years, although I accept this may not be relevant for many pilots because of the lower retirement age.
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Understandably, those affected by the cap compare the amount of compensation to what they expected to get from their pension scheme. However, that is not a valid comparison, at least in terms of how the scheme operates. As I have said, their pensions have already been lost, and if the scheme could have paid them more than the amount of compensation then it would not have entered the Pension Protection Fund in the first place. In answer to the point made by the noble Lord, Lord McKenzie, we would have to revisit the Monarch situation; although there is no intention of moving this cap, if we did then it would affect the Monarch arrangements.
The question before us is whether compensation of £26,500 a year, or just over, for life from age 55 is acceptable. To put this figure into context, it is almost double the average occupational pension in the UK. In an ideal world, I am sure that we would all like the compensation paid by the PPF to be higher, although, if such an increase were possible, some would probably prefer it to be targeted at lower earners. I certainly do not want to clobber those people with a high salary who earn it, but I wish to act fairly here, as do the Government.
The noble Lord has referred to an additional cost of £12 million. I have to say that I do not recognise that sum; the letter he wrote and the discussion we had refer to a cost of £70 million and the Government thought that that was on the low side, so I am not sure where the £12 million comes from. Regardless of the actual cost, however, any increase to the compensation cost must be paid for, so how could it be funded? To begin with, the compensation paid to others could be reduced, but I am sure that noble Lords are not advocating that approach. Another option is to increase the PPF’s income. Compensation is funded by a combination of the schemes’ remaining assets, investment return and a levy on ongoing schemes. If the money had to be found through an increase in the levy, the costs are borne by those schemes that are still backed by solvent employers. Some 78% of schemes eligible for the PPF were in deficit at the end of November 2014, and their aggregate deficit was £221 billion. Noble Lords may wish to consider whether this is the right time to be increasing their costs.
Lastly, we could expect the PPF to absorb this extra liability. It is true that it currently running a surplus, and this is something the PPF can be proud of. I am very grateful to the noble Baroness, Lady Warwick,
for her insights into its remit and work. Given that the number of schemes eligible to pay the PPF levy is declining, the PPF has taken the decision to aim to be self-supporting by 2030 so that it can continue to pay compensation, which could be necessary into the 22nd century. There are significant risks to this goal in terms of future levels of insolvency and scheme deficits. In view of this, the current surplus has, if I may put it in these terms, already been committed to help to safeguard the future.
The Pension Protection Fund currently pays compensation to about 150,000 people and protects around 11 million scheme workers. We should be very cautious before we place any extra burden on the fund. The argument for so doing must be very strong and, respectfully, I do not think that it has been made out in this case. While I sympathise with those who have lost their pensions, as do the Government, they will still get a significant amount of compensation. I do not think that the position of people with capped compensation is so unfair as to justify putting an extra burden on to the PPF. I therefore urge my noble friend Lord Balfe to withdraw the amendment.