Pension Protection Fund and Occupational Pension Schemes (Levy Ceiling) Order 2025
Lord Davies of Brixton Excerpts(1 week, 1 day ago)
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Lord Davies of Brixton
That the Grand Committee takes note of the Pension Protection Fund and Occupational Pension Schemes (Levy Ceiling) Order 2025, laid before the House on 3 February (SI 2025/103).
Relevant document: 18th Report from the Secondary Legislation Scrutiny Committee
Lord Davies of Brixton (Lab)
My Lords, this order is routine and has little practical impact on the PPF. It sets the potential cap on the levy, but the levy as is currently payable is only a small percentage of the cap, so in itself it is of no significance. However, having the order before us provides an opportunity to discuss the operation of what is becoming, a bit under the radar, one of the country’s biggest financial institutions, and one that is receiving increasing comment.
Those among us who feel a sense of déjà vu are right, as we had a similar debate almost exactly two years ago. There is an important difference, of course, in that the Front Benches have swapped places. I will not touch on the Financial Assistance Scheme—FAS—although it is worth saying that many of the same points will apply. But that will be a debate for another day.
The issues being discussed in the context of the Pension Protection Fund include the practical problem with the legislation preventing a zero levy. There is the issue of the Government’s general policies to increase productive investment by the pension universe as a whole. There is the issue, which has been raised, of fund consolidation and whether the PPF is a suitable vehicle for that. There are also the limits on the benefits that the PPF can pay. Noble Lords will be glad to know that I will not deal with the first three, although it is worth flagging them up. I will say a bit about the legislation, but my focus will be on the limit to the benefits payable to members of the PPF and what, if anything, could be done about it.
We have to thank the PPF for its extremely helpful briefing note. I do not think that anyone is here from the PPF, but one can always watch online nowadays, so I hope they are watching us. I emphasise that the briefing note was helpful and showed that the PPF was aware of and alive to the issues that I am raising, which is good to know. Having read through the fund’s annual report in preparation for this debate, I welcome its commitment to DEI policies and the requirements of climate change. It is worth putting that on record, because it is doing a great job.
In a sense, this debate is a taster for the forthcoming debates we will have on the pensions Bill. Perhaps the Minister can give us a slight hint about when and, as importantly, where we will get that Bill. But the one thing that we are almost certain to see in the Bill— because the Pensions Minister has said so—is some legislation on the calculation of the levy. I think the Minister has gone as far as is possible to say that that will be in the Bill.
However, there are other issues that can be raised in the context of the Bill. I give due warning: I think that there will be scope in the Bill to discuss the issue I am raising today—that of the increases in benefits for members of the PPF. We have not seen the Bill yet, including its Long Title and what will be in scope, but, given the issues that have already been mentioned as likely to be in the Bill, I think that it will provide an appropriate and important arena in which to discuss what I am going to raise in relation to benefit increases.
I shall make a point on the regulations and the zero levy. As I say, the Minister, Torsten Bell MP, has gone as far as he can. He mentioned the Government’s intention to allow the PPF greater flexibility in reducing the levy that it collects on pension schemes, particularly when it is not needed, but he went on to highlight the PPF’s critical role as a safety net for pension savers—on the one hand, seeking to avoid unnecessary levies on pension schemes, but, at the same time, with the intention of allowing pension scheme employers to invest, supporting savers in growth but recognising the need to maintain a secure PPF. He also drew attention to the PPF’s strong financial position. Can the Minister here tell us anything more specific about the proposals to introduce the regulations?
I move on to the PPF’s finances. I have here something in quotation marks; I think I am quoting the Minister. It says that the PPF is in “robust financial health”. In all the information that the PPF provides us with—it is a lot of information—there is a wonderful fan chart showing the future progress of the funding levels and its perception that, as things stand, those levels will continue to increase. It is already strong, and the prospects are that it is going to continue to increase over the coming 10 to 15 years.
So, an issue is bound to arise—people always raise it when they see that a pension fund has what people tend to refer to as a surplus; that is a questionable concept but people refer to surplus—which is that, if a surplus is there, people are always pretty keen to spend it on all sorts of things rather than on the prime purpose of any pension arrangement, which is obviously to provide benefits for the members. It is notable— I checked this in the annual report and accounts of the PPF—that it never actually uses “surplus” in this context. It quotes the Government’s use of the word, but the fund itself refers not to surpluses but to its reserves. That is a much more appropriate way of thinking about this. “Surplus” implies that you do not really need it, but a reserve is there for the purposes of the fund and to protect members’ benefits. It is much better to talk in terms of reserves rather than of surpluses.
It is worth recalling that, two years ago, when we last discussed this issue, we had just had the departmental review of the Pension Protection Fund, done jointly by officials of the department and the PPF. This was a particular recommendation:
“That the DWP and the PPF work together to understand the implications of the PPF’s funding position in light of expected future developments in the population of Defined Benefit (DB) pension schemes and plan well ahead for any legislative changes that might be needed; for example, to address what happens to any funding which is surplus to requirements”.
So, the departmental review uses “surplus”, which, as I have explained, I do not like, but it was asking what we are going to do about this level of reserves: is it the correct level of reserves or are there other ways in which this money could be implied?
The problem, of course, is that the legislation does not say anything at all about those resources. Given the PPF’s understandable policy of building up a substantial buffer, we have to give that issue some attention, particularly as the PPF’s figures show that buffer increasing year by year, as I said.
What could you do with it? I have seen one suggestion that it could go back to the employers, but I cannot see how that is practical. In a sense, it can go back to the employers by reducing the amount of the levy—that is for the PPF—but there is no way in which the actual cash could go back because many of the employers who paid it are no longer here and we are now in a different world compared to when the levy was being paid, up to 20 years ago. I do not think it is an option to make cash payments back to employers. The extent to which, by reducing the levy, employers have more cash in their hands is a separate issue.
It would be equally wrong, or even worse, for it to go to the Government, but that is what would happen as things stand. This is a fund, and if it ever ran out of people to pay—way in the future, of course, because we are already anticipating that benefits already in payment will still be in payment in 2100, so it is a long term—even the prospect of that money ultimately going to the Government is just wrong and it should be rejected explicitly. From my perspective, the obvious place where that money could be used is to improve the benefits for members.
There are, obviously, two ways in which members’ benefits can be increased. First, there is the 10% haircut, which is applied to members who join from deferment. Of course, those who are already receiving pensions from age, retirement or ill health get 100%, but the deferred suffer this blunt 10% haircut, which was introduced as part of the deal when the legislation was introduced. It is a real live issue: do we still need to apply that 10% haircut? You have a retention on insurance policies to reduce the premiums and to discourage people from making claims. I do not think that really applies. We have already got the levy down to minimal amounts, so we do not need it for that reason, and the idea that employers will behave recklessly in order that their ex-employees can get 100% rather than 90% benefits does not need to be taken seriously. The need for the haircut has clearly gone. It is there, but it is not needed. That is the first thing that you could do.
The second thing, and the one that perhaps gets most discussion, is providing better protection against inflation. That is the central issue that I am talking about. There is a very important distinction between what can be done under existing legislation and what would require additional legislation. That falls quite neatly into benefits accrued post 1997, where the fund has the power to make some discretionary increases. It has never exercised it, but it now says in its annual reports that it is an issue that it considers. It has always reached the conclusion that it will not make the increases, but it has the power. For pre-1997 benefits it has no right to make any increases and to do so would require legislation, which is where we come back to the pensions Bill. I very much hope that the provisions in the pensions Bill will at the very least give the PPF equivalent power to make discretionary increases for pre-1997 benefits, as it has the power to do for post-1997 benefits.
Until four or five years ago, the PPF operated in a period of relatively low inflation, so the issue did not bite so much—goodness me, I have spoken for 15 minutes already—but then we had three or four years of high rates of inflation. This had a significant impact on members’ benefits and a particularly severe impact on members with pre-1997 accruals, who got no increases. Their benefits have fallen in value by something like 40%. Benefits accrued after 1997 do get increases, but, because of the 2.5% cap on increases, the reduction they have suffered is significantly less but still material—in excess of a 20% cut. That is a reduction for ever; there is no way in which those reductions are made up subsequently, unless the PPF board were so to decide.
Baroness Drake (Lab)
My Lords, I refer to my interest as a trustee of a defined benefit pension scheme. I thank my noble friend Lord Davies for facilitating this debate.
Two of the restrictions placed on the PPF by the Pensions Act 2004 are, first, the levy ceiling and, secondly, that any increase in the actual levy is limited to a 25% increase year on year. If the PPF sets a zero levy one year, it can never subsequently raise it because 25% of zero remains zero. Although the order that we are taking note of today increases the ceiling, in reality, the levy has been systematically falling as the PPF’s position has strengthened. That 25% limit, however, inhibits setting a very low levy: if economic circumstances change, it will take longer to raise that levy back to a material level.
The Government have said that they will consider legislative changes to make it easier to set a zero levy; I hope that the Minister can confirm that that is still the disposition of the Government. However, given the stronger funding position of the PPF and the prospect of the Government removing the 25% limit, the PPF board halved its £100 million levy estimate for 2025-26 to £45 million—its lowest ever. That is the point I want to take up in the rest of my contribution.
In its foreword to its levy policy statement, which sets out the £45 million, the PPF states:
“The likelihood of the PPF encountering significant funding problems in the future … is low and is expected to continue to reduce over time … if funding problems did arise, these could be resolved over a multi-year period with our investment returns likely to be the most significant contributor”.
Taking into account that level of confidence in the funding level and investment returns, and taking into account the £13.2 billion funding surplus—
Baroness Drake (Lab)
Yes, reserves. Taking into account that and the levy reduction, it triggers the need to reflect that it is equally important to have regard to what is a fair striking of the balance between levy payer and member interests. This is the issue that I want to pause on, because it is something that the Government should reflect on—particularly regarding, as others have mentioned, the PPF indexation rules as they apply to compensation for service pre 1997.
As my noble friend Lord Davies set out, the Act sets the annual increase for PPF compensation in payment for pensionable service accrued after April 1997; that is set at the CPI and capped at 2.5%. However, that is the limit of the PPF’s power, which means that, for pension benefits accrued for service pre 1997, compensation payment does not increase at all—it just does not. No matter what the year or the economic circumstances, there are no means of increasing the compensation payments for pension benefits accrued prior to 1997. Over the period of retirement, particularly given recent high inflation, the rules on pre-1997 service compensation have had a significant, even acute, financial impact on those affected.
The PPF provided some information on the costs of improving compensation rules in a published letter in December 2024, in response to requests from the Commons Work and Pensions Select Committee. Unlike my noble friend, I shall, if I may, refer to some figures. Using those figures, if the Government allowed the PPF to apply prospectively CPI capped at 2.5% to pre-service compensation payments, it would increase liabilities by £2 billion, reducing the reserves from £13.2 billion to £11 billion but still keeping a 150% funding level even if that was done. However, for an ad hoc increase to the pre-1997 compensation payment, recognising that period of higher inflation we have been through, the figures would be significantly lower than those I have quoted.
As the noble Baroness, Lady Altmann, said, the rules set in 2004 were set cautiously because nobody was really clear on the level of schemes that would fall into the PPF. There was a lot questioning about the sustainability of the PPF; it is a compliment to the PPF that it has proved it is sustainable. So some of the rules were set very cautiously, but the PPF is now in a strong financial position, with some £32.2 billion of assets: £19 billion in liabilities and reserves of £13.2 billion. The risk of future claims has fallen, either because, as the noble Baroness, Lady Altmann, pointed out, there is a big shift to buyout, or because the funding of schemes is much stronger. The risks are falling correspondingly: the annual levy has declined from £648 million in 2023 to £45 million in 2025-26, with further reductions anticipated.
Not only has the levy in quantum declined hugely; the levy has also declined as a proportion of the PPF’s funding mix. Roughly one-third of the funding comes from the assets transferred to the PPF from those members’ pension schemes. Similarly, another third comes from the investment returned on assets, and 11% comes from assets recovered by the PPF on behalf of those schemes. Less than a quarter—23%—of the funding comes from the levy, and that is going to fall. However, the benefits of the PPF’s strong funding are deployed more to move the levy towards zero, and consideration is being given to abolishing the industry-funded PPF administration levy. This inevitably raises the question of fair balance between levy payer and member interest, particularly for pre-1997 service, as it is quite tough that there is no facility to improve those compensation payments and they never increase.
Like others, I absolutely support the Government’s priority to deliver growth, driving employer investment in their businesses. I also recognise that the PPF liabilities are captured in the whole of government accounts, which obviously introduces a sensitivity. I am not disregarding those issues, but I note that the PPF’s own three-year strategy has set a goal of working with government to progress a review of the indexing of compensation. There is a growing concern, given the level of funding and reserves, about the fact that, at the moment, service accrued pre 1997 can never be increased. It is something that starts to tilt a fair balance between levy payer and member interest. Although I recognise that these things are not easy, will the Government give further consideration to a fair striking of balance of interests?
Lord Davies of Brixton (Lab)
I will not tire the patience of the Committee by giving the half of my speech that I had to drop when I introduced the debate. I shall just thank my noble friend the Minister for her reply. It was what had to be expected, and I understand the situation. We look forward to continuing these discussions in the pensions Bill, whenever it comes.
National Insurance Pension Underpayments
Lord Davies of Brixton Excerpts(1 month, 2 weeks ago)
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Lord Davies of Brixton
To ask His Majesty’s Government what steps they are taking to reduce the number of underpayments of National Insurance pension where entitlement to that pension is based on a spouse’s National Insurance record, and the underpayment is caused by “official error” by the Department for Work and Pensions.
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Sherlock) (Lab)
My Lords, everyone should receive the state pension payments to which they are entitled. This Government understand the importance of putting right any errors. DWP became aware of issues with historic state pension underpayments in 2020 and took immediate action to investigate and correct the problem. A legal entitlements and administrative practices exercise—LEAP—began in January 2021, and DWP completed the vast majority of cases by December 2024 as planned. The exercise has now closed.
Lord Davies of Brixton (Lab)
I thank my noble friend for her Answer and welcome the good news. The problem is that this is only one aspect of the sheer complexity of state pension entitlement for spouses’ pensions. Because of the history, that largely affects women. Does my noble friend agree that the department should perhaps be doing more to inform people so they can find their way through the maze of entitlement?
Baroness Sherlock (Lab)
My noble friend raises a really important point. There is a lot of complexity, particularly in the old basic state pension. With the new state pension, your entitlement depends on your own national insurance contributions in the majority of cases, so in future it gets a lot more straightforward. Most people claim their new state pension online, so getting it is mostly automated. However, under the old state pension, if you did not have enough pension in your own right, you could inherit it from a civil partner or a spouse, or a divorced partner or a late spouse. That has led to all kinds of complexities. We are making sure that before someone reaches state pension age, the Pension Service writes to them to tell them what they have to do to claim their state pension. As part of that process, they have to give us the details that enable us to work out if they are still carrying forward any entitlements from partners’ contributions as well as their own.
So, we are really committed to making sure there is clear, accurate, accessible information out there about the state pension. There is lots of it online, on GOV.UK. There is even a tool called “Your partner’s National Insurance record and your State Pension”, which, while not imaginative, is a pretty clear description of what it does. If anyone would rather not go online, they can ring the Pension Service, which will talk them through it. We are really determined to help people get this right.
Pension Review: Phase 2
Lord Davies of Brixton Excerpts(4 months, 1 week ago)
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Lord Davies of Brixton
To ask His Majesty’s Government whether they have paused phase 2 of their pension review, and if so, why.
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Sherlock) (Lab)
My Lords, this Government are committed to enabling tomorrow’s pensioners to have security in retirement, which is why we announced the landmark pensions review days after coming into office in July. The first phase will boost investment and economic growth, with two consultations live since November, and we are committed to a second phase focused on retirement adequacy, of which we will provide further details in due course.
Lord Davies of Brixton (Lab)
I very much welcome my noble friend the Minister’s reply, but of course she will be aware of how this works. Last weekend there was a series of stories in the national press, from the FT to the Sun, suggesting that the second phase had been put on hold, presumably to provide some assurance to those who are concerned about the high costs of employment. The problem is that without an urgent definition of an adequate pension on a clear and evidence-based basis, much of the debate that we can have on pensions is facile and empty of content. You cannot know which way to go unless you know where you are going. Does the Minister agree?
Baroness Sherlock (Lab)
I think I can agree with the last statement firmly. I will try to avoid being facile and empty of content; I cannot make permanent promises, but I will do my best. I understand the point my noble friend is making, but I can perhaps offer him some reassurance. The pensions review is going to be conducted in two phases, and it matters that they are structured in the right way. The first phase, which was launched by the Chancellor in July, is aiming to boost investment, so it offers a win-win. It will boost investment for the country and provide better saver outcomes, alongside economic growth.
Phase 1 launched two significant consultations: one about DC schemes and the other about the Local Government Pension Scheme. It is right that we focus on delivering the first phase before moving on to phase 2. But the second phase, my noble friend will be glad to know, will focus on pensions adequacy and further measures to improve outcomes for pensioners. I take his point about the need to be clear about what adequacy means, and I will take that back. The scope of the second phase will be announced in due course, but I will take that comment back to my colleagues as that is being developed.
Women’s State Pension Age Communication: PHSO Report
Lord Davies of Brixton Excerpts(4 months, 2 weeks ago)
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Baroness Sherlock (Lab)
My Lords, I would like to talk to the noble Viscount outside to understand exactly what he is asking about AI. If he can clarify the question, I will be very happy to write to him with an answer.
Baroness Anderson of Stoke-on-Trent (Lab)
I apologise to the noble Lord, but he was not present at the start of the Statement, so he cannot participate.
Social Security Advisory Committee: Winter Fuel Payment
Lord Davies of Brixton Excerpts(5 months, 2 weeks ago)
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Baroness Sherlock (Lab)
My Lords, the situation is different in different parts of the country. In Scotland, it is complicated by the fact that this is the first year it is devolved, so we have had to legislate in a different way to enable us to do that for Scotland but not for elsewhere in the UK. The Government have sought to make sure, by writing, across the piece, to 12 million pensioners, that we are directly engaging and that people are as aware as possible. There are also campaigns going on with partners in local government and voluntary organisations, as well as a media campaign on radio, television and social media. I will certainly check, go back and review that, and if I have any concerns that it is not being done appropriately in some parts of the United Kingdom, I will very happily come back to the noble Lord.
Lord Davies of Brixton (Lab)
As my noble friend says—I will get it right this time—we now have the letter from the Secretary of State. I am sorry to have to press her on this, but the Government consistently fail to answer the first question raised by the committee. I asked the same question in a Written Question during the recess and, again, it was not answered. The committee wants to know,
“the offsetting cost of different levels of additional Pension Credit take-up”.
I too asked that question, and saying that the OBR has signed off the figures is not an answer.
Baroness Sherlock (Lab)
My Lords, I understand that the OBR listed certified costings if nobody claimed pension credit, and costings on the assumption, which was also our assumption, that there would be a five percentage-point increase in that. It seems to me that that gives the entire range, and between that, presumably one could do the sums. I think that that does answer the question.
State Pension: Age Increase
Lord Davies of Brixton Excerpts(5 months, 2 weeks ago)
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Lord Davies of Brixton
To ask His Majesty’s Government what preparations they are making to inform people born on or after 6 April 1960 about the increase in their state pension age from 66 to 67 which will be implemented over the period 6 April 2026 to 5 April 2028.
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Sherlock) (Lab)
My Lords, the Government recognise that information about the state pension age is crucial to retirement planning and are committed to communicating planned state pension age changes effectively. The department undertakes a range of activities, including awareness campaigns, digital tools such as “Check your State Pension age” and sending personalised letters. We are developing our strategy to communicate information and assessing the most effective ways to raise awareness about state pension age changes.
Lord Davies of Brixton (Lab)
I thank my noble friend for her Answer. I remain concerned that we are only 17 months away from when people discover that they are not able to retire at the date that they thought they would. We know where this ends up: a finding of maladministration by the ombudsman and mass discontent. I urge the noble Lord, the noble Minister, the Baroness, to make sure that a mass campaign is initiated soon. Many people have an aversion to opening brown envelopes; we need this to be highlighted in the press for the next 17 months.
Baroness Sherlock (Lab)
My Lords, I answer to anything really. The Government have already used an array of methods to communicate state pension age changes, including leaflets, advertising campaigns, digital tools and directly writing to everybody affected. Between December 2016 and May 2018, DWP wrote to all those in the group my noble friend is talking about—that is, those born between 6 April 1960 and 5 April 1961, which includes me—who have state pension ages between 66 and 67. In 2016, DWP launched a tool “Check your State Pension age” on GOV.UK and also “Check your State Pension forecast”. More than 31 million digital forecasts have been done plus another 1.5 million paper forecasts. I think it is working. The 2021 Planning and Preparing for Later Life survey talked to exactly those people and found that, of those with a pension age between 66 and 67, 94% either correctly identified their state pension age or overestimated it.
Pension Credit
Lord Davies of Brixton Excerpts(5 months, 3 weeks ago)
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The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Sherlock) (Lab)
My Lords, the Government want all eligible pensioners to apply for pension credit. The Government have written to pensioners providing advice about claiming pension credit following the change to the winter fuel payment, alongside a range of other creative media campaigns. We are engaging directly with pensioners as well as with stakeholders, including devolved Governments, councils and charities, in a joint effort to raise awareness through our combined networks and channels.
Baroness Stedman-Scott (Con)
I say to the noble Lord: feel free. Having run a pension credit campaign, I can understand what the Minister is undertaking. Do the Government intend to guarantee that the DWP has the capacity to deal with what could well be a rapid uptake of applications for pension credit—with all the extra administration needed to process the claims —after this Government’s shameful decision to deprive pensioners who need it most of their winter fuel payment?
Baroness Sherlock (Lab)
My Lords, I was so with the noble Lord for the first 20 seconds—all the way. I am grateful for his congratulations to the department, and I shall take them back to my colleagues, who are doing a brilliant job on this front. We have written to around 12 million pensioners about the change to the winter fuel allowance, so a lot of work has been done out there to encourage people to apply—and it is having an effect. We have seen a 152% increase in pension credit claims received by the DWP in the eight weeks following the announcement on the winter fuel payment compared to the eight weeks before, and that will be updated towards the end of the month.
On the costs at the end, obviously, a lot of these claims have to be processed and we will not know for some time down the road. However, it is very clear that the DWP wants everybody who is eligible to do so to claim pension credit. As I have said before, if we end up with more people claiming the money to which they are entitled, that is a good thing. Pensioners deserve the money to which they are entitled.
Lord Davies of Brixton (Lab)
My Lords, I apologise to the House and to the noble Baroness, Lady Stedman-Scott, for jumping in too quickly. My noble friend the Minister gave the figure of 500 additional staff in an Answer to a Written Question from me earlier in the Session. What was not clear from her reply was when the 500 extra staff would be in post and fully trained to provide the service required to achieve the take-up of pension credit that we all want to see.
Women’s State Pension Age: PHSO Report
Lord Davies of Brixton Excerpts(6 months ago)
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Baroness Sherlock (Lab)
My Lords, if I could persuade—with some trepidation—the noble and learned Baroness to share the details with me, I would be very happy to look into that.
Lord Davies of Brixton (Lab)
My Lords, the ombudsman made it clear that these women suffered from maladministration and that they are entitled to redress. I ask my noble friend to recognise the case for urgency, particularly because the delay is leaving the people affected prey to scammers, who are offering to assist them in making claims. This issue needs to be resolved as quickly as practical.
Baroness Sherlock (Lab)
My Lords, I am grateful to my noble friend for raising that last point. To be absolutely clear, because there has been no response to the report, there is no compensation scheme. Anyone claiming to offer it is scamming and nobody should touch it—please can that message go out loud and clear. I understand my noble friend’s general point, and I know he will understand the position that this Government are in. At the risk of boring myself, never mind the House, all I can do is repeat that the Government are looking very closely at the findings of the ombudsman and will respond as soon as is practicable.
Pensions Regulator Defined Benefit Funding Code of Practice 2024
Lord Davies of Brixton Excerpts(6 months, 1 week ago)
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Lord Davies of Brixton
That the Grand Committee takes note of the draft Pensions Regulator’s Defined Benefit Funding Code of Practice 2024, laid before the House on 29 July.
Relevant document: 2nd Report from the Secondary Legislation Scrutiny Committee
Lord Davies of Brixton (Lab)
I always appreciate a challenge, and I was quite interested to note that our Whips have got the idea that this debate will last half an hour, but I will not take up the whole 30 minutes.
First, I have to declare an interest: I am a fellow of the Institute and Faculty of Actuaries, or IFoA as it is now. Many members of the institute provide advice on funding of defined benefit or DB schemes, and they will be significantly affected by the code that is before us. However, I add with some emphasis that I no longer practise as an actuary, hence nothing of what I say must be regarded as constituting actuarial advice. It might sound like actuarial advice, but I assure those here that it is not; noble Lords have to get their own advice rather than take it from me. Nevertheless, I speak from experience as a scheme actuary who has undertaken scheme valuations including, in the past, under the Pensions Regulator or previous iterations.
We are talking about the regulator’s defined benefit code of practice—the code—issued under Part 3 of the Pensions Act 2004. I very much welcome the opportunity to make a few remarks about the code and to ask my noble friend the Minister some questions.
TPR has been producing codes of practice on funding going back to 2006, but it is worth pointing out that it first consulted on this iteration of the funding code more than four years ago, in March 2020, with a second attempt in December 2022. This version was published for consultation in March this year, so its final form comes after years of waiting and four Prime Ministers; the whole Covid epidemic; a significant shift in the financial position of many defined benefit schemes, with increased investment returns in particular; considerable discussion about how these funds should be invested in the light of the Mansion House reforms under the last Government; the pension review under this Government; and, not least, an increased appreciation of the risks to defined benefit schemes from climate change. So much has happened and the code has, in effect, had to hit a moving target. Unfortunately, I would argue that even this version has not really caught up with developments and events.
The new code, together with the Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2024, which we discussed in this Room last March and which came into force in April, gives trustees and advisers most of the tools and processes to follow for DB funding valuations with a valuation date on or after 22 September 2024. There has been a bit of time-shifting going on here, but it is not a concern. It is clear that there will be specific areas of the code where further clarification is required, which will be found out only in practice.
I will not repeat everything I said in March, but I want to emphasise my main point. I was talking about the regulations, but it applies to the code as well:
“The regulations are patently too prescriptive. The details that they require are not directed at the objective of protecting members’ benefits but are about establishing a system where box-ticking will take priority over the longer term and broader interests of scheme members”.—[Official Report, 26/3/24; col. GC 165.]
This version may well be better than earlier drafts but, given that the code is already in effect in practice, it should be understood that it is only one stage of the longer-term reassessment that is required, given the continued pace of developments in this sphere. We should not be under the delusion that this constitutes a job done.
There are positives that I want to recognise. The DWP tells us that the draft code has been revised to strike a balance between setting clear funding standards and maintaining flexibility for scheme-specific approaches. The move to a more principle-based rather than prescriptive approach to areas such as the low dependency investment allocation and assessment of the covenant is helpful and gives the trustees some flexibility. Other commentators have welcomed the redefinition of what constitutes significant maturity; clarification of what happens when the valuation is based on notional investment rather than actual investment; greater clarity on how to assess the employer covenant; and—this is particularly important—what applies when there are surplus assets. It is to be welcomed that the final version includes a section for open schemes, collating the guidance that is relevant to them across the code.
Nevertheless, the code remains a work in progress. The IFoA has said:
“The totality of the changes being introduced by the new code remain complex”,
and that there are still a few more steps on the journey to take. It says that it hopes
“the regulator will adopt a pragmatic approach when considering the first valuations under the new regime, due to the short implementation period for the final rules”,
emphasising the point that this is a work in progress.
My major concern remains that here we have 100 pages of detailed instructions and rules, albeit with quite a lot of repetition, not just on how to undertake a valuation under the terms of the legislation for a defined benefit scheme but about how such a fund should operate, particularly in the field of investment. It passed through my mind to go through the document quoting the minutiae that is dealt with—for example, telling us that we have to use a Macaulay duration calculation. I have resisted that temptation—I do not wish to delay people too much—but I have no doubt that the requirements, while well intentioned, are excessive. Although there are references to proportionality, what will happen in practice is that the code will suffer from what is described as procedural drift, where individuals become overreliant on routine processes, potentially leading to reduced understanding of the overall decision: failure to see the wood for the trees.
The underlying belief, as far as I can tell, is that detailed prescriptions and requirements are better than general principles. I do not know what evidence there is for such a belief. Is it true that detailed prescriptions and reporting requirements along the lines set out in the code make it any more likely that members will receive their benefits? I doubt it. As an overriding principle, given the inherent uncertainty about any attempt to forecast the future, there is no reason to believe that making an algorithm more complex improves the outcome.
One problem that concerns me, which I raised in the debate in March, is how the code reacts with Technical Actuarial Standard 300: Pensions. TAS is set by the Financial Reporting Council and lays down how any actuary in the UK should undertake technical actuarial work required by legislation to support decisions on funding, contribution requirements and benefit levels. I have the latest version here; it came into effect in April. The point is that the actuary who undertakes the valuation at the request of the trustees must comply with the professional standard. However, we are in the peculiar position where the code makes no reference to TAS, and TAS refers only by implication to the requirements of the code in an appendix.
It is a matter of concern that the 18 pages of TAS, only four of which refer to scheme funding, make more sense than the 100 pages in the code. What exactly in the code achieves anything that is not already achieved by those four pages in TAS 300? We are told that in its review of TAS 300, the Financial Reporting Council has deferred consideration of the provisions on funding and financing until the new legislation on funding and TPR’s revised code of practice are in place. I am not convinced that this will work. There must be a real question about who is responsible for setting technical standards on funding DB schemes—the Financial Reporting Council or the Pensions Regulator. Judging by the record, my vote goes to the Financial Reporting Council.
Having made that general point, to which I will no doubt return in future, I have three specific questions about how the code will deal with continuing developments in DB pensions. First, there must be a question of whether the code deals with whatever comes out of the first stage of the pensions review. We have been told that the first stage is due to report in the next few months and will consider further measures to support the pensions Bill. It will take account of the need to prioritise gilt market stability, liquidity and diversity. The objective, we are told, is to boost investment, increase saver returns and tackle waste in the pensions system. The problem is that this objective is not reflected adequately in the code. How and when will these issues be reconciled? How will what comes out of the pensions review be reconciled with what has been established in the code?
The second question arises from the improved state of DB funding, which has led to more schemes being run on—continuing rather than moving quickly to buyout. Because schemes will be running on and must, under the code, have the objective of being fully funded, this raises a question: when schemes move into surplus, what rules apply to that surplus? In discussions that people have initiated since we have seen the improvement in scheme funding, it has been suggested that schemes with a material surplus may invest in a greater allocation to growth assets. This aligns with the policies I have just referred to—of both the previous and the new Governments—which emphasise investing for UK growth. That objective is not adequately reflected in the code. In addition to the issue of investing surplus, there are other possible results of improved financial conditions for DB schemes. Not least of them is the possibility of improvements in members’ benefits, either through trustees exercising the discretionary powers that many of them have or through rule changes.
In the same way, some people are talking about the possibility of powers being used to refund sponsoring employers or to use the surplus in the scheme to cover the cost of accruing benefits. Unfortunately, the Pensions Regulator appears to have given insufficient thinking to such developments and to how its powers will be exercised when confronted with such issues. The code does touch on the issue, talking about covenant leakage but in a way that is clearly inadequate when faced with the challenges that will arise from these moves. Will the Government press the Pensions Regulator to give the issues that arise from the potential existence of scheme surplus further thought and more adequate thinking? I have already complained that the code is too complex. I am not suggesting that this should be in the code, which is complex enough, but it is an area to which the Pensions Regulator has to give considerably more thought, so that we know where it is coming from when confronted with these issues.
The third issue, which I will cover swiftly as we will debate it again on Thursday, is the impact of climate change. The code touches briefly on the issue, in paragraph 23 of the application module, but it is an issue on which the Pensions Regulator has to take much more of a lead. Will the Government encourage the regulator to pursue what needs to be done to enable schemes to confront the challenge of the greater risks that face the financial system, including defined benefits schemes, as a result of global warming?
Lord Davies of Brixton (Lab)
I thank the Minister for her long and detailed response. I think I need to use the formula used by Ministers: “I will read the entry in Hansard”. There was so much information in it, for which I thank her. I also thank noble Lords who came for the debate on Russian sanctions; I hope they found it informative to hear about pensions.
The phrase that had particular resonance with me was that used by the noble Baroness, Lady Altmann: “spurious accuracy”. When I was a trainee actuary, we were told specifically that making calculations more complex and difficult did not make them any better. Trying to forecast the future is difficult enough. Making complex calculations does not improve the outcome for members.
My major point is that current developments in pensions will require the code to be kept under review in any event, whether they are an increasing appreciation of the risks of climate change or the development of pension scheme surpluses. I welcome the remark about that. These changes accumulate and I hope that the Minister will enjoy further debates and discussions. I look forward, in particular, to the pensions Bill. Not many people say that, but I think we will have some interesting debates.
Motion agreed.
Social Fund Winter Fuel Payment Regulations 2024
Lord Davies of Brixton Excerpts(7 months, 2 weeks ago)
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Lord Davies of Brixton (Lab)
My Lords, these regulations are a mistake and I want my concern on the record. I want to make it clear from the start that the financial mess inherited by our Government is a result of 14 years of austerity and financial mismanagement, and I reject any suggestion that public sector workers are benefiting at the expense of pensioners. That is simply a crude attempt to divide working people, and we should reject it as such. I will therefore vote against the cynical regret Motion from the Official Opposition, and I say to the noble Baroness, Lady Stedman-Scott, that she does herself no favours attaching her name to the Motion.
There are several key points I wish to make. First, even if the case for austerity measures were accepted, the cut in winter fuel payment was not a necessary element in the July package; it was a choice. Secondly, whatever steps are taken to increase the take-up of pension credit, millions of the poorest pensioners will still suffer from an increase in fuel poverty—Age UK came out yesterday with a figure of 2.5 million. Thirdly, the effect of the triple lock should not be double counted and, in any event, it will fail to offset the effect of the cut in the winter fuel payment over the lifetime of the current Parliament. I urge the Government, even at this late hour, to hold back on any change, pending full consultation on an alternative approach to tackling fuel poverty, while retaining the advantages of a universal benefit.
It is important to understand more about why the Government wanted to include the measure in the July package, despite its obvious political downside. Unlike other possible options, it achieved in-year savings and used an existing structure for means testing the benefit, rather than having to create a new structure. However, they failed to appreciate the two adverse consequences of using the pension credit means test. First, it has a ceiling that everyone agrees is far too low. Secondly, there is no form of marginal relief, as it is not relevant for the purposes of means testing pension credit.
In response, the Government—my Government—have attempted to head off the widespread opposition to the regulations. First, they have argued that the winter fuel payment had to be cut as part of the July package to make the figures balanced. Secondly, they have argued that the impact would be offset by increasing the take-up of pension credit and, thirdly, that the impact would be ameliorated by the existence of the triple lock on the state pension. All of these arguments, regrettably, fail.
First, the cut was not necessary, even as part of the July package. There is of course a debate to be had about the need for austerity, particularly as an instant response. However, even if the need for the July package were to be accepted, the question as to whether it had to include the cut in the winter fuel payment is a separate issue. Posed in those terms, it is obvious there is no a priori reason that it had to be a necessary element of the package. Whatever risks the Government faced, they were addressed by taking the package as a whole and not by its individual elements. Despite the Government’s protestations about tough choices, there is no avoiding the fact that it was, nevertheless, a choice, thereby raising concerns about their attitudes to universalism and pensioners in general.
The second issue is pension credit, which other speakers have addressed. We know that the increase in the take-up of pension credit will be limited. It is important to acknowledge what the Government are doing to increase the take-up of pension credit, but, regrettably, there is a long history of ineffective take-up campaigns for means-tested benefits, going back to the 1940s, for national assistance, and beyond. There is no evidence that we now know more than they did in the past about how to overcome the intractable problems arising from stigma, complexity and a lack of knowledge. I am sure other speakers will go into detail on that.
My third point is about the triple lock, which does not offset the impact of the cut in the winter fuel payment. The Government suggested—not today but in other commentaries—that the triple lock increases to the state pension over their term in office would
“outstrip any reduction in the winter fuel payment”.
Unfortunately, this is an obvious case of double counting. I have done the sums, and almost all the pension increases that will occur over the coming five years are required to protect pensioners against the impact of inflation. Pensioners cannot spend that money twice, covering both increases in the cost of living and at the same time replacing the winter fuel payment. The purpose of the triple lock is to protect pensioners against inflation, keep state pensions in line with general living standards and nudge the pension gently upwards. I have calculated that, based on the latest OBR assumptions, the impact of the triple lock, taken by itself, means that the new state pension and the basic state pension will be barely 1% higher than they would have been, even with the statutory minimum increases. This is less than the winter fuel payment, which pensioners are losing because of this measure.
In all the debates on the cut in the winter fuel payment, I am not aware of anyone arguing that there is no case for change. The winter fuel payment is and always was an anomalous benefit, particularly as it affects high earners. A payment that, in practice, recipients can choose to spend as they wish should always have been included in taxable income. The fact that it was not is a historical accident, arising from how and when it was introduced, rather than a clear policy decision.
I therefore agree with the 2015 Labour manifesto, which said:
“We will stop paying Winter Fuel Payments to the richest five per cent of pensioners”.
That was the right policy then, and something like it is the right policy now. In other words, those with the broadest shoulders should bear the burden of the cut, rather than the millions of the poorest pensioners who struggle to make ends meet. Given the case for change, the Government at this late stage should hold back on the cut to the winter fuel payment, pending a full consultation on an alternative approach to tackling fuel poverty while retaining the advantages of a universal benefit.
Lord Desai (CB)
My Lords, there seems to be rather a hurry to embrace economic rationality on the part of the new Government. We know what economic rationality always says: cutting income tax for the rich is good policy because that encourages growth, and cutting the benefits of the poor is good policy because that balances the budget. All through economics—the science that I teach—there has always been this root. The poor must be made to suffer because, as Malthus pointed out, if you give them more money, they will only breed more children. That is no good. Giving money to the poor is a loss, but give money to the rich and the rich will benefit.
I imagine that there is an idea that a big hole in the fiscal accounts was suddenly discovered. I do not think so: I think we all knew there was a fiscal hole. We have all been through the pandemic and through the last 15 years, when the economy has had a very low growth rate—in fact, practically no growth rate. We know all that. We also know the public accounts numbers that were available giving us the ratio of deficit to GDP. None of this was a surprise. If you want to really tackle the deficit, you need a 10-year horizon to do it. Do it rationally; do not do it quickly, do not do it in a haphazard fashion and do not just immediately say, “Oh, I have to make a very tough decision”. As soon as a politician says “tough decision”, you know the poor are going to suffer.