BMI Pension Fund Compensation

Cathy Jamieson Excerpts

Wednesday 17th December 2014 Westminster Hall

[Mark Lazarowicz]

I agree. That is precisely my point.

I ask the Minister to take a number of steps and, if she is not prepared to agree to them today, perhaps she will at least consider them and come back to hon. Members at a later stage.

First, it is right for the Government to ask HMRC to review the application of the tax rules in this case. The trustees of the BMI pension fund did lobby for the rules applying to the then annual allowance limits and the lifetime allowance rules to be disapplied in the case of the BMI scheme, because of the special circumstances of the scheme. I should not have thought that it was impossible for it to review the rules, given the special circumstances, notwithstanding the legislation that applies to pensions more generally.

Secondly, if HMRC will not review the position, I ask the Government to consider legislating to make a change for this particular case. Again, the Equitable Life scheme is a model that can be followed.

[Cathy Jamieson (Kilmarnock and Loudoun) (Lab/Co-op)]

Will my hon. Friend provide some clarification to help me with questions that I may later ask the Minister? I recall that he questioned a former Exchequer Secretary about this issue in Parliament, who offered to set out more detail in writing. Did my hon. Friend receive that information? Would anything that came out of that be helpful in this debate?

[Mark Lazarowicz]

The Minister sent me a letter that I think was received by all hon. Members who wrote to him about the issue. It was helpful, but I do not think it added anything particular with regard to the concerns that I am raising.

Thirdly, if the Government are not prepared to change the legislation, I ask them to consider making an additional one-off payment to the BMI pension fund scheme to allow payments to pension fund members to be topped up, to at least allow for the fact that tax has been taken off. A parallel to that is VAT on church buildings: although taxes were increased by the Government, a compensation scheme was set up to pay those churches, allowing them to pay the tax back to the Government. Things like that can be done when the Government want to.

Fourthly, I ask the Government to move ahead as quickly as possible with the proposals to allow an increased cap in the Pension Protection Fund for those with long service in the pension scheme. I am aware that this is a matter for the Department for Work and Pensions and that the relevant Minister has been pursuing it, but I hope that the Minister here today will urge her colleagues in that Department to introduce those changes speedily, to ensure that there is at least some benefit, hopefully to members of the BMI pension fund scheme, and to others, who are losing out because of the cap in the Pension Protection Fund provisions.

At a time of financial pressures, it might be said that it cannot be a priority for the Government to find money to top up pension payments to a group of workers who will have been relatively highly paid during their work life and will still receive a relatively high pension compared with the average paid for by the safety net of the Pension Protection Fund. I can see that argument being made. There might be those who are cynical and will say that, whereas millions were affected by the Equitable Life scheme, only a few hundred people spread across the country are affected here and that, bluntly, that is not going to make a difference in the general election next year. Indeed, that would be cynicism, because there is a matter of justice here: these people contributed to their pension over many years and are now going to receive much less than they expected.

To give an example of the sums lost, let me mention my constituent who raised the matter with me, no doubt because he is so concerned about what has happened. Even allowing for the Pension Protection Fund guarantee, he is facing a shortfall of £700,000 on his pension fund. He will receive about £134,000 from the Lufthansa scheme, so when allowing for the tax taken off the Lufthansa compensation, he will still be almost £600,000 worse off.

Let us bear in mind that the employer did not go bust, and the Pension Protection Fund had to bail out the pensions, as it was set up to do. In fact, the previous major shareholder sold his shareholding at a profit that some have estimated to be in excess of £200 million. He sold it to Lufthansa, which then sold the entire company—or most of it, to be precise: of course, bits of it were disposed elsewhere—to IAG. Lufthansa and IAG are both international airline companies whose fortunes go up and down but, bluntly, in most years their profits number in the hundreds of millions and billions of pounds and euros. These companies have not gone bust.

In the middle of all this activity, where some people and companies are making lots of money, the long-standing former staff of BMI are losing large parts of a pension for which they worked all their working life. Of course, through the levy they are paying to the Pension Protection Fund, other companies are paying the costs of compensation going to the scheme’s members, because the pension fund members are no longer receiving it from pension funds and, therefore, from the companies by which they were employed.

As I have said, there appears to be a similar development in the case of Monarch Airlines. Indeed, there is no reason in principle why this type of arrangement could not apply to other company pensions and to people at any income level, not just those who happen to be higher paid, as with members of the BMI pension fund.

Clearly, there is something wrong here, both in respect of the individuals affected by this case and what is happening more generally with regard to how the Pension Protection Fund scheme is used, and particularly in this case. The situation needs to be remedied. The Government need to act, not just for these pension scheme members, but to ensure that this practice is not taken up increasingly by other companies that see a way of escaping from their pension obligations when they choose to restructure or in other ways change the nature of their business and dispose of parts of their operations.

I have taken some time today, but this is an important issue, not just for those affected by these developments, but more widely. I hope that the Government will respond positively to the points that I have made.

--- Later in debate ---

[Cathy Jamieson (Kilmarnock and Loudoun) (Lab/Co-op)]

It is a pleasure to be in the Chamber this morning, Mr Sanders, and to have you in the Chair once again.

I congratulate my hon. Friend the Member for Edinburgh North and Leith (Mark Lazarowicz) on bringing this important subject before Parliament. Many of us have received representations from our constituents—sometimes relatively small numbers of people in each constituency, but the matter is none the less an important one. It is useful to have the opportunity for a thoughtful debate.

My hon. Friends the Members for Livingston (Graeme Morrice), for Inverclyde (Mr McKenzie) and, most recently, for Edmonton (Mr Love) have given us a wider picture of the impact of the Pension Protection Fund and tax treatment decisions on the individuals concerned. The hon. Member for Strangford (Jim Shannon) also made a contribution, and the right hon. Member for Belfast North (Mr Dodds) and the hon. Member for Banff and Buchan (Dr Whiteford) intervened to make important points that I am sure the Minister will want to respond to as well.

As my hon. Friend the Member for Edinburgh North and Leith said in his opening remarks, many of the former BMI employees who were in the BMI pension scheme have suffered through no fault of their own. They engaged in good faith in the pension scheme, and the decisions taken were not of their making. We are in a quite different situation from some of the other resolutions that have had to come from the Pension Protection Fund, because this does not involve a company going into insolvency—the problem arose largely because the company was sold on. Consequently, the buyers did not have to take responsibility for the pension fund. Again, those are things completely outwith the control of the employees.

As has been acknowledged today, many people might think, “Well, these folks had relatively good jobs and they’ve been relatively well paid”, but there is absolutely nothing wrong with that. The fact that people have been in responsible, well paid jobs, contributing to their pensions in a decent pension scheme, does not mean that if things somehow change or go wrong they have any less right to justice in terms of what they receive in pension. That is the principled position. I fly fairly regularly up and down from Scotland, and I want to know that the people flying and crewing the planes that I travel in—the hon. Member for Strangford might be in a similar position—are well trained, well paid and well looked after for the important job that they do.

As I said, the problem we are discussing was not employer insolvency, as is normally the case when a scheme is transferred to the Pension Protection Fund. We have heard the figures, but the shareholder sold the shareholding for a considerable profit, estimated to be in excess of £200 million. The shareholding was sold on to Lufthansa, which this March announced an operating profit that had risen year on year by 62% to about €1 billion. We are definitely not talking about an insolvency scenario, which makes things a bit different.

We could look at how decisions were reached or how the Pensions Regulator operated, but we are where we are, and we now have to look at the various points that I am about to make to the Minister. What can be done to resolve the tax treatment issue amicably? Perhaps the Minister will answer my question when responding, but what would the financial implications be for the Treasury if it simply resolved the tax treatment in this case? In the global scheme of things, a relatively small number of people might be subject to such taxation, and in order to achieve some equity—my hon. Friend the Member for Edinburgh North and Leith and others have mentioned how the Equitable Life scenario was dealt with—can something more be done to help people?

Another important issue is that we would not want people already in detriment to suffer further detriment because of the taxation rules, which appears to be what has happened with the BMI pensioners. As has been mentioned, the top-up payments that were intended to reduce the detriment are now subject to tax. I am sure the Minister will come back and say, “The tax rules are the tax rules and they have to be implemented.” That is true, but the rules can be changed. In certain circumstances they have been changed and there have been different tax treatments. I have only recently finished dealing with the Taxation of Pensions Bill: we went through a whole Bill to ensure that the way certain things are treated in a tax context can be changed. Where there is a will, there can be a way. That is why I am interested to hear what the financial implications would be. If it is not a huge amount of money for the Exchequer, why can we not resolve the matter in an amicable way? I have a great deal of faith in the ingenuity of officials and Ministers when they want to do something, to go away and find some resources and a way of taking things forward. I hope that the Minister will do that today.

I come back to some of the issues that my hon. Friend the Member for Edinburgh North and Leith raised in his opening remarks. I want to put a number of points to the Minister. My hon. Friend asked the Government to look again and for the HMRC to review the application of the tax rules in this case with specific regard to the annual allowance that might result from the additional tax charge being levied. I would be interested to hear what the Minister is able to say about that.

In her intervention, the hon. Member for Banff and Buchan asked about the implications for copycat deals. Some of the points that my hon. Friend the Member for Edmonton raised are relevant to that. It would be unfortunate to say the least if other companies thought they could somehow avoid doing the right thing by their employees simply by going into the PPF, thereby leaving the problem for others to resolve. As has been said, this is not about increased resources having to come from the taxpayer; it is about the industry taking care of itself, but a degree of equity and fairness has to be looked at in the industry context. Will the Minister, along with her colleagues, look again at the PPF and the rules and ensure that there are no loopholes that incentivise that kind of behaviour, which we would not necessarily think to be a good thing? If HMRC can review that position, I hope the Government will consider the possibility of making necessary changes to the legislation, particularly to ensure that the pension holders affected are not left worse off than they thought they would be at the outset.

I heard my hon. Friend the Member for Edmonton comment on the situation of those in the Monarch Airlines scheme. I am grateful to him for bringing that to our attention in the detailed way he did. I was not fully aware of all those points, and I am sure that the Minister will respond to them. I hope that she will go back to her colleagues in the Department for Work and Pensions to look at the arrangements that have been made to see whether something can be brought forward, even at this late stage, to try to resolve the problems.

In conclusion, we have had a useful debate that has given us information and a number of points on the justice of the situation and the technical details of the taxation system. I particularly press the Minister on the tax treatment of the compensation payments because that is the responsibility of the Treasury, although I recognise that there are wider responsibilities within the DWP. I hope that she will go to her colleagues and assess what she can be done.

[The Exchequer Secretary to the Treasury (Priti Patel)]

It is a pleasure to serve under your chairmanship, Mr Sanders. I thank the hon. Member for Edinburgh North and Leith (Mark Lazarowicz) for raising this issue in a thoughtful and considered way. I also thank all others Members who have contributed to the debate. In addition to interventions, the hon. Members for Edmonton (Mr Love), for Strangford (Jim Shannon) and for Livingston (Graeme Morrice) made considered contributions.

It is fair to say that this is a serious and important issue. Members have rightfully raised their points and concerns on behalf of their constituents in a considered way. As the hon. Member for Kilmarnock and Loudoun (Cathy Jamieson) just said, these are serious concerns about people’s pensions. These individuals have done the right thing by saving and investing in their pensions. That is right and proper, and they have had the opportunity to do that through an employer’s scheme, which is to be commended. Not only the Government, but all Members are concerned when we hear about issues of this nature.

I start by putting the debate into context from a Treasury point of view. The subject reaches into the territory of the Department for Work and Pensions, and I will come on to that, but it would be helpful if I set out the facts of the case as they are known to the Treasury. Following the sale of BMI by Lufthansa, the BMI pension scheme was admitted to the Pension Protection Fund. Admittance to the PPF for a particular scheme is not a matter for Her Majesty’s Treasury, but for the PPF and the Pensions Regulator. Members will appreciate that I cannot comment on the details of that decision, but I will, as all Members here today have asked, follow up with the Department for Work and Pensions on that. I will also pick up on the point that the hon. Member for Edmonton made on the pensions cap. As he suggested, I will ask for a response on the points highlighted about the DWP, the cap and the Pensions Regulator to be sent to every Member who has contributed to today’s debate.

The PPF provides compensation to members of eligible defined benefit occupational pension schemes. The PPF provides two levels of compensation depending on a member’s circumstances at the time the scheme enters the fund assessment period. The first is for members who have reached their scheme’s normal pension age or are already in receipt of a survivor’s pension or a pension on the grounds of ill health. The second is for the majority of people below their scheme’s normal pension age. Those members are entitled to 90% of the compensation and are subject to the compensation cap, as has been outlined. The PPF rules and restrictions apply to all members, which means that they will not receive all the pension benefits they anticipated. However, while the PPF strives to award compensation fairly, compensation relating to pensionable service before April 1997 does not increase in line with inflation each year, so compensation may not equate to the full value members would have received had their scheme not been admitted to the PPF.

As has been discussed, to compensate BMI pension scheme members for the loss in expected benefits, Lufthansa offered to make an £84 million voluntary payment either as cash payments to the members or into another registered pension scheme on their behalf. The debate is about the tax treatment of that payment. Retirement benefits are subject to tax when they are received, so one would expect the £84 million payment to be taxed.

It may be helpful for me to set out how the tax treatment changes depending on how the payments are made. Where pension schemes can make cash payments to individuals, the tax legislation clearly sets out how those payments are taxed. Any one-off cash payment would be liable to income tax and national insurance contributions, as they are what are known as relevant benefits. It has been put that those payments cannot be subject to income tax and NICS because the members of the BMI scheme were not employed by Lufthansa. However, it is not because the payments are earnings that income tax would apply, but because they are deemed to be relevant benefits. Cash payments are subject to tax as relevant benefits when, for example, they are paid after retirement in connection with past service, as is the situation in the highlighted cases. Relevant benefits are taxable as employment income, and there does not need to be a direct link between the employer and the payee to establish relevant benefits. There is also no statutory requirement for the benefits to be financed by an employer of the beneficiaries. A scheme for the provision of relevant benefits to employees or former employees of an employer commercially linked to the one financing the benefits will be in the legislation for tax and national insurance contributions.

Where payments are made into a registered pension scheme on behalf of the individuals concerned, there will be a different tax treatment. Members would receive pensions tax relief on their share of the £84 million payment as well as the exemption from national insurance and income tax on the payment they would get with any contribution to a registered pension scheme.

However, the payment to a registered pension scheme could give rise to annual allowance or lifetime allowance charges. Let me explain that further. Pensions tax relief is one of the Government’s most expensive tax reliefs and the gross cost doubled from £17.5 billion in 2001-02 to £33 billion in 2010-11. The annual and lifetime allowance has been set to protect the public finances from that growing cost. However, the Government are still likely to forgo more than £36 billion in tax revenue this year and more than £39 billion in 2016-17.

The annual allowance is therefore designed to strike an appropriate balance between providing financial incentives to encourage and support saving for retirement and the fiscal risk to the Exchequer. Therefore, while there is no limit to the amount any individual may contribute to their pension scheme, there is a limit—the annual allowance—on the amount of tax relief those contributions can attract in any one year.

Tax relief is given on contributions up to £40,000 a year, but any contributions in excess of that limit will be subject to an annual allowance charge. To ease the impact of the annual allowance charge, the Government introduced a carry-forward facility, which allows individuals to make use of any unused annual allowances from the three previous years by offsetting them against excess savings. In many cases, that will result in there not being an annual allowance charge to pay.

As a result, the only people affected will be those whose pension savings over the past four tax years, including their share of the £84 million contribution, are worth more than £190,000 for 2014-15 or £180,000 for 2015-16. If an individual takes pension benefits valued at more than the lifetime allowance—currently set at £1.25 million—when they become entitled to those benefits, they will be liable for the lifetime allowance charge. The lifetime allowance charge is 25% if the excess is taken as a pension or 55% if it taken as a lump sum. As the allowance is set at those generous levels, that charge is likely to affect only a small number of people.

[Cathy Jamieson]

What estimate has the Treasury made of the number of people who are affected by the lifetime allowance charge and what income will the Exchequer receive as a result of collecting that charge?

[Priti Patel]

I will come on to that and address other Members’ points as well once I have made some progress. Some individuals may have existing enhanced or fixed protection, which means that they can test their pensions against the lifetime allowance at the time at which those protections were granted. That is subject to no further contributions being made to their pension schemes. As payments from the £84 million will be relievable contributions, members who have existing enhanced or fixed protection would lose those rights if the contribution was made to a defined contribution scheme. Again, only a small number of people will be affected by that.

Individuals will have a choice about how they access their share of the £84 million paid by Lufthansa to a defined contribution pension scheme on their behalf. From April 2015, individuals will be able to access the funds as a lump sum or as a series of payments or they can choose to purchase an annuity or draw-down product, provided that they are aged 55 or older. Alternatively, they could choose to transfer to a different pension arrangement. Payments on pensions will be subject to the individual’s marginal rate of income tax and no NICs will be payable.

I will come on to many of the points addressed in the debate. The hon. Member for Kilmarnock and Loudoun mentioned the costs for those affected. Those will depend on the precise circumstances and how payments are made. Such payments made direct to a scheme will be taxable, but the contributions will receive tax relief up to the normal limits. We do not have an estimate of the total cost to the Treasury should tax charges not be applied, but, as I said, that is dependent on the circumstances of how the payments are made.

The scheme was compared in a number of contributions to the Government’s approach in the one-off payments made under the Equitable Life payment scheme. It is worth highlighting that that scheme was established back in 2011 in response to the parliamentary ombudsman report that identified areas of Government maladministration in respect to the regulation of Equitable Life. The Government accepted the then ombudsman’s report and, as a result, made the ex-gratia payment for the loss stemming from what was Government maladministration at the time. The circumstances surrounding the loss of pensions relief for members of the BMI scheme is not owing to the Government’s maladministration and, therefore, it is not comparable in that sense at all.

The hon. Member for Edinburgh North and Leith as well as other Members touched on HMRC and reviewing rules relating to the annual allowance and lifetime allowance. As my hon. Friend the Financial Secretary has set out, HMRC must apply tax legislation consistently and it does not have discretion to waive tax charges intended by Parliament. The legislation is clear in respect of that: all new contributions into defined contribution schemes are tested against the annual allowance and all benefits are tested against the lifetime allowance.

It is fair to say that this is a complicated matter that is not at all comparable to Equitable Life. The Government are familiar with the case, which has been raised by many Members in the debate today as well as in previous representations.