Occupational Pension Schemes (Levy Ceiling) Order 2006

It is 125 per cent of the PPF level. I apologise for not being clearer. Furthermore, the inclusion of certain types of contingent asset that release cash into a scheme on the insolvency of the employer is another incentive that means that schemes can reduce their levy charge. We focused on finding a balance between two extremely important issues. On the one hand, we needed to ensure that the PPF continued to have the independence in setting the levies that is envisaged by the Pensions Act. Giving the experts at the PPF the independence to set the levies at the rate that they consider appropriate is one of the key lessons that we learnt from the PBGC in the US. If that independence is maintained, it will help ensure the long-term viability of the fund. Coupled with that, we must recognise that there is a risk that the PPF will need more in future years than it has estimated for 2005–06, one reason being that the levy for 2006–07 focuses strongly on affordability and so has no built-in reserves for economic shock. On the other hand, we needed to provide some reassurance to business about the long-term affordability of the pension protection levies. In effect, we considered how low we could set the ceiling without damaging the PPF’s independence. We took as our starting point the 25 per cent rule that already exists in the Pensions Act to control the rate of growth of the levy. We did not consider it appropriate to set the levy in a way that rendered that rule redundant, as that would clearly be removing the level of independence that Parliament had deliberately given the PPF. To not even allow the PPF one full year of independence could also leave us in the slightly difficult position of returning to the House to request an increase to the ceiling in less than eight months, should the PPF consider it necessary. These reasons suggested that the ceiling should be as a minimum 25 per cent higher than £575 million, which would bring us to £720 million. But that would, for the first year at least, be a simple duplication of the 25 per cent. The next logical step up was £775 million, which is £200 million above the levy estimate. We feel that that gives the PPF appropriate independence. It means an overall 35 per cent headroom to deal with economic shocks or extreme claims. Any amount above that would be a loose and possibly ineffective control. It would also risk being left disproportionately high as scheme funding takes effect. The risk presented to the PPF diminishes, particularly given that the ceiling increases annually in line with earnings. In a worst case scenario, after consultation, the board of the PPF can request that the ceiling be raised. This would, of course, be subject to another debate in Parliament. I understand that the publication of the levy ceiling figure led to some negative reaction, particularly the comments made by the CBI. I refer to the points that I made earlier about affordability, and stress that it is crucial not to confuse—as perhaps the CBI might have done—the levy ceiling with the actual levy. The levy is determined by the PPF, taking into account the impact on business, and is the actual cost to business. The PPF continues to have the responsibility to consider the affordability of its levies. It must seek to maintain an appropriate balance between recipients of compensation and the impact on levy payers, and must consult industry before any change to the rate of the levies. To pick up on one specific claim, the levy cannot increase to £775 million immediately. It can increase by no more than 25 per cent each year and may never reach the level of the ceiling. The levy ceiling will be uprated by affirmative order on an annual basis in line with the general level of earnings in Great Britain. The order before us, which I am content is compatible with the human rights convention, ensures that a ceiling is imposed on the PPF levy that the levy may not surpass without a return to Parliament, in line with the requirements of the Pensions Act 2004. The figure chosen has been considered in relation to the levy estimate and the expected effects of scheme funding. It represents a balance that will protect scheme members and reassure the levy payers themselves that the potential growth of the levies is not unrestricted. I therefore commend this order to Members of the Committee. I beg to move. Moved, That the Grand Committee do report to the House that it has considered the Occupational Pension Schemes (Levy Ceiling) Order 2006 [18th Report from the Joint Committee and 25th Report from the Merits Committee].—(Lord Hunt of Kings Heath.)