Occupational Pension Schemes (Levy Ceiling) Order 2006

To some extent I will be reiterating points that have already been made, but I want to make one or two observations on this order. I am glad that when we debated the previous statutory instrument, the Minister paid tribute to companies which are taking responsible action to deal with their pension deficits. However, I have to say that one employer is clearly failing and running away from taking action to deal with massive deficits, and that is the Government. I throw back to the Minister that, while he pays tribute to companies, perhaps he will make sure that the Government follow their actions and look for responsible solutions as well. I believe that the Pensions Act has, in a number of ways, been a good example of the law of unintended consequences, but this is not one of them. The increase in the levy and the total amount required by the PPF was a major issue in our debates on the Bill at the time. I note that the tone of the explanatory memorandum is very different from the tone of reassurance we were given by the Government during our debates. There is now a much more realistic awareness of the possible risks. Indeed, this order proves that all our fears were well justified. At this point, perhaps I should declare an interest as a non-executive director dealing with a lot of pension issues. During those debates we made the point time and again that the estimate of £300 million made by the Government at the time was bound to be too low. We referred a number of times to the United States scheme, where of course the deficits are very high, and probably higher than the Government are anticipating. We also argued that this would be the final blow to many defined benefit schemes—a blow at the end of a series of others that have caused the flight from such schemes. That is certainly proving to be the case. Week after week we hear of companies closing their schemes and taking other action. This increase will accelerate decisions by those employers still running the schemes to close them. I turn to the detail of the order. On what basis was the figure of £575 million established, as opposed to the £300 million that the Government kept reassuring us it would be? Here I repeat a point that has already been made: what guarantee is there that it will not grow at the same speed? After all, a growth from £300 million to £575 million in a comparatively short space of time suggests a very substantial increase in the estimate, and what guarantee is there that it will not continue? Certainly, if one looks at the plight of many pension schemes in the corporate world, I suspect that a number of closures are yet to come. The figure of £750 million has been set not on the basis of realism, but on what is presentationally acceptable. To demonstrate that, I quote from the explanatory memorandum. Under the discussion of policy of options it states that a ceiling lower than £675 million as set out in Option 2,"““would not fit with the approach taken by the PPF as it would not allow the PPF the headroom to react to worst case scenarios””." I agree with that; it is sensible. However, the note goes on to say that at the other extreme, although any levy over £1 billion—one of the suggestions—would fit with the original policy of doubling the levy estimate and would be much closer to what was originally intended in relation to the £300 million estimate, it would,"““be presentationally sensitive to set””." That says a good deal and suggests that the Government believe that the levy has to be higher than £750 million, but that it would be presentationally difficult to put it that way, just as in the original debates the figure of £300 million was put forward because anything higher would have been presentationally difficult. Again I quote from the explanatory memorandum. Its summary of benefits for Option 3 states:"““The Government does not believe that the ceiling has to be so high just to enable the Pension Protection Fund to cope with financial shocks””." I am bound to say that these financial shocks look quite likely, and therefore what will happen if the ceiling is reached earlier than anticipated? In the analysis of the option before us today, the Government say that a disadvantage of setting the ceiling at £775 million is that it could still be seen,"““as a relatively high figure given the original £600 million estimate””." There is a strong focus on what might look reasonable and to avoid that which is presentationally difficult. However, I fear that the estimates are unrealistic. I should like to hear more from the Minister in justifying that. What do the Government believe to be the likely demand on the PPF over the next few years? When do they estimate that they will have to bring forward another statutory instrument of this sort because they have reached the ceiling earlier than anticipated? I want to make a final point after what the noble Lord, Lord Oakeshott, said about the present situation in relation to liabilities. I very much agree that this is a major issue, which is tangentially relevant to today’s debate because it is relevant to how the liabilities are calculated and dealt with. I well recall a few years ago when the Financial Services Authority insisted—when the FTSE index came down to about 3,500—that to protect their solvency, life companies sold equities and went into bonds so that the proportion of their funds in equities was very much lower. That has the self-perpetuating process of driving the index further down, and we are in the same situation today in relation to the calculations of liabilities of pension funds. There is a clear encouragement now to pension funds to play safe and to go into long-term gilts. As the noble Lord, Lord Oakeshott, has pointed out, those are very low, so the sheer decision to move into gilts, which is thought to be the remedy, makes the disease worse. That very action makes the liabilities a good deal higher. A short-term answer is to issue a lot more 50-year gilts but, as the noble Lord, Lord Oakeshott, said, that is not a very good argument in terms of getting good returns for the pension funds. It is only a short-term answer. I want to put into the Minister’s mind that we will have to have more focus on how liabilities are calculated to avoid that kind of vicious circle. That is an argument for another day, but unless we address the issue many more funds are going to be regarded as being heavily in deficit, so the situation is likely to get very much worse.