My Lords, I congratulate the noble Lord, Lord Davies, on securing this debate; it is an important one. At the outset, I say that I believe that the Pension Protection Fund has done and is doing an excellent job, and member experience in the PPF seems to be very positive—for me, that is one of the big tests of whether this is working well. The administration is very efficient, and the amount of compensation being paid is reaching those who need it, and are entitled to it, well.
I also congratulate the noble Lord on his foresight in 1995. I recall first becoming involved with Allied Steel and Wire and the various other pension schemes whose members had lost their entire pension very close to the point at which they were expecting to start receiving it, together with all their other life private savings —in those days, if you wanted to have any extra pension contributions you had to put all of it into your employer’s pension scheme. I remember reading about the proposals for a central discontinuance fund and thinking, “If only”. It informed my conversations with the No. 10 Policy Unit, the Treasury and the economic advisers to the Prime Minister at the time as to which way we needed to go to improve the situation the country faced. Over the subsequent two to three years, more and more pension schemes failed, and more and more members started losing their pensions; it was a serious and heartbreaking time. Members, having been told that they were fully protected, would have expected that all their money was safe. They were told that, regardless of what happened to their employer, their money was safe and that their pension was protected—but it turned out not to be the case.
Instead of the proposal from the noble Lord, Lord Davies, of a central discontinuance fund, we got the actuarial profession’s minimum funding requirement. Unbeknown to members—and, indeed, to most pension professionals outside actuarial circles—that was designed to deliver only a 50:50 chance of people receiving their full pensions, and yet members, trustees and employers were told that, on that basis, their fund was fully funded or in surplus. Unfortunately, what happened
subsequently, around the end of the 1990s, with the market crash, was that those surpluses melted away. It looked as though the benefits had been secure but, suddenly, the market crash made that position unsafe. We saw that those so-called surpluses were in fact buffers against bad markets, rather than real surpluses—you could judge that only with hindsight in the end.
This is my concern about the Pension Protection Fund. I absolutely want to try to ensure that anyone who has a pension insured by the Pension Protection Fund receives as much as possible. If there were a secure way of ensuring that they did not fall behind while we are suffering this cost of living crisis, I would be the first to support it. My thinking has perhaps been coloured by my experience during those dreadful years, before we got the Financial Assistance Scheme sorted out in 2007—it started around 2008—of seeing people who thought that their pensions were in surplus and that their position was secure finding that, because markets had moved suddenly and unexpectedly and in a way that had never been properly forecast, their pension had disappeared.
I also believe that, although the PPF looks as though it is in surplus now, we need to address what happens should there be a severe economic dislocation causing some of the huge pension schemes, which currently seem safe—and even some of the open schemes —to fail and fall into the same problem. This is an insurance policy rather than a pension, which, for me, is an important distinction.
I would love the Government to find a way to underwrite more generous increases for the Pension Protection Fund. I am particularly mindful of the fact that, before 1997, benefits had no inflation protection at all, yet many schemes—but by no means all—offered full inflation linking, or at least up to 5%. In that pre-1997 period, the older the member was when their scheme failed, the more pension they lost as a result of the failure, because they would have had more accrual.
I support the concept that the noble Lord, Lord Davies, is promoting: that in a time of economic difficulty, with inflation roaring away, we do not want to leave pensioners behind. It is clearly the case that the Pension Protection Fund is, to some degree, leaving pension members behind in real terms. To some degree, it was modelled on the American PBGC, the Pension Benefit Guaranty Corporation. Generally speaking, in America there is no inflation protection at all on these DB schemes, so the UK has always been a little unusual in that regard. Having said that, it makes sense to look at the structure of the levy and I echo the questions for my noble friend about plans for the future management of it.
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Finally, to pick up on the remarks of the noble Lord, Lord Davies, on the arbitrary and unfair treatment of pre-1997 members, that applies particularly strongly to members in the Financial Assistance Scheme. This scheme is not funded by all other pension schemes or employers; it is a part of government spending. Members in the Financial Assistance Scheme were never told that there was a Pension Protection Fund that would reduce their pension when they reached retirement; they were always told that their pension was completely
“safe and protected by law”, to cite government documents sent to them at the time. They would be particularly at risk, because their schemes failed before the schemes that belonged to the PPF. They would be at risk of losing more because, by definition, they had more pre-1997 benefits.
May I put in a plea? Given that the Financial Assistance Scheme’s membership is more than half the size of the membership of the PPF, if there were any consideration of increasing the generosity of inflation protection for members of the Pension Protection Fund, even on a one-year basis, for example could that be applied to the Financial Assistance Scheme as well? It would be an option to offer them extra on a temporary period. On that basis, does my noble friend know, or will he write to me about, how much extra money the Government have so far added to the assets that were gathered in from Financial Assistance Scheme schemes to supplement the amounts paid out for members of those schemes?
I congratulate the noble Lord, Lord Davies, on this. I echo the words of the noble Baroness, Lady Drake, who knows so much in this area, about a need to be mindful of the longer-term potential risks. I look forward to hearing my noble friend’s response.