Pension Protection Fund and Occupational Pension Schemes (Levy Ceiling) Order 2025

Motion to Take Note

16:15:00

Moved by

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

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 applied? 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.

16:30:00

I have lots of figures here, but I will spare noble Lords those figures: I can see the Whips getting a bit twitchy. I have dramatic figures and of course we are going to return to all these issues during the passage of the pensions Bill—a treat in store. I just draw attention to a second recommendation from the departmental review, which was:

“The PPF should consider how the Board could hear more directly about the member perspective to inform its deliberations”.

I therefore welcome what the annual report says about the engagement it has had with its members about potential increases. Because of the work being done by the Work and Pensions Committee in the Commons, we also have some hard figures about the benefits.

I shall conclude—to a sigh of relief from my left—by pointing out that, to an extent, the fact that the PPF is in such a healthy position now is in large part due to these caps on the benefits, and that will have to be taken into account in any move towards paying increases. I accept that increases would have to be paid in a period of time reflecting the continued strength of the fund: you could not blow the whole £13 million reserve we have at the moment on making good the past, but it could be phased in over time, with the levy being adjusted appropriately as experience is gained with implementing increases in practice. I will finish there. The question for the Minister is: when and where will the Bill come? I ask for further confirmation that it will deal with the regulatory points. Will the Government take forward issues of the PPF being a consolidator, or is that something they have dismissed? Primarily, what is the Government’s position on moving forward with the PPF making discretionary increases post-1997, or even a change in the law to give the PPF the option, where it is considered appropriate, to make increases to pre-1997 benefits? I beg to move.

My Lords, first, I thank the noble Lord, Lord Davies of Brixton, for bringing this important matter to the attention of the Committee, notwithstanding the fact that the actual instrument that we are debating is not contentious. I thank the Minister and her officials for their engagement before this debate and for taking seriously some of the issues that we are expecting to hear about today. Of course, I also thank the Pension Protection Fund for its briefing note. I commend it on its excellent work and thank the staff for all that they have been doing to help those pensioners, or members of pension schemes, who are at a time of their lives when they are incredibly stressed—they will have seen their company go bust and feared what was going to happen to their future. At least we have in place a system which gives some comfort and underpin to the pension promises that they would otherwise be relying on, which could have disappeared were it not for the Pension Protection Fund and the way it has been managing its investments. I share some of the concerns expressed by the noble Lord, Lord Davies. I point out that, although this is talking about the maximum levy that can be imposed, it has never been imposed in all the 20 years of the PPF’s existence. Yet, each year, the maximum levy keeps going up with average earnings; it was at 4% this year, after being some 8% the previous year, and it has to be reviewed every 12 months. That was born out of the origins of the Pension Protection Fund—and I know that, at the time, other noble Lords were with me in trying to help the Government of the day to understand what was happening to the current members of the Financial Assistance Scheme, which paved the way for the Pension Protection Fund, who have been paid out so well by the PPF. Given the PPF’s robust financial position—partly as a result of the cap on benefits, as the noble Lord, Lord Davies, said, but also as a result of the investment management policies that it has put in place and maintained, which one must give them credit for—it would be really helpful, now that we have 20 years’ experience of the fund and seen the subsequent development of defined benefits scheme in this country, to consider the flexibility that we do not currently have in the levy-setting process. The Pensions Act 2004 could probably never envisage a situation, 20 years after its creation, where so many schemes had not called on the PPF, and so many employers had managed through all the different economic cycles to still fund their schemes and be heading toward buyout—which I will return to. Section 177(5) of the Pensions Act 2004 says that the maximum year-on-year levy increase cannot exceed 25%, which has clearly meant that it is impossible to have a levy holiday. As these reserves have built up over time—thanks to the noble Lord, Lord Davies, I shall not refer to “surplus” because reserves is a much better word—the PPF and, I presume, the employers’ organisations, would have wished a significant reduction in the levy to be introduced, if not a zero levy. Yet that proved to be virtually impossible because of the fear that they could never put it up again. In practice, of course, a levy of zero could never be increased; you are stuck with it for the rest of time. I hope that the Minister will help us understand what considerations are being given to the flexibility that we have heard about, which the Government would, laudably, like to see, and whether a levy of zero is possible and whether the required law change might be in the scope of the Bill that we are all eagerly anticipating. My second point, which again echoes the noble Lord, Lord Davies, is that I am seriously concerned by the lack of pre-1997 indexation. The Pension Protection Fund has an element of older members, many of whom had a significant accrual before 1997, and their own schemes may have had inflation linking. Not all did—it was not a legal requirement—but many schemes that I worked with from 2000 to 2004, before we had either the Financial Assistance Scheme or the Pension Protection Fund, had pre-1997 increases that were lost and will be lost for ever unless we change the legislation. I would be grateful for the Minister’s take on that. I make a particular plea for the Financial Assistance Scheme to mirror, as it has done all along, any changes made to the Pension Protection Fund, because those are schemes that failed before the Pension Protection Fund started. By definition, a much greater percentage of its accruals will have been before 1997, so the issue is of even greater importance and will cause greater hardship for those members. In addition—and the noble Lord, Lord Davies, mentioned this but did not really go into it—the Government’s desire to use pension assets for productive investment is one that I wholeheartedly share and would very much like to see progressed much further. But this is a classic example of assets that could be used for productive investment but that are not, partly because of the existence of the PPF and the regulator’s desire to protect against PPF entry, which has driven so many schemes to look to buy out. The extra restrictions on sponsors of defined benefit schemes have caused many employers to look to buy out, if they have not done so already. The expectation is that £300 billion of pension assets will be buying out over the next five years. Some 85% of all schemes are under £250 million; it is clear that there is money that could be used for productive investment. I hope to get this on the record: before a buyout, the distribution of assets tends to be 70% in gilts and government bonds, and about 30% in corporate bonds. There is very little, if not any, in equity investment or productive investment. After buyout, that 70% in gilts and other sovereign-type debt falls to 10% or so, maybe 15% at the most, and corporates become 80% to 85%. There are clear and present dangers for the gilt market itself from this trend. Anything that we could do to halt the buyout, perhaps by encouraging consolidation or more of that money to go into productive investment, given our experience of the Pension Protection Fund so far, would be beneficial to both the Government’s aims for the economy and the wider pensions landscape. I hope that the Minister will be able to explain some of this thinking. I wish to place on the parliamentary record my commendation of the work of both the Pensions Action Group and the “Stripped of our Pensions” campaign, which I worked on for many years with many good people to get to where we are now in terms of pension protection. I also laud in particular the work of the late Mr Peter Humphrey, who passed away just a few days ago and was one of the absolute leading stars of that campaign; he and his family lived and breathed pensions for so many other people. I hope that the Minister might join me in commending his work and that of so many others.

16:45:00

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—

Reserves.

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?

My Lords, I thank the noble Lord, Lord Davies, and the noble Baronesses, Lady Altmann and Lady Drake, for their contributions to this interesting evening. I bring fellow Peers back to the order before us—the Pension Protection Fund and Occupational Pension Schemes (Levy Ceiling) Order 2025—which is the basis for our discussion today, rather than the wide-ranging subjects we have dealt with. The order says that the Pension Protection Fund levy cannot exceed £1.4 billion, but the Pension Protection Fund has announced that it plans a levy of no more than £45 million, as referred to by the noble Baroness, Lady Drake, and potentially of zero. I cite this from the 2025-26 plans of the Pension Protection Fund. The background is that, when the PPF was created, the worry was that if things turned out badly and lots of underfunded DB pension schemes went bust, the hole in the PPF would be met by jacking up the levy on the sponsors of surviving DB pension schemes—in other words, the employers. Two protections for the employers were put in place: the levy cannot rise by more than 25% from one year to the next and it cannot exceed the levy ceiling, which is the number in this order. What actually happened was that the levy grew for a while, though got nowhere near the ceiling, but then started to fall owing to a combination, as has been referred to, of good investment returns at the PPF, lower than expected numbers of insolvencies—which is great news—and improved scheme funding. That all gives rise to it being in “robust health”, as the noble Lord, Lord Davies, defined it, and the comments around surplus or reserves, which we are not to talk about. I guess that the PPF would like to charge a zero levy but does not feel that it can; once it is zero it can never be reintroduced, because it cannot rise by more than 25%, and 25% of zero is zero. It has therefore been lobbying the DWP for a while to allow it to set a zero levy and still be able to bring it back later if, unhappily, things go wrong. I think it has won the argument and I hope that a measure to this effect will be included in the forthcoming pensions scheme Bill that has been referred to. This order, which is what we are talking about, is a formality and the ceiling obviously does not bite in any conceivable world. Can the Government confirm that, following the success of the PPF, they plan to change the rules to make it possible—this is the important part—for the PPF to charge a zero levy? Other noble Lords have referred to this flexibility that is needed. I hope the Minister can give us a positive steer on that.

My Lords, I thank the noble Lord, Lord Davies of Brixton, for securing this important and timely debate about a topic that encompasses and highlights the financial security of retirees, impacts the stability of the economy and involves the balance of responsibility and the relationship between employers, individuals, pension fund boards and trustees, and the Government. As always, it is a pleasure to precede the Minister, the noble Baroness, Lady Sherlock. As she might expect, most of my questions will be directed more towards her than to the noble Lord. We are not here to contest the order—the statutory annual levy rise in line with the growth of average weekly earnings, thereby increasing the PPF and the occupational pensions scheme levy ceiling by 4% for 2025-26. As the noble Lord, Lord Palmer, said, it is a formality. However, there are legitimate questions to ask and this is an opportunity for me to ask some questions from the Opposition about government strategy, if I may. First, I am sure your Lordships will agree that, as a safeguard, the Pension Protection Fund is a crucial backstop for protecting the retirement savings of millions of people in the UK. I very much agree with the compliments expressed by the noble Baroness, Lady Altmann, about the PPF and its management. It seems obvious to say this but, nevertheless, I will say it: we should not take for granted the importance of financial security in retirement, especially as people are living longer and relying more on the provision of private pension income.

17:00:00

However, as the noble Lord, Lord Davies, mentioned, there is an increasing disparity between these annual statutory ceiling rises and the actual levy collected by the PPF in recent years. For example, for this year—2025-26—the PPF will collect only 3.2% of the ceiling. This is a statistic expressed in a slightly different way compared to others—the same statistic, I should point out. In these challenging times, when businesses are under immense strain, any relief from the weight of an often burdensome levy offers a small financial reprieve, providing much-needed comfort in the face of an otherwise bleak landscape; I refer, among other things, to the employers’ NICs increases. In the light of this, what mechanisms are being considered to ensure that future strategic challenges and emerging policy issues will be addressed, with the DWP and the PPF working in partnership?

Yet, while the levy ceiling remains high, recent market volatility—sparked largely by comments and decisions, including ones that are then changed or retracted, by a certain Mr Trump—and continued downwards pressure on investment returns serve as a timely reminder that the stability of defined benefit schemes cannot and must not be taken for granted. The turbulence that we have witnessed in recent weeks is a cautionary tale; indeed, it is often the case that decisions taken far beyond these islands have the most profound impact on our domestic markets. It is true that the recent rise in gilt yields and a period of strong investment returns have placed many schemes on a firmer footing, with around 75% now in surplus—other noble Lords have mentioned this point—but we must not allow these favourable conditions to lull us into a false sense of complacency. To assume that such conditions will endure indefinitely would be, at best, unwise and, at worst, reckless.

I trust, therefore, that the Minister will keep this reality of recent volatility firmly in mind, particularly as we look ahead to the arrival of the eagerly anticipated pensions Bill. Can she tell the Committee to what extent the DWP is working with the PPF to discuss future legislative changes, specifically ones to address what decisions will be made to any funding deemed surplus to requirement? I also prefer “reserve” but I will interchange between the two words “surplus” and “reserves”. As the noble Lord, Lord Davies, said, return of surplus to employers—the so-called Section 251 issue—is one possibility, as is use for investing in infrastructure projects; that has been mentioned already. Will there be a new surplus code of conduct, for example? How will this affect pension accountancy methods? Are there any recommendations from the PPF’s May 2022 review with which the Minister disagrees? If not, can we expect to see those recommendations reflected in the forthcoming pensions Bill?

The Bill presents a clear opportunity for the Government to act on the findings of Lesley Titcomb’s important review; to implement her considered and constructive recommendations; to echo specifically the comment made by the noble Lord, Lord Davies, and mentioned by the noble Baroness, Lady Drake, that recommendation 18 would allow the PPF levy to fall to zero, if the PPF board so decides; and to retain the freedom to reintroduce the levy should market conditions change. Will this recommendation be included in the forthcoming legislation? This balanced approach would allow for responsiveness to both positive and negative economic shifts, ensuring the long-term sustainability of the PPF while offering timely relief, where appropriate.

It is this balanced approach—the word “flexibility” was used by my noble friend Lady Altmann—that we hope the Government will adopt in the forthcoming Bill, to ensure that the role of trustees and pensioners is protected. I pick up the point raised by the noble Lord, Lord Davies. Can the Minister outline the Government’s approach to managing pension scheme reserves? In particular, do they support setting the bar high or low for surplus extraction? How does this policy align with ensuring the long-term stability of pension funds for their beneficiaries, a point that the noble Lord raised? I emphasise the importance of long-term stability and ask the Minister the age-old question: how do the Government define “long term”?

Can the Minister also clarify the Government’s position on a subject of much speculation, the “not materially adverse” test regarding pension surplus extraction, and explain how it ensures that surplus withdrawals do not jeopardise the financial security of pension schemes or undermine the legitimacy and the right of trustees in safeguarding the interests of their members? How do the Government define “not materially adverse”? The term is, as I am sure she agrees, rather subjective.

The devolution White Paper made some intriguing references to the Local Government Pension Scheme. How do the Government plan to ensure that administering local authorities possess the necessary fiduciary, governance and advisory pension expertise to invest surpluses in local infrastructure to cover any investments made that not only are suitable for pension funds but deliver an optimum level of return? Can the Minister be specific about operational aspects, including the constraints? Does she anticipate recruiting extra expertise—I suspect the answer is yes—and, if so, how many specialists will be needed countrywide? What is the timing for this? Does she agree that clearer advice and guidance is needed to help local authorities and councils make investment decisions, including potential contribution reductions, which could release money for key council priorities such as potholes, et cetera? Guidance on the timing and decision-making for when councils should have a review of contribution rates is also highly desirable.

The forthcoming pensions Bill is not merely a routine legislative adjustment that confirms a single levy; it has the potential to be a step change, a transformative moment that reshapes the very future of our pensions landscape. It will impact savers in all corners of the system, and the decisions that arise from it must always have pensioners’ interests at their core. So can the Minister reassure me that she will rigorously assess the proposals and ensure that they strike the right balance or flexibility and address the challenges of our time?

Finally, a tidal wave of growing defined contribution liabilities balances is just over the horizon, because people are not only living longer but facing extended periods of ill health. As a result, communication and financial planning will become more critical than ever. We hope that the pensions Bill will effectively address the changing dynamics of the pensions landscape and ensure that it evolves to meet these challenges. I look forward to the Minister’s responses.

My Lords, I thank my noble friend Lord Davies of Brixton for introducing this debate and all noble Lords who have contributed. I am particularly grateful to the noble Lord, Lord Palmer, for trying to call us back—however unsuccessfully—to debating the order on the Order Paper. The serious side of that, I am afraid, is that rarely will a Minister have been able to so profoundly disappoint so many people, on almost all fronts, in one single—I hope relatively brief—speech. My noble friend has every right to want a general debate on this otherwise rather harmless order, but the timing of this debate means that I am not in a position to answer most of the questions that noble Lords asked. I suspect that they will not be surprised by that, even if they are disappointed. The reality, as I will explain, is that we are poised on a number of fronts to make both decisions and announcements in a timespan ranging from the near future to the coming months, so noble Lords will not have to hold their breath too long—but I fear they must do so just a little longer. Just for the sake of order, I call your Lordships back briefly to what we are debating today. The levy ceiling order 2025 sets out the maximum amount that the Pension Protection Fund can collect from eligible schemes through its annual levy. It is worth briefly pausing to note that we are in the 20th anniversary year of the PPF. I know that some noble Lords were celebrating this not so long ago, when there was much talk of the comment made by Andrew Smith, the Secretary of State who oversaw its creation. He famously asked “why, if people expect their holiday provider or motor insurer to be covered if the firm goes bust, there is no cover for something as important as an occupational pension”.—[Official Report, Commons, 11/6/03; col. 683.] Looking back now, it is hard to believe that we did not have something like this then, but we do now and some of the people in this Room were behind us getting to this point. I commend that. Before the PPF was established, if a DB scheme failed, of course, its members were at significant risk of losing their pensions and facing an uncertain retirement. I think that, from the comments today, we can all agree that, over the years, the PPF has built up a strong reputation, is respected by stakeholders and enjoys high levels of customer satisfaction. As we have heard in part, the PPF is primarily funded by a levy paid by eligible pension schemes over the years, but also by recoveries from insolvent employers, assets from failed pension schemes and returns on its investments. My noble friend Lady Drake made an important point about the shifting balance of both the source of those finances and how we look at that going forward. To ensure that the PPF remains affordable, and to reassure levy payers, originally three constraints were placed on how the board sets the levy for each financial year: that it cannot be increased by more than 25% of the previous year’s levy; that the levy ceiling will set the maximum levy that the board can collect; and that at least 80% of the levy must be risk-based. The levy ceiling is uprated annually in line with earnings, the point of which is to ensure that it broadly aligns with the PPF’s potential liabilities. This financial year, the ceiling has been increased to approximately £1.4 billion, while the levy estimate is just £45 million. Of course, that increasing gap between the ceiling and the estimate reflects the fund’s strong financial position. As the PPF matures, it is reducing its dependence on the levy for funding and becoming more reliant on returns from its investments. That marks a significant step in the PPF’s journey towards long-term sustainability and financial resilience, ensuring that it can protect its members into the future. My noble friend Lord Davies made a point about how far that responsibility stretches—there will be members who will need support from the fund for many years to come. I turn to points raised by noble Lords, in no particular order. The noble Viscount, Lord Younger, asked several important broad questions about the Government’s pensions strategy. To answer the last question first, he asked how the Government will ensure that authorities in the Local Government Pension Scheme have the right fiduciary expertise to invest in local infrastructure. The answer is that we will require LGPS administering authorities to work with strategic authorities to identify local investment opportunities suitable for pension funds. All 86 authorities will be required to delegate the management of their investments to pools regulated by the FCA, and that approach will create large pools of professionally managed capital, aligning with international best practice. These pools will be responsible for conducting due diligence on local investment proposals and deciding whether to invest. That ensures that investment decisions are taken by those with the appropriate professional expertise, and it will free up local pension committees to focus on developing their investment strategies. The noble Viscount also asked how the PPF and DWP will work together to respond effectively to emerging challenges and opportunities—a point also raised by my noble friend Lord Davies. Here, both noble Lords were right to refer to the 2022 departmental review of the PPF led by Lesley Titcomb. Its recommendations have really helped to shape the way the PPF and the department have worked together to ensure that scheme members are protected into the future. The noble Viscount asked the $64,000 question about recommendation 18 relating to the pension protection levy, a point raised, I think, by everybody—tutti. We announced back in January that we will give the PPF board greater flexibility to adjust the levy by removing the restriction that the levy cannot be increased beyond 25% on the previous year. That will enable the board not to collect a levy when it is not needed, thereby reducing costs for levy payers and potentially freeing up millions of pounds for investment. I hope that this will be broadly welcomed in the streets, if not just in Grand Committee. This will require legislation. I am sorry to say to the noble Viscount and, indeed, the Committee that I am not in a position yet to confirm the legislative vehicle through which it will be delivered, but I assure him that we will legislate when parliamentary time allows. We will continue to work with the PPF to consider the reserve and ensure the fund’s resilience. That sounds like a terrible bit of government “I’m not going to tell you”, but the reality is that, as anyone who has been a Minister knows—that is at least two noble Lords in the Committee—there are clear protocols about the point at which Ministers are able to indicate whether parliamentary time has been approved, and there are things we have go through before we are in a position to do that. But, as soon as it is possible to inform Members, I will be very glad to do so. More broadly, we continue to monitor the DB pension scheme landscape as it evolves. The noble Viscount asked whether we disagreed with any of the recommendations from the review, and the answer is that we do not. Some of them will be reflected in the upcoming pensions Bill, but many of them do not require legislation through the pensions Bill or anything else. Some have been overtaken by events and the department is working on some of them with the PPF to explore either them or related options. Noble Lords, in particular the noble Baroness, Lady Altmann, referred to the reality that the universe of DB schemes is maturing and will become smaller over the next decade as well-funded schemes secure their legacy liabilities in the commercial market or choose to run on. She mentioned some of the implications of that. I assure her that DWP is working with the Treasury to better understand the implication of emerging market trends. Alongside the PPF, we continue to review whether further structural changes are needed to ensure that the pension protection levy remains aligned with the various schemes that the PPF protects.

17:15:00

The noble Viscount asked about the Government’s approach to managing scheme surpluses. Before we get into everybody talking about reserves for everything, whether it is the PPF or schemes, it is worth saying on the interchanging of reserves and surplus that they are not necessarily the same. Our proposed changes to DB surplus flexibilities refer to private sector occupational DB schemes. Schemes within the PPF and the reserves it holds do not form part of the proposals. That may be obvious, but I say it for the record to be clear that that is the case.

On the question of surplus, there are, of course, billions of pounds in surplus funds in private sector DB pension schemes. Surplus assets bring an opportunity to offer greater benefits to employers, scheme members and the wider economy, without undermining member security—crucially. We will enable trustees of well-funded DB pension schemes to share surplus funds with the sponsoring employers and members, subject to stringent funding safeguards. I am sorry to say that I cannot give the details of that at the moment, but we are clear that the security of member benefits is fundamental. We will bring forward details in the coming months. The noble Viscount knows that, in the coming months, we will release our response on the DB options and that we will give more detail in that. I reassure not just the noble Viscount but the Grand Committee that changes will focus on member protection, with appropriate safeguards to ensure that benefits are not placed at undue risk.

My noble friend Lord Davies touched on the PPF’s investment strategy. The PPF deliberately operates a low-risk investment strategy to maintain financial resilience and to give a high level of security to current and future members, so it has its assets in two portfolios: a matching portfolio, which manages the risk of changing interest and inflation rates, and a growth portfolio, which is mainly focused on protecting the fund’s longevity and claims reserves. In essence, these reflect the funding requirements of current and future members.

I will not talk in detail, but the noble Baroness, Lady Altmann, asked what the Government are doing to encourage productive finance. We agree that maturing schemes need to invest a growing proportion of funds in more secure assets, such as bonds. However, most schemes are investing more prudently than is required by the scheme funding arrangements, and the regime makes it clear that there is headroom within the system for additional productive investment. Even at significant maturity, there is flexibility for trustees and managers to invest a lower but still significant proportion of funds in more productive growth assets. This is another subject on which I am afraid the noble Baroness will have to be patient to hear what the Government wish to do.

The big question of indexation, particularly pre-1997 indexation, was raised by pretty much everybody. We are rightly proud of our pension protection system, but it is not surprising that cost of living challenges and levels of inflation, coupled with the strengthening position of the PPF, have led to calls to change indexation rules. Obviously, noble Lords have noticed that PPF and FAS members do not receive increases on payments based on pension protections accrued before 1997. I simply say that the Government understand the importance of ensuring that PPF and FAS members can enjoy a secure retirement; however, the introduction of pre-1997 indexation raises a range of cross-cutting issues. We need to ensure that any proposals are fair to members of the compensation system and members of DB schemes more broadly. Any solution must strike a balance between the interests of levy payers, affected members and taxpayers. As noble Lords will be aware, this matter was raised in the report published by the Work and Pensions Select Committee last year. We will respond to the committee very soon, having carefully considered all of its 23 recommendations.

There were questions about costing, because the PPF and FAS are in different positions. Broadly speaking, indexing pre-1997 for future FAS payments in line with the CPI capped at 2.5% would cost approximately £400 million to £700 million over the lifetime of the scheme. For the PPF, that would be more like £1.7 billion to £1.8 billion. Any FAS ad hoc increase would have to be paid from the Exchequer. Any ad hoc increase for the PPF would increase its liabilities. Again, on reflecting on this, the Government have to be aware of the balance.

There was a question about the future, which was a helpful reminder from the noble Viscount, Lord Younger, that it may not be like the present and that we have to make sure that there is enough headroom for whatever happens down the line. The PPF published a review of its long-term funding strategy in 2022 and concluded that while the risk of schemes having to enter the PPF is decreasing, there are schemes which still pose risks. It said that the PPF expects that it will need to continue to build it reserves but at a reduced pace. It is worth remembering that there are still a number of risks ahead: of future claims of compensation because of employer insolvencies and of adverse investment experience and longevity risks requiring the PPF to pay more. To ensure its long-term stability and to fulfil its commitments to scheme members, the PPF must maintain a substantial reserve. However, I will make sure that the noble Lords’ comments are shared within the department and are considered carefully.

All I can say about a pension schemes Bill is that the Government have set time aside for such a Bill and its measures will include increased investing in productive UK markets and improving saver outcomes.

I hope that I have answered most of the questions. I am well aware that I will have disappointed noble Lords, and I apologise for doing so. However, as my noble friend Lord Davies said, we have at some point ahead the absolute treat of a debate on a pension schemes Bill, when we can discuss these matters in considerable detail. The time may not be specified, but the certainty is there.

I thank noble Lords for the opportunity to respond to this wide-ranging debate on issues affecting our system. The Government are determined to make our pension system work as well as it can as part of our mission to shape the pension system to serve the interests of savers and pensioners, ensuring decent, secure retirement incomes for all. I hope that is a goal we can all get behind.

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.

Motion agreed.

Committee adjourned at 5.22 pm.