Westminster Hall debate on Defined-Benefit Pension Schemes: Shell - Jan 17

Mr Alistair Carmichael (Orkney and Shetland) (LD)

I beg to move,

That this House has considered the regulation of defined benefit pension schemes.

After the heat of the debate on High Speed 2 that has just ended, I hope that we might be able to generate a little more light. The subject of defined-benefit pension schemes and their regulation does not always lead to that sort of excitement, important though it undoubtedly is. I suppose that in speaking about defined-benefit pension schemes I should declare an interest. Defined-benefit pension schemes, many of which are of course final salary schemes, were what people like me were part of when we were first elected to serve here. Then, in about 2011 or 2012, I think, we moved to a career average earnings scheme.

The Institute and Faculty of Actuaries, in a briefing provided ahead of today, says:

“This is a particularly broad and complex topic”—

a warning that I think we should all be willing to take. I am not much given to dealing with broad and complex topics, especially where hard sums are involved. I always take a fairly simple view of these things, and when it comes to pensions, some things are worth bearing in mind and never losing sight of. The first of those—I will come back to this point in a minute—is that a pension is in effect a matter of contract between an employer and an employee. It is, in other words, simply salary paid at a later stage in the employee’s life. The relevance of that is that when we anticipate changes in the way in which pensions are to be provided, we have to make allowance for the fact that people will have made decisions in their life about how they are going to provide for themselves at a later stage in their life.

Thirty years ago, I was a part of the established civil service. I was a prosecutor, a procurator fiscal depute, working at the Crown Office in Edinburgh. I worked with many talented lawyers who were able to do remarkable things as prosecutors, and most of them would have been able to command much higher salaries had they worked in private practice. They did not do so for a variety of reasons. Some had a particular commitment to prosecution and to public service, but they also had an understanding that as members of the civil service with a final salary scheme, a defined-benefit scheme, they would trade that off against the higher salary that they could have got when they were working. It is worth noting in passing in relation to the BP pension scheme, about which I will speak later, that when BP closed its scheme to new entrants, it compensated for that with a 20% increase in salary for those who were still in employment.

When we anticipate a change, we always recognise that there is a greater importance of maintaining benefits for those who are in a later stage of their career. This is currently coming to my attention and to the attention of many right hon. and hon. Members. Indeed, the Select Committee on Work and Pensions has recently taken an interest in it, because of the experience of pensioners who are beneficiaries of schemes such as BP’s, and Shell’s scheme is another. Although there are differences in the terms of the trust deed for the Shell scheme, the outcome in terms of the beneficiaries is that they are actually in lockstep with each other.
Justin Madders (Ellesmere Port and Neston) (Lab)

The right hon. Gentleman will not be surprised to learn that there are many Shell pensioners in my constituency. I have been in correspondence with Shell about its decision last year not to award an inflation-matching increase in the pension, and it told me that it did not have to do that. When it was pointed out that it had given a similar inflation-matching rise to Dutch pensioners, Shell’s response was that there are different rules and regulations for managing the Dutch schemes. That highlights the essence of the problem that we are trying to deal with.

Mr Carmichael

It absolutely does. Representing a constituency that had the Sullom Voe oil terminal managed by BP for many years, I suspect that the reasons why the hon. Gentleman has Shell pensioners in his constituency and I have BP pensioners in mine are very similar.

Jim Shannon (Strangford) (DUP)

I commend the right hon. Gentleman for bringing forward this debate. It is a critical issue, and it goes beyond the two pensions that he has referred to. Does he agree that the Government—I say this with great respect to them—have had adequate warning that we are heading towards a UK-wide pension crisis if we do not make changes to pension schemes soon? Will he join me in asking the Department for Work and Pensions to begin, today, to take adequate steps to rectify the precarious position we are currently in, on behalf of our constituents?

Mr Carmichael

The hon. Gentleman strikes at the reasons why I brought forward this debate. We might benefit from a wider and longer ventilation of the issues at some later stage, but we have 30 minutes today, so let us use it. I had the opportunity to discuss the issues yesterday with the Minister, and he is alive to the concerns.

When it comes to regulating pensions, and indeed other similar financial provisions, the law of unintended consequences is never far away. The Government are right to be cautious, but they have to be alive to the fact that this is an emerging crisis. What happens to the beneficiaries of the BP and Shell pension schemes today could happen to just about any pensioner the future. As those pension funds come to a point of greater maturity, the concern that we hear from BP, Shell and other pensioners is that decisions are being taken not in relation to their best interests, which is the primary fiduciary duty of the trustees, but because of other concerns. There is a significant number of significant issues for the Government to look at in relation to pension regulation, not least of which is the balance between the companies that have created these pension funds in the first place and the independence of the trustees.

Wendy Chamberlain (North East Fife) (LD)

With 60,000 BP pensioners impacted, it is unsurprising that I too have been contacted by constituents. There is a wider debate about the fact that if multinational companies such as BP and Shell are making these decisions, smaller companies will end up making similar decisions if something is not done. My right hon. Friend mentioned appointed trustees. Does he agree that BP has a duty to take the advice of its appointed trustees to prevent real-terms cuts to pensions? Otherwise, what is the point in having trustees at all?
Mr Carmichael

I almost entirely agree with my hon. Friend. The way in which the BP pension fund works is that the trustees have virtually no discretion up to 5%, and then from 5% to 9% there is a discretionary level. In the last year, the BP trustees recommended 9% but the company refused to pay it. I can see that there might be good reasons why a company does not want to be tied to that discretionary level, but there must be a reason for refusing to pay it. As far as I can see, the BP and Shell response has been, “No, we don’t need to give you a reason.” They play off defined benefit against defined contribution; they play off against pensioners in other parts of the world because they are transnational corporations; and they come up with other points.

That is why it is so important that when we talk about this issue, we hold right at the top of our minds that this is a matter of contract between the employer and the employee. If they were still working and receiving this money instead of receiving it as a pension, we would not tolerate it. If it is not a good enough way of dealing with somebody’s salary, it is not a good enough way of dealing with somebody’s pension.

When Nick Coleman from the BP Pensioner Group, who provided me with an invaluable briefing in the last few weeks, gave evidence to the Work and Pensions Committee, he touched on the point about the relationship between the trustees and the company, and the independence of the trustees. He produced something that, frankly, shocked me and shocked Committee members as well. He said:

“We checked the pension fund company’s annual returns to Companies House the other day and found that for the first time ever, they had added some words saying the duty of the directors, among the normal things you would expect, was also to maximise BP’s long-term shareholder value.”

As a trustee, that is a quite remarkable addition to the trust’s purposes, because the fiduciary duty is the duty of utmost good faith to the beneficiaries. If there is a conflict between the beneficiaries and the company, the trustees’ duty is to protect the interests of the beneficiaries. Nick Coleman went on:

“We are saying that the solution here is to somehow reinforce the requirement that trustee boards are demonstrably and fully independent. For example, the majority of members should be demonstrably independent rather than, in our case, the majority being company employees. They also need to be expert. Some of them have only been hired by BP two years ago and they are now trustees of the Pension Fund. They know very little about pensions, whereas they replaced people with 12 years’ experience. Expertise is a very big deal.”

It is pretty clear that these problems and pressures will become more acute. It is widely believed by BP’s beneficiaries that it wants to reduce the level of outgoings from the pension fund so that it will be a more attractive prospect for being hived off, perhaps to an insurance company or others. Such things are legally possible, but it comes back to the relationship between the employer or former employer and the employee or pensioner. If the pension fund is owned and administered by an insurance company, for argument’s sake, where will that relationship be and how will that impact on the outcome for the beneficiaries?

I raised that question in discussion with BP yesterday. Incidentally, BP has eventually come to talk to me about this, but it is still not talking to its pensioners. If BP is to avoid the reputational damage that could come from this, it would be well advised to spend time talking to its pensioners and employees in a meaningful and serious way, which it has failed to do thus far.

The BP pension fund was established 95 years ago. It has 58,000 members and 42,000 pensioners in payment, 30,000 of whom are more than 70 years old. BP closed access to the defined-benefit scheme in 2010 and closed it to new accruals by existing members in 2021. Over the years, however, BP has made significant undertakings to its employees and pensioners, a number of which I have had the benefit of considering. As far back as 1996, there was a Pensions News for BP’s pensioners, which stated:

“It is important to remember that the BP Scheme guarantees pension increases equivalent to the annual increase in the Retail Prices Index (RPI) up to 5% and the Trustees, with the agreement of the Company have stated that they intend to follow a policy of increasing pensions in line with RPI wherever possible even when this exceeds 5%, so long as the BP Pension Fund has sufficient resources to permit this.”

I will come back to the resources question. It continues:

“In times of high inflation, this would be a valuable underpinning to the purchasing power of your pension.”

This material was given to BP pensioners then. Underneath those words, the benefits of scheme membership are listed:

“The security of a large well funded arrangement…A pension linked to your earnings at, or close to retirement, part of which can be taken as a lump sum…Guaranteed increases to protect the value of your pension over the years of your retirement”.

It was on the basis of undertakings such as those given by BP to its employees that many of them made the decisions they did for their future provision. That is why, when I questioned the Minister on this in the Chamber last month, I said that BP was effectively dealing from the bottom of the pack. I hold very much to that view, which is why I think this House is right to highlight what BP has done. As I said, it could happen to others.

Fast forward to 18 months ago when BP first withheld consent for a pension increase according to the retail prices index: inflation then was at 7.5%, but it agreed to a 5% increase only six months ago when inflation was at 13.4%. The net effect of that was a 11% decrease in the pension value received by the beneficiaries.

The oil industry obviously has a reputation for high salaries, but it is worth bearing in mind that the average pension paid out by the BP pension fund is only £18,000. BP’s defence is quite revealing. It has referred me to the funds made available for payment from its Helios fund, which is effectively a lump sum payment of £2,500 for people in receipt of a household income of less than £30,000. Again, we are breaking the link between the former employer, the salary and the pension recipient. Pensions are not charitable hand-outs; this is money that people have earned in the course of their working life.

BP seeks every step of the way to play one group off against the other. It plays the defined-benefit recipients off against the defined-contribution recipients. It says, “We are a multinational company and we have liabilities to pensioners in other parts of the world.” It absolutely does, of course, but it pays people different salaries in different parts of the world. If it pays something during a person’s working life, it should be prepared to accept the logic that it should pay that at the end of a person’s working life and into retirement.

The funding ratio of the BP pension fund at the moment stands at 132%. If it were to meet the extra 4% this year, the funding ratio would still stand at 129%. There is no reason, from the position of the fund, why that should be regarded as an unsustainable payment, but of course it would make an enormous difference to the beneficiaries—the pensioners themselves.

BP has generally had a well-funded and well-managed pension fund. From 1990 to 2020, it made virtually no extra payments to the pension fund at all. It is worth reflecting on the fact that BP has announced that its new chief executive will be Murray Auchincloss, who, as chief financial officer, was the author of many of these decisions. Mr Auchincloss will enjoy a salary of £1.4 million plus a variety of other benefits in kind. I have not had the time to work out exactly what those other benefits will be, but when BP sacked his predecessor, it clawed back £32 million, never mind what it paid him. It is fair to say that Mr Auchincloss, and probably Mr Looney too, will have to go some way before they are eligible for universal credit.

The final word in this debate should go to the BP pensioners themselves. Some truly heart-rending contributions have been quoted to me. One came from a pensioner who said:

“In the 1990s, BP introduced an option for staff to put 15% of their salary into accruing pension at a faster rate which I did because my wife had no pension of her own. It was not an easy decision as we had just started a family and money was very tight.”

The other one that really jumped off the page for me was from a pensioner who had 20 years’ service with BP working in IT. They said:

“I am dying from cancer and emphysema, suddenly I am informed by bp that my widow and family will no longer be protected from inflation in the way I had always believed. Now please tell me how you would react if your loved ones came under attack in this way. And how would you feel when the man responsible for this assault is claiming to be a champion of mental health and to care about people?”

That is the human cost of the decisions that BP has taken and continues to take.

BP and Shell are just the canary in the coalmine; what happens to them can happen to others. That is why this is a matter to which the Government must now pay the most urgent attention.

11.19am
The Parliamentary Under-Secretary of State for Work and Pensions (Paul Maynard)

It is a pleasure to serve under your chairmanship, Mr Davies. I am grateful to the right hon. Member for Orkney and Shetland (Mr Carmichael) for securing this debate. We had a good discussion on this matter yesterday, but I hope I can say a bit more today.

First and foremost, I am very pleased that people are showing more interest in pension schemes more generally and the pensions they receive. I always think that we, as a nation, do not show enough interest in our pensions at the right time in our lives. I have heard very clearly the points made about individual schemes. Today I will not talk about specific schemes but will comment in more general terms about how these pension schemes are supposed to work. I recognise that many people depend on these schemes for their retirement income, but let me talk about the issues more broadly.

I understand the upset caused by schemes when pension scheme members no longer receive the discretionary increases that they had received previously. It is important to stress that legislation does not seek to set out exactly what every scheme must do in every conceivable circumstance; rather, legislation sets out minimum standards for indexation. That does not prevent more generous arrangements, which may be brought into a scheme through its rules or provided on a discretionary basis.

It is quite right that there should be some minimum standards—statutory requirements for DB indexation that all schemes must follow. These requirements are in place for all schemes, and they try to achieve a balance between providing members with some measure of protection against inflation without increasing a scheme’s costs beyond what most schemes can generally afford. That is a critical balance to strike.

It is important to provide a measure of protection for members, but we also need to have an eye to the future viability of a scheme, which could be compromised by creating significant additional liabilities. We also have to consider employer affordability. The best possible protection for the members’ future benefits is a strong and profitable employer, and we must remember that not all DB schemes are sponsored by monolithic employers with deep pockets. The setting of a statutory minimum is therefore a delicate balance to strike.

Some pension schemes go beyond the legal requirements and do indeed provide more generous indexation. Of course, if higher levels of indexation are set out in scheme rules, those levels of indexation must be paid. The scheme rules set out the pension package that the members have the right to receive.

Mr Carmichael

I agree with most of what the Minister is saying, but there is something more that comes into play here, which is the question of light-touch regulation. Light-touch regulation only works if it is possible to proceed on the basis of good-faith acting by both parties, particularly the companies. Where there is evidence of the lack of good-faith acting, as we have with BP and Shell  is it not necessary to adjust the system to ensure that at the end of the day the beneficiaries are not suffering as a consequence?

Paul Maynard

I note the right hon. Gentleman’s point. I am also conscious of time, so I do not think that I will be able to make my entire legal presentation. He very kindly said in his speech that I was alive to the issues, which I hope I can demonstrate towards the end of my speech by setting out where my thinking is moving to.

As the right hon. Gentleman rightly said, the Government’s role is to ensure that the fundamental promise of a DB scheme, as set out in its rules, is met. Whether discretionary payments are made must be a matter for the trustees and the sponsoring employer. The Government have no power to intervene to require a scheme to pay an annual increase above that required by the law or to go beyond the rules of the scheme.
It is up to trustees and sponsors to agree how their specific scheme should be run in the best long-term interests of all parties. It would not be appropriate for the Government to interfere in decisions made by individual schemes, beyond setting clear and reasonable minimum standards that apply to all schemes, including through regulation.

Justin Madders

I am grateful to the Minister for giving way; I will just pick up on the point made by the right hon. Member for Orkney and Shetland (Mr Carmichael). This issue is about good faith and promises being kept. If we look not just at the schemes that have been mentioned today but at others—I am thinking of the FOSPEN, the Midland Bank clawback issue, and of course the WASPI women—we see that there is a whole generation of pensioners out there who feel that they have not been delivered what they were entitled to. What kind of message does that send to the pensioners of tomorrow? We really need to toughen up on this, don’t we?

Paul Maynard

I agree entirely. Since coming into this job, I met representatives of the Pensions Action Group— an organisation that covers employees of a number of companies that went into liquidation many years ago. Differing rules around indexation have caused very different outcomes for those individuals, so I am very conscious of the issue. I made a point of meeting them because I believe predecessors have not met them; I wanted to make sure that I heard their case and could reflect on it, and I have commissioned further work from officials. They are aware that that is ongoing, and I look forward to hearing what my officials have to say.

Key to the points I have heard in this debate is the role of trustees. No matter whether they are employer-nominated or member-nominated, they have first to comply with the rules of the scheme and, secondly and crucially, to act in what they regard as the best interests of their members now and in the future. That includes investment decisions that they may choose to make. It also includes decisions on indexation. The trustees will sometimes need to make difficult decisions; that is the nature of trusteeship. The needs of different parties, today and in the future, have to be balanced. They have to ensure that funding problems do not emerge in the future. Trustees and sponsors must work together to seek the best way forward, taking account of a whole range of issues including the long-term health of the scheme.

Depending on the circumstances of the scheme, different models of trusteeship may be more or less appropriate. The type of trustee best for appointment to a scheme will depend upon the characteristics of the scheme. The governance and trusteeship of a scheme is best handled by the scheme and its sponsors. They will know better than anyone else what the scheme’s long-term future looks like and how best to get there, but trustees, regardless of whether they are appointed by members or by sponsors, do not and cannot act to represent any particular group. There are safeguards, however. The Pensions Regulator has powers to remove and replace trustees with an independent trustee or add an independent trustee to a trustee board should it have concerns about the capability or behaviour of a trustee.

A defined-benefit pension is a promise to pay the person concerned a certain amount of pension income every month in retirement for the rest of their life. That means that while the sponsor remains solvent, a person’s retirement income cannot decline below a set amount, regardless of the value of the pension fund or the wider economic situation. In addition, a proportion of the DB pension may also be inherited by a spouse after the pension holder’s death—again, guaranteed in value for life.

Rights in a defined-benefit pension scheme are extremely valuable and we should be rightly proud that such schemes exist for the bulk of today’s pensioners, but ensuring that these rights are protected for all scheme members involves many different parties: trustees, employers, and current and future individual scheme members. The governance of defined-benefit pension schemes must therefore balance the needs of all those different parties. It has to work for today, and in the short and long term. Our priority is to ensure that schemes pay out the full value of the promised pension to each member when it falls due, as set out in the scheme and in line with the relevant legislation. When it comes to indexation, legislation sets out the minimum standard that tries to ensure there is a measure of protection against inflation.

Having listened to the debate today, as well as to other individuals I have met in recent days, it is difficult not to have sympathy with pensioners who have planned on the assumption of receiving certain increases, no matter how discretionary they may be, but then find that their income is not increasing as they had expected or planned on. As much as I can do, I will look closely again at the situation regarding the scheme that I have heard about in this debate—and others that I am sure other Members might have covered had they been able to attend—and try to understand fully what has happened and whether the arrangements currently in place in regulation are working as intended. I will do this by discussing it with the Pensions Regulator in particular.

I will also look at the proposals we made in the autumn statement on improving the quality of trustees. I am not saying that all trustees are awful or anything like that; we have excellent trustees in many pension schemes, but we also have to bear in mind that, as I and the hon. Member for North East Fife (Wendy Chamberlain) said, many large and monolithic employers have a different ability to absorb rapid changes in the pensions landscape compared with much smaller schemes. I do not want smaller schemes pushed into administration under the Pension Protection Fund, which would then lead to reduced pensions for those scheme members. Both must be kept in balance.

I thank the right hon. Member for Orkney and Shetland.