§ `The Secretary of State may, after he has consulted organisations appearing to him to be representative of employers and of employees, by regulations make provision as to—
- (a) the establishment of one or more bodies corporate, to be known as central discontinuance funds,
- (b) the circumstances and the manner in which the trustees of an occupational pension scheme to which section 48 applies and which is being wound up may transfer the scheme's assets and liabilities to a central discontinuance fund established under this section,
- (c) the regulation of the administration of central discontinuance funds established under this section and the management of their assets.'.—[Mr. Dewar.]
§ Brought up, and read the First time.
3.45 pm§ Mr. Donald Dewar (Glasgow, Garscadden)I beg to move, That the clause be read a Second time.
This is an innocent-looking new clause; it is also short, which is a virtue, and written in plain English. That marks it out from a large acreage of a Bill that, as a result of our efforts in Committee—or perhaps I should say the Government's efforts—has swollen by some 30 pages and a good handful of clauses.
Although deceptively simple, however, the clause revisits one of the most complex and difficult parts of the new provision. It was discussed extensively in Committee, but I make no apology for returning to it now. I had hoped 148 that we would have a good deal of time in which to think about it, and particularly for the Government to think about it, but that did not happen; Report stage has arrived very quickly. Nevertheless, I think it important for us to canvass again what are very important and far-reaching arguments.
As we have just been reminded, there is pressure of business, so I shall not rehearse the history and travel through the intricacies of the widely differing opinions that have been expressed; but I think that it would be helpful to summarise the progress that has been made since the original suggestions of the Goode committee.
In shorthand, as it were, Goode recommended that, at all times, the assets of a pension scheme should be in a state to meet all liabilities, on the assumption that that scheme would be wound up. It was a matter of transfer values, and the transfer of cash equivalents. The aim, with which none of us would disagree although the practical problems of achieving it are manifest, was total security. Since then there has been considerable to-ing and fro-ing, along with many learned conferences and, I fear, many boring speeches; but I accept that the Government's position has moved considerably.
We reached a compromise—if that is the right word—which stands in the name of the hon. Member for Bournemouth, West (Mr. Butterfill), in that he was the perhaps unwilling recipient of a long and complex letter which has given him an ersatz immortality, and the arrangement has been referred to as the "Butterfill compromise".
The Government said, in effect, that, in the calculation of their pension liabilities, the larger pension funds would be able to take into account 25 per cent. of the calculation based on equities rather than gilts. That was intended to lighten the load to some extent, and to confer some flexibility. It was also agreed that the time within which pension funds must meet the various benchmarks set out by the Goode committee would be lengthened considerably.
The compromise certainly helped, in that it was given a reasonably friendly reception, but many doubts remained—and, if anything, grew. The Confederation of British Industry, for instance, was unhappy with the arrangement, reflecting a wide range of concerns felt throughout industry. There was also a complex debate between actuaries and between the various pension funds, involving their representative body, the National Association of Pension Funds.
We secured another important change—a presentational change, at least: the minimum solvency requirement became a minimum funding requirement. That, however, did no more than change the label on a product that has incurred consistent and increasing criticism.
The trouble is that we are involved in a revolving door argument. We are trying to make compatible two basically incompatible aims: total security, and a wish not to inhibit unreasonably the management of funds in the scheme in the interest of maximising benefits for members. To be fair, I believe that that was recognised on both sides of the Standing Committee.
The hon. Member for Beaconsfield (Mr. Smith), for example, rather uncharacteristically—I do not say that sarcastically; he does not often think that it is required—expressed considerable sympathy with my view, at least in the context to which I have referred.
149 The trouble is that, the more one compromises on security in the interests of growth, the more insecure the prospects become, and vice versa. We are left with an uneasy compromise and a Government—this may be unfair to them—who, at the end of the day, have said, "We have been pushed and jostled, we have agonised and worried, we have come to a conclusion, we have settled at a point in the scale, and we will not change it again. We have had enough, and we are going ahead on the basis of the argument at this stage."
I shall briefly try to invite the Minister—I suspect that it will be a hard job, but I intend to put my best foot forward—to reconsider the issue. Of course, he knows—the title of the new clause tells us—the burden of my plea.
There has been a strong feeling that we should be moving away from the winding-up principle, involving transfer values and cash equivalents, and towards valuing the system. We should be assuming that pension schemes will continue. We should value them on a continuing basis, and move towards a contributions basis with that in mind.
The actuary to the scheme should be invited and asked to draw up a schedule of contributions, the aim of which is to ensure that, at all times, the assets in the scheme keep closely in touch with—and I hope, in the majority of cases, up to 100 per cent. up to—the safety level outlined in the Goode committee report.
There is no doubt that, with the minimum funding requirement, there is a possibility that people may coast and allow the asset valuation to drop, and to sag, if I may use that metaphor, below the safety point, no doubt with the well-intentioned view that, at some point in a year or two, they can put in a major cash injection and save the position.
The trouble, of course, is that, if disaster strikes, we get a point where winding-up comes just when the sag is at its deepest. As a result, people may find that what they thought were well-protected and safely guarded assets are, at least in part, missing, and that their pension promise has unfortunately gone with the wind. Obviously, we are anxious to avoid that.
The minimum solvency requirement has problems in terms of expense. As at present drawn, it assumes a substantial shift from equities to gilts, even after the compromise to which I referred has been taken into account. There is an argument about the costs. I do not want to go into that, because we did so at some length in Committee. But briefly, if I remember correctly, the Minister takes the view, based on the cost compliance memorandum, that the shift will be between £5 billion and £12 billion over a period. He put that at a cost to funds of between £300 million and £400 million over a 12-year period.
That is a substantial sum of money and shift, and should not be shrugged off, but it is challenged in any event. The CBI is unsure whether its sample was as big as the Minister would have liked, and whether it was conducted before the adjustment was made to the formula, but it talked in terms of a £1.9 billion cost over 10 years. Even allowing for the adjustment, clearly those are substantial costs.
My real concern is that, even now, the minimum funding requirement flatters to deceive, and has the inherent dangers to which I have referred. I did not look up the actual reference, but I clearly have in my mind an 150 exchange between myself and the Under-Secretary of State for Social Security in Committee on independent custodianship. The burden of his argument was that such custodianship should not be introduced because it flattered to deceive, to use a phrase that I have just mentioned: it offered or appeared to offer guarantees, or it would be seen and understood to offer guarantees that it could not offer. That was one of the main reasons why the Under-Secretary of State, with the aid of his hon. Friends, successfully resisted in Committee the introduction of independent custodianship.
If that is a decisive argument in that case—I understand it, although I do not accept it—and if that is the opinion of the Under-Secretary of State, it seems to me that that opinion should be transferred into the aspect that we are discussing under the new clause, and that he should consider carefully whether there is a danger of inviting the public to assume that there is a guarantee when no guarantee exists.
I accept that it is difficult to offer a guarantee; on that we are united. However, I believe that the contributions approach—a contributions approach that would be joined to a central discontinuance fund—holds out promise of genuine progress and improvement. I argued that alternative approach in Committee, and the Under-Secretary of State remained unconvinced. I hope that, in the intervening time—that was one of our earlier debates in a lengthy consideration in Committee—he may have had some second thoughts.
The clause is not revolutionary. Some of my hon. Friends would say that I am not noted for revolutions, but in any event it is not revolutionary. It has been drawn sensibly in terms of enabling legislation, asking the Minister to consult and, by regulations, make provision for
the establishment of one or more bodies corporate, to be known as central discontinuance funds".It does not try to pretend that it can draft the framework and regulations at this stage, from the Opposition Benches—that would be arrogant and counter-productive. It is better, on this level, if the Minister is prepared to entertain the argument.The shift to the contribution basis makes sense. It would make it easier for people to keep in line with the pension promise and the liabilities they shoulder. The central discontinuance fund is an important safeguard—although I accept that there are arguments on both sides—because it assumes that, rather than compulsory winding up or continuing in a closed scheme, there is the option of handing the assets over to the central discontinuance fund and continuing to operate the scheme under its auspices.
We thereby get away from the present position, in which, if an unexpected disaster arises or if there is a shortfall, there may be no option but to wind up. As the Minister knows, there have been one or two outstanding examples of that happening, and substantial percentages of accrued rights have had to be written off. I emphasise that I would expect the central discontinuance fund to operate on the basis that it takes over the assets and then calculates what it can afford to undertake, given the yield of those assets and their likely history in its hands.
151 There is no doubt that that continuity is advantageous. Winding up has the unpleasant side effects that I mentioned. With a closed fund, there are difficulties concerning trustees, administrative costs tend to be great, and there is little opportunity for growth.
I emphasise that the central discontinuance fund would arise only where the employer has gone to the wall. Self-evidently, if the employer continued to trade, the employer would still have to shoulder the pension promise. If there were fraud, the central discontinuance fund would not arise, because the compensation scheme set out in the Bill would take charge. However, there are substantial arguments for a central discontinuance scheme in cases where the employer has gone to the wall.
As I understand it, there was in the mind of the Minister of State one especially substantial argument against a central discontinuance scheme—the fact that the Opposition, who are proposing that scheme, were hopelessly over-sanguine about the possibility of a deficit emerging. I quoted Watsons, the well-known firm of actuaries, to suggest that it was a comparatively remote possibility, and one that would be eminently manageable and easy to cope with.
We are told that the Government are less sanguine, although I think that it is fair to say that, when the Minister gave evidence to the Goode committee—the Pension Law Review Committee—he took the line that there was virtue in a central discontinuance fund system. However, the Minister certainly relied on his rather more pessimistic assumptions, and also talked about the American experience with the Pensions Benefit Guaranty Corporation.
I do not want to plunge into such technicalities on Report, when we have already canvassed them very heavily. I draw the Minister's attention to the fact that there is a substantial body of opinion that backs the approach that I take.
I do not for a moment deny that there will be critics on the other side of the argument. As always—this is perhaps a happy reference at this hour and place—there will be those who will stay with the devil they know even though they are unlikely to take much satisfaction from it. In any event, there is no doubt that there is a strong body of support for the approach that I am outlining.
§ 4 pm
§ Mr. Tim Smith (Beaconsfield)Could the hon. Gentleman say whether we need regulations to make provision for the establishment of central discontinuance funds? Why should not the CBI set up its own central discontinuance fund pension scheme, to which the trustees of schemes that have gone bust could transfer assets and liabilities?
§ Mr. DewarThat may be a private enterprise solution that commends itself to the hon. Gentleman, and I do not sneer at his proposal. However, there is a general assumption on both sides of the House, and clearly in the mind of the Minister, that where we are offering safeguards for the pension promise and building an essential regulatory framework as the guarantee of security after public confidence has been heavily shaken in the aftermath of the Maxwell scandal and, less 152 dramatically, by the ravages of recession, which put many pension funds under pressure, such a fund should be on a statutory basis and supervised by the Government.
That is why we are in the business of minimum solvency or funding levels, and I certainly would not want to depart from that. I am told that it would not be too difficult technically for the Government to move on that within the framework of the Bill. That is why new clause 3 has been drafted as it has.
The hon. Member for Beaconsfield diverts me. I was going to point out to the Minister, as I come towards the end of my remarks, that the weight of opinion seems to be for my side of the argument, although not 100 per cent. behind me. The Minister recently paraded with great pride the Prudential insurance company and a memorandum from it. I am not sure that the arguments that it advanced were not equally valid against minimum funding levels. They were equally applicable in both cases. It was a reminder that perfection is hard to come by.
There is support for a central discontinuance fund, through a contributions approach, from the Trades Union Congress, which has worked extremely hard on the issue and found, as it pushed the argument along, that it was not travelling alone. We had a great deal of support in the House of Lords. I pay tribute to my noble Friend Lord Eatwell, who particularly espoused the cause. When he first brought it to me, I was somewhat cynical, but my enthusiasm grew as the argument progressed. The Pensions Management Institute, the PMI, strongly favours it, and a number of firms and important funds have said at least that they want it to be further investigated.
I would especially like to draw to the Minister's attention the position of the CBI. I do not say that it is the fount of all wisdom—it would regard me with considerable suspicion if I argued that case—but it has some experience, and has spent a good deal of time considering what is on offer and what seem to it to be the best options. The best and easiest thing is for me to remind the Minister of the briefing material—he probably knows it—that the CBI produced for this debate. I will read it only briefly into the record, as the Minister, ever-efficient, has the very text on his lap.
The briefing states:
There is … concern among CBI members that the MFR"—the minimum funding requirement—would become more restrictive—and thus costly—over time. There would seem merit, therefore, in giving further consideration to the idea of an on-going funding standard backed by a central discontinuance fund (CDF) or funds. This would allow the trustees, in cases where the employer becomes insolvent, to transfer the scheme's assets and liabilities to a CDF which would operate as a pension fund and could invest in equities as do on-going schemes. Members would be protected as the benefits produced by a CDF should prove higher in the long term than could be expected from the current alternatives",which are winding up or going on as a closed scheme.The briefing continues:
We would, therefore, support the addition of a clause which would enable, but not require, central discontinuance funds to be set up. This would facilitate the move to an on-going funding standard in the future if, after further study, it appeared the better proposal.I accept that that is cautious. The CBI is not supporting the notion 100 per cent., but it makes it clear that it believes there are potential advantages, that the scheme should be considered and that machinery should be included in the Bill to allow progress along that route if, 153 as the CBI clearly thinks, it is likely to turn out to be the best approach. It is very much in that spirit that the clause has been drafted and is being moved.The Minister should reconsider and leave the option open. He must recognise that, although he may be able to quote cynics on one side of the argument, many people believe that the new clause is the right way forward. A little flexibility in government would mean that the debate could reasonably be pursued without the feeling that the door had been slammed on the proposal because there was no room for it in the current legislation. We want to get away from that kind of full stop and make a constructive attempt to get the right answer to a difficult problem.
§ Ms Judith Church (Dagenham)I shall add only a few words to what my hon. Friend the Member for Glasgow, Garscadden (Mr. Dewar) said, in his usual superb way. This is an important but complex debate. There are several clear principles which highlight the need for the new clause.
The case for a central discontinuance fund rests on three pillars: the inadequacy of having only a minimum funding requirement; the practical benefits of a central discontinuance fund; and the experience of how other countries with a CDF operate it.
The essential problem with the Government's proposals is that, like Goode, they are trying to reconcile incompatible goals. With only an MFR, it is impossible to encourage long-term efficiency. It requires high-yield equity holdings while prioritising short-term security, which of course requires low-yield gilt. The MFR is too stringent for the first objective and too lax for the second. With just an MFR, the cost of full security—in terms of higher consumer premiums and effects on the equity market—is simply too great.
The practical benefits of a CDF are clear. It would provide a low-cost complement to an MFR and make up for the deficit in security that exists if we remained with only an MFR. It would provide a cost reduction, because it would pool the risk of fund failure among all the schemes. The Government's approach will require all schemes to "insure", via the shift towards gilts, on the basis of an individual fund's probability of collapse.
In contrast, a CDF would enable schemes to "insure", via a very small industry levy, on the basis of the aggregate probability of collapse. Because of the much lower aggregate probability of collapse, the cost of security under a CDF would be much smaller than under the Government MFR. Only through a central fund could one get such economies of scale and exploit them fully. The final result with a CDF would be a low-cost comprehensive insurance scheme for all pension funds.
I shall refer finally to the experience of the operation of a CDF in other countries, which has been discussed in another place and in Committee. The practical evidence from other countries not only endorses all the arguments we have made today but expands the case for having a CDF in the UK pensions market.
Finland, for example, has an exceptionally well-functioning CDF. Beyond the core advantages that I have already mentioned, it has further value-added benefits. As set out by the Government Actuary in his report to the Goode committee, the Finnish CDF acts as a clearing house for financial adjustments between schemes to permit the whole of an individual's pension to be paid by a single employer. That overcomes a major 154 weakness of occupational pensions, in that they discourage mobility between jobs and reduce labour market flexibility.
The Japanese also have a very good CDF. In an economy such as theirs, with a heavy reliance on corporate social welfare and widespread occupational pensions, a CDF is regarded as an essential part of the market structure. Of course, America has an effective CDF too. Since 1974, when the Pensions Benefit Guaranty Corporation was established, the benefits of thousands of scheme members in the United States have been saved from a failure of their pension fund. Indeed, America is very similar to Japan, in that there is minimal state provision and significant corporate social welfare. Just as in the Japanese system, the CDF is viewed in America as a necessary part of an efficient market.
The Government have held up the American CDF as a reason for not proceeding with a UK CDF, but their arguments simply do not stand up. The only caveat to success in the American instance has been a tendency towards deficit in the CDF, but that has been more related to the specific nature of the American experience than to the principle of a CDF itself. That could easily be avoided in the British CDF, by allowing only the entry of schemes from firms which have ceased trading.
The lessons from those international examples are clear: provided that there is prudent implementation, a CDF would deliver in practice the advantages which make it so attractive in theory. Overall, a CDF would bring security to the benefit promise, and it would be efficient, equitable and just.
In our evolving pensions market, with increased reliance on the private sector, the dangers of a fund collapse need to be taken more seriously. It is no accident that, in countries where there is widespread private provision, a CDF is an integral component of the market mechanism. We must take note of the theoretical reasoning, the practical evidence, and, above all, the real concerns of our constituents when we consider the new clause. If we truly take note of those aspects, there can be only one answer: this House must support this well-thought-out, widely supported and universally beneficial proposal.
§ Mr. Hugh Bayley (York)My hon. Friend the Member for Dagenham (Ms Church) has spelled out the economic arguments for a central discontinuance fund very well, and I shall not detain the House further on those issues. The root of our argument is that it is better for people who pay into occupational pension funds to pool the unlikely risk of their employer winding up his business, and their pension therefore being put in jeopardy, than for each pension fund to pay a separate risk payment.
We debated the matter at length in Committee, and the Minister and I agreed at the end of the day that there was no such thing as a free lunch for anybody in a pension fund. I am prompted to return to the issue, however, because since that debate I have received a letter from David Morgan, the group pensions manager of Nestlé, the largest manufacturer in my constituency. I have no financial interest whatever to declare, and I raise the matter simply because thousands of my constituents are Nestlé pensioners or members of the Nestlé pension scheme.
155 In the letter, Mr. Morgan says:
We do have severe worries about the level of cost volatility which could emerge from the current minimum funding proposals … It is with some interest that we saw the recent TUC paper revive the concept of a central discontinuance fund or pension protection fund as originally conceived by Watsons and espoused by the Government Actuary.If this could be made to work, it would be a preferable solution.Mr. Morgan also urges the Government to keep an open mind, study further the proposal for a CDF and express their willingness—I hope the Minister will respond to this point in particular—to keep the matter under review, and to change horses if a practical way of establishing such a fund is found.4.15 pm
I draw the Minister's attention to the fact that the new clause does not require the Secretary of State to establish a CDF; it simply permits him, now or in the future, to do so if he thinks fit. It provides the Minister with the opportunity to continue to study the issue. If, at some stage, he then feels it appropriate to bring forward proposals for a CDF that the pension funds think might help to reduce the cost of individually insuring against the unlikely event of winding up, the Minister could do so without having to return to the House with primary legislation.
In Committee, we debated whether the Government would have to be a backer of last resort if such a fund were established. Of course, that is a possibility; indeed, they took on that responsibility for the Maxwell pensioners. However, the backer-of-last-resort responsibility could be shared by those pension funds that decided to cover their liability, in the event of a wind-up, through a CDF.
Mr. Morgan expressed concern that, under the Bill, the burden of the minimum funding requirement would put pressure on all employers to consider whether they could continue with final salary pension schemes. Indeed, he predicts that there will be a reduction in the number of such schemes—although he does not think that there will be any change in his company, he feels that there will be in others—and that there will be an increase in money purchase schemes.
If that is the case, it will underline the need to try to reduce the burden of the minimum funding requirement. It would be wise and prudent of the House to establish, as the new clause proposes, provision for a CDF, should the need arise and should a practical scheme for doing so be developed.
§ The Minister for Social Security and Disabled People (Mr. William Hague)As the hon. Member for Glasgow, Garscadden (Mr. Dewar) said, we debated this matter at great length in Committee. It is a complicated issue, and I have no objection to the hon. Gentleman and his colleagues raising it again in this non-revolutionary way.
In a moment, I shall deal with the argument whether a central discontinuance fund is a viable alternative to the Government's proposals. However, given that much of this debate stems from concern about the possible impact of the minimum funding requirement, it might be appropriate to offer reassurance—adding to what I said in Committee—to people such as the manager of Nestlé, to 156 whom the hon. Member for York (Mr. Bayley) referred, and the CBI, whose briefing was referred to by the hon. Member for Garscadden.
It is important to remember what the MFR is intended to achieve. It is about providing security for members so that, whatever happens to the sponsoring employer, they can expect pensions already in payment to continue and younger members to receive a fair actuarial value of their accrued rights. That is all we are asking for.
We know from our survey that most schemes usually fund at a higher level, and it is right that they should continue to do so. In developing our proposals for the MFR, since the publication of the Goode report and last year's White Paper we have commissioned extensive analysis and consulted widely. We have made a number of changes—which I will not go over again, but which the hon. Member for Garscadden mentioned—which were laid out in the letter to my hon. Friend the Member for Bournemouth, West (Mr. Butterfill), who is now one of the country's most celebrated recipients of unsolicited mail of a highly technical nature. The changes have ensured that the likely costs of the MFR to British industry are those that are shown in the compliance cost assessment published with the Bill. They should also avoid any risk of a substantial shift in UK pension fund assets from equities into gilts.
Our proposals for the MFR incorporate other flexibilities which I want to stress. In the extreme case of a scheme falling below the 90 per cent. level, we have fully accepted the case for secure alternatives—for example, funds held in a safe but separate account, or the provision of ring-fenced unencumbered assets. With the arrangements in place, members would be provided with security, and employers would have flexibility to spread cash contributions over a longer period than one year to restore the fund to the 90 per cent. level.
The Bill also incorporates provision for the regulatory authority to extend the MFR time limits. That is intended to be an exceptional measure, but it does introduce an important safeguard into the arrangements. The exercise of the authority's discretion will be governed by regulations, and we will be consulting on what the regulatory framework should be.
We envisage that an application to extend the MFR time limit could be made by either the trustees or the employer, but in the latter case, the regulatory authority would want to know the trustees' views on the application. As to the circumstances in which an extension might be granted, we envisage that an extension would be appropriate where an unforeseen external event outside the control of the employer or the trustees had resulted in a reduction in the scheme's funding level. We envisage that the Occupational Pensions Regulatory Authority would be more prepared to consider extending the time limit where there was objective evidence of an unusual divergence between gilt and equity yields.
The regulatory authority would need to consider whether the scheme was properly administered with clean accounts, and the extent to which the drop in funding levels had been affected by internal factors such as benefit enhancement or substantial pay rises. It will be possible to ensure that we have good practice, guidance and sound regulation in those areas.
The regulatory authority would need to take into account the probability of the scheme recovering—perhaps on the back of a longer-term funding commitment 157 from the employer, or, once time had been allowed for the employer to realise assets, to meet pension commitments. The important point that we will need to bear in mind in drawing the relevant regulations is the need to avoid any further deterioration in the security of scheme members. Subject to that, there should be considerable scope for a pragmatic application of this power. That should be reassuring to many companies.
The power would be capable of being exercised in individual cases, but we would envisage it coming into play on a more general basis if there were, for example, extreme movements in equity yields relative to gilts, or a catastrophic stock market fall from which recovery was probable, but not likely to be immediate. In such circumstances, we envisage that the regulations would provide for the regulatory authority to authorise extensions to the time limit for all applicant schemes which met certain basic criteria.
As a final safety valve, the Bill contains a power in clause 60 to modify the application of the MFR clauses in relation to particular schemes or classes of scheme. If evidence emerged that employers sponsoring a particular category scheme were being, or were likely to be, adversely and unnecessarily affected by their MFR, it would be possible to bring about a sensible resolution of the difficulty by using this power. I hope that that gives some reassurance about the MFR.
That should deal with the reasons why people have put forward a central discontinuance fund as an alternative. In response to the new clause and the arguments that have been made for it, I shall state why I believe that the arguments in favour of a central discontinuance fund are highly questionable.
I come first to the issue of administrative costs. Economies of scale will be realised only if a decision were taken to standardise the benefits provided by a central discontinuance fund. That would inevitably disadvantage some individuals, in so far as it would mean changing the nature of the benefits promised. More fundamental to the debate is the assumption that a central discontinuance fund could safely invest in equities. I seriously doubt whether that would be appropriate. A central discontinuance fund would tend to collect the liabilities of pensioner members and deferred members close to retirement. It would become a more and more mature scheme.
The Trades Union Congress has said:
Schemes that have most of their liabilities in the future can justify a more risky investment strategy than those who are already paying substantial pensions each year.But the CDF would be in that position. If it is true of an individual pension fund, where the employer stands behind the scheme to make good any deficit, the need for a prudent investment strategy is all the more evident in the case of a central fund.In order to avoid any risk of members' benefits being reduced in a central fund, individual schemes would need to be funded at a level that would enable them to meet the central discontinuance fund's transfer premium. Those transfer terms would inevitably become a de facto funding standard based on a more prudent investment policy than that used by many on-going schemes.
If that did not happen, and the central fund simply took over whatever assets the transferring scheme happened to hold, without having been funded to meet the transfer 158 terms, either members would take a cut in their benefits or the risk of the central fund running into deficit would be greater.
It is difficult to see how the costs to sponsoring employers could be lower than those attributable to the proposed minimum funding requirement, which serves to underline the fundamental truth, which I set out in Committee, about there being no free lunch. Security has a price. It is not possible to improve security without some costs. Another misconception is that there would be little risk of a discontinuance fund falling into deficit.
As the hon. Member for Garscadden said, there is a disagreement about that. He has quoted Watsons, a firm of actuaries. But other actuaries have come to a quite different conclusion. The Government Actuary took the view that, if a high equity investment strategy were adopted or optimistic rates of return were used in the valuation, the risk of a shortfall could be much greater. We have to consider how manageable even a small deficit would be, given the potential size of a central fund over time.
Although a central fund would provide for risk to be pooled, as I think the hon. Member for Dagenham (Ms Church) said, it would not reduce the aggregate level of risk. It would merely increase the size of any potential deficit. If we set up a CDF, we might find large deficits, and we might find someone taking on an open-ended liability. We know that the CBI does not agree that employers should be liable to meet that deficit. The Government do not believe that it would be a suitable use of taxpayers' money to underwrite such a fund.
The other option would be to reduce members' benefits, but I am sure that none of us would seriously want to advocate that as an option, as it would fail to provide members with the security they would expect from a central fund established under statute. That brings me to the crux of the various proposals for a CDF. The apparent agreement in support of a central fund does not rest on a common understanding of what is intended or any common objective in terms of the degree of protection that it is intended to provide for members, who would consequently shoulder the burden of risk in the event of a shortfall.
The central discontinuance fund is a superficially attractive alternative to the MFR. Some people have been attracted to it because they have seen in it a way of providing security without the increase in costs which, we concede, the MFR is likely to entail for some people and some companies. But a CDF does not succeed in escaping from the basic issue—increased security can come only at some increased cost somewhere in the system.
Therefore, the Government's strongly preferred approach is to ensure that the MFR works—to ensure that the flexibility is built into our arrangements for the MFR, so that it works in the future. I hope that what I have been able to say about the MFR has reassured people about that, and that what I have said about a central discontinuance fund has convinced hon. Members that it would not be the right course to pursue.
§ Mr. DewarThe man has a hard heart, and I can see that he has not been prepared to make any concessions since the Committee stage. I am perhaps a cynic, but I must confess that, when Ministers start dealing in fundamental truths, I start looking for the exit—and the Minister was strong on that today.
I do not accept the Minister's argument. I think that there is merit in holding the door open for the possibility of a discontinuance fund system on a contributions basis. 159 I accept that there will be alterations if pension fund assets pass to discontinuance funds. Clearly, they will have to examine the assets and what they are likely to produce in deciding what kind of promises can be delivered. They may not be the same as the original fund, depending on the size of the deficit and the crash.
4.30 pm
Despite what the Minister said about equities and a cautious approach, I still think that this is a better option than simply winding up the scheme, with the immediate short-term losses that may emerge. It is not a matter of trying to produce a miracle cure of absolute security without anyone having to pay more to achieve it. That is not the line of argument that we have tried to deploy in this case. We believe that there will be costs involved with both schemes—there is no doubt about that. However, by moving to contributions and away from a winding-up to a continuing basis, we think that there is a better chance of ensuring increased security as against the present proposals.
That is a matter for argument and debate. The primacy of purpose must be to try to produce a stable scheme that will offer, at affordable cost, the maximum security for those who invested in pension funds. On the advice that I have received, I regret what the Minister has said about not being prepared to entertain further change.
I intend to put the matter to the vote, since I recognise that it will not be settled in the next few minutes by further argument across the Dispatch Box.
§ Question put, That the clause be read a Second time:—
§ The House divided: Ayes 230, Noes 271.
163Division No. 192] | [4.30 pm |
AYES | |
Abbott, Ms Diane | Clark, Dr David (South Shields) |
Adams, Mrs Irene | Clarke, Eric (Midlothian) |
Ainger, Nick | Clarke, Tom (Monkands W) |
Alton, David | Clelland, David |
Armstrong, Hilary | Clwyd, Mrs Ann |
Ashdown, Rt Hon Paddy | Coffey, Ann |
Banks, Tony (Newham NW) | Cohen, Harry |
Barnes, Harry | Connarty, Michael |
Barron, Kevin | Corbett, Robin |
Bayley, Hugh | Corbyn, Jeremy |
Beckett, Rt Hon Margaret | Corston, Jean |
Beggs, Roy | Cousins, Jim |
Bell, Stuart | Cummings, John |
Benn, Rt Hon Tony | Cunliffe, Lawrence |
Bennett, Andrew F | Cunningham, Jim (Covy SE) |
Bermingham, Gerald | Cunningham, Roseanna |
Blair, Rt Hon Tony | Dafis, Cynog |
Blunkett, David | Dalyell, Tam |
Bray, Dr Jeremy | Darling, Alistair |
Brown, Gordon (Dunfermline E) | Davidson, Ian |
Brown, N (N'c'tle upon Tyne E) | Davies, Bryan (Oldham C'tral) |
Burden, Richard | Davies, Rt Hon Denzil (Llanelli) |
Byers, Stephen | Davies, Ron (Caerphilly) |
Callaghan, Jim | Davis, Terry (B'ham, H'dge H'l) |
Campbell, Mrs Anne (C'bridge) | Denham, John |
Campbell, Ronnie (Blyth V) | Dewar, Donald |
Campbell, Savours, D N | Dixon, Don |
Cann, Jamie | Dobson, Frank |
Chidgey, David | Donohoe, Brian H |
Chisholm, Malcolm | Dowd, Jim |
Church, Judith | Dunnachie, Jimmy |
Clapham, Michael | Dunwoody, Mrs Gwyneth |
Eagle, Ms Angela | Lloyd, Tony (Stretford) |
Eastham, Ken | Loyden, Eddie |
Etherington, Bill | Lynne, Ms Liz |
Evans, John (St Helens N) | McAllion, John |
Ewing, Mrs Margaret | McAvoy, Thomas |
McCartney, Robert (N Devon) | |
Fatchett, Derek | McCrea, The Reverend William |
Field, Frank (Birkenhead) | Macdonald, Calum |
Flynn, Paul | McFall, John |
Forsythe, Clifford (S Antrim) | McKelvey, William |
Foster, Rt Hon Derek | McLeish, Henry |
Foster, Don (Bath) | McMaster, Gordon |
Foulkes, George | MacShane, Denis |
Fyfe, Maria | Mc William, John |
Galloway, George | Madden, Max |
Garrett, John | Mendelson, Peter |
Gerrard, Neil | Marek, Dr John |
Marshall, David (Shettleston) | |
Godman, Dr Norman A | Marshall, Jim (Leicester, S) |
Godsiff, Roger | Martin, Michael J (Springburn) |
Golding, Mrs Llin | Martlew, Eric |
Graham, Thomas | Maxton, John |
Griffiths, Win (Bridgend) | Meacher, Michael |
Grocott, Bruce | Meale, Alan |
Gunnell, John | Michie, Bill (Sheffield Heeley) |
Hain, Peter | Michie, Mrs Ray (Argyll & Bute) |
Hall, Mike | Milburn, Alan |
Harman, Ms Harriet | Mitchell, Austin (Gt Grimsby) |
Harvey, Nick | Morgan, Rhodri |
Hattersley, Rt Hon Roy | Morris, Rt Hon Alfred (Wy'nshawe) |
Morris, Estelle (B'ham Yardley) | |
Henderson, Doug | Mudie, George |
Hendron, Dr Joe | Mullin, Chris |
Hill, Keith (Streatham) | Murphy, Paul |
Hinchliffe, David | Oakes, Rt Hon Gordon |
Hodge, Margaret | O'Brien, Mike (N W'kshire) |
Hoey, Kate | O'Brien, William (Normanton) |
Hogg, Norman(Cumbernauld) | Olner, Bill |
Home Robertson, John | O'Neill, Martin |
Hood, Jimmy | Orme, Rt Hon Stanley |
Hoon, Geoffrey | Pearson, Ian |
Pickthall, Colin | |
Howarth, George (Knowsley North) | Pike, Peter L |
Howells, Dr. Kim (Pontypridd) | Pope, Greg |
Hoyle, Doug | Powell, Ray (Ogmore) |
Hughes, Kevin (Doncaster N) | Prentice, Bridget (Lew'm E) |
Hughes, Robert (Aberdeen N) | Prentice, Gordon (Pendle) |
Hughes, Roy (Newport E) | Prescott, Rt Hon John |
Hughes, Simon (Southwark) | Primarolo, Dawn |
Hutton, John | Purchase, Ken |
Illsley, Eric | Radice, Giles |
Ingram, Adam | Raynsford, Nick |
Jackson, Glenda (H'stead) | Reid, Dr John |
Rendel, David | |
Jackson, Helen (Shef'ld, H) | Robertson, George (Hamilton) |
Jamieson, David | Rogers, Allan |
Janner, Greville | Rocker, Jeff |
Johnston, Sir Russell | Rooney, Terry |
Jones, Barry (Alyn and D'side) | Ross, Ernie (Dundee W) |
Jones, Ieuan Wyn (Ynys Môn) | Ross, William (E Londonderry) |
Jones, Jon Owen (Cardiff C) | Ruddock, Joan |
Jones, Martyn (Clwyd, SW) | Salmond, Alex |
Jones, Nigel (Cheltenham) | Sedgemore, Brian |
Jowell, Tessa | Sheerman, Barry |
Kennedy, Jane (Lpool Brdgn) | Sheldon, Rt Hon Robert |
Khabra, Piara S | Short, Clare |
Simpson, Alan | |
Kilfoyle, Peter | Skinner, Dennis |
Kirkwood, Archy | Smith, Andrew (Oxford E) |
Lewis, Terry | Smith, Llew (Blaenau Gwent) |
Liddell, Mrs Helen | Smyth, The Reverend Martin |
Litherland, Robert | Snape, Peter |
Livingstone, Ken | Soley, Clive |
Spearing, Nigel | Wallace, James |
Speller, John | Walley, Joan |
Squire, Rachel (Dunfermline W) | Watson, Mike |
Steel, Rt Hon Sir David | Welsh, Andrew |
Steinberg, Gerry | Wigley, Dafydd |
Stevenson, George | Williams, Rt Hon Alan (Sw'n W) |
Straw, Jack | Williams, Alan W (Carmarthen) |
Sutcliffe, Gerry | Winnick, David |
Taylor, Mrs Ann (Dewsbury) | Wise, Audrey |
Timms, Stephen | Worthington, Tony |
Tipping, Paddy | Young, David (Bolton SE) |
Touhig, Don | |
Turner, Dennis | Tellers for the Ayes: |
Tyler, Paul | Mr. Robert Ainsworth and Mrs. Barbara Roche. |
Walker, Rt Hon Sir Harold |
NOES | |
Ainsworth, Peter (East Surrey) | Couchman, James |
Aitken, Rt Hon Jonathan | Cran, James |
Alexander, Richard | Curry, David (Skipton & Ripon) |
Alison, Rt Hon Michael (Selby) | Davies, Quentin (Stamford) |
Allason, Rupert (Torbay) | Davis, David (Boothferry) |
Amess, David | Day, Stephen |
Ancram, Michael | Deva, Nirj Joseph |
Arbuthnot, James | Dicks, Terry |
Arnold, Jacques (Gravesham) | Dorrell, Rt Hon Stephen |
Arnold, Sir Thomas (Hazel Grv) | Douglas-Hamilton, Lord James |
Ashby, David | Duncan, Alan |
Atkins, Rt Hon Robert | Duncan-Smith, Iain |
Atkinson, David (Bour'mouth E) | Dunn, Bob |
Atkinson, Peter (Hexham) | Durant, Sir Anthony |
Baker, Nicholas (North Dorset) | Dykes, Hugh |
Baldry, Tony | Eggar, Rt Hon Tim |
Banks, Matthew (Southport) | Elletson, Harold |
Batiste, Spencer | Evans, David (Welwyn Hatfield) |
Bellingham, Henry | Evans, Jonathan (Brecon) |
Bendall, Vivian | Evans, Nigel (Ribble Valley) |
Beresford, Sir Paul | Evans, Roger (Monmouth) |
Biffen, Rt Hon John | Evennett, David |
Body, Sir Richard | Faber, David |
Bonsor, Sir Nicholas | Fabricant, Michael |
Booth, Hartley | Fenner, Dame Peggy |
Bottomley, Peter (Eltham) | Field, Barry (Isle of Wight) |
Bowis, John | Fishburn, Dudley |
Boyson, Rt Hon Sir Rhodes | Forman, Nigel |
Brandreth, Gyles | Forsyth, Rt Hon Michael (Stirling) |
Brazier, Julian | Forth, Eric |
Bright, Sir Graham | Fowler, Rt Hon Sir Norman |
Brown, M (Brigg & Cl'thorpes) | Fox, Dr Liam (Woodspring) |
Browning, Mrs Angela | Freeman, Rt Hon Roger |
Bruce, Ian (Dorset) | French, Douglas |
Budgen, Nicholas | Gale, Roger |
Burns, Simon | Gallie, Phil |
Burt, Alistair | Gardiner, Sir George |
Butcher, John | Garel-Jones, Rt Hon Tristan |
Butler, Peter | Garnier, Edward |
Butterfill, John | Gill, Christopher |
Carlisle, John (Luton North) | Gillen, Cheryl |
Carlisle, Sir Kenneth (Lincoln) | Goodlad, Rt Hon Alastair |
Carttiss, Michael | Goodson-Wickes, Dr Charles |
Cash, William | Gorman, Mrs Teresa |
Channon, Rt Hon Paul | Gorst, Sir John |
Chapman, Sydney | Grant, Sir A (SW Cambs) |
Churchill, Mr | Greenway, Harry (Ealing N) |
Clappison, James | Greenway, John (Ryedale) |
Clarke, Rt Hon Kenneth (Ru'clif) | Griffiths, Peter (Portsmouth, N) |
Clifton-Brown, Geoffrey | Gummer, Rt Hon John Selwyn |
Coe, Sebastian | Hague, William |
Colvin, Michael | Hamilton, Rt Hon Sir Archibald |
Conway, Derek | Hamilton, Neil (Tatton) |
Coombs, Anthony (Wyre For'st) | Hampson, Dr Keith |
Cope, Rt Hon Sir John | Hanley, Rt Hon Jeremy |
Cormack, Sir Patrick | Hannam, Sir John |
Hargreaves, Andrew | Onslow, Rt Hon Sir Cranley |
Haselhurst, Sir Alan | Oppenheim, Phillip |
Hawksley, Warren | Ottaway, Richard |
Hayes, Jerry | Page, Richard |
Heald, Oliver | Paice, James |
Heath, Rt Hon Sir Edward | Patnick, Sir Irvine |
Heathcoat-Amory, David | Patten, Rt Hon John |
Hendry, Charles | Pattie, Rt Hon Sir Geoffrey |
Hicks, Robert | Pawsey, James |
Higgins, Rt Hon Sir Terence | Pickles, Eric |
Hogg, Rt Hon Douglas (G'tham) | Porter, Barry (Wirral S) |
Horam, John | Porter, David (Waveney) |
Hordern, Rt Hon Sir Peter | Portillo, Rt Hon Michael |
Howard, Rt Hon Michael | Rathbone, Tim |
Howarth, Alan (Strart'rd-on-A) | Redwood, Rt Hon John |
Howell, Sir Ralph (N Norfolk) | Richards, Rod |
Hughes, Robert G (Harrow W) | Riddick, Graham |
Hunt, Sir John (Ravensbourne) | Rifkind, Rt Hon Malcolm |
Hunter, Andrew | Robathan, Andrew |
Hurd, Rt Hon Douglas | Roberts, Rt Hon Sir Wyn |
Jack, Michael | Robertson, Raymond (Ab'd'n S) |
Jackson, Robert (Wantage) | Robinson, Mark (Somerton) |
Jenkin, Bernard | Roe, Mrs Marion (Broxbourne) |
Jessel, Toby | Rowe, Andrew (Mid Kent) |
Johnson Smith, Sir Geoffrey | Rumbold, Rt Hon Dame Angela |
Jones, Gwilym (Cardiff N) | Ryder, Rt Hon Richard |
Kellett-Bowman, Dame Elaine | Sackville, Tom |
Key, Robert | Sainsbury, Rt Hon Sir Timothy |
Kirkhope, Timothy | Shaw, David (Dover) |
Knapman, Roger | Shaw, Sir Giles (Pudsey) |
Knight, Mrs Angela (Erewash) | Shephard, Rt Hon Gillian |
Knight, Greg (Derby N) | Shepherd, Colin (Hereford) |
Knight, Dame Jill (Bir'm E'st'n) | Shepherd, Richard (Aldridge) |
Knox, Sir David | Shersby, Sir Michael |
Kynoch, George (Kincardine) | Sims, Roger |
Lait, Mrs Jacqui | Smith, Tim (Beaconsfield) |
Lamont, Rt Hon Norman | Soames, Nicholas |
Lang, Rt Hon Ian | Spencer, Sir Derek |
Lawrence, Sir Ivan | Spicer, Sir James (W Dorset) |
Legg, Barry | Spicer, Michael (S Worcs) |
Leigh, Edward | Spink, Dr Robert |
Lidington, David | Spring, Richard |
Lightbown, David | Squire, Robin (Hornchurch) |
Lloyd, Rt Hon Sir Peter (Fareham) | Steen, Anthony |
Lord, Michael | Stephen, Michael |
Luff, Peter | Stern, Michael |
Lyell, Rt Hon Sir Nicholas | Stewart, Allan |
MacGregor, Rt Hon John | Streeter, Gary |
MacKay, Andrew | Sumberg, David |
Maclean, Rt Hon David | Sweeney, Walter |
McLoughlin, Patrick | Sykes, John |
McNair-Wilson, Sir Patrick | Tapsell, Sir Peter |
Madel, Sir David | Taylor, Ian (Esher) |
Maitland, Lady Olga | Taylor, John M (Solihull) |
Malone, Gerald | Taylor, Sir Teddy (Southend, E) |
Mans, Keith | Temple-Morris, Peter |
Marland, Paul | Thomason, Roy |
Marlow, Tony | Thompson, Sir Donald (C'er V) |
Marshall, John (Hendon S) | Thompson, Patrick (Norwich N) |
Martin, David (Portsmouth S) | Townend, John (Bridlington) |
Mates, Michael | Townsend, Cyril D (Bexl'yh'th) |
Merchant, Piers | Tredinnick, David |
Mills, Iain | Trend, Michael |
Mitchell, Andrew (Gedling) | Trotter, Neville |
Mitchell, Sir David (NW Hants) | Twinn, Dr Ian |
Moate, Sir Roger | Waldegrave, Rt Hon William |
Monro, Sir Hector | Walker, Bill (N Tayside) |
Montgomery, Sir Fergus | Waller, Gary |
Moss, Malcolm | Wardle, Charles (Bexhill) |
Nelson, Anthony | Waterson, Nigel |
Neubert, Sir Michael | Watts, John |
Newton, Rt Hon Tony | Wells, Bowen |
Nicholls, Patrick | Whitney, Ray |
Nicholson, David (Taunton) | Whittingdale, John |
Nicholson, Emma (Devon West) | Widdecombe, Ann |
Norris, Steve | Wiggin, Sir Jerry |
Wilkinson, John | Yeo, Tim |
Willetts, David | Young, Rt Hon Sir George |
Wilshire, David | |
Winterton, Mrs Ann (Congleton) | Tellers for the Noes: |
Winterton, Nicholas (Macc'f'ld) | Mr. Michael Bates and Mr. Timothy Wood. |
Wolfson, Mark |
§ Question accordingly negatived.