Official Report of the Grand Committee on the Pensions Bill

HL Deb 19 July 2004 vol 664 cc1-62GC

(Fifth Day)

Monday, 19 July 2004.

The Committee met at half past three of the clock.

[The Deputy Chairman of Committees (Lord Elton) in the Chair.]

Clause 107 [Investment of funds]:

On Question, Whether Clause 107 shall stand part of the Bill?

Lord Higgins

On the last occasion, the Question was put whether Clause 107 shall stand part of the Bill and I responded by saying that this was obviously an important clause. Our proceedings were then cut short by a Division in the House.

During the weekend, I contemplated the progress we had made on the Bill. We have spent a considerable time debating the membership of the regulator and the board of the pension protection fund. In the light of our earlier discussions, I though I might make a constructive suggestion; namely, that Members of this Grand Committee shall forthwith be appointed to the board of the pension protection fund. We have every possible expertise. We have my noble friend Lord Hunt on insolvency; my noble friend Lady Noakes on accountancy; the noble Lord, Lord Oakeshott, on fund management; and the noble Lord, Lord Lea, on trade union representation. I was not going to leave out the noble Baroness—

The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Hollis of Heigham)

I thought that first we should all take the trustees examination that Peter Lilley has taken. That would be an essential requirement and I am beginning to think that at the end of this procedure we might all have a fair crack at it.

Lord Lea of Crondall

Some of us are puzzled by why noble Lords opposite were so concerned about knowing the composition of the remuneration committee.

Lord Higgins

We have even more expertise, such as my noble friend Lord Borrie. We could negotiate the remuneration on a reasonable basis, including a pension arrangement.

Be that as it may, Clause 107 is indeed important, concerned with the investment of funds of the pension protection fund. References have been made to a number of reports by outside individuals appointed by the Government to look into various aspects of corporate governance. In this context, a report by Mr Myners dealt with the way in which pension funds might operate in investing. On the last occasion, I reflected that whenever such an individual was appointed to this sort of job, his own business tends to deteriorate. I am not sure where that will leave Marks & Spencer at the present time. However, the Myners' report makes a number of valuable remarks which are relevant to Clause 107.

We need to consider carefully, in the context of the pension protection fund, exactly how the money it acquires by taking over eligible funds is to be invested, and in particular the principles involved when it operates in that way. The clause begins by stating: The Board may invest for the purposes of the prudent management of its financial affairs". No one could object to that in one sense, except that what "prudent management" means is not made clear. We should note that this will comprise a massive conglomerate of pension funds—if, tragically, a number of funds and companies with funds do fail—which the PPF will need to manage. In essence it will operate as a pension fund, but of a rather strange kind because, as we discussed during our deliberations on earlier clauses, all these funds are effectively for deferred pensioners. Therefore the investment funds may be somewhat different from that which would apply to an ordinary final salary pension fund.

The crucial question arose when the noble Baroness, Lady Hollis, was kind enough to arrange a meeting ahead of our discussion of this Bill, concerning asset allocation. We asked in what way the pension protection fund ought to allocate its assets. If one were to interpret, the prudent management of its financial affairs", very precisely, I suppose it could be said that the sensible thing to do would be to put the whole lot in gilts. I am not sure whether that is what the Government have in mind, but it would certainly tend to relieve pressure on the Chancellor of the Exchequer in his effort to finance his very considerable borrowing requirements.

However, if that is the case, as is likely, the costs of the levy will be greater than need be. Even though, as I understand, all the pensioners will, in effect, be deferred pensioners, there would be none the less a case for a mix of assets between gilts on the one hand and investment in equities, hedge funds or similar on the other rather than all of them in gilts. That would minimise the long-term cost of the operation to those paying the levy. We need to be clear about exactly what the Government have in mind when they state in the Bill that: The Board may invest for the purposes of the prudent management of its financial affairs".

The clause goes on to state that, there should be at least two fund managers", which is also certainly my view because that is sensible. However, other Members of the Committee have greater experience of that side of things. I refer also to the various recommendations made in the Myners report that the trustees should be paid. Perhaps I have not studied the Bill adequately, but I am not yet clear whether the pension protection fund will have trustees as such or whether it will comprise a board. If it is not to have trustees, I do not understand the argument against it. There would seem to be a case for a board.

Myners goes on to ask particular funds—I think this would apply to normal funds as well as to the pension protection fund—about their attitude to risk, which is important. In order to minimise the burden on those paying the levy, will the PPF take some degree of risk in terms of the, prudent management of its financial affairs'"?

As regards the appointment of fund managers, are we to understand that there will be straightforward, open competition? I hope that there will be. But will we have rules laid down, which at the moment I cannot find in the Bill, about commission and transaction costs and whether or not they should—which I think not—engage in operations with soft options and so forth? Those are matters that I think, at this stage, it would be appropriate for us to have an idea about exactly how the Government think operations should be conducted under this clause.

Rather more fundamentally, will there be investments in active funds or in passive funds, and so forth? They will all be of very great importance to the success and ultimate cost of the operation. Given that the cost of the operation is a deterrent to people continuing to operate final salary schemes and to bear the cost of the levy, this is a matter about which we ought to be concerned. I shall not burden the Committee more, but this clause raises a number of very important issues. We shall come to some of the others at Clause 108. It would be helpful to have the Government's views. There is great expertise in the Committee and some Members may have views on how we should operate this fund.

Lord Oakeshott of Seagrove Bay

I, too, wish to press the Minister on some of those questions. The key point that should be stated in the Bill, about which we must be clear, is the broad parameter of the investment policy that the PPF should pursue. What is the benchmark? How will we know whether the board has done a good or a bad job?

Some of the more detailed points raised by the noble Lord, Lord Higgins, such as investment tactics, commission or costs, are not matters for the face of the Bill, but it is obviously perfectly proper to raise them now. No doubt, the Minister will answer us on those.

The basic investment policy—the strategy—cannot be divorced from the nature of the risks that the fund faces. As a little taster for the debate that we will have later about the circumstances, if any, under which the Government should stand behind the fund as a lender of last resort, if the Government hold to their view that they cannot stand behind the fund under any circumstances, that will inevitably mean that the PPF will have to pursue a much more risk-averse policy. Indeed, it is questionable whether it would be prudent to have equities in any proportion at all which, inevitably, will lead to a greater cost in the long run. I make that point of principle that will, in turn, affect investment strategy.

Lord Borrie

I hope that the Minister has a number of answers to the points about the way in which the provision of funds will be implemented. I am sure that the Government have given considerable thought to this and that the Minister will respond in a way that none of the rest of us can.

Perhaps I may comment on one or two points, especially those mentioned by the noble Lord, Lord Higgins. I have not read the Bill as though there will be any trustees. I have read these provisions as though there is the board, as mentioned in the previous clause. Although Clause 107 states that the board "may invest", it makes it clear that the board will appoint two fund managers, which received congratulatory comment from the noble Lord, Lord Higgins.

Clause 107(1) includes the phrase "prudent management". I should be surprised if that meant always and forever investing in gilts because I would not have thought that was, at all times, the prudent thing to do in order to invest money and safeguard its value. It all depends on what is going on out there in the world, and the managers will determine that and determine the right balance.

3.45 p.m.

Indeed, I should also have thought that the managers will keep a balance between investment, which we are discussing specifically under this clause, and the other matter of levy. In so far as managers are successful in investing, the levy will be that much less burdensome—and the opposite is true as well. Perhaps the Minister can put the matter more clearly than I can.

Finally, I am sometimes critical of Her Majesty's Opposition, or for that matter the Liberal Democrat opposition. I mention the two separately because the noble Lord, Lord Oakeshott, criticised me last week for not making the proper distinction between the two groups that sit opposite me. I have sometimes criticised the Opposition for wanting to put in the Bill more than seems appropriate—usually when they want to state the obvious. But in this instance, I must say to the Minister that subsection (4) is stating the obvious, as it says that in appointing a fund manager, the board must chose someone with the "appropriate knowledge and experience". That is so obvious that it does not need saying. I do not mind that it is there, but if the Opposition had proposed it, I must admit that I would question whether we needed those additional words.

Lord Lucas

I start by wishing the Minister the very best of fortune. The last sitting week in July is always trying, and even the best of Ministers must have some collywobbles. I hope that we can keep her mind off it, at least for this afternoon.

I find this a very exciting part of the Bill. We are seeing here the birth of a creature that may be the forerunner of solutions to two substantial problems, one of which is the annuity difficulty and one of which relates to stakeholder pensions. This sort of vehicle is in effect a public/private pension fund, which is to be run as a public body but will be just like being in a private pension fund in terms of the structure operation and the management of investment. It may be something which, if it can be made to work, we can extend to people who do not wish to turn their pensions into annuities at an early stage, and which would certainly offer, because of the scale of its operations, the opportunity for a low-cost, high-quality pension for people investing small amounts—in other words, a stakeholder pension fund. Here we have a structure because we need it.

If we can make it work, and if we think carefully about it, try to avoid the pitfalls and think around all the characteristics and make it something that will function, we may have something that will be extremely valuable. It is worth spending time on this matter; it is the birth of an idea, and one of the key parts of the Bill.

Baroness Turner of Camden

I do not see the need to amend or reframe Clause 107, which seems entirely adequate. I regard this as an insurance scheme. It is a very good idea to protect the interests of people in schemes, and I hope that it is successful. I see no need at all to alter either Clause 107 or Clause 108, since the investment principle is spelt out in the next clause.

Baroness Hollis of Heigham

My noble friend Lady Turner made tellingly the substance of the point that I was going to make.

I would be reluctant to describe the fund as a pension scheme, although it has some of those features, or even as an insurance scheme, as my noble friend did. It is a compensation scheme, but it obviously has features of both pensions and insurance in it.

As for its structure, my noble friend Lord Borrie was right in his response to the noble Lord, Lord Higgins. We are talking about a board, rather than trustees. The sort of responsibility that we would expect when advertising for non-executive directors under the Nolan principle is for a commitment to around 20 days a year for a fee of about £15,000. I have no idea whether that will hold over time, but it is our current expectation.

I agree with the noble Lord, Lord Lucas, that we are getting to a particularly interesting part of the Bill: trying to find a way through the moral hazard issues of backstopping what has hitherto been a private contract, and doing so in a public law way without recourse to public funds. Clause 107 allows the board to invest for the prudent management of its financial affairs. It is common for NDPBs to be allowed to invest funds—there is a precedent with the Pensions Compensation Board (PCB). Under Section 85 of the Pensions Act 1995, the PCB is currently permitted to invest any funds which it considers to be surplus to its immediate requirements.

The principle of allowing an NDPB to invest is to ensure value for money; in other words, investment by the board may increase the assets in the pension protection fund and therefore over time reduce the amount required to be raised by the pension protection levies. It will be very hard to achieve averages. A small number of schemes might join in one period or possibly a large number of quite small schemes will join in another, but there might suddenly be a major collapse. Resources will be needed to even out that very uneven profile, particularly if a certain sector of the economy is hit. Of the 10 major American companies that joined the scheme, live were steel, four were airlines and the last was Polaroid—I think that that is the right way around. A particular sector was hit, which produced a very jagged profile of liabilities.

We have been keen to stress that the PPF will operate at arm's length from government—investment is one example where that principle is seen in practice. This means that the board along with its advisers will be required to be responsible for its own financial management, including its investment strategy. It would not be sensible to require the board to be accountable for its financial management if we restricted its investment powers unduly. If we prescribed how the board should invest, it would put pressure on future governments to step in if investment returns went down. However, the power to invest is subject to some reasonable restrictions—under subsection (2) of this clause, the board must appoint at least two fund managers. I assure the noble Lord, Lord Higgins, that appointment will be by straightforward, open competition, to use his phrase. Before doing so, however, the board must be satisfied that the individuals or firms have the appropriate knowledge and experience.

We will discuss accountability later, but it may be worth highlighting a few key aspects. First, the board must ensure that a written statement of the principles governing decisions about investments is prepared and reviewed regularly—my noble friend Lady Turner was absolutely right in this regard. We expect the principles to cover such aspects as choosing investments: the kind of investments to be held; the balance between the different types of investment—the very point that the noble Lord, Lord Higgins, made—risk; projected returns on investment; and social, environmental or ethical considerations in the selection, retention and realisation of investments.

I would be happy to circulate to Members of the Committee three examples of statements of investment principle, because I myself was interested in how they were done. Clause 108 deals with the issue more fully. One example held to be a model of good practice is the university superannuation scheme. Its statement of investment principles lays down clearly what proportion of its investments and assets it expects to be held in UK equities, overseas equities, fixed interest and property, and what proportion of divergence there is on either side. Members opposite may well be entirely familiar with this. The three examples are the BP pension fund, a local government fund and a university superannuation scheme, which are all very similar. If they are models of best practice, I would be surprised if ours diverged greatly from them. If it would help noble Lords, I would be happy to circulate the examples so that they can see what they might look like. This approach is more appropriate than including such a provision in the Bill.

Secondly, the PPF will be required to produce annual reports, together with audited accounts. Furthermore, the non-executive committee of the PPF board will monitor performance, strategy and risk management and the organisation will have key targets and performance indicators.

Given all that, we obviously cannot define the word "prudent" in the abstract or lay down precisely what should be gilts, hedge funds, equities, derivatives or whatever, but the combination of the accountability of the PPF board through its annual report, through the Secretary of State and to Parliament, together with the statement of investment principles and the open competition for fund managers, should address any concerns that the Committee may have about the nature and structure of the financial investment policies of the board. With that, I hope that the Committee will accept that the clause should stand part of the Bill.

Lord Higgins

I am grateful to the Minister for clarifying the position, specifically the fact that there will be no trustees, it will be the board. These are important issues. It is difficult to know to what extent one should write matters into the Bill—that may be more difficult for Clause 108 than for Clause 107. I am inclined to agree with the noble Lord, Lord Borrie, that the way in which the provisions for appointing appropriate managers, and so on, are spelt out in Clause 107 is perhaps a little over the top.

On other matters, I shall need to consider what the noble Baroness said—in particular, whether there will be an opportunity for a parliamentary debate on the report. However, again, we shall come to that in later clauses, so I shall not pursue the matter further at this stage.

Clause 107 agreed to.

Clause 108 [Investment principles]:

Baroness Hollis of Heigham moved Amendment No. 187:

Page 75, line 26, leave out "made by the Board about investments" and insert "about investments made by or on behalf of the Board"

The noble Baroness said: I hope to be brief on this. This government amendment relates to Clause 108—the statement of investment principles—and provides that the board's statement must govern decisions made not only by the board but by those making decisions on behalf of the board. In other words, it is effectively a drafting amendment that covers the major point. Those making decisions on behalf of the board will primarily be the fund managers.

It is envisaged that the board must set out in its statement of investment those principles that govern decisions made by the board or by the fund managers on behalf of the board in relation to the sort of issues that I mentioned earlier—investments, the balance of risk, projected returns and whatever environmental, social or other considerations may be appropriate. Without the amendment, the fund managers could legitimately act in a manner contrary to the statement of investment principles. I am sure that they would not want to if they sought to have their contracts renewed, but they could. Hence, I hope that the Committee will accept that this amendment is useful and necessary. I beg to move.

Baroness Noakes

May I clarify one aspect of the amendment that I am sure is straightforward, but I am not sure that I understand it at present? Could statements of investment principles be made by someone else on behalf of the board? Under the amendment, the clause will state that a, 'statement of investment principles' means a written statement of the investment principles governing determinations about investments made by or on behalf of the Board". Does that mean investments made by or on behalf of the board or determinations—determination of the written statement of principles? I suggest that the amendment is ambiguous and could be read as implying that someone else could be setting the statement of investment principles, which would be wrong.

Baroness Hollis of Heigham

I am sorry. What it does is ensure that fund managers are caught within the responsibility to adhere to the statement of investment principles. In other words, not only the board but the board's agents must act in conformity with the statement of investment principles. It is obvious that they should but, technically, there could be a lacuna without the amendment.

Baroness Noakes

I completely accept that they should be bound by the statement of investment principles, but I was concerned that the amendment implied that someone other than the board could make that statement of investment principles on the board's behalf.

Baroness Hollis of Heigham

No. I am assured not, but I will check to make sure that it could not be read in that way.

4 p.m.

Lord Lucas

The draftsmen are terrible commaphobics. They clearly need to read the wonderful book on grammar, Eats, Shoots and Leaves. It is equally possible to read the clause in either direction. I would be very grateful to know the rule that says it should be read the Government's way rather than in the way suggested by my noble friend.

Baroness Hollis of Heigham

I have read and enjoyed that book. We know that the understanding of the clause will be shaped in the context of the discussion here. I hope that it is now sufficiently clear, thanks to the question of the noble Baroness. There should be no ambiguity.

Lord Borrie

It becomes clearer if one looks at the whole of the clause, including subsections (1) and (3). If one looks at them, it is perfectly straightforward that the statement is made by the board. Subsection (2), as amended, then slots into place because the investment principles are concerned with principles about investments made by or on behalf of the board.

On Question, amendment agreed to.

On Question, Whether Clause 108, as amended, shall stand part of the Bill?

Lord Higgins

We have already gone over some of the ground covered by this clause in our discussion on Clause 107. I referred earlier to the Myners report. One should not put too much weight on the various gurus who pontificate on these subjects in relation to the requests of the Government for them to carry out studies—we were discussing Higgs the other day. But it seems to me that some of the provisions in the Myners report are sensible and many, if not all, pension funds will make clear whether they are Myners compliant. To the extent that it is relevant to this fund, is it the Government's intention that it should be so?

As far as the statement of investment principles is concerned, generally speaking they are all similar. Many Members of the Committee will be familiar with this problem. None the less, it is important that it is clear what those principles are. Myners suggests that a statement of the investment principles should be sent to all the members of the funds. What will the situation be regarding communication between the pensions protection fund board and the members of that fund, who have been taken over as a result of the failure of an eligible scheme with which the fund is now dealing? Do the Government propose that the statement of investment principles should be sent out to those who are members of fund and who are depending on the success of the fund for the continued payment of their pensions, in the same way that they would be if they were in an ordinary pension fund?

It is important that members are aware of what the fund's investment objectives are. Generally speaking, despite what was said earlier, I think that there is a case for putting it on the face of the Bill. This will be a very unusual fund, as my noble friend said a moment or two ago. It will be a rather strange public/private hybrid with many of the features of an insurance fund, as the noble Baroness said, or a pension fund or, as the Minister said, a compensation fund. I do not think that it is a compensation fund. It is much closer to a pension fund. It has taken over pension liabilities, is investing assets and is trying to pay out. It is not compensating people. In effect, it is perpetuating the operation. It may be that the Minister can give us a little more information on what the Government envisage in relation to these investment principles.

Lord Oakeshott of Seagrove Bay

Picking up the Minister's reply, we certainly do not need to be too prescriptive but, as I listened to her, I heard no prescription at all. Her answer boiled down to repeating value for money and prudence. Frankly, from the point of view of an investment manager or an investment committee that is so vague as to be operationally meaningless. There is surely some third way between being over-prescriptive on detail and giving no investment policy guidelines at all. So far, that is all that the Bill and the Minister's answer amount to.

The Minister implied that there should be some sort of minimum liquidity requirement, given that she spoke about the fact that the calls on the fund would be quite lumpy. That is something that should be addressed. How far might one need to have a certain amount of liquidity? It is no good just to say, "We do not want to be too prescriptive" and then give no guidance at all. Operationally, and in terms of strategy, that is what the Minister's answer added up to.

Lord Lucas

My concern with this clause is subsection (3). Historically, the bugbear of anything that has involved a government managing investments has been that, after a while, a government will chose to manage investments in their own interests. A generation or two ago, investments would have been used to prop up ailing industries. These days, perhaps it would be mandated that a certain proportion must be invested in new industries. These get included as investment principles or direction of investments for reasons that are not in any way connected with the reasons that should govern the fund, which are its own internal requirements and the requirements of the people funding it.

I am concerned about the breadth of subsection (3). I know how it will be set up to begin with: it will be set up so that there is a sensible set of requirements. But things creep in. There will be a chunk of money sitting around in the fund. Political pressures will be put on it because it is possible under subsection (3). There will be pressures to use the fund to rescue an industry that is in trouble or to consolidate it. There will be pressures to do things British rather than overseas. There will be pressures to put money into government debt rather than equities. All these are pressures that are not properly put upon this fund. It has nothing to do with a government's investment objectives or the public's investment objectives. There has to be a degree of insulation and I do not see it in subsection (3). I would like to know how that will be provided.

Baroness Hollis of Heigham

I shall not trouble the Committee by repeating what I said earlier. I hope that what we expect such a statement of investment principles to contain and the issues it should address is very clear, given the shopping list that I read out. Therefore, the fund does not have a blank sheet of paper. There is plenty of experience in developing and drafting a statement of investment principles that would be appropriate under these circumstances.

However, I do not think it is appropriate to put it in the Bill. I shall give an example. I think that 20 years ago, or even 10 years ago, it would have been pretty unlikely that an investment strategy would have taken environmental considerations into account. We might now. Ethical considerations would probably have been included 20 years ago but 10 years before that they would not have been. The context and the salience of the issues of which one would expect investors to take account will change. The attitude toward particular industries—smoking or arms—will be for society to determine as significant. That is one broad-brush reason why it is unwise to put it in the Bill. However, I have given an indication of the half-dozen criteria that we would expect to be reflected when the board draws up its statement of investment principles.

The noble Lord, Lord Higgins, asked whether it would be sent out to all members. I am not expecting that to happen. As a member of the Universities Superannuation Scheme I do not get a statement of its SIP sent to me automatically. I have access to the web and if I write in for a statement, I can get it. I would also expect it to be included in the annual report. All of that is publicly available, without expecting that it be sent to me. Indeed, as a modest pensioner of a university scheme I do not have sent to me the annual statement of investment principles. The information will be fully available without expecting it to be sent. Furthermore, considerable costs would have to be borne by the levy payers if they were to receive all the information.

Much of the discussion has been around whether this is a pension scheme and whether it should follow Myners' principle. Because it is not a pension scheme, we do not regard it as being necessary to be Myners-compliant. The basic reason is that a pension scheme would be expected to honour the commitment between the employer and the employees' contract for 100 per cent of all benefits. The scheme is coming into the PPF because that contract has failed.

Although we expect to see 100 per cent of benefit for existing pensioners, deferred pensioners—everyone else will be a deferred pensioner—will receive only 90 per cent. That is why it is compensation and not a pension. We cannot honour the original contract because those who are parties to it were unable to honour it. That is why we are calling it compensation. It would not be appropriate to regard it as a pension. If it were, one would expect every existing scheme that entered to continue its existing pension contract or commitment. They cannot do that. It will be a pool scheme, with possibly some rough and ready bits to it.

Perhaps I may give an example. I going through information about survivors' benefit. I believe that some two thirds of all existing DB schemes have survivors' benefits at about 50 per cent of the value of the employee. I also believe that about 20 per cent offer a higher value—possibly two-thirds or 60 per cent. Although I do not understand how they get away with it, some honour less than that.

In the PPF, we are not taking over those pension commitments; we are saying that all survivors will receive 50 per cent. There is also a rough and ready element because it is a pooled fund and we cannot continue to track each individual commitment. That is a second reason why it does not make sense to call this a pension and it is misleading to do so. It is a compensation fund. In good faith, it will seek to honour, and should do so, the expectations we are laying on it to meet 90 per cent of the pensions rights approved for deferred pensioners.

I should have added that the noble Lord, Lord Higgins, might like to cross-read Amendment No. 181 in the light of Amendment No. 194, which is the general clause about information sent out. That may give him a sense of how we are operating. Amendment No. 194 includes a requirement to disclose the statement of investment principles. I wonder whether I have said enough to address Members' questions without repeating myself from previous discussions. I hope that with that response, Members will feel able to accept the clause.

Lord Higgins

A division of opinion is developing between us as to the exact nature of this particular animal. As the Minister said, it is true that those who will benefit from the scheme will not be receiving their original entitlement. It is a certain percentage, but I would have thought that once that quantum is decided, it will operate exactly like a pension scheme. If that is not so, whether or not the board says, "We are compensating you", it is a little less certain what they will receive. Once we are clear what they will receive, I do not see how it differs from a pension scheme, albeit one consisting entirely of deferred pensioners.

As to how much should be on the face of the Bill, I am now slightly worried by the noble Baroness's response. Clause 108(3) states: Before preparing or revising a statement of investment principles, the Board must comply with any prescribed requirements". Suddenly, this public/private body becomes a bit more public because we are not putting the provisions on the face of the Bill—albeit, there is the possibility of making amendment by statutory instrument—we will have a series of regulations. Therefore, although the provision will not go on the face of the Bill, the regulations will state the prescribed requirements for these investment principles.

Before we agree to all that, we are entitled to know from the Government the requirements which, in the first instance, will be prescribed. Indeed, subsection (4) states: A statement of investment principles must be in the prescribed form and cover, amongst other things, the prescribed matters". That being so, I do not see why at the outset we cannot have the provision on the face of the Bill and amend it by statutory instrument rather than have it done by regulation.

The noble Baroness says that 10 years ago we would not have been concerned with, for example, environmental issues. Four or five years ago, a Secretary of State sought to almost intimidate pension funds into investing in particular types of asset and asked trustees for a response. A number of trustees were fairly forthright on the matter. They wrote back, saying, "The object of our pension fund is not to achieve various government objectives by investing in this and that. The object of our fund is to maximise the size of the fund to the benefit of our members and we shall select our investments accordingly".

If the noble Baroness is going to say, "Well, of course the Government can intervene suddenly and prescribe that the fund must be invested to X per cent in a particular type of fund for environmental reasons", that will clearly put up the cost of the levy and in my view that should not be done. We do not have trustees, we have a board, but trustees would, or ought to, take the view that their objective is to maximise the size of the fund and not to engage in various political issues which the government of the day happen to believe they should.

4.15 p.m.

Baroness Turner of Camden

Would the noble Lord, Lord Higgins, believe it might be necessary to say that the investment should be conducted in accordance with prudential requirements? In other words, one must ensure that the fund is prudentially managed in order that people will benefit from it.

Lord Higgins

I agree 1,000 per cent with the noble Baroness, Lady Turner; I am all for them investing in a prudential way. However, the Minister was saying that compared with 10 years ago we might now suddenly find that we must take into account environmental matters; for example, funds must not invest in tobacco companies. I am against tobacco smoking and so on. None the less, one will suddenly find that the board is prescribed from investing in tobacco companies. At that point, there is a slippery slope and we need to be clearer what subsections (3) and (4) will produce. It may be going too far to have the provision on the face of the Bill, but we want a clear statement of what initially these prescribed matters will be before we agree to a totally blank cheque in that sense.

Lord Oakeshott of Seagrove Bay

If there is prescribing to do, I believe that this House should do a certain amount of it first. I listened carefully to the Minister and her various shopping lists and possibilities, but in investment policy it is important to know one's overriding objective. I suggest an objective that is common in pension fund and long-term investment generally; that the overriding investment policy objective should be to maximise the long-term total return, taking capital in together with the funds entrusted to the PPF. If people want to add on something subject to levels of risk or liquidity, I would accept that, but one must have an overriding objective.

Lord Lucas

I echo that suggestion. It solves many problems and makes clear in whose interests the fund is being managed. It is clearly being managed in the interests of the pensioners and the levy payers. To my mind, those are the people whose interests should be taken into account. Furthermore, we should have a clear statement. The noble Lord's suggestion is along the right lines and certainly better than anything I have been able to dream up in the past five minutes.

We must pin this down; there must be a restriction on what the Government can do under subsection (3) so that it is only in the interests of the pensioners and levy payers. It should not be able to introduce some other set of interests that are extraneous to the fund.

Baroness Hollis of Heigham

I am a little puzzled. I can see that one could maximise profits by having no requirement to observe equal pay legislation and so on, but we do not operate in that fashion. All that I was doing with my example of environmental considerations was to show how people's expectations about the considerations that should be brought to bear when making investment decisions have changed over time—neither more nor less—as indeed they have.

I shall have a go at unpicking some of the words to see whether that will allay some of the fears expressed by Members of the Committee. We have already discussed one—that the board must secure that a statement of investment principles is prepared and maintained, is reviewed at such intervals and on such occasions as may be prescribed and is, if necessary, revised. The board will be required to establish whether anything has changed since the last statement was produced, whether it is the nature of the liabilities, the investment market, and so on.

Subsection (2) refers to, a written statement of the investment principles", which must be available in written form, whether people write in to request it or whether it is on the web.

Subsection (3) was the source of some concern. It states: Before preparing or revising a statement of investment principles, the Board must comply with any prescribed requirements". The regulations will set out what the statement is to cover, but not specify any strategy. For example, it would specify that it must cover environmental strategy, but not what that might look like. Regulations will require the board to meet certain requirements before preparing a statement of investment principles.

Lord Higgins

I wonder whether the Minister could read the paragraph again, as I was surprised by one of the words in it.

Baroness Hollis of Heigham

Well, I read subsection (3) and then made two points: that regulations under Clause 108 will require the board to meet certain requirements before preparing a statement of investment principles. For example, it is intended that the regulations will require the board to obtain written advice from a person with appropriate knowledge and experience of investment management, and require the board to assess the nature of the its liabilities and the risk environment in which it is operating, thus considering the appropriate diversification for the fund. That will come in under the reference that it must comply with any prescribed requirements.

Finally, in response to the noble Lord's question about overriding objectives, I was trying to say that the regulations will state what the statement must cover but will not specify any strategy. In other words, any investment principles statement must include, for example, a consideration of environmental strategy, but not what that may turn out to be or how the managers respond to it.

It is a shopping list of issues to consider or principles to take on board—not how those are translated into particular investment decisions, which is as I understand it a job for fund managers working within the framework of the board.

Lord Higgins

I believe that the Minister used the expression, "environmental strategy", but it may be that again I did not hear her correctly. Did she say that?

Baroness Hollis of Heigham

Yes.

Lord Higgins

What did she mean by it?

Baroness Hollis of Heigham

This is something that I have been concerned with when wearing another hat. It may be, for example, that if one was acquiring a property asset for some function or other to happen—not particularly associated with the PPF but in another consideration—the cheapest site may be outside the city centre on a greenfield site. But there are hidden environmental costs—additional transport costs—which are dumped on to other bodies. This may be something to bear in mind when producing a green strategy such as the handling of the DWP estate. I am not saying that this is how the pension fund investment principle would operate, but it is the sort of area in which environmental considerations might come into play.

Lord Lea of Crondall

Are not our colleagues opposite inviting the Minister to predict on the hoof what the regulations might be, despite the fact that the noble Lord, Lord Oakeshott, put it very differently five minutes ago when he said, "If there is any prescribing to be done, we want to be part of it"? Parliament will be part of the prescribing in that it would have to approve. This is not the moment to raise any further debate. Noble Lords opposite have given us three different versions in the space of around three minutes of what substantively the requirements should be. The noble Lord, Lord Oakeshott, said that it was obviously a very good model of long-term maximisation of value; another noble Lord said that it was self-evident that the object should be slightly similar. The short answer is that this is not the time to predict what the substance of the prescribing should be, but simply to note that prescribing will be necessary. We cannot go any further than that.

Lord Oakeshott of Seagrove Bay

I am sorry if I was not entirely clear. I was not referring to any prescribing; I said that the single main objective should be prescribed. The noble Baroness is very good at this. She has just read out the shopping list again, which I am sure that we have all heard before, but has not responded to my point—one which, to some extent, other noble Lords are also making—that there should be a statement in the Bill of the overriding objective.

The noble Baroness may not wish to respond to my specific proposal today. The problem is that there is no effective objective in the Bill. The Minister has drawn to our attention the reports of some very good pension funds such as those of the FSSU and BP. I would be very surprised if they did not contain an overriding objective of the type I seek. Will she look into those reports and let us know why such an overriding objective as a principle should not be in the Bill? I do not need an answer now; it is a matter to consider.

Lord Higgins

I am astonished at the way in which the debate has developed. There is no inconsistency in what is said. Both opposition parties have said that there are various alternatives. The Government propose simply to operate by regulation. We are not asking the noble Baroness to respond on the hoof, but we certainly need before Report a clearer indication of exactly what the regulations will cover.

I am somewhat horrified by the noble Baroness's remarks regarding environmental considerations, because they are wholly inconsistent with the view expressed by the noble Lord, Lord Oakeshott, with which I sympathise, on what the basic objective of the fund should be. The basic objective should be common to that of many pension funds: effectively to maximise the size of the fund for the benefit of members or alternatively to minimise the contributions of levy payers. In any event, the objective is not to go off on some frolic involving environmental considerations.

Baroness Hollis of Heigham

Perhaps I can help the noble Lord. His view is not shared by the three bodies whose statements of principle I have read—I only have three so they may not be consistent with others. The BP statement of principle says, for example: Consistent with its obligation to act in the best financial interest of the fund the trustee supports a bias towards investments in companies with positive social, environmental and ethical policies".

The noble Lord talks about being horrified and queries the shopping list that I produced. All I am saying is that, so far as I can see, the list reflects closely the sort of considerations for taking social, environmental and ethical statements of policy into account. Equally, other companies talk about minimising environmental damage in various ways.

The noble Lord goes on to ask about the main objective. That is already carried in the phrase: The Board may invest for the purposes of the prudent management of its financial affairs". I do not see why that is not the overriding objective. We know that the purpose of the fund is to be able to meet the liabilities that will arise from ensuring that members are compensated for the loss of their pension schemes. It is asked to attend to the prudent management of its financial affairs and to put itself into a position in which it can best meet those liabilities. But, in addition, through its investment principle it will bear these issues in mind. It must take cognisance of certain issues, although it may decide to ignore them by saying that they are not relevant to its investment principle.

This is almost a checklist of considerations to which the statement of investment principles must be exposed in order to measure against it. I see no problem with that. Certainly the three examples I have looked at follow very closely in their formats what we are suggesting will happen here. So I am slightly surprised that noble Lords are finding this difficult, because it appears to be consistent with best practice already established in the field: the prudent management of funds for the purposes outlined. These are some of the issues on the shopping list which must be taken into account when the board draws up its statement of investment principles.

Lord Borrie

I rise briefly to intervene. Two different things are being considered here, the second of which was first initiated by the noble Lord, Lord Lucas, and followed by other noble Lords. The first was whether something more specific should be set out in the Bill as regards Parliament's statement of the objectives of the board.

At an earlier meeting the Minister pointed out that the board is to be at arm's length from the Government and Parliament. When established it is meant to set out its investment principles in accordance with Clause 107(1): The Board may invest for the purposes of the prudent management of its financial affairs". I should say in response to the noble Lord, Lord Oakeshott, because he read out something which outlined a rather more ideal and detailed objective, that that could be interpreted as favouring the short term over the long term. That would not do because the board must operate for a very long time and will have to deal with matters arising not only in the immediate future but also in the long term. It is right that on the face of the Bill it is left to the board to determine at arm's length the investment principles.

However, I do have some sympathy with Members opposite, and certainly with the noble Lord, Lord Lucas, who initiated this point. Subsection (3) of Clause 108 states: Before preparing or revising a statement of investment principles, the Board must comply with any prescribed requirements". As I understand from my noble friend at the Dispatch Box, those are not prescribed requirements on the statement of investment principles, rather the prescribed requirements for what the board must do to build up its preliminary work and knowledge in order to set out its statement of investment principles. It must take professional advice and so forth.

[The Sitting was suspended for a Division in the House from 4.33 to 4.44 p.m.]

Lord Lucas

I turn back to a point made by the noble Baroness on the last occasion. She said that this Bill is of necessity being pushed through quickly and that there are areas in it that ultimately we shall just have to take on trust.

Baroness Hollis of Heigham

I want to make a point in response to that remark by the noble Lord. I did not say that the Bill was being pushed through quickly, but that some of its clauses are coming through quickly. Were I to delay the whole Bill for the sake of those late clauses, more pensions would be put at risk. I should like to make that distinction.

I can tell noble Lords that, to my certain knowledge, 85 to 90 per cent of this Bill has been worked on for three years or even longer. This is not a swift piece of legislation being pushed through at the last minute. However, some clauses, of which pensions liberation is the most extreme example, along with the financial assistance scheme, have come through very late. That is the reason why they were not scrutinised in the Commons. We had to choose between either deferring the Bill—Members of the Committee know about the problems associated with such a move—or going ahead. I want to make that distinction absolutely clear.

The Bill follows a Green Paper and its subsequent elaborate consultation. It then went into a quasi-White Paper issued as a Statement which in turn generated consultation that was included in the Bill. The amount of work that went into the origins of this Bill far exceeds that undertaken for any other Bill I have worked on. I should not like that canard to be repeated in quite the way indicated by the noble Lord, Lord Lucas.

Lord Lucas

I consider myself suitably put down. However, my point, however inexpertly made, is nonetheless relevant. We all recognise that certain things will have to be taken on trust. Ideally we would like to have seen this Bill produced in draft form and considered by a committee able to deal with something so technical and far-reaching. However, we do not have that and so, in some cases, we shall have take decisions based on our trust that the Government have done all the work.

However, the quid pro quo is that the Government must recognise that some points cause us real problems, although in fact they are not difficult to solve. While I accept that that is not what is written, noble Lords on this side share the universal feeling that there is a considerable difficulty here. However, as I have said, I do not think that it will be difficult to solve. The noble Lord, Lord Oakeshott, has suggested that we set out in the Bill a basic statement of investment principles which outlines in whose interests these investments are being managed. If we were to go down that road, many of the subsidiary problems would fall into place. It would then be impossible to use Clause 108(3) in the wrong way because it would be subject to the basic and overriding principle that presumably would be set out somewhere in Clause 7.

I have spent some of my life as a tenant of the Church Commissioners—and an extremely unpleasant experience that has been. The commissioners interpret the mandate in the interests of their beneficiaries extremely severely and their tenants do not come into the equation at all. The noble Baroness wants to introduce some kind of softening of the absolute mandate. I suggest that the right way to do that is by a reference to general best practice rather than allowing a means by which particular special interests can fight Clause 108 in ways that might damage the fund and its beneficiaries as well as those who will have to pay for the fund.

There is a way through here, one that I do not think threatens in any way either the integrity of the Bill as a whole or this part of it—of which, as I have said, I am a great fan. I hope very much that the Government will be able to take this in a positive light, saying that they will do their best to meet our concerns rather than defending the purity of their own belief in what is already set out. That would be more in keeping with the spirit in which the Bill is being taken through this place.

Baroness Hollis of Heigham

I shall certainly reflect on what has been said because it is obviously a matter of major concern. Normally, if Members of both the main Opposition party and the Liberal Democrats press me on something, I can see where they are coming from and I am able to understand the nature of their concerns. Then it may or may not be the case that I can meet those concerns.

On this occasion, however, my difficulty is that I still remain baffled. Noble Lords have made their points very clearly, but I do not think that we shall advance much further today. The least I can do is to reflect and consider our debate to see whether I have missed something rather important, although I must repeat that I am baffled. Obviously that is a shortcoming on my part, but I really do not understand what the extra words proposed would do aside from producing a territory of debate about what the fund is for, which is carried by subsequent clauses that we shall come to discuss.

If noble Lords wish to write to me, I shall be perfectly happy to circulate these examples of investment principles. Some have an overriding objective while others do not follow that form. But the phrase "prudent management" covers virtually everything that has been said today and so I do not understand why further words in the Bill are necessary. However, I have to say that this is not ringing any bells with me.

Lord Higgins

I intervene only briefly to ensure that the noble Baroness's contemplation on this issue is correctly directed. The crucial point is this: in whose interests are these investments being made? The expression "prudent management" is too wishy-washy. Most pension funds have an overriding objective—I stress that—of the kind quoted by the noble Lord, Lord Oakeshott.

Some years ago, a Secretary of State or possibly even the Chancellor wrote to various pension funds saying, "We would like you to invest in a particular way, taking environmental issues into account", to cite the expression used by the noble Baroness. The responses were of two kinds: either the trustees responded by saying that it was nothing to do with them—in other words, take a running jump—or they produced something along the lines quoted by the noble Baroness from Shell, which stated that consistent with their main objective, they would try to be helpful to the environment, and so forth. But the phrase "consistent with prudent management" is not good enough; it has to be more explicit than that. It is that which we shall have to try and achieve on Report.

We really cannot have the board of the pension protection fund investing in this or that environmental project or small business at the expense of either the beneficiaries or those who are to pay the levy. It has to be tied down more securely than that.

The noble Baroness has always been helpful with regulations. If it is possible for her to let us have a draft of these regulations, which are probably the clearest case in the Bill, I would be grateful. However, the wording as it stands is certainly not sufficient and we shall need to straighten it out.

The Deputy Chairman of Committees (Lord Elton)

Does the noble Lord, Lord Borrie, want to refer to the issue on which he was speaking when the Division Bell intervened?

Lord Borrie

As I have completely forgotten what I said, I could not helpfully amend it.

Clause 108 agreed to.

Clause 109 [Borrowing]:

Baroness Noakes moved Amendment No. 188:

Page 76, line 6, leave out paragraph (b).

The noble Baroness said: Following that extended debate we move now to a rather mundane probing amendment drafted to find out from what kinds of institutions the Government envisage the pension protection fund borrowing. The permission to borrow is drafted in terms of a "deposit-taker"—loosely, banks. The definition of such a deposit-taker set out in subsection (3)(a) is fairly straightforward, but can the Minister give some examples or a list of the deposit-takers which would be covered by subsection (3)(b)? I beg to move.

Baroness Hollis of Heigham

The purpose of Clause 109 is to set out the power to borrow commercially in order to manage short-term liquidity so that the fund does not have to sell off assets and so forth. Noble Lords know that this is not meant to be a long-term method of funding.

The board may borrow money from a deposit-taker or, in layman's terms, a bank or building society which is authorised to lend money in the UK by one of two routes. The first route is set out in subsection (3)(a) of the clause and is where the deposit-taker has been directly authorised by the Financial Services Authority under the Financial Services and Markets Act 2000.

As the noble Baroness said, the second route is set out in the paragraph that the amendment would remove. That states that the board may borrow from, an EEA firm of the kind mentioned in paragraph 5(b)", and so on. That is where the deposit-taker has exercised its appropriate passport rights to be able to act as a deposit-taker in the UK. Those passport rights mean that, once authorised in its home state by its home state regulator, a bank is automatically authorised to carry on banking business in other member states. As they are authorised in the UK, all companies in the UK may also borrow from those banks and building societies. That is why it would be inappropriate to remove the paragraph. Does that answer the noble Baroness's question?

Baroness Noakes

I am grateful for the noble Baroness's response and I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

On Question, Whether Clause 109 shall stand part of the Bill?

Lord Higgins

As the heading suggests, the clause concerns borrowing. I have only just noticed that Amendment No. 190 in the name of the noble Lord, Lord Oakeshott, comes later and I do not want to preempt what he may say about it. I think that it essentially concerns whether the Government will be the lender of last resort in this matter. We can come to that matter in due course and I would not want to anticipate it.

None the less, the cause concerns borrowing by the board. As has already been pointed out, it may borrow from a deposit-taker. The dilemma here is that we really do not know what will be the situation when the board begins operations. It has been commonplace in our discussions that, because the provisions under the pension protection fund are likely to be more favourable than those under what I call the £400 million compensation fund under Part 6, companies or employers may seek to defer becoming insolvent if they can, so that pensioners receive the provisions of the pension protection fund, rather than those under Part 3.

Therefore, if I understand it correctly, there is likely to be something of a rush of companies becoming eligible almost immediately after the Bill becomes operational. The noble Baroness shakes her head; I should be interested to hear what she has to say. In all events, especially in the early period but perhaps in later periods as well, the funds available to the pension protection fund may well be less than the amount that it needs to pay out to eligible companies or funds. The question is then: how will it finance that? The answer in Clause 109 appears to be that it will have to borrow.

At the same time, it will have come into a lot of assets from companies that have become eligible. To some extent, at any rate, they will be funded and have assets. So, under the provisions of the two previous clauses, we may find that the pension protection fund is investing in gilt-edged securities and lending to the Government at the same time as it is borrowing from licensed deposit-takers. I think that I am right to say that the return on gilt-edged securities is likely to be lower than the amount paid to licensed deposit-takers. So overall, the pension protection fund will incur a net cost. The clause then specifies limits on the amount that it can borrow.

Again, we are told that that arms-length operation will suddenly find the murky hand of the Treasury intervening. The Treasury will say how much the PPF can borrow, although, presumably, it will always have to borrow enough to pay out the liabilities that it has taken over.

5 p.m.

What is the situation? Are we to be assured that the Treasury will never impose a limit on borrowing that prevents the PPF from carrying out its obligations to the pensioners which it has taken over from an eligible company? Similarly, as a further qualification, there will be limits set, apparently, by the Secretary of State—although I should have thought that it would be the Treasury—on the borrowing limit.

Another point arises concerning this clause. It states: The Board may … give security". I am not clear what security the board has to give. Will it be able to use the assets that it has acquired from eligible companies to finance borrowing and to secure borrowing from a licensed deposit-taker? Again, it seems that that will raise costs above that which the board could borrow if it were able to borrow from the Treasury.

As I say, I do not want to anticipate the other point, but it would be helpful to know under what rules limits are to be imposed on the PPF either for the fact that it borrows at all or increases its borrowing limits and the basis on which it will be able to offer security. Are we sure we are doing that in a way that minimises the costs of the operation?

Lord Oakeshott of Seagrove Bay

The noble Lord is right. In a sense, my Amendment No. 190 to Clause 110 could stand with either clause. In anticipation of that, in Clause 110, the heading, "Grants", should be changed to "Grants and Loans". As regards Clause 109, clearly, if there is a formal procedure by which the Government could act as lender of last resort in an emergency, that would undoubtedly reduce the borrowing costs and enable the PPF to borrow on finer terms commercially. I would invite the Minister to consider that point as well.

Baroness Hollis of Heigham

In setting out the purposes of the clause, I hope that I shall be able to answer the points that were raised. Clause 109 sets out the board's power to borrow commercially in order to manage its short-term liquidity. The power is designed to save the board money, ensuring that it does not have to sell off assets that it is holding at times when it would not receive a good price.

However, the borrowing is not designed to be a long-term method of funding the pension protection fund or the fraud compensation fund. Instead, we have given the board the power to smooth the peaks and troughs of the economic cycle. Perhaps I may summarise our approach on that. In good times, the levy system is designed to smooth costs over time, while during bad times, the immediate costs of compensation should rise only slowly over time.

After a bad time has hit—this is the most relevant part for our discussion of the clause—the board has a number of strategies open to it to deal with cash-flow problems, as the noble Lord said. The strategies include being able to increase the levy, to borrow, and, in a worse-case scenario if it is still necessary, to reduce indexation and revaluation rates. Finally, the board could ask the Secretary of State to reduce the 100 per cent or 90 per cent levels—depending on whether a person is a deferred pensioner or an active pensioner—of compensation.

As one part of that approach, the power to borrow is a sensible and appropriate measure. But, as with any other power, the PPF must account for any borrowing in the annual reports and accounts. One further restriction is that the board may not exceed the maximum borrowing limit set out in secondary legislation.

Within that broad framework, the noble Lord, Lord Higgins, asked whether we considered that there might be a rush of schemes. I accept that some schemes may delay insolvency in order to maximise its chances of entering or becoming eligible for the PPF. That is always possible. But it does not mean that the PPF should have a cash-flow problem. During the assessment period, trustees will be responsible for maintaining and making payments.

It is worth emphasising that the assessment period will be one year. In some circumstances I can conceive, it may well be longer than that. We are not talking about something that will happen the day after tomorrow. When a scheme comes into the PPF, it will take over all the assets. It is therefore unlikely that the PPF would have a cash-flow problem, although it will need to consider its funding position in terms of the amount raised by the levy.

This debate takes us back to our brief discussion on deferred pensions. Assets will immediately come into the PPF, but the only immediate payments that it will have to make will be to existing pensioners at 100 per cent. Perhaps a very high proportion of its liabilities will not fall in for five or 10 years or, in some cases, 30 or 40 years. That is why we are not expecting a cash-flow problem except, as we discussed earlier, in a situation where either a sector or a major company suddenly fall into PPF territory. Even then, given the assessment period, one is talking about a period of a year or so on average—maybe longer than that—in which the board can determine the extent to which it may need to meet liabilities that are substantial because a scheme is coming in with a very high proportion of pensioners and payments. We should bear that in mind.

In a way, we are coming back to some of the FRS 17 issues where there is an assumption that all liabilities have to be instantly met. They do not. That is why I would not normally expect there to be a cash-flow problem, but it is wise to have the borrowing power to meet it if it should occur.

What would be the maximum borrowing limit? That will be determined by secondary legislation. I do not really want to speculate or put a figure on it. Given that the PPF is estimated to have an annual income from levies of approximately £300 million, I would expect the borrowing limit to be a fairly substantial figure—rather more than, say, the £15 million that the Pension Compensation Board currently has. Whether that figure is nearer £15 million, £50 million or £100 million is something that we would want to consider when we draw up the regulations. Obviously, the maximum ceiling would have to be sufficient to meet the very occasional contingency that might befall if a seriously major company came into the PPF.

Finally, the noble Lord asked me about security. As he suspected, security is assets held, which could, for example, be property because that would be assets going into the scheme. Security, indeed, is an asset. I hope that I have met most of the queries raised by Members of the Committee. In that case, I hope that Clause 109 shall stand part of the Bill.

Lord Higgins

We shall come later to the difficult issues of indexation and revaluation to which the noble Baroness referred. In those circumstances, it would seem that the board is probably not covering the people who have been in the eligible schemes as well as it might otherwise do.

I should like to clarify two points. I am not clear why the Secretary of State should set a limit. More particularly, I am not clear that we are minimising the costs of borrowing. The PPF may well be lending money to the Government in the form of gilts at one interest rate while also borrowing on the commercial market. Generally speaking, that is not cost-effective. In other words, should the PPF not be borrowing from the Government rather than the commercial market?

Baroness Hollis of Heigham

On the first point, it is reasonable and standard practice for the Secretary of State to set a borrowing limit where it is appropriate. That is normal for NDPBs. For example, the Pension Compensation Board has a borrowing limit—I think that I am right in saying—of £15 million, which is set by the Secretary of State. I think that that is fairly standard for NDPBs. As I say, it is important that we recall that this is for only short-term liquidity problems where there can suddenly be very lumpy expenditure.

Behind that, I suspect, is a debate into which I was not going to enter because it may be more appropriately dealt with or responded to in respect of the question asked by the noble Lord, Lord Oakeshott: namely, should bodies be able to borrow from the Government or should the Government stand as a lender of last resort? The Government's view on that is very clear. The answer is "no".

The Government are not lending because they do not want to be seen to be the guarantor of last resort. That goes back to all of the moral hazard issues that we discussed earlier. If the Government are seen as a lender of last resort, possibly unable ever, unlike a commercial organisation, to recover that money because of the situation in which they find themselves, there is the moral hazard of schemes possibly failing to exercise due diligence. Instead of being "policed" by other private sector companies about what the levy should raise, they might instead rely on government hand-outs as lenders of last resort in order to bankroll them.

The Government are very clear on that. It is a major part of the Government's decision that we will not underwrite this either through making a direct contribution or, as has sometimes been suggested, putting on a levy through the public sector, which should not come into it at all, or acting as a lender of monies. I should make that clear. I know that that is not necessarily what noble Lords want to hear, but the Government's view on that is unambiguous.

Clause 109 agreed to.

Clause 110 [Grants]:

Baroness Turner of Camden moved Amendment No. 189:

Page 76, line 16, leave out ", other than" and insert "and"

The noble Baroness said: I shall speak to Amendment No. 189 standing in my name and that of my noble friend Lord Hoyle. I am sorry that I follow on just after my noble friend the Minister has categorically said that the Government will not stand behind this proposal because I am about to argue, in a very modest way, that the Government should do precisely that.

We seek to amend Clause 110, which is about grants. Quite specifically, it states: The Secretary of State may pay the Board out of money provided by Parliament … other than expenditure which by virtue of section … is payable out of—

1. (a) the Pension Protection Fund, or
2. (b) the Fraud Compensation Fund".

Our amendment seeks to reverse that. We seek to make explicit provision for the possibility of a small amount of government financial support, but not any specific amount.

The amendment, by reversing the intention of the clause, provides a safety valve that would allow, in the event of unexpectedly high claims on the fund, the possibility of a third way other than by reducing benefits or increasing the levy. It would also signal possible government underwriting of the scheme—I repeat, possible government underwriting of the scheme—which would add to confidence.

As my noble friend the Minister knows, there has been widespread pressure for a measure of this kind from those who believe that claims may be such that a reasonable level of compensation cannot be afforded while maintaining a reasonable levy payment. We do not want the cost of covering past failures to become a deterrent to providing final salary schemes in the future. From the Marshalled List, I can see that the noble Lord, Lord Oakeshott, and the noble Baroness, Lady Barker, obviously have similar concerns and approach this matter in a quite different way. I note what my noble friend the Minister has said. Nevertheless, I beg to move.

Lord Oakeshott of Seagrove Bay

It is a pleasure to follow the noble Baroness, Lady Turner. She is right: we are broadly seeking to achieve the same thing in our amendment. In due course, I am sure that we can talk about how we can combine forces. This is a fundamental issue of principle in the Bill, so I propose to say a few words about how we feel and why. Perhaps I may just say that I never thought that I would live to see the day when the noble Baroness, Lady Turner, would be supporting the third way. We agree with her on this one.

The Government are launching an untried boat—the jolly PPF—on to a very stormy sea on a voyage with no time limit through uncharted waters. We know that smaller boats have been sinking. No one knows how long the storm will last or whether it will turn into a hurricane. But everyone in the country knows that there will be a government rescue tug if the PPF starts to sink, just as there was when suddenly the pressure got too much and the financial assistance scheme was launched at the drop of a hat.

5.15 p.m.

It seems to us a matter of simple prudence—that ought to commend itself to the Chancellor—to plan before setting out what happens if the ship is forced to send an SOS call. Obviously, one is conscious of moral hazard, but that is a very important part of the reason why on these Benches—and, I believe, on the official Opposition Benches—we are insisting that a proper risk-based assessment of the scheme and the contributions to it comes in as soon as possible. That will be a considerable incentive to avoid moral hazard.

I ask the Minister to take this point up because I have twice asked her to do so across the Floor of the House and she has ignored it both times. I accept that this is a matter for the Treasury but I ask her to get a proper response for us from the Treasury as to why the PPF is so different from the PoolRe reinsurance scheme, whereby the Government stand behind possible enormous claims on terrorism insurance. I believe that that is a sensible precedent and has worked well in the past.

If we look at the PBGC in America, which the Government have clearly studied carefully, it is true that there is no official government guarantee but the Secretary of the Treasury and the Secretary of Labor are on the board. That makes clear how unthinkable it is that the American Government would walk away from it. We would be happy to accept Gordon Brown and Andrew Smith on the board, rather than a formal government guarantee, if the Government prefer to do it that way.

I believe that it is far better to deal with this in advance in case of the remote likelihood that it comes up. None of us can possibly know what the likelihood is. The Government have done their modelling but how it will work in the future is, by its nature, almost unknowable.

I have warned the Minister of my next point. We have a veritable media blitz of interviews from the newly appointed chairman of the pension protection fund, Mr Lawrence Churchill. He has been intruding very strongly in political matters, which he should not do, particularly before this House and the other place have taken a decision on this important matter. I see, for instance, that last week's Professional Pensions reported that: Calls for the government to underwrite the Pension Protection Fund have been described as 'outrageous' by its inaugural chairman. But the National Association of Pension Funds chairman Terry Faulkner questioned whether it was appropriate for Churchill to 'wade into the political debate' while still getting to grips with workplace pension issues".

In today's FT fund management section the chairman of the BT pension fund very properly queried that point of view.

It is not just politicians. Many people in the pensions industry are arguing that the Government should stand as the lender of last resort. I believe, and I hope that the Minister will accept, that it is quite inappropriate for the newly appointed chairman of the PPF to weigh in on one side or other of that debate. He was all over the Times on Saturday, saying the same thing. In Financial Adviser he said: My intention is to make sure the PPF does what it says on the tin".

We on these Benches believe that it must do what it says on the tin. What it says on the tin is that it will pay certain benefits. As the NAPF have said, this is not right. We do not believe that the PPF should cut the benefits that are laid down. The Minister is quite right that in principle it cannot go bust as it is set up at the moment because it could cut the benefits, in principle, to nothing. I do not believe that that is what the country expects. The PPF has been set up by the Government, the board is appointed by the Government and it is inconceivable that the Government could walk away from it. We believe that it is better to put that clearly upfront now.

Lord Higgins

I understand the concerns of the noble Lord, Lord Oakeshott, about recent statements about the pension protection fund. In view of his opening remarks about going off on a voyage and so on, I cannot but recall the statements made about Christopher Columbus: he did not know where he was going when he started, he was not where he thought he was when he arrived and he did it all on borrowed money.

Baroness Hollis of Heigham

I like that very much. I sought to make clear the Government's position on this. As the Committee will expect, I cannot accept the amendment of my noble friend and that of the noble Lord, Lord Oakeshott. The argument seems to be twofold. The first part is that, as we have done it for the Financial Assistance Scheme, we must accept that we may be called upon to take a similar role with the PPF. I do not accept that. The Financial Assistance Scheme exists because the PPF is not in play. It would be unfair and unreasonable to make a retrospective levy on companies when they were not getting protection at the time. That is why there was no alternative but to go for a government-funded scheme of assistance—it is not even compensation because it is not up to the levels of the PPF—to reduce some of the deficit. That is why there is taxpayers' money there.

I do not think that it is right to expect the Government to be even a last resort, let alone a direct contributor to the pension protection fund. If it is believed that the Government could be called upon, I believe that the Government will be called upon. That is the nature of moral hazard. The PPF is an arms' length body. We have established various ways of funding it: it will have substantial assets coming in from companies but will have liabilities that fall in over time; secondly, it has the capacity to raise a levy; thirdly, it has the capacity to borrow up to a certain, sensible level; and, finally, it has the capacity to review and reconsider and to ask for authority to reduce the sums of money that it needs to meet.

It is not just that if the Government can be called upon, they will be called upon, but that when we say "the Government" we are saying taxpayers. Taxpayers—at least half of whom have no occupational pension scheme or who are in public sector schemes where this does not arise—should not be asked to pay for the safeguarding of the minority of people who have occupational pensions schemes. That is not right. It is like saying that people who do not draw down on buildings insurance, for example, because they are not owner-occupiers and therefore do not have a buildings policy, should nevertheless contribute to the buildings insurance system of the country, even though only a proportion of the population are owner-occupiers. That is not reasonable. It is not the basis of this scheme and this is not where the Government are proposing to go.

I accept that Parliament determines the shape of the Bill but I want to make it very clear that this is not the Government's intention. Whether as a lender of last resort or a giver of grants, as my noble friend suggested, or however else it is put in other ingenious amendments to which I can look forward relating to the levies on public sector schemes which have been mentioned at various points, these proposals are that people other than the beneficiaries of this scheme should help to finance it. That is not the Government's view.

It is in the interest of the industry and of employees in occupational pension schemes to increase good faith, security and confidence in the pension system. But to expect others who do not benefit from the fund, and will possibly never benefit from it, to pay for it, is not reasonable, decent or fair. Of course, as more people come into pension schemes and see the value of them, then the situation may change and they will be contributing to the levy. The distinction between that and the Financial Assistance Schemes is that no such levy existed and therefore no retrospective payments could be made. There was nobody else to help out and the alternative was to allow people to come on to state-related benefits. However, that was not the primary objective, which was decency and trying to maintain confidence in the pension system. That seems to be very different.

We can continue the debate, but that is the philosophical argument. I do not think that it is right to ask those who do not benefit to pay. We have constructed a system that we believe matches those who gain and those who pay in a decent way in the pooled framework of a compensation scheme. For some people, it is rough and ready justice. I do not doubt that they will not have the exact provision that they would have enjoyed. But it seems to be a more honourable way forward than encouraging people to believe that the Government will be the lender of last resort and that the taxpayer will bale the fund out. If they believe that, it will surely happen because that is the nature of moral hazard. At that point, because they are taxpayers, those on modest incomes, often women in part-time occupations, will be asked to cross-subsidise a scheme of which they are not beneficiaries. I do not think that that is right. That is not where the Government propose to go.

Baroness Turner of Camden

I thank my noble friend the Minister for her response, which does not entirely surprise me. I nevertheless feel that there was some merit in the amendment that I put forward on behalf of my union, which thought that it was a good idea. It is concerned lest there is a lack of confidence in the fund, which may result in further diminution of final salary schemes. That is one of its concerns and one of the reasons why it suggested that the amendment should tabled.

I understand what my noble friend says about the possibility that if the Government are standing behind it, people will take advantage, which they would not be able to do if that was not the case. However, we all pay towards the pension benefits of our fellow citizens. In a situation where a person's pension entitlement is severely damaged, the eventual resource for him or her is the pension credit system, for which the taxpayer pays anyway. So, one way or another, we have to pay.

It would be better for that to be done via the fund that is being established than to rely on the means-tested benefits that are available for people whose pensions simply do not meet their requirements or the standards regarded as suitable by the Government. I shall think about the matter again before Report.

Lord Oakeshott of Seagrove Bay

If the Minister has not seen the blizzard of reports about Mr Churchill to which I referred and is unable to respond to them, will she undertake to read them and write to me regarding whether she believes that this is appropriate behaviour for him? Would she ask also him, in future, if he would not indulge in political controversy? That is clearly what it is and is clearly what many major pension funds feel.

I support the noble Baroness on her point. There is an element of national interest in rebuilding confidence in savings. I do not believe that the FAS analysis is irrelevant. One accepts that these people were in occupational pension schemes under which £400 million of taxpayers' money was given to them. All we are talking about here, which I make clear in our amendment, is the Government acting as a lender of last resort in certain specific circumstances. So I believe that there is a read across.

Baroness Hollis of Heigham

Perhaps I may quickly respond to the remarks made about Mr Churchill. It was my privilege to meet him. I was very impressed by the commitment, energy and experience that he brings. He is at arm's length from the Government. In his discussions with stakeholders, the press, and so forth, he is entitled to make clear what he regards to be the purpose of the PPF and his function in it.

It is always difficult when people say that someone is making political remarks—your political remarks are my common sense. In that sense, I have not seen anything that he has said—I am perfectly willing to say that I may have missed something—that seems to trespass beyond what we would expect from someone seeking to establish a brand new fund and as chairman of it. But if there are any particular remarks to which the noble Lord would like to draw my attention privately, I shall be happy to follow them up.

The Deputy Chairman of Committees (Viscount Simon)

There is a Division in the House. We will resume at 5.40 p.m.

Lord Oakeshott of Seagrove Bay

As before, I wish to make the point that this proposal has not yet been approved by Parliament. Mr Churchill is promoting the Government's view of how the fund should work. The issue has not yet been through this Committee, this House or the other House. I ask the Minister to consider that and write to me.

[The Sitting was suspended for a Division in the House from 5.30 to 5.40 p.m.]

Lord Higgins

Before we rose for the vote, we were discussing whether the Government should act as lender of last resort in relation to the PPF. I share the concern expressed by the noble Lord, Lord Oakeshott, about the remarks made by the person described as the "inaugural chairman" of the PPF. I assume that that person has been correctly reported; it is possible that that might not be so, but I have no reason to doubt it. Professional Pensions of 8 July states: Calls for government to underwrite the Pension Protection Fund have been described as 'outrageous' by its inaugural chairman, Lawrence Churchill". The matter has not been decided by this House or by Parliament generally. I have to say that that seems wholly inappropriate.

It is possible for the Government to make appointments provided that a Bill has had a Second Reading in the other place, which this Bill has. But it seems quite wrong for someone appointed in such circumstances—the legislation is not completed and it is possible that it will never be completed—to intervene as apparently he has. I hope very much that the Government will look into the matter. Perhaps the Minister will tell us what has happened at our next meeting. Does she agree that, if the report is correct, it is inappropriate to make that kind of remark?

Baroness Hollis of Heigham

I do not have the report in my hand, so I am not prepared to speculate on something that I have not seen. I can only repeat my previous remarks.

Baroness Turner of Camden

I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 190 not moved.]

Clause 110 agreed to.

Clause 111 [Administration levy]:

Baroness Hollis of Heigham moved Amendment No. 191:

Page 76, line 23, leave out first "the"

The noble Baroness said: I am in the hands of Members of the Committee on this matter. We have explained in the past that it would be necessary to introduce a number of government amendments, some of which would be minor amendments to achieve consistency across the legislation. I know that it is tiresome, but we have to do it. This is one such group of amendments, covering a number of miscellaneous minor amendments relating to Part 2 and the pension protection fund.

The effect of the amendments is to aid understanding and clarity and to ensure the proper working of existing provisions in the Bill. They clarify some references and change a number of further references which are inconsistent with other provisions and where the meaning is intended to be exactly the same. I shall give just one example. Amendment No. 191 removes the superfluous word "the" from the administration levy clause, which clarifies that the administration levy may recover the cost of any expenditure by the Secretary of State in setting up the board, rather than a specific expenditure.

I have before me a list or description of what all the amendments would do, if Members of the Committee wish for any further detail. I hope that the Committee is happy to accept my assurance that the amendments are minor and technical for the purposes of the Bill. I beg to move.

5.45 p.m.

Lord Higgins

I recall that as a Minister I was once given a brief that said that the amendments were drafting matters, but which in fact had horrendous consequences. However, the Minister has given us a very clear assurance that these are purely drafting amendments to remove inconsistencies in the Bill. I am not clear which way the inconsistencies go. Presumably, if an inconsistency is removed then one view prevails rather than the alternative. However, it is certainly not my intention to delay the Committee unnecessarily. On later government amendments it will probably be necessary to spell matters out because outside bodies have considerable interest in these matters. Given the Minister's assurance—

Baroness Hollis of Heigham

I am very happy to circulate to Members of the Committee a description of each of these amendments. Members of the Committee can have a quick look through and see whether they wish to probe any further. But I assure the noble Lord that the amendments are technical.

Lord Higgins

In my view, Grand Committee is a very unsatisfactory arrangement. The problem is that if we do not object, an amendment will go into the Bill. One way around this would be to object. The Government could put the amendments in on Report. But that may be a clumsy way of proceeding so I shall take the Minister's word for it.

On Question, amendment agreed to.

Clause 111, as amended, agreed to.

Clause 112 [Fees]:

On Question, Whether Clause 112 shall stand part of the Bill?

Lord Higgins

That happened rather rapidly and we made quicker progress than I had anticipated, since I had some points to make on Clause 111. No doubt we can come back to those on Report.

Clause 112, relating to fees, states that the Board is authorised to prescribe and charge fees to meet prescribed costs—we have no idea what they are—and that regulations may prescribe what they are, what fee is due, and that any fee owed to the board will be recovered as a debt. What is this all about?

Baroness Hollis of Heigham

I am happy to try and help on this. Clause 112 concerns fees. As the noble Lord said, it allows the board of the PPF to charge fees and recover costs in prescribed circumstances where it would be appropriate for the board to do so. The secondary legislation will set out the specific circumstances in which the board will be allowed to charge fees.

An example of what the Government have in mind is where the board has carried out or commissioned an actuarial valuation of the assets and liabilities of a scheme in order to assess whether it should enter the PPF. A third party may wish to use that valuation for another purpose. Alternatively, the third party may wish to ask the PPF to gather an additional category of information at the same time. In this example, the third party might be an individual or a firm interested in buying part or all of the insolvent company, which could involve taking on the pension scheme.

It would be appropriate in such circumstances for the board to charge a fee because the PPF would have incurred costs in preparing the valuation, while the provision of that service could represent a significant saving for the third party involved. Of course, the valuation or any other information could be used or disclosed only in compliance with all the necessary disclosure of information requirements, including data protection.

The ability to charge fees will be extremely limited because the circumstances where fees are allowed must be set out in secondary legislation. In any case, the regulations will not allow the PPF to take on tasks not related to its functions or, indeed, to set itself up in competition with the private sector in any way.

The opportunity to recover specified costs in this way may in certain circumstances provide practical solutions for the board and those organisations and individuals involved with the board while also keeping the administration costs of the organisation to a minimum. We think that it is appropriate for the board to charge fees and for the circumstances in which it may do so to be set out in secondary legislation as we may wish to include new categories of costs, or remove them, to reflect the changing environment in which the PPF will operate. I expect this to be a power that is exercised very seldom, in limited circumstances, but it is useful to have it should the PPF appropriately acquire information that might be of considerable value. As a result, it could recover some of the costs to the levy payer.

Lord Higgins

One certainly could not have guessed that from reading the clause or the Explanatory Notes. I must say that the Explanatory Notes fall below the standard we have normally come to expect and I believe that my noble friend Lady Noakes agrees with me in that regard. By and large, they tend simply to repeat what is in the clause. They do not explain at all what the Minister has just explained, although one might perhaps deduce it if one spent a long time puzzling. We are grateful for the explanation and have no further comments.

Clause 112 agreed to.

Clause 113 [Annual reports to Secretary of State]:

On Question, Whether Clause 113 shall stand part of the Bill?

Lord Higgins

The clause deals with annual reports to the Secretary of State, and what should be included in them.

Baroness Hollis of Heigham

Has a stand part debate on Clause 113 been notified? I am not trying to be awkward but, on looking at my file, it is the one clause stand part that is missing.

Lord Higgins

This raises an interesting technical point. I am afraid that I am influenced by my Commons experience whereby every clause has a stand part debate in Committee. The Minister is right to say that this clause is not one I included in that regard, so I may do better to return to it on Report.

Baroness Hollis of Heigham

If the noble Lord wishes to raise a question, I shall see whether I can answer it.

Lord Higgins

Is the report going to be debateable in the House, under what circumstances and how? Should not the position of the auditor and actuary be spelt out in the annual report? Should they not also have some input into it and should their views not be recorded? That seems extremely important. As for the non-executive committee, we are all doubtful whether we need it—but we can return to that matter again. But I think that an annual report should have a commentary by the actuary and auditor.

Baroness Hollis of Heigham

I cannot possibly comment on the second question. Not having had detailed notice of that point, I have not been able to check on it. However, in the normal course of events, the annual reports of all bodies that are laid before Parliament are not debated in the way suggested by the noble Lord. Normally copies are sent with a compliments slip. If any noble Lords are interested, an Unstarred Question can be tabled, which may result in a debate on something like the social fund annual report. That is the normal way in which things are done, in my experience.

In opposition I used to receive a large number of annual reports. They were not debated because they are not regulations. But if I was interested or wished to do so, I could draw attention to the report as I could draw attention to a Rowntree report, for example. That is the expected procedure.

As for actuaries, there will be an actuarial report and annual accounts as set out in Schedule 5.

Lord Oakeshott of Seagrove Bay

Are there any circumstances in which there would not be an audit report, saying that the accounts were a true and fair view, when billions of pounds of public money is involved? I should have thought that it was a useful thing to have.

Baroness Hollis of Heigham

My understanding is that it would be inconceivable that they would not be included.

Clause 113 agreed to.

Clause 114 [Duty to notify insolvency events in respect of employers]:

On Question, Whether Clause 114 shall stand part of the Bill?

Lord Higgins

We suddenly change gear at this point. This clause and the succeeding clauses relate to the way in which the pension protection fund gets involved in a particular company and whether the company is eligible. The clause starts the ball rolling with a duty to notify insolvency events.

The whole area of insolvency is, I am happy to say, one with which I am unfamiliar. My noble friend Lord Hunt is very familiar with the subject, but not for the obvious reasons, and we may rely on him rather heavily in the course of these events. As I understand it, an insolvency practitioner is required to notify the board, the regulator and so on; I am not clear about the timing. After an "insolvency event"—a splendid euphemism—occurs in relation to the employer, the insolvency practitioner is required to notify the board, the regulator, the trustees and so on. One would have thought that the trustees or managers of the scheme would have known already, so that seems strange. To save time on later amendments, will the Minister give us a general view of how the system will operate?

Baroness Hollis of Heigham

I have a very long speech on the government amendments and a very short one in this regard, but perhaps what I say will help to contextualise the matter. When we debate Amendment No. 192A there is a whole series perhaps 30—of government amendments dealing with insolvency issues. I would be willing to give a much fuller description under those amendments if the noble Lord wishes.

Lord Higgins

Let us do that.

Clause 114 agreed to.

Clause 115 [Insolvency event, insolvency date and insolvency practitioner]:

[Amendment No. 192 not moved.]

On Question, Whether Clause 115 shall stand part of the Bill?

Lord Higgins

The clause relates to the point I have just mentioned, so if the Minister would like to describe the process in the light of the government amendments, that would be entirely appropriate.

Clause 115 agreed to.

Clause 116 [Insolvency practitioner's duty to issue notices confirming status of scheme]:

Baroness Hollis of Heigham moved Amendment No. 192A:

Page 80, line 13, leave out subsection (2) and insert—

"(2) An insolvency practitioner in relation to the employer must—

1. (a) if he is able to confirm that a scheme rescue is not possible, issue a notice to that effect (a "scheme failure notice")."
2. (b) if he is able to confirm that a scheme rescue has occurred, issue a notice to that effect (a "withdrawal notice")."

The noble Baroness said: Clause 114 and subsequent clauses set out that when an insolvency event occurs in relation to the sponsoring employer of an occupational pension scheme which is eligible for PPF compensation, it is the duty of the insolvency practitioner to notify the PPF board, the regulator and the pension scheme trustees or managers of the insolvency events. It is the insolvency event which triggers the beginning of the assessment period. After all, a scheme will fall under the PPF only if both the employer is insolvent and it is deemed that there are insufficient assets to wind up the scheme and keep it out of the PPF. A two-part assessment must take place.

The insolvency event triggers the beginning of the assessment period. During that period the scheme is assessed for eligibility for PPF compensation—in other words, to see whether it can stay outside the scheme but, effectively, wound up and its liabilities bought up by annuities. Therefore, the insolvency practitioner's role in informing the board, the regulator, the trustees and managers of the insolvency event in determining the status of the scheme is clearly essential to the entry rules of the PPF. It is vital that the role of the insolvency practitioner is set out in legislation.

The amendments are the result of an adjustment in policy, the original intention of which was to make the notices issued by insolvency practitioners reviewable.

Lord Higgins

How?

Baroness Hollis of Heigham

I shall go on if I may. That is part of our problem—we wanted to get the notices reviewed, but we then found that we must produce another way in which to do it, so the noble Lord is right to ask that question.

As the Bill stands, insolvency practitioner notices take effect as soon as they are issued. For example, a notice issued under Clause 116 stating that a scheme rescue has occurred sets in train an automatic series of events that will lead to the board's withdrawal from a scheme and the termination of an assessment period. In other words, the liabilities can be met outside of going into the PPF.

It is highly unlikely that the notices issued by an insolvency practitioner will be incorrect. The matters on which insolvency practitioners make decisions—for instance, whether a scheme rescue has occurred and therefore the scheme does not come into the PPF—are straightforward and clear criteria which will have to be met before a notice can be issued. However, we can not discount the possibility of human error—for instance, an insolvency practitioner's office attaching the wrong name and address to a notice. Furthermore, because these notices set in motion such an important series of events, we felt as a matter of principle that it was important that individuals had a right of appeal.

However, because we did not want an appeal to be the only means of correcting a mistake, these amendments require the board to verify a notice issued by an insolvency practitioner. The board will do this by issuing a determination notice, and it is the notice that we have made appealable—in other words, if the insolvency practitioners did not wish, and it did not seem appropriate, that their decision be appealable, it is even more appropriate within this structure that the determination notice that the board will issue instead should be the appealable route. That there needs to be an appealable route is clear, given the ECHR considerations.

In the unlikely event that the board determines that an insolvency practitioner's notice is not correct, it is required to issue a new notice under amended Clause 117. That is exactly what it would have to do if the insolvency practitioner failed to issue a notice. The amendments also ensure that the notices do not take effect—that is to say, they do not trigger any action—until they become binding. Binding is when all appeal rights have expired and all outstanding appeals disposed are of.

However, there is one key drawback of delaying action—that is to say, bringing the scheme into the PPF—until the notice becomes binding. In the period between a notice being issued and the notice becoming binding—you have to allow that period for an appeals procedure to go through—the assessment period continues and any insolvency event that occurs in this interim period would be ignored. In view of this, we have amended Clause 140 so that if a further insolvency event occurs before a scheme rescue notice becomes binding, for example, the original assessment period is to be treated as terminating immediately before the occurrence of the insolvency event, thus allowing the further event to trigger a new assessment period. In other words, it may have been that the insolvency event has triggered a procedure where it looks as though there could be a rescue, that rescue falters and we therefore need a new insolvency event to trigger a new assessment period.

The intent behind all these amendments is sound: requiring the board to verify that notices issued by an insolvency practitioner are correct and allowing the board's verification notice to be appealed. These are important modifications to Chapter 3. Unfortunately, the implementation of this intent has required some complex changes to the existing structure of the provisions of Part 2 of the Bill—that is the reason for this long list of amendments. I think that the changes have been dealt with succinctly but I would be very happy to spell it out further, if noble Lords would find it helpful.

That is the purport of what we are doing, but I would be perfectly happy to describe the amendments further so that we had it on the record. I am in noble Lords' hands. I beg to move.

Lord Hunt of Wirral

I wish to seek clarification of a comment made by the Minister. I am no expert in insolvency; I am just a solicitor. My expertise comes from my consultations with the Association of Recovery Professionals, the Society of Turnaround Professionals and the Institute of Chartered Accountants.

There is concern that the procedure that we are now setting up is immensely complicated. Will the Minister share with us the advice that she and her colleagues have had about the application of the Human Rights Act, because it seems the motivation behind setting up this highly complicated procedure? Also, perhaps she might share with us who she is most concerned to protect, so far as concerns the right of appeal. Will she give us some examples of the sort of individuals or organisations that might wish to lodge an appeal and the circumstances in which that might happen so that we can then see these amendments more in context and understand the justification for them? They seem to create a highly complicated procedure that is difficult to follow. No doubt, the noble Baroness will now explain why it is so necessary.

Baroness Hollis of Heigham

Our legal advice is that, as a notice affects scheme members, if we did not allow them to be appealed, they would not be ECHR compatible. There must be a means of reviewing anything that affects scheme members. Given that the insolvency practitioners did not want that route to be used, we have moved sideways: the board issues a determination that embodies the insolvency practitioner notice, and that becomes the appealable route. I agree with the noble Lord that the procedure looks cumbersome, but I hope that it will apply to a tiny number of cases. Rather than try to outline examples of such cases now, I shall write to the noble Lord. One simple example is where a nought has been left off a number in notification.

Lord Higgins

The noble Baroness is always helpful in writing on points. The dilemma is that people outside who understand such matters will need to know also. I hope that the department can ensure that any interested individual can understand them.

On the Human Rights Act, if I understood the noble Baroness correctly, she said that the members of a scheme that is about to become eligible can appeal. Was she referring to an appeal against the company's decision to become insolvent? I am not clear how the members would do that, but this is an opaque area. The noble Baroness also said that she hoped that there would not be many cases. Does she hope that there will not be many eligible schemes at the end of the day or that there will not be many schemes going through this procedure? As I understood it, all potentially eligible cases will go through the process. Perhaps the noble Baroness can say whether that is the case.

I wish to raise a point that I ought to have made earlier on Amendment No. 192. As we understand it, the purpose of Part 2 of the Bill is to require insolvency practitioners to report to the regulator if insolvency events occur to the employer. The definition of "insolvency events" is contained in Clause 115 and is used elsewhere. As currently drafted, Clause 115 does not include the appointment of a provisional liquidator. It would be possible, therefore, for most of the requirements of the Bill relating to an employer in liquidation not to apply for the period of a provisional liquidation. That seems contrary to what the Government intend. Provisional liquidations tend to occur only as a short emergency measure pending full liquidation; none the less there are cases where such periods can become protracted.

Additionally, if the Government accept that the regulator should not have the power to issue notices for any act or deliberate failure to act during the period where the legal effect of an insolvency event remains in force—generally, while the insolvency practitioner is responsible—this should apply during the period of provisional liquidation also.

I may be totally wrong because the point has been covered in the government amendments. But, having only recently received the explanatory notes on those amendments, I am not sure whether that is the case. More particularly, will this procedure be applied in all potentially eligible cases or did the noble Baroness merely mean that she hoped that the provisions would not often apply?

Baroness Hollis of Heigham

If a company has become insolvent and a scheme member cannot enjoy a wind-up, the pension scheme, its assets and liabilities will come into the PPF. The member will then enjoy a lower rate of pension benefit than he or she would have done if the company had remained insolvent or if the scheme had been wound up—apart from cases of scheme rescue. By definition the PPF will be inferior to the wind-up. The legal advice given to me is that, given that it affects members, there must be an appeal procedure for members against that decision on the basis that they will enjoy lower pension rights as a result. Rather than adopting a different procedure, we are providing for an appeal against the board's determination notice rather than against the decision of the insolvent company. That is not what is being appealed in such cases; it is the appropriateness of the decision to come into the PPF during the process of assessment.

I accept that the procedure is complex. However, I am told that the existing appeal mechanisms—for example, for actuarial valuations—are consistent with this procedure and that it is not out of line. We are trying to address scheme members' need for an appeal mechanism under the ECHR. That creates a need to produce determinations or notices by the board which can be appealed against. In turn, that produces the procedure of interim periods and what can happen during them. We end up with a domino cascade: we solve a problem that produces another one. As a result, we have had to table this complex set of amendments, although they do hang together.

The noble Lord asked about interim liquidity. Amendment No. 192 sought to treat the appointment of a provisional liquidator as the first insolvency event. The court can appoint a provisional liquidator on or after the presentation of a petition for winding up—usually because it is satisfied that the company's assets may be in jeopardy and that a provisional liquidator should be appointed to seek to secure its assets pending the hearing of a petition. Those appointments have not been included as an insolvency event because they are interim measures pending the hearing of a winding-up petition. At that hearing, the court may make a winding-up order, which we have already included as an insolvency event, but it may also decide not to make a winding-up order. In that case, we do not want to proceed down the route of an insolvency event where that is not required. That situation seems rather more straightforward than the previous set of issues that we have discussed.

Lord Higgins

I hate to say it, but I have a nasty feeling that things are more complicated than the noble Baroness supposes. Following an amalgamation of pension schemes into a single scheme, it may be that some members would gain more from a wind-up than others. Some may be in favour of a wind-up while others are not. I leave the noble Baroness with that cheerful thought.

Be that as it may, I am still unclear whether the clauses as now amended will apply to all potentially eligible schemes or whether they would apply only in some schemes.

Baroness Hollis of Heigham

The provisions will apply in all cases, but there is little evidence to suggest that the IP notice would be incorrect. Earlier I asked my officials whether they could give me some examples of cases or whether this was an elaborate structure for a rare event that could be dealt with by regulations as and when it arose. I am told that that procedure, which in many ways would be infinitely more sensible, is not ECHR compliant. I am afraid that I cannot defy that advice.

6.15 p.m.

Lord Hunt of Wirral

The Minister has given a very helpful series of explanations, but she said earlier that she had more detailed explanations of each amendment. I may be a rather sad person, but I would love to spend some time going through the detailed explanations. Perhaps she might send them to my noble friend, who could then circulate them to other Members of the Committee who would like to see them.

Baroness Hollis of Heigham

I have around 20 pages of detailed explanation of how each amendment works. Given the summer television of repeats that we will be enjoying, I am sure that this will be preferable. I will ensure that a description of how each amendment works and its implications is circulated to all Members of the Committee. Those who wish to spend their time so fruitfully will surely enrich our Committee discussions even further.

On Question, amendment agreed to.

Clause 116, as amended, agreed to.

Baroness Hollis of Heigham moved Amendment No. 192B:

After Clause 116, insert the following new clause—

cc40-1GC
1. APPROVAL OF NOTICES ISSUED UNDER SECTION 116 560 words
cc41-62GC
2. BINDING NOTICES CONFIRMING STATUS OF SCHEME 9,729 words