Grand Committee Report of 7 September 2004

Official Report of the Grand Committee on the Pensions Bill
(Sixth Day)
Tuesday, 7 September 2004.
The Committee met at half past three of the clock.
[The Deputy Chairman of Committees (Baroness Gould of Potternewton) in the Chair.]
The Deputy Chairman of Committees (Baroness Gould of Potternewton): I welcome you all back after—I hope—a very happy and restful break, ready for day six on the Pensions Bill.
Clause 126 [Directions]:
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Hollis of Heigham)The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Hollis of Heigham) moved Amendment No. 194D:
Page 87, line 8, at end insert "rules"
On Question, amendment agreed to.
On Question, Whether Clause 126 shall stand part of the Bill?
Lord Higgins: I was going to begin by saying, "Here we are again". Unfortunately, that is not true, strictly speaking. Instead of being in the rather congenial atmosphere upstairs, with fresh air and so on, we find ourselves back in the Moses Room. I find the arrangement for sitting in the middle of the Recess signally inconvenient. It is one thing if World War III is about to break out or something—we would come back and understand the problems—but it is another to come back on a planned basis when the Library is cut off from many sections. The Government really ought to decide whether, in the summer, this place is a building site or a legislative chamber. It is not helpful at all.
A number of current developments are not without interest. There is, of course, a very large rumour going around that the Bill is to be dropped in favour of a Bill on fox hunting. It should be clear that we are not wasting our time. I hope that the Minister can give us a clear assurance that there is absolutely no question whatever of that happening.
A large number of government amendments have also been tabled. As often in the past, I pay tribute to the Minister for the very helpful way in which she has provided notes on the different amendments. There are hundreds and hundreds on which debate could have taken place in the Commons. We are also short of a Secretary of State. As all the legislative process seems to be moving to this end of the building rather than taking place in the other, perhaps the sensible thing to do is to make the noble Baroness Secretary of
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State. She knows infinitely more about the subject than any other possible candidate and that would enable us to proceed smoothly in scrutinising the Bill.
I ought to mention a couple of other developments. I suggested to the noble Baroness during the Recess that it would be helpful if we had some sort of matrix showing which groups of pensioners whose company schemes are in difficulty are likely to qualify for no help at all, help under the financial assistance scheme or help under the PPF. As always, she courteously replied. The difficulty is that many of us are receiving letters from companies that ask, "What's happening so far as we are concerned?". I find it difficult to give any authoritative answer lest I have misunderstood the situation. In addition to the very helpful note sent by the noble Baroness, it would be of great value to the public outside—who obviously have considerable expectations about the Bill—if she could give a more specific answer on that.
Worryingly, the noble Baroness's note referred to the financial assistance scheme. We are still in a situation where only one clause in the Bill effectively says that everything will be done by statutory instrument. We have no idea what the content is. It is clear from her note that the Government do not seem to have very much idea at the moment either. The idea was introduced in something of a panic in the other place at a late stage of the Bill, but we really need to know the Government's intentions so far as that is concerned. When we come to the clause, I hope that we have amendments so that, instead of leaving the whole thing to unamendable regulations, we know exactly what the Government have in mind. It would be unacceptable for the clause to go on the statute book in its present form.
The noble Baroness—this is a rather retrospective comment—has sent many of us a note on the progress of consultation on the moral hazard problems that we raised earlier. We are very grateful to her for that. We must hope that more progress on those crucial issues can be made. All of us are concerned with improving the Bill as it stands, particularly in regard to the dangers that the earlier clauses present on a wide range of issues.
I turn briefly to Clause 126. I am a little puzzled by it in that it enables directions to be given during an assessment period in relation to an "eligible" scheme. I am slightly puzzled by that expression because I am not clear in my own mind when a scheme becomes an "eligible" scheme. I should have thought it would not become an eligible scheme during a period of assessment because, presumably, the assessment may be such that it is decided that it is not an eligible scheme. Perhaps the noble Baroness will clarify that point.
I am not clear why the assessment period should take place when the assets appear to exceed the scheme's protected liabilities. I should have thought that only if it was increasingly apparent that that was not the case would it become an assessment period. But the whole issue of assessment periods and what happens in them is something to which we shall come a little later and I shall raise it then.

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I should be grateful if the noble Baroness could clarify those points. Once again I express our appreciation. We are all trying to get the Bill right and we are grateful to her.
Lord Oakeshott of Seagrove Bay: We on these Benches associate ourselves with the thanks given to the noble Baroness and her hard-working team for the information we have received since we last met. But clearly the clock is ticking very fast—even faster than the clock which, people will notice, is slow by five minutes. We have all had many letters and communications from people whose pensions are at risk and we are very keen to have further details of the financial assistance scheme. Frankly, it is long overdue.
Lord Hunt of Wirral: Before the noble Baroness responds to these opening remarks, I join in the tributes for the way in which she has approached this legislation, with particular reference to consultation on the so-called "moral hazard" clauses. I recall that the Minister said that she was,
"genuinely open-minded as to whether this is the right way forward",
and,
"perfectly willing to be persuaded".—[Official Report. 8/7/04; col. GC213.]
I believe that all Members of the Committee went into the Recess with the sense that while we had undoubtedly discussed the problems of moral hazard at some length, we had certainly not resolved them.
Since then, the Minister has worked exceedingly hard with her officials, issuing a discussion paper on the topic which went to a number of interested parties. Yesterday we received a fascinating letter from the noble Baroness to colleagues setting out an immensely helpful summary of what the key players in the worlds of business, venture capital, accountancy and pensions have been saying in response to the consultation paper.
At some stage, I hope to make the Minister aware of the consultations that I have been able to have with the professionals in this area. I mentioned to her the need to consult with the Society of Turnaround Professionals, which I instanced before we rose. It is not mentioned in the Minister's letter but its voice is both authoritative and indispensable. Right across the board the message is the same, particularly as a consequence of what the Minister refers to in one word—namely, "retrospection". Because of the approach to retrospection, everyone to whom I have talked has been able to give instances of companies that have been saved but which would not have been saved had the new regime proposed in the Bill been in force.
I do not want to take up the Committee's time now, but I ask the Minister to respond to the letter I have put on the board for her, which sets out the concerns of this sector.
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Finally, the appointment of a new Secretary of State provides the Government with a timely opportunity dispassionately to reassess this Pensions Bill from top to bottom.
Baroness Hollis of Heigham: Like other noble Lords, I am delighted to be back and to see everyone—I was going to say "fighting fit", but I am not sure I want "fighting fit"—fit and happy, bronzed, sun-tanned and rearing to go.
I also should like to express my appreciation—already expressed by your Lordships—for the work done by the officials over the summer while many of us were able to take a vacation. I know that many of them have postponed holiday breaks until the Bill has achieved—we hope—consent in both Houses. They have been working both on this and on the regulations. I endorse the remarks made by your Lordships this afternoon about the work that has gone on during the summer.
I agree entirely with the noble Lord, Lord Hunt, that the officials have tried, with the support of Ministers, to enter into those discussions with as constructive an attitude as possible. It is obviously true that not all expertise resides within the department. It is unusual for the DWP to work with experts outside the department because—unlike, say, education and health—it tends to work mostly with lobbies such as the poverty or children's lobbies and so on. So it is valuable for all sides concerned.
I shall address a couple of the more specific points before turning very quickly to Clause 126. The noble Lord, Lord Higgins, invited me to say where we are and whether we could do a matrix on PPF and the financial assistance scheme. When we can, we will. The trouble is that we are not there yet. I think that Members of the Committee are aware of the situation with the Pension Protection Fund. It will cover schemes required to pay the levy from April 2005 which begin winding up from April 2005 and where the sponsoring employer experiences a qualifying insolvency event from April 2005 onwards. Those three conditions have to be in place for a scheme to enter the PPF.
The noble Lord was particularly concerned about the financial assistance scheme. I have to say that the detail of who will qualify has yet to be finalised. We are still having extensive consultations with the bodies involved. I would be delighted to be able to bring more information to the Committee than I currently can. However, it is difficult and complex. The act of trying to collect robust data of those affected is a much more extensive and elongated process than certainly I had expected when we went into this. Even the apportionment of deferred members and active members to existing pensioners on some of the schemes that may be at risk is not always available.
One issue we need to consider is whether we have an initial cut-off date for support and the financial assistance scheme. We are likely to need a cut-off point, both to make it administratively feasible and to have some certainty about the funding arrangements. One option we are considering, which obviously is the

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front-runner at the moment but which is not necessarily going to be the last word, is April 1997, since that was the starting point for the Pensions Act 1995 corning into force. However, we shall take into account the position of schemes which started to wind up shortly before April 1997 before reaching a final conclusion.
3.45 p.m.
Schemes that start to wind up after 10 April 2004, when the Secretary of State made his announcement in the other place, benefit from the change in priority order. That change means that non-pensioned members will be less likely to suffer the scale of losses to their pensions as were experienced under the old priority order. We hope that that may reduce the problem for them and for deferred members.
However, I repeat that we do not yet have details of the financial assistance scheme that I can bring before the Committee. We have not yet ruled out help in respect of schemes that start to wind up between May 2004 and the introduction of the PPF—what I call the sandwich year. We are still making final decisions on requirements for the financial assistance scheme once further research and consultation have been concluded. We need better data; we need to make a decision on the start date; we need to make a decision on the transitional, interim year between May 2004 and, we hope, the effective running of the PPF from April 2005; and we need further decisions relating to the sponsoring employer not being insolvent. I understand that all those schemes will be eligible for assistance. Solvent employers should support their schemes and provide the benefits that members expect. Nevertheless, issues of employer solvency remain under consideration.
There are obvious issues about patterns of payment and to whom, about the degree of concentration that there may be and so on. We still have to resolve many issues through consultation. More data need to be collected on this matter. I hope that, by the end of the year, I shall have conveyed adequate information to the House, with appropriate regulations and so on in the spring, so that this can take effect shortly thereafter. I can assure the Committee that as soon as I have more precise information I shall certainly put it before the House. At the moment I regret that I cannot go beyond that.
On another point mentioned by the noble Lord, a number of government amendments will come through in Committee stage and in all cases I shall do my best to ensure that Members have adequate information in good time so that they can seek external advice if they wish. To the best of my knowledge, only one substantive bundle of amendments, or possibly one amendment—I do not know how many there will be—will come forward de novo on Report. We had hoped to do that at Committee stage. That concerns the survivors' benefit or the widows' benefit and what the rate would be in the PPF.
The reason for withdrawing it for reconsideration is because of the read across to the Civil Partnership Bill. Civil partners must be treated in the same way as
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spouses. When we started work on this Bill, we did not consider that. That is one item that I shall have to bring forward on Report and which I am sure will be good news to everyone. Apart from that, my best advice is that all the substantive items will have been explored in Committee with your Lordships' help.
The noble Lord, Lord Higgins, has been pressing me about the state of the regulations associated with this matter. Again, I am not able, as I had hoped to be, to bring any or a few to your Lordships' House before the Bill completes its passage through the House. My latest information is that there are likely to be at least 100 sets of statutory instruments on which officials have been working over the summer. As and when I can bring your Lordships information about that, I shall be happy to do so.
Finally, on the moral hazard point, I shall check on the position of the turnaround professionals. If they have been overlooked I shall ensure that discussions include them. I shall seek to bring details to the Committee, certainly on issues such as whether the current scheme is a constructed one, as opposed to an informal telephone call. I think we are making very good headway on that and it seems to be moving in the right direction. I thank your Lordships for your contributions on that. I believe that we have made more progress on that issue. All parties, including the officials, are to be congratulated on that.
Those were the broad remarks made by the noble Lord, Lord Higgins. He then turned to Clause 126 and asked why we needed directions during the assessment period. Perhaps I can explain. Clause 126 enables the Bill to issue directions to scheme trustees or managers or other relevant persons during the assessment period. The assessment period is designed precisely to find out and to obtain the valuation of the balance between protected liabilities and assets, and so on, on matters relating to the investment of the scheme's assets, the incurring of expenditure, the instigation or conduct of legal proceedings and any other matters prescribed in the regulations.
It is important that the board is able to monitor the activities of scheme trustees and managers at that critical stage and to ensure that they are consistent with the overall aim of achieving the best possible outcome for scheme members.
Moreover, in order to protect the funding position of the PPF, and thus the burden on levy payers, the board must aim to ensure that, where a scheme's assets exceed its liabilities, that position is maintained—in other words, that manipulation, whether in good faith or in less than good faith, does not occur—or if the liabilities exceed the assets, that any excess is kept to a minimum.
Therefore, Clause 126 gives the board the power to revoke or vary any decision made by any relevant person—for example, the trustees or managers or the sponsoring employer—if the need should arise. That is the purpose of the clause and I hope your Lordships will agree that it should stand part of the Bill.
Lord Higgins: I am most grateful to the noble Baroness for that reply. Perhaps I may respond briefly.

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I say again that there is a very strong rumour that the Bill is, or may be, dropped in favour of a hunting Bill. I hope that the noble Baroness can make it absolutely clear that that is not the case.
Her remarks about amendments at the Report stage are certainly very welcome. But I find her remarks on the financial assistance scheme extremely worrying. She is saying, "Well, perhaps we may know where we are by Christmas or November or whatever". That means that we shall let the clause go through in its present state with the whole process being carried out effectively by statutory instrument. The noble Baroness outlined many things about which the Government have still not made up their mind and that means that this House will not be able to amend any of the decisions which the Government take. In those circumstances, we can return to the matter when we reach Clause 274. However, I begin to wonder seriously whether it should be in a separate Bill which can be properly debated; otherwise, the whole matter will be a total blank cheque and that is very worrying.
I shall not pursue the matter further now. But I think that the situation that the noble Baroness outlined with regard to the lack of decisions being taken and the present inability to provide any information within the timescale envisaged in the Bill raises very serious questions and we shall need to return to that point.
Lord Oakeshott of Seagrove Bay: On the subject of the financial assistance scheme, which I also raised, were the noble Baroness back in her role as a student rather than a university lecturer, I should award her an alpha for her prescription of the problem and a delta for progress or action in dealing with it. I share the views of the noble Lord, Lord Higgins: we really must have more facts and more information before the Bill goes through.
Clause 126, as amended, agreed to.
Clause 127 [Restrictions on winding up, discharge of liabilities etc]:
Lord Skelmersdale Lord Skelmersdale moved Amendment No. 195:
Page 87, line 24, leave out from "up" to end of line 25.
The noble Lord said: The last words that the Minister uttered were that the two are connected. In this case, the three are connected because one has to look forward in order to understand Clauses 127 to 210, the last subsection of which states firmly:
"This section is to be read subject to section 127 (which restricts the winding up of an eligible scheme during an assessment period)",
which, indeed, it does.
But there is great confusion in my mind because this whole section of the Bill—not the later clauses to which I have just referred but this whole part of the Bill—refers to the activities of the board. As I view the Bill, the winding up of an eligible scheme is normally the prerogative of the board. However, subsection (3) states that that prerogative can be overridden by the regulator in certain circumstances—not least under Section 11(3A) of the Pensions Act 1995. It seems to me that if my interpretation is correct, that is a recipe
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for endless rows and possibly ultimate disasters. Why should these two distinct bodies operate what is basically the same scheme? I beg to move.
Baroness Hollis of Heigham: I may be able to help the noble Lord by setting what we are trying to do in context.
The noble Lord's amendment would remove a reference to Clause 210—the backdating of winding-up—from Clause 127(3). That would remove some essential clarity from an otherwise complicated section of the Bill. Clause 127 restricts the winding-up of pension schemes and the discharging of liabilities during the assessment period because, for example, otherwise trustees could make decisions that might not necessarily be in the best interests of all members. Subsection (3) states that this restriction does not apply when a winding-up order is made by the,
"Regulator under section 11(3A) of the Pensions Act 1995"
when an order is made by the regulator to the trustees to wind up the scheme even though the scheme is in the assessment period, and at that point the trustees must comply.
At the end of the subsection, reference is made to Clause 210. Clause 210 provides that when such a winding-up order is given by the regulator, the winding-up must be backdated to the time immediately before the start of the assessment period. That means that the winding-up must be implemented as if the order had been given immediately before the assessment period. The winding-up order is backdated to ensure that the level of benefits that members receive after wind-up are in line with the winding-up provisions on scheme rules and not the PPF level of benefits, which ensures a higher level of benefits for members than would otherwise be the case.
In summary, the reference to Clause 210 in Clause 127(3) helps to clarify that when an order to wind up a scheme is made during the assessment period, the winding-up must be implemented as if the order had been made prior to the start of the assessment period—as if it were outside the assessment period. I hope that that explains why the provision is needed.
Lord Skelmersdale: Not quite. I should have thought that it would be quite obvious to the Minister that the wording of the amendment was a hook on which to hang my question. The Minister has not answered my question, which is, "What is the logic of having two bodies independently operating—one able to over-ride the actions of another—these windings up, or whatever the plural is?
Baroness Hollis of Heigham: First, I am confident that things would not happen in that way. Such a situation would occur only when the Pensions Regulator and the PPF are in complete accord. As it stands, no winding-up notice can take place during the assessment period, but occasionally it may be in the interests of scheme members for that winding-up to occur. For example, when there is some issue of crystallising debt, a winding-up scheme may enable the debt owed from the employer to be recovered earlier

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by the PPF. When it is in the interests of members, the Pension Regulator and the Pension Protection Fund can agree that there should be an intervention that should not wait until the end of the assessment period but should occur during the 12 months or so that the assessment period is running.
For the most part, it would be best for the winding-up to await the determination of the assessment period, but there may be an occasion when, for example, there may be concerns that, given the issues of debt, creditors and so forth, it is sensible to have an earlier rather than a later winding-up. The provision allows that to take place.
Lord Skelmersdale: I am sorry, but that still does not help. Since the board started this process, why cannot the board re-determine it, if it feels it is necessary? Why does the regulator have to come into the equation?
Baroness Hollis of Heigham: The PPF does not have the power to give winding-up orders until the assessment period is completed. In other words, the winding-up powers of the PPF kick in after the assessment period, which will run for up to a year. The Pensions Regulator's powers run up to the point at which the powers of the PPF take over. It is simply a question of timing and which body has the power. However, the power will be exercised only after close consultation and I suspect that there will be no dispute. One could, I suppose, reconstruct the Bill so that the powers of the Pension Protection Fund were brought back to the beginning of the assessment period, but one would then have to rewrite what we mean by the assessment period. It is simply a perfectly sensible division of labour, given the way that the clock ticks over the assessment period. I do not envisage any problem at all.
Lord Skelmersdale: The noble Baroness, not unusually, gives the impression that I am making a bit of a mountain out of a molehill. I will have to consider what she said because at this precise moment I remain unconvinced. We may well come back to the issue at the next stage. Meanwhile, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
4 p.m.
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendment No. 195A:
Page 87, line 26, leave out from "period" to "no" in line 28 and insert ", except in prescribed circumstances and subject to prescribed conditions—
(a) "
The noble Baroness said: In moving Amendment No. 195A I shall speak also to the amendments grouped with it. This group of government amendments provides specific compensation for members who have been a scheme member for only a very short period; who have rights that have accrued under the scheme but would not be entitled to full benefits. These benefits will be payable to a member who stays in the scheme until normal pension age and are known as long service benefits.
A new paragraph 19A, which will be introduced later in Committee, has been inserted into Schedule 7. It applies to members whose pensionable service terminates on commencement of the assessment period and who do not have a right under Chapter 5 of Part 4 of the Pension Schemes Act (protection for early leavers) or rights under the scheme which give them the same level of benefits as those who stay until the scheme's normal pension age. In these cases, if a member has a right under the admissible rules to either, or a choice of, a transfer payment or refund of their contributions, then compensation will be payable at a level of 90 per cent of the transfer payment sum or refund of contributions, whichever is the greater. In other words, we are protecting those who may not have been in the scheme for two years or more.
New paragraph 30A of Schedule 7 provides that where a member's pensionable service is terminated on the commencement of the assessment period and, as a result, the member has a right to elect a cash transfer sum or contribution refund under Chapter 5 of Part 4 of the Pension Schemes Act 1993, then the member will receive compensation in the same way as other active members of the scheme as if they had rights to long service benefit. Regulations will enable modifications to Schedule 7 to ensure that the member is not entitled to double compensation in respect of the same rights under the scheme.
Amendment No. 234AJA will be formally introduced later in Committee and provides regulations under subsection (2C) of Clause 157 to provide which liabilities of the trustees the board are to discharge; that is, the liabilities that would have existed but for the discharge under Clause 152. The regulations will include provision for the trustees to discharge their liability in relation to a refund of contributions or transfer payment sum in respect of a member, where the right arose before commencement of the assessment period.
Amendment No. 199D provides that where a scheme is being wound up then the benefits payable during the assessment period should not be the reduced level payable on winding up but the full scheme benefits capped at the PPF level of compensation.
Amendment No. 195A amends Clause 12, which is headed "Restrictions on winding up, discharge of liabilities etc", to provide that discharges of liabilities can occur during the assessment period in prescribed circumstances and subject to prescribed conditions; for example, payment of a contribution refund where the right arose before commencement of the assessment period.
Amendment No. 199E provides a recognition that it may not be practicable to expect trustees to be able to reduce benefits paid to PPF levels immediately and that there will, therefore, be some risk of overpayment. In these circumstances we are concerned that scheme rules may not always provide trustees with the power to recover overpayments and this amendment ensures the trustees will have this power.
Finally, a number of consequential amendments have been made—Amendments Nos. 199F, 220D, 220B, 224A, 224B, 224C, 232A, and 232B—which make appropriate references to paragraphs 19A and subsections (2) and (2A) of Clause 157.
I hope that noble Lords will agree to these amendments. They are vital to ensure that the members referred to by these amendments do not lose out because the board of the PPF has assumed responsibility for their scheme. I therefore ask that, as they are entirely benevolent, these amendments be accepted by your Lordships. I beg to move.
Lord Higgins: It is difficult to work out precisely what this group of amendments is doing, except for the Minister's very clear statement that it is to prevent anyone being treated unfairly. We can all agree to that and we must hope that the amendments achieve the objective. However, this group of amendments, if I have understood it correctly, seems to deal with a very small percentage of people. Am I right in thinking that it is only those who either join or leave in the assessment period?
Baroness Hollis of Heigham: I realise that this is very technical. It is perhaps my fault that I did not circulate the briefing on it in advance, as that may have been helpful to noble Lords.
Perhaps I can give an example of where rights arose before the assessment period. The member has worked for six months but leaves employment two weeks before the assessment period begins. The member will eventually have a Chapter 5 right to either a contribution refund or a cash transfer sum. In other words, if he has worked there for only six months, only a modest sum will be involved. It does not usually make sense to try to turn such people into a full-scale deferred pensioner.
Although the member has elected his right to a cash transfer sum, the trustees have not completed the work before the assessment period began. The trustees will be able to discharge their liability during the assessment period in respect of the member's right to a cash transfer sum through regulations to be made under Clause 127 allowing that to be protected. If the trustees are unable to complete this discharge before the board of the PPF assumes responsibility for the scheme, then regulations made under Clause 157(2C) will allow the board to pay the cash transfer sum instead.
That is the sort of situation we are talking about. I could give the Committee other examples and would be happy to do so if noble Lords wished to press me on Report. I realise that the subject is semi-technical and I am speaking to many amendments at once. I shall try to ensure in future that such information is circulated in advance. However, that is the intent of the provision. Where people do not have vested rights but the assessment period cuts across the trustees' ability to address non-vested rights, the board will have that ability. That is why the provision is entirely
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benevolent. Otherwise, those with modest sums who effectively became deferred pensioners would not gain deferred rights but lose out.
Lord Higgins: Generally speaking, the noble Baroness has been very kind in letting us see in advance the arguments that the Government may address in particular groups of government amendments. Therefore, we need discovery of the points she has covered this afternoon.
What worries me more and more about all of this is the position of the poor trustees in moving from their normal role and responsibilities to a situation where all their responsibilities are eventually taken from them. They will have to understand in the mean time the types of points that the noble Baroness made about an individual who happens to join on one side or another of a deadline. Having long been the chairman of trustees of a pension fund, I must say that the idea that they will be aware of all that, or that steps will be taken adequately to inform them during the assessment period, is worrying.
If we are going to go through all of this, it has to be very clear that the board will have to tell the trustees what their responsibilities are. It is going to be a nightmare. Some boards of trustees are extremely confident and expert, but very often there are boards of trustees where some members are not the least bit clear about what their liabilities would be if they got it wrong. I hope that that can be taken into account when the provision comes into effect.
Baroness Hollis of Heigham: I think that that is entirely right. This is only one of several instances where an almost parallel authority will run simultaneously between trustees and the board during the assessment period. The noble Lord is right that that will inevitably be complex. Guidance will be given to trustees when a scheme enters the assessment period. So we will be taking belt-and-braces action to ensure that trustees know where their responsibilities begin and end and what the PPF's proper purview is.
On the substance of the noble Lord's point, we are talking about those who usually have less than two years' service and are therefore not vested. He is absolutely right to suggest that it will be a small number. We are just anxious to ensure that, by going into the assessment period, there is no risk that those people will lose their money due to an ambiguity or a gap between the trustees' responsibility ending and the PPF taking over. As I said, the provision is entirely benevolent. Basically, we are protecting small savers.
On Question, amendment agreed to.
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendment No. 195B:
Page 87, line 29, after first "scheme" insert "rules"
On Question, amendment agreed to.
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendment No. 195C:
Page 87, line 32, after third "or insert "—
(i) "
The noble Baroness said: In moving Amendment No. 195C. I shall speak also to the other amendments grouped with it. I believe that I have circulated to the Committee, in advance, an extended speaking note of what each amendment does so that your Lordships are not in the same position as regards the previous set of amendments. I shall make a shortened introduction and any Member of the Committee will be free to raise points on any of the amendments.
These amendments effectively do two things. They enable some additional liabilities to transfer to the board when it assumes responsibility for a scheme and they provide a regulation-making power to modify contracts of insurance in certain circumstances. Let me explain those in turn.
First, Clause 152 provides for all the property, rights and liabilities of the scheme to transfer to the board once the board issues a transfer notice and assumes responsibility for a scheme. The trustees or managers of the scheme are then discharged from their pension obligations and the board is required to pay compensation on an ongoing basis.
As the Bill currently stands, subsection (3) of this clause provides that the liabilities transferred to the board do not include any liability to, or in respect of, any member of the scheme, other than liabilities in respect of money purchase benefits. These amendments change the subsection to enable the liabilities in respect of a member, which can transfer to the board, to include other liabilities as may be prescribed. It is intended to use this power to ensure that those liabilities in respect of members, such as a contract of insurance (to which we shall come later) or a contributions equivalent premium—as your Lordships know, that is the repayment of NI rebates—can and will transfer to the board.
Let me now explain the second part of these amendments—the power to modify certain insurance contracts. Trustees may take out insurance contracts to discharge their liabilities in respect of a particular scheme member's entitlements to a pension or other benefit. In some cases, trustees may have done that without discharging their liabilities. For example, the insurance company pays them a set sum and they then pass that on to the member, as opposed to the sum coming directly from the insurance company to the member. The amendments ensure that such contracts will transfer to the board.
However, there could be an additional problem if the contracts contain provisions which impose a duty on the trustee—now the board—to pay a particular amount to a particular member. Although in most cases we expect that the specified amount will be less than the amount the member will receive under PPF compensation, that may not always be the case. We are concerned that the board may be required to pay an individual more than his or her compensation entitlement. To prevent that occurring, the
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amendments provide for regulations to modify such contracts of insurance. However, that will be only in very limited circumstances where the contracts cannot be surrendered or where the surrender value is lower than the liabilities protected and the "specified amount" is greater than the PPF level of compensation to which the member may be entitled. That is to ensure equity within the PPF.
I believe it is extremely important that we enable the transfer of liabilities to occur as smoothly as possible when the board assumes responsibility for a scheme. For that reason, I urge the Committee to accept these government amendments.
I believe that we have provided information on the background of each of these individual amendments. If I can help further, I shall be happy to do so. I hope that, with the information provided in advance, the Committee will be content to accept the amendments. I beg to move.
Lord Higgins: Is the noble Baroness saying that the clause, once amended by these amendments, may create a situation where a particular individual receives less than he would if the insurance company had paid in the normal way?
Baroness Hollis of Heigham: There could be a situation in which the individual could receive either less or more outside the PPF than he would receive if he went into the PPF. We are trying to ensure that he will receive the same level of PPF compensation.
Lord Higgins: At the same level as he would have had before the board became involved?
Baroness Hollis of Heigham: No, the same level as other members in similar situations within the PPF.
Lord Higgins: That would mean that an individual would have an arrangement whereby an insurance policy was taken out and he would receive certain benefits, but if it so happened that the scheme became an eligible scheme in the assessment period, he might receive less. This amendment achieves that. In that case, I believe it is somewhat objectionable.
4.15 p.m.
Baroness Hollis of Heigham: As I understand it, there are relatively few insurance contracts: most people come within the ordinary scheme. Some employees may have an insurance contract because the benefits are extremely expensive and an insurance contract has been taken out to protect them. If the scheme as a whole came into the PPF, existing pensioners would have 100 per cent of their benefits protected through compensation. Others would have 90 per cent protected. It would be unreasonable for some people, because they had a special arrangement through an insurance contract, to be able to come into the PPF and for the PPF to be expected to honour compensation. Had those people been within the ordinary range of members, they would be receiving 90 per cent, but they would now get 100 per cent or even more. That is why we are ensuring that the

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compensation scheme treats all people in the same way. There is therefore a power to override the insurance contract in such situations.
Lord Higgins: The compensation scheme overrides the existing arrangement, which has nothing to do with the fact that it has gone into the control of the PPF. I understand what the Minister is saying—I think—and no doubt other Committee Members also do, but it is slightly worrying. To restate the case, as I understand it, there is a scheme that insures a particular individual's rights. That is a direct arrangement through the scheme for paying out benefits for which an insurance premium has been paid. The Minister is saying that once one is into the clutches of the board everyone must be treated equally, even though some have made that particular arrangement. In such circumstances, I am not sure who gains, although I am clear who loses. The insurance benefit goes into the general pool. That is an extraordinarily odd arrangement and we shall need to think about it.
Baroness Hollis of Heigham: The arrangement is with the scheme and not the individual. We are seeking to ensure that everyone is treated in the same way, regardless of how the trustees have arranged for them to be paid. In a DB scheme, the trustees may have decided that the majority of members of that scheme can expect to receive their pension through the normal pattern of payment. However, they may have decided that some members should lay off the liability through an insurance contract, which would still come out of the scheme assets that the trustees are handling. If the scheme then goes over into the PPF, it would be unreasonable in all fairness artificially to continue to protect what may well be rates of payment well above the compensation rate to other members of the same scheme for which the trustees are responsible.
In practice, we expect that the opposite will be the case. In most insurance cases it will not be possible to reach the PPF level of funding. We are trying to ensure that, once the scheme goes into the PPF, however the pension promise was to have been delivered—whether through an insurance contract or not—all the members of the PPF are treated in a similar and equitable way in terms of compensation.
Lord Higgins: Even though they were not party to this particular insurance? Only some of the employees would be insured under the scheme and not the great mass. Therefore, surely it is not worth their while to be insured.
Baroness Hollis of Heigham: That may or may not be the case. However, we are seeking to ensure that the individuals within a scheme whose pension promise by the scheme has been met in a different way are none the less treated in the same way when they come into the PPF. Otherwise, it would be unfair and the extra cost would have to be picked up either by the pension levy or in some other way.
Viscount Trenchard: I believe that the noble Baroness is confusing fairness. In this case, I find her definition of fairness quite hard. I understand well that the aim of the Pension Protection Fund is to protect people whose schemes have fallen into difficulty. However, to treat them fairly means that they should all be treated in the same way. That seems to me to be wrong when not everyone who is in any scheme that goes into the PPF has the same level of pension benefits. In addition, some people in one scheme may have their benefits insured and others may not. On the assumption that those differentials were considered to be fair prior to the scheme falling into difficulty, to eliminate those differentials is not fair, as the noble Baroness suggests, but is patently unfair.
Baroness Hollis of Heigham: I really disagree with the noble Lord on this matter. I shall give an example. Mr Y has an entitlement—a contract of insurance for £30,000—and Mr Z is also entitled to £30,000 through the normal DB scheme. Under the PPF rules, without this clause Mr Z would come into the PPF and receive only 90 per cent compensation. If we did not have the right to override the contract of insurance, Mr Y would continue to receive the £30,000 protected by the insurance contract. In my view, that would be unfair.
Lord Oakeshott of Seagrove Bay: I have a factual question. Is the effect of this overriding of the insurance contract to reduce the amount of money that insurance companies would pay?
Baroness Hollis of Heigham: I do not believe so. The trustees have taken out the insurance contract to protect the assets of the scheme. Essentially the contract is an asset of the scheme which should transfer to the board. Once within the board, the payments to individuals are made at the same compensation rate for everyone in that same category.
Lord Oakeshott of Seagrove Bay: Effectively there will be no loss of payment by the insurance company into the pension fund. The important point is that we do not want to let the insurance companies off the hook, do we?
Baroness Hollis of Heigham: Absolutely not. We are trying to ensure that two people, who expect the same outcome, come into the scheme where both are exposed to a 90 per cent compensation rate. We do not want one of them to be protected artificially at 100 per cent when the other is protected at 90 per cent simply by virtue of the way the matter is laid off.
Lord Oakeshott of Seagrove Bay: That is a different question.
Lord Higgins: Leaving aside the question of whether the insurance company pays up in those circumstances, it would appear that we are legislating to override a series of individual insurance contracts and allocating the proceeds from someone for whom the policy was designed to a quite separate group of people. I can think of no precedent for doing that. I

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doubt that we can get any further this afternoon. We are becoming bogged down on this matter. It raises some very difficult issues that we should consider.
On Question, amendment agreed to.
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendments Nos. 195D to 195G:
Page 87, line 33, at end insert ", or
(ii) such other liabilities as may be prescribed."
Page 87, line 34, leave out "This subsection applies" and insert—
"(4A) Subsection (4)—

(a) is subject to section 130, and

(b) applies"

Page 87, line 36, at end insert—
"(4B) Subsection (4C) applies where, on the commencement of the assessment period—

(a) a member's pensionable service terminates, and

(b) he becomes a person to whom Chapter 5 of Part 4 of the Pension Schemes Act 1993 (c. 48) (early leavers: cash transfer sums and contribution refunds) applies.

Section 141(2) (retrospective accrual of benefits in certain circumstances) is to be disregarded for the purposes of determining whether a member falls within paragraph (a) or (b).
(4C) Where this subsection applies, during the assessment period—

(a) no right or power conferred by that Chapter may be exercised, and

(b) no duty imposed by that Chapter may be discharged."

Page 87, line 36, at end insert—
"( ) Where a person is entitled to a pension credit derived from another person's shareable rights (within the meaning of Chapter 1 of Part 4 under of the Welfare Reform and Pensions Act 1999 (c. 30) (sharing of rights under pension arrangements)) under the scheme, nothing in subsection (4) prevents the trustees or managers of the scheme discharging their liability in respect of the credit in accordance with that Chapter."
On Question, amendments agreed to.
The Deputy Chairman of Committees: Before calling Amendment No. 196, I must inform your Lordships that if Amendment No. 196 is carried I cannot call Amendment No. 197 for reasons of pre-emption.
Lord Skelmersdale Lord Skelmersdale moved Amendment No. 196:
Page 87, line 43, leave out subsection (7).
The noble Lord said: Amendment No. 197 will not be moved as we have already discussed it at some length. However, I am most certainly moving Amendment No. 196. The Minister will not like me for it because this is a drafting amendment.
Subsection (7) states:
"The Regulator may not make a freezing order (see section 20) in relation to the scheme during the assessment period".
We already know that because it is there in black and white in Clause 22, which we discussed a couple of months ago and to which we may return in a month's time. Why on earth is it necessary to repeat it? After all, if one is on the staff of the regulator or one is the regulator himself, one would expect to find one's powers and duties encapsulated in the provisions relating to the regulator rather than in those relating to the board. Indeed, to be perfectly fair to the draftsman,
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that is exactly what he has done under Clause 22. However, I do not understand why it is necessary to repeat it. I beg to move.
Lord Borrie: I have felt in the last short while that we have been discussing a range of amendments in this part that there is a certain difficulty about the assessment period. When the noble Lord, Lord Higgins, asked questions about it earlier, I wondered precisely what the assessment period was and how long it lasted. I raise this point in order to obtain further clarity from the Minister.
My understanding is that, during the period and before a transfer notice is given under Clause 151 transferring responsibility for the scheme to the Pension Protection Fund board, both the regulator and the board—somewhat inconveniently perhaps—have certain roles. There is an overlap of roles. For example, as we know from Clause 127(3), the regulator may make a winding-up order during the assessment period. However, I am not surprised at Clause 127(7), which we are debating now, because during the assessment period one has a similar impact as a freezing order by virtue of Clause 125(5), which states:
"No benefits may accrue under the scheme to, or in respect of, members of the scheme during the assessment period".
That is more or less exactly what is said in relation to a freezing order under Clause 20 and there are various other similarities.
The noble Lord, Lord Skelmersdale, quite correctly said that the point is made in Clause 20 that no freezing order may be made in relation to a scheme during an assessment period. If we have that in Clause 20, why also have it here? Normally, I would agree with that type of point because the Bill is long enough as it is without mentioning things twice. However, on the other hand, given that the noble Lord, Lord Higgins, and myself are unlikely to be the only people to be confused about who does what and who has what role during the assessment period, I am not worried if something is mentioned in subsection (7) that repeats something mentioned earlier if it adds to the clarity of what is and is not allowable.
Baroness Hollis of Heigham: I am grateful to the noble Lord. The short answer is that the noble Lord, Lord Skelmersdale, is correct. In a sense, this provision repeats what has already been established. In the past, your Lordships have often urged me to extend clarity to the Bill by adding other words. If Committee Members think that this provision is redundant, I shall re-examine the matter. However, it makes clear the differing functions of the regulator and the Pension Protection Fund board.
I shall take my response from Committee Members, but it may be worth describing the difference between a freezing order under the regulator and an assessment period under the board. The effect of a freezing order during this time is like pressing the pause button on the video recorder. During this time, a scheme will not be able to wind up unless the regulator itself makes a winding-up order and no further benefits will accrue in respect of members. That is the crucial element of a freezing order.

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In addition, and when the regulator deems it appropriate in the particular case, a freezing order may also determine that no transfers are allowed in or out of the scheme; no more contributions can be paid in; no other payments in may be made; no members can be admitted to the scheme; benefits are reduced to no less than the level payable if the scheme had commenced winding up; and/or the trustees or managers are compelled to obtain an actuarial valuation which will include an assessment of the assets and liabilities of the scheme.
My noble friend and the noble Lord, Lord Skelmersdale, are exactly right that the assessment period has almost the same effect on the scheme as the freezing period. The freezing period allows the regulator to ensure that any situation does not worsen and to see whether a scheme needs to go through to the PPF.
During the assessment period, a scheme will not be able to be wound up unless, as we saw in relation to the previous amendment, the regulator itself makes a winding-up order and no further benefits will accrue in respect of members. No transfers are allowed in or out of the scheme, no contributions can be paid in, no other payments can be made and no members can be admitted. Benefits are reduced to the level payable as if the PPF board had assumed responsibility for the scheme, and the auditor is compelled to obtain an actuarial valuation, which will include an assessment of the assets and liabilities of the scheme.
In essence, the assessment period is a freezing period but it is imposed by the involvement of the board with an eligible scheme on the occurrence of a qualifying insolvency event in relation to the sponsoring employer of the scheme and not by the regulator. For that reason, I do not believe it could add any benefit for the regulator to be able to issue a freezing order during an assessment period or, indeed, as the noble Lord made clear, to remove these words. I think that it is helpful to keep them in. I do not feel very strongly about the matter but it seems to me that it is probably wiser to keep the words and to make it clear that the two schemes, although parallel in their powers, will probably be distinct in terms of the times at which they are introduced and implemented—one by the regulator; the next by the board. With that, I hope that the noble Lord will not wish to press the amendment.
4.30 p.m.
Lord Skelmersdale: I am not in a position to press any amendment in a Grand Committee. I would if I were and, in other circumstances, this might well be one of those cases. I very much take on board the words of the noble Lord, Lord Borrie, who, after all, has been something to which I can never aspire—namely, a regulator. That was in a totally different context but he was a regulator none the less.
However, the very fact that this clause has nothing to do with the regulator—it is to do with the powers of the board—sometimes, as we discussed and as the noble Baroness said in relation to my earlier
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amendment regarding subsection (3), gives me grounds to think that it is unhelpful rather than helpful to include subsection (7) in this clause. But I shall consider further and we shall see whether we return to the matter. In the mean time, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 197 not moved.]
Clause 127, as amended, agreed to.
Clause 128 [Power to validate contraventions of section 127]:
Lord Skelmersdale Lord Skelmersdale moved Amendment No. 198:
Page 88, line 14, at end insert—
"( ) The Board may not validate anything not done by reason of section 11(3A) of the Pensions Act 1995 (c. 26) (powers to wind up schemes)."
The noble Lord said: Again. I am somewhat confused by the issue of validation under this clause. Therefore, in order to tease out exactly what "validation" means. I tabled this amendment, which states:
"The Board may not validate anything not done by reason of section 11(3A)",
to which we have already referred,
"of the Pensions Act 1995".
It seems to me that that is a prerogative of the regulator and therefore the board should not become involved. I beg to move.
Baroness Hollis of Heigham: I am grateful for that introduction because I was mystified by the amendment. As the Bill currently stands, Clause 127 restricts trustees from winding up a scheme during the assessment period. That is why it is a matter for the PPF and not the regulator. Clause 128—the clause addressed by the amendment—provides for the PPF board to validate any actions of trustees in contravention of Clause 127 only in circumstances where it is satisfied that to allow the winding up of the scheme during the assessment period would be consistent with the objective of ensuring that the scheme's protected liabilities do not exceed its assets and so on.
Therefore, Clause 127 restricts the trustees. Under Clause 128, if the trustees none the less contravene Clause 127, that can be validated by the board if the board judges that it is in the best interests of the members. It is the board in this case because it is in the assessment period as opposed to a freezing period or pre-assessment period. I hope that that clarifies the situation.
Lord Skelmersdale: To an extent, it does, but the board should not be allowed to override the regulator, although there may well be circumstances in which the regulator should be allowed to override—perhaps I should say, "make forcible suggestions to"—the board. That is what the amendment would achieve; I may be coming from the wrong angle, but that is what I believe.
Baroness Hollis of Heigham: I do not believe so; I shall check the noble Lord's understanding, but mine

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is very clear. Once something enters into an assessment period, it is the responsibility of the board, not the regulator. Clause 128 gives a power to the board to validate an action that, without the power, would be illegal given Clause 127. It may be in the best interests of the scheme that the trustees be supported in that action. That is what the provision is about; I am a little puzzled that the noble Lord thinks that it could apply back to the regulator, but I will have a re-read on that and see whether his apprehensions are well founded.
Lord Skelmersdale: I am very grateful, and beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendment No. 198A:
Page 88, line 28, at end insert—
"( ) In subsection (1) the reference to the assets of the scheme is a reference to those assets excluding any assets representing the value of any rights in respect of money purchase benefits under the scheme rules."
The noble Baroness said: I beg to move.
Viscount Trenchard: I beg the Committee's indulgence to make some comment on the amendment. Like my noble friend Lord Higgins, I find that the Bill is becoming increasingly complicated and difficult to read. Has the noble Baroness wondered whether it might not be easier to exclude references to money purchase benefits by making it clear that such benefits do not apply in many parts of the Bill, rather than repeatedly excluding them time and again, which makes the Bill terribly difficult to read? So much of what one comes to is simply repetition.
I ask the Committee's forgiveness for my being pedantic but, in that connection, I notice that an attempt has been made to change benefits "under the scheme" to "under the scheme rules" throughout the Bill. I have thought about that, and think that benefits derive from the scheme itself rather than from its rules, which are simply a method whereby it operates. If we are to have "under the scheme rules" throughout, perhaps we should be consistent; "rules" is clearly missing from the fourth line of Amendment No. 195G, which we have already debated.
Baroness Hollis of Heigham: We had a debate during a previous Committee sitting—I shudder to think which one it was—on the difference between rules of a scheme and scheme rules. The rules of the scheme are the rules of the particular scheme, but scheme rules are the rules of the particular scheme as modified by the overriding social security legislation—the WRP Act and all the rest of it. I shall check to see whether the noble Viscount is correct in his assertion, but it is quite appropriate that on some occasions the Bill refers to rules of a scheme and on other occasions to scheme rules. I too wish that we had sharper descriptive language so that the ambiguity could be resolved, but that is the reason for it.
As for the repetition, we are in a dilemma. If we do not say something like, "Money purchase schemes are excluded" or "Money purchase benefits are excluded",
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I suspect—I shall have to take advice on it—that we would have to refer to the matter being understood in the content of Clause x(y)(z). I doubt whether it is clearer to have two items and four cross-references, as opposed to six items, but my hunch is that if we were to follow the noble Viscount's suggestion we would multiply the cross-references and reduce the shopping list. I suspect that people will find the shopping list easier to understand.
On Question, amendment agreed to.
Clause 128, as amended, agreed to.
Clause 129 [Board to act as creditor of the employer]:
Lord Hunt of Wirral Lord Hunt of Wirral moved Amendment No. 199:
Page 89, line 4, leave out paragraph (b).
The noble Lord said: We move on to Clause 129. I have become aware that many leading players in the world of accountancy are concerned about a lack of a clear procedure in the Bill for binding the board of the Pension Protection Fund clearly and explicitly into a collective creditor procedure. On that basis, I feel strongly that the clause needs to be strengthened and clarified.
The fact that the PPF board is not bound into company voluntary arrangements—CVAs—or Section 425 schemes of arrangement was referred to in a previous debate, as the Minister may recall. The concern on the point is that it in effect gives the PPE board a form of super-priority over other creditors. That would mean that it would be able to negotiate its own terms—terms that might be very much better than those available to other, unsecured creditors. In fact, it would be able to hold other creditors and the insolvency practitioner involved to ransom.
In turn, that detracts from the established principle in insolvency of equal treatment of creditors in the same class, and is likely to influence exit routes towards liquidation, in which the PPF board of course does not have a priority. I am troubled that that again appears to be an instance of where the Bill is in direct conflict with the Government's stated aim of encouraging enterprise and the rescue of viable businesses in trouble.
The noble Baroness may remember, although it was the noble Lord, Lord Sainsbury, who took the then Bill through, that to that end the Enterprise Act, among other things, abolished the Crown preference in insolvencies. That was a balancing exercise, but it was seen as a step in the right direction. It improved returns to unsecured creditors. However, an apparent super-priority of the PPF board would establish the Crown preference in another form, which would ultimately be to the detriment of unsecured creditors.
The amendment would delete, on page 89, subsection (6)(b), which concentrates on arrangements that have effect under Section 425 of the Companies Act 1985. I am sure that the Committee will recall Section 425, which gives a company power to compromise with creditors and members. It provides for a company to enter into an arrangement with its creditors or any class of creditors. The compromise

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has to be agreed by creditors representing three-quarters in value of the debt, and is then sanctioned by the court. We are not dealing with some ad hoc arrangement, but with a scheme of arrangement that has to be approved and sanctioned by the court. The company does not have to be insolvent to enter into a Section 425 scheme of arrangement, of course.
If the board is unhappy with a proposed arrangement, which may well be in the minds of those who drafted the clause, it would have the opportunity to oppose it and have its views heard in court. The amendment should maintain the viability of Section 425 schemes and give the PPF board a full opportunity to have its views considered. I beg to move.
4.45 p.m.
Baroness Hollis of Heigham: The issue is difficult; a lot of the issues that we are discussing are, but there is a genuine and honourable dilemma on this matter. I shall set the background. Amendment No. 199 seeks to remove the provision for the board not to be bound by any terms of a scheme of arrangement as defined, as the noble Lord said, by Section 425 of the Companies Act 1985 previously entered into by the trustees or managers of a scheme where that scheme compromises a claim for the contingent debt owed to the pension scheme—in other words, to which the PPF is not a party. That is why I say that we have a genuine and honourable dilemma.
This area of the Bill is designed to protect the PPF from being duty bound to take on increasing liabilities with a reduced claim against the assets of the employer. If the employer enters into a scheme of arrangement—commonly called a compromise agreement—during the assessment period which results in the rescue of the employer, that would end the assessment period and the PPF involvement with the scheme, as there is now a solvent sponsoring employer and a scheme rescue has occurred. If there is a subsequent insolvency event in relation to the sponsoring employer, another assessment period would begin.
If the scheme compromised the contingent debt to the scheme, the PPF should not be bound by that compromise unless it has consented to it because, first, the compromise agreement may considerably reduce the money which is recoverable from the sponsoring employer, therefore reducing the payment to the PPF if the PPF were to assume responsibility for the scheme. Secondly, if the board were to be bound by any agreement entered into by the trustees of a pension scheme to compromise the contingent debt to the pension scheme before the assessment period begins, that could raise moral hazard issues. For example, the trustees could enter into a scheme of arrangement with the sponsoring employer which would absolve the employer from ever having to pay the full Section 75 debt. The trustees could essentially take any steps necessary to try to keep the sponsoring employer in operation, in the knowledge that the scheme was ultimately protected by the PPF. The Committee can see what depth of issue lies behind that situation.
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The dilemma is genuinely honourable, and I am not persuaded that to say that the PPF can revisit the issue by going to the courts, given the cost, the length of time and so on, is a satisfactory way of allowing it to destabilise a compromise arrangement that has been made without it being party to it, and which appears to be at the expense of the assets that come into the PPF or increases the liabilities that come into it. That said, we are aware that—thanks to the efforts of the noble Lord, I think—the Institute of Accountants in England and Wales has raised concerns about the approach; he echoed them today. We are involved in discussions with it, the DTI and the Insolvency Service.
Further, we would like to complete our consultations after our initial discussions, because we may well need to return on Report with an amendment. I do not yet know whether that would be one along the lines suggested by the noble Lord or some alternative. I agree that this is not the last word on the issue. In the light of our consultations, it is clear that we need to go further. I suspect that we will come back with an amendment, and I shall try to make sure that the noble Lord and others are given plenty of notice about what that might look like, to see whether it meets his concerns. I hope that he will recognise where we are coming from as a department, which is to ensure that—if I can put it crudely—the PPF does not end up being stitched up. We do not wish to see that happen. I hope that the way I have suggested that we go forward in seeking to balance perfectly honourable but possible conflicting responsibilities and obligations may be a way to progress the issue.
Lord Oakeshott of Seagrove Bay: The issue is inevitably one of shades of grey, but we are persuaded that the noble Baroness's shade of grey is rather more persuasive than that in the amendment. We welcome the fact that she will consider the matter further.
Lord Higgins: I want to ask a simple-minded question. Does the clause as drafted give more priority to the board than the trustees would anyway have?
Baroness Hollis of Heigham: Perhaps I should write to the noble Lord or address the issue in a later point. I want to ensure that my words on the subject are entirely correct.
Lord Higgins: Okay, we will let it go at that. However, surely it is the central issue. Perhaps the trustees did not previously have the power in relation to the scheme of arrangement and so on. However, we will listen with interest to the noble Baroness's reflections on the matter.
Lord Borrie: In the course of his response to the debate, I should like the noble Lord, Lord Hunt of Wirral, to amplify a point that somewhat puzzles me. He said in so many words that the Pension Protection Fund ought to be treated along with other creditors and take due cognisance of arrangements that have been made and so on. In the context of the Bill and the

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public interest purposes of the Bill and the Pension Protection Fund, why should the fund be treated as if it were just one other creditor?
Baroness Hollis of Heigham: The noble Lord, Lord Higgins, is right that the provision allows the board completely to scrap the scheme of arrangement. So the answer is yes, it would have more power than the trustees. One of the problems may have been that the trustees were dominated by the employers' representatives and so on and they produced a compromise that perhaps secured other company debts at the expense of the fund. However, we believe that they would and could do that only very rarely.
Lord Hunt of Wirral: If I may, I should like to respond to the comments of the noble Lord, Lord Borrie, in the debate on clause stand part. I think that his point goes much wider than just a Section 425 scheme of arrangement. For now, I merely want to say that in view of the Minister's comments I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
On Question, Whether Clause 129 shall stand part of the Bill?
Lord Hunt of Wirral: I have listened very carefully to the points that have been made. I say to the noble Lord. Lord Borrie, that he could make an even better case for Crown preference, the point about public money and why should the public be deprived and other creditors given an advantage. But his feet are firmly rooted in the pre-Enterprise Act environment, in relation to which, as a result of a government move that found support on all sides of the House, it was decided to abolish Crown preference. As the noble Lord knows exceedingly well in view of all the public offices he has held, particularly Director-General of Fair Trading, Crown preference has always been right at the bedrock of insolvency.
The Government, however, took what I thought was a very courageous step. As a result of Mr Gordon Brown, the Chancellor of the Exchequer, having been impressed by the American system, it was said that Crown and public money should not step in to reduce the rights of unsecured creditors and thereby perhaps jeopardise the survival of a potentially viable business. It has been implicit in a number of our debates that we have to find a way through this Pensions Bill that does not destroy jobs. I know that the trade union movement is very concerned that jobs are at risk if the Bill's retrospective elements mean that potentially viable businesses do not survive.
So it is not just a case of looking at Crown preference in its justification and it is not just a case of looking at the rights of the PPF. There is a case for looking at the whole realm of businesses in trouble and finding a way through that is consistent with the Enterprise Act.
The noble Lord, Lord Oakeshott, mentioned a shade of grey. I thought that the Minister's shade of grey could only have been from a speaking note that was not cleared with her colleagues in the Department of Trade and Industry. I have heard her colleagues in
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that department argue forcibly for removing this sort of preference. I therefore hope that she will give the noble Lord, Lord Sainsbury, the time of day, sit down with him and hear from him why he embarked on the route that he did. That Act is now on the statute book. It is being imperilled by this and other clauses.
It really is time for the Government to have a new look at how the Bill jeopardises jobs and to sit down with a number of interest groups which are very concerned about this issue. This is all part of what I hope will be a continuing dialogue within the Government that will result in a joined-up policy, so that at least we know where we are, particularly in relation to enterprise.
Baroness Hollis of Heigham: There are two points. First, the noble Lord refers to the provision somehow being Crown preference. The PPF is funded by either members' assets or a levy on industry. The money is not Crown money but industry money. I am not persuaded of an argument that basically says that other businesses, through their levy, should pick up the bill for employers to be able to forego some of their responsibility to their pension fund in order to meet other debts. I am not saying that there is right or wrong in this—there is an honourable dilemma between the jobs, the viability of the company, the rescue efforts and sustaining the pension funds—but there is no free money.
Let us take an example. The trustees may know that the scheme is sufficiently underfunded to go into the PPF. There is therefore no incentive to keep it afloat. They might just as well run it down and send the money across—particularly if the employees were represented by the trustees—deal with other debts and instead of allowing the PPF to pick up a deficit or shortfall of 25 per cent to pick up one of 75 per cent. Who is that 75 per cent to be made good by? It is not by the Crown or the by taxpayer but by levy payers and others in the industry.
The worry that has been expressed to me by some of the major financial players in the industry is that, if we are not careful, good companies will be cross-subsidising bad. At the end of the line, that seems to be where the noble Lord, Lord Hunt, would take us.
My second point is that the noble Lord talked about preference. Although it is clear that the PPE' would have more powers than a trustee, it will not have a higher priority; the assets would still be shared equally between all creditors. We are trying to prevent the PPF being excluded from the compromise because it has come late into the game. It would have equal status with other creditors and a compromise would have to be satisfactorily reached. The option of subsequently unstitching matters through court procedures is, of course, available, but it would be lengthy.
As I say, we have not come to the last word on the matter. However, I do not want it thought that we are somehow reneging on a commitment to overcome Crown guarantees, preference, liability or immunity from prosecution in all areas. We are not. A shortfall has to be made good by someone and it is not always clear that the noble Lord's position is the equitable

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one. I hope that we will come back to the matter on Report as we may be able to find a better way of squaring this rather complicated and wobbly circle.
Lord Hunt of Wirral: I hear what the Minister says. I did not evoke a direct comparison with Crown preference; I merely said that she and the noble Lord, Lord Borrie, could make a stronger case for Crown preference, as Ministers have successively done over a range of Bills. We have a real prospect that viable businesses in trouble will lose their fight for survival. That means jobs being destroyed. I take the point that we have to talk the matter through to get the balance right and that good businesses may support bad businesses.
Perhaps the issue reflects on our court system; perhaps we need a super-highway for such applications. Where an arrangement has already been entered into, surely recourse to the court is all that is necessary in the kind of case referred to by the noble Baroness. That is why I hope that she will spend a little time looking at the policy words of the DTI and try to reconcile the difficult balance. I accept that there are shades of grey and of right and wrong, but we could be destroying jobs. That is why I am particularly concerned about the clause.
Clause 129 agreed to.
5 p.m.
Clause 130 [Payment of scheme benefits]:
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendments Nos. 199A to 199F:
Page 89, line 11, leave out "Subsection (2) applies" and insert "Subsections (2) and (2A) apply"
Page 89, line 13, after "scheme" insert "rules"
Page 89, line 20, at end insert—
"(2A) But where, on the commencement of the assessment period—

(a) a member's pensionable service terminates, and

(b) he becomes a person to whom Chapter 5 of Part 4 of the Pension Schemes Act 1993 (c.48) (early leavers: cash transfer sums and contribution refunds) applies,

no benefits are payable to or in respect of him under the scheme during the assessment period.
(2B) Section 141(2) (retrospective accrual of benefits in certain circumstances) is to be disregarded for the purposes of determining whether a member falls within paragraph (a) or (b) of subsection (2A).
(2C) Nothing in subsection (2A) prevents the payment of benefits attributable (directly or indirectly) to a pension credit during the assessment period in accordance with subsection (2)."
Page 89, line 20, at end insert—
"(2D) Where at any time during the assessment period the scheme is being wound up, subject to any reduction required under subsection (2) and to subsection (2A), the benefits payable to or in respect of any member under the scheme rules during that period are the benefits that would have been so payable in the absence of the winding up of the scheme.
(2E) Subsections (2), (2A) and (2D) are subject to sections 141(1) to (1B) and l45(9A) (which provide for the adjustment of amounts paid during an assessment period when that period ends other than as a result of the Board assuming responsibility for the scheme)."
Page 89, line 20, at end insert—
"( ) For the purposes of subsections (2) and (2A) the trustees or managers of the scheme may take such steps as they consider appropriate (including steps adjusting future payments under the scheme rules) to recover any overpayment or pay any shortfall."
Page 89, line 23, leave out "subsection (2)" and insert "subsections (2) and (2A)"
On Question, amendments agreed to.
[Amendment No. 200 not moved.]
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendments Nos. 200A to 200D:
Page 89, line 25, after "scheme" insert "—

(a) in such circumstances as may be prescribed subsection (2) does not operate to require the reduction of benefits payable to or in respect of any member;

(b)"

Page 89, line 44, leave out subsection (6).
Page 89, line 44, at end insert—
"( ) Regulations may provide that, in prescribed circumstances, where—

(a) a member of the scheme died before the commencement of the assessment period, and

(b) during the assessment period, a person becomes entitled under the scheme rules to a benefit of a prescribed description in respect of the member,

the benefit, or any part of it, is, for the purposes of subsection (2), to be treated as having become payable before the commencement of the assessment period."
Page 89, line 45, after "(2)" insert "or (2A)"
On Question, amendments agreed to.
On Question, Whether Clause 130, as amended, shall stand part of the Bill?
Lord Higgins: Clause 130 concerns the payment of benefits in the assessment period. There are one or two points about which I am not quite clear. Subsection (2) states:
"The benefits payable to or in respect of any member under the scheme during the assessment period must be reduced to the extent necessary to ensure that they do not exceed the compensation which would be payable to or in respect of the member in accordance with this Chapter".
I am not quite clear who will be paying these benefits at that stage in the assessment period. Will it be the trustees or the board? If it is the trustees, how are they to know what compensation will be payable in respect of the member in the circumstances set out?
I am somewhat concerned about subsection (3), which relates to civil penalties under Section 10 of the Pensions Act 1995 and applies to,
"a trustee or manager who fails to take all reasonable steps to secure compliance with subsection (2)".
I do not understand how the trustee is to know. In fact, I am not clear why it should be "a trustee or manager". Perhaps the noble Baroness will also clarify that point.
Baroness Barker: Perhaps I may ask a question in addition to those posed by the noble Lord, Lord Higgins. It relates to subsection (4) and to those people on benefits who carry on working after retirement age. The Bill refers to the payment of pensions, lump sums and other benefits being postponed but, unlike the equivalent situation under state pension legislation,

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there seems to be no provision for those payments to be put somewhere—into a deferred pot, for example—and to be paid at a later stage.
As the Bill stands at the moment, a person who continues to work derives no benefit at all. My concern is that this will cut across the steps the Government are trying to take to enable people to continue to work after pension age. I realise that it refers to the assessment period, but it is silent on the matter of benefits being accrued in any way. I should like the noble Baroness to clarify that matter.
Baroness Hollis of Heigham: The trustees will pay benefits during the assessment period to pensioners. The payments that the pensioners receive will be exactly the same under the PPF as in the scheme—that is, 100 per cent. There is no particular complexity about that.
However, if people become deferred members—because, for example, the scheme is in the process of being wound up and so on—the situation will become complex and the PPF will provide technical support to the trustees to deal with those difficult issues. I fully accept that.
As to those who are due to work after retirement age, the benefits of deferment will be set out in regulations. We hope that they will match those in scheme rules. There should be no deleterious effect.
Lord Higgins: I may have misunderstood an important point. Is the assessment period always followed by the board taking the matter over? If not, what happens if the assessment takes place and it is decided that the scheme is not eligible? Have people been out of pocket in the mean time because they have not received the full amount?
I still do not understand how the trustees will know what would be payable under the PPF. I am not clear why they should be subject to penalties if they do not know.
Baroness Hollis of Heigham: The penalties are associated with not taking reasonable steps—in other words, if there has been some inappropriate or bad-faith behaviour, which is not unheard of in the pension world. However, the noble Lord is right about the technical difficulties for trustees. That is why we will be producing technical support to deal with such issues.
Basically, our expectation—if that is the right word—is that, of the schemes that go into the assessment period, some 75 per cent or 85 per cent may end up in the PPF. That is a working assumption. I hope that we are wrong—I hope that more will stay outside the PPF—but that is the assumption we make.
At the point at which schemes go into the PPF, obviously the level of benefits determined by the priority order will apply. That is 100 per cent for existing pensioners—exactly the same as they currently receive—and 90 per cent for deferred pensioners who are not yet drawing their pensions. If, however, a scheme is among the 10, 15 or 20 per cent that do not go into the PPF, the benefits that have accrued to the working member, but which have not
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been paid to him because he is not yet a pensioner, will be wound back to the point before the assessment period. So any theoretical or notional shortfall will be made good and the individual will continue as though the assessment period had never happened in terms of his level of benefits.
Lord Higgins: I am still not clear about the penalties. What we are saying is that there will be trustees who, instead of paying out the amount of payment to beneficiaries which should have been, might have been or would have been payable under the PPF, pay out the wrong amount—probably more than the PPF would like them to. However, if it is a genuine mistake, to clobber them with civil penalties would be rather worrying.
I am concerned that fewer and fewer people will take on the job of trustee as a result of the Bill. I am seriously concerned about the situation. Like the noble Baroness, Lady Turner, I am not in favour of professional trustees; we need as many volunteers as possible. But they are incurring bigger and bigger risks. They may inadvertently pay out too much in an assessment period—even when they may not end up with the PPF at all—and suddenly find themselves clobbered.
Baroness Hollis of Heigham: I am not saying that the role of trustees will not be made more complex as a result of these provisions. Part of the problem is that in some cases trustees have not been sufficiently trained and supported in exercising their role. However, in terms of civil penalties, we go back to the debate opened up by the noble Baroness, Lady Barker, about "knowingly" and "recklessly".
I am not talking about a situation where trustees, in good faith, accidentally make an overpayment which may or may not be recoverable. I am talking about a situation where trustees knowingly and deliberately arrange payment in such a way as to increase the deficit falling on the PPF. We do not believe that that should be allowed to happen, and that is why the civil penalties are attached, otherwise it would be an offence without a punishment.
Baroness Turner of Camden: As my noble friend knows, I am very keen on employee trustees. In fact, I have tabled an amendment—to be debated later—to increase the number of employee trustees. This would mean that people would have to be adequately trained to cope with the situation, which is much more complex. Organisations exist which are concerned with the training of trustees and I know that unions are involved in the process.
However, a number of us have a real fear that quite well motivated people, and people who would be quite qualified in a general way, may feel reluctant to put themselves forward as trustees because of the complexities of this legislation. One has to be careful about that because it is very important that people who well know their own schemes become trustees. Employee trustees get to know the workings of their own companies and their own schemes and often

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become experts in that context. However, they will be very concerned if they feel they could be in difficulty with the complexities.
Baroness Hollis of Heigham: In a way, we are touching on some of the issues on the security difficulties that arose on earlier amendments in regard to the role of trustees and the board during the assessment period. If it will help the Committee, I shall be pleased to circulate a descriptive note of what will happen and the steps to be taken during the assessment period, the degree of trustees' responsibilities and how they taper out, and the overriding powers of the pension protection board. I am very happy to ask officials to circulate a descriptive note of how we expect the assessment period to work and the parallel and ultimate responsibilities of the trustees and the board. I am in the Committee's hands.
Lord Oakeshott of Seagrove Bay: I would welcome that. Could it be written in a simple form outlining the instructions that will be given to trustees of what they should do?
Baroness Barker: Perhaps I may add that it is not only the responsibilities but the flow of information that is important. I work with trustees on a daily basis in a slightly different context. We can support and train trustees as much as we like, but they cannot possibly deal with liabilities which they cannot estimate. The key part of what the noble Baroness has said is not who has responsibility at a particular time but who is in possession of the material information. If that can be included, it would go a long way towards solving some the problems that have been quite rightly raised by the noble Lord, Lord Higgins.
Baroness Hollis of Heigham: We shall take all those proposals on board. My officials have been here to listen to them and they will be drafting the note. I shall check it to see that it meets the requests of the Committee and send it on its happy way.
Clause 130, as amended, agreed to.
Clause 131 [Loans to pay scheme benefits]:
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendment No. 200E:
Page 90, line 5, after "scheme" insert "rules"
On Question, amendment agreed to.
Lord Skelmersdale Lord Skelmersdale moved Amendment No. 201:
Page 90, line 20, leave out "that time" and insert "such time or times as the Board may direct"
The noble Lord said: If one refers to subsection (3) of Clause 131 and omits paragraphs (a) and (b), the Bill states:
"Where an amount lent to the trustees or managers of a scheme under subsection (2) is outstanding … that amount, together with the appropriate interest on it, falls to be repaid by the trustees or managers of the scheme to the Board at that time".
However, paragraphs (a) and (b) refer to three separate times. Can the noble Baroness explain? I beg to move.
5.15 p.m.
Baroness Hollis of Heigham: I think that the noble Lord's amendment is rather attractive. If he agrees, I should like to take the matter away and consider whether we should come back with a change of wording.
Lord Skelmersdale: Day six and I am finally delighted. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 131, as amended, agreed to.
Clause 132 [Reviewable ill health pensions]:
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendments Nos. 201A to 201D:
Page 90, line 35, leave out "under the scheme"
Page 90, line 41, leave out "under the scheme or another scheme"
Page 91, line 1, leave out "under the scheme"
Page 91, line 3, after "scheme" insert "rules"
On Question, amendments agreed to.
Lord Skelmersdale Lord Skelmersdale had given notice of his intention to move Amendment No. 202:
Page 91, line 30, leave out subsection (6).
The noble Lord said: I tabled the amendment to obtain some appreciation of the draft regulations which might be made under the clause. However, having listened to the opening statement of the Minister, I realise I shall get precisely nowhere. I shall not move the amendment.
[Amendment No. 202 not moved.]
On Question, Whether Clause 132, as amended, shall stand part of the Bill?
Lord Higgins: The clause is concerned with reviewable ill-health provisions, as indeed are Clauses 133 and 134. I am somewhat surprised at the complexity of' the three pages of the Bill which deal with ill-health provisions during the assessment period. The noble Lord, Lord Borrie, and several others have been worried about the whole idea of an assessment period. Can the Minister give some indication of how long she envisages these assessment periods will last? A whole chunk of the Bill is concerned with them and the fact that the board needs to review ill-health provisions in the course of the assessment period seems to be legislating in immense detail for something which is of a temporary nature and is never likely to be material so far as the assets of a scheme are concerned. Do we really need this clause and the following two clauses?
Clause 134 interprets Clauses 132 and 133. The assessment period, it is to be hoped, will not be for very long, and having an ill-health provision which can be dealt with immediately after the assessment period—even taking into account the fact that a decision may be delayed—would seem to be rather sensible.
Baroness Hollis of Heigham: Clause 132 sets out the provisions relating to reviewable ill-health pensions. My understanding is that between 10 and 20 per cent of early retirements are through ill health. Clearly,

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given that ill-health pensioners in the PPF receive 100 per cent compensation rather than the 90 per cent compensation for deferred members, we are anxious to ensure that, in the three years or so preceding the scheme coming into the assessment period, ill-health pensions have not been used as a way to appropriate and protect some pensions for some people at the expense of the PPF.
That means that the board has a right to review such pensions to ensure that they are well founded. On the presumption that they are, people will continue to receive their pensions. If the board feels that ill health has been used as a device—and there have been cases of people recovering from Alzheimer's disease, for which they have been given a pension, and so on—it will consider what to do.
The purpose of the clause is to protect the PPF from potential abuse and inappropriate awards of health pensions, which is the only way in which a scheme member under normal pension age could receive a 100 per cent level of uncapped compensation from the PPF. As I say, a member without an ill-health award would have his 90 per cent compensation capped at £25,000. We think the numbers will be very small. However, we have seen in today's press the generosity of some of the current pension settlements.
Where there is evidence to suggest that an ill-health pension awarded in the couple of years preceding the scheme going into the assessment period—which allows a person to retire with not only a 100 per cent pension but an uncapped pension—is ill-founded, we believe that the board, having reviewed the situation, should have the power to revoke and reconsider the matter.
As the Committee knows, the three-year rule is designed to prevent any manipulation of a scheme, either between DB and DC schemes or ill-health pensions, in the years preceding the insolvency event, where the directors and trustees are likely to know that a company scheme is at risk and may seek to take protective action by going for an ill-health pension under pensionable age to attract its more favourable terms. The board needs the right to review such pensions to ensure that they have been appropriately awarded. That is the purpose of the clauses.
Lord Oakeshott of Seagrove Bay: Can the Minister help on the question of how long assessment periods are likely to last?
Baroness Hollis of Heigham: I apologise. This will be a part of the circulating note but, basically, we expect the assessment period to last at least 12 months. Let me run through what we expect to happen in the briefest of terms. The assessment period begins with the occurrence of a qualifying insolvency event. During the assessment period, the board must determine whether a scheme rescue is possible and obtain a valuation in order to determine whether a scheme has sufficient assets to buy out the PPF level of liabilities. Of course, these things can happen in parallel.
The length of time it may take to determine whether a scheme rescue is possible will depend entirely on the circumstances surrounding the solvency of the
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employer. However, the Insolvency Service has advised us that in almost all cases it will take 12 months for the fate of the employer to be known.
Then, before work can continue on valuation, there has to be a data cleansing exercise, data reconciliation with the national insurance scheme and so on, all leading to determining and valuing assets and liabilities. Once the board has approved the valuation and issued it to the regulator and the trustees or managers of the scheme and the employer, we expect and intend that the trustees will forward to individual members a summary of the valuation, in particular where the assets exceed the liabilities and vice versa; whether or not the scheme is likely to be taken into the PPF; and the relevant data about individual members' PPF compensation rate.
The valuation can be challenged not only by the trustees but also by the members. For example, if the valuation indicates that a member has 20 years' rights in the scheme but he believes that he has 25, he can request a review to correct that. So the approved valuation is reviewable. We do not yet know the time period in which a review could be raised—it will be set out in regulations—but we have to allow time for that.
So given that the Insolvency Service believes that it will take 12 months to establish the insolvency event and scheme rescue, and given that—although it may happen in parallel—there will be quite an elaborate valuation of both assets and liabilities in which we have to establish a right of appeal for individual members, it seems to us that 12 months is the minimum time—it may well be longer—for the assessment period to run for any particular scheme.
I am very happy to include this in the piece of paper I offered to circulate earlier. I am able to do so because I have already seen in my own briefing a version of it. I do not know whether that answers the noble Lord's question but, when I raised the same question, it persuaded me that 12 months was probably a minimum rather than a maximum time in these circumstances.
Baroness Turner of Camden: I have listened carefully to my noble friend the Minister and I am grateful for the assurances that she gave towards the end of her statement. However, I am unhappy about the possibility of reductions in ill-health pensions. In my experience, ill-health pensions are usually awarded after a fairly rigorous medical examination. A fairly rigorous report emerges to the effect that the person concerned has to be awarded a pension because he or she is no longer able to work properly.
In those circumstances, I am really unhappy about a situation in which that pension can be reduced for a period as long as 12 months. I welcome the kinds of assurances that my noble friend has given us. She mentioned appeals, for example, and that there would be an appropriate appeal mechanism for people in that situation, but I am not terribly happy about it.
Baroness Hollis of Heigham: In direct response to my noble friend, obviously there will be appeals. There will be a two-stage process. A person may not only go

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through the PPF review process but can go to the PPF ombudsman. His determination could then be referred to the High Court or the Court of Session in Scotland on a point of law. I do not expect it to happen very often, but it is one of the reasons for the elongated period of assessment. The two-stage appeal process is required by the ECHR.
I shall be surprised if there is more than a tiny number of revocations of ill-health pensions. However, given that what will really bite on some people going into the PPF is not so much the 90 per cent level of compensation but the cap on compensation—particularly for senior, more highly-paid individuals—I can see how attractive it would be for those individuals to arrange an ill-health pension on the grounds of stress and so on.
I believe that the schemes and the PPF need protection. My noble friend is right about people who have left work for what Members of the Committee would call a genuine reason, and there should be no problem for them. But, looking at the situation from a disability benefits point of view, I am well aware that, unfortunately, on occasions, there can be some manipulation. I am not suggesting that this applies to people receiving disability benefits in particular, but the situation can be manipulated and we have to have some protection. Where directors and highly-paid individuals know that a scheme may come into PPF and know that they can organise a more advantageous pension outside it, they might seek to follow that route. All we are doing is providing insurance—a check, if you like—for the PPF to ensure that a pension is valid and appropriate. However, as I have said, for the vast majority there should be no problem whatever.
Lord Higgins: I share the disquiet of the noble Baroness, Lady Turner, about all this. We are not only talking about an assessment period of 12 months—and we are now getting a clearer picture of what that will involve—but apparently it can be retrospective for three years. So a particular pension scheme can decide that various members should retire on ill-health grounds and then, three years later, after they have retired, the scheme runs into trouble and the board states that it will review the situation and that if they do not like it they can go to the High Court or the ombudsman or whatever.
I wonder whether the noble Baroness's view as to the extent of this is valid. Directors and so on are frequently not in the main scheme anyway. My own experience is that when most pension trustees consider ill-health problems, they set up a committee, which goes into the matter in considerable depth and carries out appropriate examinations and so on. Trustees are as concerned to protect the assets of their funds as the board will be. That is normally carried out, and obviously it depends on one scheme as against another. However, I do not think that there is any great incentive for the trustees to pay out, unless, as the noble Baroness says, they are directors or so on, which I do not think is relevant. I am concerned that people who retired three years ago will suddenly find that
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their ill-health pension is reviewed and eventually, presumably, reduced as a result of the Bill, whereas otherwise payment would continue in the normal way and at the rate originally agreed.
I do not like the feel of this provision at all. It feels very odd. I am not at all sure that the provisions in these three clauses are justified.
5.30 p.m.
Baroness Hollis of Heigham: The provision is in the Bill because of the issue of manipulation in the years preceding the scheme possibly going into the assessment period, which was raised by the Conservatives in the other House. Therefore, these clauses are in the Bill partly in response to concerns raised, as I understand it, by the Official Opposition in the other place, that there could be manipulation of the scheme and changes of the rules at the point that insiders knew that the scheme was in trouble, in order to maximise the advantage to individuals. These proposals are therefore in response to the concern raised by the Official Opposition in the other place.
I want to give an assurance that this is not about trying to take pensions away from people who have legitimately retired. We are trying to protect the scheme, the PPF and the levy payers from artificial manipulation of the rules of the scheme in the preceding three years of the scheme's introduction.
I think the same is true in the States. If changes are made to alter the benefits, increase the liabilities and reduce the assets that come into the PPF and which appear to the board, the Ombudsman, the courts and so on as an artificial manipulation of the situation, the PPF must have some power to protect itself. If it did not have such a power outside organisations paying the levy could rightly be worried that there was a potential for exploitation at their expense.
However, I have no reason to think that this provision will ever be exercised in any circumstances where the PPF board believes that manipulation has occurred. More to the point, once the knowledge of these arrangements is more widespread—and clearly this is going to occur over the next two to three years—it will actually act as a discouragement to such artificial arrangements being established. I hope that as a result the number of such cases will be reduced.
The reason for using three years is that we think that this is a period when trustees or directors could be aware that the employer may be going bust. Therefore, in the rare cases when they possibly could think about manipulating funds and even abusing the PPF, we seek to protect the levy payers and the PPF on their behalf against such manipulation. It is not so very different in some ways from the issue of the balance on compromising debt. Where ill health is genuine, there should be no problem. If it is not and it is manipulation, then, in response to the concern of the Official Opposition at the other end of the building,

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these and similar issues were addressed by the Government before the Bill came to your Lordship's House.
Lord Higgins: I am obviously somewhat surprised by the point made by the noble Baroness. Is she saying that these three clauses were introduced at a late stage of the Bill as a result of representations made by the Opposition?
Baroness Hollis of Heigham: I am informed that these three clauses were introduced on Report by the Government in response to pressure raised by the Opposition in Committee. That is my understanding. I apologise to the Committee if I have misrepresented the matter.
Lord Higgins: All I can say to that is that the draftsman has worked rapidly on this when he seems remarkably slow on some other things.
I still have concerns about the matter, on the grounds of cost among other things. Apparently, we shall now have the PPF board employing people, who are no doubt expert in medical matters, to review the pensions of everyone who took out an ill-health pension in the previous three years whenever a scheme enters into the assessment period. I find the matter very odd. I know not what views my colleagues in another place may have had—although I obviously should. None the less, the whole procedure seems extraordinarily odd.
Baroness Hollis of Heigham: Perhaps I may ask the noble Lord a question. If the PPF was up and running, such powers did not exist and it became clear years down the line—in 2007 or 2008—that an artificial manipulation was going on, and if there was an exposé in the press, the noble Lord might well ask, "Why did we not put a backstop into the Bill?" But that is what we are doing.
Lord Higgins: On the overall position of the fund, it seems unlikely that that is material. Anyway, let us leave the matter there. I am not happy about it.
Lord Oakeshott of Seagrove Bay: My instinct is that this could be a sledgehammer to crack a nut. We do not know, and it is very difficult to know. However, I am rather sympathetic to the suggestion made by the noble Lord, Lord Higgins, that the problem is probably not widespread. I must say that I also am very concerned. The Minister clearly said what the minimum period for assessment will be. It sounded to me as though it might be years and years. I worry that so many companies and pension schemes are going to be in a position of uncertainty and indeed how the PPF will work. Practically, the timescale fills me with foreboding.
Clause 132, as amended, agreed to.
Clause 133 [Effect of a review]:
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendment No. 202A:
Page 91, line 35, leave out "under the scheme"
On Question, amendment agreed to.
Clause 133, as amended, agreed to.
Clause 134 [Sections 132 and 133: interpretation]:
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendments Nos. 202B and 202C:
Page 93, line 4, at end insert—
""pensionable service" is to be construed in accordance with Schedule 7;"
Page 93, leave out line 5.
On Question, amendments agreed to.
Clause 134, as amended, agreed to.
Clause 135 [Board's obligation to obtain valuation of assets and protected liabilities]:
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendment No. 203:
Page 93, line 34, leave out "a person with prescribed qualifications" and insert "—

(i) a person with prescribed qualifications or experience, or

(ii) a person approved by the Secretary of State"

The noble Baroness said: I beg to move.
Lord Skelmersdale Lord Skelmersdale moved, as an amendment to Amendment No. 203, Amendment No. 203ZA:
Line 2, leave out from "experience," to end of line 3.
The noble Lord said: I understand that government Amendment No. 203 is intended to be helpful. On page 93, line 34, it leaves out the words,
"a person with prescribed qualifications",
and inserts,
"a person with prescribed qualifications or experience".
So far, so good. The hackles of any Member of a responsible Opposition would immediately rise when he saw the continuation of this particular formation—
"or … a person approved by the Secretary of State".
That could happen to anybody. He or she need not necessarily have the prescribed qualifications or experience. I would readily understand and accept the words, "and approved by the Secretary of State", but as it stands I am, to say the least, unhappy. I await the Minister's explanation thereof. I beg to move.
Baroness Hollis of Heigham: We debated, and I had hoped that I had explained to the Committee, exactly the same issue in relation to Clause 103. We have already gone over this. The noble Lord may not have been present at that debate, and I fully accept that the Bill is complicated.
The noble Lord is absolutely right that in most cases an actuary will fall under the "prescribed qualifications or experience" category. That will include members of the Faculty of Actuaries and the Institute of Actuaries. The faculty and institute have signed mutual recognition agreements with several actuarial organisations throughout the world. However, where there is no mutual recognition agreement between the Faculty of Actuaries, the Institute of Actuaries and bodies in other countries, a person may apply to the Secretary of State for approval to undertake actuarial work.

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Although we expect the Secretary of State to approve very few individuals in this manner, the provision is necessary to ensure appropriately competent individuals are not inadvertently excluded.
As I have mentioned, it is intended that the regulations will cover the vast majority of actuaries, and that approval by the Secretary of State would be sought only in exceptional circumstances. We intend to prescribe that an actuary must be a member of either the Faculty of Actuaries or the Institute of Actuaries, although we hope to be able to consult with the faculty and the institute in the near future on the exact wording of the regulations.
The procedure is absolutely standard. It follows the Occupational Pension Schemes (Scheme Administration) Regulations 1996, which allow schemes to appoint actuaries who have suitable qualifications from abroad but who are not currently a fellow of either the faculty or the institute or do not have reciprocal arrangements.
We will fully consult with the profession. That has been the standard practice in previous pension Bills and we have of course debated the issue earlier. With that explanation, I hope that the noble Lord's hackles will be smoothed down again.
Lord Skelmersdale: They have descended somewhat. I take the point that if unnecessary and inappropriate intentions are revealed by the regulations prescribing such things, we can have another go at the issue. So, for the moment I am happy to let the matter rest. However, the noble Baroness talked about Clause 103, which is a paving clause for Schedule 5.
Baroness Hollis of Heigham: I have the amendment numbers that we referred to on the matter. They are government Amendments Nos. 183, 203, 212, 213, 263 and 311. I can assure the noble Lord that we had this debate. I remember saying exactly this because similar alarms were quite properly addressed at the time. I believe that I was able to assure the Committee that the power recognised qualifications where there was no reciprocal agreement; that we would do it in consultation with the Faculty of Actuaries and Institute of Actuaries; and that, for example, we were following conventional practice already established under the Pensions Act 1995.
Lord Skelmersdale: I can assure the noble Baroness that I was not disbelieving her. I must have misheard her. I thought she said that the debates were under Clause 103. Clause 103 is a non-clause because it is a paving clause for Schedule 5. I do not think that there is any point in pursuing this.
Baroness Hollis of Heigham: I would just quote from the noble Lord, Lord Higgins. On Amendment No. 183 to page 260, line 18, he said:
"I am not clear why the provision was not in the Bill originally. What the noble Baroness says seems eminently reasonable, but we will need to think about it and consult outside, as actuarial bodies may have a view on the matter".—[Official Report, 15/7/04; col. 343.]
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So it is entirely appropriate. As I say, I had hoped that I persuaded the noble Lord, Lord Higgins, and I hope that I have now persuaded the noble Lord, Lord Skelmersdale.
Lord Skelmersdale: I beg leave to withdraw the amendment.
Amendment No. 203ZA, as an amendment to Amendment No. 203, by leave, withdrawn.
On Question, Amendment No. 203 agreed to.
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendments Nos. 203A to 203C:
Page 94, line 5, leave out "which limits the amount of its" and insert "rules which limits the amount of the scheme's"
Page 94, line 10, leave out "under the scheme"
Page 94, line 15, at end insert "rules"
On Question, amendments agreed to.
On Question, Whether Clause 135, as amended, shall stand part of the Bill?
Lord Higgins: I have only one or two brief questions on the clause. It refers to cases within subsection (1) of Section 119 and 120, so I am not clear why it appears at this point in the Bill. At all events, the procedure seems to be rather strange. Pension trustees in the normal course of their duties ask for valuations, usually triennially and sometimes more frequently. But they leave that valuation to the actuaries. I am therefore rather puzzled why Clause 135(4) states that the,
"regulations may prescribe how—

(a) the assets and the protected liabilities of eligible schemes, and

(b) their amount or value,

are to be determined, calculated and verified".
I should have thought that the valuation would take place on the normal basis employed by an actuary. Why will the regulations prescribe the way that it has to be done as regards the board's obligation? The board is surely in the same position as normal trustees.
I am also a little puzzled by subsection (6). It states:
"In calculating the amount of any liabilities … a provision of the scheme which limits the amount of its liabilities by reference to the value of its assets is to be disregarded".
I do not understand what that subsection means. There are further subsections regarding ill-health provisions. I think we have probably gone over that sufficiently to express doubts about it. But it seems to me that if the board wants a valuation, it would simply ask for the actuary to do it in exactly the same way as a normal trustee board would. I am not clear why it does not.
5.45 p.m.
Baroness Hollis of Heigham: Regulations will set out the methodology and key principles relating to the valuation. The detailed assumptions and actual discount rates to be applied were set out in guidance issued by the board. The obvious point is that the valuation will be done by actuaries, but it will be specifically for the purpose of deciding whether a scheme requires PPF assistance. It will compare the

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assets of the scheme with liabilities assessed on the basis of the PPF level of compensation for the defined benefit members of the scheme.
A scheme, for example, might not be sufficient to meet 100 per cent of all its promises, but it might still be able to offer a level of benefit higher than that which an individual would enjoy within the PPF. That would be the kind of consideration that the PPF would wish to know. I am not sure whether we are making unnecessarily heavy weather on this. Obviously, any such guidance will be given as appropriate in consultation with the bodies concerned. But the PPF valuation has a specific function, which is to see how the protected liabilities and assets correlate with the compensation that would be offered by the PPF. I am not really sure why the noble Lord thinks there may be a problem here.
Lord Higgins: Clearly, the board will need to make assumptions. Any board of trustees, or presumably the PPF board, will have to make certain assumptions. That is normally crucial. I simply do not understand why regulations have to specify how the actuary will take on the job. That is not so as regards ordinary trustees. The board is a trustee to all intents and purposes. In the sense that a valuation is required, one asks an actuary for a valuation on specific assumptions for which the board is responsible.
Baroness Hollis of Heigham: I am thinking back to the Pension Act 1995. The Bill was introduced by Lord Mackay. I am fairly sure he introduced a similar methodology for the minimum funding requirement, which is in regulations, and for carrying out those valuations. I do not see that this provision is any different from that. I do not really understand what the noble Lord is concerned about.
Obviously, any such regulations are introduced in consultation with the industry. We are usually pressed by the industry for clarity and so on regarding the intention. To the best of my memory similar procedures were followed when we dealt with the 1995 Act to establish the MFR, in which the methodology was in regulations. When Lord Mackay proposed this no one said that actuaries did not want, need or welcome that description in regulations. So I do not understand where the noble Lord is coming from on this.
Lord Higgins: I simply do not understand why the regulations need to prescribe the way in which the actuary will carry out his normal duties. However, I will consider the matter in relation to various actuarial bodies and whether they think that the provision is appropriate.
Clause 135, as amended, agreed to.
Clause 136 agreed to.
Clause 137 [Binding valuations]:
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendments Nos. 203D to 203F:
Page 95, line 4, after "as" insert "reasonably"
Page 95, line 5, at end insert—
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"( ) the Regulator,"
Page 95, line 6, at end insert "and"
On Question, amendments agreed to.
[Amendment No. 204 not moved.]
Clause 137, as amended, agreed to.
Clause 138 [Schemes which become eligible schemes]:
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendment No. 204A and Amendment No. 204B:
Page 95, line 19, leave out "withdrawal notice" and insert "notice to that effect (a "withdrawal notice")"
Page 95, line 25, leave out subsection (3) and insert—
"(3) For the purposes of this Part a withdrawal notice issued by virtue of this section is not binding until—

(a) the period within which the issue of the notice may be reviewed by virtue of Chapter 6 has expired, and

(b) if the issue of the notice is so reviewed—

(i) the review and any reconsideration,

(ii) any reference to the PPF Ombudsman in respect of the issue of the notice, and

(iii) any appeal against his determination or directions,

has been finally disposed of and the notice has not been revoked, varied or substituted.
(4) Where a withdrawal notice issued by virtue of this section becomes binding, the Board must as soon as reasonably practicable give a notice to that effect together with a copy of the binding notice to—

(a) the Regulator,

(b) the trustees or managers of the scheme, and

(c) any insolvency practitioner in relation to the employer or, if there is no such insolvency practitioner, the employer.

(5) Notices under this section must be in the prescribed form and contain such information as may be prescribed.
(6) A notice given under subsection (4) must state the time from which the Board ceases to be involved with the scheme (see section 140)."
On Question, amendments agreed to.
Clause 138, as amended, agreed to.
Clause 139 [New schemes created to replace existing schemes]:
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendment No. 204C and Amendment No. 204D:
Page 96, line 7, leave out "withdrawal notice" and insert "notice to that effect (a "withdrawal notice")"
Page 96, line 13, leave out subsection (3) and insert—
"(3) For the purposes of this Part a withdrawal notice issued under this section is not binding until—

(a) the period within which the issue of the notice may be reviewed by virtue of Chapter 6 has expired, and

(b) if the issue of the notice is so reviewed—

(i) the review and any reconsideration,

(ii) any reference to the PPF Ombudsman in respect of the issue of the notice, and

(iii) any appeal against his determination or directions,

has been finally disposed of and the notice has not been revoked, varied or substituted.
(4) Where a withdrawal notice issued under this section becomes binding, the Board must as soon as reasonably practicable give a notice to that effect together with a copy of the binding notice to—

(a) the Regulator,

(b) the trustees or managers of the scheme, and

(c) any insolvency practitioner in relation to the employer or, if there is no such insolvency practitioner, the employer.

(5) Notices under this section must be in the prescribed form and contain such information as may be prescribed.
(6) A notice given under subsection (4) must state the time from which the Board ceases to be involved with the scheme (see section 140)."
On Question, amendments agreed to.
On Question, Whether Clause 139, as amended, shall stand part of the Bill.
Lord Higgins: Perhaps the Minister can give us a brief explanation of what is envisaged with regard to the board's attitude to new schemes that are created to replace existing schemes. Is there simply a provision that is designed to prevent employers avoiding their responsibilities in changing from one scheme to another? The Nikko Bank case may be an example of when that has happened.
Baroness Barker: I should like to take the opportunity of this stand part debate to ask a question that applies to Clause 139 as well as to many of the other clauses that relate to the board, which relates to our earlier discussion about time limits. I happened to spend my summer break learning about insolvency in a direct fashion—not personally, but on behalf of another organisation. I have had a crash course in the importance of time in insolvency matters. There appears to be no time limit to suggest when the board has to do things in almost all of these clauses. Crucially, neither is there any indication of when the board must notify other players, whether it assumes liability for a scheme or not.
For example, in Clause 139(2) there is a duty on the board to issue a withdrawal notice. There is no duty for it to do so within even the vaguest of terms such as "at the earliest opportunity". Given that the importance of when the board acts can be crucial to people trying to resolve the affairs of a pension fund, that is an oversight. The Minister rightly explained to us the importance of getting the wording right when we debated the difference between the rules of a scheme and scheme rules. Having no time limits or sense of urgency on the part of the board is an omission. Therefore, when the board is obliged to take certain action, an indication that it is under a duty to do so at the earliest opportunity is crucial. I hope that the Minister will take that into consideration in this clause.
Baroness Hollis of Heigham: It may make sense to spend a second stating the purpose of Clause 139. It enables the PPF to refuse to assume responsibility for new schemes that have been created to replace existing schemes for the purpose of enabling the members to become entitled to PPF compensation.
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For example, rather than manipulating a current scheme—we were talking about the three-year backdating rule earlier—a new scheme may be set up to replace an existing scheme in order to obtain PPF compensation. That may occur, for instance, when a current scheme has one member and is therefore not an eligible scheme, so the PPF board cannot assume responsibility for it. A new scheme could be created which is an eligible scheme, and the existing member of that old scheme transferred to it with additional members—perhaps the son-in-law of the garage owner or whoever. As a result, that scheme would then be eligible to PPF compensation should the board assume responsibility for it.
So, in a sense, this is a further version of seeking to avoid the manipulation of the rules, in order for the scheme that could be funded but which could arrange to be underfunded to come within the PPF. It is one such device by which we seek to ensure that that will not happen.
One of the conditions for the board refusing to assume responsibility for a scheme under this clause is that the new scheme must have been established during a certain period, which will be set out in regulations. Again, we expect the period to be three years in order to be consistent with the other moral hazard—a trip line, if you like—within the Bill. We just think that that is a reasonable point to follow.
Perhaps the noble Baroness could help me further on precisely what she wants some steer on in terms of the time line. It is clear that we are producing the three-year rule to try to block manipulation of any form or other. The States has a version of that which ensures that there is no artificial manipulation to take the assets somewhere else and dump the liabilities on the PPF, which is always the risk. We must have powers to thwart that, even if there are only five cases as opposed to 50 or 500. One of the problems is often that the number of words—whether they relate to ill health or whatever—may not reflect the number of people who come in. Perhaps the noble Baroness can help me on her particular query about the time period, in that the provision applies for three years and seeks to stop the creation of an artificial new scheme out of the bones of an old one to bring it within the eligibility of a PPF fund.
Baroness Barker: I shall try to help the noble Baroness. My point is that, throughout this clause, duties are placed on the board to take certain actions. Most of those actions are based on the board having arrived at a conclusion, having made a judgment about the eligibility of the scheme or about whether an action has occurred from an intention to avoid or ameliorate liability.
The point I seek to make is that, given that most of the board's actions will be based on judgments at which it has arrived, the board should be under a general and explicit duty to explain and take its action at the earliest opportunity. Most of those actions are to inform other bodies—the regulator, the trustees and so on. There should be an urgency about its doing so. Any delay on the part of the board in communicating

GC 173
that can have a material effect on the actions of all the other players in the process of determining the viability or otherwise of a scheme. That is so important that it merits being explicit and repeated throughout the legislation. That is the point that I am seeking to get across.
6 p.m.
Baroness Hollis of Heigham: I shall respond appropriately to the noble Baroness. Amendment No. 204D states:
"Where a withdrawal notice issued under this section becomes binding, the Board must as soon as reasonably practicable".
The noble Baroness has picked up two issues. One is the length of time of the assessment period and how that may be elongated with the uncertainty involved for the members. Equally, we have to accept that it is a very complicated process to try to see whether there has been any manipulation of the scheme. The second issue is the amount of information available to all the players in the scenario to ensure that they are in a position to expedite proceedings, so that we can reduce the timetable to as brief a period as possible. I take it that that is one of the concerns of the noble Baroness.
At this point, all I shall say is that we shall be discussing the position of information that goes out—I hope this latest point is addressed—under Clause 194, which will give us the chance to go into the detail. In this case, notice will be issued as soon as reasonably practicable, as referred to in Amendment No. 204D. Perhaps I can invite the noble Baroness to re-address the issue under Clause 194. If she feels that the quest for disseminating information and the need to expedite the time scale can be achieved coherently together, and not in ways that subvert each other, perhaps we can re-enter that debate when we come to Clause 194, which may be a more appropriate time. If I can give the noble Baroness any information before we come to that clause, perhaps she will write to me so that she has a better sense of where the regulations may go on this, and I will be happy to respond.
Baroness Barker: I am happy with that response and I shall talk to the noble Baroness further.
Clause 139, as amended, agreed to.
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendment No. 204E:
After Clause 139, insert the following new clause—
"WITHDRAWAL FOLLOWING ISSUE OF SECTION 116(4) NOTICE
(1) This section applies where—

(a) a notice under section 116(4) (inability to confirm status of scheme) is issued in relation to an eligible scheme and becomes binding, and

(b) a withdrawal event has not occurred in relation to the scheme in respect of a withdrawal notice which has been issued during the period—

(i) beginning with the occurrence of the last insolvency event in relation to the employer, and

GC 174

(ii) ending immediately before the notice under section 116(4) becomes binding,

and the occurrence of such a withdrawal event in respect of a withdrawal notice issued during that period is not a possibility (see section 140).
(2) The Board must determine whether any insolvency event—

(a) has occurred in relation to the employer since the issue of the notice under section 116(4), or

(b) is likely to so occur before the end of the period of six months beginning with the date on which this section applies.

(3) If the Board determines under subsection (2) that no insolvency event has occurred or is likely to occur as mentioned in that subsection, it must issue a notice to that effect (a "withdrawal notice").
(4) Where—

(a) no withdrawal notice is issued under subsection (3) before the end of the period mentioned in subsection (2)(b), and

(b) no further insolvency event occurs in relation to the employer during that period,

the Board must issue a notice to that effect (a "withdrawal notice").
(5) Where the Board is required to issue a withdrawal notice under this section, it must give a copy of the notice to—

(a) the Regulator,

(b) the trustees or managers of the scheme, and

(c) the employer.

(6) For the purposes of this Part, a withdrawal notice issued under this section is not binding until—

(a) the period within which the issue of the notice may be reviewed by virtue of Chapter 6 has expired, and

(b) if the issue of the notice is so reviewed—

(i) the review and any reconsideration,

(ii) any reference to the PPF Ombudsman in respect of the issue of the notice, and

(iii) any appeal against his determination or directions,

has been finally disposed of and the notice has not been revoked, varied or substituted.
(7) Where a withdrawal notice issued under this section becomes binding, the Board must as soon as reasonably practicable give a notice to that effect together with a copy of the binding notice to—

(a) the Regulator,

(b) the trustees or managers of the scheme, and

(c) the employer.

(8) Notices under this section must be in the prescribed form and contain such information as may be prescribed.
(9) A notice given under subsection (7) must state the time from which the Board ceases to be involved with the scheme (see section 140)."
On Question, amendment agreed to.
Clause 140 [Circumstances in which Board ceases to be involved with an eligible scheme]:
The Deputy Chairman of Committees (Lord Hogg of Cumbernauld): If Amendment No. 204F is agreed to, I cannot call Amendment No. 205 due to pre-emption.
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendment No. 204F:
Page 96, line 23, leave out subsections (2) to (7) and insert—
"(2) For this purpose the following are withdrawal events in relation to a scheme—

(a) a withdrawal notice issued under section 116(2)(b) (scheme rescue has occurred) becoming binding;

(b) a withdrawal notice issued under section 122(3) (scheme rescue has occurred) becoming binding;

(c) a withdrawal notice issued under or by virtue of section 138 or 139 (refusal to assume responsibility) becoming binding;

(d) a withdrawal notice issued under section (Withdrawal following issue of section 116(4) notice) (no insolvency event has occurred or is likely to occur) becoming binding,

and references in this Chapter to a "withdrawal event" are to be construed accordingly.
(3) Subsection (4) applies where a withdrawal notice mentioned in subsection (2) is issued in relation to a scheme and becomes binding and—

(a) an insolvency event in relation to the employer occurs during the interim period and, if subsection (4) did not apply, the event would not be a qualifying insolvency event within the meaning given by subsection (3) of section 119 solely because the condition in subparagraph (ii) of paragraph (b) of that subsection would not be satisfied, or

(b) an application under section 121(1) is made, or a notification under section 121(5)(a) is given, in relation to the scheme during the interim period and, if subsection (4) did not apply, the application or notification would be disregarded for the purposes of—

(i) subsection (1) of section 120 by virtue of subsection (4) of that section, and

(ii) subsection (4) of section 124 by virtue of subsection (5) of that section.

(4) In such a case, the withdrawal notice is to be treated for the purposes of subsections (1) and (2), as if the time when it became binding was the time immediately before—

(a) in a case falling within subsection (3)(a), the occurrence of the insolvency event, and

(b) in a case falling within subsection (3)(b), the making of the application under section 121(1) or, as the case may be, the giving of the notification under section 121(5)(a).

(5) For the purposes of subsection (3), the "interim period" in relation to a scheme means the period beginning with the issuing of the withdrawal notice in relation to the scheme and ending with that notice becoming binding.
(6) For the purposes of this Chapter—

(a) the occurrence of a withdrawal event in relation to a scheme in respect of a withdrawal notice issued during a particular period ("the specified period") is a possibility until each of the following are no longer reviewable—

(i) any withdrawal notice which has been issued in relation to the scheme during the specified period;

(ii) any failure to issue such a withdrawal notice during the specified period;

(iii) any notice which has been issued by the Board under Chapter 2 or this Chapter which is relevant to the issue of a withdrawal notice in relation to the scheme during the specified period or to such a withdrawal notice which has been issued during that period becoming binding;

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(iv) any failure to issue such a notice as is mentioned in sub-paragraph (iii), and

(b) the issue of, or failure to issue, a notice is to be regarded as reviewable—

(i) during the period within which it may be reviewed by virtue of Chapter 6, and

(ii) if the matter is so reviewed, until—

(a) the review and any reconsideration.

(b) any reference to the PPF Ombudsman in respect of the matter, and

(c) any appeal against his determination or directions,

has been finally disposed of."
The noble Baroness said: I beg to move.
Lord Skelmersdale: I had not appreciated that preemption would occur. I learnt only this afternoon of the possible length of the assessment period or the early closure of the assessment period in certain circumstances; namely, in subsection (2)(a), (b), (c) and (d).
My problem is that one of these matters is an actuarial re-visitation during the assessment period which says that the assessment period is no longer needed because the scheme has now become fully funded due to outside activities. That is fine and super; that is what we all want. However, the valuation of a scheme surely takes place at a particular time—almost on a particular day and certainly within 24 hours. Rather like advertisements that one sees in the financial pages of newspapers, valuations can go down as well as up.
Baroness Hollis of Heigham: It is like the advertisements that say, "Take the waiting out of wanting", although the noble Lord may not want to.
Lord Skelmersdale: Not just at this moment. All that thinking led me to wonder why the six months was required and whether it is the correct period. As actuarial valuations will have to be made under the Bill at regular intervals, I would have thought that the regular interval should be the right time for the withdrawal of the assessment period rather than the six months which is dictated under this clause. I would be grateful for an answer to that.
Baroness Hollis of Heigham: This concerns not whether the insolvency practitioner has determined that the scheme has been rescued or that it cannot be rescued; it is whether he is in a position not to make that order. In other words, we expect it to be fairly rare. It concerns the situation where an insolvency practitioner has issued a notice confirming that it is not possible to determine whether or not a scheme rescue has occurred; and where no further insolvency event has occurred within six months, that is to be considered a withdrawal event.
We would expect that it is not possible to determine situations in which that applies. They happen very rarely and only in instances where the insolvency practitioner has been appointed to resolve one insolvency issue for

GC 177
one creditor and has no overall view of the solvency of the company as a whole. This could occur, for example, under an administrative receivership. With such an insolvency procedure, which triggers an assessment period, the administrative receiver who represents an individual lender, for example, with a security for a loan, has the power to deal only with a claim of the relevant security creditors. If the company continues in whole or in part once the administrative receiver has recovered a specific debt, the administrative receiver will not necessarily be aware of the outcome of the pension scheme or indeed the business and would issue a notice saying that he was unable to issue either a "scheme rescue" or a "scheme rescue not possible" notice.
In practice, it is likely that the position of the company and the scheme will be reasonably clear, but not within the remit of the specific administrative receiver; and, of course, the PPF will be closely involved in understanding the wider picture. In many cases, it is likely that the company will continue to exist—perhaps in a rationalised form—or a separate insolvency trigger may occur with a separate liquidator appointed to deal with the rights of all the other non-secured creditors. In either case, we understand that a period of six months should be adequate both to clarify the insolvency position and to complete any further steps in the scheme valuation process. We do not want to continue that indefinitely as members' benefits are reduced.
I have checked to see whether any concern was raised by insolvency practitioners about the timetable, as that would be the key. I understand that none was raised. Should any doubt be raised I would reconsider the matter. Currently, I have no reason to think that going from six to eight months would have any particular benefit to insolvency practitioners, but it could have some detriment to members of a scheme.
Lord Skelmersdale: Again, I am very grateful to the noble Baroness for acquiescing to my slight bending of the Committee's rules of order and explaining that she is not entirely sure that six months is correct.
Baroness Hollis of Heigham: I have every reason to believe that six months is fine. All I am saying is that I am not aware of any support anywhere for the amendment of the noble Lord. Were there to be any, I would be open-minded about it and I would see whether that evidence was substantial. However, none has been made. I believe that that is an argument for saying that the six months is appropriate and acceptable.
Lord Skelmersdale: Very well. The noble Baroness is entirely sure as of this precise moment. However, at the next moment she may not be. We shall see. I am extremely grateful to her for replying to me. Should it turn out after the Bill is enacted that six months is wrong, what procedure is there for changing it?
Baroness Hollis of Heigham: We do not have power through regulations to change the period. It would have to be done by primary legislation. But I would have reason to think it is wrong only if those who are at
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the coal face—the insolvency practitioners—expressed concerns to us that it is an inadequate period of time and showed to us such evidence as exists. Otherwise, it is in the same position as any other requirement in any other Bill which is not carried through by regulations. That shows the advantage of having framework Bills and doing everything by regulations.
Lord Skelmersdale: I agree. There are arguments on both sides. I am reminded of a recent e-mail that I received about the Civil Contingencies Bill, which does not concern either the noble Baroness or myself. That is entirely a framework Bill.
Returning to the point, the noble Baroness assumes that the insolvency practitioners are able to confirm or to deny her belief or my suspicions in advance of this Bill becoming law. I suspect that we shall find that experience will be a great educator, as we have agreed on earlier points in the Bill. For the moment, I have no alternative but to leave the matter unless the noble Baroness wishes to saying anything else. I see that she does not.
On Question, amendment agreed to.
[Amendment No. 205 not moved.]
Clause 140, as amended, agreed to.
Clause 141 [Consequences of the Board ceasing to be involved with a scheme]:
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendment No. 205A:
Page 97, line 29, after "scheme" insert "rules"
On Question, amendment agreed to.
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendment No. 205B:
Page 97, line 33, at end insert—
"(1A) Where the winding up of the scheme began before the end of the assessment period (whether by virtue of section 210 (backdating the winding up of eligible schemes) or otherwise), the reference in subsection (1)(b) to the amount of any benefit payable to a member, or to a person in respect of a member, under the scheme rules is a reference to the amount so payable taking account of any reduction required by virtue of sections 73 to 73B of the Pensions Act 1995 (c. 26) (provisions relating to the winding up of certain schemes).
(1B) Where—

(a) an assessment period comes to an end by virtue of the Board ceasing to be involved with an eligible scheme, and

(b) during the assessment period the amount of benefit paid to a member, or to a person in respect of a member, under the scheme rules exceeded the amount that would have been payable in the absence of section 130(2A) (requirement to disregard winding up when paying benefits during assessment period),

the trustees or managers of the scheme must, at the end of that period, take such steps as they consider appropriate (including steps to adjust future payments under the scheme rules) to recover an amount equal to the excess from the person to whom it was paid.
(1C) Subsections (1) to (1B) are without prejudice to section 73A(2)(b) of the Pensions Act 1995 (c. 26) (requirement to adjust benefits paid to reflect liabilities which can be met on winding up)."
The noble Baroness said: This is another set of government amendments on which we circulated background information in advance specifying the details of the regulations. Otherwise it would have taken 20 minutes to spell them out in Committee.
This group of amendments provides for the replacement of the current statutory priority order on wind-up with a new one when the pension protection fund starts up for business. It also contains consequential amendments to PPF provisions within the Bill, which is why they are being debated at Clause 141 as consequential amendments to other legislation.
These amendments will ensure that, broadly speaking, individual scheme members will be no worse off if their scheme winds up than they would be if their scheme entered the PPF. That underlines the Government's commitment to the package of measures being introduced through the Bill to ensure that members of all defined benefit schemes receive meaningful levels of compensation on pension. In other words, the priority order for solvent employers with wind-ups, the priority order for insolvent employers with sufficient assets—which I suspect may not be a frequent occurrence—the priority for the large scheme closures, which we still have to address in future sessions of the Committee, and the priority for the PPF should all broadly be aligned. This is the first of the amendments that seeks to do that.
6.15 p.m.
That is the proposal. This is for the winding up. These amendments introduce a new priority order to take effect when the PPF opens its doors. It is set out as follows. I shall go through this to get it into Hansard.
The first category of the priority order is liabilities for pensions or benefits paid by certain insurance contracts purchased before 6 April 1997 that cannot be surrendered or where the surrender value is less than the liability secured by the contract. They will have been bought in the name of the trustees to pay a specific pension.
The terms of these contracts mean that they either cannot be surrendered or can be, but only at a disproportionate cost to the scheme. The priority order does not treat insurance contracts bought in this way after 6 April 1997 separately as the trustees should have brought them in the light of the current legislation so that they could be surrendered at a reasonable cost.
The main purpose of the revised priority order is to ensure that members of schemes which have been assessed by the PPF board, but the board has not assumed responsibility for the scheme, receive broadly what they would have done if the board had assumed responsibility for the scheme. We are trying to ensure that different categories of potential or actual benefit recipients would not be disadvantaged if the scheme wound up outside the PPF as opposed to coming within the PPF. There is a similar alignment of the priority order, whether it is the wind up of a solvent
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company or the wind up of an insolvent one and whether it should be bought out, closed, or put into the PPF.
The second and substantial category of the priority order is, therefore, the liability for benefits which does not exceed the corresponding PPF liability. That is 100 per cent of the original pension promise for people who have reached the scheme pension age and 90 per cent for people below that age, subject to an overall benefit cap which is calculated using a mixture of the scheme's individual rates and standardised rules linked to earnings. That includes 90 per cent of voluntary contributions up to the level of the cap for non-pensioners and 100 per cent of voluntary contributions for pensioners.
The second category does not include liabilities for benefits which fall in the first category. Regulations will provide that, when determining the corresponding PPF liability, the pension compensation provisions apply with certain modifications.
The third category is voluntary contributions—that is AVCs. Currently, those are a separate category in the priority order. That ensures that individuals who take out voluntary contributions which they fully fund themselves are treated as fairly as possible. However, with the introduction of the PPF, which bases compensation on all contributions paid including voluntary ones, and in the light of the moral hazard problems that schemes could be manipulated to make it appear that benefits were derived from voluntary contributions, the amendments provide for a separate third category to cover the liabilities for voluntary contributions to the extent that these are not included in the first two paragraphs of the priority order; in other words, where the voluntary contributions have not been turned into added years.
The fourth and final category covers any remaining liabilities for benefits not already met under the preceding categories.
This bundle of amendments does that. The amendments set out a priority order. We are trying to ensure that the priority order under winding up, under the PPF and under closed schemes is broadly similar so that the individual categories of members do not find themselves disadvantaged whether a scheme remains outside the PPF or within it. Without going into the detail of the amendments, I hope that the Committee will support them.
Lord Higgins: Which categories will receive less priority under these amendments?
Baroness Hollis of Heigham: Two things are taking place. First, existing pensioners will receive 100 per cent under the PPF compensation fund and others will receive 90 per cent, but the crucial difference is the issue of indexation. Under the old system the indexation for pensioners took precedence over the payment of benefit for active and deferred members. That will no longer be the case. Indexation follows the meeting of the obligation to pensioners and to active and deferred members.
On Question, amendment agreed to.
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendments Nos. 205C to 205E:
Page 97, line 35, after "scheme" insert "rules"
Page 97, line 39, at end insert "rules"
Page 98, line 2, at end insert—
"( ) modifying section 31 of the Welfare Reform and Pensions Act 1999 (c. 30) (reduction of benefit where a person's shareable rights are subject to a pension debit), in its application in relation to cases where benefits accrue under the scheme by virtue of regulations under subsection (2)."
On Question, amendments agreed to.
Clause 141, as amended, agreed to.
Clause 142 [Application for reconsideration]:
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendments Nos. 205F to 205Q:
Page 98, line 14, leave out paragraph (a) and insert—
"(a) a scheme failure notice has been issued under section 116(2)(a) in relation to the scheme, that notice has become binding and the trustees or managers have received a copy of the binding notice under section (Binding notices confirming status of scheme)(3),"
Page 98, line 25, leave out from "a" to end of line 28 and insert
"scheme failure notice under subsection (2) of section 122 in relation to the scheme, that notice has become binding and the trustees or managers have received a copy of the binding notice under subsection (7) of that section,"
Page 98, line 44, at end insert "of the binding"
Page 99, line 1, leave out "were notified" and insert "received a copy"
Page 99, line 4, at end insert "of the binding"
Page 99, line 6, leave out "were notified" and insert "received a copy"
Page 99, line 7, at end insert—
"( ) Where the Board receives an application under subsection (1), it must give a copy of the application to the Regulator."
Page 99, line 11, after "scheme" insert "rules"
Page 99, line 19, leave out first "to" and insert "for".
Page 99, leave out lines 31 to 48.
On Question, amendments agreed to.
[Amendment No. 206 not moved.]
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendments Nos. 206A and 206B:
Page 100, line 9, at end insert—
"( ) For the purposes of this section—

(a) regulations may prescribe how the cost of securing the benefits mentioned in paragraph (a) of the definition of "protected benefits quotation" is to be determined, calculated and verified, and

(b) subject to any provision made under paragraph (a), that cost is to be determined, calculated and verified in accordance with guidance issued by the Board."

Page 100, line 9, at end insert—
"( ) Where the scheme is being wound up, for the purposes of determining the benefits which fall within paragraph (b) of the definition of "protected benefits quotation" in subsection (7) no account is to be taken of the winding up of the scheme."
On Question, amendments agreed to.
Clause 142, as amended, agreed to.
Clause 143 [Duty to assume responsibility following reconsideration]:
[Amendment No. 207 not moved.]
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendments Nos. 207A and 207B:
Page 100, line 27, at end insert—
"(4A) But where the Board is satisfied of the matters mentioned in subsection (2), it is not required to assume responsibility for the scheme under subsection (2) until the determination notice issued under subsection (3) becomes binding.
(4B) For the purposes of subsection (4A) a determination notice is not binding until—

(a) the period within which the issue of the notice may be reviewed by virtue of Chapter 6 has expired, and

(b) if the issue of the notice is so reviewed—

(i) the review and any reconsideration,

(ii) any reference to the PPF Ombudsman in respect of the issue of the notice, and

(iii) any appeal against his determination or directions,

has been finally disposed of and the notice has not been revoked, varied or substituted.
(4C) Where a determination notice issued under subsection (3) becomes binding, the Board must as soon as reasonably practicable give a notice to that effect together with a copy of the binding notice to—

(a) the trustees or managers of the scheme, and

(b) the Regulator.

(4D) A notice under subsection (4C) must be in the prescribed form and contain such information as may be prescribed."
Page 100, line 29, after "date" insert "(within the meaning of section 142(4))"
On Question, amendments agreed to.
Lord Hunt of Wirral Lord Hunt of Wirral moved Amendment No. 208:
Page 100, line 36, leave out paragraph (b) and insert—
"(b) audited accounts covering the period from the date of the latest statutory annual accounts of the scheme to a date no later than three months prior to the day the application is made."
The noble Lord said: I would like to refer to the situations within which trustees apply to the Pension Protection Fund for it to assume responsibility for a scheme. It is stated that an application under the clause must be in the prescribed form and contain,
"an auditor's valuation of the scheme as at a date ('the reconsideration date') within the prescribed period ending with the day on which the application is made".
I was a little confused at the wording of the clause, because auditors do not undertake valuations of the scheme. Their responsibility is to audit scheme accounts. I hope that the noble Baroness will agree that there is a powerful case for arguing that the correct procedure should be to require the scheme trustees to obtain audited accounts to submit to the PPF. I am not at all clear, however, about what is meant by,
"as at a date … within the prescribed period ending with the day on which the application is made".

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It would surely be better to state a clearly specified period for the preparation of such audited accounts.
I therefore ask the Committee to change the wording so that the application should contain,
"audited accounts covering the period from the date of the latest statutory annual accounts of the scheme to a date no later than three months prior to the day the application is made".
That will allow a three-month period for preparing the accounts and also for having them audited. I stress that such accounts should contain the accounting information required by the regulations in respect of the annual accounts for the scheme. I beg to move.
Lord Lucas: My name is attached to this amendment. I am happy to support it. If I had thought, I would have attacked it through Clause 142(4)(b). My basic concern, as my noble friend has said, is that auditors do not carry out valuations. If one requires them to do a valuation they will resign rather than do it. It is not part of being an auditor. There is a misconception as to what an auditor does, is capable of doing and can do within the remit of an audit. I understand what is required, but it is not asking for the right thing.
Baroness Hollis of Heigham: I am a little surprised because I thought, in light of the wording of the amendment of the noble Lord, Lord Lucas, that he was about trying to ensure up-to-date valuation, whereas it is about who provides the accounts. I am in a little difficulty because the noble Lord has not spoken to his amendment at all but to something that is not in his amendment.
Given that I am dealing with the amendment on the Marshalled List and given his point, I accept any linguistic correction relating to an auditor or an accountant. We are certainly in consultation with the ICAEW about the role of an auditor in undertaking valuations and we are currently considering the matter. We may return to the issue on Report, so in terms of the language we shall be happy to return to the matter.
In terms of the substance of the point that I expected him to make had he spoken to his amendment, and given what the noble Lord, Lord Hunt, has said, in terms of ensuring that we do not restrict ourselves to not having an up-to-date valuation, I am perfectly happy to take the matter away and see whether we should include some version so that we have a series of options, an (a) or a (b) or a (c), whichever is more up to date and, therefore, appropriate to the situation under review. I am happy to move some way towards the amendment that is down in the name of the noble Lord, Lord Lucas, but to which he did not speak. I hope that the noble Lord will feel able to withdraw the amendment that he did not move.
Lord Hunt of Wirral: I am a little confused. I sent my speaking note, which I have just read out, to the Minister in July. I explained very carefully what I was to say on this occasion. It is a little bit of a set back to this noble Lord that the Minister has not understood
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the point that I made or has believed that I was speaking to another amendment. Perhaps she has confused the two of us, although I cannot understand how one could merge the youthful countenance of the noble Lord, Lord Lucas, with my rather aged one. I am about to attend a party to celebrate a Labour MP obtaining his freedom pass—I already have one—so I cannot understand how the Minister could confuse the two of us. It may be that her commitment to look at the matter again is so all-consuming that I should merely thank her very much indeed. We shall return to this matter on Report. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendment No. 208A:
Page 100, line 46, at end insert "rules"
On Question, amendment agreed to.
Clause 143, as amended, agreed to.
Clause 144 [Closed schemes]:
Lord Oakeshott of Seagrove Bay Lord Oakeshott of Seagrove Bay moved Amendment No. 209:
Page 101, line 22, after "quotation" insert "on reasonable competitive terms"
The noble Lord said: This may appear to be a somewhat esoteric amendment but I believe that it illustrates a point about the shortage of capacity in the buy-out market, which is why I seek to raise the matter and welcome what assurances the Minister can give me.
What I am seeking to do with this amendment is to put trustees who are unable to obtain a full buy-out quotation on "reasonable terms", as I put it, in the same position as if they could not obtain a full buy-out quotation at all. When I say unreasonable commercial terms, I am talking about penal or prohibitive rates of five or 10 times the normal quote.
The serious point here is that there are only two providers of full buy-out annuities for winding up schemes in this market and they are finding it harder and harder to operate. There is a shortage of capacity and they could be swamped. We could then be in a position where they are giving rather nominal quotes. That is why I am seeking to provide that it should be done only if one can achieve a quote on reasonable commercial terms. I beg to move.
6.30 p.m.
Baroness Hollis of Heigham: I think that the spirit of the noble Lord's comments is already embedded in the Government's position. Although it is useful and helpful to clarify it, my understanding is the same as that of the noble Lord. The UK insurance market presently does not appear to have sufficient capacity to absorb large-scale pension liabilities of, say, £500 million-plus on a buy-out basis that would be sufficiently competitive. The test is that such a buy-out would be competitive. If it were not, the proposition is that it would be run as a closed scheme, on the value-for-money grounds that, as the noble Lord suggested, the costs would be disproportionate.
If that addresses the noble Lord's concerns and re-emphasises the nature of the issue, perhaps he will indicate that he is content with it. If he wishes to press me on any further issues, I would be happy to try to respond to them. We are not seeking to tie trustees into accepting a buy-out that is not competitive given the state of the market. That is why closure is the realistic alternative in this situation.
Lord Lucas: I must admit that I do not see where in the wording we have any recognition of the fact that a quote might be uncompetitive. It says, "If you cannot obtain a quote". If I offer to buy your car for a pound, that is a quote, but it is probably not a competitive quote. I think that there has to be some recognition of the fact that if there are many false sellers in this market, people will offer quotes at silly prices.
Baroness Hollis of Heigham: Perhaps the noble Lord will allow me to take legal advice on this. There is no intention in the Bill to tie the trustees into taking any quote, however uncompetitive, just because it does not say that it has to be competitive. I should have thought that the fiduciary duty of trustees would not allow them to accept an uncompetitive quote where the alternative is a closed scheme. However, if that is not the case and we need further clarification, I am very happy to come back to it.
Lord Oakeshott of Seagrove Bay: It may be technically competitive in the sense that there are two quotes and that is the best one. As my son has reached the age of 25 and I promised him that I would include him in the insurance on his mother's sports car, I am very well aware of the range of quotations that one can get from insurance companies. I am happy to accept what the Minister said as a principle, but I still think that adding wording like mine—not necessarily these exact words—would help to make the position clearer.
Baroness Hollis of Heigham: I am perfectly happy to have a look at it and take advice on this. One such situation would be where the quote, for example, was so expensive that the benefits to members would fall below the PPF level of compensation. That would be an obvious case. If I may, I shall take the draftsman's advice to see whether we need additional words to ensure that trustees do not feel themselves bound to accept an inappropriate course for their scheme members.
Lord Higgins: Perhaps I may ask one question. As I understand it, there are effectively only two providers. So no quote will be competitive in the normal sense; it is a duopoly, and that is the situation. Given that, are the trustees bound to take a quote from the UK, or can they go overseas?
Baroness Hollis of Heigham: The advice that I have been given is that they can go anywhere.
Lord Oakeshott of Seagrove Bay: In the light of those assurances, I am happy to beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendment No. 209A:
Page 101, line 39, after "scheme" insert "rules"
On Question, amendment agreed to.
On Question, Whether Clause 144, as amended, shall stand part of the Bill?
Lord Higgins: I wish to make one or two points. I am not absolutely clear that I understand the terminology correctly so far as concerns closed schemes. Of course, in the context of pensions one frequently talks of a final salary scheme which is closed to new members. Is that the definition that we are using in the present context of Clause 144?
Secondly, the clause constantly refers to "trustees or managers of the scheme". I am not at all clear what the managers have to do with this. I should have thought that only the trustees would be involved. But are we to assume that they must try to obtain a buy-out before they apply for the scheme to be closed or, within the context of this clause, can they say straight away, "We would like to become a closed scheme"? Perhaps the noble Baroness would clarify that point.
I want to make only one other point. Clauses 146 and 147 are concerned with the treatment of closed schemes. I am not sure why Clause 145 comes where it does. I should have thought that it would come after Clause 150 but perhaps we can consider that point later.
Baroness Hollis of Heigham: In response to the noble Lord's direct question, the trustees and managers of a scheme may apply to the board for the authority to continue as a closed scheme only if they have been unable to obtain a full buy-out quotation. If the board is satisfied that the trustees or managers have taken all reasonable steps—and taking into account all that the noble Lords, Lord Higgins and Lord Oakeshott, said about duopolies—but have been unsuccessful, the board must authorise the scheme to continue as a closed scheme.
Any application to the board to continue as a closed scheme must be accompanied by evidence that the trustees or managers have taken all reasonable steps to obtain a full buy-out quotation. The form of the evidence will be prescribed in regulations. If the PPF board is satisfied with that evidence, it must issue a determination notice to the trustees and managers and to the regulator. The determination notice will set out the decision of the board as to whether a scheme may continue as a closed scheme. That is the procedural point that the noble Lord raised. Does he have any other concerns?
Lord Higgins: Is it a closed scheme in the sense that it is closed to new members?
Baroness Hollis of Heigham: Yes.
Lord Higgins: I am now clear about the situation. We have a scheme where the trustees have been unable to secure a full buy-out but can they secure a partial

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buy-out? The clause specifically refers to a full buy-out—the implication being that they could possibly go for a partial buy-out. But I am not clear whether they could secure a partial buy-out and a closed scheme for the rest, so to speak.
My other question is whether this is wholly outside the PPF; that is, is it simply the case that the board is saying, "You must try for a full or partial buy-out and, if you cannot, it becomes a closed scheme"? But does the matter come outside the PPF at that point? Most of the Bill is concerned with the PPF or the financial assistance scheme or whatever. But here the board suddenly seems to be setting up a quite different animal which does not come under the PPF. It becomes a closed scheme but the trustees and so on remain in operation for the members who are already in it. It is really at that point nothing to do with the board. Does the board wash its hands of the scheme at that point? Does it then have no further influence on it at all?
Baroness Hollis of Heigham: The situation is that the scheme is being wound up but the assets are greater than the protected liabilities that will come under the PPF. Therefore, in principle, it should be able to buy out its liabilities through an insurance contract. It cannot do so because of the size of the fund, so it becomes appropriate for it to be a closed scheme. It is not closed in the sense of a conventional DB or DC scheme closing to new members, but it effectively becomes frozen. It is a scheme in wind-up that cannot actually wind up.
If, for whatever reason, the scheme could not pay its members or dependants the level of protection offered by the PPF, the PPF would gain. That scheme would come into the PPF. The size of the default is not an obstacle to coming into the PPF but the scheme would normally stay outside the PPF because its assets meet its protected liabilities. It can offer pension benefits to members greater than would be obtained by those members within the PPF, but it cannot meet that obligation by buying annuities because of the size of the scheme. Should it not be able to offer levels of benefit of at least as good quality as the PPF and the PPF has certainly not washed its hands of it, the PPF is in play.
We are talking about large schemes with sufficient assets such that it is in the members' interests to stay outside the PPF, but that cannot discharge those obligations by buying insurance contracts. Therefore, they continue as closed schemes—effectively frozen schemes.
Lord Higgins: That is very helpful. I now understand the matter rather more clearly, but it means that we are using "closed scheme" in two different contexts.
Baroness Hollis of Heigham: That is certainly true.
Lord Higgins: That seems highly undesirable, and we should have thought of some other terminology. I was certainly confused originally by what was meant by a closed scheme. I am also not entirely clear why the
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PPF is involved. If I understand correctly, there cannot be a full buy-out. A scheme becomes a closed scheme in the sense that we now understand to be intended, but the PPF then has no more to do with it. That is the end of the matter.
Baroness Hollis of Heigham: No, not quite. The scheme stays outside the PPF but the PPF still has a role in terms of issuing or ensuring financial directions of the scheme in order to protect the assets so that the scheme does not later enter the PPF. There is that continued responsibility on the PPF. For whatever reason—through the stock market or whatever—one could conceive of such a closed scheme in due course coming into the PPF if it could not meet its obligations, but the PPF will continue to make sure that the scheme is not accidentally or artificially manipulated in such a way that the assets are not run down, given the health of the sponsoring company and employer, which will of course be extremely dubious. That is why it would be in such a situation.
Baroness Turner of Camden: This is a rather important point, and it is really rather confusing. I regret to say that it is very common nowadays for firms to take a policy decision that they will not provide a final salary scheme to new staff. Therefore, so far as concerns the existing scheme, we may use the terminology "closed", but in fact the scheme is still there; it is quite viable. New staff are usually given—if anything at all—a scheme based on a money purchase arrangement. That is very common, so we need to be absolutely clear about the differences. I am very glad that the noble Lord, Lord Higgins, has raised the matter as it is important.
Baroness Hollis of Heigham: The confusion arises because—my noble friend is entirely right, as is the noble Lord, Lord Higgins—"closed" is used in two different senses. Some ongoing companies close a DB scheme and open a DC scheme or they create a hybrid between the two. That is one use of "closure", but we are talking about an entirely different sense of it in which a scheme that is being wound up and would have gone into wind-up by buying out the liabilities or responsibilities through insurance contracts cannot do so, given the size of the scheme and the state of the market. Therefore, it is continuing as, so to speak, a frozen scheme. The PPF continues to have a responsibility to ensure that the assets which by definition surpass the liabilities—that is why the scheme remains outside the PPF in the first place—continue so that the scheme does not subsequently fall into the PPF. Should it have to do so in due course, it will do so.
6.45 p.m.
Lord Borrie: My noble friend Lady Turner of Camden and the noble Lord, Lord Higgins, have commonly said, several times, that what people outside talk about as "closed schemes" is quite different. The heading in italics above Clause 144 uses the phrase "Closed schemes" but nowhere is it clearly defined. Moreover, rather like a door, schemes can be

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closed one minute and opened again the next. They can be looked at from time to time by the Pension Protection Fund board. Under later clauses—they are only a few clauses later—schemes can be reconsidered and brought into the fund if circumstances change. From the point of view of wording and understanding, there really could be improvements but, having thought about the matter only as others were speaking, I certainly do not have any positive way of putting things.
Baroness Hollis of Heigham: I entirely accept that, within pensions terminology, "closure" and "closed schemes" are used in two different senses. Let me see whether there is any way of differently describing what is happening. What we are dealing with in the clause is very clear—large schemes that should be winding up because they have assets that out-price their liabilities. In the normal course of events, if they were modest-sized schemes with liabilities of £50 million or whatever, they should be able to buy those out by securing annuities from members that they would draw down then or in future. They cannot do so given the state of the market, which, as has been explained, is a duopoly. Therefore, they need some different form of outcome. It is not appropriate for it to go into the PPF: nor should it, because the assets surpass the liabilities, which would mean that members would as a result have artificially depressed benefits that they do not need to have. That is what would happen if they went into the PPF, given the cap and the 90 per cent funding.
All that said, it is clear that if the wording adds not exactly to the confusion but to a certain degree of difficulty for Members of the Committee, we should look at it. I can make no promises but I am open to suggestions. I do not promise half a bottle of champagne for the best redefinition, but perhaps we should come up with a clearer or different label so that "closed scheme" does not apply to two different beasts, which is what it does at the moment.
Baroness Barker: Perhaps I might seize the opportunity of this spirit of clarification to ask one question. The noble Baroness explained that she was talking about a scheme that did not come within the terms of the PPF because it had the assets to meet its protected liabilities. Why should the scheme then be dealt with by the PPF rather than the regulator? I understood from previous discussions—I am going back a few months before the Recess—that a vast swathe of the regulator's activities was to look at schemes in danger of coming within the remit and the clutches of the PPF. Why should the schemes be different, whatever their terms? They appear to be "frozen at a moment in time" schemes. Why should they be treated by a different body?
Baroness Hollis of Heigham: Basically, if the scheme had been sufficiently modestly sized, there would have been bought-out insurance contracts and that would have been the end of the matter. Those pensions would have been secured ad infinitum. Because of the size of a scheme, it is not in that position. It therefore depends,
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based on its regular valuations, on ensuring that there is an adequate match between its assets and liabilities. The PPF is concerned to ensure that that adequate match is not reduced in any way and it seeks to ensure that the scheme does not come within the PPF. That is why the PPF has the responsibility.
In a way, we are talking about a method of continuing to keep a shadow of an assessment period, as opposed to a regulator. With a regulator, one is dealing with a solvent company and pension scheme over the solvency of which there is a question mark. On this matter, we have an insolvent employer but an apparently solvent pension scheme which would normally have met its obligations through insurance contracts, in which case all would have been secure, but which cannot do so. Therefore, the PPF must continue to have a watchdog role in order to ensure that there is no artificial or inappropriate adjustment of the ratio between assets and liabilities such that that scheme, which would be substantial, would subsequently come into the PPF. If it did so, it would be to the disadvantage of not only possibly the PPF but of members, who would then receive a lower rate of benefit.
Lord Oakeshott of Seagrove Bay: I want to ask about the difference between the two types of closed schemes. If I understand aright, we have one form of scheme that is closed to new entrants, as the noble Baroness, Lady Turner, said. Is the essence of the other form that it is closed to contributions? Have I got that right? Perhaps a bottle of House of Lords' spring water is all I shall win on that, but that is basically right, is it not?
Baroness Hollis of Heigham: Yes—it is essentially frozen without being able to be frozen.
Lord Higgins: I think that we are clear that we need to change the terminology, and "frozen" is the obvious expression to use, I suppose. Those behind the Minister seem a little doubtful about that but, at all events, we need to think about whether something can be done. The amendments to change the drafting would not take very long on Report.
I regret to say that I am still a little confused. We agree that the scheme does not receive new contributions. It may be that, although it is a closed scheme, the situation deteriorates and it becomes part of the PPF. I am not clear on the second definition of the word "closed"—perhaps it is the primary definition—and whether the scheme cannot in any way take on new members. The other matter on which I am now doubtful is whether a frozen scheme—
Baroness Hollis of Heigham: A big scheme closure.
Lord Higgins: Is a frozen scheme bound to be closed in the traditional sense? I am unclear about whether it can become unfrozen or thawed. What happens if the stock market goes up? Does the scheme then float itself happily away from all concern with the PPF?
Baroness Hollis of Heigham: A scheme is frozen and is not able to take on new members because, by

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definition, the employer has become insolvent. Therefore, the company is not trading. That is very clear and it was my original answer on why it cannot take on new members. The company is not solvent.
I do not see what the problem is if the stock market goes up. If it does, the issue is not whether the scheme comes into the PPF but whether the trustees can discharge their responsibilities by buying insurance contracts. If the stock market has gone up, it is not clear to me that they can necessarily thereby discharge their responsibilities by buying insurance contracts. If they cannot, they will still therefore need to operate as closed schemes; there will simply be more assets to cover liabilities than might otherwise have been the case.
Lord Oakeshott of Seagrove Bay: I suggest, from my personal experience, that what is probably needed is for the stock market to go up so that there is more money to buy the annuities and for the gilt market to go down so that annuities are cheaper. One could be lucky, but that is what one is hoping for.
Baroness Hollis of Heigham: I think that it is the first time in history in which both the gilt and stock markets have gone down simultaneously.
Lord Higgins: Optimism pervades the Committee. At this stage, that may be rather remarkable. I think that we are a little clearer than we were half an hour ago.
I have one final question. Is such a scheme technically wound up?
Baroness Hollis of Heigham: Yes.
Lord Higgins: Fine—I am clear about that. I am grateful for the Minister's explanation.
Clause 144, as amended, agreed to.
Clause 145 [Requirement to wind up schemes with sufficient assets to meet protected liabilities]:
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendments Nos. 209B to 209E:
Page 102, line 37, leave out "determination" and insert "issue of the notice"
Page 103, line 9, after "section 126," insert "but subject to any order made under subsection (7A),"
Page 103, line 12, at end insert—
"(7A) The Regulator may by order direct any person specified in the order—

(a) to take such steps as are so specified as it considers are necessary as a result of—

(i) the winding up of the scheme beginning, by virtue of subsection (6), immediately before the assessment period, or

(ii) the winding up of the scheme being continued under subsection (1)(b), and

(b) to take those steps within a period specified in the order.

(7B) If the trustees or managers of a scheme fail to comply with a direction to them under subsection (7), or contained in an order under subsection (7A), section 10 of the Pensions Act 1995 (c. 26) (civil penalties) applies to any trustee or manager who has failed to take all reasonable steps to secure compliance.
(7C) That section also applies to any other person who, without reasonable excuse, fails to comply with a direction to him contained in an order under subsection (7A)."
Page 103, line 21, at end insert—
"(9A) Where an assessment period in relation to an eligible scheme comes to an end by virtue of the conditions in subsection (2) or (5) being satisfied, subsections (1) to (1C) of section 141 apply as they apply where an assessment period comes to an end by virtue of the Board ceasing to be involved with the scheme, except that in subsection (1A) of that section the reference to section 210 is to be read as a reference to subsection (6) of this section."
On Question, amendments agreed to.
[Amendment No. 210 had been withdrawn from the Marshalled List.]
Clause 145, as amended, agreed to.
Clause 146 [Treatment of closed schemes]:
Lord Skelmersdale Lord Skelmersdale had given notice of his intention to move Amendment No. 211:
Page 103, line 42, leave out paragraph (e).
The noble Lord said: I tabled this amendment in order to tease out exactly what was meant by "closed scheme". However, after the debate on Clause 144, I think that I am a little clearer, although I shall have to read it. Therefore, I shall not move the amendment.
[Amendment No. 211 not moved.]
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendment No. 211A:
Page 103, line 44, at end insert—
"( ) Regulations may require the trustees or managers of a closed scheme in relation to which the provisions mentioned in subsection (3) apply to comply with such requirements as may be prescribed when providing for the discharge of any liability to, or in respect of, a member of the scheme for pensions or other benefits."
The noble Baroness said: Amendment No. 211A amends Clause 146, which sets out the rules for the operation of closed schemes. The amendment provides a regulation-making power that will be used to place restrictions on the ability of closed schemes partially to discharge their liabilities. To some degree, we are returning to the debate that we had earlier. If the schemes were allowed to do so without restriction, they could, for example, use their assets to buy out all their liabilities to members in excess of the PPF compensation cap. Doing so might reduce their assets to such a level that either immediately or at a later stage they would have to be taken into the PPF.
However, it would not be appropriate to put on the face of the Bill a blanket ban on all discharges as there are a number of instances in which it may be necessary or acceptable for discharges of liabilities to be made. Those will, for example, include regular payments of pension to scheme members and situations in which the trustees completely discharge all their liabilities in respect of an individual. Such discharges will have to be in accordance with the winding-up requirements. I hope that the Committee will accept the amendment.
On Question, amendment agreed to.
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendment No. 211B:
Page 104, line 1, leave out subsection (4).
On Question, amendment agreed to.
Clause 146, as amended, agreed to.
Clause 147 [Valuations of closed schemes]:
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendments Nos. 211C to 212:
Page 104, line 8, after "scheme" insert "rules"
Page 104, line 19, leave out "which limits the amount of its" and insert "rules which limits the amount of the scheme's"
Page 104, line 21, at end insert—
"( ) Nothing in regulations under this section may require the trustees or managers of a closed scheme to obtain an actuarial valuation of the scheme until—

(a) the period within which the issue of the determination notice, under section 144(6), in respect of the Board's determination to authorise the scheme to continue as a closed scheme, may be reviewed by virtue of Chapter 6 has expired, and

(b) if the issue of the notice is so reviewed—

(i) the review and any reconsideration,

(ii) any reference to the PPF Ombudsman in respect of the issue of the notice, and

(iii) any appeal against his determination or directions,

has been finally disposed of and the notice has not been revoked, varied or substituted."
Page 104, line 26, at end insert—
"prepared and signed by the actuary"
On Question, amendments agreed to.
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendment No. 213:
Page 104, line 30, leave out ", a person with prescribed qualifications" and insert "—

(i) a person with prescribed qualifications or experience, or

(ii) a person approved by the Secretary of State"

The noble Baroness said: I beg to move.
[Amendment No. 213ZA, as an amendment to Amendment No. 213, not moved.]
On Question, Amendment No. 213 agreed to.
7 p.m.
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendments Nos. 213A to 213C:
Page 104, line 33, at end insert "rules"
Page 104, line 36, after "scheme" insert "rules"
Page 104, line 41, at end insert "rules"
On Question, amendments agreed to.
Clause 147, as amended, agreed to.
Clause 148 [Applications and notifications where closed schemes have insufficient assets]:
[Amendment No. 214 not moved.]
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendments Nos. 214A to 214D:
Page 105, line 16, leave out "an eligible" and insert "a closed"
Page 105, line 20, leave out "eligible" and insert "closed"
Page 105, line 24, leave out "an eligible" and insert "a closed"
Page 105, line 28, leave out "closed scheme" and insert "—
"assets", in relation to a scheme, do not include assets representing the value of any rights in respect of money purchase benefits under the scheme rules;
"closed scheme""
On Question, amendments agreed to.
Clause 148, as amended, agreed to.
Clause 149 [Duty to assume responsibility for closed schemes]:
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendment No. 214E and Amendment No. 214F:
Page 105, line 38, after "scheme" insert "rules"
Page 106, line 12, at end insert—
"( ) An application under subsection (1) of section 148, or notification under subsection (4) of that section, is to be disregarded for the purposes of subsection (1) if it is made or given during an assessment period (see sections 124 and 150) in relation to the scheme which began before the application was made or notification was given."
On Question, amendments agreed to.
Clause 149, as amended, agreed to.
Clause 150 [closed schemes: further assessment periods]:
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendment No. 214G and Amendment No. 214H:
Page 106, line 20, leave out "This section" and insert "Subsection (2)"
Page 106, line 24, at end insert—
"( ) For the purposes of subsection (1) an application under subsection (1) of section 148, or notification under subsection (4) of that section, is to be disregarded if it is made or given during an assessment period (see section 124 and this section) in relation to the scheme which began before the application was made or notification was given."
On Question, amendments agreed to.
Clause 150, as amended, agreed to.
Clause 151 [Transfer notice]:
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendment No. 214J:
Page 107, line 2, at end insert—
"( ) A transfer notice may not be given in relation to a scheme during any period when the issue of, or failure to issue, a withdrawal notice under or by virtue of section 138 or 139 (refusal to assume responsibility) is reviewable (see section 140(6)(b))."
On Question, amendment agreed to.
Lord Skelmersdale Lord Skelmersdale moved Amendment No. 215:
Page 107, line 7, leave out "12" and insert "6"
The noble Lord said: This amendment pre-empts what one might have discussed on Clause 163, because it is a forerunner of that clause. Having learned earlier this afternoon that the assessment period is likely to be

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a minimum of 12 months, one is bound to ask a different question from the one I originally intended when I tabled the amendment—without having the information so nobly imparted by the Minister. Is 12 months long enough in this case? I beg to move.
Baroness Hollis of Heigham: As a direct response to the noble Lord, we think that we have got it right based on the experience of the Pensions Compensation Board. The board has followed through three cases of fraud; two took eight months and the third took 11 months, so it seems to be about the right time. We do not want to artificially elongate the time if there is no fraud and thereby leave things in an insecure state. From our experience the time period seems appropriate.
I was expecting the noble Lord to argue the opposite and I was going to explain to him why six months would not be enough given the experience of the Pensions Compensation Board. The three cases that we have seem to fit this time scale, but who knows.
Lord Skelmersdale: There is a problem because the subsection talks not only about the fraud compensation application, but also about the assessment period. Are we again using "assessment period" in two entirely different senses? We have spent much time this afternoon talking about the length of assessment periods. In this case are we talking about the assessment period for fraud or the general assessment period that we have been discussing all afternoon?
Baroness Hollis of Heigham: It is just the same. Given what I have described, we expect the assessment period to last for a minimum of 12 months. One thing that we expect to be checked in that period is fraud. That is why I was going to argue that reducing the period to six months would be inappropriate. Obviously that forms part and parcel of the assessment period, along with looking at the manipulation of schemes, changing the scheme rules in the preceding three years, cleansing the data, and so on. Therefore, I do not think that there is any problem here.
Whether a more substantive issue arises—that is, that 12 months will not be long enough—then, as I said, all we can do is to work on the evidence thus far that such cases of fraud are fairly rare. Cases of serious fraud, in particular, end up in court procedures involving the recovery of assets and so on, and that may take it out of the PPF's realm altogether.
Lord Skelmersdale: I am afraid that I have been a little naughty because the advantage of having a hook on which to hang a question—a hook in terms of an amendment—is that the barb can go both ways. In this case, it has gone the least obvious way according to the words in the amendment.
That said, I think that I am pleased with the answer but I am still slightly confused about the reference to the assessment period as well as to the fraud compensation application pending. Clause 163 is entirely about fraud and therefore perhaps it would be
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sensible to use another word instead of "assessment period" if it is an assessment period covering a fraud rather than an assessment period by the board, which is very different.
Baroness Hollis of Heigham: I have never been involved in a Bill with so many linguistic difficulties concerning the rules of a scheme and scheme rules and closed schemes. I shall check the language. At this point I can say only that clearly my difficulty in relation to the choice of language is that not only has it come through parliamentary counsel, who are very careful to ensure that words are consistent with previous usage, but it has also gone through the other place. If it makes sense to change the words and if the concerns expressed today by the Committee have any reverberations outside—that is, that we have introduced ambiguity with the use of these words—we shall be happy to help. But basically we are keeping the scheme in the assessment period until the fraud is investigated. That is why we went for a 12-month period.
Lord Skelmersdale: I thank the noble Baroness and beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
On Question, Whether Clause 151, as amended, shall stand part of the Bill?
Lord Higgins: Perhaps I could say a word or two about this as it relates to the moment of transfer of a scheme from the existing trustees to the PPF. In the light of the discussion that we had earlier about the length of the assessment period, I am worried about the position of the scheme's trustees whose responsibilities finally terminate with the transfer notice. It seems that there may be some considerable danger that, given that an assessment is being carried out, there will be very little incentive for the trustees to remain in post. They may as well say, "Well, this is the situation. It could stagger on. We may manage to do a buy-out and so on, but otherwise we see no future and therefore we shall all resign en masse". I am not clear how one prevents that happening.
I am trying to be realistic about this. A transfer notice is made at the end of the assessment period if the assessment is found to be unfavourable, but I am not clear how one keeps the thing going meanwhile and I suspect that some practical danger may arise here. I do not know whether one has any thoughts on that point.
Baroness Hollis of Heigham: I think that the noble Lord is pressing me on whether there may be a risk of the trustees taking their bat and walking away when the transfer notice is issued—which is what the clause is about. However, is that so very different from a wind-up of the scheme? What is happening here is that the scheme is going across to the PPF. However, if it were being wound up and if the annuities or whatever were bought—the trustees role would the taper out in that situation—would there theoretically be any difference? In both cases the trustees would be presiding over the endgame of a particular scheme.

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I do not see why the trustees would be more likely to walk away, precisely because the scheme is coming into the PPF. Members' benefits would therefore be lower than they would if the wind-up was taking place outside the scheme, where by definition there are more assets. I should have thought that the trustees would expect to continue their role to the end.
It is a technical point, but there should still be provision in the scheme rules in terms of the resignation or replacement of the trustees, so that if they were to go they could be replaced. If they ultimately wished to walk away from their duties, there is no doubt but that it might have to be tested in court. However, I am not sure that that situation is different from any other wind-up, where as I say the trustees are watching the scheme taper out.
Perhaps I can invite the noble Lord to come back to the responsibilities of trustees when we reach the chunk of provisions relating to trustees. I think there is a real set of issues about the education, support, training and long-term commitment of trustees in this situation. It may be better to look at it in that context rather than in this clause.
Lord Higgins: By all means, let us do that. However, I think that there is a distinction. If the thing is being wound up, the trustees will feel that they are winding it up and that it is their responsibility; they are not handing it over to someone else. I think that there is a slight difference of approach here—that if the PPF is going to take it anyway, let it get on with it. However, let us come back to that later.
Clause 151, as amended, agreed to.
Clause 152 [Effect of Board assuming responsibility for a scheme]:
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendment No. 215A:
Page 107, line 21, after "is" insert "(and has been)"
The noble Baroness said: I assure the Committee that Amendments Nos. 215A, 215E and 215F are all minor drafting or technical changes. If the Committee is happy for me to circulate my speaking notes to save the Committee's time, I would simply ask the Committee to agree the amendments. I beg to move.
On Question, amendment agreed to.
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendments Nos. 215B to 215D:
Page 107, line 25, after "than" insert "—
(a) "
Page 107, line 26, at end insert ", and
(b) such other liabilities as may be prescribed"
Page 107, line 37, at end insert—
"(7) Without prejudice to the generality of subsection (6), regulations may authorise the Board to modify a term of a relevant contract of insurance if—

(a) any rights or liabilities under the contract arc transferred to the Board by virtue of subsection (2)(a), and

(b) as a result of the transfer, the Board is required, by reason of that term, to pay a specified amount or specified amounts to a specified person who, immediately before
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the time mentioned in subsection (2)(a), was a member of the scheme or a person entitled to benefits in respect of such a member.

(8) In subsection (7)—
"relevant contract of insurance" means a contract of insurance which—

(a) is entered with a view to securing the whole or part of the scheme's liability for—

(i) any pension or other benefit payable to or in respect of one particular person whose entitlement to payment of a pension or other benefit has arisen, and

(ii) any benefit which will be payable in respect of that person on his death, and

(b) is a contract—

(i) which may not be surrendered, or

(ii) in respect of which the amount payable on surrender does not exceed the liability secured;

"specified" means specified in, or determined in accordance with, the contract of insurance."
On Question, amendments agreed to.
On Question, Whether Clause 152, as amended, shall stand part of the Bill?
Lord Borrie: I follow what my noble friend the Minister said about her amendments to Clause 152. I have felt, in relation to Clauses 151 and 152, a certain sense of relief—not really the light at the end of the tunnel, but that we have arrived at the point where, after the assessment period, the transfer notice will put things into the hands of the PPF.
I should simply like to ask a question about Clause 152(2)(a). We have, fairly naturally, the scheme's property rights and liabilities being transferred with effect from the time when the trustees and managers receive the transfer notice. But there are three words in the middle, "without further assurance", and I just do not know what that means.
7.15 p.m.
Baroness Hollis of Heigham: The words mean that it takes effect immediately.
Lord Borrie: I see. I still do not know quite why they are there. Assurance from whom? It is a very odd phrase.
Baroness Hollis of Heigham: All I can say is that this is the parliamentary draftsman's way of expressing that this is without delay; it takes effect immediately. Why that form of words? I would have to revisit my Latin, I suspect.
Lord Borrie: I thank the Minister.
The Deputy Chairman of Committees (Viscount Allenby of Megiddo): The Question is whether Clause 153, as amended, should stand part of the Bill.
Lord Higgins: This is a very important clause indeed as it is concerned with the pension compensation

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provisions that are to be made by the PPF. But in fact I think that nearly all the important points arise on Schedule 7, as this is really a paving provision for Schedule 7. In particular, there is an important series of debates on the percentage of protection that should be made available. I think that it is probably better to defer our discussion until we come to those amendments rather than to debate it in general terms on Clause 153.
Baroness Hollis of Heigham: I understand that the noble Lord is accepting that Clause 153 should stand part, that we will be coming on to the amendments to Schedule 7, and that we will begin the next Committee sitting with opposition Amendment No. 216 onwards. Is that the noble Lord's intent, and that we will not have a substantive debate on the clause?
Lord Higgins: That seems the best way of proceeding. Amendment No. 216 and so forth are extremely important. If we were able to vote, that might well be involved. I cannot give a commitment,
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but many of the seemingly great number of amendments on page 2 of the selection list are government amendments. Perhaps we can therefore make reasonable progress if we proceed as the noble Baroness has suggested.
Clause 152, as amended, agreed to.
Schedule 6 agreed to.
Clause 153 [The pension compensation provisions]:
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendments Nos. 215E and 215F:
Page 107, line 39, leave out "pension"
Page 108, line 6, after "section" insert "155 or".
On Question, amendments agreed to.
Baroness Andrews: This may be a convenient moment to adjourn until Thursday at 3.15 p.m.
The Deputy Chairman of Committees: The Committee stands adjourned until Thursday 9 September at 3.15 p.m.
The Committee adjourned at nineteen minutes past seven o'clock.