Grand Committee Report of 9 September 2004

Official Report of the Grand Committee on the Pensions Bill
(Seventh Day)
Thursday, 9 September 2004.
The Committee met at quarter past three of the clock.
[The Deputy Chairman of Committees (Baroness Pitkeathley) in the Chair.]
Clause 153 agreed to.
Schedule 7 [Pension compensation provisions]:
Lord Higgins Lord Higgins moved Amendment No. 216:
Page 264, line 6, leave out from "means" to end of line 8 and insert "90%"
The noble Lord said: Since the Minister and I first assumed our present offices back in 1997, she has served under, and I have suffered under, no fewer than three Secretaries of State—Miss Harman, Mr Darling and Mr Smith—and we now have a fourth. Alas, in that time, I am afraid, the situation with regard to pensions has deteriorated substantially. But I do not blame any of them; it is largely the fault of the Chancellor and his preoccupation with means testing and tax credits.
There has also been a serious effect on occupational schemes and, in a way, the Bill is something of a sticking plaster on a gaping wound. However, we must do our best on both sides of the House to make it work as satisfactorily as possible.
In moving the amendment, I come to the very important part of the Bill concerned with the level of benefits to be provided by the Pension Protection Fund. Nearly all my amendments—with the exception of one, Amendment No. 227—seek to substitute "90 per cent" for "100 per cent". However, as that amendment has been grouped with the others, it might be helpful if the Minister could explain why that particular part of the Bill has been included.
As far as the 90 per cent/100 per cent argument is concerned, noble Lords may well have seen a letter in The Times from the head of the NAPF and the Institute of Actuaries regarding what percentage of the benefit should be paid out of the fund—whether it should be 100 per cent or 90 per cent—and which categories of people should receive one or the other.
The main problem with the Bill of course is the fact that it will be financed by a levy on final salary schemes. Inevitably, the cost of that is likely to encourage more of the final salary schemes that remain to close and companies to go to a defined contribution scheme. Therefore, the issue of cost and the size of the levy—to which we shall return later—are of crucial importance.
There is also an important issue as far as the relationship between various people who might benefit under the Bill is concerned. The NAPF, in particular—but it is also true of a number of other outside bodies—put rather strong arguments in favour of the type of amendment I am now proposing. On the other hand, at this stage we must regard it very much as a probing amendment.
We ought to try to reach agreement about the right balance between the size of the levy and the burden on employers, on the one hand, and the actual benefits that will accrue to those whom the Bill seeks to help, on the other. The debates in the other place were not particularly clear about where we ended up on the arguments and it is helpful to have this debate today. No doubt by the time we reach Report we will need to decide what particular line we ought to take.
The NAPF points out that a level of protection of 90 per cent is available to a person, to pension stakeholders or to a group of personal policy-holders if their provider becomes insolvent under the Financial Services and Markets Act regime. Therefore, we would have thought that a coherent policy framework should apply to pension protection irrespective of the technical structure—the vehicle through which it is provided.
It is important that we have a system which is egalitarian so far as concerns individual groups of people. At present, some people receive 100 per cent and some receive 90 per cent; some are capped and some are not capped. Clearly one way of equalising the cover would be to provide 100 per cent for everyone. No doubt that is politically attractive, but I feel bound to point out that 100 per cent is a rather misleading way of putting it because it gives the impression to those for whom the Bill provides 100 per cent that it is 100 per cent of the benefits they were expecting to receive in the first place. Of course, that is not the case, as I think everyone in the Committee realises.
If the figure were to be 100 per cent, even in those limited terms, that would clearly be very expensive. I think that an estimate was made in the other place that there would be in the region of an additional £500 million on the levy.
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Hollis of Heigham): If everyone had 100 per cent?
Lord Higgins: Yes.
Baroness Hollis of Heigham: It would be £100 million.
Lord Higgins: At all events, it clearly increases the burden on the levy and, in turn, it increases the effects—perhaps "side effects" would be the best way of putting it—that I mentioned earlier. That would be one way of equalising the payments but it has the disadvantage which I have just mentioned.
Equality could also be achieved by providing 90 per cent for everyone but uncapped. The problem with that is that clearly the rich, for want of a better expression, would gain far more than everyone else, and so that is not a very good way of doing it either.
Therefore, we come to the alternative ways of achieving it. Perhaps we should also take into account whether someone has retired or not, or whether he should be paid from a particular age. If I understand the current proposal correctly—the noble Baroness will no doubt tell me if I am wrong—it would mean that, for example, a 60 year-old retired executive would receive a 100 per cent uncapped pension, whereas a 60 year-old ordinary worker who had retired earlier from the same company would receive only the capped 90 per cent. The noble Baroness indicates assent to that. That does not seem to me to be a sensible arrangement.
Baroness Hollis of Heigham: Depending on the normal retirement age.
Lord Higgins: Yes. It depends on the normal retirement age and so on and therefore we need to straighten that out as well. At all events, it does not seem that the present arrangement is particularly advantageous compared with some of the other alternatives.
In particular, we have the well known cliff-edge effect where, if a scheme is insolvent and it falls into the PPF, perhaps typically funded at 80 per cent, the provision of 90 per cent rather than 100 per cent cover would reduce the cost by 50 per cent. But there is a danger that in some cases one will suddenly find that one person who has already retired receives a great deal and others have problems. That also raises the whole issue of priorities, which we shall deal with in other parts of the Bill.
Finally—we can no doubt come back to these points in a moment—there is the whole question of the extent to which the PPF is likely to be able to fund these liabilities on any level of levy without a very serious effect on the remaining defined contribution schemes. My impression is that at present the Government are tending to underestimate the burden which is likely to fall on the PPF.
It is also true to say that because the advantages that will be given under the financial assistance scheme are likely to be far fewer than are available under the PPF, there will be an incentive for companies which might otherwise become insolvent, or schemes which were otherwise underfunded, to try to defer the crisis until such time as the PPF comes into operation. So it seems to me that the claims on the PPF are likely to be very front-ended.
As others in the industry have pointed out, there are also likely to be sudden ups and downs. I believe that there is a real danger of the scheme collapsing if we impose too heavy a burden on it. The United States Pension Benefit Guarantee Corporation has run into somewhat similar problems and according to the press a few days ago it is in very serious difficulties. So we must bear all those points in mind when considering the appropriate level of benefit, and how best we can avoid—to the extent that it is possible—anomalies in the way in which it is distributed between different categories of people.
I have mentioned the problems. I believe that it is worth while having the debate this afternoon. Then we can see where we stand by the time we come to Report stage. I beg to move.
Lord Oakeshott of Seagrove Bay: It may be helpful if I briefly set out our attitude to this set of amendments. We have a considerable amount of sympathy with the points that the NAPF and the noble Lord, Lord Higgins, are making, but our approach is rather different. Broadly, we do not support this cut from 100 per cent to 90 per cent—not because we do not agree that there will be very serious financial strains on the PPF and indeed on funds, but because we want to take what we regard as a more positive approach.
Putting the matter crudely, our view is that broadly the Government have the balance right on the paying-out side of the PPF, while at the same time making a complete pig's ear on the paying-in side. We believe that we should concentrate on improving and strengthening the paying-in side—critically by ensuring that the Government, if necessary, stand behind the PPF as lender of last resort and by focusing on ensuring that a properly assessed risk-based levy comes into effect as soon as possible. We would prefer to concentrate our efforts on that side of the matter.
Undoubtedly, the noble Lord, Lord Higgins, and the NAPF are right—to quote a very good piece of work by Professor Anthony Neuberger and his colleague David McCarthy at the London Business School—that,
"the PPF is likely to face many years of low claims interspersed irregularly with periods of very large claims".
They conclude, as do we, that,
"There is a significant chance that those claims will be so large that the PPF will default on its liabilities, leaving the Government with no option but to bail it out".
We shall come on to that later.
We understand why the Government have done that, but we feel that there is a difference between the position of people who have already retired and the position of people coming up to retirement. It is harder for those who have already retired to have to adjust to changes in their standard of living because of their pensions. I think it is right that there is some difference between the deferred pensioners and the others. In terms of the general approach we want to concentrate not on cutting the benefits—they are not 100 per cent anyway and we do not want to cut them further—but on strengthening the paying-in side.
Baroness Hollis of Heigham: I thank noble Lords for their contributions, which were very interesting. Before I turn to the amendments I want to argue two points—one of which has in part been made for me by the noble Lord, Lord Oakeshott. First, I entirely agree with the noble Lord, Lord Oakeshott—this is the first part of the Government's argument—that it is not decent to cut pensions, which often can be quite modest, that are already in payment to people who have no capacity to make good that cut. In an ideal

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world, there would be enough resources to pay everyone 100 per cent, apart from issues about moral hazard.
The second point is that pensioners in their former scheme—before it went into the PPF—will continue to receive 100 per cent of pension payment. Ninety per cent of DB schemes, although not required to, as far as we can tell, are indexed to pre-1997 contributions. That would not continue under the PPF.
So, although existing pensioners will not see a cut, they cannot expect to see an increase on the pre-1997 contribution that they would have enjoyed had they stayed out of the fund. Incidentally, that means that a deferred pensioner with a higher accrual rate of 5 per cent may, over 20 years or so, begin to catch up with the pensioner on 100 per cent. I should be very happy to share with the Committee my working figures on that. I was very interested in what happened.
3.30 p.m.
So I agree absolutely with the noble Lord, Lord Oakeshott, that the proposition is not decent. As to the noble Lord's other concern, I have no reason to believe that the envisaged levy, and the responsibilities falling on the PPF which the levy has to meet, will be onerous in that either government money will be essential to keep it afloat or that that is desirable. I should like to remind your Lordships that, first, any scheme coming into the PPF brings its assets along with its liabilities—and in some cases those assets may be substantial—and, secondly, concerning the employer, the cost of the levy is carefully controlled by the 25 per cent cap once the transitional period is over, and during the transitional period there is of course a ceiling.
The third thing to remember is that, given the assessment period, it is likely to be a year before any payments are made out. So the fund will effectively have two years' worth of money before it makes its first payment—subject to monies coming in on time. So there should not be quite the immediate cash flow problem that has been suggested. I agree that there may be steady funding for a lot of the time and then a sudden crisis of the kind that we currently face. That could well be the case. None the less, I have no reason to think that this will be problematic.
The levy allows for large claims. Again, I am perfectly happy to share my workings on the matter. The levy allows for one major FTSE-type company to become insolvent and for its scheme to come within the PPF every two-and-a-half years. The DB scheme allows for one scheme in 250 to come each year within the PPF. As to the assumed average of assets brought into the assumed average of liabilities, our econometric calculations suggest that £300 million of the full rolled-out levy should be more than adequate.
If not, over and beyond the levy's power to borrow is the backstop that the PPF board could, if necessary,
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reduce the pay out by bringing revaluation and indexation down to nil. That is undesirable, but it could be done.
Finally, in general evidence about this issue, I want to quote something that Members of the Committee may have seen from the Aon Consulting's survey for EF of its 45 largest members. It states that 85 per cent—which is admittedly a small number but none the less an important one—of those who responded to the survey felt that the introduction of the PPF and its levy would have either a negative or no impact at all on their company's decision to provide defined benefit occupational schemes. So, about one-third of them thought that it had an effect on their DB schemes and two-thirds did not.
It is worth remembering that the average levy we are talking about, however much may get off-laid onto individual members of the scheme, would work out to about £15 to £20 per member each year—possibly one-half of what most Members of the Committee would expect to pay per year on travel insurance for their holiday. So let us keep the levy in proportion.
Perhaps I may deal very rapidly with the specifics of the amendments. Amendments Nos. 216, 218, 219, 220 and 221 seek to reduce the level of compensation for those members who are over the scheme's retirement age, for those who receive an early pension on the grounds of ill health and for those already in receipt of survivors' benefits. As I say, I think that that would be unreasonable. They are the people least able to make up any shortfall in their compensation. Members may have been ill or they may have had caring responsibilities. Many will of course be women who may have been out of the workplace for many years. They may be elderly. We already know that elderly pensioners are the poorest. To make a further cut would be harsh.
We will propose that the PPF pays a 90 per cent level of compensation to members who are under the scheme's normal pension age before the assessment date. That is partly about costs in order to balance the fund, but it is also about trying to reduce the moral hazard issue. We want to ensure that the PPF is seen as compensation and not as a replacement pension. That is why we are going for the 90 per cent figure.
Amendment No. 217 seeks to pay compensation to early-retired members at a level of 100 per cent. We are proposing 90 per cent so that they have a financial interest in ensuring that the scheme stays out of PPF.
Amendment No. 227 seeks to apply the compensation cap to those members who are over the scheme's normal pension age before the assessment date.
Lord Higgins: The noble Baroness has referred to Amendment No. 227. With respect, I do not understand the purpose of the parentheses in line 21 of page 277, which states:

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"(in a case to which sub-paragraph (7) of that paragraph applies)".
I do not understand what that means. It is a rather odd grouping. Everything in the group is 90 per cent or 100 per cent, and suddenly Amendment No. 227 refers to a little sub-paragraph which I find puzzling. On reflection, the grouping is confusing.
Baroness Hollis of Heigham: The amendment relates to the application of the compensation cap to those members who have retired early—not on grounds of ill health—and are therefore subject to the 90 per cent compensation level and the cap; as opposed to members who have retired on grounds of ill health—which the board has possibly reviewed and decided not to revoke—for whom a payment of 100 per cent without the cap remains in position, as it does for other existing pensioners who have retired above normal pension age. Is that all right?
Lord Higgins: That is fine.
Baroness Hollis of Heigham: Perhaps I can stop there. As I say, our argument is twofold. Basically, first, it is not reasonable to cut the incomes of pensioners who cannot make good a shortfall in income—and the older they are the less likely they are able to do so; and, secondly, they will in any case, I fear, suffer some diminution because the indexation that they may have enjoyed in the previous scheme will not continue to apply and, over time, the gap between the 100 per cent and 90 per cent will narrow.
I believe that in the scheme we have constructed—although obviously there is room for disagreement—the costs are carefully controlled; the employers' levy, which they may or may not choose, wish or be able to lay off onto members, is reasonable given the protection offered; and certainly some of the modest evidence we have received from snapshot surveys carried out by other organisations seems to suggest that it has some degree of support outside the House.
With that explanation, and given that pensions should be protected, although not as much as one would wish, and that employers' costs as reflected in the levy are reasonable and contained—and therefore, I trust, acceptable—I hope the noble Lord will feel able to withdraw his amendment.
Lord Higgins: I thank the noble Baroness for those remarks. It has emerged very clearly that the 100 per cent figure is likely, in presentational terms, to be misleading for the reasons that have been spelt out—namely, that it is not 100 per cent of what the pensioners expected to get in the first place. The emotional view of 100 per cent and 90 per cent is somewhat diminished once you take that point into account.
I have some personal sympathy with the view that people who have already retired are much more vulnerable than those who have not. My attempts to retire over time have proved singularly ineffective. But it is true. It was particularly true, for example, for people investing in Equitable Life, who were put in an
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impossible position and had their whole retirement disrupted when they had, as the noble Baroness pointed out, absolutely no means whatever of recouping the situation. I am not wholly persuaded by what the noble Baroness said but I should like to consider it very carefully indeed so that we can, by Report, decide whether some amendment ought to be pressed. Having accepted the point about people who have already retired, there is none the less something of a cliff-edge problem here.
The other matter on which we have not really touched is the extent to which the costs on the PPF will be reduced by the way in which it invests—whether in equities or bonds and so on. The same applies to firms that might seek to defer until the PPF comes into operation their becoming insolvent by putting far more of the fund into equities. There are problems there, but they come up more appropriately later. In the light of that, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 217 not moved.]
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendments Nos. 217A to 217C:
Page 264, line 18, leave out "under the scheme or another scheme"
Page 264, line 24, leave out "under the scheme or another scheme"
Page 264, line 39, leave out "under the scheme"
On Question, amendments agreed to.
[Amendment No. 218 not moved.]
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendments Nos. 218A to 218D:
Page 265, line 30, after first "the" insert "postponed"
Page 265, line 30, leave out "under the scheme or another scheme"
Page 265, line 32, after "the" insert "postponed"
Page 265, line 42, leave out "under the scheme or another scheme"
On Question, amendments agreed to.
[Amendments Nos. 219 and 220 not moved.]
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendments Nos. 220A and 220B:
Page 267, line 24, leave out "scheme"
Page 267, line 26, at end insert—
"paragraph 19A (compensation in respect of scheme right to transfer payment or contribution refund),"
On Question, amendments agreed to.
[Amendment No. 221 not moved.]
Lord Skelmersdale Lord Skelmersdale moved Amendment No. 222:
Page 268, leave out line 10 and insert "AR x PEL x PSL"
The noble Lord said: Even a very quick reading of the Bill will show that paragraphs 8, 10 and 11 in Schedule 7 have formulae that seem identical. Unfortunately, they are not identical because in the formula in paragraph 10 the expressions "PE" and "PS" mean something rather different from what they

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mean in paragraphs 8 and 11. For the avoidance of doubt, I should say that "PSL" in my amendment does not refer to "Parliamentary Secretary, Lords".
In paragraphs 8 and 11:
"PE is the active member's annual pensionable earnings in respect of the pension under the admissible rules".
However, in paragraph 10:
"PE is the active member's annual pensionable earnings in respect of the scheme lump sum",
which is different, for very good and obvious reasons. I am complaining not about the reasons for the formulae but about the formulae themselves. The same is true of PS. In paragraph 10, PS also refers to a lump sum, not to the,
"pensionable service in respect of the pension under the admissible rules in years".
They are slightly different, so there ought to be a slightly different formula to make that distinction. I beg to move.
Baroness Hollis of Heigham: I am confident that the noble Lord knows exactly how the formula works; it is the absolutely standard way of calculating a DB scheme. Is he suggesting that we should try to clean up the language? Is his primary concern that the language is being deployed to mean two things in the same schedule and that ambiguity might arise?
3.45 p.m.
Lord Skelmersdale: That is exactly what I am saying, but it is only in terms of the formula and not in terms of the words in the Bill explaining what the formula means.
Baroness Hollis of Heigham: Algebra is not my strong suit but certainly I had no problem in understanding how the calculations in paragraphs 8, 11 and 14 were arrived at because the definitions were applied. If this concern is shared by other Members of the Committee, I shall be perfectly happy to see whether we should look at it again. But it seems to me that with pensionable earnings you do move between added years and lump sums—that is, there is a possibility of commuting some of your years into a tax-free lump sum. You may use a lump sum to buy an annuity for additional years. Therefore, there is quite a lot of fluidity across the two.
However, the formula is clearly defined here and therefore at present I am not persuaded that there is a possibility that confusion or error will arise. Perhaps I may put it this way. If the noble Lord's point is supported by any organisations outside who feel that this is misleading or that it could give rise to confusion, I shall be very happy to have a look at it again. But if his position is not supported, perhaps we can regard this as at least being satisfactory to the insiders.
Lord Skelmersdale: I am grateful for that response so far as it goes. It is simply that I have an algebraic penchant for ensuring that formulae that appear to be the same in legislation—or, indeed, in any other piece of notification—are indeed the same. This is a case
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where they are not the same. But I take the point and, if necessary, I shall return to this matter at a later stage. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 223 and 224 not moved.]
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendments Nos. 224A to 224E:
Page 268, line 34, leave out second "paragraph" and insert"—
paragraph 19A (compensation in respect of scheme right to transfer payment or contribution refund), and
paragraph"
Page 269, line 33, at end insert—
"paragraph 19A (compensation in respect of scheme right to transfer payment or contribution refund),"
Page 271, line 30, at end insert—
"paragraph 19A (compensation in respect of scheme right to transfer payment or contribution refund),"
Page 272, line 21, leave out "under the scheme"
Page 273, line 12, leave out "under the scheme or another scheme"
On Question, amendments agreed to.
[Amendment No. 224F had been withdrawn from the Marshalled List.]
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendment No. 224FA:
Page 274, line 10, at end insert—
"Compensation in respect of scheme right to transfer payment or contribution refund
19A (1) Compensation is payable in accordance with this paragraph where—

(a) a person's pensionable service terminates on the commencement of the assessment period,

(b) as a result, he has rights, under the admissible rules, to—

(i) a transfer payment calculated by reference to the value of benefits which have accrued to him under the scheme ("the protected transfer payment"), or

(ii) a cash payment calculated by reference to the amount of contributions made by him or on his behalf to the scheme ("the protected contribution repayment"),

(c) Chapter 5 of Part 4 of the Pension Schemes Act 1993 (c. 48) (early leavers: cash transfer sums and contribution refunds) does not apply to him, and

(d) he does not have relevant accrued rights to benefit (within the meaning of section 101AA(4) of that Act).

(2) That person is entitled to compensation in the form of a lump sum in respect of the protected transfer payment or protected contribution repayment.
(3) The amount of the compensation is 90% of the amount of the protected transfer payment or protected contribution repayment (whichever is the greater).
(4) For the purposes of sub-paragraph (3), the amount of the protected transfer payment or protected contribution repayment is to be calculated in accordance with the admissible rules, which are to be applied for this purpose subject to any prescribed modifications.
(5) The compensation is payable immediately after the transfer notice given under section 151 is received by the trustees or managers of the scheme.
(6) This paragraph is subject to paragraph 29 (power of Secretary of State to change percentage rates by order).
(7) Regulations may modify any provision of paragraph 8, 10, 11 or 14 (compensation for persons who were active members immediately before assessment date) as it applies in the case of a person who is entitled to compensation under this paragraph.
(8) Regulations may modify any provision of sub-paragraphs (1) to (6) as it applies in the case of a person who is entitled to compensation under paragraph 8, 10, 11 or 14."
The noble Baroness said: I shall be brief. This is a subject that we touched on earlier. I am sure that Members of the Committee will wish to support this amendment, which introduces new paragraph 19A into Schedule 7 to ensure that members who are essentially deferred pensioners with fairly small sums—in other words, whose pensionable service terminates on commencement of the assessment period and who do not have vested rights—none the less are eligible to receive protection from the PPF.
In those 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, as often happens when one has been in a firm for less than two years, 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.
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. I hope your Lordships will agree that this was a modest loophole that we needed to close in order to protect members with modest deferred rights. I beg to move.
Lord Higgins: If they receive a refund of contributions, is interest paid on it?
Baroness Hollis of Heigham: I am not sure about that. I do not think so, but later in the Bill we shall address the whole point about transfer payments and allowing people to move their funds into another scheme after six months rather than two years. If they receive a cash refund, it is a cash refund only of their contributions. If they move the value of that pot to another scheme, they take the employer's contributions as well. Therefore, we want to incentivise them not to take the money out but to move it on in order to build up a pot. On the noble Lord's specific point, they do not pay interest but, in any case, it represents fairly bad value because a person will probably receive less than he might have done if he had moved it across to another scheme, taking with him the employer's contribution.
Lord Higgins: I am grateful for that clarification. I now find myself a tiny bit confused. Clearly, it is probably better to transfer rather than take a refund; that is the case, generally speaking. However, are we talking about someone in a scheme that has been taken over by the PPF that is then transferred? I am not clear.
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If one's scheme is taken over by the PPF, I would have thought that one was stuck with it. Perhaps that is not so.
Baroness Hollis of Heigham: No. We could be talking about when a member has not been in the scheme before the guillotine comes down of going into the assessment period.
Lord Higgins: I do not want to take too much time on the matter, but are we talking about someone who has only just joined a scheme when almost immediately the scheme is taken over by the PPF? They can either remain in the scheme taken over by the PPF or are forced to transfer—is that is what we are saying? Can they take a refund of contributions? If they have only just joined, they cannot be taken over by the PPF—is that so?
Baroness Hollis of Heigham: No. If someone has just joined—if they do not yet have vested rights—at the moment they are entitled to take out their cash payment. The sums are tiny, in which case the compensation would apply to the level of money that they would otherwise have got. They would be bought out, so to speak. If instead they prefer to keep the money as a pension payment, they would get 90 per cent of that and choose whatever was greater.
Lord Higgins: So people can either get a cash refund, transfer to another scheme, or leave money in the scheme in the way that they would if they moved jobs and decided to do so anyway. There are three alternatives.
Baroness Hollis of Heigham: Effectively.
On Question, amendment agreed to.
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendments Nos. 224G to 224K:
Page 274, line 16, at end insert—
"( ) in paragraph 15(1) and (2) the references to normal pension age are to be read as references to normal benefit age,"
Page 274, line 22, leave out "of the scheme"
Page 274, line 30, leave out ", (2) and (5)" and insert "and (2)".
Page 274, line 31, after "age," insert—
"( ) in paragraph 19(4) for the words from "the aggregate of" to the end substitute "the accrued amount",
( ) for paragraph 19(5) substitute—
"(5) In sub-paragraph (4) "the accrued amount" means an amount equal to the amount of the scheme lump sum which, under the admissible rules, the deferred member is entitled to receive at normal benefit age by virtue of his pension credit rights.","
On Question, amendments agreed to.
[Amendment No. 224L had been withdrawn from the Marshalled List.]
Lord Skelmersdale Lord Skelmersdale moved Amendment No. 225:
Page 275, line 28, leave out from beginning to "the"
The noble Lord said: We are talking now about the commutation of periodic compensation. The paragraph starts with what happens under prescribed

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circumstances, and goes on to list a few exceptions. I find that a little vague at this stage. It is a point on draft regulations, I know, but it would be helpful if the noble Baroness could give us some idea of what might be intended by the provisions. I beg to move.
Baroness Hollis of Heigham: The provisions are for dealing with very small sums—if one is just getting them out of the way, rather than having them clutter things up. Regulations will enable the PPF board to provide an option for members who are not entitled to a scheme lump sum to commute up to 25 per cent of their periodic compensation for a lump sum. That is in accordance with the Inland Revenue guidelines. We want exceptions in cases of trivial amounts of compensation, so that the PPF board can allow full commutation of periodic compensations, as that prevents the cost of paying recurring small sums of compensation such as £1.50 a week. That is all that the provision is about. I hope that the noble Lord is content with that explanation.
Lord Skelmersdale: I am very grateful, and I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendment No. 225A:
Page 275, line 43, after "scheme" insert "rules"
On Question, amendment agreed to.
[Amendments Nos. 226 and 227 not moved.]
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendment No. 227A:
Page 278, line 38, leave out "under the scheme or another scheme"
On Question, amendment agreed to.
Lord Higginshad given notice of his intention to move Amendment No. 228:
Page 279, line 21, leave out from "increase" to end of line 32 on page 280 and insert "based on the increase in the Retail Price Index"
The noble Lord said: Amendment No. 228 is grouped with Amendments Nos. 229 and 230. On reflection, I shall not move Amendment No. 228 but move straightaway to Amendment No. 229. I have a nasty feeling that Amendment No. 228 would give discretion to trustees who had ceased to exist, a point that I should have appreciated when tabling the amendment.
[Amendment No. 228 not moved.]
Lord Higgins Lord Higgins moved Amendment No. 229:
Page 279, line 21, leave out from "increase" to end of line 32 on page 280 and insert "based on the increase in the Retail Price Index"
The noble Lord said: Amendment No. 229 raises an important point. The whole section is concerned with the annual increase in periodic compensation, which will of course be paid by the PPF once it has taken over an eligible scheme. The question is: what is the
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appropriate amount by which it should be increased? Amendment No. 229 suggests that it should be based on the increase in the retail prices index.
Amendment No. 230 concerns a more important point. The Bill suggests that the appropriate percentage to be used in uprating the periodic compensation should be limited to the lesser of the increase in the RPI or, alternatively, 2.5 per cent. This is a more severe limitation than has previously been applied to upratings by existing and running pension schemes.
I am not entirely clear about the relationship between this part of the Bill and the Government's proposals that existing schemes should not be obliged to uprate by as much as 5 per cent. This was presented, together with the Bill as a whole, as a sop to pension schemes. They said, "You only need to uprate it by 2.5 per cent rather than 5 per cent", and somehow the Government managed to spin this in a way which suggested that this was a great advantage. It was a great advantage, perhaps, to those trustees who wanted to be stingy, but it certainly was not an advantage to the pensioners who otherwise might have received a bigger increase. How we deal with the problem, or where, I am not clear. Perhaps the noble Baroness can tell us where that particular provision will apply.
At all events, it seems to us not unreasonable that it should be the lesser of either the RPI or 5 per cent. The idea that the present situation—where we have a very low rate of inflation—will go on indefinitely seems excessively optimistic. The Chancellor of the Exchequer has an enormous borrowing requirement and it seems unlikely that he will be able to fund it fully. If he does not fund it fully, the money supply goes up; if the money supply goes up, the inflationary pressures increase; and there are many other factors—I shall not bore the Committee by going into them—which lead me to believe that, whatever the independent Bank of England may do, we may well find an increase in inflation of over 2.5 per cent. To suggest for all time, "Don't worry, chaps, it's not going to be more than 2.5 per cent", seems to me an unbelievably wildly optimistic view. So even the modest 5 per cent I am suggesting in the amendment seems to be the least that we can do. I beg to move.
Baroness Turner of Camden: The noble Lord, Lord Higgins, has referred to an issue that we had put down for debate later on. We wanted to raise the whole issue of doing away with the 5 per cent indexation in favour of 2.5 per cent. It occurs in this part of the Bill but I hope that we shall have the debate on it when we come to the amendments that specifically deal with it. Certainly the union feels very strongly that the present situation of a cap of 5 per cent is quite adequate and quite sufficient. We certainly do not want 2.5 per cent for some of the reasons advanced by the noble Lord, Lord Higgins, today. I hope that we will have the debate later when we come to the amendments to that effect.
4 p.m.
Lord Oakeshott of Seagrove Bay: I also support the amendment. It may come as a surprise to some Members of the Committee to know that the retail prices index is running above 2.5 per cent at the moment; the last figure that I saw was 3 per cent. The retail prices index, on which index-linked gilts depend and on which the matter under discussion will depend, is the old one, not the adjusted one that the Chancellor has given to the Bank of England, which is running rather lower. If the provision were in effect already, the real value of pensions payable under it would be being cut already. That clearly confirms how tight a cap—too tight—2.5 per cent would be.
Baroness Hollis of Heigham: I do not want to sound belligerent, but it is a little difficult if we are simultaneously asked to raise either people's compensation to 100 per cent in the name of equity, or down to 90 per cent or whatever, while being concerned about the levy on employers, and asked for full RPI indexation. At the moment in the Bill, as Members of the Committee will know, we expect the levy to be £300 million a year, once the risk-related element is through after the initial year, and possibly to go up as appropriate if necessary. Bluntly, if we were not to have a cap on indexation at 2.5 per cent and were to apply indexation to all members—active members and existing pensioners, with service both before 1997 and after—the additional cost to the levy of £300 million a year would be a further £300 million a year. It would be doubled.
The Government have to decide the priorities in expenditure. It was precisely because indexation was given a higher priority order for pensioners above active members under the 1995 Act that so many people found themselves not having their pension promises made. The noble Lord pressed me on that previously, and I said that the big change would be that indexation had come below the order of priority in terms of winding up—between trying to ensure members' benefits at 100 per cent and 90 per cent in winding up.
Amendment No. 229 would result in indexation being determined by RPI without any cap and applying to the whole amount of compensation. Although inflation is currently low, it would be foolish to assume that it can always stay that way over time; we obviously expect it to do so on average. Actuaries and accountants have to make allowances for much higher levels of possible inflation. As the noble Lord, Lord Higgins, rightly identified, the difference between what actuaries have to provide for on a very conservative estimate and what they may actually be able to provide for in forecasts with 2.5 per cent—that is covered in Clause 266—is, for existing schemes, one of the big savings to DB schemes that will remain outside the trust of the PPF. That is why the PPF has applied the minimum indexation cap, as set out in Clause 266, which is on the annual increase in the rate of certain occupational pensions.
In addition, indexation has been applied to post-1997 accruals to reflect the statutory requirement to provide indexation from 6 April 1997, as laid out in the Pensions Act 1995. Amendment No. 230 would increase the indexation cap from 2.5 per cent to 5 per cent. Again, that runs contrary to what we permit schemes to do, to contain their predictable costs under Clause 266. That is so that we can reduce the burden on employers while ensuring pensioners a reasonable level of indexation.
I can quite see, in an ideal world with unlimited resources, that every member going into the PPF—whether an existing pensioner, or an active member becoming a deferred member—would have 100 per cent compensation, that all service before 1997 as well as after it would be indexed, and that indexation would reflect RPI.
I have had the figures done and I am advised that the cost would be at least an additional £300 million a year on top of the £300 million levy. I do not think that employers would or could accept that. I think that that would undermine the case for Clause 266, which has been strongly welcomed by industry and business. The 2.5 per cent cap allows them to build into their estimates calculations for providing for scheme funding which will not be subverted by the understandably cautious responses of accountants and actuaries to provide against all possible contingencies.
It is a matter of priorities. If one were to index in this way and still try to stay within the £300 million budget, I suspect—although I have not done the sums—that compensation levels would have to come down to perhaps 60 per cent. I really do not know the answer but shall have the figures worked out, just for my own satisfaction.
Those are the sorts of trade-offs we are making. We either substantially increase the levy, possibly doubling it, or reduce the compensation level to account for indexation. We are confident that with the strong economy under the present Government—this is not a party point; I have no reason to think that any future government would subvert that economy—it is reasonable to build the 2.5 per cent into the PPF for service after 1997, as laid down in the 1995 Act.
As for moving away from that, I have to say to Members opposite that there ain't no free money. Are they suggesting that we increase the employers' levy? Or will it come from the taxpayers—or from the Government, which I think is the position of the noble Lord, Lord Oakeshott? That is a perfectly honourable position, except that the average weekly income of workers in jobs without attached DB schemes is just under £300 a week, whereas that for workers in schemes with attached DB schemes, who will be enjoying this protection, is just under £500 a week. I do not think it reasonable to ask lower-paid people, who are often women and often self-employed, to pay through taxes additional moneys into the PPF in order to subsidise the security of the pensions of those who are much better off.
That is the package under which we are operating. Unless Members of the Committee can find a way of increasing the PPF by inflation and allowing outside schemes to do so without jeopardising DB schemes—and employers have told us that the DB/RPI problem is one of their biggest obstacles, along with longevity and coping with scheme funding for pensions outside the PPF—then I have to say that I do not think that this is a realistic amendment. I therefore hope that the noble Lord will withdraw it.
Lord Oakeshott of Seagrove Bay: I have a factual question for the noble Baroness on which I ask her to write to us. Breaking down the shopping list total of an extra £300 million, and specifically on this retail prices index point, it would be interesting to know what would be the additional cost of a 5 per cent as opposed to a 2.5 per cent cap. Perhaps that information can be broken out separately so that we can look at it. I think the noble Baroness will find that she needs to make different assumptions about the actual rate of RPI over the years in order to see how much it will cost. We will need a little table, please.
Baroness Hollis of Heigham: I am perfectly prepared to circulate to all Members of the Committee the financial calculations we have done on the basis of certain assumptions, such as whether we include pre-1997 or post-1997 figures, and whether we go for 2.5 per cent, 3 per cent or 5 per cent. I am very happy to produce those figures. However, I am sure that if full indexation were paid as opposed to being capped at 5 per cent, all pre-PPF compensation including that for pensioners would have to be reduced by about 15 per cent; that is, down to 75 per cent from 90 per cent. I thought that it might come down even lower than that. However, those are the sorts of figures we are talking about. That may be the trade-off.
I am perfectly happy to share the figures I have asked for and had worked out with Members of the Committee in order to take the debate forward. These are difficult choices.
Lord Lucas: This is just a note. If the cost of Amendment No. 229 is a doubling of the cost of the compensation scheme, the noble Baroness is implicitly saying that this whole exercise will give pensioners back only half of what they would have had. They will get back only half their losses as a result of this. If we were giving them back all their losses, it would cost double.
Baroness Hollis of Heigham: No. I do not know whether the noble Lord, Lord Lucas, was here earlier when I explained the difference between the pre-1997 and post-1997 situation. The PPF will not index-link compensation for pension benefits lost for service accrued before 1997 even to 2.5 per cent; it was not required to do so under the 1995 Act. In practice, the majority of DB schemes—about 90 per cent, I think—did offer that indexation. However, it was not a requirement and the PPF will not continue it. That is one of the big pressures in terms of inflation.
Pensioners will not receive half. For their post-1997 service, under our current proposals, pensioners including active members will receive indexation of 2.5 per cent. That will be in line with proposals that we propose to bring to noble Lords under Clause 266 for schemes that remain outside. Surely it would not be reasonable to have a more generous return within the PPF than members would receive outside it. That would blow a hole through the issues of moral hazard.
Lord Higgins: I found the noble Baroness's reply a little strange. She dealt both with the question of whether the increase should be in line with RPI and whether it should be capped at 2.5 per cent. However, she seemed to be saying, "We cannot let it increase by RPI because inflation may rise, and it does not matter if we cap it at 2.5 per cent because inflation will not rise".
Baroness Hollis of Heigham: Accountants and actuaries may think it will increase. We believe it will not. None the less, as I understand it, they have to make those provisions in their schemes.
Lord Higgins: Yes; but essentially the noble Baroness's argument is, "If we were to accept these amendments, then to keep the cost within the original parameters, we would need to make an adjustment to the initial compensation payment. It is a question of evaluation between those two". I think that that is too narrow a way of looking at it. We have the initial amount of compensation, and we are then asking, "What happens if inflation increases?". The noble Baroness is seeking to balance the two. But of course, if inflation increased, the economic situation would not be the same as if it did not.
If inflation increases, it is very likely that profits, for example, will increase in money terms, although not in real terms—all of this is done in nominal terms—and that fixed interest rates to try to deal with the problem will increase. Indeed, in nominal terms, company profits and share prices are likely to increase. If there is increased inflation, the resources available to the PPF will be greater than they otherwise would be.
The noble Baroness looks slightly blank. I had not thought of this argument until just now, and I suspect that she has not either. Perhaps even her officials have not.
Baroness Hollis of Heigham: May I ask whether the noble Lord's right honourable friend Oliver Letwin also would welcome this espousal of higher inflation?
Lord Higgins: No one is in favour of higher inflation, and no one is suggesting that anyone is. All I am pointing out is that if there is higher inflation, consequences will follow which would enable the PPF—deplorable as the situation may be—to protect those who are suffering from inflation. Its resources would increase. There is no comparison with the initial amount of compensation paid and assumed over time. The noble Lord, Lord Lea, and I have been debating this issue for about the past 40 years.
Lord Lea of Crondall: This is very interesting. However, there is a contradiction in everything that

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has been said by Opposition Members as well. In so far as people are demanding specific answers to hypothetical RPI numbers, the same applies on both sides of the equation, so people cannot say that the Government ought to come clean and tell us the cost of a higher RPI on the PPF. We do not know what number Members of the Committee are talking about, and there are two sides to the balance. So there is a contradiction in the nature of the noble Lord's demand.
Lord Higgins: If I understand the noble Lord correctly, he is supporting what I am saying. One cannot deal with this particular argument without looking at what is happening to the economy as a whole. So, at the moment, I am not persuaded by what the noble Baroness says. However, as we need to make progress, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 230 not moved.]
4.15 p.m.
The Deputy Chairman of Committees (Baroness Pitkeathley): I remind the Committee that if Amendment No. 230A is agreed to, I cannot call Amendment No. 230AA because of pre-emption.
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendment No. 230A:
Page 280, leave out lines 19 to 27 and insert—
""post-1997 service" means—

(a) pensionable service which is within paragraph 33(4)(a) and occurs on or after 6th April 1997, or

(b) pensionable service which is within paragraph 33(4)(b) and meets such requirements as may be prescribed;

"pre-1997 service" means—

(a) pensionable service which is within paragraph 33(4)(a) and occurred before 6th April 1997, or

(b) pensionable service which is within paragraph 33(4)(b) and meets such requirements as may be prescribed;"

On Question, amendment agreed to.
[Amendment No. 230AA not moved.]
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendment No. 230B:
Page 280, line 30, at end insert—
"(6A) But in this paragraph, in relation to any relevant pension credit amount, "post-1997 service" and "pre-1997 service" have such meanings as may be prescribed.
(6B) In sub-paragraph (6A), "relevant pension credit amount" means an amount mentioned in sub-paragraph (3)(a) of—

(a) paragraph 3,

(b) paragraph 5, or

(c) paragraph 15 as it applies by virtue of paragraph 20,

which is attributable (directly or indirectly) to a pension credit."
On Question, amendment agreed to.
Lord Oakeshott of Seagrove Bay Lord Oakeshott of Seagrove Bay moved Amendment No. 231:
Page 281, line 12, leave out paragraph 29.
The noble Lord said: This amendment is rather different. It would delete paragraph 29, which is a set of procedures that allows the Secretary of State to vary or, so far as I am concerned, cut the percentage of the promised benefits paid as compensation. This is where we return to our objective, which is to strengthen the security of the PPF promise. This whole thing has been set up and there has been talk of guarantees. There was a fairly extraordinary exchange in the Commons yesterday, where the Minister, Malcolm Wicks, was talking about having an in extremis provision. In an extraordinary economic or business situation in which several FT-SE 100 companies go bust, there might not be the funds after raising the levy. In that case, the Secretary of State or the board with the Secretary of State could decide to cut benefits. He goes on to say:
"We have costed the provision carefully and I am certain that, allowing for even a large company to go bust, we will fulfil our commitments. That is why I, as a lay person, use the term 'guarantee'".—[Official Report, Commons, 8/9/04; col. 744.]
To most people that is clear as mud. Our view is that, although this was set up by the Government as a "guarantee", none the less the clear understanding of most people is that these are the benefits. In the event of an extraordinary economic situation, it is not right that the benefit should be cut—that there should be an insurance policy that paid out unless a disaster occurred. In that case, as we have discussed, the Government should stand as lender of last resort for a period.
In old fashioned racecourse terms, we are saying that the bookmaker should not be allowed to welsh on his commitments. We do not wish to see the Secretary of State being able to cut the percentage of benefits. That is fairly straightforward. I beg to move.
Baroness Turner of Camden: I have amendments in this group. The noble Lord, Lord Oakeshott, has explained that he wishes to remove paragraph 29. We wish to do something rather different in Amendments Nos. 233 and 234.
Schedule 7 concerns the power to reduce PPF compensation payments. The provision is a safety valve under which the Secretary of State can sanction that the amount of PPF compensation being paid can be reduced below the 90 per cent or 100 per cent levels. Our amendment would limit this power such that no entitlement can be reduced below the level at which the PPF first accepted liability for it. It is not acceptable for the PPF to get into a situation where it has to notify people in receipt of a pension that their benefits are going to be reduced.
The amendment would still leave members exposed to having increases in their pension stopped, as provided for in paragraph 28 of Schedule 7, but cutting benefits is surely going too far. Nor is it acceptable for a person to be admitted to the PPF on the basis that a level of benefit will be provided—a level of benefit that might be little or no more than the benefit that might

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otherwise be secured for them by annuity purchase—only to have that benefit subsequently reduced because of a deterioration in PPF finances.
Lord Higgins: I was slightly surprised by what happened just now. I had not realised that, because the government amendment was agreed to formally, my subsequent amendment was pre-empted. Therefore, we wish to return to the matter on Report, because many people are very concerned that the increase should take place only from 1997. We will return to the matter, but I mention it for the benefit of those outside who may be studying this debate.
My Amendment No. 232 is in this group and would leave out paragraph 29, which to some extent makes the same point as that made by the noble Baroness, Lady Turner—namely, whether the Secretary of State on the recommendation of the board should be able to substitute a different percentage which could result in benefits being reduced. I would have thought that the whole point of this Bill is that people who have suffered because their pension schemes have collapsed should have a degree of certainty about what is happening. Giving the board the power to recommend a reduction to the Secretary of State, and for him to agree it, seems to undermine the whole point. Unless the change is to be such that it is material in terms of the operation of the PPF and therefore not a matter of trivial importance, it seems to be an undesirable provision.
Baroness Hollis of Heigham: I understand and sympathise with the concerns raised throughout the House on these issues. I have tried to be brief on previous amendments, so I hope that the Committee will allow me a rather fuller answer to this one because this is a major issue. I may be able to outline where the levels of insurance lie behind the compensation levels. I emphasise that they are compensation levels not pension benefits.
Amendment No. 231, moved by the noble Lord, Lord Oakeshott, would protect all those who will be entitled to PPF compensation from any reduction in their compensation percentages by preventing any change to the percentages paid as PPF compensation. Amendments Nos. 233 and 234, tabled by my noble friend Lady Turner, would ensure that those in receipt of compensation were not subject to a sudden drop in compensation levels by limiting changes to either a limited period only or payments to which a member first becomes entitled after the date specified in the order. I reassure Committee Members that paragraph 29 will be used only in the most extraordinary circumstances. I find it difficult to envisage such circumstances, but maybe Committee Members can.
We have taken a three-pronged approach to deal with financial difficulties that the PPF may face. In good times, the pension protection levies are designed to smooth the peaks and troughs of the economic cycle, so a bad run of years for schemes should not have a detrimental effect on the funding position of the PPF. During bad times, even if a huge number of large, badly funded schemes enter the PPF board all at once,
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some of the members—possibly because there are usually twice as many active and deferred members as pensioners—will not yet have reached retirement age. The PPF is not buying them annuities, but will be paying out compensation like a pension, and that will be drawn down only as and when members reach the appropriate retirement age. Compensation will increase slowly over a number of years.
Lord Higgins: I look slightly puzzled because there are later provisions in the Bill to enable the PPF to provide annuities.
Baroness Hollis of Heigham: Yes, that tends primarily to be in DC schemes in which one is trying to float off—possibly in a hybrid scheme—the DC element. However, the point that I am trying to make is that the catastrophic scenario assumes that a big scheme comes in and all payments have to be made immediately through a full buyout. Given compensation and the age profile of most members, that would not be the case.
After a bad time has hit, the board has a number of options. It can increase the pension protection levy up to 25 per cent once it is out of the transitional period; it can borrow if, for example, it wishes to avoid selling off assets at a time when they might not achieve their full value; and it can—although we would regret it—reduce revaluation and indexation rates to zero.
Finally, only when revaluation and indexation rates have been reduced to zero and consultation has taken place, the board can ask the Secretary of State, by order under the affirmative resolution procedure so that it would be a matter for the Houses of Parliament to decide and determine, to reduce the 100 per cent/90 per cent levels of compensation. We think that this three-pronged approach should ensure that the power in paragraph 29 is used only in extraordinary circumstances—it would have to be apocalyptic for that situation to occur. Although we do not expect this power to be used, we consider it essential to ensure the long-term viability of the PPF.
It is important to recognise that when large employers become insolvent, the PPF will take control of their assets. This means that in the short to medium term the PPF will not have any cash problems and will, in fact, be cash rich, because the assets will come in but payments out will be made only as members reach normal retirement age. The PPF will obviously want to take into account the longer-term funding situation needs, so that it can control the differential between assets and liabilities. As I have already explained, the board has a number of options available—including increasing the levies, reducing revaluation and reducing indexation and borrowing—which I have already explained.
If the board has to make such a recommendation—for the Secretary of State to come to Parliament to seek to change those percentages—it is likely to be in dire straits. Being unable to reduce future liabilities will not be sufficient to help it recover. The emergency powers within paragraph 29 draw on the US experience, where some would like to limit the guarantee as they think

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that the PBGC may be getting into difficulties. Even in extraordinary circumstances, the board can limit the impact of any changes by recommending that the change to compensation percentage levels applies for a limited period and may apply only to compensation which first becomes payable after the date in the order.
I hope that I have described both the array of insurances in the system for compensation as well as the fact that, were such an apocalyptic event to happen, any change would have to have full parliamentary consent. Even then, it need apply only for a limited time and to new entries into the scheme.
Amendment No. 232, spoken to by the noble Lord, Lord Higgins, would remove what is considered to be superfluous wording from paragraph 29 of Schedule 7. I believe that reference to the "original percentage" within paragraph 29 is necessary to ensure that paragraph 29(4) clarifies the percentages at which PPF compensation is originally set. Paragraph 29(4) is required so that revaluation and indexation rates do not need to be reduced to zero to increase the "original percentages". The noble Lord's amendment would have an extremely perverse and malign effect.
The original percentages are the 100 per cent and 90 per cent compensation percentage rates that the PPF will use from the outset. The PPF will pay the 100 per cent level of compensation to those members who, before the assessment date, are over the scheme's normal pension age or are in receipt of a pension early on the grounds of ill health, and those who are already in receipt of a survivor's benefit.
We have discussed the rates. I find it hard to envisage such an apocalyptic scenario, given the powers of the PPF to increase its income and the fact that assets would come in immediately but liabilities would need to be paid out only over time. Were such an apocalyptic situation to arise, Parliament would have to give its full consent. Even then, such changes need be only for a limited period. I hope that with those assurances the noble Lord will feel able to withdraw his amendment.
Baroness Barker: We on these Benches are struggling with these definitions—apocalyptic, extraordinary and extreme. Clearly they have a significance, but it is not defined. Can the Minister confirm that she said that were the PPF board to make a recommendation and were the Secretary of State to exercise his power, that would have to be subject to an affirmative order? Therefore, in subsection (6), does "an order", which is "subject to sub-paragraph (3)", mean an affirmative procedure?
Baroness Hollis of Heigham: Forgive me, I know that the acoustics are not good in this room. I think I
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said twice that the Secretary of State would have to come before the Houses of Parliament through the affirmative procedure.
Lord Higgins: The Minister has not provided us with a precise event that is likely to trigger this clause.
Baroness Hollis of Heigham: I could not envisage one.
Lord Higgins: That is fine. If one cannot be envisaged, there is a strong case for not legislating for it as we could then have a clause which says, "Whatever happens, we can do what we like". That is not a satisfactory situation. As I understand it, the reality is that the PPF is being set up to help people in circumstances where they will not receive the benefits that they expect and a lower rate of compensation will be paid instead. Surely the essence of what is being done is that there is a degree of certainty about the matter.
In this schedule, the Government seek to say that if the board so recommends, benefits will be cut after all, and so the people who are being saved will go through the whole thing again. That does not seem to be a very satisfactory arrangement but the noble Lord, Lord Oakeshott, may have views on that. People want certainty, particularly, as the noble Baroness said earlier, if they have already retired. There is absolutely nothing they can do if, for some reason of state, the Government suddenly decide that they should cut these people's benefits.
Lord Oakeshott of Seagrove Bay: That is a good point. We are probably the only people taking the view that the payment should stay at 100 per cent and that it should not be cut because of an apocalypse.
First, I say to the noble Baroness, Lady Turner, that we are basically singing from the same hymn sheet in saying exactly how amendments get put together. I think we are all basically looking at the same thing and so I am happy to support the principle of what the noble Baroness says.
I take this opportunity to say how much I appreciate seeing Mr Churchill with the new chairman of the PPF here today. I have been critical of him in the past and I am really pleased to see him here. Indeed, he was here last week listening to our deliberations. I welcome him to this Committee. He has a very successful record on the marketing side of the insurance industry. I hope that he would be the first to say to the noble Baroness that she would not get very far with the sales pitch that we are hearing this afternoon, which is, "Join our insurance scheme. It will pay out unless there is a disaster, apocalypse, catastrophe or whatever". That is a pitch one can make only when one has clients who are compelled to invest with one.
Baroness Hollis of Heigham: I am not selling an insurance scheme; I am describing a compensation scheme.
Lord Oakeshott of Seagrove Bay: I think, as I believe the industry does, that to most people this looks like a

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scheme where pension funds are paying in and are effectively being insured against the risk of disaster. That is what most people think it is and it is what I believe it is in practice. The harder it is to envisage such an apocalypse happening—as I mentioned, Mr Wicks was talking about it yesterday—the more convinced we are that this let-out clause should not be allowed. It is simply that in that situation people need their pensions to be protected.
Baroness Hollis of Heigham: I would take the noble Lord's point as a very serious point if this power was exercised autonomously by the board. He would then have a much heavier-weight point than has so far been established. There has to be a recommendation to the Secretary of State. He has to agree that it is the only appropriate way forward. Then both Houses of Parliament have to agree. Does he not want Parliament to have the final decision? And does he not trust Parliament to make that final decision in the most extraordinary circumstances, as envisaged?
Lord Oakeshott of Seagrove Bay: Not by affirmative order, no, it would be much better to set things up on the basis that it "does what it says on the tin", to quote one of Mr Churchill's very good remarks. We are moving amendments because we believe that the Government should stand behind the scheme in the same way as they do with pool re-insurance. We do not believe that the percentage should be variable. The scheme should do what it says and do what most people in the country believe it is there to provide. With that, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 232 not moved.]
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendments Nos. 232A and 232B:
Page 281, line 18, after "19(3)" insert ", 19A(3)"
Page 281, line 28, leave out "or 19(3)" and insert ", 19(3) or 19A(3)"
On Question, amendments agreed to.
[Amendments Nos. 233 and 234 not moved.]
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendments Nos. 234A to 234U:
Page 282, line 7, leave out from beginning to first "is" in line 8 and insert "the effect of disregarding rules within paragraphs (a) and (b) of paragraph 32(3)"
Page 282, line 26, at end insert—
"Short periods of service which terminate on commencement of assessment period
30A (1) This paragraph applies to a member of the scheme if—

(a) his pensionable service terminates on the commencement of the assessment period, and

(b) as a result, he has rights, in relation to the scheme, under Chapter 5 of Part 4 of the Pension Schemes Act 1993 (c. 48) (early leavers: cash transfer sums and contribution refunds).

(2) Where this paragraph applies, for the purposes of this Schedule the member is to be treated as if, immediately before the assessment date, he—
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(a) had relevant accrued rights to benefits under the scheme (within the meaning of section 101AA(4) of that Act), and

(b) did not have any other rights to benefits (other than benefits attributable (directly or indirectly) to a pension credit) under the scheme."

Page 283, leave out line 4.
Page 283, line 8, leave out sub-paragraph (2).
Page 283, line 25, leave out from "disregarding" to end of line 26 and insert "—

(a) in a case where sub-paragraph (4) applies, the recent rule changes, and

(b) in any case, any scheme rule which comes into operation on, or operates by reference, to the winding up of the scheme or any associated event."

Page 283, leave out line 40.
Page 283, line 46, leave out "changes attributable to" and insert "any scheme rules or changes attributable to paragraph 3 of Schedule 5 to the Social Security Act 1989,"
Page 283, line 47, after "1995" insert ", section 31(4) of the Welfare Reform and Pensions Act 1999"
Page 284, line 1, leave out paragraph (b) and insert—

"(b) any enactment, or any scheme rules or changes which are required or reasonably necessary to comply with an enactment,

(ba) any scheme rules or changes that come into operation on, or operate by reference to, the winding up of the scheme or any associated event, and"

Page 284, line 3, at beginning insert "any scheme rules or"
Page 284, line 5, after "scheme" insert "rules"
Page 284, line 12, at end insert "or"
Page 284, line 16, leave out from beginning to "or" in line 19.
Page 284, line 44, leave out sub-paragraphs (4) to (6) and insert—
(4) Subject to sub-paragraph (5), "pensionable service" means—

(a) actual service in any description or category of employment to which the scheme applies which qualifies the member for benefits under the scheme, and

(b) any notional service allowed in respect of the member under the admissible rules which qualifies the member for such benefits.

(5) The service within sub-paragraph (4)(b) does not include—

(a) service attributable (directly or indirectly) to a pension credit, or

(b) service of a prescribed description."

Page 285, line 12, leave out "under the scheme"
Page 285, line 15, leave out from "service" to "is" in line 16.
Page 285, leave out lines 25 and 26.
Page 285, leave out lines 39 to 48.
Page 286, line 5, leave out "under the scheme"
On Question, amendments agreed to.
On Question, Whether Schedule 7 shall be agreed to?
Lord Higgins: We have already debated most of this matter in considerable detail. However, the debate on Schedule 7 enables me to raise the point that I was prevented from raising on an earlier amendment, which may give the Minister a clue about the answer. As I understand it, the PPF pensions payment will be indexed in line with the retail price index capped at

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2.5 per cent, but only in respect to rights built up since April 1987, which is when the statutory obligation to index occupational pensions was introduced. Deferred PPF pension rights will be revalued in line with the RPI capped at 5 per cent. That will be an unsatisfactory position for many pensioners who will lose a significant proportion of revenue based on that calculation.
The Occupational Pensioners' Alliance has made strong representations on this point. The alliance also complains that the schedule has been substantially redrafted since the Committee stage in the Commons and it now finds the provisions extremely opaque—it may not be alone in that view as far as many of the provisions of the Bill are concerned. Will the Minister confirm that pensioners retiring prior to 6 April 1997 will still be eligible for indexed payments under the PPF?
Baroness Hollis of Heigham: No, my Lords. This is part of the initial discussion when I said that there was not a cliff edge between the 100 per cent and the 90 per cent, as first appeared. This is compensation for a scheme without which, if the PPF did not exist, pensioners might very well receive not 100 per cent—it may not be index linked or RPI linked—not 80 per cent, but may receive only 50 per cent or 40 per cent.
If noble Lords agree and the Bill goes through Parliament, those pensioners will have the security of knowing that through the Pension Protection Fund, which does not exist at the moment—we hope and expect that it will come into existence from April 2005—they will have compensation for the loss of a pension that they otherwise would not receive or of which they may receive only a fragment.
It is certainly true that in order to make the books balance, and to keep the levy at £300 million and at an acceptable figure to the industry, we cannot reinstate for all members of all schemes all the benefits that they currently enjoy as though the insolvency of the company and the under-funding of the pension scheme had never happened. That is not possible. Therefore, we are offering compensation in which we are protecting pensioners at 100 per cent of their pension at the point at which the transfer takes place; service accrued after 1997 will continue to be RPI-ed at 2.5 per cent; but as the Pensions Act of 1995 laid down, there will be no requirement, even on existing schemes that stay outside the PPF—it is not going to happen under the PPF—that there will be compensation which index links service before 1997.
I regret that, but the alternative is either to produce, as I was trying to suggest earlier—the Committee may be more willing to agree with me when they see all the figures laid out—very substantial increases in employers' levy—up to double—or to bring in money from the taxpayers. That would mean that people without any pension scheme at all would be asked to cross-subsidise the better off who have them. On average people with DB schemes have salaries and incomes that are 50 per cent higher. The alternative is
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to do what we are doing, or perhaps to cut the compensation levels by about 15 per cent—I now have the more accurate figures. Those are hard choices.
We believe that what we have is in line with the expectations laid down in 1995. Therefore, the noble Lord is quite correct, that pensioners with a substantial part of their service accrued before 1997, will not see that index linked when they come to receive compensation should their scheme go into the PPF. I remind the Committee that if your Lordships do not agree to the PPF, the alternative is that they may receive only 20 per cent or 30 per cent or 40 per cent from their schemes.
A pension scheme comes into the PPF only precisely because it was unable to meet the level of benefits that pensioners had hoped to receive under their old scheme. We are trying to get the balance right. Everyone talks about words such as "balance", but we have tried to get right the balance between the employers' responsibilities and levies and contributions and what pensioners can reasonably expect. I believe we have the best we can possibly do.
Lord Higgins: We can certainly agree that, as we said earlier, the whole thing is a matter of balance between the costs and the benefits. The noble Baroness has reverted to the £300 million figure. I shall suggest under later amendments that I have considerable doubt about whether that is an adequate estimate. But, as I recall, that figure was related to the overall issue of indexation. What is the cost in this case?
4.45 p.m.
Baroness Hollis of Heigham: If indexation was applied to all service to the 2.5 per cent figure, that would add £200 million to the £300 million levy.
Lord Higgins: But I do not think that that is what the schedule states. Am I wrong in thinking that? I am trying to find out the cost of protecting the pre-1997 index arrangement.
Baroness Hollis of Heigham: It depends whether or not a cap to inflation is being built in—that is, indexation at 2.5 per cent. If you built in a cap at 2.5 per cent but applied that 2.5 per cent to pre-1997 service, that would be £200 million in addition to the £300 million that the levy will have to raise. If, however, the 2.5 per cent were removed, it would be £300 million.
Baroness Turner of Camden: In effect, is my noble friend saying that, in order to pay for this scheme, all members of all occupational schemes must give up any right that they may have under their schemes for indexation above the 2.5 per cent level? Is that the price that all pensioners pay in order to have the scheme? Is that what my noble friend is saying?
Baroness Hollis of Heigham: Yes. No pensioner whose scheme goes into the PPF—whether an active member or a deferred member—will, once they become a pensioner, enjoy more than a 2.5 per cent indexation on the years of service accruing after 1997.

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However, active members who now become deferred members because their companies are insolvent will none the less have a revaluation of their pension during their years with another company or employer at 5 per cent.
Schedule 7, as amended, agreed to.
Clause 154 [Adjustments to be made where the Board assumes responsibility for a scheme]:
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendments Nos. 234V to 234AE:
Page 108, line 13, after "scheme" insert "rules"
Page 108, line 14, leave out "assessment period" and insert "period beginning with the assessment date and ending with the receipt by the trustees or managers of the transfer notice"
Page 108, line 15, leave out "transfer notice is given," and insert "trustees or managers receive the transfer notice,"
Page 108, line 18, 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 period mentioned in subsection (2)(a), a person became 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 assessment date."
Page 108, line 20, leave out "assessment period" and insert "period mentioned in subsection (2)(a)"
Page 108, line 39, after "include" insert "—
(a) "
Page 108, line 40, at end insert ", or
(b) any other amount of a prescribed description."
Page 108, line 41, after "Board" insert—
"(a) to recover any amount from a person in such circumstances as may be prescribed, or
(b) "
Page 108, line 42, at end insert—
"( ) In this section "assessment date" is to be construed in accordance with Schedule 7."
On Question, amendments agreed to.
Clause 154, as amended, agreed to.
Clause 155 agreed to.
Clause 156 [Guaranteed minimum pensions]:
On Question, Whether Clause 156 shall stand part of the Bill?
Lord Higgins: When I first looked at this clause, I thought that it concerned the main debate on guaranteed minimum pensions as that is the heading of the clause. However, on reflection, I believe I am right in thinking that that is not so; that issue turns up later on the subject of the substitution of a guaranteed minimum pension for scheme-specific funding.
If I understand it correctly, the later provisions of the Bill will, in any case, remove the GMP. There is a succession of head movements behind the Minister, some of which are saying "yes" and some of which are saying "no". The noble Baroness says that it is all a question of balance and so I hesitated just for a moment.
Perhaps I may rephrase my question. Am I right in thinking that the guaranteed minimum pension arrangements do not terminate completely with the passage of this Bill and that scheme-specific arrangements are not substituted for it? I am not clear why provisions have to be made here for a guaranteed minimum pension so far as concerns the board when I thought that the whole concept was going to disappear.
Baroness Hollis of Heigham: The noble Lord is right to say that GMPs have disappeared from legislation. None the less, in the past, active members or pensioners will have had some rights under GMP. When the PPF takes over a contracted-out occupational pension scheme, it will not take on specific responsibility for paying the GMP; members will simply receive the PPF level of compensation. However, even though the GMP will not be received, the members will still have paid lower NI contributions and we need to be able to adjust their SERPS entitlement accordingly. If we did not do so, the individuals would effectively be receiving SERPS that they had not paid for. That is what this clause goes on to do. I could go on in greater detail; it is quite technical.
Subsections (1) and (2) require the board to notify the Inland Revenue as soon as reasonably practicable when it has assumed responsibility for an eligible scheme because the Inland Revenue needs to know about the GMP being discharged in order to apply the contracted-out deduction. Subsection (3) is needed in order to extend the current procedures, as set out in Section 47 of the Pensions Scheme Act 1993, for taking account of the effect of contracting out of SERPS to members of a scheme taken into the PPF. It is that subsection which allows an appropriate amount to be deducted from a scheme member's SERPS entitlement. Therefore, I commend that Clause 156 should stand part of the Bill.
Clause 156 agreed to.
Clause 157 [Duty to pay scheme benefits unpaid at assessment date]:
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendments Nos. 234AF to 234AJ:
Page 109, line 27, leave out from beginning to "must" in line 28 and insert—
"( ) This section applies where the Board assumes responsibility for a scheme in accordance with this Chapter.
( ) Subject to subsection (2A), the Board"
Page 109, line 28, leave out from "benefits" to "under" in line 29 and insert "which a person had become entitled to payment of"
Page 109, line 33, at end insert—
"(2A) Subsection (1) does not apply in relation to the amount of—

(a) any transfer payment, or

(b) any payment in respect of a refund of contributions."

Page 109, line 33, at end insert—
"(2B) Regulations may provide that, in prescribed circumstances, where—

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

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(b) during the period beginning with the assessment date and ending with the receipt by the trustees or managers of the transfer notice, a person became entitled under the scheme rules to a benefit of a prescribed description in respect of the member,

that person's entitlement to the benefit, or to any part of it, is, for the purposes of subsection (1), to be treated as having arisen before the assessment date."
On Question, amendments agreed to.
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendment No. 234AJA:
Page 109, line 33, at end insert—
"(2C) Regulations may make provision requiring the Board, in such circumstances as may be prescribed, to take such steps (including making payments) as may be prescribed in respect of rights of prescribed descriptions to which members of the scheme were entitled immediately before the commencement of the assessment period.
(2D) For the purposes of regulations made under subsection (2C)—

(a) this Chapter (other than this subsection), and

(b) the scheme rules (including any relevant legislative provision within the meaning of section 303(1B)),

are to have effect subject to such modifications as may be prescribed."
The noble Baroness said: I want to return to an issue that we discussed in broad terms earlier in Committee. Amendment No. 234AJA provides regulations under new subsection (2C) of Clause 157 to specify which liabilities of the trustees the board is 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.
As I said, we discussed this matter earlier and I hope that Members of the Committee will agree that the amendment is essential in order to ensure that the members referred to by the amendment do not lose out because the board of the PPF has assumed responsibility for their scheme. I therefore ask your Lordships to accept the amendment. I beg to move.
On Question, amendment agreed to.
[Amendment No. 234K had been withdrawn from the Marshalled List.]
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendment No. 234AL:
Page 109, line 34, leave out "and 'scheme rules' are" and insert "is"
On Question, amendment agreed to.
Clause 157, as amended, agreed to.
Clause 158 [Modification of Chapter where liabilities discharged during assessment period]:
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendments Nos. 234AM to 234AR:
Page 109, line 39, after "where" insert"—
"(a) "
Page 109, line 42, leave out "(a)" and insert "(i)"
Page 109, line 43, leave out "(b)" and insert "(ii)"
Page 109, line 43, at end insert "or
(b) in prescribed circumstances, any such liability of a prescribed description is discharged on the assessment date but before the commencement of the assessment period."
Page 109, line 43, at end insert—
"( ) In this section "assessment date" is to be construed in accordance with Schedule 7."
On Question, amendments agreed to.
Clause 158, as amended, agreed to.
Clause 159 [Administration of compensation]:
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendment No. 234ARA:
Page 110, line 8, leave out "payable under Schedule 7"
The noble Baroness said: In moving Amendment No. 234ARA, I shall speak also to Amendments Nos. 234AS, 234ASA and 234AT. These amendments are technical changes to Clause 159, which relates to the administration of compensation, and Clause 160 concerning the discharge of liabilities. I shall try to he brief.
Amendment No. 234AT inserts a power into subsection (2) that will allow regulations to specify the circumstances in which the board may discharge its liabilities by the payment of a cash lump sum. Again, this comes back to the issue that we discussed earlier. We think that it is necessary for an individual to gain entitlement to exceedingly small payments of compensation. For example, someone may have a salary of £10,000 and have only very limited vested rights. He may be entitled to only a couple of pounds a month, and it would be sensible to buy that out rather than to seek to pay that.
We shall set out in regulations exactly when such payments will be permitted. That is because we need to consider further the maximum amounts that we would want to discharge in this manner—so that we have a realistic figure which can be bought out in a lump sum rather than continue periodic payments of compensation—but also because the level of payments that are deemed to be trivial may need to be changed over time in order to take account of inflation. The power also allows the way that the cash sum will be calculated to be prescribed in regulations—a level of detail that we do not consider appropriate for the face of the Bill.
A power already exists in subsection (2)(c) that would allow the board to discharge liabilities of this trivial nature by the payment of a lump sum. We considered that that power was drafted in such a way as to apply only to periodic payments of compensation, which might exclude some types of liability that we may want to discharge in this way—for example, the refund of contributions as opposed to a payment of compensation for potentially lost pension.
To make it absolutely clear that we want to be able to discharge any liability of a modest sum through a single cash payment, we thought it better to insert the new power into Clause 160. Amendment No. 234AS is consequential to that, removing the existing power

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from Clause 159. Amendments Nos. 234ARA and 234ASA are minor drafting and technical amendments to follow that through. I beg to move.
On Question, amendment agreed to.
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendments Nos. 234AS to 234ASA:
Page 110, line 11, leave out paragraph (c).
Page 110, line 27, at end insert "or under section 133(2)"
On Question, amendments agreed to.
Clause 159, as amended, agreed to.
Clause 160 [Discharge of liabilities in respect of compensation]:
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendment No. 234AT:
Page 110, line 37, at end insert—
"() in prescribed circumstances, by the payment of a cash sum calculated in the prescribed manner."
On Question, amendment agreed to.
On Question, Whether Clause 160, as amended, shall stand part of the Bill?
Lord Higgins: This clause provides for the discharge of liabilities by taking out policies of insurance and annuity contracts and so on. On an earlier amendment, we discussed the availability of such providers of insurance and came to the conclusion that there were only two and probably none which could be found abroad. Therefore, the board will be buying in a very limited market. Can the noble Baroness give us an idea of the extent to which the board is expected to operate and on what scale? With the kind of sums that we have been bandying around, it seems that it may be very difficult for it to obtain effective insurance or annuities for a particular class of people.
The other point is that the cash-flow situation of the board is significantly affected. It would be able to take up such policies in cases where it was rather flush with money and thus preserve the position for future periods. Have we any idea what criteria the board might use in making that kind of decision?
Baroness Hollis of Heigham: As I said in an earlier discussion, we expect the PPF to pay compensation by way of periodic payments; in other words, in a pensionable form—that is, in monthly payments or whatever is deemed appropriate. To the best of my understanding, this is not meant in any way to refer back to the big debate about closed schemes; it is meant to ensure that the board has flexibility. Of course, big closed schemes would remain outside the PPF.
This measure allows the board to discharge any of its liabilities to pay compensation. For the most part, we expect it to make periodic payments. It may seek to discharge the liabilities by a lump sum, as we said just now, where it is dealing with trivial amounts or the refund of contributions. But, in a certain situation, it may want to take out an insurance policy or a number of such policies; in certain situations, it may want to enter into an annuity contract or a number of such
GC 234
contracts; or it may want to transfer the benefit of such policies or contracts and, as I said, also pay a cash lump sum.
The provision simply provides the board with a variety of ways in which to add to its main response to the situation, which will be to pay compensation of benefits in a periodic manner. But, so far as I am aware, this does not have any connection to the earlier debate that we had in that, in that sense, closed schemes remain outside the PPF, although obviously still under the scrutiny of the PPF. I hope that that explains the situation.
5 p.m.
Lord Oakeshott of Seagrove Bay: I should have thought that the clause was sensible. It is really rather permissive. My problem with the previous matter was that there was a question of people being forced to buy things on uncompetitive terms. We are talking about simply one option for the board to discharge its liabilities. It is pretty unlikely, but it could act in such a way if we suddenly find a great rush of insurance companies offering things on very attractive terms. Like the Minister, however, I would expect the board to meet its own liabilities.
Lord Higgins: I am grateful for the explanation.
Clause 160, as amended, agreed to.
Clause 161 [Discharge of liabilities in respect of money purchase benefits]:
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendment No. 234AU:
Page 111, leave out line 14.
On Question, amendment agreed to.
On Question, Whether Clause 161, as amended, shall stand part of the Bill?
Lord Higgins: The clause is fairly straightforward, but I want to raise a point that may arise later in the Bill; it would be helpful to have a provisional view on it. It is on eligible schemes that are taken over by the board and involve money purchase benefits. Will the scale or number of people drawing those benefits be taken into account when deciding the size of the levy? Will they remain part of the scheme, or will they be regarded as rather separate?
Baroness Hollis of Heigham: If I may be completely frank, some of our thinking on the area has not been concluded yet. We are primarily dealing with a newly emerging area of hybrid schemes, and there are a lot of different ones. For example, some DB schemes may have accrual rates of one-hundredth, and then have a DC contribution of 2 per cent a year, and so on. The board will have to disentangle that. The Pension Protection Fund protects only the DC element against fraud, not against the delivery of any pension compensation and the failure of any pension promise. We seek to allow the PPF the power to float off the DC element of a hybrid scheme, essentially, although we expect the regulations to enable the board to purchase annuity contracts with money purchase benefits—we

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talked about that earlier—or to allow the member to transfer the money purchase benefits to a new scheme or a separate personal pension.
I suspect that we will increasingly see hybrid schemes. The PPF obviously does not seek to compensate for a money purchase scheme where the risk is that of what is happening to the stock market. Therefore, it needs a way of disentangling the DC element from the DB. The clause enables the board to do so. It is a necessary provision. We will have more details on how it will be done as and when; we are still working out the regulations in consultation with the industry. I have looked at the structure of half a dozen hybrid schemes, and every one is different at the moment; people think up their own best practice for their own schemes. Such schemes will grow, so we need the power. I hope that everyone agrees that it is a benevolent power.
Lord Higgins: I am grateful for that explanation. I am sure that the noble Baroness is right that the effect of hybrid schemes is difficult and that they are likely to become a more frequent arrangement. Therefore, we need to take that into account. As always, she is extremely helpful in providing us with notes and so on. If there are any developments before Report that she thinks it would help us to be aware of, perhaps she would be kind enough to let us know.
Clause 161, as amended, agreed to.
Clause 162 [Equal treatment]:
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendment No. 234AUA:
Page 111, line 28, leave out from "functions" to end of line 29 and insert "so far as it relates (directly or indirectly) to that pensionable service—"
The noble Baroness said: I do not know about algebra, but I am finding the alphabet quite difficult with the labelling of the amendments sometimes. In moving the amendment, I shall speak also to Amendments Nos. 234AUB, 234AW, 234AX, 274ZA and 277A.
This is a small number of government amendments which have been produced in relation to Clause 162 (Equal treatment), Clause 192 (Other permitted disclosures) and Clause 199 (Investigation by the Board of complaints of maladministration).
Clause 162 ensures that the provisions relating to the payment of compensation or other payments by the board are modified if they would otherwise discriminate between men and women insofar as the provision relates to pensionable service on or after 17 May 1990.
Current legislation outlaws any discrimination by pension schemes between male and female members on the ground of gender. Section 62 of the Pensions Act 1995 provides that any discriminatory provisions of OP schemes must be modified so that the discriminatory effect is removed. When the board assumes responsibility for a scheme the calculation of payments will be partly based on the rules of the scheme.
While the PPF provisions do not differentiate between male and female members, it is possible that the rules of the scheme which are applied by the board may themselves be discriminatory if Section 62 of the Pensions Act has not been applied correctly. The clause provides that any of the payment functions which have a discriminatory effect, directly or indirectly, are modified so that the discriminatory effect is removed and equal treatment follows.
I could go on to enlarge but I think Members of the Committee will understand that if any scheme comes in which has hangover discriminatory effects, the PPF is obliged to discard them, so to speak, and ensure equal treatment in terms of payments of compensation. I beg to move.
Lord Skelmersdale: Obviously the same person who wrote the brief which the Minister has just used wrote the notes on clauses because what she has said is almost identical to what is in the notes on the clauses. Does repetition mean truth? I am not sure that I would accept that, even from an academic.
However, my confusion lies in the last of this group of amendments. The original Bill referred to "pensionable service" as in paragraph 33 of Schedule 7. But the amendment changes that to Section 124(1) of the Pensions Act 1995. Unfortunately I do not have a copy of the Pensions Act with me—nor have I done as much homework as I usually do—but either they are the same or the Government have had a change of heart. Either one must be correct. If it is a change of heart, what has caused that change of heart? If they are the same, why bother?
Baroness Hollis of Heigham: It is my fault for trying to expedite proceedings by not spelling out in detail every amendment. Returning to Amendment No. 277A, Clause 199 provides for the investigation of complaints of alleged maladministration by the PPF. The current wording of Clause 199(2)(a) provides that complaints can be made only by a person,
"who is or might become entitled to compensation under Schedule 7".
The amendment broadens the provision and allows a maladministration complaint to be made by any person who is or might become entitled to compensation under the pension compensation provisions.
With that explanation—I should have given the Committee a fuller explanation at the time—I hope the noble Lord will accept the amendment.
Lord Skelmersdale: That is very helpful.
On Question, amendment agreed to.
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendments Nos. 234AUB to 234AX:
Page 111, line 41, leave out "to" and insert "(directly or indirectly) to any"
Page 111, line 41, leave out "under the scheme"
Page 112, line 6, at end insert—
"( ) section 160 (discharge of liabilities in respect of compensation),"
Page 112, line 9, leave out "in paragraph 33 of Schedule 7" and insert "by section 124(1) of the Pensions Act 1995 (c. 26)"
On Question, amendments agreed to.
Clause 162, as amended, agreed to.
Clause 163 [Relationship with fraud compensation regime]:
Lord Skelmersdalehad given notice of his intention to move Amendment No. 235:
Page 112, line 13, leave out "12" and insert "6"
The noble Lord said: We have heard a great deal of "six months" and "12 months" during the course of the past few days. I do not think it is appropriate at this moment to go into the issue and I shall not move the amendment.
[Amendment No. 235 not moved.]
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendment No. 235A:
Page 113, line 2, at end insert "rules"
On Question, amendment agreed to.
Clause 163, as amended, agreed to.
On Question, Whether Clause 164 shall stand part of the Bill?
Lord Higgins: At long last—I say this with feeling—we come to the Pension Protection Fund clause. But we find that, to a large extent, it is paving the way for the subsequent clauses that follow which deal with vital matters such as the levy on benefits.
What puzzles me about the clause as drafted is that it seems to confuse flows with stocks. The first part of the clause, in subsection (1)(a) to (k), is essentially concerned with assets and amounts which are borrowed and so on, whereas the latter part of the clause is concerned with amounts which are paid out and so on.
I thought it might be helpful to ask precisely how the fund will form its accounts. Will they be in the form of a balance sheet—presumably they will, although the Government still has not produced one for the country or the Government as a whole—and, if so, how is it to be dealt with? Similarly, what will be the situation in regard to income and expenditure accounts? Will fairly normal accounts be produced by the fund, in the same way that an ordinary pension fund would produce them? I beg to move.
Baroness Hollis of Heigham: Clause 164 lists what is to be paid into and out of the Pension Protection Fund. It is worth noting that the Bill refers to the pot of money and assets held in order to pay pension compensation.
The three key categories of money to be paid into the fund are assets, the levies and income from investment. The clause also sets out that payments out of the pension funds are limited to such things as pension compensation, payment of loans during the assessment period and so on.
The clause is designed to ensure that income derived from the pension protection levies and assets transferred from the schemes for which the PPF
GC 238
assumes responsibility are kept separate from other money and assets such as those held in the fraud compensation fund. It expressly states that income from investment or capital gain relating to assets in the PPF must also be paid into the fund.
As a non-departmental public body operating at arm's length from the Government, the PPF will be responsible for its own financial management. However, it will have to operate within the legislative framework and fulfil its reporting requirements.
The accounts will be an actuarial valuation following regulations. The person appointed to carry out this task must have the relevant UK actuarial qualifications and so on. We will be prescribing in regulations the answers to the noble Lord's questions in order to take account of changes in actuarial best practice and any changes in accounting rules. In that sense, I would expect it to follow the accounts of other non-departmental government bodies.
5.15 p.m.
Lord Higgins: The problem is that I am not quite clear exactly what in terms of this clause will appear on, for example, the balance sheet, in whatever form it may be, so far as the liabilities are concerned.
Baroness Hollis of Heigham: Perhaps I can write to the noble Lord on this. As I said, the regulations on this still have to be worked out in detail according to the accountancy conventions and so on. Rather than ad lib it, I would much rather write to him with a description of what the accounts should look like. That will of course be available as part of the annual report of the PPF and through the Secretary of State and it will be placed in the Library. I will circulate that to everyone.
Lord Higgins: I should be grateful for that. My point was rather that the clause as drafted mixes up flows of money coming in and out with stocks of money coming in and out, and the two are not properly distinguished as one would normally expect a fund to do. If it is actually the Pension Protection Fund, one would expect to have its assets and liabilities specified here. But in fact some of these things are not stocks but flows of money. The actual drafting of the clause seems rather strange. However, I am grateful to the noble Baroness for her suggestion, which I am happy to accept.
Clause 164 agreed to.
Clause 165 [Initial levy]:
Lord Higgins Lord Higgins moved Amendment No. 236:
Page 114, line 17, at end insert—
"( ) The levy shall be based on an assessment of—

(a) the risk that the company becomes insolvent, and

(b) the risk that the pension fund is underfunded."

The noble Lord said: This amendment seeks to define the way in which the levy shall be assessed. We come now, I think, to a whole series of debates on the levy and how it will operate. In the discussions we had before the Bill arrived in your Lordships' House, the noble Baroness was helpful in discussing a number of

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these aspects. Effectively, we are going to have a levy imposed on schemes that still remain as final salary schemes. There is a timing problem and a problem relating to the way in which the levy is to be assessed.
This clause is concerned with the initial levy. As I understand it, we are going to go through a period when we have the initial levy, which will be a flat-rate levy, defined in the Bill very largely as a "scheme" levy—if I understand the terminology the Government have adopted. We will then go through an interim period when some of the levy will be flat rate and some will be risk based. Then, I believe we will finally arrive at a kind of ideal situation in which, apart from what is presumably an "overheads" levy, the rest of it will be risk based.
The important point, I think, is to distinguish between whether the size of the levy, when it becomes a risk-based levy, should be based largely on whether the company is insolvent or whether the risk is underfunded. The order of debate rather throws us in at the deep end on this issue rather than dealing with the timing problem.
The clause itself is largely concerned with the timing problem. However, I believe that the broad view outside this Committee is that the sooner we move to a risk-based levy the better. Otherwise the companies which are paying the levy—those which are sound, both with regard to the company itself and the state of its fund—will be unfairly penalised. That is undesirable.
I shall leave the issue of timing until later, but perhaps initially with regard to these amendments we may hear the view of the Minister on how she sees the risk element becoming evaluated by the board when it decides how much it is appropriate to levy.
Having said that, I am astonished by the kind of figure—£300 million—that the Minister is bandying around. What gives me particular cause for concern is that I have received representations from a very large public company which is particularly concerned about the point that I mentioned earlier. As the result of a merger, effectively it bought out an insurance policy for a large number of its members so that, ahead of the merger, it could be sure that the funds were available and that the burden would not fall on the relatively small group of people who were to be in the merged enterprise.
Earlier I posed the question (I am not sure that I received an answer) as to whether the number of people and the amount of money in that part of the scheme—I suspect it is part of the hybrid problem—will be taken into account in deciding to what extent they are paying a levy. My point here, in the context of
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these representations, is that when they bought out the fund's liabilities in respect of some 13,000 pensioners, the cost of it was £500 million.
Baroness Hollis of Heigham: That was a one-off cost.
Lord Higgins: Yes.
Baroness Hollis of Heigham: It was not a series of flows.
Lord Higgins: Yes, of course. None the less, for just one scheme that seems to be very large in relation to the £300 million, which, if I now understand it correctly, the noble Baroness says is the cost year-by-year. Even so, I am increasingly worried about the scale of the operation. No doubt we shall come to the timing problem in a few moments. Does the noble Baroness have initial ideas on how the risk assessment is to be carried out? We shall excuse her if she gives us a long reply. Could she also comment on the specific point that I made about whether those paying the levy, on whatever basis, are liable for it if effectively the whole liability has been hived off in the way in which I described by a company taking out insurance policies or annuities for their members? Are they part of a scheme in that sense?
Lord Oakeshott of Seagrove Bay: I may have got the numbers wrong and so perhaps I can ask the noble Lord for the words of the insertion and what the levy is to be based on. I am struggling to find which line that is. Is the noble Lord saying that the initial levy will be based on that risk?
Lord Higgins: We are at page 114, line 17.
Lord Oakeshott of Seagrove Bay: Does that come immediately after an initial levy or where would it come?
Lord Higgins: No, it comes earlier than that. It is at page 114, line 17. It comes in at the initial levy point. Of course, the noble Baroness will make the rather obvious point that it will not necessarily be based on risk.
Lord Oakeshott of Seagrove Bay: I assume it is meant to refer to a later matter. I just wondered whether there was a slight problem.
Lord Higgins: I take the noble Lord's point. Perhaps we are better dealing with the matter at a later stage.
Baroness Hollis of Heigham: Indeed, I have quite a long reply, because it is a very important debate. I invite Members of the Committee to speak to the group, after which I shall give a full reply, and then I shall be happy to do my best to answer any queries. My reply will obviously be based on what we assume is the thrust of the amendments, but I shall respond to points raised by noble Lords. They are right that we are thinking about hybrid contracts and stuff like that. I shall come back to that. If colleagues speak to the amendments now, I shall give set-piece advice, as it

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were. In this case, it will be important to have the debate in Hansard. Then we can come back to some of the more specific points.
Lord Higgins: Something like a Second Reading debate on the issue is much the best way of proceeding; it would be very difficult to talk about individual points.
Baroness Turner of Camden: I have an amendment in this particularly large group, which includes a number of amendments from the Liberal Democrats. My amendment is Amendment No. 247, which runs rather contrary to some of what the noble Lord, Lord Higgins, has said.
As I understand it, the levy to pay compensation has two elements. One is based on scheme factors—the number of members and so on—with the other based on risk factors. After the first year, the latter must raise a minimum of 50 per cent of the money, and higher proportions have been mentioned. The Bill identifies two elements of risk that must be considered in assessing risk-based levy. One is based on the finances of the scheme, and the other on the financial strength of the company. Our amendment seeks to remove the latter.
There is a concern that smaller companies may well be led into the withdrawal from final salary schemes in the future. More generally, firms wishing to meet their commitments to their pension schemes may be unfairly penalised. The finances of a company may, in many cases, be difficult for the PPF to assess, leading to decisions possibly taken on the basis of defective data, perhaps with unfair results. At a wider level, the whole idea of the risk-based levy is questionable. It gives companies a choice on the strength of funding policy to adopt, subject to the payment of the consequent levy.
As the clause stands, we think that there could be unfairness, and it might lead to a further decline in final salary provision. We are very anxious to prevent that. As my noble friend knows, I am a strong proponent of final salary schemes, and I would not want to do anything at all that led to their further disappearance. We are afraid that, if the Bill and particularly the relevant paragraph are unamended, that could well be the result. We seek to remove subsection (3)(a) on page 115, which reads,
"the likelihood of an insolvency event occurring in relation to the employer in relation to a scheme".
The likelihood of an insolvency event seems difficult to assess, and we do not think it a good idea for that to remain in the Bill.
5.30 p.m.
Lord Oakeshott of Seagrove Bay: Would it be appropriate if I talked generally and about our amendments? We have a number in the group. I shall deal first with the point made by the noble Baroness, Lady Turner. We often sing from the same hymn sheet, but not on this occasion. She seeks to take out the whole employer-solvency related element of the risk calculation. On any objective measure of where the
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risk really is in pension funds, that is an important part of the calculation. That would not be right; it would very much change the whole basis of the scheme to a much more—dare I say it?—socialist scheme. It would certainly not be one based on any objective analysis of the risk of default.
Our amendments seek to move the PPF and its whole operation as quickly as possible to what we regard as a fair and clear basis, on which it is commercially calculated and fairly reflects the real risk of default in individual schemes. There is the basic problem that otherwise one will end up with much more of a poll tax on pension funds, which will be a real disincentive to the good companies who do their best to have well-funded schemes.
At the moment there are two situations. There are strong companies such as BT or Marks & Spencer which can make substantial payments into their schemes to eliminate pension fund deficits over the years where the risk of default is negligible in such schemes and, on the other side, there are well-funded schemes such as the former National Coal Board pension fund or the British Steel fund, which are companies that have fallen on hard times. But again the risk is very low because they have had very prudent investment policies over many years and very well-funded schemes.
The risks of default in pension funds is very concentrated. Scheme members at risk are those who face the double whammy of under-funded pension schemes run by financially strapped companies. In motor insurance terms, if I can put it this way, they are the equivalent of a 25 year-old City of London money broker with a string of speeding convictions in a Porsche. It cannot be right to charge such a person the same as the responsible employers with the well-funded schemes—the 50 year-old teacher in the Isle of Skye with a clean licence in a Morris Minor. It must be done on a proper, commercially calculated basis.
To deal in more detail with the amendments: first, deal with the amendment in the names of the noble Lord, Lord Higgins, his colleagues, myself and my noble friend Lady Barker. It basically says that the risk-based levy must come in after one year; the initial levy must not last for longer than one year.
Amendment No. 239 says that the board must impose the risk-based element of the scheme. There is a flat-rate element per head, but it must be both risk and scheme based.
Amendment No. 240 says that the risk-based element must be assessed by the board after taking external professional advice. We think that how that is arrived at should be a very open and public process. That is why we have tabled that amendment.
Amendment No. 242 specifically includes the likelihood of one of two main things: to the under-funding of the scheme, we add the likelihood of an insolvency event occurring to the employer in relation to the scheme. That is the same form of words as is in the Bill later on, but we make it clear that that has to be used; it is not an option.
Most of the other amendments are really consequential. Amendment No. 262, which is also in this group, says that the amounts to be raised should be clearly determined, clearly planned in good time, that the board should make its recommendations and that that should basically be laid in good time by the Secretary of State before Parliament so that people can see what is to be raised.
That would be particularly important if our amendments and our proposals were accepted, to the effect that the Government, or the taxpayers, stand as the lender of last resort. Clearly there is an initial risk there, but none the less, even if that is not passed, I still believe that these provisions are sensible and that there will be great public interest and concern. There should be a transparent, public and regular process by which these levies are set and it should be possible to discuss the issue.
Finally, we are saying in Amendment No. 262 that the risk-based levy must amount to at least 80 per cent of the total amounts to be raised by the levy. So it must be the bulk of it. The scheme-based levy and the flat rate must just cover administrative costs and all the insurance investment-related element must come from the risk-based levies in that way.
We had quite a good discussion on that on Second Reading. This is the approach we have taken, and I believe that noble Lords will see things the same way. We are proposing these amendments to give effect to these principles and to ensure that this operates on a proper, commercial, transparent, fair and sustainable basis for the very long term. Pensions are very long term and this legislation has to be built to last for many years to come.
Lord Higgins: Perhaps I may intervene before the Minister's lengthy reply. We are effectively having a Second Reading debate on the clause, which happens to be about the initial levy. The initial levy, as one understands it, will be determined by a number of factors. We will come later to the question of the risk-based levy and the factors that will affect that. A very widespread view—which I certainly support, and has been reinforced by the noble Lord's comments just now—is that the shorter the period in which we have the initial levy and the quicker we move to a risk-based basis, the fairer it will be. Some have said that we really ought to defer the entire scheme until such time as we have an effective risk-based levy. So there are fundamental problems as far as this is concerned.
Perhaps I can start by saying a word on the initial scheme-based levy that will apply during the period covered by Clause 165. I am not clear about what the balance will be between the number of members and the liabilities. It seems, for example, that there is an intrinsic lack of fairness in the system presently proposed by the Government, and perhaps we will manage to persuade them on that. Let us suppose that scheme A has 56,000 members and PPF liabilities of, let us say, £1,237 million, and scheme B has perhaps 1,353 members and estimated liabilities of only £372 million. If I understand it correctly and the
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annual scheme-based levy was, for example, £10 per member, then scheme A would pay £261,000-odd and scheme B would pay £ 13,000-odd. So while scheme A's PPF liabilities will be more than three times those of scheme B, its scheme-based levy will be more than 41 times that of scheme B. Therefore, the balance between the number of members and the liabilities is a matter of very great importance.
I think I am right in saying that if the scheme-based levy was calculated by reference to its PPF liabilities, that would assure a greater degree of fairness. No doubt the noble Baroness has given great thought to that aspect of the matter.
I wonder whether I should now turn to the question of the risk-based levy. It may enable more orderly debate if we defer that until subsequent clauses in which we are considering a risk-based levy in the period beyond the transitional period. Is that the best way of doing it?
Baroness Turner of Camden: They are all grouped.
Lord Higgins: In that case, in a rather inconvenient way, let us turn to the question of—
Baroness Hollis of Heigham: The noble Lord is entirely entitled to do whatever he thinks most convenient for the Committee. We can certainly degroup these. However, as so much of the discussion is about the move from the initial levy to the transitional one, what goes into the scheme element and what goes into the risk-based element, whether we can expedite proceedings and what sort of timescale we have in mind, and what factors go into the scheme levy and what into the risk-based levy, it may be convenient for the Committee to take the issues together. If the noble Lord wishes to return to a specific point later, I would be entirely comfortable with that.
Lord Higgins: I shall restrict my remarks for the moment—the noble Lord, Lord Oakeshott did the same—to the question of the scheme-based levy. We can then turn at a later stage to the question of the risk-based levy. But it is important that we should get to the risk-based levy as soon as possible. I leave it there. Let us see how we go.
Baroness Hollis of Heigham: As the noble Lord, Lord Higgins, suspected, I do have a rather long reply. This is the second very important issue we have to consider today. The first was about the level of contributions—the 90 per cent, 100 per cent payments out in terms of compensation—and this is about the moneys coming in and how schemes will be assessed. So I hope the Committee will forgive me if I take much longer than normal.
I appreciate not only the important amendments but the informed and thoughtful way in which they have been debated. I have found it extremely interesting.
Taking the amendments in sequence, I shall seek to respond to individual amendments and explain where we have problems with them. I am perfectly happy for noble Lords to intervene as we go through them if they

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feel that they have made points which I have not predicted and they consider I should answer in addition.
Amendments Nos. 236 and 238 seek to amend the provisions relating to the initial levy outlined in Clause 165. They would require the Secretary of State to base the initial levy on the risk that a company becomes insolvent and the risk that the pension fund is under-funded.
The reason that we have provisions for imposing an initial levy is because we do not have the necessary information to put in place a pension protection levy based on risk from the outset. I wish we could, but we cannot. We have a choice. If we were to do that we would delay the introduction of the PPF altogether, but all the events of the last year show that there is an increasing urgency for it.
So the reason for the initial scheme-based levy is to produce a flat-rate scheme which gives us a working base over the transitional period. The risk is phased in as companies go through the triennial valuations. The purpose is to get it up and running and moving. Given that many schemes have been assessed against data that are nearly three years out of date, and given that different schemes may have to be assessed against different criteria, attempting to introduce a levy based on risk could have considerable implications on the amount an individual scheme is charged.
We have a straight choice. We believe that it is fairer to go for a scheme-based levy with transparent criteria and then phase in the risk-based levy as expeditiously as we can. To some extent we are in the hands of the companies. As soon as they can produce information the sooner their particular levy can be assessed on the risk-based element.
The Committee will know that a scheme-based levy will he based on the number of members. We would expect the levy to fall twice as heavily on active members as on deferred and pensioner members. The liability included could take into account, for example, the pay levels of the company involved and the degree of risk to which the PPF would be exposed. Clearly it would be very different if the average pension obligation was £5,000 a year as opposed to £25,000. It is pretty simple, I think. The scheme-based levy will be introduced after consultation with the industry.
Lord Higgins: I hesitate to interrupt the noble Baroness in full flow but she gave the impression a moment ago that you could change to a risk-based levy as soon as the company had the data available. I had rather assumed that there would be a period in time when everyone would change over to a risk-based levy. What she has just said gave the impression that as soon as a company had got the data it could change. Am I right in thinking that that is not so?
Baroness Hollis of Heigham: We are both right. What will happen is that after the transitional period is through, four years after the initial period, we would expect to be on a fully balanced risk-based levy with the underpinning of a scheme-based levy for all companies concerned. But individual companies tend
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to carry out their valuations on a triennial basis and if, for example, a company has made a risk-based valuation that is appropriate and acceptable for these purposes, it could come as an individual company into a levy that is risk-based earlier than other companies.
But we expect this procedure to be completed over the period of three years. In other words, the sort of companies that the noble Lord, Lord Oakeshott, talked about. Highly solvent and experienced companies with all the relevant skills may very well have a valuation ready to take them into a risk-based levy fairly quickly; other companies may not. So, over the transitional period companies will phase themselves on to the risk-based levy, but at the end of the transitional period all will be on it.
5.45 p.m.
Amendment No. 237, tabled by both Conservatives and Liberal Democrats, also relating to Clause 165, would result in the length of the initial levy being restricted to a maximum period of 12 months. It is our intention and hope that it would, having such a tight phrasing on the face of the Bill, remove the element of contingency that has been put in place. I should like to stress that we are committed to doing that as soon as we possibly can. We expect it to be a year, but we consider that building in an element of contingency is sensible. On a minor point, it allows the initial levy to end part way through a financial year, which would have an impact on future pension protection levies. So there is no difference between us with what we intend to do; we just think it wise to have a modest degree of flexibility.
Amendments Nos. 239, 251, 254, 255 and 256, moved by the noble Lord, Lord Oakeshott, relate to Clause 166 and would require the board to set both pension protection levies for each financial year following the initial period. Again, I am not sure how much divergence there is between us. In practice, we would expect that the board would set both levies each year, removing the board's ability to set a solely risk-based levy, should it choose to do so, and should this be sensible. It would be an unnecessary restriction. The proposed amendment may also create unnecessary complexity and burdens for schemes as it removes the ability to set a scheme factors only levy when the board estimates to collect only 10 per cent of the levy ceiling.
In other words, there is a, so to speak, de minimus for the PPF as well as de minimus for individual schemes. The noble Lord's amendment would cut across that useful de minimus. But in practice we would expect what he says to happen.
Amendment No. 240, again moved by the noble Lord, Lord Oakeshott, would require the PPF board to seek appropriate external professional advice before setting the risk-based pension protection levy. Provisions have already been included within the Bill that require the PPF board in certain circumstances to consult, for example, prior to setting the first pension protection levies or when changing any factors or rates from those used in the previous year, or indeed when no consultation has been required in the previous two years.
In addition, although we expect the PPF board to seek appropriate advice from various sources as and when it needs to, it is also the case that members of the PPF board and the PPF will themselves be "experts" drawn from the accountancy and actuarial professions as well as lawyers. So we do not want to tie ourselves to seeking external advice each year as it is unnecessary and costly but when appropriate it will obviously be sought. Given that the accounts for the PPF will be transparent and its behaviour in that sense transparent, it would be very unwise to overlook advice outside if it does not produce satisfactory advice in-house.
Amendments Nos. 242, 246, 252 and 253, also moved by the noble Lord, Lord Oakeshott, aim to alter the structure of the pension protection levy provisions in Clause 166. Amendment No. 242 would require the risk-based pension protection levy to be assessed by reference to a scheme's funding level, the risk of insolvency in relation to the sponsoring employer and the risks associated with a scheme's investment strategy.
The provisions we have put in place require the board to take account of the level of funding within a scheme because this is the risk factor most likely to encourage scheme trustees to fund their scheme sufficiently. Although important, we do not wish to require the board to take account of the risk of insolvency in relation to the sponsoring employer or the risks associated with a scheme's investment strategy. We are here making a distinction between "require" and "may". That is because at present—
Lord Higgins: Did the noble Baroness say that the Government were not going to take into account the risk of the employer's insolvency?
Baroness Hollis of Heigham: No, I was going on to say that although we do not wish to require the board to do so, which does not stop them doing so, the reason we do not require them to do so is that at present there is no consistent across-the-board approach for measuring insolvency risk; and that schemes may need to consider their investment strategy as a consequence of the risk factor relating to the level of funding.
Amendment No. 246, again moved by the noble Lord, Lord Oakeshott, seeks to remove Clause 166(3). The subsection currently sets out the risk-based factors the board may consider when setting the pension protection levies. Removing the subsection would prevent the Secretary of State prescribing further risk factors in regulations should there be a need to do so. That would allow him to respond particularly to concerns from the industry.
Amendment No. 262, again moved by the noble Lord, Lord Oakeshott, seeks completely to replace Clause 168, which establishes the boundaries within which the PPF board may operate when estimating and setting the pension protection levies. For instance, it requires the board to estimate to collect at least
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50 per cent of the pension protection levies via the risk-based pension protection levy, and restricts the board from increasing the pension protection levies by more than 25 per cent in any one year.
The first aspect of the proposed amendment seeks to use the scheme factors pension protection levy to recover the administrative costs relating to the PPF. However, the PPF administration costs will be met by grant-in-aid from the Secretary of State. He will then recover the expenditure via the administration levy. In order to ensure that there is a clear demarcation of expenditure, it is important and necessary to keep the costs relating to PPF administration separate from those costs relating to PPF compensation. I am not sure that the noble Lord has tabled this as a compensating amendment.
Lord Higgins: I am sorry to keep interrupting, but I hope it is helpful. As far as concerns the administration levy, I gather the proposal is that the Government effectively will give the board a float and the board will then recoup it in the form of an administration levy.
Baroness Hollis of Heigham: That is correct.
Lord Higgins: I am not clear why they cannot simply set an administration levy in the first instance. Certainly, it would seem a rather good idea to separate that out from the rest of the proceedings. They still have to decide how to charge individual companies for the administration levy: we are back to square one.
Baroness Hollis of Heigham: We are talking about a most interesting point. I think we are talking of £10 million to £15 million out of £300 million as the administration costs. It is certainly the case, as the noble Lord says, that we are trying to keep it at least in balance sheet terms separate from the compensation activities. The noble Lord rightly described it as an advance by the Secretary of State in order to get the PPF up and running. That is the basis of it.
I was talking about Amendment No. 262. It seeks to ensure that the risk-based protection levy goes from 50 to 80 per cent. That is where we hope and expect to get to, so again there is no policy difference between us. But we think that it would place an unnecessary constraint on the board and consider that the provisions we have put in place balance the need to focus on the use of risk factors, while at the same time ensuring the PPF board can operate in a flexible and appropriate manner.
In other words, I think that most of the disagreements arising from these amendments so far have been that your Lordships in your amendments seek a degree of precision which in terms of its policy intent we do not disassociate ourselves from, but we wish to have the contingency flexibility of not tying

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ourselves to them. I am very happy to place on the record that we expect to arrive at the position which the noble Lord has described.
Lord Oakeshott of Seagrove Bay: It is called "wriggle-room" in this instance.
Baroness Hollis of Heigham: It is called "head space for contingency room". I am sure the noble Lord would accept that is a more appropriate description of the scenario we both possibly envisage.
The final strand of the noble Lord's proposed amendment seeks to require the board to provide the Secretary of State with the estimate of the amount it proposes to impose in respect of the pension protection levies at least three months prior to the start of the financial year.
With that amendment we may also consider Amendment No. 245, moved by the noble Lord, Lord Higgins, which requires the Secretary of State to make a recommendation as to whether insolvency risk and investment strategy risk are to be included in the risk-based levy structure and to approve any future changes to the risk facts; and Amendment No. 258, which requires the board to obtain the approval of the Secretary of State when setting the pension protection levies.
As we have already discussed, the PPF will be a non-departmental government body. The way of funding the administration levy is exactly the same as is custom, standard and practice with other non-departmental government bodies. The board of the PPF will be given the appropriate levels of autonomy and flexibility to conduct its business effectively. Requiring the Secretary of State to approve any determination the board makes in respect of the pension protection levies would reduce that autonomy and could have unhelpful consequences.
For example, it might restrict the board's independence and flexibility when dealing with issues relating to the PPF, where it is essential for the PPF and sponsoring employers to proceed without political interference. Regarding this arms-length principle, which we are trying very hard to establish, if one looks to the American experience one can see why it is necessary. In the United States because the increase in the levy is only set by Congress, it has not been increased in my understanding since 1991. It has therefore not taken account of inflation and is worth probably 25 per cent or so—perhaps more—than in 1991. It is not surprising that it encounters some of the difficulties it does.
The noble Lord asked about the three months. Perhaps I may expand on that. It seemed to me at face value an entirely sensible proposition. I am very happy to circulate how we expect the timetable to operate. In terms of the three months' period of notice for which the noble Lord asks, I was assured that normally, say over the winter months, the PPF board would consult with the industry and individual schemes on the levy required; that the notice would normally go out in April; and that the monies would come in over a period of time from one to three months onwards.
So, although I cannot accept an amendment, in practice, individual schemes should have ample time both to understand and to receive the notice and have time to pay it. If we get problems in these areas, obviously the board must come back if necessary to Parliament for further regulations, but we expect the issues to be covered in regulations. That is the expected time flow of money, which should obviate the need for the noble Lord's amendment.
Amendments Nos. 241 and 243, moved by the noble Lord, Lord Higgins, seek to require the PPF board to take account of the risk of the sponsoring employer becoming insolvent when setting the risk-based pension protection levy.
Risk of insolvency is a key risk factor, but one for which there is no fully established measure that covers all those employers sponsoring DB pension schemes. Officials continue to work with industry representatives and external stakeholders to establish the options available for the board in taking this risk factor forward.
In other words, that will be done by the board in consultation with industry. Obviously, we want to establish robust agreement. It will ensure that the board has the information it needs to introduce some level of insolvency risk from the second year should the board consider it appropriate.
Amendment No. 244—a conservative amendment tabled by the noble Lord, Lord Higgins—would require the PPF board to take account of the level of a scheme's liabilities to or in respect of its members, when setting the scheme factors pension protection levy.
In order to set the scheme factors pension protection levy the board may take account of several factors: the number of members within a scheme; the annual amount of pensionable earnings for active members—in other words their pay rates, a matter I mentioned earlier; and the liabilities of the scheme. Each of those factors may be considered alone or in conjunction with each other.
The provisions are flexible enough to enable the board to choose the most appropriate scheme factors for setting the scheme-based pension protection levy in the future. Requiring the board to take account of one or all of these factors would again be an unnecessary and inappropriate constraint.
Amendment No. 247, tabled by my noble friend, seeks to remove the ability of the board—the exact opposite—to consider the risk of insolvency in relation to sponsoring employers when setting the pension protection levies. This amendment could result in schemes which are highly unlikely ever to call upon the PPF, because of the strength of the sponsoring employer, paying a greater share of the risk-based protection levy than they would otherwise have to do. Obviously that would be unfair.
We believe that taking account of the risk of insolvency, when setting the risk-based pension protection levy, is an important factor in determining the contribution levels for individual pension schemes. We have in fact received several representations from

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external stakeholders and various businesses suggesting that the PPF board should be required—not merely "made", but "must"—to take account of this risk factor.
We are therefore trying to get—those magic words that we will all be bored with by the end of these discussions—the right balance between recognising the importance of differing risk factors by setting these out on the face of the Bill and—the other side of the equation—allowing the PPF board the flexibility it needs to operate efficiently and effectively.
6 p.m.
Amendment No. 249, moved by the noble Lord, Lord Oakeshott, seeks to remove the power to allow the Secretary of State to prescribe additional scheme factors in regulations. Going forward, additional scheme factors may be established or become relevant. I was trying to think of one because, if we could think of one, we would put it in. I suppose apocalyptically, one could have something about the risk to a particular sector industry because, as in the States, PBGC has been most hurt by the liabilities of its 10 leading defaulters, so to speak, coming into the scheme, which were four airline companies, five steel companies as well as Polaroid. We were actually in some difficulty, but we wanted—
Lord Oakeshott of Seagrove Bay: I think the Minister is in difficulty. The reason is that that would undoubtedly be covered by the risk of employer insolvency requirement. That is why I do not believe anything else is relevant and why I moved my amendment.
Baroness Hollis of Heigham: It seems to me that the additional scheme factors would have to come into regulations. I am perfectly happy to say that they could be brought before the House. It is merely for what the noble Lord has so charmingly called the "wriggle-room factor", and what I like to think of as making sensible provision, to ensure there is head space so we do not need to trouble the House with primary legislation on some future occasion, but can do it by regulations.
We may disagree about that, but throughout all this the noble Lord accepts the need to have some headspace capacity for contingencies that not even the combined intellectual wattage of the present Committee can envisage.
Amendment No. 25, again moved by the noble Lord, Lord Oakeshott, is a further amendment to Clause 166. The amendment would require the pension protection levies to relate to each financial year,
"falling after the initial period".
Although I accept where the noble Lord is coming from, I do not think it is necessary. Clause 166(1) already stipulates that the provisions contained within Clause 166 refer to each financial year falling after the
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initial period. This is one occasion where straightforwardly I think that the amendment is unnecessary because it is redundant.
Because of the implications arising from those amendments, I should now like to sit down, but I realise that I probably have not covered all the points noble Lords want to raise. If any Member of the Committee would like to pursue this because it is a major issue, I am perfectly happy to do my best to answer further queries. I apologise for taking up the time of the Committee with such a long reply.
Lord Higgins: The noble Baroness has no reason to apologise. What is clear from this debate, which necessarily has covered the entire range of this clause and several later clauses, is that on Report we simply must not group this lot of amendments in this way because there may be a number of specific issues on which people wish to focus, to debate and to vote.
Perhaps I can seek to give a little shape to what we are now discussing. On the administration levy, the noble Baroness has pointed out that the costs involved are trivial in relation to the overall operation. The Government have come up with a scheme to give the board a float and then let it levy an administration levy, which apparently is something separate from the overall levy. Unless it is assessed on the same basis as the overall levy, it will have to go through a quite separate exercise.
Baroness Hollis of Heigham: Perhaps I may help the noble Lord. I gave the noble Lord the correct figures. We expect the administration levy to be between £10 million and, not the £15 million I said earlier, but £20 million. I did not have to hand the cost per member. That is a flat rate of £1 per scheme member per year.
Lord Higgins: It is fair enough if that is operated on £1 per scheme member. I should have thought that it would be more obvious for the Treasury to grit its teeth and pay out £15 million in the interests of having the scheme. The idea of having to do it on some other basis seems to us singularly unfortunate.
Perhaps I may next say a few words about the scheme-based levy. We are talking of the scheme-based levy in the initial period, but presumably it is an element of the eventual levy in the final arrangement. It seems to us to be very important that it should be done on the basis of the PPF liabilities of a particular scheme rather than, for example, on the number of members. I gave the noble Baroness an example just now. Perhaps she will consider that particular point.
On the vital question of the risk-based levy, the Minister seems to suggest that from the moment the Bill becomes law the board will start to assess individual company schemes. She again used the expression, "Each one will gradually be phased in". However, that conflicts with what she said earlier—that although the work will be done on a phased basis, the whole thing will happen at one moment in time. However, it does not. So if a particular board of pension trustees can provide the information fast

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enough, it can go to a risk-based levy faster than others. I must admit that I do not think that any of us on this side of the Committee had understood that to be the case.
Baroness Hollis of Heigham: That is indeed the case, although I am checking in case I have completely misunderstood the position. It depends on where firms are in the process of their triennial valuation. I would invite your Lordships to accept the dilemma. Noble Lords are perfectly properly asking us to go to a risk-based levy as quickly as possible. Under the timetable we expect the initial period to be about a year. We expect a transitional period of up to four years in which all the schemes will have completed their triennial valuations, which they would normally do anyway, for scheme-specific funding for the regulator, on top of which some of the PPF information would be partly extracted.
If we were to wait for four years, no risk-related levy would come into play for five years. Your Lordships are pressing us, perfectly properly, to introduce the risk-related element as quickly as possible. That is what we seek to do. Therefore, where we have that information from companies, the PPF can determine what an individual company's risk-related levy should be.
Lord Higgins: This is a fascinating development. I give way to my noble friend.
Lord MacGregor of Pulham Market: This is my first contribution on the Bill because I have not been able to be here very often. I share the same reservations and was puzzled by the Minister's earlier remarks. Clause 166(5) states:
"The Board must, before the beginning of each financial year, determine in respect of that year … whether to impose both or only one of the levies mentioned in subsection (1)".
Does that mean that if the board decides to impose only one of the levies, what she said could not apply until it changed its mind?
Lord Oakeshott of Seagrove Bay: Perhaps I may add my thoughts as this is one of the points dealt with in my amendments. The Minister thinks that it would be nice to have it on a rolling basis over several years, as we discussed at Second Reading. Whatever the intention, we do not think it a good idea. Like the National Association of Pension Funds, we wonder whether waiting for such a long period will be a case of the best being the enemy of the good. It may be a bit rough and ready to have to make estimates and bring in the risk-based element earlier, but if we do not, we will be waiting until 2009 or 2010.
If it is 12 months, we are talking about April 2006, which is 18 months away. These issues have been clear to the department, and we believe that there is plenty of time. So regardless of whether it is the Government's intention, we on these Benches will not be happy if it does not come fully into effect over that period. There is a very odd period between 2006 and 2009 when one is effectively running a sort of insurance company in which people can pick whether they pay a
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flat or risk-based rate. I think that the PPF will have to take a grip and have a policy on how it will set the risk-based levy from 2006.
Baroness Hollis of Heigham: I think I am right in thinking that Clause 171 indicates that. Certainly our expectation throughout has been that there would be a dual system in the transitional period, including both scheme factors and—as triennial valuations occur, or sooner if schemes wished to opt out of out-of-cycle valuations—a risk-based scheme. Many schemes will take several years to do all the work unless we ask them to do out-of-cycle valuations.
We can discuss that with industry. However, our proposal has come out of consultation with industry. It is partly in response to the fact that well run companies which feel they have a very low risk and believe they inevitably stand to gain as a result of moving to a risk-based levy, wish to proceed earlier. They believe they have information that we should take onboard and build into the levy which we assess on them, and that is what we are doing. I am slightly surprised that Members of the Committee are surprised at that.
Lord Oakeshott of Seagrove Bay: The noble Baroness does not understand. Of course the well funded and well organised companies want to move to a risk-based scheme, but they also want everyone else to go on to such a scheme; otherwise they will have to pay for those who are not paying enough. That is the insurance principle. We had this discussion on Second Reading. It is not right to say that that is the view of the industry. The National Association of Pension Funds does not agree with what the noble Baroness is saying. The noble Baroness must focus on the overall package.
Baroness Hollis of Heigham: We are talking not about the National Association of Pension Funds but about the employers who are paying the levy. It is certainly true that that £300 million is a zero-sum game and that the scheme basis will have to compensate accordingly if some companies are able to reduce their contribution because they have moved on to a risk-based levy. I absolutely agree that that is true by definition. However, that is where we will be regardless of when the transitional period ends.
Lord Higgins: I am slightly confused. I thought that I was making a speech when the noble Baroness intervened.
Baroness Hollis of Heigham: I am so sorry.
Lord Higgins: My noble friend Lord MacGregor then made a most interesting intervention in the intervention, which was followed by an intervention by the noble Lord, Lord Oakeshott. It goes to show that this Bill is not a simple Bill.
Be that as it may, before I was interrupted—I think that that is the right expression—I was seeking to make the point that it is absolutely crucial that the risk-based levy should take into account the solvency or otherwise of the employer. The noble Baroness is

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seeking to say, "That is very difficult because no one knows how to assess these things". It is true that a comparatively small proportion of companies have credit ratings. However, a specific and I think helpful suggestion has been made to me, which is that that can be resolved if all those companies without a credit rating were simply assumed to have a rating of, say, BB or B. As has been pointed out, numbers recently published by Standard & Poor's suggest that the insolvency risk of an employer with a BBB rating is less than one third that of a BB company and so on.
So I think that one can empirically come to a reasonable basis for assessing whether an employer is solvent or is likely to become insolvent. The sooner one does that, the better it will be. However, I think that it is unacceptable to suggest that, "This is a very difficult problem. We won't take it into account". The other part of the risk is the question of the extent to which the scheme is funded. Alas, given developments in recent years, one cannot help feeling that we will find that a rather large number of funds are fairly unfunded. We will have to come to some view on how long it takes them to sort that out. In that context, the three-year valuation point really is a dud one.
6.15 p.m.
It is true that pension schemes have valuations every three years, but there is absolutely nothing to prevent them having valuations more frequently. I, myself, in the course of a merger, called for a quick valuation. It does not need the full paraphernalia of a triennial valuation. The actuarial profession is perfectly capable of doing it. There may be some strain on resources to do so for everyone at a moment in time—to some extent the resources available from actuaries are related to the triennial arrangement—but we do not have to wait for three or four years before working out that side of the issue. Perfectly adequate valuations could be developed in the mean time.
Those are the main points. I stress once again that it is very important to recognise that the present basis for the scheme-based levy is not satisfactory. I hope the noble Baroness will take into account the example I gave and consider a better arrangement.
This has been an illuminating, if not surprising, debate. The noble Baroness may wish to say more. We shall have to be very careful on Report to table amendments on specific points related to the initial period, the transitional period and the final period, and also in regard to how the scheme assessment and risk assessment should be made. But these are complicated issues and perhaps a general run round the course of this kind has not been unhelpful.
Lord Oakeshott of Seagrove Bay: Perhaps I may speak briefly. The noble Baroness took a lot of trouble—which I appreciate—to answer a great deal of the thinking behind the amendments. I shall obviously read very carefully her detailed words in Hansard.
In essence, there is the question of whether we are saying, "This is an intention", on the one hand, or, "It must happen by a certain date", on the other. We do not want to leave too much discretion to the board because we feel that this is a case where Parliament should lay down the fundamental basic principles on which the scheme should operate. It is important that there is a clear direction to the board. I think the board would welcome that.
So far as timing is concerned, April 2006 for the end of the initial period is quite long enough. There is plenty of head space, wriggle room, whatever you like to call it, in there already. It will be my intention on Report to insist on that.
The principle of the risk-based levy—that it must be a combination of employer solvency and fund solvency effectively—is very important for the board. Unless the noble Baroness can produce more convincing possibilities than she has about ways in which one might change it, it seems to me that that must be the basis on which the figures are updated. We are not talking about technicalities; we are talking about basic principles on which both the industry and the pension funds would want us to insist.
We may all be aiming in the same direction, but it is important that Parliament should set down those basic principles. Obviously we will reconsider these amendments very carefully and bring them back when we come to the Report stage.
Baroness Hollis of Heigham: Let me pick up on a couple of detailed points. The noble Lord, Lord Higgins, pressed me about the scheme-based levy and gave an example of a company which secured the pension future for a proportion of its members by buying an insurance contract for them. I am assured that if those liabilities were completely discharged, the scheme would be levied for the PPF only on those members for whom that liability had not been discharged. I hope that is a precise answer to the noble Lord's example.
The noble Lord referred to scheme funding, and there is a difference in the PPF liability. By definition, the PPF funding is not only about compensation levels of 100 per cent and 90 per cent respectively but is also capped at £25,000. You could have a pension scheme that is under-funded for its pension promise because the company has a very high proportion of high earners who can expect significant pensions—£40,000 or £50,000 pensions—but still be more than adequately financed to meet the PPF liability, which will be capped at £25,000. Therefore it would remain outside the PPF. It could therefore be under-funded in scheme-specific terms, but still not a risk in terms of PPF liabilities.
I am slightly taken aback—it may be my fault—by the fact that there would be a potentially dual scheme operating through the transitional periods as more and more companies come over to a levy which is increasingly risk-based, with the scheme element underpinning it with a de minimis of small companies.

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I am surprised that this has taken Members of the Committee by surprise because it has been the subject of fairly widespread discussion.
However, I emphasise that, in the department's view, this is a matter for the board to take forward in conjunction with the industry. We do not want to burden schemes by requiring a further cycle of valuations if they consider it unnecessary and undesirable. If the board does, and the consensus of the industry is that it is, then maybe we can expedite the move to a risk-based levy earlier. There is no reason in principle, for example, why we might not be able to get to an assessment of insolvency risk within two years of the transitional period.
I do not believe that we disagree on any of this. We hope and expect to end up with an 80 per cent/20 per cent split or thereabouts between risk base and scheme base. Obviously it will vary between individual companies according to their assessments. We want to leave room for the board to determine these matters in conjunction with the industry.
During the debate in the other place, the Conservative spokesperson on the Committee, Nigel Waterson, said that the feeling in the industry is that a two-year period for the transition is probably unrealistically tight purely in practical terms. It looks as though the industry would prefer the likely result of a transitional period of about four years so that the full levy structure will be in place in year five—that is one plus four years after the PPF begins. I do not know to what extent he has consulted the industry, but that is also our feeling.
The substantive disagreement between us is whether it is reasonable to taper in over the transitional period the risk-based levy and the scheme-based levy. Our belief is that it is and we believe that we have the consent of the industry to do so.
The second disagreement is the degree to which we should tie down the considerations under which the PPF board should operate, the timetable it should operate to and what are the precise requirements. We simply have a difference of view in this respect. I do not wish to sound condescending but, were I in Opposition, I, too, would have wanted to argue the noble Lord's case. I would have felt that that would have helped to hold the Government to account.
Contingencies that perhaps could not be reasonably predicted hit you and you need the flexibility to better respond without coming to the House with primary legislation. But, having said that, all the matters about which we are talking—for instance, possible risks that we cannot currently identify and therefore have not been specified—will be introduced through regulations. I am perfectly happy that any regulations of that nature should be brought forward by the affirmative procedure to ensure that the House has full scrutiny of them.
But it would be very stupid—and could be regretted— if a subsequent Minister, standing in this place in two years' time, five years' time, 20 years' time, had to come back with primary legislation simply because this House denied them the capacity to cope
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with unforeseen contingencies. If I could think of why that would be necessary it would be delineated. It is not; that is why it is there. Even my limited experience has taught that it is wise to have it.
With those remarks, we have perhaps gone as far as we can on the debate today. Equally, if any Member of the Committee would like to write to me in order to follow up any of the discussion today or for further clarification, I shall be very happy to receive it. I invite the noble Lord to withdraw his amendment and we can then perhaps move on.
Lord Higgins: I note what was said in another place on my side of the House. I think the crucial point is that it should be changed to a risk-based basis as soon as practicably possible. Estimates may vary as to how soon that is, but the sooner the better. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 237 and 238 not moved.]
Clause 165 agreed to.
Clause 166 [Pension protection levies]:
[Amendments Nos. 239 and 240 not moved.]
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendment No. 240A:
Page 114, line 41, after "scheme" insert "rules"
On Question, amendment agreed to.
[Amendments Nos. 241 to 247 not moved.]
Lord Higginshad given notice of his intention to move Amendment No. 248:
Page 115, line 15, leave out paragraph (c).
The noble Lord said: This amendment deals essentially with the point that I raised earlier about whether those who had already had their pension arrangements finalised should be taken into account in determining the scope of the scheme. The noble Baroness gave me a very helpful and straightforward answer.
[Amendment No. 248 not moved.]
[Amendments Nos. 249 to 256 not moved.]
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendment No. 256A:
Page 115, line 35, leave out from "rules" to "if" in line 36.
On Question, amendment agreed to.
Clause 166, as amended, agreed to.
Clause 167 [Supplementary provisions about pension protection levies]:
Lord Higgins Lord Higgins moved Amendment No. 257:
Page 116, line 2, after "consult" insert "and give due consideration to"
The noble Lord said: This amendment seeks to spell out the fact that not only should the consultation take place but the result of the consultation should be given due consideration. The CBI believes that the board's consultation mechanism should be as strong as possible. As for up-rating proposals, in the United States, for example, Congress has to approve whether

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there should be an up-rating. I think that we should at least ensure that consultation takes place. To what extent it needs to be approved on a broader basis is a matter for consideration. I beg to move.
Baroness Hollis of Heigham: We shall be consulting. When we say "give due consideration", as has already been evidenced today, some of those views may be diametrically opposed, as we have seen on matters of insolvency of the employer. But there is no question that the board will not be consulting.
Lord Higgins: But will it give due consideration to all the matters on which it has consulted?
Baroness Hollis of Heigham: Of course. The point is, given that some of the views may cancel out each other, that still leaves quite a lot of space for—to use the charming phrase of the noble Lord—the pension board to seek to produce the schemes and proposals that it considers best for the situation.
Lord Higgins: I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Higgins Lord Higgins moved Amendment No. 258:
Page 116, line 15, at end insert—
"( ) The Secretary of State must approve any determination by the Board under section 166(5) in respect of a financial year."
The noble Lord said: The amendment suggests that after Clause 167(2), which states:
"The Board must publish details of any determination under section 166(5) in the prescribed manner",
it should read:
"The Secretary of State must approve any determination by the Board",
so far as that is concerned. We believe it is appropriate that it should be effectively endorsed by the Government rather than the board itself taking the responsibility. I beg to move.
Baroness Hollis of Heigham: Again, I am afraid that I do not believe that this is necessary. The board will produce annual accounts; it will report formally under audit requirements and so on; and, as a public body, it will be accountable to Parliament. We are seeking to ensure that it has the flexibility to exercise the appropriate judgment as do other non-departmental boards.
Lord Higgins: I thank the noble Baroness for that reply. I shall consider to what extent the amendment is necessary. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 167 agreed to.
Clause 168 [Amounts to be raised by the pension protection levies]:
[Amendment No. 259 not moved.]
Lord Skelmersdalehad given notice of his intention to move Amendment No. 260:
Page 117, line 2, after "consult" insert "the Board and"
The noble Lord said: We are interested in the two amendments in this group because they cover a situation in which the Secretary of State decides—
Baroness Hollis of Heigham: As Amendment No. 259 was not moved, I assumed that neither were Amendments Nos. 266 and 267, which are grouped with it. I was just checking.
Lord Higgins: Amendments Nos. 260 and 261 have not been dealt with yet.
Baroness Hollis of Heigham: Amendment No. 259 has not been moved because it rehearses much of the debate that we have just had. It is grouped with Amendments Nos. 266 and 267. Can I take it that those will not be moved?
Lord Higgins: They will not be moved.
Baroness Hollis of Heigham: Thank you. I am sorry.
Lord Skelmersdale: Returning to Amendment No. 260, as I said, we have reached the point in the Bill where the Secretary of State sets an initial margin for the raising of the levies. The Bill calls that the levy ceiling.
Baroness Hollis of Heigham: Perhaps I can help the noble Lord. I was persuaded by this and therefore government Amendment No. 344A has been tabled to amend Clause 301, which sets out the parliamentary control of subordinate legislation that the noble Lord is requesting.
Lord Skelmersdale: I thank the noble Baroness very much. For the second time this week, I am delighted. Therefore, I shall not move the amendment.
[Amendment No. 260 not moved.]
[Amendments Nos. 261 and 262 not moved.]
On Question, Whether Clause 168 shall stand part of the Bill?
Lord Higgins: This clause concerns the amount to be raised by the pension protection levy, and one or two points arise from it. Clause 168(2) refers to a "levy ceiling" for any financial year. I am not clear where the levy ceiling originates. It seems highly desirable that the board should impose such a ceiling. Presumably that would depend on forecasts of what it thinks its outgoings are likely to be during the course of the year and the amount necessary to give it adequate funds; presumably it will also allow for a certain amount of buffer. In what way is the levy ceiling to be determined?
Baroness Hollis of Heigham: Clause 168 sets out additional provisions relating to the pension protection levies. This clause details the parameters within which the board may set and increase the pension protection levies going forward. The parameters set out the amounts the board may raise from each of the scheme-based and the risk-based pension protection levies. That ensures that at least

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half of the money estimated to be raised by the levies in any financial year is obtained via the risk-based pension protection levy, except in the initial and transitional periods where this can be modified.
Each financial year the board must estimate the amount that it wishes to collect. This estimate must not exceed the levy ceiling applicable for that year, as set out in Clause 168(2). Only when the board sets a very low estimate of the amount that it wishes to collect—less than 10 per cent of the levy ceiling for a year—can it collect a pension protection levy that is based purely on scheme factors only. The provisions thus give the board the flexibility that it needs
We have also placed a limit of 25 per cent on any estimated increase to the total pension protection levies that the board may impose in a financial year to provide assurance to employers that the costs of the levy will not spiral out of control. That will also ensure that the board plans prudently for the longer term. I hope that that gives the noble Lord the assurances he seeks.
Lord Higgins: Yes. I am grateful for that explanation. On reflection, as far as this clause is concerned, there seems to be a transitional period after the transitional period. That is to say that arrangements are made for the first financial year after the transitional period, and then arrangements are made for a second financial year after the transitional period. I am not quite clear how this will ever come to an end.
At any rate, it appears to be going further and further into the future. Is it the case that the transitional period will end and that is the end of the transitional period? Or, will it go on with various other arrangements for years after the transitional period has ended?
Baroness Hollis of Heigham: Basically, during the transitional period the amount to be levied is capped within a levy ceiling. After the transitional period is over, the amount that can be raised beyond the £300 million—which will obviously have increased in real terms by then—is capped at a 25 per cent increase.
Lord Oakeshott of Seagrove Bay: Am I right in thinking that the increase can never go up by more than 25 per cent in any one year, under any circumstances? Is that what this clause states for the indefinite future?
Lord Skelmersdale: The amendments that I have just withdrawn rather summarily stated that the Secretary of State, in certain circumstances, can take over and increase the levy by more than 25 per cent if in a particular year it seems necessary to do so.
Baroness Hollis of Heigham: The levy ceiling is set once prior to the pension protection levies coming into force. The ceiling will he temporarily lowered during the transitional period. We further need to amend it in
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the year following a transitional period to ensure that the levy does not rise significantly. Thereafter, it is 25 per cent.
Lord Oakeshott of Seagrove Bay: I am right. So this is a permanent 25 per cent a year cap on the levy?
Baroness Hollis of Heigham: No. A 25 per cent increase on the levy.
Lord Oakeshott of Seagrove Bay: In that case. I cannot accept that. I do not believe that that is a correct provision. We are moving amendments to delete Clause 168. However, if Clause 168 is none the less included in the Bill, it is not right that there should be a permanent limit. One is in very uncertain territory on how much needs to be raised and for how long. It would be too prescriptive if we decided to turn round the argument that we were having earlier.
Baroness Hollis of Heigham: Again, we have a horrible dilemma. We think that employers are entitled to know—and they certainly want to know—what the expectation is of the limit of any possible increase in the levy that the Pension Protection Fund Board can set them. Therefore, we are giving the assurance of 25 per cent. Given all our financial assumptions—which I have already agreed to share with Members of the Committee—we estimated that £300 million would meet what we believe to be the assessed deficit between scheme commitments and liabilities according to the level of compensation by the PPF, divided through by the risks that we associate with companies. That produced the figure of £300 million, and I will circulate that figure.
We believe that the figure of £300 million, given that it is in addition to assets coming in and the power of the PPF to raise a loan if necessary, should be sufficient, together with the 25 per cent, to meet any foreseeable contingencies. If the situation should be sufficiently dire—we seem to have switched roles—there is the possibility of reducing revaluation and so on to zero.
If the worst came to the worst, the Secretary of State could come to both Houses to seek a reduction in compensation level. I do not say that that could happen, but I do not doubt that something that he could consider is whether one would need to revisit that 25 per cent. We are trying to make it very clear to employers that that is the limit of any increase. I would be surprised if the increase was by more than an appropriate amount, reflecting inflation and any foreseen contingencies in future. We believe that 25 per cent a year should be abundant head space for the PPF. If it is not, there are alternative sources of funds for the PPF to raise, should it need to do so. With that answer, I hope that the noble Lord will agree that we are trying to get the balance right again.
Lord Oakeshott of Seagrove Bay: I thank the noble Baroness for that answer. I can see why, for perhaps the first two or three years, one might want some such cap. However, we are in uncharted territory, all the experts agree that it is very difficult to make the initial estimates. Given that, having the cap in the long term

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materially increases the risk that the benefits will have to be cut, particularly if the Government will not stand behind everything. In a way, that is probably too restrictive in the very long term, but I shall not press the point now.
Lord Higgins: Most of the outside analyses suggest that there are likely to be very considerable peaks and troughs so far as the outflow of cash from the fund is concerned. My feeling at the moment is that the Government very much underestimate the likely size that could arise, particularly in the early years.
Earlier, if I recall correctly, the noble Baroness said that money would come into the fund two years before it paid anything out. Does the levy apply from the moment that the Bill is passed, with then a couple of years before it starts to pay out? Before it begins to pay out, do people get the financial assistance scheme payments instead?
Baroness Hollis of Heigham: That is not the point. I have obviously confused the noble Lord; I am sure that it is my fault. I was simply making the point that a scheme may go under in the first year of the existence of the PPF—from April 2005—in the sense that the company is insolvent and does not have sufficient resource to meet its pension promise. Therefore, that is potentially territory for the PPF. At our most recent sitting, we established that the assessment period was likely to take a minimum of a year. The levy will apply from year one. That means that any payments will not come out until after the end of the assessment period, which will effectively be in year two, so there is an extra float of moneys.
A second consideration—I keep emphasising it—is that a scheme that goes under will bring all its assets immediately into the PPF, once the assessment period is over and the transfer notices occur. However, the liabilities will be paid out according to when individuals reach their pensionable age. For the first few years, the contrary will be the case. The PPF will be cash rich, because the assets and levy will be coming in, but the liabilities will gradually build up over years as those who have potential for compensation reach their natural retirement age.
The hope—my expectation—is therefore that, to that degree, the PPF will put up the float. The problem will come if industry decides that, because there is a float, it does not need to raise the levy. There then may be debates against future contingencies. That is what I would expect to be the pattern of finance. It may be a misapprehension to assume that, somehow, one has to pay out all the block of liabilities at once. We are not doing insurance wind-ups, except for those DC elements in a hybrid scheme, when we are trying to float them.
6.45 p.m.
The reverse of what the noble Lord says may be true. The PPF will be cash rich in the beginning, with the liabilities gradually accruing. Behind the right to raise the levy by 25 per cent, there is the capacity for loans
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and peaks and troughs, as well as additional powers that the Secretary of State can exercise by coming to your Lordships' House.
Clause 168 agreed to.
Clause 169 [The levy ceiling]:
On Question, Whether Clause 169 shall stand part of the Bill?
Lord Higgins: I have only a very brief point on the clause. We have discussed the ceiling to some extent already. I am not at all clear how the overall levy ceiling will be set by the Secretary of State, but I am completely puzzled why it should be related to the general level of earnings that arise during the year. No doubt the noble Baroness can tell us.
Baroness Hollis of Heigham: Can the noble Lord repeat that? Forgive me; it is the acoustics.
Lord Higgins: I beg the noble Baroness's pardon; the acoustics are terrible. I am not clear on what basis the Secretary of State will determine the levy ceiling. In particular, I am not clear why, from subsection (4) onwards, he will set it in part by taking account of changes in the general level of earnings. It seems a strange concept suddenly to introduce in the middle of setting a levy ceiling.
Baroness Hollis of Heigham: The levy ceiling will be set in regulations by the Secretary of State. It will initially be set prior to the first year in which the levies are imposed. We anticipate the levy ceiling to be initially set at twice the anticipated costs for the PPF board to meet its liabilities—that is, £600 million. For each year following, the levy ceiling will be increased in line with the general increase in the level of earnings. That is because DB schemes follow—and therefore the compensation to be offered follows—an earnings-related factor. That is why someone who stays with one company for life with a DB scheme does much better than if they keep transferring.
Because earnings rise and because DB schemes outside the scheme follow the rise in earnings—after all, they are proportioned at 40/60ths, 40/80ths or whatever—so equally must the capacity of the Pension Protection Fund to increase its potential for compensation reflect that. It has to get its income aligned with the increase in value of the pension promises outside the scheme, so that, when any such scheme comes in within the PPF, the compensation will be sufficient to meet those, even though it has been proportionately reduced to the 100 per cent or 90 per cent. That seems to be expected.
Lord Higgins: I am most grateful.
Clause 169 agreed to.
Clause 170 [Valuations to determine scheme underfunding]:
Lord Skelmersdale Lord Skelmersdale moved Amendment No. 263:
Page 118, line 5, at beginning insert "Where they are not available from the Regulator,"
The noble Lord said: I seem to have been biting my tongue for three-quarters of the afternoon while the Committee has discussed what the board will require for the calculation of the levy and from where the requirement will come. As I was reading the Bill almost three months ago—certainly two months ago—I decided that a lot of the information required by the board would have already been provided to the regulator. Rather than the board going to a lot of different firms, why should it not go to the regulator, especially in terms of the beginning of the clause? I beg to move.
Baroness Hollis of Heigham: The noble Lord is completely right. Although it is not explicit in Clause 170, we fully expect the PPF board to use all the information available to it, including the information obtained by the regulator on its behalf. It would be daft to go back. In so far as the regulator is to some extent an information-collecting body for the PPF, what the noble Lord has envisaged will happen exactly.
Lord Skelmersdale: Will that not speed up the process of moving from stage one of the levy to stage two? The actuarial valuations will be coming in to the regulator much faster than they are likely to come in to the board.
Baroness Hollis of Heigham: But there one needs to get into the territory—I just hinted at it—of the distinction between what the regulator does, which is to ensure that a scheme outside the PPF can meet its pension promise as reflected in its scheme-specific funding, and what the PPF is concerned about, which is to ensure that a scheme staying outside the PPF will at least have benefits better than those of the PPF.
A scheme about which the regulator might be concerned could be only 85 per cent funded. Say that it is a scheme of 200 members in an economic forecasting and IT company. A third of its members might therefore go on to enjoy quite high pensions of £40,000 or £50,000. The regulator would be interested in seeing the rectification plan of the company to be able to meet its promise over a period, although it has no reason to think that it is not healthy. The PPF is not interested in that; it simply knows that, because there will be a cap at £25,000 at any rate, even though underfunded for scheme-specific funding purposes, it will be more than able to meet the liabilities that would otherwise bring it into the PPF. Therefore, it stays outside.
The information needed for scheme-specific funding has a different function, because it is measuring the competence of the company over time to meet its full pension promise. The PPF needs a snapshot of whether, at that time, the benefits offered by the scheme will be comparable to or better than what the PPF can provide. We are talking about different exercises.
Lord Skelmersdale: In general terms, the noble Baroness is quite right. However, the amendment is tabled to a part of the Bill that talks about actuarial valuations required by the board in order to move from stage one to stage two to stage three of the levy scheme. I will not pursue the point now, but she might like to think about it in the next two or three weeks. In the mean time, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 264 not moved.]
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendments Nos. 265 to 265B:
Page 118, line 20, 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"

Page 118, line 30, leave out "which limits the amount of its" and insert "rules which limits the amount of the scheme's"
Page 118, line 34, at end insert "rules"
On Question, amendments agreed to.
Clause 170, as amended, agreed to.
Clause 171 [Pension protection levies during the transitional period]:
[Amendments Nos. 266 and 267 not moved.]
Clause 171 agreed to.
Baroness Andrews: It might be convenient for us to call a halt to the sitting; I understand that the next debate might be quite long. I suggest that the Committee adjourn until Monday at 3.30.
The Deputy Chairman of Committees (Lord Lyell): That concludes the Committee's proceedings until Monday 13 September at 3.30 p.m.
The Committee adjourned at five minutes before seven o'clock.