INFORMATION SENT TO MEMBERS OF OCCUPATIONAL PENSION SCHEMES

HL Deb 14 September 2004 vol 664 cc357-404GC

(1) Section 113 of the Pension Schemes Act 1993 (c. 48) (disclosure of information about schemes) is amended as follows.

(2) After subsection (4), insert—

"(5) The annual report of the Trustee of an occupational pension scheme which is sent to members shall contain contact details of any organisation which adequately represents the pensioner members of the scheme.""

The noble Lord said: I am sorry: I was disrupted by the Division and consequently have mislaid my Marshalled List of amendments.

Baroness Hollis of Heigham

The amendment is about whether trustees should be required to include details about appropriate pension literature.

Lord Higgins

Amendment No. 300BA is about information sent to members of occupational pension schemes. The amendment reflects the views put to us by the Occupational Pensioners Alliance. It suggests that in addition to the annual reports of the scheme being made available to all members, active and pensioners, they should also be made available to those who represent their interests. Presumably that means trade unions as well.

At present, there is no definition in pension legislation of what is meant by a pensioners' association. The view is that it would, none the less, be appropriate for the annual report to be sent to such bodies so that they can be aware of the situation in any given scheme when they are advising pensioners. I beg to move.

Baroness Hollis of Heigham

The amendment seeks to amend primary legislation, but, of course, schemes already have the power to do that under Section 113 of the Pension Schemes Act 1993. We agree with the push of the amendment, but we do not need to take powers into primary legislation when that power already exists.

We do not think that copying the annual report to members is the right way to do this; we think that this information is probably more at home in the basic scheme information that schemes must provide to members and beneficiaries. That already contains details of the scheme, the OPA, the pension ombudsman and the regulatory authority. We propose to amend secondary legislation on disclosure of information to ensure that members and beneficiaries receive contact details of these organisations. We are doing what the noble Lord is proposing but through secondary legislation rather than in the Bill.

Lord Higgins

Will it be done in the basic information provided by the scheme rather than annually?

Baroness Hollis of Heigham

I do not have very strong views about this, but we felt that a better home for it was in the basic scheme information which lists all the various regimes, rights of appeal, and so on. It is an aide memoire, which we thought people were more likely to keep than annual reports. Annual reports can be used if one wishes, but my advice is the scheme information is a more comfortable home. The point is which documentation scheme members are most likely to refer to, and I suspect that it would be the basic scheme details in the original pack rather than the annual report. The form in which such information is sent out will be a matter for the scheme trustees, but we will be taking powers to ensure that that happens.

Lord Higgins

Yes, but I suppose that a member of a scheme may look at the basic information when he first joins and does not look at it thereafter. There may be some case for repeating the information in the annual report, but no doubt we will in due course see the regulations. Can the noble Baroness give us any idea about timing?

Baroness Hollis of Heigham

I wish I could. All I can say is, as I said to the noble Lord earlier, that the latest check has shown more than 100 different sets of regulations. The drafting of some—not all—is well under way. Almost all of them require quite extensive consultation with the industry. I was checking on something this morning and asked where we were but was told that we could not get a response from the industry to our draft regulations. Our dilemma is not simply the length and complexity of the regulations but the fact that, quite rightly, they need extensive consultation. I shall ensure that I give the noble Lord an update before we reach Report. I shall give him what information I can.

Lord Higgins

I am most grateful for that forthcoming reply. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 233 [Investment principles]:

On Question, Whether Clause 233 shall stand part of the Bill?

Lord Higgins

Clause 233 is very important and a number of points need to be made. On a point of detail, Clause 233(1) states that the trustees of a trust scheme must secure a statement of investment principles. The word "secure" seems rather odd—I should have thought that "ensure" was more appropriate, but that is obviously a drafting point.

The provision is yet again made by regulation in a number of important respects, for example in subsection (3), which states: Before preparing or revising a statement … the trustees … must comply with any prescribed requirements". We do not have the remotest idea what the Government have in mind regarding that. It would be helpful to know that. Will the Minister clarify those two points?

4.45 p.m.

Baroness Hollis of Heigham

I shall do my best. This clause replaces Section 35 of the Pensions Act 1995, which requires trustees of occupational pension schemes to prepare and maintain a "statement of investment principles". The change is needed to implement the provisions of Article 12 of the European Occupational Pensions Directive, which requires the statement to be reviewed at least every three years, rather than from time-to-time as the Pensions Act currently requires. That is the only change. It is almost linguistic rather than anything else. I hope that that addresses the noble Lord's point.

We do not intend to make substantial changes to the content of the statement, although we will consult on the regulations. It is just a question of how often that matter has to be addressed—it shall be every three years to comply with the Occupational Pensions Directive. This comes back to the point we were making earlier about evaluations every three years. It is part of the same structure.

Lord Higgins

I am grateful for that reply.

Clause 233 agreed to.

Clause 234 [Power to make regulations governing investment by trustees]:

On Question, Whether Clause 234 shall stand part of the Bill?

Lord Higgins

I am not sure how widely these powers operate but I am concerned about whether the regulations could implement the kind of proposal made some four or five years ago by a government Minister that pension trustees should invest in what would be regarded as socially desirable aims rather than simply investing the money to obtain the best return. Could the Minister give us some assurance on that point, which is important? Most sensible trustees replied in fairly forthright terms to the Minister that their task was to operate in the best interests of their members rather than to achieve other social objectives. I am a little worried that taking powers by regulation to govern investment by trustees might be dangerous.

Baroness Hollis of Heigham

Again, I am very happy to circulate a fuller explanation, if necessary. Again this is something of a language issue. Essentially, we are having to get the directive into our legislation with minimum change to existing practices by trustees, but we have to do so to make the legislation comply. We are simply seeking to recast in words compliant with the directive the existing responsibilities and investment decisions of trustees. We require pension funds to state their policy on socially responsible investment in the statement of investment principles, but it is not for the Government to dictate investment policy, nor, incidentally, should the European Union interfere with trustees' responsibility to that extent.

Again, this is not dissimilar to the previous issue of ensuring that the language in which we operate is now compliant with the European directive. I am assured that the measure will have no further implication for trustees in so far as they are already stating fully appropriate statements of investment principles. The regulation has to comply because the Occupational Pensions Directive does not permit member states to require investment in certain categories. I do not believe that there is anything of substance in the clause, but I am happy to write a fuller letter to the noble Lord if he wishes.

Lord Higgins

I am not clear what difference the directive makes.

Lord Oakeshott of Seagrove Bay

Perhaps I may ask a short question. At the bottom of page 159 the Bill states: Regulations under subsection (1) may, in particular … specify criteria to be applied in choosing investments". Are there regulations in existence now under this clause, and if not can the Minister give us any idea of what sort of criteria might be applied? I am just a little concerned.

The Deputy Chairman of Committees (Lord Ampthill)

Perhaps it would be better if we waited until after the Division for the Minister's reply to the noble Lord. We will meet again in 10 minutes.

[The Sitting was suspended for a Division in the House from 4.49 to 4.59 p.m.]

5 p.m.

Lord Higgins

We were discussing Clause 234 when the Division was called. If I could encapsulate my concern, the noble Baroness appears to be saying that the clause does not do anything at all but is necessary in order to implement the European directive. I assume that there must be some difference between the present circumstances and what is stated in the European directive, but I am not in the least bit clear about what that difference is. As I said previously, regulations specifying the criteria to be used and so on could be open to abuse and I am concerned about that.

Baroness Hollis of Heigham

I am not sure that I can help the noble Lord very much further. The advice that I have confirms what I said to the noble Lord; namely, that the directive puts into UK law the "prudent person" principle which is already established in trust law. There should not need to be any change in investment strategy. These statutory provisions are necessary to ensure that the occupational pensions directive is implemented in a transparent manner. The relevant regulations do not currently exist but the criteria to be applied under Clause 234(2)(1A) will include the need for diversification, the need to be prudent and to secure the quality of the portfolio as a whole, as required in the EU directive.

I was specifically asked what difference, if any, the measure would make on the ground. I am advised that in practice it should make none whatever; it is about making our legislation transparent and compliant with the directive. That is consistent throughout. After all, we are seeking to ensure that what we believe to be not only good but best practice is not deformed for any other reason.

Lord Higgins

This seems a very strange situation, but no doubt it is what we must expect if we go along with directives into which we seem to have had remarkably little input.

Clause 234 agreed to.

Clause 235 [Borrowing by trustees]:

On Question, Whether Clause 235 shall stand part of the Bill?

Lord Higgins

I wish to make one quick point. Trustees are not allowed to borrow money except in prescribed circumstances. Perhaps we could save the draftsmen the trouble of drafting the relevant regulations if the noble Baroness puts on the face of the Bill what those prescribed circumstances are. She must have a fairly clear idea what they are. I see no reason why they cannot be on the face of the Bill with necessary provisions for amending in the light of changed circumstances.

Baroness Hollis of Heigham

I would not wish to put it on the face of the Bill but I am perfectly willing to put on the face of Hansard that regulations made under this power would specify that trustees may borrow only where that was on a temporary basis and for liquidity purposes and would prohibit trustees from acting as guarantors. We have consulted in broad terms on this. The industry thinks that it is a useful backstop. It could not advise us of particular circumstances where it might come into play but it considers that it would be useful to have that power. Regulations will, therefore, indicate that.

We plan to use the directive's small scheme exemption to exempt small, self-administered schemes from these provisions. Such schemes will, however, be bound by the rules set by the Inland Revenue. I hope that helps the noble Lord. The provision is regarded as useful by the industry. It could not cite a particular example of where it might wish to use it, although I have pursued that point. I failed to get such an example. That is what the regulations will do. It seems a useful reserve power.

Lord Higgins

I am grateful for that explanation. No doubt between now and Report we can draft an amendment that will avoid the problem of producing the regulations.

Clause 235 agreed to.

Clause 236 [Requirement for knowledge and understanding: individual trustees]:

Baroness Hollis of Heigham moved Amendment No. 300C:

Page 160, line 31, leave out "scheme rules" and insert "rules of the scheme".

On Question, amendment agreed to.

On Question, Whether Clause 236, as amended, shall stand part of the Bill?

Lord Skelmersdale

Clauses 236, 237 and the supplementary Clause 238 relate to the requirement for knowledge and understanding of trustees of miscellaneous description—in fact, two descriptions, because there are two clauses dealing with those trustees. The noble Baroness, Lady Dean, mentioned that it was some years ago that she went on her first pensions course, no doubt courtesy of her union at that time. But I could not find any place in the clauses where there was a requirement for education of the trustees. That seems absolutely essential, and I hope that the noble Baroness will agree with me.

Lord MacGregor of Pulham Market

I follow on from that point. In fact, it is clear from the Explanatory Notes that the regulator will give a lot of advice about how much of the process will be carried out. However, I should like to know how far that goes. I have heard debates along these lines, and there is a real danger if one goes too far. I accept the need for knowledge and training, but if it goes too far it will become extremely difficult to find people willing to come forward to be trustees—particularly employee trustees. Will the Minister indicate what she expects the regulator to do in terms of training courses, qualifications achieved, and so on?

One must also bear in mind that most trustees are guided by a great deal of professional advice in so many of the relevant matters, such as investment management and actuarial matters—indeed, in all general process matters dealing with legal and compliance requirements which actuarial firms provide. I would be interested to know whether it is expected that trustees will have to reach something approaching the level of the advice that they are given. If that happens, combined with the liabilities that trustees face, it will be increasingly difficult to attract people to do the job.

I was chairman of the House of Commons pension fund trustees for some time. We were fortunate when I was chairman in having a number of members who had a reasonable amount of experience; but it was always difficult to attract people to become trustees and, if they were required to go on training courses and undertake all sorts of qualifications, I suspect that it would become even more difficult to get all the trustees required. There is clearly a balance to be struck here, and I should be interested to hear how the Government are approaching that matter.

I meant to raise a point about Clause 233, but it is relevant here, too. The Explanatory Notes on Clause 233 say that before a statement of investment principles is prepared or revised, trustees must, obtain and consider written advice from somebody they reasonably believe to be qualified by ability in and practical experience of financial matters and who has the appropriate knowledge and experience of the management of investments of such a scheme". Given the training that trustees will undertake, and particularly given that they will be people with a great deal of knowledge and experience who are prepared to take on the trusteeship, if they have within their midst people with as much practical experience and knowledge as any professional adviser from outside, will it be sufficient for one of them to consider the written advice? I suspect that a number of trustees will consider it unnecessary to incur extra expenditure when it will merely duplicate what they already know.

Lord Oakeshott of Seagrove Bay

I have a question on the relationship between Clause 238(2) and Clauses 236 and 237. Would that subsection make it possible effectively to repeal or water down substantially those clauses, which set out sensible basic requirements for knowledge and understanding for trustees? Do we really want to run the risk that the provisions could be watered down?

Baroness Hollis of Heigham

I could just seek to address the specific points, but the issue is so big that I am very happy—if Members of the Committee will be patient with me—to give a fuller answer than I usually do. I am mindful of what we have to cover, and, as all Members of the Committee are, I am trying to expedite proceedings. However, the issue is a serious one and it may be worth spelling out, because the fears expressed by the noble Lords, Lord Higgins and Lord MacGregor, have been widely shared.

Let me set out what we expect trustees to bring with them to the job. The clause requires an individual trustee to be conversant with the documentation of their own scheme and to have the knowledge and understanding of trust and pensions law and the principles of investment and funding appropriate to the functions that they are carrying out. The provisions supplement the existing "duty of care" and the principle of prudence that underpins it.

The "prudent person" principle remains at the heart of pensions, yet trustees may take crucial decisions without either adequate resources or expertise. Some 20 per cent of pension schemes—particularly the smaller schemes—may have trustees who have had no training, whom we are asking to make very difficult and responsible decisions on professional advice.

With regard to the requirements for knowledge and understanding of individual trustees, we are developing a code. We expect them to have knowledge and understanding about pension schemes generally; the law relating to pensions, including tax law, state pensions, ombudsmen, and so on; the law relating to trusts and the concept of "duty of care"; conflicts of interest; the duty to take professional advice; duties on ceasing to hold office; different types of scheme, and how DB schemes work; and so on.

I would be happy to circulate to all Members of the Committee a much wider description of what we would expect, rather than take the time of the Committee—but what I have said has given an outline. Basically, we want to ensure that trustees have the necessary knowledge and understanding to take informed decisions and to subject the advice that they receive from the scheme's advisers to critical challenge, rather than just following it passively. We have found that the trustees of smaller pension schemes are heavily dependent on professional advice and too often abdicate their proper responsibility for the wise investment of the scheme's funds because they lack the necessary knowledge, understanding and confidence and familiarity with their own scheme. The Myners report showed that to be the case.

The clauses have been welcomed by many, particularly trustees, who have realised the importance of knowledge for the effective performance of their tasks. However, there are misgivings. Some fear that the requirements may, as the noble Lord, Lord MacGregor of Pulham Market, said, deter potential trustees, especially those seeking member nomination, from putting themselves forward. However, the clause requires trustees to have only the knowledge and understanding appropriate to the functions that they carry out.

I know that is a matter of balance, but it is not unreasonable to expect people who put themselves forward for member nomination, who will be allowed time off with pay for appropriate training, to take such training. We do not expect trustees to have the detailed technical knowledge of, say, the professional investment manager, let alone be experts, but they should have a good knowledge of how occupational pensions in general and their scheme in particular work. They should know the terms of the trust deed, what the scheme rules say and what policies the scheme has adopted on investment and funding. They also need an understanding of pensions and trust law, of the principles of scheme funding and of different types of scheme. From trustees carrying out more specialist functions—for example, somebody who sits on an investment sub-committee—we would expect appropriately enhanced knowledge.

There have been several pieces of research, including the PricewaterhouseCoopers survey of pension scheme governance. That survey found that 20 per cent of the schemes that replied to the survey had made no assessment of trustees' knowledge and skills. Only 30 per cent were taking steps to close the perceived skills gap. In our DWP/HMT research, we found that, although most schemes provided some initial training for new trustees—one or two days—only a minority, even among larger schemes, provided refresher training. It is clear what is necessary. I have examined some of the training courses organised by the NAPF, OPRA and the trade unions, and it would seem reasonable that, when the Act is in place, people should receive four or five days' initial training and a day every year thereafter. Most schemes—even the best—fall well short of that.

I do not believe that there is a lack of interest or enthusiasm among member-nominated trustees. They want to do the job. They may find it demanding, but they also find it interesting and important. However, there has been no culture of support of the need for training or education. We need to go down that path. OPRA's research on 450 schemes—with a 98 per cent response rate—pointed to similar conclusions. It showed that the trustees of smaller schemes were overdependent on professional advice and that the professionals became the decision makers, not the advisers to the scheme. As we have discussed, we have rectified that.

The powers in Clause 238(2)(b) allow a period of grace for new trustees. That is sensible. The requirement is for knowledge, not education. They may already possess the knowledge, and we do not want to pursue a tick-box approach. It is a difficult line to draw.

The noble Lord, Lord MacGregor of Pulham Market, asked why we required trustees to take advice, if they already had enough knowledge. Trustees will not, by virtue of the provisions, have to be experts, so professional advice will still be required, before the preparation of a statement of investment principle. However, a trustee who was an expert would meet that requirement. I think that that was the question.

I could talk more generally about the development of packages, about OPRA's work or about trade union work. Even in relation to enforcement, the regulator will have a primarily educative rather than punitive role. If a trustee or a number of trustees or the board as a whole demonstrably lack knowledge and understanding, the regulator would intervene in the first instance by suggesting that they acquire the relevant knowledge by appropriate means. Only if that failed would the regulator go through the process of an improvement notice. Essentially, we are trying to change the culture. As I say, even the best schemes need to improve their act to this extent, given the degree of responsibility of trustees and the increased number of member-nominated trustees who may be less familiar with the material.

There is a period of grace; we expect firms and schemes to recognise and endorse the need for training. If the regulator at the end of the day feels that scheme members are being ill served by the lack of training that trustees have undertaken, the regulator can intervene—if necessary, by a notice. We do not expect the regulator to go down that road, except with the most wilful of schemes. The gradual approach of upping the game is, we think, the right one. I very much hope that employers and trustees, especially member-nominated trustees, will welcome the proposals. I am sure that it is necessary; there is no point in having member-nominated trustees on a board unless they can exercise their duties so that they are value added to the benefit of members. That is what the clauses seek to do.

5.15 p.m.

Viscount Trenchard

Why do those same requirements for knowledge and education not apply to the members of the board of the PPF? Surely it is, in a sense, a vast pension scheme—or it is discharging the functions of a pension scheme.

Baroness Hollis of Heigham

We have had that debate on previous occasions. In practice, the board of the PPF, like the regulator, will recruit professionals including actuaries, accountants, lawyers, and so on. I would expect those people to be well above the level of knowledge that I have indicated for member-nominated trustees. However, they are not operating an insurance or a pension scheme; they are operating a compensation scheme, which means that there are different criteria involved than would apply to ordinary trustees. That requires them to have knowledge of their own scheme rules and investment strategies and to handle some £700 billion-worth of assets in this country.

Lord MacGregor of Pulham Market

I am grateful to the Minister for her reply. I do not disagree with anything that she says; it is important to up the experience in many schemes. It is also a question of getting balance and not going too far, and it will he interesting to see how that works out.

I add one more point. In relation to non-employee trustees, the Minister referred to the Myners report, which recommended that trustees will probably have to be paid a fee, given the level of responsibility, training, experience and skills that they will have to acquire. We will have to recognise that trend in relation to all that we are taking on.

Baroness Hollis of Heigham

We missed the noble Lord on a previous discussion when I referred to him on that very subject. Schemes have the power to pay their trustees; they are required to give time off for training and duties and, if they are employees of the company, to continue to be paid during that period. The noble Lord may be right—but we also identified that there could be real difficulties in a correlation between the size of the assets managed and the normal pay of the workforce employee. I made a comparison with local government councillors who face similar problems of recompense—what happens when people are very part-time indeed. But there is no obstacle to schemes doing that if they wish.

Lord Oakeshott of Seagrove Bay

Does the Minister intend to deal with my point about Clause 238(2) now, or will she do so when we come to it?

Baroness Hollis of Heigham

I do apologise—did I not do so?

Lord Oakeshott of Seagrove Bay

I do not think so.

Baroness Hollis of Heigham

I did actually do so, but I accept that the acoustics are not brilliant in this room.

The power in Clause 238(2)(b) will be used to allow a period of grace for new trustees.

Lord Oakeshott of Seagrove Bay

Only for that?

Baroness Hollis of Heigham

I believe so. If that is not the case, I shall write to the noble Lord.

Lord Oakeshott of Seagrove Bay

Let me remind the noble Baroness that my specific question was whether there were any circumstances in which the power in Clause 238(2) would be used to water down the very sensible requirements of Clauses 236 and 237. I find it hard to envisage, but I wonder.

Baroness Hollis of Heigham

Given that the whole push is in exactly the opposite direction, the probability of the Government seeking to water down what they are trying to claw up seems unlikely. That is the intent, over and beyond recognising that we need to take people with us and change the culture. I cannot conceive of it, but I am wondering whether there are any assurances that I can give the noble Lord. These are regulations and will be available for the House to scrutinise.

Lord Oakeshott of Seagrove Bay

I am happy to accept "I cannot conceive of it", and thank the noble Baroness.

Baroness Hollis of Heigham

I find it hard to, but I cannot speak for any future government.

Lord Skelmersdale

My few words have turned this into a most useful and educative debate. On education/ training, I reassure my noble friend Lord MacGregor that I had no intention of forcing trustees or potential trustees to take exams and get certificates. That is not what we are about. We are about enabling trustees to evaluate the professional advice, whether it be actuarial, investment or even legal.

I note that the noble Baroness said that at the moment the Bill is about encouragement rather than a formal requirement to take up training places. I hope that she is right and that we do not have to come back to this on future occasions. The push is certainly in the right direction, even if it does not end up with the achievement that we would all like to see.

Clause 236, as amended, agreed to.

Clause 237 [Requirement for knowledge and understanding: corporate trustees]:

Baroness Hollis of Heigham moved Amendment No. 300D:

Page 161, line 17, leave out "scheme rules" and insert "rules of the scheme".

On Question, amendment agreed to.

Clause 237, as amended, agreed to.

Clause 238 [Requirement for knowledge and understanding: supplementary]:

Lord Higgins moved Amendment No. 301:

Page 162, line 15, at end insert— (4) Each of the Regulator and the Board must secure that any individual who exercises any function of theirs has knowledge and understanding of the matters mentioned in section 237(5). (5) For the purposes of subsection (4), the degree of knowledge and understanding required is that appropriate for the purpose of enabling the individual properly to exercise the function in question having regard in particular to the nature of the duties and objectives of the Regulator of the Board (as the case may be).

The noble Lord said: The amendment reflects representations from the National Association of Pension Funds. Perhaps I might comment on the debate that we have just had. My noble friend Lord MacGregor pointed out that he was chairman of the parliamentary pension fund. My own experience of that some years ago, when I represented various members' interests, was that every time the fund was in surplus, the Treasury contribution went down, and every time it was in deficit the members' contributions went up. In any event, there have been considerable changes in the scheme since then.

The amendment is related to supplementary requirements on knowledge and understanding. As with the earlier points made, the crucial thing is not to what extent individual trustees have as much knowledge as their advisers, but the fact that they are very ill advised to take on the role, because unless they have taken professional advice from appropriate fund managers or lawyers—I see that the Lord Chairman has been through this as well—they can be extremely vulnerable personally. That is why, however expert the trustees may be, they need to take account of professional advice.

The amendment suggests that the regulator and the board must secure that any individual who exercises any function of theirs—not the trustees of pension schemes, as was mentioned earlier—should have what the amendment suggests—that is, the appropriate degree of knowledge and understanding. This reflects the point of my noble friend a little while ago. This seems to be eminently sensible—what is sauce for the goose is sauce for the gander. If the Government are to require this of members of pension funds, surely they should require it of the regulator and the board as well. I beg to move.

Lord Oakeshott of Seagrove Bay

We support this amendment.

Baroness Hollis of Heigham

I tried to respond briefly just now. I thought that, perhaps, as a result, the noble Lord, Lord Higgins would not move the amendment. Otherwise, I would have encouraged him to defer his comments.

The question is: why does the knowledge requirement that we are asking of member-nominated trustees not apply to the regulator? I made my first point, which is that it is about the type of staff involved and that we are dealing with a compensation scheme, not a pension scheme with particular trust rules and so on. So the basis of knowledge of the professionals coming into it will be infinitely more advanced than those of member-nominated trustees, where appropriate. Secondly, their job, functions and responsibilities are in some ways distinctive and different. But the third point is that board members will be appointed with specific requirements set out in the recruitment material and terms of employment to ensure that we get the range of skills that we want. That is why we do not think that this route is the right one to go down.

Clauses 236 to 238 relate to trustees generically, not to specific board members of an NDPB, where they follow the usual public recruitment rules. So I gently suggest that this is a non-issue. If I thought that it was a real issue, I would take it away and fight its corner, but the notion that we would appoint people to do the serious job of the regulator without having confidence that they were appropriately equipped and qualified and professionally trained, where that is also appropriate, seems absurd, given the rules governing public appointments.

So I hope that, with what is a pretty blue sky response, the noble Lord will none the less accept that it will be inconceivable—and I mean that word—that we would appoint or would be allowed to appoint members to an NDPB who did not have the appropriate qualifications, training and support necessary for the job, as outlined by Parliament as and when the Bill is passed.

Lord Higgins

The Minister is inclined to use the expression, "It is a compensation scheme, not a pension scheme", in a number of different contexts. But the reality is that the Pension Protection Fund board will be operating a massive pension scheme. It may be that the proceeds go in the form of compensation—although in fact they go in the form of pensions—but it still has the same problems with regard to investment decisions. In fact, they are on a far bigger scale than a normal pension fund. But the fact that it is on a bigger scale does not mean that it is appropriate to leave it all to experts, as the noble Baroness suggests.

It is also inappropriate that everyone involved—the amendment specifies the individuals involved—should have the appropriate level of expertise. They really do not. The fact that it is compensation being paid out does not make it any different from a pension scheme, either in relation to the fact that it has investment decisions to make or to the fact that what it is doing is paying out pensions. The pensions may be compensation for other pensions, but they are still pensions. I do not think that we can say that it is appropriate for them to operate in the way that the noble Baroness has described, with a lot of experts, rather than people who have a fiscal responsibility.

On the point that produced a reaction from the Deputy Chairman of Committees, the noble Lord, Lord Haskel, it is debatable whether the members of the regulator and the board are personally liable if they are not taking advice but making the decisions themselves on the basis of their own expertise. I do not think that the regulator or the board are sufficiently legally distinguishable to ensure that that is not the case. As I said, you take advice when you are a trustee of a pension scheme because you need to be able to say. "I took advice". But if the board or the regulator is not going to do that—this had not occurred to me until now—its legal position is rather doubtful. We ought to give some further thought to that, so the amendment seems appropriate. But I will not pursue the matter.

5.30 p.m.

Baroness Hollis of Heigham

I wanted to respond on only one point. Obviously, the recruitment process for the board is different from the recruitment process for staff. I have been involved, appropriately at arm's length, with things such as disability living allowance boards, and members of such boards are run on Nolan principles. The members of the board conform to the Nolan system of recruitment to an NDPB. Staff are also professionally recruited in an appropriate way.

On the legal point, I do not know, but let me see if there is any substance to the noble Lord's point. If there is, obviously we must respond to it. I am not persuaded that there should be, given the structure. I do not think that it is any different from the legal position of someone on a DLA board or an incapacity benefit board. They also make decisions that affect people's income. But let me reflect on that to see whether the noble Lord's point should be taken further.

As for the argument about the difference between trustees and the other staff of the regulator, the PPF, I hope that the noble Lord will accept that they are very different. There is provision to ensure that they are not liable unless they act contrary to human rights or with malice—I was wondering whether to raise the point about acting with malice earlier—but they are not individually liable unless, as I say, they knowingly flout the Human Rights Act or act with malice. That returns us to the point about publication that I think we raised yesterday.

However, I will push that point a little further to see whether I am missing anything, because that is not impossible.

Lord Higgins

It is worth thinking about. The provision on malice, human rights and so on, would not protect a trustee on a pension fund who got it wrong because he did not take advice. So let us examine it. I think that the regulator and the PPF are much closer to a pension fund than they are to the other kinds of board mentioned by the noble Baroness, which, generally speaking, deal with public money in a more specific sense. But let us not take longer on the matter now; let us think about it. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 238 agreed to.

Lord Skelmersdale moved Amendment No. 302:

After Clause 238, insert the following new clause—

"INTERNAL CONTROLS

Regulations may provide that trustees of an occupational pension scheme must secure that the scheme has appropriate and sufficient systems of internal control."

The noble Lord said: Although my noble friend, Lord Lucas, is absent, I know exactly what he is worried about. He has been doing something that I would not do: ploughing through the European Pensions Directive, which must be made law in its entirety in the United Kingdom by September 2005, as I understand it. Article 14 of the directive is very short and comparatively sweet. It talks about powers of intervention and duties of a competent authority. It states: The competent authorities shall require every institution located in their territories to have sound administrative accounting procedures and adequate internal control mechanisms".

It may be that buried somewhere in this enormous Bill, Article 14 is covered with both belt and braces, but my noble friend Lord Lucas, in his reading of the Bill, clearly failed to find it. Therefore, he suggests that a new clause be inserted to implement it. The most appropriate place in the Bill would seem to be around Clauses 237, 238 and 239, which already cover the trustees of occupational pension schemes, as we have just discussed. He also feels that it would be appropriate to mirror the wording of the directive as closely as possible, and this he has sought to do. I beg to move.

Baroness Hollis of Heigham

As the noble Lord identified, we are talking not particularly about DB schemes, which tend to have internal controls in place, but DC schemes—money purchase schemes. We are in a way resuming a debate that we had on Amendment No. 155 before the Summer Recess, in the light of Article 14.1. I argued at the time that I was not persuaded or entirely clear that those internal controls did not exist to a sufficient degree to meet the requirements of the European directive.

Lord Skelmersdale

Could the noble Baroness rephrase that? It sounded like the most appalling double negative.

Baroness Hollis of Heigham

There is a fine history of double negatives in this country. Since when have they been appalling? I am quite sure that I cannot repeat the sentence.

Lord Skelmersdale

Good.

Baroness Hollis of Heigham

Following the debate on Clause 155—when the noble Lord, Lord Lucas, argued the need for internal controls, in which he was supported by the noble Baroness, Lady Noakes, and I said I was surprised that they thought this so important—I was left unpersuaded that we did not already have in place sufficient internal controls to meet the requirements of the European directive. I think that that is a perfectly proper use of a double negative, according to my O-level Latin.

Officials take the deliberations of members of the Committee very seriously, and we have looked at this further in the light of the arguments then expressed a view. We accept that European directives can lend themselves to a variety of interpretations. We thought, as I say, that we were showing full compliance with Article 14.1 and felt that the totality of the existing regulatory regime has, in effect, created an environment in which schemes already have to have internal controls, as most schemes do.

Since the detailed discussions between officials and representatives of the Institute of Chartered Accountants, we have been urged to put the matter beyond doubt and provide an explicit legislative reference. To some extent, the noble Lord, Lord Lucas, was acting as the accountants' voice on this occasion. This would give us the flexibility to decide, in the light of events and our experience in operating the directive, whether any further intervention by Government was necessary.

Although we are not convinced that it may be needed, we are willing to accept the case for flexibility and the clarity for which the accountants are asking. In the light of that, it is highly likely, if members of the Committee agree, that I shall return to this matter at a later stage to see whether I can give reassurances that we do not need this or accept the obligation that we do. In that case, we shall come forward with appropriate words to that effect.

Given the understanding that we are continuing to explore this, we have had differing advice from different bodies. In the light of that, I hope that the noble Lord, Lord Skelmersdale, will recognise that we are engaged in an honourable activity and will withdraw the amendment on behalf of his noble friend.

Lord Skelmersdale

What I recognise is that the matter is pending. I know that my noble friends Lord Lucas and Lord Hunt will be delighted that the department is taking that point seriously. I really have nothing more to say except that I hope that the matter ends satisfactorily and goes into the out-tray and the Bill in due course. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 303 not moved.]

On Question, Whether Clause 239 shall stand part of the Bill?

Lord Higgins

This clause is concerned with payment of surplus to an employer. There has been an enormous amount of controversy recently in the light of changed circumstances as to whether it was appropriate for trustees to grant to employers contributions holidays and so on. The circumstances have changed very radically indeed. However, as I understand it, there has always been a huge debate about who owns the pension surplus. I believe that there is a whole string of decided cases on that point.

The purpose of the contributions, whether from an employer or an employee, and the purpose of building up the fund, is to ensure that the liabilities can be met following actuarial advice and so on. In some cases where very large surpluses were accumulated it was clearly inappropriate—indeed, I think I am right in saying that there was a limit on the extent of surpluses—for them to remain the size that they were, which is why they tended to be disbursed in a combination of a pensions holiday and, generally speaking, increased provision for the beneficiaries.

However, suddenly, we come to a clause on payment of surplus to the employer, which seems to run right over the situation that I have just described. I am not clear why that should be. Under Clause 239, new Section 37 is to be substituted for Section 37 of the Pensions Act 1995. I must confess that I have not checked what that provision states. However, I would be surprised if it introduced a measure of the kind that is in the new section. Rather than simply pay a surplus to an employer it is better that there should be some quid pro quo in exchange for a pensions holiday, if, indeed, as I hope might happen at some point, we ever get back to the stage where large surpluses accumulate. That is certainly not the case at present as a result of the events of the past seven years. Perhaps the noble Baroness can tell us why this clause is necessary.

Baroness Hollis of Heigham

The noble Lord is right; the context of this matter is to be found in the rules introduced, I think, by Nigel Lawson in 1988. I seek help on that point. In order to prevent employers using pension funds to build up tax privileges through surpluses the figure was capped at 105 per cent. There has been some controversy about the matter since then. I read a recent Bank of England article on the matter which suggested that in some cases there was manipulation of the 105 per cent rule to enable employers to extract funds from pension funds which they did not need to do and in the process calling it a contributions holiday. The trade union movement was concerned about the substantial sums of money that came out of funds as a result of that. None the less I am not suggesting that that was done always or necessarily in bad faith as it was done within a context of the regulations laid down by the Chancellor of the Exchequer.

The current tax rules about requiring the run-down of a surplus to a 105 per cent cap will disappear. Trustees will have the freedom to decide whether to retain a surplus within the scheme in the event that there is a surplus in it. Payment could be made only from a surplus above and beyond the amount needed to secure the full buy-out rights of every member and beneficiary. The valuation certificate needed for such payments would be of limited duration. What is being said here is, should we return to a situation of soaring stock markets that resulted in pension schemes being not only not underfunded but having substantial funding over and beyond that necessary to meet full buy-out—which is a very high hurdle and much higher than exists under the 1995 Act—the trustees can decide, if they believe it is in the members' interests, to return that surplus to the employer. It is quite hard to conceive of circumstances in which it might be in the members' interests; the obvious one is if there is some question about the solvency of the company and the employer needing access to the fund. That would immediately raise a question mark as to how safe the pension fund might be.

Any such surplus would exist only when all the need to meet full wind-up liabilities could be met. In that case, the trustees could—although I am not saying that they would—make a decision that it could be returned to the employer. There is a very high hurdle that fully protects the employee. The provisions say that under the circumstances—who knows when they might occur, but should we return to that position—there is a route that trustees, the employer and scheme members can follow should they so choose. That is the point of the clause. It is necessary partly because there are no longer Inland Revenue rules, given the tax simplification with which we are now proceeding.

5.45 p.m.

Lord Higgins

As I said, there is still a great deal of controversy legally about who does or does not own the surplus, and one would have thought that there might be a corresponding clause for repaying the surplus to the employees. We seem so far from that situation at the moment that we must only hope that this clause is necessary as soon as possible. But it seems strange to legislate for it now, when it has not been a situation that has persisted in the past.

Clause 239 agreed to.

Clauses 240 and 241 agreed to.

Clause 242 [Non-European scheme to be trust with UK-resident trustee]:

On Question, Whether Clause 242 shall stand part of the Bill?

Lord Higgins

This clause relates to non-European schemes to be a trust with UK-resident status. Again, it is one of the international aspects of the problems with which we are dealing. I am not clear about a minor point, at Clause 242(4)(b), where it says that one of the conditions is that, a trustee of the scheme is resident in the United Kingdom". Does that mean that there must be a trustee—rather than the trustee—in the United Kingdom? Perhaps it refers to a company trustee rather than a set of individual trustees. Or does it mean that one of the trustees of a trustee board must be resident in the United Kingdom?

I am not sure when it will be best to debate my other point, which relates to the controversial issue of the Nikko Bank, and the fact that an overseas non-European scheme can effectively evade its pension commitments. Is it intended that the clause would cover that sort of situation? We are in fairly deep water, so it would be helpful if we could have a little clarification.

Baroness Hollis of Heigham

I am perfectly happy to have a go at describing the clause. On the other point, which the noble Lord has referred to on a previous occasion, I would be grateful if he could write to me and identify his concerns. Part 7 may be the appropriate place to raise the matter—I am not absolutely sure about that. I am broadly aware of the issues involved, but I would welcome his take on what policy issues he believes that that raises, which he believes that we should address. Then I could see where the debate might fit the Bill and could come back to him as to where we might raise the question. My first reflex is that Part 7 might be a more appropriate point than this one.

Clause 242 provides similar provisions to Clause 241, which dealt with UK-based schemes. This clause, as the noble Lord rightly identified, deals with occupational pension schemes which have their main administration outside the member states of the European Union. We are largely dealing with American companies in that regard. Part 7 deals with cross-border provisions for EC companies.

This clause applies to schemes that have their main administration outside the UK but in which there is a UK interest—either a UK-based employer is paying contributions to the scheme, or an overseas-based employer is paying contributions in respect of a UK employee employed in the UK. The clause provides that a UK-based employer can pay contributions into such a scheme and an overseas-based employer can pay contributions into such a scheme in respect of employees employed in the UK only if certain conditions are satisfied. The scheme must be established under trust and a trustee must be resident in the UK. The powers allow the Pensions Regulator a sanction if that is not the case.

More broadly, the noble Lord asked whether the trustee could be an individual or corporate trustee. It could be either, but the point is that the Pensions Regulator must have some person on which to exercise the leverage of regulation. That is what the clause sets up. Any company in that situation, such as an American bank, might have a UK pension scheme, but it would have to have a UK trustee drawn from the UK side. That might be a corporation or individual and the rest of its trustees can be based in the USA, but there must be some body or somebody resident in the UK, so that the regulator has leverage on it and so that the obligations to which I referred may be fulfilled.

I believe that the noble Lord understood those points well in his opening remarks; I am happy if he thinks that I have now confirmed his understanding.

Lord Higgins

I am grateful to the Minister. It seems a rather thin line of communication if all that is necessary is an individual trustee, and if the regulator can communicate with an individual trustee who is resident in the United Kingdom—who does not even need to be a United Kingdom citizen.

Baroness Hollis of Heigham

I would be interested to hear about the noble Lord's experience in that regard, and in the experience of other Members of the Committee. How would he toughen up the provision? I would genuinely be interested to know. Given trustee law, given the status and the regulator's leverage, and given therefore that the board corporately will end up funding whatever the individual trustee resident in the UK is required to do by virtue of the regulator's powers, what would the noble Lord suggest? Perhaps someone will write to me about the matter.

I take the point that the noble Lord has made. If he believes that this is too slender an edifice—

Lord Higgins

Right off the top of my head, I should have thought that a majority of the trustees should have to be resident in the United Kingdom. That is absolutely off the top of my head. Otherwise, there will be one trustee here and all the other trustees will not be registered in the United Kingdom. The regulator may come up to the trustee who is resident in the United Kingdom and say, "Hey, you're doing something wrong!". The trustee may reply, "Yes, but every time I raise the matter with my board, I'm outvoted". That is the best that I can do on the spur of the moment—but the thread seems pretty thin as it is.

On the other point, it may be the case that the issue that I have raised on several points will come up better in Part 7. I am referring to the case of an overseas company in Japan which has pensioners in the United Kingdom and reneges on the pension commitments—and very little can be done about it, apparently. But let us discuss that at a later stage, as the Minister suggests.

Clause 242 agreed to.

Clause 243 agreed to.

Clause 244 [Activities of occupational pension schemes]:

On Question, Whether Clause 244 shall stand part of the Bill?

Lord Higgins

I am not clear what other activities, apart from retirement benefit activities, the Government envisage might be caught by the provision. It says that occupational pension schemes would be limited to retirement benefit activities. Of course, we are not only talking about provision of pension; there are many pension schemes, for example, which have people who go around visiting the retired pensioners, and so on. But I am not clear what it is that the Government are worried that occupational pension schemes might suddenly rush off and do—run a lottery, or something, perhaps.

Baroness Hollis of Heigham

Perhaps running a garage, or something like that. Absolutely.

The clause does not prevent occupational pension schemes that are subject to it undertaking any current business. The Inland Revenue rules on tax relief currently restrict pension schemes undertaking business which is not related to the provision of pensions. Despite this, it is necessary to include the provision in the Bill because the scope of the tax rules is slightly different from the scope of the directive. It is necessary for the legislation implementing the directive to cover all occupational pension schemes, irrespective of their tax-approved status.

Lord Higgins

Whenever one gets worried about a clause in the Bill, one or two spectral figures in the background appear. It is either the Chancellor of the Exchequer or the European directive. The Chancellor may restrict tax privileges to schemes which do not engage in other activities. I should have thought that a more appropriate response would be to tax the other activities. However, I do not want to pursue this point further.

Baroness Hollis of Heigham

I can already see tomorrow's headlines.

Lord Higgins

I think that we should have little stars on each clause showing that this one is because of the directive and that one is because of the Chancellor.

Clause 244 agreed to.

Clause 245 [No indemnification for fines or civil penalties]:

On Question, Whether Clause 245 shall stand part of the Bill?

Lord Higgins

I am rather worried about this clause. There is no doubt that the vulnerability of pension trustees is increasing from moment to moment and has reached terrifying heights. Generally speaking, I think that countless employers, if not the pension fund itself, tend to take out insurance policies in cases where trustees may be vulnerable with regard to legal action. I should have thought that that would probably include fines or civil penalties. In the absence of any such protection, I should have thought the tendency for trustees to take a risk, because there is often not much in it for them, would be rather dangerous. The provision seems an unnecessary restriction which might deter people from taking on the task of being a trustee, but perhaps I have misunderstood the situation.

Lord Lucas

In a practical sense, will this not simply increase the costs on pension funds? Rather than the pension fund being able to pay for these premiums out of its income, it will have to pay the trustees, who will then pay tax on that payment before they can pay the premiums, and the cost will be grossed up.

There is no way that people would be pension trustees without such insurance. It will be obtained in one way or another—it is ridiculous to suppose otherwise. The liabilities are so enormous that no one of any standing could sensibly do the job without insurance. There will be conditions in the insurance saying that if someone does something entirely fraudulent they will not be covered by insurance and are personally liable—well, fine. But you have to have the ordinary, everyday insurance that covers you for mistakes or general forgetfulness. You could not do the job without it. All the clause will do is increase the cost for the fund.

Baroness Hollis of Heigham

The clause does not require anybody to take out insurance, although that may well be the result. However, I am slightly surprised at the comments that have been made. The clause will ensure that if a trustee has behaved unreasonably and is fined or subject to a penalty, the scheme should not reimburse that trustee. Insurance may be taken out but my understanding is that this is no different from the current arrangements for OPRA and the Financial Services Authority. The clause extends the provision to personal pensions. There may or may not be a further discussion about insurance but the power is there, in analogous circumstances, in OPRA. The clause makes sure that scheme members are not asked to pay for a trustee's unreasonable behaviour. It is quite a stringent test. The power currently exists in OPRA and is being carried forward here with a wider remit for the pensions that it covers.

6 p.m.

It seems absolutely right that members should not guarantee the liability of trustees for failure to behave appropriately. To put it in totally different language, where there has been a failure of trustees' duties of fiduciary care, it is right that scheme members should not pick up the bill. I suggest that the issue of insurance is separate. This is not a new power; a similar one already exists in OPRA. We are extending it to personal pensions, although it already exists with the Financial Services Authority.

Lord Lucas

I agree entirely with the noble Baroness on subsection (1). Certainly the scheme should not indemnify the trustees, but I cannot imagine that, these days, trustees would not have insurance. Non-executives and charity trustees have insurance, for example. Subsection (2) seems to rule that out. Perhaps I have misunderstood it.

Baroness Hollis of Heigham

I do not see how subsection (2) rules it out. The employer can pay a fine that could be insurance—I am sure that the noble Lord is right about this. All the clause says is that scheme members do not pay, and that it does not come out of scheme funds.

Lord Lucas

But it will come out of scheme funds anyway, because the trustee will require insurance. If the scheme is not funding the insurance, it will pay the trustee so that it can pay for the insurance. One way or another, the insurance will be there, and the cheapest way is for the scheme to pay for it directly, because any other way involves paying the Chancellor of the Exchequer.

Baroness Hollis of Heigham

Under subsection (2) schemes cannot pay the insurance; either employers or the trustee individually may do so.

Lord Higgins

It may be that either way the employer ends up paying, although the cost may be shared if the scheme pays rather than the employer. I share entirely my noble friend's views on the matter. In the absence of any insurance, there is a danger that it will be a question, not of whether members should pay for the liability of the trustee, but of there not being any trustees for them to pay. The noble Baroness underestimates the dangers involved. If she says that the employer will have to pay but not the pensioners—

Baroness Hollis of Heigham

Yes, I am effectively saying that. In that situation, the trustee could—with agreement, presumably—lay it off, so to speak, on the employer. We are protecting pensioners from the failure of the trustees, where they have behaved unreasonably.

Lord Higgins

But the trustees of the pension fund are not directors of the company. Ultimately, it comes down to a question of who pays: the employer or the fund? To a large extent, the fund is paid for by the employer. It will be yet another nail in the coffin of final salary schemes if one starts saying, "Oh well, the fund won't pay so the employer will have to".

Baroness Hollis of Heigham

The scheme already exists under OPRA, which we have had for seven years. Have Members of the Committee any evidence for thinking that the present scheme does what the noble Lord fears or that there have been any cases where trustees have been deterred because of it in a substantial way? I am not saying that there may not be individual cases. There is nothing new here. While I take the point about insurance, we should not treat the provision as though it were a brand new intervention. We are merely making clear that scheme members should not pay when trustees have failed bluntly to protect their interests.

Lord Oakeshott of Seagrove Bay

The point is not that this is a new power but that conditions for trustees are becoming more onerous. In particular, I am conscious of the interesting points made in the recent open letter of the National Association of Pension Funds. It pointed out that, as a result of the move towards scheme-specific funding and so on, trustees will probably become much more cautious and will take more seriously the burdens on them. To that extent, the rules are the same as before but they deal with a different situation. That is the concern.

Lord Lucas

One of the other differences is that, when we were debating the Bill that created OPRA, I was on the Front Bench and therefore the legislation was perfect. Now that we are looking at the provisions in opposition, we question some of the things that we did at the time. I understand what the noble Baroness says and can see that it will all come out in the wash, except perhaps in cases where an employer has gone bust. Under these provisions, we are telling pension scheme trustees that, if the employer goes bust or fails to pay the premiums, they are on their own and cannot get insurance unless they pay for it themselves. That seems to be inviting them to resign en masse the moment the employer goes bust.

Baroness Hollis of Heigham

Can we get matters into proportion? We are talking about insurance for regulator penalties, for which the maximum is £5,000. The analogy given to me suggests that this is no different from saying that, although you have motor insurance, it does not cover parking fines.

Lord Lucas

No, but often one's employer will pay them.

Baroness Hollis of Heigham

Parking fines?

Lord Lucas

Certainly, if you are in the business of making deliveries.

Baroness Hollis of Heigham

Ah, I see.

Lord Higgins

I am still concerned about this. The point made by the noble Lord, Lord Oakeshott, is absolutely right. The feeling among people taking on posts such as executive or non-executive director of a charity or whatever is that one can be inadvertently and without malice caught out, and that it would be foolish to take up such a position without insurance. The trustees are there helping the pensioners, therefore it seems not wholly unreasonable that the pensioners should pay the insurance. The trustees are not company employees.

Baroness Hollis of Heigham

Forgive me, but this is not a debate about insurance, is it? It is a debate about saying that if a trustee has behaved unreasonably—whether it is recklessness is another matter—and, as a result, has incurred a fine, members should not pay for this.

One of the issues that I have picked up throughout the Committee is Members' concern about issues of liability in any role. Perhaps it would help if I wrote to Members explaining why a fine would be imposed at the end of a long series of steps of intervention by the regulator which the trustees had not corrected and was a last step. At that point, having failed to correct "a, b, c or d", as the regulator has invited, it is not then reasonable to expect members to pay for the trustee's failure to alter his or her actions.

Rather than push further on the matter now, perhaps I could outline the position in writing and give details of the steps and safeguards that are in place, as a preparation for returning to the item on Report.

Lord Oakeshott of Seagrove Bay

Could the noble Baroness concentrate on the insurance point? So far as I am concerned, this debate is about insurance. I accept entirely what she says about subsection (1), but she said initially that it was a separate issue. In my view, we are talking about who pays for insurance and what is acceptable.

Lord Higgins

Subsection (2) refers specifically to insurance premiums and so on. If the risk is as slight as the noble Baroness says, any such insurance premium would be trivial anyway. It is a question, not of what the risk is, but of whether the trustee perceives that he may be at risk and is not covered if he is. If one wants to encourage trustees and schemes, and to deter companies from switching to defined contribution schemes to avoid this, then the clause is probably counterproductive.

Clause 245 agreed to.

Clause 246 [Conditions for pension protection]:

Lord Higgins moved Amendment No. 303A:

Page 167, leave out lines 40 to 41 and insert "if the benefits are provided under a money-purchase scheme"

The noble Lord said: The amendment is grouped with Amendment No. 303B. These are concerned with the transfer or schemes from one employer to another, if I understand them correctly. As currently drafted, defined benefit schemes with a money purchase option for voluntary contributions could be excluded from the protection provided by the clause. The amendment seeks to rectify that position. I beg to move.

Baroness Hollis of Heigham

I am in a bit of a dilemma and I shall seek the help of the Committee. This is the start of a debate on TUPE. I could either take the opportunity now to say something about TUPE or I could hone in narrowly on the noble Lord's point and, perhaps, have a stand part debate on TUPE in a moment, which your Lordships might prefer.

It may be that the noble Lord has misunderstood the intention of the provisions regarding money purchase schemes. The effect of his amendment, given that there are occupational schemes such as hybrid and mixed benefit schemes, would mean that requiring the contributions to comply with conditions would not comply with the respective schemes which are not money purchase schemes, such as defined benefit or hybrid schemes which provide some money purchase benefits. Technically, his amendment obscures the problem with hybrid schemes. Amendments Nos. 303B and 303C extend the same provision to employees eligible to join the scheme who have not yet joined and to employees who are serving a qualifying period of employment before vesting rights.

Protection already exists where transferors provide hybrid pension schemes which provide money purchase benefits. As this type of scheme is becoming more popular with employers, I am sure that the noble Lord would not like to restrict that. As it happens, his amendments have the technical effect of denying the protection to hybrid schemes that I am sure he would wish to see extended. It may be that it would be more appropriate to have the wider debate on the clause stand part debate, but I can assure the noble Lord that, as drafted, his amendments would provide narrower, rather than enhanced protection.

Lord Higgins

It was my intention that the amendment would ensure that money purchase options would be included rather than excluded. Perhaps I should withdraw the amendment and raise the whole issue on the clause stand part debate, which, as the Minister said, largely concerns TUPE.

Amendment, by leave, withdrawn.

[Amendments Nos. 303B and 303C not moved.]

Clause 246 agreed to.

Clause 247 [Form of protection]:

Baroness Dean of Thornton-le-Fylde moved Amendment No. 304:

Page 169, line 5, leave out sub-paragraph (i) and insert— (i) is certified by the actuary to provide to or in respect of the employee, benefits of similar value to the occupational pension scheme referred to in section 246(1)(c),

The noble Baroness said: In the absence of my noble friend Lady Turner, I shall move the amendment and speak to the other five amendments in this group. Clause 247 is intended to implement the Government's commitment to extend the protection afforded by the Transfer of Undertakings (Protection of Employment) Regulations. The move is much welcomed by many workers in such situations.

However, there is concern among many workers who are facing this situation about certain aspects of the Bill as currently drafted. I should like to briefly cover those and I very much look forward to the response from my noble friend the Minister.

The Bill provides for a maximum of 6 per cent contribution from the employer—12 per cent in total. The reference scheme test under paragraph 699 of the Explanatory Notes refers to that. But the benefits could differ greatly from those that employees received before they transferred. For instance, they may be on a 1/60th scheme and able to retire at 60. I am given to understand that, under the provisions of the Bill as it stands, people could get much lower benefits than that on transfer. Younger people may well meet the benefits, but in the case of older people in some schemes, the contribution from the employer needs to be much higher than the 6 per cent specified. That is the bones of Amendment No. 304.

6.15 p.m.

The amendment also includes an actuary provision to provide employees with benefits of similar value. That links into Amendment No. 305. The Explanatory Notes, under the reference scheme test, refer to the standard under Section 12A of the Pension Schemes Act 1993. This amendment is intended to move towards the benefits that may be paid out where there is not a money-purchase scheme. The issue is quite complicated, but nevertheless there is a concern about a shortcoming in the Bill. I would welcome a response from the Minister.

Amendment No. 305A is tabled in my name. I am seriously concerned about subsection (6) of Clause 247. It refers to subsection (1), which covers the scheme requirements under the Bill, stating that it, does not apply in relation to a contract if or to the extent that the employee and the transferee so agree at any time after the time when the employee becomes employed by the transferee". In other words, as I understand it, if an employee in a pension scheme transfers to another employer, the Bill will enable the employer to try to put pressure on the employee to convince them that you do not need the provisions in the Bill or the continuation of the contract to continue a pension scheme. I would welcome very much my noble friend's comments. I am sure that what I have described was not intended when the Bill was drafted, but it looks like that would be the result. I would like some assurance.

Amendment No. 306, in the name of my noble friend Lady Turner, is aimed at achieving clarity and protection for the scheme. Amendment No. 307 is better than my Amendment No. 307A, so I shall speak to it. It provides that you do not see a diminution of contribution and therefore a diminution of benefit, so the transferee should not be able to pay less and the employees should not be required to pay more. That might sound like fairyland, but I have seen that happen in pension schemes, particularly in the old schemes where there were surpluses: employers took a pensions holiday but the employees continued to pay, or a scheme was in trouble and employees were expected to pay more but not the employer.

I do not suggest that that is the intention of the Bill. It is intended for the very best of reasons. But we all know that, between cup and lip, a slip can happen on drafting. There are some serious concerns about this part of the Bill. I beg to move.

Lord Higgins

The amendments to which the noble Baroness has spoken would change significantly the Government's approach as carried out in Clauses 246 and 247. The amendments would mean that a transferee employer would have to provide a pension with benefits of similar value to the pension benefits provided by the transferor. However, the Government require only that a transferee employer provide either membership of an occupational-related scheme that meets the reference scheme test or alternatively membership of a defined contribution scheme—for example, a stakeholder pension—to which the new employer matches the employee contribution up to 6 per cent.

My understanding is that the Government have held considerable discussions with various outside interests, particularly the DTI, some three years ago. Nothing much has happened in the mean time. Organisation such as the Engineering Employers Federation (EEF) had serious reservations about regulations that would give protection in private sector to private sector transfers. It suggested that that would limit the number of transfers that took place. In a buyout situation, in particular, the problem is that the pension transfer provisions may be so onerous that the transfer simply does not take place. As a result, instead of transferring the operation of, say, a subsidiary from one company to another where it will survive, or from the company to a buyout situation where it will survive, the transfer does not happen and that part of the operation closes down, with a loss of employment and so on.

There is very much a question of balance in the extent to which those transferring from one company to another gain the full benefits that they enjoyed originally. On balance, for the reasons that I have just given, I am inclined to take the Government's view. No doubt we can debate the matter further, but it is a question of balance. There is considerable danger, if one goes along a route that puts too heavy a burden on the company that is trying to dispose of the assets to another operation.

Baroness Hollis of Heigham

The noble Lord, Lord Higgins, has very fairly described the intent of the proposals and identified the position from which my noble friend argues her case. Clauses 246 and 247 extend TUPE's commitment across the full range of pension provision. Research shows that the average employer contribution in a DB scheme may be around 12 to 16 per cent, whereas the average employer contribution to a money-purchase scheme is around 6 per cent. We think that the proposal for a matched contribution to a money-purchase scheme of up to 6 per cent strikes a sensible balance, given that this is the average value of contributions.

I wish to make a couple of blue-sky points before responding to each amendment. My noble friend was worried that the new approach might not produce an adequate standard of living on retirement. She is obviously right that it is age related. But the provisions also reflect the fact that in a TUPE situation an older employee will have come with accrued rights, whether through a DB or DC scheme, in his existing scheme. We are saying that, during an employee's period of employment with the transferee employer, he will be able to have a pension scheme whose baseline involves a 6 per cent contribution from the employer if he makes a matching 6 per cent contribution. A worker who contributes that 6 per cent matched by the employer could have a replacement rate of between 40 and 60 per cent of his final salary on retirement from his private pension. If, on top of that, assuming a 4 per cent rate of return, we include the state retirement pension and, if he was not contracted out, the state second pension or, if he was contracted out, to the effect of that, the replacement ratio should then be nearer 70 per cent.

So the 6 per cent plus 6 per cent plus either S2P plus state pension or the NI rebates should produce a retirement income of 70 per cent. I think that that is perfectly adequate. I must say, and far exceeds what many people will currently be retiring from in their working life. We have worked this through. Someone will be more at risk where he is not under a TUPE but is changing jobs, possibly in DB schemes and not building up vested rights. That person may very well end up with a pension far short of that, but what TUPE should do, given the hedges that I have put around it in terms of other forms of financial support, such as the state second pension or state pension, will, at those rates of contribution, on quite moderate assumptions, produce a replacement retirement income of about 70 per cent of earnings, which may be larger than people might have expected.

I therefore turn to my noble friend's amendments. As I said, the noble Lord, Lord Higgins, has identified her argument, which is why I cannot go with her. She seeks by Amendment No. 305A to remove subsection (6) from Clause 247. That would remove an employer's ability to vary the level of voluntary contribution for the remainder of the individual's period of employment. That would be the case even where the employee wants a change to be made and, importantly, would apply to increases as well as decreases in pension provision.

More generally, that would unacceptably restrict an employer's rights flexibly to manage his business and could place him under an unacceptable burden to continue with the rate of contributions that he cannot economically maintain. Through that route, we begin to come to a level of compulsion, especially on a transferee employer, that the Government cannot accept, certainly at this stage. With our 6 per cent and 6 per cent, we are ensuring that there is a baseline that many people would regard as more than adequate in today's circumstances. We do not want to tilt on to the transferee employer statutory requirements that are more onerous than on the transferor employer from whom the employee originally migrated.

I think that we have got a pretty good balance. Even the 6 plus 6 per cent figure has in some cases been felt to be unacceptably onerous because, for example, where an existing employer, the transferor employer, contributes 4 per cent, none the less, when that person goes across to the transferee employer, providing the employee is willing to match it, the new employer must go up to 6 per cent. So it is not impossible in some cases that people will actually see their pension provision improve, providing that they are willing to match it.

Given that, if I may echo the words of the noble Lord, Lord Higgins, I think that we have got the balance right. Providing the employee matches the contributions, the outcome will provide a more than acceptable level of income in retirement—all in all, about 70 per cent. With that, I hope that my noble friend will accept that we are unwilling to take the risk of upping the compulsory element of the transferee employer at this time.

Lord Oakeshott of Seagrove Bay

I have been waiting to listen to the Minister about this, because I feel somewhat torn. My heart is with the noble Baroness, Lady Dean. The noble Lord, Lord Higgins, raised the point, but I feel that there is a rather different situation between a private transfer, where there may be genuine problems if the EEF says that solvency or ongoing jobs are at risk.

With a public sector to private transfer, which many of these could be, I feel strongly that it is not acceptable just to say that in the new situation, some people may be doing better than other people do on average. The key point is that where, effectively, a decision is taken over employees' heads and they are transferred out with no real say about what happens, they should be in no worse a pension position. That is an important principle. I am rather groping here, but I feel that on a public to private transfer, I am very much with the noble Baroness.

6.30 p.m.

Baroness Dean of Thornton-le-Fylde

I thank the noble Lord, Lord Oakeshott, whose instincts are absolutely right. The noble Lord, Lord Higgins, has rightly picked up that this would be a change to the Bill, but it proposes a protection to employees and the pensions promise that they have been given by their employer. We must consider the environment in which we are working on the Bill. People out there feel that the pensions promise does not seem to have meant very much. So many people have worked the whole of their lives and at the end of it have a much reduced pension. I think we all agree that pensions will be a key issue in the election, when it comes.

The blunt fact is that if you change your job, you take a choice. You enter voluntarily into a contract with your new employer about the overall terms and conditions. All too often, I have seen companies sold off—sometimes to save the company. Usually, in the process, a lot of jobs go. But here, the employees would have no say at all and their pensions are affected. I was very interested in the figures cited by my noble friend and will certainly read her contribution. Could details about those figures be made available? The points that she made were interesting.

Baroness Hollis of Heigham

Yes, I am very happy to share that information with my noble friend. On the public to private point, which arose after I spoke, occupational rights of local authority employees who transfer to the private sector—the point identified by the noble Lord, Lord Oakeshott, and my noble friend—on a service contract are protected by measures in the Local Government Act 2003. Employees in the wider public sector who transfer to the private sector under such contracts have their occupational pension entitlement protected in most instances under the non-legislative guidelines issued by the Cabinet Office.

But there is no protection from a private-to-private TUPE. The Bill deals with private-to-private TUPEs, where we are dealing with pension funds that are not protected by Crown guarantee, if you like. As a result, the 6 plus 6 per cent, the statistics that I was giving to my noble friend, which I am happy to circulate, represents a substantial increase in protection to employees who opt and will remain in the private sector.

Baroness Dean of Thornton-le-Fylde

I accept that last point entirely, because there is no protection there at present. That is why I said that, overall, I very much welcome the clause. But I cannot help but draw on my experience, which is that it is not a terribly good employer who merely matches the employees' pension contributions. A good employer normally provides one-and-a-half to twice as much. I am not sure how many fall in the category where the employee's contribution is the same that of the employer. However, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 305 to 306 not moved.]

Lord Higgins moved Amendment No. 306A:

Page 169, line 31, leave out from "means" to end of line 32 and insert—

1. "(a) such contributions in respect of such period or periods as may be prescribed;
2. (b) such contributions where the transferee employer must match the employee's contributions up to a maximum of 3%"

The noble Lord said: As has already been discussed, the Bill will effectively extend the TUPE regulations by making a pension provision a benefit that must be included in the new employer's contract of employment where employees are members, or eligible to become members, of the occupational scheme with their previous employer. The relevant contributions will be defined in regulations and will specify that the transferee must match the employee's contribution, up to a maximum of 6 per cent. My understanding is that the CBI is not in favour of extending TUPE to cover occupational pensions because in its view that is unnecessary. Pensions are already taken into account in the private sector with flexible packages that reflect employee and employer priorities. The measure would certainly make transfers considerably more time consuming and complex to administer and in the CBI's view that would impede corporate activity by creating uncertainty, imposing burdens and so on.

There is no doubt at all that the pension provision side of any negotiation which takes place about changing ownership of an operation is now regarded as far more important—there have been a number of headline cases on this—than was previously the case. As I understand it, it is already widespread practice within the private sector for transferees to offer pension provision to those affected by a TUPE transfer. That may well be a sensible thing to do. If you transfer the operation from one employer to another and do not operate in the way that I have described, clearly the morale of the workforce is likely to be adversely affected. Problems exist in that area. Sometimes a deal is done with regard to other benefits and so on. The negotiations may be complicated. I have been involved in such matters.

The extension of TUPE to cover occupational pensions would also make transfers more time consuming and complex. The inclusion of pensions within TUPE is likely to give rise to a number of legal and technical issues as well. That creates uncertainty in the middle of what may be a very knife-edge decision. As I said earlier, it may be a question of whether the operation concerned continues at all. We have to balance all those considerations and take into account the risk that an employee loses his or her job altogether as opposed to finding that his pension is not as favourable as previously.

If the Government are going ahead with this proposal—I well understand why they think that they should—it is important that the extension of TUPE to occupational pensions is accomplished in a way that is workable and does not undermine the way in which transfers would normally operate by imposing excessive costs. Simplicity is an important aspect that we need to take into account. The CBI has said that the system should provide a safety net rather than prescribe what it considers to be good practice legislation. There is a dispute about whether the relevant figure should be 6 per cent, as in the Bill as it stands, or 3 per cent, as set out in the amendment.

Overall, this is a question of balance. The Government are moving in the direction of improving the situation somewhat as regards pension provision in transfer situations, although, for reasons that we have just debated, they are not going so far as giving the same benefits effectively. As I say, this is a question of balance. We need to consider very carefully whether the Government or those involved commercially in these operations are following the right course. These operations are often very difficult, time consuming and complex and turn on a knife edge. If the pension transfers are not agreed, the whole thing may break down, perhaps to the disadvantage of the economy as a whole and everything else. We need to strike a balance here. I shall be interested to hear the Minister's reaction to this amendment. I beg to move.

The Chairman of Committees (Lord Brabazon of Tara)

I should point out that if this amendment is agreed to, I shall not be able to call Amendments Nos. 307 or 307A.

Lord Oakeshott of Seagrove Bay

We do not support this amendment. This seems to me a classic case of CBI schizophrenia. The CBI is very good on the general policy and saying how we should take pensions much more seriously. It makes many good general points, but when it comes to the nitty gritty detail I am afraid that it is too mean. It is not prepared to carry through the logic of what it is saying, if that would cost any of its members. The 3 per cent limit is too mean, and we do not support it.

Baroness Hollis of Heigham

The noble Lord asked what I like to think was a rhetorical question—did the Government believe that they had got the balance right? Of course they do. We have certainly got it clear today: on the one hand my noble friend Lady Dean is asking us to ensure that the pension in a scheme of a transferee employer should be at least as good as the scheme from which the employee is transferring. We believe in some cases that that may be too high and onerous a responsibility.

Then, in moving his amendment, the noble Lord argued for 3 per cent. I suspect that the 3 per cent figure arose because of some sort of mental alignment with the information and advice rules. Certainly 3 per cent, even matched, would not float most recipients into an adequate standard of living—and certainly not a replacement income based on a private pension of more than about 30 to 40 per cent. That is unacceptable.

I have gone over the figures. We believe that the 6 per cent plus 6 per cent together with the implications of the contracted-out NI rebates or the alternative second state pension will together give employees a retirement income of around 70 per cent of their earnings in retirement, depending on the assumptions made about growth while, at the same time, reflecting the average contribution made now by employers to DC schemes. Let us remember that the majority of employees remain in DB schemes because those schemes tend to be the large ones.

We believe that we have the balance right; we are reflecting not best practice but average practice in the industry, which allows us at the same time to protect the position of employees. As the noble Lord might have expected when he asked whether the Government had got it right, we believe that we have. When he moved his amendment, I did not think that he argued the CBI case; he put himself at some distance from it and merely made it out that that was what the CBI argued. I take his hesitant endorsement of the CBI's position to be tacit support for that of the Government, and that as a result he will he able to withdraw his amendment.

Lord Higgins

The Minister is of course wrong about that, just as she is wrong in saying that the Government have always got it right. It is the "always" that is the crucial word; I have never yet heard her say that the Government have got it wrong—or at least I cannot recall an instance, although there may have been one or two.

Baroness Hollis of Heigham

When we were talking about internal controls under the previous amendment, which the noble Lord, Lord Skelmersdale, moved on behalf of his noble friend Lord Lucas, I accepted that on reflection we were getting conflicting advice on the matter. It may be that the advice that I originally gave to the Committee was wrong, incomplete, inaccurate and conflicting, and I said that we wanted to reconsider the matter to say whether we wanted to come out with a clearer position.

Lord Higgins

There is one thing that I am quite clear about: that the Minister has not got it right on the balance of saying whether the Government are right or wrong. Be that as it may, this is a very important issue, and we need to weigh the arguments.

We should not underestimate the argument that I made in response to the noble Baroness, Lady Dean, under the previous amendment, and which I made just now. The argument is perfectly valid; if the process is made too complicated or the cost of the transfer is too great, operations that might otherwise have been viable may turn out not to be. Any company thinking of transferring a subsidiary to another owner or of transferring it in a buy-out situation is effectively in the first place, to some extent, considering whether it wants to continue with it at all. If the company decides that it is not worth transferring the subsidiary because it is too difficult or complicated or would cost too much, it might simply close it down. It is important that we do all we can to preserve pensioners' rights, but there is no point in doing that if they are unemployed as a result of being too enthusiastic on this point.

Arguments have been put forward by both sides—the noble Baroness, Lady Dean, on one side and the CBI on the other. We have hit a balance. It is important to take into account the other points that I made towards the end of my remarks. If the Government are going to go ahead, they must consider closely some of the technical problems that arise in these circumstances. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

6.45 p.m.

[Amendments Nos. 307 and 307A not moved.]

Clause 247 agreed to.

Clause 248 [Consultation by employers: occupational pension schemes]:

On Question, Whether Clause 248 shall stand part of the Bill?

Lord Higgins

The clause is so full of regulations that it is totally devoid of content. Can the Minister give us any idea what it is all about?

Lord MacGregor of Pulham Market

I want to ask whether I have got it right. Obviously the clause refers to situations that are all too common nowadays, in which employers have to take decisions to close a defined-benefit scheme to new members, because of developments or other factors. As we know, there has been an enormous switch to that position, even among the companies in the FTSE 100, and clearly more will follow.

As I understand it, the clause is saying that the employer must consult employees in such situations, but that the decision after that consultation is up to the employer and the consultation does not affect the actual decision. I may be wrong about this, but according to the Explanatory Notes, subsection (3) seems to imply that if the employer fails to consult the employee, so be it—the decision can still be made and is valid. Is that an accurate depiction of the clause?

Baroness Hollis of Heigham

Clauses 248 to 250 are in a way the other side of what I call Section 67 clauses; they relate to future changes to the scheme, while Section 67 relates to the situation with accrued rights. There is not an identical set of requirements as to what must or must not be consulted about—they differ between the two provisions. I want to ensure that there is no ambiguity there.

The duty to consult is important, and I shall make a fuller speech, rather than simply answer the brief points that have been made. Subsequently, there may be confusion with Section 67, so this might be an opportunity to say something on that, although it will mean going on longer than I would normally seek to do.

The three clauses introduce the requirement to consult, meaning that in future employers will have a statutory obligation to consult affected active members of pension schemes or their representatives before making major changes to future pension arrangements. The requirement will apply to employers who offer occupational pension schemes or group personal pension schemes which have direct payment arrangements in place benefiting up to 7.5 million people, for example.

We shall set out the decisions which will trigger consultation by way of regulations, but we anticipate that they will include decisions, identified by the noble Lord, Lord MacGregor, such as closing a scheme to future accruals or to new members, changing from DB to DC or hybrid schemes and significantly reducing or removing an employer contribution to a DC scheme or group personal pension scheme. Those are the big ones on which the employer is required to consult. Experience shows that many employers already consult, but others have failed to take up the opportunity to do so as part of good employment relations and practice.

It will be part of the duties and objectives of the new Pensions Regulator to promote compliance and best practice by employers. Clause 299 contains the relevant powers which will enable civil penalties to be applied by the regulator to breaches of the requirement to consult regulations. When a possible breach comes to light, the regulator has powers to investigate, including requiring employers to produce evidence of compliance. In cases of non-compliance, the regulations will enable the regulator to impose a sanction by way of a civil penalty of up to £5,000 for individuals and up to £50,000 in any other case.

It has been suggested that employment tribunals should enforce compliance with the new requirement, but an important difference comparing sanctions applied by employment tribunals to those applied by the Pensions Regulator is that the regulator will be able to enforce compliance by employers and trustees equally, in a proportionate and proactive way appropriate to a pension scheme and in a way that will be joined up with the rest of pensions legislation. The new consultation requirement will focus on future changes—distinct, therefore, from the provisions in Clause 251, dealing with the former Section 67.

Clause 248 is the first of the three clauses, and relates to consultation requirements where future changes to occupational schemes are proposed. We are considering, under Clause 248(1), possible exemptions for some areas of the public sector and in respect of small employers. For example, the requirement would not add much if applied to large public sector schemes, which are governed by statutory requirements to consult. For small employers, we need to get the balance right between protection and excessive burdens.

We also must take account of different powers. We will be using these powers to prescribe who will be consulted to build on the Government's approach on information and consultation, based on a framework agreed by the CBI and TUC. This is the first time that the UK has approached implementation of EU social legislation in this way.

The key principle is that where trade unions are recognised by an employer, the employer will be able to consult on changes to future pension arrangements using another mechanism only where employees have specifically agreed and approved an alternative approach to information and consultation. So they must use trade union or approved nominated members under the information and consultation requirement or, in the absence of those, their members more generally. Throughout the consultation stages of the Bill, we have consulted and listened to both sides of the industry, and I think that we have a workable balance.

Clause 250 contains further provisions about regulations under the section. Ultimately, because pensions are voluntary, the employer is not required, following consultation, to implement the views of those consulted, but he must give them due consideration. Equally, if trustees propose changes to the scheme, the employer must still undertake the exercise. The sanctions do not bite if the employer fails to deliver what the consultation exercise has produced but if he fails the consultation exercise in its entirety. That is the distinction that I think the noble Lord wanted me to make. However, the consultation does not exercise a veto, because pensions remain voluntary.

In comparison with Section 67, the employer has all the residual powers when dealing with future changes. In the provisions replacing Section 67, the trustees have the residual powers because they are acquired rights that have been built up. That is the essential distinction between the two—who has the determining power. Here it remains with the employer; under the provision replacing Section 67 it will be, as we shall see, with the scheme trustees.

I hope that the Committee will forgive me for that rather long answer, but I think, given that there has been some confusion on the issue outside, it would be helpful to put it clearly on the record.

Clause 248 agreed to.

Clause 249 [Consultation by employers: personal pension schemes]:

Baroness Dean of Thornton-le-Fylde moved Amendment No. 308:

Page 170, line 14, at end insert "or (c) proposes to reduce the contributions which the employer pays to the personal pension scheme,

The noble Baroness said: In moving Amendment No. 308, I should also like to speak to Amendments Nos. 308A, 309 and 310.

Amendment No. 308 puts into regulation something which we believe is not there at the moment. The proposal is that there should be consultation on personal pension schemes. Over the past few years, employers have been moving towards paying a contribution either to an individual money purchase scheme, a group personal pension or, indeed, a stakeholder pension. We feel that there is a blank in the Bill on consultation in that regard.

The amendment also deals with employers who want to reduce the contributions they pay to an individual's personal pension. Certainly, Amendment No. 308A moves on to remedy. That leads on to Amendment No. 309 and the two are very much connected—as is Amendment No. 310.

I should be happy to be corrected, but there does not appear to be provision for the remedy that applies to consultation. We know that consultation means different things for different people. I know that it will be put in the regulations, but it would be helpful if the Minister could tell us a little about what is meant by "consultation". The word "meaningful" is not in the Bill and I do not intend to have half an hour's debate over one word. But "consultation" to some people means "informing"; to other people it means "discussing before you reach conclusions". That is what it means to me but that is not always the case and it has not been the case in people's experience, either.

Amendment No. 309 is not dissimilar and the requirement for consultation there is not dissimilar to what is required under health and safety legislation. We believe that it is reasonable to provide for some remedies. It may be that the intention was to do that anyway, but this is a probing amendment and I am trying to draw from the Minister what the Government mean by "consultation". If the Bill is left as it is, there would be very different interpretations of that. I beg to move.

Baroness Hollis of Heigham

As it stands, the amendment would impose an obligation to consult in the instance of any reduction in contributions. Our phrasing is "significant" reductions, so the noble Baroness would agree that the Government's position is not unreasonable. But the thrust of her amendments is, as she says, to probe what we mean by "consultation".

The regulations, which will be drawn up in partnership with the CBI, the trade union movement and so on, will explain who must be consulted. The employers must, for example, consult a recognised trade union or a recognised I&C member from April 2005. The regulations will give the timescale for representations to be made, during which the employer must "consider". If there is no trade union or I&C member, those recommendations must go directly to the employees. The regulations will be based on consultation but they will lay down a proper process and an appropriate timescale for sending it out, receiving back representations and considering those. So this would not be merely a perfunctory activity in which the consultation has had no capacity to change the outcome of any decision that the employer might make.

I do not know whether that gives my noble friend sufficient assurances. If she wishes to push me further, I would invite her to do so, because I do not know whether I have given her enough comfort. But I believe that the regulations will address the issues she has raised to ensure that the consultation is meaningful. It does not mean that the consultation itself produces a veto on what the employer has done. I was at pains to establish that that would not be the case.

Baroness Dean of Thornton-le-Fylde

This is the difficulty that we always have when we have a Bill that will probably be on the statute book by the time that we finish the regulations. At the moment, if there is one area where there is much suspicion, it is pensions. I hear what the Minister says, and we can always return to this on Report if we wish. Meanwhile, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 249 agreed to.

7 p.m.

Clause 250 [Further provisions about regulations relating to consultation]:

[Amendments Nos. 308A to 310 not moved.]

On Question, Whether Clause 250 shall stand part of the Bill?

Baroness Barker

I apologise for not having been present in the Committee for most of this afternoon. I had good reasons for being elsewhere. However, since I have been here I have listened extremely closely to the exchanges, particularly on the previous few groups of amendments. I refer to a situation that I know only too well, working for an employer who has just consulted on closure of a DB scheme. Therefore, I took to heart much of what the Minister said about consultation and the requirement for it.

We on these Benches are reaching the view that pensions form a substantial element of overall remuneration packages and therefore it is increasingly right to treat pensions as one would treat other forms of remuneration. I was most interested to hear all that the noble Baroness said. However, Clause 250(2)(g) appears to enable the regulator to waive or relax all the regulations relating to consultation, which appears to constitute a power to drive a coach and horses through all the good practice that the noble Baroness discussed. Perhaps there is a good reason for the measure. I should be delighted to know what that is. If there is no good reason for it, I question why it is there. Why would the regulator wish to have the power to tell people to override good practice?

Baroness Hollis of Heigham

I have obtained advice on under what circumstances Clause 250(2)(g) might come into play. One example is where a company ceases trading when winding-up is taking place. Any requirements for consultation imposed by the regulations would obviously be waived under those circumstances. It is an obvious point but I rather agree with the noble Baroness that it could be expressed differently.

Baroness Barker

I rather wish that it were. As the noble Baroness knows, I am at the moment fascinated by insolvency. I quite understand that that is exactly what happens in those circumstances. If that is what the measure is intended to provide, it should say so rather than constituting such an open provision.

Baroness Hollis of Heigham

The regulations will spell it all out. As I say, those regulations will be based on consultation with all the relevant parties. The officials have heard this discussion and they are drawing up the regulations. I shall do my best to encourage them to ensure that there is as much transparency as possible.

Clause 250 agreed to.

Clause 251 [Modification of subsisting rights]:

[Amendment No. 310A had been withdrawn from the Marshalled List.]

Baroness Hollis of Heigham moved Amendment No. 310AA:

Page 173, line 17, leave out "other entitlement to benefits" and insert "entitlement to the present payment of a pension or other benefit"

The noble Baroness said: The amendments in this group are extremely technical. I shall speak to them briefly but if any of your Lordships want fuller information I shall be happy to circulate additional information.

This group of amendments is needed in order to bring clarity to the provisions in Clause 251. Amendments Nos. 310AA—it sounds like a shoe size—and 310AB clarify the meaning of the term "subsisting rights" at New Section 67A.

Amendments Nos. 310D, 310E and 310F clarify the provisions in new Section 67B(5). New Section 67B sets out the requirements that must be satisfied when a modification is to be made with the consent of each of the affected members.

Amendment No. 312ZA amends the new Section 67E(2), which covers the action the trustees must have taken before they can agree or consent to a modification being made.

I hope that your Lordships will accept these amendments. I beg to move.

On Question, amendment agreed to.

Baroness Hollis of Heigham moved Amendments Nos. 310AB to 311:

Page 173, line 23, at end insert— ( ) At any time when the pensionable service of a member of an occupational pension scheme is continuing, his subsisting rights are to be determined as if he had opted, immediately before that time, to terminate that service.

Page 173, line 25, leave out from "as" to end of line 36 and insert "overridden by a relevant legislative provision, (b) the relevant legislative provisions, to the extent that they have effect in relation to the scheme and are not reflected in the rules of the scheme, and

Page 173, line 41, at end insert— (7A) For the purposes of subsection (7)—

1. (a) "relevant legislative provision" means any provision contained in any of the following provisions—
   1. (i) Schedule 5 to the Social Security Act 1989 (equal treatment for men and women);
   2. (ii) Chapters 2 to 5 of Part 4 of the Pension Schemes Act 1993 (certain protection for early leavers) or regulations made under any of those Chapters;
   GC 396
   3. (iii) Part 4A of that Act (requirements relating to pension credit benefit) or regulations made under that Part;
   4. (iv) section 110(1) of that Act (requirement as to resources for annual increase of guaranteed minimum pensions);
   5. (v) this Part of this Act (occupational pensions) or subordinate legislation made or having effect as if made under this Part;
   6. (vi) section 31 of the Welfare Reform and Pensions Act 1999 (pension debits: reduction of benefit);
   7. (vii) any provision mentioned in section 292(2) of the Pensions Act 2004:
2. (b) a relevant legislative provision is to be taken to override any of the provisions of the scheme if, and only if, it does so by virtue of any of the following provisions—
   1. (i) paragraph 3 of Schedule 5 to the Social Security Act 1989;
   2. (ii) section 129(1) of the Pension Schemes Act 1993;
   3. (iii) section 117(1) of this Act;
   4. (iv) section 31(4) of the Welfare Reform and Pensions Act 1999;
   5. (v) section 292(1) of the Pensions Act 2004."

Page 174, line 37, leave out from beginning to "if in line 40 and insert— (5) If—

1. (a) the modification is not a protected modification, and
2. (b) before the modification is made the trustees notify an affected member in writing that—

(i)

Page 174, line 43, leave out "(b)" and insert "(ii)"

Page 174, line 44, at end insert— the trustees are to be taken to have complied with subsection (4)(a)(iv) in respect of him.

Page 175, line 43, leave out "of a prescribed description" and insert "with prescribed qualifications or experience or who is approved by the Secretary of State"

On Question, amendments agreed to.

Baroness Dean of Thornton-le-Fylde moved Amendment No. 312:

Page 176, line 1, after "rights" insert ", and those of any other person contingently entitled to benefits under the scheme through him."

The noble Baroness said: Again, this short amendment is tabled in the name of my noble friend Lady Turner of Camden. Clause 67B(8) refers to, the affected member's subsisting rights". The amendment would add the words, and those of any other person contingently entitled to benefits under the scheme through him". It provides that if anything should happen to the member, his or her next of kin or beneficiaries will be contingently entitled to benefits through the scheme. I gather that my noble friend is concerned that it constitutes inherited rights—I think that that is the point to which she refers. I beg to move.

Baroness Hollis of Heigham

Dealing narrowly with the noble Baroness's point rather than the wider issue of Section 67, which Members of the Committee may wish to discuss in a stand-part debate, all that I can say is that survivors' benefits are not paid in their own right. In other words, they belong not to the survivor but to the member. While the member who has accrued those rights remains alive, they can be included in the valuation of his or her own subsisting rights. In other words, under the wider discussion that we may go on to have, if the member thinks it appropriate to accept an actuarial equivalence between adjustment to survivor's benefits and, say, accrual rights, it is for that individual to decide. The rights belong to the member of the scheme, not to any potential survivor, who may or may not be married to the member, and who may or may not outlive the member concerned. Given that the rights belong to the member, it is for that individual to determine the acceptability of any changes, looking backwards on accrued rights, which is what Section 67 deals with. This may not be particularly welcome news to my noble friend, but, as I understand it, it is the case in law.

Baroness Dean of Thornton-le-Fylde

I am not dealing with the wider issues of Section 67; it is just this one simple point. I take the Minister's point, but it is a difficult issue. Over the years, attitudes about who is entitled have changed. For the moment, on behalf of my noble friend, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Baroness Hollis of Heigham moved Amendment No. 312ZA:

Page 177, line 11, after "not" insert "a protected modification"

On Question, amendment agreed to.

On Question, Whether Clause 251, as amended, shall stand part of the Bill?

Lord Higgins

One of the complaints that I have made continually in recent times has been that, given the way in which the House of Commons programmes its legislation, the House of Lords is becoming the main scrutiny body. With this clause, however, that would be an unjustifiable criticism. It was introduced at a late stage in Committee in another place and a fairly extensive debate took place on it.

The clause reflects the recommendations made by Mr Alan Pickering in his review of occupational pension regulations, which was concerned with the difficulty of pension schemes in amending their rules and provisions. From time to time that difficulty created a situation whereby employers decided to switch from a defined benefit scheme to a defined contribution scheme. The Government accepted that argument; I think that they were right to do so. Overall, a measure of simplification will result from the proposed changes, which is to be welcomed.

These issues have attracted considerable publicity. This morning I read in the Financial Times that we would discuss Section 67. It upset my breakfast because we had already agreed that provision, but it was an understandable mistake because Clause 251 is concerned with the same issues.

The Chairman of Committees

I am afraid that there is a Division in the House.

Lord Higgins

How does the noble Baroness think that we should proceed, given that we have started the debate?

Baroness Hollis of Heigham

I would be happy to continue to the end of this debate on what I call Section 67 issues. That may take us past 7.30 p.m. I am in noble Lords' hands.

Lord Higgins

I think that the noble Lord, Lord Oakeshott, and his colleagues have indicated agreement. The noble Baroness, Lady Dean, has gone. It would seem a shame not to finish a debate that we have started.

Baroness Hollis of Heigham

Yes, especially given that it concerns the other side of the clauses that we dealt with earlier.

The Chairman of Committees

The Committee stands adjourned for 10 minutes.

[The Sitting was suspended for a Division in the House from 7.10 to 7.20 p.m.]

Lord Higgins

I am grateful to the Grand Committee for agreeing to continue. Since we have started the debate, it seems appropriate that we should conclude it rather than break in the middle and not resume for some weeks.

I said at the beginning of my remarks that there was an extensive debate in the House of Commons, unusually, on this clause, which was introduced at a comparatively late stage of the Committee stage. The Government introduced the clause in response to Mr Alan Pickering's review of occupational pension regulations; he suggested—and I believe that there is widespread agreement on this—that the difficultly that schemes have in altering their rules in some cases may result in the employer deciding that it is appropriate in those circumstances to move from a defined benefit to a defined contribution scheme. That is something that everyone would like to avoid, as the benefits of one over the other are so clear.

The Government responded by inserting the clause. Rather surprisingly, it attracted publicity today, as a result of statements made by the Institute of Actuaries and, in particular, the chairman of its pensions board. Actuaries are at the moment a little sensitive, following the comments about the Penrose report. I must say that I agree with those comments. That report was extremely disappointing, to say the least; the ombudsman is investigating the matter further, and there remain serious problems for many pensioners.

As a result of the report, the actuarial profession has said that it has been criticised for not speaking up when it mattered and that it thought that it ought to speak up with regard to the Bill. That is an entirely desirable development; I am all for actuaries speaking up. I myself made a rather unfortunate remark about them the other day, but most actuaries are expert and progressive people. However, it is true to say that they tend to have an innate—

Baroness Hollis of Heigham

Conservatism.

Lord Higgins

"Conservatism", the Minister suggests—with a small "c". In many ways, that is entirely appropriate; it may occasionally be less so—for example, on the question whether one should change the valuation of pension assets to a market-related basis, on which they took a very long time to come to a conclusion. But they are an honourable profession, and they fulfil an important role in relation to all the matters that we have discussed with regard to the Bill.

The crucial point about the clause is that the Government sought to maintain in the Committee stage of the House of Commons that no one would lose as a result of it. The actuarial profession has said that it is impossible to alter pension provisions without making some people worse off. I believe that that is true. The profession criticised Mr Malcolm Wicks for alleging that there were no losers. I shall not repeat the remarks reported in today's Daily Telegraph but, clearly, the situation is one in which the actuaries are right. There are almost certainly bound to be losers.

One of the problems that gave rise to the clause in the first place was the fact that the actuaries were unable to approve a particular set of accounts, if anyone happened to lose as a result of the change. The clause seeks to make provision for modification of subsisting rights. There clearly will be losers. The crucial thing is that we should ensure that there is adequate communication with members of the scheme if any such change is to be made and that the members of the scheme should be clear what has been altered. It may be entirely benevolent, nevertheless it is right that they should be told their rights, should know what is being done to the scheme and, therefore, that the actuaries can act appropriately in that context.

The provisions are basically right, but we need to take account of the fact that some people are likely to lose and of how that is best dealt with. Perhaps the Minister could tell us how the position of those who lose as a result of any change can be protected as far as possible and that it is clear that a decision is taken on a transparent basis. These are not simple matters. The clause runs to a considerable number of pages, but the principles involved are fairly straightforward. The Government are trying to do something that is desirable and it is important that it should be carried out as fairly as possible. I look forward to the Minister's comments.

Lord Oakeshott of Seagrove Bay

Like the actuarial profession, we also support the policy intention behind Clause 251. Indeed, the restrictions have been too tight on minor amendments to pension fund entitlements over the years, so the principle of the clause is absolutely right.

Having said that, it is extraordinary that the Government have put themselves in a position where they receive a letter such as that which we have received from actuaries. Actuaries, by their nature are cautious and measured people. I have been watching them closely in my professional life for about 30 years and I never thought that I would live to see the day where the actuarial profession, as a body, accuses the Government of not being entirely open and honest with the public. That is unfortunate. The effect of this issue has been over-spun and over-hyped. It is important for the legislative process that the record is set straight. The points that the actuaries make seem clear. Inevitably mistakes can be made and things can be put in a long Bill which Ministers in the Commons can get wrong. But in that situation it is important to clarify the matter and it is clear that there will be some losers. I am concerned and this is an obvious opportunity for the Minister to set the record straight. I look forward to her doing so.

Baroness Hollis of Heigham

I shall do my best. I am mindful of the time. I just wish to say a couple of things about what we are doing in general before dealing with the particular issue of actuarial equivalents, upon which noble Lords have focused.>lb/> The noble Lord, Lord Higgins, is right in his explanation of the context of this—the Pickering report—particularly where several schemes are amalgamated, but where those similar broad-brush pension schemes have differences in rules which are trying to be aligned for administrative simplicity and to save administrative costs without undermining the level of benefits going to members. If there is an amalgamation of half a dozen schemes which are all fractionally different, then the implications for administration are cumbersome. So there has been widespread acceptance that we need to address the issue.

As the Committee will know, there are only two big issues: going from a DB to a DC scheme and any sums of money currently in payment to pensioners that are prohibited and for which they have to have individual consent. If 90 per cent of members of a scheme agree to it, then 90 per cent will get it. In the past, two deferred pensioners who were untraceable, out of a scheme of 5,000, could effectively block an entirely sensible and modest change.

7.30 p.m.

Members of the Committee have concentrated on the issue of actuarial equivalence. I think that the understanding placed on the words of my honourable friend the Pensions Minister has been inappropriate. Reading the debate as a whole, one cannot take what he has said to imply what the press headlines have suggested.

At the point at which the change is agreed, there has to be, for the individual member, actuarial equivalence. By definition, that may mean that the individual member is willing to see the benefits for survivors or unmarried partners beefed up at the expense of benefits, possibly even accrual rates, being reduced. But although at that point in time, it is a benefit of actuarial equivalence, it is clear that, over time, that person may lose their partner or spouse. In the longer term, that may not turn out to be the optimum package for the individual member, but when it was decided, it was expected that the actuarial value of each member's accrued rights would be maintained.

All pension schemes, are, to some degree, a lottery with regard to longevity, age at retirement, age at death, and the age at retirement or death of spouses or partners. Obviously, with hindsight, this will affect whether someone gained or lost. The point was clearly established by my honourable friend in another place: at the point when it was taken up, this was a benefit of actuarial equivalence, which should be acceptable to members.

I do not want to say that this has been blown out of all proportion, because clearly it is right that there should be no misunderstanding. That was the context in which that debate took place. I am slightly surprised that there should be any ambiguity about it because how much you get from your pension ultimately depends on how long you live, whether you have a survivor and how long that survivor lives. That cannot be determined at the point at which any of these changes are made.

The way in which we are dealing with issues of consultation and actuarial equivalence has been broadly welcomed. I am sure that this is the right way to proceed, and am glad that these changes have been welcomed across the Committee today.

Lord Oakeshott of Seagrove Bay

We are not here to discuss newspaper headlines but I have here a letter, which I am sure the noble Baroness has read, from the actuarial profession, expressing considerable concern about what was said in the other place and the Government's statement that it was designed to rationalise such rules in ways that produce no losers.

The letter says: In particular we wish to ensure that the Parliamentary debate is fully informed of the important point that individual 'losers' amongst members are bound to arise at times under these proposals". Can the noble Baroness confirm that for us? That would then make it quite clear.

Baroness Hollis of Heigham

I thought that that was what I was saying. Although, at the point of accepting this, the individual member should be assured, as best as can be termed, actuarial equivalence, whether he turns out to be a loser or a gainer will often depend on life circumstances, which none of us has any capacity to forecast. By definition, if some of the changes relate to that, such as my example of survivors' benefits being increased or reduced, then it will depend on whether the individual has a survivor at the point of retirement and how long the survivor lasts after his death.

By definition, one cannot apply hindsight, but in good faith there is meant to be actuarial equivalence when the decision is made. It may advantage some people and not others, but pension schemes as a whole do that, because people cannot predict their own longevity or whether their survivor will enjoy their survivor's benefits. In that sense, I am surprised that the interpretation was given to my honourable friend's remarks, as it is clearly at odds with everything that everyone knows about pensions. But I am happy to give the assurance that the noble Lord seeks. There clearly can be losers, but they are losers that we will know about only at the end of their lives, for the most part—not always, but for the most part—because they are associated with life events.

Lord Higgins

This has been a helpful debate. I welcome the fact that actuaries, together with any other such organisation, prefer to adopt the more open approach. Rather than do deals with the Government behind closed doors—with the government of whatever party, I stress—it is much better that they make representations to the Opposition and the Liberal Democrats, as well as to the Government. That is very much to be welcomed. The other important point is that, when there are specific issues, those people may suggest what amendments could be made—again, not simply dealing with the government of whatever party behind closed doors.

What the Government are trying to do here, which we support, is to bring about a measure of simplification that will mean that the schemes as a whole work better but that the rights of the individuals are protected. It is important that members must be informed beforehand what the proposals are. The trustees will still have to get a certificate from an actuary, but not in precisely the same way as previously, when he had to say that no one lost. That effectively put a stopper on the whole thing. The actuary will sign one that does not say that there are no adverse effects but which contains actuarial equivalents.

Communication is at the heart of that process. We should consider, given the furore, as it might be described, that has arisen about the clause, whether the exact form in which the clause stands is as good as we can produce. If the actuarial profession or any other body has suggestions for improvement between now and Report stage, it would be appropriate to pursue it then. I am sure that the Government would equally wish to take into account any such views. It is important that they are put forward in public—that is very much to be welcomed, and we must see what we can do between now and Report stage.

Clause 251, as amended, agreed to.

The Chairman of Committees

The Committee stands adjourned until Wednesday 13 October at 3.30 p.m.

The Committee adjourned at twenty-two minutes before eight o'clock.