Lords Sitting of 16 February 1995

Preamble
The House met at three of the clock (Prayers having been read earlier at the Judicial Sitting by the Lord Bishop of Portsmouth): The LORD CHANCELLOR on the Woolsack.

Performance Pay: Relevance to Ministers
Lord McCarthy Lord McCarthy asked Her Majesty's Government:
What proposals they will introduce to establish a regular and direct link between the rewards of members of the Government and their contribution to improved levels of performance.
The Ministry of State, Department of Social Security (Lord Mackay of Ardbrecknish): My Lords, the Government have no plans to introduce such a link.
Lord McCarthy: My Lords, I thank the Minister for that reply, which is even more unsatisfactory than that which his noble friend Lord Caithness gave me three years ago. Does he agree that it is disgraceful that the Government are now forcing performance-related pay on to everyone who receives government money, from the Civil Service to the Tate Gallery? They are forcing neurosurgeons, lighthouse keepers and others on to performance-related pay. Apparently, the only group to which that does not apply is the Government. How can that be?
Lord Mackay of Ardbrecknish: My Lords, I am sorry that the noble Lord feels that my performance was not adequate. He has probably given me nothing out of 10 on his score sheet. But, as my noble friend Lord Caithness said when the Question was last asked, the roles of government Ministers would be very difficult to quantify and relate to performance. In any case, unlike most of the other groups that he mentioned, the Government carry a fairly drastic performance-related index, which is a kind of political snakes and ladders. You can climb up the ladder from junior whip to senior whip, to parliamentary under-secretary to minister of state and maybe even higher; then, with a bit of bad luck, you fall off and go down the snake to the Back Benches. That is a fairly dramatic way to judge performance.
Lord Hailsham of Saint Marylebone: My Lords, having regard to the fact that all Ministers of whatever government hold their office during pleasure, that is to say, without any right to notice at all, is not this Question the silliest that has ever been asked in recent years?
Lord Mackay of Ardbrecknish: My Lords, my noble friend makes roughly the same point that I made but is slightly blunter. Indeed, Ministers in another place
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can find themselves having to serve two masters: one, the Prime Minister; and secondly, their electorate. Sometimes that can cause very sudden falls from grace.
Lord Avebury: My Lords, can the Minister say why the Home Secretary and the Minister who deals with prisons are still paid the same amount after having devolved all responsibility for the prison system to Mr. Derek Lewis? If, as he said, it is a game of snakes and ladders, does he agree that the Government should find the nearest snake to slide down?
Lord Mackay of Ardbrecknish: My Lords, I recall that the noble Lord found more or less the same kind of snake as I once found. With regard to his more substantive point about the Home Secretary and Ministers at the Home Office, they take the policy decisions regarding the whole question of penal policy and the Director of the Prison Service runs the service itself. It is a perfectly understandable division of responsibilities.
Lord Boyd-Carpenter: My Lords, will my noble friend confirm that the difficulty in adopting the proposal suggested in the Question is that it would involve paying Ministers enormous increases in salary, which would be rather embarrassing?
Lord Mackay of Ardbrecknish: My Lords, my noble friend makes a very good point. I might have to declare an interest in this matter. If performance were judged on the amount of legislation in this Parliament, for example, I might hit the top of the league.
Lord Eatwell: My Lords, is the Minister aware that the salary of the Governor of the Bank of New Zealand is linked inversely to the rate of inflation? In a week which has seen a sharp rise in inflation in this country, does he agree that it would be appropriate to reduce the Chancellor's salary? Or does he feel that perhaps it would be even more appropriate to reduce the salary of the man who really runs Britain's economic policy; namely, Mr. Eddie George?
Lord Mackay of Ardbrecknish: My Lords, I shall not take any lessons on the levels of inflation from a member of the party opposite, given the fact that for many months now our inflation rate has been at quite historically low levels. When looking for performance indicators, we might, for example, see how successful a Minister is in controlling and reducing public spending. Indeed, the party opposite might consider that the proper indicator is by how much public expenditure has been increased. That is what they would do if ever they had the chance to sit on this side of the House.
Lord Renton: My Lords, is my noble friend aware that the British people will continue to expect Ministers to do what is in the people's interest, irrespective of its effect on the Ministers' interests?
Lord Mackay of Ardbrecknish: My Lords, my noble friend is absolutely right. All Ministers carry out their responsibilities in a way that they believe will further the interests of the British people.
Lord Molloy: My Lords, does the Minister agree that many skilled artisans and professional men and women

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believe that they do not get a fair deal when the work that they do is compared, not necessarily with Ministers, but with some senior civil servants whose rises seem so easy to get?
Lord Mackay of Ardbrecknish: My Lords, I am not entirely sure whether senior civil servants or civil servants generally would quite agree with the noble Lord's remarks. The simple truth is that many people, especially inside their own professions or occupations, feel that there ought to be an element of performance-related pay as otherwise people who do very well are not rewarded over those who do not do very well at all. The idea that the Government have introduced that concept, say, into the National Health Service, is at variance with the facts. For many years consultants have had "merit awards", which they all decide among themselves.
Lord McCarthy: My Lords, do the Government deny that every single voluntary organisation receiving government money, as a condition of continuing to receive that money, now has to introduce some system of appraisal and performance-related pay? They all do it and they all hate it. The only place where it does not apply is in the Government. Is the only argument they can offer that their jobs are uncertain? Everyone's job is uncertain but only the Government have no performance-related pay.
Lord Mackay of Ardbrecknish: My Lords, with due respect to the noble Lord, he overstates his case. In fact, there would be very few people not running to someone like the noble Lord if they suddenly found themselves sacked by evening time. Government Ministers and Members of Parliament are in exactly that position. All Ministers could be out of a job by the end of the evening without recourse to an industrial tribunal or the employment protection that other people have.

Leg Shackles
3.7 p.m.
Lord Dubs Lord Dubs asked Her Majesty's Government:
What action they are taking to prevent the export of leg shackles and other items that might be used to impose degrading and inhuman punishment or to facilitate torture.
The Minister of State, Department of Trade and Industry (Earl Ferrers): My Lords, the export of leg shackles is controlled and export licences would not be granted. It is impossible, of course, to control the use to which perfectly legitimate goods may be put in other countries.
Lord Dubs: My Lords, in view of the "Dispatches" programme on Channel 4 television last month which indicated that leg shackles and electric shock batons were being exported by this country, will the Minister look again at that vile trade and give us an assurance that it will stop immediately?
Earl Ferrers: My Lords, I understand that the Channel 4 programme, to which the noble Lord referred,
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consisted of a person who set up other companies to try to supply various pieces of equipment. He tried to get the Royal Ordnance and ICL Technical Plastics to supply electric batons. The Royal Ordnance offered to supply from abroad but did not do so. ICL Technical Plastics offered to supply various equipments and implied that it could assemble them on its own premises. Hiatts was asked to supply leg irons, neck restraints, gang chains and other items but declined because it considered neck restraints not to be a civilised form of restraint. I understand that that particular programme was designed to try to entrap people and they were not entrapped.
Baroness Jeger: My Lords, can the Minister confirm that this country is not exporting land-mines, which continue to kill and maim indefinitely? We should all be relieved to know that we are not playing any part in the export of those instruments.
Earl Ferrers: My Lords, the export of military equipment is another matter. I can only say that, in general, military equipment is exported only for military purposes and not where it is likely to be used for internal repression.
Lord Ennals: My Lords, having seen the results of some of these torturous weapons and the use made of them in other countries, I must ask why the Government do not decide that Britain should not export such items? Why cannot they end this wicked trade?
Earl Ferrers: My Lords, perhaps the noble Lord, Lord Ennals, did not listen as carefully as he usually does to my initial Answer. The export of leg shackles is controlled and export licences are not granted. On the other hand, one cannot control the purposes for which other perfectly normal pieces of equipment are used in other countries. For example, 5-amp electric flex can be used in a vicious way. Bicycle chains or even cigarettes can be used as elements of torture and it would be wrong to exclude the export of those items.
Lord Peston: My Lords, I am disappointed that the noble Earl is not taking the Question as seriously as he ought. These are such loathsome objects that I would not even suggest that they be used to control English football supporters.
Can the noble Earl explain why objects which are as loathsome as those mentioned can be hidden under the heading, "They are legitimate if they are controlled"? I understand that the noble Earl said that they are controlled. His department should be doing something a lot more positive so that, if for no other reason than our national honour, "Made in England" does not appear on those objects when they are used by repressive regimes abroad.
Earl Ferrers: My Lords, unusually for the noble Lord, Lord Peston, he is being slightly emotive on this subject. He referred to "loathsome objects", and did not say what they were. I said that the export of leg shackles—if that is what he means by "loathsome objects"—is controlled; that export licences would be required and would not be given. I can also say that under the export and controls order, licences are

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required for acoustic devices, for anti-riot shields, for leg irons and shackles, for portable anti-riot devices, for water cannon, for riot control vehicles, and so forth. I cannot understand why the noble Lord, Lord Peston, feels that the Government are encouraging those exports when they are totally and perfectly correctly controlled.
Lord Peston: My Lords, can the noble Earl clarify his answer? Is he saying that the Government have powers to control the export and that the items are not being exported? That is the point at issue. I refer to leg shackles and similar repressive objects. Can the noble Earl assure the House that the British Government are not allowing those things to be exported? That is the only question at issue. It is nothing to do with 5-amp cord or anything like that. It concerns something much more serious.
Earl Ferrers: My Lords, it is difficult to explain to the noble Lord exactly what I mean when I have already said it twice, but I am happy to repeat it for a third time. The export of leg shackles is controlled and export licences would not be given. Full stop. If the noble Lord then asks whether other things are exported from this country which in other circumstances may be used as offensive weapons, I am bound to say that perfectly legitimate items which can be and are exported nevertheless may be used for offensive purposes. We cannot control that.
Lord Dubs: My Lords, will the Minister look again at the transcript of the Channel 4 programme? He will see a quotation from a businessman referring to electric shock weapons where he says,
"We went to China and sold to China with the government's blessing".
Will the Minister look again at the whole issue with specific reference to electric shock batons.
Earl Ferrers: My Lords, the noble Lord, Lord Dubs, should not take every television programme at its face value. Certain people are prepared to make programmes and entrap people into making certain comments. They then broadcast them as programmes in which they purport to show that people are behaving in an untoward way. I explained that that particular programme involved three firms and those firms acquitted themselves reasonably.

Intergovernmental Conference: Agenda
3.15 p.m.
Lord Bruce of Donington Lord Bruce of Donington asked Her Majesty's Government:
What steps they propose to take, prior to the first meeting of the Intergovernmental Conference study group representatives to be held in Messina in June, to ensure that the whole question of a radical review of the present functions, structure and powers of the respective institutions of the European Union is placed firmly on the agenda.
Lord Inglewood: My Lords, a number of agenda items for the Intergovernmental Conference were established in the Maastricht Treaty itself and in
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subsequent European Councils with the unanimous agreement of the member states of the Union. Other items may be added to the agenda.
Lord Bruce of Donington: My Lords, while thanking the noble Lord for that reply, which contains no information whatever, may I draw his attention to the evidence which the Minister of State for the Foreign Office gave to the House of Lords Select Committee on 10th January last as reproduced in the House of Lords Paper No. 19 of this year in which she lists a whole series of matters, at page 16, that will be raised at the conference to which I referred? The only item missing from that list is the item contained in my Question. Will the noble Lord take note of the fact that, throughout the United Kingdom, there is a strong sense of dissatisfaction with the way in which some members of the institutions are behaving? High up in the bureaucracy in the Commission in particular there is a tendency to act like little more than puppets for the French and German Governments.
Lord Inglewood: My Lords, as I explained, certain parts of the agenda for the Intergovernmental Conference are specified in the Maastricht Treaty. There are six items and three others have subsequently been decided on by the European Council. The Government are aware of the comments of the noble Lord, Lord Bruce of Donington, and his views on the activities of the European institutions. They will no doubt give them the weight they consider appropriate in bringing forward proposals at the IGC that they believe will be in the interests of this country as a whole.
Baroness Elles: My Lords, does my noble friend agree that though the noble Lord, Lord Bruce of Donington, is always extremely fair when talking about the other institutions of the Community, nevertheless his attack on members of the Commission is regrettable? We should remember that David Williamson is a leading member of the British Civil Service and is doing an excellent job as Secretary-General.
Lord Inglewood: My Lords, my noble friend Lady Elles is absolutely right. Mr. Williamson is doing a first rate job at the European Commission.
Lord Richard: My Lords, speaking as somebody who was not a puppet of the French or German Governments when he was Commissioner, may I ask whether the Minister is aware that the picture presented by my noble friend of the activities of the European Commission is frankly a travesty and unrecognisable by anyone who has any intimate knowledge of the workings of that institution? Will the Minister confirm that whatever else the Government intend to try to achieve at the IGC, it does not involve the repeal of the Treaty of Rome.
Lord Inglewood: My Lords, I can confirm that.

Rowntree Study: Standards of Living
3.19 p.m.
Lord Dahrendorf Lord Dahrendorf asked Her Majesty's Government:
How they propose to respond to the view arising from the Rowntree Foundation sponsored inquiry into income and wealth that growing inequality in Britain is a competitive handicap and a danger for the economy and for business.
Lord Inglewood: My Lords, government policies provide a firm basis for lasting economic recovery and are the best way to safeguard living standards of all groups, including the least well off. In addition, the Government are providing considerable help for the poor and vulnerable. Extra help, worth more than £1 billion a year in real terms, has been made available to low-income families since the social security reforms of 1988. The 1994 Budget included a package worth around £700 million aimed at getting unemployed people back to work.
Lord Dahrendorf: My Lords, I thank the Minister for that Answer, which clearly addresses itself to one core issue. Is it not, however, a clear finding of the Rowntree study, as well as other studies, that in the medium term the most important instrument for bringing people back to the labour market and away from benefits is education for, on the one hand, pre-school and primary school children and, on the other hand, 16 to 19 year-olds?
Lord Inglewood: My Lords, the noble Lord is correct that both the factors that he mentioned are important in bringing people into the labour market. But it is also important that we are clear that they are by no means the whole story. It is important that we have a labour market which can respond flexibly to the requirements of the world, not merely the single market but the wider world in the post-GATT era. We believe it is necessary to ensure that we have a structurally flexible labour market which will respond to the requirements of commerce and business, because it is commerce and business which provide jobs.
Lord Clark of Kempston: My Lords, does my noble friend agree that it is quite illogical to think that there is any connection between the competitive position of our economy and the so-called difference between the rich and the poor? Does he further agree that one thing that would certainly hit our competitive position in world markets is the adoption of the social chapter? Finally, does he not agree that, compared with the standard of living in 1979, the standard of living today has increased for everyone?
Lord Inglewood: My Lords, I can confirm that the standard of living under this Government is substantially greater than it was under their predecessor.
Lord Eatwell: For everyone, my Lords?
Lord Inglewood: My Lords, across the board. We believe that the best way to increase it is to have a flexible labour market. We further believe that the fossilisation and ossification that would result from the
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imposition of the policies contained in the social chapter would be detrimental to the interests of the British people as a whole.
Lord Jenkins of Putney: My Lords, is it not the case that it is the Government's policy that the poor should have great aspirations and that the trickle-down policy should have a long way to trickle? Should not the Government be congratulated on the remarkable degree to which they have carried out this policy?
Lord Inglewood: My Lords, we believe that the policies we have been pursuing are those which will act to the best benefit of society as a whole.
Lord Skelmersdale: My Lords, is it not a fact that the poverty line is a very arbitrary line? What matters is what a given amount of work in terms of minutes and hours will buy. The cost of a bottle of whisky has fallen substantially over the past 20 years in terms of minutes of work, and other products bought by people—for example, pints of beer—also fall into that category.
Lord Inglewood: My Lords, my noble friend is right that it is the value of what one earns that is crucial. But we must not forget in this debate that there is the problem which must be addressed of those who are at the least prosperous end of the income spectrum. That is why we have focused the efforts that we are making to help people on those whom we consider and identify as being most disadvantaged. That has been the thrust of cur policy and we believe it is an appropriate complement to a policy of encouraging incentives.
Baroness David: My Lords, reverting to the Minister's earlier answer to the noble Lord, Lord Dahrendorf, about nursery education and education for 16 to 19 year-olds, if education is so important to the Government, does the noble Lord not think it very odd that the pay review body's recommendation on teachers' pay has not been followed? A great many children who would have had nursery education in the coming year will not be able to have it as the funding has not been granted.
Lord Inglewood: My Lords, with regard to the detail of the teachers' pay round, that matter is still outstanding. But it is the case that family credit child care allowance will help around 150,000 low-income families to combine work with family responsibility. In addition, there is a £10 top-up for those on family credit working more than 30 hours, announced in the 1994 Budget, which will further help those who wish to combine full-time work with family responsibilities. We believe that this shows the Government's commitment in that direction.
Lord Barnett: My Lords, perhaps I may be allowed to congratulate the noble Lord on carrying out his duties as Deputy Chief Whip which, with all the other work that he does in your Lordships' House, certainly ensures that we get value for money from him, if not from any other Minister. Reverting to the noble Lord's answer to the noble Lord, Lord Clark, that there has been an increase in living standards overall in the past 16 years,

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can he tell us whether in any other developed country over the past 16 years there has not been such an increase?
Lord Inglewood: My Lords, I thank the noble Lord for his kind comments. We could probably agree that the definition of a civilised country is one where the standard of living has gone up.
Lord Rea: My Lords, with regard to the standard of living, does the noble Lord know of important work that has been done at the Trafford Institute of the University of Sussex which shows that there is a greater increase in expectation of life in those developed countries which have the most fair distribution of income as distinct from ours, which has an increasing divide between the extremes of income?
Lord Inglewood: My Lords, I am not aware of the study to which the noble Lord alludes, but I am interested to hear his comments about what it contains.
Lord Hooson: My Lords, does the noble Lord agree that the inequality regarding educational opportunity at the lower end of the spectrum is the key question disturbing people of all parties who have any concern about the future of this country? Is that not what the Rowntree Report is really concentrating on?
Lord Inglewood: My Lords, the Rowntree Report addresses a number of matters. As I said earlier, the matter of education and educational opportunities is exercising the country as a whole. It is because we on these Benches have been concerned about these matters that we have over the past 10 years introduced a number of changes in education which we believe will be to the advantage of the nation as a whole.
Lord Eatwell: My Lords, does the Minister recall that in his Mais Lecture on 4th May 1994 the Chancellor of the Exchequer said:
"The gap between the highest paid and the lowest paid will continue to widen"?
He then said:
"This is inevitable and probably desirable".
Does the Minister agree with the Chancellor of the Exchequer that inequality is set to increase; and how much more inequality does he think is desirable?
Lord Inglewood: My Lords, what is desirable is to improve the lot of all of our citizens, and in particular to improve the lot of those who are least well off. The policies which we on these Benches advocate are ones which will achieve that in the world rather than tinkering along the lines suggested by the noble Lord, Lord Eatwell, which will not create wealth. We cannot help those who are most disadvantaged in society if we destroy wealth. We must apply wealth.
Lord Eatwell: My Lords, am I to take it that the Minister's answer is that he disagrees with the Chancellor of the Exchequer?
Lord Inglewood: No, my Lords, not with the Chancellor of the Exchequer.
Lord Molloy: My Lords, in addition to the foundation mentioned by the noble Lord, Lord Dahrendorf, there are
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many foundations which examine all kinds of issues. Do the Government take notice of any of them? Should they not at least examine their recommendations, or do they regard their work as a waste of time?
Lord Inglewood: No, my Lords. The Government listen; and on the basis of what they have heard they form their policies.
Lord Richard: My Lords, we should not leave this Question without congratulating the Minister on something which he said. We are inventing a new category of people in our society. I think he called them "the least prosperous end of the income spectrum". Is it not a fact that in the old days they were called "the poor"?
Lord Inglewood: Yes, my Lords.

World War II: 50th Anniversary Commemoration
3.30 p.m.
The Lord Privy Seal (Viscount Cranborne): My Lords, with the leave of the House, I should like to make a short statement about the commemoration of the 50th anniversary of the end of the Second World War. A ceremony is to be held in Westminster Hall, when both Houses will attend and Addresses will be presented to Her Majesty the Queen, to which she will reply. The date and time of the event is Friday, 5th May, at noon. It is proposed that a reception be held in the hall after the ceremony.
It is hoped by my noble friend the Lord Chancellor and the Speaker that as many Members of both Houses as possible will participate. It is intended that spouses and other family members will be able to accompany them. Representatives of veterans and other organisations will also be invited.
To help with the planning of this event, a notice will be circulated to all Peers in the next few days asking whether they will be attending and whether they wish to be accompanied by up to two members of their families. If demand for places is high, there may need to be a ballot. I know that all your Lordships will wish to be as helpful as possible and to make the ceremony a memorable one for all who participate.

Crown Agents Bill [H.L.]
Lord Inglewood: My Lords, on behalf of my noble friend Lady Chalker of Wallasey, I beg to introduce a Bill to provide for the vesting of the property, rights and liabilities of the Crown Agents in a company nominated by the Secretary of State, and for the subsequent dissolution of the Crown Agents; and for connected purposes. I beg to move that this Bill be now read a first time.
Moved, That the Bill be now read a first time.—(Lord Inglewood.)
On Question, Bill read a first time, and to be printed.

Accommodation Level Crossings Bill [H.L.]
Read a second time, and referred to the Examiners.
King's College London Bill [H.L.]
Read a second time, and committed to an Unopposed Bill Committee.

Pensions Bill [H.L.]
3.32 p.m.
Lord Mackay of Ardbrecknish: My Lords, I beg to move that the House do now again resolve itself into Committee on this Bill.
Moved, That the House do now again resolve itself into Committee.—(Lord Mackay of Ardbrecknish.)
On Question, Motion agreed to.
House in Committee accordingly.
[The CHAIRMAN OF COMMITTEES in the Chair.]
Clause 44 [Annual Increase in rate of pension]:
Baroness Turner of Camden Baroness Turner of Camden moved Amendment No. 145C:
Page 24, line 21, leave out ("a public service pension scheme or").
The noble Baroness said: With this clause we come to a discussion on indexation of pensions. In a sense this is a probing amendment. Clause 44 refers to annual increases in the rate of pension but for some reason public service pension schemes are omitted from that requirement. It is true that such schemes already largely enjoy total protection against inflation so we seek clarification as to why the exclusion is thought necessary.
Such schemes either comply with the requirement already or they do not. In the former case the public sector schemes already offer something better and perhaps there may be no reason to include the clause in the Bill. However, in future there may be other public sector schemes established which do not have the requirements of some of the existing schemes. If they do not comply with the basic indexation requirement then the Government need to specify and to ensure that there is some provision that they should.
There is no reason to leave out a requirement in relation to public service pension schemes when it comes to indexation simply because a great many of them already meet it. There may be cases in future where schemes are established. It is necessary to ensure that future schemes have such indexation arrangements. Perhaps the Government will tell us why it is necessary to put the exclusion into the Bill. I beg to move.
Lord Mackay of Ardbrecknish: Perhaps I may explain to the noble Baroness, Lady Turner of Camden, why it is not necessary to have these words in the Bill. I believe that she is aware of the reasons because she mentioned them herself. It is quite simply that the increases in public service schemes are already guaranteed in statute.
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The Pensions (Increase) Act 1971 provides the mechanism for uprating pensions payable in the vast majority of public service schemes. Were we to take on board the amendment the interaction of two separate pieces of legislation would only serve to confuse the position. Increases under the Pensions (Increase) Act are linked to the full increase in retail prices which is a level of protection at least as good as the minimum level that the Bill currently seeks to require of private sector pensions. With that explanation I hope that the noble Baroness will be able to withdraw her amendment.
Baroness Turner of Camden: I thank the Minister for that explanation and I am very glad to have it on the record. The matter has been raised with me by certain individuals who are concerned about public service pension schemes. There was some concern that this quite specific exclusion was included in the Bill. In view of the fact that there are already legislative requirements which, I presume, will bind future public service schemes if they are introduced, I beg leave to withdraw the amendment.
Baroness Seear: Did I hear the Minister correctly? He said that the great majority of schemes are covered. Presumably, that means that some are not. It may only be a little one, but we do not want the housemaid's baby argument coming forward all the time. The fact that it is a little one does not make it unimportant.
Lord Mackay of Ardbrecknish: There are indeed very few public service schemes which do not index by RPI. However, they index by 5 per cent. of limited price indexation which, as I said, is at least the minimum requirement in the Bill.
Amendment, by leave, withdrawn.
The Earl of Buckinghamshire The Earl of Buckinghamshire moved Amendment No. 145CA:
Page 24, line 21, leave out from ("scheme") to ("and") in line 22.
The noble Earl said: I wish to remind Members of the Committee that at Second Reading I made mention of my professional interests. I am a director of the Wyatt Company and on 1st March this year I shall become a partner in R. Watson & Sons. I wish to make that point quite clear because there are issues which we shall be discussing this afternoon which have a bearing on my professional life and I do not wish to have to repeat my interests each time I speak.
The amendment deals with limited price indexation for free-standing additional voluntary contributions schemes. As the Bill stands, currently employers make available additional voluntary contributions schemes under the trust arrangements of the occupational pensions arrangement. Free-standing AVCs or additional voluntary contributions schemes, are made available outwith the trust arrangements of the schemes.
The clause requires additional voluntary contributions schemes within the trust document to provide limited price indexation. The Bill as it stands does not require the same conditions to apply to free-standing additional voluntary contributions schemes. It seems to me that all forms of pensions provision should operate on an equal footing. It would certainly provide for a greater degree

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of flexibility and choice in the way in which free-standing additional voluntary contributions schemes are operated when an employee retires than under an additional voluntary contributions scheme. That seems a little odd. I should be grateful if the Minister could tell us why that condition should be applied to one form of additional voluntary contribution, but not to the other. Indeed, I hope that he will go further and accept the amendment. I beg to move.
Lord Mackay of Ardbrecknish: I thank my noble friend for the way in which he introduced this important amendment. One of the great merits of your Lordships' House is that people with real expertise in the areas that we discuss—in this case, pensions—are Members of your Lordship's House and can thus participate in our debates.
It is a regrettable fact that many people still do not make adequate provision for their retirement. We all want to change that position, but, even where provision is made, even quite low inflation can erode the value of a pension over time. People live longer and spend more time drawing their pensions. We believe that indexation is necessary to help to maintain an adequate income stream, protected against possible inflation, throughout retirement.
It is also regrettable that, on the basis of all the evidence that is available, individuals retiring with a pot of money from a money purchase arrangement will, if given the option, use that pot to buy a flat rate but higher starting pension rather than one protected against inflation. We are therefore requiring all occupational pension schemes, both salary-related and money purchase, to provide the level of inflation-proofing that we consider appropriate. By doing so, we are both ensuring protection against inflation and maintaining a level playing field between money purchase and salary-related provision.
However, we have to recognise that there are other circumstances where there is a large element of personal choice. Where individuals are not members of an occupational scheme there is no compulsion on them to save for their retirement. Even where they are members of such a scheme they might feel, for whatever reason, that the benefits provided will not give them an adequate income. We do not want to put in place measures that might risk deterring such individuals from setting aside adequate provision. It is possible that a requirement to index such optional arrangements might have just that effect.
Free-standing additional voluntary contributions fall into that category. They are contributions made (purely on the basis of an individual's choice) to a pension provider to purchase benefits over and above those provided by the occupational scheme to which they belong. Deterring such individuals from setting aside adequate provision for retirement is not in anyone's interests.
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I hope that I have explained the reasoning behind our inclusion of those provisions and why I am not able to accept my noble friend's amendment. I hope that, in the light of that explanation, my noble friend will withdraw his amendment.
The Earl of Clanwilliam: Does my noble friend agree that there is discrimination here in that whereas an employer with in-house AVCs is forced to provide indexation, an individual with a private pension plan and with free-standing provision is not required to have that? Surely that is not fair. It discriminates against in-house AVCs. Surely someone with in-house AVCs should have the same opportunities to arrange a pension as someone with free-standing AVCs.
Lord Mackay of Ardbrecknish: I see my noble friend's argument. It has to be a matter of balance. I think I have explained why we have reached the conclusion that we have about additional contributions that are made by choice. We do not think that they should fall inside the indexation rules whereas I believe that we all agree that other types of pension need to build in a certain amount of inflation-proofing. I repeat that we took that view because we should not like to discourage people from making that additional provision if they choose to do so.
Lord Eatwell: I wonder whether the Minister can clarify his position. When replying to the noble Earl he said that it was terribly important that suitable protection against inflation should be provided. With respect to AVCs, he is saying that that is voluntary and that inflation protection should perhaps not be provided in that case. But, surely, if the requirement to provide at least a minimum degree of indexation were written into law the cost of all AVCs (whether within a company or taken out individually) would be included in the cost of the plan. Consequently, by the noble Earl's amendment we would achieve exactly the objective which the Minister says that he holds.
3.45 p.m.
Lord Mackay of Ardbrecknish: We are going round in a circle now. All that I can do is to repeat in other words what I have already said because the noble Lord's argument is the same as that which the two previous speakers put to me. I have underlined the point, with which I am sure we all agree, that indexation is being required for all occupational pension schemes which have tax-approved status. We are looking at FSAVCs, as they are called. They are voluntary top-ups which people decide to make over and above the indexed benefits of the scheme. So there is that considerable difference. We do not want to do anything that makes such voluntary decisions more expensive or leads to the returns not being so great. That is why we have excluded them from the index-linked provision.
The Earl of Buckinghamshire: I thank the Minister for his kind words about my presence in your Lordships' Chamber. However, I find his arguments against doing what I suggest in relation to free-standing additional voluntary contributions completely circular. If you are going to do that for additional voluntary contributions,

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where a member has totally free choice as to whether to invest in them, the same argument applies to free-standing additional voluntary contributions. I wonder what on earth the reason is for that different treatment. Perhaps I shall find out at a later stage.
In the event, however, I should like to thank the noble Lord, Lord Eatwell, for his support. We share rugby football as an interest, as I note from Dod's Parliamentary Companion, and we now share an interest in free-standing additional voluntary contribution schemes. I thank also my noble friend Lord Clanwilliam. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
The Earl of Lindsey and Abingdon The Earl of Lindsey and Abingdon moved Amendment No. 145D:
Page 24, line 25, at end insert (", being the R.P.I. or 7 per cent. whichever is the lesser").
The noble Earl said: I propose to speak to Amendments Nos. 145D, 145E, 145F and 145G. The purpose of the amendments is to clarify the annual increase under an occupational pension scheme. The present wording of subsections (1) (b), (2) (b) and 4(b) refers to an annual increase of,
"at least the appropriate percentage",
which is specified in another Act. I believe that by incorporating the wording of my amendments we arrive at a more realistic and clearer understanding of what is intended. As stated in the minority Goode Report, it should be borne in mind that wages have risen on average by 9 per cent. and prices by 7 per cent. per annum between 1955 and today. Therefore, I think that providing 7 per cent. is reasonable and affordable. I should like to quote the words of leading actuaries, Bacon & Woodrow, who state:
"if inflation were eliminated, rendering increases to pensioners and deferred pensioners unnecessary, this would have the same effect on costs as the provision of increases to counteract inflation".
I beg to move.
Lord Eatwell: I shall speak to the amendments tabled by the noble Earl and refer also to Amendments Nos. 145G and 145M. The amendments relate to the problem of defining limited price indexation and providing suitable protection for pensioners against inflation.
I shall speak first to Amendment No. 145G which, in effect, places the number 10 where the noble Earl places the number seven. In some cases the choice of number for the minimum increase in indexation that must be provided if the RPI reaches that level is something of an arbitrary exercise. It is important to ensure that reasonable protection for pensioners is provided in circumstances in which the rate of inflation can oscillate widely over relatively short periods of time, even when a government pursue a strongly anti-inflationary policy. For example, if we take the current figure of 5 per cent. for limited price indexation and look at the record since 1987, between 1987 and 1993 the real value of a pension which was increased only by the 5 per cent. required rate would have fallen by nearly 10 per cent. That is in the past six years alone.
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If the required limited price indexation rate were increased to 10, the value of the pension would have been preserved over that period. It is also true that there have been periods, such as under the Chancellorship of the noble and learned Lord, Lord Howe, when inflation reached 20 per cent. In those circumstances, even with the figure of 10, the value of a pension would be eroded. Nonetheless, given the need for reasonable actuarial calculations, it would not be unreasonable to increase the figure to 10 and provide for pensioners that degree of protection.
It might be argued that increasing the figure from five to 10 would lead to a significant increase in the cost of schemes. However, I am advised by actuaries—I must say that, having thumbed through my copy of Teach yourself to be an Actuary, I still have to rely heavily on professional advice; the mysteries of that so-called science seem to verge between astronomy and astrology—that such a change would lead to little increase in cost because the actuarial assumptions associated with schemes which are funded predominantly through equities are that when there is an increase in inflation there would be an increase in the scheme's assets as well as its liabilities.
Broadly, I am advised that the proposals I make in Amendment No. 145G would not add significantly, if at all, to the cost of schemes. It seems that that would be a way in which we could offer greater security to pensioners; and that, after all, is the purpose of the entire Bill.
I shall turn now to Amendment No. 145M. Under the current regulations for limited price indexation, we have a rather more pernicious bias against the pensioner than even this little debate we are having about five, seven or 10. What happens at the moment in respect to pensions that are being paid is that the ceiling on limited price indexation applies year by year. It does not apply to the average rate of inflation over the period in which the pension has been accumulated and is to be paid. The significance of that is serious.
Let us suppose, for example, that in one year there was 20 per cent. inflation—the 1981 experience of the noble and learned Lord, Lord Howe—pensions would then be uprated by 5 per cent. If in the following four or five years there was no inflation, pensions would not be uprated. So the entire increase over the period would just be the 5 per cent. There would no way of recovering the loss of the 15 per cent. which was suffered in the one year of high inflation. If, on the other hand, we could institute the evaluation procedure which is used currently for preserved pensions in deferment and apply it to pensions which are being paid, then because the LPI would be referred to an average over a number of years, those very serious losses which could be sustained from just one year's inflation—an oil price rise or a commodity price rise which would mean that no government could possibly control the rate of inflation in just that one year—the inflationary effects upon pensioners of that burst of inflation would be protected up to the LPI rate, averaged over the appropriate years.

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So I believe that taking the two amendments together—with all due respect to the noble Earl, taking the figure of 10 in Amendment No. 145G—and extending averaging from pensions in deferment to pensions in payment, that would give a much more significant protection against the erosion of the real value of pensions than exists at the moment. I turn again to the cost. With respect to the issue of averaging, once again the arguments I presented previously apply: given the typical actuarial assumptions which are made with respect to funds which, as in the UK, are predominantly equity-based, the cost of introducing this significant increase in protection for pensions would be insignificant.
Lord Dean of Harptree: With all these amendments, I believe that Members in all parts of the Committee will agree that we are trying to strike the right balance between encouraging occupational schemes to develop and providing adequate security for the members of schemes. In my judgment the amendments go too far in the direction of discouraging the development of occupational pension schemes. They are too onerous, particularly when one compares them with the existing statutory obligation which is indexation up to 3 per cent. of an element of the pension.
'The amendments suggest indexation, in one case of up to 7 per cent. and in another of up to 10 per cent. on pensions accruing after 1997. We had a similar argument on Tuesday when I suggested to the Committee that one of the factors we have to bear in mind is that, whereas in previous years many final salary schemes were being set up, there is now a tendency for those to be substituted by money purchase schemes. That suggests strongly that there is a warning light that the conditions for setting up and improving occupational schemes are not as favourable as was once the case.
I remember in reply to that point that the noble Baroness, Lady Hollis, thought that if money purchase schemes became more common they would give less security to members of the schemes. I agree with that. She considered that the conditions should be more onerous. With respect to the noble Baroness, I draw the opposite conclusion. I believe that there is a warning light; that if we make conditions too onerous there will be a risk that the highly satisfactory development in occupational pension schemes during the past 20 or 30 years will diminish.
The Committee will remember that 20 or 30 years ago we talked about occupational pension schemes being overfunded. Indeed, at that time the superannuation funds office had to be extremely vigilant to ensure that the Revenue was not defrauded by overfunding. We have not heard much about overfunding in recent years. Again, that is an example of the less favourable climate in which occupational schemes must now operate.
There are many reasons for that and I do not wish to bore the Committee by going into them at length. One reason is that many more schemes have reached a state of maturity and a growing number of pensions are being paid. The ratio of pensioners to contributors is going against the contributors. That is happening in the
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country as a whole and it is a factor that the Government must take into account in deciding at what age pensions should be paid. Furthermore, we must take into account the fact that employers must make good any shortfall that emerges in the pension scheme.
For those reasons, I believe that a jump from the existing indexation requirement to those suggested in either amendment would be a jump too far.
4 p.m.
The Earl of Buckinghamshire: I agree with the noble Lord, Lord Eatwell, that his actuarial advice is good and that the real long-term cost of the provisions would not increase the long-term cost of a pension fund. However, the implications will run through into the minimum solvency area. There are few insurers in the market to buy out deferred annuities. They will make an assumption that in order to buy out limited price indexation they are using a rate of 5 per cent. as their assumption in the purchase price.
If we move the rate of inflation up to, say, 7 per cent. or 10 per cent., they would probably consider that they too must move up their assumptions of limited price indexation in order to mirror the promise that the noble Lord is trying to put into the Bill. That will automatically drive up the cost of buying out deferred annuities; and that will have an immediate impact back onto minimum solvency. For those reasons primarily, I suggest that the amendments relating to that area should not be accepted. The second matter that I wish to deal with is averaging, which is an extremely interesting concept. I can understand why it is being brought forward. I have recently taken over the running of a scheme which contains such a provision; the rate is 5 per cent. or, if inflation is lower, the average of that period. That is a curious way of looking at the matter from the other side—lower than 5 per cent. The problem the company has is with the administration of that averaging. I shall be interested to hear what the Minister has to say about that. I suspect that when we look at the totality of the pensioners we have to look after, averaging may be administratively complex to put into place. I may be wrong and no doubt someone will tell me that for every administrative problem there is a solution. But on that basis I suggest caution in that area.
Lord Mackay of Ardbrecknish: It is obvious from this short debate that not only do we all accept how vital it is to have a pension when we retire but also to have one that as far as possible keeps in pace with the cost of living. However, a balance must be struck between protection against inflation and the ability of the schemes and the employers who stand behind them to afford such protection. We must not lose sight of the fact that it is an entirely voluntary act on the part of an employer to set up and run an occupational pension scheme. My noble friend Lord Dean of Harptree acknowledged that. Imposing significant extra financial burdens, whether actual or potential, on employers must always carry a risk of deterring them from starting schemes or even continuing to run them. Many of the

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measures introduced by the Bill would impose costs on schemes and employers, so the cost of indexation cannot simply be seen in isolation.
During the past 10 years, inflation has on average been below 5 per cent. We certainly are committed to keeping inflation low. Of course, we cannot offer an absolute guarantee about what will happen in the future, and therefore a limit is needed to give schemes and employers the ability to plan their long-term funding needs with confidence. I am not entirely sure whether the noble Lord, Lord Eatwell, was exposing the fact that his party believes that perhaps if it wins the next election its inflation figures and ranges might be significantly above what we are trying to adhere to. But we believe that our proposed 5 per cent. indexation requirement is the right limit and the right balance. It strikes an appropriate balance between affordability and protection against inflation.
The figure of 7 per cent. given by my noble friend Lord Lindsey and Abingdon would result in wrong signals being sent as to the seriousness of the Government's commitment to keep inflation low. The figure of 10 per cent., which was suggested by the amendment of the noble Lord, Lord Eatwell, would further exacerbate the position. Schemes would have to consider how best to take into account in their funding plans the possibility of higher inflation. Extra costs would thus fall on schemes and employers—costs which, taken with the cumulative effect of other measures, might well have a deterrent effect on scheme provision.
I am not sure whether the noble Lord, Lord Eatwell, wants to continue to speak to actuaries; he referred to them as a cross between astrologers and astronomers. All the actuaries I know are profoundly serious and worryingly clever mathematicians. While the point that he made about young schemes may be true, I believe that the more mature schemes with a larger proportion of pensioners might find the proposal more expensive than he envisaged.
As regards Amendment No. 145M, I must confess that I do not find the detailed working of pensions legislation and pension schemes easy and this amendment was a good example. However, if I understand it correctly—and now I have heard the noble Lord, I believe that I do understand it correctly—I congratulate him on the ingenuity of his approach in trying to get round the minimum ceiling we impose for the indexation of pensions and payment. The amendment would have the effect of altering the way in which indexation increases are calculated. It would change the fixed annual minimum ceiling into a cumulative one, in effect, changing annual indexation into something more akin to the revaluation of deferred pensions. It would allow any "unused" part of a revaluation order in one year (where the RPI was under 5 per cent., or in this case, 10 per cent., I imagine) to count towards an increase in pension in payment in the following year if inflation in that second year was higher than, in my case, 5 per cent. and, in the noble Lord's case, 10 per cent.
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It is an ingenious amendment, but I am sorry to tell the noble Lord that it is not one that we can accept. It would just as much amend the rate of indexation as do some of the other amendments; for example, my noble friend's amendment to get to 7 per cent. As was rightly pointed out by my noble friend Lord Buckinghamshire, it would have quite significant complicating effects on the administration of pension schemes. Schemes would end up giving different increases to different pensioners, depending on when in a year they retired. It would be a recipe for complexity and confusion and could well result in pensioners receiving the wrong rate of pension. It would certainly increase the costs of running a scheme.
Therefore, taken as a whole, the amendments may cause employers to reconsider their pension provision both from the point of view of the cost and the administrative complexity. Such consequences would not be in the interests of anyone. I suspect that, whatever figure we had chosen, the noble Lord would seek to double it in one way or another. The figure that we have chosen is sensible and balanced. It gives protection to pensioners and if we can keep inflation low, that protection will be very substantial indeed; but it should not discourage employers from entering and carrying on important occupational pension schemes. Having heard my arguments and those of other Members of the Committee, I hope that my noble friend will withdraw the amendment.
The Earl of Lindsey and Abingdon: I thank the Minister for that reply. I realise that the schemes are voluntary. But taking all considerations into account I still believe that 7 per cent. is a reasonable figure. With all due respect to the noble Lord, Lord Eatwell, to whom I listened with great interest, I believe that 10 per cent. is slightly excessive. I ask the Minister to refer the matter of indexing to the Government Actuary. In the meantime, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 145E to 145G not moved.]
Clause 44 agreed to.
Clause 45 [Restriction on increase where member is under 55]:
The Earl of Lindsey and Abingdon The Earl of Lindsey and Abingdon moved Amendment No. 145H:
Page 25, line 7, leave out ("55") and insert ("50").
The noble Earl said: In moving this amendment I shall speak also to Amendments Nos. 145J, 145K and 145L. The purpose of the amendments is to draw attention to the fate of the over-50s when they are made redundant through no fault of their own. Employees who have given many years' service and who have contributed to their company pension fund may suddenly find themselves surplus to requirements. It is a fact that with the advance of technology and machinery, people in that age group are more vulnerable and expendable. With a few exceptions, they find it increasingly difficult to obtain alternative employment.
It should be borne in mind that the younger a person is, the cheaper he is for an employer to retain. Therefore, I should like to see a 50 year-old given the same rights as a 55 year-old in relation to indexing. I beg to move.
Baroness Hollis of Heigham: In speaking to this group of amendments, I should like to speak also opposing the Motion that Clause 45 shall stand part of the Bill.
The Bill removes provision whereby RPI increases are not required for members under the age of 55. That exclusion applies unless the member is incapable of full-time work or is retired on ill-health grounds. In any event, the pension has then to be increased at the age of 55 to the rate that it would have been had he been entitled to the increases. Therefore, effectively, the provision simply defers the need to make increases until the age of 55, at which age the pension is increased to the level at which it would have been had the increases applied.
That provision is included in the Bill by the Government because it exists already in public sector schemes. We assume that the Government wish to allow private sector schemes to do the same to avoid the criticism that more onerous obligations are being placed on private sector schemes. However, as in practice virtually no private sector schemes include such a provision, we believe that it is both unnecessary and unjustified. Whatever the original justification, the provision should be abolished for private and public schemes alike. Therefore, we oppose the Question that Clause 45 stand part of the Bill.
Lord Burnham: I must declare a personal interest in that I was made redundant at the age of 54½ Because it turned out that I did not obtain further employment for nearly two years, I took my pension at the age of 55. The pension, which of course is based on the expectation of life, was devalued by almost exactly 50 per cent. because it was taken at that time. Nine years later I rather regret that I took it at that time because the pension that I would have taken had I waited until the age of 65 would have been that much greater.
If a pension is to be taken and can be taken at the age of 50, the actuaries referred to by the noble Lord, Lord Eatwell, would be calculating exactly how much more the discount will be in the pension to be paid at that age and what will continue to be paid for the rest of the pensioner's life. I do not have the figure and I should have checked but that discount must be considerable, bearing in mind the expectation of life of somebody at the age of 50. Therefore, I believe that it is against the interests of a pensioner to be able to take the pension at the age of 50. I understand why my noble friend has moved the amendment, but I believe that he is misguided in doing so.
4.15 p.m.
Lord Mackay of Ardbrecknish: My noble friend Lord Burnham has just made a very good point to balance the understandable anxiety which I have heard from a number of Members of the Committee when discussing this part of the Bill in relation to people who find themselves out of a job in their fifties.
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At the risk of repeating myself—and I promise not to use the word too often—that is a matter about which we must try to find a proper balance and avoid imposing more burdens than are absolutely necessary to provide security, whether from malpractice, from future inflation or early retirement situations. We must be careful not to impose such a burden that it makes it unsustainable for the employer and discourages employers from considering starting schemes.
Of course, with early retirement being increasingly commonplace, we accept that pensions taken before normal retirement age need some degree of protection against inflation. But, as with the level of indexation, we need to strike a balance between that need and affordability. As my noble friend Lord Burnham pointed out, if you are allowed to take your pension earlier, the actuaries do their clever mathematical calculations because they still assume that you will die at the same time that they had previously assumed you would die. Therefore, the payments have to be spread out over a longer period of time and, inevitably, the annual payment is thereby reduced. That must be borne in mind as part of the balance.
Equally, as part of that balance, although we do not require indexation until the age of 55 we have introduced what I hope the Committee will accept is a slight bow in the direction of the argument being put to me this afternoon. When somebody reaches the age of 55 and is retired we require a revaluation of the pension at that age to the level at which it would have been had the increases been payable from the age of 50. Such a provision ensures that a pension receives appropriate protection as normal retirement age approaches, reflecting the fact that there will be increasingly less likelihood of individuals either wanting to continue work or necessarily being able to find appropriately remunerated employment. I should point out to Members of the Committee that our proposals relate to a minimum. If a scheme is in a position to afford indexation from the age of 50, we are not seeking to stop that.
However, requiring indexation from the age of 50, as the amendments propose, would add significant extra cost to schemes—up to a maximum of 8.5 per cent. if inflation were ever again to run at 5 per cent. through the period of retirement between the age of 50 and 55. The amendments could also send a message that those drawing a pension from the age of 50 are no longer considered to be in the employment field. We do not believe that such a message is justified.
I should also point out that our proposed revisions do not apply where early retirement is granted on grounds of ill-health. In such circumstances, we will require a pension to be indexed from the point at which it comes into payment, acknowledging the fact that such pensioners are not likely to be in a position to add to their income by gainful employment. I believe that the amendments do not add significantly to scheme members' protection, but they could possibly add to the

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burden on employers. With that explanation, I hope that my noble friend will feel able to withdraw the amendment.
Baroness Seear: We are discussing an extremely difficult point; indeed, there are strong arguments on both sides. Perhaps I may put into the Minister's mind a suggestion for consideration which is not on the Marshalled List. It is an issue which has been raised in some quarters in connection with the studies of pensions. We know that there is an increasing problem with many people who take early retirement. They find themselves in the position outlined by the noble Lord who retired at the age of nearly 55. Would it not be possible to find a way whereby those people who have taken very early retirement and therefore a very low pension and who go on to reach a ripe old age should receive an increase in their pension, recognising that many others, by the nature of things, will no longer be here? In other words, the burden of cost would be much less.
While one is at the age of 50—and it varies with different people—one may be able to obtain part-time work; indeed, one can certainly do things to save money. However, when one becomes really old one cannot do either. That is when the pinch is very hard. The idea is not in the Bill, but I should like to put it to the Minister for consideration.
Lord Mackay of Ardbrecknish: As usual, the noble Baroness, Lady Seear, is fairly ingenious. I understand her point. As I have explained, I am not an actuary. However, if such a provision were to be built into the legislation—the idea that a person who takes early retirement should, when he reaches the age of 70 or 80, receive an extra boost to his pension—I imagine that the inevitable consequences would be that the actuary would advise the scheme that the starting pension for such a person at the age of 51, 52 or 53 should be even lower. The blunt fact of the matter is that we are discussing pots into which—
Baroness Seear: I must tell the Minister that that might be the choice some people would make—the wish for security when one reaches the stage when one cannot look after oneself. Such people may be able to earn quite a bit when they are younger.
Lord Mackay of Ardbrecknish: I understand the noble Baroness's point that some people may prefer that option. However, we are now beginning to stray into rather deeper water. It is possible—and I would certainly have to take advice—that a scheme could have such a policy within it; but the consequences would be those I outlined. There is much evidence to suggest that people do not think in that way regarding, for example, personal pensions. Indeed, some of them rather like to take a larger amount at the beginning and not bother about inflation. That is a point we shall discuss later.
I see the point that the noble Baroness is seeking to make. I believe that my original point when talking about the clause in general—namely, that if people retire very early and the added years come into the actuarial cost, then the pension they receive is reduced—covers
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the position. As regards the amendment, I suggest that we shall achieve a better balance if we continue along the present route. In other words, when a person reaches the age of 55 his pension is revalued for inflation and indexed thereafter.
I believe that my noble friend wants the process to start at the age of 50 and I understand that the Opposition, who have a Motion tabled against the clause standing part of the Bill, have the same view. As I said, it is a question of balance; it is the balance I have outlined. I recommend the Committee to stick with the Government's sensible conclusion.
The Earl of Lindsey and Abingdon: I am grateful to my noble friend for his response. My original intention when tabling the amendments was to draw the Committee's attentions to the increasing problem which confronts people reaching the age of 50. It is unfortunate that, when companies have to make people redundant, they find it economical to pick those aged of 50 to 60 because of the rising costs of contributions.
Before I withdraw the amendment, I should like to read out another quotation. It comes from a report of the Legal & General insurance company dated 1983 and explains the situation. The report says that,
"underlying funding rates for existing final-salary schemes increase with age. Thus the annual cost for an older employee is significantly greater than for a younger employee".
That is the answer. It is an unfortunate situation that if a company has to get rid of staff it is rather more apt to go for the age group referred to in my amendment. However, in view of the contributions made by Members of the Committee, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 145J to 145L not moved.]
Clause 45 agreed to.
On Question, Whether Clause 46 shall stand part of the Bill?
Lord Eatwell: I oppose Clause 46 standing part of the Bill. The clause is yet another weakening of the process of indexation. It introduces a rather peculiar provision. When trustees have made an increase in a tax year which is greater than that which happens to be required under the limited price indexation legislation, in a following or subsequent year they can offset that increase, thus, so to speak, averaging downwards the overall increase.
Let us suppose that we have a year in which the rate of inflation happens to be 8 per cent. The trustees feel comfortable, given the performance of the fund, with increasing the payment by 8 per cent. Then, in the following year, inflation is 5 per cent. and the trustees apply the LPI of 5 per cent. Very roughly, leaving out the power of compound interest, that would give a 13 per cent. increase over the two-year period and would actually protect entirely against inflation.
However, if the clause stands part of the Bill, then, in the second year, the trustees could offset the extra 3 per cent. they previously gave and give only 2 per cent. Therefore, over the two years, pensioners would only enjoy the LPI even though in particular periods the

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trustees had previously been happy to increase pensions at a greater rate. In other words, the Government are trying to encourage levelling down. That is essentially what the clause seeks to do. There appears to be no sensible justification for that. It would be most helpful if the Minister could provide one.
4.30 p.m.
Lord Mackay of Ardbrecknish: This clause deals with the situation, as the noble Lord, Lord Eatwell, explained, where pensions are increased by more than the minimum required under Clause 44 and under Section 109 of the Pension Schemes Act 1993. It will allow, but not require, a degree of offset against the statutory requirement.
Under the current contracting out system guaranteed minimum pensions and payment must, every tax year, be increased in line with retail price inflation up to a ceiling of 3 per cent. Any increase that schemes make above that level in a tax year can be offset against the 3 per cent. increase in the following tax year. This system will continue for the GMP rights accrued before April 1997. We believe that schemes should continue to be allowed to take account of discretionary increases in providing indexation but this clause will ensure that only increases made above the 3 per cent. required for GMP and above the 5 per cent. required for all rights accrued after the appointed day may be offset against the new indexation requirement.
I should point out that this provision does not require schemes to offset; it only permits them to do so. In addition the ability to offset would only apply to cases where a scheme makes discretionary increases above the statutory minimum. If scheme rules already require, for example, full RPI indexation there will be no offsetting calculation from one year to the next as the scheme is already complying with the statutory requirements in full. Where a scheme makes discretionary awards above the statutory requirement we believe it right that some offsetting should be allowed, particularly where the funding position of the scheme might not be so strong the following year. I move that the clause stand part of the Bill on those grounds.
I believe the noble Lord, Lord Eatwell, said that this is encouraging levelling down. I should have thought that it might encourage schemes to make discretionary additions in the knowledge that if they were wrong, and a scheme was not in such good form the following year, they could make this discretionary offsetting. If we go down the road of not allowing them to do that, I suggest they will be more reluctant to use their original discretion.
Clause 46 agreed to.
Clause 47 [Sections 44 to 46: supplementary]:
Lord Eatwell Lord Eatwell moved Amendment No. 145M:
Page 26, line 23, leave out from ("percentage"') to end of line 27 and insert ("means the percentage increase in the appropriate revaluation percentage for the revaluation period which is the same length as the payment period for a pension as compared to the appropriate revaluation percentage for the payment period for that pension in the preceding year.
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"payment period", in relation to an increase in the whole or part of the annual rate of a pension, means the period from the appointed day or the date on which that pension was first paid, whichever is the later, to the last calendar year before the date upon which the increase is to be made.").
The noble Lord said: I refer to the short debate we had earlier on Amendment No. 145M because it seems to me that the arguments that were put against the amendment were not satisfactory except in one important case. The first argument against it, put forward by the noble Lord, Lord Dean of Harptree, and by the Minister, was that it would be terribly expensive and a burden on the scheme. That argument was refuted by the noble Earl, Lord Buckinghamshire, who pointed out that there would not be any increase in actuarial expense as a result of this averaging technique.
Secondly, the Minister said—perhaps the adjective I should use here is "cheekily"—that over the past five years inflation had been on average below 5 per cent. He is, of course, quite right that it has been on average below 5 per cent. but it has not been below 5 per cent. in every year. It is because the calculation of increases is not allowed to be averaged, as the Minister was doing, that the loss to pensioners would over the past five years have been 10 per cent. —a little less than 10 per cent. —of the real value of their pensions. His comment that inflation has been below 5 per cent. in the past five years effectively makes my case.
The third argument made against this amendment by both the noble Lord, Lord Dean of Harptree, and again by the Minister, was that it would be terribly complicated and would increase costs. But neither of them explained why it is perfectly possible to allow averaging in the case of pensions in deferment, and why that is not complicated, but why it would be complicated to increase pensions in payment. Why is it allowed and indeed supported by the Government in one case but not in the other?
I found those arguments about increased costs—the Minister accepted my point about averaging, which was nice of him—and the argument about complications as compared with deferred pensions to be entirely unsatisfactory. The single powerful argument was that put forward by the noble Earl, Lord Buckinghamshire, when he referred to the implications of averaging for the minimum solvency requirement. With that argument I agree.
The Committee will discover that later on this evening I intend to argue that the minimum solvency requirement is creating a major distortion in the entire attempt to create protection for pensions, and high quality pensions, in this country. Here is one of the examples of the distortion that the minimum solvency requirement is introducing into our attempt to provide protection against the effects of inflation.
I ask the Minister to take these arguments back, particularly after we have had the chance to review the issue of the minimum solvency requirement, to consider them carefully and perhaps to come back with some

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proposal which will protect pensions by averaging inflation rates in future years. I beg leave to withdraw the amendment.
The Deputy Chairman of Committees (Lord Strabolgi): The noble Lord must move the amendment at this stage.
Lord Eatwell: Thank you. That is kind. I beg to move.
Lord Mackay of Ardbrecknish: I must say I am confused. I just about need an actuary to keep me right. We seem to be having a second bite at this particular cherry. I thought I had made my position clear the first time round. This is a matter of balance. Quite clearly the noble Lord, Lord Eatwell, feels that the balance should be a little more in one direction than do I and some of my noble friends who support me. As I said, of course we want to try to ensure that there are safeguards against inflation, as indeed we have done over the past few years. That is in contrast to when the Party opposite was in Government and there were no requirements to index pensions, or as regards the rights of early leavers and other such matters. Pensions continue to improve. I believe we have an improvement in the Bill as regards the minimum requirement being what is called the LPI, which is the RPI or 5 per cent., whichever is the lesser. I believe that is a sensible and balanced requirement to put into the Bill. I am not sure whether the noble Lord, Lord Eatwell, is withdrawing his amendment but if he is not withdrawing it I would certainly invite my noble friends to support me in the Division Lobby.
Lord Eatwell: I am sorry for all the confusion. I was perhaps trying to hurry things along. I ask the noble Lord to examine, at his leisure, the arguments in Hansard when he has the opportunity after the debate and to consider some of the arguments put forward. In the meantime, at this juncture I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 47 agreed to.
Clause 48 [Section 44: end of annual increase in GMP]:
On Question, Whether Clause 48 shall stand part of the Bill?
Baroness Turner of Camden: I rise to oppose the Question that this clause shall stand part of the Bill because I am rather unhappy about it. I hope that in the course of the debate the Government will perhaps explain why it is in the Bill.
As I understand the position from the Notes on Clauses which were kindly supplied, the intention of the clause is to restrict increases in the guaranteed minimum pension as a result of the changes introduced by Clause 44, which we have already discussed. As we know, that clause provides for an annual increase in the rate of a pension under an occupational pension scheme by a prescribed appropriate percentage, which is presumably the RPI.
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At present, guaranteed minimum pensions must be increased in line with a formula in the Pension Schemes Act. What bothers me is that this clause as it stands could worsen the position of people who are among the lower paid. If people belong to a good occupational scheme they will have good protection, and in many instances are likely to have an index-linked pension. If the rate of increase in GMPs is removed in the future the people who are likely to suffer are those for whom the GMP is the major element in their pension.
We shall discuss the whole matter of the GMP, and the Government's desire to do away with it altogether, under another part of the Bill, and no doubt we shall wish to raise a few issues then because we are not happy about that. In the meantime, I am worried about a provision which I believe will impact unfairly on poorly paid pensioners. For them, the certainty of statutory provision which exists at the moment is being removed. They could be significantly disadvantaged as a result.
Furthermore, it appears that not all employers are happy about it. I note from some briefing that I have received about the LPI that some employers fear that the LPI will add to costs for defined benefit schemes, especially when coupled with the removal of the guaranteed minimum pension element for accruals after April 1997. They foresee added costs to them as a result of this proposal.
I hope that the Minister will be able to satisfy this side of the Chamber that the intention is not, as seems to me to be the case, significantly to worsen the position for the poorer paid pensioner.
Lord Mackay of Ardbrecknish: Clause 48 makes consequential amendments to Section 109 of the Pension Schemes Act 1993 as a result of the changes proposed under Clause 44 of the Bill.
Under the existing arrangements contracted out occupational pension schemes must increase that part of the guaranteed minimum pension element of an individual's occupational pension accrued since the beginning of the 1988–89 income tax year. The degree of inflation-proofing is limited to the increase in the RPI for the relevant period or 3 per cent, whichever is less. But from April 1997, Clause 44 requires occupational schemes to increase all of the pension entitlement accrued from that date by the rate of inflation up to 5 per cent. a year.
Under the new contracting out provisions guaranteed minimum pensions will cease to accrue from April 1997, but pre-April 1997 guaranteed minimum pension accruals will continue to be subject to inflation proofing of up to 3 per cent. by pension schemes.
The amendments to Section 109 will therefore restrict increases in an individual's guaranteed minimum pension entitlement to those earned between the tax years 1988–89 and 1996v97, the last tax year before the commencement of Clause 44. Thereafter, increases in respect of occupational pension rights will be made in accordance with the provisions of Clause 44.
I hope that with that explanation I can reassure the noble Baroness.
Baroness Turner of Camden: I am very much obliged to the Minister for that explanation. I still feel

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unhappy about the Government's attitude to GMPs. We shall no doubt discuss that matter when the appropriate clauses—Clauses 122 onwards—are before the Committee. In the meantime, I shall look closely in Hansard tomorrow at the assurances given by the Minister. I shall not press my opposition to the clause at this stage.
Clause 48 agreed to.
4.45 p.m.
Clause 49 [Minimum solvency requirement]:
The Deputy Chairman of Committees: I have to inform the Committee that if Amendment No. 145N is agreed to, I cannot call Amendment No. 145NA.
Lord Eatwell Lord Eatwell moved Amendment No. 145N:
Page 27, line 9, leave out subsection (1) and insert:
("( ) Every occupational pension scheme to which this section applies is subject to a requirement (referred to in this Part as "the minimum contribution requirement ") that the contributions paid to the scheme by the employer, after taking account of any members' contributions required by the rules, shall not be less than those which will be sufficient to meet the cost of providing benefits under the rules of the scheme for its members.").
The noble Lord said: In moving Amendment No. 145N I shall also discuss a series of consequential amendments—Amendments Nos. 145P, 145Q, 145R, 145S, 145T, 145TA, 145U, 145V, 145X, 145Y, 145YA, 145YB, 145YC, 145YE, 145YG, 163BA and 184G. Members of the Committee may have guessed by this time that this will be a rather wide-ranging discussion.
Perhaps I may remove from the grouping with which the Committee has been provided Amendments Nos. 145W and 145YH, which do not belong in the grouping and would be more appropriately considered later. I have given the Minister notice of my intention.
I must also apologise to the Committee for the introduction of a correction to Amendment No. 145N, of which I informed the Minister earlier today. In the final line of the amendment, as it appears on the Marshalled List, the word "active" should be removed so that the amendment applies to all members and not merely to active members of a scheme.
I shall turn to the full significance of Amendment No. 145N and the consequential amendments in a moment. However, I wish first to discuss the position which the Government have taken in this section of the Bill, which seeks to establish a minimum solvency requirement which must be met by appropriate schemes. This is a major innovation in the Bill. I suggest to the Committee that the Government have not got it quite right. I wish therefore to examine the rationale for a minimum solvency requirement (MSR) with some care, as well as the Government's attempt to establish an MSR as set out in Clauses 49 to 54 of the Bill before us.
I shall pose a number of questions to the Government in an attempt to discover the rationale of the approach they have taken in the Bill. I shall suggest that there are serious questions which need to be asked about the formulation of the MSR, questions so serious that they merit the Government taking away this section of the Bill and thinking again. I was intrigued to receive, just
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before I stood up to speak, a briefing from the National Association of Pension Funds which broadly supports the position which I take this afternoon.
The problem that the MSR seeks to solve is clear. It is a problem well worth solving, and the Government are to be commended for their attempt to find a solution, even though I believe that they have failed in the attempt. The problem is how to provide security for the members of an occupational pension scheme—whether pensioners, active members or deferred pensioners—when the employer who is the sponsor of the scheme becomes insolvent.
The answer which the Goode Committee provided to the problem, which the Government have accepted, is that the scheme should meet a minimum solvency requirement. The case put by Goode is as follows:
"Where there is a risk, however small, of the employer's insolvency, funding will meet the requirements of benefit security only if at all times"—
and I stress "at all times"—
"the assets of the scheme are sufficient to cover its liabilities … a minimum solvency standard [is required] in order to ensure that the rights of scheme members are adequately protected against the insolvency of the employer".
It is that point and the series of serious connected problems which arise that the Government appear to have failed to solve. The key to all the Government's difficulties is the fact that the solvency of a scheme on an ongoing basis and the solvency of the scheme on the basis of immediate discontinuance are totally different. The reason why the solvency of a scheme on an ongoing basis is different from a scheme on discontinuance is as follows. On an ongoing basis, the solvency of the scheme is defined by the relationship between the assets of the scheme and the projected benefits for service to date—its liabilities. The task of the actuary is to assess on the basis of reasonable probabilities the best mix of assets; that is, the best investment strategy to meet the liabilities of the fund.
Typically, such a strategy will involve a substantial investment in equities since the return on equities, although subject to fluctuation and therefore subject to some risk, has greatly exceeded the return on other financial assets over the past several decades. In fact, the Goode Report tells us that on average only about 11 per cent. of the assets of UK pension funds are held in gilts, and the remainder are primarily in equities with, of course, some cash. That is the ongoing evaluation. On the basis of immediate discontinuance, the solvency of the scheme is defined as the cost of buying an insured non-profit annuity for pensioners and deferred pensioners. Such annuities will provide an absolutely certain return compared with the probable, but not totally certain, return on equities. There we have a dilemma, with the ongoing scheme evaluated in terms of equity and the discontinuance scheme evaluated in terms of the insured non-profit annuity which gives certainty.
The Goode Report summed up the dilemma as follows:
"Schemes which are comfortably funded on an ongoing basis may well have insufficient assets to meet their discontinuance liabilities by the purchase of annuities. In an ongoing fund even sharp fluctuations on the price of equities at a particular time are of little

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significance, since values are based on the anticipated income stream of a notional portfolio over the life of the scheme. But where an ongoing scheme has to be valued for testing its solvency on a discontinuance basis, the relevant figure is the market value of the particular investments at the time of the valuation. If there has been a sharp fall in the market, the solvency of the scheme will be correspondingly reduced. At the same time, the cost of purchasing annuities is not responsive to variations in the market value of the equity-oriented portfolio of a typical ongoing scheme".
Added to the difficulty of the fluctuations of equity is the fact that the market for insured annuities is extremely thin and therefore the purchase is likely to be very expensive indeed.
Let us remember that the whole objective of the MSR is to ensure that schemes are solvent on discontinuance. It is a kind of snapshot test: at every moment those schemes must be solvent on discontinuance. Let us suppose that schemes were indeed required to be truly solvent—sufficient to purchase insured annuities which cover promised benefits (that is, to meet what I call the true MSR) —then, as Goode recognises, serious problems would be created for the pensions industry. The Goode Report states:
"[The true MSR] could force intrinsically healthy schemes to reduce benefits and increase contributions substantially in order to be able to meet liabilities on a hypothetical discontinuance which in the ordinary way would be very unlikely to occur. A scheme's investment managers might feel constrained to move from an equity-based to a fixed-interest or index-linked portfolio so as to be certain of covering its wind-up liabilities, with the likelihood that over the long term it would lose both income and the prospects of capital growth, and benefits would go down".
So there we have it: a true solvency—a certainty of solvency—will result in higher costs and lower benefits.
Given this major difficulty with the imposition of a true MSR, it might have been expected that the Goode Committee and the Government—they have followed broadly the approach of the Goode Committee in this matter—would have sought new ways to provide the security for pensioners which we all seek. But they did not. Instead of looking for new ways to solve the problem they decided to stick with the idea of the MSR and simply watered down the definition of solvency. Even this afternoon, the noble Lord, Lord Mackay, will move new amendments to the Bill on Clauses 50 and 51 which will yet further water down the strength of the solvency requirement. I believe that the result before us has all the disadvantages of the true MSR—higher costs, lower benefits—and few of its advantages. The MSR, as now defined, does not guarantee the solvency of a pension scheme. Yet it is likely to result in significant distortions of the investment strategy of pension funds to the detriment of employers and members.
How does the Government's minimum solvency requirement—I shall call it the false minimum solvency requirement—differ from the true insured annuity MSR? The Government have decided to define liabilities on the basis of the so-called cash equivalent of benefits of the pension fund, typically determined with respect to the interest on long-term gilts. At a later stage the Government weakened that position still further by permitting "very large schemes", as they called them, to evaluate 25 per cent. of their liabilities to existing pensioners with respect to the rate of return on equities—a rate of return typically higher than on gilts.
That further lowered the cash equivalence. However, the vital point to make is that that cash equivalence will not typically be enough to purchase an insured annuity. By that definition, the scheme will not be truly solvent. This is the first vital failing of the government scheme. On 8th December last year the noble Lord, Lord Mackay, wrote to my noble friend Lady Hollis in the following terms:
"Our original proposals envisaged that pensioner liabilities would be valued by reference to the returns on gilt-edged securities. This would provide a reasonable degree of assurance that if their sponsoring employer were to cease trading and the scheme be wound up, benefits could be secured through the purchase of insurance annuities".
I am afraid that that statement is simply false. It is made more false when the calculation of cash equivalence is weakened to include a notional equity return. That is the first major failing of the Government's proposals which must be corrected. The MSR does not guarantee solvency, and it is fundamentally misleading to suggest that it does. That point was made most forcefully at Second Reading by the noble Earl, Lord Buckinghamshire, who suggested, quite rightly, that the Government's requirement is not a minimum solvency requirement but a minimum funding requirement. The noble Earl said:
"It has never been a minimum solvency requirement".— [Official Report, 24/1/95; col. 1021.]
The noble Earl's position has been supported by the Institute of Actuaries and the Faculty of Actuaries. They have all said that this is not a minimum solvency requirement and it is misleading to call it so.
Have the Government made any estimate of the scale of the shortfall that their weakening of the minimum solvency requirement will produce? Can the Minister tell us what is the typical scale of insolvency which will result from the Government's minimum solvency scheme? At the very least, perhaps I may suggest that the Government must change the name of that requirement. The idea of minimum solvency creates a totally false impression. It will undoubtedly encourage some trustees to fund schemes in a manner which satisfies only the false MSR. That is the first major failing which I believe may well exist within the definition of the minimum solvency requirement.
The second major failing of the Government's false MSR is that it is likely to produce many of the undesirable changes in investment strategy—higher contributions and lower benefits—which the Goode Committee associated with the true MSR. The problem was pinpointed again by our local hero, the noble Earl, Lord Buckinghamshire. At Second Reading he pointed out that even the false MSR (as I have called it) as defined by the Government is likely to result in a major change in the pattern of investments from equities to gilts. That position is also supported by the CBI. That point has been reinforced by my conversations with an actuary responsible for a very large pension fund of one of Britain's biggest companies, who assured me that a significant switch in investment strategy in that fund would be necessary, with higher costs and pressure on benefits.
Have the Government made any estimate whatsoever of the likely change in investment patterns as a result of

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introducing their MSR? The Government have, I know, provided estimates of the cost involved in implementing the MSR. Therefore, because they have estimated the costs, they must have made some assumptions about the change in investment policy. What are those assumptions, and on what research findings are they based?
Moreover, have the Government made any calculations of the likely impact of the proposed contributions schedules on the investment patterns of schemes through time? If, for example, we suppose that the MSR as defined by the Government had been in place for the past 10 years, many of the country's well managed pension funds would have oscillated around the MSR, swinging wildly from 80 per cent. fulfilment in one year to 120 per cent. in the next year, as equity prices fluctuate. It is not at all clear that the Government's proposals for smoothing asset values will entirely take care of that problem. As the noble Earl, Lord Buckinghamshire, said at Second Reading:
"the requirement to certify a contributions schedule as sufficient to secure solvency over a prescribed period will be totally unworkable".—[Official Report, 24/1/95; col. 1021.]
That leads me on to the third major problem with the Government's proposals. Pension funds account for nearly half the equity investment in the UK stock market. A significant swing out of equity into gilts, even when extended over the transition period which is likely to follow the imposition of the MSR is likely to cause a significant fall in UK equities. It certainly will relative to the levels they would otherwise have obtained. Is that what the Government want?
Of course, the shifts into gilts will make it easier for the Government to fund their deficit, but surely the distortion of the equity and gilts markets is too high a price just to help pay for Mr. Clarke's profligacy. I am sorry, that was a cheap shot.
Let us get back to the serious business. We are distorting the structure of gilts in equity markets. What are the Government's estimates of the likely impact on equity in gilts markets? Surely, they must have made them if they are going to create that kind of distortion. What, for example, is the likely effect on the venture capital market, which is at the margin of more risky investment strategies and therefore likely to be the first to be abandoned? Yet it is the venture capital market that the Chancellor, by other tax concessions, has been trying to encourage, whereas the MSR will destroy it.
To sum up, it seems that the Government's proposed MSR is seriously flawed. It is not a solvency standard at all and it is misleading to label it so. It is likely to increase costs and reduce benefits of pension schemes. It is likely to cause macro-economic disruption. Surely that requires looking at again.
The amendment which I propose is, I confess, a tentative foray into that complex area. Nevertheless, I believe that it provides the skeleton of a truly viable alternative to the flawed minimum solvency requirement approach. I am quite ready to admit that some of the amendments within the group are not technically entirely satisfactory, but they are there to give the Committee and the Government an overall view of an
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alternative approach to this difficult problem. I am interested to see that the National Association of Pension Funds supports it broadly.
The essential idea is that the pensioner is best protected by the enforcement of best practice funding standards on an ongoing basis. If we examine the best practice UK pension funds, we find that they are well funded and are seldom likely to infringe reasonable solvency standards. We propose a minimum contributions requirement, the calculation of which is to be defined in regulations in line with the actuarial analysis of best investment practice in ongoing schemes.
Definition of the minimum contributions requirement in this manner will immediately overcome the problem of schemes being forced to adopt investment strategies which reduce benefits and raise costs. Moreover, it will catch those rogues whose contributions are too low—he main object, after all, of this entire exercise. Finally, it will greatly economise on actuarial effort, though perhaps lower some actuarial incomes. The actuary will be required only to perform the calculations associated with the best practice investment strategy which he or she should be making anyway.
Of course, it may be objected that, even in the case of best practice contributions and investment strategies, there may still be a risk that at any one moment in a fund with a large equity component assets will be insufficient to cover the benefits defined by the rules of the scheme, if that just happens to be the moment that the employer goes broke. That is the problem of the snapshot.
The way to a solution to the problem has been proposed by the noble Lord, Lord Mackay., in his letter of 8th December to my noble friend Lady Hollis. In it he points out that with respect to large schemes,
"such schemes, if their sponsoring employer went into liquidation, would have to run on as closed funds".
There is no mention any more of insured annuities. They would be run on as closed funds.
"They would have the administrative infrastructure to do so. They would, realistically, be able to run on … delivering pension benefits as they fall due—reliably and cost efficiently".
That is what the noble Lord, Lord Mackay, wrote. If that is right, why are we making all this fuss about cash equivalents and wind-up values? If the Government see the schemes of defunct employers as ongoing, why are they then not valued on an ongoing basis?
Actually, I am not as confident as the noble Lord, Lord Mackay, that trustees would always be willing to take up the long-term responsibilities for a closed fund which may extend way beyond the collapse of a firm. Be that as it may, the Minister has opened up an important aspect of a fruitful approach to the problem of pensioner security, for what is true for large funds can be true for small funds too. All that is necessary for the smaller funds is that they be grouped together as closed funds, combined in a central discontinuance fund.
The Goode Committee examined the possibility of establishing a central discontinuance fund and rejected it. I must say that I find its arguments rather unconvincing. Its main objection was that the fund, by adopting an ongoing investment strategy with a significant equity component, would necessarily have

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some risk attached to it. That is true, but if the fund is taking over schemes which have obeyed the best practice minimum contributions requirement and itself obeys the minimum contributions requirement, the risk would seem to be minimised, as Goode admitted; and, as the noble Lord, Lord Mackay, confidently says in his letter, the schemes will be run "reliably and cost efficiently".
Have the Government studied seriously the possibility of establishing a central discontinuance fund? Have they studied the experience of the Pension Benefit Guaranty Corporation in the United States which does that job? If so, what are their conclusions?
I am well aware that even a well-run central discontinuance fund must have an ultimate guarantor if risk is to be entirely eliminated. That could be achieved by a very small levy on existing funds, rather like the bonding scheme for travel agents. Will the Government give serious consideration to the establishment of a central discontinuance fund?
Finally, our proposal for the minimum contributions requirement has another important advantage. At present all money purchase schemes impose all the risk on the employee, since there is no defined benefit and, therefore, there can be no notion of funding or solvency. With best actuarial practice defining minimum contributions requirements for defined benefit schemes in the way that I have described, the regulator could determine a reasonable average of the minimum contributions requirement which would then be applied to money purchase schemes. Those would be the normal best practice contributions made. The employer would be required to make the minimum contributions, but would still, of course, enjoy the advantage of the absence of risk.
I apologise for taking so much of the Committee's time over the issue, but the minimum solvency requirement is a central part of the Bill and distorts and deforms aspects quite far distant from these clauses in the Bill. I believe that we must pursue two separate but equally important tasks in the discussion of the amendments. First, the Committee must subject the Government's proposals to careful scrutiny, which I believe that they desperately need. In that sense, this is a probing amendment. It seems clear that the watered down minimum solvency requirement that we have at the moment is the worst of all worlds. Secondly, I hope that the Committee will be ready to consider the broad brush merits of the alternative approach to pensioner security by means of a minimum contributions requirement, which I have proposed. I beg to move.
Lord Ezra: As the noble Lord, Lord Eatwell, said before he sat down, this is perhaps one of the most crucial elements in the Bill that we are considering. We are indebted to him for the clarity with which he has set the scene. In my opinion, he has made it much easier for us to debate the underlying issues of this very complex matter.
The noble Lord identified three issues about which many of us were concerned. We expressed that concern at Second Reading. The noble Lord referred in particular
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to the noble Earl, Lord Buckinghamshire. On this side of the Committee we have been most anxious about the way in which the modified MSR, which the Government introduced following the Goode Report, gives and could give a misleading impression to members about solvency which might not exist in the strict meaning of the term. We feel that either the word "funding" or "contribution"—or some other term—should be introduced. That is the first issue to which we should put our minds.
The second issue of concern—my noble friend Lady Seear emphasised this point in her Second Reading speech—was that the way in which this provision is to operate under the Government's proposals could lead to a fundamental shift from equity to gilt investment. The repercussions of that could go way beyond the pension funds themselves. It could have a major economic impact on the country at large. The massive contribution that pension funds make to equity investment is of vital importance. It should not be any part of the Bill to diminish that. On the contrary, it would be better if it could be increased. That is another aspect.
The third aspect mentioned by the noble Lord and which I thought very interesting was the possibility of a discontinuance fund. If we limit the burdens on employers, as we are trying to do by not having them over-fund the schemes in order to meet the minimum solvency requirement, there must be some safeguard. That safeguard, particularly for smaller firms, could well be a discontinuance fund.
The noble Lord set the scene for three vital aspects of this clause which merit very detailed consideration. I am glad he said that his amendment is basically a probing amendment. I believe that the Committee will have many views on it. I am much obliged to him for the way in which he introduced this part of the debate.
5.15 p.m.
The Earl of Buckinghamshire: I almost blush to hear the references to myself. I particularly liked the reference to being the local hero. I wish that I had the same returns on my investments as the film of that name produced. I should also like to thank the noble Lord, Lord Eatwell, for an extremely thorough resume of the situation facing the Government and everybody in the industry. His was an interesting and extremely innovative approach which has considerable merit. At this point I should say that Hansard will probably come back and bite me at the next meeting of the Committee or at Report stage. Nevertheless, I feel that it was an extremely interesting and innovative approach.
I have a twofold difficulty with this provision. First, I feel that members have a real expectation that promises will be met. That point was very adequately covered by the noble Lord. Members cannot understand why a scheme which is solvent on an ongoing basis should suddenly become insolvent on wind-up. Being very sympathetic to that view, I can quite understand why they think in that way: the situation does not seem very rational. If I understand him correctly, the noble Lord, Lord Eatwell, suggests that a way round that difficulty might be a central discontinuance fund, as in the United States. I thought I had heard a whisper that

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the fund was going bust but that can be verified; my American friends will take me to task if that is not true. However, I should like to have a response from the Minister on that point.
With regard to this being a flawed MSR, my comments at Second Reading did not imply that it was flawed but simply that the wrong word was used. The word should be "funding" instead of "solvency". I did not say that it was flawed. If I did, I should like to take that remark back—at least a little bit.
I feel that perhaps I owe my noble friend the Minister an apology in that I did not bring forward an amendment at this stage to deal with the wording: "solvency" or "funding". I am afraid that the parliamentary draftsman who is helping me on this matter just ran out of steam in view of all the other amendments that we are having to put forward.
There is another issue. We have quoted the professions—the actuaries—and their views. I recall that the noble Baroness, Lady Hollis, spoke at Second Reading about a well known firm of actuaries who said that the Government's new MSR was totally meaningless or ineffectual. I am sure that that can be checked precisely in Hansard. Interestingly enough, I have another quote from the same firm of actuaries, but probably from a different actuary, to say:
"Little by little the solvency proposal is being turned into something sensible and practical".
That tells me that this is an immensely difficult issue on which there will be possibly no common agreement as we move forward.
In conclusion, I believe that the proposals put forward should be considered by my noble friend the Minister. The question of the MSR, which will be debated with other amendments, particularly in the amendments of the noble Lord, Lord Marsh, may have a greater impact than we anticipate. It may be that we do not welcome the impact because of the implied switch from equities to gilts. But that is something that we still need to see. We do not know what will happen as MSR comes into application.
Lord Mackay of Ardbrecknish: As the noble Lord, Lord Eatwell, acknowledged, this is a very complicated issue and yet a very important one. I apologise in advance to the Committee because I shall speak at some length. The subject is serious enough for me to try to address two matters in the course of my response. First, I want to give my views on the minimum contribution requirement outlined by the noble Lord, Lord Eatwell. At the same time I shall try to explain the reasoning behind the minimum solvency requirement and respond to some of the questions and criticisms which have been raised in that regard. Perhaps the easiest matter to respond to is the point made by my noble friend Lord Buckinghamshire about "funding" or "solvency". That is a well balanced argument and I look forward to whatever amendment that he decides to table.
I shall start by looking at the group of amendments which would introduce the minimum contribution requirement. The noble Baroness, Lady Hollis, said at Second Reading that the Opposition would:
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"seek to ensure that minimum solvency means — the ability to secure the pension promise".— (Official Report, 24/1/95; col. 981]
We have here a confusing combination of the proposed minimum contribution requirement and the minimum solvency requirement. But I accept that the noble Lord, Lord Eatwell, indicated that this was by way of probing this specific issue and he was putting forward his suggestion as an alternative to give us, so to speak, something to chew on.
If we look at the minimum contribution requirement, it seems that schemes will be required to pay contributions at a level that would enable them to meet members' benefits. However, given that that is essentially an ongoing funding standard, I was puzzled by the proposal that when producing actuarial valuations and certificates, the actuary will be required to certify that the value of the scheme assets will at least equal the amount of scheme liabilities. While we all agree that we are not exactly up to the high standard of actuaries and actuarial science, it is surely the basic premise on which an ongoing funding standard is founded that the scheme does not need to hold a level of assets that is equal to its accrued liabilities; rather it need only ensure that at some future point in time there will be sufficient assets to meet its future liabilities.
The proposed minimum contribution requirement appears as a curious hybrid of an ongoing funding standard and a minimum solvency test. But I believe also that those proposals would undermine one of the central recommendations of the PLRC report and disregard the fundamentally important point that secure pension scheme funding must provide for rights accrued under the scheme. I am convinced that a measure of solvency that does not address the position of the scheme on discontinuance in some way will not be providing members with adequate security in the event of the scheme being wound up.
The overwhelming argument in favour of a minimum solvency requirement is that if an employer undertakes to provide a pension promise the scheme should be able to secure that promise at all times, especially in the event of the scheme winding up. It is at that time that the members' position is most vulnerable. A minimum solvency requirement should ensure that, irrespective of what happens to the sponsoring employer, the fund will have enough money to meet the value of members' accrued rights which will therefore be protected.
But security has a price and one of the major considerations in deciding the appropriate method of calculating the minimum solvency requirement has always been the need to maintain a balance, to improve security, but avoid creating undue cost for employers. Some commentators on our proposals have taken the view that the minimum solvency requirement should provide an absolute guarantee of security for members at all times. But it is simply not possible, either practically or economically, to require ongoing pension schemes to fund at a level that will enable them to buy out all the liabilities with non-profit annuities. For many schemes the cost would be prohibitive. 'We must also recognise that, because of the size of some pension

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schemes, there would in any case be insufficient capacity in the insurance market to absorb them, even if that were financially possible.
Nor is it possible to use the cost of annuities as a way of valuing pension scheme liabilities. Larger schemes simply cannot get quotes. Against that background the Pension Law Review Committee realised that the cost of deferred annuities was an unrealistic measure for evaluating non-pensionable liabilities and proposed that actuarial valuations should be used instead. It therefore recommended a cash equivalent approach which produces an amount equivalent to the value of the assets the scheme would need to hold to pay the members' accrued benefit. The cash equivalent is, of course, the basis of the transfer value that a scheme would pay for an early leaver moving to another scheme or indeed to a personal pension.
We listened carefully to the representations about the original PLRC proposals. The White Paper announced modifications developed in consultation with the actuarial profession. This method uses the cash equivalent approach for all members. It is based on rates of return from investment in equities for non-pensioners moving to a gilts base for those approaching retirement and for pensioners. An expense allowance will also be added which will be weighted to reflect either the cost of the scheme running off pensioners' liabilities in a closed fund or of buying out an insurance annuity. We also accept the PLRC proposal that assets should be valued by reference to market values.
A consultation exercise was held to test the impact of introducing the minimum solvency requirement on the basis set out in the White Paper and we received nearly 500 responses. The results indicated that the vast majority of private sector defined benefit schemes-86 per cent. of those who participated—would meet the minimum solvency requirement; almost all schemes-96 per cent. —were more than 90 per cent. solvent. Most of those schemes would be less than 100 per cent. solvent on the basis of the proposed minimum solvency requirement and in fact regarded as being funded on an ongoing basis. Nevertheless, on the basis of further analysis and in response to detailed comments made, the Government have already announced three important changes to the original proposals. Though they will be set out in regulations, I hope that it will be helpful if I describe them now.
First, we fully accept that a calculation of asset values should be smoothed over a number of months. That position responds to concerns that the original proposal to value assets at market prices on a particular date could have left schemes vulnerable to short-term movements in the market. Secondly, we also accept that the time limits originally proposed for complying with the minimum solvency requirement —three months to attain 90 per cent. and three years to attain 100 per cent. —should be extended. Those time limits are contained in Clause 51 and no doubt we shall come to that later.
Thirdly, we also accepted that the larger defined benefit schemes should be able to value a portion of their pension liabilities by reference to equity returns.
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That would apply to pensioner liabilities due beyond the next 10 or 12 years. That modification in respect of larger schemes recognises that such schemes would be unlikely to wind up if the sponsoring employer went into liquidation. In practice, they would have the necessary economies of scale to allow them to run on most cost-effectively as a closed fund, delivering pension benefits as they fell.
The modification valuation method will apply, as I said, only to larger schemes which would be unlikely to wind up if the employer became insolvent. We were sensitive to the argument that requiring all pensioner liabilities to be valued by reference to gilt returns would have been both impractical and unnecessarily restrictive for the very large schemes. It was also important that we should directly address concerns that the MSR would precipitate a switch of pension fund investments from equities to gilts, which both noble Lords opposite who spoke mentioned. Extending time limits for restoring solvency and smoothing the valuation should reduce volatility in contribution rates and avoid schemes unnecessarily having to inject funds into a scheme due to short-term market fluctuations.
Perhaps I can turn at this point to the estimate which I was asked about directly by the noble Lord, Lord Eatwell, and perhaps in more general terms but certainly expressing his concern, by the noble Lord, Lord Ezra. I refer to any estimates that we have made of any scale in investment shifts. We made a detailed actuarial assessment of the scale of any potential shifts from equities to gilts as a result of the MSR. We published our conclusions in the compliance cost assessment which was published with the Bill and we believe that the overall impact will be modest. Over the next 12 years, which is the period until the MSR is fully in force, we foresee a shift of between £5 billion and £12 billion from equities into gilts. That is contained in the table at paragraph 36 of the compliance cost assessment, which shows, looking forward, how we see the shift. If Members of the Committee were to look at the table they would see that what shift there is, given an optimistic and conservative range, is modest over the long timescale. I hope that drawing attention to the table will help allay Members' understandable fears about an unnecessary shift from equities into gilts.
We recognise that some schemes are underfunded against their own funding targets and may need to increase their contributions; some funds may need to adjust their funding targets to comply with the new minimum solvency test. There will be a transitional period of five years, as recommended in the PLRC report, before the provisions come fully into effect. Taking account of the modifications to the valuation method and time limits, we estimated again in a compliance cost assessment—I believe this answers the point made by the noble Lord, Lord Eatwell—that employers may need to invest an additional £300 million to £400 million per annum in their pension funds over the 12 years until the minimum solvency requirement is in place. We believe that on balance those proposals should ensure that the minimum solvency requirement will deliver an appropriate level of security for members without imposing unnecessary costs on employers.

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I have argued in favour of the minimum solvency requirement as laid down in the Bill. Perhaps I may go a step further and argue that I believe it is important that any basis for assessing scheme solvency should be consistent. Returning, if I may, to the minimum contribution requirement, which the noble Lord, Lord Eatwell, proposes as an alternative to the minimum solvency requirement, I do not believe that it appears to meet the objective of being able to be applied in assessing scheme solvency in a consistent way. The wording of the proposed test that the actuary would apply when certifying the schedule of contributions as adequate to meet the minimum contribution requirement would be that contributions were "fair and reasonable in all the circumstances". I imagine that the noble Lord, Lord Eatwell, might say that that wording might be improved on or worked on. But "fair and reasonable in all the circumstances" does not suggest to me an objective and consistent evaluation basis. It is by no means clear—it would have to be clear—what measure of security such a requirement would afford scheme members.
I was further puzzled by Amendment No. 163BA which would seek to apply the concept of the minimum contribution requirement to money purchase schemes. That would have the effect of requiring employers who run money purchase schemes to pay a minimum amount into the scheme based on targeting a particular level of benefit. If anything, that appears even more inappropriate for money purchase schemes. Indeed, it is hard to see how such schemes could continue to be called money purchase if such a requirement were to be imposed. The liability of an employer who runs a money purchase scheme is to make a defined level of contributions to the scheme. Those contributions, along with any made by the employee and the investment return on the contributions, determine the benefits provided by the scheme. It is an important part of our proposals for the minimum solvency requirement that schemes should be required to disclose full information to their members about their funding adequacy by reference to the MSR. We shall be returning to that issue later.
With regard to Amendment No. 145YE, I should point out that the schedule of contributions will be a working document which may contain very detailed information. When I asked about that I was threatened with complicated computer print-outs. Some of that could be of a sensitive nature relating to both the financial position of the scheme and of the employer. It would not be appropriate to make that generally available, nor would it convey the kind of information concerning scheme solvency that members require. The key point is that trustees will be required to inform members if the contributions are not paid in accordance with the schedule and to disclose the regular solvency certificates.
It appears to me that the minimum solvency requirement which we propose will afford scheme members a much greater level of protection than would be provided by the minimum contribution requirement proposed in these amendments. In Amendment No. 145TA, the noble Lord, Lord Eatwell, proposed, as an
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alternative method of providing security for accrued rights in the event of a scheme wind-up, a central discontinuance fund. He prayed in aid American experience. My noble friend Lord Buckinghamshire promptly suggested that there may be some doubts about that. That will be something interesting for us all to try to find out tomorrow. The PLRC concluded, in looking at a central discontinuance fund, that it would not be a viable solution to the problem of discontinuance. The Government have accepted that view and continue to believe that such a fund will not be needed under our proposed minimum solvency requirement. Such a fund would be complicated to operate. Almost all variations of the proposals would require the fund to be underpinned by a guarantee from either the Government—other taxpayers—or from other pension funds. I do not believe it would be appropriate to ask either of them to take on an open-ended commitment of that nature.
We are introducing a new power to enable trustees to secure benefits on wind-up by providing members with a cash value of accrued rights. Where a scheme is funded only at the level of minimum solvency requirement, the calculation for this will be that used for calculating liabilities for the minimum solvency requirement. Other schemes that would not wind-up in the event of employer insolvency will run off as closed funds.
We believe that our provisions, together with the proper operation of the minimum solvency requirement, will substantially reduce the likelihood of schemes winding up in deficit. The central discontinuance fund is therefore neither necessary nor appropriate.
I think I have covered all the main points. Perhaps I may be allowed to try to sum up what we believe the package of measures in the Bill will do and against which the alternative proposal of the noble Lord, Lord Eatwell, has to be judged. First, it will give a new measure of security to scheme members by ensuring that schemes are adequately funded to provide at the least the cash value of members' accrued rights in the event of the scheme winding up. Secondly, and no less importantly, it will provide an objective benchmark for setting contribution levels. Thirdly, coupled with the requirement to maintain a schedule of contributions, it will provide a focus for trustees in monitoring that contributions have been paid at an appropriate rate and by the due date. Finally, it will provide a benchmark for calculating compensation.
I have little doubt that all our words of wisdom will be pored over in Hansard tomorrow by the people who understand all these matters. Our debate about the minimum solvency requirement, the minimum contribution requirement and the central discontinuance fund has been useful. I believe that what we propose is still the better of the two options—one from myself and one from the noble Lord, Lord Eatwell—before us.
Baroness Seear: I speak as a fool in these matters in comparison with all the experts around the Committee. We were very much concerned with the minimum solvency requirement and both the noble Lord, Lord Ezra, and I were extremely impressed with the proposals

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put forward by the noble Lord, Lord Eatwell. The Minister, who had his defence ready before the noble Lord, Lord Eatwell, spoke—who can blame him for that on such a subject—never really grappled with the points put forward by the noble Lord. Do I have it aright that the central problem is that, in order to maintain sufficient funding to meet a bankruptcy in the scheme, more has to be paid into the scheme than is necessary for the scheme, which is not going to go bankrupt and which has to meet ongoing payments in retirement? That is the centre of the matter. More money is being paid in than is necessary to meet the unlikely event in the vast majority of cases that the scheme will go bankrupt.
From the employer's point of view that cannot be desirable. The Minister cannot possibly want companies to have to pay more in than is absolutely necessary. This is where we found the idea of the discontinuance fund extremely encouraging. It seemed a valuable device to help meet the problem of bankruptcy, which would therefore make unnecessary the additional funding which the schemes would have to make under the Minister's programme, which is over-insurance against an event that is very unlikely to take place. Surely from everyone's point of view this is a desirable development.
The Minister said that someone would have to back up the discontinuance fund because there might not be enough money in it. He asked why the taxpayer should do it. That is open to argument. Some of us might want at least to discuss a contribution from the taxpayer. But if one does not like the taxpayer's contribution, there is the example of what happens in the travel industry when travel agents get together to deal with bankruptcy. It is already done in the private sector. We are going to ask them to do that in relation to compensation. Why on earth can we not do it in order to deal with the backing up of the discontinuance fund which will make unnecessary these excess payments which the government scheme will require, as the noble Lord the Minister made clear?
I do not claim to have any knowledge of these matters, but I would like the points put forward by the noble Lord, Lord Eatwell, to be answered by the Minister and for the matters to be discussed far more fully.
The Earl of Buckinghamshire: After 55 minutes I hesitate to speak for the second time. There are some real problems with the discontinuance fund. One is entering into the realm where actuaries will be forced by regulation into adopting standard funding assumptions over all the schemes and every scheme has a different profile. That would not be the correct way to go forward. In any case the actuaries would fight the proposal all the way without my help.
If there is to be a discontinuance fund there will be a move to additional regulation and standard funding assumptions so that all schemes never effectively run the risk of going into insolvency. One is therefore back to square one. I found the contribution made by the noble Lord, Lord Eatwell, extremely interesting and innovative. I recognise it because the actuaries I work
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with employ the same mechanisms at the moment in most of their schemes for the standard contribution rate findings. It is inevitable that if one goes down that route one still has to return to some form of minimum funding or solvency requirement.
As I said, members have an expectation that their rights will be met in full. As I also said, they do not understand ongoing insolvency and insolvency on wind-up. I believe that the noble Baroness, Lady Turner, will be moving an amendment on MSR and reverting it back to the Goode standard. She will put me right if I am wrong about that. We have the interesting concept of a contribution-based standard which ought to be in place in schemes in any case. Later, we shall have a debate on the standard MSR assumptions in any event. There will be other variations which the noble Lord, Lord Marsh, will be speaking about and I shall be supporting them. I do not believe that we are going to make much more progress on this matter. As regards the discontinuance fund, I believe that there are major problems if we go down that route.
Lord Desai: The noble Earl is very knowledgable on these matters. If one has a central discontinuance fund which is financed by other funds there will be risk-pooling. There will be difficulties in calculating the extra sum required when pooling the risks. The noble Earl was making the point that the actuaries may have a great many problems calculating the figures.
I am puzzled that risk-pooling is not cheaper than asking every pension fund to have its own minimum solvency requirement. It seems to be counter-productive. If risks are pooled by the pension funds and not the taxpayer—because the Minister does not want the taxpayer to be disturbed—why cannot it be cheaper than if every pension fund separately bears the cost of meeting the minimum funding requirement?
I am still not convinced that the point made by my noble friend Lord Eatwell about disturbance to the equity market has been adequately dealt with. The Minister said something about it. I believe that my noble friend was on the right lines. The Government are saying that an extra £300 million to £400 million will have to be put in to meet the minimum solvency requirement. The manner in which it is injected will cause a massive shift in the equity as against the gilts market. Have the Government worked out the consequences of having a depressed equity market? It is a serious problem. There will be consequences not only for pension funds but also for the financing of industrial investment in this country. These aspects go beyond technical issues of calculating fund assets and liabilities. It is good that we are having this discussion; we should pursue it further.
5.45 p.m.
Lord Monkswell: There has been discussion about funding the minimum solvency requirement on the basis of cash injections from the firms themselves or from some form of insurance scheme. Over time there is another possible source of funding; namely, the pension fund surpluses which arise from time to time at the other end of the equity market of peaks and troughs. That is

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not being taken into account. I hope that the Government recognise that the main problem we are concerned with is government constraints in terms of the minimum and maximum funding of schemes in a narrower band than the variations in the value of the scheme assets. That can come about because of variations in the equity market.
One way of resolving the problem is for the Government to increase the range of the bottom and top levels of the scheme funding. The pension fund surpluses which are currently required to be disbursed to employers—or through pension fund holidays to employees—could be retained in some form so that they can balance deficits which require injections of funding to make up the minimum solvency requirement. That mechanism could be used.
There would be a secondary beneficial effect in the trigger for the minimum solvency requirement or the minimum funding requirement, whatever the terminology. There is going to be some mechanism for extra funding to be injected into pension schemes by companies. Generally speaking, that cash injection will be at the downturn of the economic cycle when the value of equities is very low and therefore does not meet the liabilities of the scheme. The implication is that finance has to be taken out of the economy and injected into the pension funds at exactly the wrong point in the economic cycle.
The corollary is almost completely true as well in that at a time when equity markets are high and, generally speaking, there is a high degree of economic activity, pension fund surpluses have to be disbursed because of Inland Revenue rules. Effectively, that injects more cash into the economy and generates more economic activity. That overheats the economy. The Government should think of smoothing over those cycles. They should enable pension fund surpluses at times of high equity valuation to be retained in some form. They should be held in some kind of separate account if necessary and used to make good the deficit in the minimum solvency requirement at the downturn of the equity market. Will the Government comment on that proposal?
Lord Mackay of Ardbrecknish: I have stood at the Dispatch Box almost long enough in this debate. I wish to study what the noble Lord, Lord Monkswell, said before I reply in more detail. I hope that I did answer his noble friend Lord Eatwell about the equity and gilts balance by drawing attention to the table at paragraph 37 of the compliance cost analysis.
The noble Lord, Lord Desai, and the noble Baroness, Lady Seear, seem to be attracted to the central discontinuance fund. I am not entirely sure about that. The noble Lord, Lord Desai, seemed close to suggesting some kind of national occupational pension scheme into which other pensions schemes would become subsumed. I caution Members of the Committee against being too attracted to that idea. If one thinks about it, one realises that the schemes transferred to the discontinuance fund could have many different rules and regulations. Indeed, they could have different benefits. Would the discontinuance fund pick up the benefits as per each scheme or would it attempt to rationalise the benefits?
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If it picked them up as per each scheme, it would be rewarding some schemes and, when it came to asking for the money, it would perhaps be damaging some other schemes.
Employers might be annoyed because they would have to make provision for the discontinuance fund calling on them. If they thought that they ran a good scheme, they might become annoyed if they were constantly called upon to bail out the lesser schemes. We shall do something about that in relation to schemes failing because people have acted illegally, but one is getting into difficult territory if one widens the scope.
I am not an expert on this, but I think that there would be a real temptation for schemes to sail close to the wire—if I heard the argument of the noble Baroness, Lady Seear, correctly—because they would know that they had a back-up if they wobbled on to the wrong side. I remind the Committee that there is a pension promise to each scheme. There is a promise with regard to the contributors and a promise for when members of the scheme become pensioners.
With those few additional thoughts, I hope that I can leave the matter. Clearly, this has been an interesting debate. Now that the noble Lord, Lord Eatwell, has fleshed out his ideas a little more, I can assure him that we shall study them. However, I should not like to give the noble Lord even a glimpse of a hope in relation to the amendment. Although we shall certainly study his comments, we are certain that what we propose is the best way to proceed in this difficult area. We all want to do the same thing. We all want to give solid security to scheme members—I thought that the noble Baroness, Lady Seear, was beginning to take the employers' side when she intervened—but at the same time, we want to ensure that employers will not be put off such schemes, which we all agree are an excellent way for people to provide for their retirement.
Lord Eatwell: I was delighted to hear the Minister say at the end of his summing up that he is confident that he is right. I am not sure that anybody else, having considered all the complexities of the issues, is willing to be totally confident on that. Certainly, I am not.
In proposing the amendments I have simply attempted to present the considerable difficulties that are raised by taking a snapshot approach to the minimum solvency requirement. The reaction to those difficulties, which have become evident since the Goode Report, has been to attempt to water down the solvency requirement precisely because of those enormous difficulties. We have seen the watering down which the Minister described in his reply, and we shall hear about other attempts to rectify the distortions that are created by the minimum solvency requirement when the noble Lord, Lord Marsh, moves his amendments later.
I entirely agree with the Minister that we are all on the same side. This is not a political issue. The noble Baroness, Lady Seear, was right that if an ongoing approach could be found to work, instead of the snapshot approach, that would save employers an enormous amount of money. And who is trying to recommend that ongoing approach? The TUC. It is trying to save employers an enormous amount of money

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in this respect because it recognises that it would be beneficial to the operation of the economy as a whole, to the general prosperity of us all, and consequently to levels of employment.
I should like to refer briefly to two of the Minister's comments. With respect to our suggestion that one of the virtues of the minimum contributions requirement is that the notion of a minimum contribution could consequently be applied to money purchase schemes, the Minister argued that money purchase schemes would then have to have a defined benefit. I am afraid that the Minister entirely misunderstood me. Any money purchase scheme will have a contribution made by the employer. My amendment merely creates the notion of a minimum contribution which the employer has to make. I am afraid that whether the money purchase scheme performs well or badly is a risk that the pensioners have to take.
There has been some discussion about the central discontinuance fund. I am interested to discover that one operates in Finland with, I am told, considerable success. That is in addition to the fund in the United States. No doubt in the next few weeks we can trawl around, find some more and see how they work. However, I stress that the idea of trying to secure ongoing protection is exactly the idea which the Minister is supporting. Large pension funds become closed pension funds on the insolvency of the employer, for they are then maintained on an ongoing basis. The central discontinuance fund is designed precisely to gather together the small funds which could not then be left when those employers happen to become insolvent.
We have had an enormously interesting debate. We all need to go away and ponder these issues further. Editions of "Teach Yourself to be an Actuary" will become even more well thumbed than they are already. We shall return to these issues on Report and at Third Reading because, if we get this wrong, it will affect all of us for a long time to come. It may well be appropriate to take longer to consider this part of the Bill and not be so concerned to finish our consideration of it within the next couple of months or in this parliamentary Session. It would be much better to get right such major provisions that will affect our pensions over a long period.
Therefore, I urge the Minister to reconsider. I urge him not to be too confident, but to look at the possibilities and the alternatives and to consider adopting an "ongoing" rather than a "discontinuance", "snapshot" approach. In the meantime, however, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Baroness Turner of Camden Baroness Turner of Camden moved Amendment No. 145NA:
Page 27, line 11, leave out from ("("requirement")") to end of line 12.
The noble Baroness said: It is with some trepidation that I come to the Dispatch Box to move this amendment after the erudite presentation by my noble friend Lord Eatwell. He convinced me that he was on to
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something and that his ideas in this area are innovative. I am glad that the Minister said that he will look carefully at what has been said.
When I drafted my amendment I was not sure whether there would be much acceptance from the Minister for what my noble friend suggested so I proceeded to table an amendment, the object of which is to include in the legislation precisely what the Goode Committee recommended. As we all know, the Goode Committee spent a lot of time considering minimum solvency standards and eventually came down in favour of trying to devise such a standard. The committee considered whether there was a need for that and how best it could be achieved. Eventually, it produced the proposition that is contained in my amendment—briefly, that the liabilities for which schemes should be required to meet the minimum solvency requirement are the sum of cash equivalents, calculated on the same basis as for an individual transfer value for active and deferred members, and the cost of immediate annuities for pensioners. It further suggested that the Government should give further consideration to the issue of a new type of security which could provide more appropriate backing for schemes' indexed liabilities. Furthermore, as the Minister has already said, the committee proposed a five-year transitional period to allow schemes to achieve the appropriate standard.
I know that unions representing the interests of members in occupational schemes did not think that the Goode test was good. I am sure that they prefer the contributions test proposed by my noble friend. Nevertheless, the Goode proposition has been watered down by the Government. We have already heard that many actuaries are not happy about what is proposed since they will be required to sign certificates signifying that the minimum solvency standard has been met, and it may well have been, but that will not necessarily mean that the scheme is solvent. So members will have been given a false sense of security. It is for that reason I think that the noble Earl, Lord Buckinghamshire, suggested that it be called a "minimum funding test" rather than a "minumum solvency standard". I hope that the Government are prepared to consider that argument because I should think the last thing we want to do is to give members of schemes a false sense of security.
The Minister is right—Members on all sides of the Committee have said this—there is not much difference between us. We all want to achieve a situation in which members of schemes feel that they have that degree of security. We all know why many of them do not feel that now. We want also to ensure that we maintain the right balance. The Minister has often referred to the necessity of striking the right balance. We on this side of the Committee acknowledge that too. We know that in addition to assuring the membership of a sense of security, we have also to have the type of situation which will not be so off-putting for employers that they cease to provide final salary provision for their employees. It is a fine balance that we need to strike.
Nevertheless, we believe that it is necessary to have an improvement in the solvency standard which the Government have in mind. For that reason, I have drafted an amendment which follows absolutely the line

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of the Goode Committee. It reached that decision after a great deal of discussion and after detailed examination of the issues. I hope that the Government will be prepared to reconsider what they are proposing and in this instance support entirely what the Goode Committee recommended. I beg to move.
6 p.m.
Lord Mackay of Ardbrecknish: As the noble Baroness said, the amendment would provide that the method of calculating the minimum solvency requirement was along the lines of that proposed originally by the Goode Committee. We are now moving in a direction opposite to the one in which we were being tempted to move on the previous amendment. Since the Goode Committee proposals were published, we have received various representations that they would be impractical to operate and would have imposed unnecessary costs on employers.
Very serious concerns were expressed that such a valuation basis would have led to volatility in the solvency requirement arid could have precipitated a substantial shift out of equities. That was one of the key points of the previous debate. It was recognised almost universally that not only would that impose damaging costs on employers; it would ultimately be against the interests of scheme members. Commentators also pointed out that because of limited capacity in the immediate annuity market, the proposal to value pensioner liabilities by reference to immediate annuities was not feasible.
In the White Paper we therefore proposed a number of modifications that were developed in consultation with the actuarial profession. That method uses the cash equivalent approach for all members, but would require the cash equivalent for non-pensioners to be valued by reference to the rates of return from investment in equities, moving to a gilts base for those approaching retirement and for pensioners. An expense allowance will also be added. We have been over some of this ground, and I apologise because we are talking about fairly closely related amendments. We took a decision on the basis of further analysis and more detailed comments that we should move to a slightly different position, which I have described. But because the noble Baroness is inviting me to go back to the original Goode, it is only fair that I encapsulate quickly where we have agreed to move to.
We have accepted fully that the calculation of asset values should be smoothed over a number of months. We accepted also that the time limits of three months and three years proposed originally be extended. We shall come to them when we reach Clause 51. We accepted also that the larger defined benefit schemes should be able to value a portion of their pensioner liabilities by reference to the rates of return on investment.
I know—I believe that this is the burden of the noble Baroness's argument—that some commentators have suggested that these modifications represent a weakening of member security. We do not accept that view. We were sensitive to the argument that requiring all pensioner liabilities to be valued by reference to rates
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of return on gilts would have been both impractical and unnecessarily restrictive for the very large schemes. It was also important that we should address directly concerns that the minimum solvency requirement would precipitate a switch in pension fund investment from equities to gilts. Extending the time limits for restoring solvency and smoothing the valuation should reduce volatility in contribution rates and avoid schemes unnecessarily having to make injection of funds into a scheme due to short-term market fluctuations. We believe that that is important.
The valuation basis proposed by the noble Baroness, and originally proposed by Goode, is unnecessarily tough, and the basis that we now propose delivers an appropriate level of security for scheme members without imposing unnecessary costs on employers. I suspect that part of my contribution in response to the noble Baroness's noble friend Lord Eatwell also explained why we have moved from the Goode Committee's original proposals. I hope that with that explanation she will withdraw the amendment.
Baroness Turner of Camden: I thank the Minister for that detailed explanation. Of course some of it was dealt with during the course of the debate on the amendment moved by my noble friend Lord Eatwell. I put the amendment down originally because strong representations were made to me, mainly from unions, that in their view the minimum solvency standard proposed by the Government was not much of a security; in fact it was even suggested to me that they would be better off without it because the impression given to members would be that there was a great deal more security available to members than there actually was. To that extent, they were supported by a number of members of the actuarial profession, who, as I have already said, proposed that it should not be called a solvency standard but a minimum funding requirement; that would reflect more truly what it is.
There is still a great deal of concern, despite the Minister's explanation, that the minimum solvency standard that the Government have in mind will not be adequate to provide the necessary security for members—or is it a genuine solvency standard? But, as I said earlier, we have had a long debate on the whole issue of minimum solvency standards, mainly around the amendment moved by my noble friend Lord Eatwell. There is not much point in going into this issue further at this time. I therefore beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 145NB and 145P not moved.]
Baroness Turner of Camden moved Baroness Turner of Camden moved Amendment No. 145PA:
Page 27, line 18, at end insert:
("( ) For the purposes of this section and sections 50 to 54, the value of the assets of the scheme does not (except in prescribed circumstances) include the value of any assets which are employer-related investments for the purposes of section 34.").
The noble Baroness said: This clause establishes that every occupational pension scheme to which the clause applies is subject to the minimum solvency requirement that the value of the assets of the scheme is not less than

835
the scheme's liabilities. The intention of the amendment is to prevent the value of employer-related investments being included in the total value of assets of a pension scheme for the purpose of calculating the minimum solvency requirement.
As we know—we have had some discussion about it, and the Committee knows that we do not feel happy about it—the intention of the MSR is to provide a guarantee that a pension fund has enough assets to meet the demand upon it to pay members' pensions. If a scheme which included employer-related investment was forced to wind up due to the sponsoring company going out of business, that proportion of the fund assets which was employer-related investments would not be available to meet pension requirement demands upon the scheme. We believe that it is not in the interests of the employees of a company, or the members of a pension scheme, to have a situation in which employer-related investments can be counted among the assets of a scheme for the purposes of solvency. The issue is clear and I beg to move.
Lord Mackay of Ardbrecknish: I have a certain sympathy with the arguments made by the noble Baroness about the potential risk of allowing employer-related assets to count in the valuation of assets for the minimum solvency calculation. However, the Government believe that excluding all employer-related investment would not be practical.
We understand that it is the practice for a number of investment managers to track the market and invest in a range of securities which may include the sponsoring employer or those associated with it. It could be difficult in a situation where the investment manager holds a pooled fund to disentangle the specific investments in the sponsoring company.
The Committee may recall that the PLRC recognised these practical problems and consequently recommended that employer-related investments up to the permitted level should count towards the minimum solvency requirement. The PLRC report argued that a 5 per cent. limit on employer-related investment would provide an adequate limitation on any risk. We have also accepted the recommendation that all loans or other financial assistance to an employer or associate companies should be prohibited. This will further limit the potential risk involved in financial' dealings between a pension scheme and its sponsoring employer.
Finally, I remind the Committee that trustees have a duty to ensure that when making decisions about investments (as in all their duties) they must act in the best interests of scheme members. They are therefore expected to consider risk as well as return when deciding on investment policy.
In view of the practical difficulties of excluding employer-related investments, and the fact that we recognise the dangers and have put on a ceiling of 5 per cent., I hope the noble Baroness is satisfied that the issue has been properly and adequately dealt with.
Baroness Turner of Camden: I thank the Minister for that detailed response. We were anxious that there would be a risk to the security of employees if
836
employer-related investments were counted in this way. I well remember that when I was a member of the Occupational Pensions Board we had anxieties about self investment, to which this matter is somewhat related.
However, in view of what the Minister said I do not intend to press the amendment to a Division. I was anxious to know why the Government had proceeded in this way, having realised what the Goode Committee had said. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 145Q to 145S not moved.]
Lord Lucas Lord Lucas moved Amendment No. 145SA:
Page 27, line 28, after ("prepared") insert ("and signed").
The noble Lord said: The amendment is necessary to ensure that the operation for the minimum solvency requirement is properly workable. It amends the definition of an actuarial valuation, as introduced under Clause 49(5) (c), by providing that such a valuation is one that has been prepared and signed by the scheme actuary. This is necessary to ensure that clear and effective time limits can be established within which the schedule of contributions must be prepared and within which solvency below 90 per cent. must be restored. These time limits all start from the signing of the valuation. I beg to move.
On Question, amendment agreed to.
[Amendments Nos. 145T and 145TH not moved.]
Clause 49, as amended, agreed to.
Clause 50 [Valuation and certification of assets and liabilities]:
The Deputy Chairman of Committees (Lord Broadbridge): I must inform the Committee that if Amendment No. 145U is agreed to I cannot call Amendments Nos. 145UA and 145UB.
[Amendment No. 145U not moved.]
Lord Lucas Lord Lucas moved Amendment No. 145UA:
Page 27, line 40, leave out ("to secure") and insert ("for the purpose of securing").
The noble Lord said: I shall speak also to Amendments Nos. 145UB, 145UD, 145UE, 145VA, 145ZYA and 145ZYE. These amendments address concerns raised by some actuaries that the test to be applied when providing actuarial statements and certificates requires a level of certainty that it is not possible to provide.
Because the certification looks forward over a period we accept that no actuary will be able to state with absolute certainty what will be the position two, three or four years hence and that any judgment must be based on assumptions about the scheme liabilities and economic outturn. We accept that some adjustment of the way the test is described in the Bill is desirable and that these amendments will make the test less absolute by clarifying that any assessment of solvency will be based on actuarial opinion and cannot be a definitive statement.
Amendment No. 145ZYA, which introduces new Section 51(6A), also has the effect of removing the requirement that any increase in contributions, required

837
to restore a scheme to 100 per cent. solvency, should be at a uniform rate. This will allow schemes greater flexibility in taking remedial action to restore their funding position. The amendment will continue to permit schemes to pay a higher rate of contributions at the outset of any period covered by the schedule of contributions. Permitting such "front-loading" of contributions is clearly in members' interests as it would ensure that the solvency position improves more rapidly than would be the case with a uniform rate of contributions.
On the other hand, the circumstances of the sponsoring employer may make it more realistic all round for him to be committed to lower payments in the earlier part of the period and a higher amount thereafter. However, any schedule of contributions drawn up in such circumstances would, as a minimum, need to ensure that there was no deterioration in the scheme's funding position and the trustees would need to be satisfied that the schedule offered sufficient security for members.
Amendment No. 145ZYA is also required to address a practical difficulty with the wording of Clauses 51(6) and 51(7). By referring to action following a valuation, these subsections would have prevented the schedule from being revised and recertified where the scheme met the minimum solvency requirement at the valuation but subsequently suffered a drop in the funding level; for example, by the effect of higher than expected salary increases or benefit augmentations. The new Section 6A overcomes this difficulty and allows the schedule to be recertified following amendment irrespective of whether the amendment has been prompted by a full valuation. Amendment No. 145ZYE is consequential on the new Section 51(6A).
These amendments seek to address concerns that have been expressed about the certification process and to allow schemes greater flexibility in any remedial action to restore a scheme solvency. I beg to move.
Lord Eatwell: The Minister has given the game away. He told us that instead of being able to secure with certainty the scheme must be weakened so that the solvency requirement will not be certain. That is what the amendments are for. Their entire and total purpose is to reduce the certainty of the solvency requirement. Instead of "to secure" solvency it is "for the purpose of securing solvency". The England cricket team went to Australia for the purpose of winning the Ashes. It did not win them. I am afraid that these amendments point to the continual weakening of this solvency requirement.
The noble Lord said that it would be impossible to secure because certainty is impossible; but it is not. It is perfectly possible to buy an assured annuity. It would be jolly expensive but it is possible. The problem is that the Government's minimum solvency requirement is creating so many difficulties and problems for the pensions industry that we have to have this steady weakening of the commitment to insolvency.
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The noble Lord, Lord Lucas, has made our case for us. The minimum solvency requirement is a false solvency requirement.
Lord Lucas: There is no weakening of the solvency requirement. These amendments reflect the reality that even an actuary cannot guarantee what will happen in the future.
Baroness Seear: The reality is that they are weak. The noble Lord has said so.
Lord Lucas: I do not think that we should try to put into legislation something that cannot happen. We have to adjust the wording that we use in our legislation to reflect the reality of the way the world works and to balance, as Members of the Committee have been concerned to do over several hours this evening, the interests of the companies and their employees as employees and pensioners to produce the most effective method possible. I believe that the amendments to which I have spoken improve the situation over what was in the Bill previously.
Lord Eatwell: I know that we are seeking a balance. We have heard that word continuously throughout our discussions. But the point is that we have here a further weakening of the solvency requirement from that which was on the face of the Bill. That is what the amendments achieve.
It seems to me that the Government are bringing forward the amendments, quite reasonably, because their solvency requirements will cause such a mess. Therefore, they are trying to weaken the elements which will cause the mess. But would it not be better to go back to the drawing board and, instead of having that imperfect structure, to start again? I do not wish to refer again to the imperfect English cricket team, but let us get the A team from India to play instead. This sort of amendment would be unnecessary and the complexity involved in continuously weakening the solvency requirement would be unnecessary.
Lord Lucas: If the noble Lord wants a perfect English cricket team, he should look to the women.
On Question, amendment agreed to.
Lord Lucas Lord Lucas moved Amendment No. 145UB:
Page 27, line 42, after ("if') insert ("it appears to him that").
The noble Lord said: I have spoken to this amendment. I beg to move.
On Question, amendment agreed to.
Lord Lucas Lord Lucas moved Amendment No. 145UC:
Page 28, line 3, at beginning insert ("Subject to subsection (2A)").
The noble Lord said: In moving this amendment, I shall speak also to Amendment No. 145VB. Amendment No. 145UC is minor and paves the way for Amendment No. 145VB. That provides that where, when carrying out a solvency check, the actuary is of the opinion that the scheme has dropped to below 90 per cent. of the minimum solvency requirement, an emergency valuation must be obtained.
As I am sure Members of the Committee will appreciate, we do not wish to impose the cost of unnecessary valuations on schemes. Therefore, where the actuary certifies that the schedule of contributions is no longer adequate but he takes the view that the scheme has not dropped below 90 per cent. of the minimum solvency requirement, an actuarial valuation will not be required, provided the rates of contributions in the schedule are revised. The actuary must be able to certify that the revised rates are expected to ensure that the scheme meets the minimum solvency requirement by the end of the period covered by the schedule. Of course, there will be cases where the scheme may prefer to hold a full valuation. However, in any case where the actuary believes that a scheme is less than 90 per cent. solvent, we believe that an emergency valuation must be carried out to establish the exact solvency position. Following the valuation, the schedule must be revised. And if the valuation identifies a shortfall below 90 per cent., the one year time limit for restoring at least to the 90 per cent. level will apply.
Without the amendment, the one year time limit could be sidestepped. We believe that a drop in scheme funding below 90 per cent. represents significant risk to members and that if such a drop is identified, prompt action should follow to remedy the position. I beg to move.
On Question, amendment agreed to.
Lord Lucas Lord Lucas moved Amendments Nos. 145UD and 145UE:
Page 28, line 4, leave out ("it appears to him that") and insert ("in his opinion").
Page 28, line 5, leave out ("to secure") and insert ("for the purpose of securing").
On Question, amendments agreed to.
[Amendment No. 145V not moved.]
Lord Lucas Lord Lucas moved Amendments Nos. 145VA and 145VB:
Page 28, line 7, after ("if') insert ("it appears to him that").
Page 28, leave out lines 11 and 12 and insert:
("(2A) In a case within subsection (2) (a), the trustees or managers are not required to obtain an actuarial valuation if—

(a) in the opinion of the actuary of the scheme, the value of the scheme assets is not less than 90 per cent. of the amount of the scheme liabilities, and

(b) since the date on which the actuary signed the certificate referred to in that subsection, the schedule of contributions for the scheme has been revised under section 51(3) (b).").

On Question, amendments agreed to.
Lord Eatwell Lord Eatwell: moved Amendment No. 145W:
Page 28, line 24, at end insert:
("() ) Any valuation or certificate obtained under this section shall be disclosed in accordance with section 113 of the Pension Schemes Act 1993 (Disclosure of information about schemes to members etc.).").
The noble Lord said: In moving this amendment, I should like to speak also to Amendment No. 145YH. The amendments are concerned essentially with the availability of information to members. The clause requires trustees, at prescribed intervals and on
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prescribed occasions, to obtain valuations and certificates as to the adequacy of contributions by reference to the scheme's overall level of solvency.
The amendments require that such valuations and certificates should be disclosed to members and their independent recognised trade unions in accordance with Section 113 of the Pension Schemes Act 1993. Members would be entitled to information about what contributions their employer should be paying to the scheme on their behalf.
It seems to me that one of the best ways to ensure that the minimum solvency requirement works effectively is by giving members the information as to whether or not it is being met or information as to what the contribution should be. What better means of policing a scheme could there be than providing information to members and particularly to their trade unions, which will be able to analyse such information with expert advice?
There may be a problem of overwhelming members with redundant information but that can be avoided by providing in regulations that such information need be furnished only on request. Essentially we believe that the amendments reinforce what the Government wish to do. They reinforce it by providing a policing mechanism which must be the most effective available. I beg to move.
Lord Mackay of Ardbrecknish: I accept what the noble Lord, Lord Eatwell, says about the importance of making available information to members. We believe that it is essential that certificates and reports relating to a scheme's funding position should be available to members.
However, I should point out that Clause 35(3) provides specifically for regulations to require trustees to make such documents required under the minimum solvency provision available to members and those with an interest in the scheme. We intend to make regulations which will ensure that scheme members are informed regularly of the solvency position of the scheme. The power contained in Clause 35 is sufficient to ensure that that can be done. The noble Baroness, Lady Hollis, will recall the amendment to Clause 35(3) which extends the provision so that it covers certificates provided under Clause 51, as well as those under Clauses 50 and 52. I hope that that explanation of the fact that what the noble Lord seeks to achieve is already contained in the Bill will be sufficient to persuade him to withdraw the amendment.
6.30 p.m.
The Earl of Buckinghamshire: Perhaps I may disagree with my noble friend the Minister and the noble Lord, Lord Eatwell, as regards the very sensible idea of giving out information. Who pays for such information to be sent to members if they make consistent requests for it?
Lord Mackay of Ardbrecknish: The actual details of how often and in what time-scale documents are circulated to members on occupational schemes will be part and parcel of the regulations upon which we shall

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be consulting. However, the cost of distributing information to members will obviously have to be met by the scheme.
Lord Eatwell: I am grateful for the Minister's explanation. However, at the end of his remarks, the noble Lord said that he had demonstrated to me the fact that what I sought to achieve was already contained in the Bill. But that contradicted what the Minister said earlier when he said that what I was seeking would be covered by regulations. Given the importance of the information which goes to members, I believe that it is appropriate for us to invoke legislation which has already been passed by the Government under Section 113 of the Pensions Schemes Act 1993 and put it on the face of the Bill, instead of having yet another element in such an important area being buried in regulations.
I know that the Minister has been nagged continuously about the excessive use of regulations in the Bill. Given the fact that the amendment is simply citing legislation which has already been passed by the Government in another context, I hope that the Minister will take the matter away and think again. In the meantime, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 50, as amended, agreed to.
Clause 51 [Schedules of contributions.]
Lord Lucas Lord Lucas moved Amendment No. 145WA:
Page 29, line 1, leave out ("following") and insert ("before the end of a prescribed period beginning with").
The noble Lord said: Section 51(3)(c) provides that the schedule of contributions must be revised following an actuarial valuation. Amendment No. 145WA will provide that any such revision must be made within a specified period. We will consult on the appropriate period in the context of draft regulations but are minded to propose that revision should be made within two months of the signing of the valuation report. I beg to move.
On Question, amendment agreed to.
[Amendments Nos. 145X and 145Y not moved.]
Lord Lucas Lord Lucas moved Amendment No. 145ZYA:
Page 29, leave out lines 15 to 25 and insert:
("(6A) The actuary may not certify the rates of contributions shown in the schedule of contributions—

(a) in a case where on the date he signs the certificate it appears to him that the minimum solvency requirement is met, unless he is of the opinion that the rates are adequate for the purpose of securing that the requirement will continue to be met throughout the prescribed period, and

(b) in any other case, unless he is of the opinion that the rates are adequate for the purpose of securing that the requirement will be met by the end of that period.").

The noble Lord said: I have already spoken to the above amendment. I beg to move.
On Question, amendment agreed to.
[Amendments Nos. 145YA to 145YD not moved.]
Lord Lucas Lord Lucas moved Amendment No. 145ZYE:
Page 29, line 27, leave out from ("the") to end of line and insert ("period referred to in subsection (6A)").
On Question, amendment agreed to.
[Amendment No. 145YE not moved.]
Clause 51, as amended, agreed to.
Clause 52 [Determination of contributions: supplementary]:
[Amendment No. 145YF not moved.]
Lord Lucas Lord Lucas moved Amendment No. 145ZYG:
Page 29, line 45, leave out from ("any") to ("that") in line 46 and insert ("prescribed period").
The noble Lord said: Subsection 52(3) provides that, where a scheme has failed to comply with the minimum solvency requirement, the trustees must produce a report explaining to members the reason for that failure. The amendment provides a power to specify when such a report should be completed. It was originally intended to be produced at the end of the period covered by the schedule of contributions but we now accept that, practically, it needs to be tied in with the valuation report. It is a minor change to allow the provision to work simply without the need for additional actuarial enquiries. I beg to move.
On Question, amendment agreed to.
[Amendments Nos. 145YG and 145YH not moved.]
Clause 52, as amended, agreed to.
Clause 53 [Serious underprovision]:
Lord Marsh Lord Marsh moved Amendment No. 145YJ:
Page 30, line 7, after ("(2)") insert ("or (2A), as the case may be,").
The noble Lord said: In moving the above amendment I shall, with the leave of the Committee, speak also to Amendments Nos. 145YK, 145YL and 145YN. The effect of the amendments would be to allow an employer the choice of making good smaller deficits in the same way as the larger ones by paying a lump sum into the fund where the shortfall is less than 10 per cent.
As has been said over and over again—and to state the obvious—the main thrust of the Bill is to protect the members of pension schemes from fraud or mismanagement. There is no problem between any of us on that objective. However, the one thing which I have learned from our debates is the fact that achieving such a simple objective is rather more complicated than might have been expected. I believe that we would all agree that it would be disastrous if, in our enthusiasm for protecting existing pension schemes, we succeeded in causing employers to move more to money purchase schemes, for one example, or inhibited the introduction of new schemes. Both of those are real possibilities that we all recognise.
While the amendments relate to the employer's obligations arising from the minimum solvency requirement, I hope to convince Members of the Committee that they are very much in the interests of the employee. As drafted, Clause 53 requires the employer to make good any shortfall in the solvency requirement where it exceeds 10 per cent. Where the shortfall is less than 10 per cent., Clauses 51 and 52 anticipate that that will be met by an increase in contributions. Of course, that increase includes the employee contributions.
The purpose of the amendment is to give the employer the choice to make good the smaller deficits in the same way as the larger ones. In short, the employer should be able, should he wish, to pay a lump sum into the fund where the shortfall is less than 10 per cent. I stress that the amendment continues to protect the fund and provides advantages to the employees. I hope in a moment to argue that cash should not be the only option to employers in these circumstances and that there are real advantages to be gained by allowing the employer to meet shortfalls in the MSR by bank guarantees and other means rather than increase contributions from both employers and employees. This, in my view, is a measure which can only benefit both sides. I accept that the other amendments raise much larger, or at least much more complex, issues than this. I beg to move.
Lord Mackay of Ardbrecknish: We have looked carefully at the amendments of the noble Lord, Lord Marsh, Amendment No. 145YJ and some others with it. However, we seemed to do a bit of sprinting just before we reached this amendment. It is important to recognise that the alternatives to cash contributions were originally proposed in the light of widespread concern that the original minimum solvency proposals, and especially the three-month time limit to get to 90 per cent., could have resulted in employers having to put in large amounts of cash at short notice. I believe that these concerns are now very much less valid. I shall explain why.
As I have already mentioned—I believe twice in the course of today—the statement by my right honourable friend the Secretary of State on 8th December made certain important changes to the proposed method of calculating the minimum solvency requirement which directly addressed fears that stock market fluctuations would force employers to put excessive amounts of money into their pension schemes. Extending the time limit for restoring solvency—which will apply to all schemes—will tend to reduce volatility in required contribution grades.
The further measure to smooth the calculation over a number of months will also avoid the risk of focusing the calculation on a particular day when market values might be unusually depressed. The further modification for large schemes—that is, schemes which would be likely to run as closed schemes rather than be wound up in the event of employer insolvency—allows a proportion of pension liabilities to be valued by reference to rates of return on equity investment. That means that the value of the liabilities—
Lord Marsh: I am grateful to the noble Lord but I am certainly puzzled. I genuinely do not think that the reply is addressed to the amendment. The amendment, as I remember it, is to enable employers to make cash payments rather than contributions.
Lord Mackay of Ardbrecknish: I was saying in a rather longwinded way that originally there was considerable worry in this regard, but I believed that the proposals to make the timescale a bit longer had reduced
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that worry, which concerned the need for schemes to rely on cash contributions. I believe the noble Lord wants alternatives to the need to rely on cash contributions in certain circumstances.
Lord Marsh: That is something that I wish to address on the next amendment, Amendment No. 145YP.
Lord Mackay of Ardbrecknish: I am sorry. They are all in the one group and I am trying to address them all at the one time. I believe that is the problem. They are grouped, are they not? I am in some trouble about that. If the noble Lord wishes me to ungroup them—
Baroness Seear: Perhaps it would help if the noble Lord moved them as a group and then the Minister would have the right brief, would he not?
Baroness Hollis of Heigham: There is a problem. We have had this problem with some of our amendments. Although there is a comma after N, Amendment No. 145YP has not been indented, which is what one would expect. Therefore there is a problem in the typing up of the groupings on the list in several places.
6.45 p.m.
Lord Mackay of Ardbrecknish: My Whip tells me that this is true, which is terribly helpful of him, I must say. I am afraid it is in this grouping and that gives me a slight problem. I shall read out the amendment to enable me to be sure what I am doing and to get my mind into the proper gear. The noble Lord is not speaking to Amendment No. 145YP, is that correct? The noble Lord is speaking to Amendment No. 145YJ which states:
"Page 30, line 7, after ("(2)") insert ("or(2A), as the case may be,")".
That is a huge help, and I shall quickly have to find my place in the Bill.
Baroness Seear: Perhaps the noble Lord, Lord Marsh, can suggest to the Minister how to get out of this problem. I see him rising to his feet.
Lord Marsh: I am not a procedural expert but I wonder whether it would help if I were to move to the next amendment, Amendment No. 145YP, and move that too. No doubt then the Minister could reply to the whole range of amendments.
Lord Mackay of Ardbrecknish: I am sorry to get into this difficulty but it is difficult when one is trying to make a case in the round about a number of grouped amendments if they are disentangled because that makes it rather difficult for me to catch up.
Lord Eatwell: I beg the pardon of the noble Lord, Lord Marsh, but I wanted to speak briefly to the preceding amendment, Amendment No. 145YM, before we reach Amendment No. 145YP. It fits in with some of the issues which the noble Lord, Lord Marsh, was considering in the earlier amendments which he moved, which is this whole question of how the failure to achieve the minimum solvency standard should be made

845
up and whether it should be made up with a cash payment—that was the original proposal—or by some prescribed means, whatever that may be.
In the amendment standing in my name, Amendment No. 145YM, I have suggested that the prescribed method be taken out and we settle on cash. I tabled this purely as a probing amendment to see exactly what the Government had in mind. The noble Lord, Lord Marsh, is recommending that there be a variety of methods. I am recommending that there should not be a variety of methods. I am willing to be convinced either way. I found the comments of the noble Lord, Lord Marsh, rather convincing, but I shall also be interested to hear what the Minister says. He is, of course, weakening the solvency requirement again. As President Reagan famously said, "There you go again!". He is weakening the solvency requirement, but this approach may have merit, as the noble Lord, Lord Marsh, has suggested. However, I remain to be convinced and I look forward to hearing the Minister convince me.
Lord Marsh: I am sure that the arguments are so convincing that the Minister will be convincing. I am convinced about this. The noble Lord, Lord Eatwell, believes that he may change his mind on this matter. I think it ill behoves the Minister to say that he disagrees with both of us.
I turn to Amendment No. 145YP which simply seeks to provide employers with more flexibility when they have to cover shortfalls in the fund. It is simple but it would be of major benefit to many first-rate companies and no disbenefit to employees or to pensioners. I accept that this is a much bigger issue in many ways. As far as I am aware, no one challenges the concept here. However, I am not even sure about that now because one of the things which is emerging about the minimum solvency requirement is that people are becoming increasingly disturbed at the possible scale of the implications of the provisions, which are very big indeed.
It certainly seems possible—and some would say probable —that these proposals under the minimum solvency requirement as it stands, in so far as they are clear (some of them have not been spelt out), could inflict great damage on a major section of British industry. Some of the pension funds—some of the closed funds in particular—particularly of the newly privatised industries, are massive, as we know. They are valued at £3 billion or £4 billion or more. They are major investors in British industry and the pension fund investment in total is around £150 billion.
It is against that background that the MSR provisions have to be viewed. Solvency margins are bound to fluctuate, as the noble Lord, Lord Monkswell, said. There is nothing wrong with that. In a perfectly well-managed fund they will fluctuate over a period of time between 85 per cent. and 150 per cent. with no threat whatsoever to the fund. If one takes the period of the past 25 years, for example, there was a major fall in the market in the mid-1970s. In the fourth quarter of 1987 many portfolios lost up to 30 per cent. of their value within a matter of days, and in 1994 the index fell by approximately 10 per cent. over the year. The key
846
point is that none of those major setbacks has at any point posed a serious threat to properly-run pension funds. It is not a crisis when that happens. Indeed, those declines were rightly seen as buying opportunities, with consequential gains in the inevitable upswing.
The problem which confronts us with the MSR is that there are two main risks to reasonably well-run pension funds. One is outright, calculated corruption, and the other is massive inefficiency. With the greatest respect to the Bishops' Bench, for the Church of England funds—which were not pension funds as is frequently said—to lose £890 million is not a sign of ideal fund management. On the whole, that does not happen. I see that the noble Lord, Lord Williams, is looking restless. It may well be that he is a trustee of the funds. (If I said that outside this Chamber I would be sued by him!)
The minimum solvency requirement is required as a safeguard against those problems. To achieve that one has to cover the whole spectrum, but it is sensible to give flexibility where one can. In its present form it could do great damage to the economy, as has been said. The proposed reduction, for valuation purposes, of equity investment in favour of gilts reduces fund income and therefore increases the size of the required top up. There is a feasible scenario that at the very moment when we begin to move again, as we shall from time to time, into a temporary economic difficulty, a major part of British industry will be forced to transfer literally hundreds of millions of pounds out of its companies. That cannot make sense.
The amendment seeks to write on the face of the Bill the right of the employer to use a bank guarantee or an unsecured loan, which would be protected against default by the employer but would not deprive the employer of the very large sums of working capital at the very time at which they are needed. That helps both large companies and small companies, because the problem is the same proportionately. It helps to protect jobs and it in no way detracts from the security of pension funds.
I believe that that is the kind of flexibility which we have to look for, unless the Government do as the noble Lord, Lord Eatwell, suggested—and I can see some arguments for that—and start again. 'There is no overwhelming evidence that when their proposals are wrong the Government are persuaded to take note of the arguments and withdraw the offending legislation. That is not in the nature of the beast. However, the Minister is a reasonable fellow and may decide to make a fundamental change. I would applaud that because the provision has serious implications. The reality may be that we have the minimum solvency requirement. There is a need to look at it in order to make it more flexible while maintaining the basic proposition of seeking to protect pensioners in the minority of schemes which may be at fault.
The Earl of Buckinghamshire: I should like to say a few words in support of the amendments of the noble Lord, Lord Marsh.
I have a great deal of sympathy for my noble friend the Minister because if he gives way to these very reasonable amendments he will no doubt be accused of

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weakening the solvency test. I suggest that we see the impact of the MSR as being flawed because it will bite and flawed because it will not bite. The consensus appears to be that we are all floored!
The major problem with the MSR is the uncertainty that will arise in planning one's contribution rate. The valuation period may be three years. One sets one's standard contribution rate, and if in that period one runs into solvency difficulties, for whatever reason, the company will be faced with making up the required solvency amounts. That will rapidly have an impact on the profit and loss. That will not only affect large companies; medium-sized companies will also have problems. Whether the amount involved is £10 million or £2 million, the impact will relate purely to the company's profitability.
The one thing that finance directors dislike most is uncertainty. They are facing a very uncertain situation, particularly in the closed funds which were mentioned by the noble Lord, Lord Marsh. I shall be very interested to know whether the Government have run any models to calculate the effect of the 1974, 1987 and 1990 stock market crashes on some of those closed funds. They may have a liability of 75 per cent. deferred members and pensioners and only 25 per cent. active members. There are many large schemes, and also modest schemes, in which the imbalance between active members and pensioners is great. It is that problem which the amendment of the noble Lord, Lord Marsh, attempts to address.
The impact on company liquidity is significant. I often wonder whether our friends in the stock market will be able to analyse the impact of a pension fund on a company's balance sheet. It will certainly have to take account of this situation.
Lastly, I believe that loans are permitted under the Trustee Act. I take it that companies can still make loans to the trust funds in these situations.
With those few words, which I trust are helpful, I hope that my noble friend the Minister will not regard the amendment as weakening or an attack on the provisions relating to the MSR. I hope that the noble Lord, Lord Eatwell, will be equally kind in his remarks, if he makes any.
Lord Brabazon of Tara: I should like briefly to support the amendments moved by the noble Lord, Lord Marsh. I have been informed by a company for which I have great admiration but in which I have no financial interest whatsoever—and I need to make that clear, particularly in view of present company—that this provision could cause serious problems.
A great deal of the debate on minimum solvency requirements appears to have been centred around companies which have become insolvent and closed pension funds. That is not the case with certain other companies with closed pension funds which are by no means insolvent and are doing extremely well. It occurred to me that these provisions would require that if there were a sudden fall in the stock market more money would have to be put into those pension funds. If the pension fund trust deed does not allow any refund
848
to employers, that money would then be stuck in the pension fund and could not be retrieved when, as normally happens and we hope will always happen, the market rises again.
I should like my noble friend who is to answer the debate to give me some reassurance on that particular point.
Lord Monkswell: I rise to support the noble Lord, Lord Marsh, in his powerful argument in favour of his amendments. His exposition of the problems that the British economy would face if some of the scenarios that he painted were to come to pass is important. However, I have a slight reservation about one of the noble Lord's suggestions regarding unsecured company loans to fund the deficit, if I may so put it. The idea of bank guarantees is perfectly acceptable in the sense that the banks would effectively be taking part of the risk. I can imagine that in this scenario the banks should do so.
Lord Marsh: If the noble Lord knows any bank which is prepared to take such a risk, I should like an introduction.
Lord Monkswell: I thank the noble Lord for his intervention. I listened to his remarks and there seemed to be two options: the unsecured loan from the company or some kind of bank guarantee. I may have misheard him. I stand corrected if I did. However, as I understand it, we seek to ensure the security of the pension fund from the point of view of future pensioners. To accept the idea that those pension fund assets which pay the pension could be secured through an unsecured loan by a company which might go bust is asking a little too much. I am not an accountant by profession or, dare I say it, by inclination. I recognise that there are problems which need to be addressed, but I believe that the concept of unsecured loans is a little fragile in this situation.
7 p.m.
Lord Mackay of Ardbrecknish: My noble friend Lord Buckinghamshire made a remark about people disliking uncertainty. I have to tell him that Ministers, too, dislike uncertainty. I apologise for the slight degree of confusion. My only defence is that after two-and-a-half days, with many amendments, having to watch the alphabet as well as the numbers becomes somewhat confusing. I think that I have managed to unbundle the amendments. At the risk of speaking for too long I shall deal with them in groups rather than separately.
While my introduction may have been a little long winded in repeating what had gone before, it was meant to be helpful. We believe that the situation has been improved upon from the original position outlined by Goode and then the White Paper. That was the point I sought to make on timetables.
The whole clause looks at the exceptional circumstances of a scheme failing to meet the minimum solvency requirement by more than 10 per cent.—under 90 per cent. funded. Exceptional measures are required to be taken to ensure that members are given adequate protection. Together with the new clause proposed by

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the noble Lord, Lord Marsh, later in the debate, those alternatives would run a risk of the fund not being brought up to the 90 per cent. level in an acceptable way. We are not keen on that situation.
The problem relates to a fund which is under 90 per cent. funded for which a considerable amount of cash has to be injected to attain that 90 per cent. within a year, and then from 90 per cent. to 100 per cent. in a further five years. The noble Lord, Lord Marsh, asks whether there are other ways which might be less damaging to the company than requiring it to make those quite major cash contributions, especially in the first year, and how such contributions might be better spread out. A number of ways have been suggested.
We can accept, and have accepted, that a bank guarantee or ring fencing of unencumbered assets would be an acceptable means of providing an underpin to a scheme over the period until it achieves a funding level of 90 per cent. of the minimum solvency requirement. However, scheme security is at risk here. It is essential that the alternatives to cash injection are properly described in regulations. I am advised that the term "bank guarantee" is too imprecise to appear on the face of the Bill.
If I followed the intervention of the noble Lord, Lord Monkswell, an unsecured loan quite rightly would not seem to provide sufficient security to be acceptable. We are not talking of self-investment. The funds or assets would need to be made fully secure from other creditors in the event of the employer becoming insolvent while the scheme was still severely underfunded. Therefore, quite clearly, whatever guarantee was given or whatever amount was ring-fenced would not have to be guaranteed or ring-fenced only against the employer using that money but against other creditors in the event of insolvency.
What we propose by way of regulation is intended to be of practical help to employers in the operation of the minimum solvency requirement, but it has also to offer security for members. To set out the alternatives in regulations allows us a certain amount of definition and clarification of the methods which will be used.
The effect of Amendment No. 145YP will be to extend the circumstance in which it will be permissible for employers to secure are increase in scheme assets by means of other than cash contributions. It would allow the prescribed alternatives to a cash contribution, which by virtue of this clause wall apply if the scheme is less than 90 per cent. funded on the statutory minimum solvency requirement basis, to apply at any time that the scheme was below that minimum solvency requirement. The amendment would also allow the arrangements to be taken into account as an asset of the scheme when the schedule of contributions falls to be revised. That will go a long way towards accepting that those exceptional alternative arrangements should become a part of a scheme's normal funding. I believe that that would be unacceptable because of the difficult problem of balance.
As a basis of pension scheme funding, the importance of the trust fund is that it is distinct from the employer company. Assets of the trust belong indisputably to the trustees, and we do not want to disrupt that arrangement.
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The alternatives permitted by Clause 53(2), which must also be secure, should be seen as an exceptional measure to deal with exceptional circumstances. Where a scheme is less than 100 per cent. solvent it will have five years to restore solvency. I believe that that has to be done by providing the necessary cash contributions, although, as I have sought to explain, in that first year if the figure is below 90 per cent. one might need quite a lot of money over a much shorter period. We are prepared in regulations to look at secure ways in which that might be done.
I feel a little like a pebble on the beach this time because I am being pulled first one way and then another. However, I am pretty sure that we have a reasonably balanced position.
Of course I understand the point made by the noble Lord, Lord Marsh, and my noble friend Lord Buckinghamshire that we have to consider the position of employers. Employers may well need cash at a time when the economy is going through a recession and is in difficulty. But the same is also true of the pensioner. The whole purpose of my arguments in amendment after amendment in the Bill is to protect the interests of the pension scheme members without imposing unnecessary burdens on British industry. I believe that we have the balance about right. The noble Lord, Lord Marsh, may have to read Hansard because of the slightly confused way in which I have had to tackle the provision, for which I apologise. However, I hope that he will find that we have a reasonable balance, and in regulations we shall be able to put forward sensible ways in which employers can be helped, but not at the risk of the security of the scheme.
Lord Marsh: I find the Minister's response—
The Earl of Buckinghamshire: I am sorry to interrupt the noble Lord, Lord Marsh. I referred to the question of loans in my previous intervention. I am not talking of unsecured loans. The pensions business is highly cyclical. In 1981 one bought out annuities at a 15 per cent. rate of interest and we were not facing any of the situations that exist today. If companies are forced to make a cash contribution into the scheme at any one moment in time because the funding dips below whatever we state is the minimum solvency level, in three or four years' time the markets might have recovered and suddenly we shall be looking at a surplus.
Once the employer has made that cash injection, it is difficult for him to get his money back. Is there any possibility in those circumstances of using a loan from the employer to be put into the fund? There is no question of a cash injection on a loan basis with real rates of return paid to the employer. Then, when the fund recovers, he has an ability to recover his loan. He does not have to go through the system of asking the trustees and meeting all the surplus requirements. I wanted to raise that point and make it clear.
Lord Mackay of Ardbrecknish: If that was an intervention before I sat down, I understand my noble friend's scenario. However, I believe that the noble Lord, Lord Marsh, has a later amendment which deals

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with the situation. By the time we reach it I may be able to make comments to my noble friend about the matter of a loan and how one would define it.
Lord Marsh: One needs to read the Minister's reply. As the noble Earl has just said, the whole basis and thrust of the arguments is that the industry is cyclical. The downturns do not place at risk well run pension funds; they never have done and never will. It is important to enable the pensioner to be protected against the depredations of the incompetent and the downright criminal. Therefore, we must cover the broad brush situation.
However, the burden upon industry and companies at times is so enormous that it makes sense not to seek some theoretical balance but to ensure that flexibility is available which enables the employer to retain the cash. He effectively only puts it in as a bridging loan and it will not be called in 99.9 per cent. of cases anyhow. We shall come in a moment to the argument of allowing him to take it back. Any opportunity for him to do that makes sense. The alternative is that British industry in general will suffer. I understand that there are grave anxieties in the Bank, in the CBI and among virtually everyone concerning the potential impact of depriving companies of hundreds of millions of pounds for a time for something which is a cyclical fluctuation and which deprives them of financial backing.
If the problem is one of definition, we all understand that the regulations must be framed in a certain way. It is a pity that so much of the Bill involves regulations because it means that we do not have an opportunity to discuss them. That is a great weakness. If the Bill has to be dealt with in this way, I quite understand that one may suggest different wording and different formulae. However, if a vast organisation is totally solvent and has massive assets but is not allowed to take that into account, then, with the greatest respect, it is a ludicrous situation.
I hope that before the next stage of the Bill the Minister will reconsider the matter. He will continue to receive pressure from many sources on the dangers which are inherent in the Bill. If it is a matter of the definition, he could turn it around. In my view there is no reason why in these circumstances a degree of flexibility should not be available to companies to avoid the pointless transfer of money which they need to make their industries work and for it to sit in a fund for no particular purpose. However, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 145YK and 145YL not moved.]
The Deputy Chairman of Committees (Viscount Davidson): If Amendment No. 145YM is agreed to, I cannot call Amendment No. 145YN.
Lord Eatwell Lord Eatwell had given notice of his intention to move Amendment No. 145YM:
Page 30, leave out line 14.
The noble Lord said: I wish to suggest to the Minister that in his search for balance with respect to the funding and the provision to make up the minimum solvency
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requirement, he has gone too far in referring to the possibility of ring-fenced assets. So far as I can tell, there is no way of ring-fencing assets other than to put them into a trust. What does the notion of "ring-fenced assets" mean? Cash, we understand; bank guarantees, we understand. I am sure that on mature reflection the Minister will find that ring-fenced assets are not a satisfactory approach to the problem. I leave the point for the Minister to mull over. I shall not move the amendment.
[Amendment No. 145YM not moved.]
[Amendments Nos. 145YN to 145YQ not moved.]
Clause 53 agreed to.
Lord Lucas: I beg to move that the House be now resumed. In moving that Motion, I suggest that the Committee stage begin again not before 8 p.m.
Moved accordingly, and, on Question, Motion agreed to.
House resumed.

Sex Discrimination Regulations: Armed Forces
7.16 p.m.
Lord Lester of Herne Hill Lord Lester of Herne Hill rose to move to resolve, That this House calls on Her Majesty's Government to revoke the Sex Discrimination Act 1975 (Application to Armed Forces etc.) Regulations 1994 (SI 1994, No. 3276), and to make in their place regulations which are fully in compliance with and give full effect to European Community law, by prescribing only such derogations from the Community principle of equal treatment for men and women in employment as are in accordance with Council Directive 76/207/EEC; and by repealing the blanket derogation in Section 1(9) of the Equal Pay Act 1970, so as to ensure and maintain the Community principle of equal pay for equal work for men and women serving in the naval, military and air forces of the Crown.
The noble Lord said: My Lords, before coming to the business in hand perhaps I may deal with two preliminary matters. First, my noble friend Lady Williams of Crosby had hoped to speak in the debate. However, she has asked me to apologise to the House for her absence; her daughter is being called to the Bar this evening and although lawyers are not popular in all parts of the House, I am sure that your Lordships will think that it is an important reason for her to be absent.
Secondly, I should make it clear that this is a topic on which my party does not take a collective position, I speak for myself. Thirdly, I am glad to have the opportunity to introduce the Motion. It is the only means by which the House can perform its important function of scrutinising subordinate legislation, subject to the negative resolution procedure, to do its best to ensure that it achieves its object. In this case, that is properly to implement European Community law.
On 20th December, hastily and, I am afraid, without consultation, just before the Christmas Recess, the Sex Discrimination Act 1975 (Application to Armed Forces etc.) Regulations 1994 were laid before the House. They

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were laid under the powers conferred by the European Communities Act 1972 to give effect to the European Community principles of equal treatment in employment and of equal pay for equal work, without sex discrimination.
The fact that the Government have at last introduced implementing regulations is welcome. Unfortunately, however, I believe that the regulations lack clarity and transparency. Far from removing, they create legal uncertainty and they fail to achieve their purpose of giving proper effect to Community law.
To explain what I mean, I must briefly describe the statutory scheme governing sex discrimination in employment and equal pay. I shall try to do so avoiding legal jargon, but I shall probably fail.
The Sex Discrimination Act 1975 makes sex discrimination unlawful in the employment field. Until amended by these regulations, Section 85(4) contained a blanket exception for service in the naval, military or air forces of the Crown. Section 85(5), which is unaffected by the regulations, still permits sex discrimination in admission to cadet forces administered by the Ministry of Defence.
The other statute, the Equal Pay Act 1970, requires equal pay for equal work without sex discrimination. But Section 1(9) excludes from its scope service in the Armed Forces. Therefore, it is not lawful under the present statutory scheme to deny women employed in the armed services equal pay for equal work. I emphasise that Section 1(9) is untouched by these regulations. The principle of equal pay for equal work, guaranteed by Article 119 of the Treaty of Rome and reinforced by the Equal Pay Directive, contains no such exception. Therefore, I submit that there is a continuing mismatch between the British statute book and Community law.
I turn now to Council Directive 76/207/EEC which came into force as long ago as 9th August 1978. That guarantees the principle of equal treatment without sex discrimination as regards access to employment, including promotion, and to vocational training, and as regards working conditions. Article 6 obliged the member states to introduce into their national legal systems the measures necessary to enable everyone to pursue their claims by judicial process. Article 5(2) obliged the member states to abolish any laws, regulations and administrative provisions contrary to the principle of equal treatment.
Article 2(2) is the key derogation clause. It says that the directive is without prejudice to the right of member states to exclude from its field of application those occupational activities and, where appropriate, the training leading thereto, for which, by reason of their nature or the context in which they are carried out, the sex of the worker concerned constitutes a determining factor.
The European Court of Justice—I hope that I shall be forgiven for mentioning briefly a few of the landmark points —gave an authoritative ruling on the scope of that derogation in a case called Marguerite Johnston v. Chief Constable for the Royal Ulster Constabulary in 1986. The Court there laid down the following important principles. First, that member states must take
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measures which are sufficiently effective to achieve the aim of the directive. Secondly, that Article 2(2), being a derogation from an individual right laid down in the directive, must be interpreted strictly. Thirdly, that in determining the scope of any derogation from the right to equal treatment of men and women the principle of proportionality must be observed. That principle requires that derogations remain within the limits of what is appropriate and necessary for achieving the aim in view. Fourthly, the only provisions in the treaty which provide for relevant derogations, including Article 224, the Court said, deal with exceptional and clearly defined cases. Because of their limited character, those articles do not lend themselves to a wide interpretation.
I should explain to your Lordships, even though it is dull to have to do so, that Article 224 of the Rome Treaty is a quite exceptional derogation clause, catering for extreme circumstances. It states:
"Member States shall consult each other with a view to taking together the steps needed to prevent the functioning of the common market being affected by measures which a Member State may be called upon to take in the event of serious internal disturbances affecting the maintenance of law and order, in the event of war, serious international tension constituting a threat of war, or in order to carry out obligations it has accepted for the purpose of maintaining peace and international security".
Therefore, it is not surprising that the Court of Justice rejected the British Government's reliance in Johnson on Article 244 of the treaty to justify discriminating against women members of the RUC full-time reserve on the basis of their gender, even in the quite terrible conditions of emergency and terrorism then prevailing in Northern Ireland. As the Court made clear, Article 224 is not a general escape clause permitting states to infringe the fundamental right of women to equal treatment. What matters is that a state can bring itself within the derogation clause in Article 2(2) of the directive which permits sex discrimination only where there are particular occupational activities, and, where appropriate, the training leading thereto, for which by reason of their nature, or the context in which they are carried out, the sex of the worker concerned constitutes a determining factor.
In another case, this time against France—Commission v. France in 1988—the Court held that it follows, from the fact that the exceptions provided for in Article 2(2) of the directive may relate only to specific activities, that they must be sufficiently transparent.
Finally, in another case—Emmott v. Minister for Social Welfare in Ireland in 1991—the Court of Justice decided that, so long as a directive (in that .case guaranteeing equal treatment in social security) has not been properly transposed into national law, individuals are unable to ascertain the full extent of their rights. Only the proper transposition of the directive, said the Court, will give the necessary legal certainty. Until such time as the directive has been properly transposed, a defaulting member state may not rely upon an individual's delay in bringing proceedings against the state to protect rights conferred on her by the directive; and national time-limits cannot run unless and until

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there has been proper transposition of the directive into national law. That is a heavy sanction against a defaulting state.
Let us now leave aside the legal framework. In December 1991, two former servicewomen, both nurses, for whom I acted as counsel, obtained declarations from the Divisional Court that their exclusion from the scope of the Sex Discrimination Act was contrary to the directive and that the long-standing policy and practice of dismissing all pregnant women from the Armed Forces breached the directive. That put the Government on notice that servicewomen and men could not be excluded wholesale from the protection of the Sex Discrimination Act and that the statutory exclusion could not stand in its present form. Most unfortunately, for the past three years the Government have done nothing to give effect to the decision by introducing implementing regulations. As a result—I hope that I shall be forgiven for this criticism—they have undoubtedly caused themselves and the British taxpayer, which is more to the point, readily avoidable problems and expense.
What has happened meanwhile? Several thousand women who had been dismissed from the Armed Forces because of pregnancy brought proceedings in industrial tribunals claiming compensation. The ministry admitted liability in all the claims but sought to dispute the quantum of damage, as is its right. Claims are still proceeding in industrial tribunals nationwide.
The ministry estimate that those claims have so far cost it and the taxpayer some £35 million. One reason why that figure is so high is that the ministry is liable to pay compensation to every woman dismissed because of pregnancy between 9th August 1978 (when it should have implemented the directive) and the summer of 1990, when maternity leave was finally introduced for servicewomen. In other words, the ministry had maintained an unlawful sex discriminatory policy for 12 years and thereby blighted the careers of over 5,000 women.
Some 80 per cent. of the cases have been settled, for an average of about £10,000 each. A few of the awards have been very high and that has attracted considerable adverse comment in hostile elements of the media. Those few awards are high because the women concerned have been able to demonstrate that they have been deprived of lengthy and successful careers because of the unlawful actions of the Ministry.
Perhaps I may give just two examples to serve for all. Nichola Cannock was commissioned into the WRAF. She was a mechanical engineer who in the early 1970s had obtained a degree in engineering at a time when almost no women were qualified in that way. While in the WRAF, she was involved in a senior capacity in servicing aircraft taking part in the Falklands campaign. She served on Ascension Island, where special accommodation had to be provided for her because she was the only woman engaged on that job. She became a specialist in the servicing of Tornado fighters. After some nine years of service with the WRAF, she became pregnant and her employment was terminated. Her damages were very substantial because the industrial
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tribunal accepted that she was a career woman of great ability and dedication and that she would have served to the end of her 16-year commission if she had been permitted to do so. At that time she would have been entitled to an immediately payable index-linked pension. There is no civilian employment which could have provided her with equivalent benefits.
Alison Mutton was serving in the WRAC. Her husband left the Army and took various jobs as a driver. She was the primary bread-winner, and she and her husband lived in married quarters that were in her name, which they were entitled to occupy solely by virtue of her service. She became pregnant and was informed that she must choose between the termination of her pregnancy and the termination of her service. She realised that, if she were dismissed, she and her husband would lose their home. They would not be able to remain in Oxfordshire where they were posted because they had nowhere to live, and would have to live with his parents in the north of England. Therefore, her husband would also become unemployed and they would be reduced to living with their in-laws. She decided to have the abortion, and did so at great personal cost.
The following year, as a result of a failure of contraception, she became pregnant again and decided to have a further abortion for the same reason. She went to the hospital and saw the baby move on the scan and realised that she could not go through with the termination. She therefore had the baby, and the consequences which she feared materialised. Within a matter of two weeks she and her husband were reduced from a situation in which they had had two incomes and a home to one in which they were both unemployed, she was pregnant and they were living with his parents in an area of high unemployment. Their marriage was unable to withstand the strain and they eventually separated. She won her case in an industrial tribunal last week, and will receive substantial compensation, probably in the region of £100,000.
The problems of sex discrimination in the Armed Forces are not confined to dismissal on grounds of pregnancy. For example, there is a continuing problem, I understand, about discrimination in redundancy terms under the Options for Change programme. Until 1991, women joining the WRAC were permitted to commit themselves only for a maximum of three years, whereas men joining the Army could commit themselves for three years', six years' or nine years' service. Men who committed themselves to nine years' service were immediately paid on a higher scale. Women could not be paid on that scale until they had actually completed their nine years' service. Applications for voluntary redundancy were invited from service personnel with between six and nine years' service. Women who applied for redundancy but had less than nine years' service found that, because they were on a lower pay scale than men with the same length of service serving in the same trade at the same rank, the redundancy payments they were offered were about £6,000 lower than those which were offered to men in an equivalent situation.
In what respects do these regulations fail to comply with Community law? They permit any acts of sex discrimination done for the purpose of ensuring the combat effectiveness of the Armed Forces. But Community law requires not only the pursuit of a legitimate aim, such as ensuring combat effectiveness; it also requires compliance with the principle of proportionality. The means employed must be no more than is necessary or proportionate to achieve that legitimate aim.
The phrase,
"for the purpose of ensuring … combat effectiveness",
is unclear. It is not clarified by any list of the specific occupational activities affected: for example, two personnel being employed in a tank where plainly for reasons of privacy and personal hygiene it would be inappropriate for members of different sexes to share that close confined space. Individuals will not be able to understand the scope and limits of their rights and unnecessary litigation will result.
Nor is there any reason why "combat effectiveness" should of itself require or justify treating servicewomen less favourably than servicemen. What the law requires is that men and women should be treated by their employers on the basis of their individual skills and abilities and not on the basis of broad gender-based assumptions and generalisations. Last year the United States Government decided to open combat jobs aboard ships and in naval aviation squadrons to women. Last week Secretary of State John Dalton provided departmental guidance explaining why pregnancy and parenthood are compatible with a naval career for women. But under these regulations our Secretary of State could discriminate against women with the aim of promoting combat effectiveness.
I suggest that the blanket derogation in the regulations sweeps too broadly. It goes well beyond the derogation permitted by Article 2(2) of the directive. It fails to give effect to the proportionality principle. It also lacks transparency. It is not related to specific activities, so that members and former members of the Armed Forces of both sexes are able to ascertain the full extent of their rights. It does not ensure that members of the Armed Forces are judged on the basis of their individual skills and abilities. And it manifestly falls outside the very exceptional circumstances envisaged by Article 224 of the Rome Treaty.
Because Section 85(5) of the Sex Discrimination Act is unaffected by the regulations, sex discrimination remains permissible in admission to cadet forces administered by the ministry, even where such discrimination is wholly unrelated to combat effectiveness. Because Section 1(9) of the Equal Pay Act is unaffected by the regulations, the principle of equal pay is not properly transposed into our legal system.
The Government will no doubt argue that the wording of the regulations must be broad to enable account to be taken of changing circumstances, as military technology and equipment change. However, I submit that there is no reason why the regulations cannot prescribe a specific list of exclusions which can be readily amended by subordinate legislation. That would achieve the
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necessary transparency and legal certainty, while permitting the necessary flexibility as circumstances change.
For those reasons, I hope that the Government will think again. Otherwise, I fear that there will be unnecessary litigation in our courts and tribunals, and probably in the European Court of Justice, because of the failure by Parliament to use our much-vaunted sovereignty to enact regulations which enable our fellow citizens to know the proper extent of these important rights. Employment lawyers, like myself, will thrive; the victims of sex discrimination will suffer; and the taxpayer will pay for the ministry's failure to introduce the necessary policies and legislation. I beg to move.
Moved, to resolve, That this House calls on Her Majesty's Government to revoke the Sex Discrimination Act 1975 (Application to Armed Forces etc.) Regulations 1994 (SI 1994, No. 3276), and to make in their place regulations which are fully in compliance with and give full effect to European Community law, by prescribing only such derogations from the Community principle of equal treatment for men and women in employment as are in accordance with Council Directive 76/207/EEC; and by repealing the blanket derogation in Section 1(9) of the Equal Pay Act 1970, so as to ensure and maintain the Community principle of equal pay for equal work for men and women serving in the naval, military and air forces of the Crown.—(Lord Lester of Herne Hill.)
7.37 p.m.
Lord Tebbit: My Lords, I am grateful to the noble Lord, Lord Lester, for finding a more effective means than the one which occurred to me—that of merely praying against this regulation—to ensure that we were able to debate these issues. I did not wish to interfere with the flow of his argument, but in both his Motion and in what he said, the noble Lord referred to Section 1(9) of the Equal Pay Act. That puzzled me. In my copy of the Act it appears to be Section 1(8). Are we talking about the same thing? It is not an important point and the noble Lord need not answer at this moment, but I raise it for greater certainty.
The House will no doubt be relieved to hear that I shall not argue tonight the merits of sex discrimination legislation. That is not my purpose, neither as it applies to the Armed Forces in particular, nor to society in general. I am concerned, as indeed was the noble Lord, Lord Lester, with the effectiveness, and indeed the vires,of the legislation. It may be helpful, not for the benefit of noble Lords, but for those who may read the debate at some stage, for us to remind ourselves how statutory instruments arise and how they work. I believe that to be important to my argument.
The basic rules containing statutory instruments are set out in the Statutory Instruments Act 1946. It is in Section 1 of the Act that they are defined, broadly speaking—I do not quote from the Act but summarise it—as instruments making, under the power granted in an Act of Parliament, orders, rules, regulations, or subordinate legislation. Quite clearly, this statutory instrument does not fall within that definition. It is not

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making orders or regulations in that manner. It is, in fact, repealing part of an Act and amending substantially that Act.
Of course, statutory instruments have been developed to give such power and particularly where it has been granted in a particular Act to amend prescribed provisions of that Act. There is such provision in the Sex Discrimination Act 1975. But it does not apply to the power to amend Section 85. Therefore, this statutory instrument is made—so it tells us on the face of the paper—under Section 2(2) of the European Communities Act 1972. Confusingly, Section 2(2) has nothing to do with the Article 2(2) to which the noble Lord, Lord Lester, has been referring.
When in the other place I voted for the European Communities Act 1972, I never dreamt that Section 2(2) would be used to amend at the diktat of the European Court the law concerning sex discrimination in the armed services. Clearly, I was not alone in that because subsequently, three years later, Parliament, knowing its own mind, knowing it could not be bound by the legislation of a previous Parliament (or can it these days?) made its intentions crystal clear in Section 85 of the 1975 Act, saying in the broadest terms—terms to which the noble Lord, Lord Lester, objects very strongly but they were very clear—that the sex discrimination law did not apply to anything of this kind in the armed services.
Well, Parliament has been bounced. We have been overridden. And why? Does sex discrimination in the armed services have anything whatever to do with the Common Market, the internal market, or the single market? Is it some form of barrier to trade which prevents BMWs being sold in Britain or insurance policies being sold in Germany? Not at all. It has nothing whatever to do with trade or the free movement of goods, people or capital across the internal borders of the European Community. It is about what should or should not be the rights of members of Her Sovereign Majesty's Armed Forces. That surely is not a matter for a treaty which, we were told, was primarily one concerning trade and economic matters. It must surely be a matter for a sovereign state —either this sovereign state or another sovereign state. It is clear that it is now not a matter for this sovereign state, not a matter for Her Majesty's Ministers or her Parliament, to decide in what manner her Armed Forces should be organised, but it is a matter for another body external to this kingdom, over which the people of this kingdom have no control and no rights.
Just to make all these matters rather worse, the Joint Committee on Statutory Instruments in its Eighth Report—we have before the House as HL Paper 27 an extract from that Eighth Report—casts doubt upon the vires of this statutory instrument, the very point which the noble Lord, Lord Lester, made. It suggests—and it argues it well—that it is simply not within our powers to legislate in this matter. It says that we cannot rely on Article 224 of the Treaty of Rome, nor, I take it, on the
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doctrine of subsidiarity, to give to this Parliament the right to legislate in the way that is proposed and to say, as the statutory instrument purports to do, that:
"Nothing in this Act shall render unlawful an act done for the purpose of ensuring the combat effectiveness of the naval, military or air forces of the Crown".
If Article 224 does not allow such a provision, is there some other legal basis on which a provision might be made? How do other member states proceed? Have they abolished sex discrimination in its entirety in their armed forces? We are told—I am sure that the noble Lord, Lord Lester, is right—that this matter has been hanging over our heads since 1978. Are the Greeks in line? Are the Spaniards in line? The French, the Germans? No doubt our Danish friends are—they have always had rather extraordinary views about matters of sex discrimination, as I remember from my time in the Council of Ministers. But I would be intrigued to know whether we are being pushed along rather more quickly, even if it does appear rather slowly, than our fellow member states.
I have to say, however, that it may be that we have been cutting any ground on which we might have stood away from under our own feet. After all, the navy has been putting women sailors to sea in operational ships. There are precedents for that. I understand that there were a number of women on board HMS "Victory" at the Battle of Trafalgar. I do not know whether that had anything to do with the scale of the victory—I mean the outcome of the battle not the scale of the ship itself—but undoubtedly they were there in those days. More recently, the Royal Air Force is now training women as fast jet pilots.
But I should like to come away from that gentle edging towards the merits of the matter—I want to try to avoid getting entrapped into such matters of controversy: they do not come easily to me—and back to the vires of the issue. I note also what the joint committee said in the final paragraph of HL Paper 27 concerning the making of this order under the negative procedure. It is worth quoting a little from that paragraph:
"The Committee notes that these Regulations have been made subject to negative procedure… The Ministry explain their decision to make these regulations subject to negative procedure by saying `Given the content of the Regulations (which essentially amount to regularisation of the statute book)"'—
I emphasise the words "regularisation of the statute book"—
"`it was considered appropriate for the negative resolution procedure to apply'. However, the Committee considers that the content of these Regulations is so significant in embodying a policy choice in the formulation of the new exception from the 1975 Act that it would have been more appropriate to have made the Regulations subject to draft affirmative procedure".
That is certainly true, and, indeed, I might like to go further. It is not my intention—and never was when I set down a Prayer—to seek to challenge the convention that this House does not seek to overturn statutory instruments brought under the negative procedure in particular nor that it should reject those under the affirmative procedure, unless there are somewhat exceptional circumstances.

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A marker should be set down and perhaps the joint committee has done so. When statutory instruments go beyond the implementation of the intentions of an Act already approved after due debate in both Houses of this Parliament and, like this one, reverse the effect of a key section of an Act passed by this Parliament, it seems to me that that is scarcely subordinate legislation at all.
'This statutory instrument is in fact primary legislation and would have been treated as such but for its provenance; that is, that it comes because of the diktat of a foreign court. If this proposal had been brought forward in the normal manner of reforming legislation there is no doubt whatever that it would have been treated as primary legislation with a proper debate in both Houses of Parliament.
As noble Lords will know, as a result of a Prayer laid by the Opposition in the other place, there was a 90-minute debate in a Committee upstairs at the end of which I believe eight members of that Committee voted to say that they had discussed the regulation and considered it and three voted to say that they had not. That was the extent of the democratic procedures to check on what this major piece of legislation was about and in what manner it should be conducted.
Primary legislation is now to be legislated by a means which restricts debate and prohibits amendment otherwise the noble Lord, Lord Lester, would have put down amendments to such a Bill and they could have been properly and fully discussed.
That leads to me to put a direct question to my noble friend who will answer this debate and for whom I have the greatest sympathy. I feel that he is in an almost impossible position. Let us suppose that this statutory instrument proves to be ultra vires or it is rejected. We know it is not going to be rejected tonight, but let us suppose that it is. Let us suppose that it had been rejected in the other place. What effect would that have on the law which is now being imposed in the United Kingdom? I did not ask what effect it would have on the statute book of the United Kingdom because we now know that that statute book is not the law of the United Kingdom. The law of the United Kingdom is what the European Court says is the law of the United Kingdom.
If the joint committee is wrong and the Government right, we would not even have this fig leaf of protection which is set out in Paragraph 2(a) of the order in the event that we reject it. In essence, these proceedings this evening—rightly taken during the dinner hour because the taking of dinner must surely be more important than the consideration of a trifling matter like the operation of sex discrimination within Her Majesty's Armed Forces—are nothing more than a farcical reminder of a very unpleasant fact. This Parliament is no longer a sovereign body. It no longer has the power to legislate on matters which are concerned solely with the management, leadership, effectiveness and good order and discipline of Her Majesty's Armed Forces. How much more is there left for us?
7.54 p.m.
Lord Williams of Elvel: My Lords, I shall not take up much of your Lordship's time because most of the
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arguments that I had in mind to deploy have been deployed either by the noble Lord, Lord Lester, or by the noble Lord, Lord Tebbit.
The major issue here is that of vires and hence the legality of what the Government have done, because this order is now part of the corpus of law. When the Minister comes to reply he will no doubt comment on the report of the Joint Committee on Statutory Instruments. Our view is that the Joint Committee is broadly right that the Government cannot rely on Article 224 of the Treaty of Rome as authority to introduce the order specifying "combat effectiveness" in the terms of the order. Our view is that Article 2.2. of the Equal Treatment Directive does not give the Government power to make this derogation and that therefore it has to be made under some other principle which no doubt the noble Lord will explain to us.
Our view is that the expression "combat effectiveness" in the order, as the noble Lord, Lord Lester, said, goes very much wider than the derogation which is allowed in Article 2.2. of the directive. It is clear from that that the only form of allowable discrimination is contained in the provisions of the Sex Discrimination Act 1975 and that is genuine occupational qualification. That is when, for physical or other reasons, it will not serve for the two sexes either to be jointly in an operation or together in a particular capacity. I believe that those points have been made by the noble Lords, Lord Lester and Lord Tebbit, and I am not going to elaborate on them.
I have only two other points to make. I believe that there are further omissions in the Government's approach which the directive would normally require. For instance, under Section 85(5) of the Sex Discrimination Act recruitment to military cadet forces is excluded from the ambit of the sex discrimination provisions. I believe that to be contrary to the Equal Treatment Directive. I ask the Minister to comment on that.
Then there is protection from victimisation. The Equal Treatment Directive is perfectly clear that if someone complains of discrimination they should be protected. At the moment that does not seem to appear in legislation even as amended by this order. As regards equal pay, there appears to be an omission because, as I understand it—and I stand to be corrected by the noble Lord, Lord Tebbit—under Section 1(9) (a) of the Equal Pay Act, if a member of the Armed Forces believes that the Secretary of State has not met the principle of equal pay set out in Section 7(1) of that Act, he is not entitled to complain, but an ordinary employee is entitled to complain to the Secretary of State. Again, it is likely that that exclusion violates the Equal Treatment Directive. I hope that the Minister will deal with that problem.
In sum, it seems that there is justification for the Joint Statutory Instruments Committee casting very considerable doubt on whether the Government have the vires to do what they have done. I echo the point may by the noble Lord, Lord Tebbit. If challenged, what happens if the courts overturn this particular order? What happens to our general legislative principle then? If Article 224 is the authority for this order, as the noble Lord, Lord Lester, indicated in reading out that article

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in the treaty, member states shall consult each other. Did member states consult each other about the order which we are now discussing or did the United Kingdom act unilaterally?
There are serious doubts about this whole operation. I want to emphasise to the Minister that we certainly believe that we should have combat effectiveness and nothing which I have said casts any shadow of doubt on that principle. It may well be that many women do not want to undertake the risk of combat. The same is true of many men. If they do not wish to do so, they should not volunteer to join the Armed Forces. That seems a simple matter. If they do volunteer, they must expect to be in combat situations. There is no difference between the front line and the second line in modern technological warfare, as was shown by the death of several US women in the armed forces in the second line when they were struck by a Scud missile.
So, where does that get us? Either the Government can justify the vires and can say that they fulfil the terms of the equal treatment directive, or we shall have to say that the Government are wrong and, as the noble Lord, Lord Lester, said, they will be proved wrong. And when they are proved wrong, that will be of great benefit to the noble Lord, Lord Lester, but, as he rightly pointed out, to the great detriment of the taxpayer.
8 p.m.
The Parliamentary Under-Secretary of State, Ministry of Defence (Lord Henley): My Lords, let me try to respond to the points that have been raised and let me hope that I can respond reasonably briefly. First, perhaps I may remove any misunderstandings about the aim of the regulations which were laid before the House in December and which came into effect six weeks later on 1 February. They remove the complete exemption of the Armed Forces from the provisions of the Sex Discrimination Act 1975 which the noble Lord, Lord Lester will know well—an exemption which has proved to be inconsistent with European law—and replace it with the provision that nothing done for the purpose of combat effectiveness shall be unlawful under national law.
I must stress that it is not our intention to use the regulations to place further restrictions on the areas where women can be employed in the Armed Forces. Indeed, our policy on the employment of women is moving in quite the opposite direction. I should like to say a little about that later.
Following the remarks of the noble Lord, Lord Lester, and others and the comments of the Joint Committee on Statutory Instruments, which were rightly stressed by the noble Lord, Lord Williams, I think it would be right if I said a little about the vires of the regulations and why we consider them to be intra vires I stress that the committee said only that there was a doubt as to whether the regulations were intra or ultra vires. I should like to make our position clear.
As we set out in our memorandum to the joint committee, the essential point is that Article 224 of the treaty, which has been referred to on many occasions, is
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evidence that the treaty does not extend to action taken by a member state to ensure the combat effectiveness of its armed forces. An alternative way of putting the argument is that while certain aspects of such measures might in principle affect some matters that fall within the treaty, a member state is entitled to rely on Article 224 in order to preserve the prerogative of that state to protect its national security.
Article 224 of the treaty contemplates a member state taking measures in a number of specified events. Of particular relevance to the regulations, two of those events are war or serious international tension constituting a threat of war. Article 224 is written on the assumption that the antecedent treaty obligations do not restrict the power of the member states to take action in any of the events described therein.
As I am sure the noble Lord, Lord Williams, will accept, in order to be in a position to take action in relation to war or the threat of war, a member state must be free to organise, recruit and train its armed forces in the manner it considers best calculated to ensure the combat effectiveness of those forces. If that involves a limited departure from the principle of equal treatment, that is a matter for the member state and is beyond the scope of the treaty and any directives made thereunder.
As to the Johnston case, which was referred to in the committee's report and by the noble Lord, Lord Lester, I believe that the court's decision in that case is complex and in places difficult to follow. I should stress that it involved the civil police, not the Armed Forces, and even in that context did not answer the question that was referred to it on Article 224. In so far as the judgment can be interpreted as suggesting that reliance cannot be placed on Article 224, we would not expect the court to maintain that position in the context of the defence of a member state. It should also be noted that the Joint Committee on Statutory Instruments also concluded that the Johnston case might not be followed by the European Court in the context of the defence of a member state.
Our memorandum also makes clear that the ministry would be able to rely on the expressed derogation from the principle of equal treatment contained in Article 2(2) of the equal treatment directive to which the noble Lord referred. The approach which the ministry has taken to new Section 85(4) is consistent with the terminology used in Part V of the 1975 Act. I refer in particular to Section 52 which provides that nothing in the earlier parts of the 1975 Act renders unlawful an act done for the purpose of safeguarding national security. Indeed, it might well have been possible for the ministry simply to have relied on Section 52(1) and repealed the old Section 85(4). It was, however, considered desirable to make the position in relation to combat effectiveness clear by inserting new subsection (4). As the ministry's memorandum made clear, where the ministry proposes to depart from the principle of equal treatment in order to ensure combat effectiveness it would be because of the nature of the activity in question and the context in which it will be carried out. The ministry will accordingly, as a matter of principle, be squarely within the derogation in Article 2(2).

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I should respond to the committee's views on the use of the negative resolution procedure, which was referred to by my noble friend Lord Tebbit. Given the content of the regulations which, I would argue, essentially amount to regularisation of the statute book, the ministry considered it appropriate to use the negative resolution procedure. That was consistent with previous practice. The sex discrimination and equal pay remedies regulations of 1993, which amended the 1975 Act, using the same powers under Section 2(2) of the 1972 Act, were also made using the negative procedure. The ministry had considered that a substantial change was being made to the existing legal position by the regulations and would carefully have considered the use of the affirmative procedure. But we believe that that is not the case with these regulations.
It has been suggested by the noble Lords, Lord Lester and Lord Williams, that the wording of the regulations is too broad and that we should have specified those areas where the nature of the activity makes it inappropriate for one sex or another. I believe that it would be quite impractical and totally unnecessary to do this on the face of the legislation—or for that matter in regulations. The wording is deliberately broad. It needs to be to take account of changing circumstances both now and in the future. Military technology and equipment changes. Society's attitudes change. If there were a specific list of exclusions, we would have to resort to legislation every time we wished to amend it.
Perhaps I can give just one example: the employment of women on ships. That has grown dramatically over the past few years. I stress to the noble Lord, Lord Lester, that something of the order of 700 women in the Royal Navy are now serving at sea. We were certainly ahead of the United States, to which the noble Lord referred, in taking that step. I think everyone will agree that it has been an enormous success, despite considerable misgivings at the time and considerable fears, particularly among the wives of those serving at sea who had been left back at home—and despite the misgivings of some of the tabloid press. I believe that if we had drawn up a list allowing that to be one of the areas into which women could go and it had not been a success, to have had to come back and make a small amendment and then another amendment a few weeks later would not have been the right way forward.
I wish to refer briefly, in response to the noble Lord, Lord Williams, to consultation under Article 224. If the noble Lord looks at the wording of Article 224, he will see that it is quite clear that on an issue such as this, which is not related to the Common Market and such matters, consultation is not appropriate.
Perhaps I may briefly remind the House, as I said I would, of the role of women in the Armed Forces. Servicewomen have always undertaken a wide range of duties, although they did not serve in combat roles. I am sure that all noble Lords would wish to pay tribute to the valuable contributions made by women in the Armed Forces over many years. Indeed, in order to make fuller use of the undoubted abilities of women in the services and to improve their career opportunities, new areas of employment have been opened up to them in recent
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years. Over 20 women are serving as aircrew in the three services and more than 50 others are undergoing training, including training in fast jets.
As I said earlier, about 700 women are serving at sea in the Royal Navy. That is way ahead of America where women were prohibited from serving on naval ships except hospital ships. The case referred to by the noble Lord, Lord Lester, was ruled to be illegal by the American courts. As all noble Lords will know, women are serving with the UN forces in Cyprus and the former Yugoslavia and in ships patrolling the Adriatic.
Other than normal considerations such as privacy and decency, which of course apply also in civilian life, we expect that women will not be excluded from posts in the Armed Forces except where their presence would impair combat effectiveness. It is important that I define what we mean by "combat effectiveness". I mean the ability of a unit to carry out its missions and operations successfully. Obvious examples, which are likely to continue to be for males only, include the infantry and armoured corps. But the Army and other services are keeping those matters under review and are at present looking into means of gender-fair physical testing. We recognise fully the importance of ensuring the maximum equality of opportunity consistent with the maintenance of combat effectiveness.
I shall do all I can, as will my colleagues in another place, to keep this House and another place informed of any further developments, but we are not making any immediate changes. Nor do the regulations require us to do so. There have been suggestions—made outside the House—of reduced opportunities for women in the Armed Forces. I give the House the firm assurance that the general effect of the changes will be towards a further improvement in the overall opportunities for women in the services.
Lord Tebbit: My Lords, before my noble friend leaves the point, if we take all that he has said—I am sure that he is right—about Her Majesty's Government's policies in this area, why do we need an exemption to be able to discriminate on grounds of sex in cadet forces?
Lord Henley: My Lords, I shall be coming later to the subject of cadet forces. The simple point is that cadets are not employed, and so they are not covered by the employment legislation about which we are talking. It does not affect those adults employed supervising cadets; it is purely an exemption from the Act—I shall reach this point in due course—with regard to the admission of cadets and not to their employment. My noble friend will understand that those cadets are not employed.
Lord Lester of Herne Hill: My Lords, I am sorry to take more time, but will the Minister deal with the point that the employment provisions under the Sex Discrimination Act cover training and training organisations. Surely there is no doubt that being a cadet

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is a way of becoming a member of the Armed Forces and falls within the training provisions covered by the relevant part of the statute.
Lord Henley: My Lords, some cadets join the Armed Forces, although not a high proportion. However, to argue that that is a means by which they train to become members of the Armed Forces does not follow the actuality of what is the case. Cadets are totally separate from the Armed Forces. Admittedly the Armed Forces greatly value the cadets. I would offer them a great deal of support as one of our most successful youth movements, but Section 84(5)—the noble Lord will correct me if I am wrong—covers purely the admission of cadets. It does not deal with their employment, because they are not employed.
As I said, I shall return to the subject of cadets in due course. I wish to revert to the regulations. The High Court decision to which the noble Lord, Lord Lester, referred—I believe, as he said, he acted for some of the parties—related to pregnancy dismissals in December 1991, which led to the position that total exemption of the Armed Forces from the Sex Discrimination Act was inconsistent with European law. The policy of compulsory discharge of servicewomen upon pregnancy ceased in 1990 when maternity leave was introduced. In order to act fully and fairly, and in accordance with the law, the Ministry of Defence admitted liability to pay compensation to women discharged on pregnancy between 1978—when the European equal treatment directive came into effect—and 1990. There have since been over 4,500 claims for dismissal during that period. We have made every effort to keep payments to a level consistent with the taxpayer's interests. Although there have been a few high awards by industrial tribunals, about 80 per cent. of the claims have now been settled for an average of about £10,000 each.
The purpose of the regulations, as I argued, is not to make any substantial change in the law but to tidy up national law to reflect the actual position under European law as it applies to the Armed Forces. My noble friend Lord Tebbit asked what was the practical effect of the regulations. The practical effect as regards potential claims for sex discrimination is that claims now have to be brought within three months of any discrimination. That is because the rest of the Sex Discrimination Act, including time limits, applies now to service personnel in the same way as it does to civilians. I can say frankly to my noble friend that had we not passed the regulations the claims about which he complains could continue indefinitely.
The Motion seeks also to repeal the blanket derogation for the Armed Services in Section 1(9) of the Equal Pay Act 1970. We do not believe that there is any need to do so. The Equal Pay Act 1970 does not deal with the Armed Forces in the same way as does the Sex Discrimination Act 1975. Section 7 of the Equal Pay Act specifically precludes the Secretary of State for Defence from making any distinction between servicemen and servicewomen in pay, allowances or leave, unless it is fairly attributable to differences in obligations undertaken. The basic pay of the Armed Forces already complies with the principle of equal pay for equal work.
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Lastly, I shall say a little about the cadets. As I made clear—I sense that the noble Lord, Lord Williams of Elvel, has an element of doubt—there is no direct vocational link between cadet forces and the Armed Forces. Individuals join the cadets for the opportunities offered and for their own personal and social development. As I did earlier, I again pay tribute to the important service that they provide and to the fact that they are an important element in the nation's voluntary youth movement.
I should stress—as I did earlier—that the cadets are not employed. The cadet force exemption is in respect of admission only. It does not cover the employment of adults or the activities of cadets once they have joined. Our legal advice is that because the equal treatment directive imposes no obligations in relation to the cadet forces it would be ultra vires—that is something of which we have been accused in other parts of the regulations—to remove or amend the cadet force exemption under Section 85(5) of the Sex Discrimination Act by virtue of a statutory instrument under the European Communities Act.
The exemption for cadet forces is in line with that available to other bodies, including youth organisations—I believe that that is dealt with under Section 34—but we will obviously consider with the cadet forces the scope for amending or removing the existing exemption for admission to the cadet forces in due course, should it be necessary. Again, I stress that it does not affect the cadets themselves, because they are not employed; it does not cover the employment of all adults or activities once the cadets are in. I hope that with those explanations the noble Lord will feel that we have answered his points and that it is not necessary on this occasion to press his Motion.
Lord Lester of Herne Hill: My Lords, I am grateful to the Minister for that full reply. Indeed, I am grateful to all noble Lords who have participated in the debate. I hope that your Lordships will consider that the subject was appropriate to be raised in this way; there is no other.
Perhaps I may be brief and deal with only one or two points. First, I found myself in agreement with a great deal of what was said by the noble Lord, Lord Tebbit, about the process of law-making. However, I have an important qualification to make with which he might not agree. The European Communities Act 1972 is a brilliant legal conjuring trick devised by Sir Geoffrey Howe, as he then was, to enable the United Kingdom swiftly to comply with its treaty obligations through subordinate legislation, among other things. I doubt whether either House knew exactly what was happening when that provision was passed, any more than it understood Section 2(4) and its effect on the role of the courts in interpreting statutes. As someone sympathetic towards accession to the Community, I cheer the fact that that means was devised. However, there is a need for important safeguards and this debate has shown the lack of effective safeguards in a case of this kind.
Secondly, I believe it to be the view of the House as a whole that women have made a most important contribution to the effectiveness of the Armed Forces

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and the police service and that there should he no more sex discrimination than is necessary in order to achieve the legitimate aims of the Army or the police force.
Thirdly, it would be inappropriate for me in this House to attempt a legal reply on points of law to what was said by the Minister. In my respectful view, the vires of these regulations is doubtful and their compliance with Community law obligations is very doubtful.
I agree entirely with the noble Lord, Lord Williams of Elvel, that what should have happened is that a genuine occupational qualification exception should have been included in the regulations and on their face. The noble Lord, Lord Tebbit, asked what the consequence would be if the Government and Parliament have got these regulations wrong. The consequence would be disastrous. It would mean that the three-month time limit would be quite ineffective, as the Emmott case shows. Therefore, the main purpose for introducing the regulations would have failed. Women or men will be able to complain of sex discrimination without time limit unless and until proper regulations are made and brought into force. I suggest that that will not be in the interest of the Armed Forces, their members or taxpayers. However, it would be inappropriate for me to argue further and I beg leave to withdraw the Motion.
Motion, by leave, withdrawn.

Pensions Bill [H.L.]
8.23 p.m.
House again in Committee.
Lord Marsh Lord Marsh moved Amendment No. 145YR:
After Clause 53, insert the following new clause:
("Repayments
.—(1) In any case where a payment ("the first payment") has been made by any person under section 53 to a scheme following an actuarial valuation of the scheme assets which disclosed a shortfall (within the meaning of that section) and a subsequent actuarial valuation of the scheme assets discloses that the value of the scheme assets exceeds the value of the scheme liabilities, that person shall become entitled, at the time the subsequent valuation is signed, to a refund of an amount—

(a) equal to the amount of the first payment, or,

(b) the excess,

whichever is the less.
(2) Where paragraph (b) of subsection (1) has applied in relation to a scheme, then that subsection may be applied again on a subsequent valuation which discloses a further reduction in the shortfall to permit the person concerned to recover an amount equal to the amount of that further reduction.
(3) In relation to a scheme the terms of which do not permit the trustees or managers to make a refund falling within subsection (1), subsection (1) shall be construed as conferring power on the trustees or manager to make that refund.
(4) The provisions of this section are without prejudice to Schedule 22 to the Taxes Act 1988 or section 33 of this Act.").
The noble Lord said: The proposed new clause is fair, simple and, I am sure, totally non-controversial and I hope that the Minister will say something helpful about it. It allows a company which under the MSR puts money into the fund to get it back again, in particular in the case of a closed fund or where the age profile produces minimal contributions.
The value of pension schemes inevitably fluctuates with the markets. When a scheme's assets eventually rise with the markets, the employer normally takes a pension holiday. That option is not necessarily available in the case of closed schemes. Those schemes are closed to new entrants, with the result that they tail off eventually to zero. As a result, there is little if any scope for recovering the overpayment through a pension holiday.
It may be argued that the overpayment will be returned in due course as a so-called surplus under the Taxes Act 1988. But there are many strings to that bow and this Bill adds a great many more. The process takes so long that, particularly as regards small businesses, it is a nightmare. It is a simple statement of fact that it is neither fair nor sensible that an employer who has had to pay what could well be a large sum of money in order to meet a temporary shortfall should not be able to get the money back and put it to work for the business when the problem for which it was paid in in the first place has ceased to exist. I beg to move.
Baroness Turner of Camden: I have some sympathy with the amendment moved by the noble Lord, Lord Marsh, because I am aware of certain closed funds to which the arguments could apply. The only problem that I have with the amendment is that nothing causes greater anxiety and agitation among scheme members—even scheme members who are not affected—than the belief that repayments can be made or surpluses can be returned to employers. There is often a great deal of agitation in relation to suggestions that that should be done.
I should be happy about the amendment if it included a reference to agreement by the regulatory authority for a repayment to be made. If that were the case, I should give the amendment wholehearted support because one could say that the members of the schemes would have some guarantee that the whole scheme would be exercised with their security in mind.
Lord Mackay of Ardbrecknish: The noble Lord, Lord Marsh, argued strongly in support of his amendment. It covers the same area as the amendments which we dealt with before the dinner break. I wish to begin by reiterating an important point: the minimum solvency requirement is purely that. It is a floor below which scheme funding should not fall. It may be helpful if I introduce a point that perhaps did not emerge before the dinner break. Under the valuation basis that we now propose for a minimum solvency requirement, the liabilities represented by non-pensioner members would be valued largely by reference to equity returns.
Under the modifications announced last December, up to 25 per cent. of the pensioner liabilities of large schemes may be valued by reference to equity returns. The Committee will therefore be reassured to know that this means that the value of the liabilities will move to a certain extent in harness with the value of scheme assets. As such, the risk of schemes being tipped by short-term market movements into making large and unnecessary cash payments will be much lower than some Members of the Committee fear.

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Earlier we discussed ways that might be devised to help an employer who had had to put a great deal of money into the fund. I am advised that there are ways of ring-fencing assets with a legal underpin, which answers the question asked by the noble Lord, Lord Eatwell. I tried to explain that bank guarantees or some similar arrangement could be used to get an employer over the difficulty of the scheme being less than 90 per cent. with contributions continuing on a slightly lower plane over the next four years, going to 100 per cent. Of course, if one were to carry on with the assumption behind those concerns, if the markets picked up there could be another valuation showing that the fund had a clean bill of health and that the payments could stop.
I return to the Amendment No. 145YR. It suggests that in that event the money already paid could be paid back to the employer. That is exactly what the amendment deals with. It would be damaging to the whole concept of trust-based schemes if we enabled funds to pass freely from the scheme to the employer. The importance of the trust fund is that it provides a means of ensuring that, if the employer becomes insolvent, the pension scheme assets are separate from him and are not accessible to his creditors.
Payments from surplus are allowed to be made to an employer but only when certain conditions and criteria are met. Among them is an Inland Revenue criterion that the fund is funded at a level of 105 per cent. of the scheme's liabilities. I do not pray that in aid as a particular comfort because there are a number of hoops in relation to an individual scheme, as well as Inland Revenue criteria, through which an employer would have to go before he could recover some of the surplus. In the circumstances envisaged, he would have a reduced contribution after that kind of calculation. That is an important point because, in those circumstances, there could be an agreed change to the schedule of contributions reflecting the new circumstances.
As I have explained already, I recognise that there has been much nervousness about the potential impact of our minimum solvency proposals on some schemes and their sponsoring employers. As I tried to explain at the beginning of this series of amendments, the changes which we announced to the minimum solvency calculations will provide a more stable measure for assessing the adequacy of scheme funding. Fears that there will be widely fluctuating contribution rates are unfounded. The extended time limits will certainly allow for market recovery if a scheme drops below the minimum simply because of unusual short-term movements in prices. Therefore, it would be wrong to take the fairly dramatic step of making it possible for a scheme to repay money, so to speak, to the employer in the circumstances envisaged.
While I have a great deal of sympathy with the scenario presented by the noble Lord, Lord Marsh, the changes that we have made and some of the explanations that I have given about the ability to use bank guarantees will at least demonstrate that we are
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going some way towards addressing the problem, although I appreciate that we are probably not going as far as the noble Lord wishes to.
8.30 p.m.
Lord Marsh: Inevitably these amendments have produced a somewhat complex and occasionally confusing debate. I believe that we have all found it extremely difficult to follow the debate as it moved at an ever-increasing speed and became ever more complex on the way.
All Members of the Committee interested in this area will wish to read carefully this evening's debate. I suspect that, having read it, there may be those who will wish to discuss matters with Ministers and officials to try to achieve greater understanding. The issues are important and many of us will wish to return to this area on Report. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 54 [Sections 49 to 53: supplementary]:
The Earl of Buckinghamshire The Earl of Buckinghamshire moved Amendment No. 145ZYS:
Page 31, line 4, at end insert:
("(2) The Secretary of State shall take account of employers' views in establishing and modifying—

(a) the prescribed periods referred to in section 51(7), section 53(3a) and section 53(3b); and

(b) the prescribed manner referred to in section 49(3).

(3) Where the Secretary of State determines that the prescribed periods or the prescribed manner referred to in subsection (2), or both, should be modified, he shall prepare and lay before each House of Parliament—

(a) the draft of an order giving effect to his decision; and

(b) a report containing a statement of his reasons for that determination.").

The noble Earl said: This amendment requires the Secretary of State to take account of employers' views in modifying the MSR and requires him to consider the effect on employers and prescribes both the time period and the method of calculation and, when he has done that, requires him to seek the agreement of both Houses of Parliament.
We have had a long debate today on the merits or demerits of the MSR and the various alternatives put forward. I do not wish to go into that debate again. Most companies will not wish to be under-funded either on an ongoing basis or on minimum solvency. But there are anxieties that, if the assumptions are drawn too tight, employers will be extremely anxious because they may have to pay more money into the scheme than would otherwise be the case.
Whether or not we like it, there are anxieties about how the operation of the MSR will work. I suggest that legislation should require consultation to take place with employing companies in certain prescribed periods for returning to solvency and also there should be a prescribed manner for calculating assets and liabilities.
I appreciate that the Committee has expressed considerable disquiet about moving from primary into secondary legislation by using regulations. I suggest in this case that we use regulations for that situation. If those provisions were made in primary legislation, the

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machinery for making changes in the MSR and the time periods would prove quite difficult. We have seen a good example of that this afternoon in view of the time it has taken us to debate the MSR issue.
I suggest that there should be consultation with the employer companies and that, when the consultations take place and the Secretary of State makes his decisions, he should place those before the House and give his reasons for the decisions that he has reached on that issue. I beg to move.
Lord Mackay of Ardbrecknish: I have listened with care to my noble friend. I invite him to look a lot further down the Marshalled List to Amendment No. 171. That is intended to introduce a new clause after Clause 109 which will place a statutory duty on the Secretary of State to consult those he considers appropriate before making regulations under any of the provisions in this part of the Bill.
We fully accept that it is proper for the Secretary of State to consult on the content of regulations—but not only on the minimum solvency requirement and certainly not only employers and employer organisations. We therefore propose this much wider duty to consult in the new clause. I am certain that, in producing regulations on so central a matter as the minimum solvency requirement, the duty to consult such people as the Secretary of State considers "appropriate" will always be interpreted as including employers.
In the past the Government have always consulted widely on .pensions legislation. In that way we have been greatly assisted by the knowledge and experience of employers, pensions professionals, practitioners, members and their representatives. We feel it is right to continue to seek views across a broad spectrum of opinion. Having drawn my noble friend's attention to Amendment No. 171, I hope that he will rest assured that we shall be doing a great deal of consulting on the regulations.
Baroness Seear: Before the noble Lord sits down, will he tell us whether the regulations will be subject to the affirmative resolution procedure?
Lord Mackay of Ardbrecknish: I am almost certain that they are subject to the negative procedure.
Baroness Seear: We may wish to return to that matter.
The Earl of Buckinghamshire: I am extremely grateful to the Minister for drawing my attention to Amendment No. 171. I am just relieved to see that it is not to be moved this evening. On that basis, I beg leave to withdraw the amendment.
Clause 54 agreed to.
Clause 55 agreed to.
Clause 56 [Equal treatment rule: supplementary]:
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendment No. 145YS:
Page 31, line 36, at end insert:
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("( ) The reference in subsection 55(3) to treatment which is less favourable is to treatment which for the purposes of the Sex Discrimination Act 1975 constitutes discrimination with the meaning of subsection 1(1) (a) or (b) of that Act.").
The noble Baroness said: In moving this amendment, I shall speak also to Amendment No. 145YUB. I shall speak fully to these amendments and more briefly to subsequent amendments.
Amendment No. 145YS is the first of a series of eight amendments to Clauses 55 to 59. They seek to bring domestic law into line with European law following the six decisions on pensions in the European Court of Justice on 28th September 1994.
The right to equal treatment as regards occupational pensions stems from Article 119 of the Treaty of Rome, which requires equal pay for equal work between men and women. In the absence of domestic legislation to claim equal pay, individuals in all member states may rely directly on Article 119 before their national courts and the courts are required to interpret national law, so far as is possible, so that it is consistent with European law.
The Barber case of 17th May 1990 held that pensions were deferred pay and, therefore, covered by Article 119. Many of the subsequent issues followed from that case. The equal pay act, with which, therefore, pensions are now aligned, allows employees to bring claims to industrial tribunals for discrimination in pensions. However, unlike the Sex Discrimination Act, the equal pay Act does not embody the concept of indirect discrimination (which is the subject of Amendment No. 145YS) where individuals are compared with individuals, whereas many of the problems in pensions are indirect and can be determined only by comparing the experience of one group with another and then seeing how much that difference is attributable to gender.
The obvious example here would be part-time workers. Even if male and female part-time workers were treated similarly, none the less, given the fact that part-time workers are overwhelmingly women—indeed, nearly half of all women work part time, while only about 5 per cent. or 7 per cent. of men do so—if part-time workers enjoy fewer rights than full time workers, they experience indirect discrimination.
At present the Bill follows the equal pay Act and brigades pensions with that and, therefore, does not rectify indirect discrimination. We believe that it must do so. Indeed, that is vitally important to the pension field. The Barber case also left unanswered further questions which the European Court cases tested last year. For example, the first of those concerned the date from which benefits had to be equalised. Secondly, the time limits within which claims had to be made were considered. For example, if the rights of full timers under the Barber case were equalised back to 1990, part-timers could join a scheme backdated to 1976 when Article 119 applied; but on what conditions? Thirdly, the court considered which benefits precisely have to be equalised: public as well as private occupational pensions or state as well as private pensions.
The Bill could have clarified the position in some of those areas. However, it has failed to do so. Therefore, employers and employees will not have a clear understanding of their duties and rights. That is likely to result in more complex cases and higher costs. Moreover, it will probably not end appeals to the European Court of Justice on the grounds that Article 119 will have to be prayed in aid to resolve all of the issues that the Bill fails to address.
Many of the issues are featured in separate amendments. However, perhaps I may now move precisely to Amendment No. 145YS. That amendment would make clear that the equal treatment rule provided for in Clause 55 covers both direct and indirect discrimination. As I said, the Equal Pay Act did not incorporate the concept of indirect discrimination in 1970. However, it was defined by the Sex Discrimination Act 1975.
The clarification is necessary because the ECJ ruled that Article 119 of the Treaty of Rome should be interpreted as incorporating the concept of indirect discrimination, not least, as I said, in the context of part-time workers. Unless we do so, the ECJ's decisions in the cases of Fisscher and Vroege, for example, regarding the position of part-timers will not be incorporated into UK law.
The second amendment, Amendment No 145YUB, is again part of the wider subset. The amendment would ensure protection for a person who raises a question over unequal pension provision. In that sense, it is not dissimilar to an amendment moved by my noble friend Lady Turner on the first day of Committee regarding protection for unfair dismissal of trustees. Under the amendment, the individual would be able to claim damages for victimisation under the Sex Discrimination Act if he or she suffered any detriment as a result of raising specifically issues of equal treatment. The effect of that protection would be that an employer would risk unlimited damages in respect of such victimisation. Therefore, the first two amendments on equal rights, given the judgments of the European Court of Justice, are designed to ensure, first, that the Bill covers indirect discrimination, which we think is vitally important to pension law; and, secondly, that it protects against unfair dismissal and victimisation. I beg to move.
Baroness Seear: I should like briefly to support the amendment and endorse the remarks made by the noble Baroness, Lady Hollis. The issues are implicit and part and parcel of the battle that many of us, including the European Commission, have been fighting for a long time; namely, to get rights for part-time workers. That would include the pension rights that we are discussing. It would also include not only female part-time workers but also male part-time workers. As an increasing number of men—and this is likely to continue—will spend at any rate part of their lives in part-time jobs, we must take on board when considering such matters the fact that we are moving into a situation in the labour market where both men and women will have periods of employment which are much less than full time. Unless the rights of male and female part-time workers
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are covered in the legislation, it will have very grievous effects on the ultimate pensions that people of both sexes will be able to claim when they finally retire.
8.45 p.m.
Lord Mackay of Ardbrecknish: At the risk of bringing the politically correct movement down on my head, I should like to say that it is with some relief that I move from the minimum solvency requirement to something as simple as sex—
Baroness Seear: It is not just a matter of sex.
Lord Mackay of Ardbrecknish: We have looked at Amendment No. 145YS—indeed, the noble Baroness may be more pleased with the second part of my reply to her amendments than she anticipates—and we have concluded that the amendment is unnecessary. We believe that importing a reference to Section 1(1) (a) of the Sex Discrimination Act into Clause 55 will not achieve anything. That provision, which defines what is generally known as "direct discrimination", merely states that that means less favourable treatment of a person on the grounds of a person's sex. Those words can be found in Clause 55. The reference to Section 1(1) (b) of that Act would make explicit that "less favourable treatment" in Clause 55 includes—as the noble Baroness pointed out—what is known as "indirect discrimination". However, I can assure the Committee that there is no doubt that Clause 55 already covers such treatment because, as drafted, it mirrors the wording of the Equal Pay Act 1970. Indeed, the House of Lords, in the form of our noble and learned friends, the Law Lords, has confirmed that indirect discrimination is covered by that Act. The amendment would not limit the scope of those provisions to treatment which is unlawful under the Sex Discrimination Act, but it would narrow the expression, "less favourable treatment" so as to cover only such treatment as is within Section 1 of the Sex Discrimination Act, whereas those words would otherwise bear their normal wider meaning. I hope that that explanation goes some way towards helping the noble Baroness.
It may be helpful to remind the Committee briefly—as the noble Baroness has already done; and, indeed, I repeat the words used by her noble friend earlier when I say that I broadly agree with what she said in her introduction—that the European Court of Justice has made it clear that pensions are pay. We therefore consider it appropriate that domestic legislation should follow the pattern established for equal pay which has now existed for some 25 years, together with a body of case law. I can assure the Committee that adopting that approach will not mean a more restricted approach to equality than that covered by the Sex Discrimination Act—indeed the contrary is true. With those assurances, I trust that the noble Baroness will feel able to withdraw the amendment.
I turn now to Amendment No. 145YUB. As the noble Baroness has explained, the amendment would bring the provisions of this Bill within the ambit of Section 4(1) of the Sex Discrimination Act 1975. That would mean that individuals who wished to bring an equal treatment claim before a tribunal or court would be protected

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against vitimisation on account of the fact that they had done so. I can sympathise with the intention behind the amendment, which is to provide potential claimants with the added security of knowing that they will have protection from any reprisal by their employer, and I shall carefully consider what the noble Baroness has said. However, I am not able to accept the amendment today because the Sex Discrimination Act is worded in very general terms and covers a number of different areas which may have implications for a number of other departments which will need to be consulted. Nevertheless, we shall look most carefully at that aspect because we fully appreciate the argument in favour of the kind of cover that the noble Baroness advocates. We shall certainly look to see how that might best be achieved.
Baroness Hollis of Heigham: For once when we thank the Minister for his reply it is rather more heartfelt than merely perfunctory, certainly as regards Amendment No. 145YUB and unfair dismissal. Any amendment which would seek to protect the position of the individual going before a tribunal would be welcome. I hope that the Minster will bring forward an amendment on that at Report stage. It would be much welcomed.
l heard what the Minster said about the Equal Pay Act in the light of the House of Lords judgment covering situations of indirect as well as direct discrimination. I have certainly not received a briefing to that effect. I am not in any sense challenging the Minister on that because I am simply not aware of how complete or incomplete the House of Lords' judgment is. Would the Minister be prepared to write to me and to spell that out in much greater detail so that if we are unsatisfied on some particulars we can revisit this issue on Report? If the Minister's letter addresses those issues, we shall not need to return to the matter. If I may have those assurances, I shall be happy to withdraw the amendment. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendment No, 145ZYT:
Page 31, line 42, after ("(2A)") insert ("(save for sections 2(4) and 2(5) and for the amendments to that Act for the purposes of this part of this Act set out at subsection (4) (d) below)").
The noble Baroness said: I move on to the second batch of European law amendments. In moving this amendment, I wish to speak also to Amendments Nos. 145YT, 145YUA and 145YUC. I feel as if I am dealing with an American food chain when I read out the lettering that is adopted by the conventions of this Chamber.
all speak first to Amendment No. 145ZYT. We do not think that applications of Sections 1 to 2A of the Equal Pay Act 1970 are a lawful or appropriate way of ensuring compliance. Perhaps the Minister has a different reading of this in terms of any House of Lords decisions. We also believe that the Bill should allow breaches of the equality rule to come before an industrial tribunal or a county court or the High Court. The EOC and the TUC have both complained to the European Commission that the present tribunal
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procedures are cumbersome, often ineffective and take a long time. They are taking at least 18 months to four years, and something like 40,000 cases are, I understand, currently in the industrial tribunal queue.
It is also the case that tribunals can be dealing with extremely large sums and there is no legal aid for litigants going to a tribunal. Pensioners in particular who may be seeking to recover damages are likely to be poor and not necessarily supported by a trade union or a friend. Amendment No. 145ZYT would allow cases, especially where there are substantial sums involved, to continue to go to the county courts. That seems to us reasonable. Amendment No. 145YUC—the last of the quartet—would refine that by directing claims below £25,000 to tribunals and those above that figure to the civil courts. It would also delete the capping of damages that this Bill would ensure—a capping which we suspect in any case is contrary to European law.
I now move on to Amendment No. 145YT, which deals with some of the time limitation issues. The first point I wish to make is that applying the Equal Pay Act appears to limit damages for pension inequalities to a maximum of two years preceding the point at which the legal action was commenced. The Minister may not be able to answer these points now but I should be grateful for an exchange of letters. What is the situation, as regards time limits, of part-time workers who have already submitted claims to industrial tribunals for damages going back to 1976? How far back can they claim for what damages?
Secondly, what happens to those who claim—not necessarily part-timers but anyone—after the Bill has become law but for periods before it became law? Thirdly, will it introduce a two-year time limit only for those who claim after the Bill has become law for periods after the Bill has become law? I hope the Minister will consider the issue of the interlocking time limits and the time period for which one can claim damages. I have a further question on time limits. Our understanding of the application of the Equal Pay Act is that any action for damages or compensation must be brought within six months of retirement as opposed to six years under, say, trust law. We believe that is far too short and tight a time scale because it takes several months before people may realise the implications of the pension situation. We believe that on all of these issues Clause 56 is hopelessly ambiguous and where it is not ambiguous we suspect that it is contrary to European law.
Finally, on Amendment No. 145YUA we again believe that Clause 56(6) is hopelessly vague. Does it mean that no claim for periods earlier than 17th May 1990—I refer to the Barber case—can be brought, so that a woman cannot claim a right under the equality clause to the same pension now as a comparable man because there were disparities before 17th May 1990, or will she be fully equalised? We need the Minister's thinking on that.
As I say, these are probing amendments. We are happy to accept that these may not be the sort of issues that the Minister wishes to deal with at this stage in Committee, but we need some clarification in the light of these European cases and this Bill, and our reading

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of the Equal Pay Act because we suspect that, as a result of this, there will still continue to be a necessity for many appeals to Article 119 and the European Court of Justice because this Act is incomplete or simply improper. I beg to move.
Lord Mackay of Ardbrecknish: I am grateful to the noble Baroness for explaining what is intended by the amendments we are discussing. I do not think that the noble Baroness used the word "probing" but I believe she wants me to explain what the clause means. I shall do so because this is an important issue.
The European Court of Justice, in the Barber case and subsequent clarification cases, established the principle that equal treatment is to be provided for service from 17th May 1990. Thus all occupational pension schemes must now provide equal treatment from that date. The provisions of Clauses 55 and 56 require just that.
The court also ruled in the Dutch cases of Vroege and Fisscher that the cut off date of 17th May 1990 did not apply in respect of the right to join a scheme and that in appropriate cases access could be granted as far back as 1976. However they went on to make clear that national time limits may be applied to such cases.
As the Committee will know, a great number of part-time and former part-time workers have now made claims for retrospective membership of their employers' schemes. The position is that currently there is no directly applicable national time limit for claims of this kind. It will therefore be a matter for the courts and industrial tribunals to decide in the particular case what limit should be placed on the making of the claim and any limitation on periods of retrospective membership which may be granted.
However, we cannot continue to leave the position of time limits uncertain. The Bill provides for the time limits which apply under the Equal Pay Act to be applied in the event of disputes and enforcement concerning the equal treatment rule. These limits, which will apply in respect of claims made after this Bill is enacted, will require claims to be made within six months of leaving the relevant employment and will place a limitation on retrospective membership of two years before the date of claim. The application of the Equal Pay Act time limits is only logical given that the European Court has ruled that occupational pensions are pay. They have also applied since 1978 to claims under the existing, more limited, equal access regulations.
We do not think it would be appropriate to give industrial tribunals discretion to waive the time limits for bringing claims in cases where they believed it was appropriate to do so. Neither is it right to provide for damages to be awarded for a breach of the equal treatment rule back as far as 1976. This would again break away from the long established limits and rules set out in the Equal Pay Act, which have worked well up to now. And as I have already explained, the European Court has stated clearly that national time limits may be applied to claims for retrospective access to schemes. Furthermore, the proposed amendments would create great uncertainty and potentially enormous costs for employers called upon to pay these damages
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in respect of years long past. It should also be remembered that the Bill's provisions are not intended to provide damages but to ensure that employers grant access retrospectively within the limits laid down in the Equal Pay Act so that individuals can subsequently obtain the benefits of that membership in the form of a pension.
I turn now to Amendment No. 145YUC. This seeks to differentiate between the judicial institutions which should consider equal treatment claims, depending on the level of damages being sought.
I do not agree that it is appropriate to provide for such differentiation. In the case of claims for equality of access to schemes, I have made clear why we consider that the provisions for disputes and enforcement in the Equal Pay Act should apply. In the event of a successful claim we consider that a limitation of two years before the date of claim should be placed on any retrospective membership granted by the tribunal. The effect of a successful claim will not be the award of damages, simply that the employer must provide the employee with membership of the scheme for the period concerned and that the benefits flowing from that membership are payable from the scheme at the appropriate time. That is exactly what would happen under the existing equal access legislation, which has been in force since 1978.
We believe that the route we have chosen to adopt is clear and fair to all concerned. It would be appropriate for industrial tribunals to handle disputes of this kind, as they do equal pay claims, and inappropriate for the civil courts to handle cases involving claims for amounts in excess of £25,000. Industrial tribunal procedures are certainly simpler and easier to follow than formal court procedures. No fees are required. Many people will feel that that is preferable. The idea that there are no delays in the courts is optimistic. There are delays in the court system also.
For the sake of completeness, I should add that before the Bill becomes law it is for the courts and industrial tribunals to decide on the time limit for past periods. As I said, there is currently no time limit. After the Bill is enacted for past periods, under the Equal Pay Act, the time limits will apply if the claim is made after the Bill becomes law. After the Bill becomes law the position for the periods thereafter will be as I indicated—six months and two years.
I have explained the matter at some length, but I know that the noble Baronesses consider it an important issue. I have explained the Government's thinking and how we have arrived at our conclusions on the time limits for this country which we believe are consistent with the Equal Pay Act and the European judgment. I hope that with that rather long explanation the noble Baroness will withdraw her amendment.
9 p.m.
Baroness Seear: Before the Minister sits down I should like to ask him to think again about the six-month period. It is not very long if one is not familiar with these matters. When one retires one does not move in the circles where people talk about how one

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can get equal pay and how tribunals work. It seems a very short period. I cannot think that it would cost any more or cause any great inconvenience to extend it to a year, or even to nine months.
Lord Mackay of Ardbrecknish: It may be because I am so involved in the Bill, but there seems to be plenty of publicity about the issue in the newspapers and on television and radio.
Baroness Seear: They talk about nothing else in my local hairdresser.
Lord Mackay of Ardbrecknish: Yes. I would have thought that they would have talked about the appearances of the noble Baroness in the House of Lords when they see her on television.
I hear what the noble Baroness says, but the ground on which we arrived at our conclusion is the simple ground that the court ruling said that this was pay, and we have taken the time limits from the Equal Pay Act.
Baroness Hollis of Heigham: Before we decide what to do about the amendment, can the Minister clarify one point? I understood—but I may have misunderstood—that the Vroege and Fisscher cases provided only that domestic time limits for bringing claims should be applied but did not say that damages could or should be limited. Therefore, that would still allow individuals to go straight to the European Court of Justice under Article 119, whatever the Minister may have said. Is that correct?
Lord Mackay of Ardbrecknish: I am not entirely sure about the answer to the second part of the question. I know that the two cases made it clear that national time limits may be applied to such cases.
In relation to damages we are talking about access to pension schemes. That is the primary point. I dealt with that as the essence of the matter.
The answer to the second question of the noble Baroness is no. In relation to national time limits I have said that the court clearly decided that national time limits may be applied in such cases.
Baroness Hollis of Heigham: My second question does not permit an answer of yes or no. I wonder what the Minister thinks he is saying.
Lord Mackay of Ardbrecknish: We have now gone some way from the original question. Perhaps the best and tidiest way to proceed is for me to consider the question in some detail and give the noble Baroness a proper response.
Baroness Hollis of Heigham: I thank the Minister. As I said, these are probing amendments and we need further information.
Like the noble Baroness, Lady Seear, I was disappointed. I see the thrust of the Minister's logic. If one says that a pension is deferred pay one applies procedures as though one were in the workplace. However, the Minister is well aware, because the noble Baroness put the point forcefully, that once one is retired one is not in the workplace. One is not tapped into that information. One does not have trade union support.
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One does not receive the literature and information. One does not have the financial resources to pursue claims in the normal way.
While I take on board some of the points that the Minister made, the period in which one should be able to bring an action could at the very least be extended to a year. When one retires one tries to sort out one's money, one's mortgage, domestic arrangements and so on. A great deal happens in a short time. The Bill seems not to reflect the real life situation in which people find themselves.
I am not persuaded about damages, although the Minister will provide further information in his letter. We accept the time limit for bringing claims but not yet in relation to damages. I do not accept his reasoning about the civil courts. While we recognise that tribunals have many virtues, there is a long queue of some 40,000 people. Although tribunals are to some extent the equivalent of small claims courts, once claims are no longer small claims but large claims involving substantial amounts of money—in some cases amounting to six figures—there is an argument for saying that they should be brought within the more formal proceedings of county courts and the High Court, where legal aid is available. I wonder whether we can persuade the Minister at least to give us an undertaking that if he thinks there is sense in the argument he will come back to the matter.
Lord Mackay of Ardbrecknish: Just as the noble Baroness will read what I said, so we shall read the proceedings and pick up the various points because we wish to get the Bill right and fair.
The six-month period to which we refer does not come into effect until the day of enactment. Between now and then current cases are a matter for the court or tribunal. I am happy to study what the noble Baroness said regarding the court point. I am not convinced on that. I shall ask a simple question as to how many cases exceed the limit of £25,000. I suspect that there are not many. Consistent with the Act, which is the context into which we put the provision, I still believe that an industrial tribunal is the best place. However, I shall read with care what the noble Baroness said.
Baroness Hollis of Heigham: As the bulk of cases have still to go through the courts, we do not know what the percentage will be. However, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 145YT not moved.]
Baroness Hollis of Heigham Baroness Hollis of Heigham moved Amendment No. 145YU:
Page 32, line 12, at end insert ("or such earlier date as provided in subsection (7) below.
(7) If on any valuation day the amount of the scheme assets is greater than 105 per cent of the amount of the scheme liabilities the amount of the excess shall in a prescribed manner be applied in providing equalisation in the terms on which members are treated in relation to pensionable service from a date before 17th May 1990.").
The noble Baroness said: Amendment No. 145YU turns to a slightly different issue and is grouped with Amendment No. 145YX. It seeks to make clear that when trustees make scheme amendments to comply with

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the equal treatment rule those are subject to Clause 60 in the Bill, which places restrictions on amendments which adversely affect members' accrued rights. The effect is to ensure that accrued benefits are equalised on the more favourable terms. The European Court of Justice has ruled that that is required under European law.
Unfortunately, the ECJ said that there was nothing in European law which forbids adverse changes in benefits to be accrued in the future, but there are already strong arguments that that is against our domestic employment law. We wish to know the Government's intentions on the issue. It is a probing amendment. We believe that it is an issue on which there is a case for levelling up.
Amendment No. 145YX proposes that retrospective equalisation should be required to the extent that a scheme has a surplus in excess of 5 per cent. of its liabilities. The only argument that has been used against that proposal is one of costs. We believe that where there is a surplus that argument cannot apply. Again, we shall welcome a response from the Minister on that issue. I beg to move.
Lord Mackay of Ardbrecknish: Amendment No. 145YU would mean that any surplus in a pension fund would have to be used for the purpose of providing equal treatment between men and women for periods before 17th May 1990, the date of the European Court of Justice ruling in the Barber case.
The European Court has clearly ruled, notably in the Ten Oever and Coloroll cases, that equalisation is not required before 17th May 1990, but is required for service after that date. This is a minimum requirement and there is nothing in this Bill which would prevent schemes using a surplus to provide equality for earlier service if they wish to do so. However, we do not believe that it would be right to impose more stringent requirements or a heavier regulatory burden on schemes than European law requires. We do not believe that it should be a matter for Government to dictate that any surplus should be distributed in favour of scheme members in this way. I am therefore unable to support the amendment.
Turning to Amendment No. 145YX, I entirely agree with its sentiments. However, we do not believe that it is necessary. Clause 58 gives trustees or managers of schemes such power as may be necessary to enable them to amend scheme rules to provide equal treatment. The clause does not grant trustees or scheme managers a wide power to amend scheme rules at will. The power under this clause is limited to amendments to provide equality.
The European Court of Justice has made clear that equal treatment is required for periods of service from 17th May 1990, and that where such equality has not been provided benefits are automatically levelled up to the more favourable treatment until such time as the scheme equalises benefits for periods of future service. Clauses 55 and 56 of this Bill are intended to have the same effect.
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Although the court ruled that Community law did not preclude schemes from equalising benefits at a less favourable level for periods of service before 17th May 1990, the provisions of Clause 60 would, in effect, prevent this from happening.
Clause 60 is overriding in effect. It prevents detrimental amendments being made in relation to any rights accrued before the date of the modification unless the trustees have satisfied themselves that the certification requirements or the requirements for consent have been satisfied. I can assure the noble Baroness that Clause 60 provides the necessary safeguards that she is seeking and that there is no need to make Clause 58 explicitly subject to that clause. Perhaps in view of my explanation she may be prepared to consider withdrawing the amendment.
Baroness Hollis of Heigham: I wish to study the Minister's reply. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 145YUA to 145YUC not moved.]
Clause 56 agreed to.
Clause 57 [Equal treatment rule: exceptions]:
[Amendments Nos. 145YV and 145YW not moved.]
Clause 57 agreed to.
9.15 p.m.
Clause 58 [Equal treatment rule: consequential alteration of schemes]:
The Earl of Buckinghamshire The Earl of Buckinghamshire moved Amendment No. 145YWA:
Page 32, line 40, at beginning insert:
("Subject to subsection (1A) below").
The noble Earl said: I wish to move this amendment and speak to Amendments Nos. 145YWB, 148A and 148B. They deal with the equalisation of pension rights and the objective is to ensure that the company's consent is sought before trustees or managers make alterations to the scheme. Where the company refuses to give such consent to any recommendations or decisions made by the trustees or managers, then the scheme must refer the matter to OPRA to be resolved.
There are two reasons for asking for Amendment No. 145YWA to be considered by the Minister and the Committee. The first is that there is more than one way to equalise pension ages in pension schemes. Thus, some schemes are more costly than others and the employer will clearly wish to have control over costs.
The second reason is that, while the equalisation of pension ages has arisen from European Court judgments, it is nevertheless a benefit improvement over which the employing companies would wish to have control. I realise that the issue can cause difficulties between trustees, managers and the employing company. Because of that, I have suggested that OPRA should have the power to intervene in those situations. I beg to move.
Lord Mackay of Ardbrecknish: The European Court of Justice has ruled that both employers and trustees of a scheme are bound by Article 119 of the

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Treaty of Rome and they must both ensure that pension schemes treat men and women equally within the limits of their respective powers. Clause 58 will give trustees the power to make alterations to a scheme to comply with the equal treatment rule where they do not otherwise have these powers, a duty which will be incumbent upon employers by virtue of Section 1 of the Equal Pay Act 1970 as modified by Clause 55 of the Bill.
The effect of my noble friend's Amendments Nos. 148B, 148A, 145YWB and 142YWA would be to ensure that the trustees or managers of a pensions scheme seek the employer's consent in writing to any changes to scheme rules which they wish to make under Clause 58. In cases where the employer did not give that consent the occupational pensions regulatory authority (OPRA) would have the power to intervene.
I can certainly understand that employers might be hesitant about giving trustees the power to make changes to schemes without first consulting them. However, we have given some thought to this point and concluded that this is unlikely to happen in practice. Employers are already bound by European law to provide equal treatment and scheme rules normally require trustees to obtain the consent of the employer before a change is made. It is difficult to imagine a situation where trustees would not consult the employer and reach agreement as to how equalisation should be provided for any future service. Clause 55 of the Bill will also provide for schemes without an equal treatment rule to be treated as if they had one and for the more favourable treatment to apply.
Turning to the question of what should happen where there is a dispute between the parties, since the Barber ruling it has been clear that pension schemes must provide equal treatment. Individual scheme members can rely directly on Article 119 as interpreted by the European Court's ruling before our own courts and industrial tribunals. What is more, Clause 58 of the Bill already provides a mechanism for allowing schemes to be equalised for the future without the involvement of OPRA. We intend that OPRA should enforce statutory obligations designed to snake sure that schemes are secure and appropriately funded so that they are in a position to pay the promised benefits. The equal treatment provisions do not fall into that category and other remedies are available for handling disputes between employers and trustees—for example, the pensions ombudsman and the courts.
I can understand that employers in particular might like to see an overriding requirement in the Bill that any changes to scheme rules should be expressly consented to by the employer. I am not able to accept this amendment today, but would be willing to give the matter some further consideration, though I cannot promise more than that at this stage.
The Earl of Buckinghamshire: I am grateful for the Minister's reply, which I shall read carefully and I shall return to the matter at a later stage. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 145YWB and 145YX not moved.]
Clause 58 agreed to.
Clause 59 agreed to.
Clause 60 [Restriction on powers to alter schemes]:
The Earl of Buckinghamshire The Earl of Buckinghamshire moved Amendment No. 145YY:
Page 34, line 2, after ("might") insert ("adversely").
The noble Earl said: This is quite a curious amendment. The clause currently states that scheme rules cannot be changed to the benefit of their members without their consent. I seek to be able to have a scheme improved without having to obtain the consent of all its members at the same time. It is entirely correct—and happens in any case in all the trustee rules—that you cannot make changes which are adverse to the accrued rights of members. But I am curious to know whether consents are needed if improvements are envisaged.
Fortunately, the only time when agreements to improvements would be required—it is an argument which perhaps tells slightly against the amendment—is if employers were selectively to start improving one section of a scheme or provision for one group of members of a scheme which would be contrary to the interests of the other members of it. That would be quite a difficult situation.
In a sense this is a probing amendment. I should like to hear what my noble friend the Minister feels about it. I beg to move.
Lord Mackay of Ardbrecknish: The purpose of Clause 60 is to prevent amendments which have a detrimental effect on members' accrued rights. The only exception to the rule is where individual members have given their consent to such an amendment.
The circumstances which determine whether an amendment could possibly have an adverse effect on any category of scheme members will usually be unique to the scheme. The interaction of different rules and entitlements can frequently mean that what appears to be a beneficial amendment can adversely affect the rights of a small minority of members. Making a decision on whether an amendment is adverse to any individual scheme member or group of members is often not straightforward. Whoever is vested with the power to make amendments—the employer or the trustee, depending on the terms of the scheme rules—will need in virtually all cases to seek the advice of an actuary.
This amendment would give whoever has the power to make modifications the authority to determine whether a modification has an adverse effect, without first being required to seek the advice of an actuary and certification from him. Given the complexities of occupational pension schemes, we do not believe that that is safe. Having listened to my explanation, and on the basis that we are both aiming in the same direction, I hope that my noble friend will be able to withdraw his amendment.
The Earl of Buckinghamshire: I am very grateful for my noble friend's reply. As I worked through the

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amendment I think I probably understood that he would give me that answer. On that basis, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 60 agreed to.
Clause 61 [Power of trustees to modify schemes by resolution]:
Lord Lucas Lord Lucas moved Amendment No. 146:
Page 34, line 40, after ("section") insert (" 76 or").
The noble Lord said: In moving this amendment I shall speak at the same time to Amendments Nos. 147 and 148. Perhaps I may say how pleasant it is to be able to deal with numbers only.
These amendments will clarify Clause 61. The clause enables trustees to modify schemes to comply with certain requirements of the Bill. Amendment No. 146 will enable trustees to modify their scheme to comply with such terms and conditions as may be imposed by the compensation board under Clause 76 as well as Clause 77. Amendment No. 147 adds clarity to subsection (2) (d) by making it refer to specific subsections of Clauses 33 and 69. Also, by replacing "or" with "and" at the end of line 41, it also makes clear that trustees may amend their scheme for any other purposes under subsections (2) (a) to (2) (d) as well as for any additional purposes which may be prescribed under paragraph (e). Amendment No. 148 applies the clause to Northern Ireland. I beg to move.
On Question, amendment agreed to.
Lord Lucas Lord Lucas moved Amendments Nos. 147 and 148:
Page 34, line 41, leave out from ("section") to end of line and insert ("33(2), 69(2) or (3), 83 or 84, and").
Page 35, line 6, after ("(2) (d)") insert ("or any corresponding provisions in force in Northern Ireland").
The noble Lord said: I have already spoken to these amendments. With the leave of the Committee I shall move them en bloc. I beg to move.
On Question, amendments agreed to.
Clause 61, as amended, agreed to.
Clause 62 [Grounds for applying for modifications]:
[Amendments Nos. 148A and 148B not moved.]
Clause 62 agreed to.
Clauses 63 and 64 agreed to.
Clause 65 [Modification of public service pension schemes]:
Baroness Seear Baroness Seear moved Amendment No. 149:
Page 37, line 12, at end insert:
( "( ) Notwithstanding the provisions of section 148 below, any order made by the appropriate authority under this section shall be subject to annulment in pursuance of a resolution of either House of Parliament.").
The noble Baroness said: Even in the absence of the noble and learned Lord, Lord Simon of Glaisdale, we return to the question of regulations. Under this clause considerable powers are given to the Secretary of State, as indeed they are throughout the Bill, to make regulations. While we accept that it is a Bill which will
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require regulations to be made, and we do not deny that that is the case, we also want to ensure that adequate parliamentary control is maintained.
In Clause 65 it is an "appropriate authority" that can make the regulations. According to the scrutiny committee on procedures, where a Secretary of State makes a regulation it is subject to parliamentary control—only through the negative procedure, but at least it is some element of control. But that is only if the Secretary of State makes regulations; if it is an "appropriate authority"—by which I take it to mean a Minister other than a Secretary of State—then not even the negative procedure applies to ensure that there is a modicum of parliamentary control. That is the reason for tabling the amendment. I beg to move.
Baroness Hollis of Heigham: I rise simply to show solidarity on this matter. We believe it to be a good amendment.
Lord Mackay of Ardbrecknish: It might be helpful if I explained a little more about what Clause 65 provides. This clause allows an "appropriate authority" to modify a public service scheme for the same, limited, purposes that the new regulatory authority is able to modify private sector schemes under Clause 62. Those purposes are: to allow such a scheme to comply with the contracting out requirements; and, to allow a payment to be made to the employer from surplus in such a scheme, but only where it is trust based.
This clause brings forward powers currently contained in Section 141 of the Pension Schemes Act 1993. We examined the purposes for which schemes may be modified under that Act and concluded that many of the modification powers are no longer needed. Consequently, this clause provides more restricted powers to modify schemes than currently exist under the Pension Schemes Act.
The powers to modify for contracting-out purposes could, in theory, be applied to all public service schemes. However, almost all public service schemes are presently contracted out of SERPS. We anticipate that those schemes will wish to remain contracted out when the new contracting-out regime comes into effect, and would expect them to have no difficulty in meeting the new requirements without amendment. Consequently, the power to modify for contracting-out purposes would only be used very rarely, if at all.
The powers to modify a scheme to allow payments from surpluses to the employer can only affect a limited number of public service schemes, because the powers can only be used to modify a trust-based scheme. The main public service schemes are not trust based and so cannot be affected by this power. There are some trust-based public service schemes, but those are mainly small schemes set up for the staff of non-departmental public bodies. In general, the intention throughout the Bill is that trust-based public service schemes should be treated in a similar way to private sector schemes. In respect of payments from surpluses to the employer they will need to meet the same requirements as private sector schemes (set out in Clauses 33 and 69).

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I recognise that powers to modify schemes, particularly in relation to surpluses, can give concern and the noble Baroness has tabled an amendment with which I have some sympathy. I have also noted that the Scrutiny Committee has drawn attention to this clause. However, this is a matter in which the departments that are responsible for public service schemes have the main interest. I would need to take their views on the best way forward. For that reason, perhaps I may ask the noble Baroness to withdraw her amendment and allow me to take it away for further consideration.
9.30 p.m.
Baroness Seear: We can never resist such blandishments as an offer from the noble Lord to take the amendment away and think about it, especially at this time of night. However, I should like to say—I seem to have said the same thing several hours ago —that the Minister's reference to the fact that only a small number of schemes are left out and that most people would be covered is not satisfactory. A great deal of law has to be passed for exactly that reason. A small number of people fall through the net and those are the people who attract abuses. I hope that we shall not hear any more of the argument that it does not really matter because nearly everyone is all right: and that for the rest it is just too bad. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 65 agreed to.
Clause 66 [Preferential liabilities on winding up]:
Baroness Turner of Camden Baroness Turner of Camden moved Amendment No. 150:
Page 37, line 40, at end insert ("including any liability, calculated and verified in the prescribed manner, for increases to pensions").
The noble Baroness said: In moving this amendment, I should like to speak also to Amendment No. 151. It has been grouped with Amendment No. 150A but that deals with a different point. My two amendments are concerned essentially with the rights of pensioners. Clause 66 relates to priority liabilities on wind up. It sets out the order in which the various claims are to be dealt with should a scheme be wound up. What bothers me about the present order is that it is to some extent reversing the order which currently exists in a number of schemes and, since it is legislative, it will override whatever is in those rules.
My amendment relates to increases in pensions paid in line with whatever is the prescribed arrangement. As the Bill is drafted, existing pensioners come at the bottom of the league, yet 11 believe that they do have a claim to be considered higher up the rank, so to speak. The reason is very simple. Once a pensioner, for most people that is all there is. He or she can look to no more improvement, because working life is at an end, except by way of increases to the pension in payment, which are usually paid in accordance with a formula contained within the scheme. However, an active member who is still in employment has the opportunity to improve his or her position either through promotion or by job change or simply by securing increased earnings or paying more into the scheme by way of additional voluntary contributions or whatever. It has been pointed
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out to me that if the Bill is not amended the position of existing pensioners in the event of wind up could have been worsened.
In the briefing I have received from trade unions they acknowledge that this is the case but their remedy for overcoming it is by ensuring that there are pensioners among the trustees and that they should be there by statutory requirement. However, as we know, the Committee rejected the proposition which we made that there should be pensioner members among the trustees as a matter of law, so we are left with what could be a worsening position with no right of representation. I therefore hope that the Minister will agree with me that something ought to be done in these circumstances. I beg to move.
The Earl of Clanwilliam: I support the noble Baroness very sincerely in her amendment. Pensioner trustees should be represented at some stage, especially where there are more pensioners than there are active members.
Baroness Seear: We also strongly support this amendment from these Benches.
The Earl of Lindsey and Abingdon: It is my intention to speak only to Amendment No. 150A. The purpose of the amendment, which refers to preferential liabilities on winding up, is to try to obtain a more balanced equation between those who are just below or just over retirement age. As worded at present, in Clause 66 there is a distinct advantage for those referred to in subsection (3) (b) over those in subsection (3) (c). In other words, I am looking for a more level playing field. Bearing that in mind, I should like to give an example of, say, a 56 year-old person having paid into a scheme an aggregate contribution identical to that of an older member. That person should not get significantly worse returns on his own investment after a period of 20 years' service.
Lord Mackay of Ardbrecknish: This is an important issue. I shall take a few minutes to explain what exactly we intend by this clause, and why, and also to answer the points made by the noble Baroness and my noble friends.
This clause would ensure that the liabilities covered by the minimum solvency requirement are, so far as possible, secured; and that the purpose of the minimum solvency requirement is not frustrated by scheme priority rules which would apply scheme assets on wind up on a different basis. Thus, the requirement on schemes to cover the "preferential liabilities" in the clause will ensure that a scheme which is 100 per cent. solvent on the statutory minimum solvency requirement basis will in fact, on wind up, attribute to each member the actuarial value of their accrued rights, including their rights to indexation.
However, this clause also contemplates the situation that schemes may wind up less than 100 per cent. solvent on the statutory minimum solvency basis, or otherwise be unable to meet their liabilities in full. Obviously, we hope that schemes will not wind up in a position where they are unable to secure the benefits promised. We believe that the minimum solvency

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requirement and the wide range of other measures for enhancing scheme security which we have discussed will minimise the chances of schemes winding up in this position. But we live in the real world. Things could go badly wrong and we must address the question of how we should deal with that situation.
Where a scheme does not meet the statutory minimum solvency requirement it is inevitable that some of the preferential liabilities will not be met. The proposed priority order will ensure that there is an equitable distribution of assets. It is only right that pensioners should receive some priority over active members and that they should, if possible, suffer no reduction in their income. That is reflected in the priority order.
Additionally, the position of pensioners will be further protected as a consequence of the actuarial valuation basis to be used for the purpose of calculating liabilities under the clause. This will need to be consistent with the valuation basis used for calculating a scheme's minimum solvency requirement. As such, pensioner liabilities will need to be valued by reference to the returns on gilts. This means—in simple terms—that, on wind up, the scheme will need to attribute more cash to them than would be the case if the assets were simply distributed pro rata to all members (pensioner and non-pensioner) in proportion to their accrued rights. This will be the case even where, on a scheme basis, the minimum solvency requirement calculation would allow a proportion of the pensioner liabilities of a very large scheme to be valued by reference to equities.
We have given long and careful thought as to whether pensioners should be given any further protection under the preferential liabilities and whether indexation should be given the same priority as the pension in payment to existing pensioners. However, indexation can be very costly and will mean that more of the available assets will be used to fund escalating payments to existing pensioners.
As I have already said, this should not cause problems in a scheme which meets the minimum solvency requirement. If more of the assets are used to provide for the future increases of existing pensions there will be fewer assets available to secure the accrued rights of the other members. Some members—and my noble friend Lord Lindsey made this very point—who may be close to pensionable status may be left with insufficient funds to deliver their accrued pension rights and without the ability to repair damage to any large extent. In these circumstances, someone has to lose out. We believe that it is more equitable, so far as possible, to protect the basic pension entitlement of all scheme members and share out whatever residual assets may be available to provide pension increases. This seems better than offering total protection to one class of member and prejudicing the rights of other members who may well be in a no better position than a pensioner to make the loss good.
Those arguments are applicable to Amendment No. 150A. I appreciate that the purpose of this amendment is to protect the position of an older, but not yet retired, scheme member. It would tend to ameliorate the present
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situation in which pensioners' rights can be fully secured while the rights of someone just short of retirement can be significantly reduced.
I think my noble friend's heart is in the right place. The clause as drafted achieves a similar effect in a different way. It gives a reasonable degree of priority to the basic accrued rights of all scheme members. I hope that my noble friend will therefore agree that his amendment is unnecessary. With that explanation of what is a complicated, but could in certain rare circumstances be an extremely important, issue, I hope that the noble Baroness will feel able to withdraw her amendment.
Baroness Turner of Camden: I am not really surprised by the Minister's response, although I am a little disappointed. I ask him to accept that indexation is a very important issue for many pensioners, particularly those who have been on a pension for some years because the value of their pension in relation to earnings has fallen as the years have gone by.
I am not very happy with the Minister's response, but I shall take further advice before Report. A number of representations have been made to me on this issue. It has been pointed out to me that there are already pension schemes and pension scheme rules whereby pensioners and indexation for pensioners have the priority which I am seeking to give in my amendment. As I understand it, that will be overruled by this legislation once it is on the statute book. Therefore, although I feel unhappy about this, I am not willing at this time to press the amendment to a Division, so I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
The Earl of Lindsey and Abingdon The Earl of Lindsey and Abingdon moved Amendment No. 150A:
Page 37, line 43, after ("accrued") insert ("save that any member of a scheme to which this section applies who has accrued 20 years service and attained the age of 50 shall be entitled to a pension actuarially reduced or otherwise as if entitled under subsection (3) (b) above.").
The noble Earl said: I thank my noble friend the Minister for his comprehensive reply, which was more encouraging than I had expected. However, I still feel that the older pensioner of, say, 65 who, in addition to his company pension, is already drawing a state pension has a substantial advantage over an early leaver. I believe that that still applies because of the actuarial reduction in his benefits. Having said that, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 151 not moved.]
Clause 66 agreed to.
Clause 67 [Discharge of liabilities by insurance, etc.]:
Lord Haskel Lord Haskel moved Amendment No. 151A:
Page 38, line 22, after ("requirements") insert ("being a scheme acceptable to the member").
The noble Lord said: In moving Amendment No. 151A, I should like to speak also to Amendments Nos. 151B and 163B. I am not sure why Amendment No. 163B has been grouped with this amendment, but I shall attempt to speak to it.
Clause 67(3) lists four ways of winding up a scheme. Paragraphs (a) and (b) allow members' rights to be transferred to other occupational or personal pension schemes. Paragraph (c) allows a scheme to be wound up by purchasing annuities from insurance companies chosen by the members. However, paragraphs (a) and (b), under which members' rights can be transferred, do not require that members should agree. They require only that the new scheme should satisfy the "prescribed requirements". Winding up a scheme is obviously a major decision and I believe that members should be consulted about it, whatever the way in which it is wound up. The amendment therefore seeks to iron out the differences in treatment and requires the members' agreement irrespective of the destination of the members' rights.
Amendment No. 163B deals with payments made in anticipation. It is a probing amendment and is intended to provide an opportunity to make it clear that, when the board makes a payment in anticipation of compensation, the trustees will not become liable personally for repayment. The legislation as it stands says merely that the board can recover part or all of such payments to trustees where it subsequently decides that the necessary criteria have not been met or that the payments were excessive. Without a guarantee that they will not become liable personally, there is a risk that trustees will not apply for such payments and scheme members will lose out. I beg to move.
9.45 p.m.
Lord Mackay of Ardbrecknish: At present most occupational schemes require the trustees to discharge the member's liabilities by purchasing an annuity when the scheme winds up. That is not always the best method of securing a member's pension rights and in the cases of large schemes the costs and volume required may make that avenue impractical.
The Government believe that the trustees should have a number of options for discharging their liabilities. That will provide them with the flexibility to follow the most favourable avenue for members.
Clause 67 will enable trustees to discharge their liabilities by purchasing annuities; by paying the actuarial value of their accrued rights; by enabling members to take transfer credits in another scheme; or by enabling the member to take a personal pension. Secondary legislation will provide that individual members will have a period of six months in which to consider the trustees' proposals, take advice and, if they wish, to put forward an alternative option.
The noble Lord will appreciate that, as a transfer to another occupational pension scheme and a personal pension are individual arrangements, they are dependent on the member's consent. Without that consent, the trustees could not discharge pensions liability through either of the routes to which I have specifically referred. I hope on that basis the noble Lord is prepared to withdraw the amendment.
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I am not entirely sure whether the noble Lord spoke to Amendment No. 163B which relates to the Compensation Board. I do not want to answer an amendment that has not been spoken to, especially at this time of night.
Lord Haskel: Yes, I did speak to it.
Lord Mackay of Ardbrecknish: I thank the noble Lord. One becomes so immersed that one begins to wonder whether one has heard the argument or just read it. Amendment No. 163B concerns the operation of the Compensation Board. The board will be able to make interim payments to schemes to ensure that scheme members, particularly pensioners, do not suffer undue financial hardship. The board will be able to make those payments when it has reasonable grounds for believing that compensation is appropriate. That is essential. It allows the Compensation Board to act quickly and effectively. But the board may decide after further investigation that compensation is not, after all, appropriate or that too much has been paid. There is therefore provision for the board to recover any payments made if that happens. It must be right for the board to be able to do so, because all compensation payments are funded ultimately through the levy paid by other schemes.
I understand the noble Lord's concern that those recoveries should not penalise scheme members. Of course, the intention of the Compensation Board is to assist, not penalise, scheme members; and we do not envisage that the board would press for recovery if it would be detrimental to scheme members. But we believe that that is a matter for the board to determine. Each case will be different and the board will be in the best position to determine what impact any recoveries will have on scheme members. However, we recognise that an important issue has been raised. Indeed, the National Association of Pension Funds has already brought that to our attention and we have undertaken to think about it further. We shall certainly do so after having this short debate.
Lord Haskel: I thank the Minister for his explanation about Amendments Nos. 151A and 151B. That clears up the matter very well. On Amendment No. 163B, I am pleased that the Minister will look into the matter further. The point I wanted to make was merely that it should not be trustees who are liable personally for any repayment. I hope that when the Minister is looking into the matter that point will be taken into consideration. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 151B not moved.]
Clause 67 agreed to.
Clause 68 [Deficiencies in the assets]:
Lord Lucas Lord Lucas moved Amendment No. 151BA:
Page 39, line 30, after ("verified") insert ("by a prescribed person and").
The noble Lord said: I shall speak also to Amendments Nos. 151CA, 170A, 170B and 170C. The effect of Amendment No. 151BA is to insert a power into Clause 68 which allows regulations to make it clear

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that the calculation of a debt on the employer is to be undertaken by a suitably qualified actuary. This is an existing provision of the Pension Schemes Act 1993, Section 183(3). The amendment simply ensures that the provision will continue.
Amendment No. 151CA will allow for certain schemes to be exempt from the deficiency on wind-up provisions. This means that schemes which are exempt from the minimum solvency requirement under Clause 49(2) can also be excluded from these provisions. It is important that Clause 68 can be made to dovetail with the minimum solvency requirement. This amendment, therefore, also introduces a general power to modify the provisions as they apply in certain circumstances.
Although there is an existing power to modify Clause 68 included in Clause 108, this is limited to particular sets of circumstances. The power to modify minimum solvency is not limited in this way and it is desirable that the same wider power is introduced into Clause 68. The other amendments are consequential. I beg to move.
On Question, amendment agreed to.
Lord Haskel Lord Haskel moved Amendment No. 151C:
Page 39, line 37, leave out ("not").
The noble Lord said: The amendment makes any debt due from the employer when a scheme is wound up a priority under the terms of the Insolvency Act 1986 and the Bankruptcy (Scotland) Act 1985. The money in question is, in effect, the employees' past earnings over which they have had no control and hence should be regarded as a priority debt. The argument made against that previously was that it was impractical for other potential creditors to ascertain what were the employer's unmet pensions liabilities. This argument is no longer valid as they can now seek information on how far a potential debtor's pension scheme complies with the MSR and the contributions to its schedule. I beg to move.
Lord Mackay of Ardbrecknish: I hope that I can persuade the noble Lord to withdraw his amendment because I am afraid that I cannot accept it.
The objective of insolvency law is, so far as possible, the equal distribution of assets among unsecured creditors. As the law stands, the trustees of the pension scheme are ordinary creditors of the employer. The PLRC report identified a significant reason why a deficit should not become a priority debt.
Bearing in mind the value of many pension schemes relative to the value of the employer company, the creation of a contingent debt of a size potentiallygreater—sometimes several times greater—than that of the employer could deter potential creditors from investing in the company and, as the PLRC report states:
"be a major obstacle to the provision of credit".
Nevertheless, we are obviously anxious to ensure that pension schemes are properly funded. That is the basic rationale for the minimum solvency requirement under the requirements and schemes to establish a schedule of contribution consistent with meeting that requirement. Any contribution unpaid before the due date becomes a debt on the employer. This applies while the scheme is
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ongoing and offers the trustees a clear means of securing funds due from the employer to the scheme. It should reduce the risk of a deficiency arising in the event of an employer insolvency or of the scheme winding up.
Clause 68 provides a further layer of protection for scheme measures. It re-enacts existing employer debt provisions, which mean that any shortfall in the fund at the point of employer insolvency will also be a debt on the employer. With the MSR in place, there should be less need for schemes to resort to these provisions.
We believe that they should remain in place as a useful additional contribution to members' security. But we do not believe that it would be appropriate to go further and to make any such debt a priority debt to the disadvantage of other creditors mainly, as I have pointed out, because of the adverse effect that that might have on the availability of credit for employers sponsoring defined benefit schemes. In the light of what I have said, I hope that the noble Lord will withdraw the amendment.
Lord Haskel: I thank the noble Lord for that explanation. We are trying to look after members' interests. The money in question is employees' past earnings, and earnings have always been a priority debt whenever there has been a liquidation. However, I shall read what the Minister said and I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Lucas Lord Lucas moved Amendment No. 151CA:
Page 39, line 40, at end insert:
("( ) This section does not apply to an occupational pension scheme falling within a prescribed class or description.
( ) Regulations may modify this section as it applies in prescribed circumstances.").
On Question, amendment agreed to.
Clause 68, as amended, agreed to.
Clause 69 [Surplus on winding up]:
Lord Lucas Lord Lucas moved Amendment No. 152:
Page 40, line 8, at end insert ("the requirements of subsection (3A) and (in prescribed circumstances) (3B), and any prescribed requirements, are satisfied.
(3A) The requirements of this subsection are that—").
The noble Lord said: In moving this amendment, I shall speak also to Amendments Nos. 153 and 154. The effect of these amendments is to provide that, in a scheme which is winding up and has excess funds remaining after all liabilities have been secured, including limited price indexation increases, the trustees must notify scheme members of their intention to make a payment to the employer. This will enable scheme members to make representations to the trustees. The amendment also provides that, where a member is concerned at a decision of the trustees to grant a payment to the employer in these circumstances, he will be able to ask the authority to check whether the trustees have complied with the statutory requirements.
On Question, amendment agreed to.
[Amendment No. 152A not moved.]
Lord Lucas Lord Lucas moved Amendment No. 153:
Page 40, leave out line 19 and insert:

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("(e) notice has been given in accordance with prescribed requirements to the members of the scheme of the proposal to exercise the power.
(3B) The requirements of this subsection are that the Authority are of the opinion that—

(a) any requirements prescribed by virtue of subsection (3) are satisfied, and

(b) the requirements of subsection (3A) are satisfied.").

On Question, amendment agreed to.
Lord Lucas Lord Lucas moved Amendment No. 154:
Page 40, line 20, leave out ("(3)") and insert ("(3A)").
On Question, amendment agreed to.
Lord Lucas Lord Lucas moved Amendment No. 155:
Page 40, line 28, at end insert:
("( ) If, where this section applies to any trust scheme, the trustees purport to exercise the power referred to in subsection (1) (c), or give their consent under subsection (2), without complying with the requirements of this section, sections 3 and 9 apply to any of them who have failed to take all such steps as are reasonable to secure compliance.
( ) If, where this section applies to any trust scheme, any person other than the trustees purports to exercise the power referred to in subsection (1) (c) without complying with the requirements of this section, section 9 applies to him.").
The noble Lord said: This amendment was spoken to when I moved Amendment No. 136. I beg to move.
On Question, amendment agreed to.
Clause 69, as amended, agreed to.
Clause 70 [Assets remaining after winding up: power to distribute]:
[Amendment No. 155A not moved.]
Lord Lucas Lord Lucas moved Amendment No. 156:
Page 41, line 16, at end insert:
("( ) If, where this section applies to a trust scheme, the requirements of this section are not complied with, section 3 applies to any trustee who has failed to take all such steps as are reasonable to secure compliance.").
The noble Lord said: This amendment too was spoken to when I moved Amendment No. 136. I beg to move.
On Question, amendment agreed to.
Clause 70, as amended, agreed to.
Clause 71 [The Compensation Board]:
Lord Lucas Lord Lucas moved Amendment No. 156A:
Page 41, line 21, after ("be") insert ("so").
The noble Lord said: In moving this amendment, I shall speak also to Amendments Nos. 161B, 161D, 161E and 161F. Amendments Nos. 156A and 161B make it clear that the Secretary of State will appoint the chairman of the compensation board and ensure that the board will be able to make payments out of any funds it holds, not only those directly attributable to the levy. Amendment No. 161D deletes one of the definitions listed in Clause 74 as the expression is not used in Clauses 74 to 78, while Amendment No. 161F brings the wording of Clause 75 in with that in Clause 76. Amendment No. 161E concerns the recovery of lost assets where compensation is payable.
The amendment is necessary because under trust law trustees have a duty to recover any lost assets. The fact that compensation is payable does not remove that duty; nor do we think that it should do so. It is in the interests
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of scheme members that missing assets should be recovered so that pensions can be paid in full as far as possible. But there is a risk that some trustees will relax their efforts to recover assets in the knowledge that the compensation scheme will safeguard most of the pensions. That would increase the costs of the compensation scheme, and any increase in costs would be borne by other schemes paying the levy. We need to be sure that measures are in place to protect the interests of other pension schemes and ensure that there is no abuse of the compensation scheme. I beg to move.
On Question, amendment agreed to.
10 p.m.
Baroness Seear Baroness Seear moved Amendment No. 156B:
Page 41, leave out lines 23 and 24 and insert:
("(3) In addition to the chairman, the Board shall comprise—

(a) a member appointed after the Secretary of State has consulted—

(i) organisations appearing to him to be representative of employers, and

(ii) the chairman,

(b) a member appointed after the Secretary of State has consulted —

(i) organisations appearing to him to be representative of employees, and

(ii) the chairman,

and such other member or members as the Secretary of State may appoint after consultation with the chairman.").
The noble Baroness said: We are now considering the compensation board, which is obviously another very important institution being established under the legislation. The point of the amendment is that, as proposed, the selection of the people who will be on the compensation board seems to be a somewhat cosy arrangement between the Secretary of State and the members of the board. In other words, the Secretary of State appoints the chairman and then, in consultation with the chairman, he appoints two other people.
In these days when there is so much talk of how people get on to quangos—and I shall not go into that argument—I should have thought that it was most important to make it absolutely clear that the compensation board is not just a creature of the Secretary of State. As the industry will fund the compensation board, it must be appropriate after the chairman has been appointed for members of the board to be selected in consultation with representatives of employers and trade unions. If the funding of the board is to be met by the industry surely as a matter of sheer justice control of it should at least be influenced by selection from both sides of industry. I beg to move.
Baroness Turner of Camden: Amendment No. 157, which is tabled in my name, has been grouped with the amendment of the noble Baroness. However, having studied both amendments, I must say that I prefer the wording put forward by the noble Baroness. I support everything that she has said. As I am sure the Minister will agree, it is important that the new institutions which come into existence as a result of the legislation can command a significant measure of public support, especially among the sections of the public most nearly

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affected. In my opinion, representatives of employers and employees should be on the board. I support the amendment.
Lord Mackay of Ardbrecknish: We fully recognise that members of pension schemes and employers who stand behind such schemes have a paramount interest in the running of the compensation schemes. I have listened with care to the arguments put forward by both noble Baronesses and I have a great deal of sympathy with their views. Indeed, we have now reached the position where I shall go even further than expressing a great deal of sympathy and say that I am prepared to accept Amendment No. 156B as drafted.
Noble Baronesses: Oh!
Loard Mackay of Ardbrecknish: I thought that that might bring a certain amount of joy to the Benches opposite; and I was not wrong.
However, as the noble Baroness has allowed us to do, we reserve the right to make any further appointments after consultation only with the chairman. I should like to congratulate both noble Baronesses on raising the issue. I am sure that the noble Baroness, Lady Turner, will agree to withdraw her amendment in due course. I shall try to remember to say the right thing when we reach the next amendment of the noble Baroness, Lady Seear.
Baroness Seear: I believe that this is the first time in the 24 years that I have been in this Chamber that I have had an amendment accepted. Therefore, I am especially glad. I thank the Minister for his sympathetic response.
On Question, amendment agreed to.
[Amendment No. 157 not moved.]
Clause 71, as amended, agreed to.
[Amendments Nos. 158 and 158A had been withdrawn from the Marshalled List.]
[Amendment No. 158B not moved.]
Schedule 2 [The Pensions Compensation Board]:
Baroness Seear Baroness Seear moved Amendment No. 158C:
Page 98, line 33, at end insert:
(" . where—

(a) the Compensation Board give a decision on any matter dealt with by them by means of a formal hearing or review, and

(b) they are requested on or before the giving or notification of a decision, to state their reasons for the decision,

they shall furnish a written statement of those reasons.").
The noble Baroness said: This is a small amendment to ensure that if a matter is passed to the compensation board for a formal hearing or review written statements should be given if requested. I beg to move.
Lord Mackay of Ardbrecknish: I will not repeat the exercise of the previous clause. After all, I would obtain an extremely bad reputation if I did that too often. However, I can inform the noble Baroness, Lady Seear, that at paragraph 10 of Schedule 2 the details of the board's procedural arrangements are to be set out in regulations. There is a similar provision in Clause 73 concerning the procedures to be adopted on review. I am pleased to tell the noble Baroness that it is our
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intention that both of these sets of regulations should include a requirement for the board to provide written statements including reasons for its determinations in all cases. This would, in fact, go further than the noble Baroness's amendment, which would require written statements only on request. On the basis of this assurance, which seems to me every bit as good as the previous one, I hope the noble Baroness will withdraw the amendment.
Baroness Seear: I think on this occasion I do withdraw the amendment, do I not? If we are going on at this rate we had better complete the Bill and stay all night. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Lucas Lord Lucas moved Amendments Nos. 159 and 160:
Page 98, line 40, leave out ("in relation to") and insert ("to an application for compensation under section 75 in respect of").
Page 98, line 42, leave out paragraphs (b) and (c) and insert:
("(b) determine the amount of any payment under section 76,
(c) determine whether any payment should be made under section 77 or the amount of any such payment, or").
The noble Lord said: I beg to move Amendments Nos. 159 and 160 and speak at the same time to Amendment No. 163. These amendments ensure that a formal application for compensation must have been made before the Pensions Compensation Board can make decisions. They also allow the board to make payments in anticipation both when it is likely that the scheme will qualify for compensation, and where it is already clear that the scheme will qualify but the final amount cannot yet be determined. Amendment No. 160 adds decisions on the amount of any payments in anticipation to the functions which the compensation board cannot delegate. I beg to move.
On Question, amendments agreed to.
Schedule 2, as amended, agreed to.
Clause 72 agreed to.
Clause 73 [Review of decisions]:
Baroness Turner of Camden Baroness Turner of Camden moved Amendment No. 160A:
Page 42, line 8, at end insert (" or independent recognised trade union").
The noble Baroness said: This clause provides for the compensation board to review its decisions in particular circumstances. It also sets out that it may do so on application to it of a person who appears to have an interest. That is all right but what we seek to do with this amendment is to write into the Bill the obligation of the board to review in the event of an application by an independent recognised trade union.
As I am sure everyone now knows, the unions have for a long time taken a strong interest in pension provision. They employ their own experts and they run their own training courses. My union, MSF, has its own training college and has been running courses for trustees and potential trustees for many years. It also publishes a great deal of material for scheme members and runs seminars so that members are kept up to date with developments in the pensions field. Individual

901
unions have been encouraged in this area by the Trades Union Congress, which has its own in-house experts and has been doing a great deal of briefing on the Bill.
The reason we think it would be a good idea to write this provision into the Bill is that unions stand behind their members when it comes to pension difficulties. When necessary they have been willing to fund court actions, which of course are very expensive. It therefore seems entirely appropriate to give them a role when it comes to review of compensation board decisions. They are likely to have the expertise available to help members, who on their own may not feel able to ask for a review even though they may feel one is justified. I hope that the Minister will see that that is sensible and will agree with the proposition. I beg to move.
Lord Mackay of Ardbrecknish: I understand the concern of the noble Baroness that trade unions should be able to apply for a review of a decision taken by the compensation board. I recognise that in representing its members' interests a trade union may wish to apply for a review, particularly if those members could face financial hardship.
Under the Bill as currently drafted the compensation board will be able to accept requests for reviews from any persons appearing to the board to have an interest. That will, rightly we believe, give the board a great deal of flexibility. The board will be able to accept review applications from employers and trustees, as well as scheme members. It will also be able to accept them from people acting on their behalf, including trade unions—in short, from anyone it considers has an interest. However, we would not consider it appropriate to identify any or all of those people in the Bill. Indeed, the way in which the amendment is drafted would effectively separate trade unions from those who have an interest. I presume that that is not what the noble Baroness intended.
I believe that the Bill gives the compensation board the flexibility to do what the noble Baroness wishes. Therefore, I do not believe that there is any need to include a specific reference to trade unions.
Baroness Turner of Camden: I thank the Minister for that response. I made a careful note of what he said and I shall read Hansard tomorrow.
I am glad to hear that the Minister believes that the board has the necessary flexibility to receive representations from trade unions representative of scheme members. I hope that we shall find that it works out like that so that unions are able adequately to represent their members with difficulties in pension provision.
In the circumstances, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 73 agreed to.
Clause 74 [Cases where compensation provisions apply]:
[Amendment No. 160B not moved.
Baroness Turner of Camden Baroness Turner of Camden moved Amendment No. 161:
Page 42, line 38, leave out paragraph (b).
The noble Baroness said: The amendment proposes the deletion of Clause 74(1) (b). Among the list of entitlements to compensation there stands the requirement that the employer should be insolvent. If we take the Maxwell case as an example, the problem with that is that the Mirror Group was not and never has been insolvent. Had that condition existed at that time the Mirror Group pension scheme members would not have been eligible for compensation under the clause. I do not believe that that was originally the intention. I believe that that is perhaps an accidental effect of the Bill.
It may well be that the Government feel, perhaps with some justification, that if the employer has the funds available the employer should be made to refund whatever is missing or to pay the necessary compensation. However, the provision could have the effect of driving a firm into insolvency when it might not otherwise have been insolvent. That might not be to the advantage of either existing scheme members or the employees involved.
It seems to me that subsequent clauses in the Bill give the compensation board enough flexibility to take account of the employer's circumstances without having this very rigid provision that the employer must be insolvent before compensation can even be considered.
Perhaps the Minister will be good enough to respond to that point. I shall be interested to know why the Government felt that it was necessary to include this as an absolute requirement. I beg to move.
10.15 p.m.
Lord Mackay of Ardbrecknish: The overall effect of the qualifying conditions in Clause 74 is to restrict the scope of the compensation scheme. We believe that this is an important feature of the scheme. As the Pension Law Review Committee recognised, a wide compensation scheme, covering all risks, could encourage reckless behaviour in the knowledge that all losses would be covered in the event of scheme failure.
The compensation scheme applies only to trust based schemes where the employer is insolvent. There must also be reasonable grounds for believing that assets have been dishonestly removed and the compensation board must be satisfied that it is reasonable that compensation should be paid. In addition, where the scheme is salary related, it must have fallen below the minimum solvency requirement.
We believe that limiting compensation in this way concentrates the resources of the compensation scheme on those risks which are most likely to cause loss and least likely to be reduced by other measures to improve scheme security introduced in this Bill. The compensation scheme is intended to be a scheme of last resort, standing behind a strengthened legal and regulatory framework.
Employers usually have substantial and direct influence on the security of schemes, and for that reason there is risk that they may seek to use the existence of a compensation scheme as a means of avoiding their responsibilities. The prime responsibility to fund a

903
scheme lies with the employer. It is only when the employer is unable to fulfil his obligations by reason of his insolvency that the question of external funding in the form of compensation should be considered. I hope that in the light of my explanation, and indeed the Pension Law Review Committee's specific recommendations that compensation should be payable only when the employer is insolvent—
Baroness Turner of Camden: Before the noble Lord sits down, will he be good enough to respond to my comment on the Maxwell affair? Under these provisions, the Mirror Group pensioners would not have been entitled to compensation because the Minor Group was never insolvent.
Lord Mackay of Ardbrecknish: If the noble Baroness will allow me to take the matter away, I shall write to her.
Baroness Seear: I was about to ask the same question. When the Minister replies to the noble Baroness regarding the Minor Group, will he consider whether there could be a role for the compensation board in bridging the gap—it has been a very big gap—between moneys being recovered from the Maxwell scheme and payments to the pensioners? The board could have a secondary function in tiding over in circumstances such as those which arose with the Maxwell scheme.
Lord Mackay of Ardbrecknish: Perhaps I may say this in general terms. An employer who is still solvent is obviously liable to meet the deficit under the various provisions. We have discussed some of them today on the employer-debt provision. Indeed, where there is a takeover the debt is on the old employer and not on the new one in the circumstances that we envisage.
Noble Lords will remember that some time ago we discussed whether the compensation board could take back money that it had given in the event of a situation not being as bad as had been considered. Another situation which may arise is that the pension fund may well be able over time to restore to itself the assets which had been illegally removed. In such circumstances the compensation board might help to keep the pensioners in payment. I think that that is right. However, on the specific question regarding Maxwell, I prefer to write to the noble Baroness.
Baroness Seear: Is there any provision in the Bill as it now stands which enables the compensation board to do what the Minister has just outlined and keep the pensioners paid during an interim, painful period before the money has been recovered? Is that within the power of the compensation board?
Lord Mackay of Ardbrecknish: I believe that we have probably passed that stage—although we are moving at such a rate that I find it as much as I can do to keep ahead of the amendments.
The circumstances the noble Baroness describes are those we envisaged when we discussed the pay-back to the compensation board; namely, that the board will be prepared to step in before it is absolutely certain that all
904
is lost. In the eventuality that all is not lost the board would be due some money back. Therefore I think that the answer to the question is yes.
Baroness Turner of Camden: I thank the Minister for that response, some of which was quite encouraging. Under subsection (1) (e) of Clause 74 fairly wide powers are given anyway to the compensation board to take account of all circumstances. The phrase is:
"reasonable in all the circumstances".
So there are wide powers. Even if we took out subsection (1) (b), "the employer is insolvent", there is still the ability to take account of the employer's position under paragraph (e). That is what I said in the beginning. However, I shall await with interest the Minister's response to the query I raised over the Minor Group pensioners. In the circumstances, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 161A not moved.]
Lord Lucas Lord Lucas moved Amendment No. 161B:
Page 43, line 3, leave out from second ("of') to ("an") in line 4 and insert ("funds for the time being held by them,").
The noble Lord said: I have already spoken to this with Amendment No. 156A. I beg to move.
On Question, amendment agreed to.
[Amendment No. 161C not moved.]
Lord Lucas Lord Lucas moved Amendments Nos. 161D and 161E:
Page 43, line 26, leave out paragraph (f).
Page 43, line 40, at end insert:
("(4A) Where this section applies to an application for compensation under section 75, the trustees must obtain any recoveries of value, to the extent that they may do so without disproportionate cost and within a reasonable time.
(4B) If subsection (4A) is not complied with, section 3 applies to any trustee who has failed to take all such steps as are reasonable to secure compliance.").
The noble Lord said: I have already spoken to these amendments with Amendment No. 156A. I beg to move.
.On Question, amendments agreed to.
Clause 74, as amended, agreed to.
Clause 75 [Applications for payments]:
Lord Lucas Lord Lucas moved Amendment No. 161F:
Page 43, line 47, leave out ("Payments may be made") and insert ("Compensation may be paid").
The noble Lord said: I spoke to this with Amendment No. 156A. I beg to move.
On Question, amendment agreed to.
Clause 75, as amended, agreed to.
Clause 76 [Amount of compensation]:
Lord Lucas Lord Lucas moved Amendment No. 161G:
Page 44, line 17, after ("scheme") insert ("and the Board have determined the settlement date").
The noble Lord said: I beg to move Amendment No. 161G and speak at the same time to Amendment No. 163A. These amendments together will ensure that any payments made before the amount of compensation can

905
be finally calculated are interim payments and any payments after that are compensation proper. I beg to move.
On Question, amendment agreed to.
[Amendment No. 161H not moved.]
Lord Lucas Lord Lucas moved Amendment No. 162:
Page 44, line 33, leave out from ("if') to ("exceeds") in line 34 and insert ("the maximum amount mentioned in subsection (3) (a)").
The noble Lord said: I beg to move Amendment No. 162 and at the same time speak to Amendment No. 162AA. These amendments will ensure that the correct amount is taken into account in calculating compensation for salary-related schemes. I beg to move.
On Question, amendment agreed to.
[Amendment No. 162A not moved.]
Lord Lucas Lord Lucas moved Amendment No. 162AA:
Page 44, line 37, leave out ("amount or aggregate") and insert ("maximum amount").
On Question, amendment agreed to.
[Amendment No. 162B not moved.]
Clause 76, as amended, agreed to.
Clause 77 [Payments made in anticipation]:
Lord Lucas Lord Lucas moved Amendment No. 163:
Page 44, leave out lines 43 to 46 and insert:
("(1) The Compensation Board may, on an application for compensation under section 75, make a payment or payments to the trustees of a trust scheme where in their opinion
(a) section 74 applies, or may apply, to the application, and").
The noble Lord said: I spoke to this amendment with Amendment No. 159. I beg to move.
On Question, amendment agreed to.
Lord Lucas Lord Lucas moved Amendment No. 163A:
Page 45, line 2, at end insert:
("but the Board have not determined the settlement date").
The noble Lord said: I spoke to this amendment with Amendment No. 161G. I beg to move.
On Question, amendment agreed to.
Baroness Seear Baroness Seear moved Amendment No. 163AA:
Page 45, line 9, leave out ("the payment") and insert ("so much of the payment as they consider appropriate").
The noble Baroness said: This amendment seeks to give discretion to the compensation board not to demand the total payment if there is reason to believe that its application will be very draconian. It makes it possible for the compensation board to make adjustments for so much payment as it considers appropriate. Amendment No. 163AB seeks to insert:
"but nothing in this subsection authorises the recovery from any person of a sum if in all the circumstances and in particular having regard to an action taken by that person in consequence of a payment, it would be unreasonable to recover that sum".
The idea is that the compensation board does not have to go the whole way but can use its judgment in modifying the amount that it demands. I beg to move.
Baroness Turner of Camden: This amendment seems very reasonable to us and we support it.
Lord Mackay of Ardbrecknish: This amendment comes fairly close to the discussion that we had a few
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minutes ago. The compensation board will be able to make payments in anticipation to schemes. This is an essential measure to ensure, as I said in my intervention, that scheme members, particularly pensioners, do not suffer undue financial hardship. To ensure that the board can act quickly, it will be able to make these payments when it has reasonable grounds for believing that compensation is appropriate but before a final decision has been made. After further investigation, however, the board may decide that compensation is not, after all, appropriate. Therefore, there is provision for the board to recover any payments made. All payments of compensation are funded through a levy paid for by other schemes. I believe therefore that it is right that the board should have the power to make those recoveries.
The board has discretion over the recoveries that it makes and we do not envisage that it would press for recovery if the scheme has little or no assets. The clause as drafted would not prevent it making partial recovery if the scheme has insufficient assets to repay in full. It is the intention of the compensation board to assist members and not to penalise them.
We recognise that there is an important, more general issue, regarding recoveries made by the compensation board. I understand that there are concerns that the recovery of such payments may adversely affect members, as both the noble Baronesses indicated perhaps. The National Association of Pension Funds has already brought this matter to our attention and we have undertaken to consider the issues further. On that basis, I hope that the noble Baroness will agree to withdraw her amendments.
Baroness Seear: We are again grateful to the noble Lord for saying that he is prepared to consider these amendments. We are doing rather well tonight. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 163AB and 163B not moved.]
Clause 77, as amended, agreed to.
Clauses 78 and 79 agreed to.
Clause 80 [Schedules of payments to money purchase schemes]:
[Amendment No. 163BA not moved.]
Clause 80 agreed to.
[Amendment No. 163BB not moved.]
Clause 81 [Schedules of payments to money purchase schemes: supplementary]:
[Amendment No. 163C not moved.]
Clause 81 agreed to.
Clause 82 agreed to.
Lord Mackay of Ardbrecknish: I beg to move that the House do now resume.
Moved accordingly, and, on Question, Motion agreed to.
House resumed.
House adjourned at twenty-nine minutes past ten o'clock.