Pensions Bill [H.L.]

HL Deb 16 February 1995 vol 561 cc795-852

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 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.

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 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 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.

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, 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 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.

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.

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 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 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.

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 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.

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 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 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 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 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. 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 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.

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 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 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 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 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 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 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 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 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 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: 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 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. 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.

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 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 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 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 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? 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 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 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 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 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 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 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 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 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 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 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 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.

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 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 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 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 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—

1. (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
2. (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: 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 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 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 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 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—

1. (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
2. (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 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 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 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 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 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 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 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 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 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.

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 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 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 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.