HL Deb 12 July 1995 vol 565 cc1699-704

61 Clause 34, page 21, line 21, at end insert:

'() where the power is conferred by the scheme on the employer, the employer has asked for the power to be exercised, or consented to it being exercised, in the manner so proposed'.

62 After Clause 34, insert the following clause:

Power to defer winding up

'.—(1) If, apart from this section, the rules of a trust scheme would require the scheme to be wound up, the trustees may determine that the scheme is not for the time being to be wound up but that no new members are to be admitted to the scheme.

(2) Where the trustees make a determination under subsection (1), they may also determine—

  1. (a) that no further contributions are to be paid towards the scheme, or
  2. (b) that no new benefits are to accrue to, or in respect of, members of the scheme;
but this subsection does not authorise the trustees to determine, where there are accrued rights to any benefit, that the benefit is not to be increased.

(3) This section does not apply to—

  1. (a) a money purchase scheme, or
  2. (b) a scheme falling within a prescribed class or description.'.

Lord Mackay of Ardbrecknish

My Lords, with the leave of the House I beg to move that the House do agree with the Commons in their Amendments Nos. 61 and 62. With those amendments I should like to speak also to Amendments Nos. 132 to 146 and Amendment No. 234.

These amendments are in a group of amendments that deal with surplus and wind up. Amendment No. 61 provides that trustees who wish to make a payment from surplus to the employer must ensure that the employer is content to receive it. Perhaps it will help to remind your Lordships that Clause 34 provides that in a scheme which permits a payment from surplus to the employer, the trustees alone will be able to decide whether or not to make such a payment. Trustees may exercise the power only where certain statutory requirements have been met.

One of the main conditions is that benefits must be increased annually, in line with inflation, up to a maximum of 5 per cent. for both past and future service. In defined benefit schemes, the employer stands behind the pension promise and funds accordingly. Most scheme rules give the employer the sole power to authorise improvements.

The Bill places a statutory obligation on employers to fund their schemes so that the benefits are protected. That is entirely reasonable if the employer controls the commitment to additional enhanced benefit. But it would be more difficult to justify if the employer can be faced with potential additional costs as a result of benefit increases which he has not agreed.

Amendment No. 61 therefore provides that the trustees must ensure that the employer is content to receive a payment from surplus and not act unilaterally. That will ensure that any consequent increase in benefits is approved by the employer and that the employer has the opportunity to weigh all the implications before accepting the payment.

Amendment No. 62 overrides scheme rules which require the scheme to wind up in certain circumstances. It will allow trustees to continue a scheme where they believe it would be in the interests of the members to do so. We believe that it is right that trustees of a properly funded scheme should be able to discharge their liabilities on a gradual basis as and when they crystallise. Members will be protected because the trustees can continue with the scheme only if it is in the best interests of the members.

Amendments Nos. 132 and 133 develop our intention that additional voluntary contributions should attract a high level of protection, even when they have been transferred from another pension scheme. I have accepted that it is right in principle that the first priority should be given to any pension rights attributable to additional voluntary contributions. I undertook to bring forward an amendment at a later stage to cater for all variations. These amendments redeem that commitment.

Amendments Nos. 134 and 135 deal with the priority to be accorded to dependants' benefits. An example would be of a pensioner who died during winding-up. His pension would attract a high priority under the Bill because it was in payment at the time winding-up commenced. But a widow's or widower's pension coming into payment after the date on which the winding-up commenced would appear to attract a lower priority. My noble friend Lord Buckinghamshire raised the point and I promised to consider it. These amendments make it clear that any contingent dependant's benefit is accorded the same priority as the scheme member's entitlement.

We were also concerned that the way in which the categories of preferential liabilities in the clause are set out could be interpreted as implying that accrued rights do not include provision for indexation. They do. However, misunderstandings could have arisen because accrued rights and indexation are treated separately in the clause. The amendments remove any potential ambiguity.

Amendments Nos. 136 and 137 add to the flexibility which Clause 68 gives trustees in the way they discharge scheme liabilities when a scheme winds up. The clause provides a range of options for discharging liabilities but it has been suggested that the option to purchase transfer credits in another scheme does not apply when it is in respect of an existing pension entitlement. That could be particularly important when an employer is merging schemes or is being taken over. In those circumstances, a transfer may be a suitable alternative to the purchase of an annuity for the discharge of pensioner liabilities.

Amendments Nos. 138 and 146 address the situation where the scheme has wound up, liabilities have crystallised and the value of any excess assets can be calculated precisely. Most scheme rules have clear provisions setting out exactly how assets should be allocated on wind-up. A small minority of schemes have wind-up rules which could in principle result in assets being left unallocated. There could be need for a court to determine whether the excess assets should be deployed to increase members' benefits to Inland Revenue limits, whether they should be paid to the employer or whether they should go to the Crown. The PLRC recommended that where scheme rules were clear on the allocation of scheme assets on wind-up they should not generally be interfered with.

It has been suggested to us that Clause 70 does not achieve the desired effect. It would in practice override scheme rules on allocating excess assets on scheme wind-up by effectively requiring the trustees to authorise benefit improvements up to Inland Revenue limits before any payment could be made to the employer. That is not what the PLRC recommended; and it is not what we intend.

Amendments Nos. 138 to 146 restructure Clause 70 so that clear scheme rules will be applied, subject to the additional constraint that limited price indexation must be awarded in respect of past and future service, and members must he notified and given an opportunity to make representations to the authority.

Amendment No. 234 introduces a new clause to provide new options for contracted out money purchase schemes which are in the process of winding up. It addresses concerns about the problems that many schemes have found in placing protected rights in appropriate homes. The new clause brings in new ways for discharging protected rights and will help trustees and managers to wind up schemes. It will enable insured schemes to secure protected rights through appropriate insurance policies. We believe that these measures will protect the interests of both the members and the taxpayer who has contributed to members' protected rights. I beg to move.

Moved, That the House do agree with the Commons in their Amendments Nos. 61 and 62.—(Lord Mackay of Ardbrecknish.)

Lord Boyd-Carpenter

My Lords, will my noble friend clear up one point on Amendment No. 146? This appears to give power by regulations to modify a section of the Act. I should like to know whether those regulations are themselves subject to parliamentary control.

Lord Monkswell

My Lords, I have a question on the group of amendments relating to provisions on the wind-up of a scheme and the disbursement of surplus funds. I was not quite clear as to what the Minister meant in relation to Amendment No. 138. He mentioned that the surplus might go to make up benefits to scheme members to Inland Revenue limits, go to the employer or go to the Crown. I gathered that that would happen if there were no effective mechanisms or rules to determine what should happen to the surplus on wind-up. Can we be assured that the new amendments the Minister presents will ensure that surplus money in a scheme remains the property, if I may put it that way, of scheme members. It is well established that the funds in a scheme represent deferred pay and are therefore in the ownership of the members. Parliament accepted that prior to wind-up, if there is a surplus, some of that surplus can go to the employer on the basis that if there were a deficit the employer would have to make up the difference. While that might be contested, it is now accepted by Parliament. But on the wind-up of a scheme that situation does not pertain. Effectively, any liability that the employer might have is wiped out. Therefore any surplus left in the scheme after all the agreed benefits have been paid should remain the property of scheme members and be distributed in some fashion to them, not go to the employers.

The Earl of Buckinghamshire

Perhaps I may make a few comments on the clutch of amendments on the priority clauses on wind-up; namely Amendments Nos. 132 to 135. I am pleased to have the Minister's response on the improved priority clause on treatment of additional voluntary contributions and for dealing with contingent liabilities. However, I remain concerned about the changing of this priority clause in so far as it affects pensions in payment and pensions increases which are attached to those particular pensions.

I spoke on this matter at some length previously in the House, and I do not wish to rehearse the whole argument. There is increasingly widespread concern about the diminution and, as it were, the weakening in part of the position of accrued rights. Bearing in mind that the Bill, at least in part, deals with the security of accrued rights, it is somewhat strange to find that pension increases and payment will not be treated as a prior liability. That is the situation as I understand it.

There are some practical difficulties with the Bill as it stands. It is not clear how pension increases which have already been bought out with insurance companies could be unravelled in the event of the wind-up of a scheme where those annuities have been bought out in the name of the trustees. I am dealing with a scheme at the moment in relation to which I am trying to assign the annuities bought out by the trustees to the members. I am having considerable difficulties with the insurance company involved, which is trying to change the terms of the contract, and even to weaken that particular contract still further. Therefore I have some concerns.

As the Bill stands at the moment, trustees who have bought out annuities in their own name for pensioners would be advised to look at assigning those policies to the individual annuities so that there is no danger, no matter how unlikely it is, that in future schemes will go into wind-up in deficit. I do not believe that this clause was fully debated in another place. I look forward to hearing the Minister's comments. I hope that he can offer some words of comfort.

Baroness Turner of Camden

My Lords, I support the remarks of the noble Earl. The Minister will no doubt recall that I raised the whole question of pensioners and their order in priorities in the event of wind-up. I was very concerned that the order seemed to have been reversed, with pensioners now appearing at the bottom of the list.

I understood the Minister to say during his presentation of these amendments that existing rules would not be overridden. It is to try to maintain rights that exist in current rules that I am most concerned. There are schemes that have a priorities rule which puts pensioners higher up the list than was proposed in the Bill. If that will still remain the situation where rules are in force, that at least would he a more satisfactory position. Perhaps the Minister would care to elucidate.

Lord Mackay of Ardbrecknish

My Lords, perhaps I may start with the simplest of the questions I was asked; namely, that from my noble friend Lord Boyd-Carpenter. Amendment No. 146 amends Clause 71 to enable regulations to modify the application of the clause. An example of the way in which we intend to use the power is to enable an individual section of an industry-wide scheme to be treated as a scheme in its own right. The power is similar to that for the other winding-up clauses in the Bill. It will be done by regulations, using the negative procedure. That is our intention.

Lord Boyd-Carpenter

My Lords, will my noble friend repeat what he said? Did he say "using the negative procedure"? I did not hear what he said.

Lord Mackay of Ardbrecknish

Yes, my Lords, I did say that it would be done using the negative resolution procedure.

To turn to the question put by the noble Lord, Lord Monkswell, most schemes have clear and carefully balanced provisions in place setting out exactly how scheme assets should be allocated on wind-up. Only a small minority of schemes have wind-up rules that could in principle result in assets being left unallocated. As I said, this can mean that when such a scheme winds up there is a need for a court to determine whether the excess assets should be deployed to increase members' benefits to the Inland Revenue limits or paid to the employer if he can establish a claim under what I gather is called "resultant trust" or go to the Crown as bona vacantia. No doubt the noble Lord understands exactly what that means.

4 p.m.

His argument may have been based on a slightly false premise. The money in a pension fund is not deferred pay. Once members' benefits are fully secured, any excess assets should be distributed according to the scheme rules, which could include payment to the employer. That is what the PLRC said and that seems the right course to us. That is what Amendments Nos. 138 to 146 will ensure. It has been debated quite fully during the passage of the Bill, both in this Chamber and in the other place.

I hope that that explanation will reassure the noble Lord, Lord Monkswell, that in the case of wind-up, the great majority of pension funds will already have clearly defined rules on what they do with the money and anything they have left over.

I come to the point raised by my noble friend Lord Buckinghamshire and the noble Baroness, Lady Turner. I appreciate the concerns expressed by my noble friend. Indeed, we had some considerable debate on the question of protecting the interests of pensioners in those circumstances. If a scheme is funded to at least a level of the MFR, pensioners' rights, including to indexation, will of course be protected. My noble friend was concerned about what would happen if a scheme winds up under-funded. We hope that that will not happen but, if it does, I am afraid that inevitably some members will lose out.

The clause protects pensioners by making the continuation of pensions in payment at their current level the top priority after AVCs. It also protects them through the proposed basis for valuing accrued rights under this clause, which will entail the rights of pensioners and those close to retirement being valued on a relatively conservative basis. Beyond that, the clause does indeed incorporate the outcome of some hard choices. It is possible that, as a result of this clause, some pensioners' future pension increases will be reduced. But that is fairer than the current situation in which those close to retirement can be left with a very severely reduced pension at a stage in life when they are not in a position to do anything about it. Those of your Lordships who were with me in the long hours of debate on the Pensions Bill will remember that we discussed that particular balance in some detail.

We believe that all that is consistent with the general philosophy of the Bill, which is to protect all accrued rights, whether derived from service before or after 1997. It does not represent a retrospective reduction in pensioners' rights. It merely ensures that if a scheme winds up, and is unable to secure its members' rights in full, the pain is shared on an equitable basis with a bias towards pensioners' interests.

My noble friend will also be reassured to hear that a transitional order of preferential liabilities will apply over the period until the MFR is fully in place. This will give higher protection to the rights of existing pensioners, including to indexation, and to accrued GMP rights. Therefore, it will avoid any sudden change in the position of pensioners or those with substantial contracted out rights. The extent to which rights are covered by the preferential liabilities in this clause will increase in line with the build-up of funds in schemes under the MFR.

I trust that that reassures my noble friend. I believe that we have struck the right balance in this difficult area. However, I have to say to him, at the risk of opening a Pandora's Box, that one of the advantages of regulations in difficult areas of this kind is that, if experience proves us wrong, the clause contains powers to modify the preferential liabilities to achieve what might be considered, should something happen in the future, a more satisfactory outcome.

The noble Baroness, Lady Turner, asked me whether the Bill would override existing scheme rules. The Bill will override scheme rules in establishing a new statutory priority order. It is the scheme rules on distributing excess assets on wind-up which will be left in place. The new priority order will, we believe, produce a fairer distribution of assets, if a scheme winds up under-funded with, as I said, a bias towards protecting pensioners.

I hope that I have answered the points that were made. Perhaps I may take the opportunity to say to those noble Lords who are very interested in this complicated matter that if anybody comes across anything or needs clarification I should be more than happy to correspond with him over the Summer Recess. With those remarks, I hope that the House will accept the amendments.

On Question, Motion agreed to.