COMMONS AMENDMENTS (Hansard, 12 July 1995)

HL Deb 12 July 1995 vol 565 cc1709-14 1709

§ 117 Clause 50, page 31, line 34, after 'verified' insert 'by a prescribed person and'.

§ 118 Clause 51, page 32, line 4, leave out 'at' and insert 'before the end of'.

§ 119 Page 32, line 5, after 'occasions' insert 'or within prescribed periods'.

§ 120 Clause 52, page 33, line 24, after 'be' insert:

'(i) rates of contributions determined by the trustees or managers, being such rates as in their opinion are adequate for the purpose of securing that the minimum funding requirement will continue to be met throughout the prescribed period or, if it appears to them that it is not met, will be met by the end of that period, and
(ii) other'.

§ 121 Clause 53, page 34, line 3, at beginning insert 'Except in prescribed circumstances'.

§ 122 Clause 54, page 34, line 42, at beginning insert 'Except in prescribed circumstances'.

§ Lord Mackay of Ardbrecknish
My Lords, I beg to move that the House do agree with the Commons in their Amendments Nos. 117 to 122 en bloc. I should also like to speak to Amendments Nos. 152, 153 and 155.
This group of amendments deals with funding. Amendment No. 117 is designed to ensure that the minimum funding requirement will operate properly by ensuring that the scheme actuary appointed by the trustees will also be the individual who undertakes the valuation of the scheme assets and liabilities. We shall be able to do that in regulations made as a result of this amendment. We intend to make it clear that the individual will be a properly qualified actuary who is a Fellow of the Institute of Actuaries or Faculty of Actuaries. This mirrors a similar provision in Clause 69(5).
Amendments Nos. 118 and 119 affect the timing of actuarial valuations and certificates. We intend that schemes should have valuations at intervals of not more than three years, with annual certificates to check on the funding position in the years in between. The Bill could have been interpreted as requiring those to be carried out on a particular day. Amendments Nos. 118 and 119 allow for flexibility to ensure that the provisions actually work in practice.
Amendment No. 120 has already been signalled in an earlier debate. It is about the operation of the schedule of contributions. We would normally expect the employer and trustees to agree the rates of contribution to be entered in the schedule. But there needs to be a failsafe should they not be able to agree. That needs to rest with the trustees, but they should not have a carte blanche to expose employers to financial risks. This amendment would leave the trustees with the power to set the contribution rate but limit their discretion so that they cannot preset a rate which is more than adequate to comply with the minimum funding requirement.
Amendments Nos. 121, 122 and 153 will enable regulations to clarify the duty on trustees to notify OPRA and members when payments due in the schedule of contributions are not made by the date. Without these amendments, the Bill would require trustees to notify OPRA and scheme members whenever a payment was overdue, even if it was delayed for a short time or for a trivial reason. That would involve unnecessary costs and cause anxiety for members. The amendments will allow regulations not to require OPRA and members to be notified where payment is delayed for good reason, for example, administrative fault or where it is made following OPRA's intervention.
I am sure your Lordships will be aware of the importance of the schedule showing rates of contributions and when they should be paid. Amendment No. 152 clarifies how the rates and due dates of contributions to he shown in the schedule are to he determined in respect of money-purchase schemes. It has been suggested that the clause does not make it sufficiently clear that the matters to be shown in the schedule should be consistent with 1711 scheme rules. To make it completely clear, Amendment No. 152 spells out that if the matters are already set down in the scheme rules, it is what is contained in those rules that should be shown on the schedule. If they are not contained in the scheme rules, they should be agreed between the employer and the trustees. If exceptionally they cannot agree they should be determined by the trustees. This amendment will leave trustees in no doubt how the matters to be shown in the contributions schedule should be determined.
Amendment No. 155 introduces a power to modify the minimum funding requirement and the employer debt provisions to apply to money-purchase schemes in certain circumstances. The PLRC Report noted that:
in money-purchase schemes funding is automatic unless a scheme member bears the investment risks but there is no reason why the member should also bear the risk of loss through misappropriation of scheme assets". We have accepted this by agreeing that the compensation arrangements should cover money-purchase schemes where there has been dishonest removal of assets. But this will apply only where the employer is insolvent. This amendment addresses the situation where an employer sponsoring a money-purchase scheme which has suffered fraud remains solvent. It places a requirement on such employers to make up a deficit arising from theft or fraud. Our proposal is about protecting members from the risk of loss through misappropriation of assets, not about protection from investment risk. So members, not employers, of money-purchase schemes will still bear the investment risk, but members should have similar protection to members of salary-related schemes in cases of misappropriation. The amendment will ensure that they do.
Amendment No. 155 will also provide a power that can be used to ensure that certain schemes that pay defined benefits are not inadvertently excluded from the minimum funding requirement. That is because some of the schemes are hybrid and pay out defined benefit pensions instead of purchasing annuities. We would not wish to exclude them from the minimum funding requirement.
I believe that these amendments will all improve the Bill and I commend them to your Lordships.

§ Moved, That the House do agree with the Commons in their Amendments Nos. 117 to 122.—(Lord Mackay of Ardbrecknish.)

§ 4.15 p.m.

§ Baroness Hollis of Heigham
My Lords, we welcome Amendment No. 155. However, can the Minister give us a little more help in relation to Amendment No. 120? It may be that I misunderstood the purport of what he was saying. He seemed to be suggesting that trustees could not increase the rate of contribution which would produce funds which would more than meet the minimum funding requirement. In other words, they may levy only such contributions as would meet a minimum funding standard.
1712 If that is correct—I believe that is what the Minister said—it would mean that what was a minimum has become a maximum. At present, as I understand it, virtually all good company schemes are funded above the current minimum funding level, which is only around 80 per cent. on average of what most schemes contain. From what the Minister said in his introduction to the amendment, that would in future depress that level of funding and reduce the level of contributions payable by the employer and possibly also by the members but would expose the scheme to greater risk in the unlikely event of a subsequent wind-up. Can the Minister explain that point to us?

§ Lord Boyd-Carpenter
My Lords, my noble friend referred to Amendment No. 117 and indicated that this was to secure that verification was undertaken by an actuary. The amendment refers to a "prescribed person". Where is it laid down that a "prescribed person" means an actuary?

§ Lord Mackay of Ardbrecknish
My Lords, to answer my noble friend Lord Boyd-Carpenter first, in a slightly less simple question than the one he asked me earlier, I have explained that it is our intention to ensure that the people defined will be as I indicated—Fellows of the Institute of Actuaries or of the Faculty of Actuaries. We shall be making it clear in regulations that those qualifications will be necessary for those individuals described as "prescribed persons". It is not laid down in the Bill, but our intention is that it will appear in the regulations.
To turn to Amendment No. 120, as the noble Baroness indicated, we would normally expect the employer and the trustees to agree the rates of contribution to be entered in the schedule. But there needs to be a failsafe in the event of their being unable to agree. We believe that it is appropriate for that failsafe to rest with the trustees but that they should not be able to expose employers to financial risk. The amendment would leave the trustees with the power to set the contribution rate but limit their discretion so that they cannot prescribe a rate which is more than adequate to comply with the minimum funding requirement.
The noble Baroness is arguing that that limits the powers and the responsibilities of the trustees. But this is a default procedure in the event of an agreement not being reached between the employer and the trustees. It must be in the interests of all the parties that that does not happen and that they do reach agreement. The amendment is necessary to keep a balanced approach and avoid the risk of the employer being put at financial risk should the trustees demand an unreasonably high rate of contributions which was over and above the rate acceptable to the employer and more than adequate for the scheme to meet the minimum funding requirements.
Our analysis indicates that the vast majority of schemes, as the noble Baroness said, are already funding above the minimum funding level and there is no reason why the introduction of the minimum funding requirement should change that. It would be prudent practice for schemes and sponsoring employers to keep a margin in the fund above the minimum level to avoid the risk of the scheme failing to meet the test and
1713 triggering what could be a destabilising cash call on the employer. We hope that Amendment No. 120 provides a backstop—a failsafe—in the event of the employer and the trustees being unable to reach agreement.
While I see the point being made by the noble Baroness, we hope that we have struck a balance in the light of disagreement between the trustees and what their views might be and the needs of the employer. However, we hope that the situation will not arise where the use of the failsafe becomes necessary.

§ Baroness Hollis of Heigham
My Lords, the Minister has confirmed what I feared—where there is a dispute the minimum funding requirement becomes effectively a maximum funding requirement. His point that most schemes will go above it, for the sake of prudence and so on, should precisely apply in those situations where there is a dispute between employers and trustees, because that dispute is likely to occur when there is either some controversy in the management or there is some doubt about the financial viability of the employer's scheme, and so on.
I am rather worried. From what the Minister has suggested, those schemes where the trustees have most doubt, because there they are not getting the support of the employer, are precisely the ones which will have as their maximum funding requirement the minimum funding requirement and, as the Minister himself said, that is not for the most part likely to be adequate for a scheme to be prudently managed. The Minister has allowed no headroom for a situation where there is a dispute between employers and trustees. I wonder whether even at this late stage the Minister might like to produce some headspace. After all, this is only about an 80 per cent. minimum funding requirement of what is required for full solvency. Therefore, where there is a dispute—precisely where headspace is needed—there will not be headspace. That will expose more scheme members to more risk than was ever intended. Can the Minister help us further?

§ Lord Mackay of Ardbrecknish
My Lords, of course I should like to help the noble Baroness further in this regard but I should perhaps remind her that we had a debate about this problem. I cannot recall whether it was a long one or a short one. It did not take up too many columns of Hansard, so it must have been fairly short. My noble friend Lord Buckinghamshire raised a concern that the Bill as originally drafted would leave the trustees with control over the rates of contribution payable by the employer and that could potentially leave employers financially vulnerable.
The amendment with which we are dealing now was made in the other place in June. It is needed to achieve the objective that the trustees, if there is a disagreement, should not have a power to decide on a rate which is more than adequate for the MFR rate. It is a failsafe. I do not really believe that one could operate a failsafe which set a floor for the failsafe above the level of the minimum funding requirement. That is what the noble Baroness wants me to do. I do not think one should do that. If I were to do that she would accuse me of not looking at the MFR as a safe floor. Therefore, we have to aim at looking at the MFR as the safe floor, in what I think we would both agree is the very unlikely event that the failsafe power is needed.
1714 A balance has to be struck here. I am sorry that the noble Baroness feels uneasy about it but I can assure her that we believe that this is the right balance. We do not believe that it will be putting members of pension funds at risk. I hope that she can see her way to agreeing with me that it is better that we treat the MFR as the floor in this regard rather than attempt to set another floor above that MFR.

§ Baroness Hollis of Heigham
My Lords, I do not want to extend this debate but clearly the MFR is the level to which employers must fund the scheme and, above that, to which trustees might or may fund the scheme. Let us remind ourselves that two—thirds of all trustees will be employer appointed—the Government rejected Opposition amendments to the contrary—so it is unlikely that there will be a dispute between the employer and a trustee body in which the employer's interest remains dominant. A dispute will occur only in situations where even the employer's trustees feel that the scheme is at some risk. However, we have expressed our concerns. I do not wish to push the matter further, but I believe that the Government are leaving scheme members unreasonably exposed in the most precarious of situations.

§ On Question, Motion agreed to.