Pensions Bill [H.L.]

HL Deb 13 March 1995 vol 562 cc637-716

Consideration of amendments on Report resumed.

Clause 16 [Member-nominated trustees: supplementary]:

Lord Lucas moved Amendment No. 50:

Page 8, line 9, leave out (" 3") and insert ("(Prohibition orders)").

The noble Lord said: My Lords, I spoke to this amendment with Amendment No. 3. I beg to move.

On Question, amendment agreed to.

Clause 23 [Section 22: Consequences]:

Lord Lucas moved Amendment No. 51:

Page 12, line 18, leave out (" 3") and insert ("(Prohibition orders)").

On Question, amendment agreed to.

Clause 24 [Persons disqualified for being trustees]:

Lord Lucasmoved Amendment No. 52:

Page 12, line 26, at end insert: ("(bb) where the person is a company, if any director of the company is disqualified under this section,

(bc) where the person is a Scottish partnership, if any partner is disqualified under this section").

The noble Lord said: My Lords, I shall speak also to Amendments Nos. 54, 55, 56, 57, 58 and 59. These amendments introduce changes to disqualification provisions in Clauses 24 and 25. Amendment No. 52 provides that a company is automatically disqualified from being a trustee of an occupational pension scheme if any of its directors are disqualified from acting as a trustee of a pension scheme under the provisions of Clause 24. Similarly, a Scottish partnership is automatically disqualified from being a trustee of an occupational pension scheme if any partner is disqualified. That automatically prevents individuals who are disqualified from acting as a trustee from being able to circumvent their disqualification by hiding behind the legal identity afforded to a company or Scottish partnership.

Amendment No. 57 is consequential on Amendment No. 52. It removes subsection (6) which is made redundant by the new wider automatic disqualification provision introduced by Amendment No. 52. That provides greater protection to schemes than that provided by Clause 24. As it currently stands, Clause 24 provides for the authority to remove or prohibit the company or partnership only in respect of a particular scheme. Companies and Scottish partnerships can ensure that they are not disqualified under the new provisions simply by ensuring that none of their directors or partners is a disqualified person.

The authority will be able to use this power only if the individual in question has breached an obligation placed upon him by Part I of the Bill and is to be prohibited in respect of it. That individual will be able to ask for prohibition to be reviewed in the usual way. If the decision to prohibit were to be overturned, the authority would not be able to disqualify him.

Amendment No. 54 provides for the authority to disqualify any person it has prohibited from acting as a trustee for a breach of the provisions of Part I of the Bill, if it considers it desirable to do so. It enables the authority, when considering whether to disqualify a person who has been prohibited, to take into account all relevant factors—to consider disqualification "in the round" and not just in the more restricted context of the particular actions which led to the prohibition.

Amendment No. 55 provides for the authority to disqualify a person from being a trustee of an occupational pension scheme if he is incapable of acting as such because of a mental disorder or where he is a company which has gone into liquidation. I am delighted to see that the usual third of that triumvirate—the mad and and the bankrupt—in other words, the Peerage, is not included in that provision. That provides the authority with the power to disqualify such people form being trustees and increases the protection that can be afforded to occupational pension schemes.

Amendment No. 56 is consequential upon Amendment No. 55. It adds a reference to new subsection (3A) so that the authority can consider revoking or waiving its disqualification on the application of the person who is disqualified.

Amendments Nos. 58 and 59 address the concerns expressed by the noble Lord, Lord Haskel, in Committee, when he moved Amendment No. 118L, that everyone who needed information on whether a person was disqualified should be able to get it.

I explained then the intention of Clause 25(7) to allow for any person who has concerns about either a particular person acting as a trustee of a scheme or a person under consideration for appointment as a trustee to be able to check whether the person in question is shown in the authority's register as being disqualified. These amendments enable a person who has an interest in a scheme to obtain the information from the authority.

The subsection will ensure that the authority is required to state only whether a person named by an inquirer is disqualified in respect of a particular scheme named by the inquirer. The reason is that some people may be disqualified in respect of a particular class or group for schemes only. There is also a need to protect those listed in the register from having the information held on them being used for purposes which have nothing to do with whether or not they should act as the trustee of a particular scheme. That is why the register will not be available for public inspection. I commend the amendment to the House.

On Question, amendment agreed to.

Lord Lucas moved Amendments Nos. 53 to 57:

Page 13, line 3, leave out from ("person") to ("(whether") in line 6 and insert: ("() is prohibited from being a trustee of a trust scheme by an order under section (Prohibition orders), or () has been removed as a trustee of a trust scheme by an order made").

Page 13, line 11, leave out from ("if") to ("by") in line 12 and insert ("in their opinion it is not desirable for him to be a trustee of any trust scheme").

Page 13, line 13, at end insert: ("(3A) The Authority may by order disqualify a person for being a trustee of any trust scheme where—

1. (a) in their opinion he is incapable of acting as such a trustee by reason of mental disorder (within the meaning of the Mental Health Act 1983 or, as respects Scotland, the Mental Health (Scotland) Act 1984), or
2. (b) the person is a company which has gone into liquidation (within the meaning of section 247(2) of the Insolvency Act 1986).").

Page 13, line 17, after ("(3)") insert ("or (3A)").

Page 13, line 23, leave out subsection (6).

The noble Lord said: My Lords, I spoke to these amendments with Amendments Nos. 3 and 52. I beg to move.

On Question, amendments agreed to.

Clause 25 [Persons disqualified: consequences]:

Lord Lucas moved Amendments Nos. 58 and 59:

Page 14, line 9, leave out from ("so") to ("disclose") in line 10.

Page 14, line 11, at end insert ("in respect of a scheme so specified").

The noble Lord said: My Lords, I spoke to these amendments with Amendment No. 52. I beg to move.

On Question, amendments agreed to.

Clause 26 [Trustees not to be indemnified for fines or civil penalties]:

Lord Lucas moved Amendment No. 60:

Page 14, line 24, leave out (" 3") and insert ("(Prohibition orders)").

The noble Lord said: My Lords, I spoke to this amendment with Amendment No. 3. I beg to move.

On Question, amendment agreed to.

The Earl of Buckinghamshire moved Amendment No. 61:

Before Clause 27, insert the following new clause:

("Trustees may keep benefits

A trustee of a trust scheme shall not be required to forego or account to the trustees or any beneficiary of the scheme for any benefit that may be payable to him or any other person—

1. (a) by virtue of his membership of the scheme, and
2. (b) by reason of any decision regarding the exercise of a power or discretion conferred on the trustees (including a decision to exercise or refrain from exercising a power to reduce benefits),

if the trustee did not take part in making that decision or the actuary certifies in writing that in his opinion it is fair and reasonable for the benefit to be paid.").

The noble Earl said: My Lords, the amendment is designed to remove a legal difficulty to which attention was drawn last year in the so-called Drexel case. The judge in that case pointed out that it is a long-established principle of trust law that trustees cannot derive personal benefit from their decisions as trustees. He thought that there was therefore a danger that those trustees of a pension scheme who were also members and beneficiaries may not be able to have the same benefits as other members; for example, if trustees awarded additional benefits out of surplus, something which concerned the Drexel case.

In Committee, the noble Lord, Lord Haskel, moved an amendment which was later withdrawn, which made it clear that trustees had the power to make amendments to the scheme even though one or more members were trustees. My amendment is slightly different. It assumes that the trustees may or may not already have sufficient power to amend the scheme, and deals directly with the question of whether, when such an amendment is made, the trustees who are members of the scheme can benefit from it.

As noble Lords are well aware, some trust documents allow for trustees to benefit from benefit improvements in schemes of which they are members, but others are silent or ambiguous. My amendment would make it clear that such a trustee could benefit provided that he took no part in the decision, or, if he did take part in the decision, the actuary certified that in his opinion any benefit improvements were reasonable and fair to be paid.

In his reply in Committee, my noble friend the Minister indicated that he believed that the present legal situation, as developed in case law, was satisfactory. I believe that that statement may have been made a little too easily. I should like him to reconsider the views that he expressed in Committee.

I conclude by reminding your Lordships of what was said by the judge in the Drexel case. He stated: When the legislature considers how far and in what terms to embody the report of Professor Goode and his colleagues into law or otherwise to reform the law in this area, I commend to it consideration of the creation of a clear exception to the so-called 'general rule of equity' so that in appropriate cases the administration of pension trusts by trustee-beneficiaries might safely proceed without expense and delay of proceedings".

My amendment makes clear that the member trustees would be able to proceed safely. It is an important amendment. I believe that the arguments made in Committee were too lightly dismissed. I look forward to hearing my noble friend's views. I beg to move.

8 p.m.

Lord Ezra

My Lords, I support the amendment. The issue needs to be clarified. Throughout the Bill we have talked repeatedly about the need for balance, and a subject of anxiety is the position of trustees. Of course, trustees must properly perform their duties but in this case they could be vulnerable if the law were not clarified. Naturally, member trustees are potential beneficiaries of any improvements that are introduced in the schemes of which they form members. Therefore, I hope that the Government will accept the arguments so effectively put forward by the noble Earl.

Lord Haskel

My Lords, I too support the amendment, which is similar to an amendment I tabled in Committee. The noble Earl has improved upon it and his amendment deals with some of the comments that were made in Committee by the Minister. I am sure that it will be easier for the Minister to accept.

Lord Mackay of Ardbrecknish

My Lords, the amendment seeks to address the issues brought up by the recent case of Manning v. Drexel Burnham Lambert Holdings Limited. The issue concerns a matter of trust law, commonly referred to as the "general rule of equity" whereby a person in a fiduciary position should not put himself in a position where his interest and his duty conflict. Very briefly, the question is whether it is necessary to legislate in the Pensions Bill in order to make clear that trustees who are also scheme members are not prevented from taking decisions simply because they, among others, may benefit from decisions in which they take part.

This matter has been brought into focus by our proposed legislation on member-nominated trustees. But it is not applicable only to them. It is relevant for all member trustees regardless of who nominates them. We have heard today from the noble Baroness, Lady Hollis, that there are already many pension schemes which have member trustees. These schemes operate very successfully and make decisions without recourse to the courts, despite the fact that their trustees are potential beneficiaries. I said in Committee that if there were any grounds for thinking that recent judgments in the Drexel case and the earlier Makin case cast serious doubt on the validity of trust boards containing trustees who are also scheme members, we would ourselves have introduced an appropriate amendment. I reiterate that.

Both the Drexel and Makin cases had particular features which rarely arise in schemes. In both cases, the sponsoring employer was insolvent and the scheme was winding up with a large surplus. The trustees in both the Makin and Drexel cases had discretion to distribute surplus funds. These cases are atypical. First, it is unusual for trustees to have such a discretion in a modem trust deed, and, secondly, both arose before the Social Security Act 1992, which requires an independent trustee to be appointed if the sponsoring employer becomes insolvent. The difficulties may not have arisen if there had been an independent trustee.

This amendment would give trustees two options when taking decisions on matters in which they might be faced with a conflict of interests. The first is for the trustee to decline to take part in the decision. This is already a route which trustees can take if they believe that they have an irreconcilable conflict of interest. I must say, however, that in many schemes this option would not be practical because all, or most of, the trustees would also be scheme members and if they all withdrew there would be no one left to take the decision.

Secondly, the amendment suggests that, as an alternative, the actuary could certify that it is fair and reasonable for the benefit to be paid. I do not consider that this is part of an actuary's role. To my mind, it puts him in a position where he has to make a qualitative judgment about a decision made by a trustee, in effect, to act as a kind of independent trustee but without the fiduciary responsibilities. As I see it, the actuary's role is to advise trustees on decisions of fact on scheme funding matters. With all respect to actuaries, that is not a decision for them.

My noble friend has clearly tabled his amendment with very good intentions in order to ensure that member trustees are free to participate fully in decisions of the trust board. We are confident that in fact they can and that there is no threat to the position of member trustees, providing that they act in good faith and consider the interests of all scheme members. There is a general acceptance that decisions in which member trustees participate should not be invalidated simply because they, among others of their class, could benefit.

We have considered all the issues very carefully. However, we believe that it is unnecessary and possibly unwise to legislate in this Bill. Our concern is that, by specifying the position for member trustees, not just member-nominated trustees, we might prejudice the interests of scheme members generally. And, after all, that is the purpose of the general rule of equity, which this amendment is seeking to override. The courts can enforce and develop that rule in a way that legislation cannot and we believe it would be unwise to do anything that might endanger this. I have explained the matter at length but I believe that it is important. I hope that I have reassured my noble friend that his fears are unjustified. I hope that he is now able to withdraw his amendment.

The Earl of Buckinghamshire

My Lords, I thank the noble Lords, Lord Ezra and Lord Haskel, for their support. I listened with great interest to what my noble friend the Minister said. I am aware of the unique features of the Drexel case. I am sure that in summing up the learned judge was aware of the uniqueness of the case but felt obliged to widen the scope of his comments.

I commented on the actuary certifying that it was fair and reasonable and I believe that my noble friend the Minister said that it was a qualitative judgment. In fact, it is a quantitative judgment introduced to make sure that trustees, on the direction of the company, do not unfairly award themselves improvements in benefits to the detriment of other beneficiaries. Therefore, the actuary has a role to play in this matter.

It is interesting to believe that every single trust deed and rule of the 150,000 schemes that now exist states that the trustees can make benefit improvements of which they will be the beneficiaries. I suspect that many trust deeds and rules do not have that power. The amendment, even though it may be deficient in some areas, would provide that those trust deeds and rules are dealt with in this legislation. One cannot amend trust deeds and rules in isolation because one cannot alter the balance of powers in such a way within the trust document.

I am not a lawyer—and perhaps a lawyer will correct me—but it is my understanding that the balance of powers issue must be treated with great care. The amendment would have gone some way towards dealing with that. I am disappointed by my noble friend's reply and I do not agree with all that he has said. But on that basis, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 27 [Decisions by majority]:

Lord Lucas moved Amendment No. 62:

Page 15, line 18, leave out (" 3") and insert ("(Prohibition orders)").

The noble Lord said: My Lords, I spoke to this amendment when moving Amendment No. 3. I beg to move.

On Question, amendment agreed to.

Clause 28 [Investment powers: duty of care]:

The Earl of Buckinghamshire moved Amendment No. 63:

Page 15, line 22, leave out ("investment functions,") and insert ("functions relating to investment (within the meaning of the Financial Services Act 1986),").

The noble Earl said: My Lords, I hope to inject some excitement into your Lordships' House this evening because we are now dealing with vicarious liabilities. I set the Minister a test and look forward to hearing what that actually means!

We are now dealing with amendments to Clauses 28 and 29, and I shall speak to all the amendments in the group. The combined effect of Clauses 28 and 29 is to curtail severely the delegation of discretions relating to investment decisions and in particular to prevent the trustees from passing responsibility for decisions to fund managers except where the investment is an investment within the meaning of the Financial Services Act.

For example, under the current arrangements, it will not be possible to delegate to an overseas investment house in the United States without landing the trustees in quite a considerable difficulty as regards liability. The same arguments would apply to property.

In short, this group of amendments seeks to enable sensible arrangements for delegating trustee investment functions and to allow them to continue as they do at present. I have mentioned already the difficulties with regard to property managers and overseas investment managers. If the amendments are not accepted, serious difficulties will arise.

The amendments seek to allow the trustees the power to delegate decisions as regards investments to such managers and the trustees will not be responsible for the acts and defaults of such managers if the trustees have taken reasonable steps to satisfy themselves that the managers have the necessary knowledge and experience and that they are acting competently.

The clause does not allow sub-delegation by managers, whereas my amendment seeks to allow that. Among other things, it would permit schemes to continue to use common investment funds where they are appropriate. This amendment needs to be included in the Bill and I commend it to the House. I beg to move.

Lord Ezra

My Lords, I support this amendment which is similar to an amendment which I tabled in Committee. The position is that unless the amendments moved by the noble Earl are accepted, present Investment practices by pension funds will be curtailed and no additional safeguards will thereby be achieved. I can see very little point in doing that and I hope that the amendments will be accepted.

8.15 p.m.

Lord Mackay of Ardbrecknish

My Lords, 1 thank my noble friend for explaining his detailed amendments to the House and I thank him also for setting me a test about vicarious liability. I thought that perhaps it had something to do with the behaviour of vicars and in the absence of any bishops on their Benches I thought that I should let it pass at that. But of course, vicarious liability is to do with liability for the actions of a deputy, which is perhaps more boring than my first suggestion but, nevertheless, that is the position.

In considering the issues which my noble friend raised—and as the noble Lord, Lord Ezra, pointed out, he raised the same points in Committee—I agreed to consider further the question of trustees powers to permit sub-delegation among fund managers.

We have also looked further at the issues of whether or not trustees should continue to benefit from any exclusions from liability contained in trust deeds where they delegate discretion to fund managers who do not need to be authorised under the Financial Services Act. That point is also covered in the amendments before us.

As a result of our review of Clause 29 we have concluded that, in respect of sub-delegation, the clause as drafted is too restrictive and we are considering an appropriate amendment. This would make it clear that sub-delegation should indeed be possible. We are also looking carefully at the issue of whether delegation should be possible to persons who are not fund managers in the context of common investment funds—a point raised by the noble Lord, Lord Ezra.

On the second point, the clause as drafted follows the PLRC recommendation in providing a statutory exemption from trustees' vicarious liability in respect of FSA investments managed by persons authorised under the Financial Services Act. The PLRC report did not specifically address the issue of whether trustees should continue to benefit from exclusions to their liability contained in trust deeds when other fund managers, who do not need to be authorised, are appointed to manage non-FSA investments.

The clause as drafted prevents the operation of such exclusions. We have taken careful note of the arguments which have been put to us, both in this debate, in Committee and elsewhere, suggesting that the clause as drafted may go beyond the intention of the PLRC and may have a significant adverse effect on trustees' willingness to make investments outside the scope of the Financial Services Act, even though such investments would be perfectly proper, given a scheme's circumstances. On the other hand, we obviously need to ensure that we do not place scheme members at risk through inappropriate or unregulated investments.

We have come to the view that the clause probably does go too far in limiting trustees' readiness to invest in non-FSA investments and unnecessarily interferes with scheme rules. Therefore, we are looking closely at all of the issues which my noble friend's amendments cover. We will then, if necessary, introduce suitable amendments in another place to permit appropriate sub-delegation to occur. We will also give serious consideration to introducing further amendments in respect of non-FSA investments. I trust that this response will enable my noble friend to withdraw these amendments.

The Earl of Buckinghamshire

My Lords, I am extremely grateful to the noble Lord, Lord Ezra, for his support. I thank my noble friend for his constructive reply and I look forward to seeing the amendments when they appear in the other place. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 29 [Power of investment and delegation]:

[Amendments Nos. 64 to 73 not moved.]

Clause 30 [Investment principles]:

Lord Haskel moved Amendment No. 74:

Page 16, line 45, at end insert: ("() the exercise of voting rights and other powers conferred by virtue of their investments;").

The noble Lord said: My Lords, in moving this amendment I shall speak also to Amendment Nos. 77 and 78. I am delighted that the Minister seems to be in such an accommodating mood this evening.

Baroness Hollis of Heigham

Long may it last¡

Lord Haskel

My Lords, similar amendments were moved in the Committee but the amendments now before your Lordships are altered in order to satisfy the Minister; when he responded to my amendments in Committee we shared a surprising amount of common ground. We agreed that institutional investors have a responsibility for good corporate governance and that that responsibility is crucial to our economic prosperity.

We agreed also that that responsibility is consistent with the trustees' duties to act in the interests of the beneficiaries. We agreed further that active ownership of shares was consistent with best practice. As an example, the Minister gave us the lead taken by the National Association of Pension Funds which recommends that trustees should decide on their voting policy and that that voting policy should be made public. That is the purpose of these amendments.

Indeed, the National Association of Pension Funds recognises the scale of the problem with regard to proxy voting by pension funds. At its conference in February, its vice-chairman, Graham Allen, commented: The statistics on the voting pattern of pension funds are still disappointing and significant further progress needs to be made". The question, then, is: how can the "significant further progress" of which Mr. Allen speaks be achieved? It seems to me that it could be done by finding clauses in the Bill where the duties in my amendments can simply be incorporated with the duties already in the legislation. Let us take, for example, Clause 31 which deals with choosing investments. The Bill says, The trustees or fund manager must have regard—

1. (a) to the need for diversification of investments, so far as appropriate to the circumstances of the scheme, and
2. (b) to the suitability to the scheme of investments".

That means that trustees and fund managers must "have regard to" the need for diversification and the suitability of investments.

My first amendment neatly adds a third element to the duties of the trustees and fund managers; namely, to "have regard to"—exactly the same words—good, corporate governance. We agree that this is vital for the nation's economy and for the beneficiaries. With the wording, "have regard to", the amendment gives trustees and pension fund managers the flexibility of applying those principles as they arise. For example, when shareholders indicated that bonuses and share options should depend on company performance and that wish was obviously ignored, trustees and fund managers—having regard to the wishes of the beneficiaries—would obviously be required to act. That would have saved the Prime Minister the embarrassment of a U-turn. In future, trustees and managers can adapt to the recommendations of the Greenbury Committee as and when they become known. They will also be able to adapt to the proposals of the Cadbury 2 Committee and introduce them as and when they become known.

By allowing the trustees the option of having regard to their duty, it enables them to ignore shareholdings which are too small, too far away, or matters which are not contentious. They do that by choosing to abstain. Here we have a way in which our purpose can be achieved without what the Minister called in Committee, specific or detailed obligations on pension funds which risk being regulatory and burdensome.

I now turn to the need for trustees and pension fund managers to report their voting intentions and record them. Again, there is another section of the Bill into which that requirement neatly fits. Clause 30 requires trustees of a pension scheme to prepare and maintain from time to time a written statement, of the principles governing decisions about investments for the purposes of the scheme". Subsection (2) says that the statement must cover, among other things, the trustees' policy for securing compliance … and … their policy about the kinds of investments to be held, the balance between different kinds of investments, risk, the expected return … the realisation of investments, and such other matters as may be prescribed". The Government have recognised the need to set out those duties and responsibilities of the trustees and fund managers. While carrying out those duties, surely it is neither burdensome nor bureaucratic to add the requirement to state the principles of voting and to keep a record. Let us bear in mind that abstaining is also an option which can be chosen and, indeed, may be the choice on many occasions.

It is important to find common ground in order to incorporate the amendments in the Bill. We all want shareholders to vote. The survey of the National Association of Pension Funds shows that there has been no significant increase in voting at company meetings over the past few years. Speaking at its conference in February, the vice-chairman, Mr. Graham Allen, quoted from the annual survey for 1994 of the members of the National Association of Pension Funds, as follows: There is still a very long way to travel before the majority of large UK funds regularly exercise their votes". The purpose of the amendment is not simply to increase the quantity of voting; the quality is in fact more important. When pension funds vote, all too often they are simply rubber stamping the proposals of company management. For example, M&G announced that it will vote with company management as a matter of policy.

In Committee, the Minister questioned the logic of a duty being imposed on the pension funds only and asked why such a duty should not be placed on individuals and other collective investment vehicles. My response is that individuals act in their own right and can do what they want. Trustees and fund managers hold proxies from individuals, and they have a fiduciary duty to act.

The Minister also asked in Committee why that should apply to pension funds only and why should not other collective investment vehicles have a duty to vote. I believe that the same principle should apply. Indeed, putting such amendments in the Pensions Bill would have a powerful effect on fund managers. If they supply that service to pension fund trustees, they would probably do so for other clients as it enhances the quality of their service. In fact, insurance companies have a reasonably good record. However, we are now dealing with a pensions Bill and pensions represent one-third of all the shares on the London Stock Exchange. It is a good start and we have to start somewhere.

The Minister will remember, while reading the thoughts of Chairman Mao a few years ago, that Chairman Mao said that the journey of 6,000 kilometres started with one step. My proposed amendments take that first step. If we bring the voting process within the framework of the legislation, we recognise, in the words of the Cadbury Committee, that voting rights are an asset which must, like any other asset, be managed with care in the sole interests of the beneficiaries.

With the amendments as now worded, we would not be introducing compulsory voting; we would be advocating compulsory, corporate responsibility. I beg to move.

Lord Ezra

My Lords, we had some debate on the issue in Committee. Those who contributed to the discussions at the time, like the noble Lord, Lord Haskel, myself, and others, made the point that here we have a unique opportunity to support the cause of corporate governance without departing too much from the Bill. As the noble Lord, Lord Haskel, pointed out, the amendments could very easily be dovetailed into the existing provisions. As the noble Lord rightly said, pension funds now represent a massive part of investment on the Stock Exchange. Indeed, it amounts to no less than one-third.

Many of us have been worried over the years about the role of institutional investors. Those of us who are concerned with such matters have felt that they should be taking a more positive role. As legislative opportunities present themselves, surely they should be seized. The same attitude has been adopted in environmental matters: when appropriate legislation is there, why not seize it? Therefore, I very strongly support what has been so ably proposed by the noble Lord, Lord Haskel. I believe that it would be a big step forward. I do not think that it is a small step; I believe that it would be a big, notable step forward in emphasising the responsibility of institutional investors—in this case, in the form of pension funds—for taking a more positive role in the use made of their investments.

Lord Mackay of Ardbrecknish

My Lords, the noble Lord, Lord Haskel, set out the reasoning and logic behind the amendments this evening as, indeed, he did when we debated similar amendments in Committee. Among the arguments he put forward was that I should take the advice of Chairman Mao as regards every journey beginning with a step. As the bamboo curtain is being raised, I am not entirely sure that I like all the places where Chairman Mao ended up on some of his journeys, or indeed where his country ended up. Therefore I do not consider that argument terribly good.

I agree with the noble Lord, Lord Haskel, and the noble Lord, Lord Ezra, that shareholders of all kinds have a crucial say in influencing and ensuring the competitiveness of British industry and that they should take those responsibilities seriously. I confirm that in Committee I said that what he envisaged in those amendments reflected good practice. I still hold to that view. However, I believe that good practice is not necessarily appropriate for legislation. I believe that good practice has to have an air of flexibility and that it must be geared to individual trustees and individual schemes and the various circumstances which arise. We are talking about a guide to trustees who must be careful under trust law not to fetter their own discretion by laying down, or having laid down for them, very strict rules which they have to follow regardless of what may be the situation facing them on a particular issue.

I spoke at some length about these amendments in Committee. As I said then, this is something which goes well beyond pension funds and their strategies. Both noble Lords who spoke agreed but thought the Bill was a good place to start taking action along those lines, arguing that pension funds were big holders of UK equities and for them to play a full part in decisions made at shareholders' meetings would be a considerable step forward from where we are today. I am sure the House will be aware that my right honourable friend the Prime Minister said in another place that the Government would wish to consider any recommendations from the Greenbury Committee and whether there was a need for any further legislative action to support any recommendations the committee might make. I therefore think that that is the appropriate way to proceed.

I hope that having brought this issue to our attention for a second time the noble Lord will agree that we should, as my right honourable friend the Prime Minister suggested, await the views of Sir Richard Greenbury and his colleagues before we decide what, if any, action we require to take. If we require to take any action, clearly that would be taken on a wider basis than just the pensions industry. I hope that having ably paraded his argument once again, and having heard my remarks, the noble Lord will feel able to withdraw his amendment. I am sorry that he thought I was only starting off in a good frame of mind. I hope that I am still in a good frame of mind. I wonder whether he should talk to his noble friend Lady Hollis about whether I have been in a good frame of mind all day.

8.30 p.m.

Lord Haskel

My Lords, I thank the Minister for that considered reply which I found disappointing. He put forward no new arguments as to why these amendments should not be incorporated in the Bill. The amendments are tailored so that they dovetail exactly into the Bill. It seems to me extraordinary that there are some duties which the Government think should be imposed on trustees and pension fund managers but not others. It seems to me that the duties I am asking them to undertake are entirely consistent with the things the Government are asking them to undertake.

As regards waiting for the conclusions of the Greenbury Committee, that committee is looking into the matter of remuneration. Shareholders are interested in a whole range of matters. I can well imagine that shareholders, as well as being interested in employment policies, are interested in environmental matters, moral matters and all sorts of things in a company. One cannot have a committee look into each of these aspects as soon as they arise. It would seem sensible for shareholders to be encouraged to take their proper interest in all matters relating to the company; if that were done the Prime Minister and other Ministers in the Government would not have to deal with these things as they crop up. Shareholders would deal with those matters as a matter of routine.

I did not wish to remind your Lordships that this provision is now obligatory on American pension fund managers and will apply to their shares held in British companies in London. I can well imagine that American pension fund managers will start to take a lot more interest in the activities of British companies. It seems a pity that we have to wait for them to become more active and then follow on, as inevitably we shall have to. For obvious reasons I shall not divide the House on this matter. I find the Minister's response disappointing. I shall try to find a more suitable quotation from the thoughts of Chairman Mao which may convince him on a later occasion as it is obviously some time since he read them. In the meantime I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

The Earl of Buckinghamshire moved Amendment No. 75:

Page 17, leave out line 10 and insert: (" () take into account the interests of beneficiaries and contingent beneficiaries (including employers).").

The noble Earl said: My Lords, Clause 30 provides for trustees to have the same power to make an investment of any kind as if they were absolutely entitled to the assets of the scheme. It also entitles the trustees to delegate discretion over day to day investment decisions. Clause 31, however, requires trustees to prepare, maintain and periodically review a written statement of the principles governing the trustees' investment decisions. The trustees are required to consult the employer and obtain and consider the advice of a qualified and experienced financial person before preparing or revisiting this statement.

The point I made on Second Reading and in Committee, when it was raised obliquely, is that there is no obligation on trustees to take account of the views of the employer in drawing up their policy. They are only required to consult. It seems to me reasonable that the trustees should take account not only of the interests of the beneficiaries but also of the likely financial impact of any investment decision on the employer as the contributor to the scheme. If the Bill is introduced unamended there will be no explicit obligation on the trustee body to take account of any views expressed by the employer. I believe there is a difficulty as regards the use of the word "consult" rather than "consultation". That will leave employers exposed potentially to additional costs over which they have no control.

The argument may be made that the employers accept that the trustees will not wish to prejudice the continuing sponsorship of the employers, but I believe that unless specific duties are placed on the trustees to take account of the employers' views in the new law, trustees may well think that they have a duty and are best advised to take the most conservative view on funding and investment decisions. This is an important amendment. I look forward to hearing my noble friend the Minister's reply. I beg to move.

Baroness Hollis of Heigham

My Lords, we are uneasy about the amendment for several reasons. It appears to move the trustees away from having a fiduciary responsibility to consider all the interests of all the associated parties and ask them to give particular regard to one party; that is, the employer. We have already accepted, apparently, that two-thirds of the trustees will be nominated by the employer himself. Nobody can believe for a moment that as a result the employer's view on investment policy will not be well argued and well reflected within the trustee body. That is accepted. However, we also argue that within that body a trustee should operate within a framework of fiduciary duty. If the Bill is to allow employers to nominate two thirds of the trustee membership one needs to make sure that the framework within which the trustees operate is a fiduciary one.

If the noble Earl's amendment were accepted in addition to the fact that employers already nominate two-thirds of trustees, that would seem to us to tilt the balance away from the notion of stewardship too much towards consideration of employers' interests, which is something which trustees are required to consider but not necessarily to regard as of overriding importance. I hope that on this occasion the Minister feels that he has the balance about right in the Bill as it stands.

Lord Mackay of Ardbrecknish

My Lords, I noted the points that my noble friend made on this important issue and the points made by the noble Baroness, Lady Hollis. I fully understand the anxieties which have been raised on this issue since the publication of the White Paper in June last year. It is, of course, vital for the future well-being of occupational pension schemes that they continue to be supported by sponsoring employers. The question to be addressed is whether it is either necessary or appropriate for trustees to be required in statute to take into account the interest of the employer when deciding their investment strategy. The conclusion we have reached is that it is not, and for the following reasons.

First, trust law requires trustees to act only in the interests of the beneficiaries to the trust. This cannot be clouded by statutory requirements to take into account the interests of any other parties to the trust. Trustees can, however, take account of the interests of the employer when this affects the interests of the beneficiaries.

In preparing their written statement of investment principles, trustees will need to consider all of the factors which affect the interests of the members. That will obviously include the employer's views. Trustees who propose undertaking an investment strategy which does not have the employer's support will be failing in their duty to act in the interests of the beneficiaries if that results in the employer's continuing support for the scheme being prejudiced.

Secondly, the amendment develops the view of the employer as a contingent beneficiary to the scheme, requiring the trustees to take account of his interests, not as the employer, but as a beneficiary. Employers may or may not, be contingent beneficiaries to a trust. Whether they are will depend on the terms of the trust deed or particular circumstances which may arise, such as where a fund is in surplus. But it is by no means certain that an employer will automatically be considered a contingent beneficiary of the scheme.

Even if employers were considered to be contingent beneficiaries, my legal advice is that it is inappropriate for the Bill to refer specifically to any one party to the trust. Trustees must act in the interests of all the beneficiaries to the trust. Any attempt to single out one particular party to a scheme will beg the question as to how much weight trustees should give to the interests of that party compared with others. This would require some form of statement setting out the relative weighting trustees should give to the interests of each of the parties to the trust, including scheme members, pensioners and the employer. That would be impossible.

I am glad that the noble Baroness, Lady Hollis, is a recruit to my use of the word "balance". I have to say to my noble friend in this case that we have to get the balance right. I know that he is concerned about the issue, but he has not yet convinced me of his case. However, I shall read carefully what he had to say and I have no doubt that he will read carefully what I said, and we shall see where he goes from there.

The Earl of Buckinghamshire

My Lords, I thank my noble friend the Minister for his reply and the noble Baroness for her intervention. Both answers demonstrate the great difficulties in this area. The Minister mentioned in his reply that, in part, what I wanted to happen would happen. My problem is with the word "consult", because one can consult someone and take no notice of their advice or requirements.

I accept that this is an extremely difficult area within which to legislate. I would have preferred to have seen something more positive, but on the basis that there is an on-going dialogue, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

8.45 p.m.

Lord Lucas moved Amendment No. 76:

Page 17, line 16, leave out (" 3") and insert ("(Prohibition orders)").

The noble Lord said: My Lords, I spoke to this amendment, with Amendment No. 3. I beg to move.

On Question, amendment agreed to.

Clause 31 [Choosing investments]:

[Amendment No. 77 not moved.]

Lord Lucas moved Amendment No. 78:

Page 18, line 12, leave out (" 3") and insert ("(Prohibition orders)").

The noble Lord said: My Lords, I spoke to Amendment No. 78 with Amendment No. 3. I beg to move.

On Question, amendment agreed to.

The Earl of Buckinghamshire moved Amendment No. 79:

After Clause 31, insert the following new clause:

("Custodianship of investments

.—(1) The trustees or managers of an occupational pension scheme or a personal pension scheme must secure that investments held for the purposes of the scheme are held in accordance with an agreement made between the trustees or managers and an appropriate authorised person ("the custodian") which contains the provisions mentioned in subsection (2).

(2) Those provisions are—

(a) that the investments are vested in the custodian's name and he maintains adequate records for identifying them as belonging to the scheme and not to himself or any other person,

(b) that the custodian is required to safeguard the investments,

(c) that all documents of title relating to the investments are kept in the custodian's possession and may not be delivered to any other person except—

1. (i) to another appropriate authorised person with whom the trustees or managers have made an agreement within this section or in accordance with instructions from the scheme's fund manager, and
2. (ii) upon a request which is signified in the manner specified in the agreement,

(d) that all transactions relating to the investments are conducted and recorded in the manner and within the period so specified, and, in particular, that any transactions which do not occur in the normal course of the holding of investments generally or of investments of the description in question are immediately reported to the Authority and the trustees or managers by the custodian,

(e) that adequate arrangements are made for the deposit or investment of money received by the custodian in pursuance of the agreement and for the payment by him of money required for the purposes of the scheme,

(f) that the custodian is responsible for securing that the trustees and managers are fully informed of all matters relating to the investments within a period which is reasonable having regard to the importance of the information,

(g) that, in any case where the custodian is also a person to whom any discretion to make any decision about investments has been delegated under section 29, the functions exercisable by him as custodian are adequately differentiated from those exercisable by him by virtue of that delegation,

(h) that the custodian must establish and maintain adequate arrangements for the purpose of securing so far as practicable that none of his employees or officers has the opportunity to perform any action which would or might result in a breach of the agreement,

(i) that the custodian is liable for any reduction in value in the assets of the scheme arising from any breach of his obligations under the agreement, and

(j) such other provisions as the trustees or managers consider appropriate for securing the safeguarding of the investments of the scheme.

(3) Where an agreement in relation to the investments held for the purposes of a scheme has been made with a custodian in accordance with this section—

(a) except in prescribed circumstances, the custodian shall not be regarded as a trustee or manager of the scheme by virtue only of complying with such provisions of the agreement as are mentioned in subsection (2), and

(b) the trustees or managers of the scheme are not responsible for any act or default of the custodian in the course of exercising his functions as such if they have taken all reasonable steps to satisfy themselves—

1. that he is an appropriate person to appoint as custodian, and
2. (ii) that he performs his functions under the agreement competently.

(4) Subject to any restriction imposed by the scheme, an agreement under this section may include provision enabling the custodian to make arrangements with another person for him to exercise any of the custodian's functions under the agreement; and where the custodian makes such arrangements this section shall, except in prescribed circumstances, apply in relation to the other person as it applies to the custodian.

(5) Regulations may—

1. (a) provide that this section does not apply, or
2. (b) modify it in its application,

to schemes or investments falling within a prescribed class or description.").

The noble Earl said: My Lords, in moving Amendment No. 79 I shall speak also to Amendment No. 80. The amendments concern custody. The issue of custody was discussed fully at Second Reading and an amendment was moved in Committee by the noble Baroness, Lady Dean, with greater eloquence than I can achieve this evening.

I believe that there is agreement on all sides of the House that custody is desirable. The difficulty facing my noble friend the Minister is how that can be implemented. We had a full discussion of the issue in Committee and I do not want to repeat the arguments in detail.

It is true to say that most schemes in this country already have custody, but some do not. The purpose of the amendment is to make sure that those schemes which do not at present employ custody do so in the future. I am concerned that without the amendment it would be easier to commit fraud. One could go to the safe in one's back office and pick up share certificates. It is much easier to exchange these if one does not haw to go through a third party, with the controls that that implies.

Questions have been raised as to how this proposal would be regulated. The most appropriate authority for regulating custodians would be IMRO. IMRO may have thoughts on that proposal. I do not believe that the regulatory situation should be a bar on your Lordships' House accepting the amendment. I beg to move.

Baroness Dean of Thornton-le-Fylde

My Lords, I support the amendment moved by the noble Earl, Lord Buckinghamshire. When we discussed this subject in Committee stage a few weeks ago the Minister said that custodianship is not a simple matter. I accept that it is not simple, but it is essential. There is no doubt about that. That is why we are pursuing the matter yet again at this stage of the Bill.

As has been made clear as we have discussed the Bill, pension law is not a simple matter. However, that has not held us back from trying to legislate in this Bill, which will eventually become the Pensions Act (although it is weaker than we originally wanted) in areas where that has proved necessary. I believe that it is necessary to legislate on this particular issue.

At Committee stage the Minister rightly asked who the authorised person will be. Amendment No. 80 deals with that problem and sets out supplementary provisions.

Large numbers of pension funds already have independent custodianship. That is not an argument for saying that most people are doing this and therefore it is not necessary to force everyone to have it. Those funds which do not have independent custodianship are more likely to be subject to potential fraud than those which are currently covered, legitimately and voluntarily, by independent custodianship.

When we discussed the issue a few weeks ago in Committee, whoever would have thought that the Barings scandal would be before us now? Who would have thought that Barings investment managers, using Barings Bank as the custodian of those investments, would have the problems that they now have? But they do. Although the situation has been retrieved, and there is general support that the Governor of the Bank of England was right in not stepping in to save Barings, what would have happened if ING had not bought the bank? The millions lost on pension fund investments would have made the Maxwell missing millions look small fry. I suggest that because Barings was bought by ING, it obviated what would have been an enormous scandal, and I suggest an enormous well of pressure. The Government could not then have failed to agree to introduce the amendment.

I gather that the SIB is currently carrying out a review of custodian arrangements under the Financial Services Act. However, there is no indication when it will report. With the emergence of the Barings scandal, and other situations, it is a fact that while trustee boards at present consider carefully the investment policies of their portfolio managers, they rarely consider who will be the independent custodians of their investment certificates. In future the boards will have to consider that. Without such provisions in the Bill, against what criteria will they consider the issue?

It is essential that such a provision is in the Bill. I hope that the Minister will agree to it.

Lord Ezra

My Lords, the amendments raise a central issue in the Bill. The whole purpose of the Bill is to safeguard schemes. The custodial aspect is crucial to it.

The amendments modify what was proposed at Committee stage, taking full account of what the Minister then said. He expressed concern about how one defines the custodian. As the noble Baroness, Lady Dean, points out, it is important that if schemes wish to employ custodians, it should be laid down somewhere what criteria should be used. The Bill provides another unique opportunity to help pension funds to regulate their affairs better. I hope that in the light of the modified presentation the noble Lord will find it possible at this late hour, and in his more helpful mood, to agree to the proposal.

Lord Mackay of Ardbrecknish

My Lords, clearly it has been decided to deploy flattery as the weapon against the Government this evening. I begin by acknowledging that the case for independent custody has some top quality support on both sides of the House. The provision was originally moved by the noble Baroness, Lady Dean. It has now been taken forward in an amended form by my noble friend. It continues to draw support from other noble Lords.

I remind noble Lords, as I did in Committee, that the Government, too, believe that independent custody is a good thing. We believe it is right that schemes should regularly review their custody arrangements. Indeed, I accept the case which has been put to me that even those schemes which have independent custodians should pay a little more attention to this important area and consider whether their custody arrangements really are secure and appropriate. No doubt, as the noble Baroness, Lady Dean, has pointed out, custody will be rather more of an issue in the minds of institutional investors in the immediate aftermath of the Barings affair; but it is of course something which pension funds in particular should review on a regular basis.

When we discussed this issue in Committee, I left a challenge with the noble Baroness, Lady Dean, which my noble friend Lord Buckinghamshire has gallantly picked up in his amendments. I invited her to consider how custodianship should be regulated and how agreement should be reached on who should be authorised to offer custody services. It is now proposed that custody should be regulated by IMRO under the general umbrella of the Financial Services Act.

Before I turn to that, I wish to pose a few questions. How real, for example, is the mischief which these amendments seek to remedy? What grounds are there for believing that the wide range of other measures in this Bill will not adequately address whatever concerns there may be about asset custody in some schemes? How convincingly have proponents of independent custody dealt with the reservations expressed, for example, by the PLRC? Is the proposal to establish a whole new regulatory regime for custodianship really a proportionate response to the threat?

I believe that it is widely accepted that the vast majority of pension schemes already have independent custody arrangements. The assets of insured schemes are of course secured through the arrangements made by the insurance companies and the overwhelming majority of self-administered schemes already use independent custodians, partly for security but also, I imagine, for the facility it offers for trading their portfolios. So at best this measure is aimed at a small number of relatively small self-administered schemes.

In so far as there may be a risk associated with the fact that such schemes may not have independent custody arrangements, there are some grounds for believing that the measures being put in place by this Bill will reduce it. As I pointed out in Committee, the Bill emphasises and reinforces the rights and duties of members, trustees and scheme professionals in relation to many different aspects of pension scheme security and that should focus attention on asset security among other issues.

I believe that there are still unanswered questions about the extent to which a requirement to appoint an independent custodian would reinforce this new level of scheme security. The key factor is that custodians, by their very nature, exercise administrative rather than managerial functions and have no duty to investigate the propriety of apparently valid instructions they may receive. Accordingly, as the PLRC pointed out, if fraud is committed by the ultimate source of authority, the trustee board, or by one of their number or by a third party acting within the scope of his or her apparent authority from the board, the fact that the assets are held by a custodian will not by itself be a sufficient safeguard. In other words, the PLRC continued, custodianship should be seen as an additional barrier to wrongdoing which may or may not prevent it". It concluded, as the Government are inclined to do, that, the most effective controls are the monitoring of pension fund administration and the authorisation and supervision of investment managers". However, despite what I have said, noble Lords might say that there would be no harm—it is always a dangerous argument—in accepting custodians as another requirement. My concern on that score would be that the price, in terms of new regulatory burdens, might be too high. First, there would be the requirement on pension schemes to use independent custodians. That would fetter their freedom to determine their own policy—perhaps only at the margin, but it all adds up. There might be some additional costs to some schemes—again small, as I acknowledged in Committee —but again it all adds up. That provision might itself trigger a little flurry of detailed secondary legislation. There are half a dozen references to "prescribed circumstances" in the amendment before us. All that would need to be supervised and, if necessary, enforced by OPRA.

Then there would be the regulatory burden of setting up and policing the overall regulatory regime for custodianship. That would presumably apply to the custody of assets generally, not just to those owned by pension schemes. There would need to be an additional rule book for IMRO. Any company wishing to offer custodian services would need to seek authorisation for that purpose, perhaps incurring compliance costs. IMRO's compliance checks and enforcement procedures would need to be extended. One needs to ask whether it would constitute a proportionate response to the perceived threat. Government are committed to deregulation. That does not mean we are not prepared to regulate where that is necessary, and this Bill demonstrates that; but we are wary of regulation where the case is not fully made out.

As has been mentioned, the Securities and Investments Board has been preparing a report on the regulation of custodianship. If that were to recommend that custody should be a regulated investment service under the FSA then, clearly, a part of the argument that I have just advanced would be undermined. and there would be a case for going back to see whether pension schemes should be required to use such services, but I do not believe it would be right for the pension tail to wag the dog.

I have gone into some detail because I want to show that we have thought seriously about this issue since the interesting debate that we had in Committee, and because I do not lightly resist the well-meant and sensible sounding advice from the wide range of supporters of this amendment, and indeed this cause.

However, I am bound to conclude that I do not believe that the case for mandatory independent custody arrangements for pension scheme assets has been made out. Nevertheless, I accept that this is an important issue and I am keen that the "best practice" recommended by the PLRC should be encouraged. It recommended that trustees should periodically review their custody arrangements and satisfy themselves that these are satisfactory. If your Lordships accept my advice and these amendments are withdrawn, I am certainly prepared to consider using the regulation making powers under the various disclosure provisions of the Bill and the Pension Schemes Act 1993 to require trustees to make regular statements in scheme annual reports about their policy on asset custody. That will reinforce the "good practice" requirement recommended by the PLRC and publicise the results. I believe that would be a positive and appropriate response to the concerns expressed by noble Lords,

I hope, having heard my remarks, and perhaps on reading them in Hansard tomorrow, noble Lords will see that I have listened to the argument and have tried to go along with it a little, though not quite as far as setting up a new regulatory body and bringing in new regulations for schemes to use custodians under the law so to speak, and ensuring that they consider this aspect of their duties and place that in front of their scheme members in the reports.

9 p.m.

The Earl of Buckinghamshire

My Lords, I should like to thank the noble Baroness, Lady Dean, for her support and the noble Lord, Lord Ezra. I also thank my noble friend the Minister for his very full reply. I shall certainly look at Hansard tomorrow to see the full impact of that.

The whole thrust of the Bill is about preventing mischief. Certain sections of it deal with other matters, but it mainly deals with mischief-making and preventing fraud. It has been said that this Bill will not prevent fraudulent acts within pension schemes. Every amendment that we make that puts another ratchet in place to prevent fraudulent acts is to be encouraged rather than to be rejected.

I am interested in what my noble friend the Minister had to say on the disclosure to members; it was most useful. On that basis, I beg leave to withdraw my amendment.

Amendment, by leave, withdrawn.

[Amendment No. 80 not moved.]

Lord Monkswelll moved Amendment No. 81:

Before Clause 32, insert the following new clause:

("Payments to members of scheme

. At the end of paragraph 3(3) of Schedule 22 to the Income and Corporation Taxes Act 1988 there shall be inserted () Making payments to members of the scheme.").

The noble Lord said: My Lords, in moving this amendment, I should also like to speak to Amendment No. 165 on the Marshalled List. Perhaps I may read that into the record. It would amend Clause 69. It reads as follows: Page 42, line 46, at end insert ('and/or to the members of the scheme.')".

This is our second time around this course. We cantered round it at Committee stage. I read very closely the remarks that the Minister made during that debate. I also thank him for the letter that he sent to me, and to a number of other noble Lords, in which he referred to the situation. I quote: Another issue raised in this context was that of protecting scheme members' interests when there is a surplus in a scheme that is being wound up. The treatment of that surplus, including provisions for the protection of scheme members' interests, is dealt with under clauses 68 or 69".

I have to say that I am not happy with the response, having read in Hansard the Minister's remarks in Committee and the comments that he makes in his letter. Perhaps I may try to explain why I am not happy. Before I do so, I should probably apologise to the House for not explaining adequately my reasons for tabling this amendment at the Committee stage. I can quite understand why the Minister and other Members may not have felt that it was all that important.

In Committee, I referred to the unfairness of the situation whereby employers reacted to circumstances that resulted in a surplus in the pension fund assets, generally speaking from a rise in the Stock Market and the investments that the pension fund had made. However, it is rather worse than that. It is not just a situation where an accidental surplus is created and therefore a decision arrives on the desk of the powers-that-be to ask what is to be done with the surplus. I am thinking of a situation in which the employers, through acts that they commit, generate a surplus, effectively by reducing the advantages of employees. There may be other ways, but in general there are two particular ways in which they may do that.

First, they may do it by winding up established pension schemes and effectively constituting a new pension scheme. Usually that will come about when two companies merge. The argument will be: "We are all in the same company now and we should all be in the same pension scheme. So let us wind up the two old ones and have a new one". Because of the circumstances, that may provide a surplus. The other way is where, by a deliberate act, the employer creates redundancies and makes employees redundant.

One effect of creating redundancies is that it reduces the liabilities of the scheme, but does not necessarily affect the assets of the scheme. There could be a combination of both those acts—the winding up and the redundancies—which would be deleterious to the employees. They are either out of a job or end up in a pension scheme which is probably not quite so good as the one that they were in before.

As the law currently stands, the employer can effectively get his hands on the surplus assets that he has generated by making things worse for the employees. There could be an argument that that is totally unfair and that any surplus assets generated in that way should automatically go to the disadvantaged employee. But, obviously, it would be very difficult to determine whether it was the hand of the employer making things worse for the employee which generated the surplus.

I suggest that there is a way around the problem. There is capacity for fund surpluses to be disbursed to employees in the same way that at the moment there is capacity for surpluses to be disbursed to the employer. The result would be that, if there were a final surplus available after the benefits had been raised, and probably after pension fund contribution holidays had been determined for employers and employees, it would be for negotiation between the employer and employees as to how it should be disbursed. It would then not be seen as only available to the employer. There would be a negotiating situation.

The reason for trying to create that situation is that it would be a signal to what I would describe as, generally speaking, anti-social employers—though they might not be breaking the law, they sail very close to it—that they should not engage in action which is deleterious to the employees and from which they sought to gain some advantages. On that basis, I beg to move.

Lord Mackay of Ardbrecknish

My Lords, when the noble Lord, Lord Monkswell, spoke to a similar amendment in Committee, he expressed disappointment that I used financial arguments in response. I am sorry to tell him that I intend to use those arguments again tonight because, as I am again sorry to tell him, they remain equally as valid tonight as they were the first time that I used them.

The Income and Corporation Taxes Act 1988 provides trustees with a range of options to use a surplus to improve members' existing benefits or to provide new ones; so members can benefit when an employer is eligible to seek a payment from surplus assets. I recognise that the noble Lord, Lord Monkswell, wants members to receive payments on the same basis as employers when a scheme winds up in surplus. However, I believe that his amendment is misconceived. Clause 69 already provides that a payment can be released to the employer only after members have had their pensions increased to the maximum permitted under Inland Revenue limits. Those Inland Revenue limits are as follows, for example, in the case of retirement: the maximum benefit that an approved scheme may pay is a pension of one-thirtieth of final salary for each year of service up to 20 years, which—if my arithmetic is right—means two-thirds; and a lump sum of 2.25 times that amount. Those limits are there to protect the Exchequer costs of tax relief which are given to approved pension schemes.

In the circumstances envisaged by Clause 69, the members' benefits have therefore been fully secured, indexed and enhanced to Inland Revenue limits. Members would get more than their legitimate pension expectations. The employer, who has borne the investment and other risks of the scheme, is entitled to benefit as well. The only way that he can do so is by having access to any residual assets. I can see no justification for suggesting that members should be able to share in that particular benefit, given the other gains that they would already have had.

The noble Lord suggested that employers could create a surplus by winding up an old scheme or creating redundancies. I must point out that in neither case can the employer reduce the accrued rights of any scheme member. That, I think, is what the noble Lord suggested might happen but I do not believe that he is right. I do not think he is right in that regard.

As I said, the legislation as framed, in case of wind-up, already gives considerable benefits to the employee, pension scheme member or whoever it may be. It gives them considerable benefits as the first bite of the cherry. The employer can only receive surplus benefit after those obligations to the employee have been met. To go further, as the noble Lord suggests, would be going beyond the existing tax-approved arrangements, which are substantial—they cost the taxpayer around £7 billion a year—and employers may consider that it is perhaps tilting the balance a little unfairly in the direction of the employee. After all, during all the years of the scheme the employer has paid his share of the contributions—of course the employee has paid also—and has had to stand behind the scheme. It is a bit of a quid pro quo. The employer must give a guarantee all the time the scheme is running and, if there is a surplus and after the interests of the employees have been properly dealt with, it seems right that an employer should gain some advantage to offset the risks he has taken during the years of the scheme.

9.15 p.m.

Lord Monkswell

My Lords, I thank the Minister for that response. I am intrigued by one of his arguments, and I shall come back to that in a moment. The scenario I envisaged was one in which there would be a good pension scheme that was already paying the maximum benefits allowed under the Inland Revenue rules. I accept the Minister's point that there is a need to protect the Exchequer and to place limits on the tax reliefs available for pension schemes. But perhaps I can try to explain to the Minister the mechanisms that I believe work to generate the surplus.

One may have a situation where an employee is made redundant. He worked for 20 or 30 years for a company and has another five, 10 or 15 to go before he receives his pension. Effectively, therefore, he is a deferred pensioner. I accept that the situation is rather different now, following the 1990 Act; nevertheless the mechanism still works. The current rules require that, as inflation progresses, the benefits accruing to the deferred member increase accordingly up to a limit of 5 per cent. Obviously, if the fund is well invested, an increase at least in line with inflation and probably a bit more can be expected. But what is the situation if inflation rises above 5 per cent.? Effectively the benefits for the deferred member are capped at 5 per cent.; but the scheme assets would be expected to generate income in excess of that 5 per cent. if inflation was running at 7 or 10 per cent. That is where the scheme surpluses build up.

Effectively one makes an employee redundant and reduces his situation; his money is frozen in a pension scheme and at the end of the day the employer receives the benefit. That is the crucial problem. I am concerned with the Minister's argument that the company, having invested in the pension scheme, should, if there is a surplus, retain that surplus as a reward for its investment in the scheme. That is a dangerous argument. I hope that the Minister did not intend the meaning he seemed to convey—that it is OK for companies to invest in pension schemes, which have tax beneficial regimes, with a view to recouping some reward for that investment at a later time. I am sure that that was not the Minister's intention but it appeared to be the meaning of what he said. Given that interpretation, perhaps the Minister would care to address the situation.

Lord Mackay of Ardbrecknish

My Lords, I am sorry that the noble Lord interprets my remarks in that way. I did not intend them to convey that meaning and I do not believe that they did. All I was saying was that for an employer who sets up a pension scheme and runs it for many years there is always the threat hanging over his head that he may have to underwrite it; he has committed himself to obligations. On the other hand, if the circumstances we are envisaging come about and the scheme has been wound up, and all the benefits that the employees can look for if the scheme has been wound up in surplus are already being honoured, it does not seem unreasonable in those circumstances that the employer should then be able to get, so to speak, his share of the surplus back if the employees have by that time had the first bite at their share.

I do not think that it is a quid pro quo and I do not think that any employer would put a lot of money into a pension scheme against the day when it might wind up and it might have a surplus at that date which might be more than is needed to honour all the obligations to the employees and then might give him some money after that. I am not sure that it would be a wise employer who came to that conclusion.

Lord Monkswell

My Lords, I thank the Minister for that explanation. However, he misses the point. It is not the prudent, wise, careful and considerate employer that we are talking about. We are talking about, generally speaking, a corporate raider whose one eye is on the assets that he can get his hands on and his perspective is very definitely not in terms of the long-term beneficial interests of his employees.

We have had an interesting to and fro. Some different points have emerged in this debate from those which came out at the Committee stage. I do not intend to press the matter to a Division. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 32 [Payment of surplus to employer]:

Lord Lucas moved Amendment No. 82:

Page 19, line 12, leave out (" 3") and insert ("(Prohibition orders)").

The noble Lord said: My Lords, I spoke to this amendment with Amendment No. 3. I beg to move.

On Question, amendment agreed to.

Baroness Dean of Thornton-le-Fylde moved Amendment No. 83:

After Clause 32, insert the following new clause:

Protective costs orders (" .—(1) Where, on the application of a member (in this section referred to as "the representative member") representing the views of not less than 10 per cent. of the members of a scheme or of a member-nominated trustee appointed under section 14, a court is satisfied that serious or persistent breaches of trust may have been committed which do not fall within section 3, the court may grant an order in such form as it considers appropriate compelling the trustees of the scheme to pay to the representative member or to the member-nominated trustee the reasonable costs of obtaining legal and other advice in order to pursue claims on behalf of the scheme.

(2) Any costs ordered to be paid in accordance with subsection (1) shall only be payable upon the presentation of a certificate by the solicitors acting for the representative member or the member-nominated trustee, as the case may be.

(3) A court may only grant an order under subsection (1) of this section if it is satisfied that—

1. (a) an independent trustee properly advised would have applied to the court for directions to commence or continue proceedings;
2. (b) on such application the court considers that it would have given leave to such independent trustee to proceed.

(4) Where a court grants an order under subsection (1) of this section it may from time to time renew or amend such order.

(5) Where a court grants an order under subsection (1) of this section it may make provision for the payment of past, as well as future, costs.

(6) On an application under subsection (1) of this section, a court may grant an order notwithstanding the fact that the breaches of trust which are or which form part of the grounds for the application fall within section 3, if it is satisfied that it is in the best interests of the members so to do.").

The noble Baroness said: My Lords, this matter came before your Lordships during the Committee stage of the Bill. At that stage the Minister said that he had no objection in principle to the amendment but felt that it was not necessary. During the discussion he mentioned a procedure known as the Beddoe's summons procedure, which provides that those who wish to engage in proceedings involving a trust can apply to the court for an order that the costs should be met by the trust. The Minister then put forward the view that what is already in the Bill is a belt and braces protection for individuals and trustees of pension schemes. The noble Lord said that the new authority can receive and deal with complaints from anyone in a pension fund and that therefore the intentions of the amendment would be met, either by existing law—trust law—or the new regulatory authority.

I do not wish to repeat the details I gave of why I put forward this protective costs order at the Committee stage except to say that it was the Minister's response which led me to put down this amendment again today. I must challenge the Minister's reliance on what is known as the Beddoe's procedure to cover those situations when the regulatory authority, OPRA, does not cover them. The Beddoe's procedure, I am given to understand, having checked after the Committee stage, is only for trustees. It is a kind of fail-safe for trustees who might decide that they need to embark on litigation but go to the court to get sanction in case of a future challenge by a beneficiary. It is a decision which gives them protection if at some point in the future a beneficiary takes action. It does not cover individuals. An individual with a complaint could not invoke the I3eddoe's summons procedures.

I turn to the other arm of protection, which the Minister put forward; namely, that individuals could go to OPRA. They could of course, but I have some concerns about that because the regulatory authority has a quite specific remit under this Bill which does not cover all situations. On 7th February, at Committee stage, the Minister said in response to an amendment moved by my noble friend Baroness Hollis that OPRA, will have the powers necessary to enforce compliance with the law".

Later during the same day of the Committee stage, in answer to another amendment moved by my noble friend Lord Haskel, the Minister said, referring to OPRA:

"We should not widen its powers in such a way that it becomes involved in trust law—and other matters which are best left to the courts".

There we have it. I suggest that the individual within a scheme, or groups of individual members who are not trustees and who cannot have a case decided by the regulatory authority because it is outside the powers of the regulatory authority, do not even have the procedure which is there under the Beddoe's summons procedure.

I suggest that this exposes a major gap in this Bill as regards the rights of individuals in pension schemes. Where do they go if they cannot invoke the Beddoe's procedure and the regulatory authority cannot help them?

At this stage I should like to quote from the judgment of Lord Justice Hoffman when he was giving his decision in the Melton Medes case. That is a case where a group of individuals, with the support of their union, went to court to get their costs covered. It was only when they had reached something like half a million pounds that the case was heard. As I said, the funding came from the union.

Lord Justice Hoffman said, What distinguishes the shareholder and pension fund member on the one hand from the ordinary trust beneficiary on the other is that the former have both given consideration for their interests. They are not just recipients of the settlor's bounty which he, for better or worse, has entrusted to the control of trustees of his choice. The relationship between the parties is a commercial one and the pension fund members are entitled to be satisfied that the fund is being properly administered. Even in a non-contributory scheme, the employer's payments are not bounty. They are part of the consideration from the services of the employee".

Expert pensions lawyer, John Mesher, in Occupational Pensions Law Reports, went on to say about that judgment that, there is little guidance on which to predict how the discretion will or will not be exercised in the future"—

that is a discretion which Lord Justice Hoffman gave— since the factors identified in it will be common to most cases where pension scheme members bring claims against the trustees or the employers".

At the moment I suggest that what we have in this Bill is a gap which leaves individual members exposed without any kind of back-up support unless their individual complaint is covered specifically within the regulatory authority remit in this Bill. It does not cover any problems which may arise in trust law. As the Minister said in the debate on 7th February, the intention is not to give the regulatory authority the right to interpret or indeed to intervene in trust law. I beg to move.

9:30 p.m.

Lord Mackay of Ardbrecknish

ds, I understand why the noble Baroness wishes to ensure that scheme members are not prevented by lack of funds from challenging the trustees of a scheme in court where they believe there is a breach of trust. I am sure that we all share her concern that the interests of scheme members should be protected and that where members have cause to challenge the actions of trustees, effective and straightforward methods of redress are available.

I believe at Committee stage I answered questions about the Beddoe's principle. The noble Baroness has pointed out that that covers trustees acting in good faith and that the trustees may apply for a Beddoe's order to indemnify them for the cost of litigation. I do not believe that anyone has gone on to speak about scheme members. The cost of litigation can indeed be very high. The noble Baroness mentioned the Melton Medes case. That certainly illustrates the level of costs. However, that case stems from events which began in 1986. In the intervening period there have been a number of developments which have an important bearing on this issue. I believe that those developments, taken together with various provisions in this Bill, make the amendment unnecessary.

First, the services of both the Occupational Pensions Advisory Service and the pensions ombudsman are free of charge and readily available to scheme members. OPAS offers independent advice to anyone who has a problem with their pension scheme. Since 1991, it has been receiving grant-in-aid from the Occupational Pensions Board. The Pension Law Review Committee recognised the worthwhile work carried out by OPAS in its report and the Government remain committed to providing financial support for this valuable service. If OPAS is unable to resolve the dispute, the scheme member may take his case to the pensions ombudsman.

The office of the pensions ombudsman was set up in 1991. It was established specifically to provide scheme members with an inexpensive and readily accessible means of resolving disputes as an alternative to the courts. The ombudsman is an independent commissioner who may investigate complaints of maladministration and disputes of fact or law referred to him by individuals. He has the same powers as the courts in requiring information and examining witnesses. His determinations are final and binding upon the parties and may be enforced in the courts.

When this issue was discussed in Committee, I spoke about the role of the new regulatory authority which we are introducing. Scheme members will be able to report their anxieties to the authority, which will have the power to investigate allegations and to take action to ensure that schemes comply with their statutory obligations.

There are also provisions in the Bill which will require the trustees or managers of occupational pension schemes to establish and operate procedures to resolve disagreements. We believe that it is in the interests of schemes and of members that, where possible, disputes should be resolved by the schemes themselves. The trustees will be required to give a written response explaining the position, and it is intended that they should refer to the appropriate part of the scheme rules. If the member is dissatisfied with the response he receives, he will be able to take his case to OPAS and, if necessary, to the pensions ombudsman.

In addition, as noble Lords will be aware, the noble and learned Lord, Lord Woolf, is undertaking a review of rules and procedures of the civil courts with the aim of reducing the costs of civil litigation. I submit, however, that the developments of the past few years, when added to the new provisions in the Bill, mean that taking the matter to litigation should not be necessary.

Taken together, the arrangements and developments I have described will ensure that scheme members can obtain redress for their grievances without the need for lengthy and costly litigation. It is surely in everyone's interests that court action should be avoided. The measures we have already put in place, together with those we are introducing in the Bill, will ensure that scheme members will not be prevented by lack of funds from pursuing their proper concerns—whether that be through OPAS, the ombudsman or the new authority. I hope that I have reassured the noble Baroness sufficiently for her to feel able to withdraw her amendment.

Baroness Dean of Thornton-le-Fylde

My Lords, I thank the Minister for that detailed and helpful reply which does not, however, reassure me as much as he had hoped that it would. Perhaps I may give the House an example. I refer to the well-known Imperial case. A company was sold and the members of the pension fund were guaranteed that their benefits under the scheme would be protected. They were told that their benefits would not be eroded in any way. Well, they were eroded. The scheme members would not have been covered by the regulatory authority proposed in the Bill.

It would not have been able to intervene on their behalf. So, who would be able to protect them? They would have to find some other means of redress. My information is that neither OPAS nor the pensions ombudsman could intervene in that situation. Such a case would come under trust law and would be a matter for the courts.

I agree entirely with the Minister that disputes in regard to pension funds should be settled within the fund. We welcome the disputes procedure that is established under the Bill. No one wants costly litigation where that can be avoided.

The amendment has been tabled at this stage because it is felt strongly that there is an omission in that the individual is given no assurance that either the provisions in the Bill, OPAS or the pensions ombudsman could deal with those situations which, fortunately, occur only from time to time. They are not regular events but when they occur they have such an effect upon the individuals within the pension fund that one feels strongly, as one did in the Melton Medes case, that that must never be allowed to happen again.

It is clear that the Minister will not be persuaded this evening to accept the amendment. So, taking everything into consideration, I beg leave to withdraw it.

Amendment, by leave, withdrawn.

Clause 33 [Restriction on employer-related investments]:

Lord Ezra moved Amendment No. 84:

Page 19, line 23, leave out from ("that") to ("invested") in line 24, and insert ("no more than 5 per cent of its resources is").

The noble Lord said: My Lords, I shall speak also to Amendment No. 105. The amendment deals with the issue of self-investment. A simple matter is raised by the amendment. The Bill provides that the scheme must comply, with any prescribed restrictions with respect to the proportion of its resources that may at any time be invested in … any employer-related investments".

Those are quite properly described in the following paragraph.

The issue is that from 1992, in the wake of the Maxwell affair, it has been laid down that self-investment should not exceed 5 per cent. That was referred to in the Goode Report and in the Government's White Paper. I feel that the reference to prescribed limits introduces an area of uncertainty where there was certainty.

It is important that fund managers know where they stand in this matter. The principle has now been well established. I have no doubt that the prescribed limit probably would be 5 per cent. That is all the more reason why it should be on the face of the Bill. There should be no doubt.

Some feel that there should be a total prohibition on self-investment but, as the Goode Report pointed out, that would create serious difficulties, particularly in the case of larger schemes of companies with many associates. Some of those companies track the market, and their own shares obviously play a part in that process. It would be virtually impossible to eliminate their own share of that market-tracking operation.

Therefore a certain limit has to be allowed. That has been established as 5 per cent. I believe there is a strong case for that to be endorsed in the Bill. I beg to move.

Lord Haskel

My Lords, I support the amendment. As the noble Lord, Lord Ezra, said, the 5 per cent. limit on self-investment appeared in the White Paper. For some reason it does not appear in the Bill. The Bill has prescribed limits. I feel strongly that the 5 per cent. should be on the face of the Bill to prevent any misunderstandings. There are many examples of things going wrong in this regard. There are the Bellings, the Burlington International, and the Lewis's and Lep cases. They are just but four examples.

The Goode Report gave reasons for allowing some level of self-investment, but, as the noble Lord, Lord Ezra, said, 5 per cent. seems a reasonable compromise to avoid difficulties which arise from time to time and to help promote the principle of prudent diversification of investments.

The object of Amendment No. 105 is to prevent the value of employer-related investments being included in the total value of assets. The reason is clear. The amendment is essential if the MSR is to be at all effective. If employer-related assets are to be permitted for the purpose of calculating the MSR, that is even less of a solvency safeguard than we originally believed. I support the amendment.

Lord Mackay of Ardbrecknish

My Lords, Amendment No. 84 would place on the face of the Bill a limit on the amount which schemes may invest in the sponsoring employer and associated companies. The proposed limit at 5 per cent., mirrors that currently required by regulations which took effect in March 1992. These regulations are made under existing legislation. The PLRC considered the limit and considered that there had been insufficient time since its introduction to judge whether or not it was an appropriate one. It recommended that the 5 per cent. limit should stand.

That recommendation, together with the other PLRC recommendations on self-investment, have been accepted by the Government. We propose to bring forward regulations which put these recommendations into effect. We are all agreed, therefore, that a 5 per cent. limit on the level of self-investment is currently considered appropriate and one which, I submit, has been properly introduced into legislation by regulations. I find it difficult to see the need for this limit to be placed on the face of the Bill if it can be, and indeed already has been, satisfactorily introduced by secondary legislation.

I have noted the points made by the noble Lord. However, the danger in this amendment is that while it will have no immediate effect on the level of permitted self-investment it will make it much more difficult for any changes to be made to that limit if, in the course of time, 5 per cent. is felt no longer to be an appropriate level. The inflexibility inherent in introducing a particular figure onto the face of the Bill, combined with the fact that it is simply not necessary to do so, leads me to conclude that any advantages are clearly outweighed by the disadvantages. I therefore hope that the noble Lord will not press the amendment.

Perhaps I may now turn to Amendment No. 105. It would exclude any employer-related investment from the calculation of the minimum solvency requirement. In Committee, I explained that investment managers may invest in a range of unitised securities which ensure the performance will reflect the market. These unit trusts may themselves be invested in the sponsoring employer or those associated with it. The complex world of mergers and acquisitions make it difficult to keep track of who owns which particular companies. To require the investment manager to be continuously monitoring the holdings of the parent company would be something of an administrative nightmare.

It is, of course, the trustees of the scheme who will decide whether employer-related investments are appropriate. This duty has been further strengthened by the provisions of this Bill. When making such a decision, as in all their duties, trustees 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.

If the likely rate of return from an employer-related investment is not as good as could be achieved elsewhere, the trustees should consider whether to retain the investment. Similarly, if they are of the opinion that there is a real risk of employer insolvency, they would be acting in breach of trust if they were to agree to any employer-related investment. On the other hand, there may be situations where employer-related investment is acceptable and judged to represent prudent investment.

Given that a blanket exclusion on all employer-related investment is not practical, which noble Lords accept, it would be illogical to exclude up to 5 per cent., which is legally permitted, from the minimum funding calculation. Apart from any other reasons, we would be placing an exclusion on trustees that could be breached without their intent or knowledge. It would have the effect of raising the minimum funding requirement threshold for any scheme that had up to 5 per cent. self-investment.

Finally, I would remind noble Lords that the Government have accepted the PLRC's recommendation that all loans or other financial assistance to an employer or associated companies should be prohibited. We believe that this will significantly limit the potential risk involved in financial dealings between a pension scheme and its sponsoring employer. I must therefore agree with the PLRC's conclusion that a 5 per cent limit on employer-related investment will ensure an adequate diversification of risk.

I hope that with that explanation of the way in which we have reached our conclusion, the noble Lord will withdraw his amendment.

Lord Ezra

My Lords, I thank the Minister for his comments. I am a little disappointed, in particular that Amendment No. 84 has not been accepted. That has been recognised as the limit, and the reference in the legislation to "prescribed" limits introduces a degree of uncertainty which could have been avoided. Of course, those limits cannot be fixed for all time. But on the other hand, it is not a matter which should be changed too rapidly or too easily. Fund managers need to know the rules under which they are to operate. The 5 per cent. limit has been accepted. We have had what is tantamount to an assurance from the noble Lord that that will be the prescribed limit. Therefore, it would have been extremely easy to put that on the face of the Bill.

However, I shall study carefully what the Minister said about both Amendments Nos. 84 and 105. If we need to return to those issues at the next stage, we shall certainly do so. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Lucas moved Amendment No. 85:

Page 19, line 45, leave out (" 3") and insert ("(Prohibition orders)").

The noble Lord said: My Lords, I spoke to this amendment when I moved Amendment No. 3. I beg to move.

On Question, amendment agreed to.

Clause 34 [Provision of documents for members]:

The Earl of Buckinghamshire moved Amendment No. 86:

Page 20, line 16, at end insert: ("() if the scheme is subject to the minimum solvency requirement and the actuary has prepared a certificate under section 48 or 50, a statement by the actuary concerning such aspects of the certificate as may be prescribed and containing such other information as the actuary considers to be relevant and appropriate in the circumstances,").

The noble Earl said: My Lords, in moving this amendment, I shall speak also to Amendment No. 87 which stands in the name of the Minister. I believe that Amendment No. 87 may well meet the prime objective of Amendment No. 86. In those circumstances, I should prefer to hear what the Minister has to say about Amendment No. 87. I beg to move.

Lord Mackay of Ardbrecknish

My Lords, it may be for the convenience of the House if I intervene at this point to explain the intention behind the government amendment. If other noble Lords wish to intervene afterwards, I shall try to answer any questions raised.

I am grateful to my noble friend for his brief introduction. I agree with him that trustees should obtain comprehensive information from the scheme actuary concerning the financial position of the scheme. It is also important that members have access to information about the funding position, especially in relation to the minimum solvency requirement.

Powers are already contained in Clause 49(5) to prescribe what information and statements should be produced about the scheme's ability to meet the minimum solvency requirement. I agree that this is not wide enough and propose in my alternative amendment a wider power. This effectively preserves the existing powers in the Pension Schemes Act.

Subject to the amendment which I propose, the powers in this clause enable the introduction of comprehensive requirements along the lines that I have mentioned. I am glad to have my noble friend's support in relation to this amendment which largely achieves what his amendment seeks to secure. I congratulate my noble friend on raising the matter for which, on second thoughts, we clearly saw the argument. I am sure that my noble friend will withdraw his amendment and will allow my amendment to proceed.

The Earl of Buckinghamshire

My Lords, I thank my noble friend for his kind words. Having listened to what he said, I am very pleased to allow his amendment to proceed. On that basis, I beg leave to withdraw my amendment.

Amendment, by leave, withdrawn.

Lord Mackay of Ardbrecknish moved Amendment No. 87:

Page 20, line 17, leave out from beginning to ("a") in line 18.

On Question, amendment agreed to.

[Amendment No. 88 not moved.]

Baroness Dean of Thornton-le-Fylde moved Amendment No. 89:

Before Clause 35, insert the following new clause:

Training for trustees (".—(1) Every person appointed as a trustee shall undertake a short course of training approved by the Authority (unless he has already undergone such a course or holds a relevant professional qualification). (2) The appointment as trustee of any person who fails to undertake such an approved course within six months of his appointment shall lapse and may not be renewed without the approval of the Authority.").

The noble Baroness said: My Lords, when I was discussing this Bill—and indeed the whole area of trustees—with colleagues of mine, one of them said to me that it beggared belief that someone having the responsibilities conferred by this Bill, who will be managing trust funds for beneficiaries which equate, as has been said earlier this evening, with something like one third of the value of all the shares on the London Stock Exchange, cannot be compelled to have some kind of training. It is really quite incredible if one considers the matter in depth. Indeed, I tried to think of any job that does not have some kind of training. It was difficult. The position involves the management of large amounts of money and carries considerable responsibilities and penalties for the individual. Not to require compulsory training is quite amazing and needs rectifying.

Nevertheless, the world is full of courageous people and perhaps they would be courageous enough to take on board the responsibilities of being a trustee. That is what we all want to see. However, I looked again at the Bill. Under the penalties to which the individual trustee can be subjected—mere suspension, or removal from office—there are 12 offences, all of which can be imposed upon the individual trustee.

If we take the next ratchet up penalty, we see that the penalty of a fine could be imposed on individuals responsible for pension funds. That makes a total of 17 offences. Fourteen of those offences with a penalty of a fine relate to individual trustees. If we take the ultimate sanction under the Bill—the criminal penalty—which attracts a fine or imprisonment, that amounts to five offences, three of which relate to trustees. In fairness and equity, how can we subject individuals to that kind of potential penalty and then tell them that they are not required to have some kind of compulsory training? How can they be guilty of a misdemeanour if they have had no training?

In Committee the Minister said that he felt that it was up to schemes to decide the training needs of their trustees. That is not the view of many; indeed, that is not the view of many people who have lobbied very hard on the matter, despite the fact that the Goode Committee stated that it would not put forward the requirement for compulsory training. We feel that it is right to seek training from a body outside the scheme administrators and consultants. They are far too inclined—and I have personal experience of this—to give their impression as professionals within the scheme on how things should be done and on the correct way that the scheme should operate. Let us bear in mind the fact that exposure to the individual perceptions of those professionals could result, if the legislation is breached, in suspension, removal, a fine or, at its worst, imprisonment.

There has to be some kind of quality control on courses. There are many quite reputable bodies which currently provide courses of three days or one week. They do not last long. Indeed, the TUC put about 1,000 trade union trustees through training courses, and I gather that the National Association of Pension Funds has a range of courses that cost between £100 and £900. They are not expensive in the way of things as regards pension schemes that are handling so much money. If you give people responsibilities, I believe that you must also give them rights. By imposing a compulsory requirement to train, we would in fact be giving individual trustees a right. I beg to move.

Baroness Seear

My Lords, I should like briefly to support the amendment. However, unlike the noble Baroness, Lady Dean, I can think of far too many jobs for which no training is required, starting with membership of both Houses of Parliament. But that is not an argument against having training; indeed, I should have thought it is very much an argument in favour of it. Given the risks that trustees are undertaking, it is only fair to them that they should have training, if only to expose to them the nature of the risks involved.

I can well envisage a number of well-meaning people who, for a variety of reasons, might agree to be trustees while having very little idea about what it is that they are required to do or what the penalties may be if they slip up. I hope very much that the Government will not resist this sensible requirement. It would be very much better if it applied in a great many other areas too.

Lord Mackay of Ardbrecknish

My Lords, as the noble Baroness, Lady Dean, explained, this amendment would require a trustee to undertake a short course of approved training within six months of his appointment. In effect, the amendment requires compulsory training for all trustees. The Government do not dispute for a moment that trustees should be properly trained but we believe there are very sound reasons why such training should not be made compulsory.

Compulsory training does not by its very nature take account of the different training needs of individual trustees. It is not simply a matter of exempting those who have undertaken such a course or who hold relevant professional qualifications, as described in the amendment. Some trustees would have been doing the job for years and have a wide background in pension matters. Others would be new to the job. Yet others would fall somewhere in between. Compulsory training would not, and could not, take account of their different needs, learning abilities, personal preferences or even their domestic arrangements. For example, a training course away from the workplace—

Baroness Seear

My Lords, does not the Minister agree that some of the people who have been doing jobs for years are very much the ones who most obviously need training?

Lord Mackay of Ardbrecknish

My Lords, there may be some to whom that applies, but there may be others to whom it does not apply. It seems a little unfair to those who are doing the job perfectly well—I am sorry that the noble Baroness intervened and spoke in a disparaging way about people who are doing the job at the moment, most of whom are doing it very well—to suggest that they should go off and attend some form of compulsory training. As I was saying, the amendment would also mean that the authority had to determine what could be regarded as an approved training course. We do not see a role for either the Government or for the authority in attempting to approve, regulate and set standards for the various training media that are available. More will no doubt become available as a result of the Bill and the publicity arising from it. We consider that the interventionist role envisaged in the amendment would be impracticable, costly and, we believe, unnecessary.

The amendment refers to "professional qualification". It is important to appreciate that trusteeship is not a job just for experts or professionals with particular qualifications. It is a job where lay volunteers have an important contribution to make. Anyone undertaking trustee duties must, of course, be well informed about his role and responsibilities. But personal qualities and an aptitude for the task are equally important.

The important point is not to make training compulsory but to ensure that trustees and potential trustees are fully aware of the role expected of them and the nature of their responsibilities. They must have access to information and guidance on how to carry out that role, including the various training options that are available to them. Training for trustees is essential. It is vitally important that trustee boards should contain properly trained and informed trustees who are fully aware of their role. However, rather than impose a regime of compulsory training which may or may not be appropriate for each individual, it is better for trustee boards, individual trustees and the sponsoring employer to decide the most appropriate form and method of training which will meet their particular needs.

The Government want to encourage trustee training and to this end we have made it a requirement that employers give paid time off for that purpose. We are also supporting the initiatives being taken by the pensions industry in the preparation of industry sponsored codes of practice and we know that those developing the codes are planning to cover training.

We do not believe that the amendment is the right way to proceed. I imagine it would be but a short step to compulsory examinations and the like. As a former schoolteacher dare I suggest that one can put people through courses but it does not necessarily mean that at the end of the day they learn much? It would be no time at all before we established an examinations board and the whole business would become over-regulated. I believe that the task we are discussing is a responsible and important one; it is not one for which we need the kind of professional qualifications that I envisage would follow, if we were not careful, the training proposed by the amendment, which, if it was to be properly understood, would mean establishing an examinations board and the like.

Baroness Dean of Thornton-le-Fylde

My Lords, the Minister has been less than generous in interpreting the amendment which is before the House this evening. He said that we do not want professionally qualified people but lay people. The Bill provides for special trustees to be put in place in particular circumstances who will have professional qualifications. We wanted to make sure that we were not attacked for having no regard for trustees who have professional qualifications.

The noble Baroness, Lady Seear, quite rightly chided me. She said that she could think of many jobs where people did not receive any training. I could probably match that, but I could not provide examples of many jobs which carry the penalties that this Bill imposes. That is the problem.

The Minister's arguments in response to the amendment this evening were shallow. They did not address the reasons for the amendment. The responsibilities of individual trustees under the Bill are such that they are entitled at least to some form of compulsory training. The amendment does not specify in detail what that would be. I am most disappointed that the Minister has not seen the sense of that. It is not a question of bureaucracy or the thin end of the wedge before we require academic qualifications. The intention is to make the Bill work and to put people in place who have the courage and the necessary knowledge to carry out their responsibilities.

Having said that, it is clear that the Minister has not been moved by an argument which stands on its own merits. It is with regret that I ask the leave of the House to withdraw the amendment.

Amendment, by leave, withdrawn.

10 p.m.

Clause 39 [Professional advisers]:

[Amendment No. 90 not moved.]

Lord Lucas moved Amendment No. 91:

Page 22, line 28, at end insert: ("() For every trust scheme the assets of which consist of or include investments (within the meaning of the Financial Services Act 1986) there shall be an individual or a firm appointed by the trustees as fund manager.").

The noble Lord said: My Lords, in moving Amendment No. 91 I shall speak at the same time to Amendments Nos. 93, 94 and 96. Before doing so I should draw the attention of the House to an error in Amendment No. 93 as printed on the Marshalled List. It should read: leave out ("and (2)") and insert ("to (3)")".

It is incorrectly printed as "("to (2)")".

Amendment No. 91 provides that trustees who intend to invest directly in investments which fall within the scope of the Financial Services Act must appoint an authorised fund manager. As drafted the Bill provides trustees with the power to delegate investment decisions to authorised fund managers but does not require them to appoint one. In view of the importance attached to scheme investments we consider it appropriate that the Bill should require trustees to appoint an appropriate person to manage those assets. That person may be an external fund manager or an appropriately authorised in-house fund manager. Amendments Nos. 93, 94 and 96 make changes consequential upon Amendment No. 91. I beg to move.

On Question, amendment agreed to.

Lord Lucas moved Amendments Nos. 92 to 96:

Page 22, line 33, leave out (" 3") and insert ("(Prohibition orders)").

Page 22, line 40, leave out ("and (2)") and insert ("to (3)").

Page 23, line 9, leave out from ("scheme") to ("sections") in line 10 and insert ("an auditor, actuary or fund manager is required under this section to be appointed but the appointment has not been made, or not been made in accordance with any requirements imposed under this section,").

Page 23, line 10, leave out (" 3") and insert ("(Prohibition orders)").

Page 23, line 12, leave out ("such an appointment") and insert ("compliance").

The noble Lord said: My Lords, I spoke to Amendment No. 92 with Amendment No. 3. I have also spoken to Amendments Nos. 93 to 96 with Amendment No. 91. I beg to move.

On Question, amendments agreed to.

Clause 40 ["Blowing the whistle"]:

[Amendment No. 97 not moved.]

Lord Lucas moved Amendment No. 98:

Page 23, line 36, at end insert:

("(5) If it appears to the Authority that an auditor or actuary has failed to comply with subsection (1) or (2), the Authority may by order disqualify him for being the auditor or, as the case may be, actuary of any trust scheme specified in the order.

(6) An order under subsection (5) may specify the scheme to which the failure relates, all schemes falling with any class or description of trust scheme or all trust schemes.

(7) The Authority may, on the application of any person disqualified under this section who satisfies the Authority that he will in future comply with those subsections, revoke the order disqualifying him; but a revocation made at any time cannot affect anything done before that time.

(8) An auditor or actuary of a trust scheme who becomes disqualified under this section shall, while he is so disqualified, cease to be auditor or, as the case may be, actuary of any scheme specified in the order disqualifying him.

(9) A person who, while he is disqualified under this section, purports to act as auditor or actuary of a trust scheme specified in the order disqualifying him is guilty of an offence and liable—

1. (a) on summary conviction, to a fine not exceeding the statutory maximum, and
2. (b) on conviction on indictment, to a fine or imprisonment, or both.

(10) An offence under subsection (9) may be charged by reference to any day or longer period of time; and a person may be convicted of a second or subsequent offence under that subsection by reference to any period of time following the preceding conviction of the offence.").

The noble Lord said: My Lords, the purpose of Amendment No. 98 is to provide within Clause 40 the powers to enable the authority to sanction auditors and actuaries who fail to comply with their duty to "blow the whistle".

The amendment introduces further powers for the authority, but our intention is that for the time being the new subsections will remain uncommenced. It is the same as we proposed for subsection (4) which allows the authority to fine auditors and actuaries. The reason is that we believe that the auditors' and actuaries' professional bodies are the ones best placed to discipline members who fail to comply with their statutory duty. Those bodies will take on this role as part of their already well-established professional disciplinary procedures which have an appropriate range of penalties—for example, the removal of a professional's practising certificate. We intend to introduce those additional powers only in the unlikely event that the respective professional bodies are unable or unwilling satisfactorily to discipline their members who breach the whistle-blowing duty.

The amendment allows the authority to disqualify a person from being an auditor or actuary of a trust scheme—if that person fails to comply with the duty to "blow the whistle". It also allows the authority to revoke a disqualification if, at a later date, it becomes satisfied that an auditor or actuary will in future comply with that duty. Those powers broadly reflect those contained in the Financial Services Act 1986 and the Insurance Companies Act 1982. Furthermore, it makes it a criminal offence for a person who is disqualified under this section to act as auditor or actuary of a trust scheme.

These sanctions are necessary, first, because the Pension Law Review Committee recommended that every breach of a duty should carry a sanction; secondly, because the authority needs to be able to enforce the whistle-blowing duty should the relevant professional bodies fail to do that; and, finally, because we wish to adopt an approach that is not out of step with that taken in other areas of regulation. I beg to move.

On Question, amendment agreed to.

Clause 41 [Other responsibilities of trustees, employers, etc.]:

[Amendment No. 99 not moved.]

Lord Lucas moved Amendment No. 100:

Page 24, line 13, leave out (" 3") and insert ("(Prohibition orders)").

The noble Lord said: My Lords, I have already spoken to this with Amendment No. 3. I beg to move.

On Question, amendment agreed to.

Clause 43 [Annual increase in rate of pension]:

[Amendment No. 101 not moved.]

The Chairman of Committees (Lord Boston of Faversham)

My Lords, in calling Amendment No. 102, I should point out to your Lordships that if Amendment No. 102 is agreed to, I cannot call Amendment No. 103.

Clause 48 [Minimum solvency requirement]:

Lord Eatwell moved Amendment No. 102:

Page 28, 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: My Lords, in moving Amendment No. 102, I speak also to Amendments Nos. 104, 106 to 109, 111, 113, 119, 121, 123 and 126.

The ordering of amendments at this stage is a little unfortunate. It would have been better if we could have taken Amendment No. 103 in the name of the noble Earl, Lord Buckinghamshire, first, because the noble Lord, Lord Mackay of Ardbrecknish, has put his name to that amendment. Before I proceed, I wonder whether I may assume that the Government intend to accept the noble Earl's amendment. Would that be correct?

Lord Mackay of Ardbrecknish

My Lords, I should have thought that that was fairly self-evident from reading the Marshalled List.

Lord Eatwell

My Lords, with that simple statement by the noble Lord, Lord Mackay, the Government's case for the minimum solvency requirement has been destroyed. I am grateful to him. He has acknowledged that the minimum solvency requirement is not a solvency requirement. He will acknowledge that by changing its name, it no longer has the characteristics which the Government have pretended that it had. We now have a funding requirement in which the scale of funding is to be determined by an arbitrary procedure related once upon a time to solvency but so related no more.

However, the minimum solvency requirement, or the minimum funding requirement as we shall certainly soon learn to call it, still bears the disfigurement of its misconception. The funding requirement is still defined as though it were a solvency requirement, albeit very much watered down. The watering down has steadily proceeded. Times of periods for compliance have been lengthened; asset valuation has been more flexible. The funding requirements on large schemes have been relaxed.

In Committee the Government moved amendments which transformed the solvency requirement in Clause 49 of the Bill from a requirement that a pension fund should be solvent into a requirement that a pension fund's investment policy should be adequate for the purpose of securing that the requirement of solvency will be met.

At the time I characterised that amendment as being similar to the role of the England cricket team believing that their abilities were adequate for the purpose of securing the Ashes. So we could call the Government's then position "the Atherton position". But now, with the abandonment of any pretence that there is a minimum solvency requirement in the Bill, the Government's position has become that they continue to support a requirement while they acknowledge in advance that it will not be fulfilled. Their position has switched from the Atherton position to the "Eddie the Eagle position". Eddie the Eagle knew that he could not ski-jump, but he tried all the same. The Government know that their solvency requirement will not guarantee solvency, but they continue to use it all the same.

Now that the intellectual case of the Government's position has collapsed, surely it is time for the Government to acknowledge that the minimum solvency requirement, though advanced with the best of intentions, was a thoroughly misconceived proposal in the first place.

Over the past couple of days I obtained the evidence of the Government Actuary as submitted to the Goode Committee on this proposal. The Government Actuary recommended against the minimum solvency requirement. The Government Actuary argued, in a report dated 14th December 1992: It can happen … that a scheme is insolvent on such a discontinuance basis, whilst comfortably in surplus on an on-going funding basis. Since in the majority of cases a scheme is not discontinuing, this [the discontinuance basis] seems a rather artificial process. It is also unrealistic to think that medium to large pension funds could be readily bought out with an insurance company". Why did the Government ignore their own Actuary's advice?

The noble Lord, Lord Mackay, committed the basic error of which the Government Actuary warned. He fell into exactly the error of accepting the artificial process. The noble Lord told us in Committee that he was, 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". He went on: 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".—[Official Report, 16/2/95; col. 822.] What the Government will admit by accepting the amendment of the noble Earl, Lord Buckinghamshire, is that the propositions that the noble and learned Lord, Lord Mackay, made in Committee are not going to be fulfilled. It is simply not true that under the Government's proposals the scheme will be able to secure the promise at all times. That is not true. So why do the Government not realise that they have now created the worst of both worlds: a minimum solvency requirement that is not about solvency, and now a minimum funding requirement that is not about funding?

I am quite willing to accept that the amendments that are tabled in my name are imperfectly drafted. These amendments remain in the nature of probing amendments. But their objective is clear; namely, to establish a minimum contributions requirement which is defined by best actuarial practice and which seeks to maximise the returns to the contributions of employers and employees within the context of an ongoing fund, as the Government Actuary recommended. There is no hybrid standard, as the Minister claimed in Committee. Instead, there is the standard for evaluating an ongoing fund that was proposed not by me but by the Government's own Actuary.

I am advised by the National Association of Pension Funds and by other actuaries whom I have consulted that a "best practice" requirement would provide extremely good protection against the possibility of employer insolvency. It would certainly provide far better protection than the Government's now discredited minimum solvency requirement or minimum funding requirement. That is all that these amendments seek to achieve: a basis for the evaluation of funds on an ongoing basis. However, in doing so, they would establish criteria for the operation of pension funds which would provide real protection to employees, provide an efficient funding base for employers and allow the regulator to identify with ease the rogue employer; for instead of requiring a complex, separate actuarial assessment dealing with the increasingly vague and irrelevant solvency conditions, the regulator could easily refer to the actuarial standards adopted to run the fund on an ongoing basis.

I do not mind if the Minister wants to call my minimum contribution requirement a minimum funding requirement. I do mind that whatever minimum is set should protect the interests of members. The Government's hybrid jumble of criteria does not meet that simple goal. Instead, it creates an artificial standard which, regrettably, for many pension funds will become the norm and which by its very nature will be seriously inferior to the position that will be established by best actuarial practice. Instead of protecting the pensioner from rogues, the Government are creating an environment which will discourage employers from adequately funding their pension funds, for the solvency requirements are now so far removed from the real requirements of adequate funding that they will be at the same time expensive and inadequate.

Surely, now that the Government are about to acknowledge that the case for a minimum solvency requirement is lost in its own contradictions, they should withdraw the entire sorry mess and begin to work on the framework of proposals that I have put forward. Incidentally, by so doing, it would make unnecessary the complex exceptions which are to be moved later by the noble Lord, Lord Clark of Kempston, exceptions which would be completely unnecessary if the Government were to accept that a minimum contributions requirement should be based on best actuarial funding practice.

The Government should now obey the wise advice of my noble friend Lord Healey: "When you are in a hole, stop digging". The minimum solvency requirement is not just a hole but a hole rapidly filling with water. The Government acknowledges the intellectual failure of their proposals by accepting the amendment of the noble Earl, Lord Buckinghamshire. They should accept the logic of their own position and transform the new minimum funding requirement into a minimum contributions requirement. I beg to move.

10.15 p.m.

Lord Stewartby

My Lords, I hope that the House will not accept Amendment No. 102. The noble Lord, Lord Eatwell, explained it in the context of the contribution proposals that he deployed to your Lordships at an earlier stage in the proceedings on this Bill; but he has not explained why a concept of matching contributions to benefits is sounder than a concept of solvency or funding. That is not just a technical aspect of the wording of his amendment; it is fundamental to it. The noble Lord, together with his noble friend, argues that the concept of a contribution requirement should be that the contributions match the benefits.

Any system in which contributions are related directly to the benefits becomes a pay-as-you-go scheme. I do not see how we could possibly graft that onto the existing structure of our pension funds. Unless the rentability of the assets of the scheme are taken into account, the contributions which are paid—whether paid by the employer or taking account of the members' contributions—will never be related to the benefits in the direct way that he suggests.

This may indeed be a matter of terminology. But before the noble Lord rubbishes the idea of solvency or funding, he ought at least to make a case for his own terminology on contributions. That he has not done.

Lord Mackay of Ardbrecknish

My Lords, I am surprised that this was not a longer debate.

We first heard during Committee how the noble Lord, Lord Eatwell, opposes the minimum solvency requirement and favours a "minimum contributions requirement". His proposal is based on the enforcement of, best practice funding standards on an ongoing basis". He suggested that that would provide "a truly viable" alternative to the minimum solvency requirement. Therefore, in view of that rather ambitious claim, it was something of a let-down to realise that this seems to be no more than maintaining the status quo. In fact, it would seem that the noble Lord, Lord Eatwell, is urging the Government to turn their back on their duty to improve member security and, instead, to take the easy way out—the "do nothing" option.

I hope to be able to explain to noble Lords why our proposal is superior to that of the noble Lord, Lord Eatwell. I shall attempt to do that with as few clever remarks as I can. My disadvantage is that I have been at the Dispatch Box since 3 o'clock this afternoon, whereas the noble Lord, Lord Eatwell, has clearly been on the substitute bench for a few hours now preparing his clever remarks.

The simple fact is that an employer who undertakes to provide a defined benefit scheme takes on responsibility for the balance of cost. He is responsible for paying the extra needed to provide benefits over employee contributions and investment return. The minimum funding requirement reinforces that responsibility up to a certain level. We know from the results of the consultation exercise we carried out last year to test the impact of the minimum solvency proposals that the vast majority of schemes were normally funding at a level comfortably above the minimum. The new requirement will not affect those schemes and will not, as the noble Baroness, Lady Seear, asserted in Committee, mean more money would have to be put into schemes than is necessary. But our survey also identified a minority of schemes that were very weakly funded. For such schemes, the minimum requirement is crucially important for improving security for members.

During Committee, I said that the central weakness of an ongoing funding requirement is that it does not aim to provide any level of protection in the event of a scheme winding-up. I know that some noble Lords may want to argue that the bulk of employers do not become insolvent and that it is therefore unreasonable to require schemes, at all times, to have sufficient assets to meet their accrued liabilities. I do not accept that argument. On the contrary, I believe that scheme members have the right to a clearly defined measure of protection. I should like to remind noble Lords of what the PLRC had to say on this issue: 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 the assets of the scheme are sufficient to cover its liabilities". Several commentators have said that it would be damaging for employers to require them to pay contributions at a time when equity markets are depressed. Nevertheless, there is a definite relationship between a decline in the market value of equities and employer insolvency. Thus, it is at the very point that accrued benefits are at their most vulnerable that an employer is most likely to become insolvent. Members who have had their benefits reduced on a wind-up are unlikely to take much comfort from the fact that they would have been secure had their employer remained in business. To put it another way, it is quite unacceptable that employers should be able to continue trading at the risk of leaving their employees' legitimate pension expectations unfulfilled.

The central weakness of the ongoing valuation basis proposed by the noble Lord, Lord Eatwell, is that it does not ensure that assets accumulate quickly enough to enable a scheme to meet its accrued benefits. Study of the experience of the Pension Benefit Guaranty Corporation in the United States is most illuminating in this respect. Its minimum funding rules were originally based on an ongoing valuation basis, possibly along the general lines of the proposed minimum contributions requirement of the noble Lord, Lord Eatwell. This allowed insolvent pension funds to pass millions of dollars of unfunded liabilities on to the Pension Benefit Guaranty Corporation, leading to its near bankruptcy. We shall come to that when we come to debate the question of a central discontinuance fund. It was therefore necessary to change the basis of the minimum funding rules in the US. Pension plans are now also required to consider whether they could meet their liabilities if the pension plan were to terminate, which looks suspiciously like our own proposals under another name.

I think I should repeat the merits of the minimum funding approach and what it is intended to deliver. It will require schemes to hold sufficient assets to be able to secure pensions already in payment, either by buying annuities or paying benefits as they fall due, and provide younger members with a sum of money to be invested further. The pensions they eventually draw will obviously depend on how the money is invested and the rates of return on the investment, but there is every chance of it producing a pension at least as good as, and probably better than, that which would be paid from a deferred annuity. The minimum funding proposals offer a far better measure of security for all members of defined benefit schemes than any alternative affordable proposals.

Ever since a minimum funding requirement was first proposed as the minimum solvency requirement by the PLRC there have been rather wild allegations about it leading to a massive shift out of equities which could, in turn, depress the UK equity market. While we accept that some of the more mature schemes may want to change their investment strategy in order to reduce the risk of falling below the 90 per cent. limit, we think that the position has been highly overstated and we totally reject the doomsday scenarios that have been drawn by certain commentators. Indeed, last December my right honourable friend Peter Lilley announced a number of changes, but I think we shall come to them in a debate on a later group of amendments.

The noble Lord, Lord Eatwell, made much of our responding to the pressures and suggestions that have been made that we should change the name of the scheme. It was a clever debating point. But, frankly, we do not believe that it has quite the significance the noble Lord wishes to pray in aid. The requirements which are set out in Clause 48 may not guarantee that a scheme will be able to meet its liabilities in full on a buy-out basis but they should ensure that schemes always have enough money to meet the value of their members' accrued rights calculated on a realistic actuarial basis. That is something which the proposals of the noble Lord, Lord Eatwell, could not hope to deliver on a reliable and consistent basis.

The noble Lord, Lord Eatwell, made much of the Government Actuary's alleged opposition to minimum solvency. The references he made were, I suggest, misleading. The Government Actuary was concerned about a requirement that would have required schemes to fund at a level of buying out all pensions with annuities. The Government and the PLRC have always accepted that that would be impractical and unduly costly. That is why we have gone for the minimum requirement proposed in the Bill. It is not the Government's intellectual case that has collapsed. It is close to a contradiction in terms for the noble Lord to speak of defining best practice. If we were to try to define an ongoing valuation basis in place of the minimum funding requirement it would produce a funding target higher than the MFR for the great majority of schemes and that would not endear the party opposite, or indeed your Lordships' House if it were to agree with the noble Lord, to British industry.

We have in this country thus far managed without a minimum funding requirement. For most scheme members this has produced the benefits which they have expected and were promised. Schemes were thus funded, and still are, on the basis of actuarial advice. But we need to respond for scheme members who are unfortunate enough to work for employers who go out of business and are thus unable to stand behind their pension fund. These members could well find that, as the law stands at present, they would receive less than they have a right to expect.

We live in the real world where employers do go out of business. We believe that schemes must be funded at a proper level to secure benefit rights if that should happen. I do not see how the noble Lord, Lord Eatwell, can say that there is no intellectual case. The PLRC recognised it and in years to come scheme members will, should their employers go out of business, have a great deal for which to thank the PLRC, to thank this Bill and to thank your Lordships' House this evening if it rejects the noble Lord's amendment and sticks with the minimum funding requirement as proposed in the Bill.

10.30 p.m.

Lord Eatwell

My Lords, I can understand that the noble Lord would lose his sense of humour when he has to defend the indefensible. I am not at all surprised that he has found it so difficult to do so.

The noble Lord, Lord Stewartby, asked me to explain more generally the implications of the minimum contribution requirement versus the minimum funding requirement. The key point is comparing the viability of pension schemes on an ongoing basis which the minimum contribution requirement seeks to do, with those on a discontinuance basis.

The central problem involved in comparing the scheme on a discontinuance basis is that if a pension fund is at every moment of time to be able to guarantee the pensions of its members, then it will have to move out of an equity basis for funding and strongly towards a gilts basis of funding.

The Government have recognised that problem and to try to deal with it they have steadily watered down the minimum solvency requirement as it used to be called, and in doing so they no longer provide the protection of pensions which was initially claimed. The noble Lord, Lord Mackay, has admitted that that is so. He has admitted it again this evening when he said that the purchase of guaranteed annuities would be too expensive.

We now have something called a clearly defined level of protection. I suggest to your Lordships that the noble Lord, Lord Mackay, gave the game away when he stated that the minimum contribution requirement would tend to be, higher than the minimum funding requirement". Quite so, because the minimum funding requirement, as now watered down, is inadequate to support and protect the pensions of members.

The minimum contribution requirement would, as the noble Lord also admitted, embody what in his survey was identified as best practice. He explained to us that the pension funds survey revealed that the vast majority were adequately funded; that they were conducting themselves on the basis of a standard balance of equities and gilts in a manner which would secure the pensions of their members. It is exactly that best practice which his survey has identified that my amendments are attempting to incorporate into a minimum contribution requirement.

The noble Lord referred to the problems which have been encountered in the United States with the PBGC. Those problems were created primarily because the regulations which established that central discontinuance fund did not take adequate account of future inflation in benefit levels. It was simply a general mistake and something which could be dealt with in a proper minimum contribution requirement.

We are really seeing here two different approaches to the protection of members; namely, the protection of members' positions either by attempting to establish best practice in an ongoing environment or the protection of members' rights by a discontinuance standard. Either of those approaches is intellectually defensible. The Government have started from the position of a discontinuance standard and then steadily watered it down as the costs and difficulties associated with it have emerged. That is why in the next amendment of the noble Earl, Lord Buckinghamshire, we are going to see the name of the minimum solvency requirement changed.

But there still remains the problem that the noble Lord himself identified. The now minimum funding requirement will tend to become the norm and that norm does not, as he himself has admitted, actually protect the members' pensions. That is the great danger with the minimum funding requirement, and that is why it is desirable that a minimum contributions requirement, based on best practice, should be incorporated into the Bill. As we shall clearly have to return to this matter on a day when the Minister's temper is better, I now beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

The Earl of Buckinghamshire moved Amendment No. 103:

Page 28, line 10, leave out ("solvency") and insert ("funding").

The noble Earl said: My Lords, we have probably already had the debate on this amendment; but as my noble friend the Minister has added his name to mine on it, I shall be pleased to hear whether he wishes to add anything to what he has already said.

Lord Mackay of Ardbrecknish

My Lords, I am grateful to my noble friend Lord Buckinghamshire for tabling this amendment. As he knows, we have received many representations on this matter, including in particular from the Institute of Actuaries and the Faculty of Actuaries. At the risk of being chided again for having lost my sense of humour - of course, I have not done so in the least - perhaps I may advise the noble Lord, Lord Eatwell, that I acknowledged on Second Reading that we may not have got the name of the minimum solvency requirement quite right. It should not, therefore, have come as a great surprise to the noble Lord that I was prepared to have an open mind on the subject, just as I have had on a number of issues.

In accepting the proposal which has been suggested from a number of sources, perhaps I should explain that by changing the name to a "minimum funding requirement", there is not the slightest deviation from what the requirement will do. It will mean that members can be confident that the value of their accrued rights is secure, especially in the event of the scheme or the employer company winding up.

The noble Lord, Lord Eatwell, took pains to explain to the Committee that true solvency could only mean the ability to buy out all benefits with guaranteed insurance annuities. The PLRC recognised that such a measure of solvency would not be practical and would be unduly costly. The Government fully accepted this. We also listened carefully—as I have said many times, we are always open to a good argument —to concerns about the original valuation method and the White Paper proposals. Changes were agreed to the valuation method to address those concerns. They will reduce the risk of any unnecessary costs on employers, yet maintain an acceptable level of protection for members.

It is only right that the members' investment, and their accrued pension rights, should be properly protected. Our proposals are designed to provide that protection. As suggested by the PLRC Report, we had called the vehicle for providing that protection a "minimum solvency requirement". The change of name in no way reduces what the requirement is intended to achieve. Therefore, I commend the amendments in this group, and the change of name, to the House.

Lord Eatwell

My Lords, I support the amendment which stands in the name of the noble Earl, Lord Buckinghamshire, since it provides at least a more honest name for the proposal which has never been a minimum "solvency" requirement, as the Government well know.

On Question, amendment agreed to.

[Amendments No. 104 to 109 not moved.]

Lord Eatwell moved Amendment No. 110:

Page 28, line 32, at end insert: ("() The Secretary of State shall by order establish a central discontinuance fund.").

The noble Lord said: My Lords, we return to some of the issues that we discussed in Committee - in this case, to the proposal for a central discontinuance fund. The amendment is offered in a friendly spirit - indeed, in a comradely spirit - to try to get the Government out of the hole into which they have dug themselves with regard to the minimum funding requirement.

The Government have already acknowledged that in most cases it would be severely detrimental to members' interests to wind up a fund simply because the employer has become insolvent. They have done that by arguing that large pension funds should be run on as closed funds. The whole point of a central discontinuance fund would be to provide the same facility for smaller funds which could not be maintained as closed funds and for larger funds which, for a variety of reasons, the trustees were unable or unwilling to maintain as closed funds.

One of the peculiar aspects to the Government's opposition to the creation of a central discontinuance fund is that the creation of such a fund was recommended to the Goode Committee by, once again, the Government Actuary.

I have here a document dated 21st January 1993 prepared by the Government Actuary entitled A Central Fund for Private Sector Occupational Pension Schemes: Supplementary Memorandum by the Government Actuary. In that document the Government Actuary argues what he calls "the need for a central fund". His case is: Because many schemes would find it difficult to secure their liabilities on discontinuance, a mechanism is needed for handing over the liabilities to another vehicle, similar to an on-going pension fund … The answer would appear to be to have a Central Fund (or Discontinuance Fund) … The Fund would simply act as an administrative arrangement and investment vehicle for running off the liabilities of discontinued pension funds".

The Government Actuary then examines in detail the operating basis of such a fund, dealing with a wide range of legal and practical problems. Since the Minister must have had access to the Government Actuary's memorandum, I am sure that he will not raise a whole series of bogus objections to the central discontinuance fund which the Government Actuary disposes of so effectively in his memorandum. I am sure that the Minister also knows that the Government Actuary cites the successful operation of similar funds in Finland and Japan, while emphasising that a British central discontinuance fund should be attuned to British circumstances.

The Government Actuary notes, for example: In practice immediate funding of a deficit (or a reduction of liabilities) might not be necessary, any more than it is for an ordinary occupational pension scheme"—

the essential scheme of an on-going fund. But if deficits should arise because of inappropriate transfer terms or inappropriate investment strategies, then legislation could provide for either a levy on other pension funds, or for the Government to act as reinsurer of last resort. That is what the Government Actuary recommends. I am advised by actuaries that if such a levy were chosen, it would be small. Indeed, the word used to describe it to me was "trivial".

The Government Actuary then goes on to examine in his document a wide range of additional advantages which would stem from the existence of a central discontinuance fund. In particular it could act as: a central clearing house for financial adjustments between schemes, so as to permit the whole of an individual's pension to be paid by a single scheme.

That is apparently what the Finnish version of a central discontinuance fund does. If that were done, it would overcome the major weakness of occupational pension schemes: that they discourage mobility between jobs and thus reduce the flexibility of the labour market.

I do not wish to press the Government Actuary's proposals for extension of the central discontinuance fund concept this evening, but I wish to impress upon the House that the establishment of a central discontinuance fund was the Government Actuary's preferred option for dealing with the problems created by employer insolvency. Why did the Government ignore his advice? Why are the Government prepared to leave employees at the mercy of a MSR which is not a solvency requirement, in circumstances in which, because there is no central discontinuance fund, the funds will have to be wound up to the considerable detriment of members and pensioners?

The Government have recognised that winding up is detrimental in their proposal that large funds should not be wound up. Why should pensioners in small funds have to suffer that danger?

This proposal is separate from my earlier proposal for a minimum contributions requirement, but reinforces the case for a minimum contributions requirement defined as efficient in on-going terms. It is a device to underwrite a pension funding system which is efficient for employers and employees, and which provides pensioners with the maximum level of protection which is possible within the structure of occupational pension funds. I beg to move.

10.45 p.m.

Lord Ezra

My Lords, I support the concept of the central discontinuance fund. In the light of the Government's recent amendment—that is, to change the name and to some degree the concept of the minimum solvency fund—this amendment would properly complement that. The noble Lord, Lord Eatwell, made the clear point that whereas on discontinuance larger schemes can continue to operate as closed schemes, many smaller schemes could be in difficulty on the terms now laid down for minimum funding. Therefore, the concept of a central discontinuance fund would be most appropriate.

There appears to be a wide practice abroad, from which we can derive much benefit, not only in the United States but also in Finland and elsewhere. I believe that, in the light of the Government's modified approach to minimum solvency, the concept merits serious consideration.

> The Earl of Buckinghamshire

My Lords, at the risk of extending our debate deep into the night, I declare an interest and say to my noble friend the Minister that if the Government Actuary is to be thrown at him my new employer, Watson, will throw something at me. It proposed the setting up of a central discontinuance fund. Fortunately, an article stated, "Bail out fund the bankrupt idea". I believe that the issue is extremely complex, whether it is minimum funding, minimum contribution or minimum solvency. I suggest that your Lordships enter upon it with trepidation because overnight one is supposed to become expert in a most technical area.

As regards the concept of the central discontinuance fund, it is said that successful funds have been set up elsewhere. I am not sure what the size of the pensions market is in Finland; I suspect that it is not very large. Nor am I sure how large the Japanese market is. The experience that may be of greater relevance is that of the United States. However, even there there have been unhappy experiences with the fund.

It would require pre-funding and the good schemes to bail out in part the poor schemes. It is true to say that the American central fund is now experience rated; nonetheless, the costs of the fund have increased. I believe that the present winding-up clauses within pension schemes were devised at a time when we did not have personal pensions and Section 23 buy-out contracts and when there were no alternatives to the deferred annuities, which winding-up schemes are forced to buy in many cases.

It is the winding-up area that is causing so many difficulties. In the situation described in the previous amendment, moved by the noble Lord, Lord Eatwell, the minimum contribution required on discontinuance would be greater than on an ongoing basis. I hope, therefore, that my noble friend will treat this amendment with great care. I look forward to hearing his response.

> Lord Mackay of Ardbrecknish

My Lords, in Committee a few references were made to the possibility of establishing a central discontinuance fund. We are now coming to a full-fledged debate on the fund, with the Government Actuary prayed in aid as someone whose views I ought to take, standing to attention and saluting.

One aspect of government, which is always difficult, is that governments have to take all the views that are submitted and then try to work out the sensible course of action in the light of them. In that regard, that includes the Government Actuary's report. I do not deny the points that have been made praying him in aid.

It has been claimed that a central fund would be cheaper than requiring each scheme on an individual basis to comply with the minimum funding requirement. I do not accept that argument. Our analysis indicated that it is only where a scheme is weakly funded on an ongoing basis that the minimum funding requirement will require more funds to be paid into the scheme than might otherwise be thought necessary.

It is incorrect to view a central discontinuance fund as a cheap alternative to the minimum funding requirement. We envisage that the terms on which such a fund would accept the transfer of liabilities could in effect impose a de facto requirement on all schemes. My noble friend Lord Buckinghamshire, who has professional experience in this area, suggested that we should all tread with some trepidation. I confirm to him that I certainly tread with some trepidation into these matters because they are not only complicated but they are extremely important for the people who have put their money into pension schemes.

In order to avoid any great risk of insolvency, I suggest that a central discontinuance fund would set transfer terms on a fairly conservative basis. Perhaps it is envisaged that a central discontinuance fund would just take what was thrown at it and would just be the recipient of any scheme which collapsed and would not try to control the world outside in order to ensure that what falls into its lap is not absolutely horrendous.

I noticed with some interest that the noble Lord, Lord Eatwell, mentioned Finland and Japan but did not mention the United States, although the noble Lord, Lord Ezra, did. On the last occasion on which we debated this matter, my noble friend Lord Buckinghamshire gave us an indication of why the United States was not a very good example to pray in aid. At the risk of detaining the House, I should say a few words about the experience of the Pension Benefit Guaranty Corporation in the United States. We understand that between 1974 and 1993 annual levy payments increased from 1 dollar per member to 72 dollars. Despite that level of increase, the agency still remains concerned that its reserves may not be adequate.

That position of near-bankruptcy is thought to have been caused by the fact that the PBGC was supported by a funding requirement that was based on an ongoing valuation basis. It failed to ensure that pension plans were properly funded, with the result that certain plans were able to pass on large unfunded liabilities to the PBGC. The US has now been forced to change its funding rules to something more akin to our proposed minimum funding requirement. The American experience of running a central fund clearly underlines my earlier point that a viable central discontinuance fund would need to be supported by a discontinuance-based test, and therefore cannot be viewed as an alternative to the minimum funding requirement.

There does however, remain the question of whether the central discontinuance fund has merit, not as an alternative to the minimum funding requirement, but as a bolt-on to it. It may be true that it could provide a cheaper alternative to buying insurance company deferred annuities. That is an attractive idea, but would it really be workable in practice? Pension schemes provide different pensions and benefits. Such a fund would be highly complex and expensive to administer unless some attempt were made to standardise benefits, which could in itself disadvantage some members and unfairly reward others.

Similarly, there is the issue of who would underwrite such a fund in the event of any deficit. No matter how conservative the terms on which the central discontinuance fund would accept liabilities, there would be some risk of a shortfall arising. I suggest that it would be inappropriate to use taxpayers' money to underwrite a fund that would benefit only those people who are in defined benefit schemes. Likewise, I am sure that solvent employers would object to paying a levy to secure benefits for members of insolvent schemes.

We have given serious consideration to the idea of a central discontinuance fund and of course we have taken account of the memorandum which the Government Actuary submitted to the PLRC. I know that the PLRC considered it carefully before it concluded that it could not make that recommendation. As my noble friend Lord Buckinghamshire indicated, it is clear that not everyone agrees with the Government Actuary. We believe that a central fund would do nothing to ensure that schemes are adequately funded, which is the prerequisite of scheme security.

We have had a good debate on the idea of a central discontinuance fund, even though it is late at night. I hope that in the light of what I have said, the noble Lord, Lord Eatwell, will withdraw the amendment; but if he does not, I hope that my noble friends will join with me in resisting that idea.

Lord Eatwell

My Lords, I am afraid that the noble Lord has not seriously addressed the question of the proposed central discontinuance fund. Instead, he presented a caricature. The noble Lord suggested that it has been proposed as an alternative to either a minimum funding requirement or a minimum contributions requirement; it is not. Moreover, the noble Lord suggested that it was designed to absorb insolvent schemes. It is not. The whole point is that the fund should take over schemes of insolvent employers, not necessarily schemes which are insolvent. Indeed, the schemes might be in perfectly good shape; it is simply the employer who has gone broke.

As I said, the Minister has presented a caricature of the schemes. The whole point of a central discontinuance fund is to do what the noble Lord is proposing for large funds. If the noble Lord is so sure that the notion of a central discontinuance fund is undesirable, why is he proposing that large funds be not wound up but maintained as closed funds? The noble Lord is absolutely contradicting himself in the very proposals that he is advancing.

I should like to make some comments on the PBGC in the United States. The key problem that was faced by the PBGC was that it had insolvent schemes dumped on it by employers who were still solvent. The proposals that I have put forward would simply involve a central discontinuance fund, absorbing schemes from insolvent employers. Therefore, it would not have the moral hazard problem of employers deliberately under-funding schemes and then dumping them while they are still in business. That problem would not have to be faced.

All that we are proposing is a very simple idea of the establishment of what is, effectively, a public trustee to absorb relatively small funds or those larger funds which the trustees, for one reason or another, cannot keep in operation in terms of a closed fund and maintain them on an ongoing basis to protect the members' benefits. It would always be in addition to some form of funding or contributions requirement; it could not stand on its own, although, as the Government Actuary points out in his memorandum its terms and conditions could provide a floor under which the practices of pension funds would not fall. In other words, it would provide standards which could be maintained.

The Minister should consider what he said in response this evening. He should withdraw from his speech the elements of caricature upon which he decided to rely in rejecting the proposal, look seriously at the memorandum advanced by the Government Actuary and consider the ways in which a central discontinuance fund could provide an important level of security in addition to those levels which we have already discussed this evening. In the meantime, although we may return to the proposal at a later stage, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 49 [Valuation and certification of assets and liabilities]:

[Amendment No. 111 not moved.]

Lord Lucas moved Amendment No. 112:

Page 28, line 41, leave out ("solvency") and insert ("funding").

The noble Lord said: My Lords, the above amendment was spoken to with Amendment No. 103. I beg to move.

On Question, amendment agreed to.

[Amendment No. 113 not moved.]

Lord Lucas moved Amendment No. 114:

Page 29, line 4, leave out ("solvency") and insert ("funding").

On Question, amendment agreed to.

11 p.m.

Lord Lucas moved Amendment No. 115:

Page 29, line 31, leave out (" 3") and insert ("(Prohibition orders)").

The noble Lord said: My Lords, this amendment was spoken to with Amendment No. 3. I beg to move.

On Question, amendment agreed to.

Clause 50 [Schedules of contributions]:

The Earl of Buckinghamshire moved Amendment No. 116:

Page 30, leave out lines 10 to 12.

The noble Earl said: My Lords, in moving Amendment No. 116 I wish to speak also to Amendment No. 118. I mentioned at Second Reading that I thought that my noble friend the Minister had made an omission in drafting this particular clause. I shall give the House some background on this matter. This subsection would leave trustees with the ultimate power to decide on their own the overall rate of the employer contribution to the scheme. I believe that the purpose of a schedule of contributions in this clause is to provide part of a framework to ensure prompt payment of contributions in order to meet the minimum solvency requirement, not to give trustees the ultimate power to decide the overall rate of employer contributions.

If this amendment is not accepted, tremendous power is granted to the trustees to control the overall pace of funding which currently lies with the employers. These amendments aim further to ensure that contributions must at least be equal to those certified by the actuary as necessary to meet the minimum solvency requirement, but with an agreement on any further contributions subject to the provisions in the individual trust document, which will lay down how the employer's contribution and the pace of funding is agreed. I beg to move.

Baroness Hollis of Heigham

My Lords, I am afraid this is another amendment about which we are uneasy. As I understand it in the light of the noble Earl's explanation, the Bill currently says that the contribution level is set by the trustees, if possible with the agreement of the employer, but nonetheless the responsibility rests with the trustees. Under the noble Earl's amendments, as I understand them, instead the responsibility for deciding contribution levels would be taken not by the trustees but by the actuary and would require them to be agreed by the employer. That would mean a very decisive shift of responsibility for contribution levels and the associated issues away from the trustees to the employer, yet the whole thrust of this Bill, which we support in its broad outlines, is to make such central decisions the responsibility of the trustees. We feel again that the balance goes too far away from the trustees in the noble Earl's amendment and we would therefore oppose it.

Lord Mackay of Ardbrecknish

My Lords, I have listened with care to what my noble friend has had to say and to what the noble Baroness, Lady Hollis, has had to say. I have some sympathy with the concerns expressed by my noble friend and we need to look at the wording of this clause. But I have anxieties that the amendment tabled by the noble Earl might not work. The amendments would remove the fallback altogether so we would have to rely always on the employer and trustees agreeing the appropriate level of contributions to be entered in the schedule. My worry—which I think the noble Baroness shares—is that agreement may not always be possible.

If the trustees and employers do not agree, Clause 50 puts an obligation on the trustees to prepare and revise the schedule of contributions. They must do this within a specified time limit. If they fail to do this, the trustees can be removed or they can be fined. But failure to reach agreement might not be the trustees' fault. It might be the employer who was reluctant to sign up. Therefore I still think that we need to have a fallback arrangement, but one that will work properly and fairly.

I propose that we should take this away and come back with an amendment, possibly in another place, which would retain the fallback but limit the power of trustees. The trustees would be able to set a contribution rate only at the minimum that the actuary could certify as necessary to ensure that the scheme was funded to the minimum level.

It is entirely appropriate that the trustees should be responsible at the end of the day for setting the contributions if agreement is impossible. This is consistent with the many other new provisions in this Bill which strengthen and clarify the position of trustees. I trust that your Lordships will accept this as a fair arrangement and I hope that with that commitment my noble friend will withdraw his amendment.

The Earl of Buckinghamshire

My Lords, I listened with great interest to what the noble Baroness, Lady Hollis, said about the amendment and also to the Minister's response. The problem with this clause of the Bill is that too much responsibility for the funding of schemes has been moved away from employers. I am very pleased with the Minister's response. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 117 to 121 not moved.]

Lord Lucas moved Amendment No. 122:

Page 30, line 22, leave out ("solvency") and insert ("funding").

The noble Lord said: My Lords, the amendment was spoken to with Amendment No. 103. I beg to move.

On Question, amendment agreed to.

[Amendments Nos. 123 and 124 not moved.]

Lord Lucas moved Amendment No. 125:

Page 30, line 33, leave out (" 3") and insert ("(Prohibition orders)").

The noble Lord said: My Lords, Amendment No. 125 was spoken to with Amendment No. 3. I beg to move.

On Question, amendment agreed to.

Clause 51 [Determination of contributions: supplementary]:

[Amendment No. 126 not moved.]

Lord Lucas moved Amendment No. 127:

Page 31, line 3, leave out ("solvency") and insert ("funding").

The noble Lord said: My Lords, the amendment was spoken to with Amendment No. 103. I beg to move.

On Question, amendment agreed to.

Lord Lucas moved Amendment No. 128:

Page 31, line 8, leave out (" 3") and insert ("(Prohibition orders)").

The noble Lord said: My Lords, Amendment No. 128 was spoken to with Amendment No. 3. I beg to move.

On Question, amendment agreed to.

Clause 52 [Serious underprovision]:

Lord Clark of Kempston moved Amendment No. 129:

Page 31, line 12, after ("(2)") insert ("or (2A), as the case may be,").

The noble Lord said: My Lords, in moving Amendment No. 129 I should like to speak also to Amendments Nos. 130, 131, 132, 133 and 135. The amendments were explained fully in Committee by the noble Lord, Lord Marsh. Consequently, at this late hour I do not intend to delay your Lordships. The amendments concern the minimum solvency requirement, now the minimum funding requirement.

The Bill is overshadowed by the tragedy of the Maxwell case. When a government is faced with a situation of that kind they may be guilty of over-reacting. If I may digress, I remind my noble friend that when the Financial Services Bill went through another place many of us said that the regulation of the City of London might prove onerous. That has been the case. The compliance costs of the Financial Services Act are crippling some financial advisers.

I agree entirely with the Government that there should be control of pension funds. The amendments deal with deficits in pension funds. I appreciate that since the publication of the White Paper the Government have moved some way to alleviate the provisions relating to the handling of a deficit within a fund. If the value of the fund is less than 90 per cent. of the liabilities the employer has one year to put another tranche of money into the fund. Five years is allowed to increase the value from 90 per cent. to 100 per cent. Those are welcome concessions.

One of the difficulties is that the Government have overlooked the fact that any company, whether large or small, has to operate at a profit and must have a positive cash flow. If it did not have a positive cash flow a company would be in trouble. I remind my noble friend that in many profitable small businesses the cash flow position is such that they may go out of business. I should have thought that where there is a deficit that deficit need not necessarily be made up by cash alone. In some cases a deficit can be made up by increased contributions. But an employer could easily have a subordinated loan. He could have a bank guarantee. We have to make certain in the Bill that the regulations should not mean that the normal investment policy of a company should be impaired. Consequently the nub of the amendments provides that there should be complete flexibility regarding making good the deficit. I do not suggest that the fund should be in any way weakened. However, if the Government believe that a deficit has to be made good—I agree with that—the question is how one makes good that deficit.

The deficit may become a surplus. Your Lordships will appreciate that the stock market goes up as well as down. If one has a bear market, the value of the fund goes down. The noble Lord, Lord Eatwell, has rightly pointed out that if there is a swap from equities to gilts, in many cases that decreases the paper value of the fund. I hope that my noble friend will not say that under the Income and Corporation Taxes Act 1988 one can get the money back. That is too slow a process. Business moves faster than that. We cannot wait for the Inland Revenue to make up its mind as to whether or not there is a repayment. Any employer should have the duty to make good a deficit, but he should have the right to take out the surplus, the extra money that he has put in.

Occupational pensions are an important part of our economy. The funding of occupational pensions is absolutely essential. I remind my noble friend that if one considers the shift in ages over the years, in 2030 we shall probably have 15 million retired persons. The Government should not do anything to discourage employers from setting up pension funds. If employers have a pension fund, they obviously have employees who belong to the pension fund. However, I am worried about the position for new employees if the conditions for running a pension fund are too onerous for the company.

The Government must be flexible. As my noble friend knows, I have discussed the matter with my right honourable friend the Secretary of State for Social Security. I hope that we shall hear some sympathetic noises regarding payments into and repayments out of a fund. The key player in all occupational funds is the actuary. The actuary will say whether there is a deficit or a surplus. Where there is a deficit I hope that the employer will have the flexibility to make up that deficit in any way he thinks fit which satisfies the actuary and trustees; and, conversely, I hope that he can get his money back with the consent of, and on the valuation of, the actuary.

I do not believe that payments into and out of a fund should be left to regulation. I should like to see some provision in the Bill. I hope that my noble friend will give some consideration to these points. I hope that he will indicate that the Government will think again. I know that the period has been too brief for the Government to have put forward any amendments. However, there will be a Committee stage in another place and I hope that my noble friend will make certain that when the Bill is considered in another place the points that I seek to make will be implemented. I beg to move.

11.15 p.m.

Baroness O'Cathain

My Lords, I should like to say a few words in support of Amendments Nos. 129, 130, 131 and 133 in the name of my noble friend Lord Clark and his new clause in Amendment No. 135. Before doing so, I declare an interest. I am currently a non-executive director of three major plcs, including British Airways, and I have been a non-executive director on several other boards in the past. I therefore have both a likely interest and an understanding of some of the issues behind these amendments. Many companies, large and small alike, are increasingly concerned about the implications of what we now call the MFR.

As my noble friend Lord Clark said, the aim of this group of amendments is to extend the circumstances in which it would be possible for employers to secure an increase in scheme assets by means other than cash contributions. My noble friend the Minister is, of course, aware of the profound impact on any company's bottom line of a significant increase in cash outflow. The amendments, if they are agreed, would allow the prescribed alternatives to increased contributions—a bank guarantee, subordinated loan or other alternatives which provide exactly the same level of protection for scheme members and pensioners—currently applicable only when a scheme is less than 90 per cent. funded, to apply where the shortfall is less than 10 per cent.

Many employers with mature pension schemes, and a large number of pensioners compared with active members, will find the provisions of the MFR quite burdensome. These are generally companies that have fully funded schemes on the conventional actuarial basis of valuation—a basis which has successfully dealt with high inflation and stock market volatility. The amendments aim to provide flexibility to the employers, as my noble friend Lord Clark said, in managing their finances and seeking to hold a competitive position in world markets.

I do of course appreciate that the Government have to steer a difficult path, striking a balance between providing help for employers on the one hand and security for pension scheme members on the other. I also recognise that the Government have already modified their original proposals to accommodate employers' concerns. However, these amendments in no way undermine the security of pension funds. That needs to be stressed. Nor do they attack the protection of pensioners.

I turn briefly to the new clause in Amendment No. 135. It seems fair to me that employers should have the right to the repayment of moneys paid into a pension scheme to meet the MFR and shown at subsequent assessments as no longer being required for MFR purposes. As my noble friend said, that is particularly true in the case of mature schemes which have limited opportunity to recover MFR shortfall payments through lower contributions later on.

It cannot be right that, following a temporary drop in the stock market, an employer may have to pay quite possibly a large sum of money into his pension scheme to meet the MFR with no prospect of recovering that money over a reasonable timescale when the stock market recovers. This new clause seeks to correct that unfairness.

Without it, the Bill would undoubtedly accelerate moves by employers to close defined benefit schemes to new members and move towards defined contribution and money purchase schemes. Therefore, the employee of the future will pay a very high price.

Lord Eatwell

My Lords, if I were being charitable I would begin my remarks by saying, "I told you so". The difficulties which have been accurately identified by the noble Lord, Lord Clark, and the noble Baroness, Lady O'Cathain, are difficulties that arise precisely from the structure of the minimum funding requirement and which would not arise in the case of a minimum contributions requirement or the evaluation of funds on an ongoing basis. It seems to me that the difficulties that they have identified are real difficulties to which the Government should attend in a serious manner.

I am not entirely happy, however, with Amendment No. 132, which states that there could be a, bank guarantee or by an unsecured loan or by any other method of guaranteeing the maintenance of the funding of a scheme. The phrases "or by any other", and "by an unsecured loan", seem to me to be rather too broad. Perhaps I have misunderstood that and the noble Lord, Lord Clark, can enlighten me when he replies to the debate.

But it seems to me that in particular cases, especially in the case of closed funds which are not associated with the insolvency of a company but with the change of status of a company, or which have been closed for other reasons while the company is ongoing, the minimum funding requirement will create a bizarre situation in which companies have to put money in to sustain the requirement, then have to take it out again, then put it in again and then take it out again. If we had a proper assessment of funds on an ongoing basis, the problem would not arise. It is a difficulty which the Government have created for themselves; but more, especially it is a difficulty which they have created for British industry.

Lord Mackay of Ardbrecknish

My Lords, we debated identical amendments to those that we are looking at this evening when the noble Lord, Lord Marsh, put forward his amendments in Committee—the noble Lord apologised to me for being unable to be present this evening —and there was some misunderstanding over what particular amendments we were discussing. Subsequently, I wrote to the noble Lord, Lord Marsh, to explain why there was no need to introduce amendments intended to allow an employer the choice of making good a deficit by paying a lump sum into the scheme. Perhaps I can share that point with the House, in case anyone reading over the debate that we had in Committee becomes confused. A cash payment will count as a payment due under the schedule of contributions. So, if an employer paid a lump sum, there would be no requirement to pay contributions on top. I hope that that explanation will clear up any difficulties over that particular question.

My noble friend, Lord Clark, aided by my noble friend Lady O'Cathain, set out most cogently their concerns about the minimum funding requirement and what it might mean if employers have to put money into pension schemes which turn out not to be needed to provide benefits. I hope that I can reassure them—and even help the noble Lord, Lord Eatwell —by explaining that those considerations have been very much in the Government's mind throughout the process of preparing this Bill.

I shall turn shortly to the question of alternatives to cash payment and payments to the employer out of the scheme. But perhaps I may first say that when we published our initial proposals in the White Paper, they were tested very carefully through a consultation exercise. In fact, I have already mentioned the results, which show that 86 per cent. of schemes would at that time have fully satisfied the requirements, and the vast majority of schemes had a comfortable margin between their ongoing funding level and the proposed minimum requirement.

Despite those encouraging results, there continued to be widespread concern, as I said earlier this evening. The fear was that the combination of calculating market values on a particular day, with the proposed time limits for restoring funding levels, would have a destabilising effect. In particular, the three-month limit for getting back to the 90 per cent. minimum level aroused considerable concern.

We listened carefully and we are determined that our proposals should provide scheme members with the security that they have a right to expect. But we also recognise that any requirement should not impose undue burdens on employers or schemes.

As a result, my right honourable friend Mr Peter Lilley announced last December that the calculation would take account of market values over a number of months—earlier in the Committee stage, I suggested that we were thinking about six months—rather than focusing on one particular day. That smoothing effect was designed to avoid the risk of schemes being categorised as being below the minimum level simply because the valuation took place on, for example, Black Friday. Also, the time limits for restoring the scheme to 90 per cent. and 100 per cent. were extended to one year and five years. That will apply to all schemes and will, we believe, have a significant effect. It will mean less volatility in contribution rates. Moreover, if there were a fall in the market and if market values were to rise again—despite the six months point that I made—within a year or less, an employer's contributions could then be safely scaled back. We believe that those changes will add stability for employers and schemes without endangering the security of scheme members.

Those important changes will together reduce significantly the potential volatility in the minimum funding requirement. They will minimise the risk of employers having to respond suddenly to short-term movements in the markets. The calculations will be smoothed and the time limits we now propose will allow funding levels to recover in step with normal stock market recovery.

Our analysis indicates that the main risk of serious underfunding is now likely to be caused by something going wrong with the scheme itself rather than because of external changes or fluctuations. However, we accept that in exceptional cases schemes may find themselves falling below 90 per cent. We are content that, in those cases, alternatives to cash such as bank guarantees or ring-fenced securities should be available as an option if the trustees are willing to accept it.

I believe that our proposals are sound and that it is far more appropriate that these alternatives are defined fully in regulations. It is surely better to do that than to introduce terms into the Bill which do not have clear-cut meanings or application.

The most important feature of the alternatives we propose to immediate cash injections is that they will provide security until such time as the scheme is funded to 90 per cent. of the minimum requirement. They therefore cover a temporary situation during the early years of a five-year plan to restore 100 per cent. funding. They are certainly not suitable and were never intended to be used as a permanent alternative to a cash injection. To move to a situation where any deficit below 100 per cent. could be covered by a bank guarantee or unencumbered loan would effectively remove any requirement for employers to make cash contributions to their pension schemes. They would be able to fund them entirely by loans or ring-fenced securities. That does not seem sensible.

The importance of trust funds as a basis for pension schemes is that the trust should be separate and distinct from the employer. Long-term reliance on a bank guarantee or some form of loan would blur that crucial distinction. The same considerations apply on the question of repayments. It would be damaging to the whole concept of trust-based schemes to enable funds to pass freely from the scheme to the employer. As I am sure my noble friend agrees, one of the most important reasons for setting up a trust fund is that the assets of the trust are separate from the employer's property.

I recognise the strength of the anxieties raised in this debate. As my noble friend Lord Clark mentioned, I am aware that he discussed these matters with my right honourable friend the Secretary of State. But we believe that we have demonstrated our concern to avoid any unnecessary burden on employers, and I hope that I covered those points this evening. The Bill is rooted in the need to encourage funded pension provision by providing scheme members with the security and confidence they must have if they are to invest for their retirement. I believe that we have met those two objectives.

I hate to return once again to the word "balance", but I seem to be moving inevitably towards it, and I apologise. I am receiving dissenting voices from the other side of the House—one nodding and one dissenting. But balance is an important aspect of this whole business between employers' rights and the rights of employees.

I hope that my explanation will enable my noble friends to see that we have struck that balance. I hope that my noble friend Lord Clark will take note of what I said and no doubt read Hansard in the morning. As he said, there are other opportunities between now and the end of the passage of the Bill in the other place for those who continue to have anxieties on this matter to take them up. Of course, as we do on all the matters discussed on the Bill, we shall continue to listen, discuss with, and consider the concerns of the industry on this and every other important part of the Bill. While, at the end of the day, the Government must make decisions, we want to ensure that we make the correct decisions and that they are decisions with which the majority of people involved in this industry are comfortable so that pension schemes can have a reliable and secure future.

I invite my noble friend to read what I have said. I hope that he feels able to withdraw the amendment even if, knowing him of old, he intends to return to it or find somebody else to return to it in another place.

Lord Clark of Kempston

My Lords, I thank my noble friend for his reply. It would have been much nicer if a message could be sent from this House to the other place saying that the anxieties I have tried to express would be considered carefully in another place and by the Government. That would encourage my colleagues in another place to press the matter harder than they might otherwise do. My noble friend is absolutely right. I shall see that the argument continues. That may be on Third Reading; if not then I know a lot of people in another place. I might be able to persuade one or two of them to press the Government there.

I should like to thank my noble friend Lady O'Cathain for her support. The noble Lord, Lord Eatwell, referred to bank guarantees and subordinated loans. One can also, as an employer, deposit securities with the pension fund, so there are many ways in which employers can do it. My concern is with the cash flow problem of industry. I accept the concessions—if they are concessions—that have been made. I refer to the valuation over six months rather than on a one day basis. I also accept the fact that the one-year period and the five-year period are a concession. Nevertheless, it does not in my view tackle the liquidity position of a company. However, in view of the lateness of the hour and of the fact that my noble friend has invited me to get my colleagues in another place to take up the matter, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 130 to 133 not moved.]

11.30 p.m

Lord Lucas moved Amendment No. 134:

Page 32, line 2, leave out (" 3") and insert ("(Prohibition orders)").

The noble Lord said: My Lords, I spoke to this amendment with Amendment No. 3. I beg to move.

On Question, amendment agreed to.

[Amendment No. 135 not moved.]

Clause 53 [Sections 48 to 52: supplementary]:

[Amendment No. 136 not moved.]

Clause 55 [Equal treatment rule: supplementary]:

Lord Lucas moved Amendment No. 137:

Page 33, line 8, after ("other,)") insert: ("() for section 2(4) there were substituted— (4) No claim in respect of the operation of an equal treatment rule in respect of an occupational pension scheme shall be referred to an industrial tribunal otherwise than by virtue of subsection (3) above unless the woman concerned has been employed in a description or category of employment to which the scheme relates within the six months preceding the date of the reference.",").

The noble Lord said: My Lords, in moving this amendment I wish to speak at the same time to Amendments Nos. 140 and 141. Amendment No. 137 will replace Section 2(4) of the Equal Pay Act 1970 for the purposes of Clause 54 of the Bill. We are concerned that without this amendment there may be confusion about the operation of Section 2(4) of the Equal Pay Act in the context of pensions. We wish to clarify the position. The substitution of this amendment will have the same effect as Section 2(4) of the Equal Pay Act and will impose the same time limit. The effect of Amendments Nos. 140 and 141 is to bring the terminology used into line with that in the Equal Pay Act, on which much of the equal treatment provisions of the Bill are based. I beg to move.

Baroness Hollis of Heigham

My Lords, I am sorry that we are dealing with some of these issues at such a late hour. However, when we agreed two Report days we had not realised that there would be quite so many government amendments and other amendments which perhaps we might more usefully have dealt with at the Committee stage. We now come to issues which are properly Report stage issues; that is, further clarification, refinement and discussion of issues first raised in Committee.

With Amendment No. 137, our understanding is that it appears to impose a time limit on claims for lack of an equal treatment rule of six months from the end of the description or category of employment. I am thinking, for example, of a woman who had been a part-timer for, say, 10 years while her children grew up and then went back into full-time work for another 15 years up to retirement and discovered only then that she had been differently treated as a part-timer when reviewing her pension benefits on coming up to retirement. There must be a danger that this would bar the majority of affected people from claiming and that as a consequence the Government face being taken straight back to the European Court of Justice on adequacy of remedies. Can the Government reassure the House that that is not the case?

Lord Lucas

My Lords, I do not believe that anything in this amendment changes the position which we believed applied at Committee stage—that is to say, that the relevant section of the Equal Pay Act applied. It has merely been pointed out to us subsequently that there is a possibility of some confusion because the Equal Pay Act was not, at the time it was written, designed to deal with pensions. The purpose of this amendment is to re-write that particular section of the Equal Pay Act to deal with the problems of interpretation which have been suggested to us. I am told that the answer to the question of the noble Baroness about the six-months' time limit is yes.

On Question, amendment agreed to.

Baroness Hollis of Heigham moved Amendment No. 138:

Page 33, line 10, at end insert: ("() references to the period of two years before the date on which proceedings are instituted, for the purposes of subsection 2(5) of the Equal Pay Act 1970 shall be interpreted as references to payments of benefits during such period and not to service giving rise to benefits during such period.").

The noble Baroness said: My Lords, in moving this amendment, I shall speak to Amendment No. 139. This follows up some of the issues of the previous amendment. At Committee stage we raised a number of issues presented to women by the series of European Court judgments last September, plus Barber and Coloroll.

At Committee stage we were particularly concerned about the issue of direct as opposed to indirect discrimination. We were also concerned about the time limit for damages and how far back those damages may be claimed. The Minister subsequently wrote to me very helpfully. I am hoping that he will be able to put some of those assurances on the record tonight.

As regards indirect discrimination, the Minister explained in his letter that as pensions were deferred pay they were indeed covered by the Equal Pay Act 1970 where the law Lords ruled that that also refers to indirect discrimination and therefore it was not necessary to invoke the Sex Discrimination Act 1975. I believe that the Minister referred to the 1987 case of Rainer v. Greater Glasgow Health Board. It would be helpful to have that confirmed.

I propose the amendment which applies to the issue of time limits. The amendment seeks to ensure that the limit on retrospective claims for equal treatment will not apply in respect of the period of service which is taken into account in the calculation of members' benefits, but, as with equal pay, only to the back payment of benefits, otherwise we fear that the current ambiguities will remain.

Our understanding is that only two years of back pension payments can be claimed but that service back to April 1976 must be taken into account in the discrimination conditions of entry and back to May 1990 in the case of discriminatory benefits. We believe that is what the European Court of Justice had in mind in the cases of Fisscher, Vroege and Barber. This amendment would clarify and confirm that reading. We hope that the Minister will agree. I beg to move.

Lord Mackay of Arbrecknish

My Lords, I am grateful to the noble Baroness for setting out what is intended by Amendments Nos. 138 and 139. Amendment No. 138 is designed to allow people who have been excluded from a scheme to be awarded up to two years retrospective benefits of that scheme. However, the objective of Section 2(5) of the Equal Pay Act, when modified by powers under the Bill, will not be to provide for the award of any benefits. Our intention is to provide a period of equal access to the scheme which, together with any continuing membership of the scheme in the future, will provide an improved prospective entitlement to pension benefits on retirement.

The whole purpose of the equal treatment clauses is to ensure that men and women in employment have equality of access to pension schemes and to equal pensions from those schemes when they retire. In order to have the benefits one must clearly first be a member of the scheme. The benefits then flow from that membership of the scheme. We propose a two year limitation on such awards of retrospective membership. That is entirely consistent with the regulations which have applied since 1978 to other types of equal access case.

Turning to Amendment No. 139 the European Court of Justice, in the Barber and subsequent clarification cases, established the principle that equal treatment is to be provided for service from 17th May 1990. Thus all occupational pension schemes must now provide equal treatment from that date. This is what the provisions of Clauses 54 and 55 require.

The court also ruled in the Dutch cases of Vroege and Fisscher that the cut off date of 17th May 1990 did not apply to the right to join a scheme and that, in appropriate cases, access could be granted as far back as 1976. However, it went on to make clear that national time limits may be applied to such cases.

As I said in Committee, the Bill provides for the time limits which apply under the Equal Pay Act to be applied in the event of disputes and enforcement concerning the equal treatment rule. They will place a limitation on retrospective membership of schemes of two years before the date of claim. The application of the time limits is entirely logical given that the European Court has ruled, as the noble Baroness rightly said, that occupational pensions are pay, and is consistent with the approach which has been taken since 1978 under the existing, more limited equal access regulations made when the noble Baroness, Lady Castle, was Secretary of State for Social Services.

Those regulations—known as the Occupational Pension Schemes (Equal Access to Membership) Regulations 1976—enable those who have been unlawfully excluded from membership of their employer's pension scheme to claim access to membership on an on-going basis and for two years prior to the date of their claim. Even at this late hour and in the absence of the noble Baroness, Lady Castle, I am delighted to be able to agree with something that she did. We usually joust about other matters on which we disagree.

I was asked about indirect discrimination and whether that was covered by the Equal Pay Act. I confirm that, as I said in my letter to the noble Baroness, the case of Rainer v. Greater Glasgow Health Board confirmed that indirect discrimination is covered by the Equal Pay Act 1970. With those explanations of these difficult matters in which different time scales and different issues come together, I hope that the noble Baroness will withdraw her amendment.

Baroness Hollis of Heigham

My Lords, I thank the Minister for that reply which we shall obviously need to study. I am sure that we shall be happy with what he said. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 139 not moved.]

Clause 56 [Equal treatment rule: exceptions]:

Lord Lucas moved Amendments Nos. 140 and 141:

Page 33, line 19, leave out ("women and men") and insert ("a woman and a man").

Page 33, line 22, leave out ("men and women") and insert ("a man and a woman").

The noble Lord said: My Lords, I spoke to these amendments with Amendment No. 137. I beg to move.

On Question, amendments agreed to.

The Earl of Buckinghamshire moved Amendment No.142:

Page 33, line 28, at end insert: ("() A variation is permitted by this subsection if it results from compliance with the requirements of sections 13 to 17 of the Pension Schemes Act 1993 (requirements for certification of occupational pension schemes providing guaranteed minimum pensions), sections 87 to 92 of that Act (protection of increases in guaranteed minimum pensions ("anti-franking")) or sections 108 and 110 of that Act (guaranteed minimum pensions) in circumstances where, if those requirements had not applied, the variation would not have occurred.").

The noble Earl said: My Lords, much to my surprise I find myself moving an amendment on guaranteed minimum pensions—one of the matters with which I promised myself that I would have absolutely nothing to do because this is an area of great complexity.

However, to move on, my amendment deals with a point that has been causing a considerable amount of uncertainty and practical difficulty in the administration of pension schemes. There is a need to make it clear that guaranteed minimum pensions for the members of contracted-out schemes do not have to be equalised for periods of pensionable service after 17th May 1990. Such equalisation is required for most scheme benefits following the European Court judgment in the case of Barber v. GRE, and some commentators have suggested that that applies also to guaranteed minimum pensions.

My amendment makes it clear that that process of equalisation is not required. The amendment is consistent with the principle established by the European Court decision on bridging pensions in the case of Roberts v. Birds Eye Walls, where it was ruled that bridging pensions were acceptable in occupational pension schemes, even though given to men and not women, because they resulted directly from a difference between the two sexes in the provisions of the state scheme; that is, in respect of the state retirement age.

Similarly, the different provisions between men and women in the calculation of guaranteed minimum pensions result from the differences in the state retirement age. If differing bridging pensions are acceptable under European law, as they are, then so are differing guaranteed minimum pensions.

I understand that the executive office of the Occupational Pensions Board has also written to practitioners with its view that unequal guaranteed minimum pensions are permissible under European law, though making it clear that schemes may wish to obtain their own legal advice on the point. Given that, why is the issue so unclear in the minds of trustees and scheme administrators? The reason appears to be because some legal advisers have not been willing to commit themselves to giving firm advice that the bridging pension principle is necessarily extensible to fields other than bridging pensions.

There are many schemes where the implementation of the decision in Barber v. GRE is being held up pending clarification of this issue. There are many schemes which are still refusing to accept transfers from other schemes until this question is resolved beyond doubt. Action by your Lordships' House, and by my noble friend the Minister, to clarify that issue would be welcome. I beg to move.

11.45 p.m.

Lord Mackay of Ardbrecknish

My Lords, the effect of the amendment would be to permit salary-related occupational pension schemes, which are contracted-out of SERPS, to pay pensions which are unequal between men and women. It would permit them to do so where the difference is the result of compliance with the legislation relating to the payment of guaranteed minimum pensions. It would permit them to do so only where, but for compliance with that legislation, the pension would otherwise be equal between men and women.

We are very well aware of the difficulties which face contracted-out salary-related schemes which are doing their best to comply with the requirements of equal treatment under European law, and at the same time comply with the contracting-out rules which are based on the current difference in the state pension age between men and women. We know that compliance with those rules makes it difficult for schemes to achieve equality. That is one of the reasons why we are taking the step of so-called breaking the links in 1997.

However, we cannot solve that problem by, in effect, saying in the Bill that, where inequality is the result of compliance with those rules, such inequality may be permitted. That would run counter to European law, and the Government could not possibly countenance such a step. The European Court of Justice has made absolutely clear, in rulings over recent years, that equality is required for periods of pensionable service from 17th May 1990—the date of its ruling in the Barber case. It has ruled that there may be certain exceptions to equal treatment where differences result from the use of sex-related actuarial factors, or where bridging pensions are payable, and we are providing for those exceptions in Clause 56. But it has not ruled that differences may be permitted where they result from GMPs.

GMPs do, in certain circumstances, create inequalities. But European law is clear that pensions must be equal for service from 17th May 1990. We do not believe that an exception along the lines envisaged by my noble friend would comply with European law.

As I said, one of the main reasons why the Government have decided to break the links with SERPS for future service, and to move to a contracting-out test of overall scheme quality, has been in recognition of the difficulties which the present unequal GMP arrangements create for schemes in equalising their overall benefits. We propose that the new arrangements should come into force, as I said, in 1997. We realise that that still leaves a problem for schemes with regard to GMPs accrued in the period between the Barber ruling in 1990 and the new arrangements in 1997. Of course there is no problem with regard to GMPs accrued between 1978 and 1990, since the law is clear that pensions may remain unequal in respect of pre-May 1990 service.

There can be no doubt that equality must be provided in the overall rate of pensions accrued since 1990, but we have concluded that contracted-out salary-related schemes should have the freedom and flexibility to make their own arrangements as to how that should be achieved, rather than having arrangements imposed on them by government. Unfortunately we do not believe that my noble friend's amendment would comply with European law. With that explanation of what I freely accept is a difficult and, I can understand for some people, unsatisfactory position, I trust that he will be able to withdraw the amendment.

The Earl of Buckinghamshire

My Lords, having listened to my noble friend's reply, I am even more convinced that I should have had nothing to do with moving an amendment on guaranteed minimum pensions. It is an important issue that needed to be raised. The position is still unsatisfactory. I shall read with great care my noble friend's words in Hansard, and feel free to return at a later stage. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 57 [Equal treatment rule: consequential alteration of schemes]:

The Earl of Buckinghamshire moved Amendment No. 143:

Page 34, line 1, at beginning insert ("Subject to subsection (1A)").

The noble Earl said: My Lords, this amendment relates to equalisation. In Committee I moved amendments which dealt with the matter. The amendments relate to the equalisation of pension rights and ensure that the employer's consent is sought before trustees or managers alter scheme rules to implement equalisation. Where the employer refuses consent, the trustees or managers of the scheme, or the employer, may apply to OPRA for an order to modify the scheme to secure conformity with the equalisation rule.

The amendment is being moved again because it is important to understand that the employer must pick up the balance of costs in pension schemes' defined benefit plans. Therefore, wherever possible, consent to the way in which the trustees equalise what is in effect a benefit improvement should also rest with the employer.

There are several ways of equalising pension ages. Some are more costly than others. It is only right that the employer should be involved in the decision. In Committee the Minister said that the Government believed that the trustees would consult the employer in those instances but that they appreciated the possible areas of conflict. He also said that they understood the anxieties that I had raised and would consider the amendment further. I beg to move.

Lord Mackay of Ardbrecknish

My Lords, the European Court of Justice has ruled that employers and trustees of a scheme are bound by Article 119 of the Treaty of Rome. They must ensure that pension schemes treat men and women equally within the limits of their respective powers. Clause 57 will give trustees the power to make alterations to a scheme to comply with the equal treatment rule where they do not otherwise have these powers, a duty which will be incumbent upon employers by virtue of Section 1 of the Equal Pay Act 1970 as modified by Clause 55 of the Bill.

As I said in Committee, I can certainly understand that employers might be wary of giving trustees the power to make changes to schemes, seemingly without any prior reference to them, and I have given careful consideration to the arguments then put forward by my noble friend. However, I have concluded that the situation which I think he envisages, in which trustees proceed to make changes to the scheme without the employer's consent, would be very unlikely to occur in practice.

Employers, like trustees, are already directly bound by Article 119 to provide equal treatment in schemes. Clause 54 of the Bill will provide for schemes without an equal treatment rule to be treated as including one and for the more favourable treatment to apply. The effect of Clause 54 therefore is that if a scheme's rules have not been amended they are deemed to have been amended at the more favourable level. Clause 57 would permit further changes for the future; for example, to equalise at a higher age, or simply to amend the rules so that they are in line with the changes deemed to have been made by Clause 54. Scheme rules themselves normally require trustees to seek the employer's consent to changes to schemes. Under Clause 57 it is not intended that trustees should go any further than is necessary to comply with the equal treatment requirement. Nor should it interfere with any of the existing arrangements for making changes to scheme rules. Given all the legal requirements on employers to provide for equal treatment in schemes, we envisage that Clause 57 would probably come into play only rarely.

I can appreciate that employers would feel more at ease if there were a requirement in the Bill that any changes to scheme rules should be expressly consented to by them. However, I do not believe that they need worry that the powers in Clause 57 will be abused for the reasons I have explained. In view of the explanations, I hope that my noble friend will be able to withdraw his amendment.

The Earl of Buckinghamshire

My Lords, I thank my noble friend for his full reply. I shall read Hansard tomorrow and digest what he said. On that basis, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 144 to 149 not moved.]

Clause 64 [Modification of public service pension schemes]:

Lord Lucas moved Amendment No. 150:

Page 38, line 23, leave out from ("may") to end of line 26 and insert ("adapt, amend or repeal any such enactment as is referred to in paragraph (a) or (b) of subsection (3) as that authority thinks appropriate").

The noble Lord said: My Lords, I spoke to this amendment when I moved Amendment No. 20. I beg to move.

On Question, amendment agreed to.

Clause 65 [Preferential liabilities on winding up]:

The Chairman of Committees

My Lords, I should point out that if Amendment No. 151 is agreed to, I cannot call Amendment No. 152.

Lord Mackay of Ardbrecknish moved Amendment No. 151:

Page 38, line 31, leave out from ("liabilities") to end of line 42 and insert ("in respect of pensions and other benefits (including increases in pensions).

(2) The assets of the scheme must be applied first towards satisfying the amounts of the liabilities mentioned in subsection (3) and, if the assets are insufficient to satisfy those amounts in full, then—

1. (a)the assets must be applied first towards satisfying the amounts of the liabilities mentioned in earlier paragraphs of subsection (3) before the amounts of the liabilities mentioned in later paragraphs, and
2. (b) where the amounts of the liabilities mentioned in one of those paragraphs cannot be satisfied in full, those amounts must be satisfied in the same proportions.").

The noble Lord said: My Lords, in moving this amendment, I shall speak also to Amendments Nos. 152 to 159 and Amendment No. 178.

Amendments Nos. 151 and 156 appear substantial but a careful reading will show very few changes of real substance. The main effect of the redrafting is to make the clause easier to understand. I am sure that that is something which we can all welcome. The main substantive change is in subsection (4) which has been rewritten to make clear that any assets left after satisfying the statutory priorities set out earlier in the clause should be distributed according to scheme rules.

Subsections (4A) and (4B) provide a mechanism for enforcing the important requirement set out in Clause 65. The reference to prohibition orders is consequential on Amendment No. 6 to which I spoke earlier.

Subsection (4C) merely imports from Clause 107 the power to amend the statutory priority arrangements set out in Clause 65. Amendment No. 178, as a consequence, deletes that power from Clause 107.

Perhaps I should defer my comments on my noble friend's amendments until he has had the opportunity to introduce them, otherwise I shall be looking into my crystal ball. I shall intervene again, if necessary, after my noble friend and other noble Lords have spoken. I beg to move.

The Earl of Buckinghamshire

My Lords, I should like to speak to Amendments Nos. 152, 153, 155 and 158 which stand in my name. I shall deal first with Amendments Nos. 152, 155 and 158 and deal lastly with Amendment No. 153. If the Minister receives favourably those amendments, the good news is that I shall not move Amendments Nos. 154, 157 and 159—and that is good news for everyone.

Amendments Nos. 152 and 155 address the problem of pension increases under the priority clauses. All my amendments deal with priority clauses on wind-up. Currently, existing pensioners usually have priority not only for their own pension at the level currently in payment but also for any future increases which are guaranteed under the scheme and for the contingent pension which may become payable to their spouse if they predecease the spouse, and that includes also any future guaranteed increases on that pension.

Those future increases are not intended to improve the position of the member and his spouse but merely to maintain as far as possible the purchasing power of the pensions at the current level. If a recently retired pensioner were to lose the benefit of his future increases, the purchasing power of his pension might easily halve by the time he is 85.

Under the Bill, future pension increases for existing pensioners come at the bottom of the queue, along with other benefits. That must be wrong. It is not clear where the Government intend the priority for a member's spouse to come. It would appear that a contingent spouse's pension is not a benefit, entitlement to payment of which has already arisen, since it might never become payable if the spouse predeceases the member. Therefore, presumably under the Bill, it ranks at the bottom of the queue along with other benefits. Both future pension increases and spouses' pensions for existing pensioners would, under the Bill as drafted, have a lower priority than the return of contributions to a member who has less than two years' pensionable service. I must ask your Lordships whether that is fair.

I turn now to Amendment No. 158 which really takes a look at the situation for those people who are close to retirement. One of the reasons for moving the amendment on the priority clause that I have just discussed is that a pensioner has absolutely no chance of making good any loss which may arise on a wind up in an insolvent position. Amendment No. 158 takes into account those people who are within five years of retirement. One may ask: why five years? Well, we have to pick a point at which to decide such matters. Anyone within five years of retirement has very little chance of making up any losses that may occur when a scheme is wound up. I believe that Amendment No. 158 would give some additional protection which the members would welcome in such difficult situations.

I move on now to Amendment No. 153 which deals with additional voluntary contributions and a slightly different issue. I want to make it clear in primary legislation that, on wind up, all additional voluntary contributions have the highest priority—which I believe is quite right—provided that they are segregated as a separate category under the rules and that separate investment or management is not required to achieve segregation.

12 midnight

Lord Mackay of Ardbrecknish

My Lords, with the leave of the House, perhaps I may respond by saying at the outset that I have some sympathy with Amendment No. 153. It seems right in principle that rights resulting from AVCs should be a first priority of a scheme wind up. However, there is a wide variety of AVC arrangements and we need to ensure that any amendment would cater equally for all variations. We are looking carefully at the matter and will bring forward a suitable amendment at a later stage.

As regards Amendment No. 157, I share my noble friend's view that any benefit payable following a member's death should also attract the same priority as a member's entitlement. I believe that it is clear from the wording of subsection (3), especially the reference to "pensions or other benefits", that contingent benefits such as widows' or widowers' benefits or dependant's benefits should receive the same priority as the member's basic pension entitlement. If necessary, that can be made clear in the valuation basis which will be prescribed in regulations for calculating and verifying those liabilities.

I turn now to Amendment No. 159. I accept the force of my noble friend's concern about schemes which have started to wind up before the commencement of the Act, but have not completed that process. My noble friend will be pleased to hear that it is our intention that the clause should be applicable only to those pension schemes which start to wind up after the Bill comes into force. We intend to frame secondary legislation to achieve that aim. Where a scheme commences to wind up prior to 1997, the priority order set out in the scheme rules will operate even if the eventual wind up is not concluded until 1997 or beyond.

However, I am unable to accept my noble friend's other amendments which would completely overturn the proposal reflected in the Bill to produce a more equitable allocation of assets on scheme wind up as between the different classes of members. The particular theme of my noble friend's amendments is that they would seek to protect the position of some of those pensioners whose pension was in payment before the Bill takes effect. The protection, which would extend to indexation, would be given at the expense of scheme members, including those who become pensioners after the Bill takes effect.

Indexation can be costly. To give it the same priority as pensions in payment when a scheme winds up in deficit would leave fewer assets available to secure the accrued rights of other scheme members. We believe that it is more equitable to protect the basic pension entitlement of all scheme members and share out whatever residual assets may then be available to provide pension increases. That does not represent any retrospective worsening of anyone's accrued rights. No one's pension expectations will be reduced by the clause.

I accept that if a scheme winds up underfunded then pensioners may have to share some of the consequences from which they would previously have been insulated. However, I have already explained why I believe that that is more equitable than the present situation. It is also consistent with the principle underlying the minimum funding requirement which is based on an assessment of the assets needed to meet all liabilities under the scheme, whether in payment or not and regardless of when any particular entitlement came into payment. I listened carefully to what my noble friend said. I shall read in Hansard what he said and also the points he has made to me in correspondence. This is a delicate set of issues. We believe we have got it right but, as I have indicated in other parts of the Bill, we are always ready to give due weight to well founded comments and to make any changes which we believe are justified.

On Question, amendment agreed to.

[Amendments Nos. 152 to 155 not moved.]

The Chairman of Committees

My Lords, I should point out that if Amendment No. 156 is agreed to, I cannot call Amendments Nos. 157 or 158. I now call Amendment No. 156.

Lord Lucas moved Amendment No. 156:

Page 39, leave out lines 3 to 17 and insert: ("(b) any liability for pensions, or other benefits, entitlement to payment of which has arisen, (c) any liability for—

1. (i) pensions or other benefits which have accrued, or
2. (ii) (in respect of members with less than two years pensionable service) the return of contributions,

(d) any liability for increases to pensions referred to in paragraphs (b) and (c);

and, for the purposes of subsection (2), the amounts of the liabilities mentioned in paragraphs (b) to (d) are to be taken to be the amounts calculated and verified in the prescribed manner.

(4) To the extent that any liabilities, as calculated in accordance with the rules of the scheme, have not been satisfied under subsection (2), any remaining assets of the scheme must then be applied towards satisfying those liabilities (as so calculated) in the order provided for in the rules of the scheme.

(4A) If the scheme confers power on any person other than the trustees or managers to apply the assets of the scheme in respect of pensions or other benefits (including increases in pensions), it cannot be exercised by that person but may be exercised instead by the trustees or managers.

(4B) If this section is not complied with—

1. (a) section (prohibition orders) applies to any trustee who has failed to take all such steps as are reasonable to secure compliance, and
710
2. (b) section 9 applies to any trustee or manager who has failed to take all such steps.

(4C) Regulations may modify subsection (3).").

On Question, amendment agreed to.

[Amendments Nos. 157 to 159 not moved.]

Baroness Dean of Thornton-le-Fylde moved Amendment No. 160:

After Clause 65, insert the following new clause:

Dependants' pension for unmarried partner (".—(1) Regulations shall provide that occupational pension schemes, whether constituted under statute or under trust, shall be required to introduce rules stating that, where no widow's or widower's pension is payable but the member has a partner for whom a valid nomination has been received, an equivalent pension shall be paid. (2) Regulations shall further provide that every scheme shall notify members of this in the first annual report after the amendment has been made, and shall circulate a notice to all members and a nomination form.").

The noble Baroness said: My Lords, the main issues here were discussed in Committee. At that time the Minister said that the amendment as it was then worded took away the discretion of trustees to reach decisions in situations where a scheme member died or was killed. I challenge that point but we have tried to accept some of the reasoning by making clear in the amendment now before the House that we are referring to situations where no widow's or widower's pension is paid. The amendment now covers that situation.

Another point the Minister made in Committee was that if one has nominations they soon become out of date, people forget about them, and they are not relevant at the time the matter is considered by trustees. I do not accept that either. It is a major issue for a member of a pension fund to register with trustees a nominee to whom his benefit should be paid if he passes on or is killed.

On the previous occasion we discussed this matter the Minister expressed considerable concern that what we were dealing with was a public policy area that he wished to discuss with the Treasury. Of course the Pensions Bill does not give exclusions to public sector pension schemes as opposed to private sector pension schemes. It is correct to say that whereas in the private sector a member of a scheme who passes on will find his benefits—either reduced, or at the same level—are paid to the widow or widower, or to the nominated beneficiary, that is not the case in the public sector. We do not seek to hide the fact that this amendment will in future make the anomaly I have discussed not allowable under pension schemes.

At the moment members of the police force pay a not inconsiderable amount of money in the form of contributions into a scheme. In the Civil Service it is assumed that there is a contribution level of some 9 per cent. into a pension fund. This is not a benefit that the Government give to public sector workers: I suggest it is deferred pay. Therefore it is right that the individual beneficiary of a scheme should have the right to nominate rather than see his benefit go by default or, as is the case in some public sector schemes, go to an individual's brother, sister, or indeed his mother or father, but not to his or her permanent partner to whom he would want the benefit to be paid.

Nor indeed is it original to suggest that as regards the public policy area—I recollect the Minister implied this in Committee—a partner is not defined. Indeed the Administration of Justice Act 1982 made amendments to the Fatal Accidents Act 1976 under which, I gather, most claims for death in work are brought. That Act states: In this Act 'dependant' means [any person who] was living with the deceased in the same household immediately before the date of the death; … had been living in the same household … was living during … that period as the husband or wife of the deceased".

I believe that the amendment provides a fairer treatment of pension benefits, to which people have either paid or been assessed as having paid in their overall employment package. I beg to move.

Lord Mackay of Ardbrecknish

My Lords, the effect of this amendment would be to remove from individual pension schemes the freedom to decide their own rules regarding the payment of survivors' pensions.

We agree with the conclusion of the PLRC that there is no need for a general change in the law regarding the payment of benefits on death, and I cannot support this amendment.

As noble Lords are aware, employers set up occupational pension schemes voluntarily, usually under trust law. Widows and widowers of members of contracted-out pension schemes have a statutory entitlement to an occupational pension based on a proportion of the deceased member's guaranteed minimum pension or protected rights. In both the private and public sector any pension above this level or to other dependants will depend on the provisions made by the rules of a particular pension scheme. Some schemes already provide for other dependants of the deceased member to receive a pension. It should remain up to individual schemes, both in the private and public sector, to determine whether and in what circumstances a survivor's pension should be paid.

While we do not accept the amendment we are keen to encourage greater transparency and remove obstacles to the payment of survivors' benefits in particular types of case. We believe as a first step that scheme members should be fully aware of conditions relating to the payment of survivors' pensions. We intend to introduce a new requirement in regulations made under Clause 34 and Section 113 of the Pension Schemes Act which will require trustees to include these details in scheme booklets.

We have also accepted that in some cases the wording of trust deeds, particularly older deeds, can be unnecessarily restrictive when it comes to nominations for lump sum death benefits. We agree with the PLRC that schemes should consider amending their deeds where trustees' discretion on the payment of death benefits are restricted. The provisions of Clause 60(2) (a) will enable trustees to modify a scheme by resolution in order to extend the class of persons who may receive death benefits. This avoids the need for the intervention of a third party such as the courts or the authority.

These changes go some way towards tackling the concerns which underlie this amendment, but they do so without restricting the freedom of schemes and sponsoring employers to decide their own rules in this area.

I do not know whether I have conceded enough to satisfy the noble Baroness, Lady Dean, but I hope that with that explanation she will agree that it would be wrong to press her amendment and force schemes to make the changes she wishes.

Baroness Dean of Thornton-le-Fylde

My Lords, I do not accept the Minister's point that trustees are in a better position to decide to whom the benefits of a deceased member of a fund will be paid. I should have thought that the individual member of a fund has every right to say whom they want to receive their benefit.

The Minister said that the rules of a particular scheme would determine who receives the benefit. I wonder to what extent that is a legitimate argument and to what extent it is concern about the possible impact on the public purse should the proposal I put forward be extended to public sector pension funds.

The Minister suggested that there will be greater explanation in regulations. While that will in no measure provide the coverage proposed in the amendment, it will be interesting to see how those regulations are worded and when the Government will make them. We must be up to 232 regulations under this Bill. I beg leave to withdraw the amendment.

Clause 66 [Discharge of liabilities by insurance, etc.]:

Lord Lucas moved Amendment No. 161:

Page 39, line 26, after ("scheme") insert ("in respect of pensions or other benefits (including increases in pensions)").

The noble Lord said: My Lords, in moving Amendment No. 161 I shall speak also to Amendments Nos. 162 and 163.

Amendment No. 161 will make it clear that the discharge of liability provided for by Clause 66 applies only to liabilities in respect of pensions and other benefits.

Amendment No. 162 will make it possible for trustees to complete the wind up of a scheme without necessarily securing the positive consent of every member for the way in which the scheme discharges its liabilities. Many trust bodies seeking to wind up a scheme find it very difficult indeed to track down and consult all members, particularly deferred members. We therefore believe that it is right to give trustees the option of buying annuities for scheme members without having to secure their consent. The trustees' discretion will be restricted. We intend to prescribe in regulations that they should notify all members of the way in which it is proposed that liabilities should be discharged and give them a few months to respond. If a member accepts or chooses an alternative to an annuity, or asks for a different annuity provider to be used, all well and good. But if, having been given sufficient notice, a member fails to respond or cannot be contacted, the effect of Amendment No. 162 will be to enable trustees to buy an appropriate annuity for the member, thus discharging their liability and facilitating the wind up of the scheme.

Amendment No. 163 removes any possible ambiguity about the amount which the trustees would need to use to discharge their liabilities when winding up a scheme. It makes clear that if they cannot meet the scheme liabilities in full, they must apply the assets of the scheme on the basis set out in Clause 65. I beg to move.

On Question, amendment agreed to.

12.15 am.

Lord Lucas moved Amendments Nos. 162 and 163:

Page 39, line 43, leave out ("chosen by the member and").

Page 39, line 46, at end insert: ("() If the assets of the scheme are insufficient to satisfy in full the liabilities, as calculated in accordance with the rules of the scheme, in respect of pensions and other benefits (including increases in pensions), the reference in subsection (2) to providing for the discharge of any liability in one or more of the ways mentioned in subsection (3) is to applying any amount available, in accordance with section 65, in one or more of those ways.").

On Question, amendments agreed to.

Clause 68 [Surplus on winding up]:

Lord Lucas moved Amendment No. 164:

Page 42, line 6, leave out (" 3") and insert ("(Prohibition orders)").

On Question, amendment agreed to.

Clause 69 [Assets remaining after winding up: power to distribute]:

[Amendment No. 165 not moved.]

Lord Lucas moved Amendment No. 166:

Page 43, line 2, leave out (" 3") and insert ("(Prohibition orders)").

On Question, amendment agreed to.

Clause 73 [Cases where compensation provisions apply]:

Lord Lucas moved Amendment No. 167:

Page 44, line 44, leave out from second ("the") to ("and") in line 46 and insert ("value of the assets of the scheme is less than 90 per cent. of the amount of the liabilities of the scheme").

The noble Lord said: My Lords, this amendment corrects a mathematical inconsistency in the Bill.

Baroness Hollis of Heigham

You made a mistake¡

Lord Lucas

My Lords, I accept that it is a mathematical mistake in the Bill. It ensures that the eligibility criteria for compensation in Clause 73 are in line with the provisions for the calculation of compensation in Clause 75. The need for the amendment has been drawn to our attention by the National Association of Pension Funds, the Association of British Insurers and the Association of Pension Lawyers, and I am grateful to all three organisations for their assistance, as indeed I am to the noble Baroness.

On Question, amendment agreed to.

Lord Lucas moved Amendment No. 168:

Page 45, lute 41, leave out (" 3") and insert ("(Prohibition orders)").

On Question, amendment agreed to.

Clause 75 [Amount of compensation]:

Lord Lucas moved Amendment No. 169:

Page 46, leave out lines 38 to 42 and insert: ("amount ("the deficit in the assets") by which, immediately before the application date—

1. (i) 90 per cent. of the amount of the liabilities of the scheme,

exceeds

1. (ii) the value of the assets of the scheme.

so much of that maximum amount as does not exceed the deficit in the assets").

The noble Lord said: My Lords, this amendment sets right another possible mathematical confusion. I beg to move.

On Question, amendment agreed to.

Clause 76 [Payments made in anticipation]:

Baroness Seear moved Amendment No. 170:

Page 47, line 14, leave out ("the payment") and insert ("so much of the payment as they consider appropriate").

The noble Baroness said: My Lords, in moving this amendment, I speak also to Amendment No. 171. The purpose of the two amendments is simply to give the freedom when assessing the repayments to be made to use discretion and not to demand the full amount which could be charged. I beg to move.

Baroness Hollis of Heigham

My Lords, give in¡

Lord Mackay of Ardbrecknish

My Lords, I wish I could be as brief as the noble Baroness. However, she raises a serious point even at this late hour of the night, and I shall resist the temptation to give in, as has been pressed upon me by those who seem to want to call it a day—or a morning.

The ability of the board to make payments in anticipation of compensation being payable is an essential feature of the compensation provision. It will ensure that, where a scheme is unable to pay pensions in full, scheme members, particularly pensioners, do not suffer undue financial hardship.

As noble Lords will appreciate, it may take some time to determine where a prescribed offence has occurred, but where the payment of the pensions is threatened the board needs to act quickly. The downside is that the board may later determine that compensation is not after all appropriate. Any payment made by the board is, of course, funded by other schemes paying the levy. We believe that it is right that where compensation is not appropriate, the board should be able to recover any payments made.

I can, however, appreciate the noble Baroness's concern, which she also raised in Committee. She does not want to see the compensation board act in a draconian manner. I can assure the noble Baroness that the Bill as drafted means that the compensation board will have discretion over the recoveries it makes, and this includes the discretion to make partial recoveries. Where a scheme has no assets, recoveries cannot be made, and we would not expect the compensation board to pursue the recovery in such cases. Further, it has never been the intention that trustees should be personally liable for payments due to the compensation board.

I gave a commitment in Committee that we would give further consideration to a number of issues surrounding recovery. The issues are wide and varied, covering important areas such as the potential impact on scheme members and the impact on other schemes paying the levy. If any changes are made, they need to strike a balance and ensure that no one has been unduly penalised. We also need to ensure that the board has sufficient flexibility to deal with the situations which may arise.

In these circumstances, we believe that it would be unwise to make hasty changes, particularly if it becomes clear that changes are not, after all, required. I can, however, assure the noble Baroness that we are giving serious and very careful consideration to these issues. If any changes are necessary, we will bring forward an amendment at a later stage in another place. Whatever the outcome, I will certainly write to the noble Baroness once we have completed the work in hand. I suppose that on that basis—which is quite close to giving in, or at least close enough for this time of night—the noble Baroness will withdraw her amendment.

Baroness Seear

My Lords, since the noble Lord has gone as far as he has done, surely it would not be unreasonable to get that degree of flexibility written onto the face of the Bill. We want to encourage trustees, not to discourage them. We want to give the impression that their treatment in cases of this kind will be reasonable and flexible. The Minister has very nearly agreed to it. With just one little push, perhaps he could go the whole way. I ask him to think again and come back at Third Reading with a more generous response to this amendment. Meanwhile, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 171 not moved.]

Lord Lucas

My Lords, I beg to move that further consideration on Report be now adjourned.

Moved accordingly, and, on Question, Motion agreed to.