Pensions Bill

HL Deb 04 November 2004 vol 666 cc432-62

11.37 a.m.

The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Hollis of Heigham)

My Lords, I beg to move that the Bill be now further considered on Report.

Moved, That the Bill be further considered on Report.—(Baroness Hollis of Heigham.)

On Question, Motion agreed to.

Clause 111 [Investment of funds]:

Baroness Hollis of Heigham moved Amendment No. 134:

Page 80, line 42, at end insert—

"(1A) When exercising the power conferred by subsection (1) in relation to the Pension Protection Fund, the Board must have regard to—

1. (a) the interests of persons who are or may become entitled to compensation under the pension compensation provisions (see section 160) or any corresponding provisions in force in Northern Ireland, and
2. (b) the effect of the exercise of the power on the rate of any levy which may be imposed under section 172 or 173 or any corresponding provision in force in Northern Ireland and the interests which persons have in the rate of any such levy.

(1B) When exercising the power conferred by subsection (1) in relation to the Fraud Compensation Fund, the Board must have regard to—

1. (a) the interests of members of occupational pension schemes in relation to which section 187(1), or any corresponding provision in force in Northern Ireland, applies, and
2. (b) the effect of the exercise of the power on the level of any levy which may be imposed under section 187 or any corresponding provision in force in Northern Ireland and the interests which persons have in the rate of any such levy."

The noble Baroness said: My Lords, I love the enthusiasm for pension matters.

Clause 111 provides for the board to invest for the prudent management of its financial affairs, and for it to appoint at least two fund managers with the appropriate knowledge and experience. We are introducing the amendment in response to the points raised in earlier debates in this House about investment by the PPF board.

Lord Higgins

My Lords, which amendment is the Minister moving?

Baroness Hollis of Heigham

My Lords, I am moving government Amendment No. 134. I apologise if I said differently.

Lord Higgins

My Lords, my problem was simply that I had some difficulty relating the noble Baroness's remarks to Amendment No. 134. They seemed to have little to do with it. Amendment No. 134 is about Northern Ireland, as I understand it.

Baroness Barker

My Lords, we too were expecting a speech on Northern Ireland.

Baroness Hollis of Heigham

My Lords, I am slightly thrown. I am confident that I am speaking to the right amendment. Let me finish. It is about, the interests of persons who are or may become entitled to compensation under the pension compensation provisions … or any corresponding provisions". Let me contextualise it for a moment. When noble Lords pressed me on the matter, they were anxious that the statement of investment principles should have due regard to the interests of the parties concerned. The reference to Northern Ireland is that whatever we introduce extends to Northern Ireland, or we would have to table a separate amendment for it. There should be no misunderstanding about that. I am sorry; I suddenly thought that I had got the wrong file, but I think that I am correct. We are introducing this amendment in response to the points raised in earlier debates in this House about investment by the PPF board. Perhaps to the noble Lord's surprise, which may be why he is slightly taken aback, we have listened to the debate and brought forward an amendment to address, I hope, the concerns raised on opposition Benches. This amendment expands on the provisions of Clause 111 and clarifies the interests which the board must consider when exercising its powers to invest in relation to the Pension Protection Fund and the Fraud Compensation Fund.

The amendment provides that the board must consider the interests of two key stakeholders when exercising its powers to invest. When investing in the Pension Protection Fund, the board must consider the interests of current and potential recipients of PPF compensation and the interests of those who are responsible for paying the levy—that also applies to Northern Ireland. Similarly, in investing in the Fraud Compensation Fund, the board must consider the interests of occupational scheme members and of fraud levy payers. Of course the board remains responsible for its own financial management and investment strategy. The principle that the PPF shall be an independent body which operates at arm's length from government is unaffected by the amendment.

We have reflected on earlier debates and we think—in fact, I think—that the case has been made well by the opposition parties for some clarification of the board's investment objectives which are consistent with the overall aim of prudent management of its financial affairs, so that the PPF provides cost-effective compensation for pension scheme members. The amendment promotes those aims and I urge the noble Lords to accept it.

I should add that I have in hand a version of a draft regulation to that effect; it is brief—about a page and a half—and we will be sending it out to consultation. So, given that it is a draft and may need to be altered I am happy, if it helps noble Lords, to circulate it to them for their consideration before Third Reading to discover whether they feel that the Government have met the concerns raised by the opposition parties in Committee.

With that, and, I hope, the entirely benign, entirely welcome and entirely enthusiastic response that I anticipate from the Benches opposite, I beg to move.

Lord Skelmersdale

My Lords, yes, certainly our reception to the amendment is enthusiastic, as the noble Baroness said. These were points that were raised at earlier stages of the Bill. It always occurred to us that it is odd that the PPF, when taking over schemes in particular circumstances, should not have a direction at any point and that it should look after the best interests of the members that it acquires—either deferred, existing or potential.

So it is with many thanks that I, for one, accept the amendment. I should say that, at the beginning of this second day of the Report stage, the Minister has been exemplary in examining our points—certainly some of my more obstruse ones—and she has taken enormous trouble to prove me either wrong or half right. I am particularly grateful.

We and the Liberals Democrats will look forward eagerly to the draft regulations—a theme that I have pursued throughout the Bill's progress. We understand the health warnings of which the Minister has advised us.

Lord Oakeshott of Seagrove Bay

My Lords, we, too, welcome the amendment and the spirit in which it has been moved. Given that we are talking about investment policy, perhaps I may ask the Minister whether she has received and seen the recent paper on investment policy for the PPF published by the National Association of Pension Funds and, in particular, its conclusion that the fund would need to run in an extremely risk-averse manner; which, by that token, would yield a very low return and a very expensive long-term investment policy. I would welcome her views, because it cannot be in the interests of the fund or its potential beneficiaries to have a very low return investment policy in the long term.

Baroness Hollis of Heigham

My Lords, I am grateful for that generous response. I will ensure that the draft regulations are circulated with health warnings. Indeed, I have a copy of the NAPF report here; I have read it and we are reflecting upon it. We welcome the NAPF view that investment decisions should consider the interest of both levy payers and recipients. We are setting parameters and it will be for the board to take its investment decisions as an independent non-departmental public body, operating at arm's length from government. NAPF is a, if not the, major player in the field. Its views would be taken seriously, but some of the earlier discussion regarding two-fund managers and so on will allow the board to have access to independent professional financial advice, which it will be able to assess in the light of some of the concerns raised by NAPF. So we are well aware of those concerns and, as the noble Lord would agree, whether we endorse them or not, it will be for the board to consider in the light of its professional advice.

Having said that we have taken those comments on board—or, at least, registered them—I hope that your Lordships will agree to the amendment.

On Question, amendment agreed to.

Clause 112 [Investment principles]:

Lord Lucas moved Amendment No. 135:

Page 81, line 23, leave out subsection (3).

The noble Lord said: My Lords, in moving the amendment, I shall not speak to Amendment No. 136.

The amendment concerns the degree to which the Government should be able to dictate the investment principles under which the fund should operate. I welcome the amendment that we have just passed. The noble Baroness has, as she said, responded to our comments in Committee and has produced a fine answer to them. Sadly, regarding her response to the points that I have raised, she is rather better at defeating my arguments than conceding to them. I feel strongly about this matter. If the fund is to work well, the investment principles of that fund must be free from direct mandates from the Government.

The example given by the Minister in Committee was that it might be the wish of the Government to specify that the fund should be invested ethically. Well, yes, but that is the grassy green top of a very slippery slope. We do not have to look that far back to be aware that it would have been in the minds of Mr Heath and Mr Wilson and others that the money should be invested in supporting the steel industry or keeping coal mines open. Once you give the Government the power to dictate how money is invested, then some Secretary of State, at some time, will use it. It is in the nature of politicians and governments that that should be so.

If we want the fund to be regarded seriously and to be accepted by those who will have to continue to put money into it, the investment principles should be based on the noble Baroness's Amendment No. 134, not on the particular whims of the Minister at the time. It strikes me that any proper influence that the Government wish to exert can be exerted under subsection (4) by prescribing the form of the statement of investment principles. They can say that it must cover such matters as investment or whatever else the Government are concerned about and thereby ensure, by making the fund report on those matters, that it is run in accordance with best principles. But to be able to impose a diktat, so that the investment shall be in accordance with the wishes of the Government, runs entirely counter to the amendment that we have just passed.

Beyond anything else, this fund will be an important precedent. We face a substantial crisis in pensions. We are looking around for a vehicle that we can use to enable people without great means to invest on acceptable terms and at acceptable costs, to help to provide pensions for themselves.

To my mind, this fund is a pretty good model of what might be used. It is run centrally but the investment is made professionally. The investment principles are set out clearly but, as I said, it is crucial that those principles are in the interests of the people providing the money and not in the interests of the government of the time. I would be very sad to see the fund become a potential political plaything. I say that not in relation to the current incumbent but, looking back at our history, it is not impossible that such a temptation will be resisted. I cannot see that there is anything in subsection (3) which cannot be done equally well through subsection (4), which would not pose anything like the same dangers to the future management and general acceptance of the fund. I beg to move.

Lord Higgins

My Lords, I think that my noble friend's amendment is helpful. In considering it further, we shall need to look very carefully at what the Minister says and, if necessary, return to the matter at Third Reading. In Committee, we had an extensive debate on investment principles. It is very important that we get those right because, in effect, the Pension Protection Fund will operate in much the same way as any other pension fund and, as in the case of individual pension funds, it is important that we are clear about the exact principles.

Rightly, what concerns my noble friend is that the wording of the clause is too wide, and we are not clear about exactly what the Government have in mind. One would expect a number of normal, if I may put it that way, investment principles to be specified. But, in particular, as the clause states specifically that the board must comply with any prescribed requirements, the question is whether the Government would impose any requirements which might be objectionable.

Some three or four years ago, a Minister issued a general circular to those in charge of pension funds about so-called "ethical investment" and asked them to respond. Generally speaking, the crucial point is that the assets should be invested in a way that maximises the benefit to the beneficiaries, and that is the primary responsibility of the trustees.

A few days ago, I was interested to come across a paper circulated by the universities' pension fund, which, I understand, is the second largest fund in the country. It raised both the question of the extent to which the fund should take into account good governance, which is entirely understandable, and, secondly, the question of the ethical issues—for example, whether the fund should not invest in tobacco companies, even though they might give a better return than alternative investments.

I think that my noble friend's concern arises both from the history of the matter to which I have just referred and also from the general feeling that this is a matter which should not be dictated, as it could possibly be by this clause, by the Government. Therefore, I hope that the noble Baroness can assure us that it is not the intention of the Government that the so-called "prescribed requirements" should seek to influence the decisions of the Pension Protection Fund in the way that I have just described. As I said, it will be important to consider carefully what the Minister says and, if need be, return to the matter at Third Reading. It is an important issue.

Perhaps the noble Baroness will also comment specifically on the point made by my noble friend; namely, whether there is any way in which subsection (3) can be dispensed with because it is reasonably covered by subsection (4).

Lord Oakeshott of Seagrove Bay

My Lords, we on these Benches support the amendment. As we discussed in Grand Committee, we think it is very important that there are clear, simple and limited objectives for the investment policy of the PPF. One does not want to end up with a kind of Christmas tree on which all sorts of worthy objectives are hung. One needs a simple, clear objective, which is basically to maximise the investment return, subject to an acceptable level of risk, or something on those lines.

I completely agree with noble Lords on the Opposition Benches that, when one is setting up a Bill and establishing the structure for the long term, however much confidence one might have in the existing incumbents or, indeed, in the board not to abuse that, it is important that the principles are set out clearly and in statute at the beginning. On that basis, I very much support the amendment.

Baroness Noakes

My Lords, I support what my noble friends have already said and, in particular, what my noble friend Lord Lucas said and his contention that, by removing subsection (3), nothing of substance would be taken away.

If the Minister believes that something of substance would be taken away by removing subsection (3), will she consider an alternative formulation which would imply that government had less ability to interfere with the proper running of the fund—that is, a duty of consultation with the Secretary of State? If there is a need for the Government to have some formal contact with the fund in connection with its investment objectives, it seems to me that it would be less objectionable if they did not have a power to tell the pension fund what to do by regulations but the ability and duty to be consulted.

Baroness Hollis of Heigham

My Lords, I can see where Opposition Members are coming from but, for once, if I may say so, I think that we are making slightly heavy weather of this. Perhaps that is because noble Lords need more of a gloss on subsections (3) and (4) than they have had so far, and I hope to be able to allay their concerns.

These amendments seek to remove from Clause 112 the power to make regulations regarding the requirements to which the PPF board must adhere prior to preparing or revising a statement of investment principles and the minimum requirements concerning the matters that the statement should cover. I hope that our amendments to Clause 111 have reassured the House that we shall have regard to the interests of key stakeholders when investing for prudent financial management. In doing so, we have also underlined that the provisions of Clause 112 are not designed to give this or future governments some unfettered control or leverage over the board's investment principles.

I want to reassure noble Lords that, as they have told me, statements of investment principles have been a feature of pension schemes, both public and private, for many years and, in the light of your Lordships' debate, that is the path that we are now pursuing. The draft does, indeed, cover issues such as the impact of the nature of the board's liabilities on its investment strategy, the kinds of investments to be held, the balance between different kinds of investment, and so on. Those are fairly conventional things. Noble Lords may wish to pursue this matter at Third Reading, although I rather hope that they do not.

I turn to the point of the subsections. With regard to subsection (3), as I mentioned during our previous discussion, the requirements that we envisage are simply that, before preparing or revising a statement of investment principles, we shall require the board to obtain and consider relevant expert advice. I hope that the House will agree that, under the circumstances, that is a reasonable regulatory requirement.

Subsection (4), to which the second amendment relates, is simply about requiring the board to cover a limited number of key areas in the statement in order to provide a degree of accountability to all its stakeholders; for example, the kind of investments held and the balance between them. Nothing in this provision fetters the board's freedom to invest as it sees fit, subject to Clause 111. That is the type of area in which the Government expect these subsections to be used.

As I said, I think that in this case, if I may say so, the Opposition are reading ogres into sensible and useful requirements, such as the requirements to consult and to take professional advice—the kind of thing that I mentioned during the previous discussion. I hope that those reassurances will allay the fears of Members opposite and that the noble Lord will be happy to withdraw the amendment.

Baroness Noakes

My Lords, before the noble Baroness sits down, the explanation of subsection (3) seems wholly innocuous, but could the subsection be used, for example, to tell the board to invest in certain categories of investment? Could the power be used in that way?

Noon

Baroness Hollis of Heigham

My Lords, I am led not to believe so, but I shall clarify that point.

Lord Lucas

My Lords, I should be grateful for that clarification because my concerns were principally raised by the illustration that the noble Baroness chose to use in Committee. She said specifically that this clause could be used to direct the board to invest ethically.

Baroness Hollis of Heigham

My Lords, I apologise. I realise that noble Lords are handicapped by not having the possible draft regulations in their hands. The regulations could state, for example, the extent, if at all, to which social, environmental or ethical considerations are taken into account in the selection, retention and realisation of investments. That would be the kind of matter that the board would determine—not the Secretary of State.

Lord Oakeshott of Seagrove Bay

My Lords, before the noble Baroness sits down, can she clarify a point? Is she saying that ethical and social considerations will be matters for the board to take into account in its investment policy?

Baroness Hollis of Heigham

My Lords, this is Report stage. The statement of investment principles is a transparency measure only. The board must set out its own principles. Therefore, there is no scope at all for ministerial diktats and directions on how the board should invest. However, the phraseology of one of the draft regulations that we are proposing to issue—with health warnings attached, so that we know what will be considered in the investment principles—is, "the extent, if at all, to which social, environmental or ethical considerations". There is probably a division of views between the two Opposition Benches about whether that should be included. "If at all" it should be included will be for the PPF board to determine.

Lord Lucas

My Lords, I am very grateful to the noble Baroness for saying that she will circulate noble Lords with the draft regulations before we come to Third Reading. That will be crucial to our understanding of where this clause may lead. If the noble Baroness is going along those lines, I should be much more comfortable with something on the lines proposed by my noble friend Lady Noakes; that is, that rather than having a diktat, we must have regard to guidance. That would remove the possibility of this clause ever being used to override the amendment we have just passed, or the other objectives which are quite properly in the Bill as regards the management and investment of the fund.

The noble Baroness has not allayed my fears, but she has directed me to a considerable amount of reading and thought before Third Reading. I shall include my noble friend on the Front Bench in that. We shall certainly return to the issue if there are any remaining problems. To my mind, it is absolutely crucial that we get this right. It would be like leaving a cyanide capsule in someone's mouth and hoping he does not close his jaws. If this is wrong, it could cause such damage. It could entirely be misunderstanding. I shall know much more when I have read Hansard and the documents that the noble Baroness has but I do not. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 136 not moved.]

Clause 114 [Grants]:

Lord Oakeshott of Seagrove Bay moved Amendment No. 137:

Page 82, line 12, at end insert—

"( ) The Secretary of State shall have the power to make loans to the Pension Protection Fund in prescribed circumstances."

The noble Lord said: My Lords, the amendment stands in my name and that of my noble friend Lady Barker. It raises an important issue of principle, as all sides of the House recognise, on which we on these Benches feel very strongly. The effect of our amendment is to make the Government the lender of last resort to the Pension Protection Fund if the fund, at some future date, were to get into financial difficulties.

We know that there are provisions whereby the PPF can borrow commercially, but clearly if we are dealing with a situation in which equity markets are very depressed and firms are going bust in large numbers, the PPF will not be in a good commercial position to borrow money on the markets. Indeed, an effective government fallback guarantee of the fund's position, very similar to that which the Government happily employ in the case of Network Rail and a number of other areas, will make it easier for the PPF to borrow money commercially, as its first line of defence, if you like, without having to call ultimately on a government guarantee.

The reason we take that view is that, first, the Government have set up the Pension Protection Fund; they control appointments to its board; and, effectively, they have designed its basic rules of operation. In sum, the Government pull all the PPF strings, but what happens if it gets into difficulties? What will the Government say, "It is nothing to do with us, gov"? That is the epitome of power without responsibility.

It seems to us a matter of simple prudence to plan for emergencies before one sets out on a voyage as uncharted and as hazardous as I believe we would all agree the new PPF will be. We have had some very interesting, detailed and robust work by Professors Neuberger and McCarthy, pointing out how the risk of large claims on the PPF is likely to be very concentrated at some future date. I believe that we should all take that piece of work very seriously. We feel that that is an important issue.

Let me paint, in practice, the situation that we would be in if the PPF found itself in difficulties. We on these Benches do not believe that it would be appropriate to cut what we believe are the proposed, reasonably modest payment levels that the PPF will make. We are very taken with what the new PPF chairman, Lawrence Churchill, has been saying, that the PPF must do "what it says on the tin". As far as we are concerned, the levels of benefits that it proposes are "what it says on the tin".

For the fund to have to cut benefits if it were in serious difficulties would be a cruel delusion and deception to people whose pensions are paid by the PPF. They will probably already have been through the wringer, if I can put it that way, with their own company having gone bust and their own pension fund being unable to meet its liabilities. Then to make them suffer further pressure and difficulties, without the Government standing by as lender of last resort, puts them in, if I may use a police term, double jeopardy.

In sum, if the PPF were to be allowed to go down or even if it were in serious danger of going down, that would make Equitable Life look like a vicarage tea party.

There is a clear precedent for what we are suggesting in the Pool Re arrangement for the insurance of commercial buildings against terrorist attack. The Treasury explicitly stands behind commercial insurance companies and unconditionally guarantees their obligations. I have raised this matter a number of times in the House and in Grand Committee, but I have not received a proper answer. I appreciate that this is not the responsibility of the noble Baroness, but I must press her on this. I ask her to obtain the proper answer from the Treasury on this point.

The one answer she gave me in Grand Committee was that the Government would not wish to underwrite the PPF as last resort because not all taxpayers benefit—far from all taxpayers benefit from membership of defined benefit pension schemes. But that argument applies equally to the Pool Re arrangement. Far from all taxpayers—indeed, only a fairly small minority of taxpayers—own commercial buildings and, therefore, benefit from the Government standing behind insurance companies in that way. This is an important issue of principle and we shall wish to press the matter. I beg to move.

Lord Higgins

My Lords, the noble Lord, Lord Oakeshott of Seagrove Bay, is right to say that it is an important issue. We have given careful consideration to it and will await with interest the response to the point that he made about the Government standing behind those insuring buildings, and so on, that might be subject to terrorist attack. The Government, of course, in effect, stand behind individuals or other bodies on which a terrorist attack may have a serious impact.

I am surprised that the noble Lord did not compare the situation to that in the United States, where the body on which, in many ways, the PPF is modelled has run into very large deficits. None the less, even ahead of the presidential election, the US Government did not come to the view that they should act as lender of last resort.

One can envisage disastrous scenarios in which it may be difficult for the PPF to borrow in order to cover its responsibilities, although there are various ways in which the PPF could adjust its affairs to minimise that. Even without a disaster, there is scope for considerable peaks and troughs in the operation of the PPF. That could create difficulties, as I have stressed, in the early years of the PPF, before any substantial cushion has been built up. None the less, the argument made by the noble Baroness in Committee that the provision would mean that taxpayers would, in effect, guarantee the position, if, in a crisis, the Government were to act as lender of last resort, whereas only a comparatively small part of the population would benefit from such an arrangement, has considerable force. I am somewhat persuaded by that, although others may legitimately take a different view. I await with interest any further elaboration from the noble Baroness.

The other point that we debated in Committee was whether the cost of borrowing would be less on the part of the PPF, if the Government stood behind ordinary loans. The Government borrow at gilt-edged rates, and everyone else—even bodies such as the PPF—borrows at rates closer to or even higher than commercial rates. However, that point is separate from the main thrust of the argument made by the noble Lord, Lord Oakeshott of Seagrove Bay. I understand why he feels strongly about the matter, but I do not think that we will want to support the amendment. Perhaps, my noble friends will take different view.

Baroness Noakes

My Lords, it is always difficult to know whether a government should explicitly take powers either to lend or to guarantee. I understand that there is no power to guarantee the borrowing of the PPF.

In setting the PPF afloat without any ability to support it if things go badly, the Government are raising the real possibility that a crisis will occur. It could occur relatively quickly, if there were a bunching of schemes being taken into the fund. Will the noble Baroness explain how the Government see such a crisis being resolved, if the Government themselves have no levers at their disposal?

12.15 p.m.

Lord Fowler

My Lords, I accept what my noble friend Lord Higgins said about the United States. It is a strong point. I understand that, to some extent, he is constrained by making commitments in this area.

Having said that, I agree with what the noble Lord, Lord Oakeshott of Seagrove Bay, said. The effect of the provision would be to make the Government the lender of last resort to the protection fund. At present, the board can borrow, but only from deposit takers, as set out in the Bill. As the noble Lord, Lord Oakeshott of Seagrove Bay, said, there could be difficulties with that. The Bill allows the Secretary of State to pay the board money, but only for administrative expenses. Payment of such money in compensation is specifically banned.

It is unrealistic to believe that the Government can divorce themselves from the issues as starkly as they want to do. The debate on the previous amendment, which got more fascinating the longer it went on, showed the difficulties that the Government were getting into by seeking to go down that road. Obviously, there is an issue of principle. What effect will a fund financed in the way proposed have on encouraging new final salary schemes? I suspect that it will be a further discouragement, not an encouragement. However, that decision has been taken, and that is not what we need to debate.

The Government's policy is to see the setting-up of such a protection fund. Certain consequences flow naturally from that decision. It raises the expectations not only of scheme members but of the public generally that, in all circumstances, they will be protected, at least to the extent that the Bill protects them. Ministers, not least the Prime Minister, make that point and claim that it is a great advance in pension protection. I simply do not see how, in those circumstances, the Government can say that they will never, in any circumstances, stand behind it. They are not able morally to make that point.

The public expectation is there, and consequences flow from that. I am sure that the Treasury will oppose what is proposed, but, if I may speak personally, I do not regard that as conclusive. The Treasury has been the biggest obstacle to sensible pension reform in this country over the past 20 years, so I am not persuaded by that argument.

It would be sensible—prudent—for the Government to make the amendment. The noble Lord, Lord Oakeshott of Seagrove Bay, has made a strong case.

Lord Lucas

My Lords, I agree with my noble friend. He has more experience of such things than I do. I was carried along by his analysis. I cannot see how, in a crisis, the Government would not be there to make sure that the pensions were paid. I cannot see them funding the deficit, but the pensioners of the fund should not suddenly find that they are not being paid because the fund is in problems. The Government cannot, having set the thing up, escape the moral responsibility.

As the noble Lord, Lord Oakeshott of Seagrove Bay, said, we must expect the fund to hit catastrophic problems at some stage. Things are bad enough at the moment, but, with the Bill enacted, they will be much worse. The provisions relating to how the regulator will go after deficits and require funds to be put in place and so on will mean that, as soon as a company gets financially near the edge in any way, the full Section 75 deficit will swing into place and accelerate the company down the slope. That will make it even harder to find a way of refinancing and make the whole business of refinancing extremely dangerous. It will increase instability and greatly increase the chance of major pension funds coming into the fund together.

The additional Section 75 deficit on the FTSE 100 is £100 billion. A total of £500 billion additional Section 75 deficit is out there and could come crashing into the fund. What if 10 per cent comes in at once? I can see why the Government are frightened by such a sum. They do not want to find themselves suddenly having a commitment to cover it. None the less, if such a thing happens, something will have to be done. A lot of people who had believed that the Government had done well by them will find that they are not there.

We have had enough in the pensions industry of promises that are not really promises. The Equitable Life business was the latest. Everyone believed that the bonuses were somehow magically created without any need to worry about the performance of the underlying investments. This is the same thing: people will believe that the safety is there in some magic way because of the Bill, but the risks are still there. Through this Bill, the Government are putting themselves in the moral position not only of having to stand behind the total deficit, because doubtless that will ultimately return to industry, but also of ensuring that pensioners receive their cheques every month. The idea that the Government will not let that happen is ridiculous.

I support the noble Lord, Lord Oakeshott. I am sorry to disappoint my noble friend on the Front Bench. I imagine that he has constraints from the shadow Chancellor; fortunately, Back-Benchers are not bound in that way.

Baroness Hollis of Heigham

My Lords, I disagree profoundly with the amendment. As the noble Lord, Lord Oakeshott, made clear, and the noble Lord, Lord Lucas, reconfirmed, it would make the Government the lender of last resort whereby they would stand behind the PPF and be a source of funding should people believe that the PPF needs it. In other words, the Government would be a funding agency for the PPF. Obviously, that has been pursued at various stages; industry would like nothing better under certain circumstances. But, for reasons on which I shall enlarge, we believe profoundly that, if people believe that the Government will, or could, be the lender of last resort, they will end up as such. To some degree, it would be a self-fulfilling prophecy.

I wish to enlarge on those arguments. Clause 114 sets out the funding arrangements for the administration costs of the board of the PPF. It provides for these costs to be met through a grant-in-aid. The Secretary of State will recover that expenditure through the administration levy. The amendment would allow that, in certain circumstances, the Secretary of State would also have the power to make loans to the board, loans that could be used not only to cover administrative costs but also to pay PPF compensation. The amendment would make the Government the lender of last resort, meaning that they could be required to act as guarantor for the Pension Protection Fund.

There are profound reasons why I feel strongly that the amendment is wrong, not merely as a matter of fact or on grounds of industry best practice. On all those issues, I have tried to respond to noble Lords, to recognise their expertise and to see where there can be a meeting of minds. But there are issues of principle involved; this is one of them.

Lord Higgins

My Lords, the Minister knows the position that I have set out, but for the first time she has used the word "guarantor". Given her position, is it not wholly inappropriate that Ministers in another place have repeatedly used the expression that the system "guarantees" the position of pensioners? She, this House and I recognise that that is not so. Can she have a word with Ministers at the other end and tell them that they simply must stop doing that, if she is to maintain the position that she is setting out?

Baroness Hollis of Heigham

My Lords, I take the noble Lord's point. I do not have the words of my honourable and right honourable friends from the other place before me, but I do not want to be tempted into a linguistic debate on what was said at the other end. I would like to deal with the amendments tabled today.

The first reason for resisting the amendment is that it would undermine the founding principle of the Pension Protection Fund and the Fraud Compensation Fund as compensation for members of occupational pension schemes. Those schemes should be funded by the people who in future may benefit from that compensation. It would not be appropriate to ask the taxpayer to finance such compensation.

The amendment would also change the nature of the PPF as an independent, non-departmental public body. To allow the board to request loans from the Secretary of State would seriously erode the arm's-length principle. I sense some picking and choosing on the part of noble Lords on the Benches opposite about where they want the Government at arm's length and where they do not. That would certainly have negative consequences. For a start, if the board could come to the Government for a loan, it would cease to be fully accountable for the financial management of the fund. It was apparent in our previous debate that members want the money to come but to preserve entire independence. The board's independence could too easily be undermined by others complaining that it should always take the apparently easy option of borrowing funds from government rather than making its own financially more appropriate decisions to change levy rates or borrow commercially.

Secondly, if the board borrowed money from government, it would be very difficult for the Government to enforce repayment of the loans, especially if it appeared that by seeking repayment the Government were forcing a rise in levies or a reduction in compensation. It would not be right for government to surrender control of taxpayers' money in that way.

Finally, some employers may be led to believe that, because the PPF is backed by government, it does not matter how many schemes end up in the PPF. We would thus create the problems of moral hazard that we seek to overcome. They therefore may not take full responsibility for their pension promises. In that way, the amendment would undermine the PPF's aim of restoring confidence in occupational pension schemes. An example that I have used ad nauseam is that, as ever, I have argued very fiercely on occasion with Members of my own side that the Government should make health payments for asbestosis. That would be fine, except that if the employer made no contribution and knew that the Government would pick up the bill, one can be sure that no employer would ever secure their properties against asbestos. There is an issue about where responsibility lies.

The noble Lord, Lord Oakeshott, asked me about the Pool Re insurance scheme. Pool Re was set up in 1993 to ensure that terrorism insurance would continue to be available, following the withdrawal of insurers from provision of terrorism insurance for commercial property. Therefore, the Treasury came in as the re-insurer of last resort for Pool Re, protecting it in the event that it exhausted all its financial resources following claim payments. The Government recognise that there are circumstances in which they have a role as re-insurer of last resort to prevent or mitigate market failure where there is a substantial public-policy interest in pooling risk, and where the market is currently unable to provide insurance. In that situation, the market could not provide the insurance therefore the Government took over the risk.

The noble Baroness, Lady Noakes, asked what assumptions the Government had made about the flow and the likelihood of such severe bunching that a crisis could arise. The estimate of the amount that the PPF needs to collect to meet its liabilities has been based on actuarial modelling of PPF finances over the next 20 years, given a range of assumptions about several factors, including pension schemes, funding levels and rates of insolvency. It includes an assumption of at least one big FTSE 100 company going bust every five years—around one company in every 250 possibly going under. We anticipate that 0.04 per cent of all DB-scheme sponsoring employers could go insolvent in each year. That is based on GAD analysis of historical data.

Baroness Noakes

My Lords, I did not mean to ask what assumptions had been made or what stress-testing the Government had done of the assumptions. I tried to ask what the Government thought would happen if a crisis arose.

Baroness Hollis of Heigham

My Lords, it depends on what one means by "crisis". I have seen the detailed research, and based on our model we think that, to start with, the PPF will have the assets of the underfunded schemes coming into the fund. Such schemes will bring with them what there is, even though there may be insufficient assets to meet the PPF level of support; otherwise they would stay outside and wind up. Secondly, they will have the power to raise the levy and to take commercial loans to deal with situations where even a major company scheme might go under. The liabilities only fall in over time. There is no suggestion that the PPF is buying annuities to top up for potential responsibilities. It will pay it as though it were a pension fund, with the liabilities falling in over time.

As the noble Baroness will be aware, although in an average company, depending on what it does and how long it has existed, a certain proportion of staff members will be existing pensioners, others will be active members well short of retirement age, who may go on to other jobs. A very high proportion will be deferred pensioners for whom liabilities will not fall in for 10, 20 or 30 years, or possibly longer.

12.30 p.m.

Given all those assumptions and modelling; given the assets that will come in, given the levy; and given the falling in over time of the liabilities and responsibilities to be met, we are confident, even if there was significant pressure by virtue of the collapse of a couple of major companies in a particular sector—as I say, I have gone over some of the research on this—that our assumptions here are sound and should be able to deal with the sort of crises that the noble Baroness envisages.

The noble Lord, Lord Fowler, looks as though he wants to come in. But, as I say, we are on Report.

Lord Fowler

My Lords, perhaps I may add a supplementary to that. Having said what she has said, if there is such a crisis that would—or should—involve the intervention of the Government, is the Minister really saying that under no circumstances will the Government intervene? In other words, having set up this fund, at no stage in the future are the Government prepared to stand behind it.

Baroness Hollis of Heigham

My Lords, the whole push of what I have said is that the Government are making very clear that they are not coming in as a lender of last resort to the PPF. I have been pressed on the circumstances under which they might. I have been told about a crisis; although I have been given no details of what such a crisis might be. But, even in the situation that the noble Baroness, Lady Noakes, might have in mind, the structure that we have set up, including the power to go for commercial loans and the power, if necessary, to reduce compensation levels, will be available to the PPF. Noble Lords will know that there are assets, there are levies, there is the capacity to raise commercial loans and wipe out indexation temporarily before restoring it again, as well as finally being able to reduce compensation levies.

Therefore, in all our modelling—subject to the meteor hitting the earth type of scenario—I cannot conceive of a circumstance in which the situation envisaged by the noble Baroness is such that there would be no alternative funding available and such that only the Government could come into play.

Given that, perhaps I may emphasise that the PPF will already have the appropriate power to borrow commercially, as provided by Clause 113. It is normal and appropriate for an independent NDPB to be able to borrow commercially to cover short-term liquidity problems. Throughout all of this, noble Lords are talking as though suddenly the whole bundle of liabilities will hit the PPF and will have to be paid out within a six-month period. That is a profound misconception of how the PPF's liabilities will be discharged. For example, two companies may hit the PPF in six months, but the liabilities will be discharged over 30 years. That is why there should not be the funding crisis of the sort described by the noble Baroness. As I say, the board will be able to manage its resources, if necessary, by going for a commercial loan.

I repeat, if we did go down that path—the noble Lord, Lord Higgins, mentioned this—we would genuinely inflate the problem of moral hazard. If it is believed that the Government could act as guarantor, employers would act in the assumption as though the Government will be guarantor, with all of the sad consequences that we do not want to see.

We know from OPRA that some companies are already seeking to arrange their affairs in order to make use of PPF potential funding, and so on. We should not assume that all companies will act in the most honourable way when they are seeking, quite possibly legitimately, to protect jobs. They may think that the best way of doing that is to offload some of their liabilities, including pension liabilities. We have to ensure that that balance is properly maintained in the interests of both levy payers and taxpayers. So there is a real moral hazard issue, which should not be lightly dismissed by Members opposite.

There is also a very real problem about who pays and who gains. I repeat: we would be asking taxpayers to fund the insurance for DB private-sector members. Who are the people who do not have the benefit of occupational pension schemes? They are those whose earnings are, on average, half—I repeat, half—of those who are in jobs that attract a DB final salary scheme. We would be asking taxpayers without occupational pensions and with, on average, half the earnings of those who are in DB schemes to help to fund the insurance for the benefit of those other people but from which they as taxpayers gain no advantage. That money will go from the low paid to the better off; from the relatively financially unsuccessful to the more successful; from the self-employed—half of whom earn less than £11,000 a year but pay taxes—to those in employment; and from women to men.

This is a regressive form of redistribution. Tenants in rented accommodation would not be asked to pay the building insurance in a pooled scheme for those who are owner-occupiers as well. People who do not own cars would not be asked to pay for the pooled risk of motor insurance, and so on. One would not do that; nor do I think that it should be done here. It would very clearly be the part-time employed, the self-employed, women and the low paid who would be asked to subsidise and fund potentially, through the PPF, the pensions of people who are in much better financial positions to look after themselves than they may be. That is wrong. It is not just inappropriate, but wrong.

There is a real moral hazard issue as regards the employer. There is a real problem of who pays and who gains, as well as the fact that in our view the capacity to go for commercial loans, and so on, would produce—in all of our modelling—the resources necessary for the PPF to meet its obligations and its liabilities as they gradually fall in over time. I hope that your Lordships will not support the amendment.

Lord Oakeshott of Seagrove Bay

My Lords, I thank the noble Baroness for that clearly heartfelt response. I respect the sincerity in which she gave it. We explored these issues at some length on Second Reading and in Grand Committee. I propose to make only two brief points. I thank the Minister for explaining how the Government see the position of the Pool Re insurance scheme. Perhaps I may say that that exactly makes my point. As I heard her say it, they stand to prevent or mitigate market failure in areas where there is a substantial public interest in so doing. It seems to me that possible collapse of the pension protection fund would be just that situation and very similar to one where there is a sort of systemic financial collapse in the banking system.

Baroness Hollis of Heigham

My Lords, as regards terrorism and the Pool Re scheme, first, commercial companies could not get insurance: there is no evidence that PPF could not get a commercial loan. Secondly, terrorism acts can hit anyone—absolutely anyone. Here, we are talking about a minority section of the population—the better paid—who are in DB schemes. On both of those grounds, I hope that the noble Lord will accept that there is no read across.

Lord Oakeshott of Seagrove Bay

My Lords, the noble Baroness has made her points fairly. I quite take the point made by the noble Lord, Lord Higgins, about the Pension Benefit Guarantee Corporation. I suppose it was rather silly of me not to pray in aid something done by America to try to encourage the Government to follow.

I particularly thank my former colleague the noble Lord, Lord Lucas, and my neighbour the noble Lord, Lord Fowler—I look forward to buying him a drink in the Seaview Hotel this weekend if he is down there—for their support. But this is a very serious issue. Clearly, there is a division between us. I wish to test the opinion of the House.

12.38 p.m.

On Question, Whether the said amendment (No. 137) shall be agreed to?

Their Lordships divided: Contents, 59; Not-Contents, 108.

Division No. 1
CONTENTS
Addington, L. [Teller]	Miller of Chilthorne Domer, B.
Avebury, L.	Molyneaux of Killead, L.
Barker, B.	Monson, L.
Beaumont of Whitley, L.	Mowbray and Stourton, L.
Bradshaw, L.	Newby, L.
Chorley, L.	Northbourne, L.
Clement-Jones, L.	Northover, B.
Dholakia, L.	Norton of Louth, L.
Dykes, L.	Oakeshott of Seagrove Bay, L. [Teller]
Ezra, L.
Falkland, V.	Palmer, L.
Falkner of Margravine, B.	Park of Monmouth, B.
Fowler, L.	Plummer of St. Marylebone, L.
Garden, L.	Roberts of Llandudno, L.
Gilmour of Craigmillar, L.	Rodgers of Quarry Bank, L.
Goodhart, L.	Roper, L.
Harris of Richmond, B.	Saltoun of Abernethy, Ly.
Hooper, B.	Scott of Needham Market, B.
Knight of Collingtree, B.	Sharp of Guildford, B.
Laidlaw, L.	Shutt of Greetland, L.
Linklater of Butterstone, B.	Smith of Clifton, L.
Livsey of Talgarth, L.	Steel of Aikwood, L.
Lucas, L.	Stewartby, L.
Mackie of Benshie, L.	Thomas of Walliswood, B.
Maclennan of Rogart, L.	Thomson of Monifieth, L.
McNally, L.	Tugendhat, L.
Maddock, B.	Wakeham, L.
Mar and Kellie, E.	Wallace of Saltaire, L.
Methuen, L.	Walmsley, B.
Michie of Gallanach, B.	Williams of Crosby, B.

NOT-CONTENTS
Acton, L.	Clinton-Davis, L.
Ahmed, L.	Cohen of Pimlico, B.
Allenby of Megiddo, V.	Corbett of Castle Vale, L.
Amos, B. (Lord President of the Council)	Davies of Coity, L.
	Davies of Oldham, L. [Teller]
Archer of Sandwell, L.	Drayson, L.
Ashton of Upholland, B.	Dubs, L.
Bach, L.	Elder, L.
Bassam of Brighton, L.	Evans of Parkside, L.
Berkeley, L.	Evans of Temple Guiting, L.
Bernstein of Craigweil, L.	Falconer of Thoroton, L. (Lord Chancellor)
Boothroyd, B.
Borrie, L.	Farrington of Ribbleton, B.
Bragg, L.	Faulkner of Worcester, L.
Brooke of Alverthorpe, L.	Filkin, L.
Brookman, L.	Gale, B.
Burlison, L.	Gavron, L.
Campbell-Savours, L.	Gibson of Market Rasen, B.
Carter, L.	Goldsmith, L.
Christopher, L.	Goudie, B.
Clarke of Hampstead, L.	Gould of Potternewton, B.

Grabiner, L.	Maxton, L.
Graham of Edmonton, L.	Mitchell, L.
Greengross, B.	Morgan of Drefelin, B.
Grocott, L. [Teller]	Morris of Aberavon, L.
Harris of Haringey, L.	Pendry, L.
Harrison, L.	Pitkeathley, B.
Haskel, L.	Plant of Highfield, L.
Hayman, B.	Puttnam, L.
Henig, B.	Radice, L.
Hilton of Eggardon, B.	Rendell of Babergh, B.
Hogg of Cumbernauld, L.	Richard, L.
Hollis of Heigham, B.	Rogan, L.
Howarth of Breckland, B.	Rooker, L.
Howie of Troon, L.	Rosser, L.
Hoyle, L.	Rowlands, L.
Hughes of Woodside, L.	Royall of Blaisdon, B.
Hunt of Kings Heath, L.	Sewel, L.
Janner of Braunstone, L.	Sheldon, L.
Jay of Paddington, B.	Simon, V.
Kirkhill, L.	Strabolgi, L.
Laming, L.	Taylor of Blackburn, L.
Lea of Crondall, L.	Tomlinson, L.
Leitch, L.	Triesman, L.
Lipsey, L.	Truscott, L.
Listowel, E.	Tunnicliffe, L.
Lockwood, B.	Turner of Camden, B.
McIntosh of Haringey, L.	Wall of New Barnet, B.
McIntosh of Hudnall, B.	Warner, L.
MacKenzie of Culkein, L.	Weatherill, L.
Mackenzie of Framwellgate, L.	Whitaker, B.
McKenzie of Luton, L.	Whitty, L.
Maginnis of Drumglass, L.	Williams of Elvel, L.
Marsh, L.	Williamson of Horton, L.
Massey of Darwen, B.	Woolmer of Leeds, L.

Resolved in the negative, and amendment disagreed to accordingly.

12.48 p.m.

Clause 119 [Insolvency event, insolvency date and insolvency practitioner]:

[Amendment No. 138 not moved.]

Clause 124 [Eligible schemes]:

Baroness Hollis of Heigham moved Amendment No. 139:

Page 89, line 15, leave out "In" and insert "Subject to the following provisions of this section, in"

The noble Baroness said: My Lords, this group of government amendments makes adjustments to Clause 124, entitled "Eligible schemes", and Clause 135, entitled "Board to act as creditor of the employer".

The first amendment to Clause 124 will enable regulations to prescribe that a scheme is to be treated as an eligible scheme when it would otherwise lose its eligibility status during an assessment period. That is necessary to enable all the subsequent provisions to apply.

The second amendment to Clause 124 introduces a regulation-making power to exclude schemes from the PPF, including the requirement to pay the levy in certain circumstances. We shall use that power to exclude schemes when, outside an assessment period, the scheme trustees have compromised the Section 75 debt, and when such an arrangement means that members would receive less than the current PPF level of benefits.

The final amendment is to Clause 135 and is linked to the amendment on compromise agreements. This amendment will ensure that the board will have no more power than the trustees would have had in any insolvency arrangement with the employer. It has been introduced following an opposition amendment tabled in Committee and further consultation with the Institute of Chartered Accountants in England and Wales.

We have again responded to the debate in your Lordships' House and have brought forward what we hope is an appropriate amendment, one that has been tabled very much in response to our Committee discussions. I hope that noble Lords understand the intention behind these amendments and I urge their acceptance. I beg to move.

Lord Higgins

My Lords, these provisions certainly do arise from our previous discussions. However, when the noble Baroness speaks of a "compromise agreement", is she referring to what is normally known as a Bradstock agreement?

Baroness Hollis of Heigham

Yes, my Lords. Bradstock is what I would think of as a classic compromise agreement.

On Question, amendment agreed to.

Baroness Hollis of Heigham moved Amendment No. 140:

Page 89, line 21, at end insert—

"(3) Regulations may provide that where—

1. (a) an assessment period begins in relation to an eligible scheme (see section 130), and
2. (b) after the beginning of that period, the scheme ceases to be an eligible scheme,

the scheme is, in such circumstances as may be prescribed, to be treated as remaining an eligible scheme for the purposes of such of the provisions mentioned in subsection (4) as may be prescribed.

(4) Those provisions are—

1. (a) any provision of this Part, and
2. (b) any other provision of this Act in which "eligible scheme" has the meaning given by this section.

(5) Regulations may also provide that a scheme which would be an eligible scheme in the absence of this subsection is not an eligible scheme in such circumstances as may be prescribed."

On Question, amendment agreed to.

Clause 127 [Applications and notifications for the purposes of section 126]:

Baroness Turner of Camden moved Amendment No. 141:

Page 91, line 16, leave out "and" and insert "or

(b) that employer would be unlikely to continue as a going concern unless the trustees agree to waive any debt owed by that employer to the scheme, and"

The noble Baroness said: My Lords, this amendment has been tabled in my name and that of my noble friend Lady Gibson of Market Rasen. The situation the amendment addresses is where trustees propose to reach an agreement with the employer to waive a debt owed to them, enabling the employer to stay solvent.

The situation could arise where an employer, unable to fund the pension scheme, puts forward a proposal whereby the scheme will wind up in deficit. Ordinarily, that would trigger an obligation on the part of the employer to make up the deficit under Section 75 of the Pensions Act 1995, but the employer cannot afford to meet it. Under the agreement which it reaches with the trustees, this debt is waived in whole or in part, the scheme winds up with an unmet deficit and benefits are cut. Waiving the debt, however, means that the employer is saved and no insolvency proceedings are needed.

This situation is possibly not covered in the Bill as drafted. To fall within Clause 125, which requires the PPF to take responsibility for the scheme, the employer must be insolvent. To fall within Clause 127, which enables the trustees to call in the Pension Protection Fund, they must be satisfied that the employer is unable to meet its debts. Arguably, the trustees could refer the scheme to the board under this section on the basis that the employer is unlikely to be able to continue as a going concern, the requirement of Clause 127, unless the trustees are prepared to let it.

Clause 127 deals with the situation where the trustees are obliged to apply to the board of the PPF for the board to assume responsibility for the scheme. This amendment extends the obligation to the situation where the trustees form the view that the employer can be saved only if the trustees will agree to waive the debt owed by the employer. They would then have the obligation to make an application to the board for the board to assume responsibility. That would not require the trustees to cease discussions with the employer. Recent experience shows that a compromise can be reached with the employer which will deliver better benefits than perhaps might be provided by the PPF. In other words, the trustees could put the board on notice, and the board should consider whether to take the scheme under its wing. An assessment period commences and the board must consider whether a scheme rescue would be possible. The trustees are not prevented from continuing negotiations which might produce a better out-turn for members than the PPF will deliver.

As we know, the Government agreed to an earlier amendment of mine that one half of the trustees should be employee trustees. We expect that those trustees will have an opportunity to receive appropriate training. I am grateful for that concession on the part of the Government because I am certain that properly trained employees will take into consideration all the benefits accruing to scheme members as well as the interests of both scheme members and employees generally. I beg to move.

Lord Higgins

My Lords, it may be that the noble Baroness is anticipating later amendments on trustees and member trustees. However, what is not clear from the case she is now putting forward is its relationship to the debate we had the other day on the moral hazard clauses so far as concerns the clearance procedure. I understood the suggestion to be that in certain circumstances the board or the trustees might apply for clearance. Perhaps, in her reply, the Minister could make clear what the situation is.

Lord Lucas

My Lords, what interests me about this amendment is whether in order for a scheme to get into the fund, the employer has to go through the process of receivership—with all the damage that that implies for the business and employment prospects—or whether it is possible for a scheme to be accepted into the fund through some other form of restructuring. Such a restructure would certainly destroy all the shareholder value, but would not destroy the business in the same way as receivership. While the shareholders would come out with nothing—so there is no incentive for them to encourage kicking the scheme into the fund—I wonder whether the events that the company must go through in order for the scheme to go into the fund do not have to be those of receivership. Rather, it could be done through administration. That is so much better both for the business and for the continuing employees. I am anxious to understand the point and I support the noble Baroness, Lady Turner, in looking for that.

Baroness Hollis of Heigham

My Lords, what has been reflected by the speeches made in support of the amendment and in moving it suggests a misunderstanding of exactly what the amendment would do.

Clause 127 provides for those schemes whose sponsoring employers are unable to become insolvent using the definitions in Clause 119, such as public bodies whose pension schemes do not have a Crown guarantee. I refer to the Arts Council, British Waterways and so forth. Because those employers are technically unable to become insolvent, they are therefore unable to trigger the start of an assessment period even when the body is clearly not continuing as a going concern. However, the remarks of the noble Lord, Lord Lucas, envisaged a different effect.

The amendment tabled by my noble friend would enable schemes such as I have described to apply to the board if they believed the employer would become insolvent unless the trustees waive the debts owed to the pension scheme. I assume that the intention of my noble friend's amendment was to enable all schemes to apply to the board, whether or not the employer would be subject to insolvency events as defined in Clause 119, but where the trustees waiving the debt—possibly as part of a compromise agreement—would enable the employer to avoid insolvency and therefore continue as a going concern. The practical effect of this would be for the PPF to have to determine whether or not an employer would have been able to continue as a going concern had a compromise agreement not been met. This could be very difficult to determine and might be open to manipulation.

However, I share my noble friend's concerns about the jobs of people whose employers are in serious financial difficulty due to the debt owed to their pension schemes and the concern that members of those schemes should receive at least the PPF level of benefits. I believe that we already have mechanisms in place to enable businesses to continue as going concerns, thus saving people's jobs, while also ensuring that pension scheme members receive at least the PPF level of benefits.

I should like to remind noble Lords of previous debates in Committee on compromise agreements, on which I was pressed by the noble Lord. As I mentioned during that debate, where a company is in such financial difficulty that it is not possible to put in place a recovery plan for the pension scheme, it will be possible for the scheme to enter into a company voluntary arrangement, a CVA. This is a form of business rescue designed to keep an employer continuing as a going concern.

1 p.m.

The calling of creditors for a CVA is also an insolvency event as defined in Clause 119; as such it will trigger the beginning of an assessment period. If a company were to set up a successful CVA, which we would hope, the employees would be able to keep their jobs and the members of the associated pension scheme would receive at least the PPF level of benefits.

I hope I am able to give my noble friend the assurances she seeks. But we believe it is more appropriate for compromise agreements to take place as part of a formal administration, or a CVA to ensure entry into the PPF, rather than leaving it to the board to determine which compromise agreements would make a scheme eligible for entry to the PPF. My noble friend's amendment as it stands addresses a problem which is quite limited. I suspect she and the noble Lord, Lord Lucas, were concerned about the wider issues raised so I have trespassed beyond the scope of the amendment to seek to answer them. I hope that I have answered any queries but if not, I am happy to return to them.

The noble Lord, Lord Higgins, raised a query about clearance. Clearance is in case of avoidance of contribution notices and financial support directives from the regulator. It is not directly related to PPF eligibility.

Baroness Turner of Camden

My Lords, I thank my noble friend for that response and other noble Lords who have contributed to the debate, including the noble Lord, Lord Lucas. It was the intention to try to deal with a situation where otherwise jobs would be lost. The intention was to try to maintain a company in existence as an employer of the members of the pension scheme. As I said earlier, I am quite confident that trustees who were properly trained would act responsibly in that respect. However, I do acknowledge that there could be difficulties to which my noble friend has responded. I shall study very carefully what she has said. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 135 [Board to act as creditor of the employer]:

Baroness Hollis of Heigham moved Amendment No.142:

Page 97, line 38, leave out subsections (4) to (6).

On Question, amendment agreed to.

Clause 141 [Board's obligation to obtain valuation of assets and protected liabilities]:

Baroness Hollis of Heigham moved Amendment No. 143:

Page 103, line 12, at end insert—

"(2A) For those purposes, regulations may provide that any of the following are to be regarded as assets or protected liabilities of the scheme at the relevant time if prescribed requirements are met—

1. (a) a debt due to the trustees or managers of the scheme by virtue of a contribution notice issued under section 39, 46 or 54 during the pre-approval period;
2. (b) an obligation arising under financial support for the scheme (within the meaning of section 45) put in place during the pre-approval period in accordance with a financial support direction issued under section 43;
3. (c) an obligation imposed by a restoration order made under section 51 during the pre-approval period in respect of a transaction involving assets of the scheme."

The noble Baroness said: My Lords, in moving Amendment No. 143, I shall speak to the other amendments grouped with it. I shall be brief but I shall seek to answer any particular queries that noble Lords may have.

This group of amendments amends Clause 141 which sets out the board's obligation to obtain a valuation of assets and protected liabilities. The group also includes necessary consequential amendments to Clauses 149 and 156 in order that they are made consistent with amended Clause 141.

These amendments ensure that the valuation will take account of any contribution notices, financial support directions and restoration notices imposed by the regulator using its moral hazard powers. Without these amendments the PPF could be called upon to assume responsibility for schemes which, had these been taken into account, could have been wound up outside the PPF to the benefit of members. In other words, we are bringing into the balance sheet the contribution notices, financial support directions and so forth. This is consequential on the proposals we have made on the moral hazard clauses. If noble Lords wish, I could go into detail but these amendments are benign and sensible. They make sure that all assets are properly taken into account. I see that from a seated position I have the support of the noble Baroness, Lady Noakes, which reassures me enormously.

On Question, amendment agreed to.

Baroness Hollis of Heigham moved Amendments Nos. 144 to 148.

Page 103, line 13, leave out subsection (3).

Page 103, line 29, at end insert—

"(4A) Regulations under subsection (4) may provide, in particular, that when calculating the amount or value of assets or protected liabilities of an eligible scheme at the relevant time which consist of any of the following—

1. (a) a debt (including any contingent debt) due to the trustees or managers of the scheme from the employer under section 75 of the Pensions Act 1995 (c. 26) (deficiencies in the scheme assets),
2. (b) a debt due to the trustees or managers of the scheme by virtue of a contribution notice issued under section 39, 46 or 54,
457
3. (c) an obligation arising under financial support for the scheme (within the meaning of section 45) put in place in accordance with a financial support direction issued under section 43, or
4. (d) an obligation imposed by a restoration order made under section 51 in respect of a transaction involving assets of the scheme,

account must be taken in the prescribed manner of prescribed events which occur during the pre-approval period."

Page 103, line 30, leave out "those matters" and insert "the matters mentioned in paragraphs (a) and (b) of that subsection"

Page 103, line 37, at end insert—

"( ) Nothing in subsection (2) requires the actuarial valuation to be obtained during any period when the Board considers that an event may occur which, by virtue of regulations under subsection (2A) or (4), may affect the value of the assets or the amount of the protected liabilities of the scheme for the purposes of the valuation."

Page 104, line 1, leave out "In this section" and insert "For the purposes of this section—

1. (a) "actuarial valuation", in relation to the scheme, means a written valuation of the assets and protected liabilities of the scheme which—
1. (i) is in the prescribed form and contains the prescribed information, and
2. (ii) is prepared and signed by—
1. (a) a person with prescribed qualifications or experience, or
2. (b) a person approved by the Secretary of State,
2. (b) "the pre-approval period", in relation to the scheme, means the period which—
1. (i) begins immediately after the relevant time, and
2. (ii) ends immediately before the time the Board first approves a valuation of the scheme under section 142 after the relevant time,
3. (c) "the relevant time"—
1. (i) in a case within subsection (1) of section 125, has the meaning given in subsection (4)(b) of that section, and
2. (ii) in a case within subsection (1) of section 126, has the meaning given in subsection (3)(b) of that section, and
4. (d) "

On Question, amendments agreed to.

Clause 149 [Application for reconsideration]:

Baroness Hollis of Heigham moved Amendment No. 149:

Page 111, line 13, leave out from beginning to "within" in line 14 and insert "audited scheme accounts for a period which—

1. (i) begins with such date as may be determined in accordance with regulations, and
2. (ii) ends with a date which falls"

The noble Baroness said: My Lords, in moving this amendment I should like to speak also to Amendments Nos. 150 to 153, 155 to 162, 207 and 219 to 221. These amendments are minor and technical. Essentially they make three changes to the Bill. First, they require the trustees to obtain a set of audited accounts when applying for reconsideration. This replaces the need for an auditor's valuation—an incorrect use of terminology about which the noble Lord, Lord Hunt, was very fierce with me. The amendments respond to concerns raised in Committee and after consultation with the Institute of Chartered Accountants.

Secondly, they amend Clause 152. This clause provides that where a public service pension scheme is required to be wound up, then provision may be made, by order, to modify any enactment in which the scheme is contained. The amendment clarifies that the order may be made by the appropriate authority, which is a Minister of the Crown or government department with responsibility for the scheme in question.

Lastly, they make a minor technical amendment to Clause 179 changing references to "the financial year" to "the period for which the levy is imposed". This is to ensure that the terminology in the clause fits with that used in Clause 172. I urge your Lordships to accept these technical amendments.

Lord Higgins

My Lords, this is a somewhat shotgun set of amendments. They seem to be aimed at various clauses all over the Bill. However, we accept that the Minister has sought to meet some points made in Committee and for that we express our appreciation. I am a little puzzled by one point the noble Baroness made in regard to the amendment which amends Clause 152—"Requirement to wind up schemes with sufficient assets to meet protected liabilities". The Minister referred to public sector schemes. I am not clear in what circumstances such schemes were being wound up. Perhaps she could elucidate further.

Baroness Hollis of Heigham

My Lords, I am just trying to think. There could be a case where a body with a pension scheme could come to an end. There might be a need to wind the scheme up if an organisation went out of existence. I was pressed on this point in Committee by the noble Lord, Lord Skelmersdale. All this does is to make it clear who has the power to do the winding up. We had some difficulty envisaging such a circumstance, but if it did occur we need the power to be able to act should such a body come to the end of its appropriate life. As I said, these are essentially public sector schemes where there is no Crown guarantee.

Lord Higgins

My Lords, the Minister is saying that it is a public sector scheme which has insufficient assets to do anything other than meet its protected liabilities. That seems very difficult to envisage.

Baroness Hollis of Heigham

My Lords, the bulk of public sector schemes—Civil Service or whatever—are underwritten by Crown guarantee. However, there are some public sector schemes which are not underwritten by Crown guarantee. They tend to be associated with non-departmental government bodies such as the Arts Council, British Waterways, the Armouries and so on. Where they have no Crown guarantee they pay the levy and are eligible for protection and therefore potentially come within the PPF. But because they could need to be wound up, somebody needs to do it. All we are doing here is saying who has to do it.

On Question, amendment agreed to.

Baroness Hollis of Heigham moved Amendments No. 150 to 156.

Page 111, leave out lines 34 to 39 and insert— "audited scheme accounts", in relation to a scheme, means—

1. (a) accounts obtained by the trustees or managers of the scheme ("the scheme accounts") which are prepared in accordance with subsections (8A) to (10) and audited by the auditor in relation to the scheme, and
2. (b) a report by the auditor, in the prescribed form, as to whether or not such requirements as may be prescribed are satisfied in relation to the scheme accounts;

auditor", in relation to a scheme, has the meaning given by section 47 of the Pensions Act 1995 (c. 26);

Page 111, line 44, leave out "date" and insert "time"

Page 112, line 7, at end insert—

"(8A) The scheme accounts are prepared in accordance with this subsection if, subject to subsections (9) and (10), they—

1. (a) include a statement of the assets of the scheme (excluding any assets representing the value of any rights in respect of money purchase benefits under the scheme rules) as at the reconsideration time, and
2. (b) are prepared in accordance with such other requirements as may be prescribed."

Page 112, line 7, at end insert—

"(8A) The scheme accounts are prepared in accordance with this subsection if, subject to subsections (9) and (10), they—

1. (a) include a statement of the assets of the scheme (excluding any assets representing the value of any rights in respect of money purchase benefits under the scheme rules) as at the reconsideration time, and
2. (b) are prepared in accordance with such other requirements as may be prescribed."

Page 112, line 8, after "section 141" insert "(other than regulations made by virtue of subsection (4A) of that section)"

Page 112, line 9, leave out from "to" to "as" in line 10 and insert "the scheme accounts"

Page 112, line 12, leave out from "provide" to end of line 18 and insert "that, where an asset of a prescribed description has been acquired during the assessment period, the value assigned to the asset as at the reconsideration time is to be determined, for the purposes of the scheme accounts, in the prescribed manner."

On Question, amendments agreed to.

Clause 150 [Duty to assume responsibility following reconsideration]:

Baroness Hollis of Heigham moved Amendments Nos. 157 to 160.

Page 112, line 36, leave out "date" and insert "time"

Page 112, line 39, after "amount" insert "at that time"

Page 112, line 41, at end insert "at that time"

Page 113, line 24, leave out subsections (9) to (11) and insert—

"(9) The Board may—

1. (a) for the purposes of subsection (2), obtain its own valuation of the assets of the scheme as at the reconsideration time (within the meaning of section 149), and
2. (b) for the purposes of subsection (2)(b), obtain its own valuation of the liabilities of the scheme as at that time;

and where it does so, subsections (8A)(b), (9) and (10) of section 149 apply in relation to the valuation as they apply in relation to the scheme accounts (within the meaning of that section).

(10) Regulations under subsection (4) of section 141, and guidance under subsection (5) of that section, apply for the purposes of this section in relation to the estimated costs within subsection (2)(c) as they apply for the purposes of section 141 in relation to protected liabilities within section 129(1)(c)."

On Question, amendments agreed to.

Clause 152 [Requirement to wind up schemes with sufficient assets to meet protected liabilities]:

Baroness Hollis of Heigham moved Amendments Nos. 161 and 162:

Page 116, line 42, leave out "provision may be made by order" and insert "the appropriate authority may by order make provision"

Page 116, line 43, at end insert—

"( ) In subsection (14) "the appropriate authority", in relation to a scheme, means such Minister of the Crown or government department as may be designated by the Treasury as having responsibility for the particular scheme."

On Question, amendments agreed to.

Clause 156 [Duty to assume responsibility for closed schemes]:

Baroness Hollis of Heigham moved Amendments Nos. 163 to 166:

Page 119, line 36, leave out "141(3)" and insert "141"

Page 119, line 37, at end insert—

"(3A) Subject to subsection (5), subsection (2A) of section 141 applies for those purposes as it applies for the purposes mentioned in subsection (2) of that section (and the definitions contained in paragraphs (b) and (d) of subsection (9) of that section apply accordingly)."

Page 119, line 41, after "(9)" insert "(b) and (d)"

Page 120, line 1, leave out from first "of" to "applies" in line 2 and insert "sections 141 and 143 by virtue of subsection (3A) or (4)—

1. (a) subsections (2A), (4A) and (9)(b) and (d) of section 141 apply as if the references to "the relevant time" were references to that term as defined in subsection (7) below, and
2. (b) subsection (2) of section 143"

On Question, amendments agreed to.

Clause 160 [The pension compensation provisions]:

Baroness Hollis of Heigham moved Amendment No. 167:

Page 122, line 33, leave out from "of" to end of line 34 and insert ", and the provisions made by virtue of, this section, sections 138 to 140, 159(2)(c), 162 and 166 and Schedule 7."

The noble Baroness said: My Lords, in moving Amendment No. 167, I shall speak also to Amendments Nos. 168 and 205, which affect an area of future proofing.

Schemes are now moving away from traditional benefit schemes and exploring ways in which they can share the risk with employees and yet still offer an attractive pension scheme. As a result, we are seeing new scheme designs, and these amendments will allow us to respond to them. This small group of government amendments to Clause 160, "The pension compensation provisions", and Schedule 7, "Pension compensation provisions", enables us to deal with defined benefit schemes which are transferred to the PPF but have differing characteristics—for example, cash balance schemes.

Cash balance schemes are eligible schemes for the purpose of Clause 124 but have slightly different characteristics. As your Lordships will know, under a cash balance scheme members are entitled to a pension based on their having a cash sum available at retirement which is typically expressed as a percentage of salary for each year of service and with some guaranteed revaluation. Subject to any allowance for a tax-free lump sum, this cash sum is then converted to a pension by securing an annuity either with an insurance provider or within the plan, possibly on guaranteed terms. So, although the pension is defined in relation to a cash sum—like a normal money-purchase scheme—the cash sum itself is guaranteed; in other words, all investment risk remains with the employer.

While it has always been our intention—and I am sure your Lordships will endorse this—that these schemes would be covered by the PPF, as a result of their complexity we need to amend Clause 160 and Schedule 7 to enable payment of compensation to cash balance scheme members. This allows the provisions specified in Schedule 7 to be tailored by regulations to work satisfactorily in such cases which are not the norm—for example, the paragraphs relating to postponed and deferred members would need some modification in their references to "protected pension rates". This avoids overcomplicating those provisions by including the modifications on the face of the Bill.

I hope your Lordships will agree that these amendments are vital to ensure that the members referred to are paid the appropriate amount of compensation because the board of the PPF has assumed liability and responsibility for their scheme. I therefore ask your Lordships to accept the amendments. They are totally benign and seek to ensure that people are not inadvertently left out of protection as schemes increase the variety of ways of offering pensions beyond the conventional polarity between DB and DC schemes. I beg to move.

Lord Higgins

My Lords, perish the thought that anything in this legislation is complicated. If the noble Baroness says that we shall have to go further on this group of amendments because the matter is complicated, then it must be totally incomprehensible.

Be that as it may, she has referred to statutory instruments and so on, and in earlier debates she has helpfully said that she will provide us with the relevant statutory instruments. She has always been extremely helpful in previous legislation by seeking to publish regulations in draft form so that we could consider them before we finally let the Bill pass. Perhaps she will at some stage in the proceedings give an indication of what progress she has made in that respect and whether she can—ahead of Third Reading, at any rate, and some little time before that—provide the regulations that she considers most crucial and which we both most need to know about before we let the Bill go through.

Lord Oakeshott of Seagrove Bay

My Lords, I am happy to accept the Minister's assurance that these government amendments are benign—although it does raise a question about what the other government amendments are like. However, we certainly accept the benign assurance.

Baroness Hollis of Heigham

My Lords, to my pleasure, apparently the draft regulations are ready now. I shall ensure that noble Lords receive them tomorrow.

On Question, amendment agreed to.

Baroness Hollis of Heigham moved Amendment No. 168:

Page 122, line 35, after "include" insert "any provision of, or made by virtue of,"

On Question, amendment agreed to.

Baroness Farrington of Ribbleton

My Lords, I beg to move that further consideration on Report be now adjourned. In moving this Motion I suggest that the Report stage begin again not before 2.15 p.m.

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