HL Deb 04 November 2004 vol 666 cc476-503

Further consideration of amendments on Report resumed.

Schedule 7 [Pension compensation provisions]:

[Amendments Nos. 169 and 170 not moved.]

Baroness Hollis of Heigham moved Amendment No. 171:

Page 295, line 41, at beginning insert "Subject to subparagraph (3A),"

The noble Baroness said: My Lords, in moving Amendment No. 171, I shall speak also to Amendment No. 174 and the associated amendments in the group.

There are three elements to these amendments to paragraph 23 to Schedule 7. The first—new paragraph 23(1)(a)—will allow the Secretary of State, through regulations, to provide for PPF compensation payments to be made to surviving partners. The second is a group of amendments to prescribe that the widow or widower of pensioners, postponed pensioners, and deferred and active members will not be entitled to compensation in such circumstances as may be prescribed. The third—new paragraph 23(1)(b)—is intended to clarify the circumstances in which the regulations may provide that the PPF board will be able to pay compensation to surviving dependants.

I shall explain the thinking behind paragraph 23(1)(a) first. The Bill currently makes provision for compensation to be paid only to surviving spouses. During the Committee stage in the Commons, an amendment put forward by Steve Webb sought to extend this provision to surviving unmarried partners. My honourable friend the Minister for Pensions, Malcolm Wicks, agreed to consider the proposal further.

On reflection, we considered that we did not want to close the door to payments to unmarried partners. Although among current and soon-to-be pensioners marriage remains overwhelmingly the norm—around 13.3 million out of a total population of 14.6 million of those over the age of 50 are married or widowed—there is an increasing preference among younger age groups for cohabitation without marriage. Further, about three-quarters of private sector defined benefit scheme members are in schemes that provide benefits to unmarried partners—that is, three-quarters of members and not three-quarters of schemes; the proportion of schemes is low because often very small schemes do not have this provision.

Given that, we felt that an amendment to the Bill was essential, and I hope that your Lordships will welcome it today. Without such an amendment, the PPF would be unable to cover a key feature of the pensions promise in the majority of schemes—a feature that will only increase in importance in the future. I think I am right to say that such a change was recently made to the MPs' pension scheme.

We also had to consider that, because marriage is not an option for same-sex couples, the PPF will provide no security for those in long-term same-sex relationships. Many of the same arguments apply here: a more significant number of co-habiting same-sex couples is in younger age groups, although the numbers remain small, and the majority of pension schemes will pay benefits to surviving same-sex partners. I think that something like 75 per cent of schemes do that. Therefore, we have ensured that the power is wide enough to cover same-sex partners and civil partners.

The detail will be set out in regulations but we expect to provide, first, for members of schemes that make any provision for unmarried survivors. Surviving civil partners and surviving unmarried partners will receive 50 per cent of a member's total compensation. In other words, if the scheme already makes such a provision, that will continue under the PPF.

Under schemes that make no provision for unmarried survivors, surviving unmarried partners will receive nothing but surviving civil partners will receive 50 per cent of a member's total compensation. That is because, for the first time, they will be treated as though they were in a spousal relationship for the purposes of this provision. We always intended that the PPF would pay compensation to surviving civil partners, and I think that in Committee I gave notice that I would be returning to this point as we worked through the amendments.

The second part of the amendment has been introduced to maintain consistency between surviving spouses, civil partners and unmarried partners. These amendments provide regulation-making powers to provide that the PPF will not pay compensation to a widow or a widower in prescribed circumstances. The power will be used to provide that compensation which will be paid only to those widows or widowers who would have received survivor's benefits under their scheme. These amendments ensure that the PPF is not more generous than the schemes, though spouses will not be assessed against scheme rules.

Through regulations, we will pay surviving spouses 50 per cent of a member's total compensation entitlement where the scheme would have paid surviving spouses benefits. In other words, the scheme may have paid 60 per cent or 70 per cent, but we will not take that degree of detail into the PPF. Everyone entitled to survivor's benefits—widows, widowers, civil partners in due course, and unmarried partners if they had that protection in their original scheme—would receive 50 per cent. We simply cannot go into the complexity of replicating the detail of each scheme and continue to fund that in the PPF.

I turn to the third part of the amendment, the proposed Section 23(1)(b). This amendment seeks to clarify the categories of dependants to whom compensation may be paid. The entitlement to compensation is to be prescribed in regulations. The first of the categories is composed of dependants of prescribed descriptions of individuals who were members of a scheme or who had rights in respect of such a member—such as individuals who were eligible for survivor's benefit under the scheme—before the assessment date. So no one who would have received it under the old scheme would lose it under the PPF.

The second category comprises dependants of individuals who became entitled to benefits in respect of a member—for example, those who became eligible for survivor's benefit—on or after the assessment date but before the board assumed responsibility for the scheme. The final category comprises dependants of individuals who became entitled to compensation under paragraph (22).

Essentially, those categories, which are entirely benign, allow us to capture the dependants of all individuals who are or may become eligible to receive PPF compensation. I believe that these amendments will form an important part of the security, propriety and decency that the PPF will offer to members of eligible schemes. I am confident that your Lordships will welcome these changes. I have taken a little time to spell them out because, given the Civil Partnership Bill, I think it important that people know what we are proposing. I hope that, with that explanation, your Lordships are happy to accept the amendment. I beg to move.

Lord Oakeshott of Seagrove Bay

My Lords, I am sure that I speak on behalf of my right honourable friend the Member for Northavon in welcoming these amendments which properly reflect the modern world.

Lord Higgins

My Lords, as I was also heavily engaged in the Civil Partnership Bill, perhaps one understands this a bit better than the general public may initially do.

I have just a couple of questions. First, is the noble Baroness saying that the PPF will in some circumstances pay out benefits that the recipients would not have received under the scheme of which they are a member? Secondly, is it proposed to make provision for unmarried opposite-sex couples regardless of whether the scheme of which they are a member and which has been taken over does so? More particularly, will unregistered same-sex couples be in the same position as unmarried opposite-sex couples? I think that that is rather important, not least as far as the intended operation of the Civil Partnership Bill is concerned.

Baroness Hollis of Heigham

Basically, my Lords, we will be giving all widows and widowers 50 per cent rights. I think that there may be one or two schemes that still do not do that, which is very odd, but in that case it is a question of the scheme rules overriding the rules of the scheme. In some cases, widows may receive less than 50 per cent, rather than more, but they will receive 50 per cent under the PPF. Civil partners will, accordingly, be treated in the same way.

Where an existing scheme has survivor's benefits for unmarried partners, regardless of whether it is a heterosexual or single-sex couple, they will take the rules of their scheme into the PPF. In other words, we will not take away any rights that people currently enjoy in their existing scheme. However, if their existing scheme does not provide protection for unmarried partners in either heterosexual or single-sex couples, neither will the PPF.

On Question, amendment agreed to.

Baroness Turner of Camden moved Amendment No. 172:

Page 295, line 44, leave out "half' and insert "the same proportion"

The noble Baroness said: My Lords, in moving Amendment No. 172 in the name of myself and my noble friend Lady Gibson of Market Rasen, I shall speak also to a number of other amendments in this group to which my name has been put: Amendments Nos. 173, 177, 178, 183, 184, 188, 189, 191, 194 to 197 and 200 to 203. I think that, in total, we have 14 amendments in this group, because the specific sentence that we wish to amend occurs about 14 times in the schedule.

The reason for the amendment is that we want to ensure that widow's and widower's benefit paid by the PPF are the same as widow's and widower's benefits would have been had they been paid by the scheme. As I am sure noble Lords will know, different schemes provide greater or lesser proportions of the member's pension to a surviving spouse on the member's death. In order to contract out of the state second pension, the proportion must be greater than 50 per cent.

Many schemes provide two thirds, which is the Inland Revenue maximum. However, the provision in Schedule 7 requires the proportion to be 50 per cent in every case. The purpose of the amendments is to reinstate the proportion as two thirds where that is what the scheme would have paid. I hope that my noble friend will regard this as a reasonable and sensible amendment. I beg to move.

Baroness Noakes

My Lords, I should like to speak briefly in favour of the noble Baroness's amendment, which I think is about fairness to women more than anything else. The provision in the Bill means that, very largely, it is women who will lose out. The noble Baroness referred to schemes that pay out higher amounts than 50 per cent. There are indeed some.

Over the summer, I corresponded with the noble Baroness, Lady Hollis, about a slightly different position where a widow's pension was based on a proportion, but a proportion of the pre-commuted pension of her husband. Consequently, the proportion of the pension that she received was even higher than two thirds, because of the way in which a pension sacrifice had been taken earlier in retirement in order to provide for my mother. If this Bill is passed, her income could be sliced by almost a half. So the Bill could bear very unfairly on people whose expectations are that they will have a certain income level. It could come down very significantly on them.

The Minister said that it is too complicated to take in all the individual arrangements. If it is not too complicated to take in the primary pensioner's arrangements, I cannot see why it should be excessively complicated to take in the arrangements that apply to widowers or indeed dependants.

2.30 p.m.

Baroness Hollis of Heigham

My Lords, I do not know whether I shall be able to answer the noble Baroness. I may be given the advice that perhaps the noble Baroness should write to me with the circumstances. I am not quite sure where tax-free lump sums came in and so on. Perhaps I may respond to the amendment of my noble friend Lady Turner, which in a sense revisits a previous discussion. Perhaps it should have been grouped with other amendments. If that is the case, the fault lies with me and I apologise.

Essentially, my noble friend is arguing that we should import into the PPF the same level of widows' benefits as existed in the previous schemes. As I say, we did go round this point. I am sorry but we are not going to do that; the PPF will not replicate it. However, our policy mirrors the survivors' benefits offered by the majority: 75 per cent of schemes covering 84 per cent of members of private sector DB schemes will do as we shall be doing. We have tried to keep a balanced package between a meaningful level of compensation and something that is affordable and easy to administer. Some schemes pay less, although I accept that, for the most part, they may pay slightly more.

I am afraid that we have made an administrative decision that the simplest way is to pay 50 per cent because what goes into the PPF is pooled assets. Logically, that could have led to excluding the payment of unmarried partners. We thought long and hard about what we should do there, when some schemes have it and some do not, unlike survivors' benefits. In that exception only—there are still quite strong feelings about it and in some schemes one pays additional money to receive those benefits—we decided that we would import that characteristic into the PPF only in so far as existing schemes had it.

I am afraid I have to say to my noble friend that we believe that what we are offering reflects what the vast majority of schemes do. There are schemes that can be more generous and there are schemes that are less generous. We thought that this was simple to understand and that people would know what their expectations would be after going into the PPF. It would not depend on some complicated assessment of 90 per cent of X and so on.

On the question posed by the noble Baroness, Lady Noakes, the PPF survivors' benefits will be post-commutation. That may help. If she cares to write to me with the details, I shall try to obtain a more careful answer for her. I do not believe that it is unfair to women. On this issue I believe that most women will have a fairly secure and predictable pension.

At the moment individual trustees make quite complicated decisions on whether a child is a dependant when he or she goes to university and such matters. We are trying to establish rules that apply to everyone so that people know what they are and reflect the situation in which they are engaged at the moment. I cannot help the noble Baroness beyond inviting her to write to me if she wishes, except to say that it will apply only to post-commutation.

To my noble friend I say that I am sorry, but in the name of straightforward administrative simplicity, the only exception where the details of the scheme will affect what comes out of the PPF will be in the situation of unmarried partners.

Baroness Turner of Camden

My Lords, I thank my noble friend for that explanation. I am a little disappointed because, as the noble Baroness, Lady Noakes, said, this relates largely to women. I thank her very much for her support. Of course, I am pleased that something is to be done for unmarried couples and I am delighted that same-sex couples will also be looked after in the way indicated by my noble friend. That still leaves widows, in many instances, with a much reduced expectation than they would have had, had the pension scheme still been in existence and able to provide for them. However, it is not my intention to press this matter this afternoon. In the circumstances, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 173 not moved.]

Baroness Hollis of Heigham moved Amendment No. 174:

Page 295, line 47, at end insert—

"(3A) The pensioner's widow or widower is not entitled to periodic compensation under this paragraph in such circumstances as may be prescribed."

On Question, amendment agreed to.

[Amendment No. 175 not moved.]

Baroness Hollis of Heigham moved Amendment No. 176:

Page 296, line 45, at beginning insert "Subject to sub-paragraph (3A),"

On Question, amendment agreed to.

[Amendments Nos. 177 and 178 not moved.]

Baroness Hollis of Heigham moved Amendment No. 179:

Page 297, line 5, at end insert—

"(3A) The postponed pensioner's widow or widower is not entitled to periodic compensation under this paragraph in such circumstances as may be prescribed."

On Question, amendment agreed to.

[Amendments Nos. 180 and 181 not moved.]

Baroness Hollis of Heigham moved Amendment No. 182:

Page 298, line 32, at beginning insert "Subject to sub-paragraph (3A),"

On Question, amendment agreed to.

[Amendments Nos. 183 and 184 not moved.]

Baroness Hollis of Heigham moved Amendment No. 185:

Page 298, line 39, at end insert—

"(3A) The active member's widow or widower is not entitled to periodic compensation under this paragraph in such circumstances as may be prescribed."

On Question, amendment agreed to.

[Amendment No. 186 not moved.]

Baroness Hollis of Heigham moved Amendment No. 187:

Page 301, line 25, at beginning insert "Subject to sub-paragraph (3A),"

On Question, amendment agreed to.

[Amendments Nos. 188 to 191 not moved.]

Baroness Hollis of Heigham moved Amendments Nos. 192 and 193:

Page 301, line 40, at end insert—

"(3A) The active member's widow or widower is not entitled to periodic compensation under this paragraph in such circumstances as may be prescribed."

Page 304, line 20, at beginning insert "Subject to sub-paragraph (3A),"

On Question, amendments agreed to.

[Amendments Nos. 194 to 197 not moved.]

Baroness Hollis of Heigham moved Amendments Nos. 198 and 199:

Page 304, line 36, at end insert—

"(3A) The deferred member's widow or widower is not entitled to periodic compensation under this paragraph in such circumstances as may be prescribed."

Page 307, line 18, leave out from "of" to end of line 22 and insert "—

  1. (a) partners of prescribed descriptions of persons of prescribed descriptions who were members of the scheme immediately before the assessment date:
  2. (b) dependants of prescribed descriptions of persons of prescribed descriptions who—
  1. (i) were members of the scheme, or had rights to benefits payable under the scheme rules in respect of a member, immediately before the assessment date,
  2. (ii) became entitled to benefits under the scheme rules in respect of a member on or after the assessment date but before the time the trustees or managers of the scheme received a transfer notice under section 158, or
  3. (iii) have become entitled to compensation under paragraph 22 (survivors who do not meet conditions for scheme benefits at assessment date), in relation to the scheme."

On Question, amendments agreed to.

[Amendments Nos. 200 to 204 not moved.]

Baroness Hollis of Heigham moved Amendment No. 205:

Page 315, line 12, at end insert—

"Power to modify Schedule in its application to certain schemes

32A Where the scheme is a prescribed scheme or a scheme of a prescribed description, this Schedule applies with such modifications as may be prescribed."

On Question, amendment agreed to.

Baroness Hollis of Heigham moved Amendment No. 206:

Page 317, line 14, leave out "or category"

The noble Baroness said: My Lords, this amendment is necessary as a result of the change to the definition of occupational pension scheme made by Clause 237 and the consequential change that was made to the definition of employer in Clause 316.

Clause 237, which replaces the definition of occupational pension scheme in Section 1 of the Pension Schemes Act 1993, was made as a consequence of changes in the Finance Act. The old definition included the phrase. "categories of employment", which was replaced with "service in employments of a description". The word "description" refers to the description in the scheme rules. As a consequence of this, the definition of employer in Clause 316 was also altered to refer, in the case of occupational pension schemes, to the employer as "the employer of persons in the description of employment to which the scheme in question relates". This had also previously referred to "persons in the description or category of employment". With that lucid explanation of the amendment, I am sure that your Lordships will be happy to accept the amendment, which realigns the vocabulary.

On Question, amendment agreed to.

Clause 170 [Relationship with fraud compensation regime]:

Baroness Hollis of Heigham moved Amendment No. 207:

Page 128, line 23, leave out "date" and insert "time"

On Question, amendment agreed to.

Clause 172 [Initial levy]:

Lord Higgins moved Amendment No. 208:

Page 130, line 7, leave out "that date" and insert "the day referred to in paragraph (a)"

The noble Lord said: My Lords, we come to a series of important amendments regarding the levy. It may be helpful if I say a few words by way of introduction. We have discussed this matter in Grand Committee. A number of the issues have become more clearly defined. It is important when looking at the Bill as a whole always to bear in mind that its effect, while beneficial in many respects, is nonetheless likely to encourage—if that is the right word—companies to abandon final salary schemes to avoid the levy or certainly not to encourage any company from setting up a final salary scheme, given that the company would then become liable to the levy. So, the burden of the levy, its timing and its nature are crucial to the whole scheme. The greater the extent to which the levy is more onerous than it ought to be or the longer it is in an unsatisfactory state, the greater will be the deterrents to which I just referred. Therefore, it is important that the House should get the thing right.

We consider the issue against the background of what can only be described as the tragic decline in the number of final salary schemes. It is due to factors including the fact that people live longer and what one might call the scandalous changes that the Chancellor of the Exchequer has made in advance corporation tax. A heavy burden has been imposed on companies as a result of those and other changes, combined with the fall in the stock market, the lowering of annuity rates, and so on. The Bill is necessary to deal with companies that have decided, one way or another, that their schemes cannot continue to function.

I turn to the specific question of the levy. The first amendment is concerned with timing. Others are concerned with the nature of the levy with regard to the extent that it should be risk-based, and so on. In Clause 172, the Government seek to set out the provisions with regard to the initial levy. That levy will be on a flat-rate basis. It will not take account either of the standing or solvency of the company whose scheme we are considering or the extent to which the scheme is underfunded. In that period, the levy will be on a flat-rate basis. We strongly believe that the scheme should be changed to a risk basis. In some ways, we would like it to start off on a risk basis.

There are considerations with regard to assessing the risk, but we do not accept some of the arguments that have been put forward that assessing the solvency of a company can be done using the available information on a broad-brush basis. Initially, it must be a broad-brush basis.

Secondly, we do not accept the argument that the question of the solvency of the scheme, and so on, is determined by the fact that pension schemes normally have a triennial valuation. I have been through that process. Not infrequently, companies will have an interim evaluation, not of every comma and dot but sufficient to enable a reasonable assessment of the position of the scheme.

The Bill says that the initial period will begin,

"with the day appointed for this purpose by the regulations".

We do not know how long it will be before that happens, although we hope that it will happen as soon as possible. The clause then says that the period will end on,

"the following 31st March or, if the regulations so provide, 12 months after that date".

We suggest that the date should be 12 months after the date when the regulations begin the initial period. It is a tightening of the timescale, but we believe that it is appropriate for all the reasons that I mentioned.

Once the Bill becomes law, we must get on with the matter and ensure that we move to a risk basis and away from a flat-rate basis at the earliest possible moment. I beg to move.

2.45 p.m.

Lord Oakeshott of Seagrove Bay

My Lords, we strongly support this amendment and have tabled a similar one. We are concentrating on this amendment, which establishes a principle that we strongly support.

We discussed the matter at length on Second Reading and in Committee. Together with, I think that it is fair to say, all the major industrial and commercial firms—certainly, the great majority—in this country, the National Association of Pension Funds, EEF and the vast majority of representative bodies, we believe that it is essential to move to a risk-based levy as soon as possible. "As soon as possible", for most people—certainly for us—means that the flat-rate levy should not last for longer than a year.

I have here, for example, the comments of Terry Faulkner, chairman of the National Association of Pension Funds, who said that the timetable that the Government were talking about was "absolutely unacceptable". He said: The purpose of the PPF is to protect benefits from those companies that go bust with an underfunded pension scheme. The right way to deal with the premium is on a risk-based basis like other forms of insurance". Colin Hartridge-Price, chief pensions officer of the BT pension scheme—the largest pension fund in the country—said:

The risk-based levy should be introduced in full as soon as is practicably possible. It should surely be possible for the PPF Board to agree a formula within the first 12 months of its operation". At Second Reading, we discussed the idea that, over several years, some funds could be allowed to stay on a flat-rate basis and others go on to a risk basis. I think that we exploded the idea that we could have an insurance scheme in which the good risks paid one rate and were flat rate, while the bad risks were not. We must go over within a year to a fully risk-based—or minimum 80 per cent risk-based—levy. In any insurance scheme or policy, one will not know exactly what the risks are but, in this case, waiting for the best will be the enemy of the good. The one thing that we know is that the longer we go on with a flat rate policy—a poll tax on pension funds, in effect—the more unfair it will be to the better funded schemes and to the responsible employers who are doing their best to reinforce their funds.

The noble Baroness said a good deal about moral hazard. What greater moral hazard could there be than not going to a fully risk-based levy as soon as possible? We strongly support the amendment.

Baroness Hollis of Heigham

My Lords, the first thing to say is that I, too, support the amendment: I just cannot accept it. I hope to explain the reasons.

The noble Lord, Lord Higgins, clearly spoke about the initial period. The noble Lord, Lord Oakeshott of Seagrove Bay, talked about the initial and transitional periods put together. There is a wide chasm between those positions. We may be able to tease that out later.

Making the amendment moved by the noble Lord, Lord Higgins, would mean that the initial period would run from the appointed day until the following 31st March or 12 months after the appointed day. In effect, therefore, the amendment would limit the initial period, when everybody will be on a flat rate, to no longer than 12 months. I point out to the noble Lord, Lord Oakeshott of Seagrove Bay, that we propose a transitional period thereafter in which we phase in the risk-related levy. I got the impression that he thought that the whole risk-related scheme could come in one day after the 12 months. If that is what he is saying, it worries me considerably.

Limiting the initial period to 12 months would, first, remove the in-built element of contingency that we have put in place, should it be necessary for the period to be longer. When I sat on the Benches opposite, the late, lamented Lord MacKay of Ardbrecknish came here to explain why, although the Bill said that the jobseeker's allowance would take effect from April 1996, it would, to his regret, have to be delayed for another six months until October 1996. That inconvenienced him slightly, as he had found some difficulty with the regulations and the primary legislation, which determined the timetable. These things happen. It was not intended; we had to accept it. Any Minister knows that things do not always go absolutely according to plan—we do not need to talk about the CSA in that context.

Secondly, the amendment would also mean that the initial period could end after the start of the financial year. I said that I supported the amendment but could not accept it because we did not envisage the initial period being any longer than 12 months. However, as we are launching a new organisation, we think it prudent to build in an element of contingency to allow for unforeseen difficulties. Obvious examples would be computer hiccups: the Standish Group found that around two thirds of all computer projects ran over time. I do not want to get hung up on debates about computers but I can conceive that such problems could arise—they certainly did with JSA.

The formulation of the amendment means that the initial period could end after the start of a financial year. As the pension protection levies operate by reference to financial years, problems could arise. Sponsoring employers and schemes would find it more difficult to plan ahead financially, in line with current business and scheme requirements. It would also mean that the annual reporting requirements of the PPF and the general levy currently collected by OPRA, both of which operate by reference to financial years, were carried out at different times.

Again, we fully expect that the PPF will open its doors on the date anticipated and that the initial period will last no longer than 12 months. We just do not want to be tied to it by its inclusion in the Bill in case a contingency arises that has not occurred to noble Lords opposite or those on the government Benches. I hope that what I have said will enable noble Lords to withdraw their amendment.

Lord Higgins

My Lords, the noble Baroness asked whether the Liberal Democrats and the Conservatives were singing from the same hymn sheet. Yes, we are; that will become apparent in our debates on subsequent amendments.

Today's sitting began with Question Time, during which a Question was asked on firearms legislation. It was pointed out that the Government had not carried through the legislation, seven years after the Bill was passed. The Minister replied, "They did not put a date in the legislation. If a date had been included, we would have stuck to it". It seems that there is a lesson to be learnt as regard legislation: apparently, if you do not give this Government a definite deadline, the process may drag on for seven years or more—I suppose that they get an itch at that moment.

I understand the noble Baroness's point about financial years and so on. However, we want to insert a very clear deadline. We think, therefore, that the amendment is appropriate. I regret that, although the noble Baroness agrees with it, she is not prepared to accept it. Not only do we agree with the amendment, but we think that it would be appropriate to test the opinion of the House.

2.53 p.m.

On Question, Whether the said amendment (No. 208) shall be agreed to?

Their Lordships divided: Contents, 147; Not-Contents, 106.

Division No. 2
CONTENTS
Addington, L. Geddes, L.
Alliance, L. Goodhart, L.
Ampthill, L. Goschen, V.
Anelay of St Johns, B. Greaves, L.
Astor, V. Greengross, B.
Astor of Hever, L. Hamwee, B.
Attlee, E. Hanham, B.
Avebury, L. Hanningfield, L.
Barker, B. [Teller] Harris of Richmond, B.
Beaumont of Whitley, L. Hayhoe, L.
Bonham-Carter of Yarnbury, B. Higgins, L.
Bradshaw, L. Hodgson of Astley Abbotts, L.
Bramall, L. Holme of Cheltenham, L.
Bridgeman, V. Howard of Rising, L.
Brooke of Sutton Mandeville, L. Howe, E.
Brookeborough, V. Howe of Aberavon, L.
Brougham and Vaux, L. Hunt of Wirral, L.
Buscombe, B. Jacobs, L.
Byford, B. Jenkin of Roding, L.
Caithness, E. King of Bridgwater, L.
Carlisle of Bucklow, L. Knight of Collingtree, B.
Carrington, L. Laidlaw, L.
Chadlington, L. Laing of Dunphail, L.
Clement-Jones, L. Linklater of Butterstone, B.
Colwyn, L. Liverpool, E.
Cope of Berkeley, L. [Teller] Livsey of Talgarth, L.
Crathorne, L. Lucas, L.
Dean of Harptree, L. Luke, L.
Dholakia, L. Lyell, L.
Dixon-Smith, L. McColl of Dulwich, L.
Dundee, E. Maclennan of Rogart, L.
Dykes, L. McNally, L.
Elliott of Morpeth, L. Maddock, B.
Elton, L. Mar and Kellie, E.
Ezra, L. Marlesford, L.
Falkner of Margravine, B. Marsh, L.
Feldman, L. Mayhew of Twysden, L.
Fowler, L. Methuen, L.
Garden, L. Miller of Chilthorne Domer, B.
Gardner of Parkes, B. Miller of Hendon, B.
Molyneaux of Killead, L. Roper, L.
Monro of Langholm, L. Saltoun of Abernethy, Ly.
Montrose, D. Sandberg, L.
Morris of Bolton, B. Sanderson of Bowden, L.
Mowbray and Stourton, L. Scott of Needham Market, B.
Moynihan, L. Seccombe, B.
Murton of Lindisfarne, L. Sharman, L.
Naseby, L. Sharp of Guildford, B.
Neuberger, B. Shaw of Northstead, L.
Newby, L. Shutt of Greetland, L.
Newton of Braintree, L. Simon of Glaisdale, L.
Noakes, B. Skelmersdale, L.
Northover, B. Smith of Clifton, L.
Norton of Louth, L. Steel of Aikwood, L.
Oakeshott of Seagrove Bay, L. Swinfen, L.
O'Cathain, B. Taverne, L.
Onslow, E. Tebbit, L.
Palmer, L. Thomas of Gresford, L.
Park of Monmouth, B. Thomas of Swynnerton, L.
Perry of Southwark, B. Thomas of Walliswood, L.
Phillips of Sudbury, L. Thomson of Monifieth, L.
Tope, L.
Platt of Writtle, B. Trumpington, B.
Plummer of St. Marylebone, L. Ullswater, V.
Rawlings, B. Vallance of Tummel, L.
Rawlinson of Ewell, L. Wakeham, L.
Razzall, L. Wallace of Saltaire, L.
Reay, L. Walmsley, B.
Redesdale, L. Walpole, L.
Rennard, L. Warnock, B.
Renton, L. Watson of Richmond, L.
Roberts of Conwy, L. Williams of Crosby, B.
Roberts of Llandudno, L. Willoughby de Broke, L.
Rodgers of Quarry Bank, L. Windlesham, L.
NOT-CONTENTS
Acton, L. Gould of Potternewton, B.
Ahmed, L. Graham of Edmonton, L.
Amos, B. (Lord President of the Council) Grocott, L. [Teller]
Harris of Haringey, L.
Archer of Sandwell, L. Harrison, L.
Ashton of Upholland, B. Hart of Chilton, L.
Bach, L. Haskel, L.
Bassam of Brighton, L. Haworth, L.
Berkeley, L. Hayman, B.
Bernstein of Craigweil, L. Henig, B.
Borrie, L. Hilton of Eggardon, B.
Brennan, L. Hogg of Cumbernauld, L.
Brooke of Alverthorpe, L. Hollis of Heigham, B.
Brookman, L. Howarth of Breckland, B.
Burlison, L. Hoyle, L.
Carter, L. Hughes of Woodside, L.
Christopher, L. Hunt of Kings Heath, L.
Clarke of Hampstead, L. Jay of Paddington, B.
Cohen of Pimlico, B. Jordan, L.
Corbett of Castle Vale, L. Kirkhill, L.
Crawley, B. Lea of Crondall, L.
Dahrendorf, L. Leitch, L.
David, B. Lipsey, L.
Davies of Oldham, L. [Teller] Lockwood, B.
Drayson, L. McIntosh of Haringey, L.
Dubs, L. McIntosh of Hudnall, B.
Elder, L. MacKenzie of Culkein, L.
Evans of Parkside, L. Mackenzie of Framwellgate, L.
Evans of Temple Guiting, L. McKenzie of Luton, L.
Falconer of Thoroton, L. (Lord Chancellor) Massey of Darwen, B.
Maxton, L.
Farrington of Ribbleton, B. Merlyn-Rees, L.
Filkin, L. Mitchell, L.
Finlay of Llandaff, B. Morgan of Drefelin, B.
Gale, B. Morris of Aberavon, L.
Gavron, L. Morris of Manchester, L.
Gibson of Market Rasen, B. Murphy, B.
Giddens, L. Pitkeathley, B.
Goldsmith, L. Ponsonby of Shulbrede, L.
Prosser, B. Triesman, L.
Randall of St. Budeaux, L. Truscott, L.
Rea, L. Tunnicliffe, L.
Rendell of Babergh, B. Turner of Camden, B.
Richard, L. Uddin, B.
Rosser, L. Wall of New Barnet, B.
Royall of Blaisdon, B. Weatherill, L.
Sewel, L. Whitaker, B.
Sheldon, L. Whitty, L.
Simon, V. Wilkins, B.
Snape, L. Williams of Elvel, L.
Stone of Blackheath, L. Williamson of Horton, L.
Strabolgi, L. Wilson of Dinton, L.
Taylor of Blackburn, L. Woolmer of Leeds, L.
Tomlinson, L. Young of Norwood Green, L.

Resolved in the affirmative, and amendment agreed to accordingly.

3.4 p.m.

[Amendment No. 209 not moved.]

Clause 173 [Pension protection levies]:

Lord Higgins moved Amendment No. 210:

Page 130, line 17, leave out "one or"

The noble Lord said: My Lords, I have already made preliminary remarks about this group of amendments. We are arguing very strongly that the scheme should be a risk-based scheme as soon as possible. The purpose of the amendment is to leave out the possibility that, after the end of the initial period, the Government would have powers to have either a risk-based basis or a scheme basis that is not risk based, or both. The amendment seeks to remove the possibility that they might be able to continue with a scheme-based basis—one that does not take risk into account—after the initial period. For the reasons that the noble Lord, Lord Oakeshott, and I have previously spelt out, in our view, at the end of the initial period, it would be appropriate for us to go to a risk-based basis. I beg to move.

Lord Oakeshott of Seagrove Bay

My Lords, as the Minister seems to think that there might be a chasm opening between the noble Lord, Lord Higgins, and myself, perhaps I may make it clear that that is not so. I apologise if in my enthusiasm I ran slightly ahead of the narrow definition of the previous amendment. But I wish to make it clear that we sing from the same hymn sheet on this issue. For the reasons that I have discussed at some length, we support the amendment.

Baroness Hollis of Heigham

My Lords, I thought that the noble Lord's hesitation on the words "hymn sheet" was because he was trying to work out what the nature of the breadth of the inclusive Church might be.

As regards the amendment, we intend to give the board the flexibility to set the pension protection levies as it best sees fit, subject to certain constraints. Our general concern is that this amendment would unnecessarily constrain the board to the detriment of schemes and employers.

The pension protection levies must seek to balance two issues: on the one hand they should reflect the level of risk posed by schemes so that, very simplistically, well run and well funded schemes pay less, which we all accept; on the other hand, we must avoid setting the levy in such a way that it becomes unaffordable for many schemes.

We anticipate that the board will do that by setting a predominantly risk-based pension protection levy alongside a smaller scheme-based protection levy. As noble Lords know, we expect that ratio to be about 80:20 per cent risk-based to scheme-based when the transitional period is mature.

The scheme-based pension protection levy will also ensure that every eligible scheme may pay something to the pension protection levies. That reflects the view that in the very long term no scheme represents zero risk. That will mean that the board will be able to reflect, with a fair degree of accuracy, the level of risk that a scheme poses to the PPF, but the underlying scheme-based pension protection levy will help to narrow the range of levy charges so that schemes in difficulty are not landed with an unsupportable levy.

Basically, we have got the problem of adverse selection: not being careful and going too fast in this way will end up so reducing the risk-related levy that the scheme-based levy has to soar commensurately. Those schemes therefore that have not just that but also have poor risk could find themselves having a level of payment that I think that we might all judge to be, at least initially, unacceptable. So we anticipate that in most years the board will set both protection levies as required by the amendments.

However, there are several occasions when setting both protection levies and applying the risk-based protection levy to all schemes may not be appropriate. Noble Lords may want to reflect on whether it is appropriate to follow their amendment through after hearing the examples that I will offer the House.

For example, there will be a number of extremely small eligible schemes that are required to pay the levy—applying an extremely complex risk-based calculation to schemes, which might have 10, 20 or perhaps 40 members, would be a case of using a using a sledgehammer to crack a nut—and providing the required information may be overly burdensome and costly for the scheme.

We therefore want to give the board the freedom to set a simplified levy for small schemes should it so wish. That may involve setting only a scheme-based pension protection levy. Noble Lords will remember that that scheme-based protection levy, although it is so to speak flat rate, also differentiates between deferred, active and retired members—it has different rates for those. In other words, it assesses the liabilities of the scheme as opposed to the risk-related levy, which seeks to determine the risk to entering the PPF. That is the different functions of the two levies.

It may be that after consultation the board will establish a method for calculating the risk-based pension protection levy that does not result in any extremely high charges. For example, the board may start with a maximum charge for particular sizes of scheme and then discount according to risk factors. If that is the case, we would want the board to be able to charge a risk-based pension protection levy only.

Lastly, if the board estimates to collect an extremely small levy in any given year, we do not want that impeded because the costs of assessment might come near the value of recoveries for whatever reason. It does not seem that probable but if, for example, it wants a small amount, the costs of going for the risk-based levy in that case might be excessive.

We are therefore allowing the board to set a scheme-based pension protection levy only when it estimates to collect less than 10 per cent of the levy ceiling in any given year. That is almost like a cost benefit—a point made by the industry that it feels would be wise.

I reassure your Lordships that in the majority of cases we expect the board to act in accordance with the spirit of the amendments. However, because of concerns that that would require us to force an unnecessarily complicated levy structure on small schemes, and because until the method of calculating the risk-based pension protection levy is settled, we do not know the extent to which the scheme-based pension protection levy will be necessary. We therefore do not want to require that of the board, so I urge the noble Lord to withdraw his amendment.

The difference between us is that the noble Lord believes that the information that is necessary will be available in ways that we do not believe. It will be a secure enough base to resist possible challenges, and so on. During the initial period, we intend to differentiate charges for active, deferred and pensionable members. After the initial period, it will be up to the board to decide whether to do it. We do not disagree, but the implications of the amendment would be to impose a risk-related levy for small schemes, for example, when that would be inappropriate, costly and regarded as a burden by small businesses. With that explanation, I hope that the noble Lord will agree that the gap between us is small. We want some flexibility, and I hope that the noble Lord will feel able not to pursue his amendment.

3.15 p.m.

Lord Higgins

My Lords, I am surprised that the noble Baroness can produce arguments at this stage of the Bill that she has not used previously. One or two which she produced this afternoon were not made as clear in Committee.

We believe that it is appropriate that the PPF should impose, after the initial period, both a risk-based levy and a scheme-based levy. Obviously, with regard to the scheme-based part, that may cover overheads and so on. I stress strongly that this is on a broad-brush basis—we do not want to go to the last decimal point. But it should be possible to work out a reasonable assessment of risk in relation to each scheme that pays the levy. Otherwise, it would be unfair on those who enter the scheme.

The noble Baroness says that it would be to the detriment of schemes and employers, but I do not see how. The noble Baroness likes to call it a compensation scheme, but it is effectively an insurance scheme. The curiosity is that if one were not careful one would end up with a flat-rate levy where there is a danger that the people who are the soundest—either in terms of the ability of the employer to continue in business, or in the financing of the pension scheme—would not operate effectively.

I am not persuaded by the arguments of the noble Baroness. It is right to put a firm framework in place for the Pensions Protection Fund to work within. That should not be too difficult.

One could do it by category of scheme for small schemes, when perhaps the risk element is small compared with that of larger schemes. I imagine that the board will wish initially to do it by type of scheme rather than on a general basis.

3.15 p.m.

Baroness Hollis of Heigham

My Lords, it would be impertinent of me to ask a direct question, but I take it that the noble Lord has heard the view of industry on this issue. The ABI states: We believe that a maximum period of this length"— the transitional period, as envisaged by the Government— strikes the correct balance between what is administratively possible and what is desirable". The industry, as reflected by the ABI, is backing the Government's position as against that adopted by the noble Lord. That point was made by his honourable friend Nigel Waterson in Committee in the other place.

The feeling within the industry is that a two-year period of transition is probably unrealistically tight. It would prefer a transitional period of about four years. The noble Lord's honourable friend in the other place argued for what the Government are proposing. Because of consultation with the industry, that position no doubt reflects the industry's views, and those of the ABI.

The provision is not something that has been dreamt up by the Government. It is the result of consultation. One should be a little careful about appearing to go against the wishes and consensus that appears to be emerging from the industry that we have consulted.

Lord Higgins

My Lords, things have moved on. An enormous amount of consultation has taken place on all those issues. When one receives representations, one should take into account the interests of those making them—I am not thinking of any particular organisation when I say that. Some of the initial representations that were made when the Bill was in the other place suggested that it might be 2009 before we got to a risk-based levy.

I presume that the arguments to which the noble Baroness is referring are those that she has put forward this afternoon. They relate almost entirely to the position of small firms rather than the overall situation.

Baroness Hollis of Heigham

My Lords, I refer to the quotation from the ABI that I mentioned in good faith. I was not present in the Committee attended by the noble Lord's honourable friend who was leading for the Conservatives, but he reflected the general position of the Government to phase in over a transitional period the risk-related levy alongside the scheme-based levy.

Small schemes are an additional problem. Given the amendments, small schemes would have to have a risk-based levy whether or not it was sensible or appropriate. That is an additional complication.

Lord Higgins

My Lords, I understand that it is an additional complication, although the noble Baroness did not put forward the other arguments to which she is referring. If we are to be fair to employers and companies generally, it is important to go to a risk-based levy at the earliest possible moment.

Lord Oakeshott of Seagrove Bay

My Lords, does the noble Lord agree that the ABI does not represent the pension fund industry? It is a supplier of investment management services to the pension fund industry. It is in a small minority in its view; it is not the view of the National Association of Pension Funds, or the major in-house pension funds.

Lord Higgins

My Lords, I was carefully avoiding being rude about the ABI for whom I have enormous respect. I said that when receiving representations from outside bodies, it is wise to consider whether they have a particular axe to grind. I am not saying whether the ABI has or has not in this case. I think that one should apply—as all good economists do—an appropriate rate of discount. One must consider the arguments on their merits while taking into account the views that have been expressed. Having considered the issue carefully, and having discussed it over a long period—the Bill has been in progress for a long time—the amendment is appropriate. I wish to test the opinion of the House.

3.19 p.m.

On Question, Whether the said amendment (No. 210) shall be agreed to?

Their Lordships divided: Contents, 149; Not-Contents, 104.

Division No. 3
CONTENTS
Addington, L. Byford, B.
Allenby of Megiddo, V. Caithness, E.
Alliance, L. Campbell of Alloway, L.
Ampthill, L. Carlisle of Bucklow, L.
Anelay of St Johns, B. Carrington, L.
Attlee, E. Chadlington, L.
Avebury, L. Chan, L.
Barker, B. Clement-Jones, L.
Beaumont of Whitley, L. Colwyn, L.
Bonham-Carter of Yarnbury, B. Cope of Berkeley, L. [Teller]
Bradshaw, L. Craigavon, V.
Bridgeman, V. Crathorne, L.
Brooke of Sutton Mandeville, L. Dean of Harptree, L.
Brougham and Vaux, L. Dholakia, L.
Buscombe, B. Dixon-Smith, L.
Dundee, E. Newby, L.
Dykes, L. Newton of Braintree, L.
Elliott of Morpeth, L. Noakes, B.
Elton, L. Northover, B.
Ezra, L. Norton of Louth, L.
Falkland, V. Oakeshott of Seagrove Bay, L. [Teller]
Falkner of Margravine, B.
Feldman, L. O'Cathain, B.
Finlay of Llandaff, B. Onslow, E.
Fookes, B. Palmer, L.
Fowler, L. Park of Monmouth, B.
Garden, L. Perry of Southwark, B.
Gardner of Parkes, B. Phillips of Sudbury, L.
Geddes, L. Pilkington of Oxenford, L.
Goodhart, L. Platt of Writtle, B.
Goschen, V. Plummer of St. Marylebone, L.
Greaves, L. Rawlings, B.
Hamwee, B. Rawlinson of Ewell, L.
Hanham, B. Razzall, L.
Harris of Richmond, B. Reay, L.
Hayhoe, L. Redesdale, L.
Higgins, L. Rees, L.
Hodgson of Astley Abbotts, L. Rennard, L.
Holme of Cheltenham, L. Renton, L.
Howard of Rising, L. Roberts of Conwy, L.
Howe, E. Roberts of Llandudno, L.
Howe of Aberavon, L. Rodgers of Quarry Bank, L.
Howe of Idlicote, B. Roper, L.
Hunt of Wirral, L. Saltoun of Abernethy, Ly.
Jacobs, L. Sandberg, L.
Jenkin of Roding, L. Sanderson of Bowden, L.
King of Bridgwater, L. Scott of Needham Market, B.
Knight of Collingtree, B. Seccombe, B.
Laing of Dunphail, L. Sharman, L.
Linklater of Butterstone, B. Sharp of Guildford, B.
Liverpool, E. Shaw of Northstead, L.
Livsey of Talgarth, L. Shutt of Greetland, L.
Lucas, L. Simon of Glaisdale, L.
Luke, L. Skelmersdale, L.
Lyell, L. Smith of Clifton, L.
McColl of Dulwich, L. Steel of Aikwood, L.
McNally, L. Swinfen, L.
Maddock, B. Taverne, L.
Mar and Kellie, E. Tebbit, L.
Marlesford, L. Thomas of Gresford, L.
Marsh, L. Thomas of Walliswood, B.
Mayhew of Twysden, L. Thomson of Monifieth, L.
Methuen, L. Tope, L.
Miller of Chilthorne Domer, B. Trumpington, B.
Miller of Hendon, B. Vallance of Tummel, L.
Molyneaux of Killead, L. Waddington, L.
Monro of Langholm, L. Wakeham, L.
Monson, L. Wallace of Saltaire, L.
Montrose, D. Walmsley, B.
Morris of Bolton, B. Walpole, L.
Mowbray and Stourton, L. Watson of Richmond, L.
Moynihan, L. Weatherill, L.
Murton of Lindisfarne, L. Williams of Crosby, B.
Naseby, L. Williamson of Horton, L.
Neuberger, B. Windlesham, L.
NOT-CONTENTS
Acton, L. Carter, L.
Ahmed, L. Christopher, L.
Amos, B. (Lord President of the Council) Clarke of Hampstead, L.
Cohen of Pimlico, B.
Archer of Sandwell, L. Corbett of Castle Vale, L.
Ashton of Upholland, B. Crawley, B.
Bassam of Brighton, L.
Bernstein of Craigweil, L. Davies of Oldham, L. [Teller]
Borrie, L. Drayson, L.
Brennan, L. Dubs, L.
Brooke of Alverthorpe, L. Elder, L.
Brookman, L. Evans of Parkside, L.
Burlison, L. Evans of Temple Guiting, L.
Falconer of Thoroton, L. (Lord Chancellor) Maxton, L.
Merlyn-Rees, L.
Farrington of Ribbleton, B. Mitchell, L.
Filkin, L. Morgan of Drefelin, B.
Gale, B. Morris of Aberavon, L.
Gavron, L. Morris of Manchester, L.
Gibson of Market Rasen, B. Murphy, B.
Giddens, L. Pendry, L.
Goldsmith, L. Pitkeathley, B.
Gould of Potternewton, B. Ponsonby of Shulbrede, L.
Graham of Edmonton, L. Prosser, B.
Griffiths of Burry Port, L. Randall of St. Budeaux, L.
Grocott, L. [Teller] Rea, L.
Harris of Haringey, L. Rendell of Babergh, B.
Harrison, L. Richard, L.
Hart of Chilton, L. Roll of Ipsden, L.
Haskel, L. Rooker, L.
Haworth, L. Rosser, L.
Hayman, B. Royall of Blaisdon, B.
Henig, B. Sewel, L.
Hilton of Eggardon, B. Sheldon, L.
Hogg of Cumbernauld, L. Simon, V.
Hollis of Heigham, B. Snape, L.
Stone of Blackheath, L.
Howarth of Breckland, B. Strabolgi, L.
Hoyle, L. Taylor of Blackburn, L.
Hughes of Woodside, L. Tomlinson, L.
Hunt of Kings Heath, L. Triesman, L.
Jay of Paddington, B. Truscott, L.
Jordan, L. Tunnicliffe, L.
Kirkhill, L. Turner of Camden, B.
Lea of Crondall, L. Uddin, B.
Leitch, L. Wall of New Barnet, B.
Lipsey, L. Warner, L.
Lockwood, B. Whitaker, B.
McIntosh of Haringey, L. Wilkins, B.
McIntosh of Hudnall, B. Williams of Elvel, L.
MacKenzie of Culkein, L. Wilson of Dinton, L.
Mackenzie of Framwellgate, L. Winston, L.
McKenzie of Luton, L. Woolmer of Leeds, L.
Massey of Darwen, B. Young of Norwood Green, L.

Resolved in the affirmative, and amendment agreed to accordingly.

3.30 p.m.

Lord Higgins moved Amendment No. 211:

Page 130, line 18, after "of" insert "all"

On Question, amendment agreed to.

Lord Higgins moved Amendment No. 212:

Page 130, line 21, at end insert—

"( ) The proportion of the levy to be raised under subsection (1)(a) and (b) shall be 80% and 20% respectively.

The noble Lord said: My Lords, in moving Amendment No. 212, it would be convenient also to discuss Amendment No. 217A. Noble Lords will appreciate that these amendments address essentially the same point. I shall argue them jointly, although we have come to the view that Amendment No. 212, although good, is inferior to Amendment No. 217A. At the appropriate moment, therefore, I shall withdraw Amendment No. 212 and in due course move and propose a vote on Amendment No. 217A.

Amendment No. 212 is the third of a group of amendments in which the point at issue is comparatively simple: what proportion of the levy raised under Clause 173(1)(a) and (b) shall be risk-based and what percentage on a scheme-based provision? While the noble Baroness earlier cited the views of industry—wrongly, in my view, given the context in which she made those remarks—so far as industry in general is concerned, I think that there is a strong feeling that the proportion on the scheme basis, which may be used to cover the overhead costs of the scheme and so forth, should be comparatively low while the risk-based element should be comparatively high. For that reason, our amendment suggests that the proportion ought to be at least 80 per cent.

The arguments are fairly simple and we discussed them extensively in Committee. It is now appropriate for the House to consider them. I beg to move.

Lord Oakeshott of Seagrove Bay

My Lords, I should make it clear that Members on these Benches also support the amendments. I have already discussed why, but I rise to quote briefly from a very perceptive letter I have received from one of Britain's pension funds. It sets out clearly the problem being faced by private pension funds in this country and why moving quickly to as full a risk-based levy as possible is important: The practical question is how can we tackle the deficit … This depends a lot on the long term strength of the business involved. In all probability, most of the big industrial companies will be around on a twenty year view and can approach this in a gradualistic way—a combination of increasing contributions, reinvested investment returns and changing benefit structures. The company that I work for has projects with streams of income going forward 20 years for example and I think it would be legitimate to spread any deficit recovery over a long period. The problem is that (a) many schemes are in deficit which do not have a strong covenant"— a strong employer behind them, as this particular one I am talking about does— and (b) the entire thrust of regulation seems to be to crystallise the problems rather than recognise that, as with banking crises, policies have to nurse the system to a point at which more radical security measures can be put in place. This requires quite subtle regulation and some long term thinking. Do not get me wrong. I am not arguing for evading the problem but … for those of us in the middle of the deficit hole and in financially viable companies, policy needs to ensure that we are taking measures that will lead to solvency in the mid term and then we should be regulated so that it will never happen again. Unfortunately, the [present] thrust of policy seems to be the reverse". That sums up clearly what the big, solvent companies with strong backing are doing. It would be a real kick in the teeth for them to carry on with what is in effect a flat-rate basis any longer than necessary.

The noble Baroness talked about a chasm between us. Let me make it clear that on this amendment and on the thrust of these amendments, we are bound together with the noble Lord, Lord Higgins, with hoops of steel.

Baroness Hollis of Heigham

My Lords, perhaps there is a profound misunderstanding between us. The noble Lord, Lord Oakeshott of Seagrove Bay, said that companies should not have to have a flat-rate levy any longer than they have to. Fine. After the initial one-year period it is entirely in their hands. If they wish to produce the information required for the valuation so the regulator of the board can determine what their levy would be, they may do so. The assumption here is that the Government are delaying them going into a risk-based levy when they wish to do so. That is not true.

Lord Oakeshott of Seagrove Bay

My Lords, let me explain the issue to the Minister. One cannot have a situation after the first year where some companies effectively are able to go on to a risk-based scheme and others are not. The people paying the risk-based levy at that time will not be paying the right rate. Everyone has to go over to it all together; that is obvious.

Baroness Hollis of Heigham

My Lords, on the contrary. That is exactly the point in dispute between us. It will certainly be the case that during the transitional period there will be a mixed economy in which all schemes will have some scheme-based levy and others will carry, by choice, a risk-based element. It is clear that insofar as the good companies seek the risk-based element in the hope of reducing their premium, this will have an adverse selection effect on the scheme-based levy for the rest. However, that is the choice of those companies—the very same companies quoted by noble Lords opposite. They have precisely that option and that flexibility now. The amendments produced today are built on a false hypothesis that it is either one or the other—flat rate or risk.

No, my Lords; that is not the case. I have circulated at least three trees' worth of paper on this. After the initial year—we have just discussed the date—we shall phase in over the transitional period the risk-based levy; that is why it is called a transitional period. We would expect companies to come within that on a three-year valuation cycle. If they feel they wish to bring that valuation cycle forward, they can do so, once the risk-based factors have been determined which is what the first year will be spent doing. Thereafter they will be able to go on to the risk-based levy.

The noble Lord is exactly right. He may well find a large company with 100,000 members that is well run and well funded with a secure employer coming on to a risk-based levy in year two or year three. It will have judged, probably accurately, that the collective levy will reduce accordingly. Another company, also as large but with a funding deficit and a struggling employer, will decide that it is better off remaining with a scheme-based levy as long as possible since, once the risk-based levy comes in, it will find that its premiums go up as a result.

We want to accelerate movement to the risk-based levy. There is no difference between us. Therefore the industry will have to address these adverse selection issues as it sees fit. It is not the Government saying they cannot move on to a risk-based levy. After year one, they can, but it is up to the companies to determine their entry to the scheme rather than for the Government to lay it down.

I have to say I am very surprised. We could almost be exchanging positions here. I would have expected the Opposition to say that individual companies should determine whether they go into the risk-based levy since they alone will know, when they have their valuations and make the judgment call, whether they wish the arrangement to be flat rate or some combination of the two elements. Instead, we would deny that flexibility or judgment call to companies and, if we followed this amendment, we would impose a straitjacket on how companies best see the way forward in terms of responding to this levy call. Members opposite have got it wrong. They seem to think that it is either one or the other. It is not. There is a phase-in period during which those companies that wish to do so can bring themselves into the risk-related levy ahead of the terminal point of the transitional period.

Why do Members opposite want to tell companies when they can enter the scheme? We are not doing that. We are saying that they can come into it as they see fit. I cannot believe that Members opposite, who say they are speaking for the industry, want to impose a government-ordained timetable as opposed to allowing companies to determine their own.

However, that is a bigger issue. I had not meant to say anything about it but there is such a profound misunderstanding of how the transitional arrangements will operate that I thought it was worth sharing my perceptions with the House. I shall now formally deal with the contents of the amendments.

The amendments would require the board to collect at least 80 per cent of the levy through the risk-based pension protection levy. Yes, as soon as maybe, I agree, but I cannot support the amendments, for reasons that I shall come to later. They would require the board to recover its administrative costs through the scheme-based pension protection levy and prevent it exceeding the administration costs—but the problem is that if you have very small schemes of two or three you will actually exceed the money you collect—and they would give the Secretary of State and Parliament control over the total amount of levy the PPF board could collect in any given year.

The approach to calculating the risk-based pension protection levy as the responsibility of the board has yet to be finalised. While we expect the risk-based levy to account for approximately 80 per cent of the levies, certainly by the time the transitional period is complete, in advance of the methodology being established it would be extremely unwise to restrict the board's flexibility in setting the levy's structure. For example, until it is known how the risk-based levy is to be determined, it is uncertain how much the worst-run, most underfunded schemes will be required to pay simply because of the problem of adverse selection. The noble Lord, Lord Oakeshott, identified that problem but is not willing to follow through the consequences of his remarks.

In order to prevent those schemes being landed with an unsupportable charge—a risk identified by NAPF—it may be necessary to impose a scheme-based levy of a value greater than 20 per cent in order to avoid the floor and ceiling of the risk-based levy being so wide that it would produce a scheme-based levy that is unacceptably low.

Conversely, the way in which the risk-based levy is calculated may enable the board to collect more than 80 per cent of the levy. Again, the amendments would prevent that. The amendments would freeze us into 80 per cent to 20 per cent, even though the smaller schemes—the two person schemes, the three person schemes—which you may wish to keep on a scheme-based levy would then be faced with costs wholly disproportionate given the way in which adverse selection has worked. Companies which would do well out of the risk-based levy have pulled out of contributing in the way in which they would under a flat-rate scheme.

We appreciate the importance of a risk-based levy in ensuring that the charge on well-run schemes is fair. That is why we have stipulated that the risk-based levy must form a minimum estimated 50 per cent of the total amount to be collected. We believe that will strike the right balance. But we are dealing with a zero-sum game—that is what adverse selection is all about. If some companies pay less, others will pay more. If the noble Lord's amendments are carried, it could make some struggling firms face an unacceptably high levy.

I now move to the second part of the amendments. I shall explain why we do not want the scheme-based pension protection levy to be linked to the PPF's administrative costs. I do not believe either noble Lord spoke to this issue—I agree that it is less of a blue sky issue than the one we have been discussing—but it may be worth spelling out our thinking on this and explaining why we are unable to accept the amendment.

3.45 p.m.

As set out in Clause 115, the administrative costs of the board will be met by a grant in aid paid by the Secretary of State, which the Secretary of State will then recover through an administrative levy. This is quite separate to the pension protection levies with which Clause 175 and these amendments are concerned. This separation is important—as it is for other non-departmental boards—because it provides a clear demarcation between the expenditure and the income used to pay compensation, which is paid for by the levy, and the expenditure and income which is used to pay the administrative costs of the board. The differing ways in which we are approaching this issue provides an important accounting clarity for the House. It will enable Parliament to scrutinise more closely the accounts of the PPF, which I am sure we will all welcome. It is worth noting that most of the executive NDPBs which operate at arm's length from government in the way in which the PPF will operate are funded in this way. Indeed, OPRA was set up and funded in this way, and the regulator will continue in a similar manner. I am sure that noble Lords do not want us to introduce a new method of funding other than the one we have for OPRA and other NDPBs. It would be unreasonable.

We expect that the scheme-based pension protection levy will have a particular role to play in ensuring that the application of the risk-based levy to struggling schemes does not result in an overall charge that is unsupportable. The amendments would ensure that the scheme-based pension protection levy could not exceed the administrative costs of the board. This would prevent the board using the scheme-based levy to control those unsupportable charges because, when compared to the overall levy, the estimated administrative costs of the board are insignificant. The board would therefore be forced to adjust the way in which it calculates the risk-based protection levy to take account of this. Again, that would be highly undesirable.

I have assumed that the third part of the amendments is intended to give the Secretary of State and Parliament control over the amount of levy the PPF board could collect in any particular year. Neither noble Lord addressed this point in their opening remarks but, given that your Lordships will be seeking, no doubt, to test the opinion of the House, it seems proper that I should specify what is going on in this area. The amendments would require the board to tell the Secretary of State what it estimates it will collect through the levies in the coming financial year. The intention is that if there was any change the Secretary of State would have to seek Parliament's approval via regulations. We believe that preventing government interference in deciding the rate of the pension protection levy is absolutely essential.

Again, I am surprised. I would have expected noble Lords on the other side of the Chamber to say exactly the opposite to what is in the amendment. It flies in the face of everything they say about "arm's length", "industry money" and "keep government out". Now they are trying to bring the Government back in. I cannot believe that is what they want to do.

The board of the PPF will be best placed to know what levy rate it needs to secure current and future liabilities. That is what the board, with its expertise, is meant to assess. We believe that the Government have no place in that kind of decision because political concerns could override what is best for the PPF. Indeed, the noble Lord, Lord Lucas, pressed me only three hours ago to say that there should be no political interference by government. That is until it suits the opposition amendments, whereupon we can have political interference by government. That cannot be sensible or decent.

I know we are all concerned about the possible impact of these freedoms on the levy payer. They are understandable concerns. But your Lordships know what safeguards are in place to prevent the board using any powers inappropriately in terms of the cap on the limit the board can raise and the total amount that it can raise. These controls are reflected in Clause 175, as your Lordships will know.

I could expand on these points, but I hope that I do not need to. Your Lordships know perfectly well the pattern of capping in terms of the levy that can be raised. We do not need the Secretary of State to do it; it is already there in the Bill, in the schedules and in the regulations.

I ask Members opposite to consider this. We have an initial one year—now with a fixed date, which obviously we shall try to honour—of a flat-rate levy. We are also saying that over the next four years or thereabouts the risk-based levy will be phased in. It will have to be phased in on the basis of the three-year accounts, but any individual company can choose to come on to the risk-based levy earlier than that if they wish by having a valuation out of time. It is their choice if they want to pay for it. To ask all small companies to go for valuation out of time in year one or year two to get onto the risk-based levy would add something like £100 million in valuation costs to 50,000 schemes, many of which are quite small in number—two member, five member, 10 member.

That is not the Government's approach. We are saying that by the end of this transitional period companies will be on a balanced levy, largely risk based but partly scheme based. How quickly they come on to the risk-based levy will be for them, not the Government, to determine. It is their choice; the companies decide. The opposition amendment seems to state, "No. Companies do not know what is the best thing for them. The Government will tell them what to do". I do not hold that position. We have built this Bill on consensus with the industry and I am confident that the industry would prefer to determine when it goes on to the risk-related levy. The opposition amendments would not permit that to happen.

I invite Members opposite to think through the implications of government interference in the timetable of when companies come onto the risk-related levy; government interference in terms of reporting on how the board may or may not cap the money raised and so on. If we are not careful we will be turning the PPF into an arm of government rather than, as we all wish, an arm's length body funded by the industry for the protection of scheme members in ways best structured to avoid moral hazard. I think that the Opposition amendments begin to subvert that thrust. To go for this would be very unwise, so I hope that your Lordships will reject the amendments.

Lord Higgins

My Lords, I listened with great interest to what the noble Baroness said, but I am somewhat puzzled by the initial part of her remarks. They seemed to be based on the assumption that the Government won the last vote, and that is not so.

Baroness Hollis of Heigham

My Lords, there has been a misunderstanding, which is why I was talking about chasms between two noble Lords opposite on what the last vote did. Instead of saying that the initial period would last about a year, which was the Government's intent, the amendment puts a date of 31 March 2006 on it. So when the Bill receives Royal Assent and comes into force, we hope, from the beginning of April 2005, there will be one year for a flat-rate scheme for everybody. That was what the last vote did.

Lord Higgins

My Lords, that was the result of the vote on Amendment No. 208, but we have voted on another amendment since then. That said that the levy should be a flat-rate levy and have a risk-based element as well. In a sense, this debate is a consequence of the vote we have just had; namely, that there should be both a scheme-based levy and a risk-based levy, and that the proportion between the two is such that the risk-based element should be at least 80 per cent. This is what we are saying.

Baroness Hollis of Heigham

My Lords, that, is not what the noble Lord, Lord Oakeshott, said. He talked about not wanting a flat-rate levy, about it being all or nothing, so to speak—you cannot have some companies included and some not—and about wanting the risk-based levy virtually immediately. That was what I was arguing against.

Lord Oakeshott of Seagrove Bay

My Lords, I said that after a year it should be 80 per cent risk based. That is the key.

Baroness Hollis of Heigham

Forgive me, my Lords, I know this is not Committee, but we are not arguing about the year. The difference between us is whether, after that year has elapsed, companies go immediately on to the risk-based levy or whether they do so as they see fit.

Lord Higgins

Again, my Lords, that is what we debated on the previous amendment, which was carried. We are effectively debating a consequential proposal; namely, if we go after the initial period to a system, one component of which is scheme-based and the other risk-based, then the proportion between the two is such that the risk-based element should not be less than 80 per cent. That is what this amendment is about.

The other thing that puzzled me in the noble Baroness's remarks was that she quoted the NAPF as being against Amendment No. 217A, which we believe to be superior to Amendment No. 212. However, my understanding is that the NAPF is entirely in favour of what is suggested in Amendment No. 217A.

Lord Oakeshott of Seagrove Bay

Absolutely, my Lords.

Lord Higgins

My Lords, that view is confirmed by the noble Lord, Lord Oakeshott.

We listened with interest to what the noble Baroness said, but we are not persuaded, for the reasons which I have just mentioned, and hope to take the opinion of the House.

Lord Lea of Crondall

My Lords, before the noble Lord sits down, I do not hear him respond to the point that this is a major responsibility of the board. However one does this, its responsibility is to make an assessment based on what I think my noble friend described as a zero sum game. I do not think that the noble Lord has answered that point about the board's responsibility.

Lord Higgins

My Lords, we are seeking to set out what seems to us a reasonable basis on which to set up the situation in the relationship between the Government and the board. That is what we have done. I beg to take the view of the House.

The Deputy Speaker (Lord Lyell)

My Lords, the Question is that Amendment No. 212—

Lord Higgins

My Lords, I am sorry. I wish to withdraw the amendment which, as I indicated earlier I think is inferior to Amendment No. 217A, and to vote in due course on Amendment No. 217A.

The Deputy Speaker

My Lords, I am much obliged to the noble Lord.

Lord Higgins

My Lords, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 213 to 216 not moved.]

Clause 175 [Amounts to be raised by the pension protection levies]:

[Amendment No. 217 not moved.]

Lord Higgins moved Amendment No. 217A:

Leave out Clause 175 and insert the following new Clause—