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Baroness Seear: I speak as a fool in these matters in comparison with all the experts around the Committee. We were very much concerned with the minimum solvency requirement and both the noble Lord, Lord Ezra, and I were extremely impressed with the proposals

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put forward by the noble Lord, Lord Eatwell. The Minister, who had his defence ready before the noble Lord, Lord Eatwell, spoke—who can blame him for that on such a subject—never really grappled with the points put forward by the noble Lord. Do I have it aright that the central problem is that, in order to maintain sufficient funding to meet a bankruptcy in the scheme, more has to be paid into the scheme than is necessary for the scheme, which is not going to go bankrupt and which has to meet ongoing payments in retirement? That is the centre of the matter. More money is being paid in than is necessary to meet the unlikely event in the vast majority of cases that the scheme will go bankrupt.

From the employer's point of view that cannot be desirable. The Minister cannot possibly want companies to have to pay more in than is absolutely necessary. This is where we found the idea of the discontinuance fund extremely encouraging. It seemed a valuable device to help meet the problem of bankruptcy, which would therefore make unnecessary the additional funding which the schemes would have to make under the Minister's programme, which is over-insurance against an event that is very unlikely to take place. Surely from everyone's point of view this is a desirable development.

The Minister said that someone would have to back up the discontinuance fund because there might not be enough money in it. He asked why the taxpayer should do it. That is open to argument. Some of us might want at least to discuss a contribution from the taxpayer. But if one does not like the taxpayer's contribution, there is the example of what happens in the travel industry when travel agents get together to deal with bankruptcy. It is already done in the private sector. We are going to ask them to do that in relation to compensation. Why on earth can we not do it in order to deal with the backing up of the discontinuance fund which will make unnecessary these excess payments which the government scheme will require, as the noble Lord the Minister made clear?

I do not claim to have any knowledge of these matters, but I would like the points put forward by the noble Lord, Lord Eatwell, to be answered by the Minister and for the matters to be discussed far more fully.

The Earl of Buckinghamshire: After 55 minutes I hesitate to speak for the second time. There are some real problems with the discontinuance fund. One is entering into the realm where actuaries will be forced by regulation into adopting standard funding assumptions over all the schemes and every scheme has a different profile. That would not be the correct way to go forward. In any case the actuaries would fight the proposal all the way without my help.

If there is to be a discontinuance fund there will be a move to additional regulation and standard funding assumptions so that all schemes never effectively run the risk of going into insolvency. One is therefore back to square one. I found the contribution made by the noble Lord, Lord Eatwell, extremely interesting and innovative. I recognise it because the actuaries I work with employ the same mechanisms at the moment in

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most of their schemes for the standard contribution rate findings. It is inevitable that if one goes down that route one still has to return to some form of minimum funding or solvency requirement.

As I said, members have an expectation that their rights will be met in full. As I also said, they do not understand ongoing insolvency and insolvency on wind-up. I believe that the noble Baroness, Lady Turner, will be moving an amendment on MSR and reverting it back to the Goode standard. She will put me right if I am wrong about that. We have the interesting concept of a contribution-based standard which ought to be in place in schemes in any case. Later, we shall have a debate on the standard MSR assumptions in any event. There will be other variations which the noble Lord, Lord Marsh, will be speaking about and I shall be supporting them. I do not believe that we are going to make much more progress on this matter. As regards the discontinuance fund, I believe that there are major problems if we go down that route.

Lord Desai: The noble Earl is very knowledgable on these matters. If one has a central discontinuance fund which is financed by other funds there will be risk-pooling. There will be difficulties in calculating the extra sum required when pooling the risks. The noble Earl was making the point that the actuaries may have a great many problems calculating the figures.

I am puzzled that risk-pooling is not cheaper than asking every pension fund to have its own minimum solvency requirement. It seems to be counter-productive. If risks are pooled by the pension funds and not the taxpayer—because the Minister does not want the taxpayer to be disturbed—why cannot it be cheaper than if every pension fund separately bears the cost of meeting the minimum funding requirement?

I am still not convinced that the point made by my noble friend Lord Eatwell about disturbance to the equity market has been adequately dealt with. The Minister said something about it. I believe that my noble friend was on the right lines. The Government are saying that an extra £300 million to £400 million will have to be put in to meet the minimum solvency requirement. The manner in which it is injected will cause a massive shift in the equity as against the gilts market. Have the Government worked out the consequences of having a depressed equity market? It is a serious problem. There will be consequences not only for pension funds but also for the financing of industrial investment in this country. These aspects go beyond technical issues of calculating fund assets and liabilities. It is good that we are having this discussion; we should pursue it further.

5.45 p.m.

Lord Monkswell: There has been discussion about funding the minimum solvency requirement on the basis of cash injections from the firms themselves or from some form of insurance scheme. Over time there is another possible source of funding; namely, the pension fund surpluses which arise from time to time at the other end of the equity market of peaks and troughs. That is not being taken into account. I hope that the

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Government recognise that the main problem we are concerned with is government constraints in terms of the minimum and maximum funding of schemes in a narrower band than the variations in the value of the scheme assets. That can come about because of variations in the equity market.

One way of resolving the problem is for the Government to increase the range of the bottom and top levels of the scheme funding. The pension fund surpluses which are currently required to be disbursed to employers—or through pension fund holidays to employees—could be retained in some form so that they can balance deficits which require injections of funding to make up the minimum solvency requirement. That mechanism could be used.

There would be a secondary beneficial effect in the trigger for the minimum solvency requirement or the minimum funding requirement, whatever the terminology. There is going to be some mechanism for extra funding to be injected into pension schemes by companies. Generally speaking, that cash injection will be at the downturn of the economic cycle when the value of equities is very low and therefore does not meet the liabilities of the scheme. The implication is that finance has to be taken out of the economy and injected into the pension funds at exactly the wrong point in the economic cycle.

The corollary is almost completely true as well in that at a time when equity markets are high and, generally speaking, there is a high degree of economic activity, pension fund surpluses have to be disbursed because of Inland Revenue rules. Effectively, that injects more cash into the economy and generates more economic activity. That overheats the economy. The Government should think of smoothing over those cycles. They should enable pension fund surpluses at times of high equity valuation to be retained in some form. They should be held in some kind of separate account if necessary and used to make good the deficit in the minimum solvency requirement at the downturn of the equity market. Will the Government comment on that proposal?

Lord Mackay of Ardbrecknish: I have stood at the Dispatch Box almost long enough in this debate. I wish to study what the noble Lord, Lord Monkswell, said before I reply in more detail. I hope that I did answer his noble friend Lord Eatwell about the equity and gilts balance by drawing attention to the table at paragraph 37 of the compliance cost analysis.

The noble Lord, Lord Desai, and the noble Baroness, Lady Seear, seem to be attracted to the central discontinuance fund. I am not entirely sure about that. The noble Lord, Lord Desai, seemed close to suggesting some kind of national occupational pension scheme into which other pensions schemes would become subsumed. I caution Members of the Committee against being too attracted to that idea. If one thinks about it, one realises that the schemes transferred to the discontinuance fund could have many different rules and regulations. Indeed, they could have different benefits. Would the discontinuance fund pick up the benefits as per each scheme or would it attempt to rationalise the benefits? If it picked them up as per each scheme, it would be

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rewarding some schemes and, when it came to asking for the money, it would perhaps be damaging some other schemes.

Employers might be annoyed because they would have to make provision for the discontinuance fund calling on them. If they thought that they ran a good scheme, they might become annoyed if they were constantly called upon to bail out the lesser schemes. We shall do something about that in relation to schemes failing because people have acted illegally, but one is getting into difficult territory if one widens the scope.

I am not an expert on this, but I think that there would be a real temptation for schemes to sail close to the wire—if I heard the argument of the noble Baroness, Lady Seear, correctly—because they would know that they had a back-up if they wobbled on to the wrong side. I remind the Committee that there is a pension promise to each scheme. There is a promise with regard to the contributors and a promise for when members of the scheme become pensioners.

With those few additional thoughts, I hope that I can leave the matter. Clearly, this has been an interesting debate. Now that the noble Lord, Lord Eatwell, has fleshed out his ideas a little more, I can assure him that we shall study them. However, I should not like to give the noble Lord even a glimpse of a hope in relation to the amendment. Although we shall certainly study his comments, we are certain that what we propose is the best way to proceed in this difficult area. We all want to do the same thing. We all want to give solid security to scheme members—I thought that the noble Baroness, Lady Seear, was beginning to take the employers' side when she intervened—but at the same time, we want to ensure that employers will not be put off such schemes, which we all agree are an excellent way for people to provide for their retirement.

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