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The Earl of Buckinghamshire moved Amendment No. 103:


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

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

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

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

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

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

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

On Question, amendment agreed to.

[Amendments No. 104 to 109 not moved.]

Lord Eatwell moved Amendment No. 110:


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

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

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

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

I have here a document dated 21st January l993 prepared by the Government Actuary entitled A Central Fund for Private Sector Occupational Pension Schemes: Supplementary Memorandum by the Government Actuary. In that document the Government Actuary argues what he calls "the need for a central fund". His case is:


    "Because many schemes would find it difficult to secure their liabilities on discontinuance, a mechanism is needed for handing over the liabilities to another vehicle, similar to an on-going pension fund ... The answer would appear to be to have a Central Fund (or Discontinuance Fund) ... The Fund would simply act as an administrative arrangement and investment vehicle for running off the liabilities of discontinued pension funds".

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

The Government Actuary notes, for example:


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

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

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The Government Actuary then goes on to examine in his document a wide range of additional advantages which would stem from the existence of a central discontinuance fund. In particular it could act as:


    "a central clearing house for financial adjustments between schemes, so as to permit the whole of an individual's pension to be paid by a single scheme."

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

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

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

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

10.45 p.m.

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

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

The Earl of Buckinghamshire: My Lords, at the risk of extending our debate deep into the night, I declare an interest and say to my noble friend the Minister that if the Government Actuary is to be thrown at him my new

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employer, Watson, will throw something at me. It proposed the setting up of a central discontinuance fund. Fortunately, an article stated, "Bail out fund the bankrupt idea". I believe that the issue is extremely complex, whether it is minimum funding, minimum contribution or minimum solvency. I suggest that your Lordships enter upon it with trepidation because overnight one is supposed to become expert in a most technical area.

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

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

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


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