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

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

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

It is incorrect to view a central discontinuance fund as a cheap alternative to the minimum funding requirement. We envisage that the terms on which such a fund would accept the transfer of liabilities could in effect impose a de facto requirement on all schemes. My noble friend Lord Buckinghamshire, who has professional experience in this area, suggested that we

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should all tread with some trepidation. I confirm to him that I certainly tread with some trepidation into these matters because they are not only complicated but they are extremely important for the people who have put their money into pension schemes.

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

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

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

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

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

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

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

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

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

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

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

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floor under which the practices of pension funds would not fall. In other words, it would provide standards which could be maintained.

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

Amendment, by leave, withdrawn.

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

[Amendment No. 111 not moved.]

Lord Lucas moved Amendment No. 112:


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

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

On Question, amendment agreed to.

[Amendment No. 113 not moved.]

Lord Lucas moved Amendment No. 114:


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

On Question, amendment agreed to.

11 p.m.

Lord Lucas moved Amendment No. 115:


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

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

On Question, amendment agreed to.

Clause 50 [Schedules of contributions]:

The Earl of Buckinghamshire moved Amendment No. 116:


Page 30, leave out lines 10 to 12.

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

If this amendment is not accepted, tremendous power is granted to the trustees to control the overall pace of funding which currently lies with the employers. These amendments aim further to ensure that contributions must at least be equal to those certified by the actuary

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as necessary to meet the minimum solvency requirement, but with an agreement on any further contributions subject to the provisions in the individual trust document, which will lay down how the employer's contribution and the pace of funding is agreed. I beg to move.


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