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Lord Ezra: My Lords, I have much pleasure in supporting the amendment moved so ably by the noble Lord, Lord Eatwell. He has pointed to a fundamental issue in our deliberations. As we have noted as we have gone through our considerations on the pension industry, it contributes some 30 per cent. to investments on the Stock Exchange. It is of vital importance that that contribution to our industrial welfare should continue. We must reconcile continued investment in the industrial strength of the country on the one hand and the security of pensioners on the other.

The noble Lord has drawn a distinction quite rightly between the discontinuance basis of valuing pension funds which could jeopardise the continued investment in equities and minimise the risk which they take in their investments and the ongoing basis which runs the risk that, at a particular point in time when a business ceases to operate, the valuation of their investment in the Stock Exchange might be very low.

I believe that the noble Lord has suggested a quite ingenious way out. It is a way out which many other countries have adopted. The Government would be well advised to take this seriously and to reconcile those two issues: maintenance of the investment of pension funds in the equity market on the one hand and safeguarding

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the security of pensioners or members of schemes on the other. I hope that the Minister will take this matter very seriously.

Lord Finsberg: My Lords, the noble Lord, Lord Eatwell, has made a very interesting case. I declare my interest as a trustee of a major pension fund and as a former trustee of the parliamentary pension fund. That fund could never be valued on a discontinuance basis, or at least I hope that it would not be, otherwise some of us in this House would be uneasy.

This is a very complex issue and the House is grateful to the noble Lord, Lord Eatwell, for the clear way in which he has explained the amendment. His argument for giving an option for the fund to be either on a discontinuance basis or an ongoing basis is one with which I certainly go along. I hope that the Minister will agree to look with some care at that matter. I hope that he will not ask us to dismiss it today.

However, I do not go along with the idea of establishing a discontinuance fund. That adds an unnecessary piece of bureaucracy and will impose costs of one kind or another on other schemes. I should be very uneasy about that. I endorse the idea of giving an option to the fund to decide whether it wishes to be on an ongoing basis, which I favour, or on a discontinuance basis, about which I am uneasy. Therefore, I hope that my noble friend will indicate that amendments will be brought forward in another place to cover paragraphs (a) and (b) but that he will not accept the last three lines of the amendment.

5.15 p.m.

The Earl of Buckinghamshire: My Lords, I congratulate the noble Lord, Lord Eatwell, and the noble Lord, Lord Ezra, on bringing forward what is a very clever amendment. Indeed, I congratulate the noble Lord, Lord Eatwell, on his conduct as regards the whole debate on the Pensions Bill.

Having said that, I call this the Morton's Fork amendment because I think you are damned if you do and damned if you do not. I find myself in some difficulty because, rather like my noble friend Lord Finsberg, there are some superficial attractions to the amendment.

On the surface the amendment provides a straight choice between funding for discontinuance and funding for ongoing liabilities. If the latter is chosen, as the noble Lord, Lord Eatwell, said, the company would be asked to pay a levy into a central discontinuance fund. I know that the noble Lord, Lord Eatwell, defined discontinuance liabilities when he was describing the impact of the minimum funding requirement but I am not entirely sure that I understand what he means in that context about discontinuance liabilities. If it means funding to meet the liabilities of a defined benefit plan, we are back into the old discussions about how to meet those liabilities, given the impossibility of the market at present to provide that as a means of liquidating the liabilities on a wind-up.

There are major difficulties in funding for discontinuance liabilities. That goes back and is linked to investment policy. It would lead inexorably towards

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investing almost totally in gilts. Future increased pension liabilities would be matched by index-linked gilts but it would not be possible, if funding for discontinuance liabilities, to invest for growth. On that basis, the results of that investment policy are likely to lead to an increased and volatile cost about which companies are not likely to feel very comfortable.

The next stage of the amendment deals with funding for future liabilities on an ongoing basis. That is something with which we are very much more familiar and comfortable. Defined benefit plans are linked to salary inflation and, as the noble Lord, Lord Eatwell, said, it is possible to justify more easily a high equity content in investment policy. But your Lordships should be aware that it is technically possible to be solvent on an ongoing basis and insolvent on a discontinuance basis. That is a very important point to grasp.

If one follows the ongoing basis of funding, the solution is to cover the insolvency situation by the payment of a premium, as I understand it, to a central discontinuance fund. I shall be interested to know whether the noble Lord, Lord Eatwell, agrees that there is a selection against the central discontinuance fund because the company will be able to opt for the basis on which it wishes to proceed. Therefore, there could be selection and an increase in what I describe loosely as a moral hazard.

On the surface, that second option seems to be attractive. You can invest for growth via equities; and you are not faced with a minimum funding requirement which requires an injection of cash or funds when things go wrong. On Report the noble Lord, Lord Eatwell, mentioned Finland and Japan as examples of countries which had central discontinuance funds. While that is true, I suggest that the USA may be a more relevant example at which to look in relation to that type of fund. It goes under the initials of the PBGC.

In the US, the PBGC is under very serious scrutiny at present within Congress. Your Lordships can perhaps take a considerable amount of comfort from an article which I recently read which said that the PBGC's deficit is 2.9 billion US dollars. It goes on to say that there is none. It seems that, even in the US, the actuaries cannot agree what is a deficit and what is a surplus. I am not sure whether that is a matter of comfort to your Lordships. It seems to me that the whole issue is quite difficult to grasp.

I appreciate that the noble Lord's amendment is offered in a constructive and probing manner to my noble friend the Minister. However, I believe that there are considerable dangers in going down that route. I do not believe that it has been fundamentally researched. Although I am quite sure that the amendment of the noble Lord, Lord Eatwell, will produce a considerable number of articles from my colleagues in the actuarial profession, I believe that there are difficulties with it.

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I can commend to your Lordships an article from The Brookings Review entitled, "Avoiding the Next Guaranteed Bailout". I should like to read to the House a short extract from it. In essence, there are issues in it about which we should be aware. The article says:

    "Government as we have come to know it—that mother of all insurance agencies—has expanded far beyond the confines of the welfare state. In fact, we now live in what can be more accurately described as a modern insurance state. The purpose of the PBGC and the plethora of other programs like it is the very political, but limited, goal of shifting risk".

When talking about the PBGC the article asks:

    "How much do claims exceed expected revenues?".

The answer is:

    "No one knows. Companies are permitted to use actuarial assumptions that greatly understate the cost of retirement benefits, and even the limited information required by the PBGC becomes available only after long delays. Not surprisingly, the agency has discovered that the unfunded liabilities accumulated by terminating plans tend to be much larger than plan sponsors previously reported".

I am quite sure that when we put in—if we ever do—a central discontinuance fund, we shall of course get it right without any problems. However, there are some major difficulties connected with such a fund.

I have also found another quote which I quite like. It is one from Schumpeter. Just to show off, I should tell your Lordships that Schumpeter taught that capitalism is an evolutionary process of creative destruction.

When looking at the amendment, I hope that we do not drive our own pension funds into imminent destruction. It is an interesting amendment. However, I should prefer my noble friend to stick with his own policy but accept in full the amendment put forward on Report by my noble friend Lord Clark of Kempston as a means of coping with the matter of the injection of funds at awkward times.

Lord Mackay of Ardbrecknish: My Lords, we have had a most interesting debate on a very difficult and complex subject. Listening carefully today to the noble Lord, Lord Eatwell, who accused me of moving a little towards him, I almost began to detect, unlike at the Committee and Report stages, that he was moving a little towards the minimum funding requirement. Indeed, perhaps the noble Lord is thinking that we might meet somewhere in the middle. I have no great objection to meeting in the middle, so long as it is not a muddled middle and so long as the objectives which I believe we both have to ensure security in pension schemes are not compromised by trying to find a comprise between two ideas which does not really exist on a firm basis.

I believe that the noble Lord continued to imply today—as, indeed, he did on the two previous occasions when we debated the matter—that we have moved from a position of offering an absolute guarantee to little more than an arbitrary test and that somehow that test would manage to increase costs and drive down funding levels. We have today been offered further glimpses into exactly what the noble Lord intends. To be fair to him, I believe that the noble Lord has gone a good deal further as regards putting clothes on his proposals than he did in Committee.

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Interestingly, the merits of the best practice approach, which underlines what the noble Lord feels we ought to do, were that it,

    "would provide extremely good protection against the possibility of employer insolvency".

It seems to me that hidden behind the noble Lord's tentative proposals was a recognition of my central argument that any measure to improve security must look at the position of the scheme on discontinuance in some way. Therefore, I believe that we may at least be agreed on that point.

It remains for us to consider the most appropriate way of providing security on discontinuance. I have already, several times, given extensive explanations and descriptions of what the Government's proposals will achieve. During the preparation of the Bill the minimum funding requirement has been debated widely by actuaries, employers, investment managers and financial advisers. It has been tested; we have carried out detailed analysis, and we have published our findings. Yet the noble Lord, Lord Eatwell, seems prepared to dismiss all of that and suggest that there is a better alternative. The noble Lord certainly seemed to derive some enjoyment when we changed the title, as we were requested to do by a great many people in the field, to a minimum funding requirement.

This afternoon I should like to look at the alternative which is before us. I take it that the amendment is now a serious policy proposal and no longer the tentative idea that it seemed to be during the earlier stages of our discussion. We need to examine what it would mean for members, for employers and, ultimately, for taxpayers. I suspect that, deep down, there may be other matters which ought to concern general taxpayers.

As I understand the amendment, schemes would appear to have a choice—to fund either on a discontinuance basis or on an ongoing basis. I wonder whether the noble Lord is saying that, if they choose discontinuance, they would have to hold sufficient assets to buy out all benefits with insurance company non-profit annuities. During his speech on the issue last week and again today he argued that that was an unrealistic proposition. He quoted the Government Actuary as saying that it was unrealistic. Indeed, the Government Actuary seems to figure a good deal in our debates, although he is usually quoted against me. "Your actuary" are normally the words used. But I did not notice them today.

The noble Lord has no need to argue the point: the Government have always agreed, as did the PLRC. However, what puzzles me now is why it is proposed in the amendment that there should be a choice. Presentationally, it may look fair and reasonable to offer a choice. But, seriously, what kind of choice is there between option (a) and (b) if everyone agrees that (a) is unrealistic?

I turn now to option (b). If schemes were to decide to take the ongoing funding option—if, indeed, and as I have mentioned, they have any option—they must also pay a levy to a central fund. The noble Lord has told us that ongoing funding, if it is to provide security for members, must require contributions to be paid

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according to best actuarial practice. It would be interesting to know what he understands by "best practice".

We know from our consultation exercise on the minimum funding proposals that there are schemes that are weakly funded on an ongoing basis. But they and their actuarial advisers may well take the view that they do in fact adopt "best practice" when deciding on their funding levels. "Best actuarial practice", depending on your point of view, might range from very prudent assumptions to the most optimistic. So a statutory best practice, if prudent, would increase costs for some schemes—potentially considerably. Moreover, if more optimistic or aggressive assumptions were used it would drive down funding levels and make schemes less secure. Either way, there would be no clear idea of what members should, as a minimum, expect if the worst happened and their employer went out of business.

Any central fund would have to set transfer terms to be able to pay pensions as they became due. Those transfer terms would no doubt become a statutory basis for ongoing funding. Who knows what the cost implications of that might be? The basis would presumably need to be fairly rigorous to ensure that the central fund itself was fully protected. Otherwise there would be a greater risk of it being unable to pay benefits and of taxpayers being expected to make up a shortfall.

What would it mean for members if their scheme was not able to pay the transfer terms? The noble Lord referred to a report that the Government Actuary made to the PLRC in December 1992 on the idea of a central discontinuance fund. He failed, however, to mention that the Government Actuary had pointed out that if the central fund were to operate effectively there would need to be a system of strict supervision of all schemes. The report said:

    "it would be essential for the system to be backed by adequate supervision to ensure that schemes were soundly administered and financed and that funding was targeted at an appropriate level".

The last GAD survey of occupational pension schemes indicated that there are some 37,500 defined benefit schemes. A new external system set up to investigate all pension schemes, including supervision of their funding levels and investments, would surely be very expensive to administer.

The Government Actuary also suggested that an insurance system could be set up to protect against schemes being underfunded and unable to pay transfer terms. This again would require detailed investigation of each scheme. To avoid the risk of schemes being purposely underfunded, knowing that the central fund was there as a safety net, premiums would have to create the right incentives. Thus, weakly funded schemes would be charged higher premiums than the more secure schemes. When deciding the appropriate premium, judgment would need to be made about the adequacy of the scheme's ongoing funding level, taking account of the nature of the scheme's liabilities and how risk averse the trustees were in setting investment policy. Judgment might also need to be made about the financial or trading position of the employer company.

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One could go on building a more and more elaborate system of protection and controls. But how much would it all cost? Would employers be prepared to pay a levy to support a supervisory machinery that would be many times more intrusive than OPRA? Is what we have here really a backdoor means of achieving the intrusive regulatory authority which the Opposition failed to persuade your Lordships we should have in OPRA itself? What would be done to control costs? Should well run schemes be expected to bail out weaker schemes? And who, finally, would be expected to stand behind a central fund set up by statute? The answer is the taxpayer may be expected to back all this, and we would have to question how reasonable that would be.

At the Report stage I referred to the central discontinuance fund in America. My noble friend Lord Buckinghamshire has referred to some other problems that have arisen with the central discontinuance fund in America. These are all serious matters. Last week I was accused of presenting a caricature of the central discontinuance fund. I suspect that happened because I chose America rather than Finland or Japan. I deny that. The idea of a central discontinuance fund clearly was developed as a means of protecting scheme members and has been seriously considered. But so have a lot of other ideas. The minimum funding requirement we now propose is an honest attempt to ensure that pensions in payment will continue as expected, and that younger members will have a means of securing their accrued pension rights and indeed building on them with future contributions.

The noble Lord, Lord Eatwell, suggested that a minimum funding requirement on a discontinuance basis will lead to higher funding levels for most schemes. I am afraid I think that is based on a misconception. Ongoing funding will normally include discretionary benefits and a past service reserve to reflect the fact that further service will increase the value of past rights. The survey we conducted last year showed that the minimum statutory requirement for most schemes would be below their ongoing funding level. Therefore, our proposal for an MFR will not increase costs for most schemes. However, what it will do—by contrast to the amendment of the noble Lord, Lord Eatwell—is to provide a greater degree of certainty for the members of schemes that the rights they have accrued at any point in time will be adequately secured.

I am sure I do not need to remind your Lordships of the importance of maintaining a balance between costs and a fair degree of security. The noble Baroness, Lady Turner, said when we debated these clauses in Committee that we needed to ensure that we maintain the right balance. I suggest that the amendments before us today would not maintain and secure that proper balance and that the minimum funding requirement is the position we have reached after—as I have explained —the announcement made by my right honourable friend the Secretary of State last December. I hope that went some way to help with the problem identified on a number of occasions by the noble Lord, Lord Ezra—namely, the shift from equities to gilts—and also the concern some noble Lords have expressed

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about valuing on one single day, which has now been removed. We are also allowing for a much longer time period to restore a fund to the minimum funding requirement.

We are proceeding carefully on this issue and listening carefully to what people are saying. We are changing and amending provisions as we did last December. I am sure that is the sensible way to proceed. I hope I have persuaded your Lordships that the ingenious proposal put so eloquently, as always, by the noble Lord, Lord Eatwell, is not one that should seduce us. I invite the noble Lord after this excellent debate—I have no doubt there will be a few more comments from him—to withdraw his amendment. But if he wishes to put it to the test, I hope that my noble friends will support the minimum funding requirement as we have outlined it in the Bill.

5.30 p.m.

Lord Eatwell: My Lords, I am grateful to the Minister for that somewhat obscure reply. I thank noble Lords who have taken part in this discussion. I wish to draw out a couple of points because I regard this matter as an enormously serious technical matter which affects pension funds and the pension future of millions of people. This is not a party political matter; it is a matter where we have tried to tease out the complicated technical issues.

It is important to remember what the noble Lord, Lord Ezra, said in bringing out the implications of the introduction of the Government's discontinuance system for the macro-economy and for the performance of the equity market. That is an important point. It would be appropriate in another place to hear Treasury Ministers speak on this matter. It is not a matter for the Department of Social Security; it is a matter for the Treasury. It is worrying that the macro-economic issues have been ignored.

I wish to refer in particular to the point brought out by the noble Lord, Lord Finsberg, who said, with respect to the parliamentary fund of which he used to be a trustee, that it would not have to be valued on a discontinuance basis, presumably because we have confidence in the mother of parliaments. But the point is, under this Bill it will have to be valued on a discontinuance basis even though we can be totally confident that it will never be discontinued. That is the fundamental problem with the Bill.

As regards the comments of the noble Earl, Lord Buckinghamshire, I have also read the article in the Brookings Review. That article is opposed to defined benefit schemes altogether. We are trying to devise ways in which defined benefit schemes can be maintained with appropriate security. Therefore, I do not feel that the position I have mentioned would be acceptable, given the success and importance of occupational pension schemes within the British system.

As regards the difficulties of the American PBGC, as I pointed out on Report a lot of those were due to companies which were still solvent dumping pension funds on the PBGC. That could be prevented here simply by relating use of the central discontinuance fund

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to corporate insolvency or ceasing to trade. I am afraid that I found the Minister's comments extremely muddled. He said that the whole purpose of the Government's approach was to provide, in his words, "security on discontinuance", but he then attacked me for writing into the amendment that there should be a discontinuance basis, and went back to talking about insured annuities which we dropped long ago—when I say "we" I refer to us as a collective House—in discussing this whole problem. I could not work out what the devil he was trying to say.

As regards an ongoing basis, he said that an ongoing basis, as defined, may raise some contributions and lower others. Of course it would. We want to catch those rogues who are not paying enough and they will have to raise their contributions. The Minister also said that I had argued that under the Government's discontinuance approach funding costs would rise. I did not argue that; it was the Goode Report which argued that funding costs would rise.

I am afraid that I do not believe that the Minister or the Department of Social Security have really grasped what the issue is about. There is no evidence in his argument of a clear understanding of the problems of evaluating ongoing pension funds, such as the parliamentary pension fund, which will have to obey a discontinuance criterion. That is the nonsense of the Bill and of applying only the discontinuance criterion.

The amendment I put forward sought to provide the regulator and the industry with the option of defining a funding requirement in a way that would provide security for pensioners and be appropriate to maintaining efficiency in the provision of adequate pensions.

I hope that the Minister and his honourable and right honourable friends in another place will come back to the issue and consider it very carefully. The provision has been amended considerably since we began considering the Bill, and I am grateful to the Government for that. However, I feel that they still have not got it right and will need to return to the matter. Having said that, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 57 [Equal treatment rule: supplementary]:

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