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Baroness Turner of Camden: My Lords, I support the amendment moved by the noble Earl. It is similar to an amendment to, I think, Clause 66 which I moved unsuccessfully at an earlier stage. I expressed some concern about what seemed to be a worsening of the position of pensioners on wind up. I felt that pensioners ought to have consideration. If one is in employment it might be argued that one has some possibility of improving one's position. However, once one is on a pension, that really is it unless one has increases which are payable under the rules of the scheme.
The noble Earl has thought up an ingenious method of protecting the position of people who are pensioners at the time that the legislation comes on to the statute book. It seems to me entirely legitimate. As the noble Earl said, the Minister gave the impression that no one's expectations would be worsened as a result of the legislation. I fear that they may be unless we have a provision of this kind somewhere in the Bill.
Lord Mackay of Ardbrecknish: My Lords, my noble friend's amendments are intended to protect pensioners whose pensions are in payment before the Bill takes effect. They would cover cases where the scheme rules afford their indexation a higher priority than that provided under the new priority order proposed in the Bill.
Perhaps I may remind your Lordships of the way in which the clause is intended to fit with the minimum funding requirement. The intention is to ensure that when a scheme winds up, all of the members are treated fairly. If the scheme is fully funded to the level of the minimum funding requirement, all of the members should receive the full actuarial value of their accrued
Obviously, we hope that schemes will not wind up in a position where they are unable to secure the benefits promised under the scheme. We believe that the minimum funding requirement and the wide range of other measures for enhancing scheme security incorporated in the Bill will minimise the chances of schemes winding up in this position. But we live in the real world, and we must cater for those cases where things do go wrong despite our best endeavours.
A scheme which does not meet in full the statutory minimum funding requirement will not be able to meet all of its liabilities on wind up. That is when the priority order will come into play and ensure that there is an equitable distribution of assets. It is only right that pensioners should receive some priority over active members. That is why we propose that they should, if possible, suffer no reduction in their income. That is reflected in the priority order we propose.
However, to go further and give priority to indexation for all pensions in payment would place at risk the rights of other members. We have to ensure that the assets are shared fairly. We believe that this can best be done by protecting pensions in payment first, then protecting the basic pension entitlement of all other scheme members, then sharing out whatever assets remain for the benefit of all scheme members.
The amendment proposed by my noble friend would give added protection to those scheme members who are pensioners when the Bill comes into effect. As I hope I have made clear, this would not cause problems for a scheme that is fully funded when it winds up. Indeed, the provision would not be needed. However, as I have just explained, where a scheme is underfunded the protection my noble friend seeks to give to some pensioners could be achieved only at the expense of other scheme members, including members who will become pensioners after the Bill comes into effect and others who could well be approaching retirement age when the scheme winds up. Such individuals may be no more able than existing pensioners to make good the loss. The real difficulty with most schemes' current wind up rules is that they can produce a step, or series of steps, usually around retirement age. Thus one member may receive his full entitlement while a colleague only six months younger can lose 40 per cent or 50 per cent. of the pension rights he can legitimately expect. Our proposal produces a smoother and more equitable distribution.
It is also important to recognise that the valuation base we propose for the minimum funding requirement will be more appropriate for protecting pensioners and those approaching retirement. As members get older so their rights will be more largely valued by reference to gilt returns. This will give them an entitlement which has greater certainty of being able to deliver their promised benefits.
Let me conclude by saying this. The clause will not affect anybody's pension rights as such. What may change is the degree of certainty that those rights will be delivered. Pensioners may indeed have to share in any losses whereas they have previously been insulated. So while their rights will remain the same, the distribution between the various members will, I believe, be fairer.
Overall, our proposals will produce a fairer and more equitable result while giving a degree of priority and extra protection to pensioners and older non-pensioners. They are consistent with the principle underlying the minimum funding requirement and other scheme security measures. These aim to secure the rights of all scheme members at all times irrespective of whether they are pensioners, deferred members or active members, and regardless of when they became or may become pensioners.
I understand what my noble friend Lord Buckinghamshire says and the concerns he expressed. However, I hope that he will understand from the explanation given that we are attempting to be fair to all scheme members and at the same time remove a problem. As I mentioned, people just short of retirement can face a quite considerable drop in their pension entitlement; and they will have absolutely no time in reality to make up for that drop.
We believe that re-ordering the priorities in the way that we propose, still giving pensions in payment the first priority, is the sensible way to proceed. I hope that with that explanation my noble friend will be able to withdraw his amendment.
Lord Eatwell: My Lords, before the Minister sits down, perhaps he would clarify something he said just now. He stated that rights would stay the same but certainty would diminish. As I understand it, if I am to be paid £100 with a probability of 90 per cent., that is worth £90. If I am to be paid with only a probability of 50 per cent., it is only worth £50. If the Minister is saying that my right will be protected but the amount of money I am likely to receive will be diminished, I am rather unimpressed. It seems to me that his argument that the position of existing pensioners is protected does not stand careful examination.
Lord Mackay of Ardbrecknish: My Lords, that is why I made a distinction between the rights, which do not change, and the situation which would occur if, when the scheme was wound up, it was under-funded. I fully admit that in those circumstances pensioners would not receive the same protection on indexation as they currently do. I put forward the argument that there are other people in the fund whose position must be considered. It is particularly important for those close to retirement who find themselves in the situation that we can envisage, which could be quite serious. I believe that the clause in the Bill re-ordering the priorities will in some way protect pensioners but it will also give perhaps some protection, in the worst scenario, at marginal expense, to pensioners regarding indexation. It will give them the bulk of the protection, but it will also
Lord Mackay of Ardbrecknish: My Lords, the right is there but it depends on the situation at the time of the winding up of a pension scheme. If the pension is fully funded then the right can be carried out. If the pension is under-funded, I suggest that the rights stay the same; all the pension rights remain and those of active members stay the same. However, as the schemes are constructed at present, active members perhaps of the age of 59 or 64, just short of pension age, have their rights severely restricted under the current arrangement. I suggest that looking sensibly at the situation on winding up and trying to be fair to everyone, the rights remain the same but in the worst case scenario the pensioner may find that his or her indexation has to take second place to looking after the rights of other members of the scheme.
The Earl of Buckinghamshire: My Lords, I wish to thank everyone who has taken part in the debate. The Minister is in some difficulty over the amendment and his justification for not taking greater note of it. He has not answered the question on the immediate annuities which have been purchased and how they are unlocked from insurance companies in such situations. Although I did not mention the point in moving the amendment, there will be an implication for members as to whether they should take the transfer value prior to retirement and whether the Government will amend the regulations or provisions of previous Bills on taking transfer values just before one retires.
There was no response from the Minister on the health warning. I could imagine it being inserted in a pension booklet: "With a bit of luck we may have a pension for you and with even greater luck we will give you indexation on the guaranteed basis, but don't count on it".
I find the whole manner of dealing with the matter extremely disappointing. It is retrospective legislation. It is retrospective in the manner in which it tries to undo what the Government believe is an unfairness in the current trust deeds. It would be sensible of the Minister to consider the points that I have made. He could then take them further in another place. I beg leave to withdraw the amendment.