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Baroness Noakes: My Lords, I did not mean to ask what assumptions had been made or what stress-testing the Government had done of the assumptions. I tried to ask what the Government thought would happen if a crisis arose.
Baroness Hollis of Heigham: My Lords, it depends on what one means by "crisis". I have seen the detailed research, and based on our model we think that, to start with, the PPF will have the assets of the underfunded schemes coming into the fund. Such schemes will bring with them what there is, even though there may be insufficient assets to meet the PPF level of support; otherwise they would stay outside and wind up. Secondly, they will have the power to raise the levy and to take commercial loans to deal with situations where even a major company scheme might go under. The liabilities only fall in over time. There is no suggestion that the PPF is buying annuities to top up for potential responsibilities. It will pay it as though it were a pension fund, with the liabilities falling in over time.
As the noble Baroness will be aware, although in an average company, depending on what it does and how long it has existed, a certain proportion of staff members will be existing pensioners, others will be active members well short of retirement age, who may go on to other jobs. A very high proportion will be deferred pensioners for whom liabilities will not fall in for 10, 20 or 30 years, or possibly longer.
Given all those assumptions and modelling; given the assets that will come in, given the levy; and given the falling in over time of the liabilities and responsibilities to be met, we are confident, even if there was significant pressure by virtue of the collapse of a couple of major companies in a particular sectoras I say, I have gone over some of the research on thisthat our assumptions here are sound and should be able to deal with the sort of crises that the noble Baroness envisages.
Lord Fowler: My Lords, perhaps I may add a supplementary to that. Having said what she has said, if there is such a crisis that wouldor shouldinvolve the intervention of the Government, is the Minister really saying that under no circumstances will the Government intervene? In other words, having set up this fund, at no stage in the future are the Government prepared to stand behind it.
Baroness Hollis of Heigham: My Lords, the whole push of what I have said is that the Government are making very clear that they are not coming in as a lender of last resort to the PPF. I have been pressed on the circumstances under which they might. I have been told about a crisis; although I have been given no
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details of what such a crisis might be. But, even in the situation that the noble Baroness, Lady Noakes, might have in mind, the structure that we have set up, including the power to go for commercial loans and the power, if necessary, to reduce compensation levels, will be available to the PPF. Noble Lords will know that there are assets, there are levies, there is the capacity to raise commercial loans and wipe out indexation temporarily before restoring it again, as well as finally being able to reduce compensation levies.
Therefore, in all our modellingsubject to the meteor hitting the earth type of scenarioI cannot conceive of a circumstance in which the situation envisaged by the noble Baroness is such that there would be no alternative funding available and such that only the Government could come into play.
Given that, perhaps I may emphasise that the PPF will already have the appropriate power to borrow commercially, as provided by Clause 113. It is normal and appropriate for an independent NDPB to be able to borrow commercially to cover short-term liquidity problems. Throughout all of this, noble Lords are talking as though suddenly the whole bundle of liabilities will hit the PPF and will have to be paid out within a six-month period. That is a profound misconception of how the PPF's liabilities will be discharged. For example, two companies may hit the PPF in six months, but the liabilities will be discharged over 30 years. That is why there should not be the funding crisis of the sort described by the noble Baroness. As I say, the board will be able to manage its resources, if necessary, by going for a commercial loan.
I repeat, if we did go down that paththe noble Lord, Lord Higgins, mentioned thiswe would genuinely inflate the problem of moral hazard. If it is believed that the Government could act as guarantor, employers would act in the assumption as though the Government will be guarantor, with all of the sad consequences that we do not want to see.
We know from OPRA that some companies are already seeking to arrange their affairs in order to make use of PPF potential funding, and so on. We should not assume that all companies will act in the most honourable way when they are seeking, quite possibly legitimately, to protect jobs. They may think that the best way of doing that is to offload some of their liabilities, including pension liabilities. We have to ensure that that balance is properly maintained in the interests of both levy payers and taxpayers. So there is a real moral hazard issue, which should not be lightly dismissed by Members opposite.
There is also a very real problem about who pays and who gains. I repeat: we would be asking taxpayers to fund the insurance for DB private-sector members. Who are the people who do not have the benefit of occupational pension schemes? They are those whose earnings are, on average, halfI repeat, halfof those who are in jobs that attract a DB final salary scheme. We would be asking taxpayers without occupational pensions and with, on average, half the
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earnings of those who are in DB schemes to help to fund the insurance for the benefit of those other people but from which they as taxpayers gain no advantage. That money will go from the low paid to the better off; from the relatively financially unsuccessful to the more successful; from the self-employedhalf of whom earn less than £11,000 a year but pay taxesto those in employment; and from women to men.
This is a regressive form of redistribution. Tenants in rented accommodation would not be asked to pay the building insurance in a pooled scheme for those who are owner-occupiers as well. People who do not own cars would not be asked to pay for the pooled risk of motor insurance, and so on. One would not do that; nor do I think that it should be done here. It would very clearly be the part-time employed, the self-employed, women and the low paid who would be asked to subsidise and fund potentially, through the PPF, the pensions of people who are in much better financial positions to look after themselves than they may be. That is wrong. It is not just inappropriate, but wrong.
There is a real moral hazard issue as regards the employer. There is a real problem of who pays and who gains, as well as the fact that in our view the capacity to go for commercial loans, and so on, would producein all of our modellingthe resources necessary for the PPF to meet its obligations and its liabilities as they gradually fall in over time. I hope that your Lordships will not support the amendment.
Lord Oakeshott of Seagrove Bay: My Lords, I thank the noble Baroness for that clearly heartfelt response. I respect the sincerity in which she gave it. We explored these issues at some length on Second Reading and in Grand Committee. I propose to make only two brief points. I thank the Minister for explaining how the Government see the position of the Pool Re insurance scheme. Perhaps I may say that that exactly makes my point. As I heard her say it, they stand to prevent or mitigate market failure in areas where there is a substantial public interest in so doing. It seems to me that possible collapse of the pension protection fund would be just that situation and very similar to one where there is a sort of systemic financial collapse in the banking system.
Baroness Hollis of Heigham: My Lords, as regards terrorism and the Pool Re scheme, first, commercial companies could not get insurance: there is no evidence that PPF could not get a commercial loan. Secondly, terrorism acts can hit anyoneabsolutely anyone. Here, we are talking about a minority section of the populationthe better paidwho are in DB schemes. On both of those grounds, I hope that the noble Lord will accept that there is no read across.
Lord Oakeshott of Seagrove Bay: My Lords, the noble Baroness has made her points fairly. I quite take the point made by the noble Lord, Lord Higgins, about the Pension Benefit Guarantee Corporation. I suppose it was rather silly of me not to pray in aid something done by America to try to encourage the Government to follow.
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I particularly thank my former colleague the noble Lord, Lord Lucas, and my neighbour the noble Lord, Lord FowlerI look forward to buying him a drink in the Seaview Hotel this weekend if he is down therefor their support. But this is a very serious issue. Clearly, there is a division between us. I wish to test the opinion of the House.
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