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11.40 am

The Minister for Railways and Roads (Mr. John Watts): Historians, like Opposition Members this morning, have the benefit of hindsight when commenting on past events. The House will appreciate that with litigation in prospect on the recent determination by the pensions ombudsman I have to weigh my words carefully in replying to this debate.

It may help the House if I describe the background to the decision taken in 1986 on the best way to protect the accrued pension benefits of NBC employees.

The bus employees superannuation scheme was what is called a defined benefits scheme: that is, the rules of the scheme defined the benefits that are expected to be payable to the member. It is important to note that, even in a defined benefit scheme, the benefits for employees specified in the rules are not unequivocally guaranteed by the employer. The trust deed and rules of the typical defined benefit scheme allow the employer to refrain from paying contributions that cannot be afforded or are higher than necessary.

The unilateral right of the employer to suspend or terminate contributions to the scheme is necessary, not only because of the risk of the company being faced with severely unfavourable circumstances but because of the risk that the trustees might demand a higher level of contributions than was reasonable.

The privatisation of the NBC 10 years ago differed from earlier transport privatisations in that it involved the privatisation of a nationalised industry into a large number

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of separate units, rather than as a whole. The NBC had two pension funds. The larger of these, covering the majority of NBC employees, was called the bus employees superannuation trust and is the subject of the pensions ombudsman's recent decision. The funds had built up large accrued liabilities in respect of employees' past service with the NBC or its predecessor companies.

There was great debate and concern during the passage of the Transport Act 1985, and during discussion of the detailed arrangements for the privatisation, about how these accrued benefits for past service would be secured. The question was, following the demise of the NBC, who would stand behind the funds if they had insufficient assets at some future date to secure benefits or--if the funds were not to be continued--what alternative arrangements should be entered into to secure benefits.

As some hon. Members will recall, there were strong demands for the Government to give a formal guarantee of the funds. To have done that would have meant that the Government assumed a greater responsibility for the fund than the employer had done in the past.

However, the Government recognised the strength of feeling behind the demands and the need to provide reasonable protection for members' accrued benefits. There were lengthy discussions in which the NBC, the trustees of the funds--including trade union representatives--and the Government all took part and in which all sides had the benefit of legal and actuarial advice in considering the options for achieving that aim.

In those discussions the Government offered an undertaking, which, though short of a formal guarantee, would involve the NBC making funds available to cover any deficiency in the fund at the date it was wound up following an actuarial valuation on a reasonable and prudent basis.

Against that background, a number of options were considered at the time, including for example the possible continuation of the funds as "closed funds". The point to note about a closed fund is that there is no employer standing behind it with the consequent risk that the assets of the fund have to stand alone in meeting its liabilities.

We should bear it in mind that the trustees in 1985-86 were faced with great uncertainty about how far the fund's assets would be sufficient to meet its obligations to members. Although an interim valuation of the fund, available to the trustees at the end of 1985--just before the relevant decisions--indicated the possibility that the fund was moving into surplus, the last full formal valuation, available at the beginning of 1985, had shown the fund to be in deficit.

It is not unreasonable or surprising that the trustees in making their decisions placed great value on arrangements which secured members' accrued benefits against these uncertainties.

A clear and very relevant illustration of the general uncertainty the trustees faced is what might have been the consequences for the fund of the stock market collapse of October 1987, when the value of equity investments fell by 30 per cent. Fortunately for the bus employees fund it had already changed the emphasis of its investment policy

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from equities to index-linked gilts, but only as a consequence of implementation of the 1986 decisions and ahead of the purchase of insurance.

Mrs. Dunwoody: I am interested in this argument because the Government used the closed fund without any difficulty in certain other privatisations. Is the Minister really suggesting that it was not made clear by the Government to the trustees that if they did not accept what was on offer, the Government would cease to pay the contributions? If that was the case, was that not simply straightforward blackmail?

Mr. Watts: Not at all. The trustees had the option of taking the view that the fund would have adequate assets to meet its liabilities and to continue it as a closed fund. However, as I have been explaining, because of the uncertainties about the fund's ability to cover the future liabilities, the trustees opted for the insured option which guaranteed the accrued benefits for members of the fund, to their advantage.

Those concerned in 1986 concluded that the balance of advantage was with an option which involved using the fund to purchase annuities from an insurance company. That meant that an insurance company would assume the obligations of the two funds, including the payment of pensions to individuals, in return for a capital payment from the funds' assets.

The insurance option was therefore explored. One of the further issues that had to be considered was the basis of indexation of accrued benefits up to the point when the pension was in payment. The existing rules of the bus employees superannuation trust provided for indexation on the basis of equivalence to changes in national average earnings. However, there was great uncertainty about whether insurance companies would be willing to underwrite at any realistic price insurance on that basis because of the uncertainty it involved.

It was possible to envisage insurance on the basis of indexation linked to a formula of retail prices index plus a specific figure, which might turn out in practice--as did turn out generally to be the case--to be as beneficial as, or even more beneficial than, a link to national average earnings.

I can now outline for the House the main elements of the agreement, the deal or the scam, as Opposition Members have described it, reached between the trustees of the fund, the NBC and the Government in 1986. It had four essential elements: the accrued benefits of members would be secured by the purchase of insurance and the fund would be wound up; to facilitate the purchase of insurance, the rules of the fund would be changed to provide for indexation of accrued benefits at RPI plus 2.25 per cent., if insurance on that basis could be purchased more cheaply than insurance on the basis of a link to earnings; the Government's undertaking, which I have already mentioned, to make good any deficiency in the fund at the date of wind-up; and finally, and crucially for subsequent events, it was agreed that that undertaking would be balanced by a change in the fund's rules which

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provided that should there be a surplus in the fund at wind-up, that surplus would be paid to the NBC and thence to the Government.

Mr. Martlew: Why was it necessary to include a clause to provide that any surplus should go to the Government rather than the pensioners?

Mr. Watts: It was necessary because otherwise the agreement would have been a one-way bet at the expense of the taxpayer for the pensioners involved in the fund. In that case, if the fund was in deficit, the taxpayer would step in and provide funds, but if the fund was in surplus--having already secured the accrued benefits by insurance--that benefit would also go to the pensioners. That would have meant the Government stepping in--as the hon. Member for Crewe and Nantwich (Mrs. Dunwoody) said--and using the taxpayer's money to secure greater benefits for the pensioners than had ever been available to them under the original terms of the scheme.

Mr. McNamara: Surely the whole point at issue is that the agreement would not have been necessary had not the Government set out on their course of action. Under the old scheme, it would have been possible for the trustees to go back to beneficiaries and the contributors and say that they were in difficulties and then the problem would not have to be dealt with in such a way. That option was removed by the Government's decision to privatise. In fact, it is the Government who are on a two-way bet in their favour, not the beneficiaries.

Is the Minister saying that he does not accept the ombudsman's statement that there was a fraud and that the trustees were subject to coercive action by the Government? In that case, he is saying that he does not accept the ombudsman's findings.

Mr. Watts: It is precisely because we do not agree with the decision of the pensions ombudsman that we believe, and are advised, that there are important matters to be considered at law and that is why we have acted as we have. The hon. Gentleman is right to say that if we had not privatised NBC, none of the changes would have been necessary, but he must accept that the trustees, in fulfilling their obligations to the members of the fund, had to take as a given the fact that the industry was being privatised, and that NBC--the employer that had been contributing to the fund--would no longer exist and, therefore, had to agree arrangements that secured the benefits for pensions in payment and for those whose pensions were deferred.

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