Occupational Pension Schemes(Minimum Funding Requirement and Miscellaneous Amendments) Regulations 2002

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Mr. Boswell: I fully understand the spirit in which the Minister is speaking, but I have one question, although she need not respond now, and may reflect on it. I am sure that her briefing on the regulations included charts and other more simplified structures, which may have drawn the issues out. I am a great believer in visual aids—perhaps because of my family background and education—and it may be possible to include some in an explanatory memorandum. Will the Minister reflect on whether it would be possible to experiment with such ideas to make matters easier? Visual aids could be used to highlight the changes to the previous regulations so that we could more clearly understand what was going on, without doing a huge amount of homework.

Maria Eagle: I understand the hon. Gentleman's point, but I am not sure whether visual aids are allowed in Committee.

The Chairman: Not in my Committee.

Maria Eagle: I do not have any with me, Miss Widdecombe, so you will not have to make a ruling.

I have experienced and read of many problems with more graphical illustrations of such complex issues in previous pension Committees. I appreciate what the hon. Member for Daventry says, but we must stick to using words. That said, he will recall from proceedings on clause 3 of the State Pension Credit Bill that sticking to words sometimes causes even more trouble, particularly when we use them to try to explain mathematical formulae.

Let me clarify what the regulations are meant to achieve, before dealing with hon. Members' points. The regulations represent the next stage in our plans to replace the minimum funding requirement, and I am pleased that everyone has managed to discern that. The MFR applies to defined benefit occupational pension schemes. The Government need to protect the interests of pensioners and of other pension scheme members, and our plans to replace the MFR play a key role in that.

As the hon. Member for Daventry said—I shall not make cheap political points, because I do so only when provoked, and I do not feel too provoked today—the MFR was introduced by the Pensions Act 1995 and came into effect in 1997. It was part of a package of measures designed to provide protection for members of defined benefit occupational pension schemes. It

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requires schemes to hold a minimum level of assets to meet their liabilities, and to correct any underfunding against the MFR test within prescribed time scales. However, it has not worked as intended over the period that we examined. The inflexible ''one size fits all'' approach of the MFR regime does not take into account an individual scheme's specific circumstances, and assumptions that might be right for one type or size of scheme are not necessarily right for others. That has become clear to those who have observed the operation of the MFR.

The MFR has also led to too much attention being paid to short-term market conditions, rather than to a focus on the longer term. As we all know, pensions are a long-term business, and must be considered in the long term, not the very short term. The MFR has militated against such an approach, and can have an adverse effect on a pension scheme's investment strategy, which can lead to pension provision costing more than it needs to. That is not what we want to achieve, and it is not in the best interests of employers, who provide for schemes, or of scheme members. Those flaws may be one factor in the decision of some employers to close their defined benefit schemes, and both hon. Gentlemen referred to that trend.

The Government have consulted widely on the question of security for occupational pensions, and we are taking action. If there is any issue on which we need wide consultation and general agreement, pensions is it. We have announced proposals to replace the MFR with a long-term scheme-specific funding standard within a regime of transparency and disclosure. Our proposals have been widely welcomed in the industry and by a wide range of stakeholders.

The idea is that the proposals will provide effective protection for members of defined benefit schemes, and encourage an intelligent, tailored and thought-through approach to planning, investment and contributions policy on a scheme-specific basis. They will offer more scheme members effective security, without damaging consequences for investment.

Primary legislation is needed to implement our proposals.

Mr. Boswell: The Minister is explaining the issue very helpfully, but will she explain—perhaps not definitively—the relationship between those involved in the scheme? On one hand there are its proponents and the actuaries who advise it—its inner management, as it were—and on the other there are those who will be required to consult from outside on its adequacy. Moving to a scheme-specific basis may reflect the differences to which the Minister properly referred, but will there be any way of preventing regulatory capture? Regulatory capture may give the scheme's proponents exactly what they want, but without ensuring that there are adequate safeguards. Conversely, it may provoke a stand-off, which would make it impossible for the two parties to agree on what was suitable for the scheme.

Maria Eagle: The key is transparency and disclosure. A consultation panel has been established,

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and its members come from across the industry—from the TUC to the Association of British Insurers and other organisations with an interest in the issue. The panel has been meeting since November to assist us in developing detailed proposals for legislation.

We want our proposals and the legislation to be widely accepted and welcomed and to be what the industry and pensioners need and want. We are obviously not interested in legislation that will not work, and we are examining the issue. I therefore cannot answer the hon. Gentleman's detailed questions now, but he can be assured that we are studying the issue in great detail. We are not doing so in a closed room, but are consulting openly across industry.

Annabelle Ewing (Perth): On that issue, I want to look a wee bit to the future. I am not expert on occupational pension schemes, but should we anticipate any developments at the European Community level? Will the EC consider minimum solvency requirements for pension funds, including occupational pension schemes?

Maria Eagle: The EU will consider various aspects of the social side of the Community as and when it feels like it. We respond to it and have our input, and it shows a certain interest in pensions. However, we are much more concerned to get our domestic legislation right and that is what we intend to do.

I cannot be drawn by either the hon. Member for Northavon or the hon. Member for Daventry into setting out a precise timetable for primary legislation. That is partly because I am not in control of the Queen's Speech, although I sometimes wish that I were, but also because there are reviews going on and we need to ensure—this should be accepted by all parts of the Committee—that when legislation does come, it is right. The Pensions Act 1995 was widely supported throughout the industry and yet there are still aspects of it that are not working as we would have hoped. Given that pensions is a long-term business, we need to ensure that we get whatever legislation we propose right.

I do not propose to set out a timetable for the Committee beyond saying that we continue to work on the detailed development of the matter in a very open way with the industry and with stakeholders. That is the best way to ensure that we get it right. We will need primary legislation to implement our proposals in full, and we will tackle that when parliamentary time is available. In the meantime, we are working closely with the industry and everyone else to finalise the details of the proposals.

The regulations were introduced to improve the way in which the MFR operates in the period leading up to its replacement. That deals with the question that the hon. Member for Northavon asked about why we are bothering to change it if it is going to be replaced. If we can improve it and get rid of some problems, why not? We held consultations on the changes and they were widely welcomed by the industry. Why not make them if we can ameliorate some of the downsides of the MFR's operation?

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Mr. Boswell: There are two worries related to that—the hon. Member for Northavon may have his own comment to make. First, the changes are provisional, and nothing survives as much as the provisional into perpetuity, so we need to be sure that the Minister is not doing this as an alternative to the radical changes that she wants.

Secondly—this is the context to the hon. Gentleman's remarks about winding-up schemes—there is a danger that the whole thing will be put on ice until the new regime comes in or that winding-up orders, which might have been completely different in import had they been deferred, will be nodded through under the new arrangements. There is potential for inequity. I want merely to rehearse that difficulty.

Maria Eagle: I can reassure the hon. Gentleman that the regulations are not an alternative to the abolition of the MFR. Hon. Members will recognise that Ministers in Standing Committees on statutory instruments cannot commit the Government to a precise timetable for legislation. However, I assure the Committee that the Government still intend to introduce legislation when we have the parliamentary time. Much work is ongoing with the industry and other stakeholders to find out how best to improve things so that when there is an opportunity to legislate, the legislation will satisfy the industry and those who have an interest in getting it right, including Members of this House.

A further aim of the regulations is to improve protection for pension scheme members where an employer decides to wind up a scheme voluntarily. The draft regulations were issued for consultation last September. A summary of the responses was published and made publicly available on 26 February, and copies were placed in the Library. We had 33 highly detailed responses to the consultation. The hon. Member for Northavon fairly and rightly made the point that not only have we changed the regulations since they appeared in draft form but we have taken on some of the practical points raised during consultation. The Government have not sprung the regulations on the industry and said, ''Here you are; take it or leave it.'' We did not simply use the negative resolution procedure, so that the House's only chance to talk about it would be if an Opposition Member prayed against the regulations. We have been open and the regulations have been widely welcomed throughout the industry.

Hon. Members were worried that they could not understand certain measures in the regulations. There are effectively three principal measures. One, which has been picked up on by both hon. Gentlemen who have spoken, extends what is usually referred to as the MFR deficit correction period. Where a pension scheme's MFR valuation shows it to be underfunded on the basis of the MFR test, the relevant legislation provides that the underfunding must be corrected within specified periods—the deficit correction periods.

The regulations extend those periods to allow a scheme three years to bring its funding up to 90 per cent. of the MFR level, and 10 years to bring its funding up to 100 per cent. of the MFR level.

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Previously these periods were set at one and five years, subject to special arrangements that applied during the transitional periods. The extended periods have been welcomed. They smooth out some of the short-term volatility problems associated with the current MFR regime—problems that have been highlighted by the sharp movements in the stock markets during the past couple of years. Those problems may be one of the factors affecting employers' willingness to continue with defined-benefit schemes although, as the hon. Member for Daventry fairly pointed out, many factors have contributed.

Secondly, the regulations remove the requirement for the automatic annual recertifications of contribution schedules for schemes that were fully funded at the time of their last MFR valuation—that is, schemes that are at least 100 per cent. funded on the basis of the MFR test. Schemes are required to carry out full MFR valuations every three years. However, prior to these changes, in each year between valuations the trustees of all schemes had to obtain a certificate from the scheme actuary to the effect that the level of contributions being paid to the scheme was still on track to maintain MFR funding levels at 100 per cent. or more.

Such checks were required regardless of the actual level of the scheme's last MFR valuation. For schemes that are fully funded this adds little in terms of member security, but causes a disproportionate administrative burden. That is why we have removed that burden for schemes that are fully funded. But I should stress that schemes that are not fully funded at their last MFR valuation will still have to carry out these annual checks. That requirement is not being completely removed—where schemes are not 100 per cent. funded they will still have to meet it.

Thirdly, the regulations introduce stricter conditions when an employer decides to wind up a scheme voluntarily. That means that the method of calculating the debt on an employer who decides to wind up a scheme has now been strengthened to include the actual costs of the winding-up process, which can be considerable, the actual cost of buying annuities for pensioner members, and cash-equivalent transfer values calculated on an MFR basis for non-pensioner members.

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