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5.39 pm

Sir John Butterfill (Bournemouth, West) (Con): It is rather refreshing when a political party such as my own admits that it got some things wrong and that they need to be put right. It is right to say that we got some things wrong in the Pensions Act 1995 and that we want to sit down with the Government to work out how to improve things. That does not always happen. There is no doubt that there were faults in the 1995 Act, although some have been compounded or made a good deal worse by the present Government's subsequent actions.

It is undoubtedly true that the priority orders introduced by the 1995 Act are wholly inappropriate for the circumstances in which many pensioners, prospective pensioners or deferred pensioners find themselves today. It is wholly unfair that existing pensioners under a scheme that is being wound up continue to receive full pensions, while other scheme members on the verge of retirement get almost nothing.

There is an urgent need for change. My colleagues on the Front Bench have said that they would be happy to engage in bipartisan talks to see how such change could be achieved. I think that the Liberal Democrats would go along with that as well.

Mr. Webb indicated assent.

Sir John Butterfill: I see that the hon. Member for Northavon (Mr. Webb) is nodding in approval. The matter is urgent. Action needs to be taken now, and it is astonishing that it has not been taken before.

The 1995 Act was rather a hurried response to the Maxwell scandal. It attempted to patch up the holes that that affair revealed in the pensions system. Like all hurried legislation, the Act was not perfect. There have been plenty of opportunities to improve it since it was enacted almost nine years ago. The previous Conservative Government, and the present Labour Government who came to power in 1997, have had plenty of opportunity to sort out the defects. I am worried that nothing has been done, even though some of us have said repeatedly that the 1995 Act has defects that need to be resolved.

There is another considerable problem. The regulatory regime—the Occupational Pensions Regulatory Authority, and other bodies—is not dealing with the difficulties that have arisen in some of the many schemes to which the hon. Member for Cardiff, West (Kevin Brennan) referred, and in other schemes that are now in liquidation. The Government must think about how to deal with the problems that have arisen and how to alleviate the plight of the people who have been affected so severely.

I do not go along with the hon. Member for Northavon, however, whose approach was typical of the Liberal Democrats. He seemed to say that Government money should be used to bail out all the people who have been affected. Everything would then be lovely, at a cost of only a few hundred million pounds a year. However, that few hundred million would not then be available to the health service, education or any of the other things at which the hon. Gentleman's party has pledged to throw money.

Mr. Watts : Many people who are faced with a black hole in their pensions look at the very rich farmers who

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were compensated for losses as a result of foot and mouth disease, and other tragedies, and ask, "Why was it good enough for the farmers but not for us?"

Sir John Butterfill: The hon. Gentleman makes an interesting point. It is a matter of the existing legislation or the priorities of the Government of the day. My point is that it is not appropriate to say that we can always throw money at the problem. That is especially true in respect of private sector schemes, some of which have been the subject of pretty dirty dealing.

I make no specific allegations, even with the benefit of parliamentary privilege, but some companies have been very badly run, with directors running off with the money or using it for inappropriate purposes. In some schemes, the trustees have not properly guarded the funds that they were supposed to look after, and other schemes have not been regulated properly by the Occupational Pensions Regulatory Authority. Litigation may follow in all such cases and some of the money may be recovered. If the regulatory authority is at fault, the Government might be an appropriate compensator. However, to say that the Government should write a blank cheque to bail out any private sector scheme that is in trouble would be to encourage the misbehaviour that we want to discourage. In many ways, the Pensions Bill is a good one, and it is designed to prevent such misbehaviour in the future.

Mr. Waterson: My hon. Friend speaks from vast knowledge and experience. Does he think that there will be any effect on the behaviour of those who run pension schemes and the risks that they take, knowing that in future—if not retrospectively—there will be a safety net along the lines of that which has existed in America for some 30 years?

Sir John Butterfill: My hon. Friend makes an important point. There is the risk of moral hazard. If there is a safety net, some employers may be discouraged from behaving correctly. For that reason, there should never be a flat-rate contribution to the pensions protection fund, but it must relate to the level of risk—so that employers who do not behave correctly pay a much higher premium than employers who behave in the best interests of their work force.

I criticised the minimum funding requirement in 1995 and have done so ever since because it directs people, through actuarial advice, to specific forms of investment—overwhelmingly to index-linked, predominantly Government bonds. The more bonds that people buy in a diminishing bond market—and it has been diminishing—the lower the yield. The way that the MFR operates requires the purchase of more bonds if there is not enough income to cover the liabilities—then the yield may fall still further. It is a like a black hole that spirals ever downwards, sucking in money from a lower and lower yield. That is not necessarily always the fault of the Government, but perhaps of the actuarial profession in being terribly short-sighted in the way that it has viewed liabilities—thinking that the only way to match a future liability to pay pensions is to buy a bond that will provide an income in the future. If the yield keeps falling, the bond will not even achieve its primary objective. Successive Governments—including

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those of my own party and the present Government—have failed to address that fundamental flaw in the MFR mechanism.

David Taylor : Is it not the case that MFR directions of the kind to which the hon. Gentleman refers have relatively little influence on the price of bonds compared with minimum strategic economic actions such as changing interest rates? One cannot attribute everything to the MFR.

Sir John Butterfill: The hon. Gentleman is entirely correct that bond values are attributable to a series of factors—including the fact that Government borrowing has decreased, so the supply of bonds has diminished. That may be a good thing, but it has nevertheless been a contributing factor, for which the Government should have compensated in the make-up of the MFR.

Another factor is that regulators are increasingly telling insurance companies that they must cover more of their potential liability by bonds rather than equities. We saw that with Standard Life, which was recently told that it must sell a chunk of equities and buy something seen as more secure. Standard Life, having done that, and to everyone's surprise, now has, through bonds, double the liability coverage required by statute—yet the yield to that company's policyholders will be substantially reduced. The fall in yields is attributable also to changing market conditions. The point that I am trying to make is that the Government and the actuarial profession must be far more sensitive to how the market has changed and examine other forms of investment.

In my capacity as chairman of the parliamentary pension fund, I recently went to a seminar held by PricewaterhouseCoopers on alternative investments. Statistics show that investments in, for example, commercial property over a 30-year period have been less volatile than bonds, which are supposed to protect against volatility, and have shown almost double the yield. Should we not ask the actuarial profession why we have not put more—not all of it—into commercial property? Why are we not investing in derivatives that protect against future changes? We should have a range of investments because there are more choices than equities versus bonds—we should have mixed portfolios. Successive Governments have, however, failed to do that, which is why the MFR is a problem today. I shall give up that particular hobby-horse, but I was challenged to say whether I objected to the MFR in the past, and I objected to its composition.

Mr. Webb: Ideologically, I imagine that the hon. Gentleman favours thrift and self-reliance. We face a situation in which people worked hard, saved hard and anticipated a good pension, but are getting next to nothing. Does he accept that there is a basic injustice there that must be addressed in a way that goes beyond legal action by those who can afford to take it? Is there not a bigger issue?

Sir John Butterfill: There may well be a bigger issue, and we must quantify the scale of the problem, how it has arisen and whether the Government have failed to regulate, which would give them a moral responsibility.

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The hon. Gentleman is right to raise that point. All I am saying is that there are all sorts of demands on the public purse, and compensation may mean one less hospital, somebody not getting a hip operation or education not being provided properly. We must all suffer a degree of pain if we compensate everybody. We currently live with a compensation culture where everybody must be compensated for everything and the Government bail out every lame duck. We cannot go that far, but the hon. Gentleman is right to say that it is a question of balance.

The reforms that the Government are introducing and the changes that they have made since they came to power have had a pernicious effect. The difficulty is that if we are to encourage good employers to provide good pension schemes, they must have some incentive to do so. Most of the Government's actions have provided disincentives—there was no worse disincentive than their £5 billion a year grab on all our pension schemes.

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