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(7)   If a person other than the trustees purports to exercise the power referred to in subsection (1)(a), section 10 applies to him.

(8)   Regulations may provide that in prescribed circumstances this section does not apply, or applies with prescribed modifications, to schemes of a prescribed description.".'.—[Malcolm Wicks.]

Brought up, and read the First time.

Malcolm Wicks: I beg to move, That the clause be read a Second time.

Mr. Deputy Speaker : With this it will be convenient to discuss the following:

Government new clause 31—Payments of surplus to employer: transitional power to amend scheme.

Government amendments Nos. 175 to 180.

Malcolm Wicks: The new clauses provide new rules governing occupational pension schemes making payments to an employer from an actuarial surplus in an ongoing scheme.
 
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Section 37 of the Pensions Act 1995 allows pension scheme trustees to make a payment to an employer only where the Inland Revenue has approved the payment as part of a strategy to reduce an excessive actuarial surplus. The Inland Revenue currently requires schemes to take steps to reduce such surpluses. Section 37 also imposes further conditions, for example, by extending limited price indexation to all the rights of members and by requirements on informing members.

The tax simplification measures in the Finance Bill remove the requirement to reduce an excessive surplus, which in turn requires a consequential amendment to section 37 of the Pensions Act. However, simply removing the reference to tax law in the Pensions Act would leave the matter of making payments to the employer entirely dependent on the rules of individual schemes. We do not believe that would provide an adequate safeguard against the inappropriate removal of funds from pension schemes, so we propose to replace section 37 with a provision that allows us to ensure that such payments are not made unless a scheme is sufficiently well funded, to the extent that it can more than cover the accrued rights of a scheme.

New clause 30 provides for the making of regulations, which will be used to ensure that payments to an employer may not be made from a defined benefit scheme unless it is funded to a level sufficient to purchase annuities and deferred annuities securing the rights of all members and beneficiaries. That is known as the full buy-out level. The scheme actuary will be required to carry out a valuation and provide a certificate confirming that those conditions have been met before a payment can be made. Trustees must also be satisfied that such a payment would be in the interests of members.

We believe that the higher threshold for the withdrawal of surplus funds serves members' interests better than the present requirement to enhance members' benefits by the application of limited price indexation to all scheme benefits before a payment to the employer can be made, so that requirement is dropped. However, existing statutory or scheme indexation will of course be reflected in the valuation of the scheme's liabilities carried out by the actuary.

The new clause also allows for rules to be made governing payments to employers from defined contribution schemes. Regulations will define the more limited number of occasions when refunds of an excess of assets over liabilities may take place in defined contribution schemes, such as where, for example, a member of an earmarked scheme takes a refund of his contributions, leaving the employer's contributions as a surplus.

The process for making a payment of surplus will be simplified, but members will have to be notified of the intention to make a payment and given time to make representations on the matter to the regulator, who has powers to intervene if the payment appears to be irregular. The Finance Bill provides that any such payments will continue to be taxed at 35 per cent.

At present, Revenue requirements for tax approval generally require scheme rules to prohibit payments to employers except in accordance with Revenue rules and
 
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with Revenue approval. Those scheme rules would be ambiguous given the removal of the Revenue requirements, so new clause 31 contains transitional provisions to allow trustees to amend their scheme rules consequential to the relaxation of Inland Revenue and current section 37 requirements. Where schemes may currently make payments of surplus to the employer, trustees may choose to continue to do so; but if they do not so amend scheme rules within five years of the commencement of the provisions, they will be unable to make such payments.

Amendments Nos. 175 to 180 are consequential to the replacement of the existing section 37 and to the requirements under schedule 22 of the Income and Corporation Taxes Act 1988. They also remove the requirement for limited price indexation to be applied to all pensions before an excess of assets over liabilities can be paid to an employer where a scheme is winding up. That is to ensure that the valuation of assets and liabilities in a scheme that is winding up is in line with the new section 37 requirements for ongoing schemes.

2.45 pm

Mr. Webb : I apologise to the Minister for having missed the beginning of his speech. It would inform our discussion if he could clarify how it would ever be in the interests of scheme members that money was taken out of their pension fund and handed back to their employer. How could that ever satisfy the interests of members?

Malcolm Wicks: It is in the interests of members that their full pension rights should be protected, so that in due course their pensions are paid. It would, however, be absurd to argue that a pension scheme should have substantially more than it requires for that purpose. As the hon. Gentleman missed my introductory remarks, he may not realise that we are saying that in the new regime money could be paid back to an employer only when the actuary has substantiated—by signing a certificate and so on—that there is a full buy-out fund in place should that become necessary. Currently, it may seem unlikely that we could return to circumstances where there is more than enough money to meet pension rights, but after several tests money could, in those circumstances, be returned to the employer, bearing in mind that the employer is normally—although not always—the major funder of the company pension scheme.

I believe that our proposals strike a fair balance between the legitimate interests of both members and sponsoring employers. Restrictive rules on building up and retaining surplus in pension funds since the 1980s are frequently cited as having played a role in contributing to the funding problems of the last few years. At the same time, there are naturally also concerns that employers should not be able to cream off surplus funds where that could affect the fundamental well-being of the scheme—the point that we have just discussed. The complementary changes in tax and pensions law requirements are aimed at solving both those problems. In future, there will no longer be a restriction on employers who wish and are able to fund
 
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their scheme generously, but at the same time they will be able to remove funding only above a level that should not threaten the health of the scheme.

Mr. George Osborne: The new clauses bring in significant changes to the rules governing the disposal of scheme surpluses. I am beginning to sound like a cracked record, but I point out again that it is extraordinary that we have not been accorded a proper process to scrutinise something that will affect every member of an occupational scheme and many employers.

As the Minister acknowledged, the present problem is usually one of deficit rather than of surplus, but it is important to get the rules right and to prepare for a future, perhaps under a Conservative Government, when the stock market recovers and schemes are in surplus. I thus have a direct interest in ensuring that the rules are right.

One of the problems we face is that much of the detail is left to as yet unpublished and unseen regulations. Indeed, we have only just seen the new clause. The regulations will include matters such as the valuation of the assets and liabilities of schemes, which assets and liabilities are to be taken into account, the maximum amount that can be paid, who should carry out the valuation and who should inform the Inland Revenue and the pensions regulator—a very significant detail.

My favourite sentence in the explanatory notes, which I found when I was reading them last night, is:

"The Government will, as customary, consult extensively on these draft regulations before laying them before Parliament."

Very little consultation on any of those proposals is taking place. The Bill is being rushed through on Report in the House of Commons, where a couple of Members are taking part, both of whom only saw these new clauses on Friday. They had not received representations from outside bodies because they have had no chance to examine or comment on such things in detail, and the whole thing goes through on the nod. Indeed, as we heard during the debate on the previous clause, the Minister did not really know what he was putting through Parliament. Perhaps he will say something about what he imagines will be in the regulations.

Certainly, when I asked the National Association of Pension Funds what it thought of the new clause—I stress that it said that it had not had time to reach a formulated viewpoint—its initial observations were:

"Much of the detail is to be prescribed so it is difficult to comment. From the clause as it stands it is difficult to be sure what level the funding needs to be in order for a surplus payment to kick in. If the main aim is to protect the PPF then one would assume that the funding level would be to full buy-out basis. If that is the case, how useful is this clause? You would also need to get clarification of who owns the surplus and ensure that there are correct powers to pay the money back out of the fund."

The Minister said—this is clear in the explanatory notes—that in the great majority of cases, the new rules will be more restrictive than the existing Inland Revenue requirement that those provisions supersede. What assessment has the Minister made of the resulting impact on the scheme and the ability to move surpluses to employers? What consultations has he had with the industry? Will there be any unintended consequences? In Committee, we discussed the unintended
 
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consequences of the minimum funding requirement's impact on gilts, for example. Will any unintended consequence be involved in requiring schemes to hold on to surpluses that they would otherwise have disposed of?

May I ask the Minister—perhaps this is the wrong place in our proceedings on the Bill, but I do not think that it is—how these proposals interact with the European pensions directive's requirements on surpluses? I am sure that the Minister will be aware that there is enormous concern in the pensions industry that the EU directive will force company pension schemes to hold sufficient assets so that, at all times, they are able to pay out all the benefits promised to members, whereas the UK rules tend to be more flexible, allowing schemes to take a longer-term view of promised benefits, without being held to the day-to-day movements of the stock market, for example. As a result, UK schemes have not had to hold as many assets as their European counterparts. Of course, that has not only downsides when schemes turn out to be underfunded, but upsides in allowing schemes to pay more generous benefits and encouraging more companies to set up schemes.

The industry says that complying with the EU directive could cost up to £300 billion—a huge sum—and I have no reason to doubt its figures. Interestingly, at the end of last year the chief executive of the NAPF, Christine Farnish, said:

"The UK has to implement this directive. Continuing to provide a defined benefit pension is a hugely costly undertaking for supervising employer. We know a number of firms have closed their schemes to new members but our concern is that greater numbers will also close to future accruals because of these extra costs. It is unquantifiable, and finance directors do not like having that sort of risk on their balance sheets. It is very dangerous and very costly to UK schemes, and because the rules cannot be scheme-specific, will no doubt lead to endless battles in the court. It is ridiculous; it is not the real world."

That is what the chief executive of one of the most respected pensions organisations has said.

I mention the EU pensions directive because these proposals relate to scheme funding and the interaction with the disposal of surpluses. Are these new clauses compliant with that directive, or will the Government have to return with further new clauses, perhaps in the other place? How will the Government deal with the industry's concerns on this important point?

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