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Mr. Webb: I understand that the reason for the rule about people who are "retired" but under normal pension age is to try to stop people in the know getting 100 per cent. rather than 90 per cent. However, what about the innocent person under the normal pension age who draws a pension for reasons other than health grounds? Perhaps that person has taken an actuarially—I got into trouble for using that word yesterday—reduced pension. Why should not such people get 100 per cent. of that pension?

Malcolm Wicks: In taking this approach, we want to make the PPF regime as simple as possible so that it can be administered inexpensively. We are keen that those who are not of pensionable age should get 90 per cent. I accept that there is a broad-brush nature to this approach and—inevitably, I guess—some rough justice, but we do not want to get into a situation in which we have to assess individual entitlements in the way that the hon. Gentleman suggests.

The 90 per cent. level of compensation also prevents abuse from members taking early retirement other than on the ground of ill health, and guards against levy payers subsidising schemes that manipulate the rules to gain access to a 100 per cent. level of PPF compensation. If the PPF were to apply 100 per cent. compensation to those scheme members who have taken retirement early on grounds other than ill health, there would be an approximate increase to the PPF levies of £10 million per year. Therefore we should not favour a single percentage level for all, as that would unfairly cut the benefits of existing pensioners and remove an incentive for employers, company decision makers and influencers to keep their scheme out of the PPF.

Amendment No. 31 seeks to remove the Secretary of State's power to vary the levels of PPF compensation percentages. That would remove one of the checks and balances, albeit one that would be used only in the most extreme cases, but it would undermine levy payers' confidence in the sustainability of the PPF for the long term. Pension scheme members can have confidence in the protection that the new PPF will provide, but businesses also need to have confidence that checks and balances are built into the structure of the PPF to ensure that the cost of the levy cannot rise exponentially in the future.

Mr. Webb: Does the Minister not accept that there is already a safeguard against what he just called exponential rises, because there is already a cap on the
 
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increase from one year to the next? The costs cannot go up exponentially anyway, so why do we need this further provision?

Malcolm Wicks: It is a question of having the right number of checks and balances in the system, and we think that this is an important additional one.

Mr. Waterson: The Minister says that this measure would come into effect only in extreme circumstances, but presumably the only relevant circumstances—whether we characterise them as extreme or otherwise—would be that there was not enough money in the PPF. If the Government are intent on saying that they are not standing behind the PPF, surely those are the only possible circumstances. We can call them extreme or not, as the case may be, but whenever and however they arose, those would be the circumstances.

Malcolm Wicks: We are now rehearsing issues that we have rehearsed many times.The Government are confident that the way in which we are establishing the PPF, with the levy system and the ability of the board to increase the levy subject to certain limits—another check and balance—will give us a PPF that is properly funded and which can meet ongoing pension liabilities. We are obviously confident about that, but it is prudent to safeguard against extraordinary eventualities. That is why we are putting these checks and balances into the system. We can argue whether the figure should be 100 per cent. or 90 per cent., but one argument for the 90 per cent. is simply that those below retirement age are, by definition, in a better position to find new work and to supplement their retirement income than those who are above retirement age. This is obviously a broad-brush approach and there will be some rough justice, but the amendment would remove one of those checks and balances—albeit one that would, as I have said, be used only in the most extreme cases—which would undermine confidence.

The members of the PPF board will have the relevant expertise and information available to oversee the PPF's investment strategy and set the pension protection levies at appropriate levels to ensure that the PPF has sufficient funds to pay out compensation. It is important to point out that the PPF will have recourse to a number of measures that must be implemented before reduction of compensation can ever be an option. For example, the PPF will be able to raise the pension protection levies, reduce revaluation and indexation, or borrow commercially. In fact, the compensation percentages can be varied to below the level currently set out in schedule 7 only when revaluation and indexation have been reduced to nil.

6.15 pm

The Secretary of State can make a reduction or an increase in compensation only if a recommendation to that effect is made by the board. The Secretary of State will give extremely careful consideration to any such proposal from the board, which can be made only following consultation. In addition, any change to the level of compensation would have to be subject to the affirmative resolution procedure. The clause makes it clear that indexation and revaluation must have been
 
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reduced to nil before the percentages of compensation payable by the board can be reduced below 100 per cent. to 90 per cent., and that indexation and revaluation cannot be reapplied unless those original percentages are in payment. I am sure that hon. Members will agree that a balance is needed between building in constraints to reassure levy payers that costs will not rise beyond control and allowing the PPF flexibility to raise the funds that it needs to reassure members that they are sufficiently protected. Let us not forget that paragraph 29 also provides for compensation percentages to be increased. Amendment No. 28 seeks to increase the cap on indexation to 5 per cent.

Legislation was introduced in April 1997 requiring certain occupational pension schemes to provide indexation capped at 5 per cent. on all pension accruals. This Bill seeks to reduce the indexation capped at 2.5 per cent. on all future accruals through clause 246, which relates to the annual increase in the rate of certain occupational pensions. Clause 247 is also relevant. It would therefore be inconsistent with other provisions in the Bill were the PPF to provide indexation greater than 2.5 per cent. By restricting the amount of indexation paid, the PPF is better able to predict its liabilities and plan ahead financially. In terms, that means that the PPF can provide consistent and meaningful compensation to scheme members.

Were indexation increased from 2.5 to 5 per cent. on all post-1997 accruals, we estimate that the PPF levies would increase by approximately £100 million per year. It is not clear to me whether that is a new spending commitment—the hon. Member for Eastbourne will wish to tell us. We must not lose sight of the fact that businesses must ultimately bear the burden of financing PPF levels of benefit, and although we aim to provide meaningful compensation, we must balance that with affordability. In addition, from 10 May 2004, as we know, the priority order has changed for schemes that wind up, giving greater priority to scheme members who are under normal pension age by dealing with them before the indexation of pensioner members. I ask the hon. Gentleman to consider withdrawing the amendments.

Mr. Waterson: Let me reassure the Minister that these are probing amendments, but what they are designed to probe is an important issue, which has emerged as a major theme in Committee and will certainly be a major theme on Third Reading—the difference between spin and reality as to the sort of guarantee or safety net that this Bill is supposed to deliver.

I was slightly amused in relation to two of the factors on which the Minister was trying to rely, in terms of availability of the right decision making and resources. First, there were the qualifications of members of the board. We have just had that debate. Let us hope that they are well qualified, as that will not be stated in the Bill. Secondly, he talked about commercial borrowing. I have not had time to look up the reference, but the Minister was pretty adamant in Committee that that would only be for relatively short-term cash-flow requirements, and that the PPF would not be expected to borrow massively on the markets. Indeed, it would be odd if it were being given that power without some sort of Treasury guarantee.
 
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That brings me on to my main point, before I deal with the specific amendments in more detail: there are only limited numbers of directions from which resources can come to the PPF. There are the assets that it may take over from schemes that, by definition, are short of assets, and the investment income that it makes from them. There is the levy income, which we know is reduced in the early stages in any event, certainly in the first year. There may be some short-term borrowing, but we can discount that. Certainly, no public money is to be made available, as I understand it. This is, then, an organisation with finite resources. I do not say that that is necessarily a bad thing, but it is the background against which the amendments must be examined.

I can say immediately that I have no difficulties with amendments Nos. 101, 102 and 103. Our proposal to substitute "90 per cent." for "100 per cent." is really an attempt to draw out the justification for the distinction between those who are not retired and those who are. I did not get to the bottom of that in Committee. One late entrant in the reasons race was that there would somehow be an effect on key decision makers who would otherwise go out of their way to arrange matters so that a particular company's pension scheme did not function properly. I must say that I think that a rather desperate argument. I do not see why there should be a distinction. Ideally all involved should receive 100 per cent., because the Government are offering a guarantee.

The Minister talks of rough justice. That brings me to the question of indexation, and the 2.5 versus 5 per cent. The Minister talks as if we were trying to do something new and different. All we are trying to do is reinsert the current 5 per cent. figure. We had a lengthy discussion of the issue in Committee. The 2.5 per cent. figure may be all right for the moment, while inflation is relatively low, but every time I pick up a newspaper I see talk of a sharp rise in inflation, mainly because of oil crises. No doubt the Chancellor himself is getting a bit worried. Why seek to reduce the existing figure to 2.5 per cent. at this stage of the game, when there seems to be a reasonable consensus—certainly in the industry—that 5 per cent. is sensible? The Minister has put it to me in terms of a public spending commitment, but I would put it the other way round. Given that the purpose of a Bill that has been allotted 22 sittings in Committee and three days on Report is to restore confidence in pensions, why should there be all this cheese paring in people's entitlements?

A closely related aspect is the cut-off date for pension increases. In its briefing, Age Concern has expressed its own worries. It says that the actuaries Lane Clark and Peacock and the Occupational Pensioners Alliance estimate that some pensioners may receive only 70 to 80 per cent. of their total pension promise under the PPF. It refers to pensioners who retired before 6 April 1997. It states:

"We believe the Bill should be changed so everyone can be entitled to 100 per cent. compensation".

That is the point I am trying to make. I cannot see why there should be either the 90 versus 100 per cent. distinction or the little distinctions buried in the small
 
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print, not immediately visible to the average leisured reader, which will cheese pare away the amounts that people will receive in real life.

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