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Malcolm Wicks: The hon. Gentleman seems to make no allowance for the fact that, where a company pension scheme goes bust and there are relatively few assets, people could be faced with receiving only 20 per cent. of their pension rights. Does the hon. Gentleman not agree
 
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that, if such people could receive 90 per cent. under the PPF, they might be rather pleased that we legislated to set it up?

Mr. Webb: I wonder whether the Minister has misunderstood me. My illustrative people are a man in his early 60s or a woman in her late 50s who give up work to become carers. When the firm goes to the wall, such people are, under the present regime with the present wind-up rules, in the privileged category that gets first call on the fund. The problem is that those people might get 100 per cent. and the workers next to nothing. If there is absolutely no money in the fund whatever, of course the Minister is right. Generally, however, those people will receive privileged treatment.

My key point is that the Government are using the rule pertaining to people below normal pension age as an anti-moral hazard point, thereby catching many deserving good people.

In all other parts of the Bill, the Government have introduced screeds of new clauses to deal with moral hazard. Instead of tarring everyone with the same brush, they have thought about how people might abuse the system, and defined very specifically what will not be allowed. For example, the Bill does not allow a person to set up a company with no assets to run a pension scheme, and then let that company become insolvent. The Bill explicitly prohibits that sort of moral hazard.

Why do the Government not deal with the rotten apples by inserting a clause to prevent people from retiring the day before a company goes bust? That would be my strategy, and it would not have the damaging effect on carers that the Government's strategy will.

Amendment No. 27 would protect the pension rights of what I imagine is a relatively small number of people, and is therefore desirable, but accepting it would mean that another anti-moral hazard provision would be needed. Perhaps the hon. Member for Eastbourne has something in mind: history shows that some people have abused the system by using their inside knowledge to put themselves in a favourable position just before a pension fund is wound up.

That outrage is clearly unacceptable, and a further anti-moral hazard provision is needed to prevent it. However, the Government's proposal is much too broad, because it includes many worthy and deserving people.

Mr. Waterson: Before the Bill even appeared, many industry experts told me that the key would be the anti-avoidance provisions that it contained. However, they have appeared only at the end of the Bill's passage through the House, and many have not been subject to proper consideration, either in Committee or on Report. Surely the right way to go about this matter is to consult the experts who might advise people how to get around the so-called moral hazard provisions. That would be preferable to the scatter-gun approach adopted by the Government.

Mr. Webb: That is an interesting question. Ironically, the Bill originally contained only one anti-moral hazard provision—the one that we are discussing now, which will catch many innocent people. All the other
 
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provisions were introduced at the last minute and, although I am sure that they are not merely an afterthought, their late appearance is rather worrying. But I do not want to go too far down that route.

I shall be interested to hear the Minister's response to this debate. I was a member of the Standing Committee, which did not consider this matter in any depth, and I do not think that I am repeating debates that have been held already on this point. There are deserving people in the middle group—the pre-pension age retired, not workers or retired people over pension age—who would benefit from amendment No. 27. At present, they are being harshly treated, and I am sympathetic to the amendment for that reason.

My main observations will concentrate on amendment No. 31, but I want to say a few words about amendment No. 28, which would replace the proposed 2.5 per cent. indexation level with a level of 5 per cent. The Minister said that that would not be possible as the Bill was premised on 2.5 per cent. indexation, but in fact it already contains a 5 per cent. indexation level in connection with revaluation. The Government seem to have forgotten to change that bit. They cannot argue that amendment No. 28 would not work because it is out of kilter with the rest of the Bill, or because inflation will be 2.5 per cent. always and for ever. The weakness of that argument is revealed by the fact that a figure of 5 per cent. already appears in the Bill.

Funnily enough—and I made this point in an earlier intervention on the hon. Member for Eastbourne—an argument for taking 5 per cent. down to 2.5 per cent. could be made on the basis that the Bill places a burden on final salary schemes, in the form of the PPF levy. The flip side of that is that it will reduce the burden on such schemes through retirement benefits and indexation. The implication of amendment No. 28 is that the schemes would have to bear that burden but that they would not get the relief from it.

The Secretary of State asked whether it would not be better to accept a trade off and have safe company pensions—albeit with more limited indexation through the PPF—rather than unsafe ones, and that is quite a strong argument. However, the hon. Member for Eastbourne needs to explain how, if he wants 5 per cent. indexation, he would reconcile that with his other amendments that try to reduce the burden on the scheme.

6.45 pm

My main concern is amendment No. 31, which is based on an amendment that we tabled in Committee. The hon. Member for Tatton (Mr. Osborne) made fun of the fact that we did not table very many amendments, but we tabled this one because we feel strongly about the issue. Amendment No. 31 would remove the Government's ability to undermine the PPF. Otherwise, it would not really be an insurance scheme, because the Government would be able to say, when the going got tough, that the benefits would be cut.

This point only dawned on me during the recent exchanges—I had thought that the only way in which the Government could undermine the PPF was through the draconian and extreme process of affirmative resolutions in both Houses of Parliament to cut the 100 per cent. and 90 per cent. benefits: I had forgotten that
 
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before we got to that stage, the Government could have undermined the PPF in other ways. That is why amendment No. 31 is necessary.

When times get hard, the PPF could put the levy up. It could also cut the indexation or the revalorisation, and that would mean a real cut in people's entitlements. I had thought, charitably, that the PPF was a strong guarantee of benefits, because although 100 per cent. did not quite mean 100 per cent. and 90 per cent. did not quite mean 90 per cent., only in extremis would the Government undermine the value of benefits. However, I had forgotten that the PPF, without recourse to this House, could cut indexation benefits. Why does that matter?

The cut might be only 2.5 per cent. and we might think that we could live with that. However, people—especially women—might typically be retired for 20 to 25 years and if the non-indexation were to take place over several years, pensions could be cut by 10 or 15 per cent. Indeed, if the fund were not restored, that reduction in benefits could continue for the rest of the recipients' lives.

When the Minister responds, I hope that he will tell us whether the PPF will be under any onus to restore lost indexation. Amendment No. 31 is about what will happen when times get tough and the indexation is knocked off. When times are good again, will the PPF be under an obligation to restore the indexation? People who pay the PPF levy through their employers will want to know what they can expect. Will the literature for the members of PPF schemes say that not only does 100 per cent. not actually mean 100 per cent., but the inflation protection may be undermined and never restored? If it does not say that, there is a danger that scheme members will be misled.

What should be the appropriate response from the PPF when things get tough? The first step would be to put up the levy. We have already discussed the cap on increases in the levy and that could put a financial pressure on the fund that it might have to respond to in other ways. The Minister said that paragraph 29 of schedule 7, which the amendment would delete, is necessary because the levy could rise "exponentially". But there is a cap, so there is a limit on how much the PPF board can respond to adverse circumstances by raising the levy.

If raising the levy does not deal with the financial shortfall, what would happen? In that case, the indexation or revalorisation would stop, and people would not have inflation protection. In other words, their pensions would be cut in real terms.

At that stage the Government say that the next thing that the board can do is to borrow money on the market. In Committee, we discussed whether that was a good idea and it struck me as absurd that because of their obsession with privatisation the Government would prefer the PPF board to borrow money from the private market, with all the associated risk premiums and profit margins, yet the Government could raise the money more cheaply so that the taxpayer obtained better value.

We would not necessarily want the PPF board constantly to have to come back to the Government, so it could perhaps borrow money for cash flow. I accept the arguments about the need for the board to be at arm's length from the Government, so we could allow it
 
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some day-to-day flexibility. However, it would be bad economics if, in the event of a serious financial crisis, such as a big steel company or a big airline going to the wall and making a large claim on the fund, the board responded by huge borrowing on the commercial markets. It would be bad public spending and the National Audit Office would probably have something to say about it.

None the less, the Government say that the board can borrow on those markets and having done so it will have recourse to paragraph 29 of schedule 7. When the Minister responds, will he tell us whether there will be a limit on the PPF's borrowing powers? Why does it need such powers? If the Government think that it should be able to borrow money, it should be able to borrow as much as it needs. Why are the Government allowing the PPF to cut back further on the 100 per cent. or the 90 per cent? If the Government accept the principle that the PPF can borrow, what limits do they have in mind?

Perhaps the Treasury view is that the debts of the PPF would be on the Government's balance sheet. Can the Minister tell us whether the Chancellor is worried that if the PPF borrows—because there is a financial mess—its debts will be on the public sector balance sheet and will feature in his borrowing figures? I presume that is why PPF borrowing is to be capped. If so, what would happen?

Let us suppose that all avenues have been tried: we have cut indexation; we have borrowed money; we have increased the levy up to the cap and there is still not enough. What would happen then? There are two options. The first is in the Bill; it would be to ask the House and the other place to approve a cut in the pay-out—to reduce the 100 per cent. to 90 per cent. or the 90 per cent. to 80 per cent., or whatever the figure happens to be.

People have been told not to worry because their pensions will be insured. The Secretary of State has told us that just as we can insure our holidays or our cars so, too, we can insure our pensions. But what sort of insurance company would say when someone made a claim, "Sorry, we're having a bad year and we're not going to pay you"? That would be outrageous and probably actionable. It would be wholly unacceptable for Direct Line to tell me, in response to a claim on my car insurance: "We're having a tough time. The roads have been icy lately so there have been a lot of claims. We can't increase premiums so we can pay you only 80 per cent. of the value of your car, not the 100 per cent. you were expecting." It would presumably be illegal to do that in the private sector, so why do the Government want such a power in the Bill?

What is the alternative? What should have been in the Bill? The Government should act as lender of last resort. They would not make a grant, nor would they bail out the PPF in the sense of handing over public money from the taxpayer, but would stand ready to lend. That is what happens in terrorism reinsurance. The Government want there to be a market, but as insurers would be subject to calamitous risks if they offered insurance against terrorism, the Government say, "Don't worry. You offer the insurance and we'll stand
 
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behind it. If necessary, we will lend money to make the market work." That is precisely what the Government should do in this case.

When things get difficult for the PPF, which may happen not in year one, but decades down the line, the Government should be there to say, "You've tried putting up the levy as much as you can", perhaps to the ceiling, "You've got rid of indexation"—although I have some reservations about cutting benefits at all, because even cutting indexation benefits is the same as ringing up Direct Line to be told that it will not pay out, so I am more worried about that provision than when I started considering these proposals—"You've done all those things. You may even have done some borrowing, but things are still tough. Right, we can borrow money more cheaply than you can. We will lend to the fund to tide it over, but the money will be repaid."

I stress that the money would be repaid. It is not a public spending commitment, but a cash flow issue. Something calamitous could happen to the scheme. That happened in America, where big airlines and big steel companies became insolvent. We have been talking about steel companies today, so this is not far fetched. Such things can happen. We could experience a sectoral recession that hits an industry, causing a rush of claims on the fund. It would then be wrong to jack up the levy excessively on the firms that survive or to slash the pensions in payment to retired people.

The right thing for the Government to do would be to tide over the PPF. That would not be expensive; the Government would get back their money, because steel firms or airlines will not go to the wall every year. There will be good years and bad years, and the Government would see the PPF through the bad years. I simply cannot understand the point of paragraph 29 of schedule 7, unless the Chancellor is behind it, and I presume that he is because he does not want the borrowing to appear on his balance sheet. We fundamentally believe that this will not be a proper insurance scheme unless the Government stand behind it as lender of last resort.

To draw those threads together, we moved a similar amendment in Committee because we believe passionately that the Bill is fatally flawed: it will set up not a proper insurance scheme, but an insurance scheme with a hole in it. If people make a claim on the scheme in a good year, everything will be fine; but if they make a claim in a bad year, the insurer may turn round and say, "Sorry, we're not going to pay out." Given that we have discussed restoring confidence in pensions and that the PPF and the special financial assistance scheme are supposed to restore confidence, what will paragraph 29 of schedule 7 do? It will undermine confidence in pensions. It says, "You thought you were insured, but you weren't."

The history of pensions is that people are given promises and Governments tell them things, but when they go back to the Government, they are told, "We didn't mean it," "We meant something else," "We forgot to tell you," or "There's something in the small print." That is a dreadful basis on which to set up a shiny new scheme. Paragraph 29 of schedule 7 does not belong in the Bill. A better way forward would be for the Government to lend the money when things get difficult. That is why amendment No. 31 deserves the support of the House.
 
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