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Malcolm Wicks: Clauses 157 and 164 set out the provisions relating to the initial levy and the pension protection levies. The amendments are aimed at amending the structure of the current provisions and altering the factors that the PPF board may take into account when setting future pension protection levy rates and structures. For clarity, I will deal with each clause in turn setting out the proposed amendments relating to it.

Clause 157 provides for the Secretary of State to set the initial levy rate and structure, with the approval of the Treasury. The initial period is needed in order to get the PPF up and running. That is because the information required to set in place a risk-based pension protection levy from the outset is not available. Amendment No. 33 would prevent the setting up of the PPF until it is in a position to establish the basis for the risk-based pension protection levy.

The amendment could have several implications. The setting up of the PPF could be postponed, which in turn would delay the vital protection for scheme members the PPF will provide; it could require the PPF board to set in place a risk-based levy structure based on incomplete information; or it could require employers to conduct an out-of-cycle PPF-style valuation, placing additional financial burdens on sponsoring employers. Alternatively, it could result in no levy being collected in the initial period, which could have financial implications for the PPF in future. It is not clear to me which of those intentions lies behind amendment No. 33.

2.30 pm

Amendment No. 34 would reduce the length of time that the initial period could be extended from 12 to six months. If we put in place a provision that can increase the period of the initial levy to more than 12 months, we have built in a contingency. Restricting that flexibility may impact on the setting of the pension protection levies in the year that follows the initial period, because, as a result of that restriction, the board may need to implement a further, simplified levy structure for the whole year following the initial levy. In addition, allowing the initial levy to apply for a period other than one that coincides with the end of a financial year would have implications on the setting of future pension
 
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protection levies, because the pension protection levies that immediately follow the initial levy operate in respect of financial years.

Clause 158 sets out the provisions that relate to the pension protection levies, including the factors that the board can take into account when calculating those levies. Amendment No. 35 would require the board to take account of the likelihood of an insolvency event occurring in relation to a scheme when it sets the risk-based pension protection levy. Amendment No. 36, if taken in isolation, would result in the board being unable to take account of the likelihood of an insolvency event occurring in relation to a scheme. However, we have assumed that that amendment was proposed in conjunction with and to complement amendment No. 35.

When setting the risk-based pension protection levy, the PPF board will be required to take account of the level of funding within a scheme, because we consider that underfunding is the most critical factor in determining whether a scheme may require PPF assistance. However, we recognise the importance of other risk factors, such as insolvency risk or investment strategy risk, when setting the pension protection levies, but it will be for the PPF board to determine if and how those other risks can be used. Officials in my Department are continuing to work with industry representatives to establish the most appropriate options available to the board in taking account of insolvency risk.

Mr. Webb: The Minister is generous in giving way. I have never heard him put it quite as starkly before that the Department considers that the underfunding level is the critical thing and that everything else is in a sense second order. That certainly mirrors the Bill's structure. However, for example, let us compare BT, which, on certain measures, has a socking great deficit but practically no chance of making a claim on the fund, with another scheme with a fairly small deficit but a really shaky company. It is the second company that will make a claim on the PPF, so why is the insolvency risk deemed to be second order?

Malcolm Wicks: I will not mention any company, but where a company is perfectly solid and judged by the board on different criteria, probably not just one, to be very solid—to use that non-technical description—it will do well out of the risk-based levy, so there should be no concern.

Kevin Brennan (Cardiff, West) (Lab): Is not a possible danger of incorporating an insolvency risk into the levy that the PPF itself would participate in disseminating commercial information that could damage the business concerned in the markets?

Malcolm Wicks: A key point is that the levy can influence the behaviour of scheme sponsors to ensure adequate funding. The PPF must try to do that in many respects. The other risk factors are obviously desirable in relation to the one that I mention, and we assume that the PPF will include them in the levy's structure.
 
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However, it would be wholly desirable if the fact that such information becomes public—I guess that it will in a sense—encourages a scheme to fund itself properly.

Mr. Bill Tynan (Hamilton, South) (Lab): It is obviously important that companies are not jeopardised because a levy is placed on them. Will my hon. Friend clarify the situation? Under the Bill, the PPF has to be mindful of the financial position, but it does not have to take that totally into account. Would it not be better if the PPF had to take account of a company's financial problems in a more structured way before it levied that company?

Malcolm Wicks: In those circumstances, the importance of the regulator will come into play. As my hon. Friend knows, as well as I do, from his service on the Standing Committee, we very much need to consider the PPF in tandem with the new regulator. The regulator's task is to act early where signs of risk arise and to try to ensure, using a range of powers from the relatively soft to the very tough, that company pension schemes come up to scratch. Obviously, in an ideal world, we would want as few companies as possible to pay the risk-based levy because we do not want too much risk to be placed on the PPF. If that came about, the levy for all companies could be relatively low, but that is probably an aspiration for the longer-term future.

Clause 160 sets out the provisions that relate to the amounts to be raised by the pension protection levies and the parameters within which the board may operate. Amendment No. 37 would require the PPF board to estimate that it would collect at least 75 per cent. of the pension protection levies via the risk-based levy. That would have an impact upon the PPF board's flexibility when setting and determining future pension protection levy rates and structures.

We consider that the Bill will restrict the PPF board adequately, while ensuring that the board has the freedom, flexibility and independence to set the most appropriate pension protection levy rates and structures in the future. However, we share with hon. Members a desire that the great majority of the levy in the transition period will be based on risk factors. As guidance to colleagues, we consider, after consulting stakeholders and other relevant bodies, that an appropriate split would be—this is a guideline—about 80:20 in favour of risk factors; but there will be flexibility and that will be a decision for the board, not for Ministers.

Mr. Webb: I shall endeavour not to intervene on the Minister again in the debate on this group of amendments, but I must have failed to make my point about what counts as risk, because the Minister's response was completely wrong. If the risk-based premium is based only on underfunding, a scheme such as BT's—a big, solid company but temporarily with a big deficit—will pay a socking great premium. He said that a solid company need have nothing to fear from a risk-based premium, but the Bill will allow the premium to be based only on underfunding risk, so such a company would be very heavily penalised.

Malcolm Wicks: I will not talk about any company in particular. When I used the word "solid", I was not
 
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talking about any company, whether solid or a bit soggy. Of course, while underfunding is absolutely crucial, other factors can be taken into account by the board. That comes back to the discussion that the hon. Gentleman hinted at earlier, but we think it important that the new PPF is at considerable arm's length from the Government. Obviously, we are accountable ultimately to the House, through the Secretary of State, but we are establishing a board that will have much expertise. People willing to serve on the board should have the appropriate flexibility, and new members of the board will want to read the reports of the considerations of the House on such matters.

Clause 161 sets out the provisions that relate to the levy ceiling in connection with the pension protection levies. The levy ceiling will be set by the Secretary of State, with the approval of the Treasury, and will restrict the PPF board from increasing the pension protection levies beyond a set amount. Under amendment No. 38, the Bill would set the levy ceiling at no more than £600 million for the first financial year following the initial period. The amendment would not have the desired effect, for the reasons that I shall now set out.

During the transitional period and the first year thereafter, provisions have been put in place to lower the levy ceiling. That is to restrict the board when setting pension protection levies during the transitional period, when the 25 per cent. yearly increase rule does not apply. The levy ceiling is therefore likely to be significantly lower in the first year after the initial period than the £600 million suggested in the amendment. In addition, it would be unusual to state a figure such as the levy ceiling in primary legislation, especially given that the Secretary of State will be required to make an order every year specifying the amount of the levy ceiling and that the Bill already provides for further provisions to modify the levy ceiling. We are confident that the provisions that we have put in place for the setting of the levy ceiling and future pension protection levies are both appropriate and sufficient. It is important to balance the needs for the PPF board to have the necessary flexibility and for the costs relating to the pension protection levies to be managed effectively.

Clause 163 sets out the provisions relating to the pension protection levies during the transitional period. The transitional period is needed because some of the information that we need to set up a risk-based pension protection levy from the outset is not available. The transitional period will allow the board to take a balanced approach to determine what information it has available and what information is necessary to implement the risk-based approach effectively. Amendment No. 39 would restrict the transitional period to two years and would have implications for the setting of future pension protection levies, because the information that the board needs to implement a risk-based pension protection levy will not be fully available from the outset. The amendment could therefore result in the board being required by the provisions of the Bill to implement a very simplified or inaccurate risk-based approach based on incomplete or out-of-date data. Alternatively, if the board decided that it needed to base its decisions on more complete information, additional financial burdens could be placed on employers, which would have to provide an out-of-cycle valuation
 
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because the board would need a completed PPF-style valuation to be able to determine accurately comprehensive risk-based pension protection levies.

The calculation, collection and recovery provisions relating to the initial levy and the pension protection levies are contained in clause 164. Amendment No. 40 would amend the clause by providing scheme trustees and managers with the power to recoup from all scheme members, whether active, pensioner or deferred members, the cost of at least the scheme factors element of the initial levy and the pension protection levies. Although we understand the intention behind the amendment, we must consider the implications. It could, for example, result in a reduction in the income of current pensioner members, or have an impact on future pension entitlements where there is no current pension in payment. Alternatively, it could allow pension scheme trustees and managers to invoice active and deferred members directly to request a contribution in respect of the pension protection levies. I am not sure that the hon. Member for Eastbourne (Mr. Waterson) wants that, and there would be a practical problem with doing so, as many schemes do not have up-to-date contact details for many deferred members. In addition, the amendment does not set a limit on the amount that can be recovered from the scheme member. Giving scheme trustees or managers such a power could result in members paying towards the risk-based element of the pension protection levies, which would be unfair because scheme members cannot influence how the scheme invests its funds or its financial state.

Because of the various implications that the proposed amendments have for the setting of the initial levy and the pension protection levy, I urge that they be withdrawn. At present, schemes would be allowed to draw the costs of the levy from current members, but that would involve a higher contribution. The scheme can make that judgment if it wishes to. However, such flexibility is altogether different from allowing via the Bill a levy to be imposed in such a way on deferred or retired members of a scheme.

2.45 pm

The hon. Member for Northavon (Mr. Webb) presented another scenario, his argument being essentially that the company or pension scheme might try to shift members away from the scheme by giving them a transfer value—getting rid of them simply to avoid paying the levy. I think that that is a little far-fetched. The new full buy-out procedure for solvent employers means that no company could do that on the cheap. It would have to buy out fully the pension rights of the individuals' concerned, and, no doubt, incur many administrative and other costs in trying to do so. In addition, as we drive up standards of pensions literacy and as the trade unions continue to become more involved in pension issues, that scenario becomes even less likely to arise. None the less, we shall reflect on it.

I hope that in view of my assurances—perhaps explanations is a better word—the hon. Member for Eastbourne will withdraw his amendment.

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