---

Mr. Fallon: It would be churlish not to recognise that the Minister has moved on the question of the percentage of the risk-based levy, and I think we would all welcome that. My hon. Friend the Member for Bournemouth, West (Sir John Butterfill) has raised a very valid point about charities, because it perfectly illustrates what I think will be the problem under this legislation—regulatory overload. I suspect that in essence, what will happen is that the regulator will have to confirm the trading position of a charity and will be drawn into dialogue, presumably in this case with the charity commissioners, but in other cases probably with the Financial Services Authority and who knows what else, and we shall have one regulator chasing another regulator round and round the block.

3.15 pm

It will not quite do for the Minister to say that every conceivable transaction has to be registered, and will not be officially cleared, in case of any change of circumstance, for the whole of a six-year period, and then to say—presumably in reply to my hon. Friend the Member for Bournemouth, West—that this particular issue will not take too long to resolve. The Minister cannot have it both ways.

Finally, on small schemes, I would certainly support the hon. Member for Northavon (Mr. Webb) on exempting small schemes if there is no element of cross-subsidy involved. That was the purpose of my question to him, and he has given me an assurance on that. I suspect that we would support what he has put forward and I hope that he may be comforted by what the Minister has said in reply.

There is one element of the Minister's reply that I would like him to reflect on, perhaps at a later stage of the Bill. He did say that it was his intention to invite the regulator to disapply. I think that that will be in the guidance or, eventually, in the regulations. An awful lot
 
16 Nov 2004 : Column 1206
 
is being left to the guidance and there are a lot of people outside the House who will have no comfort from these debates until they see that guidance and see the form of regulations that will flow from the Bill. I wonder whether, if not now, at some stage in our proceedings, the Minister will be able to clarify what he means when he says, "it is our intention that"; does that mean that he will be publishing guidance in draft, between the passing of this legislation as an Act and the setting up of the regulator and his powers coming into force, or are we simply going to be confronted, as usual, with a great pile of regulations?

Mr. Waterson: I have a mental image, which I have shared privately with the Minister recently, of the Minister haring up the road to Buckingham palace at the last minute, dashing the pen from Her Majesty's hand before she signs the Royal Assent and saying, "Your Majesty, we have had a final thought on this and we would like to change things just a teeny little bit—tweak things just a fraction to get the Bill right." I cannot get rid of that image. I used to think that it was a joke, but I am beginning to wonder.

We have just heard something extraordinarily revealing from the Minister, which confirms my impression that, from start to finish of the Bill, he has been making it up as he goes along. He has revealed a new bit of policy that has suddenly emerged—unless I just failed to spot it on a previous occasion, although I noted that the hon. Member for Northavon (Mr. Webb) was equally taken aback.

We did manage to extract rather painfully from the Minister in Committee that in fact it could be 2009—although he did hotly contest the idea that it could be 2010—before we had an all-singing, all-dancing risk-based levy system applying across the board. He referred to the question of triennial reviews and he did confirm, as I understood it, in response to a point raised by the hon. Member for Northavon, that it was possible for schemes to opt in early, as it were, to the risk-based levy. Presumably, the other side of that coin is that they can put it off as long as it suits them within the 2009 ceiling.

Then suddenly there emerged the brand new idea that the PPF would somehow produce a yet further basis for charging some schemes, completely outwith anything that has been debated in the House or the other House, to incentivise some of these schemes to opt in sooner than they might otherwise. We have to ask, in all seriousness, is the Minister simply making it up, or is there some developed policy thinking on this, and if so, why does it not feature in the hundreds, if not thousands, of amendments and new clauses that have been pouring out of the Department ever since the Bill saw the light of day?

Mr. Webb: The hon. Gentleman refers to schemes choosing whether to go for the risk-based levy or the flat-rate levy, but is there not a further paradox? Presumably, the scheme must guess what its risk-based levy would be, which is related to that specific scheme's features. So the scheme may not even know what its risk-based levy might be, and it will therefore inject greater uncertainty into the Government's proposed voluntary approach.
 
16 Nov 2004 : Column 1207
 

Mr. Waterson: The hon. Gentleman makes a fair point. I seem to remember that, in Committee, we as the official Opposition made a kind of rough and ready interim proposal, not unrelated to the MFR, to try to get a risk-based levy up and running sooner rather than later. That was airily dismissed by Ministers, but it at least had the attraction of being more immediate in its application. There is a real problem, but we can be sure that those schemes that face perhaps the greatest risk in reality will be those that are most careful about calculating whether they will be better off staying outside for as long as possible. There is a real worry, and not for the first, the second or the hundredth time, I find myself having to respond to something that is brand new and has just come barrelling out of the blue this afternoon without warning and with no paperwork attached.

Before I move on to the central questions involved in the risk-based levy, I wish to touch on the smaller schemes issue. I take on board some of what the Minister says and some of the things said in the other place about the practicalities; but, on balance, we understand the force of what is proposed by the hon. Member for Northavon, and subject to anything further that I hear from the Minister or any other hon. Member, we would be minded to support the hon. Gentleman if he presses his amendment to a vote this afternoon.

I cannot help reflecting on the fact that, just for once, the exasperation expressed by Baroness Hollis in the other place only yesterday was justified when she made the point that Lord Oakeshott had indeed argued against such a proposition in Grand Committee and on Report. She said:

"When I tried to make that key point on behalf of the Government, it was not acceptable. However, when, beyond the appropriate time, the NAPF takes exactly the same line as the Government, we hear that amendments may be moved in the Commons."—[Official Report, House of Lords, 15 November 2004; Vol. 666, c. 1221.]

I dare say that it is not unusual for the Liberal Democrats to change their minds on any number of issues, but it is worth reflecting on the fact that they seem to have done a bit of gymnastics on this issue.

I shall come now to the key matter. I never know whether this is appropriate, but to be on the safe side, I suppose that I should declare a possible interest in that I have private pension provision, as I have indicated in, I think, all our previous debates on the Bill. We in the House and our colleagues in the official Opposition in the Lords have always had three basic concerns about the risk-based levy. First, the initial levy period should be limited to one year. In other words, as soon as is humanly possible, we should have a risk-based levy, and I shall return to some of the major reasons why in a moment.

Secondly, we want to ensure that, after the initial period, the pension protection levy should comprise both risk-based and scheme factor components. As has been said already, we have consistently, certainly in Committee, looked for the greatest possible definition of risk, so that we consider not just the risks to the scheme of underfunding as well as the nature and quality of a fund's investments, but the likelihood of the sponsoring company's insolvency in respect of any scheme, as the hon. Member for Northavon said.
 
16 Nov 2004 : Column 1208
 

The third major issue, which the Government are clearly now accepting—although in a sense the Minister did so in Committee, and I shall return to that in a moment, as I would not want to seem to misrepresent his position—is that the highest possible proportion of the levy should indeed be risk-based. We argued successfully in the Lords for an 80 per cent. figure.

Those have always been our major concerns about the Bill, and I shall explain in a little detail why we think that they are important issues. Before the Bill ever saw the light of day, when it was in what passes for its gestation period, I took the trouble of going to Washington to met Mr. Steve Kandarian, the then executive director of the Pension Benefit Guarantee Corporation, the body on which the Government claim that they are modelling the pension protection fund, although that is not the case in a variety of respects. The Government have diluted the model—if one can dilute a model—in a number of important respects, not least of which is that the so-called guarantee offered by the PPF is nothing like as secure as that offered by the PBGC.

Leaving that aside for a moment, Mr. Kandarian, who has since visited London, having ceased to be the executive director, and lectured on these issues at Imperial college, was adamant about a variety of things, one of which the Minister touched on: the importance of not necessarily leaving it to the legislature, particularly in election periods, to decide to increase the levy. Mr. Kandarian was adamant in his discussions with me and, I suspect, with anyone who was prepared to listen to him—I am sure that that included the Minister and his officials, as they prepared the Bill—about the need to have a risk-based levy from the very outset. Indeed, it was a number of years before the PBGC started to pay out benefits, as it gradually built up its funding since its founding in 1974. Mr. Kandarian was very clear that a proper risk-based levy was needed from the start, and he also spoke with some regret that, when the original model was set up in 1974, it was not fully risk based because it did not include all the components of risk that I spoke about earlier. We have always taken the view that that must be an important part of the Bill because it seemed sensible to take some note of 30 years' experience on the other side of the Atlantic, and it became even more important the more we considered the Bill.

I shall briefly refer to the evidence on these issues that Mr. Kandarian gave to the United States Senate when he was still the PBGC's executive director. He said:

"When PBGC takes over underfunded pension plans, financially healthy companies with better-funded pension plans end up making transfers to financially weak companies with chronically underfunded pension plans. If these transfers from strong to weak plans become too large, then over time strong companies with well-funded plans may elect to leave the system."

That is what we are talking about. We can dress it up and call it moral hazard or any number of fancy terms, but the reality is that if the Bill, despite having changed shape in so many important respects, is supposed to protect the members of existing defined-benefit schemes in this country, while encouraging not only those schemes to continue to be open to new members, but perhaps new schemes even to start, the last thing that we want is to deter employers who might be considering opening a new scheme or keeping one open to new members. That is clearly a problem.
 
16 Nov 2004 : Column 1209
 

If we tell well-run schemes and well-run companies that, for a significant period, they will end up paying a flat-rate levy that is not fully risk-based—in effect, the good will subsidise the bad—perhaps some of the less well-run, more risk-based schemes will be able to continue to opt out for as long as possible from the whole scheme, despite the new bit of policy that we heard about just a few minutes ago,

In America, as Mr. Kandarian went on to say in his evidence, there is

"a flat-rate charge of $19 per participant, and a variable rate premium of 0.9 per cent. of the dollar amount of a plan's underfunding, measured on a 'current liability' basis."

His great regret, which he explained to me and others, was that the system was not got right from the start and that regret is encapsulated in the example of Bethlehem Steel. It resulted in the largest single claim in the history of the PBGC. However, Bethlehem Steel paid no variable rate premium for five years prior to termination despite being drastically underfunded on a termination basis. That flags up the enormous importance of ensuring, as we have consistently said, that the risk-based levies are in place early on.

3.30 pm

In fairness to the Minister, what he said earlier—apart from the new bit of policy—only reflects what he said in Committee. It emerged that he conceded that, because of the practicalities involved in bringing in a fully risk-based element, it would not come in for three or four years. That obviously took me by surprise, because he refers to me grimacing from a sedentary position. He added that

"if a scheme chose to bring forward the three-yearly valuation, presumably to benefit from a lower risk base, it could do so."

However, the hon. Member for Northavon pointed out that this could end up without a proper insurance scheme covering all funds until 2010. The Minister responded—somewhat in annoyance, as I recall it—by saying that that was certainly not the case, but added:

"The three-yearly valuation cycle takes us to 2008, so the full risk-based levy could be introduced for all schemes at the end of the process by 2009"—[Official Report, Standing Committee B, 1 April 2004; c. 560, 568.]

The Hansard report shows that that remark was followed by an "Interruption", I am not at all surprised.

There will be a significantly longer period for all schemes to pay a fully risk-based levy, but the position gets worse. We heard only recently that the burdens on the PPF at its inception are increasing rather than decreasing. We will spend more time on that when we come to a later group of amendments, but I think of the statement the other day about schemes such as that run by Turner and Newell. They still might be dealt with retrospectively under the PPF even if there were a significant event before April 2005.

There have been strenuous arguments on all these issues. I think that the Government have accepted most of them and, in particular, the argument about the figure of 80 per cent. It is important to point out that the National Association of Pension Funds has been clear throughout that it wants the highest possible proportion
 
16 Nov 2004 : Column 1210
 
of risk element in the way that the levy is calculated. It says:

"NAPF would like the PPF's risk-based levy to be at least 80 per cent. of the total funds raised, in order to minimise moral hazard. The initial transitional period when there is only a flat rate levy should not extend beyond a year."

The fact that we need to debate this issue in the Lords or this House is slightly curious. In Committee, the Minister said that

"we consider that an appropriate split in due course could be—although it is up to the board—about an 80 per cent., 20 per cent. split in favour of risk factors."—[Official Report, Standing Committee B, 1 April 2004; c. 588.]

There has never really been a lack of common ground between the two sides on the 80 per cent. issue. This is all about whether the Government have been prepared to include that figure in the Bill. Baroness Hollis put it rather well when she said:

"I, too, support the amendment: I just cannot accept it."

That struck us as slightly bizarre. She also coined the memorable phrase when she said that, in the early stages, there would be a

"mixed economy in which all schemes will have some scheme-based levy and others will carry, by choice, a risk-based element. It is clear that insofar as the good companies seek the risk-based element in the hope of reducing their premium, this will have"—

this is an important admission—

"an adverse selection effect on the scheme-based levy for the rest."—[Official Report, House of Lords, 4 November 2004; Vol. 666, c. 485, 497.]

That is the point that the hon. Member for Northavon made. Some good companies will clearly be disadvantaged by the long run-in to a fully risk-based levy right across the board. We think that that is wrong.

The good news is that the Government appear to accept the 80 per cent. figure and that we should be moving as rapidly as possible to a fully risk-based levy. We still think that they could do more to tighten up the time scale, but we do not propose to divide the House on the main issue. We think, however, that there is sufficient merit in the amendment tabled by the Liberal Democrats, and we do not think that it should be dealt with in the way that the Minister suggested. The amendment makes a clear point that should be included in the Bill, so we urge the hon. Member for Northavon to pursue it. We are prepared to support him in the Lobby.

---