Pensions Bill

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Kevin Brennan: Just to take the Minister's analogy further, is it the case that the Bill will set up negative equity insurance?

Malcolm Wicks: Can we discuss that over a cup of coffee, or possibly something else later this evening, lest I say the wrong thing?

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Mr. Webb: I knew that I had seen it somewhere, as they say. Clause 5(1)(c)—the objectives of the regulator—states:

    ''to reduce the risk of situations arising which may lead to compensation being payable from the Pension Protection Fund''.

The Minister seems to be saying that as long as funds satisfy the requirements of clause 179—the scheme-specific funding requirement—the regulator will leave them alone because they can pay a risk-based premium if they are not funding up to PPF levels. However, clause 5(1)(c) states that part of the regulator's job is to reduce the risk of claims on the PPF. The regulator will come knocking on the door because that is part of his role. So the Bill refers to two separate regulations.

Malcolm Wicks: I see where the hon. Gentleman is coming from, but with respect, he is wrong. The regulator has to ensure that the pension scheme is run efficiently and competently, in many ways, and that the trustees are doing their job. If they are not, an independent team will be sent in—there will be inspection rights and so on. The scheme will be run at such a high standard that it will not have to be a customer of the PPF. That is not the same as saying that at all times every scheme has to have funds for PPF levels of benefits.

A scheme can fund up to scheme-specific funding levels, but as I said, that might be below the level required for PPF. Scheme-specific funding is appropriate to the scheme. The trustees might say to themselves, ''Yes, we can't suddenly pay out all the rights today should the thing crash, but we are satisfied that it is being adequately run on an ongoing basis and that it would meet the criteria for scheme-specific funding.'' The two concepts are different. If a scheme does crash—we hope that there will be few cases of that—the PPF will make sure that pension rights are honoured.

Mr. Waterson: I found the Minister's mortgage analogy unhelpful. He is in danger of making the obvious complicated. If what he is saying is correct, my understanding is that both the PPF and the scheme-specific funding are designed to achieve one thing—and one thing only—which is that the money will exist to pay the liabilities throughout the life of the scheme. If the funding requirement is met—as it must be met for the specific scheme—it leaves an extraordinarily narrow risk on which to base the risk-based levy later, a point to which I shall return in detail. It seems that it would take almost an act of God to make a well run scheme that is fully endowed with assets suddenly crash. The Bill seems to be drafted in that way, but I might be wrong.

Malcolm Wicks: We shall discuss detailed PPF funding later, so perhaps we can return to the implications of the clause for the PPF. I was asked whether the European Union pensions directive requires the Bill to specify the period for schemes to make good a shortfall in fund. It allows schemes to be underfunded for a limited time, provided that they put in place a realisable and concrete recovery plan to make good the shortfall.

We do not believe that the directive requires the recovery period to be specified in legislation. Rigid

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deficit correction periods were one of the main drawbacks of the MFR, leaving some employers to take a short-term approach to funding or even to close their schemes. However, it is clear that the directive does not envisage that the schemes should be permitted to remain indefinitely underfunded. To prevent that from happening, schemes will be required to file copies of their recovery plans with the regulator. If a recovery plan were then replaced with another, trustees will have to explain why to the regulator and to know whether the regulator can impose a time limit on recovery plans.

The hon. Member for Northavon said that the directive requires schemes to have at all times sufficient and appropriate assets to cover the technical provisions and whether that meant full buy-out. The directive does not require a scheme to be fully funded in the sense that it must at any time be able to buy and defer annuities to discharge all its crude liabilities immediately. That would be unrealistic and inappropriate for an ongoing scheme. The directive recognises that actuarial valuations may, of course, identify funding shortfalls and requires domestic schemes in that position to put in place a recovery plan for correcting the shortfall.

Mr. Webb: Does the Minister understand my confusion at the phrase ''at all times''? It cannot be true that schemes have sufficient funding at all times if there are also recovery mechanisms. Why are the Government happy with a directive that requires schemes at all times to have enough assets to meet their liabilities if we are not legislating for that?

Malcolm Wicks: The directive requires schemes ''at all times'' to have sufficient and appropriate assets to cover the technical provisions. I explained that ''technical provisions'' means funding adequately on an ongoing basis. As we know, such issues are difficult, but they are fundamental. The difference between a fund that would be required to be built up for anything approaching full buy-out could be, depending on the scheme, colossally larger, by a factor of many times, than what would be required on an ongoing basis. If we were tempted into anything that looked like a full buy-out for every scheme, there might be a stampede away from defined benefit schemes. That is one of the difficulties that we face. The Bill seeks to strike a balance between security and reasonableness in terms of how we fund pension schemes and of what we expect employers, among others, to fund.

11 am

I was asked about savings. It is assumed that private sector defined benefit schemes have £100 billion invested in gilts and UK corporate bonds. It is also assumed that 5 per cent.—£5 billion—of those investments will be switched to equities after the removal of the MFR and that, on average, an additional 2 per cent. interest a year will be achieved on those switch investments. That additional investment return will amount to £100 million a year. That is the basis of our calculation.

The hon. Member for Bexhill and Battle asked what assets it was appropriate for schemes to hold, and he

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obviously was not expecting much by way of an answer because he has not stayed to hear it.

Mr. Waterson: He has learned from experience.

Malcolm Wicks: Touché. I am sure that he will be an avid reader of Hansard in the days to come.

It will be for trustees to determine what assets a scheme should hold. In doing so, they will have regard to the scheme's statement of investment principles and to matters such as the scheme's demographic profile, including the balance between younger members and those who have retired. It is not for me give advice, but a scheme with a relatively young age profile might have a very different investment strategy from one in which the great bulk of members were within 10 years of retirement age. The regulator's code of practice for trustees will cover the factors that they will need to consider in deciding what assets it is appropriate for the scheme to hold in order to meet its technical provisions.

I will not be tempted into commenting on the remarks made by the hon. Member for Bexhill and Battle about the halcyon days of Conservative rule. I will certainly not comment on them in his absence, save to say that people spoke of nothing else in Croydon's dole queues, although the words that they used in their critique were blunter than the word ''halcyon''.

The issue of actuarial methods and assumptions arose. Regulations will require trustees to choose the actuarial methodology and assumptions to be used in calculating their scheme's technical provisions. In doing so, trustees will need to obtain actuarial advice. It would, perhaps, not be useful to go into too much detail, but I can write to hon. Members who want more information.

I may, or may not, have covered all the very technical issues that have been raised, but I have done my best and shall write to hon. Members if I need to answer any other questions.

Question put and agreed to.

Clause 179 ordered to stand part of the Bill.

Clause 180

Statement of funding principles

Malcolm Wicks rose—

Mr. Waterson: I think that the Minister is about to move the amendment formally.

Malcolm Wicks: The hon. Gentleman is anxious to get on the Government Front Bench. I was, indeed, about to move the amendment formally.

Amendment made: No. 318, in

    clause 180, page 114, line 20, after 'reviewed', insert

    ', and if necessary revised,'.—[Malcolm Wicks.]

Question proposed, That the clause, as amended, stand part of the Bill.

Mr. Waterson: Now that we have disposed of the amendment, I want to make a couple of quick comments about the clause. It is clear that the

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Government intend the statement of funding principles—the SFP, as we shall learn to call it—to be reviewed at least every three years. What is the reasoning behind that? The provisions are perhaps an echo of the 1995 Act, so the Minister will probably tell me, ''If it was good enough for the Tories, it's good enough for us.'' [Interruption.] Indeed, the Halcyon days argument. In all the Committees on which I have ever sat, the arguments have eventually become categorised, and a sort of shorthand has taken over.

If that three-year period were to straddle the recent collapse in the stock market, it could make a complete nonsense of the funding principles going in compared to those that should be coming out. Will further guidance be issued on that? Is there a role for the regulator in spreading best practice? Harking back to part 1—it was a long time ago since we discussed that—it seems that that is something for which codes of practice might be available.

Is the Minister relaxed about the possibility that funding principles might be different for particular schemes? It is inherent in the new system that every scheme will have its own set of criteria that will, supposedly, be tailored to that scheme, but might that create problems, with the application of different funding principles? I am trying to get a feel for how the Minister expects the arrangement to work in practice, particularly on the three-year basis.

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