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Lord Eatwell: I was delighted to hear the Minister say at the end of his summing up that he is confident that he is right. I am not sure that anybody else, having considered all the complexities of the issues, is willing to be totally confident on that. Certainly, I am not.

In proposing the amendments I have simply attempted to present the considerable difficulties that are raised by taking a snapshot approach to the minimum solvency requirement. The reaction to those difficulties, which have become evident since the Goode Report, has been to attempt to water down the solvency requirement precisely because of those enormous difficulties. We have seen the watering down which the Minister described in his reply, and we shall hear about other attempts to rectify the distortions that are created by the minimum solvency requirement when the noble Lord, Lord Marsh, moves his amendments later.

I entirely agree with the Minister that we are all on the same side. This is not a political issue. The noble Baroness, Lady Seear, was right that if an ongoing approach could be found to work, instead of the snapshot approach, that would save employers an enormous amount of money. And who is trying to recommend that ongoing approach? The TUC. It is trying to save employers an enormous amount of money in this respect because it recognises that it would be

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beneficial to the operation of the economy as a whole, to the general prosperity of us all, and consequently to levels of employment.

I should like to refer briefly to two of the Minister's comments. With respect to our suggestion that one of the virtues of the minimum contributions requirement is that the notion of a minimum contribution could consequently be applied to money purchase schemes, the Minister argued that money purchase schemes would then have to have a defined benefit. I am afraid that the Minister entirely misunderstood me. Any money purchase scheme will have a contribution made by the employer. My amendment merely creates the notion of a minimum contribution which the employer has to make. I am afraid that whether the money purchase scheme performs well or badly is a risk that the pensioners have to take.

There has been some discussion about the central discontinuance fund. I am interested to discover that one operates in Finland with, I am told, considerable success. That is in addition to the fund in the United States. No doubt in the next few weeks we can trawl around, find some more and see how they work. However, I stress that the idea of trying to secure ongoing protection is exactly the idea which the Minister is supporting. Large pension funds become closed pension funds on the insolvency of the employer, for they are then maintained on an ongoing basis. The central discontinuance fund is designed precisely to gather together the small funds which could not then be left when those employers happen to become insolvent.

We have had an enormously interesting debate. We all need to go away and ponder these issues further. Editions of "Teach Yourself to be an Actuary" will become even more well thumbed than they are already. We shall return to these issues on Report and at Third Reading because, if we get this wrong, it will affect all of us for a long time to come. It may well be appropriate to take longer to consider this part of the Bill and not be so concerned to finish our consideration of it within the next couple of months or in this parliamentary Session. It would be much better to get right such major provisions that will affect our pensions over a long period.

Therefore, I urge the Minister to reconsider. I urge him not to be too confident, but to look at the possibilities and the alternatives and to consider adopting an "ongoing" rather than a "discontinuance", "snapshot" approach. In the meantime, however, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Baroness Turner of Camden moved Amendment No. 145NA:

Page 27, line 11, leave out from ("("requirement")") to end of line 12.

The noble Baroness said: It is with some trepidation that I come to the Dispatch Box to move this amendment after the erudite presentation by my noble friend Lord Eatwell. He convinced me that he was on to something and that his ideas in this area are innovative. I am glad that the Minister said that he will look carefully at what has been said.

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When I drafted my amendment I was not sure whether there would be much acceptance from the Minister for what my noble friend suggested so I proceeded to table an amendment, the object of which is to include in the legislation precisely what the Goode Committee recommended. As we all know, the Goode Committee spent a lot of time considering minimum solvency standards and eventually came down in favour of trying to devise such a standard. The committee considered whether there was a need for that and how best it could be achieved. Eventually, it produced the proposition that is contained in my amendment—briefly, that the liabilities for which schemes should be required to meet the minimum solvency requirement are the sum of cash equivalents, calculated on the same basis as for an individual transfer value for active and deferred members, and the cost of immediate annuities for pensioners. It further suggested that the Government should give further consideration to the issue of a new type of security which could provide more appropriate backing for schemes' indexed liabilities. Furthermore, as the Minister has already said, the committee proposed a five-year transitional period to allow schemes to achieve the appropriate standard.

I know that unions representing the interests of members in occupational schemes did not think that the Goode test was good. I am sure that they prefer the contributions test proposed by my noble friend. Nevertheless, the Goode proposition has been watered down by the Government. We have already heard that many actuaries are not happy about what is proposed since they will be required to sign certificates signifying that the minimum solvency standard has been met, and it may well have been, but that will not necessarily mean that the scheme is solvent. So members will have been given a false sense of security. It is for that reason I think that the noble Earl, Lord Buckinghamshire, suggested that it be called a "minimum funding test" rather than a "minumum solvency standard". I hope that the Government are prepared to consider that argument because I should think the last thing we want to do is to give members of schemes a false sense of security.

The Minister is right—Members on all sides of the Committee have said this—there is not much difference between us. We all want to achieve a situation in which members of schemes feel that they have that degree of security. We all know why many of them do not feel that now. We want also to ensure that we maintain the right balance. The Minister has often referred to the necessity of striking the right balance. We on this side of the Committee acknowledge that too. We know that in addition to assuring the membership of a sense of security, we have also to have the type of situation which will not be so off-putting for employers that they cease to provide final salary provision for their employees. It is a fine balance that we need to strike.

Nevertheless, we believe that it is necessary to have an improvement in the solvency standard which the Government have in mind. For that reason, I have drafted an amendment which follows absolutely the line of the Goode Committee. It reached that decision after a great deal of discussion and after detailed examination of the issues. I hope that the Government will be

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prepared to reconsider what they are proposing and in this instance support entirely what the Goode Committee recommended. I beg to move.

6 p.m.

Lord Mackay of Ardbrecknish: As the noble Baroness said, the amendment would provide that the method of calculating the minimum solvency requirement was along the lines of that proposed originally by the Goode Committee. We are now moving in a direction opposite to the one in which we were being tempted to move on the previous amendment. Since the Goode Committee proposals were published, we have received various representations that they would be impractical to operate and would have imposed unnecessary costs on employers.

Very serious concerns were expressed that such a valuation basis would have led to volatility in the solvency requirement and could have precipitated a substantial shift out of equities. That was one of the key points of the previous debate. It was recognised almost universally that not only would that impose damaging costs on employers; it would ultimately be against the interests of scheme members. Commentators also pointed out that because of limited capacity in the immediate annuity market, the proposal to value pensioner liabilities by reference to immediate annuities was not feasible.

In the White Paper we therefore proposed a number of modifications that were developed in consultation with the actuarial profession. That method uses the cash equivalent approach for all members, but would require the cash equivalent for non-pensioners to be valued by reference to the rates of return from investment in equities, moving to a gilts base for those approaching retirement and for pensioners. An expense allowance will also be added. We have been over some of this ground, and I apologise because we are talking about fairly closely related amendments. We took a decision on the basis of further analysis and more detailed comments that we should move to a slightly different position, which I have described. But because the noble Baroness is inviting me to go back to the original Goode, it is only fair that I encapsulate quickly where we have agreed to move to.

We have accepted fully that the calculation of asset values should be smoothed over a number of months. We accepted also that the time limits of three months and three years proposed originally be extended. We shall come to them when we reach Clause 51. We accepted also that the larger defined benefit schemes should be able to value a portion of their pensioner liabilities by reference to the rates of return on investment.

I know—I believe that this is the burden of the noble Baroness's argument—that some commentators have suggested that these modifications represent a weakening of member security. We do not accept that view. We were sensitive to the argument that requiring all pensioner liabilities to be valued by reference to rates of return on gilts would have been both impractical and unnecessarily restrictive for the very large schemes. It was also important that we should address directly

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concerns that the minimum solvency requirement would precipitate a switch in pension fund investment from equities to gilts. Extending the time limits for restoring solvency and smoothing the valuation should reduce volatility in contribution rates and avoid schemes unnecessarily having to make injection of funds into a scheme due to short-term market fluctuations. We believe that that is important.

The valuation basis proposed by the noble Baroness, and originally proposed by Goode, is unnecessarily tough, and the basis that we now propose delivers an appropriate level of security for scheme members without imposing unnecessary costs on employers. I suspect that part of my contribution in response to the noble Baroness's noble friend Lord Eatwell also explained why we have moved from the Goode Committee's original proposals. I hope that with that explanation she will withdraw the amendment.

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