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Lord Mackay of Ardbrecknish: I am sorry. They are all in the one group and I am trying to address them all at the one time. I believe that is the problem. They are grouped, are they not? I am in some trouble about that. If the noble Lord wishes me to ungroup them
Baroness Hollis of Heigham: There is a problem. We have had this problem with some of our amendments. Although there is a comma after N, Amendment No. 145YP has not been indented, which is what one would expect. Therefore there is a problem in the typing up of the groupings on the list in several places.
Lord Mackay of Ardbrecknish: My Whip tells me that this is true, which is terribly helpful of him, I must say. I am afraid it is in this grouping and that gives me a slight problem. I shall read out the amendment to enable me to be sure what I am doing and to get my mind into the proper gear. The noble Lord is not speaking to Amendment No. 145YP, is that correct? The noble Lord is speaking to Amendment No. 145YJ which states:
Lord Marsh: I am not a procedural expert but I wonder whether it would help if I were to move to the next amendment, Amendment No. 145YP, and move that too. No doubt then the Minister could reply to the whole range of amendments.
Lord Mackay of Ardbrecknish: I am sorry to get into this difficulty but it is difficult when one is trying to make a case in the round about a number of grouped amendments if they are disentangled because that makes it rather difficult for me to catch up.
Lord Eatwell: I beg the pardon of the noble Lord, Lord Marsh, but I wanted to speak briefly to the preceding amendment, Amendment No. 145YM, before we reach Amendment No. 145YP. It fits in with some of the issues which the noble Lord, Lord Marsh, was considering in the earlier amendments which he moved, which is this whole question of how the failure to achieve the minimum solvency standard should be made
In the amendment standing in my name, Amendment No. 145YM, I have suggested that the prescribed method be taken out and we settle on cash. I tabled this purely as a probing amendment to see exactly what the Government had in mind. The noble Lord, Lord Marsh, is recommending that there be a variety of methods. I am recommending that there should not be a variety of methods. I am willing to be convinced either way. I found the comments of the noble Lord, Lord Marsh, rather convincing, but I shall also be interested to hear what the Minister says. He is, of course, weakening the solvency requirement again. As President Reagan famously said, "There you go again!". He is weakening the solvency requirement, but this approach may have merit, as the noble Lord, Lord Marsh, has suggested. However, I remain to be convinced and I look forward to hearing the Minister convince me.
Lord Marsh: I am sure that the arguments are so convincing that the Minister will be convincing. I am convinced about this. The noble Lord, Lord Eatwell, believes that he may change his mind on this matter. I think it ill behoves the Minister to say that he disagrees with both of us.
I turn to Amendment No. 145YP which simply seeks to provide employers with more flexibility when they have to cover shortfalls in the fund. It is simple but it would be of major benefit to many first-rate companies and no disbenefit to employees or to pensioners. I accept that this is a much bigger issue in many ways. As far as I am aware, no one challenges the concept here. However, I am not even sure about that now because one of the things which is emerging about the minimum solvency requirement is that people are becoming increasingly disturbed at the possible scale of the implications of the provisions, which are very big indeed.
It certainly seems possibleand some would say probable that these proposals under the minimum solvency requirement as it stands, in so far as they are clear (some of them have not been spelt out), could inflict great damage on a major section of British industry. Some of the pension fundssome of the closed funds in particularparticularly of the newly privatised industries, are massive, as we know. They are valued at £3 billion or £4 billion or more. They are major investors in British industry and the pension fund investment in total is around £150 billion.
It is against that background that the MSR provisions have to be viewed. Solvency margins are bound to fluctuate, as the noble Lord, Lord Monkswell, said. There is nothing wrong with that. In a perfectly well-managed fund they will fluctuate over a period of time between 85 per cent. and 150 per cent. with no threat whatsoever to the fund. If one takes the period of the past 25 years, for example, there was a major fall in the market in the mid-1970s. In the fourth quarter of 1987 many portfolios lost up to 30 per cent. of their value within a matter of days, and in 1994 the index fell by approximately 10 per cent. over the year. The key
The problem which confronts us with the MSR is that there are two main risks to reasonably well-run pension funds. One is outright, calculated corruption, and the other is massive inefficiency. With the greatest respect to the Bishops' Bench, for the Church of England fundswhich were not pension funds as is frequently saidto lose £890 million is not a sign of ideal fund management. On the whole, that does not happen. I see that the noble Lord, Lord Williams, is looking restless. It may well be that he is a trustee of the funds. (If I said that outside this Chamber I would be sued by him!)
The minimum solvency requirement is required as a safeguard against those problems. To achieve that one has to cover the whole spectrum, but it is sensible to give flexibility where one can. In its present form it could do great damage to the economy, as has been said. The proposed reduction, for valuation purposes, of equity investment in favour of gilts reduces fund income and therefore increases the size of the required top up. There is a feasible scenario that at the very moment when we begin to move again, as we shall from time to time, into a temporary economic difficulty, a major part of British industry will be forced to transfer literally hundreds of millions of pounds out of its companies. That cannot make sense.
The amendment seeks to write on the face of the Bill the right of the employer to use a bank guarantee or an unsecured loan, which would be protected against default by the employer but would not deprive the employer of the very large sums of working capital at the very time at which they are needed. That helps both large companies and small companies, because the problem is the same proportionately. It helps to protect jobs and it in no way detracts from the security of pension funds.
I believe that that is the kind of flexibility which we have to look for, unless the Government do as the noble Lord, Lord Eatwell, suggestedand I can see some arguments for thatand start again. There is no overwhelming evidence that when their proposals are wrong the Government are persuaded to take note of the arguments and withdraw the offending legislation. That is not in the nature of the beast. However, the Minister is a reasonable fellow and may decide to make a fundamental change. I would applaud that because the provision has serious implications. The reality may be that we have the minimum solvency requirement. There is a need to look at it in order to make it more flexible while maintaining the basic proposition of seeking to protect pensioners in the minority of schemes which may be at fault.
The major problem with the MSR is the uncertainty that will arise in planning one's contribution rate. The valuation period may be three years. One sets one's standard contribution rate, and if in that period one runs into solvency difficulties, for whatever reason, the company will be faced with making up the required solvency amounts. That will rapidly have an impact on the profit and loss. That will not only affect large companies; medium-sized companies will also have problems. Whether the amount involved is £10 million or £2 million, the impact will relate purely to the company's profitability.
The one thing that finance directors dislike most is uncertainty. They are facing a very uncertain situation, particularly in the closed funds which were mentioned by the noble Lord, Lord Marsh. I shall be very interested to know whether the Government have run any models to calculate the effect of the 1974, 1987 and 1990 stock market crashes on some of those closed funds. They may have a liability of 75 per cent. deferred members and pensioners and only 25 per cent. active members. There are many large schemes, and also modest schemes, in which the imbalance between active members and pensioners is great. It is that problem which the amendment of the noble Lord, Lord Marsh, attempts to address.
The impact on company liquidity is significant. I often wonder whether our friends in the stock market will be able to analyse the impact of a pension fund on a company's balance sheet. It will certainly have to take account of this situation.
With those few words, which I trust are helpful, I hope that my noble friend the Minister will not regard the amendment as weakening or an attack on the provisions relating to the MSR. I hope that the noble Lord, Lord Eatwell, will be equally kind in his remarks, if he makes any.
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