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The Earl of Buckinghamshire: Perhaps I may intervene before the Minister stands up. I should like to speak to Amendment No. 191G. My understanding on this amendment is that it introduces a method of calculating cash equivalents or transfer values where there is none now. I know that the Institute of Actuaries and the faculty have laid down guidelines on how to calculate transfers. But I do not believe that it is true to say that they have stipulated that gilts should be the basis in all instances.
The schemes have very different age profiles. I should like to put the question: should a scheme with a very young average age have cash equivalents and transfer values calculated in the same way as a scheme which has a very high average age? I suggest that that should not be the case. It would be true to say that the whole area of how to calculate transfer values and cash equivalents is difficult and controversial. Many members do not understand how that is done in final salary schemes. Nonetheless, I suggest to my noble friend the Minister that he exercise some caution in dealing with this technical area.
Scheme portfolios for younger members include a significant proportion of equities, the theory being that higher returns will come via such investments. To use transfer values which are based purely on gilts' yields will mean that the cash equivalent for many younger members in particular is likely to be higher than is necessary to support those benefits. I realise that in investment areas the past is no guide to the future. A debate is taking place in investment and actuarial circles about the gilt and equity yields converging. That debate is ongoing. We shall not know the answer in fact until it is finished.
With regard to this amendment, I believe that we should not interfere in the process. Schemes have very different structures in their actuarial management, investment policies and practices on discretionary benefits. In conclusion, I should not be happy to see Amendment No. 191G accepted by my noble friend the Minister. However, I appreciate that it has been put forward as a probing amendment.
Amendment No. 191E revises Clause 131, with the effect that the statutory right to transfer pre-1986 accrued pension rights is extended to all members of occupational pension schemes. The current position is that pre-1986 early leavers from occupational pension schemes have no statutory right of transfer. Clause 131 extends the right of transfer to that group but provides a regulation-making power to exclude from salary-related schemes pre-1986 early leavers in respect of whom prescribed arrangements are satisfied.
I should explain the purpose of the regulation-making power which this amendment seeks to remove. Most pre-1986 early leavers have pensions which are frozen, in the sense that they are not protected by the revaluation provisions which apply to those who left after 1st January 1986. The policy intention of Clause 131 is to give members with frozen deferred rights the opportunity to transfer those rights to another occupational pension or a personal pension fund.
However, we do not intend to require those schemes which have fully protected the rights of pre-1986 early leavers to provide them with transfer values. As now, such schemes will be free to offer transfer values if they choose to do so. We feel that it is right to focus that extra freedom on those with frozen rights.
Amendment No. 191F seeks to impose a one-month time-limit on the production of a guaranteed statement of entitlement. I sympathise with the purpose of the amendment, which is to speed up the transfer process, but we believe that the proposed time limit is unreasonably short.
Let me explain the current situation. The current legislation allows a scheme two months to produce an estimate of a member's cash equivalent. There is no requirement under current law for the estimated level of the transfer value to be guaranteed. Under our proposals for guaranteed statements, schemes may well feel the need to take even more care in producing the statements because there will be guarantees.
The calculation of a cash equivalent in any event is a complex process. It is important that a guaranteed transfer value should be accurately assessed. In particular, contracted-out salary-related schemes may often wish to check details of the guaranteed minimum pension element of the transfer value with the Contributions Agency. Such queries are more rather than less likely in the light of the Barber judgment and would consume most, if not all, of the time that this amendment allows for the statement to be produced.
The regulation-making power that we have taken is designed to enable us to consult with the pensions industry on a suitable time limit. I can tell the Committee that we should not expect the time allowed to be less than the two months currently allowed for production of an estimate, but we have not excluded the possibility that a slightly longer period might be appropriate. I should add that the time taken to produce a statement will not bite into the three-month guarantee period within which the transfer request must be received. The guarantee period will start when the statement has been produced.
Amendment No. 191G seeks to make it a statutory requirement that in calculating transfer values the scheme actuary shall base his assessment on the market redemption yields of British Government stocks at the time of the transfer. In short, transfer values for allyoung and old membersshould be gilt-based. That is indeed one of the ways in which the actuary is currently advised that transfer values may be assessed in the actuarial guidance note (GN11) which deals with this complex subject. Indeed, my noble friend Lord Buckinghamshire underlined the fact and warned me that this was a complex subject. He made some very good points in suggesting to me that I should be cautious. I fully intend to take his advice on this matter.
The amendment proposes to elevate the advice in the guidance note, which is permissive, to a statutory requirement in all cases. I believe that it is necessary to maintain a balance between actuarial guidance and statute. The Government have no objection to schemes paying transfer values in line with returns on gilts. Many schemes already do so and there is no reason why they should not continue to do so. Moreover, we propose to regulate in due course so that in future the calculation of transfer values should reflect at least the level of investment in gilts specified in the new minimum solvency requirement. That will effectively put a floor on transfer values so that they cannot be calculated
The practical effect of the noble Baroness's amendment would be to require schemes to fund above the minimum solvency requirement, since a scheme which was exactly 100 per cent. solvent would not be funded to pay transfer values based on gilts for younger members. Let me repeat that we have no objections to schemes funding significantly above 100 per cent. of the minimum solvency, but we cannot accept that that should be a statutory requirement.
Baroness Turner of Camden: I thank the Minister for those explanations. I said earlier when moving the amendments that they were probing amendments. We were anxious to find out exactly what was in the mind of the Government in drafting these clauses of the Bill.
I noted with great interest what the Minister said about my first amendment. I am glad that he indicated that the intention was to do something more special about those with frozen rights. I shall read his remarks in Hansard tomorrow with some interest.
With regard to my second amendment, I noted that he sympathised to some extent with our concern that there should be a time limit and that people should not be left hanging around waiting for that very necessary information. I also noted that the intention is to ensure that there will be at least some guarantee that people will not have to wait too long. In that respect, I am grateful for the Minister's explanation.
It has been very apparent that my final amendment concerns a highly technical matter. I do not claim to be an expert in that area. I was interested in what the noble Earl, Lord Buckinghamshire, had to say because I know that he is expert in that area, which is very much a part of his profession. On the other hand, I am assuredindeed, the Minister confirmed it to be the casethat the amendment reflects the precise wording from the current actuarial guidance note.
The Minister's case is that he does not want the guidance imported into the legislative requirement. He says that, if we were to do soand he is quite rightit would mean that the minimum solvency standard would be higher than that originally envisaged. I am quite aware of that. In fact, when we discussed the minimum solvency standard earlier, I indicated that many people felt that the minimum solvency standard was not an adequate guarantee of solvency and that we wanted rather more in the way of security than was promised in the minimum solvency requirement. However, I note what the noble Lord has said and, in the circumstances, I shall certainly not press the amendments this evening. As I said at the opening of this short debate, these are probing amendments. We were anxious to find out exactly where the Government stood on these three quite important issues. Having said that, I beg leave to withdraw the amendment.