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Lord Lucas moved Amendment No. 100:

Page 24, line 13, leave out (" 3") and insert ("(Prohibition orders)").

The noble Lord said: My Lords, I have already spoken to this with Amendment No. 3. I beg to move.

On Question, amendment agreed to.

Clause 43 [Annual increase in rate of pension]:

[Amendment No. 101 not moved.]

The Chairman of Committees (Lord Boston of Faversham): My Lords, in calling Amendment No. 102, I should point out to your Lordships that if Amendment No. 102 is agreed to, I cannot call Amendment No. 103.

Clause 48 [Minimum solvency requirement]:

Lord Eatwell moved Amendment No. 102:

Page 28, line 9, leave out subsection (1) and insert:
("( ) Every occupational pension scheme to which this section applies is subject to a requirement (referred to in this Part as "the minimum contribution requirement ") that the contributions paid to the scheme by the employer, after taking account of any members' contributions required by the rules, shall not be less than those which will be sufficient to meet the cost of providing benefits under the rules of the scheme for its members.").

The noble Lord said: My Lords, in moving Amendment No. 102, I speak also to Amendments Nos. 104, 106 to 109, 111, 113, 119, 121, 123 and 126.

The ordering of amendments at this stage is a little unfortunate. It would have been better if we could have taken Amendment No. 103 in the name of the noble Earl, Lord Buckinghamshire, first, because the noble Lord, Lord Mackay of Ardbrecknish, has put his name to that amendment. Before I proceed, I wonder whether I may assume that the Government intend to accept the noble Earl's amendment. Would that be correct?

Lord Mackay of Ardbrecknish: My Lords, I should have thought that that was fairly self-evident from reading the Marshalled List.

Lord Eatwell: My Lords, with that simple statement by the noble Lord, Lord Mackay, the Government's case for the minimum solvency requirement has been destroyed. I am grateful to him. He has acknowledged that the minimum solvency requirement is not a solvency requirement. He will acknowledge that by changing its name, it no longer has the characteristics which the Government have pretended that it had. We now have a funding requirement in which the scale of funding is to be determined by an arbitrary procedure related once upon a time to solvency but so related no more.

However, the minimum solvency requirement, or the minimum funding requirement as we shall certainly soon learn to call it, still bears the disfigurement of its misconception. The funding requirement is still defined as though it were a solvency requirement, albeit very much watered down. The watering down has steadily proceeded. Times of periods for compliance have been

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lengthened; asset valuation has been more flexible. The funding requirements on large schemes have been relaxed.

In Committee the Government moved amendments which transformed the solvency requirement in Clause 49 of the Bill from a requirement that a pension fund should be solvent into a requirement that a pension fund's investment policy should be adequate for the purpose of securing that the requirement of solvency will be met.

At the time I characterised that amendment as being similar to the role of the England cricket team believing that their abilities were adequate for the purpose of securing the Ashes. So we could call the Government's then position "the Atherton position". But now, with the abandonment of any pretence that there is a minimum solvency requirement in the Bill, the Government's position has become that they continue to support a requirement while they acknowledge in advance that it will not be fulfilled. Their position has switched from the Atherton position to the "Eddie the Eagle position". Eddie the Eagle knew that he could not ski-jump, but he tried all the same. The Government know that their solvency requirement will not guarantee solvency, but they continue to use it all the same.

Now that the intellectual case of the Government's position has collapsed, surely it is time for the Government to acknowledge that the minimum solvency requirement, though advanced with the best of intentions, was a thoroughly misconceived proposal in the first place.

Over the past couple of days I obtained the evidence of the Government Actuary as submitted to the Goode Committee on this proposal. The Government Actuary recommended against the minimum solvency requirement. The Government Actuary argued, in a report dated 14th December 1992:

    "It can happen ... that a scheme is insolvent on such a discontinuance basis, whilst comfortably in surplus on an on-going funding basis.

    Since in the majority of cases a scheme is not discontinuing, this [the discontinuance basis] seems a rather artificial process. It is also unrealistic to think that medium to large pension funds could be readily bought out with an insurance company".

Why did the Government ignore their own Actuary's advice?

The noble Lord, Lord Mackay, committed the basic error of which the Government Actuary warned. He fell into exactly the error of accepting the artificial process. The noble Lord told us in Committee that he was,

    "convinced that a measure of solvency that does not address the position of the scheme on discontinuance in some way will not be providing members with adequate security in the event of the scheme being wound up".

He went on:

    "The overwhelming argument in favour of a minimum solvency requirement is that if an employer undertakes to provide a pension promise the scheme should be able to secure that promise at all times, especially in the event of the scheme winding up".—[Official Report, 16/2/95; col. 822.]

What the Government will admit by accepting the amendment of the noble Earl, Lord Buckinghamshire, is that the propositions that the noble and learned Lord,

13 Mar 1995 : Column 678

Lord Mackay, made in Committee are not going to be fulfilled. It is simply not true that under the Government's proposals the scheme will be able to secure the promise at all times. That is not true. So why do the Government not realise that they have now created the worst of both worlds: a minimum solvency requirement that is not about solvency, and now a minimum funding requirement that is not about funding?

I am quite willing to accept that the amendments that are tabled in my name are imperfectly drafted. These amendments remain in the nature of probing amendments. But their objective is clear; namely, to establish a minimum contributions requirement which is defined by best actuarial practice and which seeks to maximise the returns to the contributions of employers and employees within the context of an ongoing fund, as the Government Actuary recommended. There is no hybrid standard, as the Minister claimed in Committee. Instead, there is the standard for evaluating an ongoing fund that was proposed not by me but by the Government's own Actuary.

I am advised by the National Association of Pension Funds and by other actuaries whom I have consulted that a "best practice" requirement would provide extremely good protection against the possibility of employer insolvency. It would certainly provide far better protection than the Government's now discredited minimum solvency requirement or minimum funding requirement. That is all that these amendments seek to achieve: a basis for the evaluation of funds on an ongoing basis. However, in doing so, they would establish criteria for the operation of pension funds which would provide real protection to employees, provide an efficient funding base for employers and allow the regulator to identify with ease the rogue employer; for instead of requiring a complex, separate actuarial assessment dealing with the increasingly vague and irrelevant solvency conditions, the regulator could easily refer to the actuarial standards adopted to run the fund on an ongoing basis.

I do not mind if the Minister wants to call my minimum contribution requirement a minimum funding requirement. I do mind that whatever minimum is set should protect the interests of members. The Government's hybrid jumble of criteria does not meet that simple goal. Instead, it creates an artificial standard which, regrettably, for many pension funds will become the norm and which by its very nature will be seriously inferior to the position that will be established by best actuarial practice. Instead of protecting the pensioner from rogues, the Government are creating an environment which will discourage employers from adequately funding their pension funds, for the solvency requirements are now so far removed from the real requirements of adequate funding that they will be at the same time expensive and inadequate.

Surely, now that the Government are about to acknowledge that the case for a minimum solvency requirement is lost in its own contradictions, they should withdraw the entire sorry mess and begin to work on the framework of proposals that I have put forward. Incidentally, by so doing, it would make unnecessary

13 Mar 1995 : Column 679

the complex exceptions which are to be moved later by the noble Lord, Lord Clark of Kempston, exceptions which would be completely unnecessary if the Government were to accept that a minimum contributions requirement should be based on best actuarial funding practice.

The Government should now obey the wise advice of my noble friend Lord Healey: "When you are in a hole, stop digging". The minimum solvency requirement is not just a hole but a hole rapidly filling with water. The Government acknowledges the intellectual failure of their proposals by accepting the amendment of the noble Earl, Lord Buckinghamshire. They should accept the logic of their own position and transform the new minimum funding requirement into a minimum contributions requirement. I beg to move.

10.15 p.m.

Lord Stewartby: My Lords, I hope that the House will not accept Amendment No. 102. The noble Lord, Lord Eatwell, explained it in the context of the contribution proposals that he deployed to your Lordships at an earlier stage in the proceedings on this Bill; but he has not explained why a concept of matching contributions to benefits is sounder than a concept of solvency or funding. That is not just a technical aspect of the wording of his amendment; it is fundamental to it. The noble Lord, together with his noble friend, argues that the concept of a contribution requirement should be that the contributions match the benefits.

Any system in which contributions are related directly to the benefits becomes a pay-as-you-go scheme. I do not see how we could possibly graft that onto the existing structure of our pension funds. Unless the rentability of the assets of the scheme are taken into account, the contributions which are paid—whether paid by the employer or taking account of the members' contributions—will never be related to the benefits in the direct way that he suggests.

This may indeed be a matter of terminology. But before the noble Lord rubbishes the idea of solvency or funding, he ought at least to make a case for his own terminology on contributions. That he has not done.

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