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Lord Mackay of Ardbrecknish: My Lords, I am surprised that this was not a longer debate.

We first heard during Committee how the noble Lord, Lord Eatwell, opposes the minimum solvency requirement and favours a "minimum contributions requirement". His proposal is based on the enforcement of,

He suggested that that would provide "a truly viable" alternative to the minimum solvency requirement. Therefore, in view of that rather ambitious claim, it was something of a let-down to realise that this seems to be no more than maintaining the status quo. In fact, it would seem that the noble Lord, Lord Eatwell, is urging the Government to turn their back on their duty to improve member security and, instead, to take the easy way out—the "do nothing" option.

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I hope to be able to explain to noble Lords why our proposal is superior to that of the noble Lord, Lord Eatwell. I shall attempt to do that with as few clever remarks as I can. My disadvantage is that I have been at the Dispatch Box since 3 o'clock this afternoon, whereas the noble Lord, Lord Eatwell, has clearly been on the substitute bench for a few hours now preparing his clever remarks.

The simple fact is that an employer who undertakes to provide a defined benefit scheme takes on responsibility for the balance of cost. He is responsible for paying the extra needed to provide benefits over employee contributions and investment return. The minimum funding requirement reinforces that responsibility up to a certain level. We know from the results of the consultation exercise we carried out last year to test the impact of the minimum solvency proposals that the vast majority of schemes were normally funding at a level comfortably above the minimum. The new requirement will not affect those schemes and will not, as the noble Baroness, Lady Seear, asserted in Committee, mean more money would have to be put into schemes than is necessary. But our survey also identified a minority of schemes that were very weakly funded. For such schemes, the minimum requirement is crucially important for improving security for members.

During Committee, I said that the central weakness of an ongoing funding requirement is that it does not aim to provide any level of protection in the event of a scheme winding-up. I know that some noble Lords may want to argue that the bulk of employers do not become insolvent and that it is therefore unreasonable to require schemes, at all times, to have sufficient assets to meet their accrued liabilities. I do not accept that argument. On the contrary, I believe that scheme members have the right to a clearly defined measure of protection. I should like to remind noble Lords of what the PLRC had to say on this issue:

    "Where there is a risk, however small, of the employer's insolvency, funding will meet the requirements of benefit security only if at all times the assets of the scheme are sufficient to cover its liabilities".

Several commentators have said that it would be damaging for employers to require them to pay contributions at a time when equity markets are depressed. Nevertheless, there is a definite relationship between a decline in the market value of equities and employer insolvency. Thus, it is at the very point that accrued benefits are at their most vulnerable that an employer is most likely to become insolvent. Members who have had their benefits reduced on a wind-up are unlikely to take much comfort from the fact that they would have been secure had their employer remained in business. To put it another way, it is quite unacceptable that employers should be able to continue trading at the risk of leaving their employees' legitimate pension expectations unfulfilled.

The central weakness of the ongoing valuation basis proposed by the noble Lord, Lord Eatwell, is that it does not ensure that assets accumulate quickly enough to enable a scheme to meet its accrued benefits. Study of the experience of the Pension Benefit Guaranty Corporation in the United States is most illuminating in

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this respect. Its minimum funding rules were originally based on an ongoing valuation basis, possibly along the general lines of the proposed minimum contributions requirement of the noble Lord, Lord Eatwell. This allowed insolvent pension funds to pass millions of dollars of unfunded liabilities on to the Pension Benefit Guaranty Corporation, leading to its near bankruptcy. We shall come to that when we come to debate the question of a central discontinuance fund. It was therefore necessary to change the basis of the minimum funding rules in the US. Pension plans are now also required to consider whether they could meet their liabilities if the pension plan were to terminate, which looks suspiciously like our own proposals under another name.

I think I should repeat the merits of the minimum funding approach and what it is intended to deliver. It will require schemes to hold sufficient assets to be able to secure pensions already in payment, either by buying annuities or paying benefits as they fall due, and provide younger members with a sum of money to be invested further. The pensions they eventually draw will obviously depend on how the money is invested and the rates of return on the investment, but there is every chance of it producing a pension at least as good as, and probably better than, that which would be paid from a deferred annuity. The minimum funding proposals offer a far better measure of security for all members of defined benefit schemes than any alternative affordable proposals.

Ever since a minimum funding requirement was first proposed as the minimum solvency requirement by the PLRC there have been rather wild allegations about it leading to a massive shift out of equities which could, in turn, depress the UK equity market. While we accept that some of the more mature schemes may want to change their investment strategy in order to reduce the risk of falling below the 90 per cent. limit, we think that the position has been highly overstated and we totally reject the doomsday scenarios that have been drawn by certain commentators. Indeed, last December my right honourable friend Peter Lilley announced a number of changes, but I think we shall come to them in a debate on a later group of amendments.

The noble Lord, Lord Eatwell, made much of our responding to the pressures and suggestions that have been made that we should change the name of the scheme. It was a clever debating point. But, frankly, we do not believe that it has quite the significance the noble Lord wishes to pray in aid. The requirements which are set out in Clause 48 may not guarantee that a scheme will be able to meet its liabilities in full on a buy-out basis but they should ensure that schemes always have enough money to meet the value of their members' accrued rights calculated on a realistic actuarial basis. That is something which the proposals of the noble Lord, Lord Eatwell, could not hope to deliver on a reliable and consistent basis.

The noble Lord, Lord Eatwell, made much of the Government Actuary's alleged opposition to minimum solvency. The references he made were, I suggest, misleading. The Government Actuary was concerned

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about a requirement that would have required schemes to fund at a level of buying out all pensions with annuities. The Government and the PLRC have always accepted that that would be impractical and unduly costly. That is why we have gone for the minimum requirement proposed in the Bill. It is not the Government's intellectual case that has collapsed. It is close to a contradiction in terms for the noble Lord to speak of defining best practice. If we were to try to define an ongoing valuation basis in place of the minimum funding requirement it would produce a funding target higher than the MFR for the great majority of schemes and that would not endear the party opposite, or indeed your Lordships' House if it were to agree with the noble Lord, to British industry.

We have in this country thus far managed without a minimum funding requirement. For most scheme members this has produced the benefits which they have expected and were promised. Schemes were thus funded, and still are, on the basis of actuarial advice. But we need to respond for scheme members who are unfortunate enough to work for employers who go out of business and are thus unable to stand behind their pension fund. These members could well find that, as the law stands at present, they would receive less than they have a right to expect.

We live in the real world where employers do go out of business. We believe that schemes must be funded at a proper level to secure benefit rights if that should happen. I do not see how the noble Lord, Lord Eatwell, can say that there is no intellectual case. The PLRC recognised it and in years to come scheme members will, should their employers go out of business, have a great deal for which to thank the PLRC, to thank this Bill and to thank your Lordships' House this evening if it rejects the noble Lord's amendment and sticks with the minimum funding requirement as proposed in the Bill.

10.30 p.m.

Lord Eatwell: My Lords, I can understand that the noble Lord would lose his sense of humour when he has to defend the indefensible. I am not at all surprised that he has found it so difficult to do so.

The noble Lord, Lord Stewartby, asked me to explain more generally the implications of the minimum contribution requirement versus the minimum funding requirement. The key point is comparing the viability of pension schemes on an ongoing basis which the minimum contribution requirement seeks to do, with those on a discontinuance basis.

The central problem involved in comparing the scheme on a discontinuance basis is that if a pension fund is at every moment of time to be able to guarantee the pensions of its members, then it will have to move out of an equity basis for funding and strongly towards a gilts basis of funding.

The Government have recognised that problem and to try to deal with it they have steadily watered down the minimum solvency requirement as it used to be called, and in doing so they no longer provide the protection of pensions which was initially claimed. The noble Lord,

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Lord Mackay, has admitted that that is so. He has admitted it again this evening when he said that the purchase of guaranteed annuities would be too expensive.

We now have something called a clearly defined level of protection. I suggest to your Lordships that the noble Lord, Lord Mackay, gave the game away when he stated that the minimum contribution requirement would tend to be,

    "higher than the minimum funding requirement".

Quite so, because the minimum funding requirement, as now watered down, is inadequate to support and protect the pensions of members.

The minimum contribution requirement would, as the noble Lord also admitted, embody what in his survey was identified as best practice. He explained to us that the pension funds survey revealed that the vast majority were adequately funded; that they were conducting themselves on the basis of a standard balance of equities and gilts in a manner which would secure the pensions of their members. It is exactly that best practice which his survey has identified that my amendments are attempting to incorporate into a minimum contribution requirement.

The noble Lord referred to the problems which have been encountered in the United States with the PBGC. Those problems were created primarily because the regulations which established that central discontinuance fund did not take adequate account of future inflation in benefit levels. It was simply a general mistake and something which could be dealt with in a proper minimum contribution requirement.

We are really seeing here two different approaches to the protection of members; namely, the protection of members' positions either by attempting to establish best practice in an ongoing environment or the protection of members' rights by a discontinuance standard. Either of those approaches is intellectually defensible. The Government have started from the position of a discontinuance standard and then steadily watered it down as the costs and difficulties associated with it have emerged. That is why in the next amendment of the noble Earl, Lord Buckinghamshire, we are going to see the name of the minimum solvency requirement changed.

But there still remains the problem that the noble Lord himself identified. The now minimum funding requirement will tend to become the norm and that norm does not, as he himself has admitted, actually protect the members' pensions. That is the great danger with the minimum funding requirement, and that is why it is desirable that a minimum contributions requirement, based on best practice, should be incorporated into the Bill. As we shall clearly have to return to this matter on a day when the Minister's temper is better, I now beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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