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Baroness Hollis of Heigham: My Lords, I am afraid this is another amendment about which we are uneasy. As I understand it in the light of the noble Earl's explanation, the Bill currently says that the contribution level is set by the trustees, if possible with the agreement of the employer, but nonetheless the responsibility rests with the trustees. Under the noble Earl's amendments, as I understand them, instead the responsibility for deciding contribution levels would be taken not by the trustees but by the actuary and would require them to be agreed by the employer. That would mean a very decisive shift of responsibility for contribution levels and the associated issues away from the trustees to the employer, yet the whole thrust of this Bill, which we support in its broad outlines, is to make such central decisions the responsibility of the trustees. We feel again that the balance goes too far away from the trustees in the noble Earl's amendment and we would therefore oppose it.

Lord Mackay of Ardbrecknish: My Lords, I have listened with care to what my noble friend has had to say and to what the noble Baroness, Lady Hollis, has had to say. I have some sympathy with the concerns expressed by my noble friend and we need to look at the wording of this clause. But I have anxieties that the amendment tabled by the noble Earl might not work. The amendments would remove the fallback altogether so we would have to rely always on the employer and trustees agreeing the appropriate level of contributions to be entered in the schedule. My worry—which I think the noble Baroness shares—is that agreement may not always be possible.

If the trustees and employers do not agree, Clause 50 puts an obligation on the trustees to prepare and revise the schedule of contributions. They must do this within a specified time limit. If they fail to do this, the trustees can be removed or they can be fined. But failure to reach agreement might not be the trustees' fault. It might be the employer who was reluctant to sign up. Therefore I still think that we need to have a fallback arrangement, but one that will work properly and fairly.

I propose that we should take this away and come back with an amendment, possibly in another place, which would retain the fallback but limit the power of trustees. The trustees would be able to set a contribution rate only at the minimum that the actuary could certify as necessary to ensure that the scheme was funded to the minimum level.

It is entirely appropriate that the trustees should be responsible at the end of the day for setting the contributions if agreement is impossible. This is consistent with the many other new provisions in this Bill which strengthen and clarify the position of trustees. I trust that your Lordships will accept this as a fair arrangement and I hope that with that commitment my noble friend will withdraw his amendment.

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The Earl of Buckinghamshire: My Lords, I listened with great interest to what the noble Baroness, Lady Hollis, said about the amendment and also to the Minister's response. The problem with this clause of the Bill is that too much responsibility for the funding of schemes has been moved away from employers. I am very pleased with the Minister's response. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 117 to 121 not moved.]

Lord Lucas moved Amendment No. 122:

Page 30, line 22, leave out ("solvency") and insert ("funding").

The noble Lord said: My Lords, the amendment was spoken to with Amendment No. 103. I beg to move.

On Question, amendment agreed to.

[Amendments Nos. 123 and 124 not moved.]

Lord Lucas moved Amendment No. 125:

Page 30, line 33, leave out (" 3") and insert ("(Prohibition orders)").

The noble Lord said: My Lords, Amendment No. 125 was spoken to with Amendment No. 3. I beg to move.

On Question, amendment agreed to.

Clause 51 [Determination of contributions: supplementary]:

[Amendment No. 126 not moved.]

Lord Lucas moved Amendment No. 127:

Page 31, line 3, leave out ("solvency") and insert ("funding").

The noble Lord said: My Lords, the amendment was spoken to with Amendment No. 103. I beg to move.

On Question, amendment agreed to.

Lord Lucas moved Amendment No. 128:

Page 31, line 8, leave out (" 3") and insert ("(Prohibition orders)").

The noble Lord said: My Lords, Amendment No. 128 was spoken to with Amendment No. 3. I beg to move.

On Question, amendment agreed to.

Clause 52 [Serious underprovision]:

Lord Clark of Kempston moved Amendment No. 129:

Page 31, line 12, after ("(2)") insert ("or (2A), as the case may be,").

The noble Lord said: My Lords, in moving Amendment No. 129 I should like to speak also to Amendments Nos. 130, 131, 132, 133 and 135. The amendments were explained fully in Committee by the noble Lord, Lord Marsh. Consequently, at this late hour I do not intend to delay your Lordships. The amendments concern the minimum solvency requirement, now the minimum funding requirement.

The Bill is overshadowed by the tragedy of the Maxwell case. When a government is faced with a situation of that kind they may be guilty of over-reacting. If I may digress, I remind my noble friend that when the Financial Services Bill went through another place many of us said that the regulation of the City of London might prove onerous. That has been the case. The compliance costs of the Financial Services Act are crippling some financial advisers.

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I agree entirely with the Government that there should be control of pension funds. The amendments deal with deficits in pension funds. I appreciate that since the publication of the White Paper the Government have moved some way to alleviate the provisions relating to the handling of a deficit within a fund. If the value of the fund is less than 90 per cent. of the liabilities the employer has one year to put another tranche of money into the fund. Five years is allowed to increase the value from 90 per cent. to 100 per cent. Those are welcome concessions.

One of the difficulties is that the Government have overlooked the fact that any company, whether large or small, has to operate at a profit and must have a positive cash flow. If it did not have a positive cash flow a company would be in trouble. I remind my noble friend that in many profitable small businesses the cash flow position is such that they may go out of business. I should have thought that where there is a deficit that deficit need not necessarily be made up by cash alone. In some cases a deficit can be made up by increased contributions. But an employer could easily have a subordinated loan. He could have a bank guarantee. We have to make certain in the Bill that the regulations should not mean that the normal investment policy of a company should be impaired. Consequently the nub of the amendments provides that there should be complete flexibility regarding making good the deficit. I do not suggest that the fund should be in any way weakened. However, if the Government believe that a deficit has to be made good—I agree with that—the question is how one makes good that deficit.

The deficit may become a surplus. Your Lordships will appreciate that the stock market goes up as well as down. If one has a bear market, the value of the fund goes down. The noble Lord, Lord Eatwell, has rightly pointed out that if there is a swap from equities to gilts, in many cases that decreases the paper value of the fund. I hope that my noble friend will not say that under the Income and Corporation Taxes Act 1988 one can get the money back. That is too slow a process. Business moves faster than that. We cannot wait for the Inland Revenue to make up its mind as to whether or not there is a repayment. Any employer should have the duty to make good a deficit, but he should have the right to take out the surplus, the extra money that he has put in.

Occupational pensions are an important part of our economy. The funding of occupational pensions is absolutely essential. I remind my noble friend that if one considers the shift in ages over the years, in 2030 we shall probably have 15 million retired persons. The Government should not do anything to discourage employers from setting up pension funds. If employers have a pension fund, they obviously have employees who belong to the pension fund. However, I am worried about the position for new employees if the conditions for running a pension fund are too onerous for the company.

The Government must be flexible. As my noble friend knows, I have discussed the matter with my right honourable friend the Secretary of State for Social Security. I hope that we shall hear some sympathetic noises regarding payments into and repayments out of a

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fund. The key player in all occupational funds is the actuary. The actuary will say whether there is a deficit or a surplus. Where there is a deficit I hope that the employer will have the flexibility to make up that deficit in any way he thinks fit which satisfies the actuary and trustees; and, conversely, I hope that he can get his money back with the consent of, and on the valuation of, the actuary.

I do not believe that payments into and out of a fund should be left to regulation. I should like to see some provision in the Bill. I hope that my noble friend will give some consideration to these points. I hope that he will indicate that the Government will think again. I know that the period has been too brief for the Government to have put forward any amendments. However, there will be a Committee stage in another place and I hope that my noble friend will make certain that when the Bill is considered in another place the points that I seek to make will be implemented. I beg to move.

11.15 p.m.

Baroness O'Cathain: My Lords, I should like to say a few words in support of Amendments Nos. 129, 130, 131 and 133 in the name of my noble friend Lord Clark and his new clause in Amendment No. 135. Before doing so, I declare an interest. I am currently a non-executive director of three major plcs, including British Airways, and I have been a non-executive director on several other boards in the past. I therefore have both a likely interest and an understanding of some of the issues behind these amendments. Many companies, large and small alike, are increasingly concerned about the implications of what we now call the MFR.

As my noble friend Lord Clark said, the aim of this group of amendments is to extend the circumstances in which it would be possible for employers to secure an increase in scheme assets by means other than cash contributions. My noble friend the Minister is, of course, aware of the profound impact on any company's bottom line of a significant increase in cash outflow. The amendments, if they are agreed, would allow the prescribed alternatives to increased contributions—a bank guarantee, subordinated loan or other alternatives which provide exactly the same level of protection for scheme members and pensioners—currently applicable only when a scheme is less than 90 per cent. funded, to apply where the shortfall is less than 10 per cent.

Many employers with mature pension schemes, and a large number of pensioners compared with active members, will find the provisions of the MFR quite burdensome. These are generally companies that have fully funded schemes on the conventional actuarial basis of valuation—a basis which has successfully dealt with high inflation and stock market volatility. The amendments aim to provide flexibility to the employers, as my noble friend Lord Clark said, in managing their finances and seeking to hold a competitive position in world markets.

I do of course appreciate that the Government have to steer a difficult path, striking a balance between providing help for employers on the one hand and security for pension scheme members on the other. I also recognise that the Government have already modified their original proposals to accommodate

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employers' concerns. However, these amendments in no way undermine the security of pension funds. That needs to be stressed. Nor do they attack the protection of pensioners.

I turn briefly to the new clause in Amendment No. 135. It seems fair to me that employers should have the right to the repayment of moneys paid into a pension scheme to meet the MFR and shown at subsequent assessments as no longer being required for MFR purposes. As my noble friend said, that is particularly true in the case of mature schemes which have limited opportunity to recover MFR shortfall payments through lower contributions later on.

It cannot be right that, following a temporary drop in the stock market, an employer may have to pay quite possibly a large sum of money into his pension scheme to meet the MFR with no prospect of recovering that money over a reasonable timescale when the stock market recovers. This new clause seeks to correct that unfairness.

Without it, the Bill would undoubtedly accelerate moves by employers to close defined benefit schemes to new members and move towards defined contribution and money purchase schemes. Therefore, the employee of the future will pay a very high price.

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