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Lord Eatwell: My Lords, if I were being charitable I would begin my remarks by saying, "I told you so". The difficulties which have been accurately identified by the noble Lord, Lord Clark, and the noble Baroness, Lady O'Cathain, are difficulties that arise precisely from the structure of the minimum funding requirement and which would not arise in the case of a minimum contributions requirement or the evaluation of funds on an ongoing basis. It seems to me that the difficulties that they have identified are real difficulties to which the Government should attend in a serious manner.

I am not entirely happy, however, with Amendment No. 132, which states that there could be a,

method of guaranteeing the maintenance of the funding of a scheme. The phrases "or by any other", and "by an unsecured loan", seem to me to be rather too broad. Perhaps I have misunderstood that and the noble Lord, Lord Clark, can enlighten me when he replies to the debate.

But it seems to me that in particular cases, especially in the case of closed funds which are not associated with the insolvency of a company but with the change of status of a company, or which have been closed for other reasons while the company is ongoing, the minimum funding requirement will create a bizarre situation in which companies have to put money in to sustain the requirement, then have to take it out again, then put it in again and then take it out again. If we had a proper assessment of funds on an ongoing basis, the problem would not arise. It is a difficulty which the Government have created for themselves; but more especially it is a difficulty which they have created for British industry.

Lord Mackay of Ardbrecknish: My Lords, we debated identical amendments to those that we are

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looking at this evening when the noble Lord, Lord Marsh, put forward his amendments in Committee—the noble Lord apologised to me for being unable to be present this evening —and there was some misunderstanding over what particular amendments we were discussing. Subsequently, I wrote to the noble Lord, Lord Marsh, to explain why there was no need to introduce amendments intended to allow an employer the choice of making good a deficit by paying a lump sum into the scheme. Perhaps I can share that point with the House, in case anyone reading over the debate that we had in Committee becomes confused. A cash payment will count as a payment due under the schedule of contributions. So, if an employer paid a lump sum, there would be no requirement to pay contributions on top. I hope that that explanation will clear up any difficulties over that particular question.

My noble friend, Lord Clark, aided by my noble friend Lady O'Cathain, set out most cogently their concerns about the minimum funding requirement and what it might mean if employers have to put money into pension schemes which turn out not to be needed to provide benefits. I hope that I can reassure them—and even help the noble Lord, Lord Eatwell —by explaining that those considerations have been very much in the Government's mind throughout the process of preparing this Bill.

I shall turn shortly to the question of alternatives to cash payment and payments to the employer out of the scheme. But perhaps I may first say that when we published our initial proposals in the White Paper, they were tested very carefully through a consultation exercise. In fact, I have already mentioned the results, which show that 86 per cent. of schemes would at that time have fully satisfied the requirements, and the vast majority of schemes had a comfortable margin between their ongoing funding level and the proposed minimum requirement.

Despite those encouraging results, there continued to be widespread concern, as I said earlier this evening. The fear was that the combination of calculating market values on a particular day, with the proposed time limits for restoring funding levels, would have a destabilising effect. In particular, the three-month limit for getting back to the 90 per cent. minimum level aroused considerable concern.

We listened carefully and we are determined that our proposals should provide scheme members with the security that they have a right to expect. But we also recognise that any requirement should not impose undue burdens on employers or schemes.

As a result, my right honourable friend Mr Peter Lilley announced last December that the calculation would take account of market values over a number of months—earlier in the Committee stage, I suggested that we were thinking about six months—rather than focusing on one particular day. That smoothing effect was designed to avoid the risk of schemes being categorised as being below the minimum level simply because the valuation took place on, for example, Black Friday. Also, the time limits for restoring the scheme to 90 per cent. and 100 per cent. were extended to one year and five years. That will apply to all schemes and will,

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we believe, have a significant effect. It will mean less volatility in contribution rates. Moreover, if there were a fall in the market and if market values were to rise again—despite the six months point that I made—within a year or less, an employer's contributions could then be safely scaled back. We believe that those changes will add stability for employers and schemes without endangering the security of scheme members.

Those important changes will together reduce significantly the potential volatility in the minimum funding requirement. They will minimise the risk of employers having to respond suddenly to short-term movements in the markets. The calculations will be smoothed and the time limits we now propose will allow funding levels to recover in step with normal stock market recovery.

Our analysis indicates that the main risk of serious underfunding is now likely to be caused by something going wrong with the scheme itself rather than because of external changes or fluctuations. However, we accept that in exceptional cases schemes may find themselves falling below 90 per cent. We are content that, in those cases, alternatives to cash such as bank guarantees or ring-fenced securities should be available as an option if the trustees are willing to accept it.

I believe that our proposals are sound and that it is far more appropriate that these alternatives are defined fully in regulations. It is surely better to do that than to introduce terms into the Bill which do not have clear-cut meanings or application.

The most important feature of the alternatives we propose to immediate cash injections is that they will provide security until such time as the scheme is funded to 90 per cent. of the minimum requirement. They therefore cover a temporary situation during the early years of a five-year plan to restore 100 per cent. funding. They are certainly not suitable and were never intended to be used as a permanent alternative to a cash injection. To move to a situation where any deficit below 100 per cent. could be covered by a bank guarantee or unencumbered loan would effectively remove any requirement for employers to make cash contributions to their pension schemes. They would be able to fund them entirely by loans or ring-fenced securities. That does not seem sensible.

The importance of trust funds as a basis for pension schemes is that the trust should be separate and distinct from the employer. Long-term reliance on a bank guarantee or some form of loan would blur that crucial distinction. The same considerations apply on the question of repayments. It would be damaging to the whole concept of trust-based schemes to enable funds to pass freely from the scheme to the employer. As I am sure my noble friend agrees, one of the most important reasons for setting up a trust fund is that the assets of the trust are separate from the employer's property.

I recognise the strength of the anxieties raised in this debate. As my noble friend Lord Clark mentioned, I am aware that he discussed these matters with my right honourable friend the Secretary of State. But we believe that we have demonstrated our concern to avoid any unnecessary burden on employers, and I hope that I

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covered those points this evening. The Bill is rooted in the need to encourage funded pension provision by providing scheme members with the security and confidence they must have if they are to invest for their retirement. I believe that we have met those two objectives.

I hate to return once again to the word "balance", but I seem to be moving inevitably towards it, and I apologise. I am receiving dissenting voices from the other side of the House—one nodding and one dissenting. But balance is an important aspect of this whole business between employers' rights and the rights of employees.

I hope that my explanation will enable my noble friends to see that we have struck that balance. I hope that my noble friend Lord Clark will take note of what I said and no doubt read Hansard in the morning. As he said, there are other opportunities between now and the end of the passage of the Bill in the other place for those who continue to have anxieties on this matter to take them up. Of course, as we do on all the matters discussed on the Bill, we shall continue to listen, discuss with, and consider the concerns of the industry on this and every other important part of the Bill. While, at the end of the day, the Government must make decisions, we want to ensure that we make the correct decisions and that they are decisions with which the majority of people involved in this industry are comfortable so that pension schemes can have a reliable and secure future.

I invite my noble friend to read what I have said. I hope that he feels able to withdraw the amendment even if, knowing him of old, he intends to return to it or find somebody else to return to it in another place.

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