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Lord Mackay of Ardbrecknish: My Lords, the European Court of Justice has ruled that employers and trustees of a scheme are bound by Article 119 of the Treaty of Rome. They must ensure that pension schemes treat men and women equally within the limits of their respective powers. Clause 57 will give trustees the power to make alterations to a scheme to comply with the equal treatment rule where they do not otherwise have these powers, a duty which will be incumbent upon employers by virtue of Section 1 of the Equal Pay Act 1970 as modified by Clause 55 of the Bill.

As I said in Committee, I can certainly understand that employers might be wary of giving trustees the power to make changes to schemes, seemingly without any prior reference to them, and I have given careful consideration to the arguments then put forward by my noble friend. However, I have concluded that the situation which I think he envisages, in which trustees proceed to make changes to the scheme without the employer's consent, would be very unlikely to occur in practice.

Employers, like trustees, are already directly bound by Article 119 to provide equal treatment in schemes. Clause 54 of the Bill will provide for schemes without an equal treatment rule to be treated as including one and for the more favourable treatment to apply. The effect of Clause 54 therefore is that if a scheme's rules have not been amended they are deemed to have been amended at the more favourable level. Clause 57 would permit further changes for the future; for example, to equalise at a higher age, or simply to amend the rules so that they are in line with the changes deemed to have been made by Clause 54. Scheme rules themselves normally require trustees to seek the employer's consent to changes to schemes. Under Clause 57 it is not intended that trustees should go any further than is necessary to comply with the equal treatment requirement. Nor should it interfere with any of the existing arrangements for making changes to scheme rules. Given all the legal requirements on employers to provide for equal treatment in schemes, we envisage that Clause 57 would probably come into play only rarely.

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I can appreciate that employers would feel more at ease if there were a requirement in the Bill that any changes to scheme rules should be expressly consented to by them. However, I do not believe that they need worry that the powers in Clause 57 will be abused for the reasons I have explained. In view of the explanations, I hope that my noble friend will be able to withdraw his amendment.

The Earl of Buckinghamshire: My Lords, I thank my noble friend for his full reply. I shall read Hansard tomorrow and digest what he said. On that basis, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 144 to 149 not moved.]

Clause 64 [Modification of public service pension schemes]:

Lord Lucas moved Amendment No. 150:

Page 38, line 23, leave out from ("may") to end of line 26 and insert ("adapt, amend or repeal any such enactment as is referred to in paragraph (a) or (b) of subsection (3) as that authority thinks appropriate").

The noble Lord said: My Lords, I spoke to this amendment when I moved Amendment No. 20. I beg to move.

On Question, amendment agreed to.

Clause 65 [Preferential liabilities on winding up]:

The Chairman of Committees: My Lords, I should point out that if Amendment No. 151 is agreed to, I cannot call Amendment No. 152.

Lord Mackay of Ardbrecknish moved Amendment No. 151:

Page 38, line 31, leave out from ("liabilities") to end of line 42 and insert ("in respect of pensions and other benefits (including increases in pensions).
(2) The assets of the scheme must be applied first towards satisfying the amounts of the liabilities mentioned in subsection (3) and, if the assets are insufficient to satisfy those amounts in full, then—
(a) the assets must be applied first towards satisfying the amounts of the liabilities mentioned in earlier paragraphs of subsection (3) before the amounts of the liabilities mentioned in later paragraphs, and
(b) where the amounts of the liabilities mentioned in one of those paragraphs cannot be satisfied in full, those amounts must be satisfied in the same proportions.").

The noble Lord said: My Lords, in moving this amendment, I shall speak also to Amendments Nos. 152 to 159 and Amendment No. 178.

Amendments Nos. 151 and 156 appear substantial but a careful reading will show very few changes of real substance. The main effect of the redrafting is to make the clause easier to understand. I am sure that that is something which we can all welcome. The main substantive change is in subsection (4) which has been rewritten to make clear that any assets left after satisfying the statutory priorities set out earlier in the clause should be distributed according to scheme rules.

Subsections (4A) and (4B) provide a mechanism for enforcing the important requirement set out in Clause 65. The reference to prohibition orders is consequential on Amendment No. 6 to which I spoke earlier.

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Subsection (4C) merely imports from Clause 107 the power to amend the statutory priority arrangements set out in Clause 65. Amendment No. 178, as a consequence, deletes that power from Clause 107.

Perhaps I should defer my comments on my noble friend's amendments until he has had the opportunity to introduce them, otherwise I shall be looking into my crystal ball. I shall intervene again, if necessary, after my noble friend and other noble Lords have spoken. I beg to move.

The Earl of Buckinghamshire: My Lords, I should like to speak to Amendments Nos. 152, 153, 155 and 158 which stand in my name. I shall deal first with Amendments Nos. 152, 155 and 158 and deal lastly with Amendment No. 153. If the Minister receives favourably those amendments, the good news is that I shall not move Amendments Nos. 154, 157 and 159—and that is good news for everyone.

Amendments Nos. 152 and 155 address the problem of pension increases under the priority clauses. All my amendments deal with priority clauses on wind-up. Currently, existing pensioners usually have priority not only for their own pension at the level currently in payment but also for any future increases which are guaranteed under the scheme and for the contingent pension which may become payable to their spouse if they predecease the spouse, and that includes also any future guaranteed increases on that pension.

Those future increases are not intended to improve the position of the member and his spouse but merely to maintain as far as possible the purchasing power of the pensions at the current level. If a recently retired pensioner were to lose the benefit of his future increases, the purchasing power of his pension might easily halve by the time he is 85.

Under the Bill, future pension increases for existing pensioners come at the bottom of the queue, along with other benefits. That must be wrong. It is not clear where the Government intend the priority for a member's spouse to come. It would appear that a contingent spouse's pension is not a benefit, entitlement to payment of which has already arisen, since it might never become payable if the spouse predeceases the member. Therefore, presumably under the Bill, it ranks at the bottom of the queue along with other benefits. Both future pension increases and spouses' pensions for existing pensioners would, under the Bill as drafted, have a lower priority than the return of contributions to a member who has less than two years' pensionable service. I must ask your Lordships whether that is fair.

I turn now to Amendment No. 158 which really takes a look at the situation for those people who are close to retirement. One of the reasons for moving the amendment on the priority clause that I have just discussed is that a pensioner has absolutely no chance of making good any loss which may arise on a wind up in an insolvent position. Amendment No. 158 takes into account those people who are within five years of retirement. One may ask: why five years? Well, we have to pick a point at which to decide such matters. Anyone within five years of retirement has very little chance of making up any losses that may occur when a scheme is

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wound up. I believe that Amendment No. 158 would give some additional protection which the members would welcome in such difficult situations.

I move on now to Amendment No. 153 which deals with additional voluntary contributions and a slightly different issue. I want to make it clear in primary legislation that, on wind up, all additional voluntary contributions have the highest priority—which I believe is quite right—provided that they are segregated as a separate category under the rules and that separate investment or management is not required to achieve segregation.

12 midnight

Lord Mackay of Ardbrecknish: My Lords, with the leave of the House, perhaps I may respond by saying at the outset that I have some sympathy with Amendment No. 153. It seems right in principle that rights resulting from AVCs should be a first priority of a scheme wind up. However, there is a wide variety of AVC arrangements and we need to ensure that any amendment would cater equally for all variations. We are looking carefully at the matter and will bring forward a suitable amendment at a later stage.

As regards Amendment No. 157, I share my noble friend's view that any benefit payable following a member's death should also attract the same priority as a member's entitlement. I believe that it is clear from the wording of subsection (3), especially the reference to "pensions or other benefits", that contingent benefits such as widows' or widowers' benefits or dependant's benefits should receive the same priority as the member's basic pension entitlement. If necessary, that can be made clear in the valuation basis which will be prescribed in regulations for calculating and verifying those liabilities.

I turn now to Amendment No. 159. I accept the force of my noble friend's concern about schemes which have started to wind up before the commencement of the Act, but have not completed that process. My noble friend will be pleased to hear that it is our intention that the clause should be applicable only to those pension schemes which start to wind up after the Bill comes into force. We intend to frame secondary legislation to achieve that aim. Where a scheme commences to wind up prior to 1997, the priority order set out in the scheme rules will operate even if the eventual wind up is not concluded until 1997 or beyond.

However, I am unable to accept my noble friend's other amendments which would completely overturn the proposal reflected in the Bill to produce a more equitable allocation of assets on scheme wind up as between the different classes of members. The particular theme of my noble friend's amendments is that they would seek to protect the position of some of those pensioners whose pension was in payment before the Bill takes effect. The protection, which would extend to indexation, would be given at the expense of scheme members, including those who become pensioners after the Bill takes effect.

Indexation can be costly. To give it the same priority as pensions in payment when a scheme winds up in deficit would leave fewer assets available to secure the

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accrued rights of other scheme members. We believe that it is more equitable to protect the basic pension entitlement of all scheme members and share out whatever residual assets may then be available to provide pension increases. That does not represent any retrospective worsening of anyone's accrued rights. No one's pension expectations will be reduced by the clause.

I accept that if a scheme winds up underfunded then pensioners may have to share some of the consequences from which they would previously have been insulated. However, I have already explained why I believe that that is more equitable than the present situation. It is also consistent with the principle underlying the minimum funding requirement which is based on an assessment of the assets needed to meet all liabilities under the scheme, whether in payment or not and regardless of when any particular entitlement came into payment. I listened carefully to what my noble friend said. I shall read in Hansard what he said and also the points he has made to me in correspondence. This is a delicate set of issues. We believe we have got it right but, as I have indicated in other parts of the Bill, we are always ready to give due weight to well founded comments and to make any changes which we believe are justified.

On Question, amendment agreed to.

[Amendments Nos. 152 to 155 not moved.]

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