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Baroness Seear: My Lords, that is the unsatisfactory answer that I had expected from the Minister. Of course, it is all part of the bigger issue that we discussed so frequently in the earlier stages; that is, the real powers of the regulator and the fact that the regulator has inadequate powers and relies on a system of whistle blowing. That is not the way to achieve the results that the Government say they wish to achieve.

The Government are relying on the whistle blower, and, as the Minister just said, it is early when things are beginning to go wrong that it is important that the regulator should be aware of what is happening. I suggest that the regulator will not receive that information. Whistle blowers will not blow the whistle until they are sure that things are going wrong. Let us imagine a situation in which the auditors, thinking that things are not well, blow the whistle, only to find that they were in error in so thinking. I suggest that that is the end of the relationship between the auditor and that company. If they leave it until they are absolutely sure, they have left it until it is too late.

The whole weakness of the Bill is that the regulator himself has insufficient powers to do the job. However, having realised that the Government Chief Whip has done his job with even more than his usual efficiency on this occasion, I do not propose to waste the time of the House in testing the opinion of the House, because it would not be the opinion of the House; it would be the opinion of the hordes who are in and out of the bar and elsewhere—

Noble Lords: Oh!

Baroness Seear: My Lords, well a greater proportion of those on the other side, anyway, who will not have

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heard the arguments. I just hope that in another place other people will take up this point and deal with it more effectively. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 43 [Other responsibilities of trustees, employers, etc.]:

The Earl of Buckinghamshire moved Amendment No. 3:

Page 26, line 29, at end insert:
("(1A) Regulations must require the trustees of a trust scheme, except in prescribed circumstances—
(a) to maintain written procedures for the payment, transfer or receipt of cash or other assets, and
(b) to obtain from the auditor at prescribed times in respect of prescribed periods a statement containing the information mentioned in subsection (1B).
(1B) The information referred to in subsection (1A) (b) is—
(a) the opinion of the auditor as to whether or not the procedures mentioned in subsection (1A) (a) are appropriate,
(b) relevant particulars known to the auditor of any actual or apparent failure to comply with those procedures during the prescribed period if the auditor considers the failure to be material,
(c) the steps that have been taken by the auditor to identify any such failure,
(d) the opinion of the auditor as to whether or not further steps are appropriate in the circumstances, and
(e) such other information as may be prescribed.").

The noble Earl said: My Lords, on Report I moved an amendment on custody which my noble friend the Minister unfortunately declined to accept. This amendment is another part of the ratchet to prevent fraud. It would require occupational pension schemes to have a financial control system approved by the scheme auditor, and upon which he reports regularly to the trustees. It may seem odd that there is no such requirement under the present law, and even odder that such a requirement was not recommended by the Goode Committee in the light of the Maxwell affair.

The recent Barings difficulties underline the need for all financial institutions and pension schemes that fall into that category to have rigorous financial control systems. Nowhere is that more important than in the case, as I said, of pension schemes.

Although the effects of fraud might to some extent be mitigated by the new compensation scheme, the compensation payable will be less than the whole loss. It is still necessary to do our utmost to put obstacles in the way of fraud to try to reduce the number of cases where it happens and the size of the sums misappropriated.

I am advised that in the current situation there is a considerable difference between schemes in the way financial controls are applied. Some systems provide a much greater level of protection than others. In certain cases, for example, important transactions involving millions of pounds can still be carried out by telephone by one trusted person, and it could be several days before any flaw in the documentation, or any other problem, was picked up.

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I tried to deal with that matter on Report in my amendment on custody, but, as I said, that was not accepted. Under this amendment, responsibility for approving the financial control system and reporting upon its operation would be placed firmly upon the scheme's auditors, who are the people in the best position to undertake that task. That would be in addition to their normal audit responsibilities.

In case it may be thought that the amendment would introduce unnecessary bureaucracy, I should like to point out that a financial control system need not necessarily be complex. It would usually necessitate just a few pages of sensible procedures about the signing of cheques, the authorisation of payments, and other such matters, the system being tailor-made to the particular circumstance and designed to avoid too much power being placed in the hands of one or more persons. On that basis, I beg to move.

Lord Mackay of Ardbrecknish: My Lords, as my noble friend explained, the amendment would require trustees to have in place a system of financial controls. Of course, that is not something new. Trustees, as the people responsible under trust law for safeguarding the assets of the pension fund, have always needed to have a sound control system in order to be able to discharge their responsibilities. Indeed, if a scheme did not have adequate financial controls the auditor would presumably say so by qualifying his annual report.

Because it is such a fundamental part of a trustee's duty and because checking that a scheme's financial control systems are satisfactory is a normal part of an auditor's duty, we had not considered it necessary to make specific reference to the matter in the Pensions Bill. Moreover, the Bill itself serves also to reinforce trustees' responsibilities in that respect. We believe, therefore, that this amendment is not necessary to ensure that trustees do exercise control over financial matters.

However, I do recognise the importance of such controls and now that my noble friend has raised it, I will consider carefully whether the position is in fact satisfactory. If, despite my initial view, an amendment along the lines suggested does seem necessary, we will introduce it in another place.

I hope that, in view of what I have said, my noble friend will withdraw his amendment.

The Earl of Buckinghamshire: My Lords, I thank my noble friend for his positive reply. On that basis, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 50 [Minimum funding requirement]:

Lord Eatwell moved Amendment No. 4:

Page 31, line 6, at end insert ("which shall allow determination, calculation and verification either—
(a) on a discontinuance basis, or
(b) on an ongoing basis
and if the trustees or managers of a scheme to which this section applies choose the latter a levy must be paid by them to a central discontinuance fund.").

The noble Lord said: My Lords, we had extensive debates on this question in Committee and on Report. It is essentially a technical matter and not a party political

21 Mar 1995 : Column 1158

matter. I shall begin by saying that we on these Benches regard the Government's objectives as entirely laudable. We support them wholeheartedly. The objectives of establishing what is now called a "minimum funding requirement" are to provide the greatest possible protection to the members of pension funds in the event of their company becoming insolvent. That is the role of this requirement.

The fundamental problem that we have faced all along is that the scale of the contributions required, and the type of assets in which those contributions are invested—whether they be gilts or equities—will be different when the fund is valued on a discontinuance or wind-up basis from when it is valued on an ongoing basis. Our problem has been to devise the best security for members on either one or other of those two bases of valuing a fund.

The Government began by imposing a funding standard defined on a discontinuance basis. That is essentially a sort of snapshot approach. It is important to realise that that is at odds with the investment strategy which has been pursued by successful pension funds over the past 30 years. That investment strategy has been based on well over 80 per cent. of contributions being invested in equities, but the very nature of the equity market is that it is subject to fluctuation—sometimes large fluctuation—consequently, using a discontinuance or wind-up criterion, funding will often not be adequate, even though on an ongoing basis the funding is more than adequate. If a discontinuance approach were enforced the result would be that funds would necessarily have to adapt to a different investment strategy, with the result, as Goode recognised, that serious problems could be created. It is worth quoting from the Goode Report on that matter. At paragraph 4.4.31 the report states that a minimum funding requirement of this type,

    "could force intrinsically healthy schemes to reduce benefits and increase contributions substantially in order to be able to meet liabilities on a hypothetical discontinuance which in the ordinary way would be very unlikely to occur. A scheme's investment managers might feel constrained to move from an equity based to a fixed-interest or index-linked portfolio so as to be certain of covering its wind-up liabilities, with the likelihood that over the long term it would lose both income and the prospects of capital growth, and benefits would go down".

That is the fundamental problem with the discontinuance approach.

The Government, having decided to back this particular horse, have tried to tackle the problems created by the discontinuance approach by, on the one hand, watering it down and, on the other, by moving steadily towards an ongoing approach. That has seriously weakened the discontinuance approach without, I suggest, producing a truly coherent alternative.

Perhaps we may look at the watering down. The Government have decided to define liabilities on the basis of the so-called cash equivalence of benefits of the pension fund determined with respect to the interest rates on long-term gilts. This cash equivalence, as has been mentioned since Second Reading, will not be

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enough to purchase an insured annuity; that is, the scheme will not by this definition be truly solvent. The pension is not protected.

Secondly, the Government weakened the position still further by permitting very large schemes to evaluate 25 per cent. of their liabilities to existing pensioners with respect to the rate of return on equities, which is typically higher than on gilts. This lowered the cash equivalence further and meant that the pension was less well protected.

Having weakened the criterion, the Government then moved slowly towards an ongoing basis. They proposed that asset values should be smoothed over defined periods to try to avoid the arbitrariness of evaluating an equity portfolio on a snapshot basis. It is not at all clear that that will work. On Second Reading, the noble Earl, Lord Buckinghamshire, argued that it would not. I can see it working only if the period over which the smoothing takes place is defined with respect to best actuarial techniques for ongoing funds; that is, if it becomes an ongoing fund and the discontinuance argument is abandoned.

The fourth change was proposed by the noble Lord, Lord Mackay, in a letter to my noble friend Lady Hollis. He said, with respect to large schemes, that,

    "if their sponsoring employer went into liquidation, [they] would have to be run on as closed funds. They would have the administrative infrastructure to do so. They would, realistically, be able to run on as closed funds, delivering pension benefits as they fall due—reliably and cost efficiently".

Quite so; that is an ongoing basis and not a wind-up.

Finally, the Government renamed the previous minimum solvency requirement "the minimum funding requirement". Throughout consideration of the Bill, the Government's actions have been an implicit admission that a minimum funding requirement defined on a discontinuance basis will introduce major distortions and create significant difficulties often for well-run funds. That was pointed out in Committee and on Report by the noble Lords, Lord Marsh and Lord Clark.

It must always be remembered that the discontinuance funding criterion specified in the Bill is to be applied to thousands of well-run funds in an attempt to catch the few rogues and incompetents in the industry. There is also the obvious danger that the minimum funding requirement, defined in discontinuance terms, will become the standard funding requirement, confirming the prediction of the Goode Report of higher contributions and lower benefits.

As I said, we entirely accept the Government's objective and we support it. We want to have the best possible protection for pensioners. The amendment proposes that pension funds be permitted to apply to the regulator on terms to be defined in regulations to define their minimum funding requirement either on a discontinuance basis, if that is most appropriate to that fund, or on an ongoing basis. The appropriateness could be decided in consultation with the regulator. Therefore, the clause would make available the ongoing approach and the advantages of that approach are obvious.

21 Mar 1995 : Column 1160

But what are the disadvantages of the ongoing approach? I have talked about the disadvantage of the discontinuance basis. The key disadvantage of the ongoing approach is that, given the fluctuations in the equity market, a pension fund which adopts a minimum funding requirement on an ongoing basis may be inadequately funded at the snapshot moment when the employer ceases trading. As has been mentioned several times in our debates, that is highly unlikely in the case of a fund that is run on a basis of the best actuarial practice. On several occasions the noble Lord, Lord Mackay, told us that government surveys have discovered that well-run funds typically will not suffer from the problem, but it is a possibility.

The way to deal with the problem is by the provision of a central discontinuance fund, which might, for example, be a government agency. In the event of company insolvency, it can keep the fund going so that it achieves its smooth, medium-term valuation. It avoids the folly of a pension fund being forced to wind up at just the moment when the markets are in such a state that wind-up is to the maximum disadvantage of the members.

Perhaps we may consider the disadvantages of a central discontinuance fund. What are the arguments against it? An argument that has been put forward is that a central discontinuance fund will mean that well-run funds will subsidise badly-run funds. That is nonsense. The case is that a company has ceased to trade. Such a company may have a fund which is run perfectly well and competently; it is a free-standing element. We have heard in debates about companies which have ceased to trade and have left pension funds behind them; for example, public sector companies, when privatised, ceased to trade as a public sector company and their pensions fund were left behind. No one has suggested that those pension funds were run badly. They have continued as closed funds. The argument about the well-run fund subsidising the badly-run fund is nonsense.

Secondly, it has been argued that this is in some way an alternative to a minimum funding requirement. That too is nonsense. The two issues need to go together; we want a minimum funding requirement defined on an ongoing basis and then, in the unhappy event of the employer ceasing to trade at just the moment when the stock market is down, a central discontinuance fund keeping the fund going until the market recovers. Therefore, one will avoid the nonsense of winding up the pension fund at the worst possible moment.

A third argument made against a central discontinuance fund is that it might be unable to meet its obligations. That is provided for in the amendment by those pensions funds which opt for valuation on an ongoing basis being required to make a contribution. Given the Goode prediction that on an ongoing basis general pension funds' contributions will be lower and benefits higher, the small contribution to sustain the central discontinuance fund seems to be a reasonable price to pay.

Finally, the noble Lord, Lord Mackay, mentioned on Report the problem of the heterogeneity of liabilities of various funds which might be amalgamated into the

21 Mar 1995 : Column 1161

central discontinuance fund. I suggest that it is not a problem. The central discontinuance fund could provide a standard set of benefits, the scale of which would be linked to the minimum funding requirement. The central discontinuance fund could also have the additional benefit that, as the Government Actuary proposed, the scheme could be used as a device for facilitating mobility between occupational pension schemes, which surely is the fundamental weakness of the entire occupational pensions industry.

This is a belts and braces amendment. It is designed to maximise security while minimising disruption. It makes available the two approaches; that is, discontinuance and ongoing. As will be clear, I have doubts about the strength of the discontinuance criterion as now applied by the Government and as watered down. However, I am prepared to believe that the Government are doing their best on this matter. I believe that they have made the best of a bad job with respect to the discontinuance requirement. Indeed, it may be appropriate for some funds.

If the amendment were accepted it would give members confidence in their pension funds without reducing the value of their pensions. It would allow employers to adopt the most efficient funding strategy for their pension funds. As is often the case in moving amendments, I am totally at a loss as to why the Government should possibly resist this amendment. In their amendments to the late and—perhaps I may suggest—unlamented minimum solvency requirement, the Government have moved steadily towards valuation on an ongoing basis. The approach which we have adopted is based on the recommendations of the Government Actuary. It also has wide support in the industry. I wish that the Government would accept the logic of their own position and support the amendment. I beg to move.

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