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Lord Oakeshott of Seagrove Bay: My Lords, today's debate is the overture to an opera of many acts which will inevitably, in light of our starting date, have very long intervals. Day after day in the other place, as the
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noble Lord, Lord Higgins, pointed out, Members struggled to digest a demanding diet of new government clauses and amendments. I had hoped that we would be spared much more of this from the Government in this House. My noble friend Lady Barker has weighed the Bill carefully. The two volumes and the Explanatory Notes come to 1.48 kilograms—three and a half pounds, in old money. It really is about time the Government tried to cut down on obesity in their Bills.

Some of the proceedings in the other place inevitably smacked more of pre-legislative scrutiny than proper, detailed parliamentary consideration of a complex Bill, offering properly worked-out solutions to Britain's pension crisis. No other issue in Britain combines such economic, political and social significance, and on no other issue, despite the impression the Minister tried to give, is there such widespread acceptance by all sides of industry, independent experts and stakeholders—as new Labour loves to call them—that current government policies have failed and we need a radical change of course.

I declare my interest as a pension fund investment manager for the past 28 years. We have already, in this House, displayed remarkable consensus, apart from the Government, in the debate initiated by the noble Lord, Lord Fowler, in March. Today I intend to focus not on what is wrong in government pensions policy—I only have 15 minutes—but on how this House can improve this well intentioned but muddled Bill. Let me start with a warm and genuine welcome for the good intentions.

We welcome the new proactive pensions regulator—a tiger with teeth, we hope, when things start to go wrong, instead of a box-ticker limited to fining funds for technical infringements or putting returns in a few days late. We welcome, too, the cornerstone of the Bill, the new pension protection fund. Workers and pensioners are, rightly incensed to find their hard-earned contributions effectively stolen from them if companies go bust with deep troughs in their funds, indulge in fancy financial engineering to shuffle off pension liabilities in subsidiaries or move businesses offshore, leaving pension black holes in Britain.

We all agree on the problems, but we on these Benches will do our utmost in the weeks and months ahead to improve and strengthen the Government's proposals for the PPF. We must put far more flesh on the bones of what is really only a skeleton in the Bill. As for the "son of PPF", the £400 million financial assistance scheme, so-called, knocked up between the Prime Minister and the Chancellor of the Exchequer on the back of the note from their Chief Whip warning them that the Government faced imminent defeat in the House of Commons, that is not even a skeleton in this Bill. It is more a twinkle in the Government's eye. They really must give the House a proper account of how that £400 million in the next 20 years will operate, who it will cover and what it will cost, if we are to do our job of scrutiny properly.
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Britain is split into two nations on pensions: in public pension land, if I can call it that, 5 million employees enjoy full protection against investment risk, inflation risk and insolvency risk from a guarantor safer than the Bank of England—the British Government, with unlimited recourse to the British taxpayer. The other 19 million people at work are barely covered by a ragged patchwork quilt of mean and means-tested state pensions, leaving women worst off, and a fast unravelling web of private pensions covering ever fewer people with ever poorer benefits.

We see a classic case of the Government's schizophrenia on pensions in Schedule 5 of the Bill, setting up the PPF. Paragraph 27 states that the chair and staff of the PPF will be eligible for a Government-backed pension for which the,

So private sector schemes struggling to meet their pension commitments and pay their levy to the PPF will also have to sign a whole book of blank cheques to the Minister for the Civil Service to charge whatever he likes for giving government-guaranteed index-linked pensions to the board and staff of the PPF. Other public bodies, such as the FSA, do not grant Civil Service-type pensions, so why should the PPF?

French restaurants used to have a sign outside, saying "Le patron mange ici", but the PPF will not taste its own basic cooking if the Government get their way. The sky is the limit on index-linking on the PPF boardroom menu.

Following the initial period, the Bill provides for a transitional period during which the implementation of the risk-based element of the levy may not be applied. As the PPF is essentially operating as an insurer of the benefits to be provided in the event that a scheme is wound up with an insolvent employer, it is essential—and here I stand shoulder to shoulder with the noble Lord, Lord Higgins—that the levy charged by each scheme reflects properly the risk involved. A well funded scheme supported by a strong employer should not be charged the same levy as a similarly funded scheme with a weak employer.

In fixing PPF premium rates the two key factors are the scheme funding level and the risk of employer insolvency. The real risks to the PPF will be heavily concentrated in schemes where weak employers run underfunded schemes, and the premium paid must reflect that joint risk fairly as soon as possible. Any other policy would be a poll tax on pension funds, penalising responsible employers and prudent trustees.

We will propose, therefore, that, after the initial period, the risk-based element of the levy should contribute at least 80 per cent of the total. The risk-based element is, as set out in the Bill, a function of the scheme position, in particular the shortfall between its assets and liabilities to which the PPF is exposed—the "sum at risk"—and the employer's position—that is, the likelihood of insolvency.
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The essential ingredient in calculating the sum is that it should be determined on a consistent and objective basis across all schemes. That is not a mere technical matter to be left to the yet-to-be appointed board of the PPF. It is fundamental to fair operation of the scheme, and Parliament must make two things crystal clear in the Bill: when the risk-based levy will be in full operation, and the basic principle that the risk-based levy must be calculated on the joint risk of scheme underfunding and employer insolvency. Parliament is compelling all DB pension funds to pay this levy and Parliament must therefore set its main parameters.

To make it easiest to move rapidly to a mainly risk-based levy, the PPF board should provide the basis for a broad-brush assessment of the sum at risk for each scheme to be introduced at an early stage. We appreciate that it will not be possible for a precise assessment to be made immediately, but there are funding calculations made for all relevant schemes which would provide a starting point. For all its faults, the MFR provides that. That could lead to a much fairer interim solution than the poll tax solution, and would help the transition to the final goal of a scheme-specific risk levy. Responsible employers with properly funded schemes are not prepared to wait until 2008 or 2009 to move to a proper risk-based levy, particularly as there will be an extra element of moral hazard in letting underfunded schemes choose whether to wait for a triennial valuation or do it immediately.

No insurance company would last five minutes if it let its bad risks pay a flat-rate premium and its good risks pay the correct risk-based premium. This nonsense policy for the first few years will not wash for the PPF either. Waiting for the best here really would be the enemy of the good and waiting up to five years for the perfect solution would be grossly unfair in the mean time. The National Association of Pension Funds assures me that an interim approach along the lines that I have outlined would attract the support of most pensions schemes that are exposed to the PPF levy. One of the main problems of the Bill, as the noble Lord, Lord Higgins, said, is that it delegates too much power to the board of the PPF, which is a non-elected public body.

The second key question on the PPF is whether the Government, who appoint the chairman and the board in the first instance, and in practice pull most of the PPF's strings, can wash their hands of all responsibility if the PPF gets into serious trouble. We recognise that there are interim solutions in the Bill, such as suspending indexation. But is anyone seriously suggesting that the Government, having invested so much parliamentary time and political capital in setting up the PPF and going one step further by establishing the financial assistance scheme would stand idly by if the PPF could not meet its 90 per cent and 100 per cent obligations up to a cap, as set out in the Bill? Of course not; so why do they not come clean and admit that they would, if they had to, act as a lender of last resort on a clearly defined and limited basis?
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There are precedents; the Bill provides one, as the Exchequer is to lend the PPF enough to cover its start-up costs before the levy is charged. Well established now for many years is the Pool Re arrangement for insurance of commercial buildings against terrorist attack, whereby the Treasury explicitly stands behind commercial insurance companies and unconditionally guarantees their obligations. I have raised that point before in the House and not had an answer, so can the Minister either explain why the Pool Re principle cannot be applied to the PPF or, alternatively, undertake to procure a proper answer from the Treasury?

Business and industry are also concerned about the complex provisions introduced late in the other place, designed to make directors and investment groups liable for pension fund shortfalls. A fine balance has to be struck, between on the one hand, too lenient a line that enables directors to walk away from their obligations or parent companies to shuffle off their subsidiaries and, on the other hand, too tough a regime that makes company rescues impossible or stifles venture capital investment—a great favour of Gordon Brown's, noble Lords will recall—or management buy-ins or buy-outs at troubled companies. We must protect pensioners properly without making the market in struggling companies seize up. We shall take some convincing that the Bill has got the balance right so far.

My noble friend Lady Barker will cover the vital topics of fair treatment for women, survivors and state pension issues in so far as they feature in the Bill. State pensions are the black hole at its heart. So long as long-term state pension policy in this country is founded—let us be fair to the Minister and the Government, quite openly and honestly—on means-tested benefits for the majority, it really will be gross mis-selling to try to persuade millions of our fellow citizens to save privately for a pension. This Bill is not the place for that battle of principle, which will be fought between the three main parties at the general election, when pensions will be right up there with health, education and the economy at the top of voters' concerns. As we prepare for the long hard slog of work on the Bill, I find it difficult to banish the haunting fear that without radical reform of state pensions we will, like Nero, merely be fiddling while Rome burns.

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