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Lord Higgins: My Lords, before the noble Baroness leaves the point she was just on, I just wanted to say that much of the risk on roll-out involves the company becoming insolvent. That does not need to be delayed over a long period. The other aspect of it is based on the valuation of the assets. However, many pension schemes, including the one with which I was involved, do evaluations other than in the three-year period. So there is no real reason why it needs to be staggered over such a long time.

Baroness Hollis of Heigham: My Lords, I am perfectly happy to take this away and see whether we can expedite it. However, in consultation with the industry, we believe that people are most comfortable with this timetable. I nevertheless take the point: if we can expedite it, we should.

Lord Oakeshott of Seagrove Bay: My Lords, the noble Baroness mentioned consultation with the
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industry. That is certainly not what the National Association of Pension Funds believes. I think that that is very important.

Baroness Hollis of Heigham: My Lords, whatever the National Association of Pension Funds believes is important, but whether its belief is correct is another matter. The point that I am making, as noble Lords will see in their briefing packs, is that sophisticated companies that have the sort of assessments to which the noble Lord, Lord Higgins, refers can bring themselves into the valuation procedure ahead of the triannual valuations. Therefore, companies are not forced to remain towards the end of the period; they can bring themselves forward if they wish. That option is available to them.

I should like to make one point on the USA comparison that has been made and the possibility that that presages bad news. The fact is that in the United States the levy is set by Congress. The levy has not been increased since 1991, not even to deal with inflation—despite inflation and market instability. It is also worth emphasising that the 10 largest claims in the United States amounted to two thirds of the liability. Five of those were steel, four were airline companies and the other was Polaroid. The situation is not the same as that in the UK.

I was pressed by the noble Lord, Lord Oakeshott, and, I think, the noble Lord, Lord Freeman, on whether the Government should stand behind the PPF, and to say what sort of scheme it is if the Government will not stand as its guarantor. We are seeking to ensure that marginal companies are not encouraged to enter into what we would all accept is moral hazard behaviour because they know that the Government will stand as guarantor. I believe that there is a similarity to the case of asbestos. If companies knew that the Government would pick up the bill for every asbestos claim, what inducement would they have to improve their health and safety practices in relation to asbestos? That is the point. If we want companies to produce the best possible standards, they themselves will have to act as their own moral policemen across the industry. If the Government picked up the bill, we could be sure that individual companies would not. That is not the way in which to go forward with a pension protection fund.

The noble Baroness, Lady Greengross, asked about the moral hazard of bad companies. We have tried to build out that hazard. I do not think that I have the time to go into the detail, but, basically, for companies to come under the scheme, they will have to be insolvent and the scheme will have to be underfunded. If the company is insolvent but the scheme is funded, it will be able to buy full annuities. Those are the tests. Without them, too many companies would seek to come within the PPF as a better buy purchase. That is exactly the sort of moral hazard we cannot afford to sustain.

On the adequacy of funding, I do not think we should confuse the nature of assets for funding with cash flow. The scheme will bring in assets from companies that are folding, however limited those
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assets may be. It will also have the levy and, ultimately, the power to raise loans. That £300 million a year will be over the lifetime of the fund, in contrast to the financial assistance scheme, which is £400 million over 20 years.

My noble friend Lord Borrie very effectively addressed most of the points on the financial assistance scheme. We could not have made the PPF retrospective; that would not have been fair. If one had gone for unclaimed assets—one of those siren calls—one would have had to raid privately owned assets, which would have been questionable. I also do not think that it would have been accepted as an additional levy on industry across the board.

I believe, therefore, that members of those defaulting schemes have nowhere else in these particular circumstances to go for compensation. Compensation it will not be; but assistance, at least, it will be. The Government have no legal liability, but we do accept a moral argument here about decency. That is why we have tried to assist as we are doing. I shall have to ask the House to indulge me until I can provide further details. We will be publishing our best statistics as soon as we can.

The second big concern was on the cost-savings ratio and, in particular, whether the amount of savings generated by the reduction in LPI would be sufficient to cover the costs of things such as the levy. I realise that time is pressing, but perhaps I should spend a moment on this issue.

At present, although we expect inflation to run at 2.5 per cent, with a tolerance over time of about 1.5 per cent on either side, companies nevertheless have to hedge against the possibility of paying up to 5 per cent indexation each year. The GAD has calculated that this will reduce the cost of indexation from about 23 per cent of total contributions to 19 per cent of total contributions—the 4 per cent, multiplied by the £12 billion of employers' contribution, brings us down to £480 million, and 75 per cent take-up of that is £370 million. That is how we reach the sum which the RIA says industry should be saved. Within that, industry can offset the cost of what are, I think, the quite modest charges on the pension protection fund. We expect the average levy to be about £20 per member—not a sum that I would think would determine the solvency or otherwise of schemes.

My noble friend Lady Turner asked about the downside for people denied as a result of price indexation. It is true that over time the total loss for men and women in the schemes may be about 2 per cent over the course of their retirement.

The first big issue was about the pension protection fund and the second about costs and savings, in particular the costings behind the LPI reductions and the way in which they generated the savings necessary for the fund. I think the third issue is the absolutely legitimate views and concerns about the role of trustees and whether they will be overburdened. That issue was raised by my noble friends and by the noble Lords, Lord Hodgson and Lord MacGregor, and other noble Lords. There are three points. First,
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trustees already need knowledge and understanding, and the best trustees are already compliant. I have full figures showing that about 80 per cent of companies and 95 per cent of mixed schemes already send their trustees for training. That already happens; whether that is enough training is another matter, but it is happening.

Secondly, the provisions say "relevant knowledge and understanding". We do not expect people to be legally qualified, but we do expect trustees in future to have a good basic understanding of the major issues including funding and investment.

Thirdly, the regulator's approach will be educative, not punitive, with a code of practice offering advice on how trustees can attain the relevant knowledge and understanding. I have put some relevant information in the pack and I am happy to send noble Lords additional information about the sort of trustee training we would expect companies to ensure they receive to discharge their duties. The issue of when a trustee should be paid, raised by the noble Lord, Lord MacGregor, is open to the individual funds to determine as they consider appropriate. We would not wish to legislate at this point on the subject.

Moving from those three big issues, I was pressed by several noble Lords on the Benches opposite—the noble Lord, Lord Hodgson, I think, and the noble Lords, Lord Higgins and Lord MacGregor—on Clauses 35, 36 and 39 and the CBI's concerns that the moral hazard provisions are too widely drawn.

It may be worth my putting a few remarks on the record which I hope will be of some assurance. The CBI supports the proposals in principle. The clauses have to be wide to ensure that the regulator can effectively tackle avoidance, but the regulator will be able to act only where avoidance was the primary motive for a decision. The regulator will be able to issue a contribution notice under Clause 35 only where an act or failure to act was deliberate and designed to avoid pensions liabilities.

The regulator will be able to issue financial support directions only in prescribed circumstances. Those involved in business transactions, corporate restructuring or investments will be able to seek confirmation in advance that the regulator will not impose a contribution notice on them. Officials are working with industry to provide examples of how these new powers will work and how they will be exercised. I hope that the noble Lord, Lord MacGregor, and others who have raised this issue will take some comfort from that.

My noble friend Lady Turner asked about OPRA. I have no reason to think that that body will not continue. It is a valuable body and I hope that it will continue. Points were raised about TUPE by one noble Lord. It might be better if I write to the noble Lord on that point. The noble Lord, Lord Freeman, referred to the Better Regulation Task Force. That body was consulted during the consultation on the Green Paper. However, I hope that the noble Lord will work with us if we need to improve the matter further.
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The noble Lord, Lord MacGregor, asked whether we could raise the issue of mis-selling on the retirement planner. We do not seek to give financial advice but information from which people will be able to make their own deductions. However, I take the "fair cop" point about pension credit; that was well made. I shall find out why that is not included. The noble Lord, Lord MacGregor, also referred to the plain English technical provisions. The term "technical provisions" is used in the EU directive. It requires schemes to have appropriate assets to cover technical provisions and to put a recovery plan in place. We understand that to mean the amount of assets a scheme needs to hold now on the basis of the actuarial method and assumptions used in order to pay its accrued pension commitments as they fall due in the future. In calculating this amount the scheme actuary will be required to use assumptions about factors such as future investment returns and life expectancy that have been chosen prudently. If we can enlarge on that in correspondence which I shall circulate to your Lordships, I am happy to do so. Given the time that is available to me, that seems to be the most helpful thing I can say.

The noble Lord, Lord Hodgson, asked about the Armed Forces Bill. So far as I understand it, the Armed Forces pension fund is unfunded. Unfunded schemes do not come within the remit of this Bill. Therefore, his concerns should not be raised in this context.

Various accusations were made regarding what was not in the Bill. The four big ones concerned annuities, compulsion, state pension age and the reshaping of state pensions. Strong arguments were advanced today by noble Lords on all sides of the House, which I respect, about the role of annuities and about the degree to which taking them at the age of 75 could be seen as discouraging oversaving, which is what you might want people to do when they are younger. However, I ask your Lordships to bear in mind that it is not a problem that affects many people. To float off the amount of money you would need to protect yourself against income related benefits and so on, you would probably need at least £100,000. The average pension annuity is only about £25,000. Some 95 per cent of people draw their annuities now before the age of 70. There is no reason to think that they seek or need extended choice.

I accept—the point was well made by my noble friend Lady Dean—that with increasing movement towards DC schemes, this will be an increasing and not a diminishing issue. However, at the end of the day, I ask your Lordships to consider what you are arguing and whether you are willing to strip away all tax privileges and the like; that is, that people should have the right to be able to save through their pensions to gain the tax concessions without any of the constraints to ensure that that money is spent on pensions. There is nothing to stop everyone of us in this House tonight saving for our old age in any other way we see fit without necessarily expecting a cross-subsidy from other people possibly less well off than ourselves in the form of tax privileged entry into pension annuities.
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As I say, there may be other issues that we can take up in future debates, but essentially the reason people do not wish to defer the measure until the age of 75 is because they wish to be able to pass on a tax privileged asset to their heirs. They can save in other formats but those do not enjoy the tax privileges that people currently enjoy with annuities.

I am sure that we shall revisit the issue of compulsion. The climate is changing on that matter. I do not think that five years ago we would have heard the arguments that we heard today. We await the report of Adair Turner. The debate on that matter, rather like the debate on annuities, will not go away and will increase in significance and importance over the next couple of years, as my noble friend Lord Lea said.

Accusations were made that we are not reforming the whole of the state pension system. I plead guilty to that. We are not reforming the whole of the state pension system, nor are we raising the state pension age. That would bear too unfairly on the poorest people in the poorest jobs who have the lowest life expectancy. Two-thirds of men and a half of women have already left the labour market before they reach basic state pension age now. The issue is to keep them in work in their 50s and 60s, not to extend their working years longer still. I ask noble Lords not to press that matter further.

We all share the objectives of security, stability and the building up of trust. We all accept that the Bill will need, and will incur, scrutiny. I emphasise that it has emerged after elaborate consultation exercises and that the regulations that will flesh out so much of the detail of the Bill will in turn be subject to consultation. The debate will not end with the completion of the passage of the Bill through your Lordships' House before the Queen's Speech. I appreciate that your Lordships have been grateful for the additional information that the officials produced. It involved a lot of work. I am glad that noble Lords opposite and my noble friends thought that that was a worthwhile exercise. We are all in this together trying to ensure that we build a better basis for the health of occupational pensions in the future.

Like others, I am appreciative of the courteous nature of the debate and the respect for information. Like everyone else, I am confident that together we shall ensure that the Bill will leave this House, if not changed, at least to your Lordships' satisfaction.

On Question, Bill read a second time.

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