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Lord Higgins: Is the noble Baroness saying that the clause, once amended by these amendments, may create a situation where a particular individual receives less than he would if the insurance company had paid in the normal way?

Baroness Hollis of Heigham: There could be a situation in which the individual could receive either less or more outside the PPF than he would receive if he went into the PPF. We are trying to ensure that he will receive the same level of PPF compensation.

Lord Higgins: At the same level as he would have had before the board became involved?

Baroness Hollis of Heigham: No, the same level as other members in similar situations within the PPF.

Lord Higgins: That would mean that an individual would have an arrangement whereby an insurance policy was taken out and he would receive certain benefits, but if it so happened that the scheme became an eligible scheme in the assessment period, he might receive less. This amendment achieves that. In that case, I believe it is somewhat objectionable.

Baroness Hollis of Heigham: As I understand it, there are relatively few insurance contracts: most people come within the ordinary scheme. Some employees may have an insurance contract because the benefits are extremely expensive and an insurance contract has been taken out to protect them. If the scheme as a whole came into the PPF, existing pensioners would have 100 per cent of their benefits protected through compensation. Others would have 90 per cent protected. It would be unreasonable for some people, because they had a special arrangement through an insurance contract, to be able to come into the PPF and for the PPF to be expected to honour compensation. Had those people been within the ordinary range of members, they would be receiving 90 per cent, but they would now get 100 per cent or even more. That is why we are ensuring that the
 
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compensation scheme treats all people in the same way. There is therefore a power to override the insurance contract in such situations.

Lord Higgins: The compensation scheme overrides the existing arrangement, which has nothing to do with the fact that it has gone into the control of the PPF. I understand what the Minister is saying—I think—and no doubt other Committee Members also do, but it is slightly worrying. To restate the case, as I understand it, there is a scheme that insures a particular individual's rights. That is a direct arrangement through the scheme for paying out benefits for which an insurance premium has been paid. The Minister is saying that once one is into the clutches of the board everyone must be treated equally, even though some have made that particular arrangement. In such circumstances, I am not sure who gains, although I am clear who loses. The insurance benefit goes into the general pool. That is an extraordinarily odd arrangement and we shall need to think about it.

Baroness Hollis of Heigham: The arrangement is with the scheme and not the individual. We are seeking to ensure that everyone is treated in the same way, regardless of how the trustees have arranged for them to be paid. In a DB scheme, the trustees may have decided that the majority of members of that scheme can expect to receive their pension through the normal pattern of payment. However, they may have decided that some members should lay off the liability through an insurance contract, which would still come out of the scheme assets that the trustees are handling. If the scheme then goes over into the PPF, it would be unreasonable in all fairness artificially to continue to protect what may well be rates of payment well above the compensation rate to other members of the same scheme for which the trustees are responsible.

In practice, we expect that the opposite will be the case. In most insurance cases it will not be possible to reach the PPF level of funding. We are trying to ensure that, once the scheme goes into the PPF, however the pension promise was to have been delivered—whether through an insurance contract or not—all the members of the PPF are treated in a similar and equitable way in terms of compensation.

Lord Higgins: Even though they were not party to this particular insurance? Only some of the employees would be insured under the scheme and not the great mass. Therefore, surely it is not worth their while to be insured.

Baroness Hollis of Heigham: That may or may not be the case. However, we are seeking to ensure that the individuals within a scheme whose pension promise by the scheme has been met in a different way are none the less treated in the same way when they come into the PPF. Otherwise, it would be unfair and the extra cost would have to be picked up either by the pension levy or in some other way.
 
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Viscount Trenchard: I believe that the noble Baroness is confusing fairness. In this case, I find her definition of fairness quite hard. I understand well that the aim of the Pension Protection Fund is to protect people whose schemes have fallen into difficulty. However, to treat them fairly means that they should all be treated in the same way. That seems to me to be wrong when not everyone who is in any scheme that goes into the PPF has the same level of pension benefits. In addition, some people in one scheme may have their benefits insured and others may not. On the assumption that those differentials were considered to be fair prior to the scheme falling into difficulty, to eliminate those differentials is not fair, as the noble Baroness suggests, but is patently unfair.

Baroness Hollis of Heigham: I really disagree with the noble Lord on this matter. I shall give an example. Mr Y has an entitlement—a contract of insurance for £30,000—and Mr Z is also entitled to £30,000 through the normal DB scheme. Under the PPF rules, without this clause Mr Z would come into the PPF and receive only 90 per cent compensation. If we did not have the right to override the contract of insurance, Mr Y would continue to receive the £30,000 protected by the insurance contract. In my view, that would be unfair.

Lord Oakeshott of Seagrove Bay: I have a factual question. Is the effect of this overriding of the insurance contract to reduce the amount of money that insurance companies would pay?

Baroness Hollis of Heigham: I do not believe so. The trustees have taken out the insurance contract to protect the assets of the scheme. Essentially the contract is an asset of the scheme which should transfer to the board. Once within the board, the payments to individuals are made at the same compensation rate for everyone in that same category.

Lord Oakeshott of Seagrove Bay: Effectively there will be no loss of payment by the insurance company into the pension fund. The important point is that we do not want to let the insurance companies off the hook, do we?

Baroness Hollis of Heigham: Absolutely not. We are trying to ensure that two people, who expect the same outcome, come into the scheme where both are exposed to a 90 per cent compensation rate. We do not want one of them to be protected artificially at 100 per cent when the other is protected at 90 per cent simply by virtue of the way the matter is laid off.

Lord Oakeshott of Seagrove Bay: That is a different question.

Lord Higgins: Leaving aside the question of whether the insurance company pays up in those circumstances, it would appear that we are legislating to override a series of individual insurance contracts and allocating the proceeds from someone for whom the policy was designed to a quite separate group of people. I can think of no precedent for doing that. I
 
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doubt that we can get any further this afternoon. We are becoming bogged down on this matter. It raises some very difficult issues that we should consider.

On Question, amendment agreed to.

Baroness Hollis of Heigham moved Amendments Nos. 195D to 195G:

Page 87, line 33, at end insert ", or

(ii) such other liabilities as may be prescribed."
Page 87, line 34, leave out "This subsection applies" and insert—
"(4A) Subsection (4)—
(a) is subject to section 130, and
(b) applies"
Page 87, line 36, at end insert—
"(4B) Subsection (4C) applies where, on the commencement of the assessment period—
(a) a member's pensionable service terminates, and
(b) he becomes a person to whom Chapter 5 of Part 4 of the Pension Schemes Act 1993 (c. 48) (early leavers: cash transfer sums and contribution refunds) applies.
Section 141(2) (retrospective accrual of benefits in certain circumstances) is to be disregarded for the purposes of determining whether a member falls within paragraph (a) or (b).
(4C) Where this subsection applies, during the assessment period—
(a) no right or power conferred by that Chapter may be exercised, and
(b) no duty imposed by that Chapter may be discharged."
Page 87, line 36, at end insert—
"( ) Where a person is entitled to a pension credit derived from another person's shareable rights (within the meaning of Chapter 1 of Part 4 under of the Welfare Reform and Pensions Act 1999 (c. 30) (sharing of rights under pension arrangements)) under the scheme, nothing in subsection (4) prevents the trustees or managers of the scheme discharging their liability in respect of the credit in accordance with that Chapter."

On Question, amendments agreed to.

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