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Lord Oakeshott of Seagrove Bay: Can the Minister help on the question of how long assessment periods are likely to last?

Baroness Hollis of Heigham: I apologise. This will be a part of the circulating note but, basically, we expect the assessment period to last at least 12 months. Let me run through what we expect to happen in the briefest of terms. The assessment period begins with the occurrence of a qualifying insolvency event. During the assessment period, the board must determine whether a scheme rescue is possible and obtain a valuation in order to determine whether a scheme has sufficient assets to buy out the PPF level of liabilities. Of course, these things can happen in parallel.

The length of time it may take to determine whether a scheme rescue is possible will depend entirely on the circumstances surrounding the solvency of the
 
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employer. However, the Insolvency Service has advised us that in almost all cases it will take 12 months for the fate of the employer to be known.

Then, before work can continue on valuation, there has to be a data cleansing exercise, data reconciliation with the national insurance scheme and so on, all leading to determining and valuing assets and liabilities. Once the board has approved the valuation and issued it to the regulator and the trustees or managers of the scheme and the employer, we expect and intend that the trustees will forward to individual members a summary of the valuation, in particular where the assets exceed the liabilities and vice versa; whether or not the scheme is likely to be taken into the PPF; and the relevant data about individual members' PPF compensation rate.

The valuation can be challenged not only by the trustees but also by the members. For example, if the valuation indicates that a member has 20 years' rights in the scheme but he believes that he has 25, he can request a review to correct that. So the approved valuation is reviewable. We do not yet know the time period in which a review could be raised—it will be set out in regulations—but we have to allow time for that.

So given that the Insolvency Service believes that it will take 12 months to establish the insolvency event and scheme rescue, and given that—although it may happen in parallel—there will be quite an elaborate valuation of both assets and liabilities in which we have to establish a right of appeal for individual members, it seems to us that 12 months is the minimum time—it may well be longer—for the assessment period to run for any particular scheme.

I am very happy to include this in the piece of paper I offered to circulate earlier. I am able to do so because I have already seen in my own briefing a version of it. I do not know whether that answers the noble Lord's question but, when I raised the same question, it persuaded me that 12 months was probably a minimum rather than a maximum time in these circumstances.

Baroness Turner of Camden: I have listened carefully to my noble friend the Minister and I am grateful for the assurances that she gave towards the end of her statement. However, I am unhappy about the possibility of reductions in ill-health pensions. In my experience, ill-health pensions are usually awarded after a fairly rigorous medical examination. A fairly rigorous report emerges to the effect that the person concerned has to be awarded a pension because he or she is no longer able to work properly.

In those circumstances, I am really unhappy about a situation in which that pension can be reduced for a period as long as 12 months. I welcome the kinds of assurances that my noble friend has given us. She mentioned appeals, for example, and that there would be an appropriate appeal mechanism for people in that situation, but I am not terribly happy about it.

Baroness Hollis of Heigham: In direct response to my noble friend, obviously there will be appeals. There will be a two-stage process. A person may not only go
 
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through the PPF review process but can go to the PPF ombudsman. His determination could then be referred to the High Court or the Court of Session in Scotland on a point of law. I do not expect it to happen very often, but it is one of the reasons for the elongated period of assessment. The two-stage appeal process is required by the ECHR.

I shall be surprised if there is more than a tiny number of revocations of ill-health pensions. However, given that what will really bite on some people going into the PPF is not so much the 90 per cent level of compensation but the cap on compensation—particularly for senior, more highly-paid individuals—I can see how attractive it would be for those individuals to arrange an ill-health pension on the grounds of stress and so on.

I believe that the schemes and the PPF need protection. My noble friend is right about people who have left work for what Members of the Committee would call a genuine reason, and there should be no problem for them. But, looking at the situation from a disability benefits point of view, I am well aware that, unfortunately, on occasions, there can be some manipulation. I am not suggesting that this applies to people receiving disability benefits in particular, but the situation can be manipulated and we have to have some protection. Where directors and highly-paid individuals know that a scheme may come into PPF and know that they can organise a more advantageous pension outside it, they might seek to follow that route. All we are doing is providing insurance—a check, if you like—for the PPF to ensure that a pension is valid and appropriate. However, as I have said, for the vast majority there should be no problem whatever.

Lord Higgins: I share the disquiet of the noble Baroness, Lady Turner, about all this. We are not only talking about an assessment period of 12 months—and we are now getting a clearer picture of what that will involve—but apparently it can be retrospective for three years. So a particular pension scheme can decide that various members should retire on ill-health grounds and then, three years later, after they have retired, the scheme runs into trouble and the board states that it will review the situation and that if they do not like it they can go to the High Court or the ombudsman or whatever.

I wonder whether the noble Baroness's view as to the extent of this is valid. Directors and so on are frequently not in the main scheme anyway. My own experience is that when most pension trustees consider ill-health problems, they set up a committee, which goes into the matter in considerable depth and carries out appropriate examinations and so on. Trustees are as concerned to protect the assets of their funds as the board will be. That is normally carried out, and obviously it depends on one scheme as against another. However, I do not think that there is any great incentive for the trustees to pay out, unless, as the noble Baroness says, they are directors or so on, which I do not think is relevant. I am concerned that people who retired three years ago will suddenly find that
 
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their ill-health pension is reviewed and eventually, presumably, reduced as a result of the Bill, whereas otherwise payment would continue in the normal way and at the rate originally agreed.

I do not like the feel of this provision at all. It feels very odd. I am not at all sure that the provisions in these three clauses are justified.

Baroness Hollis of Heigham: The provision is in the Bill because of the issue of manipulation in the years preceding the scheme possibly going into the assessment period, which was raised by the Conservatives in the other House. Therefore, these clauses are in the Bill partly in response to concerns raised, as I understand it, by the Official Opposition in the other place, that there could be manipulation of the scheme and changes of the rules at the point that insiders knew that the scheme was in trouble, in order to maximise the advantage to individuals. These proposals are therefore in response to the concern raised by the Official Opposition in the other place.

I want to give an assurance that this is not about trying to take pensions away from people who have legitimately retired. We are trying to protect the scheme, the PPF and the levy payers from artificial manipulation of the rules of the scheme in the preceding three years of the scheme's introduction.

I think the same is true in the States. If changes are made to alter the benefits, increase the liabilities and reduce the assets that come into the PPF and which appear to the board, the Ombudsman, the courts and so on as an artificial manipulation of the situation, the PPF must have some power to protect itself. If it did not have such a power outside organisations paying the levy could rightly be worried that there was a potential for exploitation at their expense.

However, I have no reason to think that this provision will ever be exercised in any circumstances where the PPF board believes that manipulation has occurred. More to the point, once the knowledge of these arrangements is more widespread—and clearly this is going to occur over the next two to three years—it will actually act as a discouragement to such artificial arrangements being established. I hope that as a result the number of such cases will be reduced.

The reason for using three years is that we think that this is a period when trustees or directors could be aware that the employer may be going bust. Therefore, in the rare cases when they possibly could think about manipulating funds and even abusing the PPF, we seek to protect the levy payers and the PPF on their behalf against such manipulation. It is not so very different in some ways from the issue of the balance on compromising debt. Where ill health is genuine, there should be no problem. If it is not and it is manipulation, then, in response to the concern of the Official Opposition at the other end of the building,
 
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these and similar issues were addressed by the Government before the Bill came to your Lordship's House.

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