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Baroness Hollis of Heigham: Yes.

Lord Higgins: I am now clear about the situation. We have a scheme where the trustees have been unable to secure a full buy-out but can they secure a partial
 
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buy-out? The clause specifically refers to a full buy-out—the implication being that they could possibly go for a partial buy-out. But I am not clear whether they could secure a partial buy-out and a closed scheme for the rest, so to speak.

My other question is whether this is wholly outside the PPF; that is, is it simply the case that the board is saying, "You must try for a full or partial buy-out and, if you cannot, it becomes a closed scheme"? But does the matter come outside the PPF at that point? Most of the Bill is concerned with the PPF or the financial assistance scheme or whatever. But here the board suddenly seems to be setting up a quite different animal which does not come under the PPF. It becomes a closed scheme but the trustees and so on remain in operation for the members who are already in it. It is really at that point nothing to do with the board. Does the board wash its hands of the scheme at that point? Does it then have no further influence on it at all?

Baroness Hollis of Heigham: The situation is that the scheme is being wound up but the assets are greater than the protected liabilities that will come under the PPF. Therefore, in principle, it should be able to buy out its liabilities through an insurance contract. It cannot do so because of the size of the fund, so it becomes appropriate for it to be a closed scheme. It is not closed in the sense of a conventional DB or DC scheme closing to new members, but it effectively becomes frozen. It is a scheme in wind-up that cannot actually wind up.

If, for whatever reason, the scheme could not pay its members or dependants the level of protection offered by the PPF, the PPF would gain. That scheme would come into the PPF. The size of the default is not an obstacle to coming into the PPF but the scheme would normally stay outside the PPF because its assets meet its protected liabilities. It can offer pension benefits to members greater than would be obtained by those members within the PPF, but it cannot meet that obligation by buying annuities because of the size of the scheme. Should it not be able to offer levels of benefit of at least as good quality as the PPF and the PPF has certainly not washed its hands of it, the PPF is in play.

We are talking about large schemes with sufficient assets such that it is in the members' interests to stay outside the PPF, but that cannot discharge those obligations by buying insurance contracts. Therefore, they continue as closed schemes—effectively frozen schemes.

Lord Higgins: That is very helpful. I now understand the matter rather more clearly, but it means that we are using "closed scheme" in two different contexts.

Baroness Hollis of Heigham: That is certainly true.

Lord Higgins: That seems highly undesirable, and we should have thought of some other terminology. I was certainly confused originally by what was meant by a closed scheme. I am also not entirely clear why the
 
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PPF is involved. If I understand correctly, there cannot be a full buy-out. A scheme becomes a closed scheme in the sense that we now understand to be intended, but the PPF then has no more to do with it. That is the end of the matter.

Baroness Hollis of Heigham: No, not quite. The scheme stays outside the PPF but the PPF still has a role in terms of issuing or ensuring financial directions of the scheme in order to protect the assets so that the scheme does not later enter the PPF. There is that continued responsibility on the PPF. For whatever reason—through the stock market or whatever—one could conceive of such a closed scheme in due course coming into the PPF if it could not meet its obligations, but the PPF will continue to make sure that the scheme is not accidentally or artificially manipulated in such a way that the assets are not run down, given the health of the sponsoring company and employer, which will of course be extremely dubious. That is why it would be in such a situation.

Baroness Turner of Camden: This is a rather important point, and it is really rather confusing. I regret to say that it is very common nowadays for firms to take a policy decision that they will not provide a final salary scheme to new staff. Therefore, so far as concerns the existing scheme, we may use the terminology "closed", but in fact the scheme is still there; it is quite viable. New staff are usually given—if anything at all—a scheme based on a money purchase arrangement. That is very common, so we need to be absolutely clear about the differences. I am very glad that the noble Lord, Lord Higgins, has raised the matter as it is important.

Baroness Hollis of Heigham: The confusion arises because—my noble friend is entirely right, as is the noble Lord, Lord Higgins—"closed" is used in two different senses. Some ongoing companies close a DB scheme and open a DC scheme or they create a hybrid between the two. That is one use of "closure", but we are talking about an entirely different sense of it in which a scheme that is being wound up and would have gone into wind-up by buying out the liabilities or responsibilities through insurance contracts cannot do so, given the size of the scheme and the state of the market. Therefore, it is continuing as, so to speak, a frozen scheme. The PPF continues to have a responsibility to ensure that the assets which by definition surpass the liabilities—that is why the scheme remains outside the PPF in the first place—continue so that the scheme does not subsequently fall into the PPF. Should it have to do so in due course, it will do so.

Lord Borrie: My noble friend Lady Turner of Camden and the noble Lord, Lord Higgins, have commonly said, several times, that what people outside talk about as "closed schemes" is quite different. The heading in italics above Clause 144 uses the phrase "Closed schemes" but nowhere is it clearly defined. Moreover, rather like a door, schemes can be
 
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closed one minute and opened again the next. They can be looked at from time to time by the Pension Protection Fund board. Under later clauses—they are only a few clauses later—schemes can be reconsidered and brought into the fund if circumstances change. From the point of view of wording and understanding, there really could be improvements but, having thought about the matter only as others were speaking, I certainly do not have any positive way of putting things.

Baroness Hollis of Heigham: I entirely accept that, within pensions terminology, "closure" and "closed schemes" are used in two different senses. Let me see whether there is any way of differently describing what is happening. What we are dealing with in the clause is very clear—large schemes that should be winding up because they have assets that out-price their liabilities. In the normal course of events, if they were modest-sized schemes with liabilities of £50 million or whatever, they should be able to buy those out by securing annuities from members that they would draw down then or in future. They cannot do so given the state of the market, which, as has been explained, is a duopoly. Therefore, they need some different form of outcome. It is not appropriate for it to go into the PPF; nor should it, because the assets surpass the liabilities, which would mean that members would as a result have artificially depressed benefits that they do not need to have. That is what would happen if they went into the PPF, given the cap and the 90 per cent funding.

All that said, it is clear that if the wording adds not exactly to the confusion but to a certain degree of difficulty for Members of the Committee, we should look at it. I can make no promises but I am open to suggestions. I do not promise half a bottle of champagne for the best redefinition, but perhaps we should come up with a clearer or different label so that "closed scheme" does not apply to two different beasts, which is what it does at the moment.

Baroness Barker: Perhaps I might seize the opportunity of this spirit of clarification to ask one question. The noble Baroness explained that she was talking about a scheme that did not come within the terms of the PPF because it had the assets to meet its protected liabilities. Why should the scheme then be dealt with by the PPF rather than the regulator? I understood from previous discussions—I am going back a few months before the Recess—that a vast swathe of the regulator's activities was to look at schemes in danger of coming within the remit and the clutches of the PPF. Why should the schemes be different, whatever their terms? They appear to be "frozen at a moment in time" schemes. Why should they be treated by a different body?

Baroness Hollis of Heigham: Basically, if the scheme had been sufficiently modestly sized, there would have been bought-out insurance contracts and that would have been the end of the matter. Those pensions would have been secured ad infinitum. Because of the size of a scheme, it is not in that position. It therefore depends,
 
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based on its regular valuations, on ensuring that there is an adequate match between its assets and liabilities. The PPF is concerned to ensure that that adequate match is not reduced in any way and it seeks to ensure that the scheme does not come within the PPF. That is why the PPF has the responsibility.

In a way, we are talking about a method of continuing to keep a shadow of an assessment period, as opposed to a regulator. With a regulator, one is dealing with a solvent company and pension scheme over the solvency of which there is a question mark. On this matter, we have an insolvent employer but an apparently solvent pension scheme which would normally have met its obligations through insurance contracts, in which case all would have been secure, but which cannot do so. Therefore, the PPF must continue to have a watchdog role in order to ensure that there is no artificial or inappropriate adjustment of the ratio between assets and liabilities such that that scheme, which would be substantial, would subsequently come into the PPF. If it did so, it would be to the disadvantage of not only possibly the PPF but of members, who would then receive a lower rate of benefit.

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