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Baroness Noakes: My Lords, before the noble Baroness sits down, the explanation of subsection (3) seems wholly innocuous, but could the subsection be used, for example, to tell the board to invest in certain categories of investment? Could the power be used in that way?
Baroness Hollis of Heigham: My Lords, I am led not to believe so, but I shall clarify that point.
Lord Lucas: My Lords, I should be grateful for that clarification because my concerns were principally raised by the illustration that the noble Baroness chose to use in Committee. She said specifically that this clause could be used to direct the board to invest ethically.
Baroness Hollis of Heigham: My Lords, I apologise. I realise that noble Lords are handicapped by not having the possible draft regulations in their hands. The regulations could state, for example, the extent, if at all, to which social, environmental or ethical considerations are taken into account in the selection, retention and realisation of investments. That would be the kind of matter that the board would determine—not the Secretary of State.
Lord Oakeshott of Seagrove Bay: My Lords, before the noble Baroness sits down, can she clarify a point? Is she saying that ethical and social considerations will be matters for the board to take into account in its investment policy?
Baroness Hollis of Heigham: My Lords, this is Report stage. The statement of investment principles is a transparency measure only. The board must set out its own principles. Therefore, there is no scope at all for ministerial diktats and directions on how the board should invest. However, the phraseology of one of the draft regulations that we are proposing to issue—with health warnings attached, so that we know what will
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be considered in the investment principles—is, "the extent, if at all, to which social, environmental or ethical considerations". There is probably a division of views between the two Opposition Benches about whether that should be included. "If at all" it should be included will be for the PPF board to determine.
Lord Lucas: My Lords, I am very grateful to the noble Baroness for saying that she will circulate noble Lords with the draft regulations before we come to Third Reading. That will be crucial to our understanding of where this clause may lead. If the noble Baroness is going along those lines, I should be much more comfortable with something on the lines proposed by my noble friend Lady Noakes; that is, that rather than having a diktat, we must have regard to guidance. That would remove the possibility of this clause ever being used to override the amendment we have just passed, or the other objectives which are quite properly in the Bill as regards the management and investment of the fund.
The noble Baroness has not allayed my fears, but she has directed me to a considerable amount of reading and thought before Third Reading. I shall include my noble friend on the Front Bench in that. We shall certainly return to the issue if there are any remaining problems. To my mind, it is absolutely crucial that we get this right. It would be like leaving a cyanide capsule in someone's mouth and hoping he does not close his jaws. If this is wrong, it could cause such damage. It could entirely be misunderstanding. I shall know much more when I have read Hansard and the documents that the noble Baroness has but I do not. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 136 not moved.]
Lord Oakeshott of Seagrove Bay moved Amendment No. 137:
"( ) The Secretary of State shall have the power to make loans to the Pension Protection Fund in prescribed circumstances."
The noble Lord said: My Lords, the amendment stands in my name and that of my noble friend Lady Barker. It raises an important issue of principle, as all sides of the House recognise, on which we on these Benches feel very strongly. The effect of our amendment is to make the Government the lender of last resort to the Pension Protection Fund if the fund, at some future date, were to get into financial difficulties.
We know that there are provisions whereby the PPF can borrow commercially, but clearly if we are dealing with a situation in which equity markets are very depressed and firms are going bust in large numbers, the PPF will not be in a good commercial position to borrow money on the markets. Indeed, an effective government fallback guarantee of the fund's position, very similar to that which the Government happily employ in the case of Network Rail and a number of other areas, will make it easier for the PPF to borrow
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money commercially, as its first line of defence, if you like, without having to call ultimately on a government guarantee.
The reason we take that view is that, first, the Government have set up the Pension Protection Fund; they control appointments to its board; and, effectively, they have designed its basic rules of operation. In sum, the Government pull all the PPF strings, but what happens if it gets into difficulties? What will the Government say, "It is nothing to do with us, gov"? That is the epitome of power without responsibility.
It seems to us a matter of simple prudence to plan for emergencies before one sets out on a voyage as uncharted and as hazardous as I believe we would all agree the new PPF will be. We have had some very interesting, detailed and robust work by Professors Neuberger and McCarthy, pointing out how the risk of large claims on the PPF is likely to be very concentrated at some future date. I believe that we should all take that piece of work very seriously. We feel that that is an important issue.
Let me paint, in practice, the situation that we would be in if the PPF found itself in difficulties. We on these Benches do not believe that it would be appropriate to cut what we believe are the proposed, reasonably modest payment levels that the PPF will make. We are very taken with what the new PPF chairman, Lawrence Churchill, has been saying, that the PPF must do "what it says on the tin". As far as we are concerned, the levels of benefits that it proposes are "what it says on the tin".
For the fund to have to cut benefits if it were in serious difficulties would be a cruel delusion and deception to people whose pensions are paid by the PPF. They will probably already have been through the wringer, if I can put it that way, with their own company having gone bust and their own pension fund being unable to meet its liabilities. Then to make them suffer further pressure and difficulties, without the Government standing by as lender of last resort, puts them in, if I may use a police term, double jeopardy.
In sum, if the PPF were to be allowed to go down or even if it were in serious danger of going down, that would make Equitable Life look like a vicarage tea party.
There is a clear precedent for what we are suggesting in the Pool Re arrangement for the insurance of commercial buildings against terrorist attack. The Treasury explicitly stands behind commercial insurance companies and unconditionally guarantees their obligations. I have raised this matter a number of times in the House and in Grand Committee, but I have not received a proper answer. I appreciate that this is not the responsibility of the noble Baroness, but I must press her on this. I ask her to obtain the proper answer from the Treasury on this point.
The one answer she gave me in Grand Committee was that the Government would not wish to underwrite the PPF as last resort because not all taxpayers benefit—far from all taxpayers benefit from membership of defined
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benefit pension schemes. But that argument applies equally to the Pool Re arrangement. Far from all taxpayers—indeed, only a fairly small minority of taxpayers—own commercial buildings and, therefore, benefit from the Government standing behind insurance companies in that way. This is an important issue of principle and we shall wish to press the matter. I beg to move.
Lord Higgins: My Lords, the noble Lord, Lord Oakeshott of Seagrove Bay, is right to say that it is an important issue. We have given careful consideration to it and will await with interest the response to the point that he made about the Government standing behind those insuring buildings, and so on, that might be subject to terrorist attack. The Government, of course, in effect, stand behind individuals or other bodies on which a terrorist attack may have a serious impact.
I am surprised that the noble Lord did not compare the situation to that in the United States, where the body on which, in many ways, the PPF is modelled has run into very large deficits. None the less, even ahead of the presidential election, the US Government did not come to the view that they should act as lender of last resort.
One can envisage disastrous scenarios in which it may be difficult for the PPF to borrow in order to cover its responsibilities, although there are various ways in which the PPF could adjust its affairs to minimise that. Even without a disaster, there is scope for considerable peaks and troughs in the operation of the PPF. That could create difficulties, as I have stressed, in the early years of the PPF, before any substantial cushion has been built up. None the less, the argument made by the noble Baroness in Committee that the provision would mean that taxpayers would, in effect, guarantee the position, if, in a crisis, the Government were to act as lender of last resort, whereas only a comparatively small part of the population would benefit from such an arrangement, has considerable force. I am somewhat persuaded by that, although others may legitimately take a different view. I await with interest any further elaboration from the noble Baroness.
The other point that we debated in Committee was whether the cost of borrowing would be less on the part of the PPF, if the Government stood behind ordinary loans. The Government borrow at gilt-edged rates, and everyone else—even bodies such as the PPF—borrows at rates closer to or even higher than commercial rates. However, that point is separate from the main thrust of the argument made by the noble Lord, Lord Oakeshott of Seagrove Bay. I understand why he feels strongly about the matter, but I do not think that we will want to support the amendment. Perhaps, my noble friends will take different view.
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