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Baroness Noakes: My Lords, it is always difficult to know whether a government should explicitly take powers either to lend or to guarantee. I understand that there is no power to guarantee the borrowing of the PPF.
 
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In setting the PPF afloat without any ability to support it if things go badly, the Government are raising the real possibility that a crisis will occur. It could occur relatively quickly, if there were a bunching of schemes being taken into the fund. Will the noble Baroness explain how the Government see such a crisis being resolved, if the Government themselves have no levers at their disposal?

Lord Fowler: My Lords, I accept what my noble friend Lord Higgins said about the United States. It is a strong point. I understand that, to some extent, he is constrained by making commitments in this area.

Having said that, I agree with what the noble Lord, Lord Oakeshott of Seagrove Bay, said. The effect of the provision would be to make the Government the lender of last resort to the protection fund. At present, the board can borrow, but only from deposit takers, as set out in the Bill. As the noble Lord, Lord Oakeshott of Seagrove Bay, said, there could be difficulties with that. The Bill allows the Secretary of State to pay the board money, but only for administrative expenses. Payment of such money in compensation is specifically banned.

It is unrealistic to believe that the Government can divorce themselves from the issues as starkly as they want to do. The debate on the previous amendment, which got more fascinating the longer it went on, showed the difficulties that the Government were getting into by seeking to go down that road. Obviously, there is an issue of principle. What effect will a fund financed in the way proposed have on encouraging new final salary schemes? I suspect that it will be a further discouragement, not an encouragement. However, that decision has been taken, and that is not what we need to debate.

The Government's policy is to see the setting-up of such a protection fund. Certain consequences flow naturally from that decision. It raises the expectations not only of scheme members but of the public generally that, in all circumstances, they will be protected, at least to the extent that the Bill protects them. Ministers, not least the Prime Minister, make that point and claim that it is a great advance in pension protection. I simply do not see how, in those circumstances, the Government can say that they will never, in any circumstances, stand behind it. They are not able morally to make that point.

The public expectation is there, and consequences flow from that. I am sure that the Treasury will oppose what is proposed, but, if I may speak personally, I do not regard that as conclusive. The Treasury has been the biggest obstacle to sensible pension reform in this country over the past 20 years, so I am not persuaded by that argument.

It would be sensible—prudent—for the Government to make the amendment. The noble Lord, Lord Oakeshott of Seagrove Bay, has made a strong case.

Lord Lucas: My Lords, I agree with my noble friend. He has more experience of such things than I do. I was carried along by his analysis. I cannot see how, in a crisis, the Government would not be there to make
 
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sure that the pensions were paid. I cannot see them funding the deficit, but the pensioners of the fund should not suddenly find that they are not being paid because the fund is in problems. The Government cannot, having set the thing up, escape the moral responsibility.

As the noble Lord, Lord Oakeshott of Seagrove Bay, said, we must expect the fund to hit catastrophic problems at some stage. Things are bad enough at the moment, but, with the Bill enacted, they will be much worse. The provisions relating to how the regulator will go after deficits and require funds to be put in place and so on will mean that, as soon as a company gets financially near the edge in any way, the full Section 75 deficit will swing into place and accelerate the company down the slope. That will make it even harder to find a way of refinancing and make the whole business of refinancing extremely dangerous. It will increase instability and greatly increase the chance of major pension funds coming into the fund together.

The additional Section 75 deficit on the FTSE 100 is £100 billion. A total of £500 billion additional Section 75 deficit is out there and could come crashing into the fund. What if 10 per cent comes in at once? I can see why the Government are frightened by such a sum. They do not want to find themselves suddenly having a commitment to cover it. None the less, if such a thing happens, something will have to be done. A lot of people who had believed that the Government had done well by them will find that they are not there.

We have had enough in the pensions industry of promises that are not really promises. The Equitable Life business was the latest. Everyone believed that the bonuses were somehow magically created without any need to worry about the performance of the underlying investments. This is the same thing: people will believe that the safety is there in some magic way because of the Bill, but the risks are still there. Through this Bill, the Government are putting themselves in the moral position not only of having to stand behind the total deficit, because doubtless that will ultimately return to industry, but also of ensuring that pensioners receive their cheques every month. The idea that the Government will not let that happen is ridiculous.

I support the noble Lord, Lord Oakeshott. I am sorry to disappoint my noble friend on the Front Bench. I imagine that he has constraints from the shadow Chancellor; fortunately, Back-Benchers are not bound in that way.

Baroness Hollis of Heigham: My Lords, I disagree profoundly with the amendment. As the noble Lord, Lord Oakeshott, made clear, and the noble Lord, Lord Lucas, reconfirmed, it would make the Government the lender of last resort whereby they would stand behind the PPF and be a source of funding should people believe that the PPF needs it. In other words, the Government would be a funding agency for the PPF. Obviously, that has been pursued at various stages; industry would like nothing better under certain circumstances. But, for reasons on which I shall enlarge, we believe profoundly that, if people
 
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believe that the Government will, or could, be the lender of last resort, they will end up as such. To some degree, it would be a self-fulfilling prophecy.

I wish to enlarge on those arguments. Clause 114 sets out the funding arrangements for the administration costs of the board of the PPF. It provides for these costs to be met through a grant-in-aid. The Secretary of State will recover that expenditure through the administration levy. The amendment would allow that, in certain circumstances, the Secretary of State would also have the power to make loans to the board, loans that could be used not only to cover administrative costs but also to pay PPF compensation. The amendment would make the Government the lender of last resort, meaning that they could be required to act as guarantor for the Pension Protection Fund.

There are profound reasons why I feel strongly that the amendment is wrong, not merely as a matter of fact or on grounds of industry best practice. On all those issues, I have tried to respond to noble Lords, to recognise their expertise and to see where there can be a meeting of minds. But there are issues of principle involved; this is one of them.

Lord Higgins: My Lords, the Minister knows the position that I have set out, but for the first time she has used the word "guarantor". Given her position, is it not wholly inappropriate that Ministers in another place have repeatedly used the expression that the system "guarantees" the position of pensioners? She, this House and I recognise that that is not so. Can she have a word with Ministers at the other end and tell them that they simply must stop doing that, if she is to maintain the position that she is setting out?

Baroness Hollis of Heigham: My Lords, I take the noble Lord's point. I do not have the words of my honourable and right honourable friends from the other place before me, but I do not want to be tempted into a linguistic debate on what was said at the other end. I would like to deal with the amendments tabled today.

The first reason for resisting the amendment is that it would undermine the founding principle of the Pension Protection Fund and the Fraud Compensation Fund as compensation for members of occupational pension schemes. Those schemes should be funded by the people who in future may benefit from that compensation. It would not be appropriate to ask the taxpayer to finance such compensation.

The amendment would also change the nature of the PPF as an independent, non-departmental public body. To allow the board to request loans from the Secretary of State would seriously erode the arm's-length principle. I sense some picking and choosing on the part of noble Lords on the Benches opposite about where they want the Government at arm's length and where they do not. That would certainly have negative consequences. For a start, if the board could come to the Government for a loan, it would cease to be fully accountable for the financial management of the fund. It was apparent in our previous debate that members want the money to come
 
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but to preserve entire independence. The board's independence could too easily be undermined by others complaining that it should always take the apparently easy option of borrowing funds from government rather than making its own financially more appropriate decisions to change levy rates or borrow commercially.

Secondly, if the board borrowed money from government, it would be very difficult for the Government to enforce repayment of the loans, especially if it appeared that by seeking repayment the Government were forcing a rise in levies or a reduction in compensation. It would not be right for government to surrender control of taxpayers' money in that way.

Finally, some employers may be led to believe that, because the PPF is backed by government, it does not matter how many schemes end up in the PPF. We would thus create the problems of moral hazard that we seek to overcome. They therefore may not take full responsibility for their pension promises. In that way, the amendment would undermine the PPF's aim of restoring confidence in occupational pension schemes. An example that I have used ad nauseum is that, as ever, I have argued very fiercely on occasion with Members of my own side that the Government should make health payments for asbestosis. That would be fine, except that if the employer made no contribution and knew that the Government would pick up the bill, one can be sure that no employer would ever secure their properties against asbestos. There is an issue about where responsibility lies.

The noble Lord, Lord Oakeshott, asked me about the Pool Re insurance scheme. Pool Re was set up in 1993 to ensure that terrorism insurance would continue to be available, following the withdrawal of insurers from provision of terrorism insurance for commercial property. Therefore, the Treasury came in as the re-insurer of last resort for Pool Re, protecting it in the event that it exhausted all its financial resources following claim payments. The Government recognise that there are circumstances in which they have a role as re-insurer of last resort to prevent or mitigate market failure where there is a substantial public-policy interest in pooling risk, and where the market is currently unable to provide insurance. In that situation, the market could not provide the insurance therefore the Government took over the risk.

The noble Baroness, Lady Noakes, asked what assumptions the Government had made about the flow and the likelihood of such severe bunching that a crisis could arise. The estimate of the amount that the PPF needs to collect to meet its liabilities has been based on actuarial modelling of PPF finances over the next 20 years, given a range of assumptions about several factors, including pension schemes, funding levels and rates of insolvency. It includes an assumption of at least one big FTSE 100 company going bust every five years—around one company in every 250 possibly going under. We anticipate that
 
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0.04 per cent of all DB-scheme sponsoring employers could go insolvent in each year. That is based on GAD analysis of historical data.

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