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Lord Higgins moved Amendment No. 210:
The noble Lord said: My Lords, I have already made preliminary remarks about this group of amendments. We are arguing very strongly that the scheme should be a risk-based scheme as soon as possible. The purpose of the amendment is to leave out the possibility that, after the end of the initial period, the Government would have powers to have either a risk-based basis or a scheme basis that is not risk based, or both. The amendment seeks to remove the possibility that they might be able to continue with a scheme-based basis—one that does not take risk into account—after the initial period. For the reasons that the noble Lord, Lord Oakeshott, and I have previously spelt out, in our view, at the end of the initial period, it would be appropriate for us to go to a risk-based basis. I beg to move.
Lord Oakeshott of Seagrove Bay: My Lords, as the Minister seems to think that there might be a chasm opening between the noble Lord, Lord Higgins, and myself, perhaps I may make it clear that that is not so. I apologise if in my enthusiasm I ran slightly ahead of the narrow definition of the previous amendment. But I wish to make it clear that we sing from the same hymn sheet on this issue. For the reasons that I have discussed at some length, we support the amendment.
Baroness Hollis of Heigham: My Lords, I thought that the noble Lord's hesitation on the words "hymn sheet" was because he was trying to work out what the nature of the breadth of the inclusive Church might be.
As regards the amendment, we intend to give the board the flexibility to set the pension protection levies as it best sees fit, subject to certain constraints. Our general concern is that this amendment would unnecessarily constrain the board to the detriment of schemes and employers.
The pension protection levies must seek to balance two issues: on the one hand they should reflect the level of risk posed by schemes so that, very simplistically,
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well run and well funded schemes pay less, which we all accept; on the other hand, we must avoid setting the levy in such a way that it becomes unaffordable for many schemes.
We anticipate that the board will do that by setting a predominantly risk-based pension protection levy alongside a smaller scheme-based protection levy. As noble Lords know, we expect that ratio to be about 80:20 per cent risk-based to scheme-based when the transitional period is mature.
The scheme-based pension protection levy will also ensure that every eligible scheme may pay something to the pension protection levies. That reflects the view that in the very long term no scheme represents zero risk. That will mean that the board will be able to reflect, with a fair degree of accuracy, the level of risk that a scheme poses to the PPF, but the underlying scheme-based pension protection levy will help to narrow the range of levy charges so that schemes in difficulty are not landed with an unsupportable levy.
Basically, we have got the problem of adverse selection: not being careful and going too fast in this way will end up so reducing the risk-related levy that the scheme-based levy has to soar commensurately. Those schemes therefore that have not just that but also have poor risk could find themselves having a level of payment that I think that we might all judge to be, at least initially, unacceptable. So we anticipate that in most years the board will set both protection levies as required by the amendments.
However, there are several occasions when setting both protection levies and applying the risk-based protection levy to all schemes may not be appropriate. Noble Lords may want to reflect on whether it is appropriate to follow their amendment through after hearing the examples that I will offer the House.
For example, there will be a number of extremely small eligible schemes that are required to pay the levy—applying an extremely complex risk-based calculation to schemes, which might have 10, 20 or perhaps 40 members, would be a case of using a using a sledgehammer to crack a nut—and providing the required information may be overly burdensome and costly for the scheme.
We therefore want to give the board the freedom to set a simplified levy for small schemes should it so wish. That may involve setting only a scheme-based pension protection levy. Noble Lords will remember that that scheme-based protection levy, although it is so to speak flat rate, also differentiates between deferred, active and retired members—it has different rates for those. In other words, it assesses the liabilities of the scheme as opposed to the risk-related levy, which seeks to determine the risk to entering the PPF. That is the different functions of the two levies.
It may be that after consultation the board will establish a method for calculating the risk-based pension protection levy that does not result in any extremely high charges. For example, the board may start with a maximum charge for particular sizes of
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scheme and then discount according to risk factors. If that is the case, we would want the board to be able to charge a risk-based pension protection levy only.
Lastly, if the board estimates to collect an extremely small levy in any given year, we do not want that impeded because the costs of assessment might come near the value of recoveries for whatever reason. It does not seem that probable but if, for example, it wants a small amount, the costs of going for the risk-based levy in that case might be excessive.
We are therefore allowing the board to set a scheme-based pension protection levy only when it estimates to collect less than 10 per cent of the levy ceiling in any given year. That is almost like a cost benefit—a point made by the industry that it feels would be wise.
I reassure your Lordships that in the majority of cases we expect the board to act in accordance with the spirit of the amendments. However, because of concerns that that would require us to force an unnecessarily complicated levy structure on small schemes, and because until the method of calculating the risk-based pension protection levy is settled, we do not know the extent to which the scheme-based pension protection levy will be necessary. We therefore do not want to require that of the board, so I urge the noble Lord to withdraw his amendment.
The difference between us is that the noble Lord believes that the information that is necessary will be available in ways that we do not believe. It will be a secure enough base to resist possible challenges, and so on. During the initial period, we intend to differentiate charges for active, deferred and pensionable members. After the initial period, it will be up to the board to decide whether to do it. We do not disagree, but the implications of the amendment would be to impose a risk-related levy for small schemes, for example, when that would be inappropriate, costly and regarded as a burden by small businesses. With that explanation, I hope that the noble Lord will agree that the gap between us is small. We want some flexibility, and I hope that the noble Lord will feel able not to pursue his amendment.
Lord Higgins: My Lords, I am surprised that the noble Baroness can produce arguments at this stage of the Bill that she has not used previously. One or two which she produced this afternoon were not made as clear in Committee.
We believe that it is appropriate that the PPF should impose, after the initial period, both a risk-based levy and a scheme-based levy. Obviously, with regard to the scheme-based part, that may cover overheads and so on. I stress strongly that this is on a broad-brush basis—we do not want to go to the last decimal point. But it should be possible to work out a reasonable assessment of risk in relation to each scheme that pays the levy. Otherwise, it would be unfair on those who enter the scheme.
The noble Baroness says that it would be to the detriment of schemes and employers, but I do not see how. The noble Baroness likes to call it a compensation
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scheme, but it is effectively an insurance scheme. The curiosity is that if one were not careful one would end up with a flat-rate levy where there is a danger that the people who are the soundest—either in terms of the ability of the employer to continue in business, or in the financing of the pension scheme—would not operate effectively.
I am not persuaded by the arguments of the noble Baroness. It is right to put a firm framework in place for the Pensions Protection Fund to work within. That should not be too difficult.
One could do it by category of scheme for small schemes, when perhaps the risk element is small compared with that of larger schemes. I imagine that the board will wish initially to do it by type of scheme rather than on a general basis.
Baroness Hollis of Heigham: My Lords, it would be impertinent of me to ask a direct question, but I take it that the noble Lord has heard the view of industry on this issue. The ABI states:
the transitional period, as envisaged by the Government—
The industry, as reflected by the ABI, is backing the Government's position as against that adopted by the noble Lord. That point was made by his honourable friend Nigel Waterson in Committee in the other place.
The feeling within the industry is that a two-year period of transition is probably unrealistically tight. It would prefer a transitional period of about four years. The noble Lord's honourable friend in the other place argued for what the Government are proposing. Because of consultation with the industry, that position no doubt reflects the industry's views, and those of the ABI.
The provision is not something that has been dreamt up by the Government. It is the result of consultation. One should be a little careful about appearing to go against the wishes and consensus that appears to be emerging from the industry that we have consulted.
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