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"( ) The proportion of the levy to be raised under subsection (1)(a) and (b) shall be 80% and 20% respectively."

The noble Lord said: My Lords, in moving Amendment No. 212, it would be convenient also to discuss Amendment No. 217A. Noble Lords will appreciate that these amendments address essentially the same point. I shall argue them jointly, although we have come to the view that Amendment No. 212, although good, is inferior to Amendment No. 217A. At the appropriate moment, therefore, I shall withdraw Amendment No. 212 and in due course move and propose a vote on Amendment No. 217A.

Amendment No. 212 is the third of a group of amendments in which the point at issue is comparatively simple: what proportion of the levy raised under Clause 173(1)(a) and (b) shall be risk-based and what percentage on a scheme-based
 
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provision? While the noble Baroness earlier cited the views of industry—wrongly, in my view, given the context in which she made those remarks—so far as industry in general is concerned, I think that there is a strong feeling that the proportion on the scheme basis, which may be used to cover the overhead costs of the scheme and so forth, should be comparatively low while the risk-based element should be comparatively high. For that reason, our amendment suggests that the proportion ought to be at least 80 per cent.

The arguments are fairly simple and we discussed them extensively in Committee. It is now appropriate for the House to consider them. I beg to move.

Lord Oakeshott of Seagrove Bay: My Lords, I should make it clear that Members on these Benches also support the amendments. I have already discussed why, but I rise to quote briefly from a very perceptive letter I have received from one of Britain's pension funds. It sets out clearly the problem being faced by private pension funds in this country and why moving quickly to as full a risk-based levy as possible is important:

a strong employer behind them, as this particular one I am talking about does—

That sums up clearly what the big, solvent companies with strong backing are doing. It would be a real kick in the teeth for them to carry on with what is in effect a flat-rate basis any longer than necessary.

The noble Baroness talked about a chasm between us. Let me make it clear that on this amendment and on the thrust of these amendments, we are bound together with the noble Lord, Lord Higgins, with hoops of steel.

Baroness Hollis of Heigham: My Lords, perhaps there is a profound misunderstanding between us. The noble Lord, Lord Oakeshott of Seagrove Bay, said that companies should not have to have a flat-rate levy any longer than they have to. Fine. After the initial one-year period it is entirely in their hands. If they wish to produce the information required for the valuation
 
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so the regulator of the board can determine what their levy would be, they may do so. The assumption here is that the Government are delaying them going into a risk-based levy when they wish to do so. That is not true.

Lord Oakeshott of Seagrove Bay: My Lords, let me explain the issue to the Minister. One cannot have a situation after the first year where some companies effectively are able to go on to a risk-based scheme and others are not. The people paying the risk-based levy at that time will not be paying the right rate. Everyone has to go over to it all together; that is obvious.

Baroness Hollis of Heigham: My Lords, on the contrary. That is exactly the point in dispute between us. It will certainly be the case that during the transitional period there will be a mixed economy in which all schemes will have some scheme-based levy and others will carry, by choice, a risk-based element. It is clear that insofar as the good companies seek the risk-based element in the hope of reducing their premium, this will have an adverse selection effect on the scheme-based levy for the rest. However, that is the choice of those companies—the very same companies quoted by noble Lords opposite. They have precisely that option and that flexibility now. The amendments produced today are built on a false hypothesis that it is either one or the other—flat rate or risk.

No, my Lords; that is not the case. I have circulated at least three trees' worth of paper on this. After the initial year—we have just discussed the date—we shall phase in over the transitional period the risk-based levy; that is why it is called a transitional period. We would expect companies to come within that on a three-year valuation cycle. If they feel they wish to bring that valuation cycle forward, they can do so, once the risk-based factors have been determined which is what the first year will be spent doing. Thereafter they will be able to go on to the risk-based levy.

The noble Lord is exactly right. He may well find a large company with 100,000 members that is well run and well funded with a secure employer coming on to a risk-based levy in year two or year three. It will have judged, probably accurately, that the collective levy will reduce accordingly. Another company, also as large but with a funding deficit and a struggling employer, will decide that it is better off remaining with a scheme-based levy as long as possible since, once the risk-based levy comes in, it will find that its premiums go up as a result.

We want to accelerate movement to the risk-based levy. There is no difference between us. Therefore the industry will have to address these adverse selection issues as it sees fit. It is not the Government saying they cannot move on to a risk-based levy. After year one, they can, but it is up to the companies to determine their entry to the scheme rather than for the Government to lay it down.

I have to say I am very surprised. We could almost be exchanging positions here. I would have expected the Opposition to say that individual companies should
 
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determine whether they go into the risk-based levy since they alone will know, when they have their valuations and make the judgment call, whether they wish the arrangement to be flat rate or some combination of the two elements. Instead, we would deny that flexibility or judgment call to companies and, if we followed this amendment, we would impose a straitjacket on how companies best see the way forward in terms of responding to this levy call. Members opposite have got it wrong. They seem to think that it is either one or the other. It is not. There is a phase-in period during which those companies that wish to do so can bring themselves into the risk-related levy ahead of the terminal point of the transitional period.

Why do Members opposite want to tell companies when they can enter the scheme? We are not doing that. We are saying that they can come into it as they see fit. I cannot believe that Members opposite, who say they are speaking for the industry, want to impose a government-ordained timetable as opposed to allowing companies to determine their own.

However, that is a bigger issue. I had not meant to say anything about it but there is such a profound misunderstanding of how the transitional arrangements will operate that I thought it was worth sharing my perceptions with the House. I shall now formally deal with the contents of the amendments.

The amendments would require the board to collect at least 80 per cent of the levy through the risk-based pension protection levy. Yes, as soon as maybe, I agree, but I cannot support the amendments, for reasons that I shall come to later. They would require the board to recover its administrative costs through the scheme-based pension protection levy and prevent it exceeding the administration costs—but the problem is that if you have very small schemes of two or three you will actually exceed the money you collect—and they would give the Secretary of State and Parliament control over the total amount of levy the PPF board could collect in any given year.

The approach to calculating the risk-based pension protection levy as the responsibility of the board has yet to be finalised. While we expect the risk-based levy to account for approximately 80 per cent of the levies, certainly by the time the transitional period is complete, in advance of the methodology being established it would be extremely unwise to restrict the board's flexibility in setting the levy's structure. For example, until it is known how the risk-based levy is to be determined, it is uncertain how much the worst-run, most underfunded schemes will be required to pay simply because of the problem of adverse selection. The noble Lord, Lord Oakeshott, identified that problem but is not willing to follow through the consequences of his remarks.

In order to prevent those schemes being landed with an unsupportable charge—a risk identified by NAPF—it may be necessary to impose a scheme-based levy of a value greater than 20 per cent in order to avoid the floor and ceiling of the risk-based levy being so wide that it would produce a scheme-based levy that is unacceptably low.
 
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Conversely, the way in which the risk-based levy is calculated may enable the board to collect more than 80 per cent of the levy. Again, the amendments would prevent that. The amendments would freeze us into 80 per cent to 20 per cent, even though the smaller schemes—the two person schemes, the three person schemes—which you may wish to keep on a scheme-based levy would then be faced with costs wholly disproportionate given the way in which adverse selection has worked. Companies which would do well out of the risk-based levy have pulled out of contributing in the way in which they would under a flat-rate scheme.

We appreciate the importance of a risk-based levy in ensuring that the charge on well-run schemes is fair. That is why we have stipulated that the risk-based levy must form a minimum estimated 50 per cent of the total amount to be collected. We believe that will strike the right balance. But we are dealing with a zero-sum game—that is what adverse selection is all about. If some companies pay less, others will pay more. If the noble Lord's amendments are carried, it could make some struggling firms face an unacceptably high levy.

I now move to the second part of the amendments. I shall explain why we do not want the scheme-based pension protection levy to be linked to the PPF's administrative costs. I do not believe either noble Lord spoke to this issue—I agree that it is less of a blue sky issue than the one we have been discussing—but it may be worth spelling out our thinking on this and explaining why we are unable to accept the amendment.

As set out in Clause 115, the administrative costs of the board will be met by a grant in aid paid by the Secretary of State, which the Secretary of State will then recover through an administrative levy. This is quite separate to the pension protection levies with which Clause 175 and these amendments are concerned. This separation is important—as it is for other non-departmental boards—because it provides a clear demarcation between the expenditure and the income used to pay compensation, which is paid for by the levy, and the expenditure and income which is used to pay the administrative costs of the board.

The differing ways in which we are approaching this issue provides an important accounting clarity for the House. It will enable Parliament to scrutinise more closely the accounts of the PPF, which I am sure we will all welcome. It is worth noting that most of the executive NDPBs which operate at arm's length from government in the way in which the PPF will operate are funded in this way. Indeed, OPRA was set up and funded in this way, and the regulator will continue in a similar manner. I am sure that noble Lords do not want us to introduce a new method of funding other than the one we have for OPRA and other NDPBs. It would be unreasonable.

We expect that the scheme-based pension protection levy will have a particular role to play in ensuring that the application of the risk-based levy to struggling
 
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schemes does not result in an overall charge that is unsupportable. The amendments would ensure that the scheme-based pension protection levy could not exceed the administrative costs of the board. This would prevent the board using the scheme-based levy to control those unsupportable charges because, when compared to the overall levy, the estimated administrative costs of the board are insignificant. The board would therefore be forced to adjust the way in which it calculates the risk-based protection levy to take account of this. Again, that would be highly undesirable.

I have assumed that the third part of the amendments is intended to give the Secretary of State and Parliament control over the amount of levy the PPF board could collect in any particular year. Neither noble Lord addressed this point in their opening remarks but, given that your Lordships will be seeking, no doubt, to test the opinion of the House, it seems proper that I should specify what is going on in this area. The amendments would require the board to tell the Secretary of State what it estimates it will collect through the levies in the coming financial year. The intention is that if there was any change the Secretary of State would have to seek Parliament's approval via regulations. We believe that preventing government interference in deciding the rate of the pension protection levy is absolutely essential.

Again, I am surprised. I would have expected noble Lords on the other side of the Chamber to say exactly the opposite to what is in the amendment. It flies in the face of everything they say about "arm's length", "industry money" and "keep government out". Now they are trying to bring the Government back in. I cannot believe that is what they want to do.

The board of the PPF will be best placed to know what levy rate it needs to secure current and future liabilities. That is what the board, with its expertise, is meant to assess. We believe that the Government have no place in that kind of decision because political concerns could override what is best for the PPF. Indeed, the noble Lord, Lord Lucas, pressed me only three hours ago to say that there should be no political interference by government. That is until it suits the opposition amendments, whereupon we can have political interference by government. That cannot be sensible or decent.

I know we are all concerned about the possible impact of these freedoms on the levy payer. They are understandable concerns. But your Lordships know what safeguards are in place to prevent the board using any powers inappropriately in terms of the cap on the limit the board can raise and the total amount that it can raise. These controls are reflected in Clause 175, as your Lordships will know.

I could expand on these points, but I hope that I do not need to. Your Lordships know perfectly well the pattern of capping in terms of the levy that can be raised. We do not need the Secretary of State to do it; it is already there in the Bill, in the schedules and in the regulations.
 
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I ask Members opposite to consider this. We have an initial one year—now with a fixed date, which obviously we shall try to honour—of a flat-rate levy. We are also saying that over the next four years or thereabouts the risk-based levy will be phased in. It will have to be phased in on the basis of the three-year accounts, but any individual company can choose to come on to the risk-based levy earlier than that if they wish by having a valuation out of time. It is their choice if they want to pay for it. To ask all small companies to go for valuation out of time in year one or year two to get onto the risk-based levy would add something like £100 million in valuation costs to 50,000 schemes, many of which are quite small in number—two member, five member, 10 member.

That is not the Government's approach. We are saying that by the end of this transitional period companies will be on a balanced levy, largely risk based but partly scheme based. How quickly they come on to the risk-based levy will be for them, not the Government, to determine. It is their choice; the companies decide. The opposition amendment seems to state, "No. Companies do not know what is the best thing for them. The Government will tell them what to do". I do not hold that position. We have built this Bill on consensus with the industry and I am confident that the industry would prefer to determine when it goes on to the risk-related levy. The opposition amendments would not permit that to happen.

I invite Members opposite to think through the implications of government interference in the timetable of when companies come onto the risk-related levy; government interference in terms of reporting on how the board may or may not cap the money raised and so on. If we are not careful we will be turning the PPF into an arm of government rather than, as we all wish, an arm's length body funded by the industry for the protection of scheme members in ways best structured to avoid moral hazard. I think that the Opposition amendments begin to subvert that thrust. To go for this would be very unwise, so I hope that your Lordships will reject the amendments.


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