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Under paragraph 18 of Schedule 1 the Secretary of State may provide financial assistance to the trustee corporation in the form of grants, loans, guarantees or indemnities and the Secretary of State may set the conditions for such assistance. An identical power is provided for PADA in Clause 72. These provisions clearly allow the Secretary of State to provide money to underpin the personal accounts scheme as grants or on other non-commercial terms. That has caused considerable consternation among the pensions provider bodies, which will be competing with the personal accounts scheme, as they can see unfair competition written all over the Bill. Bodies such as the ABI want there to be no public subsidy for the trustee corporation and are concerned at the amount of grant-aided expenditure that PADA is racking up.
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My amendments do not go as far as that. There may be expenses that, on public policy grounds should be met by the public purse but, if that is the case, there needs to be transparency about why those costs should be subsidised. The default position is that finance should be made available on commercial terms. That is, in most cases there will be a requirement for market interest and repayment terms. My Amendments Nos. 112U and 112V seek to achieve this for the trustee corporation, and Amendment No. 113P does so for PADA. They are not in exactly the same form, which is my fault, but could easily be harmonised for Report and the idea behind the amendments is the same. During the course of the Bill, I do not believe we can settle exactly how finance should be made available to the trustee corporation or to PADA. We believe that there should be a presumption that finance should be available only on commercial terms. As I have said, I have accepted that the reality is that some subsidy may well be necessary.
My amendments allow Parliament a modest involvement in agreeing whether finance is to be provided on a subsidised basis in future by requiring the Secretary of State to make a report to the House setting out why he needs to provide finance on a non-commercial basis. There is no other parliamentary procedure involved, but it is about transparency. As well as transparency to Parliament, it would allow other bodies, such as the National Association of Pension Funds, which has raised this issue with us, to scrutinise the reasons for subsidy and make representations if it feels that the subsidy is likely to cause an unfair advantage for the personal accounts scheme.
At present, the only information that will be available on funding from the pension corporation or PADA will come out when the annual accounts come out, which, as the Minister will be aware, could be 15 to 18 months after financial assistance has actually been given. We believe that that time period is too long in the context of the kind of transparency that should be available about such an important issue. I hope that the Minister will agree. I beg to move.
Lord Oakeshott of Seagrove Bay: I fear that these amendments will not work. I say that from bitter experience of having studied the definition of loans on commercial terms under the Political Parties, Elections and Referendums Act. Anyone with any business experience will clearly know that totally uncommercial loans made to a bust organisation, unsecured at low rates of interest, on commercial terms proved not to have any real meaning in law. I wish the noble Baroness more luck in getting something here, but I do not think she will. Even she accepts that there is a public policy argument for a certain amount of public help. It is very difficult to draw the line.
Lord McKenzie of Luton: There is an understandable interest in the way in which the personal accounts scheme will be financed and that it should not be given a competitive advantage over other qualifying schemes. Before turning to the specific points raised by these arrangements, I think it will be helpful if I explain how the scheme’s funding strategy will be developed and the principles it will need to meet.
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The Government are clear in their intent that the scheme should be self-financing in the long run. That means its set-up and operational costs being recouped from members’ charges. However, in the scheme’s early years, there will be a gap between its costs and revenues. The delivery authority is currently developing a strategy to bridge that gap. I am sure noble Lords will agree that we should not underestimate the complexity of this task.
The personal accounts scheme will be unlike any other scheme. It will be the largest occupational scheme in the UK, with possibly 4 million to 7 million active members; it will interact with nearly 1 million employers; it will be specifically targeted on a part of the market which existing providers find uneconomic to serve; and it will be required to admit anyone eligible to join, irrespective of whether the revenue they might bring will cover the cost of their account.
The scheme’s funding strategy will need to reflect these unique features, as well meeting the guiding principles which the Government have set out. These principles are that the strategy should deliver low charges for members, be based on our intention that the scheme is self-financing in the long run and delivered at nil cost to taxpayers, be commercially viable, not provide the scheme with an unfair advantage, and comply with European rules on state aid. I hope this brief overview of how the scheme’s funding strategy will be developed and the principles it will be based on has been useful. I will now move on to the amendments.
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Given the size and complexity of the task that PADA faces, it is important that legislation should enable the authority to carry out its work and explore all options available. We must avoid ruling out options at this stage that could later prove to be in the best interests of members. These amendments would limit the options by requiring that financial assistance to both the authority and the trustee corporation should, in the first instance, be on commercial terms. I should make it clear that, in resisting this amendment, we are in no way setting our face against commercial funding of the scheme. Funding from commercial providers or from Government on commercial terms are options under consideration. Legislation should not, however, make commercial terms the overriding objective of the funding solution. As I have said, the scheme’s funding strategy will need to balance a range of factors.
It should also be remembered that the authority will continue to incur costs in relation to activities, such as providing advice to the Secretary of State, that it is not appropriate to pass on to scheme members through charges or to expect to be funded commercially. Indeed, Amendments Nos. 112V and 113P appear to recognise that there are circumstances where commercial funding would not be appropriate, but require a detailed report to the other place before other funding can be put in place. Transparency is a key issue. I agree that there is a need for transparency once decisions have been taken and hope to reassure the noble Baroness that such transparency will exist.
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As non-departmental public bodies, the authority and the trustee corporation will have to publish annual reports and accounts that will be placed before Parliament. The receipt of funding, from whichever sources and on whatever terms, will be made clear in these documents, subject to the need to protect any commercial negotiations occurring at the time. In addition, my department will provide information on funding within supply estimates, which are laid before Parliament each year for approval. As noble Lords will be aware, supply estimates are the means by which the Government seek authority from Parliament for their own spending each year. They reflect resource and capital spending plan provisions for the financial year to which they relate, as well as showing the total net resource figures for the two prior financial years.
Government funding will be reflected in the Department for Work and Pensions estimates; grant in aid funding is included within the sub-headline catching all DWP grant in aid payments to its non-departmental public bodies. The actual figure for grant in aid to PADA is shown separately under notes to the estimate, and if a loan is provided by the DWP it will be shown separately from grant in aid—in the same sub-headline, but as capital rather than resource. Figures presented in the main estimates at the beginning of the year are, of course, subject to changes as plans develop; those changes would be reflected in subsequent supplementary estimates.
The authority’s annual accounts will provide information on each year’s funding sources and the expenditure incurred against that funding. The financial statements within those accounts will comply with the accounting and disclosure requirements detailed in the Government’s financial reporting manual and any accounts direction issued by the department. The trustee corporation will also have to comply with these requirements inasmuch as it comes within the classification of bodies to which the manual applies. Details on the layout of the accounts are still under discussion, but we expect that funding from grant in aid and loans from whatever source will be separately visible within the accounts. Additionally, within PADA’s operating cost statement we would expect expenditure to be recovered from future scheme charges, which will be reported separately from expenditure that will not be recovered.
I hope that this explanation will reassure the noble Baroness both that the Government have no intention of unfairly advantaging the scheme through the funding approach—and of the importance of retaining flexibility at this stage—and that the basis for funding the scheme will be made clear to Parliament through existing reporting arrangements; I suggest that those would be pretty robust. The noble Baroness says that accounts sometimes take a little while to be produced and signed off but, notwithstanding that, I suggest that the detail that will be within them and in the department’s estimates—showing what it is funding, and how—is a robust series of indicators on how the scheme is being funded. That should satisfy her on transparency.
Baroness Noakes: I thank the Minister for the explanation of the Government’s approach. I want to read that carefully in Hansard tomorrow. I entirely
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The key issue is transparency, which is what my amendments are directed at, because they involve no other parliamentary processes, as I made clear. I understand that there will be information in the annual accounts, but I do not think that is appropriate. If a transaction takes place in April 2008, I would not find out about it until, perhaps, July 2009 if the accounts were out very quickly, and quite possibly July 2010.
This is the first time I have heard a Minister stand at the Dispatch Box and argue that useful information can be obtained from estimates. Estimates are extremely obscure documents read by a few civil servants. I am prepared to go away and look at the DWP’s estimates to see the detail currently being provided.
Lord McKenzie of Luton: That will not take the noble Baroness long with her financial acumen.
Baroness Noakes: The Minister is not getting away with any form of flattery because I am completely impervious to it. I will look at the estimates, which it had never occurred to me were an element of transparency in government expenditure. As he is aware, I am seeking to ensure that there is a proper public spotlight on what is subsidised and what is not. That is still a bit of an open issue but, for today, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 112V not moved.]
Baroness Noakes moved Amendment No. 112W:
The noble Baroness said: We are coming to the end of Schedule 1. I shall move Amendment No. 112W and speak to Amendments Nos. 112WA, 112X and 113Q. These amendments concern charges made by the trustee corporation for the personal accounts scheme and they are designed to ensure that the costs of the trustee corporation are fully recovered in charges. They are linked to the group of amendments that we have just debated, which sought to eliminate or constrain subsidy flowing into the personal accounts scheme. This group of amendments concentrates on charges rather than financing.
Amendment No. 112W would amend paragraph 19 of Schedule 1 so that the trustee corporation must make charges in connection with the exercise of its functions. The current paragraph 19 is merely permissive and I could not see why that should remain. Amendment No. 112WA would ensure that the charges were sufficient, taking one year with another, to cover its costs. I am not seeking to get into the philosophy of charging. I am aware that PADA has issued a document on how charges should be made for the personal accounts scheme. My amendments are much more modest because they are designed to ensure that charges will be made
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Amendments Nos. 112X and 113Q deal with the costs that are being incurred in the preparatory phase, which are currently being incurred by PADA. My amendments would ensure that the costs are passed on to the trustee corporation and then recovered. The Government and PADA have been vague about this. I understand that PADA expects to spend some £36 million in the current financial year, but it is hiding behind commercial confidentiality and has refused to give any estimate of the costs that it will incur on setting up the personal accounts scheme within that total amount. I accept that it will be doing things other than simply setting up the personal accounts scheme, but this is a very real problem. If we do not get further information from PADA on how those costs are made up—I am hopeful that there will be some progress on this—we may want to revisit the issue of making more information available from PADA to Parliament on the ongoing emerging costs of the personal accounts scheme. There are precedents for that for other major schemes that have been introduced in the public sector. For today, my key point is that my amendment would require PADA to account separately for the costs related to setting up and operating the personal accounts scheme and not simply to write them off.
Amendment No. 113Q states that PADA must separately identify these costs and then charge them to the personal accounts pension scheme once it has been established. Amendment No. 112X picks that up by stating:
As we debated on the previous group of amendments, we share the industry’s concern that public money could be used to subsidise the personal accounts scheme. In the early years, when the upfront costs are being borne by PADA, it would be easy for these costs to slip from public view—government accounting rather helps that to happen—but they could be an important element of the overall costs of the scheme. Indeed, they will form the bulk of the costs that need to be recovered over a period. We must not let government accounting rules just write them off. It is important that they are kept in view and are included properly within the overall costs of the scheme to be recovered by charges. I hope that the Minister will see that these amendments are reasonable in the circumstances. I beg to move.
Lord McKenzie of Luton: I thank the noble Baroness for these amendments, which give me the opportunity to explain our intentions on how costs in relation to the scheme will be charged. I hope that it is clear from our earlier debate that our intention is for the personal accounts scheme to be self-financing in the long term, such that its costs will be met from membership charges. Paragraph 19 of Schedule 1 simply enables the trustee corporation to fulfil this policy aim by allowing it to charge to the scheme any costs that it incurs in relation to the exercise of its functions. Amendment No. 112W would require, rather than allow, the corporation to
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Although the scheme will be self-financing in the long run, there will inevitably be a period during its early years when its income from membership charges will be insufficient to recover its costs, as the noble Baroness acknowledged. This stems from the fact that it will have to bear set-up costs before it can open its doors to members and that it will need some time after that before its revenues grow to a sufficient scale.
It is not clear whether the purpose of Amendment No. 112WA is to ensure that the scheme would not have an operating deficit for more than two years running. If so, this could lead to unreasonably high charges for members in the early years of the scheme. It could adversely affect members’ income at retirement and potentially lead to high levels of opt-out at the very time when we will most need to establish the confidence of a group of people, many of whom will be saving in a pension for the first time.
It is vital that we give the delivery authority the time and flexibility that it needs to develop a funding strategy that achieves the best balance between the scheme’s initial level of charges and the time that it takes for the scheme to become wholly self-financing. I hope that it is also clear that one of our guiding principles in developing the scheme’s funding strategy will be to ensure that the scheme is not unfairly advantaged. This means requiring the delivery authority to identify the costs that it incurs in relation to implementing the scheme and charging them to the trustee corporation so that they are recouped through members’ charges.
I therefore find myself agreeing with the principle that appears to lie behind Amendments Nos. 112X and 113Q, which is that any costs incurred by PADA in relation to the establishment of the scheme should be recouped from the scheme through member charges. However, just as it seems fair that members should meet the costs of establishing the scheme, it would be unfair to ask them to meet those costs that do not directly relate to it, particularly those costs arising from the delivery authority’s continuing role in providing advice on the commercial and operational implications of the Government’s reform programme.
I do not think that it is the amendment’s intention to pass such non-scheme costs on to members, but it is important to be clear about such matters. However, my response to the amendment is to make it clear that primary legislation is not required to achieve the noble Baroness’s aims. Instead, we will place a requirement on the delivery authority to separately identify costs relating to the set-up of the scheme through the framework document that exists between my department and the authority. That document describes the respective duties, roles and relationships between the delivery authority and my department, and will be updated to reflect PADA’s expanded role. The framework document will be in the public domain, with copies placed in the Libraries of both Houses and on the authority’s website.
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A lot has been said about whether the Government intend to put the scheme at a commercial advantage through a subsidy. However, less has been said about the commercial disadvantages that it will face due to the policy goals that we are asking it to meet. As well as being restricted to a particular segment of the market, it will have a public service obligation to accept into the scheme workers whom the current market finds commercially unviable. This means that the scheme will have to provide accounts to individuals where it will not recover the costs of doing so. In the long term, the scheme’s scale will enable it to do this as part of its normal business while delivering low charges to members and being self-financing, but in the short term, prior to achieving this scale, the obligation could make it more challenging to bridge the mismatch between early years costs and revenues.
These obligations may ultimately mean a short-term level of charges that undermines both the scheme’s policy goals and its ability to build the scale that it needs to be viable in the long term. If this is the case, it would be reasonable for the Government to consider whether it was in the public interest to compensate the scheme in some way for the burdens placed on it. This concept is recognised in European state aid rules, whose purpose is to prevent anti-competitive behaviour, while recognising that there may be cases when it is right to compensate a body for performing a public service obligation. These rules are very explicit: it is possible for the state to recognise only the cost of imposing a public service obligation; it is not possible to go any further. In other words, it is possible to ensure only that the personal accounts scheme is not disadvantaged by its public service obligation; it is not possible to tilt the playing field in its favour, nor would we want to do so. We do not yet know whether any such support will be necessary. The authority needs to complete its work on scheme design and scheme cost and engage in dialogue with potential suppliers before the parameters of scheme financing are known in detail.
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