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When we discussed this in Committee, my noble friend Lord McKenzie said:
“The Government have stated their intention that when transferring assets and liabilities from the Royal Mail pension plan, sufficient assets will be left to cover its liabilities. In calculating those liabilities, the Government will work with the trustees to find an appropriate valuation basis that delivers value for money without putting members’ accrued benefits at risk. The details of the valuation will be set out in secondary legislation”.—[Official Report, 20/4/09; col. 1291.]
The issue here concerns the word “sufficient”. What does it mean? Four matters need to be dealt with. First, what exactly is meant by “sufficient”? In Committee, the noble Lord, Lord Skelmersdale, asked whether the deficit would be measured on the basis of FRS 17. I had to go away and find out what on earth he was talking about, but I understand now that FRS 17—which means financial reporting standard 17—is used for accounting for pension scheme deficits in a company’s own accounts. My noble friend Lord McKenzie said in Committee that FRS 17 was,
I agree. This is an accounting convention that does not measure the cost of the scheme.
My noble friend also said that the measurement would be made on the basis of the “technical provisions”, leading the casual observer to think that RMPP and the new companies that will sponsor it will be left with enough money to cover the liabilities of the RMPP on the same sound and “technical” basis. That is what the regulatory impact assessment hints at. The RMPP will have assets of £3 billion and liabilities of £3 billion, and therefore it will have enough to make ends meet. That is taken from table 2 in the pensions appendix to the regulatory impact assessment.
The technical provisions basis means something very specific however: it is an assessment made by the scheme’s trustee acting on the advice of its own actuary. He or she can take a more optimistic or more pessimistic view of life depending on the likelihood that the employer will still be around to meet the liabilities if the assumptions on which the evaluations have been made turn out to be wrong. The £3 billion figure comes from the assumptions that were used in the 2006 evaluation, when the sole sponsor was Royal Mail Group. Noble Lords can take their own view on whether the current Royal Mail Group could ever realistically become insolvent in the sense that it goes into administration and abandons its pension scheme. However pessimistic one may be about that, the prospect of the new Royal Mail going into administration when there is no possibility of further support because Europe would forbid it—I ask my noble friend to note that there is a question about what Europe would allow—must be increased. The real point is not about optimism or pessimism but the futility of measuring a deficit on the basis of “technical provisions”, as if that were some magical benchmark. It is not. It depends on the assumptions that the actuary makes. The £3 billion figure is out of date and based on a different world.
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The second issue is more technical. In any ongoing assessment of a pension scheme—any assessment where there is a viable employer—liabilities are assessed on the assumption that pensions will be tied to final pensionable pay. As we know, that will not be the case here. The RMPP is not just picking up liabilities for pensions earned after the date of separation; it is picking up the cost of the salary link for the past service liabilities that the Government are assuming. An ordinary technical provision basis omits that link altogether. The £3 billion of liability going forward, as assumed in the regulatory impact assessment, is short of the mark. The RMPP will have a deficit from day one.
The third issue follows on from that. One benchmark is largely free from actuarial assumption, which is the measure that a private sector trustee would use in a situation just like this. If a new employer were to branch out into the unknown, taking on past liabilities of any nature on trust, it would want to know that it was being paid enough to meet the liabilities, come what may. There is a pension scheme measurement for this. It is the cost of buying liabilities on the insurance market. Actuaries call it the buyout basis; it is the risk-free option.
It is important to recognise the scale of the differences we are talking about. At the 2006 valuation, the RMPP had technical provisions to meet 86.7 per cent of its liabilities. That is a substantial deficit in anyone’s book. On a buyout basis, however, the technical provisions would have met only 64.2 per cent. The deficit is more than twice as big. If anyone thinks that the RMPP will be fully funded post-privatisation because the scheme is sufficient to meet its “technical provisions”, they are wrong. The RMPP will still have a serious deficit and the scale of the theoretical actuarial deficit depends on the optimism or pessimism of the actuary. That is my fourth point. Who makes the assessment? My noble friend Lord McKenzie said in Committee that,
- “the Government intend to hire an appropriately qualified actuary, but we do not believe that it is necessary to put this on the face of the Bill”.—[Official Report, 20/4/09; col. 1287.]
I think that it is necessary to put it on the face of the Bill. Actuaries disagree with each other if they are paid to do so. It is no good pretending. In many cases they do what they are paid for. The actuary who is paid to look after the interests of the members of the RMPP going forward is the actuary appointed by the trustee. He or she should attempt to reach an agreement with whichever actuary is appointed by the Government. If there is a disagreement involving handing over many billions of pounds of pension savings by members of the RMPP, the actuary appointed by the trustee ought to be given the final word.
Amendment No. 55 addresses all these issues. It states that the division should be assessed in the same way that it would be in a commercial transaction; the trustee of the scheme that is being divided would insist that the scheme as it goes forward is left with sufficient assets that could buy out all of its liabilities if it had to in the short term; and the trustee is handing over the security of real assets in exchange for the unknown future strength of the new employer to meet its future
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7.15 pm
Lord McKenzie of Luton: My Lords, I shall start with one or two immediate responses to my noble friend. He said that the term “technical provisions” is not a magical benchmark, and I agree with that. I should make it clear in relation to the funding of the salary link that the liability estimate of £3 billion staying with the RMPP includes the estimated value of the salary link, so it is covered in the assets staying with the RMPP.
Amendments 55, 56 and 57 relate to Clause 21, as my noble friend has just outlined. The clause is an important feature of the member protection in Part 2 of the Bill. It restricts the Secretary of State’s ability to make an order to transfer assets from the RMPP under Clause 20. The restriction is that the ratio of assets to liabilities in the RMPP is no worse immediately after the transfer of assets and liabilities than it was immediately before the transfer. A specific calculation is being undertaken. The restriction applies to all sections of the RMPP, including new sections for Post Office employees and Royal Mail Group employees.
I do not believe that it was intended from what my noble friend said, but Amendment 55 requires that for the purposes of Clause 21 the liabilities are measured on a buyout basis—that is, the most cautious basis for funding pension liabilities, often used to assess the cost of winding up a pension scheme. In addition the amendment requires that the RMPP scheme actuary is responsible for determining the liabilities, and as a result the assets remaining with the ongoing scheme. Amendment 56 has the same purpose but in the scenario where the Government create a section of the RMPP to hold qualifying accrued rights.
Measuring the liabilities on a buyout basis rather than using other assumptions, such as the assumptions used by the trustees at the most recent full actuarial valuation in March 2006, would have two effects on Clause 21. First, the measured value of the liabilities of the RMPP immediately before the transfer would be higher, and so the ratio of assets to liabilities would be lower. This would mean that under Clause 21 the Secretary of State could leave the RMPP with a lower ratio of assets to liabilities. Secondly, however, the measured value of the liabilities of the RMPP immediately after the transfer would also be higher on a buyout basis. As a result the assets remaining with the RMPP would need to cover a greater value of liability but, as noted, the Secretary of State could leave the RMPP with a lower ratio of assets to liabilities. Broadly these two effects would cancel each other out, and so in practice the amendment would have little effect on the operation of Clause 21.
The Government have stated their intention that when transferring assets and liabilities from the RMPP, sufficient assets will be left to cover its liabilities. The Government will appoint a suitably qualified person
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The thrust of my noble friend’s amendment was to seek to establish that the RMPP should be fully funded at the end of the exercise on the buyout basis. The RMPP and its sponsoring employers will be in a significantly improved position by virtue of the measures in the Bill and it would be perverse to argue in this context that the trustees need full funding on a buyout basis to protect members going forward. Nor is it desirable to specify a particular funding basis for the purposes of Clause 21. In addition to the state aid issues I have just described, leaving the scheme fully funded on a buyout basis could involve a large cost to the Government and the taxpayer but provide members with little extra protection. Indeed, it could also provide an incentive for the company to wind up the scheme. The Government have no intention of doing that.
Although the Government are confident that it will be possible for state aid approval to be obtained, they cannot prejudge the Commission’s detailed decision or rule out the possibility of modification to the proposals. That is why the Bill is not written in those terms. But there is protection written on the face of the Bill in the way that I have just outlined. As a result, I ask my noble friend Lord Clarke not to press the amendments.
Amendment 57 would remove subsection (3). This subsection deals with the scenario where the Government have created a section of the RMPP to hold qualifying accrued rights under Clause 17. Subsection (3) states that, for the purposes of calculating the ratio of assets to liabilities described earlier, any liabilities in a government section holding qualifying accrued rights should not be taken into account. This is because those liabilities would now be supported directly by Government and not by the remaining assets in the RMPP. Although the option of a government-sponsored section containing qualifying accrued rights is only a contingency measure, it is a necessary precaution, should it not be possible to transfer qualifying accrued rights into a new public service scheme, as we discussed earlier. Accordingly, again, I ask my noble friend to consider not pressing his amendment.
Lord Clarke of Hampstead: My Lords, before my noble friend sits down, can I get something clarified? Obviously, I am happy with much of what my noble friend said, but at the end of my contribution earlier, I talked about the independence of the actuary. Can there be a mechanism that says that the choice of actuary can be discussed between the parties on appointment? One of the problems of actuarial assessments, quinquennial or otherwise, is that people and companies change and it is nice to have someone who knows what they are looking at. Can my noble
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Lord McKenzie of Luton: My Lords, the intention is that the Government will appoint a suitably qualified person and also that they will engage with the trustees and their actuarial advisers. So there will be two sets of advisers engaged on this, one of which will be the trustees’ advisers. Obviously, it is for the trustees to appoint who they wish. I imagine that they would wish to use actuaries who are familiar with the scheme. I hope that is helpful to my noble friend.
Lord Clarke of Hampstead: My Lords, I thank my noble friend for that further comment but, as I said earlier, people deliver what they are paid to do. Anybody who has dealt with accountants and charitable funds knows that you get the advice that you pay for. I do not want to be too suspicious, but I have heard enough. It is on the record that there will be this consultation and the possibility of coming to an agreement, but if you have two actuaries, you are going to get two figures.
Lord McKenzie of Luton: My Lords, I agree with my noble friend on many things but I disagree on this and stress the purity of accountants—a profession of which I am a member.
Lord Clarke of Hampstead: My Lords, I had no doubt my noble friend would say that. I was going to say quite a lot more about state aid and competition, which obviously have to be considered in this line of events. I hope that, before this Bill goes to the other end, somebody will clarify whether we are going to get the commission’s authority to go ahead. In the mean time, I beg leave to withdraw the amendment.
Amendments 56 and 57 not moved.
Clause 29 : The universal post service
58: Clause 29, page 14, line 32, at end insert—
“( ) The following postal services may not be designated as part of a universal postal service under subsection (1)—
(a) the conveyance of letters of members of a document exchange from a departure facility for that exchange to an arrival facility for another document exchange by persons who are not members of either exchange, and the collection and delivery by such persons for that purpose of letters delivered to the departure facility concerned,
(b) the conveyance of an overseas letter out of the United Kingdom (except when provided by the designated universal provider), and
(c) (except when provided by the designated universal provider) the conveyance of a letter—
(i) which is conveyed in consideration of a payment of not less than £1 made by or on behalf of the person for whom it is conveyed, or
(ii) which weighs not less than 350g.
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“arrival facility”, in relation to a document exchange, means any box, receptacle or other facility associated with that exchange which is provided for the receipt of letters from members of another document exchange which are conveyed to the facility from a departure facility for that other exchange for collection by members of the first exchange,
“departure facility”, in relation to a document exchange, means any box, receptacle or other facility associated with that exchange which is provided for the collection of letters of members of that exchange which are delivered to the facility by those members for conveyance to an arrival facility for another document exchange for collection by members of that other exchange,
“document exchange” means a system involving at least three members for the exchange of letters between members of the system,
“overseas letter” means a letter which is directed to a specific person or address outside the United Kingdom.”
Lord Hunt of Wirral: My Lords, these amendments are similar to ones I tabled in Committee and make very much the same point. I have, of course, carefully read the Minister’s response to my amendments in Committee and I am grateful to him for the subsequent letter on the matter, which contained a great deal of useful information about the Government’s thinking and expectations of Ofcom.
Unfortunately, I am still concerned. The Government’s defence of the current drafting rests on the safeguards in the Bill that Ofcom should be proportionate, non-discriminatory, et cetera, coupled with their other requirements to seek to be deregulatory and so on. That is all well and good and I am sure that Ofcom genuinely intends to apply these conditions only when appropriate. The fact remains, however, that Ofcom and the Government are insisting that power be given now for future regulation of the services I have specified in my amendments. The very insistence that such regulation be possible is precisely what is causing me concern. In Committee, the Minister specifically referenced the possibility that services such as “document exchange” might be regulated in the future. Essentially, my argument boils down to the simple premise that if there is genuinely no intention dramatically to increase the scope of regulation to burden private-sector companies providing services that many question are even covered by the term “post”, why is every indication being given that these amendments are being resisted?
If the Government and Ofcom genuinely intend to reduce the amount of regulation out there, not by merely spreading it more widely and thinly, but instead by lighter as well as narrower regulation, I would contend that my amendments would be an easy and harmless way of providing legal certainty and immense reassurance to the many companies concerned by this part. If the Government are, as their responses would unfortunately suggest, not currently intending to regulate these sectors, but are pretty relaxed at the idea that it might happen in the future, we have a serious problem.
Many of these services were set up specifically to provide an unregulated alternative. Their very reason for existing, and the basis of their commercial success, is that they are not the universal postal service. They are as irrelevant to the Royal Mail’s continuing provision of the postal services this country needs as is the question of whether post offices continue to sell
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There has been considerable debate about how and where exemptions might be inserted and I am very open to persuasion on this matter. My Amendments 58 and 61 are focused on the clauses where the universal service and the services considered within its scope are defined. This is because I am deeply troubled by the idea that Ofcom could eventually decide that users’ needs justify, or even require, broad regulation. I remember, when I had responsibility, that regulation always seemed to be a wonderful option. I know that many of us have had experience of the Health and Safety Commission. The idea of being able to step in and sort out all the alleged problems is a very tempting one, but that temptation—and I am talking about areas other than health and safety—is exactly what has led to the most enormous mountain of red tape currently suffocating businesses right across this country. My instinct was, therefore, to cut off that possibility as early as possible and to not even allow Ofcom to entertain the idea of regulating these services. However, I know the Secretary of State and his colleague Ministers feel that the market assessment should be as broad-based as possible in order to result in the most accurate picture of the sector on which to make regulatory decisions. I can see their point, although I do not entirely agree. I would be happy with inserting these exemptions into Clause 27, where it could be made absolutely, unquestionably clear that there is no possibility of the conditions—apart from consumer protection, the essential condition—being imposed on these services. I just hope the Secretary of State and his Ministers have thought a little further on these points and may be announcing to the House tonight that they accept them. I beg to move.
7.30 pm
Lord Mandelson: My Lords, my response to the noble Lord will probably test my powers of persuasion. It is quite a challenge, but I am up for it. The amendments seek to limit Ofcom’s powers to regulate in respect of services which do not currently require a licence. The amendments are not necessary and may in future even be damaging to securing the provision of the universal postal service. On that basis, I shall seek to persuade the noble Lord to think again.
Protecting the universal service is what this Bill is all about. We need to give Ofcom the best tools available to help it to do that now and in the future. It is vital that we do not tie Ofcom’s hands. I appreciate that there is a concern that some postal operators might be regulated in future where previously they were not. I reassure noble Lords straightaway and in the strongest terms that Ofcom will not regulate everything within the potential scope of regulation—there is a clear distinction there. I make it absolutely clear that Ofcom will regulate only where it is proportionate and justified. In practice, from what is already known about the courier and parcels market in particular, it is highly unlikely that Ofcom will materially increase the burden of regulation.
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We do not expect Ofcom to regulate services not currently required to have a licence for the foreseeable future, except to the extent required by the directive. The directive requires us to ensure that operators have complaints systems and other consumer protection measures. However, operators tell us that they have these systems in place in any event because the market requires it. It is likely therefore that they will already be complying with any consumer protection measures and, as such, there will be no added burden for them.
The amendments are unnecessary also because exceptions to the regulatory regime are redundant under a system of general authorisations. Moving, as we are proposing, from a system of licensing to one of general authorisations means that it is no longer an offence to convey a letter without a licence. As such, it is not necessary to list services which are exceptions to the regime.
On the specific questions of excluding from the scope of the universal service,
of a letter in consideration of £1 or more, or of a letter weighing 350 grammes and over, the postal services directive requires that the universal postal service covers both national and cross-border services, and that the universal service extends to postal packages of up to at least 10 kilograms, which will almost certainly be priced above £1. To prescribe that the conveyance of such letters is within the scope of the universal service when undertaken by the designated universal service provider but outside the scope when provided by any other operator simply lacks logic, and introduces an undesirable element of regulatory confusion.
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