Pensions Bill

Public Bill Committee, 23 March 2004.

Standing Committee B

Pensions Bill

Nigel Waterson (Conservative, Eastbourne)

On a point of order, Mr. Griffiths. On the morning that four of the most senior actuaries in the country have written to the Secretary of State expressing their serious worries about the Bill, I want to know what shape it will be in by the end of our proceedings in Committee. The Ministers have been good enough to tell us that amendments will be tabled to clarify section 67 of the Pensions Act 1995 to introduce a facility to transfer, thus simplifying guaranteed minimum pensions, removing the requirement to provide an additional voluntary contributions facility and consultation with trade unions. I refer also the more recent revelation that the Government want to amend the Bill to deal with defined contribution schemes.

Such issues are important and weighty. I am not suggesting that they should not form part of the Bill, but at the end of our proceedings on Thursday the junior Minister said that he would write to me about such matters. As yet, I have not received a letter, but at the beginning of the third week in Committee, which started yesterday with 10 pages of Government amendments to the Bill, it is reasonable to ask when the meaty amendments will be tabled and, more importantly, when people outside the House with a legitimate interest in such matters will see them.

Win Griffiths (Labour, Bridgend)

I thank the hon. Gentleman for requesting that information. I am sure that the Ministers will have heard it. I agree that it is important that such matters are resolved and I am sure that, during the day, the Committee will receive some further information. Whether it satisfies the hon. Gentleman or not is another matter.Clause 178 Pension schemes to which this Part applies

Clause 178 - Pension schemes to which this Part applies

Steve Webb (Liberal Democrat, Northavon)

Good morning, Mr. Griffiths. The clause is short and I even think that I understand it. That was probably the only time that I shall repeat either of those statements today. Before the Committee nods through the clause, it will be helpful to have a steer from the Minister about the scope of the clauses that we shall be discussing this morning. The Bill makes it explicit that money purchase schemes will be excluded. They do not make a promise, so there is no funding requirement. It will be helpful if the hon. Gentleman clarifies what issues are envisaged under subsection (1)(b), which refers to a

''prescribed scheme or a scheme of a prescribed description.''

Did the Government have a scheme in mind when they drafted the provision or was it so drafted to cover anything that they might think of later?

Nigel Waterson (Conservative, Eastbourne)

I associate myself with the hon. Gentleman's remarks. It would be helpful to receive an explanation. I wish to make a point that applies to the whole of part 3 of the Bill. In effect, it is a mere shell, which is why relatively few amendments have been tabled to the group of clauses, except, of course, Government amendments. The clauses leave so much to subsequent regulation. Clause 178 is no exception. The word ''prescribed'' keeps popping up. I am especially interested in subsection (2), which states:

''Regulations . . . may provide for exemptions from all or any of the provisions of this Part.''

We are in a slightly bizarre situation. The clause does not give much away about what it is setting up or the exemptions from what it will set up by way of regulation. That is thoroughly unsatisfactory. I am sure that the Committee are bored with my saying that draft regulations would be helpful, but matters as they stand make the position difficult; finding out what the Government are at is like trying to find a black cat in a darkened room.

Malcolm Wicks (Labour, Croydon North)

I have a black cat. It usually meows in such circumstances, so that it is not a particular problem. However, I take the comparison.

I hope that there may be an opportunity outside the Committee—perhaps tomorrow—to meet Opposition spokesmen to discuss our plans for new clauses.

Nigel Waterson (Conservative, Eastbourne)

Persons.

Malcolm Wicks (Labour, Croydon North)

In response to the sedentary remark—or do I mean a remark from a sedentary position?—I shall meet whoever comes forward.

As the hon. Member for Northavon (Mr. Webb) suggested, it might be helpful if I put part 3 of the Bill in context. It is a key area for legislation as it concerns the new scheme funding requirement to replace the minimum funding requirement. The MFR is a flawed approach; it is rigid and inflexible, and the underlying calculation cannot be adapted in a timely way to reflect changing economic and demographic factors or revise life-expectancy forecasts, for example. Although it was designed as a minimum funding requirement, it may have encouraged some trustees to rely on it rather than stand back and think through an appropriate funding strategy for their scheme. In addition, its inflexibility may have contributed to some employers' decisions to close their schemes and skewed the investment decisions of others. At the same time, it led many members to expect it to deliver protection greater than it was designed to provide. We have recognised the need for greater protection, which is why we are setting up the pension protection fund.

This morning, we are considering scheme funding. It is the proper funding of pension schemes that provides the greatest assurance that members will get the pensions that they expect. The replacement of the MFR with a scheme-specific approach is a widely welcomed deregulatory measure, and has been developed through extensive consultation with the

pensions industry, employers, the actuarial profession and consumer group representatives.

More recently, we have consulted on the scheme funding implications of the European directive on the activities and the supervision of institutions for occupational retirement provision, which also aims to improve security for members and encourage the efficient management of schemes. The scheme funding arrangements in the Bill comply with the requirements of that directive, while allowing schemes the flexibility to choose the funding strategy most suited to their particular circumstances under a scheme-specific approach. Whereas the MFR was calculated using tightly defined actuarial methodology and assumptions with a fixed period for making up any deficit, the part 3 provisions allow schemes flexibility and choice over those matters while remaining compatible with the protective framework of the directive.

We will require schemes to have an objective to fund in order to meet their pension commitments in full, and to put a recovery plan in place where a valuation reveals a shortfall. Trustees and employers, with advice from the scheme actuary, will work together to agree the appropriate funding strategy to meet that objective. The trustees will have ultimate responsibility for the funding decisions affecting the scheme. To help the trustees fulfil those responsibilities, the regulator will issue a code of practice, which is one of the codes that the regulator will be required to issue under clause 64. That will give trustees practical guidance on their duties and responsibilities in relation to the funding of their scheme. If the trustees cannot reach agreement with the sponsoring employer, they will be required to report to the regulator, which will have a wide range of powers aimed at resolving the situation. The regulator will use those powers both to protect scheme members' interests and reduce calls on the PPF.

As we shall see when we discuss part 2, the PPF will be funded by a levy, at least half of which will be based on an assessment of risk. That assessment will take account of the scheme's funding level, but there will be no requirement for schemes to fund to that level. Although there will be a clear incentive for schemes to fund to a level at which they do not have to pay the risk-based element of the levy, they will be able to make a choice. The funding requirements on schemes are in part 3.

There will also be much greater transparency of other schemes' funding positions. Under existing powers on matters that must be disclosed to members, we will require schemes to send to all members, including pensioner members, an annual update of the funding position of their scheme, together with information on their likely position were the scheme to wind up the funding at its current level. That should include reference to the protection offered by the new protection fund. Committee members will appreciate that this is an area of considerable technical complexity. For that reason, and to allow for further consultation with key stakeholders, much of the detail of process by which trustees determine the actuarial methods and the

assumptions that underpin them, together with the required contents of key scheme documents such as the statement of funding principles, is to be prescribed in regulations. That approach allows us to ensure that the implementation is workable and proportionate.

Clause 178 would require occupational pension schemes to comply with the scheme funding provisions unless they are exempt from the legislation. Subsection (1) would exempt money purchase schemes, which operate as a collection of individual funds rather than as a collective fund from which a defined level of benefits is paid. The hon. Member for Northavon recognised why they are exempted.

The clause would provide a power to prescribe in regulations that a particular type of scheme or an individual named scheme may also be exempt. Subsection (2) would enable other exemptions for all or any of the scheme's funding provisions to be set out in regulations, in the same way in which regulations currently exempt some schemes from the MFR regime. For example, as currently, schemes that are winding up will be exempt from the requirement to put a schedule of contributions in place.

The Conservative spokesman asked about those exemptions. The broad intention is for schemes currently exempt from the MFR to be exempt from the new scheme funding arrangements. We will, of course, consult widely on our draft regulations to ensure that the scope of the exemptions remains appropriate.

Question put and agreed to.

Clause 178 ordered to stand part of the Bill.

Clause 179 - The statutory funding objective

Nigel Waterson (Conservative, Eastbourne)

The clause is a key part of the Bill, and it deserves considerable discussion by the Committee. I make no apologies for the fact that I shall be speaking at length on the clause. I have already explained why it is difficult to come up with amendments: so much is being left to further consultation, or to regulation or codes of practice later on.

The National Association of Pension Funds makes the same point. It says that

''most key issues (eg the way in which assets are valued; the determination of liabilities; etc) are to be set out in secondary legislation or in actuarial guidance.''

It makes the perfectly reasonable point that it wants

''to see an open and transparent process with proper consultation of interested parties.''

I do not think that anyone could disagree with that.

I shall begin by discussing the background, including the history of the MFR, because it will be useful to inform the debate. The MFR has had a fairly bad press recently but, as the Minister conceded earlier in a different context, it served its purpose, at least for some time. It is interesting to note what my right hon. Friend the Member for Richmond, Yorks (Mr.

Hague) said during the Committee stage of the Pensions Act 1995:

''The MFR will provide members with a reasonable assurance that, should the sponsoring employer become insolvent, the scheme will be able to deliver the relevant accrued rights. If the scheme is at least 100 per cent. funded on the statutory basis, pensioners can expect their pensions to continue to be met in full, while younger scheme members will be entitled to a fair actuarial value of their rights which they can transfer to another scheme or to a personal pension.''—[Official Report, Standing Committee D, 23 May 1995; c. 355.]

In broad terms, the aim of the MFR test was to ensure that a scheme had sufficient funds to keep paying benefits for members whose benefits were already in payment and to pay minimum transfer values for other members. However, as has become painfully apparent since then, the fact that a scheme was 100 per cent. funded on the MFR basis would not necessarily indicate that there were sufficient assets to secure the accrued benefits on wind-up.

It is also worth remembering that, prior to the 1995 Act, if a company became insolvent, the pensions of those who had not retired were only partly protected: to the extent of the guaranteed minimum pension, given in place of the state earnings-related pension scheme. If one reads the debates on the 1995 Act, as I am sure you have, Mr. Griffiths—

Win Griffiths (Labour, Bridgend)

What else do we have to do?

Nigel Waterson (Conservative, Eastbourne)

I can see that you have done your homework. No one ever claimed in those debates that the MFR would give 100 per cent. protection in all circumstances.

Kevin Brennan (Labour, Cardiff West)

As the hon. Gentleman knows, I have read that debate. He will be aware that my right hon. Friend the Member for Southampton, Itchen (Mr. Denham), who was on the 1995 Committee, asked the right hon. Member for Richmond, Yorks about an occupational pension scheme that had fallen short on wind-up. My right hon. Friend was assured that the right hon. Member for Richmond, Yorks did not anticipate that sort of loss being incurred once the minimum funding requirement had been introduced.

Nigel Waterson (Conservative, Eastbourne)

If I may, I shall develop a bit further my comments on how it was envisaged that the MFR would work in such cases, and where it has perhaps turned out to be lacking. It is important to recognise that, at the time, no one suggested that there was a 100 per cent. successful safety net, or that the MFR would provide complete security for pension savers. At that time, 78 per cent. of a typical 40-year-old's benefit would have been covered by contributions at MFR level but, of course, the landscape was very different. I served on the Committee in 1995 and, as we were in government, our party's Back Benchers were not particularly encouraged to say a great deal. There is a much more liberal, relaxed and laissez-faire regime now, of course.

Kevin Brennan (Labour, Cardiff West)

Due to programming.

Nigel Waterson (Conservative, Eastbourne)

Due to programming, and the steamroller that is a Government who—at the moment, anyway—have a large majority. However, I notice that one or two hon. Members have not taken the opportunity to share their views on the Bill with us.

A typical 40-year-old would have had 78 per cent. of their benefit covered at MFR level, but most schemes had surpluses. As I said, the landscape was very different in 1995; there were post-Maxwell issues, and all the resulting complexity and difficulty, to deal with. At the time, the issue was schemes having surpluses, and companies taking contribution holidays. That was very much the flavour of the time. Very few schemes wound up with shortfalls, although I do not say that none of them did. How times have changed!

Kevin Brennan (Labour, Cardiff West)

Does the hon. Gentleman agree that one of the problems with companies taking pensions holidays—in some cases they were forced to—was that they often argued that they should do so because, when times got bad, they would be called upon to fund the scheme? Was that not partly why the issues have arisen?

Nigel Waterson (Conservative, Eastbourne)

I would not disagree. If one looks at the American experience, one sees that companies have a disincentive to top up their pension fund in good times. That was one of the issues put to me when I visited the Pension Benefit Guaranty Corporation in Washington. Other countries, such as Holland and Germany, approach the matter quite differently: they just have extremely tight funding requirements—to the extent that funds are, if anything, over-funded at most times. At least then there is minimal risk of the problems with which the hon. Member for Cardiff, West has been associated in relation to his constituency.

Then times changed. Between March 1997 and December 1998 interest rates fell sharply, and 20-year gilt yields almost halved, falling from 7.6 per cent. to 4.4 per cent. The problems of securing annuities for pensioners and deferred pensioners have made things more expensive; but, to make matters worse, apart from that, the Government have twice cut the rules and requirements for MFR. It was cut by 10 per cent. in June 1998, and by another 8 per cent. in 2002.

The stark result of that and other factors—I think it was the Americans who coined the phrase ''the perfect storm'' in relation to pensions—was that the test devised in 1995 can lead to members who have not retired getting significantly less than they expect when a scheme winds up. Today's weaker MFR, after the two reductions that I mentioned, would give a typical 40-year-old only about 20 per cent. of their benefit.

Steve Webb (Liberal Democrat, Northavon)

That is an interesting analysis, and one which the hon. Member for Havant (Mr. Willetts) brought before the House some weeks ago. He made the contrast between the typical 40-year-old then and now. The hon. Member for Eastbourne (Mr. Waterson) mentioned the two regulatory changes to the MFR and all the other things going on at the same time. Does he think that those two regulatory changes—which, as far as I am aware, his party did not oppose at the time—contributed to all, part or

very little of that change? How far does he think that the change was due to the other things going on at that time?

Nigel Waterson (Conservative, Eastbourne)

I do not claim to be such a pensions expert as to be able to answer that question but, as I have conceded, a variety of different factors were at work. The one thing that one can argue with a clear conscience is that those changes to MFR would not have helped. I was not doing this job then, so I cannot recall what my party's attitude to those reductions was, or what the attitude of the Liberal Democrats was—assuming that they had one. One has to see it all against a background of continuing criticism and carping from the industry. It felt that the concept of the MFR was unhelpful, and that it was an example of the law of unintended consequences—a constant theme in pensions legislation—and there was a strong feeling that it should be replaced with something. I will discuss the something shortly. I have no doubt that given all those factors, those two reductions in the MFR have significantly helped to weaken the guarantees given at the time of the 1995 legislation.

This is where I become even more critical of the Government. They have plainly known since 1998 that the MFR needed to be updated, replaced or changed in some way. They have been consulting with the industry about replacing it for four years. They are still consulting on the details and are proposing to carry on doing so. At the same time, as we know, companies are still going bust and members are continuing to lose their pensions. Later, we shall debate in inordinate detail the pension protection fund. All this is designed to be in place by April 2005 and I hope that in the Minister's winding-up speech he will share with us how confident he is that that timetable can be met. I think that he described it as a very challenging time scale and it would be interesting to hear whether that adjective still applied.

There has been a consistent delay in taking action. The Myners report of March 2001 made a series of recommendations, including the MFR's abolition and its replacement with a scheme-specific approach of the sort that is in the Bill. It reached the conclusion that the MFR distorted investment patterns without providing effective protection for members of defined benefit pension schemes, which many industry representatives had been saying for some time. It went on to say that it had distorted investment choices. In March of the same year, the Chancellor announced that he had accepted the recommendations and would be scrapping the MFR. That month, a joint Department of Social Security/Treasury document, ''Security for Occupational Pensions: The Government's Proposals'' was published. Lo and behold, in September that year, a further consultation document was produced, entitled ''The Minimum Funding Requirement: The next stage of reform''. There was considerable further consultation.

One thing that the Government did was to introduce the Occupational Pension Schemes (Minimum Funding Requirement and Miscellaneous Amendments) Regulations 2002. Then we had the pensions Green Paper in 2002 and the pensions White

Paper in June 2003. That confirmed what we already knew—that the Government intended to replace the MFR with more flexible scheme-specific funding requirements. Interestingly, the change was put forward as a way of reducing the burden on employers who wanted to provide defined benefit schemes. I will return to the question of cost a little later.

It is fair to say that the change, which was long overdue, has been generally welcomed. The CBI said that it welcomed the replacement of the MFR with a new scheme-specific funding requirement. It expressed a concern that there must be no clash between the Bill and the European pensions directive. As far as one can tell from as little detail as is in the Bill, there seems to have been an attempt to harmonise those two pieces of legislation.

I shall also refer to the comments made by the Association of Consulting Actuaries. It is something of a tribute to the Government that they have brought out of their shell the normally retiring folk in the actuarial profession. We read in the paper that the four most important actuaries in the country—people of considerable importance—have written to the Secretary of State expressing their serious concerns about the Bill. We shall have a more detailed discussion about their reservations when we discuss the PPF.

In its original briefing, the Association of Consulting Actuaries states:

''There are growing concerns about the scheme specific funding standard that is to replace the minimum funding requirement.''

It remarks that there are concerns that

''the detail, in order to meet the EU Pension Directive 'requirements', could be just as or even more onerous than the MFR when it emerges at a later date via regulation and guidance''.

It also makes the point that I have made—clearly, with little effect—that Ministers should

''give a commitment to reveal greater details of how the scheme specific standard will work during the Committee Stage of the Bill and before this measure passes into legislation.

In particular, sponsoring employers need to be satisfied that the new funding requirement will allow greater flexibility rather than, as is feared, a provision that is more onerous than MFR and will limit flexibility on managing the funding position. If the new regime turns out to be more onerous, then—again—employers will 'vote with their feet' in terms of the pension provision offered into the future.''

There is an issue that has been raised in a number of contexts in Committee; will the Government—unintentionally—make it less likely that employers will start new defined benefit schemes or keep existing ones open? I should be interested to hear the Minister's view on that.

I turn to the important topic of the interaction between this provision on funding and the proposed pension protection fund. There is concern about how they will work together. Mr. Kandarian, the former head of the Pension Benefit Guaranty Corporation, raised an issue with me when I was in Washington. As he saw the problem in America, two things needed to be addressed; first, the funding rules are not sufficiently onerous to ensure that most schemes will not get into difficulties when times are hard, and secondly, there is a tax disincentive for companies in

the United States to top up their funds when times are good. I have mentioned that disincentive; it is a specifically American problem, which they must address. It is perhaps ironic that, having received that advice from Mr. Kandarian as the outgoing head of the PBGC, the Senate recently passed legislation to relax the rules that he said were not ensuring sufficient funding for corporate pension schemes.

Steve Webb (Liberal Democrat, Northavon)

I seek guidance from the hon. Gentleman on something that I wrestle with. On one hand, he says that the actuaries are worried that the new scheme-specific funding requirement will be too tough—that it will be tougher even than the MFR and that it will kill off defined benefit. On the other hand, he quoted Mr. Kandarian highlighting the problem that the funding requirement was not tough enough and that that left insurance schemes vulnerable. Is the hon. Gentleman saying that the MFR needs to be toughened up to protect the PPF or relaxed so that we have more DB schemes?

Nigel Waterson (Conservative, Eastbourne)

I am not necessarily saying either of those things. A lot of the detail of what the Government intend to do is not in the Bill, and it would be presumptuous of me to go further than they are prepared to go at present.

There is a question about to what extent one needs a Pension Benefit Guaranty Corporation equivalent—a pension protection fund to act as a safety net—if one gets the funding requirements right. The Government have decided to go down a particular avenue and we broadly support their approach. In answer to the hon. Gentleman's question, a balance must be struck. We fear that because of other unintended consequences in the legislation and the problem, to which we shall return, of not starting from day one with a risk-based levy, the new protection fund will, as I said on Second Reading, be vulnerable in its early years, particularly if the Government do not get right the detail of the scheme-specific funding requirements.

I return to Steve Kandarian, who said:

''The biggest single thing that needs to be addressed is that employers need to fund (pension schemes) properly.''

Clearly, this is a problem now in America, as it was in 1995 in this country. He criticised contributions holidays in the USA in his final speech to the corporation, saying:

''The only alternative to tough funding rules is to charge painfully high premiums to the corporate sponsors of pension schemes or to shift the cost of a possible bail-out to taxpayers. 'There is no free lunch' ''.

Steve Webb (Liberal Democrat, Northavon)

Just like that.

Nigel Waterson (Conservative, Eastbourne)

Just like that. There is nothing like recycling such expressions.

In saying that, does not Steve Kandarian put his finger on the nub of the Bill? If there are not proper tough funding requirements there will be inordinate pressure on the protection fund in its early years. We should remember that in America, as I understand it, no benefits were paid for four or five years after the

fund at the guarantee corporation was set up following the collapse of the Studebaker car company. There is not even the option of charging what Steve Kandarian calls ''painfully high premiums''; the United Kingdom Government have set their face against doing that because they are not in a position to set the risk-based levy at the beginning. I shall deal with that again. Most people recognise that it could take several years in practice to sort out that matter.

Then there is the issue of whether the taxpayer stands behind that. We shall debate that in future, but we begin to see that a domino effect could develop if one were not careful. Other people closer to home than Mr. Kandarian have made similar points about the interaction between the PPF and the scheme-specific funding system. The Society of Pension Consultants has also pointed to the link between the risk-based premiums and scheme funding standards. Paragraph 3.2.4 of the regulatory impact assessment says that

''schemes which are over 100% funded relative to the PPF level of compensation, will not have to pay a risk-based premium.''

Might not that encourage employers to use this funding standard as their own funding standard? What will concern the finance director of a big company, when looking at the bottom line, is whether the company will be able to get out of paying the risk-based premium. We have already seen that one big company, Marks and Spencer, is looking for a way to avoid altogether—or at least to some extent—the risk-based levy by having a bond issue of some £400 million to raise funds for the black hole in its pension fund.

The Society of Pension Consultants says:

''There is also tension between the proposal for risk based premiums and the government's intention to replace the minimum funding requirement by a scheme specific funding standard.''

Deborah Cooper, who is a senior research actuary at Mercer's, the well-known company, says that

'' 'there is a very real possibility that the risk adjusted premium to the PPF will become a de facto benchmark, replacing the MFR and effectively outweighing the SSF in the minds of trustees and sponsors' ''.

I should be interested to hear the Minister's thoughts on that, because if the interaction between these concepts within the legislation cannot be got right, we will face some significant problems down the road.

It is axiomatic that the Government are trying to tread a careful line between providing the protection that the pension schemes and their members deserve and not producing an excessive burden of regulation and cost that will deter employers in the way that I have described from continuing to sponsor schemes and sponsoring new ones. That is the trick that the Bill must pull off if it is to be remotely successful.

The Bill's regulatory impact assessment, which is extremely interesting, says that the annual administrative costs of maintaining a statement of funding principles, compiling annual funding statements and producing inter-valuation reports will outweigh the savings of producing MFR valuations by £16.75 million. It is worth remembering that the assumption made about savings is that people will switch a proportion—in this case, 5 per cent.—of their

investments from gilts to equities, and that that will yield an additional 2 per cent. rate of return—the RIA makes some amazing assumptions about returns on equities, but that is a different matter. According to paragraph 4.1.15 of the RIA, that switch is assumed to increase investment returns by about £100 million a year.

Christine Farnish, the chief executive of the National Association of Pension Funds, says:

''We have deep reservations about the assumptions made. There is by no means any guarantee that funds will shift from bonds to equities, in fact there is evidence to suggest the opposite is happening.''

As with all such documents, the RIA is only as good as its assumptions. In this case, the assumptions are somewhat suspect. I should be interested to hear the Minister comment on that.

I shall make a final point on cost and member security. It was interesting that in its response to the December 2002 Green Paper, the Office of the Pensions Advisory Service made the point that scheme-specific funding is not a minimum funding requirement or a standard, but a return to the situation before MFR was introduced. It said:

''If employees are to be persuaded to join company final salary schemes they must have confidence that the employer is properly funding it. Whatever the demerits of the MFR system, it did at least impose some minimum standards on employers. The new proposal for scheme specific funding requirements does not.''

It would be difficult for any of us to argue for or against that view, because we—that includes the industry, the actuarial profession and everyone else—have yet to see the details of the new proposal. To put it mildly, it is worrying that OPAS should be taking such a negative view of the provision.

There are all sorts of more detailed points to be made later in the debate, but I have highlighted the big arguments that need to be resolved if the new concept of the funding requirement is to work.

Steve Webb (Liberal Democrat, Northavon)

I want to make two or three observations about clause 179, which sets up the scheme-specific funding requirement. It is appropriate to have the substantive debate at this juncture.

The hon. Gentleman rightly says that one of the key issues is the relationship between the scheme-specific funding requirement and the PPF funding rules. We do not want schemes to try to satisfy different funding rules at the same time in a conflicting, burdensome or onerous way. We do not want one set of incentives arising from one funding requirement that applies one investment strategy alongside different incentives from a different pressure source that applies a different investment strategy. That would place funds in a difficult position.

Each scheme will have its own agreed funding requirement, which will presumably reflect things such as the split of deferred and retired members and actives, the weight structure of the firm, its existing assets and its future liabilities. Will the PPF's risk-based levy be based on the extent to which the fund falls short of its scheme-specific funding requirement? In other words, will the risk-based levy be scheme-specific or will the pension protection fund have its

own definition of a deficit and then work out its levy on that basis? If that is how it will work, and it probably is, we shall have two different definitions of deficit—scheme-specific deficit relative to its scheme-specific funding requirement and a pension protection fund assessment of the extent to which the scheme would, if it were wound up, place a burden on the fund.

There is no reason why those two definitions should amount to the same thing. As the hon. Gentleman queried, will schemes pay more attention to one than the other? Will they be worried about not paying the risk-based premium because there is a financial penalty attached to it? Therefore, will that be the first thing they look at to ensure that they are not a burden on the PPF when they wind up? Will they then look at the scheme-specific funding requirement separately and try to satisfy two different things at the same time? How will the definitions inter-react? Is there a double regulation? That is my central question.

Nigel Waterson (Conservative, Eastbourne)

I absolutely agree with the hon. Gentleman. Does he agree that, if there are two different measures of compliance and one has a choice, the one upon which a company will quite legitimately and commercially focus is that which decides how much levy it will pay?

Steve Webb (Liberal Democrat, Northavon)

The hon. Gentleman has raised an important question about clarification. He implies, and OPAS seems to imply, that a scheme-specific funding requirement is to some extent discretionary and there is some element of choice. That is not my reading of the Bill. If the clause says:

''Every scheme is subject to a requirement . . . it must have sufficient and appropriate assets'',

I do not understand why OPAS would say that it is optional. Clearly, there is a menu for constructing funding requirements, and there must be an agreement between the trustees and the employer about them, but I do not get the impression that there would be any opt-out option. My worry is about the contrary—that there would be a double burden, a double regulatory responsibility. There would be certification to the scheme that it satisfied the scheme-specific funding requirement, but the regulator, and the PPF perhaps acting through the regulator, would also ask for information to ensure that the assets and liabilities satisfied a different set of criteria. Will the Minister clarify how the two will inter-react?

Clause 179 has its origins in the EU directive to which the Minister referred when talking to clause 178. Clause 179 uses the phrase ''technical provisions''. In the EU directive, the term requires pension schemes to have

''at all times sufficient and appropriate assets to cover the technical provisions''.

That sounds like a 100 per cent. funding requirement. One must have the assets to cover one's technical provisions—loosely, one's liabilities.

Later clauses talk about recovery plans. Thus it is recognised that one cannot just look at a scheme to tell whether it is fully funded; one must do a complex actuarial calculation and assessment of assets and liabilities, to which the answer might be, ''It is not.''

One does not then say, ''They have broken the law; we lock them up.'' One says, ''They are not satisfying section 179, so we shall put in place a recovery programme.''

In the words of the directive, the Bill says that a scheme needs enough money to cover its technical provisions. However, the Bill also has a recovery process for circumstances in which a scheme does not have enough money. How lax could that recovery process be and still allow Britain to satisfy its obligation under the EU directive? The directive will be introduced in 2005, if I remember rightly, and we shall be party to it. It will require us to require of occupational pension funds that they have the assets necessary to meet their technical provisions. We also accept that there will be schemes that do not manage that. By regulation, we shall allow a structure for recovery. What I am not sure about is whether the EU directive provides for the concept of a recovery period. Will there by any stipulation in the directive that schemes must meet the conditions within so many years of failing to do so? Is that what will accompany the regulations that we have not yet seen? How far will they be driven by what the EU directive eventually stipulates? There are a series of questions that relate to that issue.

If I remember rightly, the EU directive says that funds shall have the money to meet their technical provision at all times. How can it be that funds have the money at all times, when a later clause mentions recovery plans? That clause clearly implies that they do not have the money at all times. That is my second issue.

My third and final issue is about whether the changes are more or less of a burden. The regulatory impact assessment says that firms are switching to equities, which have higher returns, so that is £100 million extra. To borrow Mr. Kandarian's phrase, that sounds like a free lunch. It seems to suggest that if schemes put more money into equities, they will have more money in their funds and will gain a free £100 million.

One's initial reaction to that is that if it is a free lunch, why do funds not do it anyway? If they can get an extra £100 million, why do they not? The Minister's argument is that they cannot because of the MFR. However, once that has gone, why stop at 2 per cent.? If they can have £100 million free, why not put 4 per cent. of their assets into equities and have £200 million free or 6 per cent. and have £300 million free? The answer, of course, is that there is a risk attached to that strategy, which is not reflected in the regulatory impact assessment. Are the Government right to claim the win without counting the hit? There is an uncertainty attached to the £100 million. It could become minus £100 million. The Government are wrong to claim the full benefit of the enhanced return without recognising that there is a risk and an uncertainty attached to that. Is it standard practice to claim uncertain gains in a regulatory impact assessment when, in any given year, schemes could do worse by shifting into equities? As

we know, some schemes are shifting out of equities for that reason.

On the face of it, it seems to make sense that schemes have a funding requirement that fits their characteristics. In a world where there is also a pension protection fund that does things differently, my concern is that we may end up with schemes having to try to do two different things and, possibly, being pulled in different directions. Potentially they may be doubly regulated. Pendulums have a knack of doing what pendulums do and perhaps we have swung back to the other extreme. We were worried that MFR was not giving enough protection, so we have gilded the lily by having a scheme-specific funding requirement and a risk-based levy and PPF scheme, both of which try to do similar things, possibly in different ways. I wonder whether the Minister can reassure us on that.

Gregory Barker (Conservative, Bexhill and Battle)

As I rise for the first time in this Committee, may I say what a pleasure it is to serve under you, Mr. Griffiths?

I have a brief point to make to the Minister. I simply query the wording in clause 179(1), namely that every scheme should have ''sufficient and appropriate assets''. I wonder what exactly that means. My hon. Friend the Member for Eastbourne referred to the great change that has taken place in pension schemes since 1995. That is a change in the valuation and performance of the assets held in those schemes. In the years since 1995, we have seen a dramatic underperformance and a fall, in real terms, of the UK stock market. It has been a massive underperformance compared with other major indices around the world. In the eight years prior to 1995, we saw a significant recovery from the crash of 1987 and a year-on-year outperformance by the major UK indices of other indices around the world with which they are often compared. If appropriate assets include equities, what view does the Minister take of the volatility of equities and their ability to fluctuate daily, let alone yearly? How will he measure that over the longer-term life of the scheme?

Nigel Waterson (Conservative, Eastbourne)

Is my hon. Friend aware that the American model for the protection fund—the Pension Benefit Guaranty Corporation—has changed its investment policy away from equities to gilts and other fixed-income investments? Given the $11.5 billion deficit, does he share my concern that that might not be precisely the right moment to be moving in that direction?

Gregory Barker (Conservative, Bexhill and Battle)

I was not aware of that, but I am now. I learn something new whenever I sit with my colleague and his point was well made. If the pensions industry is ever to dig its way out of the terrible hole in which it finds itself, it will not do so by investing in the safest of all asset classes. The returns and long-term growth afforded by gilts and other fixed-income instruments will not provide the high returns that are the only realistic way in which pension funds can claw back some of the values that they enjoyed during the halcyon days of the 18 years of Conservative Government.

Pension funds in the past have gone up and they have come down, but they have always recovered. The

most depressing aspect under the Labour Administration is not the fact that they have fallen—what goes up can come down—but the low growth and no growth of a whole range of asset classes. It is much harder for investment managers to make a return in a low-inflation, low-growth economy and I query what the Minister means by appropriate assets and how he sees the fund managers—it will be their job to oversee the much-needed growth in funds—having the leeway to get the necessary returns rather than just putting money into gilts and fixed-income investments. I should be grateful for his comments on that.

Kevin Brennan (Labour, Cardiff West)

I enjoyed the first contribution by the hon. Member for Bexhill and Battle (Gregory Barker), but the fetish with laissez-faire got us into the present pensions mess. We are discussing the former minimum funding requirement and scheme-specific funding for pensions and we should always think about scheme members when designing provisions. The purpose of the clause and the Bill is to provide ultimate security for scheme members. The minimum funding requirement failed to do that. When workers found that their pension companies had become insolvent and that their pensions were not worth the paper they were written on and certainly not worth the promises that they had been given, they were puzzled. Having done their research, they discovered that there was such a thing as the minimum funding requirement and believed that the words ''minimum funding requirement'' in an Act of Parliament meant that and that their pension fund was funded to the minimal level to ensure that their benefits were protected.

I was a trustee of a local authority pension scheme, which was, fortunately, backed by the taxpayer so we did not have to worry about whether we got it wrong, although we took it seriously. I remember advisers telling us that we should expose the fund to more equity risk because we were turning down marvellous returns and one-way bets, and that, in the long term, over a 70-year cycle, equities would produce the best returns of all, and we should get out of property and gilts.

Nigel Waterson (Conservative, Eastbourne)

The hon. Gentleman describes a classic case of what is called moral hazard. He and his fellow trustees felt able to be a bit more adventurous—as far as that word can be used in the context of pensions—because they knew that they had a Government safety net. Does he believe that the Government should stand behind the pension protection fund?

Kevin Brennan (Labour, Cardiff West)

It was not a case of moral hazard for two reasons. First, we would not take the immoral option of handing over the responsibility to the taxpayer, and secondly, it was in our own interest not to do so because we had to stand for re-election as councillors at some point in the future. There was no question of our doing that. Nevertheless, it is true that people in the public sector in those types of final salary schemes have those schemes underwritten by the taxpayer. Clearly, given that that is not the case in the private sector, the pension promise has to be given reality through the laws introduced by the state. I think that we have all agreed that the minimum

funding requirement abjectly failed to provide the protection that people were led to expect, notwithstanding the hon. Gentleman's quotation from comments made by the right hon. Member for Richmond, Yorks during proceedings on the Pensions Act 1995.

Ultimately, the technical question of whether the Government should stand behind the fund is not what is most important. The Government stand behind the entire private banking sector as lender of last resort. If it were not for the fact that the Government, as lender of last resort, guarantee the entire financial system in this country, the private sector banking would collapse. If a laissez-faire policy were adopted and the sector were left to the free market, it could not work because, as we all know, it is built on a credit bubble and if confidence in that were lost, the whole system would collapse. I am waiting for the hon. Member for Eastbourne to dispute my little lesson, but he is choosing not to do so at this point.

We need to get things technically right.

Nigel Waterson (Conservative, Eastbourne)

The hon. Gentleman has provoked me again. I do not disagree with him. He is quite right that there are already circumstances—he mentioned banking—in which the state stands behind the system. However, he has not quite answered my earlier question about whether he believes in this context that the PPF should be underpinned by a Treasury guarantee.

Kevin Brennan (Labour, Cardiff West)

I hope that that will not be necessary, but it is my personal view that if the whole system came under such pressure that it was unable to meet its requirement, the state would have a responsibility. If we consider the situation in the United States—I know that the hon. Gentleman knows a lot about this—where the Pension Benefit Guaranty Corporation perhaps has a much closer relationship with the Government than is planned in this country, we can see that ultimately that probably is the case there. However, I understand the Government's reasons for not wanting to include a provision of that sort in the Bill. They are the very moral hazard reasons that the hon. Gentleman raised with me earlier.

Gregory Barker (Conservative, Bexhill and Battle)

If the hon. Gentleman anticipates that there are circumstances in which the Treasury could assume this potentially huge and unlimited liability, does he anticipate that national insurance contributions would have to rise to guard against that?

Kevin Brennan (Labour, Cardiff West)

Not in the least, because that is not what I said. I said that I could understand why the Government had not made that commitment—for the moral hazard reasons mentioned earlier. If we follow the hon. Gentleman's argument to its logical conclusion, the Government's guarantee as lender of last resort to the banking system would have to be underwritten by a massive increase in national insurance. That has not happened, because everyone knows it will not be necessary, because we will maintain confidence in the system. If we build the confidence that is necessary—that is what we have to do in the occupational pension system—there will be

no need for the Government or anyone else to act as a guarantor of last resort.

What workers and scheme members are looking for from the Bill is probably not for us to tell them exactly how things will work, although that is very important. They want to know that the pension promise that they are given is just that: a promise, not a false promise as it has turned out to be in the past. They want the Bill to guarantee that, if a company becomes insolvent and has promised workers a pension based on their final salary, up to 90 per cent. of the pension's value will be protected in the case of active pensioner members. That is the key point.

What is most important is not that rigid handcuffs are put on scheme trustees who are trying to attain that objective, but that people are assured that the pensions regulator and others are keeping a close eye on what is done to pension schemes, and, ultimately, that workers are confident that their benefits will be protected.

Malcolm Wicks (Labour, Croydon North)

We have had a good, general and, at times, technical discussion about this and other clauses, and, indeed, about other parts of the Bill. I will try not to be persuaded to go into too much detail about the pension protection fund, but I listened with great care to what my hon. Friend said on a range of issues.

This part of what is a complex and technical Bill could claim to be top of the pops when it comes to complexity. The seemingly simple question of how we adequately fund a pension scheme brings to mind a range of sub-questions relating to adequacy, the scheme and so on. The issue is difficult. I notice the hon. Member for Eastbourne grinning. We all sit at his feet when it comes to learning, but although I learned much from him about what other people say about the provisions—some think them too strict, others too lax—I do not know whether he thinks them too tough. Doubtless there will be an opportunity for him to draw together and synthesise the analyses that he presented to us and give his own view, although not necessarily now.

The clause requires schemes to satisfy a statutory funding objective. That requires it to have sufficient and appropriate assets to cover its technical provisions. The term ''technical provisions'' is taken from the European pensions directive. It is defined in the clause as

''the amount required, on an actuarial calculation, to make provision for the scheme's liabilities.''

In plain English, that means the amount that a scheme needs to hold now, on the basis of the actuarial method and assumptions used, to meet its pension commitments as they fall due in the future. That is a critical phrase. The clause sets out the broad framework and the key elements involved in the actuarial valuation of a scheme, its assets, liabilities and technical provisions.

Gregory Barker (Conservative, Bexhill and Battle)

Is this a good time for the Minister to respond to my question about what ''sufficient and appropriate'' means?

Malcolm Wicks (Labour, Croydon North)

Perhaps I could come to that later. The concept of scheme-specific funding means that those questions would be tested against the nature of the scheme, so there is no general answer. It would, for example, depend on the age profile of the members.

Nigel Waterson (Conservative, Eastbourne)

I will not keep complaining about this, but clearly the details of how the assets and liabilities are to be calculated will be laid down in regulations and actuarial guidance. I think we are clear about that. However, according to the Library brief, there will be

''alternative methods, and scheme trustees or managers will be able to choose the method most appropriate to their scheme.''

Will the Minister at some point set out those alternative methods?

Malcolm Wicks (Labour, Croydon North)

I will try to cover that either now or when we address later provisions.

Subsection (3) provides for regulations to specify the detailed requirements for how these calculations will be carried out by the scheme actuary. Scheme trustees will play a greatly enhanced role in the operation of the schemes and the new funding requirements. Regulations under subsection (4) will require them to determine what methods and assumptions the actuary will use when calculating the scheme's technical provisions. They will also require that, in doing so, the trustees will need to follow prescribed principles. Those principles will reflect the provisions of the EU pensions directive and will require actuarial calculations to use assumptions on relevant factors, such as investment returns and life expectancy of scheme members, that have been chosen prudently.

Steve Webb (Liberal Democrat, Northavon)

It strikes me that a third funding requirement is lurking: accountancy standards. The Minister is reading out the terms of the EU directive that will feed into the scheme-specific requirement, which is one way of valuing assets and liabilities. The PPF is a second way. Is he happy that either of them relates to the accountancy profession's Europe-wide decisions? Finance directors may be driven to deal with how they present their scheme funds in the annual accounts. That would be a third driver with regard to the mix of assets and liabilities and funding pressures. Is he confident that we have not merely got three different pressures at work at the same time?

Malcolm Wicks (Labour, Croydon North)

The issue of over-regulation has been raised. However, I stick to the point that we can establish broad principles and criteria in the Bill, but we need to work them up with the relevant professionals in order to get things right. Ultimately, the scheme actuaries must satisfy themselves that professional standards are being kept to. The hon. Gentleman is right to say that there are different approaches to the difficult question of how to fund pension schemes adequately. I have come across more than three of them.

Within the parameters that I was describing, the trustees will have considerable flexibility to develop a

scheme-specific funding strategy that reflects the circumstances of their particular scheme. They will be able to take account of factors, such as the age profile of the scheme's members and the balance between active and retired members, which will vary from scheme to scheme. A one-size-fits-all funding requirement is inappropriate. Other relevant matters will include the employer's policy on future salary increases, expected staff turnover, life expectancy and the trustees' investment policy.

I will do my best to answer some specific questions. If I do not have sufficient technical expertise to do so, I hope that Committee members will think it appropriate for me to write to them. The hon. Member for Eastbourne asked a range of questions. The minimum funding requirement came into force only in April 1997. It might not matter too much, but I was unsure whether the hon. Gentleman was defending the MFR or was a principled critic of it.

Steve Webb (Liberal Democrat, Northavon)

Both.

Malcolm Wicks (Labour, Croydon North)

Yes, but at different stages.

The hon. Member for Eastbourne indicated that the MFR was running into difficulties as early as 1998. I do not want to be partisan by wondering aloud why it ran into difficulties so soon after it was passed by a previous Administration.

Gregory Barker (Conservative, Bexhill and Battle)

There was a change of Government.

Malcolm Wicks (Labour, Croydon North)

Political historians will agree that April 1997 was pretty early on for the blame to lie with the new Labour Government. If that is where the blame lies, it was prescient of that new Government to run into difficulties before they were elected.

Nigel Waterson (Conservative, Eastbourne)

I was only trying to make the point that the Minister's Government took the view—rightly or wrongly—as early as 1998 that something needed to be done, and not long thereafter they were clear about what they intended to do, but it has taken until March 2004 for us to get around to doing it. Why has it taken so long?

I have a subsidiary point. The Minister made the interesting observation that much of the Pensions Act 1995 came into force a year or two after it was enacted. The view was obviously taken that a challenging time scale was inappropriate. Does he think that there are lessons to be learned from the way in which the 1995 Act was introduced, not at a leisurely pace, but in a measured way to ensure that it was right?

Malcolm Wicks (Labour, Croydon North)

The hon. Gentleman's theme of the day is having it both ways. He asks us why we have taken so long and then asks whether we should learn the lesson of acting in a measured way. Perhaps he will wrestle with those contradictions and give us a general answer on that later.

The MFR came into force in April 1997 and was subject to a phased introduction. Far from operating at a satisfactory level, it became clear fairly soon after its introduction that it had some serious structural problems, which led to the programme of review and consultation, culminating in the Government's announcement in May 2001 that they intended to replace it with scheme-specific funding arrangements.

It is right to say that that was widely welcomed by employers and the pensions industry. We have taken a measured approach in our consideration of the issues and in the consultation. Of course, we must always find a legislative slot, which explains much about the time scale.

The hon. Gentleman also asked why the Government have twice cut the value of the MFR, in 1998 and 2002. I am bound to say that this is a highly technical arena that concerns the actuarial basis for the MFR, which has, as he said, been adjusted twice. The relative strength of the MFR test is affected by a range of factors, including economics and demography and covering issues such as longevity, changes in yields from equities and other investments, which were mentioned, and changes in the costs of buying annuities and deferred annuities. Perhaps it is inevitable that such factors will change over time and, therefore, the strength of the MFR will fluctuate relative to prevailing market conditions.

The Faculty and Institute of Actuaries monitors the actuarial basis for the MFR, with a view to recommending changes when appropriate. That basis was adjusted in 1998 and 2002, following its recommendations, because the MFR was operating at a higher strength than originally intended. As I said, those changes represented technical adjustments, which were recommended by the actuarial profession and were intended to realign the MFR closer to the strength that was originally intended. They did not involve any change in policy regarding its strength.

These are profoundly difficult matters. Although one is occasionally tempted into partisanship, it is normally sensible to listen to what the actuarial profession advises.

Nigel Waterson (Conservative, Eastbourne)

As we all know, actuaries always get things right, including projections for longevity, which is one of the problems that we face now.

I have a technical, rather than a partisan, question. Does the Minister accept that if those two changes to the MFR had not been made, the people who have lost out on their pensions rights would have more to show for their contributions than they do now?

Malcolm Wicks (Labour, Croydon North)

Hindsight is a wonderful thing. All I can say is that that was the recommendation of the Faculty and Institute of Actuaries at the time and it was sensible of the Government of the day to follow that advice. It all adds up to us—not just to the Government, but to others, too—thinking that we need to move ahead in a different direction, hence the proposals that we are discussing today about scheme-specific funding.

I was asked about timing. The new scheme funding requirements will come into force as soon as is practicable. However, a precise date has not yet been determined. We intend to have a transitional period to allow schemes to maintain the existing three-yearly valuation cycle if they wish to do so. The measure does not have to be introduced as early as April 2005. Its introduction in September 2005 would be in line with the European directive that is coming into force. We are considering that possibility.

In response to the line of questioning adopted by the hon. Member for Eastbourne, unlike the MFR, the new funding arrangements will allow individual schemes to adopt funding strategies and contribution levels appropriate to their specific circumstances. That is the burden of this issue. I said that one size does not fit all when it comes to pension schemes and their actuarial basis. I have indicated a range of factors, including staff turnover, which will need to inform scheme-specific funding.

The hon. Gentleman asked about what one might call moral hazard and whether we need a minimum funding standard to protect the PPF from abuse. He mentioned what he had learned in Washington. We are ensuring that rigorous safeguards are in place to protect it from abuse and to ensure that it has sufficient funds and that costs to the levy payer are minimised. For example, the regulator will have a range of new powers to take action aimed at resolving difficulties arising in a scheme's funding arrangements. Those include powers to impose a scheme of contributions. The PPF will be available for those members whose employers become insolvent if, for example, they have been unable to make up a deficit within the scheme.

The hon. Member for Northavon asked a range of questions. He was particularly interested in the distinction between PPF levels of funding and scheme-specific funding. The risk-based levy will be based on PPF levels of benefit, which we will discuss later. On the difference between that level of benefit and what benefits the scheme holds, a range of considerations come to mind. The scheme-funding provisions require trustees to have in place a funding strategy appropriate to their scheme. There will be no requirement to fund up to the PPF level. If we were to make that a requirement, it would be too general a provision and would run a coach and horses through the concept of scheme-specific funding.

The two concepts are different. That might make for some difficulty in hon. Members' minds—I am not making a point about the hon. Member for Northavon in particular—but this is a matter of horses for courses. It is perfectly appropriate for a scheme to fund up to the PPF level if it wants to, perhaps to avoid the risk-based levy. However, that is not the same as adequacy in terms of scheme-specific funding.

Steve Webb (Liberal Democrat, Northavon)

My broad recollection from our discussions about the regulator is that he keeps one eye on funds, which means ensuring that there is enough money in them, while keeping half the other eye on the pension protection fund. The Minister seems to be saying something slightly different: frankly, if the schemes do not fund up to the PPF level, what the heck? It seems that as long as they are satisfying the scheme-specific funding requirement, the regulator will not come knocking at their door. Which is it?

Malcolm Wicks (Labour, Croydon North)

The regulator is as important as the PPF in ensuring that as few cases as possible need

to be salvaged by the new PPF. The new regulator has a range of powers to ensure that schemes are being run properly. Scheme-specific funding is a requirement that properly means that schemes have sufficient funds on an ongoing basis to meet pensions rights and liabilities. It is not the same—this is the burden of my remarks—as saying that the fund must be funded up to the PPF level in case everything has to be paid out at once. They are different concepts. I can understand that it appears confusing, but there is a logic and rationality to the two concepts.

Nigel Waterson (Conservative, Eastbourne)

I agree with the hon. Member for Northavon. The Minister is dealing with an important issue, and it will save time later on if we deal with it carefully. Can a scheme have its own scheme-specific objective and take all the relevant steps to meet it—meaning it is completely in the clear—but still end up not meeting the PPF requirements and paying a heavy risk-based levy? I wonder whether the industry has picked up on that in the various discussions on how the system will work. I thought of the two provisions as belt and braces, but it sounds as if one is gold-plating the PPF standard whereas the other is more of a basic standard.

Malcolm Wicks (Labour, Croydon North)

As I said, we shall deal with PPF funding later, but the PPF funding measure will be based on the cost of buying out PPF-level benefits with an insurance company. That is how it will be measured. It should be relatively simple for schemes to perform that calculation because it will work according to a similar methodology to the full buy-out valuation of scheme benefits required by the actuarial profession. The funding measure is not a funding standard, and would not be an appropriate funding requirement for all schemes.

Part of the difficulty relates to what seems to be a simple question of how we can fund a pension scheme adequately. As I said, that leads to a host of sub-questions and difficulties. I was thinking about that yesterday. Although actuaries will say that the comparison is far too simplistic, it is like being asked about the mortgage liabilities on one's dwelling. How would we answer that if we had to move house tomorrow? One of my officials helpfully suggested, ''Minister, you would have to move if you lost the next general election.'' I am not sure where that official is based today.

If we needed to pay off our mortgages immediately, we would need a large amount of money. Calculating mortgage liabilities also involves working out what we need to pay out next month, in the year ahead and so on. We are talking about a high standard for PPF levels. With scheme-specific funding, we are talking about a standard that is based on ongoing liabilities. That is the difference.

Kevin Brennan (Labour, Cardiff West)

Just to take the Minister's analogy further, is it the case that the Bill will set up negative equity insurance?

Malcolm Wicks (Labour, Croydon North)

Can we discuss that over a cup of coffee, or possibly something else later this evening, lest I say the wrong thing?

Steve Webb (Liberal Democrat, Northavon)

I knew that I had seen it somewhere, as they say. Clause 5(1)(c)—the objectives of the regulator—states:

''to reduce the risk of situations arising which may lead to compensation being payable from the Pension Protection Fund''.

The Minister seems to be saying that as long as funds satisfy the requirements of clause 179—the scheme-specific funding requirement—the regulator will leave them alone because they can pay a risk-based premium if they are not funding up to PPF levels. However, clause 5(1)(c) states that part of the regulator's job is to reduce the risk of claims on the PPF. The regulator will come knocking on the door because that is part of his role. So the Bill refers to two separate regulations.

Malcolm Wicks (Labour, Croydon North)

I see where the hon. Gentleman is coming from, but with respect, he is wrong. The regulator has to ensure that the pension scheme is run efficiently and competently, in many ways, and that the trustees are doing their job. If they are not, an independent team will be sent in—there will be inspection rights and so on. The scheme will be run at such a high standard that it will not have to be a customer of the PPF. That is not the same as saying that at all times every scheme has to have funds for PPF levels of benefits.

A scheme can fund up to scheme-specific funding levels, but as I said, that might be below the level required for PPF. Scheme-specific funding is appropriate to the scheme. The trustees might say to themselves, ''Yes, we can't suddenly pay out all the rights today should the thing crash, but we are satisfied that it is being adequately run on an ongoing basis and that it would meet the criteria for scheme-specific funding.'' The two concepts are different. If a scheme does crash—we hope that there will be few cases of that—the PPF will make sure that pension rights are honoured.

Nigel Waterson (Conservative, Eastbourne)

I found the Minister's mortgage analogy unhelpful. He is in danger of making the obvious complicated. If what he is saying is correct, my understanding is that both the PPF and the scheme-specific funding are designed to achieve one thing—and one thing only—which is that the money will exist to pay the liabilities throughout the life of the scheme. If the funding requirement is met—as it must be met for the specific scheme—it leaves an extraordinarily narrow risk on which to base the risk-based levy later, a point to which I shall return in detail. It seems that it would take almost an act of God to make a well run scheme that is fully endowed with assets suddenly crash. The Bill seems to be drafted in that way, but I might be wrong.

Malcolm Wicks (Labour, Croydon North)

We shall discuss detailed PPF funding later, so perhaps we can return to the implications of the clause for the PPF. I was asked whether the European Union pensions directive requires the Bill to specify the period for schemes to make good a shortfall in fund. It allows schemes to be underfunded for a limited time, provided that they put in place a realisable and concrete recovery plan to make good the shortfall.

We do not believe that the directive requires the recovery period to be specified in legislation. Rigid

deficit correction periods were one of the main drawbacks of the MFR, leaving some employers to take a short-term approach to funding or even to close their schemes. However, it is clear that the directive does not envisage that the schemes should be permitted to remain indefinitely underfunded. To prevent that from happening, schemes will be required to file copies of their recovery plans with the regulator. If a recovery plan were then replaced with another, trustees will have to explain why to the regulator and to know whether the regulator can impose a time limit on recovery plans.

The hon. Member for Northavon said that the directive requires schemes to have at all times sufficient and appropriate assets to cover the technical provisions and whether that meant full buy-out. The directive does not require a scheme to be fully funded in the sense that it must at any time be able to buy and defer annuities to discharge all its crude liabilities immediately. That would be unrealistic and inappropriate for an ongoing scheme. The directive recognises that actuarial valuations may, of course, identify funding shortfalls and requires domestic schemes in that position to put in place a recovery plan for correcting the shortfall.

Steve Webb (Liberal Democrat, Northavon)

Does the Minister understand my confusion at the phrase ''at all times''? It cannot be true that schemes have sufficient funding at all times if there are also recovery mechanisms. Why are the Government happy with a directive that requires schemes at all times to have enough assets to meet their liabilities if we are not legislating for that?

Malcolm Wicks (Labour, Croydon North)

The directive requires schemes ''at all times'' to have sufficient and appropriate assets to cover the technical provisions. I explained that ''technical provisions'' means funding adequately on an ongoing basis. As we know, such issues are difficult, but they are fundamental. The difference between a fund that would be required to be built up for anything approaching full buy-out could be, depending on the scheme, colossally larger, by a factor of many times, than what would be required on an ongoing basis. If we were tempted into anything that looked like a full buy-out for every scheme, there might be a stampede away from defined benefit schemes. That is one of the difficulties that we face. The Bill seeks to strike a balance between security and reasonableness in terms of how we fund pension schemes and of what we expect employers, among others, to fund.

I was asked about savings. It is assumed that private sector defined benefit schemes have £100 billion invested in gilts and UK corporate bonds. It is also assumed that 5 per cent.—£5 billion—of those investments will be switched to equities after the removal of the MFR and that, on average, an additional 2 per cent. interest a year will be achieved on those switch investments. That additional investment return will amount to £100 million a year. That is the basis of our calculation.

The hon. Member for Bexhill and Battle asked what assets it was appropriate for schemes to hold, and he

obviously was not expecting much by way of an answer because he has not stayed to hear it.

Nigel Waterson (Conservative, Eastbourne)

He has learned from experience.

Malcolm Wicks (Labour, Croydon North)

Touché. I am sure that he will be an avid reader of Hansard in the days to come.

It will be for trustees to determine what assets a scheme should hold. In doing so, they will have regard to the scheme's statement of investment principles and to matters such as the scheme's demographic profile, including the balance between younger members and those who have retired. It is not for me give advice, but a scheme with a relatively young age profile might have a very different investment strategy from one in which the great bulk of members were within 10 years of retirement age. The regulator's code of practice for trustees will cover the factors that they will need to consider in deciding what assets it is appropriate for the scheme to hold in order to meet its technical provisions.

I will not be tempted into commenting on the remarks made by the hon. Member for Bexhill and Battle about the halcyon days of Conservative rule. I will certainly not comment on them in his absence, save to say that people spoke of nothing else in Croydon's dole queues, although the words that they used in their critique were blunter than the word ''halcyon''.

The issue of actuarial methods and assumptions arose. Regulations will require trustees to choose the actuarial methodology and assumptions to be used in calculating their scheme's technical provisions. In doing so, trustees will need to obtain actuarial advice. It would, perhaps, not be useful to go into too much detail, but I can write to hon. Members who want more information.

I may, or may not, have covered all the very technical issues that have been raised, but I have done my best and shall write to hon. Members if I need to answer any other questions.

Question put and agreed to.

Clause 179 ordered to stand part of the Bill.

Clause 180 - Statement of funding principles

Nigel Waterson (Conservative, Eastbourne)

I think that the Minister is about to move the amendment formally.

Malcolm Wicks (Labour, Croydon North)

The hon. Gentleman is anxious to get on the Government Front Bench. I was, indeed, about to move the amendment formally.

Amendment made: No. 318, in

clause 180, page 114, line 20, after 'reviewed', insert

', and if necessary revised,'.—[Malcolm Wicks.]

Question proposed, That the clause, as amended, stand part of the Bill.

Nigel Waterson (Conservative, Eastbourne)

Now that we have disposed of the amendment, I want to make a couple of quick comments about the clause. It is clear that the

Government intend the statement of funding principles—the SFP, as we shall learn to call it—to be reviewed at least every three years. What is the reasoning behind that? The provisions are perhaps an echo of the 1995 Act, so the Minister will probably tell me, ''If it was good enough for the Tories, it's good enough for us.'' [Interruption.] Indeed, the Halcyon days argument. In all the Committees on which I have ever sat, the arguments have eventually become categorised, and a sort of shorthand has taken over.

If that three-year period were to straddle the recent collapse in the stock market, it could make a complete nonsense of the funding principles going in compared to those that should be coming out. Will further guidance be issued on that? Is there a role for the regulator in spreading best practice? Harking back to part 1—it was a long time ago since we discussed that—it seems that that is something for which codes of practice might be available.

Is the Minister relaxed about the possibility that funding principles might be different for particular schemes? It is inherent in the new system that every scheme will have its own set of criteria that will, supposedly, be tailored to that scheme, but might that create problems, with the application of different funding principles? I am trying to get a feel for how the Minister expects the arrangement to work in practice, particularly on the three-year basis.

Malcolm Wicks (Labour, Croydon North)

The clause requires that trustees prepare and keep under review a statement of funding principles. That important new document will be one of the key elements of the new scheme funding arrangements.

The statement will set out the trustees' strategy for ensuring that their scheme is appropriately funded. Subsection (2) requires that it shows the trustees' decisions about what methods and assumptions the scheme actuary should use when calculating the scheme's technical provisions, and about how, and over what period, any funding deficits will be corrected. Regulations under subsection (1) will specify certain other key information underpinning the funding of the scheme that will need to be included in the statement. That could include whether, and under what conditions, funding surpluses may be paid to the employer. As with other clauses in this part of the Bill, the regulator may impose penalties for breaches of the requirements or for unreasonable failure to comply.

The statement will play an important role in improving the transparency and understanding of the funding of defined benefit pension schemes. Our main purpose is that it should set a framework for the parties involved in the funding of the scheme—the trustees, the sponsoring employer and the scheme actuary—to develop an appropriate funding strategy, but we also intend to require trustees to send a copy of the statement to any scheme member who wants to see it.

Committee members will know that schemes are already required to prepare a statement of investment principles. Complementary information about funding is a logical and consistent step. Trustees will be able to

combine those two documents if they consider it appropriate for their scheme. As hon. Members will see when we consider later clauses in this part of the Bill, trustees will need to obtain the advice of the scheme actuary and the agreement of the sponsoring employer when preparing the document. The statement will, for the first time, set out clearly and transparently how the funding of each scheme will operate.

The hon. Member for Eastbourne asked about the time period. Regulations will specify minimum review requirements for the statement. It is intended that, as a minimum, trustees will be required to review the statement in line with each full three-yearly actuarial valuation, but they will also be able to review it at any other time that they consider appropriate. I think that that answers his question. He is right to say that we have been through a period of fluctuation. We do not want to impose a more regular requirement, such as an annual requirement, but what I have said about the importance of trustees being able to review it is an important qualification.

Question put and agreed to.

Clause 180, as amended, ordered to stand part of the Bill.

Clause 181 - Actuarial valuations and reports

Steve Webb (Liberal Democrat, Northavon)

I beg to move amendment No. 281, in

clause 181, page 115, line 12, after 'employer', insert

', recognised trades unions and organisations representing the pensioner members of the scheme.'.

Win Griffiths (Labour, Bridgend)

With this we may discuss the following:

Government amendment No. 324.

Amendment No. 265, in

clause 183, page 116, leave out lines 8 and 9 and insert—

'(6) The trustees and managers of the scheme must send a copy of any recovery plan to—

(a) the Regulator, and

(b) organisations representing the pensioner members of the scheme, and

(c) recognised trade unions,

as soon as reasonably practicable.'.

Government amendments Nos. 325, 326, 332, 333, 335 and 340.

Amendment No. 255, in

clause 188, page 119, line 39, at end add—

'(5) In exercising any of the powers conferred by this section the Regulator must inform—

(a) recognised trade unions, and

(b) organisations representing the pensioner members of the scheme

as soon as is reasonably practicable.'.

Amendment No. 260, in

clause 113, page 70, line 8, at end insert

', and

( ) recognised trade unions and organisations representing the pensioner members of the scheme.'.

Amendment No. 261, in

clause 116, page 71, line 40, at end insert

', and

'( ) recognised trades unions and organisations representing the pensioner members of the scheme.'.

Amendment No. 263, in

clause 122, page 77, line 9, after 'Regulator', insert—

'( ) recognised trade unions and organisations representing the pensioner members of the scheme.'.

Steve Webb (Liberal Democrat, Northavon)

I am sorely tempted to go through each amendment and to set out the basis for Government amendments Nos. 324, 325 and so forth. However, I do not want to deny the Minister that pleasure, so I will refrain and simply speak to amendment No. 281.

The amendment stands in my name and that of my hon. Friend the Member for Chesterfield (Paul Holmes). However, during this afternoon's sitting I will be elsewhere, responding to the Budget debate, and may not be present at the end of the debate on this group of amendments. If it is in order for him to do so, the hon. Member for East Carmarthen and Dinefwr (Adam Price) will judge whether the Government have responded properly to the amendment and whether to withdraw it. I hope that that is acceptable.

The Committee will recognise the form of words in the amendment. It relates to actuarial valuations and reports in the particular context of clause 181. Subsection (7) states:

''any actuarial valuation or report obtained by''

the trustees or managers should be

''made available to the employer within seven days of their receiving it.''

The amendment would require the valuation or report to be supplied not only to the employer, but to recognised trade unions and groups representing retired scheme members. We are not asking for what might be a lengthy document to be sent to potentially hundreds of thousands of scheme members; that would clearly be impractical. However, we think that sending a handful of copies of a detailed report to organisations such as trade unions or pensions organisations would be a reasonable obligation.

The benefit of discussing the amendment is that we might also get a clearer sense from the Minister of the enhanced information flow to scheme members that will arise. My understanding is that, under the Bill, scheme members may start to get more information, perhaps about the funding position of schemes. If the Minister gave a reassurance that scheme members would get annual information about not only their individual rights but about the overall funding position of the scheme in a form that was intelligible

to them—I stress those last few words—then the amendment would not be necessary.

Two different things are going on. Under the amendment, a technical actuary's report, as mentioned in the clause, would be sent to organisations that might reasonably be expected to understand it, such as trade unions or pensions organisations. It may well not be appropriate to send such information to individual scheme members, who would probably not be able to understand such a report. If the Minister gave an assurance that scheme members would get a regular and clear picture of whether their fund is well funded, and, if it were not, what would be done about it, then the amendment would become less important.

The requirement under the amendment is unonerous—if there is such a word. Simply sending the report to two or three organisations to complement the information that individual scheme members will receive seems a fairly modest request.

Malcolm Wicks (Labour, Croydon North)

I will not make any comment on the new alliance between the Liberal Democrats and Plaid Cymru—what with the Conservative party trying to move Government amendments formally, a new alignment in British politics seems to have started today.

I will concentrate on the amendments tabled by the hon. Member for Northavon. We agree with the amendments in principle. We know where the hon. Gentleman is coming from and we have the same objectives. As he said, they require certain information about scheme funding to be sent to trade unions and organisations representing pensioner members of schemes. I shall not go through all the different amendments. They have much the same purpose.

The Government wholeheartedly support the view that members of defined benefit pension schemes should receive information about how their pension scheme is funded and its funding position. As I said in my opening remarks on part 3, we shall require much greater transparency about those issues, using existing powers to make regulations concerning information that must be made available to all members and to recognised trade unions. We already require actuarial valuations to be made available on request. The Bill will put actuarial reports and recovery plans on the same footing, so that they, too, will be available to anyone who wants to see them, as will statements of funding principles.

We also intend, by regulations under clause 165, to require trustees or managers to disclose to members and recognised trade unions information relating to the exercise of the functions of the board of the pension protection fund. We shall consider those provisions under part 2. Further provision in that respect, which the amendments would bring about, would be unnecessary duplication.

The amendments would also require disclosure to organisations representing pensioner members. However, in contrast to trade unions, pensioner representative groups have no precise legal definition,

which would make it difficult for scheme trustees to determine their status. As I said, trustees will anyway be required to disclose the information to all scheme members, including pensioner members.

Nevertheless, I accept that where recognised pensioner organisations exist, it is important for schemes to communicate properly with them. As hon. Members will remember, we had a lengthy debate about that last week, with respect to consultation about arrangements for member-nominated trustees. The procedures in the provisions that we are now considering may give us a basis for thinking further about increasing the involvement of pensioner organisations in relation to information on scheme funding and perhaps other things such as member-nominated trustees.

There may be scope for regulator guidance to encourage best practice. In the case of scheme funding, that could be achieved by enabling members or their representatives in trade unions or pensioner organisations to register to receive the documents automatically and regularly. We shall certainly consider what could be achieved for pensioner members in that way.

Additionally, and most importantly, we shall require the trustees of all defined benefit schemes to send all members, including pensioner members, an annual statement on the funding position of their scheme. I think that that directly answers the point made by the hon. Member for Northavon and it will be welcomed in the Welsh valleys. The report will be based on the last full valuation, supplemented by any actuarial reports for intervening years, but it will be an assessment of those reports, rather than the reports themselves. Alan Pickering made the point in his report that

''communication with members should be tested to see whether it is understandable'',

which reinforces the point that has been made about plain English.

While the full actuarial valuations and reports will be available to those members who want to see them, we recognise that in that form they are unlikely to be of much direct use or interest to most scheme members. Our intention is that the amendments to the disclosure regulations will require that the funding statement give members clear information about the funding position, including whether a recovery plan is in place and, if so, what steps are being taken, over what period, to make up the deficit.

The statement will also say whether the regulator has made any directions on the funding of the scheme, using any of its powers under clause 188 or other provisions in the Bill. In addition, we shall require the funding statement to contain information on the likely position of members if the scheme were to wind up with funding at its current level, including the protection offered by the pension protection fund.

I assure hon. Members that we shall consult interested parties as we develop detailed proposals for the disclosure requirements for secondary legislation. In short, I trust that hon. Members will now see that the proposed measures will introduce a

wider and more meaningful process of disclosure than simply copying the scheme actuary's advice to representatives groups. I put a lot of emphasis on the way we as individuals communicate, and I will ensure that the provisions are written in a way that folks can understand. They are, after all, those with the most direct interest in the matter. I ask the Opposition Members to withdraw their amendments.

Nigel Waterson (Conservative, Eastbourne)

I have not moved my amendment, but it has been helpful to hear the Minister's rebuttal, even if it puts the cart before the horse somewhat.

My amendments Nos. 260, 261 and 263 eerily mirror those in the name of the Liberal Democrats—it must have been a photo finish to get them tabled—and they make the same points. I endorse what the hon. Member for Northavon said in support of them and I am very encouraged by the Minister's comments.

In our discussions on part 1, we attempted to define pensioner representative groups. I appreciate that there must be a legal definition otherwise any self-appointed busybody could claim to represent pensioners. The Minister is welcome to build on our draft definition, if he sees fit, when making his own recommendations.

Amendment No. 265 is not dissimilar to those that I have already discussed. It deals with the fate of the recovery plan. We have said that it must go to the regulator, organisations representing pensioners and trade unions, and it sounds like a means will be devised by the Government to ensure that that happens.

Amendment No. 255 states that the regulator must inform trade unions, pensioners organisations and so on when exercising powers. It is clear that the Government have accepted the spirit of the amendments.

Steve Webb (Liberal Democrat, Northavon)

Here we are again. I welcome what the Minister said about scheme members receiving information about the funding position of their fund and not merely about their own individual entitlements. I also welcome the commitment to plain English.

The Minister says that the technical documents are available on request, but I am not sure that the trade unions or the pensioners organisations would

necessarily know that they had been written. There might be a problem when there are bad relations between them and trustees. We are discussing actuarial evaluations or reports obtained by the trustees, which presumably will not be regular. Although the unions and pensioners organisations will be able to ask for them, I am not sure that they will always know that the documents exist.

Malcolm Wicks (Labour, Croydon North)

I will check the details, but in the case of scheme funding, communication might be achieved by enabling scheme, organisation or union members to register to receive documents automatically and regularly. It might solve the problem that the hon. Gentleman identifies.

Steve Webb (Liberal Democrat, Northavon)

It might well. The Minister mentioned the concept of registration, and if one had the legal right to register, it would help.

The Minister said that the provisions in our amendment could not be undertaken because the concept of a pensioners organisation does not exist in law. Last night, we tabled amendment No. 404 to clause 241, which tries to define in law a pensioners organisation. We are happy for the Government to propose an alternative, and this might be just the Bill in which to do it. Reassured by the Minister's response, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause, as amended, stand part of the Bill.

Nigel Waterson (Conservative, Eastbourne)

I have a couple of points to make on stand part. They are issues requiring clarification which have been put to me by the National Association of Pension Funds, and there was no time to table formal amendments. The Association says that there should be clarity about the transitional provisions between the timing of the first actuarial evaluation following the enactment of the Bill and the end of the old MFR evaluations. How long will they remain valid?

It being twenty-five minutes past Eleven o'clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at half-past Two o'clock.

Standing Committee B

Clause 181 - Actuarial valuations and reports

Nigel Waterson (Conservative, Eastbourne)

Welcome again to our deliberations, Mr. Cran.

I was in the process of referring to comments made by the National Association of Pension Funds. We have already dealt with the amendments to the clause, and I was referring to the overlap of the old minimum funding requirement valuations with the transitional provisions and the first actuarial valuation under the new system. The association wanted to put the word ''material'' before the word ''developments'' in clause 181(2)(c), and I would have tabled an amendment to that effect if I had received the briefing in time. That point is self-evident, so I will not bother explaining it.

The NAPF is a little concerned about the phrase

''within seven days of . . . receiving it'',

in subsection (7). It says that the phrase ''as soon as reasonably practicable'' would make more sense, and that it is important that trustees or managers have an opportunity to see and consider the valuation report at least as soon as the employer does, which is a fair point. That very phrase appears elsewhere in the Bill, so it is not unfamiliar to the draftsmen.

Malcolm Wicks (Labour, Croydon North)

Good afternoon, Mr. Cran.

I shall deal with some of the hon. Gentleman's specific questions. He asked whether trustees should make an actuarial valuation or report available to the employers as soon as is reasonably practical, instead of within seven days of receiving it. However, clause 181 carries forward a similar requirement to the legislation that currently applies to the minimum funding requirement. It is important to ensure that the employer is kept fully informed at key stages of the valuation process. It is appropriate to ensure that that seven-day period applies equally to the new scheme funding provisions, so we would like to stick to it.

On the question whether schemes must do a scheme-specific valuation straight away, we will ensure that appropriate arrangements are in place to allow schemes to make a smooth transition to the new requirement. Those arrangements will be set out in regulations, and we will consult on the detailed proposals before the regulations are introduced. We intend that there will be a transitional period to allow

schemes to maintain the three-year valuation cycles if they wish to do so.

The hon. Gentleman also asked whether the requirement for actuarial reports should be restricted to covering material developments since the last valuation. We do not believe that such a restriction would be necessary or appropriate. The European pensions directive requires actuarial reports to cover developments in the schemes' technical provisions and changes in the risks covered. The detailed framework for the calculation of a scheme's assets and technical provisions will be set out in regulation. We will consult interested parties as we finalise those detailed requirements.

Question put and agreed to.

Clause 181, as amended, ordered to stand part of the Bill.

Clause 182 - Certification of technical provisions

James Cran (Conservative, Beverley and Holderness)

With this it will be convenient to discuss Government amendments Nos. 321 to 323.

Nigel Waterson (Conservative, Eastbourne)

It may be because I was considering the amendments late at night, but I cannot get my head around what they are designed to achieve. Will the Minister talk us through them?

Malcolm Wicks (Labour, Croydon North)

As it happens, I prepared a note over lunch in anticipation of that question. Government amendments Nos. 320 to 323 amend the requirements in clause 182 relating to the actuary's certification of the scheme's technical provisions. Government amendment No. 320 to subsection (2)(a) clarifies the fact that the certificate must state that the calculation of the technical provisions has been made in accordance with regulations made under clause 179. Clause 179 provides for regulations to specify ''alternative . . . methods and assumptions'' and to specify that

''it is for the trustees or managers to determine which methods and assumptions are to be used''

in accordance with prescribed principles.

Government amendments Nos. 321 and 322, which apply to subsection (2), remove the requirement that the calculation must be consistent with any prescribed guidance. We agree with the professional body for scheme actuaries, the Faculty and Institute of Actuaries, that there is no need for additional prescribed guidance, as the requirement will be set out in the regulations. Government amendment No. 323 removes the power in subsection (3) to prescribe further requirements, as it is considered that the requirements of subsection (2) are sufficient.

Amendment agreed to.

Amendments made: No. 321, in

clause 182, page 115, line 23, leave out from beginning to ', and'.

No. 322, in

clause 182, page 115, leave out lines 25 to 27.

No. 323, in

clause 182, page 115, line 28, leave out subsection (3).

No. 324, in

clause 182, page 115, line 31, leave out

'as soon as is reasonably practicable'

and insert

'within a reasonable period after the end of the period within which the valuation must be received by the trustees or managers'.——[Malcolm Wicks.]

Question proposed, That the clause, as amended, stand part of the Bill.

Nigel Waterson (Conservative, Eastbourne)

I am grateful to the Minister for that explanation. I am sure that it is because of my slowness on the uptake that I required an explanation of the amendments. It seems that they simply shrink the amount of prescription allowed under the clause. As I said, it is difficult to get one's head around what is likely to emerge, simply because there is to be so much prescription in subsequent regulations. I hope that we will see those regulations one day.

I wonder whether the Minister saw a report a few days ago saying that Standard and Poor's, the ratings agency, is launching a service to identify the likelihood of a company pension scheme remaining in deficit when a company goes bust. I will tell him a little bit more about that, in case he has not heard the reports. To assist any official who might be scribbling a note on this issue, I would like to know to what extent such certification can be sub-contracted. Many of the certifications, recovery reports, actuarial reports, funding principles and other things required will create a significant burden, particularly for smaller schemes. Clearly, they do not pose a problem for those running the Marks and Spencer or British Airways pension scheme. However, there is at least the possibility of a private sector solution.

According to the report, Standard and Poor's, which is reputable and long-standing in its field, as the Minister will know, has spent two years developing a service that uses complex models to measure the likelihood of large companies defaulting on debt obligations, and it applies that to their current situation. Apparently, its reports will have three strands, which to some extent reflect what is in the Bill. The first strand assesses the financial strength of the company, and the solvency of its pension scheme and the adequacy of the contributions being made to it. The second strand looks at whether the investments made by the scheme are likely to meet its requirements. The third strand assesses institutional asset managers.

The bad news is that S&P will award companies up to five stars, depending on the strength of their pension schemes, although given the relative lack of success of star schemes—or at least those run by the Government—we might perhaps persuade it to make the stars rosettes or spanners or something else. S&P says that its rating system will enable trustees to communicate the company's findings easily to employees. There is some merit in that, and I am sure that the Minister would agree that the public sector does not have a monopoly on wisdom in these matters. Although I am not suggesting that he should

give me a definitive answer now, perhaps I may ask him to consider whether certification and compliance with some of the technical provisions could be met with arrangements such as those in the S&P scheme. Malcolm Wicks: I saw S&P's proposals in outline, although I have not studied them in detail. In response to one of the hon. Gentleman's points, our current approach is a private sector solution. We are not asking the Government Actuary's Department to do this work. I am happy to consider the implications of what he proposes. However, the scheme is responsible for itself, subject to the provisions that we are discussing the powers of the regulator, and so on. I would not want anything to take away responsibility from the trustees for the governance of their own scheme or from the scheme actuary, for example, but I shall look further into his question.

Question put and agreed to.

Clause 182, as amended, ordered to stand part of the Bill.

Clause 183 - Recovery plan

Clause 184 - Schedule of contributions

Nigel Waterson (Conservative, Eastbourne)

The NAPF is worried that clause 184(6)(b) will lead to actuaries being more cautious and risk averse, which is difficult to conceive of. None the less, they can apparently be even more cautious and risk averse than they already are in their view of what can be expected, with the consequence that trustees will increasingly decide to pursue risk-minimising, rather than return-seeking, investment strategies. In other words, they will pursue a course rather like defensive medicine—a defensive investment strategy. The NAPF thinks that that could cause the cost of funding schemes to increase, with a significant impact on the cost to scheme sponsors. It expressed the hope that the regulations, when they appear, will do their best to discourage such an outcome. I should be grateful if the Under-Secretary could reassure me and the NAPF about that.

Chris Pond (Labour, Gravesham)

Under the new provisions, the trustees will make the key funding decisions about the scheme. They will have to seek the employer's agreement and obtain actuarial advice. It will be for the trustees to decide the degree of risk appropriate for the circumstances of the scheme when they decide what method and assumptions within the prescribed framework will be used for the calculation of the technical provisions. The actuaries will be required to certify that any schedule of contributions is consistent with the statement of funding principles, which sets out the methods and assumptions to be used. The actuaries will be required to state whether in their opinion, and on the basis of the actuarial assumption chosen by the trustees, the scheme's funding position will be met or restored during the period covered by the schedule of contribution.

It is difficult in such circumstances to know why the clause should make actuaries, who, as the hon. Member for Eastbourne (Mr. Waterson) suggests, are usually a fairly loose-willed group of people who can be a bit zany, more risk averse than they would otherwise be. The clause ensures that the trustees have to make the decisions based on actuarial advice. On that basis, actuaries can put forward the advice that they think is appropriate, which is neither risk averse

nor riskier than would otherwise be the case. For that reason, we cannot understand why clause 184 would have the effect that has been described.

Question put and agreed to.

Clause 184, as amended, ordered to stand part of the Bill.

Clause 185 - Failure to make payments

Chris Pond (Labour, Gravesham)

I beg to move amendment No. 336, in

clause 185, page 117, line 21, leave out subsection (3).

James Cran (Conservative, Beverley and Holderness)

With this it will be convenient to discuss Government amendment No. 337.

Chris Pond (Labour, Gravesham)

These are tidying up and drafting amendments, so I doubt whether the Committee will dwell on them for too long. Government amendment No. 336 removes the requirement on actuaries and auditors to notify the regulator when they become aware of a failure to pay contributions in accordance with the schedule of contributions. Government amendment No. 337 removes the penalties for non-compliance with that reporting obligation. The two amendments remove duplicate provisions, as the reporting duties for actuaries and auditors are contained in clause 45, which is entitled ''Duty to report breaches of the law''. On that basis, I hope that the Committee will not have difficulty in accepting the amendment.

Amendment agreed to.

Amendment made: No. 337, in

clause 185, page 117, line 33, leave out paragraph (b).—[Mr. Pond.]

Clause 185, as amended, ordered to stand part of the Bill.

Clause 186 - Matters requiring agreement of the employer

Chris Pond (Labour, Gravesham)

I beg to move amendment No. 338, in

clause 186, page 118, line 12, after first 'the' insert 'active'.

James Cran (Conservative, Beverley and Holderness)

With this it will be convenient to discuss Government amendments Nos. 339 and 341.

Chris Pond (Labour, Gravesham)

The amendments deal with the modification requirements under subsection (3). Government amendment No. 338 amends subsection (3)(b) so that only the active members of the scheme must be notified when the trustees or managers have exercised their power to modify the scheme with regard to the future accrual of benefits. Last Thursday, we discussed the Bill's approach to active, pensioner and deferred members. We put undue emphasis on active members, so I want to underline that, under the provisions, deferred and pension members will not be affected by a change to the future accrual of benefits.

Government amendment No. 339 requires members to be notified within one month of the modification

taking effect, not within one month of the decision being made. The change makes it clear that modification is not dependent on the notification having taken place and gives the trustees a longer period for notification beginning on a clearly defined date.

Government amendment No. 341 is a technical amendment to subsection (5), which extends the regulator's powers to impose sanctions in circumstances in which the trustees or managers fail to take all reasonable steps to comply with the notification requirements.

I trust that the Committee will feel able to accept the amendments.

Amendment agreed to.

Amendments made: No. 339, in

clause 186, page 118, line 12, leave out 'decision being taken' and insert 'modification taking effect'.

No. 340, in

clause 186, page 118, line 15, leave out

'as soon as reasonably practicable'

and insert 'within a reasonable period'.

No. 341, in

clause 186, page 118, line 17, after 'subsection (1)', insert ', (3)'.—[Mr. Pond.]

Question proposed, That the clause, as amended, stand part of the Bill.

Nigel Waterson (Conservative, Eastbourne)

I want to make a couple of points. I apologise that they did not materialise in the form of amendments, but that was because of the breathtaking, breakneck speed at which we considered earlier parts of the Bill. Again, they involve issues raised by the NAPF that merit the Committee's consideration.

On clause 186(1), the NAPF welcomes the provision requiring trustees to gain the employer's agreement on key funding issues. That makes sense. On clause 186(2), it would like to replace the expression

''the future accrual of benefits''

with the phrase ''anything that does not affect accrued rights''. It takes the view that that would be clearer and more helpful to schemes. I do not know whether officials could examine that proposal, and I do not expect the Under-Secretary to have an instant response.

Beyond that, we have no comments to make except on subsection (4), but I think that they will arise more naturally in respect of the powers of the regulator that are set out in clause 188(2). I will therefore leave those further points for the moment.

Chris Pond (Labour, Gravesham)

Funnily enough, I did have an instant reaction. It was to disagree with the hon. Gentleman's proposal that we should insert the wording ''accrued rights'', because it is open to interpretation. The term ''future accrual of benefits'' means benefits that accrue after the date of the modification. The wording was carefully chosen. I hope that the Committee will accept

that it was chosen for a purpose and accept the clause as it stands.

Question put and agreed to.

Clause 186, as amended, ordered to stand part of the Bill.

Clause 187 - Matters on which advice of actuary

Chris Pond (Labour, Gravesham)

I beg to move amendment No. 342, in

clause 187, page 118, line 27, after 'preparing', insert 'or revising'.

James Cran (Conservative, Beverley and Holderness)

With this it will be convenient to discuss Government amendments Nos. 343 and 344.

Chris Pond (Labour, Gravesham)

Clause 187(1) sets out matters on which trustees or managers must obtain the actuary's advice. Government amendments Nos. 342 and 343 insert into that list the requirement to obtain the advice before ''revising'' as well preparing a recovery plan and before

''modifying the scheme as regards the future accrual of benefits''.

The intention is that trustees and managers should seek advice from the scheme actuary before making any of the key decisions on the funding of their schemes.

Government amendment No. 344 inserts into the clause a subsection (4) that provides for the regulator to penalise a trustee or manager who fails to ''take all reasonable steps'' to comply with the requirements to obtain advice from the scheme actuary. That provision is consistent with the approach taken elsewhere in this part of the Bill where duties are placed on trustees and managers. I hope that the Committee will accept the amendments.

Amendment agreed to.

Amendments made: No. 343, in

clause 187, page 118, line 28, at end insert—

'(e) modifying the scheme as regards the future accrual of benefits under section 186(2).'.

No. 344, in

clause 187, page 118, line 35, at end insert—

'(4) Where subsection (1) is not complied with section 10 of the Pensions Act 1995 (civil penalties) applies to a trustee or manager who has failed to take all reasonable steps to secure compliance.'.—[Mr. Pond.]

Clause 187, as amended, ordered to stand part of the Bill.

Clause 188 - Powers of the Regulator

Nigel Waterson (Conservative, Eastbourne)

I have three points to make about clause 188. A moment ago, I flagged up the fact that I wanted to return to the powers that were available when an agreement could not be reached between trustees or managers and the sponsoring employer, as envisaged under clause 186(4). Those powers are largely set out in clause 188(2); the regulator has some wide-ranging powers.

The National Association of Pension Funds says that it would

''like to see a statutory requirement on the Regulator to consult on and publish its policy framework for determining matters which could be subject to orders as set out in Clause 188 (2) (a) to (c).''

That may already be in the pipeline. There is a department within a Department producing draft regulations, codes of practice, guidance and God knows what else. If such a requirement is not already on its shopping list, perhaps it could be added to it.

The Library briefing makes an interesting point. There seems to have been a change of Government policy since the June 2003 White Paper was published; we have to remember the dates, because there has been a blizzard of White and Green Papers on pensions policy. That document proposed that trustees should be given a sort of nuclear option as a last resort—the power to freeze or wind up the scheme. Pensions Week, which is quoted in the briefing, thought that that would give power and strength to the trustees in their dealings with the sponsoring employers. Given that they now have to meet the full buy-out cost on wind-up, perhaps they will be more reluctant to allow that to happen. The Government seem to have gone down the slightly different path of giving the regulator more specific powers to impose a schedule of contributions or to give directions on how and over what period any failure to meet the statutory funding objective should be rectified. Will the Minister give some background on that shift on the part of the Government?

My final point concerns issues that I assume we will deal with one day—those related to simplification. We are quite properly dealing with the powers of the regulator to modify a scheme in the circumstances set out in clause 188. However, so far, the Bill is missing what I shall call by way of shorthand the section 67 points—they relate to section 67 of the Pensions Act 1995—which the Minister has, in fairness, said that he will come to. Those would make it easier for the sponsoring employer and the trustees to amend the terms of an existing scheme, rather than just shut it down. Under clause 188, the regulator would be given significant powers in certain circumstances, but we should not forget the enormous attraction of simplification, which could be available to most

schemes. Hopefully, one fine day, that could happen as part of this legislation.

Malcolm Wicks (Labour, Croydon North)

Clause 188 gives the pensions regulator additional powers to intervene and take corrective action if it becomes aware that any part of a scheme funding process is breaking down. It is an important clause. Subsection (1) sets out the circumstances in which the regulator may intervene, such as when an agreement cannot be reached with the sponsoring employer or when some key part of the process, such as an actuarial valuation, has not been carried out.

In such circumstances, the regulator would have the wide range of powers in subsection (2), which it could use in a proportionate and targeted way to help resolve matters. The powers under subsection (2) would modify the future accrual of benefits for active members, direct how a scheme should calculate its technical provisions, determine the time frame over which funding deficits must be made good and/or impose a schedule of contributions.

Such powers are essential to assist the regulator in the exercise of its responsibilities to protect members' interests when the security of their benefits appears to be at risk, and to help to protect the pension protection fund from the moral hazard of trustees pursuing funding strategies that do not comply with the legislation in the expectation that the fund will bail their scheme out if things go wrong. The powers will be additional to those set out in part 1, including powers to issue improvement notices, to prohibit or appoint trustees, to issue a freezing order and, ultimately, to order the winding up of a scheme in exceptional cases.

In answer to the points raised by the hon. Member for Eastbourne on consultation, yes, we propose that there should be consultation. It is important that the regulator's powers in clause 188(2) should not be construed as a get-out clause for trustees and employers who wish to absolve themselves of the responsibilities imposed on them by part 3. The regulator will therefore publish guidance on how it proposes to exercise those powers under normal circumstances. I expect such guidance to be available from day one. The regulator's code of practice will be drafted by operational experts in consultation with relevant stakeholders involved in schemes. Before a code of practice becomes active, it will be subject to a rigorous approval process that will require agreement by the Secretary of State and scrutiny by Parliament. Either may reject the code and insist on revision.

The hon. Gentleman asked why the power of trustees to wind up a scheme—the so-called nuclear option—has been dropped. As he intimated, such a power was included in the proposals announced in the Green Paper in December 2002. It was intended as a power of last resort, only for use if the trustees could not reach agreement with the employer on funding the scheme. However, we received many representations that trustees should not have the power to wind up a scheme and force an employer who is willing to continue to sponsor it to meet the full buy-out costs.

Since the Green Paper was published, we have continued to develop detailed proposals for legislation in the light of continuing discussions with the pensions industry and other interested parties. We have taken account of those concerns in drawing up the detailed proposals in the Bill.

Question put and agreed to.

Clause 188, as amended, ordered to stand part of the Bill.

Clause 189 - Power to modify provisions of this Part

Nigel Waterson (Conservative, Eastbourne)

This is a small point, but an important one. Yet again we are considering a very wide get-out clause. Clause 189 will allow, by regulation, the modification of provisions in this part of the Bill as they apply in prescribed circumstances. Indeed, one could almost have eliminated all the other clauses in this part and left just this clause, because, as has been pointed out not just by me but by representatives of the industry and other interested parties, the reality is that all the meat in this part has been left to be prescribed. Piling one thing on another, there is now a power to change the prescription later.

Since we have no idea at present what the detailed regulations will provide, it is almost impossible to conceive what the Government have in mind for changing later. Such sloppy legislation makes it extremely difficult to gauge just what we are being asked to sign up to in this part. As such, the Minister may have noticed the paucity of Opposition amendments and suggestions from the industry for amendments. We are being offered a pig in a poke, if I may use that expression. If I thought that we could win the vote, I would recommend that my hon. Friends vote against clause 189.

Malcolm Wicks (Labour, Croydon North)

I am sure that one day the hon. Gentleman will win a vote, but not just yet. This issue, which he has returned to on several occasions and which, to be fair, Opposition Members tend to return to on such occasions, raises the crucial question about the balance that must be struck between provisions in a Bill and the need for secondary legislation. However, I shall not deal with that well-known British constitutional point. I hope that the hon. Gentleman will concede that in technically detailed matters such as this, where circumstances change regularly—if not all the time—it would be wrong of us to constrain and restrain ourselves in the Bill if that meant that its overall objectives could not be pursued.

The framework and broad principles of the scheme-specific funding requirements, which will replace the MFR, are set out in the Bill. The detailed requirements that will operate within that framework will more properly be set out in regulations, for the reasons that I have hinted at. That will enable us to work closely with the pension industry and bodies representing both employers and pension scheme members to ensure that

the detailed requirements of the regulations are workable and effective.

The public need to know what the broad thrust of the wishes of the Government and Parliament. We can then enter the detailed discussions that the hon. Gentleman has urged us to take seriously on a number of occasions; we do take them seriously.

Question put and agreed to.

Clause 189 ordered to stand part of the Bill.

Clause 190 - Construction as one with the Pensions Act 1995

Nigel Waterson (Conservative, Eastbourne)

I have only one question for the Minister. What does the clause mean?

Malcolm Wicks (Labour, Croydon North)

I should have thought that that was fairly obvious. Clause 190 provides for the terminology used in part 3 of the Bill to be interpreted as having the same meaning as it does in part 1 of the Pensions Act 1995. I imagine that the hon. Gentleman voted in favour of that Act. I regard him as a scholar of that legislation.

The clause is needed to ensure consistency between the provisions in part 1 of the aforesaid Act and part 3 of this Bill. Part 1 of the 1995 Act contains the regulatory framework for occupational pension schemes and the provisions in part 3 of the Bill relate to scheme funding.

Gregory Barker (Conservative, Bexhill and Battle)

For the benefit of hon. Members who were not in Parliament in 1995, would the Minister care to refresh our memories about what that Act said?

Malcolm Wicks (Labour, Croydon North)

That is one of those questions where the answer is known already. Sections 124 and 125 of that Act define the bulk of the terms used in the legislation, such as ''member,'' ''actuary''—it does not refer to a ''cautious actuary''—and ''employer.'' Clause 190 ensures that those terms have the same meaning when used in the scheme funding provisions.

Nigel Waterson (Conservative, Eastbourne)

I just want things to be made clear. The question was not wholly fatuous. The jury is still out on the nature of the answer. Does the phrase ''as one'' simply mean that words in the Bill mean the same as they did in the 1995 Act, or does it go further than that? If there is a clash between, for example, powers and responsibilities in the two pieces of legislation, how would that be resolved? If the Minister is saying, ''This clause simply states that the definitions of words and terms of art in that Act are being carried forward'', I would be slightly bemused as that is not what the clause states, but I would be happy to accept that.

Malcolm Wicks (Labour, Croydon North)

This is simple and straightforward stuff; it just does not sound as though it is. I agree with the hon. Gentleman on that. The intention is to ensure that there is consistent terminology and vocabulary across the two pieces of legislation. For example, in clause 186(3) the term ''members'' has the same meaning as in section 124(1) of the 1995 Act. I

would never dare to refer to the hon. Gentleman as wholly fatuous.

Question put and agreed to.

Clause 190 ordered to stand part of the Bill.

Clause 81 - The board of the Pension Protection Fund

James Cran (Conservative, Beverley and Holderness)

I shall now put the Question—

Malcolm Wicks rose—

James Cran (Conservative, Beverley and Holderness)

If the Minister wishes to speak, far be it from me to prevent him from doing so. I cannot guess who wants to speak.

Malcolm Wicks (Labour, Croydon North)

I apologise for being slower than you, Mr. Cran, at least on this occasion.

It is appropriate that I speak to clause 81, as it is the first clause on the pension protection fund. I shall set out the context for the clause because, up until now, the pension protection fund has been rather like Banquo's ghost; we have referred to it frequently, but have not dealt with the substance of it.

Part 2 concerns the new pension protection fund—a crucial measure, as we have heard, to increase member protection and boost confidence in pensions generally. As most of us are acutely aware, if a company goes bust, someone who has paid into that company's final salary scheme throughout their working life could face losing not only their job but their pension if the scheme is left underfunded. I have met people in that situation and I know, as I am sure do other hon. Members, how deeply that can affect them and their families. That is why the fund is such a vital step. It will benefit at least 10 million members by giving them the reassurance that they need to pay into their company scheme, and they will be safe in the knowledge that they will have a secure retirement even if their company goes bankrupt.

I am pleased to say that this significant move to improve security and confidence in pensions has rightly received a positive response. I take the opportunity to thank all those involved in the consultation for their contributions and support. It is safe to say that we all stand behind the common goal of improving pension protection, but, as some have rightly pointed out, to achieve that goal we must ensure that the detail of the new fund is right and that it works. To build on the expert advice that we have already received from key players in the pensions world and beyond, the next few weeks of constructive debate in Committee will be just the opportunity to go one step further and take a closer look at the design of the pension protection fund.

I shall set out the areas that this part of the Bill will be covering and talk through their main features. The first area is the PPF as an organisation and its governance arrangements. As Committee members are aware, the PPF will be an executive non-departmental public body run at arm's length from Government in order to maintain its independence. At the same time, it will retain a necessary degree of

accountability. There has already been some debate about whether the Government should be financially involved with the PPF, and we shall no doubt return to that issue in the days ahead.

It is worth pointing out that we have not taken lightly the decision to make the fund responsible for its own financial management. We have learned lessons from the experience of the American Pension Benefit Guaranty Corporation, we have been careful to make our financial assumptions as sound as possible, and we have built in safeguards to ensure that the British PPF can be self-sufficient in the long term. The new organisation will be governed by a board, the members of which will be appointed in an open and transparent way, making the best use of skills, experience and knowledge. Some Members may have noticed that we are already planning ahead by starting the recruitment process for the key positions of chairman and chief executive, as it is sensible for them to be involved at the earliest stage in the development of the fund.

The board's main function will be to pay PPF compensation and ensure that there are enough funds to pay that compensation by managing the calculation and application of the levy and setting and overseeing the investment strategy. In terms of the dispute procedure, the PPF will follow good governance guidelines by having a clear and transparent internal procedure for dealing with disputes similar to the current practice for pension schemes. There will also be ultimate access to an independent PPF ombudsman and the High Court if required.

In addition to its main functions, the board will take over responsibility from the pensions compensation board for paying compensation in cases of fraud. That changeover is intended to make life simpler all round and improve efficiency, as it makes sense for all types of compensation relating to occupational pension schemes to come from one single source. The new arrangement will mean that the PPF board will have the authority to pay compensation to both defined benefit and defined contribution schemes up to 100 per cent. of the value of the loss due to fraud. In order to cover the cost of fraud, a fraud compensation levy will be charged to both defined benefit and defined contribution schemes, but only when the need arises. I am grateful to you, Mr. Cran, for allowing me to set the context, because that is probably helpful to Members.

Clause 81 sets up the board of the pension protection fund. I have outlined in my introduction the reasons for introducing the fund. Suffice it to say that it forms a part of a substantial, balanced package of measures that seek to ease the financial and administrative burden on employers while offering a sustainable system of protection to individuals. Under clause 81 the board of the fund is set up as a corporate body referred to as ''the board''. Although occasionally I might refer to that as the fund, hon. Members will know that in both cases I am talking about the PPF; that is to avoid confusion with the pot of money, which is referred to as the pension protection fund. The PPF board will ensure that the PPF will significantly improve protection for scheme

members as individuals in defined benefit pension schemes based in the UK will have a safety net to ensure that they will always receive a meaningful pension, even if their company goes bankrupt.

Nigel Waterson (Conservative, Eastbourne)

I think that the Minister is right. It is probably sensible to have an overview of this central part of the Bill before we get into the detail. I should like to touch on a couple of things that he said before I expand on my own points. He reiterated two things that have been made clear by Ministers. First, the fund must stand on its own and will have no support from Government. I shall deal with that in more detail later. The official Opposition have real worries as to whether the Government are being realistic, simply because of the way in which they have chosen to set up this fund, not least because they have got themselves into a situation in which the funds have to work on a reduced, flat-rate levy, at least in the early stages. We shall go into that in more detail in due course.

Secondly, the Minister said that there will be no retrospectivity in the compensation. Again, we have specific tabled amendments on that, as have other Committee members. Has he received any guidance from No. 10, following the meeting the other day, on how best to approach the issue? It seems as if those above his pay grade—if I can put it like that—are taking an interest. If there is to be a further dollop of amendments on another important issue pertaining to the Bill, it would help to know about that in good time.

The Minister also touched on the purpose of the measure, which is to protect the 10 million or so current members of final salary schemes. Again, I must remind him of the view of his own pension tsar, who thinks that that figure will be down to around 1.4 million within 20 years. Since the Bill was published, we have said that the measure will do nothing to encourage new final salary schemes or even to keep the existing ones open if they were due to close. We are passing legislation that will preside over the gentle decline of the final salary scheme. Subject to the amendments on DC schemes that may be tabled—that has been flagged up, but we have seen nothing yet—that is principally what the Bill is about, as the Minister said.

Malcolm Wicks (Labour, Croydon North)

It might help if the hon. Gentleman told us whether the Conservative party supports the pension protection fund? He has some technical questions on it, but will he explain why Her Majesty's loyal Opposition declined to give the Bill a Second Reading?

Nigel Waterson (Conservative, Eastbourne)

We have been around that course, but I am willing to go around it again. The Minister is well aware, because he and I came into the House on the same day in 1992, that if the Opposition do not want to vote against a Bill because it contains some things on Second Reading that are worth while and others that are not, their only option is a reasoned amendment. The rules of the House require that the reasoned amendment must start with the magic words,

''this House declines to give a Second Reading''. I know that it sounds bizarre and would seem odd to the average Martian watching our proceedings. The Minister, however, has had his 10 cents' worth out of that particular point.

To clarify our position, we are in favour of an insurance scheme. I see that the Minister has a piece of paper, to which we shall have to return. As I said, we have severe reservations about the way in which the fund is being established. In a recent letter to my hon. Friend the Member for Havant (Mr. Willetts), the Secretary of State stated:

''In designing the PPF, we are looking to import those elements of the US model that work well and fit best with our system of provision.''

He makes other points, to which I shall return, but that is our starting point.

Other countries do things differently. Holland and Germany, for example, have rigorous funding requirements. The Government examined a variety of models and chose to follow the American model of 30 years ago—the American Pension Benefit Guaranty Corporation of 1974. I said that I thought it appropriate to go to Washington to hear a bit more about it at first hand. There are lessons for us to learn from the experience of that fund. Some people's reaction verged on incredulity when they discovered what line the Government were going to pursue. When that fund was set up, the Americans did not pay out benefits until they had built up reserves.

I quoted Mr. Kandarian, and no doubt I will do so again at length—we will hear much about him in this stage of our deliberations. However, his plea was that we must not start until we have much more rigorous funding requirements and a proper risk-based levy that goes beyond the risk that is currently built into the levy applied in the USA. I am sure that his departure from his job at the PBGC—nominally to spend more time with his family—was not unconnected with his experience of trying to make sense of the organisation that he had taken over.

It is useful, as well as coincidental, that we are discussing this on the very day on which the papers report that the four most senior actuaries in the country have written to the Secretary of State expressing what they call ''our serious concerns'' about the PPF. I would have thought—especially with the American model fresh in our minds—that Ministers would have gone to some lengths to ensure a broad element of consensus, not just on the principle of what is to happen, but on how it is to be organised.

It strikes me as remarkable that at this late stage, as we discuss this part of the Bill, the president of the Institute of Actuaries, his president-elect, the president of the Faculty of Actuaries, and the vice-president of that body have written a joint letter to the Secretary of State. As I said, they expressed their ''serious concerns'' about the PPF as set out in the Bill. They said:

''The PPF has an important role to play in helping to rebuild public confidence in retirement saving.''

None of us can disagree with that sentiment. They go on to say:

''It is therefore vital that it is set up and operated with clear objectives'',

and make the point that the way in which the Bill is constructed suggests that the PPF

''will operate like a pension fund. As such, it would be subject in the future to the same risks''

of failure

''as those which have given rise to the need for the PPF in the first place.''

In other words, there will be a domino effect. They continue:

''If this is to be the case, then it is essential that the public are clearly informed from the outset that it is not the Government's objective to provide 'guaranteed' benefits from the PPF.''

However, they go on to note that, at times, Ministers' looseness of language, which I am sure it is unusual, has meant that the PPF has been described as an insurance fund.

On Second Reading, the Minister referred to the PPF as ''honouring pension promises.'' The actuaries say:

''If these are the Government's objectives, the PPF must be set up and operated like an insurance company, subject to full insurance supervision and solvency regulations.''

They ask for a meeting with the Secretary of State.

Gregory Barker (Conservative, Bexhill and Battle)

I have been listening carefully to my hon. Friend. Does he agree that if the PPF is a mirror image of the smaller funds that it is supposed to protect, it will be subject to many of the same negative forces—namely, market forces—which will have a detrimental effect on it? A general decrease in the value of gilts or equities will have a knock-on effect on the holding fund if it is not simply a pot of ring-fenced Government money. There is a danger that the PPF will be affected by the same forces that will drive funds to draw on it in the first place.

James Cran (Conservative, Beverley and Holderness)

Order. I note that the hon. Gentleman's intervention was turning into a speech. I did not want to interrupt him, however, because his points were important.

Nigel Waterson (Conservative, Eastbourne)

As it happens, my hon. Friend touched on investment policy, which I shall deal with shortly.

Actuaries are almost by definition retiring people who are not normally in the habit of writing open letters to the Secretary of State. Clearly, there must have been a breakdown in communication somewhere along the line because in the attachment to their joint letter they make a crucial point about members' benefits, which goes to the heart of the Bill and, in particular, the clause. They say:

''The liabilities that the PPF will take over from a failed scheme are limited. For retired members, no future increases in pension will apply for benefits earned for service before April 1997, while future increases for benefits earned for service since April 1997 will be limited to 2.5 per cent. p.a. For members who are not retired . . . only 90 per cent. of their benefits will be covered. These benefits will be inflation proofed up to retirement, up to a limit of 5 per cent. p.a. . . . In addition, there is an overall maximum pension of £25,000 p.a. which will be covered by the PPF.''

They state, quite fairly, that limits to the extent of the safety net already exist in the Bill. The actuaries go on to make the point:

''There is a power in the Bill for the Board of the PPF to stop increasing pensions if the Fund cannot afford the cost of further increases. There is also a power for the Secretary of State''—

no less—

''to further reduce the benefits being paid by the PPF.''

On the point made by my hon. Friend about investment and the responsibilities of the board, which will be established by clause 81, the actuaries state that the board

''must draw up a SIP and appoint at least two investment management companies. The least risky, or best matching asset class for a pension scheme to invest in, in order to meet future pension payments, is bonds. However, a typical UK pension scheme will invest a large proportion of its assets in equities. Equities are expected to outperform bonds over the long term and, in a typical scheme, the contributions are determined by taking credit in advance for some of this expected out-performance . . . Despite the risks associated with equity investments, pension fund trustees do not hold additional reserves against these risks. In effect, they are relying on the employer to provide this capital. Because the assets held in equities are 'mismatched' to the scheme's liabilities, then over time the ratio of assets to liabilities can be volatile.''

That approach has two implications for the funding of pension schemes. The first is that

''The employers contributions will also be volatile.''

The second, which is extremely important, is that

''If the scheme and the employer fail simultaneously, members' benefits will not be paid in full.''

That is precisely the problem that the Bill is trying to resolve, albeit without retrospection.

The actuaries continue:

''If the PPF is run according to the model described above, there would be a serious risk that members' benefits would need to be cut back.''

As I explained, the Bill includes powers for the board and the Secretary of State to reduce benefits. The actuaries again state:

''The Board's ability to increase the size of the levy in adverse times is restricted by the powers in the Bill''.

If that were not bad enough, they note:

''The Government has stated that taxpayers' money will not be used to bail out the PPF.''

That is the basic problem if the PPF is regarded as a pension fund.

If it is an insurance fund, subject to strict solvency regulations in the normal way, companies that write that sort of business

''normally adopt a strictly matched investment policy, investing in bonds. To the extent that they adopted a mismatched investment policy, they would be required to hold additional capital in order to meet the solvency requirements.''

The conclusion of the actuaries is as follows:

''If the PPF is run according to this model''—

that is, the insurance fund model—

''there will be substantial security for members' benefits from the PPF. However there would be implications for the levy. It would need to be calculated having regard to the deficit in each scheme measured on an 'annuity buy-out' basis.''

As we know, that would make a big difference.

The actuaries continue:

''It may be tempting for the Government to run the PPF like a pension fund, particularly as this would enable it to keep down the size of the initial levy. However, there would be severe risks to

members' benefits from adopting this course of action. It is possible for the PPF to have a stable levy and secure benefits for members, provided that it invests in bonds . . . The PPF cannot simultaneously invest in equities, have a stable levy and provide secure benefits, since these three objectives are mutually incompatible.

The Government should therefore either:

Be entirely open and honest with the public about the uncertain future for benefits covered by the PPF, in particular, making it clear that benefits . . . are not 'guaranteed'; or,

Operate the PPF like an insurance fund, applying insurance company solvency regulations.''

As we are following the American model, it is worth pointing out that there is a read-across with the Pension Benefit Guaranty Corporation. As I said this morning, it has announced plans to change its investment strategy radically. It is cutting its equity holdings and buying more Government bonds. As I have said, actuaries believe that those are the best match for pension liabilities. As Steve Kandarian said in January, the safety nets liabilities were bond-like, so the corporation would buy more fixed-income securities as a good asset to match those liabilities.

Thus, right at the start of our detailed consideration of this centre-piece of the Bill, we have an enormous conundrum set out with admirable clarity by the four most senior actuaries in the country.

Only the other day, a written statement from the Minister sought parliamentary approval for additional resources of £450,000 in a supplementary estimate in relation to the pension protection fund. Those of us who occasionally surface from the Committee will be aware that the Department for Work and Pensions is advertising the post of chairman for the PPF at £80,000 for a two-day week and the post of chief executive for what is described as an attractive six-figure package. Both posts are described as fixed-term appointments of two to three years' duration. All credit to the Government for getting on with it. They are, perhaps, a bit quick off the mark but I believe that the convention is that once a Second Reading has occurred in this House, as opposed to the other House, it is possible to start advertising such posts.

Before we take anybody on at that kind of rate, I ask the Government to reflect on and respond to those serious matters raised today with the Secretary of State by the four leading actuaries in the country.

Kevin Brennan (Labour, Cardiff West)

At the start of this part of the Bill, it is important to welcome the establishment of a pension protection fund, including its board, which is what the clause does. That is the heart of what the Bill is about. I have learned a lot about pensions over the last couple of years. I have still got a long way to go in my education on the subject, as I suspect those who have been doing it for 20 or 30 years have. It is a vast and complex subject, but one part of it that was little understood by the public—and certainly little understood by myself and many colleagues in the House before recent events—was the extent to which final salary occupational pensions were not protected by some sort of fund or board.

I walked into a meeting of steelworkers in Cardiff in the Railway club in Splott a couple of years ago and met workers who had faced a double whammy. They had lost their jobs and were likely to lose their pensions. I thought that such an experience might have been possible in the Dickensian era in this country. At that time, one might have been able to walk into a meeting with workers and discover that they had all been sacked and that their promised pensions had been taken from them on the same day. But I discovered that it was possible for it to happen in the 21st century, despite the fact that only a few years previously there had been legislation on the matter.

The establishment of some sort of pension protection fund is absolutely crucial. It is crucial because, as the Secretary of State said on Second Reading, the pension promise is worthless otherwise. It would be an utter betrayal of those workers if they were permitted to work loyally for a company for 20, 30 or 40 years in some cases, believing reasonably and rationally that they would receive a pension related to their final salary on retirement, only to find out that that was not the case. The establishment of the fund is to be welcomed, and the clause should be welcomed.

The hon. Member for Eastbourne raised several issues that I am sure we shall debate in some detail as we consider the clauses related to the establishment of the protection fund and its board. Ultimately, the key point is security. Unless the pension protection fund delivers a promise of guaranteed benefits upon insolvency for workers who have paid into final salary pension schemes, the fund and the board will be worthless. Unless it provides security it is not worth having, because the schemes are not worth having unless they provide security. By their definition, they are defined benefit schemes, not defined contribution schemes. If employers wish to offer defined contribution schemes, they are free to do so.

Often, some employers have offered to fund benefit schemes because it is quite advantageous for the management to do so, and they often load up their salaries in the latter years of their careers to ensure that their final salary pension is quite generous. They often go early, and often jump ship when the company is on its way out. Final salary pension schemes are worth having; we should promote them and the Government should encourage companies to have them. However, if we are going to have them, they must have meaning. They will have meaning, and offer a pension promise to people, only if the protection offered by the fund is real and guaranteed in some way. That is why it is absolutely essential that security is the first priority of the board of the pension protection fund in securing the benefits that will be available. Adopting a more conservative investment strategy—rather than the Conservative strategy, which was rather reckless in the '80s and '90s—would be the appropriate way forward.

The problem otherwise is that we shall return to the issue again in a few years' time. If we do just one thing in the Bill, and particularly in this clause and those that follow, it should be to ensure that we do not have to return to the issue in the next few years as we are doing now, just nine years after the previous Bill on

the subject was passed. If we do have to return to it, and the pension protection fund does not provide the security that I spoke about, we will have failed. That failure would have a severe effect on working people's confidence in pensions. Many workers feel as though they have somehow failed, although they have not, because they feel that they were foolish enough to believe their employer, successive Governments and other advisers who told them that, by participating in a final salary occupational scheme, they had the best kind of pension possible. That is frequently what they were told.

Gregory Barker (Conservative, Bexhill and Battle)

In light of the hon. Gentleman's expertise as a former trustee of a pension fund, and in the absence of a cast-iron Government guarantee for the fund, what weighting of gilts, bonds and equities, broadly speaking, does he think would give the fund the guarantee that he seeks?

Kevin Brennan (Labour, Cardiff West)

I profess non-expertise in the subject. As I said at the outset, I am a beginner, and I suspect that I will remain so even if I study it for many years to come. However, I am sufficiently intelligent to know that it would be daft of me to speculate on the proportion of gilts, equities and other investments in the pension protection fund. Such decisions should be made in light of proper advice from the board when it is set up. It would be wholly inappropriate for me to offer advice on that.

I suspect that the Conservative Front-Bench spokesman, the hon. Member for Eastbourne, will not offer any advice on the subject, either. We are still waiting for him to tell us his party's position on many clauses. We have heard what various interest groups think about them, we have heard various observations from outside, and we have heard what the Library has to say about the Bill several times during this debate; but we have not often heard the position of Her Majesty's official Opposition, and I do not anticipate that we shall hear their opinion on the proportion of equities, gilts and other investments in the pension protection fund, either. However, perhaps the hon. Member for Bexhill and Battle (Gregory Barker) is about to tell us that.

Gregory Barker (Conservative, Bexhill and Battle)

I am not, but I appreciate the hon. Gentleman's reticence in suggesting what the weighting would be. However, does he recognise the conundrum mentioned by my hon. Friend the Member for Eastbourne, which is that the lowest-risk investments also offer the lowest return? There is a difficult decision to be made there; one cannot manufacture large returns on low-risk investments.

Kevin Brennan (Labour, Cardiff West)

I perfectly understand the point that the hon. Gentleman is making, namely that there is a relationship between the risk undertaken and the size of the levy likely to be brought to bear in order to make the pension protection fund work; but I made it fairly clear at the outset of my remarks that I think that the pension protection fund should err on the side of security in making that decision, because it would be pointless to have a pension protection fund that could not meet its liabilities. If the pension protection fund were to fail, we would all have failed in our responsibilities.

I think that it is right to welcome the principle of the establishment of the pension protection fund. We should work thoroughly and carefully in our next sittings to scrutinise exactly how the fund would work—and, in all fairness, that is what the hon. Member for Eastbourne said, too. We should work together to make sure that the fund works, because if it does not, we will all have failed.

Sally Keeble (Labour, Northampton North)

I very much welcome the part of the Bill that clause 81 introduces. It is potentially the most important part of the Bill, in terms of dealing with some of the real pressures that our constituents face. Certainly, in my constituency, where a number of shoe firms and other firms have collapsed, the issue of pension protection is crucial. Many of those firms were small. They were not the kind of large organisations that my hon. Friend was talking about. People faced huge pressure with little help and advice and I have some questions about that for my hon. Friend the Minister.

The hon. Member for Eastbourne set out the actuaries' views and referred to different models for the scheme and different investment strategies, but, as my hon. Friend the Member for Cardiff, West (Kevin Brennan) said, he did not say whether the official Opposition are opposed to it, nor did he argue against it. He said, ''Here are different models. It will be difficult.'' That is not surprising. The official Opposition's attitude is critical because one of the problems facing us all when dealing with pensions issues is that many people do not know what their rights are and are unable to obtain some of the income or benefits to which they are entitled because they simply do not know about them.

Can the Minister explain how people will know about the scheme, how to join it and whether employees will be able to have a role in ensuring that their employer's scheme joins the pension protection fund? What information will people be given if their scheme is covered by the pension protection fund to enable them to tell, if the company folds, whether they will obtain the benefit? I am sure that that will be clear in large companies, but in some of the smaller ones people are not so well informed and information is critical. The same applies to the ombudsman scheme and it is right to have different ombudsman offices for different aspects of pensions. It is also right to have an ombudsman for the pension protection fund because, if people feel that something has not been done properly, they may want to take issue with what happened. It is important that people know how to do that. MPs also have a role and it is important for us to understand the position so that if a company in our constituency collapses we can provide people with help and advice.

When the details have been discussed, I hope that the Conservative party will make its position clear because, on a number of pension issues, such as pension credit—

Nigel Waterson (Conservative, Eastbourne)

I agree with the hon. Lady about people being informed, but our concern about the specific issue is twofold. First, the fund should not be

oversold to people because, as the actuaries reminded us, there is no full safety net by any stretch of the imagination, even if it works. Secondly, and not least because we expect to be back in government at some stage, perhaps as early as 14 months from now, we do not want to inherit an inherently unstable structure that will ultimately fail because it was not properly thought through and funded.

Sally Keeble (Labour, Northampton North)

The hon. Gentleman's comments were helpful. It will, of course, be technically difficult to set up such a scheme. If it was easy, his own party, when it was in government, might have done that. The public may pick up only a fraction of what we say in Committee and what parties say, but when MPs' comments are picked up they are sometimes accepted as describing the way things are. The hon. Gentleman knows that his party has a strong following among pensioners, as we do. If his party is simply critical of this fund and does not make it clear to people not only that there are issues about setting it up but that there are advantages and that there are ways in which they can access it, that could affect the ability of his constituents to have access to the kinds of benefits that the fund provides. The pension credit makes it crystal clear what the effect can be of negative remarks by the Conservative party. It is extremely important that the party makes its views clear and that it draws a distinction between issues about technical implementation and the question whether it is a good or a bad scheme once it has been set up. No legacy of ours will be anything akin to the pensions mis-selling that was a legacy of the hon. Gentleman's party.

There were also the state earnings-related pension scheme widows. I was one of the MPs involved in the test case about the lack of information provided on that. I ask the Minister to offer clarification on the issue of information and the hon. Member for Eastbourne to make his party's attitude clear at some point.

Nigel Waterson (Conservative, Eastbourne)

Let me try to put the hon. Lady's mind at rest, because she has obviously been having sleepless nights worrying about the official Opposition's attitude. That is a tribute to the new standing of my party, following the election of the right hon. and learned Friend the Member for Folkestone and Hythe (Mr. Howard) as its leader. As we are breathing down the Government's neck, I will be clear about this.

Malcolm Wicks (Labour, Croydon North)

That is why we are so scared.

Nigel Waterson (Conservative, Eastbourne)

Be very afraid, as they say in the movies.

To be blunt, I want to ensure that the PPF is not another Equitable Life waiting to happen. I want to ensure that it is properly endowed with assets, is properly run and will not let people down. As for the pension credit analogy, it is perfectly possible to assist pensioners who want help to get what they are entitled to, as I do in my surgeries and elsewhere, while at the same time criticising the basic madness of a system that increases exponentially the level of means-tested

benefits and puts off lots of those pensioners from applying in the first place.

Sally Keeble (Labour, Northampton North)

I can assure the hon. Gentleman that I have no sleepless nights. However, it would help if he were to set out the Conservative party's views. There is a difference between the technical points that the actuaries raise, and which the hon. Gentleman read out in detail, and the Conservative party's political position, which the hon. Gentleman did not get around to explaining as he was reading out his brief. It is important that that is clearly expressed, and the Minister spells out how the Government are going to set about informing the public and how people will be able to ensure that their employer's schemes sign up to the fund. Once people are in a fund, if the company collapses they must know how to get access to their money.

Vera Baird (Labour, Redcar)

I welcome this provision very much. I echo the comments of my hon. Friend the Member for Cardiff, West on the many people who have spent their working life saving with every expectation that they would in the end have a reasonable retirement. As the story unfolded, it was reminiscent of Gradgrind in ''Hard Times''. As a person who is not historically close to pensions issues, I thought that we had left that situation behind many years—if not a century—ago. There cannot be any Committee member who does not have great sympathy with the approaching 60,000 employees who have suffered this fate either fully or partially.

Happily, no one in my constituency has suffered that catastrophe. I am an Iron and Steel Trades Confederation member and there is a large steelworks in my constituency. Its pension provision is absolutely secure. However, the sympathy between ISTC members in Redcar and ISTC members in Allied Steel and Wire, who were among the earliest and most major sufferers of this kind of catastrophe, is so outstanding that I am required to take a very active interest—although I would have done so anyway.

I want to echo in my own terms what my hon. Friends the Members for Northampton, North (Ms Keeble) and for Cardiff, West have said. The whole of the Opposition's approach to the Bill appears to have been a sort of phantom scrutiny—one that involves reading out what the Association of British Insurers thinks of one particular clause, and what the National Association of Pension Funds thinks about other clauses, without the Opposition having any sort of view themselves. Is it that they, for some strange reason, are not able or prepared to put one forward? That is a wholly unsatisfactory way of carrying out their task, which is to scrutinise in great detail and to ensure that the Government, who I am pretty satisfied are getting it right, have indeed got it right. We have all had the handouts from the ABI and the NAPF. A bit of independent thinking about what they will do is required from the Opposition. I hope that they will change.

Kevin Brennan rose—

Vera Baird (Labour, Redcar)

I give way.

James Cran (Conservative, Beverley and Holderness)

Order. I have not interrupted the hon. and learned Lady until now because she had a

point to make about the Opposition. However, I would not want to hear much more about that because we are here to debate the Bill, rather than the Opposition.

Kevin Brennan (Labour, Cardiff West)

On the basis of the debate on clause 81, should not my hon. and learned Friend the Member for Redcar (Vera Baird) be a little bit kinder? At least the Conservatives have turned up.

Vera Baird (Labour, Redcar)

My hon. Friend has always been a generous man, even in adversity. In a burst of generosity, I will agree with him. I suppose that it is good to have them here—[Hon. Members: ''Him, him!'']—to have him here. There has been another one, I am sure.

Nigel Waterson (Conservative, Eastbourne)

Is not the hon. and learned Lady a tad worried that at this stage of the game the Secretary of State should receive a letter from the four most senior actuaries in the country, expressing massive concerns about this part of the Bill?

Vera Baird (Labour, Redcar)

Are not the Opposition a tad worried that they do not have a thing to say about it? All they can do is read somebody else's letter out. I assume—I may be rash—that the Secretary of State has the letter and that he could have read it himself, without its being committed to the Hansard record. I am sure that in due course my hon. Friend the Minister will be able to deal with the issues that the letter raises; I doubt very much whether they will be dealt with during the debate on clause 81, as that is about the structure of the board.

While considering the clause—closely, of course—the Opposition have spoken of going to Washington and finding nothing but incredulity that this route should be followed by the Government. Yet they themselves do not appear to have the slightest clue about how else the system should be put together. I have looked in vain through all the manifold documents that one gets on Standing Committees for some really fundamental amendments, fresh clauses or proposals from the Opposition that would give us better security, a different proportion of investments or whatever.

I am trying very hard to grasp what the Opposition think is a key problem. May I urge the Opposition to try to think a little bit about clause 81 and those that follow, and to make a serious contribution to what I see as an extraordinarily important debate about the future of pensions? It is not good enough for the Opposition to talk about the Government not having any consensus because the actuaries have written today, and yet not to be prepared to offer a single suggestion themselves. I hope that they have a good shake-up and a think during the weekend, because they have not tabled anything that will significantly alter anything.

When the Minister says a little more about clause 81, will he help on the question of scale? I find it very difficult to get an idea of the scale of the pension protection fund operation not in relation to its funding, but with regard to its likely number of employees and that sort of thing. I know that the

American equivalent has about 800 people. I imagine that that is not the scale that is envisaged under the Bill. However, we must bear in mind that the levy will have two parts—the flat-rate levy and the risk-based levy—and I hope that we shall have an opportunity to debate them extensively. It will have to finance the costs of the board under clause 81 and the costs of all the functions that it carries out, as well as ensure that the fund itself is adequately funded, so it is key for us to find out a little more about the likely scale of the costs.

Malcolm Wicks (Labour, Croydon North)

I thank hon. Members for their contributions. In my introductory remarks on the clause, which sets up the board, I thought it appropriate to make some general observations. I am grateful to you for allowing me to do that, Mr. Cran. It has led to a fairly wide-ranging debate about the PPF, and I am not too tempted to deal with specific points that will come up in respect of later clauses. I shall deal with the other points in reverse order.

I thank my hon. and learned Friend the Member for Redcar for her support for the pension protection fund. I seriously believe and predict that it will be seen as a major force for security in old age. It will be regarded by future parliamentarians, workers and others as a substantial social advance in our country. We are learning lessons from the experience of the American Pension Benefit Guaranty Corporation, taking on board many of its arrangements and policies and changing arrangements, when appropriate, for this country.

When I visited Washington, I met a Republican Senator, Democrat politicians, the trade union side, the employers' side and staff at the PBGC and elsewhere, but I met no one who suggested that the United States could now do without the Pension Benefit Guaranty Corporation, for which there was strong support. At one level, I could ask Conservative Members in this country to be as supportive of such things as I think the Republicans are in the United States.

Nigel Waterson (Conservative, Eastbourne)

Did the Minister meet one person who believed that, if the corporation got into difficulties, the federal Government would not stand behind it?

Malcolm Wicks (Labour, Croydon North)

There were different views on that matter. However, we will cross the Atlantic on more than one occasion in the next few weeks. [Interruption.] No, we are not a Select Committee; I was talking about visits not in a literal sense, but in terms of a philosophical policy analysis. [Interruption.] I shall not raise false hopes. We will consider such serious matters, but because we are enabling the board itself to vary the levy in the light of economic circumstances, the PPF will bring a flexibility to our fund that is not available to the fund in the United States, which has to go to Congress to gain approval to change the levy. That is one example of a significant difference between our countries.

My hon. and learned Friend the Member for Redcar asked me to give her an idea of scale. We expect the number of staff to be somewhere between about 100 and 150. As for administrative costs, it

could cost in the region of £12 million to set up the fund and a not dissimilar amount—£9 million—for ongoing costs. As a broad estimate—I am talking about orders of magnitude—that is what we are contemplating.

My hon. Friend the Member for Northampton, North—I almost got her mixed up with my hon. Friend the Member for Cardiff, West; excuse my being a Londoner and London-centric about such things: I do know the difference between Cardiff and Northampton, North—made a number of important points, not least about the ombudsman. We will be discussing the ombudsman. It is right and appropriate that people can challenge the decisions of the board, and the ombudsman is important in that respect.

On publicity, we certainly expect the board to have a publicity strategy, like any other sensible organisation. Give that it is a new organisation, that is particularly important. I would expect a website, articles written by staff members, press notices, visits to insolvent employers and so on.

I should make it absolutely clear that joining the PPF is not a voluntary activity. Every defined benefit scheme, and some schemes that are of a hybrid nature, will be required to pay the flat rate and the risk-based levy where appropriate. When a final salary scheme gets into trouble, the PPF will move in compulsorily to protect members' rights. There will be a series of notices, when appropriate, to individuals, and it will be made absolutely clear what individuals subject to the PPF will receive and when. They will be kept fully informed.

My hon. Friend the Member for Cardiff, West made an important speech. The contribution that he has made to these debates on behalf of his constituents has been widely welcomed. I hope to persuade him in the future that the PPF will be set up on a solid financial foundation so that pension rights can be guaranteed.

The hon. Member for Eastbourne made a number of important points.

Nigel Waterson (Conservative, Eastbourne)

Only at random.

Malcolm Wicks (Labour, Croydon North)

They are important in the sense that they are important for us to consider and answer. To some extent, we will deal with them clause by clause, but I want to make a broad point in answer to one of his concerns. Like my hon. and learned Friend the Member for Redcar, I am still not absolutely certain what the Opposition's position is. I am sure that it will emerge as leaders of their party used to do—in due course, albeit in some mysterious way. The pension protection fund will bring security both for employees and good employers. Knowing that there is an insurance fund—I use the term as part of common English vocabulary—

Nigel Waterson (Conservative, Eastbourne)

Not in the actuary's sense?

Malcolm Wicks (Labour, Croydon North)

I use the word in its proper sense. English vocabulary is important. I am not using the term in a technical, legal or actuarial sense. I refuse to give away certain key parts of the English vocabulary

to any one profession. Bringing insurance to people will mean that even the very best employers who probably stand no chance of going bankrupt in the next 100 years will nevertheless know that, should things go wrong, they can demonstrate to their employees that their contributions have been well spent and that their pension rights will be secure. That is important.

The letter from the actuaries has been mentioned more than once. Let me deal with one or two of the points that were made. I always find it interesting to distinguish between people who come to us to discuss issues informally or confidentially and those who discuss them through a press notice, but of course people in a free society can make those choices for themselves.

The fund has been carefully designed to maximise protection to scheme members while ensuring that it is affordable for the industry, with the levy predominantly focused on risk. It is neither a pension fund nor an insurance fund. The board will be obliged to agree a statement of investment principles focused on addressing the risks that it will face. As such, it will not be constrained by the need to comply with solvency regulation. The PPF will have freedom, within the parameters set out in the Bill, to alter the levy to ensure that protection is maximised—a point that I made in terms of the contrast with the experience in the United States, from which we have learned. It will also be able to borrow money. In extremis, the PPF board may make recommendations to the Secretary of State to vary the level of compensation that is paid. It is important that that ability is included in the Bill, but I emphasise the words ''in extremis''. I can foresee no realistic circumstances in which it would be necessary.

It is important to point out that the fund will have recourse to a number of measures that must be implemented before the reduction of compensation is an option. I am sure that the hon. Member for Eastbourne will read that in Hansard tomorrow. He is clearly not listening, even though he asked the question. For example, the PPF will be able to raise the levy, reduce indexation or borrow commercially. In fact, the compensation percentages can be varied only when revaluation and indexation have been reduced to nil.

Nigel Waterson (Conservative, Eastbourne)

I can assure the Minister that I am following his every word. To prove it, can I ask him something? He talks about borrowing commercially, but does he accept that if there is no Government guarantee, the PPF will have to pay much more for its borrowing than it might otherwise have done?

Malcolm Wicks (Labour, Croydon North)

I accept that the board will have an income stream from the levy that is largely risk based. In the unfortunate circumstance that a scheme goes bankrupt with the company, which will occur, it will take over the assets. There will often be considerable assets—often millions of pounds' worth—which may only add up to a percentage of pension rights, but it might invest those and therefore gain an income stream. From time to time, because of an economic cycle, it may need to borrow. However, it is important

to bear in mind that the board will have assets and income. We will return to that issue in due course.

The Secretary of State will not be acting with a free rein to reduce compensation; he or she will be approving the board's carefully considered proposal—should it come to that—which it can make only after consulting stakeholders. Any change to the level of compensation will be subject to an affirmative resolution procedure. Our approach strikes a balance between building in constraints to reassure levy payers that costs will not rise beyond control and allowing the fund the flexibility to raise the funding that it needs to reassure members that they are sufficiently protected.

I will not go into a detailed analysis comparing and contrasting those arrangements with the American PBGC. We will be able to deal with those issues when we come to different clauses, but I should like to emphasise that we have learned a great deal about the advantages and disadvantages of the United States model. I mentioned that we feel that requiring the board to come to Parliament, just as the PBGC is required to go to Congress in the United States to change the levy, would be inflexible and would not be sensible.

The hon. Member for Eastbourne is correct in his implication that the PPF alone is not the way to social security in old age. We regard it as part of a package, much of which is covered in the Bill, including scheme-specific funding and the importance of the regulator working in partnership.

I hope that I have covered some of the points, although I have deliberately not gone into the detail, because it might be tedious to the Committee to repeat such remarks during a clause stand part debate, and they would probably be ruled out of order by our rigorous Chairman.

Gregory Barker (Conservative, Bexhill and Battle)

Given that the scheme will not be mandatory for all—

Sally Keeble (Labour, Northampton North)

It will be.

Gregory Barker (Conservative, Bexhill and Battle)

In that case my question does not arise.

Malcolm Wicks (Labour, Croydon North)

It will be mandatory for all final salary or defined benefit schemes and those of a hybrid nature that have a DB and DC element. It is not voluntary. People may not choose to join or not to join.

I have not dealt with the comment from the hon. Member for Eastbourne that his party will be back in 14 months, but there are limits to the powers of the pension protection fund.

Question put and agreed to.

Clause 81 ordered to stand part of the Bill.

Clause 82 - Membership of the board

Nigel Waterson (Conservative, Eastbourne)

I beg to move amendment No. 347, in

clause 82, page 52, line 18, at end insert—

'(4A) Any person appointed as an ordinary member shall have knowledge and understanding of—

(a) the law relating to pensions and trusts,

(b) the principles relating to—

(i) the funding of occupational pension schemes, and

(ii) investment of the assets of such schemes, and

(c) such other matters as may be prescribed'.

I confess that this amendment, which has a lot going for it, was inspired by the National Association of Pension Funds. The association's first concern, which seems sensible, is that the kind of people that will be appointed to the board should—to put it bluntly—know what they are doing. They should have the appropriate skills and expertise to discharge their duty. A different part of the Bill, which we have mercifully moved on from, places heavy and onerous duties on trustees, who are required to be conversant in various things, but there is no equivalent test for PPF board members. That strikes me as bizarre because in many ways those board members will be the ultimate trustees of all pension funds in the country.

Amendment No. 347 would ensure that anybody who is appointed has knowledge and understanding of the relevant issues including: pensions and trusts, and the law relating to them; and the principles relating to the funding of schemes, investment of the assets of such schemes and other matters that may be prescribed. We have just heard from the Minister that the board will have to make tricky decisions about investment of assets brought in from failed schemes, about revenue streams from the levy or levies, and about borrowing. Board members will therefore have to be high-powered, and we certainly do not want a board that is unable to cope with its requirements.

Amendment No. 347 strikes me as eminently sensible. If we are capable of stating the requirements on trustees' knowledge in the Bill, why not state the requirements on ordinary members of the board?

John Robertson (Labour, Glasgow Anniesland)

I should be obliged if the Minister considered the phrase ''five other persons'' in clause 82(1)(c). Will that ensure a broad coverage of people? Perhaps we could include employers, employees and people with experience of the insurance business. Would the Minister consider having somebody with occupational pension and management experience? To say ''five other persons'' leaves things open to having five anybodies. We could end up with five people of the same ilk, which would not ensure diversity. I would like employees in particular to be represented, as well as employers. As an ex-manager, I know that experience of managing schemes and business is helpful. How does the Minister expect to achieve a broad coverage if all that is stated is

''five other persons ('ordinary members')''?

Malcolm Wicks (Labour, Croydon North)

Amendment No. 347 relates to the board of the PPF, and it suggests that we include in the Bill a requirement for ordinary board members to have when they are appointed knowledge of the law relating to pensions and trusts, and of the principles relating to funding and investment of schemes and other

prescribed matters. We recognise that the amendment is an attempt to mirror the requirement that applies to trustees under clauses 200 and 202, which we discussed earlier. After all, the argument would go, if individual trustees are required to have such knowledge, why should PPF board members be exempt? That is the argument in a nutshell; in principle, it is not a bad one.

It may help if I explain the principle behind clauses 200 and 201. Clause 200 is designed to give trustees clear guidance about the knowledge that they require to carry out their role effectively. The ''lay'' trustees are at the very heart of the UK's private pension provision, particularly as many are unpaid. We value their commitment and sense of duty. There is a similar requirement for corporate trustees. As I said earlier, the clauses do not mean that we expect all trustees to be expert in every aspect of pension law and administration. Rather, we expect them to be able to demonstrate a good, solid understanding of the scheme rules and a broad knowledge of the issues.

We do not believe that the requirement set out in the amendment should be added to the Bill for PPF board members. It is unnecessary for several reasons. First, board members will not be acting in an unpaid capacity. They will be suitably experienced in order to ensure that the board as a whole is best capable of exercising its functions efficiently and effectively. Secondly, the appointment process will require that each board member has the knowledge and experience that is appropriate for his role. We would not appoint people who seem to be ignorant or who are not knowledgeable about the job for which they are applying. For example, we would expect a finance director of the PPF to have suitable financial qualifications and experience to ensure proper conduct of its financial affairs, but they need not necessarily have detailed knowledge of the law relating to pensions and trusts.

Thirdly, we envisage that the terms and conditions will set out that board members must continue to have the knowledge to carry out their role, and that they will undertake training if necessary. Non-executive members will also be appointed on merit and the chairman will be expected to implement the recommendations of the Higgs report for non-executives. [Hon. Members: ''Hear, hear.''] I know that my hon. Friend the Member for Greenock and Inverclyde (David Cairns) followed the Higgs report proceedings with some interest.

The recommendations specify that the role of each non-executive should be clear from the beginning of their appointment, that a comprehensive induction programme should be provided for them and that the chairman should address the development needs of the board as a whole with a view to enhancing its effectiveness. Furthermore, the performance of the board, its committees and its individual members should be evaluated at least once a year. The annual report should state whether such performance reviews are taking place and how they are conducted. I believe that the objective of the amendment is achieved by

those approaches, and so I hope that the hon. Member for Eastbourne will withdraw the amendment.

My hon. Friend the Member for Glasgow, Anniesland (John Robertson) raised a point that may come up again later about the people who are required for the board. It is not intended that the board will be strictly representative of certain groups. We have learned lessons from other public organisations that found that such an approach tied their hands when they were trying to appoint the right person for the job. Instead, as I said, each appointment will be based on merit to ensure that members of the board have the right skills and experience for their role and that the board as a whole provides the best range of experience and knowledge. Given the importance of that broad range of experience, skills and knowledge, we would not, by definition, expect the board to consist of exactly the same kinds of characters. That would not be in keeping with what we are trying to achieve. However, I reiterate that that does not mean that representative interests will be ignored or that individuals and groups will not be reasonably informed about board decisions. I ask the hon. Member for Eastbourne to withdraw the amendment.

Nigel Waterson (Conservative, Eastbourne)

I am grateful to the Minister. I was not suggesting that in the real world there would not be an attempt to get the best possible people. To take just one category as an example, I hope that we will not see any of the Prime Minister's former flatmates popping up as members of the board.

I am slightly worried by what the Minister said about training. For reasons that I have already explained and will go on to explain in more detail when appropriate, board members will have to hit the ground running. I think that the fund is going to be extremely vulnerable in its early years until the full risk-based levy kicks in. Even then, it will be difficult to run it well, and the people concerned will need all the relevant skills. The CBI made the important point in briefings to us that people with a relevant business background will be needed to run the fund.

I am happy to withdraw the amendment, but I am still not wholly convinced that there is some great point of principle that requires the Bill to insist that trustees, but not the ordinary members of the board, have certain skills. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Nigel Waterson (Conservative, Eastbourne)

I beg to move amendment No. 348, in

clause 82, page 52, line 30, at end insert—

'(8) The appointment of any member of the Board shall be open and transparent.'.

To coin a phrase, the Minister has already shot my fox on this amendment because he has already mentioned the magic word ''Higgs-compliant''. The amendment is inspired by the NAPF, which was keen that the appointment of all the members should be as transparent and open as possible. I cannot imagine any argument against that. The words ''open'' and ''transparent'' are code for Higgs-compliant, which is

the current best practice in such matters. I hope that the amendment will have some appeal to the Minister.

Malcolm Wicks (Labour, Croydon North)

To some extent, as the hon. Gentleman anticipated, I dealt with these matters in my earlier remarks. I am fully in favour of the spirit of the amendment, but we believe that it is wholly unnecessary. The Bill already provides that procedure for any appointment made by the board must follow prescribed procedures and guidance. I hope that I have given the hon. Gentleman some reassurance in the remarks that I made some moments ago about our intentions. We need people with a range of experience and skills to carry out this important and complex task. I therefore hope that the hon. Gentleman will consider withdrawing his amendment, however well intentioned it may be.

Nigel Waterson (Conservative, Eastbourne)

All my amendments are well intentioned, Mr. Cran, as you well know. None the less, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 82 ordered to stand part of the Bill.

Clause 83 ordered to stand part of the Bill.

Schedule 5 - The Board of the Pension Protection Fund

Clause 84 - Board's functions

Nigel Waterson (Conservative, Eastbourne)

I tabled an amendment or two to the clause, but I am sure that for all the right reasons they have not made it through to the final round. I wanted to make a point about our preferred method of dealing with the 60,000 people—the ghosts at the feast, as I previously described them on the Floor of the House—referred to by the hon. and learned Member for Redcar, the hon. Member for Cardiff, West and others.

The Government have made it quite clear that the Bill should not be retrospective. In principle, I can see the logic. We have already expressed our concerns about the vulnerability of the fund in its earliest years, and it is difficult to justify a retrospective role for the protection fund as it stands in the legislation. Equally, all members of the Committee feel most strongly that those 60,000 people cannot simply be ignored.

The Minister neglected an earlier opportunity that I gave him to reveal more to us—and I am not privy to any ongoing discussions—about how those 60,000 can be compensated. The hon. and learned Member for Redcar gave Her Majesty's official Opposition a fair old tongue lashing, but on the issue under discussion, which she regards as important, we were the first to table amendments to the Bill, and I do not think that they have attracted her signature or those of her hon. Friends.

We at least proposed a possible solution, which was in part based on the Private Member's Bill of the right hon. Member for Birkenhead (Mr. Field), to use so-called unclaimed assets to compensate the 60,000. At last, despite the unwillingness of the Secretary of State to allow an independent inquiry into the numbers involved, it now seems that 60,000 is the right figure; I think that the Secretary of State said so on the Floor of the House the other day.

The most practical way to deal with the issue is to have a separate fund, known as the interim pension protection fund, running parallel to the pension protection fund and administered largely by the same people—there is no point in reinventing the wheel and there must be economies of scale in having a separate fund run under the same umbrella as the 100 to 150 people that we have heard will be working for the PPF—with the sole task of administering those assets. They would be used to deal with the people who have already lost or who will have lost—I am sure that the process will not have stopped by April next year—pension rights before the Bill is enacted and the fund is set up.

The interim fund would take its place alongside the pension protection fund and the fraud compensation fund. There would be three parallel funds, all administered by the same people but kept quite separate because of the point I have already made about retrospection.

That approach would be fair and sensible. We are not impressed by the Treasury's argument that just because funds are unclaimed does not mean that they do not have any owners. Everyone has a shrewd suspicion that the Treasury has other plans for those funds—possibly to prop up falling receipts from the lottery for charitable purposes. I have no doubt that the Treasury wants to get its own sticky fingers on those assets.

Given that some estimates state that there are £15 billion of unclaimed assets across the country, there is plenty of scope for meeting those claims. Subject to whatever work is going on behind closed doors in Government—perhaps the Minister will fill us in on that—it seems that the only ones doing any serious work are the unions, and people such as Dr. Ros Altmann, to whom we should all pay tribute for raising the profile of the issue and doing some hard number crunching.

We take the view that, in an ideal world, the board should have that function. So far, that idea has not found favour with the Government, as is their prerogative. I am slightly more surprised that it has not found favour as a way of tackling the problem with some Government Members who take a close interest in the subject. It is a little rash to back just one horse—namely, the hope that the Government will decide to use taxpayers' money to compensate those 60,000 people—because that horse may not even make it to the finishing line.

I commend our thoughts on the clause. Bluntly, we think that the board should have wider functions. I

hope that I have set out clearly how we believe that that would work.

Kevin Brennan (Labour, Cardiff West)

If we are to back a horse, perhaps we should back Best Mate. Usually in such matter, that is one's own side.

The hon. Gentleman is wrong to say that the idea of an interim protection fund did not occur to some Government Members. As he probably realises, I had the same thought: that one might try to amend the Bill in Committee to create a third fund, to be known as the interim protection fund or whatever. The Ways and Means resolution on the Bill is drawn up in such a way that it is impossible at this point to draw up an amendment that amends the Bill in that way—or, at least, we could not do so. However, I accept that the idea might be a way to provide more clarity on the issue of assistance, compensation or whatever one calls it for those affected by the occupational pension insolvency problem of recent years.

Of course, how that fund would have been funded, had it been possible to introduce it in the clause, is a matter for debate. There is a problem with the orphan assets proposal of my right hon. Friend the Member for Birkenhead. That proposal is worth looking at; the Conservatives find it attractive because it means that they do not have to make any spending commitments in their consideration of the issue, so it seems like an easy way out. The problem with the proposal is that building societies and banks have objections to it.

Nigel Waterson (Conservative, Eastbourne)

I have been following carefully what the hon. Gentleman says, because I know that he has built up a genuine expertise on the matter. It is not that we do not want to make spending commitments; we are just trying to find out the size of the spending commitment, if the measure is one of the options. The Government have set their face against an independent inquiry, so the only figures available are those of Dr. Altmann. With the best will in the world, she does not have the resources of the Government. I just wanted to clarify that point.

Kevin Brennan (Labour, Cardiff West)

My view is that it is right to decide whether it is correct to assist in principle, and then to look at the scale on which one can assist, and the funding that should be put into that. Over a very long period—that is what we are talking about—occupational pensions will be undermined if no form of assistance is available. The pension protection fund might not perform the role that it is intended to perform if lots of people are wandering around the country saying, ''You can't believe in pension protection; we thought we had such protection, and a guaranteed pension and security. Look at what they said to us, and look what it meant.'' It is therefore in the public interest to say that we will assist, and to look at the scale on which that assistance could be offered and the cost of that.

The hon. Gentleman is quite right that Dr. Ros Altmann has made estimates, and she has ensured that they are overly generous, in order to give some idea of the maximum scale of contribution that the Government would have to make. That maximum scale, whatever it is, pales into insignificance, and seems a tiny sum, when held against the massive sums

involved in subsidising private pensions in the UK. That costs £14 billion a year, half of which, as we now know, goes to the top 10 per cent. of earners, and 25 per cent. to the top 2.5 per cent. of earners. Huge sums are involved and we must restore confidence in occupational pensions. The provision would have a broader impact on restoring confidence in pensions and it is worth the Government's investing in that. Nevertheless, if it was decided that it was appropriate for unclaimed assets to be used to fund assistance or compensation, I would not object, not least if unclaimed assets in national savings, for example, were used. That is money that people have lent to the state rather than to the private sector, and huge sums may be involved. I have not asked how much money there is, but I am sure that there is a significant amount of unclaimed money that could be used for this purpose.

It might have been better if the Ways and Means resolution had made it possible for an additional function to be added to the board to create a separate fund to avoid confusion when administering any compensation. If that is to be done—I hope that it will be—we must wait and see exactly how.

We shall return to the subject when we come to later amendments because we have had to find other ways of trying to get around the Ways and Means resolution.

Chris Pond (Labour, Gravesham)

Hon. Gentlemen have used a broad-brush approach to clause 84, if not a paint roller, but I understand why and we have had this debate on many occasions. It is important for the Committee to recognise that, as we have always said, the pension protection fund will apply to the future and cannot be made retrospective. To pay pension protection fund compensation to companies that have already gone bust, leaving members with less than their expected pensions, would mean compensating those who had not paid the PPF levy and an unfairly bigger bill for those who had.

Kevin Brennan (Labour, Cardiff West)

No one is suggesting that the levy should be used to compensate people.

Chris Pond (Labour, Gravesham)

I thank my hon. Friend for that comment.

We have had this discussion, understandably, in the context of a specific clause on the pension protection fund and I want to make it absolutely clear for those who read Hansard that we cannot discuss retrospection. However, as my hon. Friend and other hon. Members know, the Government are sympathetic to those whom my hon. Friend has represented so effectively and who worked so hard to build up their pensions for their future retirement but now, as he so eloquently said, have lost both their jobs and their security in retirement.

As my hon. Friend the Minister and my right hon. Friend the Secretary of State said earlier, they have both met people who are affected and their representatives and have considered all the options, but have had to be very straight and tell them that they do not know whether a solution can be found to their current plight. In the Bill we are trying to do everything possible to ensure that it never happens

again, but we must be clear that expectations should not be raised because we may not be able to deliver all that.

As I said, that is a broad-brush approach to a clause that relates specifically to the functions of the pension protection fund, which are set out in part 2, and to the fundamental functions of the board—namely, that it must manage the pension fund and the fraud compensation fund, and that it may levy contributions to those funds under clauses 137 and 151. The clause also states that the board has the functions that are set out in other enactments, as well as all the functions set out in the Bill.

Functions in other enactments may include those that have been transferred to the PPF from the Pensions Compensation Board. Those functions were originally set out in the halcyon days of the Pensions Act 1995. It is worth mentioning that the clause sets out the functions of the board in a similar way to the way in which clause 4 sets out the functions of the regulator, which we discussed earlier. If we were still talking about the regulator, we would refer not to the ghost at the feast, as certain Members have suggested, but to the phantom at the opera.

The clause should be read with clause 85, which we shall discuss in a moment. Clause 85 states:

''The Board may do anything which . . . is calculated to facilitate its functions, or . . . is incidental''

to them. We shall debate those functions in our debate on clause 85.

Question put and agreed to.

Clause 84 ordered to stand part of the Bill.

Clause 85 - Supplementary powers

Nigel Waterson (Conservative, Eastbourne)

The Minister should be a little worried, because the Under-Secretary has a better gag writer than he does. Who knows where that might lead?

Malcolm Wicks (Labour, Croydon North)

At least we have one.

Nigel Waterson (Conservative, Eastbourne)

We do not need one. Gags come naturally. ''It's the way I tell 'em.''

This is another sinister clause, drafted by the Darth Vader of the Department. It is far too wide. It states:

''The Board may do anything which—

(a) is calculated to facilitate the exercise of its functions, or

(b) is incidental or conducive to their exercise.''

It would have been bad enough if the Government had satisfied themselves with paragraph (a), but paragraph (b) goes way beyond anything that we could legitimately pass in what passes for a democracy. If we had not got ahead of ourselves, an amendment would have materialised in time for Thursday's sitting. It would have suggested that we simply insert the words, ''on administrative matters only.'' Surely the supplementary powers that the board seeks to have would relate only to the administration of its

functions. Anything wider than that strikes me as sinister, so it would be extremely helpful if the Minister could explain why the Government believe that these extraordinarily wide supplementary powers are needed.

Chris Pond (Labour, Gravesham)

I can reassure the hon. Gentleman about his Darth Vader concerns. The clause does not mean that the organisation may do anything at all. It merely means that the action must relate to the exercise of the board's functions. It may not do anything that the legislation expressly prevents it from doing. It therefore clearly relates to the functions of the board and its administrative responsibilities. It will certainly not allow the board to take over the universe in a way that might concern the hon. Gentleman.

Question put and agreed to.

Clause 85 ordered to stand part of the Bill.

Clause 86 - The Non-Executive Committee

Clause 87 - Investment of funds

Malcolm Wicks (Labour, Croydon North)

I beg to move amendment No. 365, in

clause 87, page 54, line 25, after 'be', insert 'at least'.

Malcolm Wicks (Labour, Croydon North)

The clause allows the board to invest assets in order to manage its affairs prudently. The Pensions Compensation Board has a similar power to invest funds that are surplus to its immediate requirements under section 85 of the Pensions Act 1995.

The pension protection fund board is required to appoint fund managers in relation to investing assets to manage its affairs prudently. The current wording of clause 87(2) requires the board to appoint two, and only two, fund managers to manage investments. This minor Government amendment will require the board to allow at least two fund managers to carry out the functions. The value of the pension protection fund's assets is likely to be significant in time. It is only reasonable, therefore, that the board should have the flexibility to appoint the number of fund managers that it thinks is required to maximise its investment returns and implement its investment strategy.

The amendment will enable the board to ensure that its fund managers have the breadth of knowledge, experience and expertise to manage the fund's assets to the best possible standard. We consider it appropriate for the board to have at least two fund managers, for reasons of propriety.

Amendment agreed to.

Question proposed, That the clause, as amended, stand part of the Bill.

Vera Baird (Labour, Redcar)

I am conscious that the board of the pension protection fund will take over the functions of the current Pensions Compensation Board. I assume that a separate levy to that will continue. Is it intended under the Bill that that fund will be managed separately from the main fund of the pension protection fund? I imagine that that must be so. Is there a separate provision? I am slightly puzzled that the matter is referred to as if there is only one set of investments, when it is likely that there will be two.

Malcolm Wicks (Labour, Croydon North)

The answer is yes—or two yeses. The new fund will take over the compensation regime from the previous, or existing, board, and there will be a separate fund to be managed. Mercifully, because of relative lack of fraud, the fund has not needed to be gigantic. The levy has been incurred only from time to time.

Question put and agreed to.

Clause 87, as amended, ordered to stand part of the Bill.

Clause 88 - Investment principles

Nigel Waterson (Conservative, Eastbourne)

I beg to move amendment No. 349, in

clause 88, page 55, line 9, at end insert—

'(5) The statement of investment principles prepared under this section shall be made available by all appropriate means to members of the public.'.

This is another amendment inspired by the National Association of Pension Funds and it is a sensible one. A statement of investment principles must be prepared, as we have seen, under the clause. That is quite right too. However, I can see no reason why that should not be available to members of the public. The body in question is, after all, a public body designed to protect members of the public who are members of final salary occupational pension schemes. The NAPF takes the view—and I agree—that the information should be in the public domain.

I cannot see any argument, for example, that the investment of the pension protection fund would be so enormous that knowledge of the investment strategy would affect other economic considerations. I can see no immediate reason for any secrecy or confidentiality. I think, although I cannot find the relevant clause off the top of my head, that I am right in saying that the board will publish its accounts annually, and that those will be open and available to members of the public, who take a close interest in such matters. So it seems perfectly sensible that the investment principles underlying the way in which those concerned deal with the funds or assets with which they are endowed, or the money received through levies, should be set out in a way that is accessible to the public.

Malcolm Wicks (Labour, Croydon North)

I agree with the hon. Gentleman, but I do not think that his amendment is necessary to achieve the objective. I certainly support the aim that he outlined. We stress that although the body being set up will operate at arm's length from Government, it must abide by reasonable reporting requirements, which will include the duty to prepare annual reports and accounts. The account must also contain an

actuarial valuation of the fund's assets and liabilities. The requirement to produce a written statement of the principles governing decisions about investments is similar to that which applies to trustees of pension schemes, which is set out in clause 199. It is intended that the statement of investment principles must be made available to members of the public on request as part of the disclosure requirements. The details of the disclosure requirements will be set out in regulations under clause 165(1), which we shall discuss in the coming weeks.

In view of that reassurance, I hope that the hon. Gentleman will consider withdrawing the amendment.

Nigel Waterson (Conservative, Eastbourne)

I am grateful for the Minister's explanation; I am thoroughly reassured. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 88 ordered to stand part of the Bill.

Clause 89 - Borrowing

James Cran (Conservative, Beverley and Holderness)

Make up your minds.

Malcolm Wicks (Labour, Croydon North)

We are both such gentlemen; we were deferring to one another, although that may not continue.

The clause allows the board to borrow sums that it may require from time to time to carry out its functions and to give security for any amounts that it borrows. The power to borrow is designed to address short-term liquidity problems and is normal for many executive, non-departmental public bodies. For example, the provision exists for the Pensions Compensation Board. The board may borrow from certain deposit takers or banks, and this term is defined as organisations authorised to accept deposits, and complies with the Financial Services and Markets Act 2000. However, the power will be restricted, in that the board may not borrow if its total borrowing would exceed its borrowing limit, which will be set by the Secretary of State in regulations. The board will, of course, also have to meet legal requirements for the prudent management of its finances and investments.

Nigel Waterson (Conservative, Eastbourne)

I am grateful for the Minister's explanation, but I have some additional questions. First, he said that borrowing should be restricted to deal with short-term liquidity problems, but our concern is about longer-term liquidity problems. Does the Minister think there is a case for taking a slightly more relaxed attitude to that sort of borrowing? Clause 89(1)(b) states that the board may

''give security for any money borrowed by it.''

What kind of security does the Minister have in mind? Does he mean the uncharged assets of schemes taken over by the board, or other things?

I want to probe the Minister about the basis for the borrowing limit. The heart of the clause is missing,

because the Secretary of State will have the power to decide the borrowing limit. What is the thinking behind the proposal? What criteria will be applied to produce a borrowing limit, and will it be related to the income from the levies, or the income on the assets being administered at a given time? Will the approach be based purely on liquidity or on other relevant issues?

The big question, which hovers around the edges of many of the clauses, is about the Government's position. From my brief but highly informative trip to Washington it seemed that there was a consensus on both sides of the political argument that the American Government could not allow the Pension Benefit Guaranty Corporation to go under. Our Government are being unrealistic in suggesting that they will set up the board and the fund, which will run themselves and not require input from the Government if things go horribly wrong.

In the context of clause 89, that translates into the cost of borrowing because, as I said earlier, if the Government bit the bullet and said that they would stand behind the fund, that would not only satisfy the concerns of people such as the hon. Member for Cardiff, West, but reassure people who need assurance. It is pointless to have this elaborate structure if it does not reassure people, but the cost of borrowing would be that much lower simply because the board would not have to go to the commercial market and there would be some benefit in having support from the Government.

I am sure that the last thing the Treasury wants is to be seen to be backing the fund and I understand the narrow approach that would produce that result. However, the Treasury wants to interfere in all sorts of other aspects of the Bill, as we have seen, so will the Minister give a little more detail about the basis of borrowing, the borrowing limit, security, the Government's role and the cost of borrowing?

Malcolm Wicks (Labour, Croydon North)

It is important to emphasise that borrowing is a short-term measure for specific short-term problems that may or may not occur. In the long term, the board may increase the levy and not need to borrow. The difference between what will become the British practice and the United States experience is that the board will have flexibility to make its own judgment on the level and that is crucial. Over time, the fund will accumulate its own assets as it takes over assets, which may be considerable, of failing pension schemes. There will be an income stream from those assets, so we do not foresee borrowing being at the heart of the board's funding—far from it. It is reasonable for the Secretary of State to set a borrowing limit. That is normal for non-departmental public bodies and replicates the provision for the Pension Compensation Board. It is important to remember that the power to borrow is aimed at addressing short-term issues.

On security, I mentioned that the scheme will have considerable assets and there could be security in property owned by the PPF, but borrowing will be only in short-term circumstances.

Question put and agreed to.

Clause 89 ordered to stand part of the Bill.

Further consideration adjourned.—[Margaret Moran.]

Adjourned accordingly at three minutes past Five o'clock till Thursday 25 March at half-past Nine o'clock.