Pensions Bill

Public Bill Committee, 30 March 2004.

Standing Committee B

Pensions Bill

Nigel Waterson (Conservative, Eastbourne)

On a point of order, Mr. Cran. I wish to refer to two issues on which, quite unwittingly, Ministers may have misled the Committee at our previous sitting. We had a lengthy discussion about prospects for compensating the 60,000 workers who have already lost their pension rights. Members of the Committee may have read in The Times on 27 March that the Government have commissioned a study from the Association of Corporate Trustees on the size of the problem. It has been asked to assess how much a bail-out could cost. That unaccountably slipped Ministers' minds during our detailed discussion about such matters. Surely they would have considered that it was something of more than passing interest to the Committee.

At our sitting last Thursday, I pressed the Minister about the priority order, to which he responded:

''Our proposals . . . which we hope to introduce to the Committee as soon as possible after Easter, will be part of the Bill.—[Official Report, Standing Committee B, 25 March 2004; c. 459.]

That has caused some confusion and consternation among those in the know and I understand that the hon. Gentleman may have made an error. Now might be a good opportunity for him to correct the position.

James Cran (Conservative, Beverley and Holderness)

I am perfectly happy with the hon. Gentleman's point of order, although he and the Committee will understand that it has nothing to do with me, but doubtless others whom it relates to will respond at the appropriate time if they wish to do so.Clause 121 Duty to assume responsibility following reconsideration

Clause 121 - Duty to assume responsibility

Nigel Waterson (Conservative, Eastbourne)

I hope that my point of order will produce some response from the ministerial team.

During a busy weekend in the pensions press, it emerged that there was an apparent loophole in this part of the Bill. There are two schools of thought. The first is that the loophole was unintentional, the consequence of an oversight by the Department for

Work and Pensions. The more colourful theory is that the loophole is a clever way of dealing with the points that I, the hon. Member for Cardiff, West (Kevin Brennan) and others have made about compensating those who have already lost out because of problems with their pension schemes.

Senior pension lawyers who specialise in such matters say that the way in which this part of the Bill is drafted could trigger the collapse of hundreds of schemes within days of the launch of the pension protection fund, and that

''Any trustees of company pension schemes where the employer had already collapsed might be delaying the liquidation of the scheme until members could qualify for payments from the PPF''.

Mr. Robin Ellison of the solicitors' firm, Pinsents, said:

''It will be very interesting to see just how many schemes collapse within the first three days. We expect to see a rush of collapses. What we don't know is how many. I suspect it will be in the low hundreds.''

Oh, so that is all right then. He went on to say that trustees might have no option but to

''keep the funds running. If you're a trustee and you begin wind-up between now and next April, you could be accused of being in breach of trust.''

Mr. Giles Orton of Eversheds said that he could not believe that Government officials were not

''fully aware, right at the start, of the significance of wording the Bill in this way. Access to the PPF depends not on the date that a company goes into receivership or liquidation but the date the pension starts wind-up. This is a crucial difference.''

The lawyers point out that some employers would go to great lengths to buy time and avoid damage being done to their reputation of being seen to walk away from a pension scheme. They believe that some people, particularly overseas owners of ailing United Kingdom subsidiaries, might also be waiting for the launch of the PPF to put the scheme into liquidation. Another way round such a problem is apparently management buy-outs. According to Mr. Orton, the management are told, ''We will bung you a reward to keep it going as long as you can. By the time the inevitable happens, the PPF will be up and running.'' It buys them time.

Last week, it was the actuaries who fired a torpedo at this ailing ship; today, it is the pension lawyers. I would be fascinated to hear what Ministers have to say about the latest large problem that has opened up in their Bill.

Chris Pond (Labour, Gravesham)

What a delight it is, Mr. Cran, that you are seeing us through our proceedings on this wonderful spring morning.

I shall first deal with the specific point made by the hon. Member for Eastbourne (Mr. Waterson) about the apparent loophole that he thinks has been discovered by the weekend press. I reassure the Committee that there is no loophole. The key is that wind-up must occur after April 2005; insolvencies that take place before that date will not qualify. Indeed, the Committee passed an amendment to clause 99 last week to that effect, so I hope that the hon. Gentleman is reassured.

I remind the Committee that, towards the end of last week, we were discussing the entry rules to the PPF, assessment periods and so on—I am sure that hon. Members will have thought of nothing else over the weekend. They will remember vividly that clause 120, which we debated on Thursday, provided for schemes to apply for reconsideration if the PPF has determined that schemes have sufficient assets to buy out the PPF level of benefits, and therefore imposes a requirement to wind up outside the PPF.

Applications for reconsideration must be submitted by the trustees or managers of the scheme. Such applications must, first, contain a quotation for one or more annuities from one or more insurers willing to accept payment in respect of the members that would provide benefits to those members; and, secondly, a written auditor's valuation of the assets, excluding assets relating to money purchase benefits under the scheme.

Clause 121 provides that if the protected benefits quotation and asset valuation submitted by a scheme during the reconsideration period confirms that the scheme is not able to buy out benefits for members that are at least equal to the level of the protected liabilities, the board must take the scheme into the PPF. The board may obtain its own valuation of the assets of the scheme as at the reconsideration date. That valuation will have the same effect as an auditor's valuation. Audited scheme accounts, for the purposes of the clause, means accounts audited by the scheme's auditor, and obtained by the trustees or managers of the scheme in accordance with section 41 of the Pensions Act 1995.

The clause is crucial in enabling the board to assume responsibility for a scheme, following a decision by it having received an application for a reconsideration.

Question put and agreed to.

Clause 121, as amended, ordered to stand part of the Bill.

Clause 122 - Transfer notice

Clause 123 - Effect of Board assuming responsibility for a scheme

Nigel Waterson (Conservative, Eastbourne)

I beg to move amendment No. 411, in

clause 123, page 77, line 42, at end insert—

'(7) The trustees or managers of such a scheme shall be discharged from any further liabilities of whatsoever nature; and they will in addition receive an indemnity and hold harmless agreement from the Board.'.

The clause sets out the effect of the board's assuming responsibility for a scheme. It is important to realise that the board does not take over as the trustee of a pension scheme—it is a crucial distinction. Instead, all the property of the scheme is transferred to the board. Under subsection (2), the scheme is to be treated as having been wound up. It seems to us, therefore, that it needs to be clear to the trustees that once they no longer have any assets under their control they will be free from further liabilities. Subsection (2)(b) contains a general discharge from their pension obligations, and pension obligations are defined in subsection (4).

I am told, however, that there may be other circumstances in which trustees will remain liable for obligations that they have entered into, even if those involve assets that have been transferred to the board. For example, if they have entered into a lease they might still be personally liable as trustees under the lease covenants, even though the board might also become liable under subsection (2)(a). We think that it should be made clear that those obligations would disappear once the assets were taken over. It may also be worth while to make it clear that no further claims can be brought against the trustees before the pensions ombudsman. Ministers may want to consider that; perhaps we shall consider the possibility later in the Bill.

I included in amendment No. 411 a requirement for the board to give the trustees an indemnity and hold harmless agreement. I can see no good reason for the trustees, having relinquished, or being advised to relinquish, their responsibilities, not to be given a very wide indemnity by the PPF.

Chris Pond (Labour, Gravesham)

The hon. Gentleman makes an important and relevant point. I am pleased to reassure him and the Committee that his concerns have already been dealt with in the provisions.

I do not think that there is anything between us on the issue of trustees' further liabilities. It has been made clear that once the board has taken over responsibility, it has responsibility. The clause provides that, where a transfer notice is given to the trustees or managers of a scheme, the effect of the transfer notice is to transfer all the property, rights and liabilities of the scheme to the board. The trustees or managers of the scheme are discharged from their obligations to the scheme and the PPF board is required to pay compensation to scheme members on an ongoing basis.

The amendment, however, would allow the trustee or managers of a scheme to be discharged from any

liabilities whatsoever relating to the scheme, and enable them to receive an indemnity and not be held responsible by the board for any consequences of their actions prior to the taking effect of the transfer notice.

The effect of schedule 6 is that only rights and liabilities of an occupational pension scheme transfer to the PPF. That does not include any personal liability of the trustees or managers in respect of their acts or omissions prior to the date on which the transfer notice was given. Prudent trustees should as a matter of course have indemnity insurance in respect of personal liabilities. The amendment would therefore appear to be unnecessary and I hope that with that reassurance the hon. Gentleman will feel able to withdraw it.

Nigel Waterson (Conservative, Eastbourne)

I am thoroughly reassured by that response to my amendment; it was impertinent of me even to table it. I therefore beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 123 ordered to stand part of the Bill.

Schedule 6 - Transfer of property, rights and liabilities to the Board

Nigel Waterson (Conservative, Eastbourne)

I beg to move amendment No. 413, in

schedule 6, page 191, line 40, at end insert—

'2A Any claims for unfair dismissal or other breach of a contract of employment arising therefrom are payable in full by the Board.'

The amendment concerns another small point, which I dare say the Under-Secretary is about to tell me is already dealt with in the Bill. I shall plunge on regardless.

Schedule 6 sets out in some detail the property rights and liabilities being transferred to the board under clause 123. Paragraph 2(2) provides for any contracts of employment to be immediately terminated. I understand that that would include anyone who had been directly employed by the trustees. I am advised that the schedule should make it clear that any claims for unfair dismissal or unlawful breach would be payable by the board, not the trustees.

I think that the point involved in this amendment is subtly different from the one dealt with under amendment No. 411. Some genuine concern seems to have arisen about it, and I should be interested to hear from the Under-Secretary why my amendment is inappropriate.

Chris Pond (Labour, Gravesham)

While I am on a winning streak, may I suggest again to the hon. Gentleman that the legitimate points that he has raised have already been dealt with? He is right to say that any rights and liabilities under contracts of employment that would be transferred to the board are terminated and become void on the day preceding the day that the transfer notice is received by the trustees or managers of the scheme. That does not mean, of course, that any entitlement that people have in terms of unfair dismissal would no longer fall to the board.

Schedule 6 also allows for any legal proceedings by or against the scheme or applications pending immediately before the transfer to be continued by or against the board. The amendment seeks to allow any claims for unfair dismissal or other breach of contract of employment arising from the issue of the transfer notice to be transferred to the board. However, subsection (2)(a) of clause 123 already provides for the property, rights and liabilities of a scheme to be transferred to the board once a transfer notice has been issued. Any contractual issues arising as a result of the transfer notice will be transferred to the board. Those would include outstanding employment issues. Under those circumstances, I hope that the hon. Gentleman will agree that the amendment is unnecessary.

Nigel Waterson (Conservative, Eastbourne)

That serves me right. I am happy to accept the Minister's explanation, and I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 6 agreed to.

Clause 124 - The pension compensation provisions

Steve Webb (Liberal Democrat, Northavon)

When we get to schedule 7, which will be enacted by clause 124, in a moment, I expect that we will have a long and detailed discussion of the details of compensation under the PPF. However, under the rubric of clause 124, which sets out the overall framework, it would be helpful to have a brief steer from the Minister on the philosophy underlying the detailed decisions that the Government have taken about the structure of compensation. Clause 124 says that periodic compensation and lump sum compensation should be payable. Immediately, that raises a question. Clearly, we are worried about people's pensions but clause 124 is not just about pensions—it mentions lump sums, and allows the payment of lump sums even when the scheme rules did not.

There is a philosophical question about how far the PPF is trying to replace the pension arrangements that the scheme would otherwise have given, and how far it is trying to do something slightly different. For example, lump sums are payable under the clause even if they were not under the scheme, but in other cases, benefits that would have been payable under the scheme are not replicated in the PPF provisions. We will debate in detail the issue of unmarried partners and so on later, but a muddled approach underlies all our discussions about the benefit structure of the PPF.

The clause provides for a cap, but only for non-retired scheme members, not for retired scheme members. What is the philosophy behind that? If the schemes had run on, none of the caps would have applied. Why is there a cap in one place and not in another? Will the Minister clarify whether it is the Government's intention that the PPF will, as far as possible, try to give people what they would have got if

their employer had not gone to the wall with an underfunded scheme, or are the Government trying to create a kind of pseudo-pension with certain characteristics that they think schemes should have, such as lump sums, even if the scheme did not have them, but without unmarried partners' benefits, even if the scheme had them? Do the Government have a model of an ideal scheme? What is the thinking that will underlie our subsequent discussions on the detail of the schedule to follow?

Malcolm Wicks (Labour, Croydon North)

With your permission, Mr. Cran, I will comment on two points that were raised by the hon. Member for Eastbourne earlier.

James Cran (Conservative, Beverley and Holderness)

Order. I am perfectly happy for you to refer to those two points, Mr. Wicks, but I would like to separate that from the current discussion. If the issue is germane to the clause, that is fine, but if it is not, let us find another way of talking about it.

Malcolm Wicks (Labour, Croydon North)

I shall try to find another way of talking about it later; I was just trying to be helpful to the hon. Member for Eastbourne. For now, I will talk about clause 124 and touch briefly on the point made by the hon. Member for Northavon (Mr. Webb).

Clause 124 sets out the pension compensation provisions relating to the new fund. The detail of the compensation rules is provided in schedule 7, section 123(2)(c), and will be set out in regulations under section 130. The purpose of schedule 7 is to detail the PPF compensation provisions relating to scheme members, their survivor—or in certain circumstances, dependants—when their defined benefit pension scheme or hybrid pension scheme, with a defined benefit element, enters the PPF.

The clause enables the provisions in schedule 7 to be considered and applied in order to calculate PPF compensation entitlement. Without the clause, PPF compensation could not be paid to any member of an eligible scheme that had been taken over by the PPF.

It will be more helpful if some of the issues that were raised by the hon. Member for Northavon are discussed at the relevant time—when we discuss the schedule. I do not think that there is a simple one-line answer to his question, but the broad one is that on PPF compensation we are going for a simple, broad-brush approach whereby existing scheme pensioners are paid 100 per cent. of their pension rights and other scheme members are paid 90 per cent. I concede—though I make no apology for this—that from time to time we shall examine the specifics of the scheme.

On the subject of partners, when, sadly, a scheme member has died and a partner who is not married is receiving benefit, she or he will continue to do so; it seemed right not to interfere with an existing arrangement. Some characteristics are more scheme-specific, but broadly speaking we are not seeking to replicate every last detail of the rights under a scheme. We are going for a broader-brush approach. That is equitable, and we also think that such a system is simpler to administer. Wherever possible, we are going for simplicity.

Nigel Waterson (Conservative, Eastbourne)

I urge the Minister not to be too broad-brush, because we must remind those who are following the shaping of the Bill that there is a cap, and the board is given a power to reduce benefits. Leaving aside the issue of the 90 per cent./100 per cent. distinction, there is also the question of the 1997 cut-off. Anyone who thinks that the Bill will guarantee their pension, full stop, in a broad-brush way has been misled.

Malcolm Wicks (Labour, Croydon North)

Yes, but I would prefer to deal with those issues when we get to the relevant moment. Those who are concerned about their pension rights being guaranteed stand more chance of that if the Bill receives Royal Assent than they would if we took the advice of those who declined to give it a Second Reading.

Question put and agreed to.

Clause 124 ordered to stand part of the Bill.

Schedule 7 - Pension compensation provisions

Nigel Waterson (Conservative, Eastbourne)

I beg to move amendment No. 355, in

schedule 7, page 193, line 11, leave out from 'means' to end of line 13 and insert '90%'.

James Cran (Conservative, Beverley and Holderness)

With this it will be convenient to discuss the following:

Amendment No. 417, in

schedule 7, page 193, line 11, leave out from 'means' to '100%' in line 13.

Amendment No. 356, in

schedule 7, page 193, line 24, leave out sub-paragraph (7).

Government amendment No. 478.

Amendment No. 418, in

schedule 7, page 200, line 11, leave out '90%' and insert '100%'.

Amendment No. 419, in

schedule 7, page 201, line 10, leave out '90%' and insert '100%'.

Government amendment No. 480.

Amendment No. 420, in

schedule 7, page 203, line 4, leave out '90%' and insert '100%'.

Nigel Waterson (Conservative, Eastbourne)

Amendments No. 355 and No. 356 are the only ones in the group that were tabled by our party, but it may help if at the same time as discussing our amendments, I make some comments on the others.

The amendments all represent slightly different ways of coming at the same issue. Ours are probing amendments, designed to point out the slightly surprising distinction—I am not sure whether the hon. Member for Northavon used that word, but I think I understood what he was getting at—between giving only 90 per cent. compensation to those under retirement age, and giving 100 per cent. compensation to those who have reached normal pension age. That is almost an echo of our current difficulties with the priority order, albeit in a much more modest way.

The hon. Gentleman talked about a philosophical issue. I do not want to follow him too far down that route, but the question of why there should be such a

cliff edge—to borrow the phrase use the National Association of Pension Funds—is almost a philosophical one. The NAPF bluntly says that it would like the cliff edge to be removed. Its perfectly legitimate position is that pensioners and non-pensioners alike should get 90 per cent. of their entitlement, up to a cap of £25,000 a year. It also has something to say about indexation and valuation; we will come to that under a different set of amendments.

NAPF has a point: it is difficult to see why there should be a distinction. I suppose that the reason for trying to level down to 90 per cent. could in part be a feeling that a 100 per cent. guarantee may be inappropriate in the circumstances. However, as I have pointed out, the Government's proposals are far from being a complete guarantee of people's pensions. I understand why the Minister is being ''broad-brush'', to use his phrase, but it is important that we do not allow people to go away with the idea that once the PPF has been set up, their pensions are fully guaranteed for good and all, because they certainly are not. There is a range of reasons for that, and the distinction between 90 per cent. and 100 per cent. is one of them.

It is interesting to see that the fact sheet produced for our deliberations makes no such extravagant claim for the PPF. It says:

''For the first time ever, individuals in defined benefit schemes based in the UK can rest assured they will always receive a meaningful pension, even if their company goes bust and leaves the pension scheme underfunded.''

That is not, I think, overselling the proposals in this part of the Bill, but people should be clearly aware that, although the PPF does of course provide a welcome safety net, it is only a partial safety net, and it certainly will not guarantee in full the pension rights that people may have built up over a great many years.

I think that we all have the Age Concern briefing, and I suspect that we will hear a bit more about that in a moment. It covers the issue from a different angle; the amendments that it suggests would level up the percentage to 100 per cent. for everyone in the scheme. It is difficult to disagree with that logic, and I am sure that we will hear it deployed in support of other amendments, too. Why should there be a distinction between the two groups of people simply because one group has retired and the other has not?

Age Concern says that it has worries about the amount of pension entitlement that people will receive under the new system. It says:

''We believe that the proposed Pension Protection Fund . . . benefits are not generous. In fact the actuaries Lane Cark & Peacock and the Occupational Pensioners Alliance both estimate that some pensioners may receive only 70 per cent. to 80 per cent. of their total pension promise under the PPF.''

We will certainly come back to the issue of the April 1997 cut-off date. Age Concern goes on to say:

''We have particular concerns about the difference in pension entitlements granted by the Bill for those under a company's normal retirement age and those above it. Pensioners under normal retirement age, who may have been given little choice in taking early retirement, are therefore likely to see their pensions cut''—

hence Age Concern's amendments.

As I said, ours are only probing amendments; however, the same logic applies to the amendments that Age Concern rightly inspired. It seems odd that there should be a distinction between those receiving 90 per cent. and those receiving 100 per cent. I will allow those who are to speak to what are, in effect, Age Concern amendments to make more of the organisation's briefing and to say more about the logic behind those amendments.

The bottom line is the same for both sets of amendments: why is there that slightly odd distinction? What is the logic of it, and what is the fairness that is said to be behind it?

Steve Webb (Liberal Democrat, Northavon)

The hon. Gentleman has already observed that the level of cover is not all that good anyway. People who have already retired get 100 per cent. of something, but that something, for example, is not indexed. Having recognised and acknowledged that, he then wants to cut back further through the amendment, presumably to keep the levy down. Is he not worried that on one hand he says that the protection is not as good as it looks anyway, and on the other he moves an amendment to cut it further? Is he not worried that that would undermine the whole scheme?

Nigel Waterson (Conservative, Eastbourne)

I do not think that the hon. Gentleman's intervention is unfair, or designed to be so. However, I really hope that, when the Bill emerges from this Committee, the scheme will work. Given the eloquent way in which hon. Members such as the hon. Member for Cardiff, West and others have described the problems of those who have already lost out because of the use of words such as ''guarantee'' in the past, it would be extraordinarily unfair and inappropriate if the Bill ended up sending people the message that they are getting more than they are.

There is a real danger—I thought this before I saw the comments of some leading pension lawyers—that the fund will get into trouble very early on, largely because of the way in which it has been set up. Later we shall discuss the issue of the levy in much more detail; I am sure that you are looking forward to that, Mr. Cran. There will be a temptation to cut the benefits, because that would be the only way out. The Government have said that they are not going to back the fund. The fund will have claims on it and limited resources because of the reduced flat-rate levy in the early years. It will have little choice but to cut benefits. I would prefer that the Bill progressed on an honest rather than a false prospectus.

For the benefit of the hon. Member for Northavon, I want to clarify a point that I made earlier. My amendment is really a probing amendment, as I am sure the other amendments are. I can see the argument for levelling up as well; I just do not see the reason for one figure of 100 per cent. and one of 90 per cent. In fairness, I think that the hon. Gentleman made a similar point.

Finally, I want to return to the heart of what we are offering people in the Bill. The Minister is famously on record as saying that it is not an insurance scheme and not a pension scheme. That leaves the question—

answers on a postcard, please—as to what it actually is.

I do not know whether the Minister ever reads the briefings that are sent out. Due to the European dimension of the Allied Steel and Wire claim and others, I received a briefing via UKRep, our Government's representative in Brussels. It has an interesting note about the pension protection fund. The briefing ends with the immortal lines:

''The PPF, however, is an insurance scheme and no insurance scheme can cover against events that have already happened.''

There is still a question mark hanging in the air about what this animal is.

Amendment No. 355 is a probing amendment. There is a lot of force in the other amendments, which may have been inspired by Age Concern; they make a lot of sense. However, I see no sense in making the arbitrary distinction of 90 per cent. and 100 per cent., depending on whether a person has retired or not.

Bill Tynan (Labour, Hamilton South)

I begin by clarifying the situation as regards Age Concern. I have had discussions with Amicus, of which I am a member, about the amendment that stands in my name and that of my hon. Friend the Member for Glasgow, Anniesland (John Robertson). I had much pleasure in tabling the amendment.

Age Concern certainly supports the amendments, but they are probing amendments. We have to remember that the full intention of the fund is to give confidence as regards people who may find that they lose their pensions. I would start from the basis that we are creating confidence by establishing the fund in the right vein. It would be abhorrent if we reduced the pension of existing pensioners from 100 per cent. to 90 per cent., so I would dismiss amendment No. 355, which was moved by the hon. Member for Eastbourne.

Obviously, compensation is payable under schedule 7. The schedule determines the formula, but I want to examine the general principle behind it—that compensation for pensions in payment at present is 100 per cent. of the pension due under the scheme while that for the other pensions suggested in the Bill is 90 per cent. Nowhere in the explanatory notes, in the Minister's contribution on Second Reading or on the DWP website is there an explanation of why we should have the 90 per cent. target. I suspect that it is based primarily on protections in other financial compensation schemes, but I would like to hear how the Minister sees the situation. My first question, therefore, is why 90 per cent. was selected rather than 100 per cent. My second question is what the cost difference to the PPF would be if the levy were set at 100 per cent. That is an important point. Is it a matter of funding, or could funds not support such a provision?

Another point that must be raised relates to the guaranteed minimum pension and the state second pension. Will those benefits be protected at 100 per cent. under the PPF? There is concern that payments under the state second pension and the guaranteed

minimum pension could be reduced because they would be calculated at the 90 per cent. rate and would lose their value. What knock-on effect would that have on other pension benefits?

In moving an amendment to change the rate from 90 to 100 per cent., I understand that existing pensioners receive 100 per cent. If we really want to restore confidence in the fund so that it is generally accepted among those who are concerned about losing their pensions, we should look at 100 per cent.

I am looking for the Minister to tell me how he sees the present situation. We could have a tiered system of compensation that is based on the fact that it is normally poorer people who build up a guaranteed minimum pension or a state second pension. We could introduce a tiered system for pension schemes, with people on different levels—say, £10,000, £15,000 or £20,000. We could then build the system up on that basis. Of course, 90 per cent. of £30,000 or £35,000 could be acceptable, but setting compensation at 90 per cent. of the poorest people's pensions could have a dramatic effect on those individuals.

The amendments are intended to probe different issues, and when the Minister responds, we shall know where we go.

Steve Webb (Liberal Democrat, Northavon)

This is obviously a very important set of amendments, and Government amendments dealing with the definition of compensation will be moved in a moment. However, there is clearly an issue about why the levels have been set at 90 per cent. and 100 per cent. and why they are not the same. If there should be only one level, what should it be?

At first sight, one would imagine that compensation for people who have not reached the scheme's pension age might reasonably be lower, because, potentially, they will still have time to do something about it; that would be the philosophical argument. Once people have retired and passed pension age, however, it is unrealistic to think that they can save; potentially, they will have accrued all their pension. They may, however, be in their 40s when their company goes to the wall. Only the other day, I came across a constituent who worked for the Lister Petter Group, which will become a household name like ASW. It is based in Stroud, in the neighbouring constituency to mine. My constituent told me that he had lost out, but when I asked him about his circumstances, it turned out that he was in his mid-40s. Clearly, what had happened was important to him, but he told me that it was less important to him than it is to others, because he still had time to make pension savings. In that sense, the fact that he might have got 90 per cent. rather than 100 per cent. compensation if the scheme had been up and running would have been less significant for him than for a retired scheme member. However, the 90 per cent. makes no distinction between those who are on the brink of retirement and those who are 21, so I do not think that the argument stands up. Unless the scheme makes a distinction between those two different cases, the worker aged 64 or 59 who is below the normal scheme pension and but for a year will have received 100 per cent. will receive real rough justice. That

worker will be treated identically to the 21-year-old, who will have decades to sort out their pensions.

The Government's proposals are analogous to the priority order issue. The problem there was a lack of data: the relevant distinction could not be made because the scheme's records were not good enough. However, we are talking about a scheme that will apply in the future, in a world where the regulator will require schemes to have proper information about their members. Such a distinction might therefore be made. I should be interested to hear the Minister's comments about that. In other words, there is a stronger case for having a slightly lower compensation level, perhaps so as to afford something more generous for retired members, if a distinction is made according to how long people had served in the scheme. As far as I can see, however, the Government have no intention of doing that, so there is no argument for a lower compensation level for those below pension age. The provisions are too rough and ready and fail to discriminate between those who literally have a few months to sort out the problem and those who have 40 years in which to do so. That is unacceptable.

The question then is: if there is to be a level of support, what should it be? In a sense, any decision is arbitrary, because 100 per cent. does not mean 100 per cent., as we have discussed; it means 100 per cent. of benefits defined in a particular way. Because of inflation protection rules and so on, that may still end up as less than the pension that one would have received if one had stayed in the scheme. The numbers do not quite mean what they sound as though they mean. Clearly, one would prefer to level up, as suggested by amendment No. 417, which the hon. Member for Hamilton, South (Mr. Tynan) tabled. The better the protection, the better for everyone.

The hon. Member for Eastbourne accepted the latter argument, but said that if the scheme were in a mess, the proposal would worsen it by placing more of a burden on it. My answer is that we should set up the scheme properly. Let us not water down the benefits. If we are going to set up the thing, let us do so properly—in my view, we should underwrite it, in case the worst happens. Let us not approach some of the fears that have been expressed by immediately eroding a new protection scheme. That is a dangerous road to go down.

Funnily enough, 100 per cent. is psychological. There is a difference between 100 per cent. and 90 per cent. If a future Government went from 90 per cent. to 87 per cent., it would be much harder to argue that there had been a breach in principle. However, if the scheme said 100 per cent.—of something quite specific, but still full protection on a particular definition—subsequent Governments would, in my judgment, find it much harder to chip away at it. That is an argument for levelling at 100 per cent., not 90 per cent. The scheme would be more robust in the face of future Governments, even those perhaps less benign than this Government. One would prefer legislation to be resistant to Governments who might be less sympathetic—[Interruption.] Obviously I do not mean Governments of my own party—rather, those of the Conservative party.

The hon. Member for Hamilton, South raised a couple of important points. I want to confirm that I understand them. His first question is what difference it would make if the scheme were 100 per cent. levy protection, not 90 per cent. Let us suppose that the cost of the scheme was half on the retireds and half on those under pension age, and that all we were doing was knocking 10 per cent. off. According to the back of my envelope, that would suggest 5 per cent. on the levy, give or take. [Interruption.] It is quite crowded on the back of my envelope. That is a fairly small difference. Given the advantage of telling people who have not yet reached pension age that their pensions are protected on a particular definition, that is a pretty small margin to worry about. If the numbers were much bigger than that, we would have to consider the matter. However, my sense is that the cost is not huge. The hon. Gentleman rightly asked the Minister to give us the figure, but I do not know whether he can.

The hon. Member for Hamilton, South also raised the important issue of the interaction of occupational schemes and state pension rights. I come at the issue from a slightly different angle. Some of those schemes will have contracted out of second pension provision—I am not sure, but this might be a different point from the hon. Gentleman's. In return for contracting out, a promise will have been made to deliver scheme benefits equivalent to the state scheme. In return for a rebate from national insurance contributions, a certain pattern of scheme benefits will be promised. One feature of those scheme benefits, for example, is that they will be fully indexed. The PPF benefits will not be paid on the same basis. Does the 90 per cent. figure mean that the workers who are in contracted-out schemes will have been expecting a certain level of benefits, and the PPF will not guarantee the benefits that they would have received in the thing that replaces the state scheme? I know that that is slightly garbled. Is there an issue about contracting out, GMPs and so on? What is the difference between schemes that are contracted out and not contracted out in the way that the PPF interacts with them?

The key point for me is that although one can see a general argument for a differential approach, in the sense that it is too late for people who are retired to do anything about it, in practice many of those who will be affected by these wind-ups also cannot do anything about it. To tell them, arbitrarily, that the scheme went to the wall six months before they were a pensioner—not six months afterwards—does not affect the fact that they cannot do anything about it. The income for the rest of their lives is wholly dependent on these arrangements. The distinction cannot be justified, because the 90 per cent. figure makes no distinction between those people and young workers who could do something about it. A levelling is required. To make the measure future-proof, provided that it is affordable, 100 per cent. would be better than 90 per cent.

If the argument is that we must try to keep the levy down as much as possible, there are other ways of doing that than to go for 90 per cent. The £25,000 cap is another way to keep the costs down. For example, if

we think that the total levy has to be a certain figure and we want 100 per cent. rather than 90 per cent., the cap could be lower. There are different parameters in the scheme. Even if the Minister said, ''We have pushed the levy as far as we can go'', there is still a case for the 100 per cent. figure, but with a lower cap. Why did the Government reject that approach?

Malcolm Wicks (Labour, Croydon North)

I am grateful to my hon. Friends and other Members for raising these issues. In many respects I have found this a rather encouraging debate because, although the provisions are subject to the will of Parliament, the Committee is beginning to take it for granted that one day soon there will be a pension protection fund. Having established the fund, we can then discuss details. I do not mean to be dismissive—I mean that we can discuss important characteristics of the fund. I am reminded of debates about what the level of the minimum wage should be. At least we now have a minimum wage. No doubt, we shall hear many suggestions this morning and in later debates as to how the PPF could supposedly be improved, including suggestions from some people who opposed the original proposition and some who would never have thought of it. In many ways, that is progress.

When devising the PPF policy, we needed to balance a number of competing factors, such as how best to ensure that individuals received in a fair and transparent manner compensation close to the pension that they were expecting, thus protecting their expected living standards, while minimising costs on employers and limiting both the potential for abuse and unwanted behavioural consequences—the concern about moral hazard, to which I will return. The balancing act is not easy, but the solution that is advanced in the Bill is broadly the right one. I say ''broadly'' because no one can argue with 100 per cent. conviction about the odd percentage point.

A key feature is that the measure will provide the reassurance to some 10 million members or more of pension schemes that they can continue paying into their company scheme safe in the knowledge that they are likely to have a secure retirement, even if their company goes bust. Let us not lose sight of that or the fact that although we can argue about figures of 100 per cent., 95 per cent. or 90 per cent., if we had proposed 100 per cent. some lobbies would have suggested 110 per cent., hence the nature of these debates. We can argue about this, but let us always remember that in discussing the virtues of 90 per cent. or 100 per cent., we are confronting the current reality that some people are facing a figure of 20, 30 or 40 per cent. when their company goes insolvent, hence the importance of the protection fund.

Steve Webb (Liberal Democrat, Northavon)

The Minister is making helpful contextual remarks, but can he clarify the figure of 10 million? The scope of the PPF covers private sector defined hybrid benefit schemes. Can he confirm whether there are 10 million workers in private sector defined benefit schemes?

Malcolm Wicks (Labour, Croydon North)

There are 10 million scheme members of different kinds. On Second Reading, I cited up to 15 million but added the important

qualification that some of those individuals in those 15 million schemes might be in more than one scheme. That is why I am referring to the more modest figure of 10 million or so scheme members. I shall write to the hon. Gentleman on that point.

Amendments Nos. 417 to 420 are designed to ensure that everyone receives 100 per cent. compensation. Using the word ''compensation'' reminds me of the question that the hon. Member for Eastbourne asked, about what the PPF is if it is not an insurance scheme or a pension scheme. We discussed that earlier. It is perfectly reasonable that in conversation in this Committee and the House we use words such as insurance and pensions in the sense that most of our constituents would understand their English usage. Clever people from outside may say, ''Ah, but the PPF is not, strictly speaking, an insurance fund or a pension scheme,'' and of course they are right. We are inventing something that is unique to this country—a pension protection fund. We do not yet have one, and it is a compensation scheme. However, in terms of English usage, it has insurance elements and it is about protecting people's pensions. Only the nit-pickers would want to go on about that; I give way.

Nigel Waterson (Conservative, Eastbourne)

The Minister cannot patronise his way out of this corner. The clever people whom he talks about are those who already make a profession of ensuring that people's pensions promises are met. They are deeply concerned that the fund will not work. They are not nit-picking; they are saying that if it is an insurance scheme, certain rules and regulations apply, particularly about investments; if it is a pension scheme, different rules apply. If the Government are persisting with saying that the PPF is neither, which set of rules applies?

Malcolm Wicks (Labour, Croydon North)

It is in the Bill and will be in regulation what the PPF is doing. We are discussing whether non-pensioner scheme members should have pension rights of 100 per cent. or 90 per cent. Those are the details under discussion. The PPF is a unique institution—I use that phrase properly, certainly on this occasion—as we do not yet have one in the United Kingdom. It is a compensation scheme to ensure people that their pension rights will be safeguarded. Exactly what their pension rights are, and whether they are high enough and so on, is something that we are discussing. At least the Bill means that we can discuss those matters.

Let me explain why we do not favour paying everyone 100 per cent. In an ideal world we would have liked to pay everybody exactly what they were expecting from their scheme, but sadly we cannot do that. In the real world, employers have to bear the cost of the PPF, and there are moral hazard issues, which we would be foolish to ignore.

On cost, I am advised that levelling up to 100 per cent. for everyone could add an extra £100 million to the levy—we will consider that figure again and, if I need to add any details or qualifications, I shall do so in writing. We have to get a balance between providing answers quickly and considering questions carefully.

Nigel Waterson (Conservative, Eastbourne)

With all due respect, the Minister speaks as if this had suddenly been sprung on him this morning. He says that the business plan is broadly right, but why does he think that? These matters have never been discussed until now, and he will have to write to the hon. Member for Northavon to deal with this rather simple issue. The difference in cost must have been considered; otherwise, who is in charge of the rattling train?

Malcolm Wicks (Labour, Croydon North)

Rightly or wrongly, I did not have the figure of £100 million in my head. I knew that, by definition, it would be significant, but I thought it helpful to take advice, as one does in the strange way of Committees. One day we will need to reform the Committee process so that the expert judgments of officials and others can be brought to bear. That is another matter, however, and relates to the modernisation of Parliament.

I was advised that the figure was £100 million, and sought to be helpful by citing it. I will have to write to the hon. Gentleman about exactly how it was calculated, if that seems sensible. I will try to keep being helpful to the hon. Member for Eastbourne, but if he is inconsiderate every time I do so, I might have to change my mind as we approach the Easter recess.

Steve Webb (Liberal Democrat, Northavon)

I want to confirm that I understand what the Minister is saying. The backs of my envelopes are not the most reliable places for writing things down, but I understand him to be saying that the figure is £100 million a year, because we are adding a third to the cost of the scheme, which is £300 million a year. However, all we are doing is adding a ninth to the benefits of a percentage of the scheme to the scheme member, so how can that add a third to the cost?

Malcolm Wicks (Labour, Croydon North)

That is our estimate on the basis of a levy a year or so into the scheme of £380 million, but I will write to the hon. Member for Northavon. When members of the Committee have a whip-round to buy an Easter egg for the hon. Gentleman, we shall put it in a very large brown envelope so that he can entertain us even more with his detailed questions. No doubt, a draft Liberal Democrat Budget could also be thrown in for free.

Steve Webb (Liberal Democrat, Northavon)

With sweeties.

Malcolm Wicks (Labour, Croydon North)

A sweetener, yes.

To keep costs down, we have deliberately kept the compensation arrangements as simple as possible by using a combination of the essential scheme rules and standardised PPF rules. This ''no-frills'' approach controls costs and is relatively transparent to individuals, which is important. Costs fall on employers, and the PPF design needs to be proportionate so that costs remain reasonable and sustainable. We are very much alive to the point that excessive costs could drive employers to close their schemes, which is not what we want.

I have said several times that it is very important that while we are introducing new security for individuals we are not naive and innocent about the costs of the schemes to employers. I do not regret this morning's debate about increasing the costs; it is an

important debate. Another time, we might have a debate about concerns that there are too many burdens on business as a result of the PPF. We seek to get the balance right.

Bill Tynan (Labour, Hamilton South)

I have a different perspective. I hope that my hon. Friend the Minister will write to me in response to my question about the initial cost. If the figure is £100 million, will the Minister say how much the levy would need to be increased to the employer in order to pay it? This is an important aspect. I recognise that we do not want to make it difficult for companies to set up their schemes, but we should fund the PPF properly. If we fund it properly, 100 per cent. is not a major problem. The amendment is probing, and I seek information on that basis.

Malcolm Wicks (Labour, Croydon North)

Perhaps I can go into detail in this increasingly long letter, but I emphasise that our estimates suggest that the overall levy to employers would increase by £100 million. I believe that the hon. Member for Northavon is asking about the cost per scheme member, which we will think about. I promise to sit down before Easter to write Committee members a letter—[Interruption.]—I will not make believe that it came from me: I will write it, although I might need advice from my officials.

The cost issue is important, but the greatest risk to the pension protection fund is, without question, moral hazard—that those with the ability to influence the way in which a pension scheme is run will take less care than they otherwise would because of the new PPF. Scheme decision makers might deliberately undertake certain activities or fail to take action if they know that the PPF will step in 100 per cent. They may make risky investment decisions or not adequately fund their schemes, especially if their employer is in difficulty and they have to make hard choices about where to put the money. Also, others with influence may be less inclined to intervene if they, or their members, will not lose out. We are concerned about moral hazard.

George Osborne (Conservative, Tatton)

The Minister is right to talk about the risks of moral hazard and the burdens on employers but, as he seems to have moved on from the issue of differing levels, may I ask why the Government have decided to pay those below the pension age a different level to that paid to those over the pension age? They could have paid both of those groups 90 per cent., so why the philosophical distinction—to use the words of the hon. Member for Northavon? Why has that been enshrined? Did they consider setting a lower than 100 per cent. figure for all scheme members, whether pensioners or not?

Malcolm Wicks (Labour, Croydon North)

I do not think that there is a philosophical argument; it comes down to pragmatics. Existing company pensioners have retired and generally will not become economically active again. They may have been living on their pensions for several years, and their expectations are based on that. It would be unjust suddenly to cut their pensions, which is what would be required to do what the hon. Gentleman suggests.

Scheme members are in a different position. I thought that I was addressing that issue when discussing moral hazard. We believe that key decision makers in companies that are at risk, which may survive only if certain decisions are taken, might not go about their duties as responsibly if they think that they can get 100 per cent. of pension rights, albeit up to a cap, as they would if they thought, ''Well, I'm not going to get 100 per cent., it is 90 per cent.; we'd better take some proper decisions about the future of this company.'' Those are our concerns. Does the hon. Gentleman want to respond to that?

George Osborne (Conservative, Tatton)

Again, the Minister is right to talk about justice for those who are on a fixed pension, especially those who have been on it for some time, but it is rough justice for those who are 63 or 64 and, perhaps, a few months from retirement. They may be ordinary employees of the company, who are not involved in key decisions about its financial future and on whom there is no incentive to manage the company properly in the way that the Minister described. Does he accept that those different levels of compensation create an element of rough justice, and a cliff-edge approach, which means that people who happen to be a few months off retirement will get less?

Malcolm Wicks (Labour, Croydon North)

I had always assumed that, geographically, the hon. Member for Eastbourne was the expert on cliff edges.

Seriously, the answer is yes, I do accept that, but, to use a well-known argument, a balance must be struck in social security. On one hand there are those who seek simplicity and wax eloquent about its joys, but who in their next speech talk about rough justice as a result of that simplicity; on the other, there are people who talk about the importance in social security of understanding each and every nuance and individual, but in their next speech attack the complexity that results. That is where we are on this subject.

In terms of the famous cliff edge, I can see the letters coming in now—and I understand why—from people close to retirement age and to the 100 per cent. I hope that when they write those letters to the then Minister with responsibility for pensions they will reflect that if we had not got the PPF the figure might have been 30 per cent. That is the alternative. I hope that we shall all keep reminding ourselves of that. We might think that 90 per cent. or 100 per cent. is right, but both of them are better than 30 per cent.

Mr. Webb rose—

Malcolm Wicks (Labour, Croydon North)

The hon. Gentleman is going to tell me what the arithmetic shows.

Steve Webb (Liberal Democrat, Northavon)

I am not, Mr. Cran.

The Minister's central argument is about moral hazard; we need to have less than full protection because if we had full protection people would misbehave. There are two objections to that. First, the key decision makers will almost certainly—nine times out of 10—be capped. The Minister hinted at that. They will already not have full pension rights. The operation of the cap means that there is a limit on

the moral hazard of those people, even if they still have anything to do with the works pension scheme. Secondly, why is the moral hazard different for scheme members who are active and for members who are retired? The Minister is saying that because of moral hazard we have to undermine the workers' benefits. Should we not undermine everybody's benefits if we are worried about moral hazard?

Malcolm Wicks (Labour, Croydon North)

The PPF is about restoring benefits; it increases them from what they would have been if it had not existed.

Some of the key decision makers might be in small companies, so they might come under the cap and expect a good pension of £24,000 or whatever. Some key decision makers might be less responsible in the decisions they make about their company's future and finances if they know that at the end of the day they will be okay because they will still get 100 per cent. of their pension. However, the existing company pensioners are probably no longer key decision makers in their company. The hon. Gentleman seems to find that answer strange, but I think that it is probably true that someone who retired from their company several years before is no longer a key decision maker in that company, whereas the director of finance of a small or medium-sized company is a key decision maker, and he may be more careful about the decisions he makes if he thinks that he might not get 100 per cent. of his pension.

Does the hon. Gentleman want to come back on that? I thought that I had made a simple point, but I obviously have not explained it properly.

Steve Webb (Liberal Democrat, Northavon)

We are talking about the finance director of a company that might employ many people and have many retired members, and the Minister is focusing his entire moral hazard argument on the individual incentive of that individual finance director for his individual pension, which nine times out of 10 will be capped anyway. Therefore, he has far more incentive to worry about the overall health of the company, in which he probably has share option dividends or something similar. Because of the cap—the moral hazard argument—he already knows that he will not get a full pension if things go wrong. I find the argument confusing that a distinction must be made between all the other active and retired members because of the moral hazard on that individual.

Malcolm Wicks (Labour, Croydon North)

I think that I understand the gist of that, and I have conceded without apology that there are elements of rough justice. However, the rough justice relates to 10 percentage points—or do I mean 10 per cent?

Steve Webb (Liberal Democrat, Northavon)

Both.

Malcolm Wicks (Labour, Croydon North)

Yes, it is both this time, because we are talking about 100, are we not? Very good; I can see why the hon. Gentleman made it to professorial level at university and I did not. That is the difference we are talking about. This is roughish justice, to coin a phrase. I take the point that some of the people caught by rough justice—meaning, I repeat, that they will get 90 per cent. rather than the 30 per cent. that they would have got without the PPF, so it is not that rough—will not be key decision makers. However,

some of them will be key decision makers. The hon. Gentleman must not make the mistake of assuming that we are always talking about large and grand companies in which everyone, including the director of finance, will be on huge pensions. Some companies will be more modest, and people may be looking forward to good but not astronomical pensions.

We have several strategies to mitigate moral hazard, such as the risk-based pension protection levy to encourage schemes to fund well. We will also be introducing a range of further proposals to combat moral hazard. However, we strongly believe that the strategies on their own will not provide sufficient protection against moral hazard or cost escalation; that will rather come from providing less than full protection to a major proportion of scheme members by limiting their compensation to 90 per cent. and capping their benefits.

Mr. Osborne rose—

Malcolm Wicks (Labour, Croydon North)

I am happy to give way, but I am desperate to come to the end of my six-page speech before Easter.

George Osborne (Conservative, Tatton)

We have plenty of time for the Minister to reach the end of his speech. He mentioned in passing that he would be introducing other measures to help with the moral hazard problem. What does he mean by that?

Malcolm Wicks (Labour, Croydon North)

All will become clear when we introduce one or two new clauses after Easter. I have said that the very nature of the risk-based levy is concerned with moral hazard.

We believe that the 90 per cent. and the cap addresses moral hazard because it may directly impact on the compensation payable to key decision makers and key influencers, so they will be personally better off staying out of the PPF than staying in it. As I have argued, that should encourage responsible behaviour in relation to the scheme. In addition to helping to fight moral hazard, the 90 per cent. also helps to control costs.

Why pay 100 per cent. PPF compensation to pensioners? I have given the reasons why that seems to be sensible. Arguments for less than full protection for those over normal pension age are less relevant to the issues surrounding moral hazard.

Before I close, I want to make it clear that Government amendments Nos. 478 and 480 will make minor drafting changes. They tidy up the precise wording for the calculation of the compensation in respect of lump sums for deferred members. That will not affect their entitlement, but it will make the wording consistent with other parts of the legislation.

Finally, I shall respond to the hon. Member for Northavon, who said that the roughest justice of all would be for someone who was approaching retirement age. I conceded that that did sound rough. However, the 64-year-old will have had more years in work to accumulate pension rights than the 24-year-old. Although they may not be in a position to make up the 10 per cent. difference, their pension rights—all other things being equal, which they will

not always be—will be far more than those of a 26-year-old or even a 56-year-old. On that basis, I hope that the hon. Gentlemen will consider withdrawing their amendment.

James Cran (Conservative, Beverley and Holderness)

I have almost forgotten who moved the amendment. I think that it was you, Mr. Waterson.

Nigel Waterson (Conservative, Eastbourne)

Indeed, Mr. Cran—and the next election will be here sooner than you think.

I will, of course, ask leave of the Committee to withdraw the amendment, but these amendments have revealed a sparsity of thought on the part of the ministerial team that is a little worrying. Themes such as rough justice can be repeated too often, but it strikes me that some rough thinking has been involved here. The distinction between the 90 per cent. and 100 per cent. figures is a central part of the Bill and was ramped up as such long before the Bill ever saw the light of day. However, it is almost as though we have sprung it on the Minister this morning in a sort of ambush, and he has to write to us on one or two of the key issues. Of course, we always enjoy receiving his letters and we await them with interest.

In a sense, there is an unreal element to this discussion because it is not exactly about what people are going to get. They may be subject to the cap or the lack of indexation, depending on the relevant dates, and their benefits may be reduced across the board because the fund does not have the money to cover such levels of compensation.

Kevin Brennan (Labour, Cardiff West)

Is the hon. Gentleman in favour of the cap?

George Osborne (Conservative, Tatton)

We are going on to that.

Nigel Waterson (Conservative, Eastbourne)

I will deal with that in more detail shortly.

David Cairns (Labour, Greenock and Inverclyde)

He'll write to you.

Nigel Waterson (Conservative, Eastbourne)

It is all very well making jokes from a sedentary position; that is the main purpose of a Parliamentary Private Secretary, as I can testify. However, Opposition Members are a bit of a ''Mom and Pop'' operation. The Minister has vast resources at his beck and call, yet does not seem to know the answer to basic and obvious questions.

Yes, of course there should be cap, but there is scope for debate on the level at which it is set. The point that I was trying to make—possibly laboriously—is that one has to look not at the cap, or at the figure of 90 per cent. or 100 per cent., but at the interaction of the various factors, which, as Committee members have pointed out, we will deal with in more detail during our discussion of indexation. The promise being made is for a figure more like 70 or 80 per cent. for many pensioners.

I confess to being as bemused as the hon. Member for Northavon by the moral hazard argument. I am delighted that the Government have woken up to the real dangers of moral hazards, about which the Americans will have been telling the Minister's officials for a long time. However, I do not understand why the argument should not apply to

the 100 per cent. We are not simply talking about key decision makers; we are talking about the people who are running the pension schemes and who may well take an equally loose attitude to investment decisions and so on for people who will be retired shortly or in the near future. All these decisions have a long-term effect.

I will have to go back and check my notes from my recent meeting with the Minister to find out whether he flagged up further amendments on moral hazard as being on the Government's shopping list of major topics to which they will return. Perhaps my memory is at fault. However, if that shopping list is being added to as we speak, I would repeat in spades everything that I have said so far about the unacceptability of changing the shape of the Bill significantly in Committee stage or beyond.

Bill Tynan (Labour, Hamilton South)

Some of my amendments are in this group and I want to press the Minister a little further on the selection of the 90 per cent. level. He said that a company could have risky investments and there would be a moral hazard. I would expect the actuaries and trustees of any pension scheme to ensure that the investments make it sound. It is hard to marry that with a situation in which moving to 100 per cent. would lead to people taking a gamble with the pension scheme of a company. I have listened to what the Minister said and may come back to that on Report.

Will the guaranteed minimum pension and the second state pension be guaranteed in full or subject to the 90 per cent. figure? I raised that question in my original contribution.

Malcolm Wicks (Labour, Croydon North)

Guaranteed minimum pensions will not be considered separate from the rest of the pension for PPF purposes. That ensures that the PPF's intention for there to be simplified rules to keep costs down for levy payers is maintained. That benefit is part of the 100 per cent. that pensioners will get. State benefits are, of course, separate and people will have them alongside their PPF pension. I can talk to my hon. Friend later about that. [Hon. Members: ''Or write to him?''] Yes.

Bill Tynan (Labour, Hamilton South)

I thank the Minister for that. I have one final question. The 100 per cent. will continue to be paid to people who have retired, which is the intention of the PPF. The suggestion is that people who have not retired will receive 90 per cent. The Minister mentioned £100 million. Will he re-examine that figure? He said that he would write to the hon. Member for Northavon and other Committee members to clarify exactly how much it would be. If he does that, I will be happy to withdraw my amendments.

James Cran (Conservative, Beverley and Holderness)

Just for the avoidance of doubt, Mr. Tynan, you will not have to withdraw your amendments. We are dealing with the lead amendment, which is Mr. Waterson's.

Nigel Waterson (Conservative, Eastbourne)

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment made: No. 476, in

schedule 7, page 193, line 19, leave out from 'if,' to end of line 23 and insert 'paragraph 32(3A) applies.'.—[Malcolm Wicks.]

Nigel Waterson (Conservative, Eastbourne)

I beg to move amendment No. 357, in

schedule 7, page 193, line 31, at end insert—

'(7A) The Board shall have the power to review any early retirements that have taken place in the three years prior to the Pension Protection Fund assuming responsibility for that scheme and to make retrospective adjustments if it appears that inappropriate early retirements have taken place that have caused unfair advantage to certain scheme members.'.

Hon. Members will be pleased to hear that I have a short point to make, which was raised by the National Association of Pension Funds. It thinks that the board should have a power to review retrospectively any early retirements and to make retrospective adjustments. There is a fear that sometimes what it calls ''inappropriate early retirements'' take place, which cause an unfair advantage to some scheme members and, therefore, an unfair disadvantage to the others, and that particularly generous arrangements are made that might need to be examined after the event.

The amendment proposes a three-year period, which strikes me as sensible. There are longer periods for such things. For example, I think that there is a seven-year retrospective period for looking into transfers of property and money for inheritance tax purposes. Three years is a practical period to be able to go back and examine arrangements.

As always, the caveat that if the wording is not right, the Government are welcome to improve on it applies. However, there might well be cases—I understand that there already are cases—where scheme members feel badly done by simply because a particular individual has been given a very generous package, ultimately to the detriment of the others. The amendment proposes a sensible power for the board to have in its locker.

Kevin Brennan (Labour, Cardiff West)

I have sympathy with the spirit of the amendment. Many Allied Steel and Wire members felt that some of the more senior early retirements that took place in the period leading up to when the company went into administrative receivership might have been related to insider knowledge of the company's fate, which returns us to the issue of moral hazard.

In one way, the Bill reduces the moral hazard for people to jump ship early, perhaps to protect their pension rights. However, it balances that by putting a cap on the compensation available, which means that they still might jump ship early because they know that their pension entitlements are quite rightly capped by the PPF. I hope that the Minister will tell us that current arrangements, the Bill or other regulations contain a provision to ensure that that widely perceived potential for abuse is cauterised if the amendment would not achieve that end.

Malcolm Wicks (Labour, Croydon North)

As we know, the schedule sets out the pension compensation provisions relating to the Bill. The amendment would enable the board to

reconsider pensions in payment on the ground of early retirement and to make retrospective adjustments if it appears that inappropriate early retirements have taken place. We have carefully considered the ways in which we can protect the PPF from abuse by employers or trustees, who may take unfair advantage and gain access to PPF compensation. For example, PPF compensation will be subject to admissible rules. Where the effect of any changes or recent discretionary increases result in increased entitlement to PPF compensation, those changes, which were made or that took effect in the three years before the assessment date, will be disregarded. That is a very important provision, with which, I believe, the hon. Member for Eastbourne agreed.

General early retirement does not present a problem. PPF compensation to most members who are younger than the usual pension age at the assessment date will be limited to 90 per cent. That limit aims to prevent abuse. It also guards against levy payers who subsidise the schemes and manipulate the rules to gain access to 100 per cent. PPF compensation. It is also important to ensure that members are treated fairly. For example, members who are 55, except those who retired early on the grounds of ill health, will be entitled to 90 per cent. PPF compensation, regardless of whether they are active, deferred or early retired members of the PPF.

It has been suggested that the schemes may enhance the levels of compensation payable to members through the PPF by awarding early retirement on the grounds of ill health—hence the amendment. We know that abuses are possible. Only the rich seem to be able to recover from Alzheimer's disease, and I remember a famous case of that. This is a highly complex subject, which we are carefully considering. I will consider further the essence of the amendment. In the meantime, however, I ask the hon. Gentleman to withdraw it.

Nigel Waterson (Conservative, Eastbourne)

I am pleased to hear that the Minister is actively considering the matter. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

John Robertson (Labour, Glasgow Anniesland)

I beg to move amendment No. 421, in

schedule 7, page 194, line 7, leave out 'half' and insert 'the same proportion of'.

James Cran (Conservative, Beverley and Holderness)

With this it will be convenient to discuss the following amendments: No. 422, in

schedule 7, page 194, line 10, at end insert

'as the proportion of that pension which would have been payable under the rules of the scheme before the assessment date'.

No. 423, in

schedule 7, page 195, line 15, leave out 'half' and insert 'the same proportion of'.

No. 424, in

schedule 7, page 195, line 19, at end insert

'as the proportion of that pension which would have been payable under the rules of the scheme before the assessment date'.

No. 425, in

schedule 7, page 197, line 4, leave out 'half' and insert 'the same proportion of'.

No. 426, in

schedule 7, page 197, line 8, at end insert

'as the proportion of that pension which would have been payable under the rules of the scheme before the assessment date'.

No. 427, in

schedule 7, page 199, line 39, leave out 'half' and insert 'the same proportion of'.

No. 428, in

schedule 7, page 199, line 42, after 'died,', insert

'as the proportion of that pension which would have been payable under the rules of the scheme before the assessment date'.

No. 429, in

schedule 7, page 199, line 44, leave out 'half' and insert 'the same proportion of'.

No. 430, in

schedule 7, page 199, line 46, after 'paragraph', insert

'as the proportion of that pension which would have been payable under the rules of the scheme before the assessment date'.

No. 431, in

schedule 7, page 202, line 30, leave out 'half' and insert 'the same proportion of'.

No. 432, in

schedule 7, page 202, line 33, at end insert

'as the proportion of that pension which would have been payable under the rules of the scheme before the assessment date'.

No. 433, in

schedule 7, page 202, line 35, leave out 'half' and insert 'the same proportion of'.

No. 434, in

schedule 7, page 202, line 37, after 'paragraph 15', insert

'as the proportion of that pension which would have been payable under the rules of the scheme before the assessment date'.

John Robertson (Labour, Glasgow Anniesland)

The 14 amendments would ensure that the widows' and widowers' benefits paid by the PPF are the same as the widows' and widowers' benefits that the scheme would have paid. Different schemes provide greater or lesser proportions of the member's pension to a surviving spouse on the member's death. In order to contract out of the state second pension, the proportion must be greater than 50 per cent. Many schemes provide two thirds, which is the Inland Revenue maximum.

The schedule requires the proportion to be 50 per cent. in every case. The purpose is to reinstate the proportion to two thirds if that is what the scheme would have paid. The amendment is repeated 14 times because the same issue arises 14 times in the schedule. It deals with pensioners, deferred pensions, active members, active members who die after retirement age and so on. I can imagine only that the Government have forgotten that there is a 50 per cent. and a two-thirds pension. The Minister talked of rough justice. Is it right that surviving partners are treated differently from others who are in the same sad position, but who are fortunate enough to have had a partner with a pension that did not become a PPF? It is not their fault that the company became insolvent. As my hon. Friend the Member for Hamilton, South said about the figures of 90 per cent. and 100 per cent., we need confidence in the PPF. I suggest that further cutting pensions for surviving partners does the same

as the reduction from 100 per cent. to 90 per cent. by bringing future confidence in the PPF into question.

We need to treat people the same—even-handedly—not to punish them. With 50 per cent. of a capped pension some pensioners might be forced into the poverty trap, depending on how long they had worked for the company. Fifty per cent. of 90 per cent. already brings the figure down to 45 per cent. If we reduce a two-thirds pension to 50 per cent., we shall have knocked off more money that could have been given to people who need it more than most. I should like the Minister to attend to that, and to tell us whether he thought of the idea of a two-thirds pension. Is this provision another form of the cost cutting that he mentioned earlier earlier?

The amendment would provide for the benefits to be determined by the rules of a particular scheme, rather than being standardised at 50 per cent. It is not fair to single out one area of benefits to be limited, when the benefits may be weaker in another area of the scheme that is not limited. Relatively few schemes depart from the 50 per cent. norm anyway, so the cost would be limited.

I ask the Minister to think about the amendment with a view to establishing confidence in the PPF from the beginning, and maintaining future confidence without the fear of further reductions—I shall speak about that again on a later amendment relating to the possibility of imposing further reductions. I ask the Minister to consider including provision for the two-thirds pension.

Malcolm Wicks (Labour, Croydon North)

I thank my hon. Friend for the way in which he introduced a perfectly reasonable question. However, I think that I shall have to disappoint him, and I shall try to explain why.

The amendments would provide for paying PPF compensation to survivors on the basis of the proportion that would have been payable under scheme rules. We feel that that would create unwanted complexity and would be onerous, as the PPF would have to check each set of scheme rules for each person to see what the proportion would have been. That would obviously increase administration costs and could therefore increase the PPF administration levy. The PPF rules are intended to be as straightforward as possible, to ensure that the PPF is both transparent and cost-effective.

As we have heard, the PPF will pay compensation to a surviving spouse at half the amount of the periodic compensation that the member would have been getting had he or she not died. I know that my answer will be disappointing to my hon. Friend, but I am afraid that there is no getting away from one of the factors—cost. At a time when some companies are considering the future of their final salary schemes because of their cost, I am afraid that we must be mindful of that issue. It would be absurd if establishing the finest possible PPF scheme led to a rush away from final salary schemes, so I am afraid

that the word ''costs'' will be repeated often during our debates.

There may be another consideration. In answering the hon. Member for Northavon I did not mind conceding—because it is a reality—that although the PPF pays attention to the existing scheme in some respects, the intention is nevertheless that the rules for PPF compensation should be fairly simple. However, I want to suggest to my hon. Friend the Member for Glasgow, Anniesland that, as we gather in the levy from across the pension schemes, we might be open to criticism in our handling of survivors' benefits if, because of scheme specificities, the PPF treated some survivors more generously than others, where the proportion was 50 per cent. or less. Equity across the PPF is a factor—but I appreciate that there are counter-arguments.

Steve Webb (Liberal Democrat, Northavon)

That raises an important general point. All schemes are different, but if someone has paid into a scheme that gives generous widows' benefits, for example, that may have been the quid pro quo for, say, a lower accrual rate; there can be a mix and match. Surely no one will cry foul if the PPF pays out generous widows' benefits but a lower pension, if that is how the scheme was designed. We are not talking about people getting something for nothing, as the Minister seems to imply.

Malcolm Wicks (Labour, Croydon North)

I hope that I put forward that last argument with suitable hesitancy, because I know that there are counter-arguments. At the end of the day, we are talking about schemes that have gone bust, and people who would be facing a very stark future if it were not for the PPF. We are not talking about schemes that have a future, or cases in which all the benefits could be paid out; otherwise the PPF would not be involved. This is our old friend rough justice again. I hope that I have explained why the Government think that 50 per cent. compensation is appropriate, and I hope that my hon. Friend the Member for Glasgow, Anniesland will consider withdrawing his amendment.

John Robertson (Labour, Glasgow Anniesland)

I hear what the Minister says. This is a probing amendment and I will withdraw it, but I find it difficult to understand why the cost of working out a pension, no matter where the scheme collapsed, would differ depending on whether compensation was always set at 50 per cent. A two-thirds pension compensation would just involve having a different percentage point on the computer. I cannot understand the costs of working out a pension differing from one pension to another, no matter what the percentage. I ask the Minister to consider that. My hon. Friend the Member for Hamilton, South and I reserve the right to return to the matter, but I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment made: No. 477, in

schedule 7, page 194, line 35, leave out from 'if' to end of line 38 and insert 'paragraph 32(3A) applies.'.—[Malcolm Wicks.]

Steve Webb (Liberal Democrat, Northavon)

I beg to move amendment No. 406, in

schedule 7, page 197, line 8, at end insert—

'(3A) Regulations shall provide that such compensation shall, in prescribed circumstances, also be payable to a surviving unmarried partner of the pensioner.'.

This is another case in which the PPF rules and the rules of the scheme might be different. Increasingly, occupational pension schemes provide, in certain circumstances, survivors' benefits not only for married spouses—widows and widowers—but for surviving unmarried partners. The Minister, in another life, had a long and distinguished career at the Family Policy Studies Centre—an organisation to whose monthly digest of research I am sure the hon. Member for Eastbourne used to subscribe.

One of the themes of family policy is that families are changing, and that legislation should reflect the changing patterns. We are in a new century, and we are introducing legislation that will, I hope, last us for decades to come, so it needs to fit the future, not the past. This is the prime time to frame legislation that fits the future. The Minister surely accepts that the issue of unmarried partners and their pension rights will not go away. Cohabitation rates are highest among the young, but one can speculate that nowadays, cohabiting is not simply something that young families do before they get married, and that cohabitation rates among older workers, too, are on the increase. I do not have the statistics to hand, and the Minister will perhaps correct me, but to my mind, we are not just talking about twenty-somethings living together before they get married: this is a long-term phenomenon. That will be more and more of an issue for pensions in coming decades. The question is therefore whether future pensions law should be framed exclusively around marriage, or whether it should reflect the position of unmarried partners.

The position of civil partners will become an issue, and a further amendment may be needed at some point to reflect their position, because I presume that the Government will want to make PPF benefits available to civil partners. Obviously, unmarried partners could be in same-sex couples or opposite-sex couples; we have not specified that. We need to define these things, but they are definable. Certain public sector schemes are already providing survivors' benefits for unmarried partners, and the best-practice private sector schemes, too, are providing such benefits. This can be done—it is not straightforward, but it can be done. The key question is whether the PPF should be doing it.

The Minister's objection to the hon. Member for Glasgow, Anniesland, who has just spoken about widows' benefits, was that it is expensive to provide scheme-specific replacements and mirror the exact detail of every scheme because a vast numbers of schemes are out there, and the PPF would have to find out the rules of every one. Through the amendment, my hon. Friend the Member for Chesterfield (Paul Holmes) and I are not suggesting that the PPF should provide benefits for unmarried partners if the scheme did, but not if the scheme did not. That would be one option—to mirror whatever the scheme did. However, the Minister says that that is too complicated and too difficult.

Amendment No. 406 would simply allow the PPF to say that one of the things that it could do was to provide survivors' benefits to unmarried partners, regardless of whether the scheme that they were in did so, just as the PPF can allow lump sum benefits even if the scheme did not include them.

I think that I am right to say that in some cases the PPF will go beyond the scheme. There is no iron rule and no absolute point of principle that the PPF will always provide less than, or the equal of, what the scheme did. The PPF will sometimes provide better, and in many cases it will provide differently. If there is an argument that we cannot be scheme-specific, there can be a general presumption that there will be a very small number of cases. I am keeping my envelope in my pocket at this juncture, but I suspect that the numbers are pretty small now. However, they will rise, because society is changing.

Are we framing a piece of legislation whereby in 2004 a Minister can say, ''That's not much of an issue; it doesn't happen much. It's just one of those bells and whistles,'' yet in 2014, the same Minister—[Interruption.] I suppose it would be a corresponding Minister by then, and that Minister would say, ''This is mainstream; it is an absolutely central benefit. We would not think of not providing benefits for widows—for the married partners of dead scheme members—and in this day and age we would not think of not providing for unmarried partners either.''

I can see the argument about matching scheme-specific characteristics, and why that might be expensive. The proposition behind the amendment is to set out one of the things that the PPF does. Just as any decent pension scheme pays out for widows, albeit at a limited rate, any decent pension scheme in the future will probably pay out for unmarried partners as well. Is that not the basis on which the PPF should be structured?

Malcolm Wicks (Labour, Croydon North)

I find this an interesting question. I am a great believer in open government, and useful discussions take place in Whitehall that I sometimes think should be shared.

George Osborne (Conservative, Tatton)

Particularly in the immigration and nationality directorate.

Malcolm Wicks (Labour, Croydon North)

I had better not respond to that. I, for one, am not allowed by you, Mr. Cran, to talk more generally in this Committee, and I am sure that the hon. Gentleman will be suitably disciplined.

Nigel Waterson (Conservative, Eastbourne)

So much for open government; that didn't last long.

Malcolm Wicks (Labour, Croydon North)

Let me start by stating the position and then reflecting on it. The PPF will provide survivors' benefits for unmarried partners who were entitled before the assessment date. As I understand that, if, sadly, a worker has died and the scheme recognised cohabitation and the partner has got the pension, we will not interfere, and that will continue. I am sure that everybody would think that that was right and proper, whatever side of the argument they are on with this new issue. It is entirely at the discretion of schemes to determine whether, through their scheme rules, survivors' benefits are provided to

unmarried partners, and to determine the definition of ''unmarried partners''.

The issues surrounding definitions are not that simple for anyone to determine, let alone schemes. If the PPF were to pay survivors' benefits to unmarried partners, it would have to check each set of rules for each person, to see what provision the scheme had made for unmarried partners. Although schemes manage to do that, the PPF would have to do it for a range of different schemes, all of which could have different rules. That could lead to inconsistent decision-making, because of the degree of discretion involved. Undertaking such investigations could also be time-consuming and costly.

Providing survivor's benefits to unmarried partners could also be contrary to the principle that the PPF provides standardised basic compensation that does not pretend to replicate the myriad of scheme rules. The aim is to strike a balance between providing sufficiently generous compensation and maintaining standardisation, to keep costs down for levy purposes. The PPF is based on that proposition.

I certainly take on board the force of what the hon. Member for Northavon said, and should like to reflect further on it. Patterns of relationships and families are changing quite rapidly. Indeed, Parliament is now discussing, perhaps in a nearby Room, the concept of civil partnerships, to give gay couples certain rights in law, and other provisions. That is the mark of how Parliament seeks to address, and perhaps to catch up with, societal change. I realise, because of my background, which the hon. Gentleman was kind enough to mention, that cohabitation among heterosexuals is more and more commonplace. Cohabitation still normally precedes marriage, but sometimes, over a longer time, it takes the place of marriage.

The hon. Gentleman has raised an important issue. It is important to concede that primary legislation that reflects an era—perhaps an era that is long gone—will cause difficulties for Parliament and the Government in the longer term when they seek to revisit such issues, as one suspects they will. We are now in between times. On the one hand, for reasons that I could no doubt defend, state pensions reflect the institution of marriage. On the other hand, income support rules have long reflected the reality of cohabitation. I do not support the hon. Gentleman's amendment, but I am still thinking about it. I take the point that many company pensions—indeed, the civil service and MPs' schemes too, I understand—are now addressing the issue of partnerships.

The hon. Gentleman has made his argument well. I shall ask him to withdraw the amendment, but I shall reflect actively with colleagues, to see whether some of the issues can be addressed, one way or another, through secondary legislation such as regulations. Without conceding that the PPF should reflect the contents of the amendment on day one, or even within the first few years, I take the issue that has been raised

seriously. With those assurances, I hope that the hon. Gentleman will consider withdrawing his amendment.

Steve Webb (Liberal Democrat, Northavon)

I am heartened by the spirit in which the Minister has responded. If I had a tendency to be slightly harsh—which of course I shall not be now—I would have to conclude that in the first half of his speech he said that, in a sense, provision for surviving non-married partners was a ''bells and whistles'' scheme. In other words, the PPF is about bog standard, basic provision, and covering surviving partners is one of those nice things that can be done, but are not central. That is another way of saying that marriage counts and non-marriage does not count—that we are going to make a distinction, and that the basics of a pension scheme should cover only legal marriage.

Yet the Minister said that his thinking, or the Department's thinking, was moving on. He made the important point that he would consider whether the objective of the amendment could be achieved through secondary legislation. That is exactly what we are trying to do through the amendment, because it begins, ''Regulations shall provide''. The point was simply to have a formula in the Bill to give the Government the power to do something about this issue when they wanted to.

The Minister says that we need to do that in a slightly different way; I understand that and I find it quite encouraging. However, I hope that he will ensure that by the time the Bill is enacted there will be something in there somewhere that opens the door to dealing with the issue through secondary legislation. I am heartened by the Minister's response, and I am not wedded to the particular form of words in the amendment, so I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment made: No. 478, in

schedule 7, page 200, leave out line 11 and insert—

'(3) The compensation is a lump sum equal to 90% of the protected amount.

(3A) In sub-paragraph (3) ''the protected amount'' means the aggregate of—'.—[Malcolm Wicks.]

Malcolm Wicks (Labour, Croydon North)

I beg to move amendment No. 479, in

schedule 7, page 200, line 41, leave out '27' and insert '25'.

James Cran (Conservative, Beverley and Holderness)

With this it will be convenient to take Government amendments Nos. 481 to 485.

Malcolm Wicks (Labour, Croydon North)

This group of Government amendments is of such great significance that we might want to discuss them during this afternoon's sitting, as well as this morning. The clocks in the Room were wound forward last night, as they should have been, which is fortunate for those of us who need a cup of coffee.

The amendments deal with the cap on the pension protection fund compensation, and they would alter paragraphs 14, 19, 23, 25 26 and 27 of schedule 7. It is important to have a cap on the level of compensation to reduce the risk of moral hazard and control the costs of the PPF. A cap on compensation will affect only a small number of higher-paid scheme members.

From memory, I think that fewer than 10 per cent. might be so affected—I know that the hon. Member for Eastbourne likes to hear such figures. The cap would affect a relatively small proportion of scheme members, and would by definition focus on higher earners, who are likely to include those most able to affect the proper governance of the pension scheme. Such members may also have the greatest interest in the scheme, and in ensuring that it is adequately funded.

The purpose of the amendments is to introduce, instead of a cap on periodic compensation, as in paragraph 25 of the schedule, and a cap on lump sum compensation, as in paragraph 27, one cap on the aggregate periodic compensation and the annualised actuarial equivalent of the lump sum compensation. The existence of any lump sum compensation will therefore be taken into account in determining how the cap will apply to the periodic compensation, as well as how it will affect the cap on the lump sum itself.

People with different types of benefit from their pension scheme will be dealt with more fairly if the cap

works in a combined way, rather than separately, on each part of the compensation. In particular, people with entitlement to periodic compensation alone will be dealt with consistently and fairly in comparison with people who have both a pension and a lump sum.

Amendment No. 483 is the main amendment, and would replace both paragraph 25, which deals with the cap on periodic compensation, and paragraph 27, which deals with the cap on lump sums. It sets out the different types of compensation subject to the cap. Those include the pensions of people who are under the normal retirement age for their scheme and are not receiving an ill-health pension, but who are pensioners at the assessment date. For example, they may have taken early retirement—

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

Pensions Bill

Malcolm Wicks (Labour, Croydon North)

On a point of order, Mr. Griffiths. I welcome you to the Chair. The hon. Member for Eastbourne (Mr. Waterson) raised a point of order at the beginning of play this morning. I thought that it would be helpful to reciprocate with my own point of order. I welcome the opportunity to clarify the position on the two points that he raised. He referred first to a weekend press report concerning Allied Steel and Wire workers and other workers that we discussed at length last week.

The hon. Gentleman may recall that I have already told the Committee—indeed, it was last Thursday—that we are working with the pensions industry to establish firmer estimates of the numbers and costs involved in such cases. I said that

''we are currently exploring with industry representatives a basis on which we can establish firm estimates of the extent of the problem of defined benefit schemes winding up underfunded. We are also assessing the numbers affected and the potential scale of losses.''—[Official Report, Standing Committee B, 25 March 2004; c. 446.]

I do not think that the Sunday newspapers added anything to what I said to the Committee.

Secondly, it seems that there has been confusion about the priority order. The hon. Gentleman and my hon. Friend the Under-Secretary may have been talking at cross-purposes last week. The Bill introduces a priority order that will broadly ensure that, for schemes that do not enter the pension protection fund because of their funding position, individual scheme members should not be worse off than if their schemes had fewer funds and entered the PPF. They were the priority order measures to which my hon. Friend was referred.

However, there is a separate question about the current priority order regulations. I wish to take the opportunity to remind members of the Committee that my right hon. Friend the Secretary of State for Work and Pensions said:

''I can confirm that we shall move forward in the very near future to rebalance the order so that the basic benefits of those in the run-up to retirement and other deferred members take precedence over the indexation of pensions in payment. That will achieve a substantial rebalancing. Many members may gain 20 per cent. of their pension, so it is a worthwhile interim change before the pension protection fund comes into effect.''—[Official Report, 24 February 2004; Vol. 418, c. 214.]

I hope that I have provided the necessary level of clarification sought by the hon. Member for Eastbourne. I shall be happy to write to him, so that we can all be absolutely clear about the two separate issues in respect of the priority order.

Schedule 7 - Pension compensation provisions

Win Griffiths (Labour, Bridgend)

I remind the Committee that with this we are taking Government amendments Nos. 481 to 485.

Malcolm Wicks (Labour, Croydon North)

Under the chairmanship of Mr. Cran this morning, we were interrupted at the end of the sitting when I was talking about the Government amendments that deal with the cap on the pension protection fund. I was saying how we set out different types of compensation that are subject to the cap. I shall clarify the matter. The different types cover people under the normal retirement age of their scheme and who are not receiving an ill-health pension, but are pensioners at the assessment date. For example, they have taken early retirement. They also cover active and deferred members who are under the normal retirement age of their scheme at the assessment date and any future survivor's benefits in relation to those members will also be capped as the level of survivors' entitlement is calculated from the member's compensation.

The amendment sets out the details of how the cap will apply. For example, sub-paragraphs (6) and (7) introduce the annualised value of any lump sum payments, which will enable them to be treated consistently with any periodic payments. If the total of periodic payments and any annualised values of lump sum payments exceed the cap, all amounts of compensation will be reduced proportionately by the cap fraction, so that the total compensation is equivalent to the level of the cap. The compensation cap at age 65 will be set by the Secretary of State. In order to maintain flexibility, the PPF board will publish figures for the level of the cap at other ages. They will be actuarially equivalent to the level at age 65 and will therefore be lower when the compensation is payable at ages younger than 65 and higher at older ages.

The other amendments are minor drafting amendments either correcting references between clauses or making changes to improve the wording or clarity of the clause. Amendment No. 485 would delete paragraph 27 as the provisions in that paragraph are now subsumed into paragraph 25. I hope that members of the Committee will accept the amendments.

Nigel Waterson (Conservative, Eastbourne)

Welcome back to the Committee, Mr. Griffiths.

I am grateful to the Minister for writing to the Committee, and for his explanation. He was caught in mid-sentence this morning. I read in Mr. Peter Ustinov's obituary in The Times today that someone once asked him how he would prefer to die and he replied that he did not mind as long as it was not in the middle of a sentence. That was a good answer.

Malcolm Wicks (Labour, Croydon North)

I hope that that does not happen to me in the middle of my remarks on amendment No. 414.

Nigel Waterson (Conservative, Eastbourne)

Given the excitement in this Committee, would anyone notice? I am sorry; that comment was mean and below the belt, and I withdraw it unreservedly.

Malcolm Wicks (Labour, Croydon North)

I am a household name in my own household.

Nigel Waterson (Conservative, Eastbourne)

I am grateful for the Minister's explanation, and I am delighted that I have not had to work out what the sinister-looking algebraic equation means; I take it entirely at face value that it means what the Minister says it means—that it is something to do with the annualised value. I can see the sense of trying to marry elements together so that there is one cap rather than a multiplicity of caps. That is right in general terms, but time will tell whether it wreaks unfairness in individual cases.

The Minister was perhaps a little too eager to defend the cap; this morning he blithely talked about 10 per cent. of employees. For higher-paid employees, that could mean a very significant loss from the pension promise that they were expecting. I hope that the Chancellor's redistributive instincts are not creeping in.

Steve Webb (Liberal Democrat, Northavon)

I hope that they are.

Nigel Waterson (Conservative, Eastbourne)

I have just received a little yellow book on Liberal Democrat quotations, and I shall add that one to the collection. My party is not noted for its attachment to redistributive taxation. [Interruption.] Ah, the pension protection fund again.

The Minister might have been a little too glib. I hope that his sole motive is the honourable one of trying to contain the costs. Ultimately, that was his central argument on the 90 per cent. and 100 per cent. cliff edge that we discussed this morning. I hope that he is not also slightly gleeful that higher-paid employees will lose out significantly more than others simply because they are more highly paid. There is no sin in that; indeed, it may reflect some merit on their part, or commitment to their company. We should remember that, and that they will lose out disproportionately even under this scheme.

The explanatory note was helpful, and I hope that more of them are in the pipeline on future amendments. Having read that and listened to what has been said, I will not oppose the amendments.

Amendment agreed to.

Amendments made: No. 480, in

schedule 7, page 203, leave out line 4 and insert—

'(3) The compensation is a lump sum equal to 90% of the protected amount.

(3A) In sub-paragraph (3) ''the protected amount'' means the aggregate of—'.

No. 481, in

schedule 7, page 203, line 21, leave out '27' and insert '25'.—[Malcolm Wicks.]

Nigel Waterson (Conservative, Eastbourne)

I beg to move amendment No. 414, in

schedule 7, page 204, line 25, after 'may', insert

'(and in the case of children must)'.

This is a short point that slightly mirrors the debate on widows and widowers. There is no provision in schedule 7 for any children's pensions that might otherwise have been payable under the scheme. Paragraph 22 contains a general regulatory power to

allow compensation to be payable to prescribed dependants, but it seemed right to have a clear obligation in the schedule giving statutory rights to children who would have been entitled under the scheme. I have a sinking feeling that this is already covered but, even if it is, we do not think that it is sufficiently covered.

Malcolm Wicks (Labour, Croydon North)

I assure the hon. Gentleman that the purpose of the PPF compensation in the form of dependants' benefits, as set out in paragraph 22, is to provide security for children. The hon. Gentleman's amendment is thus well intentioned—my notes say that it is ''superfluous'' but that sounds rude, and I want to start the afternoon on a good note.

The detail of the provisions for PPF dependants' benefits will be set out in regulation, and that will encompass children. Provisions will be set out in regulations as flexibly as required when dealing with the complex area of dependants. With that assurance, I hope that the hon. Gentleman will consider withdrawing his well intentioned amendment.

Nigel Waterson (Conservative, Eastbourne)

It is possible to be both well intentioned and superfluous. I plead guilty on both counts, and beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendments made: No. 482, in

schedule 7, page 204, line 43, at end insert—

'( ) Any reduction required to be made under paragraph 25 (compensation cap) must be made before determining the amount of a person's periodic compensation which may be commuted under this paragraph.'.

No. 483, in

schedule 7, page 205, line 42, leave out paragraph 25 and insert—

'25 (1) Where—

(a) a person becomes entitled to relevant compensation in respect of a benefit (''benefit A'') under the scheme, and

(b) sub-paragraph (2)(a) or (b) applies,

the amount of the compensation must be restricted in accordance with sub-paragraph (3).

(2) For the purposes of sub-paragraph (1)—

(a) this paragraph applies if—

(i) the annual value of benefit A exceeds the compensation cap, and

(ii) paragraph (b)(i) does not apply, and

(b) this paragraph applies if—

(i) at the same time as the person becomes entitled to relevant compensation in respect of benefit A he also becomes entitled to relevant compensation in respect of one or more other benefits under the scheme or a connected occupational pension scheme (''benefit or benefits B''), and

(ii) the aggregate of the annual values of benefit A and benefit or benefits B exceeds the compensation cap.

(3) Where the relevant compensation in respect of benefit A is required to be restricted in accordance with this sub-paragraph—

(a) if that compensation is within sub-paragraph (4)(a), the protected pension rate for the purposes of paragraph 3(3)(a) is the cap fraction of the rate determined in accordance with paragraph 3(5),

(b) if that compensation is within sub-paragraph (4)(b), the protected notional pension for the purposes of paragraph 11(3)(a) is the cap fraction of the rate determined in accordance with paragraph 11(4);

(c) if that compensation is within sub-paragraph (4)(c), the protected amount for the purposes of paragraph 14(3) is the cap fraction of the amount determined in accordance with paragraph 14(3A);

(d) if that compensation is within sub-paragraph (4)(d), the protected pension rate for the purposes of paragraph 15(3)(a) is the cap fraction of the rate determined in accordance with paragraph 15(4);

(e) if that compensation is within sub-paragraph (4)(e), the protected amount for the purposes of paragraph 19(3) is the cap fraction of the amount determined in accordance with paragraph 19(3A).

(4) For the purposes of this paragraph ''relevant compensation'' means—

(a) periodic compensation under paragraph 3 (in a case to which sub-paragraph (7) of that paragraph applies),

(b) periodic compensation under paragraph 11,

(c) compensation under paragraph 14,

(d) periodic compensation under paragraph 15, or

(e) compensation under paragraph 19.

(5) For the purposes of this paragraph, ''the cap fraction'' means—

C V

Win Griffiths (Labour, Bridgend)

With this it will be convenient to discuss Government amendments Nos. 492 to 495, 497, 504 and 505.

Nigel Waterson (Conservative, Eastbourne)

I want to make a small point. I hope that in the outbreak of amity this afternoon the Minister will not take it amiss.

We on the Conservative Benches work terribly hard to keep up with the torrent of Government amendments, as well as with our own amendments and even the occasional Liberal Democrat amendment. We are working on the assumption that we shall receive a briefing on amendments that have any substance to them. If there is no briefing, we assume that they are minor or drafting amendments. I would not want there to be any misunderstanding.

Malcolm Wicks (Labour, Croydon North)

I can give that assurance, and we will do our best to keep Committee members informed of those amendments that are essentially technical. I am grateful that the hon. Gentleman is in a good mood. He talked about the torrent of Government amendments, rather than the torrid Government amendments, which was kind.

Amendment agreed to.

Bill Tynan (Labour, Hamilton South)

I beg to move amendment No. 436, in

schedule 7, page 207, line 38, leave out 'the lesser of' and insert—

'(a) in respect of periods of service prior to the assessment date, the percentage increase provided for under the Rules of the scheme;

(b) in respect of periods of service after the assessment date, the lesser of'.

Win Griffiths (Labour, Bridgend)

With this it will be convenient to discuss amendment No. 415, in

schedule 7, page 207, line 42, leave out '2.5%' and insert '5%.'.

Bill Tynan (Labour, Hamilton South)

This is a simple probing amendment. The current position is that trustees normally have the opportunity to do something. In a pension scheme there is a set figure regarding increasing pensions for pensioners who have taken them. If there were a surplus in the scheme, there could often be a situation in which the trustees could take a decision to pay a higher sum than the amount in the pension scheme. I realise that in respect of the pension protection fund, we have to be conscious that we are talking about an increase of 2.5 per cent., which is very limited. If a pension is accrued before the scheme is taken under the care of the pension protection fund, it should increase at the same level that applies under the rules of its pension scheme. If it is taken into assessment, there is a danger that it will only be increased by 2.5 per cent. and will override the rules of the scheme even before it comes under the PPF's control. I ask the Minister to consider that seriously.

There is opportunity for the Secretary of State to take a decision, saying that the 2.5 per cent. could be less than 2.5 per cent. My union is concerned—as I am sure other interested bodies are—that if the inflation rate were substantially higher than 2.5 per cent, and if we did not increase the pension on the basis of at least the inflation rate, the value of the pension would be lost. Although I understand that the 2.5 per cent. figure is in the Bill as drafted, I am concerned that the value might be lost if a scheme were to be taken into assessment. Currently, the 2.5 per cent. figure might not cover the rate of inflation. I ask for clarification on both those issues.

Nigel Waterson (Conservative, Eastbourne)

This is, to some extent, an echo of a debate that we had on indexation what seems like aeons ago, but was presumably only in the past couple of weeks. I shall try not to weary the Committee more than is necessary. There were some amendments on the main indexation provisions in a previous clause, and we had something to say about the assumptions that seemed to underlie them—assumptions about inflation remaining low; we would all be delighted if that were so, but a third term of this Government might well ensure the opposite. Who knows?

Malcolm Wicks (Labour, Croydon North)

A third term.

Nigel Waterson (Conservative, Eastbourne)

I do not want to get into that, with third-term tax rises and all that.

The reality is that if things start to change, some pensioners who are currently protected under the wing of the PPF would end up worse off than they might otherwise have been. We deployed those arguments in

the previous clause relating to indexation, and they are just as powerful here. That is why we want to remove the reference to 2.5 per cent. and re-insert 5 per cent. If I remember it right, there is a section in the regulatory impact assessment about all this. However, it is difficult to see on what basis it is being proposed.

John Robertson (Labour, Glasgow Anniesland)

The hon. Gentleman's figure of 5 per cent. sounds reasonable, but where would that lie in terms of inflation? Some of us are old enough to remember the early '70s, when, at one stage, we were talking about inflation of 25 per cent. How would a rate of 5 per cent. seem if there was that kind of rate of inflation?

Nigel Waterson (Conservative, Eastbourne)

Well, some of us are old enough to remember the Callaghan Government, and the roaring inflation and many other problems them. However, I know that you will lose patience if I go too far down that road, Mr. Griffiths.

As I understand it, 5 per cent. is merely the status quo and the ordinary situation in terms of the indexation of pension increases. Of course, the hon. Gentleman is right—if this is the point that he is making—that, in those days, a rate of 5 per cent. would have been irrelevant, but at the moment there seems to be a kind of consensus that the figure works reasonably well.

We have started off with a bold pension promise, which the Government will no doubt continue to shout from the rooftops, but everywhere that we turn today we find a bit of cheese paring going on—that is, ways of reducing what people will get. This is yet another example of that; we are toning down the indexation that people could get. At the moment, that would not be a problem, and no doubt that is what the Minister will say, but who knows what the future may hold? I do not want to repeat the arguments that we made when the issue last arose, but we are dubious about the matter—hence our amendment, which I commend to the Committee.

Steve Webb (Liberal Democrat, Northavon)

I want to make a couple of observations on the amendments. I am quite attracted to amendment No. 436 because, in a sense, it preserves the principle of the PPF trying to replace the pension that a person expected to draw or—in this case, if I understand the context correctly—is actually drawing. That person would have acquired expectations. The question is how far the PPF should let those expectations down. The idea in the amendment that people should get what they would have got seems quite a good principle. When we made that point earlier, the Minister's reply was, ''Ah, but it's all very expensive,'' and he said that as soon as one uses a principle that relates to the details of the scheme, the fund suddenly costs a lot more to run.

Clearly, anything in the Bill that makes the cover provided by the PPF specific to the scheme that it replaces adds a burden and a cost; but the additional cost would be different according to the kind of replication that we are talking about. In this case, we are talking about replicating the indexation rules—post-retirement, I think—of pensions in payment under individual schemes. Are those fairly standard, or are there a hundred thousand different sets of rules?

If practically all the schemes fall into one, two or three different types, and we are only asking the PPF to decide whether a scheme is A, B or C and to mirror it, that is perhaps not much of a burden. Some of the other ways in which we have asked the PPF to replicate scheme rules and regulations might have been much more onerous, and one can see that there is a point at which one says, ''Too much detail—Ed.''

We are talking about something pretty fundamental; we have used the phrase ''bells and whistles'' in the past, but indexation is not an afterthought. It determines people's living standard over a retirement that could last, particularly in the case of a woman pensioner, 30 years. The odd per cent. here or there over a 30-year retirement could mean a third or a half of one's standard of living. That is significant. I hope that the Minister can give us some guidance as to whether scheme-specific indexation rules vary enormously, or whether it is fairly straightforward to look at a scheme, perhaps ask the scheme actuary or whoever, ''What's your indexation rule? Tick the boxes'', and then to crunch it. Is that really so great a burden? I am sure that one of the Minister's responses will be, ''Oh, it's all too bureaucratic and scheme-specific.''

The second point, which, again, slightly echoes something that we said this morning, is that people have, in general, paid for the benefits. I recognise that, if there were no PPF, they would be completely stuffed; however, the Minister is drawing a distinction between the people who paid for benefits in a particular way, and is penalising them particularly, relative to other people in the PPF. That is the point that I am trying to make. Some people will have fairly high contribution rates, and their scheme will have done quite well. To deal with the surplus, indexation arrangements are made more generous. Others may pay lower contribution rates, and their schemes may have done less well. There is no surplus, and no discretionary change to the indexation rules, but they never pay for that. Again, it is rough justice. The Minister is equalising people who may have paid for the benefits with those who have not. Therefore, in a sense, he is giving something for nothing or nothing for something in such cases.

Amendment No. 415 would increase indexation to 5 per cent. That, in a sense, would be the status quo, because it would mirror the limited price indexation. However, there is no status quo for the PPF, because there is no PPF. We need to design from scratch what the PPF benefits will look like.

I had a revelation at the end of this morning's sitting, which I want to share with the Minister because it is germane to the amendment. When we consider the impact of any change to the generosity of the PPF benefits on the level of the levy, we are not dealing with the total amount of benefits, but with the amount that the levy has to raise—that is, the gap between the money that the funds put in and the total amount of liabilities. Any incremental change that we make to the level and generosity of the benefits will have a gearing effect, similar to that of the council tax.

Committee members will all be familiar with the analogy. If a council wants to do a bit more—say,

spend 1 per cent. more on its total budget—it has to charge 4 per cent. more on its council tax. It is geared; one is only dealing with the gap between two big numbers—the liability and the income. The same is true of the PPF.

The reason why I raised the point, other than to admit in an indirect and roundabout way that I was wrong this morning, was to say that, although the amendment tabled by the hon. Member for Eastbourne looks innocuous, presumably he is now asking for 5 per cent. indexation. Although against the aggregate liabilities of the fund that may not look like such a big percentage, presumably, given the gap that the levy might have to fill, it could be quite a big percentage. Will the Minister tell us what that number would be?

Malcolm Wicks (Labour, Croydon North)

We will not discuss the supernatural nature of the hon. Gentleman's revelation. The hon. Gentleman reads one set of newspapers; I read others. There was some suggestion over the weekend that he might be a contender for the leadership of the Liberal Democrats. If it were a primary election in the United States, that revelation might gather more votes than in our more down-to-earth and secular society. That is for him to judge.

From April 1997, occupational pension schemes have been required to provide indexation capped at 5 per cent. on all pension accruals. However, requiring pension schemes to have an indexation at all is a relatively recent phenomenon. However, as we have heard, clause 212 would reduce the level of indexation to 2.5 per cent. on all future accruals. We have discussed that; it was controversial, but we have resolved that matter.

Providing a level of indexation greater than 2.5 per cent. on PPF compensation would not be consistent with other provisions in the Bill. It would also be inconsistent with our principle that the PPF should not, in general, provide more generous benefits than scheme rules.

The PPF is being set up to provide adequate protection for individuals who face losing some or all of their pension entitlements, not to provide a level of compensation that would attempt to match the level of scheme benefits, or even offer more. Providing indexation increases prior to 1997 could result in some members receiving a level of PPF compensation in excess of the level that would have been provided from their scheme.

However, I stress that the PPF seeks to provide a consistent and meaningful level of compensation for all members eligible for fund assistance. Restricting the amount of indexation paid on PPF compensation would ensure that the PPF could do that, by being better able to predict its liabilities and plan ahead financially.

The Opposition are curiously silent on the question of the need to match and get the balance right between security and cost, which I keep stressing. I do not know whether that is because I have failed to convince them of the importance of cost on schemes, or whether they do not want to discuss the issue. I take it very seriously, at a time when all of us have an interest in

ensuring that decent occupational pension schemes survive and that more are opened to benefit more of our citizens. Surely hon. Members would agree that we need to strike that balance as well as we can?

As my hon. Friend the Member for Hamilton, South (Mr. Tynan) knows, we are sadly not discussing a situation where we are comparing the pension protection fund benefits with the scheme benefits. In a sense, we are not discussing that because the scheme has gone bust. For some reason of analysis one can make that comparison, but people will not get the things that they would have got, because the scheme has gone bust. That is the purpose of the pension protection fund.

Bill Tynan (Labour, Hamilton South)

In the context of this morning's discussions, we established that we are discussing 90 per cent. and not 100 per cent. If we establish 90 per cent. and then lock in 2.5 per cent., there is a danger that we will further erode the amount of pension that someone will achieve over a period. That is a double whammy. If the inflation rate is above 2.5 per cent., that would eat into the pension. I argued that it is worth while to have the opportunity to go above that 2.5 per cent. and recognise the inflation rate in a pension scheme to protect the value, even at the 90 per cent. Ministers should consider that.

Malcolm Wicks (Labour, Croydon North)

The big whammy to pension scheme members has already been done because the company has gone bust. That is the situation. In the current era, inflation has, mercifully, been very low. It increases and decreases a little, but it has been about 2.5 per cent. That is why we picked that figure. No doubt others would have picked a different one if we were in another era. Of course, we are confident that the Government will hold inflation down. Anything else that I might say should not deflect from that. If, in some future era—yes, to be partisan, under another Government—inflation were much higher, no doubt the Government of the day might want to think again. However, we are in the situation that I referred to and the provision offers protection.

I hate to drone on about costs, but we reckon that indexation for all service and all members could cost the levy an extra £200 million. We are talking about significant sums. My hon. Friend does not seem to agree with my arithmetic and, again, perhaps one of the famous letters or exchanges can take place. I would hate it if the Government, in a good natured way, accepted all the amendments—we are not going to, by the way—and, as a result, heard in the coming months and years that more and more employers were using the cost of the fund as an excuse to flee away from defined benefit schemes. That would, of course, be quite the wrong way to proceed, but that is the danger.

Nigel Waterson (Conservative, Eastbourne)

The problem is that each of our little debates seems to mark another milestone in the retreat from the original full pension promise. The Minister talks about £200 million. He might be right; I do not know and suspect that he does not either, but he will

write to us about it. Presumably, that is £200 million that might otherwise be paid to pensioners.

Malcolm Wicks (Labour, Croydon North)

I am sorry?

Nigel Waterson (Conservative, Eastbourne)

Where else would it go?

Malcolm Wicks (Labour, Croydon North)

I am saying that the amount that would have to be taken away from levy payers would be £200 million. We do not think that that cost is worth paying.

I mentioned future eras. We are not anticipating this, but the fund's board can increase the 2.5 per cent. under paragraph 29 to schedule 7. Although we hope that that is light years way, if inflation were very much lower or very much higher, the board could revisit the matter.

Nigel Waterson (Conservative, Eastbourne)

If there is the same kind of deficit in those mythical light years from now that the American scheme faces, there would be an enormous temptation not to change the figure.

Malcolm Wicks (Labour, Croydon North)

That would be for the board to decide and is another reason why it should be at arm's length. The hon. Gentleman asks for an enormous extra amount to go to the pension protection fund—I do not know whether he has squared that with the shadow Chancellor—whereas we are prudently trying to strike the right balance between security and costs.

Bill Tynan (Labour, Hamilton South)

I thank the Minister for his comprehensive answer. However, I have concerns. This morning, we spoke about 10 per cent., 90 per cent. and 100 per cent., and that the cost would be £100 million. I am not a mathematician. We now have a figure of £200 million for an inflation-proofed indexation. That is incredible. If inflation stays low there is no cost to escape; the figure is only 2.5 per cent. There will be an increase only if the inflation rate lets rip, but we do not know what that figure will be—3 per cent., perhaps, or 4 per cent. On that basis, I find the sum of £200 million incredible. How can the Government come up with that amount when they do not know what the inflation rate will be and we have no idea what we are asking for?

I was thinking about the value of the scheme. The 90 per cent. will reduce the value for those who receive pensions. In the circumstances, we must consider how to protect the amount that is given from a scheme that has been wound up. We have floated the pension protection fund as a basis for encouraging people to pay into pension schemes. We want to protect their interests and avoid the situation in which ASW finds itself with only 30 or 40 per cent. If we can protect the reduced amount of money that pensioners receive at the 90 per cent. level, that will be a step forward.

I hope that we never have a Government of a different political complexion. I also hope that the inflation rate will stay low, but I would hate us to be tied to 2.5 per cent. Concerns have been raised that the pension fund might go into deficit like the American scheme did, and the point has been made that the scheme allows for the 2.5 per cent. to be reduced.

I am happy to withdraw the amendment on the basis that I will have the opportunity to reintroduce it on Report if I feel that that is necessary. I am aware that an amendment was voted on earlier in our

proceedings and cannot be reintroduced. Therefore, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Kevin Brennan (Labour, Cardiff West)

On a point of order, Mr. Griffiths. With regard to what my hon. Friend the Member for Hamilton, South just said, I raised that matter with your co-Chairman, Mr. Cran, who confirmed that it would be in order for an hon. Member to reintroduce an amendment if it had been voted on in Committee. I hope that you can confirm that that is the case.

Win Griffiths (Labour, Bridgend)

Yes, but that is reliant on the amendment being selected. If an amendment has been voted on in Committee, that does not always mean that it will not be selected. Such decisions are made on a case-by-case basis; there is no general rule.

George Osborne (Conservative, Tatton)

Further to that point of order, Mr. Griffiths. Can you confirm that the best way to change the law would be to vote through the changes in Committee, which we are perfectly able to do? If hon. Members win the support of a majority of the Committee for their amendment, they will amend the Bill.

Win Griffiths (Labour, Bridgend)

That is not a matter for the Chairman to comment on.

Amendment proposed: No. 507, in

schedule 7, page 208, line 5, leave out from 'attributable' to end of line 10 and insert 'to post–1997 service, and'.—[Malcolm Wicks.]

Win Griffiths (Labour, Bridgend)

With this it will be convenient to discuss the following:

Amendment No. 270, in

schedule 7, page 208, line 6, leave out

'on or after 6th April 1997'.

Amendment No. 271, in

schedule 7, page 208, line 9, leave out

'on or after that date'.

Government amendment No. 508.

Nigel Waterson (Conservative, Eastbourne)

It would be great if one day I could move one of my amendments formally. However, it would not be as much fun and they all have substance.

Amendments Nos. 270 and 271 examine another aspect of the salami slicing that the Government are trying to impose on their promise. The amendments are inspired by the Occupational Pensioners Alliance, although it is not the only concerned group. It is quite exercised by the widening gap between the hype attached to the Bill, the effects of the PPF and the reality.

The provision turns on the date of 6 April 1997. In the words of the OPA:

''The Government has been keen to point out that pensioners will receive '100% compensation' from the PPF.''

That is the headline figure. We discussed the 100 per cent. for people who have already retired, but, according to the OPA, that is only for pensions that are

''in payment at the date of insolvency and does not include all the future pension increases that many pensioners might have''

reasonably

''been expecting from the original pension scheme. For those pensioners who retired before 6th April 1997, the PPF will not grant any increases to pensions in payment. In practice this could mean the PPF protects only around 70 to 80% of the value of the total pension promise.''

That is separate from other issues, such as the cap for some 10 per cent. of higher paid employees and the Government's or the board's reserve power—I forget which—to reduce the benefits, presumably if they face an unsustainable deficit.

The Government have not been keen to disguise the situation. In their paper published on 23 February, they said:

''PPF pensions in payment will be indexed in line with the Retail Price Index . . . capped at 2.5%'',

which we have just debated,

''but only in respect of rights built up since April 1997 (which is when the statutory obligation to index occupational pensions in payment was introduced). Deferred PPF pension rights will be revalued in line with the RPI capped at 5%.''

Again, to quote the Occupational Pensioners Alliance:

''This will be an unacceptable position for many pensioner scheme members who will lose a significant proportion of their revenue based on this calculation.''

It urges Committee members to vote against those proposals.

I refer again to the infamous open letter from the country's four leading actuaries, who raise the same point: that no future increases for retired members will apply for benefits earned before April 1997. They also describe exactly how the calculations will be made and add that there is a power to stop increasing pensions if the fund cannot afford it. There is also the power of the Secretary of State to further reduce the benefits paid by the PPF.

Although I imagine that the Minister will berate us for increasing the costs of the PPF, we are trying to reinvest it with the reality suggested by its image. As I said, there is a danger that it may be oversold. Conservative Members do not want to be party to that.

I referred to the actuaries' letter, which is old hat. That was last week. This week, the pension lawyers are up in arms. Mr. Tim Cox, the chairman of the Association of Pensions Lawyers, touched on the issue and gave an example of the chaos that is reigning on the different types of protection that different groups will receive from the PPF. He says:

''The best protection goes to those who have already retired at normal retirement age. But retirement age varies from scheme to scheme.''

He continues:

''Most management schemes have a normal retirement age of 60, while other workers can only pick up a full pension at 65. This means a manager aged 61 might well get considerably more than a lower-grade worker who retired at 64. The Government does not seem to have considered the fairness, nor the impact, of this.''

He goes on:

''We believe that many schemes will reduce their normal retirement age, along with pensions paid at that age, to maximise protection. Those who work longer will receive higher pensions.''

I do not want to depress Committee members, but Tim Cox described the Bill in this context and more generally as follows:

''We have a mountain of words but a complete lack of clarity, which is very demoralising for those trying to run pension funds.''

Another specialist in the area, Mr. Robin Ellison, who is a lawyer with Pinsent, says:

''The Government has lost the plot. It's terribly depressing. The law of unintended consequences will apply here in spades.''

Finally, Mr. Orton, a pensions lawyer with Eversheds, which I think is the body that the Government are recruiting to find out the size of the problem of people who have already lost their pension rights, says:

''I am struggling to understand what the Bill is trying to do. We already have muddled pensions law. This Bill looks likely to make it worse. Ministers promise fundamental reform, and all they're doing is tinkering.''

This is certainly tinkering, but it is tinkering that will wreak unfairness on pensioners, because this is dependent purely on the arbitrary date of 6 April 1997. That is eroding and diluting the pensions promise that the Bill and the fund are meant to be offering people. I commend my amendments to the Committee.

Malcolm Wicks (Labour, Croydon North)

I shall not rise to the nonsense that we have just heard, the constant attempts by Her Majesty's loyal Opposition to talk down what I firmly believe will one day be seen as a major social policy innovation in this country, which will bring much security to people in occupational pension schemes.

The Bill's provisions allow for indexation to apply to compensation derived from or rights attributable to pension service on or after 6 April 1997. That is based on the requirement on schemes to provide limited price indexation as contained in the Pensions Act 1995. As a result, all pension scheme and pension credit members will receive indexation capped at 2.5 per cent. on the PPF compensation for the pensionable service from 6 April 1997. Restricting the indexation in that way ensures that the fund can better protect its liabilities and plan ahead financially. In addition, we do not think it appropriate that the PPF should pay indexation prior to 1997 when that is not a requirement for all pension schemes. Providing indexation increases prior to 1997 could also result in some members receiving a level of PPF compensation in excess of the level that would have been provided from their scheme, and that is hardly the intention of the PPF. That would be inconsistent with our principles.

We need to strike a balance between affordability, protection against moral hazard and the provision of a meaningful level of compensation. The PPF is being set up to provide adequate protection for individuals who face losing some or all of the pension entitlement, not to provide compensation that attempts to match scheme benefits or even offer more. Let us remember that the schemes we are talking about have gone bust. Government amendments Nos. 507 and 508 are

technical amendments, and that is why I moved amendment No. 507 formally.

The hon. Gentleman quoted a range of commentators. Perhaps his quotations were selective—I do not know, but they all denigrated what we are trying to do. I am not generalising, but when I read the remarks of some pension commentators in the broadsheets I find them less accurate than the words of football reporters who write about the latest antics at Chelsea football club in the tabloid newspapers.

Amendment agreed to.

Amendment made: No. 508, in

schedule 7, page 208, line 12, at end insert—

'(3A) Where paragraph 25(3) (compensation cap) applies to restrict the amount of periodic compensation under one of the paragraphs mentioned in sub-paragraph (1), the amount mentioned in sub-paragraph (3)(a) of the paragraph in question is attributable to post–1997 service and pre–1997 service in the same proportions as the amount so mentioned would have been so attributable had paragraph 25(3) not applied.

(3B) Where a portion of periodic compensation under one of the paragraphs mentioned in sub-paragraph (1) has been commuted under paragraph 23—

(a) for the purposes of sub-paragraph (2), the definition of ''underlying rate'' in sub-paragraph (3) applies as if the reference in paragraph (a) of the definition to the amount mentioned in sub-paragraph (3)(a) of the paragraph in question was a reference to that amount reduced by the commutation percentage, and

(b) that amount (as so reduced) is attributable to post–1997 service and pre–1997 service in the same proportions as that amount would have been so attributable had no part of the periodic compensation been commuted.

(3C) In this paragraph—

''post–1997 service'' means—

(a) pensionable service under the scheme on or after 6th April 1997; or

(b) rights which are derived (directly or indirectly) from rights attributable to pensionable service on or after that date;

''pre–1997 service'' means—

(a) pensionable service under the scheme before that date, or

(b) rights which are derived (directly or indirectly) from rights attributable to pensionable service before that date;

''the commutation percentage'', in relation to periodic compensation, means the percentage of that compensation commuted under paragraph 23.'.—[Malcolm Wicks.]

John Robertson (Labour, Glasgow Anniesland)

I beg to move amendment No. 438, in

schedule 7, page 208, line 15, leave out paragraph 29.

Win Griffiths (Labour, Bridgend)

With this it will be convenient to discuss Government amendment No. 486.

John Robertson (Labour, Glasgow Anniesland)

Excuse me if I sound a bit hoarse; I was shouting at my football team on Sunday.

David Cairns (Labour, Greenock and Inverclyde)

It did not do them any good.

John Robertson (Labour, Glasgow Anniesland)

Like the Minister, they did not listen to me. I will have another go.

The amendment mentions paragraph 29, which would allow the board of the PPF to reduce the indexation rate both for pensions in payment and for pensions for deferred pensioners, including those who were active members when the scheme was wound up.

Paragraph 12(4), in the case of active members, and paragraph 17(4), in the case of deferred members, say that, during the period between the beginning of an assessment period and the date when a pension is drawn—that is, the period when the pension remains deferred—the deferred pension will increase by 5 per cent. or the retail prices index rate.

Paragraph 29 allows the board to change—that is, reduce—the 5 per cent. ceiling should circumstances so require. Paragraph 28 says that pensions in payment increase at 2.5 per cent. or RPI. Paragraph 29 allows the board to reduce the 2.5 per cent cap, too, but the PPF should be kept adequately funded at all times, so circumstances should never require that. In any event, a 5 per cent. ceiling should be the lowest acceptable cap for all purposes connected with the PPF.

Will the Minister comment on why the PPF would want to change the ceiling other than to lower it, possibly if—I can think of no other reason—the fund is running low? Is that fair? Does he not agree that a real indexation, fair to all, is required, and that if paragraph 29 is removed that will be achieved? Where is the confidence in the scheme that we talked so much about earlier?

We have now taken care of the 100 per cent. and have reduced it to 90 per cent, we have got rid of two-thirds and made it 50 per cent., and now we are talking about the possibility of reducing a cap figure to whatever the PPF requires, depending on how much money there is in the fund. [Laughter.] I would ask the Minister to look at the issue as a serious thing. It could be a matter of eating or not eating for some families, particularly in constituencies such as Glasgow, Anniesland, where there is a high degree of poverty, and a great number of pensioners. As I have told the Minister, there are about 18,000 over-60s in my constituency. If those people's pensions had gone bust—in which case a lot of them would not have pensions—they would be in dire straits. I still accept that the Government are doing a good job in relation to the PPF, but there are issues to consider, and I ask the Minister to address them.

Malcolm Wicks (Labour, Croydon North)

I commiserate with my hon. Friend on his football experiences over the weekend. I was similarly disappointed; if only the referee had obeyed the rules and blown the final whistle after 70 minutes, instead of going on for another 20, we would have beaten Chelsea football club. That is becoming a theme this afternoon.

My hon. Friend's amendment would prevent the PPF board from reducing or increasing the percentage levels of revaluation and indexation as part of PPF compensation. That would result in the PPF board being unable to make appropriate decisions regarding the levels of compensation that it can provide. It could also have an adverse effect on the pension protection levies imposed on pension schemes.

The provisions in schedule 7 enable the board to increase or reduce the percentage levels of indexation, as we discussed earlier, and revaluation on PPF compensation. That is because the board needs appropriate levels of flexibility to make decisions concerning the effective management of the PPF and

its finances. That includes the ability to reduce the percentage levels of revaluation and indexation on PPF compensation, should that be required.

Removing the board's ability to reduce those levels could have an impact on the pension protection levies, because the board may need to reduce its liabilities in response to economic or financial pressures. Without the flexibility to reduce the levels of indexation and revaluation, the board would need to increase the amount of pension protection levies imposed on pension schemes. That would place an additional burden on all pension schemes required to pay the pension protection levies.

However, we do not expect the board to take lightly a decision to reduce the levels of indexation or revaluation or increase the pension protection levies; I want to emphasise that, not least to my hon. Friend. We are including the provision in the Bill because of the danger one day of very extreme circumstances occurring. I believe that such circumstances are very unlikely, but it is responsible for us to include such a provision.

We have heard—not from my hon. Friend, but from the Opposition—a number of nightmare scenarios in which benefits could plummet down and down. However, in drawing up the scheme, we have considered the rights that people should have, and have been as generous as possible—but not too generous—in looking at the likely costs and the likely levy and in allowing for the assets that would be taken over. I assure the Committee that we are convinced that we have a workable and fundable scheme.

Although provisions have to be put into the Bill to be prudent and sensible, we do not anticipate the difficult scenarios that my hon. Friend has mentioned. He is a mighty champion of pensioners in his constituency, and of course we want to avoid difficult circumstances for people, or perhaps their widows, who depend on their pensions. I hope that I can reassure my hon. Friend. The words of Don McLean from the great classic ''American Pie'' come to me: we do not want to chevy to the levee and find that the levee was dry.

I hope that I have said enough. I might have sung those lines, but I would have been called out of order. I hope that I have assured my hon. Friend about our intentions and that he will consider withdrawing his well intentioned amendment.

John Robertson (Labour, Glasgow Anniesland)

I thank the Minister for that; I will try not to be one of the good ole boys drinking whiskey and rye.

Although I accept that the Minister is being honourable and I believe what he tells me, I have to say that the Minister will not always be in his position. God forbid that the Opposition should get in; them I could not trust. That leaves a suspicion over the figures that we are using. Although I accept that this Government can be trusted to look after pensions, I may not be able to trust others.

Malcolm Wicks (Labour, Croydon North)

On that point about future scenarios, did my hon. Friend take any comfort from

the fact that the hon. Member for Eastbourne talked with some confidence about Labour's third term? Should he not have heeded my usual warning on these occasions: we should never confuse confidence with complacency?

John Robertson (Labour, Glasgow Anniesland)

I thank the Minister for that; he says it all. I will be out working hard with many colleagues, and not just during the election; I have to be selected for that election first, so there is a lot of work to be done before then.

I want to put it on the record that my concern is not about what happens in the short term but in the long term, but I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment made: No. 486, in

schedule 7, page 208, line 30, leave out sub-paragraph (6) and insert—

'(6) A determination under sub-paragraph (2)—

(a) has effect in relation to future increases under paragraph 28 only, and

(b) may be expressed to have effect—

(i) in all cases (whether the entitlement to the periodic compensation first arose before or after the date the determination is made), or

(ii) only in cases where entitlement to the periodic compensation first arose on or after a date determined by the Board.'.—[Malcolm Wicks.]

Steve Webb (Liberal Democrat, Northavon)

I beg to move amendment No. 6, in

schedule 7, page 208, line 37, leave out paragraph 30.

Win Griffiths (Labour, Bridgend)

With this it will be convenient to discuss Government amendments Nos. 487 to 489.

Steve Webb (Liberal Democrat, Northavon)

I shall try to work in Simon and Garfunkel in the next five minutes.

David Cairns (Labour, Greenock and Inverclyde)

''The sound of silence'' would be a good start.

Steve Webb (Liberal Democrat, Northavon)

I guess I asked for that.

The amendment goes to the heart of what the PPF is about and it goes to the heart of what it should not be about, which is that when the going gets tough the Government get going and say, ''Right. We are not going to pay out what we thought.''

The Minister might be in some confusion as to whether this is an insurance scheme or not, but the Secretary of State is not. He is on record repeatedly as saying that one can insure one's car and one's holiday, so why cannot one insure one's pension? He clearly sees it as a form of insurance and that is the way that it is being sold to the public. The presumption is that one pays one's levy and then one's pension is protected to 100 per cent. if one is retired or to 90 per cent if one is not. We know that it is 100 per cent. of something quite specific, which is not quite what people expected, but we understand the reasons for that.

However, the fact is that it might not be 100 per cent. or 90 per cent. Paragraph 30(2) of schedule 7 lists all the places in the schedule where the 90s and the

100s appear and it basically says that every time that one sees 90, one could read any number whatever less than 90, and that where one sees 100, it could be anything that one likes as long as it is less than 100. That is a power that we do not want in the Bill. The Government have circumscribed the position of the PPF.

What can the PPF do if it is in financial difficulties? The first thing that it can do is to stick the levy up. However, there is a cap on that. The PPF can only increase the levy by, I think, 25 per cent. It can only put the levy up by a certain amount from one year to the next. If money is looking tight or if an industry goes down, we might be talking about quite serious situations. The big hits on the American equivalent of this fund have come when whole industries have been hit. One can imagine a September 11-type incident that hits an entire industry. If it were an industry that was struggling and on the brink of insolvency, a large number of firms could go down at the same time, and the fund would not necessarily have time to sort its finances out to deal with them. Therefore, the levy can be increased, but that might not fill the gap. Indeed, increasing the levy substantially year after year might not fill the gap. In any case, the Government have told us time and again that they do not want the levy to be much higher, because it will cause defined benefit schemes to shut.

To give one example from this morning's deliberations, one amendment was rejected because it would have added £100 million to the £300 million raised by the levy—in other words, a third. The Government said, ''No, that is too expensive. That is getting the balance wrong between cost and benefit. You will kill the goose that lays the golden egg.'' Yet, the levy can increase by 25 per cent. in one year and then another 25 per cent. the next year. That ain't going to happen; that will not be the way that the PPF sorts out its problems. If the Government are right that if the levy is too high, the thing that is trying to be insured is killed, that would be crazy. It would be stupid to have spent all of these many happy hours trying to protect something that in a few years' time does not exist any more because it costs too much to run.

In reality, if the PPF gets into serious financial problems, as the American scheme has done, merely jacking up the levy will not happen. There is a limit to how far the levy goes. Even if there were not a cap in the Bill, there would be a political, practical limit on the levy. Therefore, if one cannot get the money from the levy, what is the second way to do it? Where one cannot get one's revenue up by more than a certain amount, one cuts back on the benefits. I welcome the fact that the hon. Members for Hamilton, South and for Glasgow, Anniesland (John Robertson) have added their names to this amendment, because it is in the same spirit as an earlier amendment that they tabled.

The provision in the paragraph gives the board powers to get rid of the indexation. We are uneasy about that, as are the Minister's own colleagues. We recognise, or grudgingly accept, that there is a bit of a margin going on. I suppose that, if something has to be

squeezed, indexation is a slightly softer option than cutting into the underbelly of the benefits. It is all money. At least one has the money, which might not rise as quickly as it might otherwise have done or might not be revalued as quickly as it might otherwise have been. However, this paragraph states that it might not even be there. Pensioners in payment might have their pensions cut. That is what this paragraph allows for. A PPF pensioner—I do not know whether they will call themselves that, or whether they will have something like a special tie—might be drawing a pension paid by the PPF, and the PPF might get into financial difficulties and, after it had done everything that it could on the levy, inflation and revaluation, under this paragraph the Secretary of State might say, ''Sorry folks, but we are going to cut your pensions by 10 per cent.,'' or 100 per cent., because there are no limits on the powers in this paragraph; they can do what they like. There will be an insurance scheme that might not pay out; the Government will have been collecting premiums adding up to hundreds of millions of pounds a year, but they will reserve the right not to pay out anything for them. It is incredible that they have taken that power.

What happens if that power is taken out of the Bill? If the PPF cannot raise enough money through its levy and by having—at worst—tweaked the benefits, the Government should act as a lender of last resort. There are good precedents for that sort of operation. When there was a big terrorist explosion and lots of insurers ran around saying that they would not insure anybody because the catastrophic risk of terrorism was too great, the Government said, ''We want an insurance market that works, so we will be the insurer of last resort; we will cover the minuscule chance of a catastrophic event.'' Therefore, the Government are an insurer of last resort on terrorism. That provides an important analogy. The Government are the insurer of last resort of the PPF not for predictable day-to-day reasons but for the slim chance of a catastrophic event.

The American scheme has run into deficit, the level of which is 11 times the value of the annual premiums. That is a massive deficit. Therefore, this is not fevered speculation about something that will never happen; we have seen that it happens. The question is, what should be done? We are not suggesting that the money should be non-repayable. The Minister may say, ''A lot of the taxpayers who are being asked to bail out the PPF do not have company pensions so why should they support those who do?'' That is why we are not saying that this should be a grant or a gift. It should be smoothing money—cash-flow assistance—so that the PPF can have a much longer time horizon in which to sort out its affairs by getting the levy to a more credible level. That would give it the chance to have a few good years and to get into a better position.

What do taxpayers lose by this promise? They potentially lose the interest, but they might not even lose that, because one can envisage a scheme of this sort where in the end the PPF pays back the interest as well. We are arguing not that this cannot be made to work over a generation or two, but that there might be very bad periods. In the good times there will be the smoothing money, but the taxpayer will get the money

back—and they might get it back with interest. Therefore, this guarantee might create no long-term cost to the taxpayers.

There is a simple reason why the provision that I am describing is not in the Bill and paragraph 30 is; the Chancellor does not want it on the Government balance sheet because it would be regarded as a public sector liability, and it might muck up his borrowing rules. That is wrong. The Government will be guilty of mis-selling if they say to employers and pension scheme members, ''Pay us your contributions and we will protect your pension, but we might not.'' What good is rainy-day insurance that says, ''Well, here's your insurance for a rainy day but if it rains really hard we will not pay out''?

The paragraph undermines the purpose of the Bill. The Minister will say that this will never happen; he will say that the right circumstances are so extreme and unlikely to occur that the Government will never use this reserve power. If that is the case, they should take it out of the Bill. Perhaps it is included because they want to use it and rip up their insurance promise. This is fundamental. We are committed to this measure not being part of the Bill.

Nigel Waterson (Conservative, Eastbourne)

I agree with the hon. Gentleman. This is an important part of the Bill. Speaking for the official Opposition, I am torn as to whether we would support him if he sought to divide the Committee. On balance, we would not, for reasons that I will explain.

If the provision is to remain, it should be put behind a piece of glass with the words, ''Break glass in emergency'' underneath it. That is roughly the assurance that the Minister will give us in his response. This power must be used only in the most exceptional circumstances. We, the official Opposition, are becoming so concerned about how the PPF is being set up—and we are not the only ones—that we are torn between removing it altogether, as the amendment would do, and leaving it in, on the basis that the glass might have to be broken in case of emergency because of the way in which the PPF is set up in its early years.

There are, if one can visualise it, two families living side by side in identical houses, working for identical, or similar, companies, with similar pension schemes with similar terms. One family, as the hon. Member for Northavon (Mr. Webb) said, is a PPF pensioner and the other is a pensioner with the scheme and company that he worked for still intact. As those families respectively draw the pension and the compensation from the PPF, we begin to see a picture in which their lifestyles diverge over the years, perhaps because of the cap, or the other changes that we have discussed, such as indexation and so on, and perhaps, most cataclysmically, because of a Government decision to pull the plug on payments, or reduce them dramatically. Let us be in no doubt that it is a Government decision to give power not for the board, but for the Secretary of State. Some of those pensioners will end up where they started when the pension scheme and the company failed. That is a real concern, because if we as a Parliament, and the Government, are trying to sell the PPF to the outside world as something that will restore

confidence in occupational pensions, the small print will be a problem—unless there is an attempt to brush it under the carpet, to change metaphors mid-stream.

This is a far-reaching power. I endorse what the hon. Gentleman said about the levy not being sufficient to get the Government out of difficulties. There is, as he said, a cap on the levy, and a short-term self-imposed cap where there is a flat-rate levy at the beginning. Then there are also the problems that we discussed, which some of the pension lawyers mentioned, concerning schemes that are tottering along waiting to collapse into the arms of the PPF when it is set up. I repeat that the PPF will be at its most vulnerable in its early years. I have always believed that. Presumably there is some wisdom in the fact that the US Pension Benefit Guaranty Corporation did not pay any benefits for four or five years after it was set up; presumably it did that to build up a cushion against the claims that fell on it in due course.

The hon. Gentleman was also right in looking across the Alantic at the $11.5 billion deficit that the sister fund has already developed. All the pressure will be to reduce, possibly dramatically, the benefits and compensation that will be paid. It all comes back to the old question of proper funding. If a comparison is made—as we have done—of the different regimes that apply in different countries, it is apparent that at one end of the scale there is an extremely robust set-up in the Netherlands, where all the substantial schemes were 110 per cent. funded at the end of 2002, which is something of an achievement, given the outside circumstances. Even then, the Dutch regulator was complaining bitterly that the funds should have been 160 per cent. funded in the good years and not only 150 per cent. When funding requirements are at that level, there is no need to talk about a PPF or whatever the Dutch might call it—if they had one. There is no insurance scheme if, indeed, we are of the mind that we are talking about such a scheme. The Minister is neither nodding nor shaking his head.

Malcolm Wicks (Labour, Croydon North)

I am bored.

Mr. Waterson rose—

Steve Webb (Liberal Democrat, Northavon)

He said, ''It's the power of the board.''

Nigel Waterson (Conservative, Eastbourne)

Well, there we go.

At the other extreme, the United States schemes are only 77 per cent. funded on average and the Pension Benefit Guaranty Corporation incurred record losses. Various countries have different funding regimes. The United Kingdom has a moderate funding regime. As we heard, it has been diluted twice by the Government. As yet, we do not have an insurer, which is a large political problem.

The most lenient funding regime—the US regime—has been made even more lenient as a result of the recent Senate vote. The PBGC would have to quadruple its premium income from $0.8 billion to $3.2 billion a year to correct its negative cash flow. That would raise the effective premium rate from 0.05

per cent. of liabilities to 0.2 per cent., which, by a bizarre coincidence, would bring it straight into line with Germany and Sweden. On an equivalent basis, that would put the average annual cost of the UK's fund at about £1.5 billion, not the £300 million or £350 million so often quoted by the Government. That shows the possible substantial extra burdens that the scheme might place on industry beyond those that the Government claim will be placed on it.

Adam Price (Plaid Cymru, Carmarthen East and Dinefwr)

To reduce some of the burden on private sector schemes, what does the hon. Gentleman think of the suggestion that public service pension schemes that the Government stand behind should contribute the flat-rate levy to the PPF?

Nigel Waterson (Conservative, Eastbourne)

I have certainly heard that suggestion. While not endorsing it on behalf of my party—at least at the moment—there is a strong feeling in the country that public sector pensions have led a charmed existence compared with the private pension sector. It all comes back to funding. As has been said, if there were an enormous downturn in the fortunes of the PPF, certainly in its early days, that could not be addressed by the levy, even without the cap. So how could it be addressed? The only significant way to regulate it is by reducing benefits.

I come back to where I started. I have enormous sympathy with the amendment because removing the provision would rightly put considerable pressure on the Government to think through what they are trying to achieve. I take the point about Government backing. There seems to be a conspiracy of silence in America in that everyone accepts that, if the PBGC were in danger of failing, the Federal Government would have no choice politically but to step in. Indeed, if the PPF were not an insurance scheme or a pension scheme, but a political construct, we would assume that there would be a political imperative to step in to stop it going bust. That being the case, as a responsible official Opposition with every anticipation and expectation of becoming the Government in due course—unlike the Liberal Democrats—we suspect that we need paragraph 30 behind the glass, ready to be broken in an emergency.

Gregory Barker (Conservative, Bexhill and Battle)

I am listening carefully to my hon. Friend. Does he accept that it is not just the fund going completely bust that would cause concern? Obviously, there is a spectrum of scenarios whereby the cover against likely claims against the fund could break it, which would impinge on public confidence in the fund. Perhaps he could share the American experience with us, whereby the cover looked increasingly thin and confidence in the pension system had waned without the fund going bust.

Nigel Waterson (Conservative, Eastbourne)

My hon. Friend makes a fair point. My impression was that, broadly speaking, people in America were fairly relaxed about it. The Minister has often referred to specific people he met on what was, no doubt, many visits to America to find out what was right and wrong with their system. Everyone recognises that, at the end of the day, the Government would step in. There is a political dimension, not least because the figures for the

PBGC are dominated by airlines and steel companies. All too often there must be phenomenal pressure if a large employer in a particular town or state is in danger of going bust unless something can be done about its pension fund deficit. That is not a situation that I want replicated here.

The Government cannot make up their mind. On the one hand, they are adamant—the Minister said so more than once, even today—that they want the PPF to have a life of its own, to get on and do its own thing once it has been set up. On the other hand, we keep bumping up against provisions such as paragraph 30, by which the Government have the right to pull the plug. I think that they are suffering from an advanced case of schizophrenia over their real role vis-à-vis the PPF. They must make up their mind about which solution they want. So, with due apologies to the hon. Member for Northavon, I do not think that, on balance, we can support his amendment. We do, however, have enormous sympathy with it because it does deal with an important part of the Bill.

John Robertson (Labour, Glasgow Anniesland)

The hon. Member for Eastbourne made valid points on amendment No. 6, which my hon. Friend the Member for Hamilton, South and I also tabled. The hon. Member for Northavon also made some good points.

I am in a bit of a quandary. If the Minister will not agree to get rid of paragraph 30, which I am sure he will not, I look to him at least to consider its wording, which is a bit ambiguous. It starts off:

''The Secretary of State may, on the recommendation of the Board, by order amend''.

Does that mean that every time that the board wishes to do something, it has to get the Secretary of State's agreement? If it does not, then that is what I want added. Paragraph 30(4) says that the board will

''consult such persons as it considers appropriate''.

I would be a lot happier if I knew what that meant. I am probably quite thick, and I am certainly not a lawyer.

Nigel Waterson (Conservative, Eastbourne)

The two are not mutually exclusive.

John Robertson (Labour, Glasgow Anniesland)

I do not particularly like lawyers. I once said that hanging was too good for them, but I take that back: it is perfect for them.

The sub-paragraph is ambiguous and I want something with a bit more meat on it. I want to know that the Secretary of State has some control over what the board can do. I also want some protection. The sub-paragraph should say that if a catastrophic event occurs, those already in the fund will not be punished for it. That has to be considered because people should be protected. I await the Minister's response with interest. I have reservations, but I am sure that he can persuade me to side with him.

Bill Tynan (Labour, Hamilton South)

The saying, ''When you have a hole, take the shovel away'' springs to mind. As the co-accused, I want to make a few points. The amendment is in my hon. Friend's name as well as mine, so we are both to blame.

Paragraph 30 to an extent negates the PPF. It is a concern that the funding will come not from the Government, but from companies. The levy has to be

such that it does not damage companies. There could be a situation in which there were enormous problems for the fund and the people it benefits. Unless there is a mechanism whereby the board can tell the Secretary of State, ''Look, we have an enormous problem that has to be dealt with'', it could have to take decisions that might be unpalatable for those receiving pensions.

Paragraph 30 builds in an insurance policy for the Government. If the board comes to them with a problem, they can do a number of things, all of which are included in the paragraph. They could also take another avenue and say, ''Yes, we have to help maintain the fund in order to make sure that its beneficiaries do not lose their pension.'' A glass case provision—one that would allow us to take an axe to the glass if the unlikely event that concerns us occurs—is vital. If we do not have such a provision, we allow the board to take decisions for the beneficiaries of the fund.

We will not press the amendment to a Division, although the paragraph needs further discussion. My hon. Friend said that the Minister should look carefully at it. I hope that, under the circumstances, we can reach an accord on it.

Malcolm Wicks (Labour, Croydon North)

Two concerns have been articulated. The first was expressed by my hon. Friends the Members for Glasgow, Anniesland and for Hamilton, South, who, perfectly properly and understandably, are concerned that pension rights should be guaranteed whatever the circumstances. They are, I suppose, understandably suspicious of anything that seems to negate that. I hope that I can reassure them. Much of the argument comes down to whether it makes sense to include provisions for extreme circumstances, whatever one's objectives. We would argue that that is prudent, but obviously it gives rise to the suspicions expressed by my hon. Friends. I hope that I can allay their fears.

The second concern was expressed by the hon. Member for Eastbourne, who, sadly, again talked the measure down, but that has been the story of social reform for 200 years; it has happened whenever anyone has come to Parliament with the temerity to suggest, for example, that child labour should be outlawed or, more recently, that we should establish a national health service. The opponents of advance have always said, ''This'll be a catastrophe; it can't work'', and have come forward with a host of reasons why that would be the case. Much of what the hon. Gentleman said falls into that category.

George Osborne (Conservative, Tatton)

For the historical record, it was a Conservative Government who, because of Lord Shaftesbury, outlawed child labour, and it was a Conservative Government under Stanley Baldwin who introduced the state pension.

Malcolm Wicks (Labour, Croydon North)

It was the mentor of the hon. Member for Northavon, Lloyd George, who introduced the old-age pension: let us get our history right. The Conservatives voted against the national health service on Second Reading, which is, perhaps, a precedent for the Pensions Bill.

Gregory Barker rose—

Win Griffiths (Labour, Bridgend)

Order. The Bill is not about what type of pension was introduced by which Government. Let us get on with the amendments—[Interruption.]

Malcolm Wicks (Labour, Croydon North)

Saved by the bell.

Sitting suspended for a Division in the House.

On resuming—

Malcolm Wicks (Labour, Croydon North)

I feel mellower now, because my hon. Friend the Under-Secretary bought me half a hot cross bun with my cup of coffee. I wanted a full one, but he capped it, no doubt because of a 50 per cent. survivor's benefit.

I was about to make a point about the contribution of the hon. Member for Eastbourne. He talked about a scenario with two homes, one beside another, with one person on a full company pension scheme but the other on a substandard PPF benefit. That was when it became clear that he was overdoing the argument; his two homes argument did not compete with Disraeli's two nations as an important analysis.

When I met Mr. Jackson, a steelworker in Washington, he and Mrs. Jackson told me in a dignified way about how pleased they were that the Pension Benefit Guaranty Corporation was there for them when Bethlehem Steel, against all the odds, failed. He lost some health care rights, but thought only about how much worse his situation would have been had American legislators not had the foresight in the mid-1970s to legislate for something resembling the PPF.

Adam Price (Plaid Cymru, Carmarthen East and Dinefwr)

On American legislation, is the Minister aware that three Bills have been passed by the House of Representatives and the Senate in the past few months to bail out the Pension Benefit Guaranty Corporation? A process of negotiation is taking place on pension reform measures, particular in the Senate.

Malcolm Wicks (Labour, Croydon North)

I am broadly aware of developments in the United States. When I was in Washington, I had the honour of being asked to address a Senate sub-committee during a hearing on the Pension Benefit Guaranty Corporation, so I am familiar with those issues.

The hon. Member for Northavon has a beguiling technique—I can say that now, armed with my hot cross bun. He paints a ''what if?'' scenario, takes a new proposal and says, ''What if this happened, what if this extremity occurred? What if a real tragedy, a nightmare scenario were to unfold?'' We then add on and on to that, and we say, ''In those circumstances, things would be dire.''

We have been prudent and sensible in our actuarial calculations of what could happen in the real world when making our estimates about the proper funding of the PPF. If the hon. Gentleman were to ask me what would happen in the most calamitous and terrible circumstances, I would say that of course there would be difficulties, and perhaps in those extreme circumstances benefits would have to be reduced. But in extreme circumstances all sorts of

social institutions would be affected, and I do not want to say much more about that.

At the end of the day, the Committee will have to compare the hon. Gentleman's sometimes slightly absurd ''what if?'' notions with our translation into concrete reality of the dream about pension rights, and our assurances that it can work, and that we have calculated the funding for it and the known risks. Committee Members will have to make that judgment. It is not our intention to set up a pension protection fund, to ask hon. Members to vote for it and communicate its virtues to the British public, while expecting that in a few months' or a few years' time we will be cutting benefits to catastrophic levels. I have not become Pensions Minister to see that happen. The only argument is whether, despite my assurances, it is right to include in the Bill an in extremis measure for flexibility in dire circumstances. On balance, I think it is right to do so.

I have never been an anti-Liberal—

David Cairns (Labour, Greenock and Inverclyde)

I am.

Malcolm Wicks (Labour, Croydon North)

My Parliamentary Private Secretary is, which is why we are a balanced team. I have never been a wild anti-Liberal, but I sometimes think that being a Liberal Democrat means never having to be consistent. The hon. Member for Northavon tabled several amendments that would have meant our being more generous, despite the fact that for the first time the Bill will introduce a protection fund, or an insurance fund—I am just trying to get the hon. Member for Eastbourne going.

That is a perfectly reasonable argument; some of my hon. Friends would say that instead of 90 per cent. the percentage should be 100 per cent., and instead of 50 per cent. it should be 75 per cent. The hon. Member for Northavon is in the camp that says we should be more generous, but then forgets that and says that the levels of benefit being proposed may never be paid because of the way that the measure is established. If the hon. Gentleman doubts that we can fund the pension rights that we propose, why does he say that we should be more generous? His argument is inconsistent.

The power is sensible; the flexibility in the relevant paragraph could be used by the board to propose that pension rights should be increased. I do not suggest that that will happen, but in favourable circumstances the power could be used to increase the 90 per cent. level, should the board feel able to support that, and as long as the Secretary of State agreed.

Our approach to the arithmetic of the pension fund is right in terms of the levy, of how we have estimated its likely level in the first year or so, and of the money that we will we need to raise—£300 million in the first full year after the interim year. I may have said £380 million this morning when asked about a certain scenario, but it should have been £300 million. The levy can be increased by 25 per cent. in any one year, and can be increased again and again up to 100 per cent. of the original amount. That brings in flexibility. Compare that with the situation in the United States, where the levy has not been increased since 1991—in large part, I think, because the US legislators said that

the levy could be only increased if the Pension Benefit Guaranty Corporation went back to Congress; only Congress could increase the levy.

We have learned lessons from that; we think that that would be an unnecessary inflexibility. The board will be able to increase the levy. We talk a great deal about the levy, but we should recall that, in time—sadly, there will be schemes that go bust—assets may be taken over and invested, and there will also be that source of income. Although we hope that it would not have to be used for this purpose, there is also the power to borrow commercially, if at stages in the economic cycle that seems necessary.

We all understand that the Pension Benefit Guaranty Corporation is in some difficulties. We are not American legislators, and I am sure that they are not complacent, but those difficulties should not be exaggerated. Our understanding is that the Pension Benefit Guaranty Corporation is 75 per cent. funded on a buy-out basis, which many would say is a reasonably healthy position for a scheme at this point in the economic cycle. It would have been in an even stronger position had it been able to raise the levy in a more flexible way, without having to go to Congress.

In drawing up the proposals, we have taken a lot of account of past US experience. For example, we are aiming to give greater importance to the risk-based element of the levy, which from memory I would say is only 25 per cent. of the total levy in the United States. The risk-based element will be at least 50 per cent. here, and perhaps a lot more. We are learning from the experience in the United States about what does and does not work.

I can reassure my hon. Friends the Members for Glasgow, Anniesland and for Hamilton, South about the potential for a reduction in benefits. I have said words about that already, to try to reassure them that that is not our intention; we have put in an in extremis clause.

There are limits on the powers of the board to make any reductions: it would have to consult, and reflect on that consultation. Perhaps more importantly, it would have to get the approval of the Secretary of State before any reduction could occur. The Secretary of State would not act with a free rein to reduce compensation; he would be approving what the board did. He would have to listen to the board. In such extreme circumstances, the Secretary of State would not give way lightly, although I guess that that would depend on the Secretary of State. Regulations would also have to be passed under the affirmative procedure in the House before any reductions could take place. I hope that that will reassure my hon. Friends.

Nigel Waterson (Conservative, Eastbourne)

I do not quite follow the Minister's logic. On one hand, he criticises the Americans because they have to go to the legislature for an increase in the levy; on the other, he claims credit for this system, which would allow the Secretary of State to decide about cutting benefits. Any Secretary of State would feel constrained—for example, in the run up to a general election campaign—about reducing the

rate of benefits, even if all the other indicators suggested that that was the right thing to do.

The Minister was rather relaxed about increasing the levy and explaining how it could be increased almost exponentially. However, there are natural limits on the levy, such as how much the market can bear, and how much companies that are still going strong can bear to pay.

Malcolm Wicks (Labour, Croydon North)

I apologise for accusing the Liberal Democrats of never having to be consistent; clearly it is a more widespread contagion. The hon. Member for Eastbourne has spent much of today waxing eloquent about us being too mean with PPF benefits, but when he advocated that the benefits should be more generous he said nothing about the costs to the industry or the scheme, or about the danger that we might be over-egging the final salary pudding. Now that I am saying that there will be flexibility to increase the levy—a lesson that has been learned from across the Atlantic—he wants to talk about costs.

I am never quite sure where the hon. Gentleman is coming from; he might want to refer to one of his briefing notes so that he can tell us. Is he saying that we should be piling more costs on the scheme to increase benefits, or that we should never have the flexibility to increase the levy? There is a difference. We should give the board the flexibility to increase the levy. That is important. It is absurd to suggest that the board will suddenly decide that it must increase the levy by X per cent. and then have to say, ''Oh dear, we must return to Parliament and there will have to be the full panoply of getting parliamentary approval.''

There is a difference between that and the dire circumstances, which I do not think will ever occur, of the Webb-Northavon scenario—the ''Bridge over Troubled Water'' scenario—in which the board says, ''I'm sorry, we've got to reduce benefits.'' It would be appropriate to get the approval of Parliament on people's social security generically and their benefits. I hope that I have reassured Committee members. I may not have reassured Opposition spokesmen, but, as I say, there is some confusion about the consistency of their argument.

Steve Webb (Liberal Democrat, Northavon)

I am sure that we would all rather be ''Homeward Bound'', but before we go we should talk about this central amendment. The Minister's response must be the feeblest that we have heard. It does not stack up at all.

It has been suggested that the scheme benefits that will be paid out on a routine, day-to-day basis might not, in some circumstances, be generous enough to unmarried partners, for example. If I remember rightly, the Minister asked us to withdraw that suggestion because he wanted to reflect on it because he saw some merit in it. So, our suggested marginal improvements to the scheme that the Government said were worth thinking about are apparently no good. They now tell us that the suggestion is inconsistent with querying the reserve power of the Government to rip up the entire promise. Where is the inconsistency? One is a day-to-day occurrence of the everyday operation of the fund; the other is, we are all agreed,

an extremist provision. As the Minister well knows, there is no inconsistency.

The Minister says that we are talking about an unlikely set of circumstances—in fact, he said that he did not think they would ever happen. Well, Hallelujah! If we are all agreed that they will never happen, we do not need paragraph 30, which exists because the circumstances might arise. It is because the circumstances could happen that the Government have written paragraph 30. It is not my fevered imagination, but the Government's that has ensured that the paragraph is in the Bill. The question is: how should the Government of the day respond if the circumstances do arise?

The hon. Member for Hamilton, South, who is momentarily my hon. Friend, was right first time. He was right when he added his name to the amendment and he was right to say, ''If you get to this point, the Government of the day should not have as one of their options the right to rip up the pay-outs.'' If this is an insurance scheme, the idea that the Government reserve the right to rip it up cannot be correct, and if that power is removed, the Government must do something else; they will not do nothing. The something else that they should do is to lend money to the fund. That is entirely reasonable and will not be at a huge cost to the taxpayer because, over time, we all accept that there will be good years, and nobody doubts that an insurance scheme can be run sustainably on a long-term basis. All we are trying to do is to tie it over during circumstances that the Minister says will never occur.

Malcolm Wicks (Labour, Croydon North)

If the hon. Gentleman is saying that there could be circumstances, which we hope will not be common, in which the fund needs to borrow, the fund will be allowed to borrow commercially. Why does he object to that and why does he think that all taxpayers, many of whom are not members of final salary schemes, should do the borrowing? What is wrong with the commercial option?

Steve Webb (Liberal Democrat, Northavon)

Because the taxpayer can do it cheaper. In my proposal, there is nil long-term cost to the taxpayer, because he lends money to the scheme and gets it back with interest. It is like the Government issuing a bond: when they issue a bond, they borrow money and promise to pay interest. In this case, they would lend money to the PPF and get it back with interest because the PPF has revenue-raising powers. In a given year, the Government are doing the equivalent of issuing a bond; there is nil cost in the long-term to the taxpayer because the Government get the money back with interest, whereas if the PPF has to do it commercially, the commercial banks will want their cut. The whole deal is more expensive if it is done through commercial borrowing than through the state. The state can do it cheaper, so it is more efficient. Given the Minister's position on the political spectrum, I should not have thought that he would say, ''Private good, public bad.'' Which is the most efficient? In this case, the private sector is more expensive than the public sector.

Nigel Waterson (Conservative, Eastbourne)

Does the hon. Gentleman also agree that the fund is likely to want to borrow commercially precisely when its books look particularly dodgy?

Steve Webb (Liberal Democrat, Northavon)

tw=.99wIndeed. The risk premium, especially if there is no Government underwriting of the scheme, might be significant. That money has to be found from somewhere, and if it is borrowed commercially, which is more expensive, the levy payers, who run the schemes that we want to keep going, end up paying for it. That is an unnecessary burden on the people who run the type of pension scheme that this whole exercise is designed to preserve. I find that very puzzling.

We all know that if there were a crisis, perhaps concentrated on a geographical basis, the Government of the day would do that anyway. Would it not be better to do it in a measured, planned way, in the calm of a Committee Room now, than in a panicky response to local newspaper headlines when everything has gone horribly wrong and everyone is panicking saying, ''Something must be done''? Would it not be better to plan, in the unlikely event that such a situation would arise, for how it would work, on what terms borrowing would be possible, over what period and for what interest rate? It is better to think it through calmly than have to react to a crisis.

Bill Tynan (Labour, Hamilton South)

If the board finds it difficult to maintain funding for retired people, to whom does it go if we remove the involvement of the Government and the Secretary of State? Would the hon. Gentleman not agree that it would be better, even though the paragraph's conditions are severe, for it to go to the Secretary of State to clarify what can be done to avoid the sort of crisis that he paints?

Steve Webb (Liberal Democrat, Northavon)

Absolutely. I agree that there should be such a provision. Removing paragraph 30 would be half of the deal; we must then insert a provision to cover what would happen if the fund is in trouble and cannot pay its pensions. The hon. Gentleman is right: we must specify what would happen, including the involvement of the Secretary of State, because he will be involved. The current Secretary of State is involved because he cuts benefits, and I do not think that we should give him that reserved power.

On one hand, the Government parody the argument, saying that there is hysterical scaremongering on the issue, although they inserted the paragraph; we did not. On the other, they say that, in extremis, they might want to take the pensions away in part. We do not think that they should.

Question put, That the amendment be made:—

The Committee divided: Ayes 3, Noes 12.

Clause 126 - Postponement of compensation entitlement for the assessment period

Steve Webb (Liberal Democrat, Northavon)

I have a short and simple question. The clause provides that entitlement may be delayed in prescribed circumstances. I am interested to know which circumstances the Government have in mind

and whether such a delay would be exceptional or quite routine.

Nigel Waterson (Conservative, Eastbourne)

To some extent, the hon. Gentleman has stolen my thunder, in that I wanted to ask the same question about circumstances, but I shall range a little beyond it.

Is the clause designed to mirror the provisions that we have already dealt with on deferring the taking of the state pension? We are back with the ''black cat in a dark room'' syndrome. Is the clause related to new clauses that may or are likely to be tabled later to deal with a cliff-edge situation? [Interruption.] Yes, there seem to be several cliff edges, as the resident expert, the Minister, has pointed out, so let me specify which one I mean.

I am thinking of someone who works for Tesco, retires, wants to work part-time and goes to work down the road at Asda. Is there a read-across in such circumstances? It is difficult to know because, yet again, we are in the murky, distant land of regulations that we have not seen in draft and of circumstances that have not yet been explained, let alone prescribed. I am sure that we are all cheerful because we have waved a temporary goodbye to schedule 7, but some important issues arise on clause 126.

Chris Pond (Labour, Gravesham)

The hon. Member for Eastbourne emphasised the fact that the Committee is now in a cheerful phase, and I feel that I have some responsibility for that, having ensured that my hon. Friend the Minister for Pensions had his bun during the tea-time voting break, which left him neither hot nor cross, but cool and measured in his approach.

Malcolm Wicks (Labour, Croydon North)

I only had half.

Chris Pond (Labour, Gravesham)

My hon. Friend complains that he had only half, but it was the half with the cross.

Clause 126 provides for the board, when it assumes responsibility for an eligible scheme, to deal with any member's entitlement that was postponed during or for any part of the assessment period when the member continued in employment after attaining normal pension age. The clause ensures that if pension scheme members postponed taking up their entitlement because they decided to continue in work that will be taken into account in calculating the level of compensation payable by the PPF. Regulations may provide for the board in calculating a member's compensation to take account of any entitlement postponed during or for part of the assessment period.

In reply to questions raised in different ways by the hon. Members for Eastbourne and for Northavon, I can tell them that it is not the PPF's intention to allow members the option of postponing the compensation when they attain pension age during or after the assessment period. Scheme members who reach pension age when or after the PPF takes over the scheme will have no choice about taking their benefits as they fall due. Of course, if someone does not want to receive the compensation, they can put the payments into a savings account. There will not be

restrictions on working after normal pension age and receiving PPF compensation, if someone chooses to do that. There is read-across to potential Inland Revenue simplification that would affect the tax treatment of pensions in payment when members work for the same employer. The clause allows flexibility to deal with the Inland Revenue proposals.

Question put and agreed to.

Clause 126, as amended, ordered to stand part of the Bill.

Clause 127 - Guaranteed minimum pensions

Chris Pond (Labour, Gravesham)

I beg to move amendment No. 470, in

clause 127, page 79, line 19, at end insert—

'( ) In section 47 of the Pension Schemes Act 1993 (further provision concerning entitlement to a guaranteed minimum pension for the purposes of section 46), after subsection (7) insert—

''(8) For the purposes of section 46, a person shall be treated as entitled to a guaranteed minimum pension to which he would have been entitled but for the fact that the trustees or managers were discharged from their liability to provide that pension on the Board of the Pension Protection Fund assuming responsibility for the scheme.''.'.

The clause requires the board to notify the Inland Revenue when it has assumed responsibility for an eligible scheme. The amendment is needed to extend current procedures for taking account of the effect of contracting out of the state earnings-related pension scheme to members of a scheme taken into the pension protection fund. This is a complex area, but it is worth ensuring that the Committee has it sorted out.

Where a pension scheme was contracted out before 1997, a reduction must be made to the members' SERPS entitlement to reflect the fact that they have paid lower national insurance contributions. That is normally achieved by reducing their SERPS entitlement by the amount of the guaranteed minimum pension payable by the scheme—a system known as the contracted-out deduction, or COD. There are circumstances when an individual has paid a reduced amount of national insurance contributions but does not receive the guaranteed minimum pension. In such cases, a notional guaranteed minimum pension is calculated and then deducted from the person's SERPS entitlement. That is a notional COD—which might be the solution to declining fish stocks.

When the pension protection fund takes over a contracted-out occupational pension scheme, it will not take on specific responsibility for paying the guaranteed minimum pension, but the members will still have paid lower national insurance contributions, so we must be able to adjust their SERPS entitlement. If we did not do that, they would effectively be getting SERPS income that they had not paid for. The amendment ensures that we can make that deduction. When a pension scheme is taken over by the pension protection fund and members of that scheme have paid the lower rate of national insurance contributions, the amendment will allow a notional amount to be deducted from their entitlement to SERPS.

Amendment agreed to.

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

Nigel Waterson (Conservative, Eastbourne)

The Minister may have already dealt with this question, but I can be forgiven for not realising if he has. I suspect that he would be in some difficulty if I asked him to repeat what he just said without the benefit of his brief. [Hon. Members: ''Shame!''] All that stuff about fish is all very well, but whether amended or unamended, what is the clause meant to do? What are its consequences?

I gather between 120 and 140 pages of the Finance Bill are devoted to pension simplification. As we consider chunks of this Bill, there is a danger that we will catch glimpses of something called the Finance Bill, on a parallel railway line travelling in roughly but not entirely the same direction, which could have a significant effect on what we are doing, and vice versa. Is there a read-across to the Finance Bill? Does it matter if there is, and if so, what steps are being taken to ensure that we can harmonise—to use that ghastly European term—what we are doing with what the Committee considering the Finance Bill is doing?

Chris Pond (Labour, Gravesham)

Believe it or not, I can speak on this subject without looking at my notes. There is no read-across to the Finance Bill. We are merely ensuring that the PPF operates in the same situation as existing contracted-out schemes. That means that the PPF will not take on responsibility for guaranteed minimum pensions, but it will take account of the SERPS position and the national insurance contributions that people have made when their schemes have been taken into the PPF. It is a very straightforward matter.

The hon. Member for Eastbourne was looking at his notes from the NAPF, but I was not looking at my notes at all during that response.

Clause 127, as amended, ordered to stand part of the Bill.Clause 128Duty to pay scheme benefits unpaid at assessment date

Clause 128 - Duty to pay scheme benefits unpaid at

Clause 129 - Modification of Chapter where liabilities discharged during assessment period

Clause 130 - Administration of compensation

Nigel Waterson (Conservative, Eastbourne)

I have some questions and requests for clarification. It is difficult to comment on subsections (1) and (2) because they both refer to future regulations, and we have given up on hoping to see any draft regulations. None the less, I want to raise some issues relating to subsection (2)(a). Is it not a blinding statement of the obvious? Why would one need regulations to prescribe

''the manner in which and time when compensation is to be paid''?

I presume that, as far as possible, periodic compensation would be paid as if it were the pension being replaced. I presume that it would be paid once a month. I do not like to think of two houses, one with nice shiny paintwork and a new car outside, and the other with weeds growing up the side of the building, because one received payments quarterly and the other did not. I am slightly curious as to why the manner and timing needs to be spelt out in regulations, but no doubt we will be enlightened.

Paragraph (b) makes eminent sense. Paragraph (c) is interesting. Does it give individuals the option of saying that they do not want periodic compensation, and just want a lump sum? Is it a variant of the state pension lump sum provision that we have already debated? What kind of ''circumstances and manner'' do the Government anticipate would allow the liability to be discharged? Could the board decide to dispose of a troublesome claimant by paying them a lump sum? Perhaps we could be told.

I have no particular point to make about paragraph (d). Paragraph (e) refers to

''dispensing with strict proof of their title''.

Is that wise, and on what basis would it occur? Would it mirror what happens already in schemes that are ongoing, or would it be a new departure? How would it work?

Next to paragraph (f) I have written ''Tax credits?''. We are all aware of the horrors of some of the Department for Work and Pensions IT schemes, and we are also aware of the debacle with the Treasury and tax credits. Through this paragraph, are the Government recognising in advance that there will be errors in the payment of compensation? Are we already envisaging failures in IT and computer systems, and the recovery of amounts of compensation? In retrospect, I would have been tempted to table an amendment to leave out paragraph (f), because it sounds as if the Department is already working on the basis that problems will arise.

Paragraph (g) mentions

''specifying the circumstances in which payment of compensation can be suspended.''

Is that on an individual basis, or are we talking about a group of people? What circumstances have Ministers in mind? We should bear in mind that we are not talking about the power under paragraph 30 of

schedule 7, which we have debated fairly exhaustively. We seem to be talking about a separate power, which would allow payment to be suspended. Ministers ought to set out the circumstances that they have in mind, even if the draft regulations are not available.

Chris Pond (Labour, Gravesham)

I am happy to try to clarify things. The hon. Gentleman listed the different elements of the regulations under subsection (2) according to their position in the alphabet—

Nigel Waterson (Conservative, Eastbourne)

That is the way that they are written in the Bill.

Chris Pond (Labour, Gravesham)

I am not criticising the hon. Gentleman; I am simply saying that for the benefit of other members of the Committee, who may not necessarily have the clause in front of them. I will explain where the different elements stand.

Paragraph (a), which relates to the method and timing of payment, has been included because we want the flexibility for PPF to administer compensation in the most efficient way. Like all the regulations, they will be essential in ensuring that the PPF can deal with the practical elements of the task of paying compensation.

Nigel Waterson (Conservative, Eastbourne)

Does that mean that the Minister envisages that PPF pensioners—those people in the house with the unmown lawn and the very old car—might receive their compensation payments less frequently than they would have received their pension payments?

Chris Pond (Labour, Gravesham)

The assumption is that we will try to replicate the arrangements that already exist. If there are circumstances in which pension scheme members feel that the payment is made using inappropriate method and timing, they have the opportunity to appeal against the way in which that is done. There is no intention to create disadvantage for any individual in the PPF.

The hon. Gentleman said that he was happy with

''calculating the amounts of compensation payable''

in subsection (2)(b) because it was straightforward. I should explain that the reference to lump sum payments in paragraph (c) concerns trivial commutation—situations in which very small sums are involved and it is therefore more sensible for them to be paid as a lump sum, rather than over a period.

I believe that the hon. Gentleman was also happy with subsection (2)(d), and that he had no concerns about subsection (2)(e).

Nigel Waterson (Conservative, Eastbourne)

Yes, I did.

Chris Pond (Labour, Gravesham)

I shall return to that in a moment; I may have to ask the hon. Gentleman to repeat his concern. Subsection (2)(f) deals with the recovery of overpayments. It mainly concerns administration during the assessment period. We must ensure that when the board has taken over a scheme, the amount that is paid to individual members of the scheme is appropriate according to entitlements measured against the PPF levels of compensation. Levy payers will want to be assured that the board is administering

the correct amount of compensation in an efficient manner. That part of subsection (2) will ensure that the board does so.

Nigel Waterson (Conservative, Eastbourne)

The Under-Secretary has just described the exact opposite of what the subsection says, because paragraph (e) refers to dispensing with strict proof of someone's title, which was the point that I raised. With regard to the recovery of compensation, my concern was—

Chris Pond (Labour, Gravesham)

Tax credits?

Nigel Waterson (Conservative, Eastbourne)

My concern was about the IT problems.

Chris Pond (Labour, Gravesham)

The subsection is not concerned with that or with the payment of tax credits, nor is it to do with the board getting anything wrong. It will ensure that the payments that people receive are properly aligned with the PPF level of compensation once they have been transferred from individual schemes into the PPF. It is merely a matter of adjustment rather than of general overpayments.

The hon. Gentleman was concerned about payments when a beneficiary dies. Paragraph (e) will ensure that the board administers such payments fairly and that the system will not be abused. Paragraph (g) concerns the suspension of payments and relates to fraud, which we will discuss later.

Question put and agreed to.

Clause 130 ordered to stand part of the Bill.

Clause 131 - Discharge of liabilities in respect of compensation

Nigel Waterson (Conservative, Eastbourne)

I beg to move amendment No. 352, in

clause 131, page 80, line 33, at end insert—

'(d) by agreeing that the purchase of annuities in respect of an occupational pension scheme which is in the process of being wound up can be postponed, and that relevant benefits may be discharged by the Board.'.

The amendment is important, and I shall spend a little time developing the argument behind it. It would amend subsection (2) by including another way of discharging liabilities in respect of compensation. We are back with the respectivity issue, which we seem to approach from a number of different directions.

The amendment would build on the question of annuities in paragraph (b). We want to amend the Bill to provide that when the purchase of annuities, which is the standard way of crystallising someone's pension promise, occurs in respect of a scheme that is in the process of being wound up, that purchase can be postponed, and the relevant benefits can be discharged by the board. That proposal has been punted around for some time by the pensions action group, including the indefatigable Dr. Ros Altmann.

I appreciate that there is a philosophical actuarial discussion surrounding the matter—debated by those to whom the Minister referred as very clever people outside here, whose views he believes should not be

taken too seriously. I suppose an actuary would say, ''Yes, annuities are very expensive and one of the main reasons for that is that we are all living longer. So how can we complain? Because when you buy an annuity, you are secure—as secure as anything can be in this world—in the knowledge that you will receive the relevant payments until you depart this life.'' That is the great advantage of annuities.

The current problem is that when a company and its scheme are going into wind-up and they do not have sufficient assets, the purchase of annuities for retiring members of the scheme rapidly consumes the available resources. The pensions action group has put forward an interim and not a long-term solution. Until solutions can be found for the 60,000 people who have lost their pension rights, it makes sense to husband the remaining assets of the scheme as well as possible.

One way of eking out those resources is to postpone the purchase of annuities and to pay the relevant benefits out of the available funds. The group says that instead of forcing schemes to buy index-linked annuities, we should allow scheme assets to be drawn down to pay pension commitments as they fall due.

One way to approach the matter would be to draw the scheme assets that still exist when a scheme is already in wind-up into a central fund run in parallel with the PPF. By running things centrally through the PPF, administration costs and ongoing management would be reduced and it would create an economy of scale. It could also mean saving the high costs of wind-up, where in many cases the cost is more than 5 per cent. of the scheme's assets.

The return on annuities is currently about 5 per cent. for a fixed single life and lower at about 3.2 per cent. for joint cover with indexing. That is one major problem currently faced by the schemes. Existing funds should be used to pay existing and new pensioners as they retire until the fund is exhausted. The pensions action group has produced some specific figures for ASW Sheerness, which shows its calculations for the scheme by Dr. Altmann. It proposes that the funds be used to pay for those claims until the fund is exhausted. It says:

''The government would therefore not have to pay a penny for at least five years. This gives time to plan the finance for the subsequent years.''

According to Dr. Altmann, the average person would receive a pension of £8,000 a year, which would be drawn for an average of 20 years. With 20,000 people, the average annual cost for the 50 years of the scheme would be £64 million a year. I am not in any position to comment on how accurate those figures are, but they look fairly persuasive to me. When contrasted with an annuity purchase on the same scenario, the group comes up with an amount of £143 million a year—a very big gap.

In our continuing attempts as the official Opposition to produce imaginative ideas—

David Cairns (Labour, Greenock and Inverclyde)

Or borrow other people's.

Nigel Waterson (Conservative, Eastbourne)

Or borrow those that other people have, as a substitute for the lack of imagination currently shown by the Government. The postponement of annuity purchases and the use of

available resources to pay the relevant benefits is a practical short-term approach to the problems of those funds. It comes back to a point that I have made more than once in Committee, which is that the Government should take a lesson from the Conservatives when they were in government and faced with the Maxwell saga. Their solution was the measured introduction of the Pensions Act 1995, but they used imaginative methods to deal with the immediate problems of Maxwell pensioners who faced destitution. In the end, many of the resources were gathered in and the Maxwell problem and the need for legislation were addressed.

I commend the amendment to the Government. I do not suggest that it is perfectly drafted, but such a solution should be among the powers available to the board. It has particular relevance to the 60,000 people whom we often mention in Committee, and how they are to be looked after.

Steve Webb (Liberal Democrat, Northavon)

The hon. Member for Eastbourne has done the Committee an important service by moving the amendment, although for reasons that I shall explain I am not convinced that it would do what he suggests because of where in the Bill it would go. However, I support the principle behind the amendment. It deals with the urgent matter of things going on prior to the coming into force of the Bill. People are losing out now because funds are being wound up and converted into products, which will result in their receiving less money than they would if the funds were allowed to accrue through investment and paid out only on retirement.

Essentially, a relatively young scheme member with money in a pension fund may find it being wound up and converted into a promise that would have to be honoured 50 years later. That is an extraordinarily expensive pension promise. Even as we speak, workers are losing their jobs and finding not only that the money in their pension funds is not enough but that it is being converted into expensive promises. That is a real concern. I hope that the Minister will point out, as I suspect he will, that the amendment would not do what the hon. Member for Eastbourne suggests.

Kevin Brennan (Labour, Cardiff West)

Is it the hon. Gentleman's understanding that it would be possible and not unreasonable for independent trustees currently not to go ahead with the purchase of annuities? In other words, they should not be forced to do so if they believed that some form of compensation might be forthcoming. At least for the moment, would it not be sensible for people not to purchase annuities—and cannot they justify that under the current legal position?

Steve Webb (Liberal Democrat, Northavon)

I hope that the hon. Gentleman is correct, but I could not be definitive about it. Certainly, anything that provides breathing space to prevent that irreversible step being taken must be considered. It adds insult to injury that the fund does not have enough money and that what money is left is then used inefficiently to buy the workers rather meagre pension benefits. I would certainly support something along the lines of the amendment, in the right place in the Bill.

I would not say that was definitive, but my understanding is that clauses 131 and 132, both about the discharge of liabilities, relate to money purchase benefits. As I understand the context of the amendment, we are talking about people who bring not only final salary promises but money purchase benefits to the PPF fund; and the PPF board has the ability to discharge those liabilities by providing an equivalent to the money purchase benefits. Making the amendment to this clause would not deal with the sorts of promises that concern us—but I may have misread the problem.

I am with the hon. Member for Eastbourne in spirit, but I am not convinced that the amendment would achieve what he wants.

Chris Pond (Labour, Gravesham)

We all share some of the spirit of the amendment. The hon. Member for Eastbourne spoke about exploring imaginative ideas to see whether we could find some means of helping those who, in the past, have lost their pension entitlements. The idea behind the amendment, of halting winding up and stopping the purchase of annuities, has, as he rightly acknowledges, been proposed by Dr. Ros Altmann. The hon. Gentleman and other members of the Committee will know that officials have met Dr. Altmann to discuss that and other ideas. During our extensive debates on Thursday about pre-PPF compensation, my hon. Friend the Minister for Pensions said that we will leave no stone—even the most imaginative—unturned to ascertain what can be done without raising false expectations.

Nigel Waterson (Conservative, Eastbourne)

Any hopes.

Chris Pond (Labour, Gravesham)

Not any hopes, but false expectations.

The hon. Member for Northavon, although he agrees with the amendment in spirit, is correct in saying that this is not the right place for the proposal. The hon. Member for Eastbourne will know, following our discussions on pre-PPF compensation, that the amendment would not have the effect that he wants on clause 131. Clause 131 applies only to schemes under the PPF—those that are not winding up before the appointed day. After the appointed day, any scheme that begins winding up and subsequently falls into the assessment period will have to suspend winding up and halt the purchase of annuities and everything else.

Although we understand the reasons why the hon. Member for Eastbourne considers the amendment to be another imaginative way of finding a route through the impasse, I hope that he will accept my assurance, confirmed by the hon. Member for Northavon, that the amendment would not have the effect that he desires.

Nigel Waterson (Conservative, Eastbourne)

The Under-Secretary is breaking my heart by pointing that out, but it does not come as a surprise. My amendment is massively flawed, but the bigger flaw is the Government's apparent unwillingness to consider the imaginative suggestions. The amendment does not work as it stands, but almost all of our amendments have been either out of order because of the tightness of the

money resolution or squeezed in in a vain attempt to catch the Government's attention.

My initial reaction to the postponement of annuities was that it could not be a solution precisely because of what annuities are there for. However, the more I thought about it, the more the postponement of the purchase of annuities was appealing, at least as an interim measure in some cases. Amendment No. 352 is not remotely appealing, but I hope that further attention will be paid to the idea behind it.

The rest of the debate is in Hansard.