Pensions Bill

Public Bill Committee, 1 April 2004.

Standing Committee B

Pensions Bill

Nigel Waterson (Conservative, Eastbourne)

On a point of order, Mr. Cran. As the Committee hurtles towards the Easter recess, I think it only fair to give the Minister an opportunity to update the Committee on the Government's progress with their new clauses and amendments on a range of important and serious issues—but as we listen to the Minister's answer, we must, of course, keep today's date in mind.

James Cran (Conservative, Beverley and Holderness)

Your point of order has, of course, nothing to do with me, Mr. Waterson, but doubtless the Minister has heard it.Clause 136 Initial levy

Clause 136 - Initial levy

Nigel Waterson (Conservative, Eastbourne)

I beg to move amendment No. 184, in

clause 136, page 83, line 39, after 'regulations', insert

', which shall be no earlier than the day on which the basis for calculating the risk-based levy in the first financial year after the initial period has been published.'.

Moving amendments in this Committee sometimes feels like serving in tennis against someone without a racket.

Malcolm Wicks (Labour, Croydon North)

You cannot be serious.

Nigel Waterson (Conservative, Eastbourne)

The jokes do not get any better. I see that the Minister is in a frisky, pre-Easter mood; he obviously has a new team of gag writers, even if he does not have a new team of draftsmen.

We have reached an important and meaty part of the Bill, which deals with how the levy is to work. A range of amendments have been tabled to clause 136, which deals with an animal called the initial levy, whose purpose is to bridge the gap between the coming into existence of the pension protection fund, on a challenging timetable—to use the ministerial words—and the ability to introduce a risk-based levy, which we will talk about in more detail in due course. In other words, there will be a flat-rate levy in the opening period of the PPF's operation.

It is important to recognise that we are in a dynamic situation. As we consider the Bill in Committee, pension funds are still getting into difficulties—quite apart from the funds that may be staggering on only to fall into the arms of the PPF as soon as it is up and running. In the past few days, we have heard the worrying and serious news of the Mayflower bus maker company, which called in the administrators yesterday. Its retirement scheme, which affects some 2,000 workers, has assets of £36 million, but its pension promises amount to a liability of £57 million.

That is another example of a group of workers who will fall through the cracks between where we are now and where we will be when the PPF is up and running. I do not want to repeat the arguments about how that problem could be dealt with or how compensation could be provided through unclaimed assets. However, we have yet to hear a satisfactory explanation of why unclaimed assets are available and usable for certain purposes set out in the Budget but not for this purpose.

There are significant arguments, some of which will be developed in later amendments, about whether it is sensible to start the PPF on a flat-rate levy. As a concession, the Government are proposing to claim only half the proposed levy in the initial stages. There is a whole raft of reasons why that might not be sensible, not least that the fund may not have sufficient resources to meet the claims in the early stages. Expert opinion suggests that quite a few claims will arise at the beginning of the PPF's life.

Amendment No. 184 approaches the issue from one direction; we shall consider amendments that approach it from other directions in due course. It would ensure that the regulations provided for in the clause, which start the application of the initial levy, would not come into effect any earlier than the day of publication of the basis for calculating the risk-based levy in the first financial year after the initial period.

This will be a theme of several mini-debates, so let me get the issue out in the open now: the Government are being foolhardy in starting off with a flat-rate levy. That would be extremely unfair on some companies, and may well not provide the resources to meet claims in the early stages. I can hear the Government's argument now: ''We want to get this in place in plenty of time—we want it up and running as soon as possible to help people in that situation.'' I understand that argument, but I simply do not accept it.

There are interim approaches that could be adopted. One of them would be to legislate in a measured, calm way—as the Government of the day did after the Maxwell saga—and seriously try to deal with the situation that people face, whether that is the case of the 60,000 Allied Steel and Wire workers, of whom the hon. Member for Cardiff, West (Kevin Brennan) speaks so eloquently, or the potential problems of the 2,000 workers in the Mayflower pension scheme.

We have set out how we think the parallel compensation scheme can be set up, but there are other views, and I will come to them in more detail in due course. The Association of Consulting Actuaries is also concerned about the fact that a risk-based levy will not be introduced from the outset. It says that one way of dealing with the problem would be to start by calculating the levy by reference to the existing minimum funding requirement. It says:

''It is inevitable that the risk based premium cannot be totally fair as some schemes would be 'uninsurable'.''

That is one approach. The MFR is at least a familiar concept, and it could well be used as an interim measure, so that we could start off with some element of risk built into the calculation of the levy. Those

seem perfectly sensible proposals for dealing with the interim situation.

I commend the amendment to the Committee, but it is only one way of dealing with the genuine concerns out there in the real world about the delay in bringing in the risk-based levy. I shall have quite a lot to say about that under other amendments.

Steve Webb (Liberal Democrat, Northavon)

As the hon. Member for Eastbourne (Mr. Waterson) said, a whole group of amendments have been tabled to tackle the issue of the initial period, the initial levy, how it should be calculated and for how long it should apply. I shall restrict most of my remarks to some of other amendments to the clause.

As I understand it, the hon. Gentleman's specific proposal is that if the initial levy is not risk based, we should at least be able to expect that the basis on which the risk-based levy will be calculated will be known at the outset. That puts the onus on the PPF to get moving and gather the information that it might need to calculate the risk-based levy. It could also encourage the Government to take a bigger role at the outset. I recognise that Ministers want the body to be at arm's length from Government to some extent, but as we are scrutinising the setting up of the fund, the earlier that we have sight of what sort of risk-based levy we might have, the better. We will talk about the nature of the levy at some length later.

There is an issue of accountability involved. Who will decide how the risk-based levy looks? The Committee and the House will decide what is to be included in it. The amendment goes slightly further than that, and says that the basis of the risk-based levy should be set out as soon as possible—indeed, before the whole thing gets going. Certainly, provided that that does not cause delay in getting the scheme up and running—none of us would want that—I have a lot of sympathy with what the hon. Gentleman suggests.

Malcolm Wicks (Labour, Croydon North)

Good morning, Mr. Cran. Despite the date, we on the Government Benches are in serious mode, as usual. There are no jokers in our pack of Government amendments—but of course I cannot speak for all the amendments before us today; I do not have that authority.

I draw some comfort from the fact that there is no fundamental challenge to the concept that the PPF should be funded by a levy. Moreover, there is consensus that it should have a risk-based element, and I suspect that there is consensus that the risk-based element should represent most of the levy moneys raised. In that sense we are discussing some important detail—indeed, more than detail—about the nature of the levy, its timing and how specific we should be at this stage about the factors that relate to the risk. We shall cover that matter when debating different amendments.

The amendment would delay the introduction of the PPF until the risk-based protection levy can be implemented. Again, I would gently challenge the position of the hon. Member for Eastbourne on that. In debates on the pre-PPF situation, the ASW workers

and others, he urges speed, but sometimes he urges delay. At some stage he should clarify whether he wants the PPF up and running as soon as possible or not.

Nigel Waterson (Conservative, Eastbourne)

If the Minister had been paying his usual close attention, he would have noticed that clarification during my opening remarks. It is perfectly possible to deal with the interim situation as I have described while setting up the PPF and the long-term levy in a more measured way.

Malcolm Wicks (Labour, Croydon North)

It is helpful to have that clarification, because the hon. Gentleman mentioned the news reports about the financial situation of Mayflower, the bus manufacturer, and the possible threat to workers' pensions. It is not for me to comment on press speculation, but some companies will run into such difficulties in the coming period. While scrutinising the Bill perfectly effectively—as we are doing—it is also important to look forward to the PPF's coming into being in April next year.

The amendment would delay the introduction of the PPF, but the hon. Gentleman has clarified that. Setting up the pension protection fund as soon as we can means that some of the information we need to calculate the risk-based levy will not be available from the outset. That is a statement of plain fact and common sense. We remain committed to enabling the board to introduce the risk-related element to the pension protection levy as soon as possible.

We have clearly stated that the levy must take into account risk factors. That is clear from subsections (2)(a) and (3) of clause 137 on the pension protection levy, which will ensure that schemes that pose the greatest risk pay the lion's share of the levy. It will be for the PPF board, however, following consultation with stakeholders, to decide how those risk factors will be taken into account when it sets future levy rates and structures.

Steve Webb (Liberal Democrat, Northavon)

This is obviously a central point. Could the risk based-levy be brought in at the start, and if not, what information is lacking? How long would it take to collect it? The Minister has highlighted the fact that the next clause allows the Government to introduce a risk-based levy based on only one risk—underfunding. On that specific point, will the Minister clarify why that information is not available at the start? Why is information on the underfunding level of pension schemes not available at the outset?

Malcolm Wicks (Labour, Croydon North)

There are a number of reasons, and we may be able to return to that point under a later amendment, when we discuss the criteria relating to the calculation of risk that we establish in the Bill. The process will require detailed assessment of each and every pension scheme with defined benefits. I do not think that all that information is available at the present time. The pensions regulator and the PPF will have to work closely on the issue. Although the hon. Gentleman's argument is that it should be for this House to determine exactly how a risk-based levy is calculated, we do not think that that is realistic. We are setting up the new board to calculate that for us, albeit guided by the Bill. We will return to that issue.

The amendment would have several implications. It would result in a delay in the commencement of the PPF and would, thus, delay the vital and meaningful protection that we wish to bring in as soon as possible. It would create a risk-based levy structure based on incomplete information; we discussed that. It would place an additional financial burden on employers, who would need to conduct an out-of-cycle PPF-style valuation. Delaying the introduction of the fund is not an option. We need protection for scheme members to be in place as soon as possible.

Equally, it would not be wise to publish a risk-based levy framework based on incomplete data. Instead the board can gradually add in the risk-based factors as the information becomes available and operate a dual-levy system in the meantime.

Following that clarification, I hope that the hon. Gentleman will withdraw his amendment.

Nigel Waterson (Conservative, Eastbourne)

I will, of course, seek leave to withdraw the amendment. I think that, as the Minister suggested, some of the broader and more detailed issues will come up naturally in debating other amendments. As I clearly failed to do so when introducing the amendment, I want to make it abundantly clear that my view is that it is perfectly possible to deal with the interim situation of 60,000 workers plus any Mayflowers that come along between now and when the PPF is up and running properly, rather than rush to have the PPF open its doors on an inadequately funded basis, with a flat-rate levy. That would wreak unfairness across all the schemes—good and bad, well run and badly run, well funded and underfunded—that will be involved. I can imagine few things more likely to persuade employers to shut schemes to new entrants, let alone put them off starting new ones, than that scenario. We will return to those arguments.

On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Steve Webb (Liberal Democrat, Northavon)

I beg to move amendment No. 519, in

clause 136, page 83, line 40, leave out from 'or' to end of line 41.

James Cran (Conservative, Beverley and Holderness)

With this it will be convenient to discuss amendment No. 358, in

clause 136, page 83, line 40, leave out '12 months' and insert '6 months'.

Steve Webb (Liberal Democrat, Northavon)

The amendment seeks to take out of clause 136 the passage that allows the initial period in which the initial levy will apply to roll on. In our amendment, we suggest that the 12 months that it is allowed to roll on for should be removed altogether. The amendment with which it is grouped suggests that that period should be no more than six months. Obviously the thinking behind the two is the same, which is why you have so wisely grouped them together, Mr. Cran.

If we are unhappy about having an initial period and an initial levy at all, which we are and which I will come to more substantively, we are even more unhappy about the get-out clause that we are trying to delete. It says, ''If we can't get our act together,

we'll have another 12 months''. That may be an imprecise paraphrase of

''if the regulations so provide,''

but that is what I take it to mean. There will be an initial levy and initial period. One of its characteristics is that the level of the levy will not be determined by risk. We know that the levy will be set at such a level that it will raise about half of the total that will be raised when the scheme is up and running and there is a risk-based element.

Ministers and officials have advised us that the Government's goal is that the risk-based levy will end up amounting to 75 or 80 per cent. of the premium and that the flat-rate levy will end up at only 10 to 20 per cent. The clause says that for the first year the risk-based levy will be 50 per cent. The bit that we are trying to take out allows that to go on for another year. What that means is that, to use insurance terms, the good guys get hit and the boy racers get away with it. In other words, the well run, properly funded scheme with no deficits and a solvent employer has to pay a hefty premium and if we do not get our amendment through it has to pay it for another year. However, the badly funded scheme with the dodgy employer who may go out of business at any moment is paying less than it should. It is bad enough that it happens at all, but it is worse that it should be allowed to continue for a further 12 months.

I will not go on at length about our unhappiness with the initial levy as a concept, because, as you will have gathered, Mr. Cran, we are seeking a clause stand part debate on its substance. I will restrict my remarks to the specific proposal. We do not like it at all but, if we have to have it, we certainly do not want the possibility of its continuing for a further 12 months.

I hope that the Minister will tell us in what circumstances he envisages the initial period continuing for another 12 months. Will it be because the information is not available and it will take longer to obtain it? If the PPF is inefficient, will the people who pay the levy have to just sit and wait and the good guys subsidise the bad guys? It seems unacceptable that there is a get-out clause at all, so it should be removed.

Nigel Waterson (Conservative, Eastbourne)

I think that I am responding to the hon. Gentleman and speaking to amendment No. 358. I endorse almost everything that the hon. Gentleman said. The Opposition share a deep unease about the half-organised way in which the levy will start. The National Association of Pension Funds is also quite exercised about it. It believes that

''it is unacceptable for the period of the initial levy to last for up to two years.''

It therefore suggests reducing the period from 12 to six months after that date—a proposal that I am happy to adopt. Like almost every amendment, this is only a probing amendment to find out the Government's realistic view of how long the process will take.

The Secretary of State, in answering a series of questions posed by my hon. Friend the Member for Havant (Mr. Willetts) before Second Reading, said in a letter:

''As I explained, it will be necessary to collect the appropriate information in order to be able to charge a risk-based levy''.

He then talks about the first year and the flat-rate levy at half the normal amount, and continues:

''We shall then work closely with businesses to allow them to adopt the risk-based element as soon as it suits them, given the triennial nature of schemes' valuation cycles.''

That strikes me as a recipe for quite a long period of drift, with schemes moving at different speeds. I can see that if one has a well run and efficient scheme, one wants to get stuck into the risk-based levy as soon as possible, but the odd scheme may be quite happy to drag its feet and explain, ''We are at the wrong end of our triennial cycle. It is all very difficult and it may take some time.'' We shall return to the matter, but does the Minister have an end date by which all schemes will have signed up to their version of the risk-based levy?

John Plender, writing in the Financial Times at about the time that the Bill was published, put it rather well, saying:

''Only a raging optimist would expect the risk-based levy to start in a year's time.''

[Interruption.] The Minister agrees with that from a sedentary position, so we cannot accuse him of being a raging optimist. Mr. Plender points out that

''the task will be complicated because only a small proportion of companies that sponsor final salary schemes are credit rated.''

It would be interesting if the Minister were to tell us or write to us about the proportion he thinks that is. John Plender continues:

''there will be a strong temptation, where pension funds are in deficit, for trustees to punt their way out of trouble through excessive exposure to equities in the knowledge that a deus ex machina lurks in the wings.''

I am sorry to describe the Minister or the PPF in those terms—all the more so, since schemes are to be granted flexibility over the speed at which they move to risk-based payments. That is very worrying indeed.

If I were Marks and Spencer, or a company with a sensible approach to risk, which is in good order, I would get my ducks in a row sooner rather than later. How on earth is one to ensure that all other companies do so? It is a pretty mammoth undertaking, and we have not had any real guidance from the Minister, the explanatory notes or anywhere else about just how long Ministers think the process will take. Some very large schemes have real concerns about how the process will affect them. I shall perhaps return to that later.

We need to push the Minister hard on the fact that there should be a final date by which all schemes will be signed up to a risk-based levy.

Malcolm Wicks (Labour, Croydon North)

I shall not say too much about the boy racer analogy. As a green Member of Parliament, the hon. Member for Northavon (Mr. Webb) recycles his quips. That analogy first appeared in a press notice attacking the Pensions Bill, which he was prescient enough to issue on the day before we published the Bill. The hon. Gentleman had already made up his mind about what the Bill contained, thus relieving him of the task of reading it. I suggest that he reads the Bill

during the Easter recess; I will not say anything more about that. However, given the imminent leadership bid of the Liberal Democrats, we know who the boy racer will be.

Clause 136 sets out the provisions relating to the initial period. Amendments Nos. 358 and 519 would restrict the length of time the initial period will apply. That would mean that no contingency was available to manage the establishment of the PPF, which might impact on the setting of future pension protection levies. We are committed to introducing the risk-based element of the pension protection levies as quickly as possible.

However, as we are unable to put in place a full risk-based levy structure from the outset, the initial levy is required to get the pension protection fund off the ground. To reflect the fact that the board will not have all the data that it needs to introduce the risk-based element, the initial levy will collect only a reduced amount during that period. I am clear, however, that we expect the board to introduce an element of risk from the second year. The initial levy is likely to apply for the first 12 months. Members of the Committee will recognise the sense of building in an element of flexibility as a contingency.

The existence of a provision that can increase the period of the initial levy to more than 12 months will mean that we have a built-in flexible contingency should the introduction of the risk element have to be delayed. Restricting that flexibility may mean that the board is faced with a stark decision either to place additional burdens on businesses by collecting the initial information to introduce a full risk-based approach immediately—we do not think that it can be done immediately—or to introduce a scheme factors pension protection levy only in the year following the initial period to collect the full amount required.

In addition, the pension protection levies immediately following the initial levy operate in respect of financial years. Providing for the initial levy to end midway through a financial year, as implied under amendment No. 358, would have implications on the setting of future pension protection levies. That is because, before the start of each financial year, the PPF board must estimate the amount that it will raise from the pension protection levy or levies. The Secretary of State must also determine the levy ceiling prior to the start of the financial year.

I must reiterate our commitment to getting the PPF up and running and having a pension protection levy that is based mainly on risk as soon as we possibly can. As we may discuss when we come to other amendments and as members of the Committee may know, although the risk element starts at the beginning of the second year of the PPF, it develops over several years because of the triennial cycle of scheme valuations. If some schemes consider that they want to bring forward their three-yearly valuation because it might benefit them in terms of a risk-based element amount, they can do so. However, we do not want to make that an additional burden on schemes.

As for an end date, we are talking about a period in which a full risk-based element for every scheme

probably would not come in for three or four years. The hon. Member for Eastbourne grimaces from a sedentary position—if it is possible to do that. I have discovered that it is possible. I repeat that, if a scheme chose to bring forward the three-yearly valuation, presumably to benefit from a lower risk base, it could do so. However, I think that we would be thwarted—also by the hon. Gentleman—if we forced that early valuation on all schemes. It is for that reason that we think that we are proceeding in a measured, proportionate way. I ask the hon. Gentleman to withdraw his amendment.

Steve Webb (Liberal Democrat, Northavon)

That was quite a revealing answer, because the Minister is saying that the provision will not come in until 2005, so the Government will have a year—and if they cannot get it right, they can have another year, which takes us to April 2007. Then, because we are on a three-yearly cycle of valuations, if someone had a valuation just the wrong side of April 2007, the next one would not be until 2010. The Minister seems to be saying that this could end up not looking like a proper insurance scheme until 2010. That is a long time to wait.

The Minister seemed to be saying, ''We'd quite like it to be done within a year, but we might not manage it. We want to keep this option.'' I can see why he has rejected the suggestion that there should be a valuation every six months. To change things halfway through a financial year would raise other issues. However, it was not such a bad idea to have a deadline and an incentive for the new organisations to pull their fingers out and get things moving.

The hon. Member for Eastbourne made the interesting suggestion, originally advanced by the Association of Consulting Actuaries, that there could be an interim, or first stage, risk-based levy based on some fairly simple information that was already available—perhaps something like the MFR criteria—so that even if every dot and comma of what the Government wanted for their all-singing, all-dancing risk-based premium was not available after 12 months, something could be put in place after that period to make the insurance scheme look like an insurance scheme. The Government does not need this get-out. We do not think that there should be an initial period at all, let alone one that could be extended for an extra 12 months, so rather than quibble around the edge by persisting, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Nigel Waterson (Conservative, Eastbourne)

I beg to move amendment No. 157, in

clause 136, page 84, leave out line 1.

James Cran (Conservative, Beverley and Holderness)

With this it will be convenient to discuss the following:

Amendment No. 158, in

clause 140, page 86, line 25, leave out subsection (2).

Amendment No. 159, in

clause 142, page 88, line 9, leave out subsection (2).

Nigel Waterson (Conservative, Eastbourne)

These amendments are a symptom of my paranoia about the Treasury, mention of which dips in and out of the Bill from time to time, particularly with things that really matter. Suddenly, regulations made under subsection (3), which I am attempting to remove through the amendment, have to be made

''with the approval of the Treasury.''

I do not know why that is so. I have made comments before about the Department for Work and Pensions being a wholly owned subsidiary of the Treasury, and they are still valid. Why should the Treasury be involved in regulations governing the detailed make-up of the initial levy, let alone any of the other levies?

My comments apply to the Treasury's involvement in the other levies that are being established, too. Why should it get involved in the initial levy, which is, after all, meant to be an interim measure? Perhaps it is not so interim, as we have just heard; it seems that it may last more like four years, which is the lifetime of a Parliament these days. The Treasury is not guaranteeing the scheme and it has no direct interest in whether the levy is set at the right level.

In any event, it is almost impossible to envisage the initial levy being set at the right level—but leaving that aside, what is the Treasury's involvement in this matter, unless the Government are, without admitting to it, sidling up to the American solution? Although there is no formality about this, everyone recognises that the Government would stand behind the PPF if it got into difficulties, especially in its early days. As they say in Private Eye, I think we should be told.

Malcolm Wicks (Labour, Croydon North)

The practicalities and timing around getting the PPF up and running, and protecting scheme members as soon as possible, mean that the initial levy period and a transitional period are needed to set in place the PPF. The amendments would mean that the initial levy—the pension protection levies during the transitional period—and the levy ceiling would all be set without any reference to the Treasury.

Because clauses 136, 140 and 142 all confer powers to raise a levy, it is vital that the relevant regulations are made with the approval of the Treasury. It is important that appropriate mechanisms are put in place to agree the parameters for setting the initial levy, the pension protection levies during the transitional period and the levy ceiling. In addition, it is important that those parameters are agreed by the Treasury, because of the financial implications that they will have on both pension schemes and businesses.

The amendments would mean that the initial levy, the pension protection levies during the transitional period and the levy ceiling could all be fixed without reference to the Treasury. That is not sensible. I am sure that hon. Members, and businesses that might be subject to the initial and pension protection levies, would agree that the requirement for the Treasury to be involved in the setting of parameters for any levy-raising power is prudent and appropriate, and would assist in managing the financial implications that any changes to the levy structure would undoubtedly have. I ask the hon. Gentleman to withdraw his amendment.

Nigel Waterson (Conservative, Eastbourne)

I will, of course, do so, but not with any great pleasure. The Minister is arguing by

assertion; he is not explaining to us why the Treasury should be involved. If he is worried about the impact on business, it would make more sense for the Secretary of State for Trade and Industry to be directly involved in approving regulations.

We are setting up a body to establish the right figure for the levy. Why should that be second-guessed by the Treasury? The figures are either right or wrong. If the Minister is saying that the Treasury will have a raft of different criteria—macro-economic ones, perhaps—for working out the levy, that is worrying. He is welcome to intervene if I am overselling what he is saying, but it is worrying because we are going to a lot of trouble to establish different levies through the machinery being set up in the Bill, but the Treasury could take a totally different view, based on completely different criteria, presumably outwith the criterion of whether the levy will provide sufficient income for the PPF to carry out its functions.

The Minister has not explained why the Treasury should be involved. I can see why the Department of Trade and Industry might be relevant, but his apparent unwillingness to leap to his feet—

Malcolm Wicks (Labour, Croydon North)

The hon. Gentleman is making extraordinarily heavy weather of a simple proposition. We are giving the board powers to raise a levy on pension schemes, and so, in a sense, on business. The Treasury is responsible for the management of economic affairs in Britain and it is sensible that it should be consulted about such levy powers. That is uncontroversial, and I know that if this were not in the Bill the hon. Gentleman would have proposed that we consult the Treasury.

Nigel Waterson (Conservative, Eastbourne)

The pre-recess camaraderie has evaporated already, and it is barely 10 o'clock; I am sorry to disappoint the Minister. Among my constant themes in Committee has been a distrust of the Treasury and great puzzlement as to why the Government want to keep everything at arm's length when it suits them, yet when it does not suit them, they still want to have their hands on the levers.

The Treasury may have its own reasons for saying that a lower or a higher levy must be charged. It is much more likely to say that the levy must be lower, for economic and/or political reasons. There is no point in consulting it if it will just rubber-stamp whatever is proposed, so presumably it has a say. Particularly with regard to the initial levy in the difficult early years—four years, by the sound of it—before the PPF is established, the Treasury will then be able to say, ''No, you can't charge that much; you'll have to reduce it.'' Where does that leave the PPF? Where does that leave the chairman and chief executive of that new organisation? The advert apparently describes the new chief executive as somebody with ''drive and vision''—so far, so good, but then that has to be ''coupled with political sensitivity''. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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

Steve Webb (Liberal Democrat, Northavon)

Having gone through a clause in detail, I would not normally seek a separate stand part debate, but I have tried to restrict my comments so far to the detailed amendments, because now I want to raise the general principle of having an initial period at all. The key point is that we are clearly setting up an insurance scheme. The Secretary of State said that a person could insure their holiday and their car, and asked why they should not be able to insure their pension.

The idea is that because an employer or a pension scheme is paying a levy into the pension protection fund, workers will know that if the company goes to the wall and the fund does not have enough money, their pension will to a greater or lesser extent be protected. So far, so good. The question then is on what basis such insurance premiums should be calculated.

I sensed some months ago that car insurance would be a helpful analogy for our deliberations. Car insurance providers make a distinction, as far as they are able, between good drivers and bad drivers. When a person has a crash or gets done for speeding, their premium goes up, because they are deemed more likely to make a claim on the fund. Eventually, the Government will get round to charging premiums on a similar basis for the pension protection scheme.

However, if we keep clause 136 in the Bill, there may be a period of up to two years during which they do not do that. The Government say, ''We need a bit of time to get the facts and figures together. Just give us a few years and we'll sort it out.'' However, this is not a free lunch; the two-year period will not be without costs—and the people bearing those costs will be the good guys.

We have talked a lot in the Committee about one of the problems of insurance markets—moral hazard, the effects of which the Government are worried about. However, from my undergraduate economics I remember that there is a second problem with insurance markets—adverse selection, and that will be the problem with the initial period. Good drivers who get charged unfairly for their premiums still have to have car insurance, but good companies that run good final salary schemes do not still have to run final salary schemes. If the premiums are perceived to be unfair and too high for the good guys who run properly funded schemes with good solvent employers, they may well say, ''This is unfair, and too much of a burden for us. We'll switch to a money purchase scheme, for which we'll pay no levy at all.''

The good guys, who present no risk to the fund, would pull out and the fund would be left with the bad guys—the underfunded schemes and the nearly insolvent employers. In turn, that would undermine the effectiveness of the fund and put up the amount of levy that needs to be raised. We would be taking out a potential source of revenue—from schemes that will never make a claim—and there would be a heavier and heavier concentration of schemes with a high chance of making a claim. We would end up undermining the entire basis of the system.

If the initial period were really short, schemes would live with that, but it could last for two years. Pension funds may already be on the cusp of deciding

whether to carry on with final salary schemes. We have already seen lots of good final salary schemes close to new members, and that probably means that for every one that has gone over the cliff, there is one that stopped just short.

In his previous remarks, the Minister was at pains to say that he did not want to close good final salary schemes. He did not want to overegg the pudding or put all the bells and whistles on the benefits, because that would put the levy up and put extra pressure on the schemes. However, having an initial period would guarantee that the good guys would pay more than their fair share. Surely he would accept that there is a risk? He may say that the initial period will probably not be two years, and that he hopes that it will be one year—but the Government are clearly worried that it might be more than one year, otherwise that provision would not be in the clause.

The Minister might also say that that would not be enough to make a difference. However, we have to remember the point that I made earlier: during that period, everyone will pay 50 per cent. on a per head basis, whereas when the risk-based levy is up and running, the good guys will probably not have to pay it at all, because they are not a risk. They would only pay the per head amount, which would be less. During the initial period they might pay two and a half times what would be the right amount for them. The per head amount might be, say, 20 per cent., but the payment would start off at 50 per cent. during the initial period, and the good guys might be paying double what they would if there had been a fair assessment of their risk.

We all accept that the scheme would be a burden on final salary schemes, but it is a burden that we are willing for them to take. We have tried to make savings elsewhere, but the burden will be particularly heavy in the first couple of years.

The Government must accept that for years they have watched final salary schemes close and membership of such schemes for new members decreasing year after year. There has been precious little that they could do about it, because they cannot force schemes to offer a particular pattern of benefits. However, the one thing that they can do is to get off the backs of good schemes. It is a classic case of Government putting an additional burden on the good guys, who are, surely, the very people on whom we want to put as light a burden as possible.

That is why we think that clause 136 should not exist. Yes, it puts a burden on the PPF to get things moving, but we have accepted that the risk-based premium could be calculated in a rough and ready way to get the thing going and the situation could be refined subsequently. That deals with the problem of information. I accept that one is not going to get chapter and verse on 150,000 schemes overnight, although already there is another year between now and the start of the PPF. Therefore, the Government want to potentially allow three years in which to get that information. Why? The basic information—a crude indicator of risk for those schemes—could be

obtained in the next 12 months, quite credibly. [Interruption.] I am sure that the Minister will make that point. It could be obtained to get the thing going and not risk killing the goose that lays the golden egg. The worry about the whole process is that at the end of it we might have the best insurance scheme in the world but nothing left to insure. Let us get off the backs of the good schemes and let us not have an initial period.

Nigel Waterson (Conservative, Eastbourne)

I endorse a great deal of what the hon. Gentleman has just said, but I want to add a few comments.

It suddenly started to dawn on me that the Government's problem is that they are looking at all this from the wrong end of the telescope. They are quite understandably keen to get the PPF set up, to get this legislation on the statute book and, as all Governments want, to say, ''That is a promise redeemed and it is one that we have made to future pensioners.'' They will clearly get their legislation. Whenever their lordships have spat the Bill out and all of the stages have been completed within this challenging time scale, a PPF will be set up. It will have a chief executive—on whatever salary it might be—a part-time chairman, and all of its people, some of whom will have transferred across from the Occupational Pensions Regulatory Authority. It is right that they should be getting on with that.

I can understand that Ministers must be more than a tad frustrated by the fact that this idea of theirs, this gleaming new concept, is being comprehensively overshadowed, as it was on Second Reading, by concerns about the lack of action over the people who have already lost pension rights and those who are continuing to lose them, as in the case, possibly, of the Mayflower company. Where Ministers have got it horribly wrong is that they should be giving priority to that. That is the problem that needs to be addressed now; those are the people who are worried and who come and see me or their excellent local Member of Parliament, such as the hon. Member for Cardiff, West, or, as we have heard from the Minister, they come and see him and his right hon. Friend the Secretary of State.

Why not decide to set up the structure, more as less as the Government intend, adopt our idea of a parallel interim protection scheme—one of our slick amendments that is not in order because of the money resolution—so that all the structures that are necessary to run these funds can be getting organised, and sort out the funding of the interim compensation in some of the ways that the Government are doing, albeit at a snail's pace, and by adopting the idea of unclaimed assets? They might wish to go down another route; the hon. Member for Cardiff, West said that he did not care where the money came from. That is a matter for them and they should start addressing that problem and the new ones as they arise.

The Government should recognise that, in reality, starting off with an initial levy is a bad idea. The more I think about it, the more I think that the Committee should divide on the issue of whether we should have an initial levy at all. It will get the PPF off to a bad start for two reasons, both of which were touched on

by the hon. Member for Northavon. It will create resentment and disincentives to the good schemes and the companies that are already beginning to think about whether they want a defined benefit scheme. For a significant period, perhaps up to four years, they will find themselves effectively subsidising the bad schemes. In addition—I make no apology for voicing this fear again—the funding may simply not be significant enough to cover the liabilities in the opening years of the PPF. There is some consensus that we need a PPF, although there seems to be an inability to decide how to describe the animal and whether it is insurance or pension, but I leave that on one side for a moment. Everyone wants it to work. If we inherit the scheme, we do not want to find that it is in a mess, heading for a big deficit and losing confidence among reputable companies, so it is not in our interest to see a badly constructed, underfunded, failing organisation in its early years. The Minister should be aware of that. We want it to work and our arguments and amendments were designed for that purpose.

Steve Webb (Liberal Democrat, Northavon)

The hon. Gentleman made a good point. Things could go pear-shaped in the first year because, as some of the doom-mongers have said, some of the schemes are just waiting for year one. Given that the initial levy could last for two years, the second year's levy, which would be a flat rate and not risk-based, could be quite high as a result of the need to make up the shortfall on the fund. That would be even more unfair to the good guys who have no risk-based element in the initial period.

Nigel Waterson (Conservative, Eastbourne)

The hon. Gentleman made a pertinent point.

Turning to the interim situation, I have an uneasy feeling, particularly as a general election begins to loom, that our position will be misrepresented. We want these matters tackled. The Government have become obsessed—I understand that the machinery of Government takes over if one is not careful—with this legislation. The real problem is out there already and is not being tackled by the Bill because it will not be retrospective. Various interim measures could be adopted and unclaimed assets is our preferred solution. The preferred solution of the hon. Member for Cardiff, West may be taxpayers' money, unspent money in the Department's budget and so on. There could be a realistic appraisal of the rightful claims of those who have already lost out with some boundaries on those claims, and a look at the idea of postponing annuity purchases as one way of keeping the show on the road until a more lasting solution is found. We have also punted the suggestion of the Association of Consulting Actuaries, which the Minister said that he would deal with when he winds up. Another suggestion is that the MFR basis, which is the only game in town at the moment, with an element of the risk-based approach in the interim period would be a practical solution.

We are not in the business of being negative about the problem; we are simply looking at ways of helping the Government out of the difficulty. The Bill contains

some good provisions, but almost all the press comment seems to focus on what is not in the Bill—there is no help for people who already have problems or are beginning to have problems. We should change the way in which we look at the matter. Yes, let us get the legislation sorted and improved, but let us also start to look at the immediate problem and interim measures. I have made some helpful suggestions as to how that can be done.

Malcolm Wicks (Labour, Croydon North)

I suppose that this has been a useful debate, but we are making a great meal of the matter. I repeat that we want the risk-based element to come in as soon as practicable from the start of the second year. To get the thing up and running, we need to start raising funds. The initial levy will be at 50 per cent. of the later levy. We are probably talking about £10 per member, so when the great arguments are made let us remember that we are talking about 10 quid in the initial period.

Could we introduce a risk-based element sooner? We do not think that we could and we do not think that the board could; if we had thought so, we would have proposed that. The answer does not lie in the minimum funding requirement, which has already been criticised, and is being abolished; if it were the answer, we would not be abolishing it. The MFR will make way for scheme-specific funding, which we discussed a few weeks ago. Trying to base the risk-based pension protection levy on an out-of-date MFR valuation, or establishing a system to update the MFRs to a relevant current date when the figures are simply not available, would be absurd. We cannot just turn to OPRA and ask for the MFRs because the figures are not there. On balance, allowing the PPF board time to introduce a more appropriate method of determining scheme funding will be beneficial and sensible in the long term.

Apart from talking about boy racers, the hon. Member for Northavon talked about the good guys—I imagine that that is a gender-neutral term these days—and said that they will lose out. If a well run company with a well run pension scheme thinks it will lose out because of a delay to the risk-based element, it can bring forward its three-yearly valuation cycle.

Steve Webb (Liberal Democrat, Northavon)

Not in the initial period.

Malcolm Wicks (Labour, Croydon North)

Not in the initial period, no. The company will have to take on the enormous burden of claiming £10 per member—for the Hansard record that should be followed by the word ''irony'' in brackets. Americans may not understand irony, and nor does the text of Hansard, so I should be careful.

Nigel Waterson (Conservative, Eastbourne)

You are making heavy weather of the irony.

Malcolm Wicks (Labour, Croydon North)

At least I have some.

The amount of £10 per member will not bring schemes crashing to the ground. It is a sensible way of raising some initial money. If, after the first year, people want to bring forward the triennial cycle, they can do so if they are confident, as many will be, that they will not have to pay any risk-based element. That disposes of the idea that somehow the MFR is the solution.

I would not want it to be recorded that somehow the risk-based element is not going to be up and running until 2010, as the hon. Member for Northavon was saying. That is not right. The requirement for a valuation on PPF level of benefits will be in place by 2005. The three-yearly valuation cycle takes us to 2008, so the full risk-based levy could be introduced for all schemes at the end of the process by 2009—[Interruption.] Well, I will say it a third time: if schemes want to bring forward the three-yearly valuation, they can do so. That is why there is a transitional period enabling the board to roll out the risk-based approach. We think that that is sensible. The board could require it to be rolled out more quickly if it deems it appropriate. However, we should not set up an arm's length body to second-guess in Committee every detail of what the PPF's approach may or may not be a year or so into its work. That is not sensible.

Steve Webb (Liberal Democrat, Northavon)

There is a precedent—I think in the case of child support—for this Department taking powers to spend public money prior to an Act coming into force in order to get things moving so that the body is up and running on the day it begins. Have the Government considered doing the same for the PPF? If the Government use powers to start spending public money on the PPF to get it going, say, tomorrow, they would have another year, and then perhaps we would not need an initial period.

Malcolm Wicks (Labour, Croydon North)

As the hon. Gentleman reminds us, we have powers to spend limited amounts of money after Second Reading, which is why we are advertising the two key posts. We are preparing hard for the establishment of the PPF in all sorts of ways. Nevertheless, when the Bill receives Royal Assent there will be a limited period before we set the whole thing up. It is our judgment that it would not be possible or practicable to do all the work to get the risk-based element up and running in April 2005.

We understand that there might be an element of injustice in asking everyone to pay the same flat rate, so we are setting that at a modest level. It is only 50 per cent. of what the average levy will be in the second and subsequent years—approximately £10 per member. We think that that is fair and proportionate.

Question put, That the clause stand part of the Bill:—

The Committee divided: Ayes 15, Noes 6.

Clause 137 - Pension protection levies

Steve Webb (Liberal Democrat, Northavon)

I beg to move amendment No. 520, in

clause 137, page 84, line 3, leave out 'one or'.

James Cran (Conservative, Beverley and Holderness)

With this it will be convenient to discuss the following:

Amendment No. 521, in

clause 137, page 84, line 35, leave out paragraph (a).

Amendment No. 522, in

clause 137, page 84, line 36, leave out 'levy or'.

Amendment No. 523, in

clause 137, page 84, line 39, leave out 'levy or'.

Amendment No. 524, in

clause 137, page 84, line 40, leave out 'levy or'.

Amendment No. 525, in

clause 137, page 85, line 8, leave out 'a'.

Amendment No. 526, in

clause 137, page 85, line 8, leave out 'levy or'.

Steve Webb (Liberal Democrat, Northavon)

Our discussion of this group of amendments can be brief. We will have a more substantive debate on the next group. This group addresses the components that will be in the levy after the initial period has passed. Not only should there be a risk-based element, which will happen in any case, but there should be a scheme-specific element immediately after the initial period. Schemes want certainty. They want to know where they stand with regard to the pension protection fund and the levy. They want to know the basis on which that will be calculated and how much they will have to pay. We have learned that under these proposals, schemes will not have certainty for many years. How long the initial period will last is not known; it could be one year, or it could be two.

As clause 137 stands, after up to two years the levy can be introduced, it can be risk-based—it can include certain sorts of risk but not others, which is the subject of the next group of amendments—and it can include scheme-specific characteristics, or they can be added at some point by the board. There will be a period when there could be one sort of levy and then another sort of levy; one bit of it would have to be in but another bit would not, and another bit might be amended in different ways. It could be constantly changing; the board has the power to muck about with the scheme every year. Schemes will get to the stage where they just want to know where they stand.

There could be a good case for having scheme-specific elements in the levy. Factors such as the earnings distribution of the work force covered, the mix of assets and liabilities in the scheme, and many of the things listed in subsection (4) may be relevant to the chances of the scheme making a claim on the fund, and to the size of the claim that it might make. It would be sensible to include such factors. Pension schemes want certainty about the levy. We are talking about at least two, if not three, years down the track, so when all those factors come in, it will be sensible to

deal with them together, so that schemes know where they stand. That is the point of this group of amendments.

Malcolm Wicks (Labour, Croydon North)

These amendments would require the PPF board to set both a scheme factors pension protection levy and a risk-based pension protection levy for each financial year following the initial period. The amendments would result in the board being unnecessarily constrained and unable to introduce the most appropriate levy rates and structures.

We consider both scheme factors and risk factors important and necessary for the calculation of a scheme's contribution to the PPF; I do not think that much divides us on that. The provisions in the Bill allow the board to set one or both of the pension protection levies, but emphasis is placed firmly on the use of risk factors. That is because the board must collect what it estimates to be at least 50 per cent. of the levies from the risk-based pension protection levy. The requirement for the board is set out in clause 139(3). Indeed, the board could decide to set a pension protection levy based purely on risk. However, if the amendment were made, the board could not do that. Amending the provision so that the board would ultimately be constrained in that way is both undesirable and unnecessary.

To require the board to set both pension protection levies would also cut across other provisions in the Bill. For example, the board can decide to set only a scheme factors pension protection levy if the amount that it expects to raise in a year is less than 10 per cent. of the levy ceiling for that year. That would apply only in very favourable circumstances, of course. For example, our regulatory impact assessment estimates that the annual amount that might be raised by the levies in any one year is £300 million. That would mean that the levy ceiling would be set at £600 million. This is hypothetical, but if the board needed to raise less than 10 per cent. of that amount in any one year—£60 million—it would have the freedom to do that on a scheme factors basis only. The framework that we are suggesting will ensure that the board does not have to put in place a complicated risk structure when it aims to collect a relatively small amount.

We feel that we have found a balance that allows the board the necessary and appropriate levels of flexibility while recognising the importance of risk-based factors in setting pension protection levies. It is important that we provide the board with the ability to determine the most effective levy rates and structures for both the PPF and businesses in future. I therefore urge the hon. Gentleman to withdraw his amendment.

Steve Webb (Liberal Democrat, Northavon)

I am slightly puzzled by what the Minister says. There is a good case for a scheme-specific levy. To give just one example, part of the levy is an amount per scheme member, and that amount does not vary according to whether someone is a full-timer or a part-timer. Particular sorts of pension schemes—those of retailers, say—might have lots of part-time members. Therefore the levy, as a percentage of the payroll, would be much more significant, even though the members were not getting any more

protection out of the scheme, because it would be a smaller pension scheme. If we bring in a scheme-specific element to the levy, we deal with that sort of problem. That is why I think that a scheme-specific element would be good.

However, the thrust of my remarks has been that we want the risk-based element to be as big as possible. If the Minister is right to say that the amendments would make it more difficult for the risk-based element to be as high as we would like—and I am prepared to accept that—I suppose that is an unwarranted by-product of the amendment. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Nigel Waterson (Conservative, Eastbourne)

I beg to move amendment No. 215, in

clause 137, page 84, line 14, after 'liabilities', insert—

'(ia) the likelihood of an insolvency event occurring in relation to the employer in relation to a scheme,'

.

James Cran (Conservative, Beverley and Holderness)

With this it will be convenient to discuss amendment No. 216, in

clause 137, page 84, line 21, leave out paragraph (a).

Nigel Waterson (Conservative, Eastbourne)

To some extent, these amendments mirror the previous group. They are intended to tease out the final shape of the risk-based levy. It makes sense to spell out as clearly as possible in the Bill how that levy should be made up, and the factors that should be part of it. Clearly, the details are for the future. However, there is a certain unease in the industry, and in industry generally, about the apparent lack of detail.

I have to confess that amendments Nos. 215 and 216 were inspired by the CBI. It says that it is concerned about continuing uncertainty as regards the fundamental structure of the levy and about whether insolvency risk will be included as a risk variable. Although it believes that insolvency risk should be incorporated, it recognises that there are practical issues around measuring insolvency risk and assessing asset allocation. It feels that the Government should be clear about those factors being part of the calculation of the levy. The CBI has strong concerns that those key decisions should not be left to a newly appointed pension protection fund board. The amendments would therefore ensure that the Government would take the decision about whether the risk-based elements of the levy will take account of insolvency risk and investment strategy, as well as underfunding.

In fairness, the fact sheets prepared by the Government on this subject are fairly reassuring. They make the point about drawing on the United States experience. I will return to that. The fact sheets refer to

''ensuring that risk-based factors will be the major component of our levy''.

That mirrors words that the Minister used. If by that the Government mean 50 per cent. or more, I suppose risk-based elements would be just about the major factor, but we will deal with that in relation to a different amendment. The fact sheets go on to say:

''The Bill specifies a number of factors that can be considered in assessing risk—scheme underfunding, credit-rating and investment strategy—and also leaves flexibility for the PPF board to add more.''

Having set out in the fact sheets the obvious bases for assessing risk, what does the Minister think are the additional bases that the PPF board might consider? What have Ministers got in mind?

The Government's fact sheet refers to the US experience. This is one issue on which it is quite instructive to consider the way in which the Pension Benefit Guaranty Corporation has been set up and developed. I just looked up my notes of a very friendly meeting I had with Mr. Steve Kandarian, the former executive director of the PBGC, when I was in Washington. Incidentally, I notice that he is giving a lecture at Imperial college on the Thursday of the week when we come back after the Easter recess. If the Whips are prepared to co-operate—neither of them is in the Room, which is helpful—we could ensure that our Thursday sitting finished in time for us to go on a bus, paid for by the Department, to listen to Mr. Kandarian. I certainly intend to attend. It will be extremely useful.

Mr. Kandarian made a variety of points, some of which I have covered, on different aspects of the Bill, but he was adamant that one of the main problems that the corporation faced—one of the reasons why it had a massive deficit and was under all that pressure—was that its premium, which is the equivalent of the levy, takes no account of creditworthiness or the risk attached to particular pension scheme investments. There is still a basic levy of $19, with an element for underfunding. Unlike the arrangements under the Bill, the US has no formal cap on the premium, but as we have heard, there is political influence in the direction of its not being set too high.

It is also instructive to consider the evidence given by Mr. Kandarian to a special committee of the US Senate. I do not know whether the Minister gave evidence to that committee. I have not yet been able to identify it on the internet, but perhaps I will. Mr. Kandarian said:

''When underfunded pension plans terminate, three groups can lose: participants can see their benefits reduced''—

clearly—

''other businesses can see their PBGC premiums go up, and ultimately Congress could call on the taxpayers to support the PBGC.''

It is important in everything that we are doing to remember those three potential payers in any such situation. He says later:

''When the PBGC takes over underfunded pension plans, financially healthy companies with better-funded pension plans end up making transfers to financially weak companies with chronically underfunded pension plans. If these transfers from strong to weak plans become too large, then over time strong companies with well-funded plans may elect to leave the system.''

That is an extremely perceptive comment, which we need to have in mind. It would be the ultimate irony—because irony seems to be the flavour of the morning—if we went to all this trouble to pass the Bill and it encouraged more employers to get out of that kind

of pension scheme. Mr. Kandarian mentioned the $11.3 billion loss in the last accounts, which is

''more than five times larger than any previous one-year loss in the agency's 29-year history.''

He also said:

''The title of this hearing asks whether America's pensions will be the next savings and loan crisis.''

There is a lot of interesting background, with which I will not weary the Committee, about the make-up of the claims in the PBGC. It is interesting that currently in this country the typical failed scheme is that of a smallish engineering company. We have not, thank goodness, seen any massive failures so far, although one occasionally hears of potential failures. However, the PBGC, as a much more mature scheme, is dominated in terms of money by airlines and steel companies. There has been an enormous peak and surge in claims in the past year or two. Mr. Kandarian says:

''At current premium levels, it would take about 12 years of premiums to cover just the claims from 2002.''

He continues:

''The premium—

the American version of the levy—

''has two parts: a flat-rate charge of $19 per participant and a variable-rate premium of 0.9 percent. of the dollar amount of a plan's underfunding, measured on a 'current liability' basis. As long as plans are at the 'full-funding limit', which generally means 90 percent. of current liability, they do not have to pay the variable-rate premium. That is why Bethlehem Steel, the largest claim in the history of the PBGC, paid no variable-rate premium for five years prior to termination, despite being drastically underfunded on a termination basis.''

I commend Mr. Kandarian's evidence, and his lecture in a couple of week's time, to the Committee. His evidence underlines the absolute need, from day one, for all the reasons that we have discussed—although we have had that debate and vote—for a proper, really sophisticated risk-based levy. It also underlines the real dangers that are faced if all the risks are not taken into account and made clear in the Bill. We have to look not just at the rather narrow version in the PBGC. The Americans bitterly regret that now, and there is a consensus that when the elections are over they will have to revisit it in legislation at some point, and they are only looking at the underfunding in a particular scheme. We will have to consider the creditworthiness of a company and the risk profile of the investments that a scheme chooses to make. Then we get into the moral hazard argument, on which I have a lot to say, but under a different group of amendments. These are important risk elements that need to be written and set in concrete; there should be a minimum set of risk elements in approaching the levy.

I should be interested to hear from the Minister why we cannot at least specify minimum types of risk in the legislation and what other risks he had in mind when he drafted the fact sheet.

Steve Webb (Liberal Democrat, Northavon)

Mr. Cran, you will have observed that this group of amendments has the names of both principal Opposition parties appended to it. We, too, think that, when the risk-based levy comes in, the risks that it should take account of include not only the

underfunding of the scheme, but the risk of the employer going out of business and prompting a call on the fund. It is what a fellow Liberal Democrat, Basil Fawlty, would call a statement of the blindingly obvious, that claims on the fund are only made if the company is likely to go out of business. An underfunded scheme may never go anywhere near the pension protection fund, because underfunding does not of itself make a call on the fund. It is only the event of insolvency that prompts a call on the fund. It would be a topsy-turvy world if the ''risk-based premium'' did not include the risk of making a claim on the fund because of insolvency, which is what triggers a claim on the fund.

That is not an argument for not including an underfunding risk element as well, as that is the other side of the coin. However, it seems odd to give the board the power to introduce a risk-based premium that does not take account of the insolvency risk.

The effect of the amendments would be to move the insolvency risk into the part of the clause that details the things that the board must include, rather than those that it may include. Why is it where it is? I think that the Government will say that they might have trouble measuring insolvency risk. Clearly that is a key issue. A premium can only be assessed in terms of risk if there is some way of assessing the risk. If insolvency risk were unmeasurable, sticking it in this part of the Bill would not be much use.

However, it is important to make a distinction between the range of occupational pension schemes that we are talking about. While a lot of them may be for small companies where there is no credit rating, the big schemes, which will be putting in most of the money, will be operated by the type of companies who do have credit ratings. In other words, it would be a bogus argument against the amendment to say that because we cannot do an insolvency risk assessment for 150,000 companies we cannot do it at all. There could be an assessment of the insolvency risk of the big players, while the premium on the small players would not include an insolvency risk element if that was not considered measurable. I can see no argument against that. If we can get it right for the big players who are contributing the bulk of the premiums, ignoring the insolvency risk for the small players, for whom it may be difficult to measure anyway, may be something that we have to live with. That would still make things fairer.

One might think that fairness is an odd concept here, but the danger of an ''unfair'' levy is that it would drive the good guys out. To give one example, consider a company such as British Telecom. At one point last year it had, on the FRS 17 valuation, a scheme deficit of £6 billion. Nine months later the deficit was down to £3 billion. That is a company that is doing a great deal about its deficit. Nobody thought that BT would go bankrupt or make a claim on the PPF, yet if we do not pass the amendment its premium could relate wholly to the huge gap in the fund. So it could have faced a huge premium even though there was practically no chance that it would make a claim

on the fund. That seems to be totally irrational. I am aware that BT has closed its final salary scheme to new members, probably for a variety of reasons.

It is bad enough to have a flat-rate levy for two years, but when the levy becomes risk-based, if it does not reflect the true risk of companies making a call on the fund, such companies might well give up the ghost. The Minister said, ''Oh well, we are only talking about a tenner'', but for a big scheme, for which it may be possible to judge the insolvency risk, that is a lot of tenners if there is a negligible insolvency risk. We could be talking about millions of pounds. To expect such companies to pay millions of pounds in premiums when they pose no risk to the fund seems not merely unfair, but to have the potential to kill off the remaining final salary schemes for new entrants to large employers.

I wholeheartedly support the amendments. I agree that insolvency risk cannot be assessed for every company, but there is enough information to assess it for the big players, thereby creating fairness and avoiding counter-productive effects on the premium. Insolvency risk should be included.

Malcolm Wicks (Labour, Croydon North)

The hon. Member for Eastbourne is in burdens-on-business mode today, whereas on Tuesday he was more into saying that the PPF was not generous enough and that it should pay out more benefits—with, presumably, burdens on business. I am not sure that that is a consistent approach. However, to be generous, perhaps it is perfectly reasonable when dealing with probing amendments to be, if not all over the place, of two minds, to put it more delicately. Nevertheless, if we all go to the lecture on a bus, it should be a bendy bus for the hon. Gentleman's convenience.

Clause 137 sets out provisions for the pension protection levies, including the factors that the board can take account of in calculating them. The amendments would result in the board being required to take into account the likelihood of an insolvency event when calculating the risk-based part of the levies. The Government recognise the importance of a variety of risk factors in determining the likelihood of a scheme requiring PPF assistance, but we consider the funding of the scheme to be the most critical measure. We have therefore made it a requirement for the board to take account of such funding when it sets the levies.

The other risk factors that the board may take into account when setting the levies, such as insolvency risk or investment risk, are also important, which is why they are included in the Bill. We fully expect the board to use all the information available to it to make informed decisions about future pension protection levy structures.

Officials from my Department have been meeting with representatives from industry to discuss how insolvency risk might be taken into account when setting the levies. They will continue to work with the industry during the next few months to establish the information and processes currently available and to provide the board with various insolvency risk options. That will help to reduce the amount of time

the board spends establishing a measure of this nature and help it to hit the ground running. I hope that that answers the point raised by the hon. Member for Northavon. Although I cannot concede that it will be possible to include the risk element from day one—in April next year, I hope—we are doing a great deal of preparatory work.

Establishing the likelihood of an insolvency event is not as straightforward as it might seem, as there is no consistent, across-the-board method for doing so. For example, not all employers who sponsor a pension scheme have credit ratings. As such, it would be difficult to justify placing a requirement on the board to take that factor into account. Credit ratings are just one part of the answer to the hon. Gentleman's question about why the information is not available at present.

As I said, officials in my Department are working with industry to establish the options that might be available on insolvency risk. The board needs flexibility and independence when conducting its business. It must be able to determine a levy structure that best suits itself and sponsoring employers, within the framework set out in the Bill. The amendment would result in the board's being restricted in the way in which it sets future levy rates and structures. It would also require the board to take account of a risk factor for which a comprehensive measure is not yet available.

On other points, it would not be appropriate for me to name companies, but let us always remember that history, although not littered with examples, does offer several cases in this country and in the United States. Bethlehem Steel, which the hon. Gentleman mentioned, is a major example. There was a time when people said of that company, which I believe built much of the US navy in the second world war, that if it ever went out of business, the USA would. I shall not mention any British examples, but we all know of companies that not so long ago were guaranteed to last forever and did not. Sadly, that will be the case for some of the great names in British business during the next 10, 20 or 30 years. Hopefully, it will not be true of too many.

Steve Webb (Liberal Democrat, Northavon)

That is clearly true, but a company does not turn overnight from being rock solid to being a basket case. As its condition becomes more serious and its insolvency risk increases, so should its premium. That is only right and proper. When a company looks rock solid, its premiums should be low, and when it is moving towards being a basket case, the risk of making a claim on the fund goes up, so that should be part of the process. The provision would not be in the Bill if the Minister did not think that that was true. The argument he has just made is not an argument against putting the insolvency risk into the levy, is it?

Malcolm Wicks (Labour, Croydon North)

Insolvency risk is one factor that the board will take into account.

Steve Webb (Liberal Democrat, Northavon)

Or may not.

Malcolm Wicks (Labour, Croydon North)

It is on the face of the Bill. We are discussing it with colleagues in industry so that we can present options to the board, and it can then make early decisions on the matter.

There is only one other point I would like to emphasise. The hon. Member for Eastbourne was helpful in reminding us of the American experience. We are learning lessons from the PBGC. I hope that Mr. Kandarian will have time to do other things occasionally before he takes up a business appointment. He has certainly been very generous with his time to myself, my colleagues in the Department and the hon. Gentleman, and no doubt to others. His lecture will be interesting and we should think about whether we can all attend that lecture, as long as no Opposition Members say, ''Will the hon. Gentleman give way?'' because that would be impolite to a visiting American.

We have learned lessons, and one key lesson is that we have to give the board flexibility. We are setting it at arm's length as a non-departmental public body; that is right and proper. There are constraints in the Bill—the Secretary of State has a role—but the board can raise the levy up to a ceiling. It has that flexibility. In the United States, the PBGC has to go cap-in-hand to Congress. Therefore, the levy has not been raised for a good number of years.

The second lesson is that the risk-based element has to be a substantial part of the levy—certainly more than 50 per cent. My guess would be that the board could determine that it would be much higher than that. I think that I am right in saying that the risk element for the PBGC in the United States is about 25 per cent. There is quite a measure of difference. Those are lessons we have learned by comparing and contrasting what we feel we need in the United Kingdom with the experience in the United States.

Nigel Waterson (Conservative, Eastbourne)

I am still fairly wedded to the amendment. When the Minister was making his ironic comments at the beginning of his speech about burdens on business he got the whole point precisely wrong. It is because the good, well run businesses are so keen that the various elements of risk are carefully orchestrated and included from as near to the start as possible. They are the ones that will lose out if that does not happen. It is a question of reducing burdens on business, particularly good, well run businesses.

I am pleased with what the Minister says about the preparatory work that is going on. This is clearly one of a number of areas where it is important to carry business along with what is happening; long may those steps continue.

I have a slight concern that an element of self-fulfilling prophecy may be involved. The companies and schemes that are experiencing the most potential difficulties will end up paying a higher and higher levy, if the system works. That will add to their problems. One of the things that Mr. Kandarian was quite proud of when I saw him in Washington was the fact that he had started publishing a list of the 10 most underfunded schemes. That sends a real message to the markets about those companies. It is a bit of a nuclear option because it may shame companies if they

have the money—or access to it—to top up their pension funds, but for some it may be the coup de grace that drives them out of business altogether. Therefore it may not be an example to follow, but we will all get on that theoretical bus, bendy or otherwise, in a couple of Thursdays and go to hear what he has to say. Until then, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Nigel Waterson (Conservative, Eastbourne)

I beg to move amendment No. 359, in

clause 137, page 84, line 32, at end insert

'save that this levy shall not exceed the equivalent of £5 per member.'.

This is a fairly simple amendment. It is inspired by the NAPF—[Interruption.] Any mention of the NAPF sends the Parliamentary Private Secretary into paroxysms of laughter. The NAPF thinks that there is a lot to be said for setting the initial flat-rate levy at a low and specific rate—it suggests £5 per member—in order for it to benefit schemes with relatively large numbers of low-paid members. There is some merit in the amendment, and I should be interested to hear from the Minister why it is completely wrong-headed and impractical.

Malcolm Wicks (Labour, Croydon North)

Briefly, we have made calculations based on assumptions about what the PPF will need in its early years. In its first full year after the interim year, it will need about £300 million. We have said that we think that the board can cope financially with half that amount in the first year, and the arithmetic suggests £10 per member. Without that £10 per member, the board would not get off to the financial start that it needs. For that simple reason, we cannot agree with the NAPF's—sorry, the hon. Gentleman's—suggestion of a cheaper £5 option.

Nigel Waterson (Conservative, Eastbourne)

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Malcolm Wicks (Labour, Croydon North)

I beg to move amendment No. 498, in

clause 137, page 85, line 3, leave out 'is' and insert 'would be'.

James Cran (Conservative, Beverley and Holderness)

With this it will be convenient to discuss Government amendment No. 499.

Malcolm Wicks (Labour, Croydon North)

I ask the Committee to support the amendments because they are Government amendments, which we actually drafted one evening ourselves, as I recall.

The amendments are technical drafting amendments to clause 137, which provide for the imposition of levies relating to eligible pension schemes. The pension levies will comprise two parts: one levy will be based on scheme factors and one levy will be based on risk factors.

Subsection (4) provides that the board may take account of the total annual amount of pensionable earnings of active members of a scheme in calculating the scheme factors levy. That will enable the levy to reflect the size of scheme liabilities and therefore the

level of compensation that might be payable in respect of a scheme. For example, should the board choose to implement it, the provision would enable the levy structure to be adapted to reflect the differing liabilities of schemes with predominantly lower-paid workers.

The amendments refine the drafting of the definition of pensionable earnings used in clause 137 to ensure that it is workable in practice. It is therefore technical, and I urge hon. Members to accept the amendments.

Amendment agreed to.

Amendment made: No. 499, in

clause 137, page 85, line 5, after 'Schedule 7)' insert

'if he ceased to be an active member at the time by reference to which the factor within subsection (4)(b) is to be assessed'.—[Malcolm Wicks.]

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

Adam Price (Plaid Cymru, Carmarthen East and Dinefwr)

I would like the Minister to clarify—at least in my mind if not in the minds of other Committee members—how the provisions of the clause relate to public service pension schemes. There has been some confusion about how the Bill relates to those schemes because my first assumption and that of many other members of the Committee was that the Bill referred exclusively to private sector defined benefit and hybrid schemes. However, it has emerged during our proceedings that it is relevant to public service pension schemes. In an earlier sitting, I asked mischievously whether the pension fund of the Financial Services Authority would come under the aegis of the new pensions regulator and the hon. Member for Northavon raised the wider issue of other public service pension schemes. The Minister was good enough to write to me on 24 March to confirm that the FSA, as another pensions regulator, will be regulated by the new pensions regulator. As it is an independent body, its public service pension scheme and its occupational pension scheme will be affected by the clause. It will have to pay the levy. Can the hon. Gentleman confirm whether that is the case?

There has been some confusion about the public service pension schemes that are not covered by Crown guarantee. I am talking about funded schemes as opposed to the large majority of public service pensions, which are unfunded. The civil service pension scheme and most of the NHS pension schemes are paid from the Government's current income rather than out of a separate pension fund. That is not true of all public service pension schemes.

Last week, the hon. Member for Tatton (Mr. Osborne) raised the issue of pension schemes of non-departmental public bodies and asked to what extent they would be covered by the PPF. The Minister cited as examples the Arts Council of England, the British Tourist Authority and the Medical Research Council, and said that they would have to pay the levy. There is certainly confusion about the extent to which public service pension schemes, which are funded, will have to pay the levy under the terms of the clause.

George Osborne (Conservative, Tatton)

When I questioned the Minister about the matter, he did not seem clear about how much it would cost the taxpayer. He suggested in jest that the Arts Council of England could fund the levy by organising a rock opera or a rock ballet, but he could not identify the burden of levy on the taxpayer as well as on public services. I have yet to hear a good answer from the hon. Gentleman about the sums involved.

Adam Price (Plaid Cymru, Carmarthen East and Dinefwr)

Yes, indeed. Perhaps the Minister will do the hon. Member for Tatton the same courtesy and write to him about the costs to the taxpayer of the levy as well as to the Arts Council of England or punters of the ballet or rock extravaganza that he has in mind.

The Minister went on to say that, because the number of organisations involved and their staff members was relatively small, we were not talking about a large sum. Will he clarify whether, for example, the local government pension scheme would come under the terms of the PPF levy? Clearly, that is a large pension scheme and is essentially funded by local funds. It is backed by individual local funds in England and Wales, and there are separate provisions for Scottish local authorities. At the latest triennial valuation, the local government pension scheme in England and Wales had a deficit of £6.2 billion. We need to know whether that pension scheme will come under the terms of clause.

Clause 98 refers to eligibility. It simply states that an eligible scheme is

''an occupational pension scheme which—

(a) is not a money purchase scheme, and

(b) is not a prescribed scheme''.

Clause 241, which is about definitions, states that an occupational pension scheme

''has the meaning given by section 1 of the Pension Schemes Act 1993.''

That Act makes a distinction between public service pension schemes and occupational pension schemes thus: it states that a public service pension scheme is a subset of an occupational pension scheme.

My reading of the Bill as drafted is that schemes such as the university superannuation scheme and the local government pension scheme would have to pay the levy. Perhaps the Minister can point out where in the Bill those funded public service pension schemes are exempted from the responsibility and obligation of paying the levy.

On those public service pension schemes that the Minister has already admitted will have to pay for the levy, will he clarify the issue of insolvency? Many universities have substantial pension fund deficits for non-academic staff. For example, King's College London has a shortfall of £3.2 million in its pension fund, Bristol university has a pension fund deficit of £4 million and Nottingham and Sheffield have similar problems.

How will the risk-based levy be calculated for those public institutions? In the interests of equity and fairness, it would not be acceptable for there to be different standards for assessing the risk-based levy for

public institutions and for private sector bodies. Will there be another test—not for insolvency, but some other sort of test for public institutions? I particularly press the Minister for clarification on where in the Bill funded schemes in the public sector are exempted from paying the levy. I cannot find that at all.

Malcolm Wicks (Labour, Croydon North)

A little while ago, I promised to write to the hon. Gentleman and Committee members about this issue. I have not yet done so, and I apologise for that and for any confusion that that has caused. I will write as soon as possible. In our desire to cover some of the specific schemes mentioned, we are checking one or two facts, and that might be the reason for the delay. I apologise to the hon. Gentleman and to the Committee.

Essentially, the matter is clear: by definition, eligible schemes are those that could potentially benefit from PPF compensation. We are therefore talking about final salary or defined benefit schemes. Perhaps I should not speculate, but I have a feeling that there has been a movement towards defined contribution schemes in the university sector, so universities may not be included. However, we will clarify the issue in the much-promised letter.

The great bulk of those whom we understand to be public service employees will not be subject to the PPF because the Government stand behind them. In that sense—as a generalisation, but only as such—there is a divide between the public and private sectors. However, there are many exceptions. The only public sector schemes that would be covered by the PPF—I said that I was generalising just now—are those without a Crown guarantee. In other words, they could potentially need to call on the services of the PPF. Other defined benefit schemes not funded by a Crown guarantee are not covered.

The hon. Gentleman asked me where in the Bill it states who is in and who is out. That is not stated in the Bill; the exemptions will be in regulations under clause 98(1)(b). I promise that the hon. Gentleman will get a letter from me, but some things will be clarified in regulations.

George Osborne (Conservative, Tatton)

If it is not too difficult a task, will the Minister set out in the notes that he provides to the Committee all the institutions or non-executive agencies that are not covered by a Crown guarantee so that we can see the kinds of bodies that this levy will be imposed upon? Will he also give an estimate of the cost of the levy to the Exchequer or the individual agencies?

Malcolm Wicks (Labour, Croydon North)

Let me just promise at this stage to do my best to give as much detail as possible in the letter. I will do my utmost to ensure that one or two of the institutions that have been mentioned are covered in it. I do not know whether there are technical reasons why providing a full list is difficult, but I will try to find out.

In an earlier debate, I waxed lyrical about ways in which the Arts Council, which will be subject to the PPF, might raise funds by staging an extravagant concert. I hope that I will be forgiven if at certain times in this Committee's proceedings I think about life in the terms of a Department for Culture, Media and

Sport Minister who goes to the ballet, watches important football matches and so on.

Question put and agreed to.

Clause 137, as amended, ordered to stand part of the Bill.

Clause 138 - Supplementary provisions about pension protection levies

Nigel Waterson (Conservative, Eastbourne)

I beg to move amendment No. 221, in

clause 138, page 85, line 26, at end insert—

'(3) The Secretary of State must approve any determination by the Board under section 137(5) in respect of a financial year.'.

I apologise for not moving amendment No. 222. It did not make much sense when I read it in the cold light of day.

On the other hand, amendment No. 221 is eminently sensible. Despite my visceral distrust of the Treasury sticking its oar into a number of crucial areas in the Bill, there is merit in including in these provisions an approval by the Secretary of State in respect of a particular financial year under the levies set out in clause 137(5). Given that he pops up in other parts of the Bill I am surprised that he has not been included here, and I would be grateful if the Minister explained that.

Malcolm Wicks (Labour, Croydon North)

I cannot account for the hon. Gentleman's prejudices against the Treasury. He should discuss them with a senior colleague to see what Oliver's twist is on that.

This clause sets out the supplementary provisions relating to the pension protection levies. The

amendment provides that the Secretary of State must approve any determination made by the PPF board in relation to the pension protection levies as contained in clause 137(5). That would result in the PPF board not having the appropriate freedom and flexibility to set future pension protection levy rates and structures. It would also result in the Government being seen as providing a financial guarantee for the liabilities relating to the PPF. Our aim in setting up the PPF as a non-departmental public body is to strike the appropriate balance between giving the PPF board the freedom it needs to operate independently and applying the appropriate checks and constraints. To provide that the Secretary of State should approve any determination the board makes in relation to the levy cuts across that intention.

We have taken on board the lessons learned from the United States where Congress is responsible for setting the rate of the levy. That has posed political problems for the Pension Benefit Guaranty Corporation in raising the levy sufficiently to meet its liabilities. That has resulted in there being no increase in the levy rate since 1991, and in the PBGC now experiencing severe financial difficulties. To ensure that the PPF is managed prudently and appropriately, we have set in place the necessary constraints and parameters within which the board may operate.

Nigel Waterson (Conservative, Eastbourne)

On the basis of that explanation, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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 Two o'clock.

Standing Committee B

Pensions Bill

James Cran (Conservative, Beverley and Holderness)

It may be for the convenience of the Committee if I explain about the tabling of amendments between now and when we return to Committee on Tuesday 20 April. Any amendments or new clauses tabled today will appear in print on blue pages tomorrow. Any amendments or new clauses received by the Public Bill Office up to and including Thursday 15 April will be printed and appear on blue pages on Friday 16 April. Any amendments or new clauses tabled on Friday 16 April will be printed and appear on blue pages on Monday 19 April. Anything that has appeared in print on or before Monday 19 April may be included in the Chairman's selection of amendments for debate on Tuesday 20 April.

Clause 138 ordered to stand part of the Bill.

Clause 139 - Amounts to be raised by the pension

Nigel Waterson (Conservative, Eastbourne)

I beg to move amendment No. 360, in

clause 139, page 85, line 36, leave out '50%' and insert '75%'.

Thank you for clarifying matters, Mr. Cran, although it has risked ruining my Easter recess. There is nothing more encouraging—or, rather, enervating—than to be involved in Committee matters when everyone else has been allowed to go home.

Under clause 139, as we can tell at a glance from subsection (3), the levy must be based on at least 50 per cent. of the amount raised by the risk-based pension protection levy. Judging from the Minister's previous comments, I am knocking or pushing at an open door—whichever is the right expression—because he has made a great deal of saying that the Government's policy is that most of the levy should be calculated on a risk base.

I hope that it will not cause pain to Labour Members to know that the amendment is supported by the National Association of Pension Funds, which has a slight genuine interest in the Bill. I am sure that some hon. Members who are new to occupational pensions, as opposed to the public benefit system, may not be aware of the association's crucial role in such matters. It is comforting to know that it is alongside us in such amendments.

Malcolm Wicks (Labour, Croydon North)

I think that you challenged the association a bit.

Nigel Waterson (Conservative, Eastbourne)

I am not saying that the NAPF gets everything right nor am I saying that the Minister gets everything wrong. Obviously, there must be a bit of give and take. The amendment would simply replace

50 per cent. with 75 per cent. We want to make it sure that the overwhelming majority of the levy is risk based. As we said, there are various reasons for such action. Such a measure is only fair on well run businesses and schemes. It would also help to tackle the problem of moral hazard. When I first became familiar with such matters, I was not sure what that meant, but I now have a more clear understanding of it and it is much less interesting than I first thought.

There is an incentive to encourage employers to fund their schemes to the best of their ability if the risk-based element is as high as possible—at least 75 per cent. or preferably 90 per cent. plus, if that can be arranged. I shall cite a couple of examples of reputable companies, which have similar worries to ours and those of the NAPF. British Telecom has already been mentioned, and its defined benefit pension scheme is the largest in the United Kingdom. Its assets are worth £26 billion. It has 180,000 pensioners, 100,000 deferred pensioners and 87,000 active members. As the Committee would expect, it is a well run and responsibly funded scheme.

BT supports the idea of a pension protection fund but, as it says, it needs to be proportionate and certain. It is trying to avoid wild variations year on year, such as the FRS 17 valuations, and says that the levy cannot be so large that it places such an additional burden on schemes judged to be underfunded that it exacerbates existing problems. To put that in context, and assuming the flat-rate levy in the first year and the £300 million to £350 million per annum cost of running the fund, BT calculates that it would pay out £12 million in the flat-rate levy. It commented on the 50 per cent. risk-based proposal, and clearly there will be year-on-year variations in how much it will be required to pay. BT points out that it was suggested in The Times recently that it might have to pay up to £100 million a year. By any stretch of the imagination, we are talking about big players, at the top end of the best kind of employers, with the most responsible attitudes to pension provision.

Steve Webb (Liberal Democrat, Northavon)

Does the hon. Gentleman accept that there is a paradox in the case of a scheme such as BT's? If we demand a high proportion of the total premium to be risk based, which is what I want, but the Government insist that the risk-based element is based only on the underfunding risk, BT, with potentially colossal underfunding because of the snapshot way of measuring it, could find itself paying more until such time that the Government add the insolvency risk. That is another reason why we need to get on and establish the thing in full.

Nigel Waterson (Conservative, Eastbourne)

I would not disagree with a word of that. It is not just the insolvency risk, but the risk profile of the investments that a company chooses to make. I have no doubt that BT's approach to all these matters is praiseworthy and an example to other schemes. Sadly, I expect that several schemes do not come up to its high standards. However, the bigger the schemes are, the harder they fall. If it happens to be a big scheme and, because of the rollercoaster nature of equity markets, it has a large paper deficit, it could end up paying extremely high amounts. At the moment,

there is even talk of schemes paying £100 million a year.

BT came to talk to me and it made a plea. A view of risk analysis needs to reflect the fact that companies such as BT take a long-term approach to risk. It hopes that that will also be the attitude of the PPF. It thinks that that means using a funding risk-analysis approach via an actuarial valuation, rather than a volatile accounting valuation approach—that is, FRS 17—or commercial rating levels applied to companies, or second-guessing asset mixes against scheme profiles. What are the Minister's comments on that? These are serious people who know what they are talking about. Their briefing says that there should be no risk at all to company or fund, but there will probably be a large paper deficit, although that is not mentioned in the briefing.

That leads me to another major employer, and an issue to which we referred on Second Reading. I am keen to get the Minister's input, as I really do not know the answer to it. The Times recently referred to another issue, under the heading ''M&S leads pension bond rush''—a headline that seems a little over-excited when compared with article that follows. This was the news that Marks & Spencer has a £1 million black hole, as the newspapers would call it, or deficit, as we should refer to it, in the pension scheme. It was hoping to tackle at least part of that with a bond issue of £400 million. The article suggests that for larger companies, for which that could be a cost-effective way of raising money, M&S will set a trend. The Minister may remember that on Second Reading I said that that is another disparity between smaller, less well run and less well funded schemes, which cannot do that, and the very big companies, which can.

If companies such as M&S do that kind of thing, does that count in reducing their underfunding? Will it have a direct effect on the amount of levy they pay? I assume that M&S would take such action for the best possible reasons—we would expect that—but also because it will save it money on the levy. I assume that the answer to my question is yes, but I have seen the speculation in the press. It would help if the Minister gave a distinctive answer.

One final example is Allied Domecq, which is a large company that is entirely signed up to the concept of a safety net for pensioners that is established in legislation. However, it has serious concerns about the mechanics of the scheme's funding. It says:

''We are not aware that any large employers' pension fund has failed to deliver the pension benefits anticipated by its members.''

That relates to something that I said this morning. It is interesting that so far that has happened to smaller schemes and smaller companies. Of course, I am not talking down the real hardship and anxiety that such circumstances cause to the members.

Allied Domecq has 58,000 members, almost half of whom are currently enjoying pensions that are largely funded by the company's contributions. It thinks that it is inequitable that the burden of funding the PPF should

''fall disproportionately on large employers such as ourselves.''

It makes the obvious point, which cannot be gainsaid by the Minister, that the flat-rate element impacts

''on companies with large numbers of scheme members and''

will

''unfairly penalise pension funds established for lower paid employees relative to pension funds where the employees enjoy higher levels of pay''.

It is also concerned about the risk-related element, because it might focus exclusively on a scheme's PPF funding level.

Allied Domecq proposes two things: first, that

''the flat rate element of the PPF levy be based on the total PPF liabilities of each scheme (rather than the number of members)'',

and, secondly, that the

''board be required, as a minimum, to ensure that the risk of default by the sponsoring company is fully factored into the calculation of the risk based levy together with the scheme funding level in respect of its PPF liabilities.''

Those are sensible proposals. Although that is not the way the Government are planning to go—at least, not in respect of the first proposal—I am interested to hear the Minister's objections, if he has any.

I return, finally, to the moral hazard. As the CBI pointed out, the idea of a PPF

''could encourage less scrupulous employers to act in an imprudent manner . . . a company might fund at too low a level or might be tempted to hold a higher risk portfolio than appropriate'',

which is why the risk profile of a given pension fund must be built in. The CBI also says that the PPF could result in

''reduced vigilance by trustees . . . excessive benefit promises by employers . . . companies or trustees granting benefit improvements just before insolvency . . . deliberate underfunding of schemes''

and

''providers of capital increasingly shunning companies with defined benefit plans.''

In case anyone thinks that some of that is a bit far-fetched, one of the features of the US scene in recent years, which I learnt from no less a person than Mr. Kandarian, is that where a company is facing difficulties, it is all too easy to make employees much enhanced pension promises instead of giving them a significant pay rise. That is done on the basis that the problem is being shoved into the future, and everybody knows that if the company goes out of business, those promises will be redeemed by the Pension Benefit Guaranty Corporation. That seems to be a feature in negotiations between employees and trade unions in what I call the smokestack industries. An additional twist in the US scene is the crystallisation of certain rights on the part of workers when a plant or company goes out of business. That is already a problem in the US. If we are, as Ministers say, trying to draw on their experience, that is a good example of where we should take careful note. It is perfectly sensible to require that a minimum of 75 per cent. is risk based, on the basis that Ministers are saying that most of the levy should be calculated in that way in any case.

Steve Webb (Liberal Democrat, Northavon)

I have some brief observations that are broadly in sympathy with what the hon. Member for Eastbourne (Mr. Waterson) said. He cited two high-profile schemes that illustrate a couple of issues raised by the PPF. I want the Minister to clarify the basis for the levy. The hon. Gentleman referred to the BT scheme. It told me that within one financial year its deficit—on the FRS 17 basis, I think—fluctuated by more than £3 billion. I hope that the Minister can confirm that the risk-based part of the levy will be raised on a more stable basis, such as actuarial valuation. However, what happens between actuarial valuations because it is my understanding that they are three yearly? We have discussed annual valuations, perhaps with the PPF board or the regulator in mind, but it is all getting a bit fuzzy—although that may be due to lunch. It would help if the Minister clarified how that will work.

The hon. Member for Eastbourne mentioned the M&S scheme. If it makes sense for companies to borrow money to reduce the deficit in their schemes, thereby lowering the risk-based premium because—to go back to an earlier point—that takes no account of the insolvency risk and takes into account only the deficit in the fund, there will be a bizarre non-economic incentive for companies to borrow lots more money so that they save money on their PPF levies, but put themselves in a more exposed financial position. Will that be the case? Will firms have an incentive to borrow a pound, put it in the fund and save themselves the PPF levy as a result, and yet thereby increase their financial insecurity because they are more in debt?

The nub of the amendment is what minimum proportion of the levy should be risk based. The Government are on shaky ground. Their argument for not introducing the risk-based levy initially is that they need lots of information, but the clause presumes that the risk-based levy is up and running. It presumes that they already have enough information and the argument is about what percentage of the total should be risk based. Once they have got the information, under what circumstances would the Government or the board not want to make the levy predominantly risk based?

It is clear that the Government's policy intention is that the levy should be predominantly risk-based, but they also want the board to be at arm's length. Do they have any means of requiring the board to make the risk-based levy a larger proportion of the total? That is an important point, and I would be grateful if the Minister commented on it. Although it is the Government's intention that the risk-based levy is a big proportion, the board might for some reason say, ''No, it will be 50 per cent.'' If the board thwarts the Government's policy objective, who wins? If we do not require a minimum of 75 per cent., do the Government have any power to say to the board, ''No, we think it should be more risk-based for wider economic reasons''? I do not think that they have that power.

Under what circumstances might the board want the risk-based levy to be less than 75 per cent.—or less than 100 per cent., frankly? As the Government are

broadly sympathetic to that outcome, do they have any levers to make the PPF board deliver that, or can the board do what it likes on that front once it is in existence?

Malcolm Wicks (Labour, Croydon North)

The amendment is not dissimilar to others. The Government's approach is to set down the criteria that the new board will have to take into account, and to state very clearly that we need to get the balance right between the basic levy and the risk-based levy with an emphasis on the risk element. The Government's position is not to so prescribe the new fund that the board will not have the discretion that we believe it needs and deserves, if only to put some distance between itself and some of the difficulties that the Pension Benefit Guaranty Corporation ran into in the USA.

The hon. Member for Eastbourne said that he thought that by prescribing, or at least by using, 75 per cent. he was pushing at the door. In terms of trying to develop a soundtrack for this Committee, ''Knocking on Heaven's Door'' comes to mind. The hon. Member for Northavon (Mr. Webb) was very helpful with his Simon and Garfunkel offerings earlier, and I thought that my Parliamentary Private Secretary should apologise to the Committee for suggesting that the ''Sound of Silence'' would have been the appropriate track.

David Cairns (Labour, Greenock and Inverclyde)

Never.

Malcolm Wicks (Labour, Croydon North)

He withdraws his remark.

The hon. Member for Eastbourne is pushing at an open door in the sense that we think that the greater proportion of the levy should be risk based. However, we do not think that it would be sensible to so restrict the new board by saying that it must be at least x per cent. That is the only difference between us; it does not come down to much more than that.

It was mentioned that BT could pay about £100 million. Even those who are not very good at arithmetic must realise that if we are talking of raising £300 million in the first full year after the initial year, to somehow suggest that one of our British companies might contribute a third of that defies the rules. I am sure one of the lobbyists provided the hon. Member for Eastbourne with that absurd example. It is so absurd that it could not have come from the wise and hon. Gentleman. It is daft.

Nigel Waterson (Conservative, Eastbourne)

It was in The Times.

Malcolm Wicks (Labour, Croydon North)

Well, there we go. We should not comment too much on what the figure might be for one company. A major company of that kind might pay a few million pounds initially. However, to suggest that it would be a third of the total would mean that we would soon end up with about fifty thirds adding up to the whole. We should ground the discussion in some common sense.

We do not want to prescribe to the board what the percentage break should be. Having consulted various stakeholders and relevant bodies, we consider that an appropriate split in due course could be—although it is up to the board—about an 80 per cent., 20 per cent. split in favour of risk factors.

The hon. Member for Northavon asked how we stop the board doing its own thing. It would be proper common sense and convention for it to listen to our debates, as it were, in retrospect—that is a bit of retrospectivity that I support—and read what this Committee says about the issue. If, in due course, something like 80:20 came about, we would not be surprised. The hon. Gentleman, who is amused by that piece of information, should realise that for us to suggest exactly what the circumstance might be in 2005–06 would be a bit ridiculous. I hope that that gives a steer as to our broad intention.

Steve Webb (Liberal Democrat, Northavon)

That is a helpful steer to the future. Will the Minister clarify why his preference is not for 100 per cent.?

Malcolm Wicks (Labour, Croydon North)

It would be for the board to consider at any one time how large the greater proportion might be, and it might well be 100 per cent. I suppose that against that, one might take the view that all scheme members will potentially benefit one day, and they will certainly derive some sense of confidence and security with regard to their pension scheme from the fact that the PPF exists. It might be that some basic levy would, therefore, be appropriate, although I would not particularly want to prescribe that. The PPF will take a longer-term view. I assure the hon. Gentleman that that is one of the intentions behind the PPF. It is why, for example, the board will not be able to vary the levy by more than 25 per cent. in any one year. Perfectly appropriately, that will force the board to take a view.

I do not think that we should run through the whole high street of companies. I was asked about M&S and bonds—the name is Bond, St. Michael Bond, is a phrase that comes to mind; it is near Easter, Mr. Cran, so forgive us. If a company issues a bond and puts money into the pension fund, then, yes, all other things being equal, we would expect such investment to lead to a lower levy. That is probably the answer to the question.

On lower-paid employees, the ability to take account of the level of pensionable earnings of the active members of a scheme, which we allow for, will ensure that schemes with large numbers of low-paid members will not be penalised. I hope that that is reassuring.

On the point that the hon. Member for Northavon raised, the PPF board will consider valuations at a specified date. For example, if one scheme completed a valuation in March and another scheme did so in June, and the results were different because of the differing economic conditions, the board might take such differences into account.

The regulator will collect annual information to provide an updated position. The PPF can use that to take account of variations in scheme circumstances.

Nigel Waterson (Conservative, Eastbourne)

I am grateful for the Minister's clarification on a couple of points, including the St. Michael one. I hope that the industry will take note. This was never more than a probing amendment. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 139 ordered to stand part of the Bill.

Clause 140 - The levy ceiling

Nigel Waterson (Conservative, Eastbourne)

I beg to move amendment No. 362, in

clause 140, page 86, line 24, at end insert

'save that in the first year, the levy ceiling will be no higher than £600 million'.

Not unreasonably, the Bill attempts to impose a ceiling, so that people have at least some idea of the contributions that they are likely to be required to make. This is a probing amendment. We thought that it would be useful to get the Government to confirm that the ceiling in year one will be set no higher than £600 million.

Figures have been bandied around about how much the ceiling is likely to be. There is a nervousness, which I hope I managed to communicate this morning, about the claims that are likely to come in those early stages when we have not only a flat-rate levy, but a 50 per cent. of flat-rate levy as well. The regulatory impact assessment, which some of us have seen, puts the cost of the levies to employers at £300 million a year. The Times, despite the Minister's disapproval, has described that as a £40-a-year stealth tax on 8 million workers in final salary schemes. That assumes that the cost of the levy will be passed on to employees with higher contributions.

Malcolm Wicks (Labour, Croydon North)

Given the hon. Gentleman's broad support for the PPF—I think that that is his position at the moment, on Thursday—does he regard that as a stealth tax, even though the figure that he quoted is wildly inaccurate?

Nigel Waterson (Conservative, Eastbourne)

It is certainly an additional requirement for companies, and possibly, through companies, on their members. I am trying to pin the Minister down on his estimates of the cost of the scheme. Contrary to what the Government suggest, Watson Wyatt, the leading actuaries, reckon that the average administration costs for a company scheme are, at present, £90 a member. Mr. John Ralfe, famous for his connection with the Boots pension fund, said that the scheme needed £600 million from FTSE 100 companies alone; otherwise, it could go bust. Have the Government any revised estimates of the total cost of the scheme?

Another way of looking at the issue, which I developed the other day in connection with other parts of the Bill, is to compare the experiences of the UK with those of countries such as Germany and Sweden, which approach the matter differently. For example, in Germany, the PSVaG, as it is called, raises an equivalent levy on 40,000 companies. It passes the levy along to 62 private sector insurance companies. The 28-year average levy is 0.22 per cent. of gross liabilities. Assuming gross UK pension liabilities of £650 billion to £750 billion, that would equate to an annual PPF levy of between £1.4 and £1.6 billion.

Let us compare that to the situation in Sweden. It has something called the FPG, which is a mutual scheme run by big companies in the private sector. Again, levies are 0.2 per cent of gross liabilities. It actually makes a profit. According to my calculation, the equivalent would produce a UK levy of between £1.2 billion and £1.4 billion.

The PBGC, as we know, has negative cash flow, and the situation is expected to worsen this year. To regain neutral ongoing cash flow, levies would have to triple from $948 million in 2003. If that were to happen, that would represent 0.19 per cent. of gross liabilities of $1.5 trillion dollars. Again, the equivalent rate in the UK would be premium or levy of between £1.2 and £1.4 billion.

Those are just three comparisons, but they all suggest that the ongoing cost to the PPF could be three or four times the figure quoted by the UK Government. Surely the Minister must give some credence to the views of someone such as John Ralfe, who knows a great deal about how occupational pension schemes work in this country.

Malcolm Wicks (Labour, Croydon North)

Of course I take advice from outside experts very seriously, but on this occasion they are wrong, and it is important to say so. The figures cited are not at all relevant to the British experience.

As we have heard, the amendment would result in the levy ceiling being set at no more than £600 million for the first financial year following the initial period. The amendment would not have the intended effect, for reasons that I will explain. First, let me set out how the levy ceiling will work. The responsibility for setting the levy ceiling will rest with the Secretary of State, who will need the approval of the Treasury. I do not know whether, should there ever be a different Government, the Conservatives would say that the Treasury should not be involved. We might seek clarification on that subject, just out of philosophical interest.

The levy ceiling will be set only once before the introduction of the pension protection levies. The Secretary of State will not set a new levy ceiling for each financial year. Instead, regulations will set out the levy ceiling, which the Secretary of State will be required to uprate annually by the general increase in earnings.

The levy ceiling will be set with the anticipated PPF costs in mind. We have set out in the regulatory impact assessment that the anticipated year-on-year costs of the PPF meeting its liabilities will be some £300 million. Our intention is that the levy ceiling will be set at twice that amount—in other words, at £600 million—going forward. It is only during the period of the initial levy that the levy ceiling will not apply. That is because the Secretary of State will be responsible for setting the rate of the initial levy.

However, during the transitional period, and for the first year after the transitional period, regulations will allow the levy ceiling to be lowered. The purpose of the power is to restrict the amount that the board may raise in the transition period, when it may not be in a position to implement a full risk-based approach. As a

result the amendment would have no effect, as the levy ceiling is likely to be less in the first year than the £600 million levy ceiling that will apply going forward.

Instead, we envisage the levy ceiling being set at a reduced level of about £300 million for the first year of the transition period. In addition, the PPF board will be required to consult before setting the pension protection levies for the first financial year following the initial levy period, as set out in clause 138. That will ensure that any levy structure that the PPF board proposes to impose will take into account the views and needs of pension schemes and sponsoring employers.

Steve Webb (Liberal Democrat, Northavon)

I am aware that we have not reached clause 142, which deals with the transitional period, but the Minister has been talking about the transitional period and the initial period. Will he clarify, for my benefit if for no one else's, how the initial period and the transitional period relate to each other?

Malcolm Wicks (Labour, Croydon North)

By the initial period I mean the first year—we anticipate that it will be a year—when the flat-rate levy, of 50 per cent. of the likely levy for the next year, will apply. That will be non-risk based, as we have discussed. There will then be a transitional period, as we develop the risk-based levy. I think that I gave some figures this morning to suggest that the full development, or roll-out, of the risk-based approach to every scheme will be complete by 2009.

We have included in clause 140 a provision to enable the Secretary of State, with the approval of the Treasury, to increase the levy ceiling, should that be required. Any increase in the levy ceiling above the general increase in earnings could be considered only once the board had consulted its stakeholders and made a recommendation to the Secretary of State.

We are confident that the provisions that we have established for the setting of the levy ceiling and future protection levies are both appropriate and sufficient. It would be unusual to state a figure for the levy ceiling in primary legislation, particularly when further provisions in the Bill enable it to be modified. We therefore do not consider it necessary to state the amount of the levy ceiling in the Bill.

Steve Webb (Liberal Democrat, Northavon)

I hope by this question to avoid a stand part debate, unless any other hon. Member wants one. I do not really understand the philosophy of the levy ceiling. We have heard all through our discussion about the arm's-length nature of the board, and that there would be a cap on the increase in the levy from one year to the next. Is the levy ceiling to be set at double what might the levy might be, just in case? If a cap is placed on the amount by which the levy can go up from one year to the next, I do not understand why there is a need for a levy ceiling at all.

Malcolm Wicks (Labour, Croydon North)

In calculating the costs at £300 million a year, our methodology was based on actuarial modelling of PPF finances over the next 20 years, but updated to take account of current market conditions and the decisions taken on the precise nature of the PPF compensation payable. If the hon. Gentleman wants further detail from me about

our thinking on the £600 million, I may need to write to him.

However, I want to assure business that there are parameters around the level that can be set for the levy. It is sensible to set a ceiling over and above the initial £300 million. If I can give the hon. Gentleman more arithmetic about that, I shall do so. We wanted to be prudent about the ways in which the levy could be increased. Hence the idea of the cap at twice the initial amount, and the idea that it will go up by only 25 per cent. in any one year.

I remind the Committee of something that is sometimes forgotten in discussion: when we are talking about the finances of the PPF we refer, perfectly properly, to the levy; however, we should include in the equation the fact that when, sadly, companies go bust, the PPF has the power to take over their assets—and, certainly in the American case, those can become considerable over time. I think that the Pension Benefit Guaranty Corporation is, in that sense, almost the largest pension fund in the United States; it can be compared with perhaps two schemes in California. We hope that it will not be like that in Britain, because we do not want companies to fail. However, the assets part of the equation is considerable.

With those assurances, and my offer to provide such further details as I can, I hope that the hon. Gentleman will withdraw the amendment.

Nigel Waterson (Conservative, Eastbourne)

I am happy with much of what the Minister said, although I think that he got things slightly inverted on his last point. The PBGC has so many assets—the Minister quickly touched on this—only because so many schemes have gone bust. So, by definition, the assets that get folded into the PPF will be insufficient to meet schemes' obligations—or am I missing something massively important?

That brings us to the subject of the incredibly expensive purchase of annuities, which is one of the things gobbling up the assets that remain in schemes.

Malcolm Wicks (Labour, Croydon North)

By definition, a company that has come into the PPF's warm embrace must be in trouble. It will have gone bust, and there will be a big gap between assets and liabilities. In a sense, the PPF has at least two sources of funds to meet ongoing pension liabilities: the levy that comes in every year, and the income from the assets that it will invest with suitable advice from outside organisations.

Nigel Waterson (Conservative, Eastbourne)

I am not trying to deny that, and it would do no good if I did, because what the Minister says is true. If he looks across the Atlantic, he will see that the PBGC has a big deficit, but also that it has the assets to pay claims for a long time into the future. However, there are still genuine and well founded concerns about its future, because the current situation cannot go on for ever. That is simply because the imbalance between what the PBGC has to pay out and what it has in reserve is getting greater the whole time.

However, today of all days, I do not want to extend the debate unnecessarily, so I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 140 ordered to stand part of the Bill.

Clause 141 - Valuations to determine scheme underfunding

Malcolm Wicks (Labour, Croydon North)

It might be useful if I put on record the fact that clause 141 sets out the requirement for schemes to provide a valuation of their assets and protected liabilities in order to determine the level of underfunding.

For the purposes of establishing a scheme's level of funding to allow the board to take account of funding levels in the risk-based pension protection levies, they will be subject to a PPF-style evaluation. That valuation will provide information on the financial state of eligible schemes that are required to pay the levy. That will help the board to determine the amount of the risk-based levy due from schemes.

We expect that valuation to be conducted in tandem with schemes' normal triennial valuations to ensure that additional financial burdens are not placed on employers or trustees. As I said, however, a scheme that feels that it would benefit from a lower risk-based element by bringing forwards its triennial valuation would be free to do so.

Question put and agreed to.

Clause 142 - Pension protection levies during the transitional period

Nigel Waterson (Conservative, Eastbourne)

I beg to move amendment No. 218, in

clause 142, page 88, line 11, leave out from 'means' to '(within' in line 12 and insert

'a period of time no longer than two years after the initial period begins.'.

Let me explain the purpose of the amendment, although the more I read it, the more I wonder whether this is how it will come out in the wash. As we heard, the Government's position is that during the first year, the fund will collect about half of what they would expect it to collect in a normal year—say, £150 million. They recognise that it would, in some way, be unfair, or to use a more neutral word, inappropriate, to charge the full £300 million, if that is the correct figure—which we question, as the risk-based elements have yet to be incorporated. It is clear from the drafting of the Bill that the Government plan that the fund will collect the full £300 million, or whatever the figure is, from year two in any event—hence the amendment.

There is a certain symmetry in requiring employers or schemes to pay only half the levy until the risk-based elements are introduced. It would also give people an incentive to get on with things, so that the

lack of risk-based elements could be addressed sooner rather than later. The feeling in the industry is that a two-year period for the transition is probably unrealistically tight, purely in practical terms. It looks as though they would prefer a likely result of a transitional period of about four years, as we debated this morning, so that the levy structure would be in place five—that is one plus four—years after the PPF begins. I think that that was the way in which this morning's discussion went.

The wording of the Bill is far too loose. A lot of people would like to see some definite commitment. I appreciate that the Minister was clear about his aspirations this morning, but they are merely aspirations. Within that time scale, even if there is not a change of Government, there is likely to be a change of Minister. By that, I mean that the Minister will go on to greater things.

Malcolm Wicks (Labour, Croydon North)

To draw his pension.

Nigel Waterson (Conservative, Eastbourne)

Or maybe to draw his pension.

Even if the Government will not accept the amendment, which would put a two-year limit on the transitional period, would the Minister consider wording it so that it would tighten up the restriction on the length of the transitional period? That would ensure that the permanent levy structure would come into effect and the so-called transitional period would not be allowed to drift on endlessly. If Ministers are not prepared to accept a two-year maximum, why not recognise what they have already accepted in this morning's debates? A four or five-year maximum is appropriate and they should perhaps agree to that. People need some certainty, but they also need something based on reality. That would be a useful compromise.

Malcolm Wicks (Labour, Croydon North)

The clause sets out the provisions for the levies during the transitional period. The amendment seeks to restrict the length of time for which the transitional period will apply to two years. We have made it clear that we are committed to introducing a risk-based levy as soon as possible. I thought earlier that the hon. Gentleman said that people in the business world thought that they would be hard pressed to do so within two years, but the amendment urges that it should be done within those two years. He might want to clarify that at some stage.

Our approach gives the board the flexibility to roll out a risk-based component from the second year, without creating new burdens on trustees and employers by requiring them to conduct out-of-cycle valuations. My response will be very much in a burdens-on-business mode. The amendment would restrict the board's flexibility and could lead to new financial burdens for employers.

Setting up the pension protection fund as soon as we possibly can means that some of the information that the board needs to calculate the risk-based levy will not be available from the outset. The purpose of the transitional period is to allow the board to take a balanced approach to determine what information is available, what is feasible and what is necessary to implement the risk-based approach. It would not be wise or practical to restrict the transitional period from

the outset when it is clear that the information that the board may need to implement the risk-based levy is not fully available. The amendment that the hon. Gentleman has proposed could result in the board's being required to implement a simplified or inaccurate risk-related approach, based on incomplete or out-of-date data.

Moreover, the amendment could result in an additional financial burden being placed on employers, as the board would need pension schemes to obtain a PPF-style valuation outside the normal triennial cycle. The transitional period will allow the board to implement a dual system of levy calculation. We anticipate that those schemes that have completed their triennial evaluation—and which therefore have the appropriate information available—would be able to pay a levy based on risk. Those that have not done so will pay a levy based on scheme factors only. I repeat that those that want to bring forward the three-yearly review can do so if they think that that would benefit them in terms of the risk-based levy.

We have tried to have regard to normal cycles, in terms of valuations. That is why, although we appreciate that the hon. Gentleman was well intentioned in tabling the amendment, we cannot, sadly, accept it on this occasion.

Nigel Waterson (Conservative, Eastbourne)

I am overwhelmed that the Minister thinks that I have moved up the scale and am now well intentioned in my amendment. At least we are making some progress. I appreciate that the matter is difficult and I am grateful for the Minister's explanation, so I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 142 ordered to stand part of the Bill.

Clause 143 - Calculation, collection and recovery of levies

Nigel Waterson (Conservative, Eastbourne)

I beg to move amendment No. 279, in

clause 143, page 88, line 21, at end insert—

'( ) The trustees or managers of the scheme may charge a sum at least equivalent to the non-risked based amount of the levy to all scheme members.'.

This is a probing amendment, but it raises some interesting issues that I look forward to seeing the Minister resolving. ''Levy'' refers to the administrative levy, if that is the right terminology. I thought long and hard about whether I should table the amendment at all. One of the deciding factors was the thought that the proposal might have been among the Government's intentions in the first place. However, it is not clear from the Bill whether employers will have the ability to share the costs of the levy with all scheme members. That does not happen in the USA, as I understand it, so we would be breaking new ground.

The CBI and the Engineering Employers Federation both support the proposal. The latter says:

''Employers should be able to recover part of the PPF levy from pension scheme members'',

as that would encourage employers to keep schemes open or even start new ones. The federation also says:

''As members are the ultimate beneficiaries of these insurance arrangements, it is only reasonable that employers should be able to share the cost of financing the PPF by recovering at least part of the levy from members.''

That view is echoed by the CBI, which also thinks that there should at least be the facility, where appropriate, to pass those charges on to scheme members, whether active, deferred or pensioner. However, I gather that there are sometimes practical problems, on which the Minister may have more information, in obtaining lists of names, addresses and so on.

Strangely, chapter 3.2.2 of the Bill's regulatory impact assessment, which the Government have kindly provided, says that

''employers will be able to recoup the costs of the part of the levy assessed by reference to scheme factors from members, if they choose to do so.''

That was not part of my initial understanding, but there it is in black and white. It therefore seems that, without trumpeting it, the Government are on the same wavelength as the employers' organisations to which I have referred.

Although the amendment is a probing amendment, I am interested in the Minister's views on the regulatory impact assessment and the preferences of the employers' organisations.

Malcolm Wicks (Labour, Croydon North)

The clause sets out the calculation, collection and recovery of the initial, pension protection and risk-based protection levies. The amendment seeks to provide scheme trustees and managers with the power to recoup the cost of the scheme of the initial and pension protection levy from scheme members. Because that would impact on the calculation of future pension entitlements, the amendment could result in a reduction in the level of income for current pensioner members or reduce the amount of pension accrued for active and deferred members. In addition to the impact on future pension entitlements, and any potential PPF compensation, the amendment would also be difficult to administer, particularly where there is no pension in payment. Furthermore, the amendment does not restrict the amount that can be recouped from an individual scheme member, which could result in members paying towards the risk-based element of the pension protection levies.

On reflection, the hon. Gentleman might agree that that would be unfair, because members do not have any say in how the scheme invests, or indeed in the financial state of the scheme. That also may have an effect on the behaviour of scheme trustees, who could pass on the whole cost of the pension protection levies to their members, thus preventing any increase in costs to the scheme, while continuing to undertake a risky investment strategy.

I hope that not least on account of those rather practical, important matters, the hon. Gentleman might consider withdrawing his amendment.

Nigel Waterson (Conservative, Eastbourne)

First, I was not clear whether the Minister was dealing with the point in the regulatory impact assessment about whether the Bill as it stands

allows some recovery of costs. I hope that he will be able to deal with that in a moment.

Secondly, I should like to speak about a new issue relating to the same point, on which it may be appropriate for the Minister to have another bite at the cherry. In the run up to the Bill I was approached by Marconi, which is one example of a specific type of company to which this situation would apply in spades: a company that is smaller than it was, but with large legacy liabilities. Let me say immediately that Marconi supports the PPF, and its pension fund is healthy. However, it is, to use its own word, a bit ''lopsided'', because it has just 3,327 active members, but because of its history it has 69,000 deferred and pension members—a ratio of over 20:1. It estimates that the average PPF levy will amount to 1 per cent. of all active member contributions. In addition to the general point that I made in opening the debate on the amendment, there is a more specific category of companies that, for historical reasons, will be particularly affected by the levy, and for which there is an even stronger argument to be able to pass on at least some of the cost.

I should be interested to hear from the Minister. Perhaps he would like to write to me about this specific, narrow issue. I hope that now he has the answer on the RIA point.

Malcolm Wicks (Labour, Croydon North)

I have reflected on this issue, and I recommend reflection—the hon. Gentleman smiles, but he might try some. There is not a great matter of principle involved. In principle, there is no reason for saying that it should never be thought that scheme members should consider contributing to the levy. Some of the issues are more practical, particularly in respect of existing pensioners, who have got used to a level of pension. Would it be appropriate—perhaps because of the difficulties that a company has got into long after they have retired—to say that they should pay a not insignificant levy?

There are practical matters of that kind to consider. Employers currently have the ability to recover costs from active members, perhaps by reducing wages, not increasing wages to a level to which they may have risen, or increasing employees' contributions, should they choose to do so. That is best left to employers and employees to consider. If I have missed some points on the RIA, I had better write to the hon. Gentleman.

Nigel Waterson (Conservative, Eastbourne)

This is one and the same point. The Minister is accepting that as the Bill stands, my amendment is probably unnecessary, because it already seems, as the RIA says, that employers could pass some of the costs to scheme members. In a sense, my amendment falls. Is that so?

Malcolm Wicks (Labour, Croydon North)

I think that I had better write to the hon. Gentleman on that important point; I am sorry that I do not have the whole answer. It seems to me that, just in terms of the ability to look at wage increases and periodic discussions about the level of the employee's contribution, it is possible for a company to pass on the cost of the levy to the members, should that be thought wise in any company. The Government should not prescribe

that; it is a matter for negotiation between the two sides.

If the hon. Gentleman forgives me, I will leave my response to his point on the regulatory impact assessment to a letter.

James Cran (Conservative, Beverley and Holderness)

Mr. Waterson, are you withdrawing the amendment?

Nigel Waterson (Conservative, Eastbourne)

The killer reason for withdrawing the amendment would have been the Minister confirming my suspicion that it does not add anything to the Bill. However, he is going to write to me about it, and that puts me in a predicament. I suppose I had better withdraw it and see what happens. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment made: No. 390, in

clause 143, page 88, line 28, leave out 'the Board's' and insert

', on the Board's behalf, its'.—[Malcolm Wicks.]

Malcolm Wicks (Labour, Croydon North)

I beg to move amendment No. 500, in

clause 143, page 88, line 30, after 'year,' insert 'except in prescribed circumstances,'.

The amendment provides for regulations to set out exceptions relating to the payment of part-year levies. Subsection (5) provides for part payment of the initial levy and pension protection levies when a scheme is not an eligible scheme for the whole of the financial year. Payment of part-year levies would be required when, for instance, a new scheme is set up and becomes an eligible scheme part way through the year. The new scheme would be charged the initial levy or pension protection levies from the date it became an eligible scheme. The amendment is sensible, and technical.

Amendment agreed to.

Clause 143, as amended, ordered to stand part of the Bill.

Clause 144 - Cases where fraud compensation payments

George Osborne (Conservative, Tatton)

It makes more sense if the Under-Secretary speaks first.

James Cran (Conservative, Beverley and Holderness)

Let me make it clear that I choose who speaks first.

George Osborne (Conservative, Tatton)

The Minister clearly agrees that it is important that we have a brief debate about this clause. It applies to other clauses up to clause 51. The clause transfers to the PPF the responsibilities of the pension compensation fund, which was set up in the groundbreaking Pensions Act 1995, which established the principle that people could be compensated for things that went wrong in this way with their pension scheme. My party thinks that it is sensible for only one organisation to administer the different types of funds. In our discussions of later clauses, I might deal with whether there is a requirement to have two separate funds that the PPF administers.

I want the Minister to tell us generally about the transfer of responsibilities and to assure us that that will happen smoothly, but I also want to ask him about what is, perhaps, the most important element. I must confess that what I am talking about is addressed in clause 211, but the principle—the amount of compensation payable—is important. In the 1995 Act, the level for that was set at 90 per cent. for defined contribution schemes where members are more than 10 years from retirement and for defined benefit schemes.

I had the opportunity in the lunch break, in between asking a question at Treasury questions and listening to an interesting statement, to speak to the Minister who had responsibility for pensions in 1995 and who helped to introduce the pensions legislation of that year, the right hon. Member for Richmond, Yorks (Mr. Hague).

I told him that I was likely to discuss these clauses this afternoon. I asked him why the compensation level was set at 90 per cent. rather than 100 per cent. First of all he said, ''hold on, let me think'', because some things have happened to him professionally since that time. However, he remembered that at the time the basic argument was about moral hazard. The Government of the day thought that it was sensible to set the compensation level at 90 per cent. rather than 100 per cent. because it might give an incentive to scheme members—people who worked for a company—to keep an eye out for fraud. Therefore, they would suffer some small loss, 10 per cent. of their pension, rather than be fully compensated if things went wrong. That would create an incentive and that is what my right hon. Friend the Member for Richmond, Yorks told me over lunch.

Of course, the striking thing is that that argument is very similar to that deployed earlier in our discussions by the Ministers about the PPF and the 90 per cent. compensation to scheme members who are not retired. Indeed, the Minister for Pensions made exactly the same kinds of arguments about moral hazard and how

it would provide an incentive to scheme members to keep an eye on the financial health of their company.

It struck me that it is difficult to come to any qualitative differentiation between the moral hazard of a scheme member keeping an eye out for fraud as opposed to the requirement for them to keep an eye out for financial incompetence. If it were a very large company, such as Allied Steel and Wire, there is an element of rough justice, because one cannot expect a steelworker to have any idea whether there is financial incompetence or fraud taking place at the top of the company. If we were talking about more senior members of the company's management structure, they might be just as aware of dodgy practices as they were that the company were not particularly well run or that it were facing financial difficulties.

Therefore, I thought that it was worth asking the Minister why the Government had come to the conclusion that in the case of fraud, as opposed to that of insolvency through poor business management, there should be full compensation. The moral hazard arguments were deployed by the Government in 1995—obviously, a different Government, but they probably had the same people advising them—so, why was there a change of mind in the intervening period?

I am sure that he might tell me that there was a recommendation in the Myners report and the that Government said in their Green Paper that they were going to make this proposal. However, if one examines the regulatory impact assessment—the explanation given by the Government for the changes—it says on page 15:

''If the proposed change were not implemented, the security of the pension rights built up by members of schemes that suffer from acts of dishonesty, would continue to be at risk.''

That seems to be just a statement of the obvious rather than an explanation for why the Government are changing their mind and, particularly, why they are creating a different playing field between those scheme members who lose their pension because of financial problems and those who lose their pension because of fraud. I thought that this would be a good opportunity to ask the Government to set out why they have changed their mind, albeit from a previous Conservative Government.

There are a couple of other points on clause 144 that I have asked the Minister about, particularly on the date. I might have misunderstood this, but as I understand it, it is only fraud that has taken place since 6 April 1997—if that is the right way of putting it—or rather a devaluation in scheme assets that has happened since that date as a result of fraud that is eligible. However, reference is made in the clause, or certainly in the explanatory notes to any other date appointed by the Secretary of State. Does that not mean that in theory—I do not suggest that this would happen in practice, but does that not mean that in theory the Secretary of State could remove the protection against fraud that exists under the 1995 Act? The Secretary of State could set a date in the future—2020, say—and suddenly remove all the protection against fraud that Parliament has

provided under that Act. I am not suggesting that this Secretary of State, or any other, Conservative or Labour, would do that, but it is worth probing the Minister on why the Secretary of State should be given that discretion.

Under subsection (6), there is a requirement on the trustees or managers to notify the PPF within 12 months of a fraud taking place, or 12 months beyond the point at which they should reasonably have known that a fraud was taking place. Again, there is a get-out clause; the end of the subsection adds the words:

''or within such longer period as the Board may determine in any case.''

What sort of criteria will the board use for extending the 12-month period? What are the good excuses that trustees or managers could deploy, particularly given that fail-safe arrangement, which allows a period of 12 months beyond the point at which the trustees or managers know, or ought reasonably to have known, that a reduction in the value of the scheme had taken place.

My main question to the Under-Secretary is about why the level of compensation has been raised from 90 to 100 per cent. However, the other two points, about the timing—the date of 6 April 1997—and about the 12-month period, are also important details. It would be good if the Under-Secretary responded to them.

Chris Pond (Labour, Gravesham)

Good afternoon, Mr. Cran. As you saw, both the hon. Member for Tatton (Mr. Osborne) and I are eager to talk about clause 144—for two reasons, in my case. The first is that my hon. Friend the Minister of State has been carrying the burden of responding for most of today, and I get the sense that the Committee would like me to develop my thoughts on this group of clauses, especially as we will not be interrupted by Division bells this afternoon, and we can approach our deliberations in a more relaxed way.

Secondly, as I have the label of anti-fraud Minister, and as we have made considerable progress towards our fraud targets, I want to explore some of the issues associated with occupational pension scheme fraud. I can reassure the Committee that identified fraud in occupational schemes is quite rare. As the hon. Member for Tatton reminded us, the Pensions Compensation Board was established under the 1995 Act in 1997, following the Maxwell incidents. In the seven years since then, that board has only needed to make three payments in three cases, totalling less than £570,000.

Although identified fraud is rare, when it happens it can have a serious effect on the current or future incomes of scheme members. The PCB board has provided an important safety net for members, and it is right that the PPF board should replicate and build on that function.

Clause 144 lists the cases in which fraud compensation can be paid. The rules are effectively the same as those of the PCB, as the hon. Member for Tatton confirmed, except that the PCB currently pays up to 90 per cent. of the fraud loss. Clause 211, which we have already considered, and to which the hon. Member for Tatton has also referred, makes provision

for the PCB to pay the full amount until the PPF takes over responsibility for fraud compensation payments. I will come to the hon. Gentleman's questions about why that change was made in a few moments, although that has been flagged up.

The main principles are that the scheme must be an occupational pension scheme, or treated as such. Its assets must also have been reduced by a dishonest act or omission since the relevant date, and it must have an insolvent employer, or one that is not to continue trading, if the insolvency occurred after the PPF ''go-live'' date.

In conclusion, the clause will enable us to help schemes when theft or fraud occurs, and it clearly sets out the circumstances in which the board can offer that help. I say ''in conclusion'' but that would, of course, be discourteous to the hon. Member for Tatton. His first question was why there should be a separate fund. It is important to recognise that the PCB deals with both defined contribution and defined benefit schemes, as fraud can, of course, affect DC schemes as well as DB schemes. However, the PPF will apply only to DB schemes. Therefore, we have to keep the two funds running side by side.

On the figure of 90 per cent. and the reason why we are increasing the amount of compensation, clause 211 was based on an assumption that the simplest and fairest approach in the exceptional circumstance of theft by fraud is fully to compensate the loss, especially since such occasions are relatively rare, instead of attempting to link compensation to scheme-specific valuation methods. The intention is that the PCB will operate under the more generous rules until the fraud compensation fund becomes effective. That partly answers the hon. Gentleman's point about moral hazard. On PPF, we have had much discussion about the figures of 90 per cent. and 100 per cent, and one of the major reasons for that was the issue of moral hazard. As we have heard, the amount of identified fraud in relation to occupational schemes is very small. It is important that we ensure that scheme members have safeguards against that fraud, but the potential impact of moral hazard is of a wholly different order of magnitude. That is why it seems appropriate to make full compensation in those rare cases in which there has been fraud.

George Osborne (Conservative, Tatton)

The Under-Secretary says that the distinction is one of quantity, rather than quality. He says that because there are very few cases of fraud, we are not talking about a large problem. However, first, there may be bigger frauds in future; it may just be that we have been lucky. Secondly, he has not established the difference in principle. What is the difference in principle between the moral hazard that applies to an employee of a steel factory, in terms of the financial health of that company, and the role of the steel employee in terms of the fraud going on in that company? Surely the same principle of moral hazard applies.

Chris Pond (Labour, Gravesham)

That is a valid point. Clearly, there is an issue to do with scheme members wanting to keep an eye on potential fraud, just as they might want to do in

relation to the proper management of the scheme. However, the point about the order of magnitude is important, in terms of the implications when a scheme member suffers the impact of one of the relatively rare occurrences of fraud. Of course, that impact can be considerable. In those circumstances, there is rough justice, but in this case the rough justice is perhaps on the side of the scheme members, whereas previously in our discussions it worked slightly in the other direction. That is the reason why we reached our conclusion.

The hon. Gentleman also asked why the period could be extended beyond 12 months. That is quite simply because, in many cases, the investigation of fraud can be complex and lengthy. If it appears that further time is needed to uncover that fraud and to ensure that scheme members are compensated, it may be necessary to extend the period. That is why we want to make provision for that in the Bill.

Question put and agreed to.

Clause 144, as amended, ordered to stand part of the Bill.

Clause 145 ordered to stand part of the Bill.

Clause 146 - Recovery of value

George Osborne (Conservative, Tatton)

The clause makes it a requirement on trustees and managers to try and recover some of the money that has been lost through fraud if

''they may do so without disproportionate cost and within a reasonable time.''

I suspect that that is replicating features of the 1995 Act, but I am not as familiar with that Act as perhaps I should be. What sort of judgment do we expect the PPF to make on disproportionate cost and reasonable time? Obviously, we do not want pensioners left hanging around for years, while lengthy court proceedings take place at the end of which not very much money is recovered.

Chris Pond (Labour, Gravesham)

That is why the clause makes provision for a so-called settlement date. Although the trustees and managers are required to make reasonable and appropriate inquiries, and attempt to recover any of the funds that are lost as a result of fraud, we have to give what the Americans call ''closure'' to these issues and move on. That is why, as the hon. Gentleman suggested, the idea of a settlement date is proposed both in the 1995 Act and in clause 146.

Question put and agreed to.

Clause 146 ordered to stand part of the Bill.

Clauses 147 and 148 ordered to stand part of the Bill.

Clause 149 - Board's powers to make fraud compensation transfer payments

George Osborne (Conservative, Tatton)

As I understand it, the clause gives the power to transfer payments from the fraud compensation fund to the pension protection fund—to move funds from one fund to the other—once it has been established that fraud has taken place. That applies where the PPF has assumed responsibility for a scheme before there has been an application for fraud compensation. Because we are setting up the PPF, there will now be cases that the PPF takes responsibility for and it will subsequently discover that fraud has taken place and will wish to transfer money.

The Minister gave a perfectly reasonable explanation of why there were two separate funds. As a result, there will also be two separate levies, which are set out in clause 151. The levies are paid for slightly differently. The fraud levy is an irregular levy, in the sense that it is levied only when it is necessary; the normal PPF levy is much more regular. Also, as the Minister has said already, different groups of people will pay them. The fraud levy will be payable by a much broader group of people. Therefore, a scheme may already have received compensation from the PPF fund, which has presumably come out of the normal levy, but money can also be transferred from the fraud fund, which is raised from a special levy. Will the people who have paid the normal levy to pay for that sum get a reduction, or their money back? If not, they will be paying twice for the same scheme. The levy may have to be increased. Let us suppose that we had a big fraud case, and the levy rose to cover the subsequently discovered fraud; money would then be taken from the fraud fund into the normal PPF fund and a special fraud levy could also be levied. Some schemes will end up having to pay twice. Will they get some of their money back?

Chris Pond (Labour, Gravesham)

There is an issue of practicality. If fraud has been discovered after a scheme has entered what my hon. Friend the Minister for Pensions called the warm embrace of the PPF, the scheme cannot benefit from a fraud compensation payment, as would be the case for schemes outside. Normally, payment would be added to the overall funds of the scheme, but at the point of entry to the PPF the scheme ceases to exist in its own right and becomes part of the PPF compensation arrangements.

A transfer payment will be consistent with the principle that all assets and rights of a scheme should be transferred to the PPF upon entry. In a sense, that is a deferred element of those rights and assets. The transfer payment would be made from the fraud compensation fund into the pension protection fund and would reflect the full value of the loss suffered to scheme assets. As for whether there would be a reimbursement to scheme members of part of their fraud levy, I must disappoint the hon. Gentleman and say that that is not our intention.

Clause 149 is very much a belt-and-braces clause. We do not expect there to be many circumstances in which the fraud is discovered after a scheme has entered the PPF. Therefore, even if we were to seek to make a reimbursement of the levies already paid, the cost of the calculation would probably far outweigh any amount that we could transfer back to scheme

members as a result. I hope that the Committee accepts the clause.

Question put and agreed to.

Clause 149 ordered to stand part of the Bill.

Clause 150 - Fraud Compensation Fund

Clause 152 - Information to be provided to the Board

Nigel Waterson (Conservative, Eastbourne)

I beg to move amendment No. 412, in

clause 152, page 95, line 16, at end insert

'and in so far as the information is relevant to the discharge of its function.'.

Clause 152 takes the prize in a Bill that, despite its length, is short on crucial detail. When I read it this morning, I wondered whether it was an April fool hoax on the part of the Government. To say that subsection (1) does not give much away is a massive understatement. It says:

''Regulations may require such persons as may be prescribed to provide to the Board information of a prescribed description at such times, or in such circumstances, as may be prescribed.''

That is a little like going to the chemist. It contains three different sets of regulations. The Committee now knows what I shall say before I say it: I accept that there is no danger of seeing any draft regulations. I suppose that we might tease out of the Minister vaguely how his mind works, but it is an extraordinary clause and the potential jackboots that are inherent in it need removing. That is why we want to insert the words,

''and in so far as the information is relevant to the discharge of its function.''

The clause gives almost limitless powers to the board to require information. Even though clause 153 contains similar wording, it is imperative that such a vast potential power under clause 152 has some limit upon it. I hope that the Minister accepts the force and wisdom of that argument.

Malcolm Wicks (Labour, Croydon North)

We are not in a joking mood and the clause is not an April fool. Regulations under clause 152 will require specified people to provide specified information to the board or its agent, in certain specified circumstances. The amendment would clarify that the regulations may make provision only in respect of information that relates to the board's functions. Although the other information clauses specify that the data that the board gathers must be relevant to its functions, it is not considered necessary to make similar provision under clause 152.

The clause is designed to ensure that certain people automatically provide the board with information at specified times, including information that is required to calculate individual entitlement.

Let me give two examples of what the regulations will cover. First, individuals will be required to inform the board of a change in their circumstances. For example, a surviving dependant should send notification of death to the board. Secondly, the regulations may require groups, such as insolvency practitioners, trustees or employers, to notify the board when they receive information that is relevant to the exercise of the board's functions. That regulation-making power is required in addition to the other information-gathering clauses because the board cannot trawl for information. Instead, individuals will be required to provide information automatically to the board.

We fully support the amendment's intention. I assure Committee members that regulations under clause 152 will refer only to information that is relevant to the board's functions. On that basis, it is not considered to be necessary to specify that. I hope that with that reassurance, the hon. Gentleman, being a reasonable man, will withdraw his amendment.

Nigel Waterson (Conservative, Eastbourne)

I am not remotely reassured. We shall all tremble in fear of the knock on the door in the middle of the night on the basis of provisions in the clause. This is extraordinary drafting. However, if we divided on it, we would lose, so I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment made: No. 395, in

clause 152, page 95, line 20, at end insert—

'( ) Regulations made by virtue of paragraph (b) of that subsection must make provision regarding the manner in which the persons required to provide information are to be notified of the identity of the person authorised as mentioned in sub-paragraph (ii) of that paragraph.'.—[Mr. Pond.]

Clause 152, as amended, ordered to stand part of the Bill.

Clause 153 - Notices requiring provision of information

Nigel Waterson (Conservative, Eastbourne)

I have some legitimate concerns about the extent of the clause's provisions. Subsection (2)(b) is about notices being given by the board and also by

''a person authorised by the Board for the purposes of this section in relation to the scheme.''

What kind of people will they be? There is an issue with paragraph (b), which refers to professional advisers

''in relation to the scheme''.

To what extent are they covered by professional privilege?

An interesting point has been raised with me. Clause 234 deals with information given to a professional legal adviser—a term covering solicitors and barristers, and their equivalents in Scotland. Is it also intended to cover anyone appointed under section 47(1) of the 1995 Act? If that is the intention, it will bring into the provision some non-lawyers, such as firms of benefit consultants, who may, out of an abundance of caution, have been appointed as legal advisers for section 47 purposes. That counts as an unintended consequence, but it is a specific issue that must be addressed.

Malcolm Wicks (Labour, Croydon North)

Clause 153 should be viewed in conjunction with the other PPF information-gathering provisions, which will enable the board to gather the data that it will need to carry out its functions. Under the clause, individuals involved with a scheme will be required to disclose information that is relevant to that scheme on notice in writing from the PPF, or someone acting on its behalf. Other people who are authorised might include actuaries or a property expert. The notice must specify what information is required and how it must be produced, including the time limit for its production. As always, the board may only gather information that is relevant to its functions. This power is targeted at gathering information during the assessment period. For example, in order to carry out its valuation, the board may wish to ask the employer to provide information that is necessary to calculate individual entitlement.

Because the matter emerged earlier in our proceedings, I should like to confirm that legal professional privilege will not be breached. That is set out in clause 234.

Question put and agreed to.

Clause 153 ordered to stand part of the Bill.

Clause 154 - Entry of premises

Nigel Waterson (Conservative, Eastbourne)

As you know, Mr. Cran, Conservatives are natural defenders of people's legal and human rights, so we are always very worried about clauses with headings such as ''Entry of premises''. That is particularly the case in this instance, as this clause is in the same part of the Bill as the infamous clause 152.

On any view, clause 154 is very widely drawn; it relates to any premises where documents relevant to the employer are kept even if there is no direct evidence that there are any documents to do with the pension scheme in those premises. Presumably, the offices of any advisers to the employer will be included.

Does the clause also enable the board to appear at the premises of a newspaper that is carrying out an investigation into the employer or its funding position in order to obtain relevant documents?

There will need to be some high Chinese walls between those involved in the investigative parts of the PPF—the people who abseil down buildings to get information—and those giving advice or directions on investments. Does the Minister have any comments on that concern?

My final point echoes one made in relation to an earlier amendment. Subsection (5) states that documents

''may be retained until the end of the period''.

There is a basic 12-month period, with extensions. Inherent in that should be the requirement that any such document can be retained unless, on reflection, it is clearly irrelevant to the investigation. Perhaps we should table an amendment to that effect. We have all seen footage of dawn raids by organisations such as the Office of Fair Trading, which seem to have a remarkable ability to hoover up masses of stuff, some of which turns out later to have nothing to do with their investigations. I am sure the Minister agrees that we cannot allow people to go on fishing expeditions, as lawyers persist in calling them.

Malcolm Wicks (Labour, Croydon North)

The clause allows the board to appoint a person who may enter scheme premises to gather information in relation to the functions of the PPF. That is not the same as an inspection in the sense of the regulator provision. It will be routine for the board to visit premises, normally with prior appointment, during the assessment period. That is necessary because once a scheme's employer has entered insolvency proceedings, an assessment period will commence.

During that period, the board will carry out a valuation of the assets and liabilities of the scheme, which will be used to inform the decision as to whether that scheme should enter the PPF. The power to enter premises will in that case simply allow actuaries and other professionals to gather the information necessary for that valuation. That is why the board will appoint a person who is authorised to enter premises where information in relation to that scheme may be held. That is similar to an auditor entering premises to view documents, gather data and ask questions. It is vital that the board can carry out the valuation and that it has accurate information to enable it to do so. However, it will not have unrestricted powers; it may only gather information that is relevant to its involvement in that scheme.

I hope that I have reassured the hon. Gentleman, as I tend to do on these occasions. We do not anticipate that a crack squad from the PPF will abseil down the building occupied by the Eastbourne Bugle and storm its offices; that is not our intention.

Question put and agreed to.

Clause 154 ordered to stand part of the Bill.

Clause 155 - Penalties relating to sections 153 and 154

Clause 156 - Warrants

Malcolm Wicks (Labour, Croydon North)

It will help if I speak to this clause, albeit briefly. It relates to warrants and it is important to put the Government's intention on the record.

In extreme circumstances, the board's power to gather information may be ineffective. For example, it may believe that if it asked for certain data they would be removed or destroyed. In such circumstances, there is a safeguard and the board may apply to a justice of the peace for a warrant to enter premises, using reasonable force if necessary, and to search for and take possession of documents or copies of documents.

The justice of the peace will issue a warrant only if he or she is satisfied on the basis of the information given to the board on oath that certain conditions are met. That will ensure that in extreme circumstances, when the board is being obstructed from gathering information, it can enforce compliance, which might prevent vital evidence from being destroyed. However, it is intended that the board will apply for a warrant only in the most serious of cases, such as if there is evidence to suggest that there is considerable risk of documents being altered or destroyed, or if requests for documents under clauses 153 and 154 have not been complied with. It is recognised that in the vast majority of cases, scheme trustees and other individuals will provide the information requested, which means that the powers will be used very sparingly.

Question put and agreed to.

Clause 156 ordered to stand part of the Bill.

Clauses 157 and 158 ordered to stand part of the Bill.

Clause 159 - Restricted information

Schedule 8 - Restricted information held by the Board: certain permitted disclosures to facilitate exercise of functions

George Osborne (Conservative, Tatton)

This is a small point, and I am sure that everyone is keen to get on. It will be interesting to know why there is a distinction between the information that can be passed to the pensions ombudsman and the information that can be passed to the ombudsman for the board of the pension protection fund. We shall talk about ombudsmen, perhaps when we get back from Easter, depending on when the Committee adjourns. However, it is interesting that there is a limit on the information that should go to the pensions ombudsman. Given that there is no limit on the information that goes to the pensions regulator, the Bank of England, the Auditor General and so on, why the restriction on the information that goes to the pensions ombudsman?

Chris Pond (Labour, Gravesham)

Perhaps I should explain that under clause 162, to which schedule 8 relates, the board may disclose information to a limited number of public and regulatory bodies to facilitate the exercise of certain functions. The schedule contains the details of those bodies and which functions are to be included. The organisations are specified in the first column of the schedule, and disclosure would be permitted only if it would enable or assist that body in the exercise of specific functions, which are listed in the second column.

Throughout our debates on the information clauses, we discussed the fact that the board will need the power to gather and disclose information in limited circumstances. We do not wish to create a situation in which two bodies are unable to share information that would be relevant to both their functions. That could restrict the effectiveness of both bodies, while increasing the administrative burden for everyone involved.

On the PPF ombudsman, there is, of course, an independent right of appeal for PPF-related matters. The ombudsman can ask for information and, under those circumstances, that transfer of information would be covered by separate arrangements.

George Osborne (Conservative, Tatton)

I think that the Under-Secretary misunderstands me. I totally understand why the ombudsman for the board of the PPF can receive information; that is not my question. My question is why the pensions ombudsman—a separate ombudsman—can receive only a limited amount of information, and certainly does not have the same degree of disclosure enjoyed by the Bank of England, the pensions regulator, the Comptroller and Auditor General, the Auditor General for Wales, the Auditor General for Scotland, the Comptroller and Auditor General for Northern Ireland and the Counter Fraud and Security Management Service.

Chris Pond (Labour, Gravesham)

I had indeed misunderstood the hon. Gentleman's question, and I apologise for that. I do

not wish to detain the Committee for too long by replying in detail to it now, so perhaps I could write to him.

Question put and agreed to.

Schedule 8 agreed to.

Clause 163 - Other permitted disclosures

Clause 164 - Disclosure of information by the

Margaret Moran (Labour, Luton South)

I beg to move, That further consideration be now adjourned.

Malcolm Wicks (Labour, Croydon North)

I believe that it is the convention that the motion to adjourn is debatable. I will not argue against my hon. Friend's suggestion, but the hon. Member for Eastbourne raised a point of order at the beginning of our proceedings this morning—[Interruption]—as he eagerly recalls, and I would like to respond briefly to his questions. As I come from what I call the Department for Work, where we believe in the work ethic, I believe that there is no reason why we should not debate this subject long into the evening, but that may not be universally popular.

I would like to clarify our proposed timetable for discussing our remaining new clauses. As hon. Members are aware, we have tabled new clauses relating to the pensions ombudsman and additional voluntary contributions. We had hoped to table more new clauses before the Easter recess, but I regret that

that has not proved possible. We therefore plan to table further new clauses during the recess. I am advised—although you may have better information, Mr. Cran—that amendments tabled before Thursday 15 April will be printed in the Order Paper on Friday 16 April. Amendments tabled on 16 April will appear on the Order Paper on 19 April and, I understand, will not be starred when we reconvene on 20 April.

Of course, I recognise that that leaves members of the Committee in a difficult position regarding notice of Government amendments. To try to help them with that, I will send copies of the amendments and briefing notes to hon. Members as they are tabled. As previously discussed, we are still aiming to table a number of amendments relating to subjects announced in the action document in June 2003 but not yet included in the Bill. Those include changes to section 67 of the Pensions Act 1995, which relates to the modification of the accrued rights of members of occupational pension schemes. The amendment would enable schemes to rationalise existing arrangements and reduce administration costs and complexity, provided that certain safeguards are in place.

A new power will require employers to consult affected active members and/or their representatives on key major changes to future pension arrangements. Amendments will also relate to the transfer and preservation provisions in the Pensions Act 1995, which include a measure for people who change jobs regularly, to flexible retirement provisions enabling employees to draw a pension while continuing to work and contribute, and to the age at which deferred pensions can be taken in schemes in which the normal retirement age is below 60. That links with changes in pension age in public service schemes.

Additionally, as I indicated earlier, we shall table some further amendments relating to the pensions regulator, which deal with pensions liberation—pensions ''liberation'' is not as nice as it sounds; it is something that we do not really like. They will also give new powers to the regulator to keep pace with constantly evolving unlawful practice. There will also be amendments to enable the regulator to appoint and maintain a register of approved independent trustees.

We also intend to table new clauses dealing with moral hazard, to provide adequate protection against the manipulation of liabilities by employers that wish to take unfair advantage of the pension protection fund. Further PPF-related amendments will give the PPF the power to publish reports, provide limitations on investment powers and ensure parity of treatment for members of schemes that do not enter the pension protection fund because of their funding position.

I do not expect that this afternoon's debate is over, although we are discussing a motion to adjourn, but in case I do not have an opportunity to speak again, may I wish you, Mr. Cran, and Mr. Griffiths in his absence, and all Committee colleagues and supporting officials a happy Easter?

Nigel Waterson (Conservative, Eastbourne)

I echo those Easter sentiments.

What is one to say? Hardly any of the issues that the Minister has flagged up in his comments, which were helpful as far as they went, are new. On the contrary, they are almost all matters that the industry and the experts expected to be in the Bill. The Minister talks about the Department for Work, but some sections of that Department have not been working hard enough.

I want to make a point that I have made before, but which seems to have fallen entirely on deaf ears. This point is not just about amendments or new clauses that will be tabled during the recess so that they are printed, and debatable on the Tuesday when we come back. Perhaps Opposition Committee members will have had the chance at least to glance at them, and at the explanatory notes. The whole point is that people out there want to know that they are being tabled, and want to have the chance to comment on them through Committee members, and I do not think that they will have that opportunity. That is an outrageous way to legislate in a complex area of the law, which will severely limit our ability to scrutinise those parts of the Bill, and will make it all the more necessary for proper scrutiny to take place—ultimately, in another place.

Malcolm Wicks (Labour, Croydon North)

I appreciate the briefing problems that the hon. Gentleman faces, and I promise to send a copy to the House of Commons Library.

Nigel Waterson (Conservative, Eastbourne)

A copy of what?

Malcolm Wicks (Labour, Croydon North)

A copy of the things that I promised to send to Committee members. I know that the hon. Gentleman draws a lot on the Library information documents; hence my suggestion.

Nigel Waterson (Conservative, Eastbourne)

I never know whether the Minister is being funny or not, and I suspect that I am not in the minority. This is a serious point; it is up to the Government whether they want to seem even more crassly incompetent to the outside world and to the people who will have to make the legislation work in the real world than they already do. That is a matter for them. We will do what we can to scrutinise the legislation, but I suspect that it will run into closer scrutiny in another place.

Anyway, I do not want to ruin this pre-Easter warmth and amity, so I again wish the Committee a happy Easter—and one free from worries about rafts of new clauses.

Steve Webb (Liberal Democrat, Northavon)

If those clauses, which have proved so tricky that they have not yet been written, finally arrive imperfect from the womb in our e-mail inboxes on Easter Sunday, shall we be able to table amendments to them? Once we have seen them, if there are bits of them that we do not like, will it be in order to table amendments to a new clause that will not, at that point, have been added to the Bill?

James Cran (Conservative, Beverley and Holderness)

Yes.

Steve Webb (Liberal Democrat, Northavon)

In that case, I am happy to agree that the Committee should now adjourn.

Nigel Waterson (Conservative, Eastbourne)

But in practical terms, if any of the new clauses are debated straight after the Easter break, there will not be time to table amendments to them that will be debatable.

Steve Webb (Liberal Democrat, Northavon)

I am grateful for that intervention. May I ask for further clarification, Mr. Cran? I can understand why Government new clauses—even those that appear the day before our debate and are therefore starred—will be selected for our Tuesday sitting, otherwise I do not know what we shall do on that Tuesday. Is there a distinction between Government and non-Government new clauses, because the latter would be starred and not selectable?

James Cran (Conservative, Beverley and Holderness)

Having consulted those who know, I am advised that if hon. Members wish to table amendments to new clauses that are available, it would be much better for the Committee if they could do so by the Friday, if possible. If they table them on the Monday, the Chairman will have to use his discretion.

Nigel Waterson (Conservative, Eastbourne)

I am sorry, Mr. Cran—this is not some anti-religious attempt to stop Easter, but some of

the new clauses will be printed on the Monday, so we cannot possibly do that, if I am correct in assuming that by ''the Friday'', you mean the Friday before we return.

James Cran (Conservative, Beverley and Holderness)

For the avoidance of any doubt whatever, I shall read out this piece of paper that I have been given. Amendments to new clauses: if the new clauses are not seen in print until the Monday, they will be starred.

Nigel Waterson (Conservative, Eastbourne)

So they cannot be debated?

James Cran (Conservative, Beverley and Holderness)

I think that we have got there, have we not?

Question put and agreed to.

Adjourned accordingly at one minute to Four o'clock till Tuesday 20 April at half-past Nine o'clock.