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Premium On Termination Of Contracted-Out Scheme

Volume 893: debated on Wednesday 11 June 1975

The text on this page has been created from Hansard archive content, it may contain typographical errors.

".—(1) In the case of an occupational pension scheme which is contracted-out, the Occupational Pensions Board may, for the event of its ceasing to be contracted-out, approve any arrangement made or to be made in relation

to the scheme, or for its purposes, for the preservation or transfer—

  • (a) of earners' accrued rights to guaranteed minimum pensions under the scheme;
  • (b) of the liability for the payment of guaranteed minimum pensions thereunder in respect of persons who have then become entitled to receive them.
  • (2) If the scheme ceases to be a contracted-out scheme (whether by being wound up or otherwise)—

  • (a) the employer of each earner whose accrued rights to guaranteed minimum pensions under the scheme are not subject to approved arrangements shall pay a state scheme premium in respect of that earner; and
  • (b) the prescribed person shall pay a state scheme premium in respect of each person who has then become entitled to receive a guaranteed minimum pension under the scheme and whose guaranteed minimum pension rights are not subject to such arrangements.
  • (3) A premium under subsection (2)( a) above may be referred to as an 'accrued rights premium'; and a premium under subsection (2)( b) may be referred to as a 'pensioner's rights premium'; and in each case the premium shall be paid within the prescribed period to the Secretary of State.

    (4) For the purposes of subsection (2) above, an earner's accrued rights or, as the case may be, a person's guaranteed minimum pension rights are subject to approved arrangements if (either before or after the scheme ceased to be contracted-out) the Occupational Pensions Board have approved arrangements under subsection (1) above which operate as respects him and the rights in question, and have not since withdrawn their approval.

    (5) The amount—

  • (a) of an accrued rights premium shall be the cost (as certified by the Secretary of State) of providing guaranteed minimum pensions for the earner and his widow in accordance with his accrued rights under the scheme; and
  • (b) of a pensioner's rights premium shall be the cost (as so certified) of providing or continuing to provide any guaranteed minimum pension thereunder, whether for the earner (or former earner) or for his widow.
  • (6) The costs referred to in subsection (5)( a) and ( b) above shall, if the person liable for the premium so elects in the prescribed manner, be calculated on the basis that (disregarding any orders made under section 21 of this Act) the relevant earnings factors have been increased by 12 per cent. per annum in each of the five complete tax years before that in which the scheme ceases to be contracted-out.

    (7) In calculating those costs, the Secretary of State shall apply the prescribed actuarial tables; and regulations for the purposes of this subsection—

  • (a) shall be made only after consultation with the Government Actuary;
  • (b)) shall be so framed that the tables applicable from time to time vary with the yield on such investments or classes of investments as the Secretary of State thinks fit.
  • (8) In certifying any amount under subsection (5) above, the Secretary of State may make such adjustments as he thinks necessary for avoiding fractional amounts.

    (9) Payment of an accrued rights premium shall extinguish the earner's accrued rights to guaranteed minimum pensions under the scheme; and payment of a pensioner's rights premium shall extinguish any right to receive guaranteed minimum pensions thereunder, whether for the earner (or former earner) or for his widow'.—[ Mrs. Castle.]

    Brought up, and read the First time.

    8.16 p.m.

    I beg to move, That the clause be read a Second time.

    With this clause we may also discuss the following: sub-amendment (a), at end of subsection (7)(b), insert—

    '(c) shall require that the Secretary of State shall publish the full actuarial bases of such tables and shall give five years' notice of any change in such bases'.

    Amendment No. 29, in Clause 39, page 29, line 39, at end insert—

    '(6) In considering a scheme for the purposes of subsections (1) and (2) above, the Board may calculate guaranteed minimum pensions on the basis that the earner's earnings factor for any relevant year shall be taken as that factor increased by eight per cent. per annum and not as increased by any order or orders that have come into force under section 21 above'.

    Government Amendment No. 31.

    Amendment No. 32, in Clause 41, page 31, line 32, after 'premiums', insert—

    'subject to the provisions of subsection (7) below'.

    Amendment No. 33, in page 32, line 19, at end insert—

    '(7) If the resources of the fund are less than the amount of the state scheme premium then the amount of the state scheme premium shall be determined as prescribed'.

    This new clause fulfils a promise I made in Committee. During our Committee debates my right hon. Friend the Minister of State, the Under-Secretary and I made it clear that what we were seeking in the Bill was a permanent solution of the pensions questions, in so far as anything can be considered permanent in our developing political life. Perhaps it would be better to say that we are seeking an enduring solution based on an agreement between both sides of the House that the right way to solve our problems is to secure a partnership between the State scheme and private occupational schemes. That is what we have sought to do in the Bill.

    We have recognised that working men and women attach considerable importance to their private occupational schemes when they are good ones, so we have sought to improve the schemes and to enable the good private schemes to continue. We have sought to remove any disincentive in the Bill to the contracting-out of good, recognised schemes. I am sure Opposition Members will appreciate that we made several concessions in Committee to that end. They will remember that we agreed to a larger reduction in the contribution for the approved contracted-out scheme, and we made a concession on the buying-back of early leavers. As the Committee stage developed, however, it became clear that there remained one major uncertainty which was likely to act as a disincentive to employers to contract out. That was described in Committee as the open-ended commitment which faced the contracted-out employer if for any reason he wanted or had to terminate his arrangements for contracting out.

    Under the provisions of the Bill as it stands and as it came out of Committee, when an occupational scheme ceases to be contracted out the employer has to pay a premium to the State scheme in respect of the earners in the scheme. The amount of that premium is the cost of providing or continuing to provide guaranteed minimum pensions for the employee and his wife.

    Clause 41, which is being deleted by Amendment No. 31, provides:
    "In calculating the costs … the Secretary of State shall apply the prescribed actuarial tables".
    which will be set out in regulations.

    The complaint made in Committee and by the pensions interests to my right hon. Friend the Minister of State who has been in continuing consultation with them, is that at a time when wages are rising rapidly and investment yield is falling, the employer could be caught between the upper and nether millstones of rising costs and falling resources and that the fear of being caught in that way could make him hesitate to contract out under the scheme. In addition, it was put to us that when a scheme was winding up the employer might be driven to realise his assets to pay high premiums at a time when the yield on and therefore the market value of his assets was low.

    None of us expects this to be the permanent background to this legislation. If it were, not only the scheme but the country's whole economy would be in a parlous state. But the experience of recent years has caused a great deal of understandable nervousness and uncertainty among employers. Therefore, it was put to us in Committee that a way must be found to close the open-ended commitment which the employer faced when his scheme ceased to be contracted out for any reason and he had to buy back his employees into the State scheme.

    During discussions in Committee and during the talks which my right hon. Friend had with pensions interests, various and highly complex solutions were advanced. The ingenuity of some members of the Committee has been commendable but not always completely fruitful in finding an answer to this problem. There was no consensus of opinion among hon. Members and there has been no consensus of opinion among pensions interests, because we are seeking to deal with an emergency situation and we cannot legislate on the basis that the emergency is endemic and that provision for dealing with it should therefore be built into the legislation. There has to be a fall-back position for dealing with a situation which it is hoped will not face any of the schemes concerned.

    We were immensely intrigued and stimulated by the various suggestions that were put forward. As I told the Committee when we last discussed this matter, my right hon. Friend has been in continuing consultation with the pension interests to see whether an agreed solution can be reached. In the end, it became clear to us that there would not be a complete consensus of opinion. Therefore, we have had to reach our own decisions.

    New Clause 1, which I am recommending to the House, embodies the result of our thinking, in the light of the talks that have been held and of the Committee's discussion. I pay tribute to my right hon. Friend, who has been continuously thinking about this problem, and to the officials of my Department who have been working to clothe his bright ideas with the practicalities of legislation and administration. The clause is our answer, and no better one has been produced. It suceeeds remarkably well in dealing with the potential catastrophe with which we are trying to deal.

    The clause does three things. First, it meets a suggestion made in Committee that there might be a little more clarification of nomenclature. It distinguishes between the two types of premium which have to be paid on the termination of contracting out by giving them names. We refer to the "accrued rights premium", payable in the case of the employee with accrued rights, and to the "pensioner's rights premium", which relates to the retired person with a guaranteed minimum pension when the scheme winds up.

    Subsection (6) limits the employer's financial liability when he is buying his employees back into the State scheme. Thirdly, in subsection (7) it is provided that in calculating the cost on which the premium is based the actuarial tables shall vary with the yield on investment.

    The way in which the provision will work is as follows. First, under subsection (6), for buying-back purposes the employer, instead of having to revalue the amount of the guaranteed minimum pension earned in line with national average earnings, can choose to revalue on the basis that earnings have risen by 12 per cent. a year in each of the five complete tax years in the period before the scheme ceased to be contracted out. That, as the House will appreciate, has the effect of letting the employer know in an uncertain situation the maximum extent of his commitment for five years ahead. At a time of an upsurge in earnings such as we have been through it would limit his liability in respect of the guaranteed minimum pension. After a period of high inflation, the employer would be able to wait and see whether the income from and the value of his investments were catching up with earnings before having to take a decision to buy back. In other words, it gives him time.

    8.30 p.m.

    Secondly, under subsection (7) the premium paid into the State scheme to transfer the guaranteed minimum pension liability back to the State scheme will vary according to current market yields. It is envisaged that the regulations which we shall be laying under the subsection will provide for a set of buying-back tables, the particular tables to be applied at any time depending on the value of some measure of market yield. For practical reasons it would probably be desirable for the same tables to remain in operation for a minimum period of at least, let us say, one month.

    The details of how the scheme would operate are still being worked out. We have not yet decided whether the measure to be used should be the price of a particular stock or some market index, and whether it would be desirable or feasible to take account of changes in the yield of equities as well as gilt-edged stocks. When the proposals have been worked out in detail it will clearly be only reasonable to give the pension interests an opportunity to comment before the proposals are embodied in regulations, and that is what we shall do.

    Together these two new provisions should remove the fear on the part of employers that a period of rapid inflation could result in a high buying-hack premium to be met out of depreciated assets, with a resulting deficiency in the occupational scheme which would be absolutely beyond the employer's ability to make good without serious damage to his enterprise.

    It would be helpful if the right hon. Lady could clarify the way in which the Government Actuary is involved. It is said in subsection 7(a) that the regulations will be made after there has been consultation with the Government Actuary. Subsection 7(b) says, as the right hon. Lady has just explained, that the applicable tables will take into account the yield on such investments as the Secretary of State thinks fit. It would help if the right hon. Lady were able to say that in the arrangements which she is now working out the Government Actuary will be consulted as to the appropriate investment to take into account.

    Yes, of course he will be consulted. I do not think that the lack of a specific mention has any significance. We rely very much on the Government Actuary's advice in this whole area.

    These two new provisions should remove the fear of the open-ended commitment which was referred to in Committee by so many hon. Members. It would give the employer an assurance that it is no part of our intention that he should be placed in a situation in which, as a result of his statutory obligations, he could be bankrupted. I repeat what my right hon. and learned Friend said in Committee—namely, that it is no part of our purpose to place undertakings on occupational pension schemes that they are manifestly unable to fulfil. The whole purpose of the Bill would be invalidated if we were to do so.

    There could be cases where a firm was in difficult financial straits and had to apply the provisions of the clause. Would the liability under the clause produce, as it were, a preferential creditor, as it would in the case of salaries, or would the position be that of an ordinary creditor under the bankruptcy scheme?

    If there is to be any guarantee to the members of the scheme, that must be so. We are trying to meet the needs of both employer and employee. To ensure that the scheme is acceptable, we are limiting the liability. That does not mean that the rights of the employer go out of the window. I think that is obvious.

    In Committee the hon. Member for Somerset, North (Mr. Dean) asked me to confirm that when I produced the Government's proposals I would ensure that they covered three areas—first the case of the scheme when contracting out ceased, secondly the case of the scheme on winding up, and thirdly the case of the early leaver.

    The provisions in the new clause cover both schemes—namely, schemes which cease to contract out and those which are involved in a winding-up. In amendment No. 36, with which we shall deal a little later, I shall be extending the concession which varies the premium in line with the market rate of interest to cover early leavers. We can examine that point later. I hope that the hon. Gentleman will be satisfied that I have met the three matters mentioned in Committee.

    We have throughout been in close touch with the pension interests and it is fair to say that they have welcomed our provisions. I think they recognize that the clause deals satisfactorily with the problems in respect of earnings revaluation where a scheme ceases to contract out and the situation involving a decrease in yield, which in turn leads to a fall in asset values.

    I have been asked to go further. Indeed, it has always been my experience in the Government that once one makes a concession one is asked to take even further steps. That is what has happened in this case. I have been asked to ensure that the tables should not operate for a period of five years. Indeed, that is the effect of sub-amendment (a). We do not know whether it will be moved, and we shall wait and see, but, if it is moved, my right hon. Friend the Minister of State will explain why we cannot accept sub-amendment (a).

    I hope that the House will welcome the clause as further proof of the fact that we have been genuine in our intention of a partnership between the State and private schemes. I hope indeed that the proposals will not be accepted grudgeingly. I want a message to go out from this House today as we reach the concluding stages of this Bill. The message is that yet again the Government have shown their real desire that good private schemes shall flourish and shall be enabled to operate. We want the message to be understood—and the message is that this scheme will stick.

    8.45 p.m.

    The clause is substantially the result of the bipartisan approach adopted in Standing Committee and our deliberations there. I am happy to confirm that we appear to be making real progress towards a bipartisan agreement on a scheme which will reassure those with an interest in occupational pensions that a genuine partnership will be achieved and will last into the future.

    It is in a way surprising that we begin on this note. I should certainly like to add to what the Secretary of State has said by paying tribute to her right hon. Friend and to her staff for the genuine way in which they responded to the arguments during Committee and for the great deal of work which has clearly been done in trying to meet the points and representations that were made. It is surprising that we have reached this stage in this manner, given the background of anger with which we began when the White Paper was first produced.

    The Crossman scheme produced by the Labour Government in 1970 fell with a General Election and was rejected by the succeeding Conservative Government. We committed ourselves to a scheme which we still defend vigorously—namely, the Joseph scheme—which provided occupational pensions for all. However, the present Government found it unacceptable. The anger arose when that scheme was rejected. Fortunately, both sides clearly reached the view that if we continued successfully to destroy each other's pension schemes, with successive parties throwing out a measure with a view to bringing forward something else, the uncertainty and change would succeed in completely destroying the occupational pensions industry outside. Moreover we would jeopardise the interests of the substantial number of people who have great expectations of good occupational pension schemes. Although we prefer the principle of funding and of occupational funded pensions being the main expectation of most people in work, we are prepared to settle for good contracting-out arrangements, for the maximum number of people, in schemes which meet the Government's requirements in this legislation.

    The clause deals with what the occupational pensions industry saw as the major obstacle. We must test the clause as it now stands, and the work of the House so far, to see whether we shall achieve the target which we are all agreed upon—namely, that when the new scheme comes into operation in 1977 or 1978 it will provide a structure which can be accepted by successive Governments thereafter as the structure within which any further political debate will take place, and that approximately 8 million working people will contract out under the arrangements that the Bill will lay down.

    The biggest single obstacle to that expectation and the factor most likely to persuade employers and those who advise them not to contract out but to abandon their general occupational scheme and to rely on the State was what we came to describe as the open-ended commitment that seemed implicit in the Bill as it originally stood.

    As the Secretary of State has said, fear about the open-ended commitment especially arises because of the unfortunate relationship that has persisted for some time between the yield on investment—the income coming into a fund—and the high level of inflation of wages and salaries, given that final salaries determine benefit.

    Those who manage any kind of invested fund have found that they have had a negative yield. Therefore, on paper they are losing money. The return on their investment has not been increasing at an adequate level to keep pace with rising wages and salaries. If that negative yield continues indefinitely there is simply no basis upon which any occupational pension, as we know it, can conceivably continue in business.

    There is one particular problem which follows this legislation. In the past there have always been short periods when this sort of situation has arisen and it has been a risk at the back of everybody's mind. However, an occupational pension fund, in the last resort, could wind up and do the best it could to satisfy as many of its beneficiaries as possible, and then close down.

    For the first time the Bill imposes a legal liability on the fund and, through the fund, on the employer to keep match with the open-ended inflation-proof obligation of guaranteed minimum pensions come what may, even if it is suffering a negative relationship between the yield on its investment and the inflation of its employees' salaries. As a legal liability the problem that was being contemplated in Committee was in the last resort—and I accept that we are talking about a doomwatch situation—an emergency situation which all Governments would hope to avoid. In the last resort one could reach a situation where the legal liability upon the fund and, through the fund, upon the employer could possibly bring down the company and cause bankruptcy and difficulties to other creditors. We must therefore see how far this substantial and welcome clause has gone towards removing that fear in all but the most unlikely situations.

    There are two other matters that we must consider. I have already said that the whole matter is bedevilled by the appalling economic climate and the serious difficulties that occupational pensions have faced for the past three or tour years, and that they are very fearful of facing for two or three years more. We are talking about the relationship between yield on investment and the high level of inflation and salaries. In Considering the clause in detail, we must keep in mind that the essential thing that will remove doubts and fears, the only thing that can make any sense if we continue expecting this to mean anything in 1978, is that there must be a change in the inflation in wages and salaries and the yield on investment, particularly the relationship between the two.

    The black fears sometimes expressed, one hopes unnecessarily, by some people in the pensions industry are in part conditioned by the apparent impossibility of this Government's producing any economic policy giving anyone confidence that the rate of salary and wage inflation will be checked in the foreseeable future. The problems of their yields on investment and the difficulties their funds face were made worse during the progress of the Bill through Committee by an asinine interjection by a Secretary of State in another Department, then Industry and now Energy. He started producing policy documents pre-supposing that at some future date a Government would start intervening with investment managers, directing that their funds be invested in areas approved by the Government or the National Enterprise Board, in such a way as to reduce the yield on investment that they would receive by investing elsewhere.

    That proposal was fantastically ill-timed. It ran totally counter to every thing Ministers now in the Chamber were saying about pensions policy, and it caused a great deal of fear. I am glad to say that the Secretary of State for Social Services ultimately associated herself with the Prime Minister's repudiation of the then Secretary of State for Industry's proposals, although her letter to me seemed a somewhat lukewarm repudiation and more an obedient falling in with the authority of the repudiation of those views by the Prime Minister. Given what the right hon. Lady has done in the clause, one trusts that she accepts that such proposals affecting the yield on investment would do terrible damage if they were ever introduced, if any such restraints were put on pension funds and the way in which the savings of working people, put into those funds, are invested in the future. We trust that such wild schemes will not be implemented.

    Against the background I have described, an employer contemplating contracting out must look at the limits of his commitment. He is bound to consider the worst that could happen to him if the present economic climate continued and he found himself facing liabilities because of his pension fund. Those whose commercial interest it is to try to persuade employers to contract out will be able to give that advice honestly, will be able to give good advice which will carry weight, only if they can tell an employer that there is a tolerable limit to the commitment that can fall upon him through his pension fund, that that commitment is reasonably ascertainable, with plenty of warnings, and that it could in no circumstances cause disaster to his company.

    When deciding what the extent of the commitment could be, one must look at the situations which may arise when a negative yield situation is persisting and the actuaries and others advising on the management of an invested pension fund realise that the fund faces serious difficulties in continuing to meet its obligations.

    It seems to me that there are three situations that can occur when a fund gets into such a situation and an employer is receiving advice. There are three courses open to an employer who has his mind trained to the situation when real difficulties are occurring in the management of his fund.

    The first is that the employer should cease to contract out, and buy back into the State scheme, which is one of the bases of the clause.

    The second—in my opinion, preferable to ceasing to contract out and buying back—is to contract out of the scheme, so that there is no ongoing commitment to a guaranteed minimum pension, but to make other arrangements for the preserved rights that have so far accrued, so that there is no question of buying the whole thing back into the State.

    The third course—I accept that it is the Government's preference—is to choose not immediately to cease to contract out but to do what any properly managed investment fund ought to be able to do—that is, to ride out a period of temporary difficulties until the climate improves, and then, having ridden out the storm, to look at the liability which falls on the fund management, if the worst comes to the worst. It would not do that if real disaster, possibly bankruptcy, lay at the end of it.

    In each of these situations it is necessary to look at limited liability. The third of those situations is covered by new Clause 1, because, as I understand it, a firm which chooses to ride out difficulties, hoping to continue to be contracted out, will have at the back of its mind the risk of winding up. This limits the liability on winding up, so that course may not be too bold, and is the preferable course that we would like it to take. This is an encouragement to do that.

    We have to test the clause. We seem to be agreed on the aims of it. Are we now completely out of the wood in the situation where an employer might face bankruptcy in some foreseeable situation, or where there are real risks? I think that substantially we are, and I pay tribute to the Government for introducing a scheme of their own which seems to cover most of the situations about which we were all so fearful in the Committee.

    The 12 per cent. limit on the revaluation of earnings factors for the last five years seems to me to be entirely an O'Malley idea, or that of those who advise the right hon. Gentleman. It supersedes all those which were pouring in on the Government, and the representations of the Opposition. The figure seems to be fairly steep at 12 per cent. I would not want to lobby against it. Some limitation of that kind is an advantage, and there is no point in trying to go to the market place haggling for the most advantageous bargain.

    I welcome the fact that subsection 7 (b) is applying the prescribed actuarial tables. That is the point we made in relation to an emergency arising at a time when the value of investments is depressed, so that depreciated assets have to be sold to pay the premium that has to be paid.

    Having said those things about it, and that it covers most aspects of the situation, I still have some doubts—as the right hon. Lady said, those in the industry have some doubts—whether the Government have completely achieved the purpose I described of encouraging the employer to ride out bad times, waiting for his well-managed fund to enjoy the usual relationship between yield, investments and liabilities, and to continue to contract out. When an employer looks at that situation, and at the limits of his liability upon winding up, it is true that, following this clause, one limitation is that there will now be a 12 per cent. limit on the revaluation of earnings factors in the last five years before he ceases to contract out. But he still has to pay a premium which takes account of the future cost of providing a guranteed minimum pension and that premium is still uncertain. It would still be an uncertain factor to be calculated at the time when the employer was deciding whether to ride out the storm.

    The CBI has been one vehicle for putting forward this complaint, as Ministers know. But it is not simply a CBI point. I understand that, on this occasion, the CBI has put forward an agreed problem.

    I quote from a letter which I have received from Mr. Martin Cobb of the CBI:
    "We are concerned, however, that there is still an element of openendness since if, when the new tables are issued under Clause 41 these are based on less favourable assumptions with regard to future earnings increases, or indeed to other factors such as reduced mortality of pensioners, occupational schemes might not be able to take the way out by winding up before the new tables come into force. We therefore think it essential that there should be one further concession to the effect that when the new tables are issued a sufficient period is provided in the legislation before these come into force so that companies will have an adequate opportunity to pay premiums on the old basis for which they will have funded. We assume the new tables will normally apply from the beginning of a tax year and we think it necessary to write into the legislation a provision that they will not be brought into force until at least 5 years after their approval by Parliament. This time factor would be consistent with the 5 year period in Sub-clause (6), and a period not much shorter than this would often in practice be required for a scheme to carry through all the consultation with employees and their representatives and make the administrative arrangements necessary in a winding up situation."
    We are back to the problem of the premium being calculated on the actuarial tables which have to be produced under the Bill. In Committee we all got used to these acturial tables and the problems of using them as the basis for assessing the various bills—in this case, the bill for buying back if anyone ceased to contract out.

    Sub-amendment (a) deals with the effect of changes in the actuarial tables. The Government say that the actuarial tables will usually last for five years and that there will usually be about 12 months' notice of any change. But the problem arises when those changes are made.

    If I understand the representations aright, the problem is that every time the tables are changed, at that stage the possible cost of the premium may change substantially. If there is to be only 12 months' notice of a change being made, that is not long enough if 12 months is not long enough with which to organize a winding-up situation or to decide about contracting out.

    The amendment would mean that, instead of having five-year tables changed at five-year intervals with 12 months' notice each time, there would be, to use town and country planning jargon, a five-year rolling period, with the tables being reviewed each year but with no change coming into force until five years after the date on which they were announced. The five years would give all the time necessary for the advice and the consultation for which the Bill wisely provides, and it would mean that at every stage when the price of the premium was being changed, the employer who decided that the price had moved to his advantage would have the option of shutting up shop, contracting out, winding-up and buying back at the price which he knew before.

    It is already the case that, in a sense, the tables would be rolling tables, since this clearly would indicate the premiums required according to investment yield at a given level and at a given time. Secondly, it is the case that they would not be rolling tables in the sense that the underlying, basic assumptions would be changed every year.

    However, the hon. Member for Rushcliffe (Mr. Clarke) should bear in mind that in the initial round of reactions which we had from the industry there was almost complete unanimity that the period of five years for the review of the fundamental assumptions underlying any such tables was a sensible period in which to operate.

    9.0 p.m.

    I am obliged to the right hon. Gentleman. There is complete unanimity now on the representations of the CBI. What he referred to was put forward in a different context, before new Clause 1 was tabled. That was when the acturial tables were being revised five years at a time, with 12 months' notice. Certainly, if they were to be applied in that way, the industry would not want them chopped and changed every year. The industry now wants, because of the circumstances the clause gives rise to and because of the two types of premium we are considering, a last-resort protection against the risks involved from the open-ended commitment. The industry wants five years' notice of change so that there will be a five-year interval between announcement and their coming into effect.

    If this is to be the industry's last protection, which it is now, it is the Government's answer to the open-ended commitment but it is not the situation which was discussed previously.

    The industry needs time to take advice from its actuaries and expert advisers and then to consult its members and trade unions—which, easily, demonstrably could certainly take a number of years, given the slow progress with the OPB, if that is involved—but it also has another advantage which would satisfy what the Government are trying to meet; namely, certainty. With the five years' notice the price of the premium at any given time is there. I am advised that it would give certainty, which is the ultimate protection which any prudent investment manager or employer would like. It would make the liability insurable and coverable, and it would close finally the suggestion that this was an open-ended commitment because it would be open to insurance companies acting legally within the restraints put upon insurance companies by other branches of legislation to give cast-iron insurance cover to the liability, which they cannot do at present.

    As Ministers are aware, an insurance company cannot legally give any kind of cover for an open-ended, unlimited liability of any kind. The Secretary of State has already intimated that that is not acceptable, and the Minister of State will give further reasons why not. By his intervention the Minister of State thinks that it is the opposite to what was put to him earlier, when representations were made.

    I have put the case. It has considerable merit. It is intelligible, and it is obviously of serious concern. I was first made aware of it in a letter from the CBI. No doubt the Minister also first heard of it in this way. The Minister has probably found that it has been backed up solidly by almost every branch of the pensions industry. No hon. Member will listen to the pensions industry and say that it must be right. All the lobbying and representations that industry has made have to be sifted and considered, and what is of commercial interest has to be disregarded.

    However, expert advice should not go unheeded, because if we have a genuine partnershp these are the partners, and the actuaries, with their professional standards, will give objective advice to employers, who, in the last resort, are the people who have to make the decisions on whether they contract out or whether they rely on the State.

    Given that such strong representations have come forward on a new clause which was tabled only recently, that the representations so far are coupled with an acknowledgment of the Government's good faith in tabling the new clause and that we appreciate that the Government have responded with a novel suggestion to all our representations in Committee, at this stage they should say that if there is a problem they will look at it, especially as we have gone so far down the road towards an agreement not only between the Government and the Opposition but between the Government and the occupational pensions industry. There should be an agreed structure which would give 8 million people the benefit of occupa- tional pensions. I ask the Government seriously to consider this.

    There are two other important points with which I hope the Minister will be able to deal. First, I am still rather worried about what happens to a scheme which ceases to contract out, in the difficult circumstances I have described, but preserves its pension rights, a scheme which decides that it will cease to contract out but not buy back, a scheme which decided that it could not continue to contract out would still want to do rather than have all the problems of buying back. It seems to me that the clause does not give much reassurance on that point.

    May I ask the hon. Gentleman a question so that I may the better answer him at some stage? What is the proposition that he is putting to me? Is it that the scheme ceasing to contract out nevertheless would wish to maintain to the fund the full responsibility of pre-award dynamism in respect of the GMP,—or is the proposition that such a scheme would wish to pay a premium into the State scheme as the Bill now stands and merely maintain a liability in respect of pre-award dynamism to the extent of 5 per cent.? Which set of circumstances is the hon. Gentleman envisaging?

    I was envisaging the former—I think—which is that the scheme would wish to cease to contract out so far as future liability of the GMP is concerned, because it would have received the advice that it was no longer covered by investment but it would not wish to pay a premium of any kind to the State to buy back to pre-award liability for its GMP. That again involves an element of risk which, among other things, an employer would want to take rather than go through the process of buying back. It does not seem that there is a limitation on the possibility of winding up.

    I should like the Minister to get another reaction about what the industry would prefer. Instead of having a premium of this kind, liability could be fixed at a certain fixed level of revaluation. This is still being urged and has the overwhelming merits, which this scheme does not have, of simplicity and of clear, defined liability and a clearly insurable risk which everyone could manage. I trust that the Minister has not thrown that out of the window, even at this late stage.

    I also draw the Minister's attention to Amendment No. 29 and I ask him to give his reactions to it. This bears slightly on the same point. It is the liability which could fall on a scheme in relation to the solvency requirements in a later part of the Bill. The Occupational Pensions Board can quite rightly require a scheme to top up its fund when the board considers that the scheme cannot guarantee its liabilities. That could be punitive, particularly if the OPB requires a topping-up payment to be made at a time when a company is in cash flow difficulties.

    These are not light sums of money. Some of the corporations in the public sector have been paying out huge sums in recent months to cover their pensions liability. The Post Office and the British Gas Corporation have been paying out millions of pounds. In this case it is public money, so it is all right for them. But major breweries and others have used a great deal of money in topping up funds. If the cash cannot be raised, this involves a question of a legal liability. This is a requirement that the OPB can impose. A company might be made insolvent if it could not raise the cash to top up its fund. It might be guilty of an offence under the Companies Act if it continued to trade.

    It would be helpful if we got this little area out of the way at this stage. I believe there would be general agreement on both sides of the House, and indeed, between the pensions industry and the Government, that differential solvency requirements lead one into a series of extremely serious anomalies which one could not sensibly contemplate. Therefore, in the type of circumstances that the hon. Gentleman is describing, I think we must expect the Occupational Pensions Board to use its discretion in a sensible way to avoid the kind of difficulties which can be avoided under the discretionary powers which the board has under the Bill.

    I believe that it would be generally the view of the House that the OPB, both on its present representation and on the manner on which it has acquitted itself so far since it was set up by the hon. Member for Somerset, North (Mr. Dean), could be expected with some confidence to deal sensibly with the type of situation that the hon. Gentleman describes.

    That is a considerable reassurance. I accept that the OPB can be relied upon to do that, if it has the necessary discretion, and to make sure that its solvency requirements are not more stringent and out of line with those which will be imposed under other legislation, especially the Companies Act. That amendment might not be necessary. It is an attempt to fix the liability limit to revaluation. I hope that the Minister will deal with that point in general. I hope he will accept the principle of the main burden of my remarks. We hope that the Government will look at this problem with considerable care. They have moved a long way to close the open-ended commitment.

    We have moved a long way, through an interesting Committee stage, to produce a workable bipartisan scheme involving partnership between occupational pension schemes and State schemes. We should like to complete that deal and to take the structure of pensions out of politics. I trust that the Minister will reassure us that the subject will be looked at again in the other place.

    I welcome the new clause as a genuine effort on the part of the Government to meet the points that were made in Committee and in the consultations which the Minister of State had with pensions interests. I believe that this is a genuine and successful attempt to meet the open-ended uninsurable commitments which existed in the Bill before the new clause appeared. I welcome the co-operation of the Government and the careful thought which they have given to the points raised.

    In the context I should like to make two general points and one detailed point. The first general point is minor in scope. The right hon. Lady, in introducing the new clause, spoke of clarification. I do not know what hon. Members think. We find reference to "accrued rights premium", "pensioner's rights premium" and, in a later new clause, "contribution equivalent premium". I suggest that that is not clarification but is the worst form of jargon creeping in. I know why it has happened. The Minister has been through the process which I went through a few years back and has endeavoured to meet the points which have been made and to introduce amendments to meet them. As a result, complexities have been introduced into the Bill which were not there before. I give credit to him for introducing these amendments. I suspect that he will be criticised, as I was, for making the measure more complex than it was to begin with.

    My main point was referred to by my hon. Friend the Member for Rushcliffe (Mr. Clarke). However, in spite of the new clause, which I welcome, those concerned with pensions are still unhappy. Their anxieties stem not from the Bill but largely from the economic and financial situation. The ugly spectre of inflation casts its dark presence over all, including pension funds, which are one of the strongest and safest forms of investment. The Bill will fail, even with these amendments, unless inflation is curbed. It will be a dead letter. It will not be worth the paper on which it is printed. The fears of those concerned will be realised unless the Government take action and the country backs them in that action.

    9.15 p.m.

    Up to now we have had talk from the Government on inflation, but not action. In recent months, to be charitable, the Government have been paralysed by the referendum. From last Thursday, however, that reason no longer applies. Unless the Government are prepared to take effective action to deal with the problem of inflation, the fears of the pensions industry will be realised. However, I believe that those fears stem largely from the general financial and economic situation, not from the Bill as amended.

    I should like to make one or two detailed points on the clause as it stands. The Secretary of State, referring particularly to subsection (6), said that it lays down the maximum extent of the com- mitment on an employer and that he is therefore able to plan on that basis. I think that the subsection does that, and I welcome it.

    Subsection (7) refers to consultation with the Government Actuary and to taking into account the yield on various investments which will be selected by the Secretary of State as she thinks fit.

    We are here moving into a new area. It is important that the Minister of State should be able to assure the House tonight that the decisions on the types of investment to be taken into account will be actuarial and in no sense political, social or any other type of decision. They must be based firmly on the discussions which Ministers will have with the Government Actuary, and the advice that he gives on the types of investment which are most appropriate in assessing the tables must be the criterion on which those tables are based. It is important to get this point established clearly now as we move into this new area.

    Is the hon. Gentleman saying that pension fund investments ought to meet a national criterion or that they ought not necessarily to meet a national criterion but should be based purely upon actuarial assessment?

    The hon. Gentleman has not quite grasped the point I am making. I am talking about a fairly important point of detail. The clause deals not with the investment of pension funds in general but with a particular circumstance: in what circumstances can a pension scheme, finding that it can no longer fulfil the liabilities of contracting out, cease to contract out or, if necessary, wind up its scheme?

    I am asking the Government to assure us that in those circumstances the only criterion which is acceptable and should apply is an actuarial criterion, that the judge of that should be the person who is most expert to decide these matters—the Government Actuary—and that political considerations should not come into it. I believe that the Minister of State will be able to assure us on this point. I hope that that is the case, because it will help the pension interests, employers and those concerned with pension schemes in their planning following this debate.

    Can the Minister also say a little more—I appreciate that it may not be easy at this stage—about what types of investments are likely to be taken into account and over what period the criterion will apply? Presumably it will be comparatively long rather than short. Any further information that the right hon. Gentleman can give will give additional assurance to those concerned about these matters.

    With those observations I welcome the new Clause as a genuine and helpful attempt by the Government to meet the points put forward. I hope that we shall get a little more information, particularly on the point about a longer period of notice before new tables come into operation.

    I know that we want to make progress but it is not the fault of those who were on the Standing Committee that we are only now dealing with new Clause 1. We should not be diverted from thoroughly exploring vital issues.

    I shall confine myself to one comment and one question. I hope that the comment will be received as it is intended—constructive and helpful. It is that it is vitally important that the Government should recognise that their present aim should be to buy time, in the sense of stopping precipitate movement to contract in before the scheme starts by schemes at present contracted out. The danger is that decisions will be taken hastily and that, once they have been taken, there will be no chance for second thoughts. The Government must give a favourable impression of the justice of this scheme right from this moment.

    There could not be a more unfavourable economic background against which to introduce it. Our present inflation presses particularly hard on schemes set up by what I would call, in shorthand and, I hope, uncontroversial terms, good employers—those schemes which have been long established, have final salary provision and at the moment face a heavy commitment for existing pensions in payment and a heavy liability for accrued pensions for those in service. It is just such schemes which are under pressure and will look hard at any opportunity to limit their liability. If they are in any doubt about whether or not to continue to contract out, such schemes will seek to contract in.

    I am sure that the Minister of State will regard as helpful—it is surprising that the Secretary of State did not make it more strongly—the point that the liability for guaranteed minimum pensions will build up very slowly. One of the criticisms of the Bill is that help to new pensioners in the early days will be very small. There will be very little liability for a guaranteed minimum pension before 1980, and, therefore, established schemes will have time to evaluate the sense of what the Government have done. The problem is much more urgent for schemes which are just now being brought into existence or are in contemplation. There is a tendency not to appreciate the slow impact of the statutory obligation for a guaranteed minimum pension, and the attitude to that obligation is being influenced by existing liabilities which are pressing very hard on companies but have nothing to do with the Bill.

    The question concerns the tables. We keep coming back to the actuarial tables, and I wish to pursue the point now. I hope that I shall be coherent and reasonably concise. We have been told, and we can see, that the liability for actual current guaranteed minimum pension at any one time will be limited by the option to substitute a 12 per cent. earnings escalation over the previous five years for what might have been a higher actual figure. Presumably there will be an element in the premium calculation and a variable in the tables to take account of this. We understand that the tables will be cast in semi-permanent forms with columns from which one can read off the appropriate current yield: but will there be another column from which one can read off the projected future escalation of earnings?

    It seems that somewhere in the actuary's assessment of the premium to be paid must be taken into account his assumption of future earnings escalation. It will not be much consolation if the assumed yield is realistic—I echo the words of my hon. Friend the Member for Somerset, North (Mr. Dean), that the figure must take into account the equity yield as well as fixed interest, although they do not always vary as much as people think in an actuary's assessment—but has a factual yield of, say, 15 or 16 per cent. and an actual earnings escalation of perhaps 25 per cent., giving a negative 10 per cent. yield.

    We have been told that the actuary will take into account the current yield position. In arriving at a figure the actuary is looking at a future liability as well as a current liability in terms of buying back, and that future liability must reflect his assumption about the level of future earnings escalation. Will there be any limitation on that? Are we, as was hinted in Committee, never to have a negative yield assumption? Is the minimum yield position to be zero? This point must be answered, or people will feel that there is an element in the calculation which may turn against them very quickly indeed.

    9.30 p.m.

    However long one may be connected with this subject, one always runs up against new questions. The last two posed by the hon. Member for Morecambe and Lonsdale (Mr. Hall-Davis) I have heard tonight for the first time. I shall attempt to answer all the questions which have been raised in the debate.

    This new clause, with the associated amendments, is extremely complex. We are involved with such questions as yield, negative yield, assumptions about inflation and the last five years of employment rather than the whole period of employment. Questions have been asked about whether that affects the whole of the accrued liabilities of pension schemes, particularly at a time of rapid inflation. This is a complex matter because complex solutions are the only solutions to what is a simple problem. I shall put the matter on which there is broad agreement as simply as possible and comment on the further requirements and observations of the Opposition.

    During the past decade there has been a significant increase in the number of occupational schemes and occupational pensioners covered by final salary type provision. Inherent in such provision is complete pre-award dynamism based on earnings movements. The occupational pensions movement has demonstrated its ability to provide pre-award earnings dynamism.

    Two things have changed and produced the type of discussion we have had on the open-ended commitment. Before the Bill was introduced an occupational scheme, if it ran into financial difficulties, could in the last resort do the best it could for its members and wind up. Now, for the first time, such schemes are faced with a legal liability, which could in certain circumstances lead directly to the bankruptcy of an employer, particularly if he were required to wind up at a time when he was not especially liquid, when the stocks and assets in the pension funds were at a low level. This is the essential first leg of the open-ended commitment problem.

    The second leg is that throughout the whole of the post-war period there have been peaks and troughs but over the period as a whole the occupational schemes have existed in a positive yield situation. That situation has changed dramatically in the past two years. Occupational pension schemes are in a negative yield position. Funded occupational pension schemes cannot continue indefinitely to provide final salary type pensions with this inbuilt pre-award dynamism in a negative yield situation.

    Unless we get out of such a situation these schemes will not be able to carry on. We are dealing here not with the money of employers or of a fund but with the deferred pay of millions of men and women. It is, therefore, right for hon. Members on both sides of the House to say that we must get out of the position of negative yield. If that negative yield were to continue for long enough, the people who would be hurt are the men and women in the work force of this country whom we represent in the House. We clearly have to get out of that situation.

    Coming to the detail of the Bill, the position is as simple as this. We want to avoid a situation in which because of a new legal liability an employer at a time of low liquidity and falling asset values is driven into bankruptcy by the provisions of the legislation. Secondly, we want to safeguard the position during periods, such as the present, when there is a short-term negative yield. As Lord Byers said, it is wrong to write off good occupational pension provision, whether in the public or private sector, but that provision depends on a positive yield situation. To allow such provision to continue and to flourish, there must be a limitation on the open-ended commitment contained in the Bill when it first came before the House.

    There has been general agreement on the type of solution we have brought forward, namely, the 12 per cent. limitation of the premium tables, varying with the investment yield, as was described by my right hon. Friend the Secretary of State. In that context I give an assurance that the Government Actuary will advise the Government. We are consulting pension interests in an attempt to get a fair index which represents yield. We want to be able to measure the yield of funds in occupational schemes. We shall carry forward that consultation as we have carried forward other consultations.

    The hon. Member for Somerset, North (Mr. Dean) referred to the question of names. I do not find the names poetic either, but what is in a name? What became obvious during my discussions with the pension interests was that when we talk about buy-back situations we have to go into a lot of longhand to decide what type of buy-back situation we envisage. It is better that there should be some names rather than no names.

    The hon. Gentleman asked me a question which I did not understand. He will no doubt interrupt me if I answer him wrongly. He asked me over what period the premium tables would operate. It is the yield on investment at a certain point in time which determines the market value of the investment and, therefore, the level of the buy-back premium. I think that I was right all along. As my right hon. Friend said, the premium would depend on the yield within the table. As I have described to the hon. Member for Rushcliffe (Mr. Clarke), there would be roll-on tables. The basic assumption having been made, one would turn at a certain time to the yield on the investment at that time. From the part of the table dealing with the yield on investment one would be able to see the type of premium which would be required to be paid.

    One would not necessarily wish to take into account the yield over the one year. One would probably want to take into account the yield over a longer period. I was seeking an assurance that that would be one of the elements that would be taken into consideration.

    I think that the hon. Gentleman misunderstands the situation. We are concerned with a situation in which assets have declined in value. That decline can be measured through the level of yield.

    Therefore, the tables could vary according to the yield.

    As my right hon. Friend explained—and this is subject to consultation—we might take a period of one month in which to use a particular assumption or figure of yield for the purpose of assessing the amount of premium payable at a certain time. I hope that this answer satisfies the hon. Gentleman. No doubt he will read what I have said—I shall also read what I have said—and if he has any further questions I shall be pleased to answer them.

    The hon. Member for Morecambe and Lonsdale rightly pointed out that the liabilities under the scheme would grow slowly because the liabilities only begin with the inception of the scheme in 1977 or 1978, whatever is the starting date of the new scheme. The hon. Gentleman asked me whether there would be an escalation of earnings figures on the tables. I have not been asked that question before. It is a highly technical matter. I would not regard such figures as suitable for inclusion in a set of tables of the kind we are discussing. However, I shall consider the question. I shall write to the hon. Gentleman and give him my considered judgment. I do not think I can answer him now with any finality. I shall contact him and let him know the full facts of the situation and the assumption that will be made.

    The hon. Member for Rushcliffe asked me questions about preservation. By permission of the Occupational Pensions Board, preservation can be either with full revaluation or with the 5 per cent. plus the premium as the Bill stands. First, I deal with the situation in which the premium is paid. In such a case the 12 per cent. limitation is not in the Bill as it stands, but I give the hon. Gentleman an assurance that a suitable amendment will be moved in another place to meet that point. It was the Government's intention that such a matter should be contained in the Bill, and we have endeavoured to meet the point.

    9.45 p.m.

    I should like to deal with sub-amendment (a) to new Clause 1. The effect of the amendment is twofold. First, it requires the Secretary of State to publish the full actuarial basis of the tables. In Committee the Government accepted in principle that the premium tables would be brought within the review procedure of Clause 27 and that any changes in the bases of the tables would be subject to affirmative resolution in both Houses. It has not been possible to prepare amendments in the time available, and amendments will be tabled in another place. When those amendments have been made, any changes in premium tables will be within the full control of Parliament and the bases on which the tables will be calculated will have already been published in a memorandum by the Government Actuary.

    I turn to the second part of the sub-amendment. I find that sub-amendment—which comes from the CBI and also from a large number of organisations interested in pensions—somewhat surprising. I thought that we were all concerned to assess premiums on the actuarial cost of paying for the pension. The sub-amendment would freeze any actuarial assumption for five years. That assumption could be completely out of date, so that it would be a negation of any actuarial assumptions. We could work on a basis quite apart from actuarial assumptions in these circumstances. The five-year situation could operate to the acute disadvantage of employers. I wonder whether the organisations concerned have considered all the aspects.

    I repeat that I find the sub-amendment surprising. Frankly, as I see the situation, I regard it as an unsound proposal. I did not receive any information about the proposition until the CBI's letter of 2nd June. I am not complaining about the date of the letter, but I wish merely to say that if the pensions industry would like to discuss the problem further with me, so that I may have the opportunity of listening to its views and of pointing out the fundamental flaws in the propo- sition, I shall continue the type of consultation which we have already pursued on the Bill. Before the matter is discussed further in another place, I shall look to see whether the proposition which is being put forward stands up to detailed scrutiny. Therefore, if the hon. Gentleman decides not to press his subamendment—although I give no commitment about what would happen as a result—I shall be happy to undertake such consultations before the Bill is considered in another place.

    Will the Minister of State assure us that in carrying out his consultations he will explain to the interested parties exactly what problem he envisages in this amendment? Moreover, will he assure us that he will enter the consultations with a genuine open mind seeking perhaps some alternative solution to close the open-ended commitment entirely, and that if such a solution can be reached he certainly will consider tabling the necessary amendments in the House of Lords to complete the understanding and the bargains that the Government are clearly trying to seal with the interested parties?

    It is one thing to make not concessions, but sensible arrangements for a partnership. However, the hon. Member for Rushcliffe must also understand that it is in the nature of interested organisations., whether in this business, politics, diplomacy or anything else, not to be impartial.

    As the Secretary of State said at the outset, if one makes a concession someone always wants something more. Therefore, I give no commitment of any kind that I shall accept anything. Of course, I shall enter into any discussions with an open mind. I shall put my views and objections to this amendment in detail to the organisations. I am prepared with an open mind to see what the results of those consultations will be. I hope that on that basis the hon. Member for Rushcliffe will be able to withdraw his amendment. I am most grateful for the way in which the Government amendment has been accepted.

    It would certainly help me and other hon. Members if we could see the format of these tables as early as possible. One of our difficulties is that tables are being scribed where the curtain is lifted only in part and not in full. I do not expect to see the tables now, but discussions would be more fruitful if, the Government having gone so far in devising these all-important tables, their format could be disclosed as soon as possible.

    I shall certainly let the hon. Member for Morecambe and Lonsdale have as much information as I can on that matter at the earliest possible date.

    Question put and agreed to.

    Clause read a Second time.

    Does the hon. Member for Rushcliffe (Mr. Clarke) wish to move his amendment?

    Accepting the Minister's open-mindedness on the discussion, I beg to ask leave to withdraw my amendment.

    Clause added to the Bill.