(Fifth Day)

Monday, 19 July 2004.

The Committee met at half past three of the clock.

[The Deputy Chairman of Committees (Lord Elton) in the Chair.]

Clause 107 [ Investment of funds]:

On Question, Whether Clause 107 shall stand part of the Bill?

During the weekend, I contemplated the progress we had made on the Bill. We have spent a considerable time debating the membership of the regulator and the board of the pension protection fund. In the light of our earlier discussions, I though I might make a constructive suggestion; namely, that Members of this Grand Committee shall forthwith be appointed to the board of the pension protection fund. We have every possible expertise. We have my noble friend Lord Hunt on insolvency; my noble friend Lady Noakes on accountancy; the noble Lord, Lord Oakeshott, on fund management; and the noble Lord, Lord Lea, on trade union representation. I was not going to leave out the noble Baroness—

Be that as it may, Clause 107 is indeed important, concerned with the investment of funds of the pension protection fund. References have been made to a number of reports by outside individuals appointed by the Government to look into various aspects of corporate governance. In this context, a report by Mr Myners dealt with the way in which pension funds might operate in investing. On the last occasion, I reflected that whenever such an individual was appointed to this sort of job, his own business tends to deteriorate. I am not sure where that will leave Marks & Spencer at the present time. However, the Myners' report makes a number of valuable remarks which are relevant to Clause 107.

We need to consider carefully, in the context of the pension protection fund, exactly how the money it acquires by taking over eligible funds is to be invested, and in particular the principles involved when it operates in that way. The clause begins by stating:

"The Board may invest for the purposes of the prudent management of its financial affairs".

No one could object to that in one sense, except that what "prudent management" means is not made clear. We should note that this will comprise a massive conglomerate of pension funds—if, tragically, a number of funds and companies with funds do fail—which the PPF will need to manage. In essence it will operate as a pension fund, but of a rather strange kind because, as we discussed during our deliberations on earlier clauses, all these funds are effectively for deferred pensioners. Therefore the investment funds may be somewhat different from that which would apply to an ordinary final salary pension fund.

The crucial question arose when the noble Baroness, Lady Hollis, was kind enough to arrange a meeting ahead of our discussion of this Bill, concerning asset allocation. We asked in what way the pension protection fund ought to allocate its assets. If one were to interpret,

"the prudent management of its financial affairs",

very precisely, I suppose it could be said that the sensible thing to do would be to put the whole lot in gilts. I am not sure whether that is what the Government have in mind, but it would certainly tend to relieve pressure on the Chancellor of the Exchequer in his effort to finance his very considerable borrowing requirements.

However, if that is the case, as is likely, the costs of the levy will be greater than need be. Even though, as I understand, all the pensioners will, in effect, be deferred pensioners, there would be none the less a case for a mix of assets between gilts on the one hand and investment in equities, hedge funds or similar on the other rather than all of them in gilts. That would minimise the long-term cost of the operation to those paying the levy. We need to be clear about exactly what the Government have in mind when they state in the Bill that:

"The Board may invest for the purposes of the prudent management of its financial affairs".

The clause goes on to state that,

"there should be at least two fund managers",

which is also certainly my view because that is sensible. However, other Members of the Committee have greater experience of that side of things. I refer also to the various recommendations made in the Myners report that the trustees should be paid. Perhaps I have

not studied the Bill adequately, but I am not yet clear whether the pension protection fund will have trustees as such or whether it will comprise a board. If it is not to have trustees, I do not understand the argument against it. There would seem to be a case for a board.

Myners goes on to ask particular funds—I think this would apply to normal funds as well as to the pension protection fund—about their attitude to risk, which is important. In order to minimise the burden on those paying the levy, will the PPF take some degree of risk in terms of the,

"prudent management of its financial affairs'"?

As regards the appointment of fund managers, are we to understand that there will be straightforward, open competition? I hope that there will be. But will we have rules laid down, which at the moment I cannot find in the Bill, about commission and transaction costs and whether or not they should—which I think not—engage in operations with soft options and so forth? Those are matters that I think, at this stage, it would be appropriate for us to have an idea about exactly how the Government think operations should be conducted under this clause.

Rather more fundamentally, will there be investments in active funds or in passive funds, and so forth? They will all be of very great importance to the success and ultimate cost of the operation. Given that the cost of the operation is a deterrent to people continuing to operate final salary schemes and to bear the cost of the levy, this is a matter about which we ought to be concerned. I shall not burden the Committee more, but this clause raises a number of very important issues. We shall come to some of the others at Clause 108. It would be helpful to have the Government's views. There is great expertise in the Committee and some Members may have views on how we should operate this fund.

Some of the more detailed points raised by the noble Lord, Lord Higgins, such as investment tactics, commission or costs, are not matters for the face of the Bill, but it is obviously perfectly proper to raise them now. No doubt, the Minister will answer us on those.

The basic investment policy—the strategy—cannot be divorced from the nature of the risks that the fund faces. As a little taster for the debate that we will have later about the circumstances, if any, under which the Government should stand behind the fund as a lender of last resort, if the Government hold to their view that they cannot stand behind the fund under any circumstances, that will inevitably mean that the PPF will have to pursue a much more risk-averse policy. Indeed, it is questionable whether it would be prudent to have equities in any proportion at all which, inevitably, will lead to a greater cost in the long run. I make that point of principle that will, in turn, affect investment strategy.

Perhaps I may comment on one or two points, especially those mentioned by the noble Lord, Lord Higgins. I have not read the Bill as though there will be any trustees. I have read these provisions as though there is the board, as mentioned in the previous clause. Although Clause 107 states that the board "may invest", it makes it clear that the board will appoint two fund managers, which received congratulatory comment from the noble Lord, Lord Higgins.

Clause 107(1) includes the phrase "prudent management". I should be surprised if that meant always and forever investing in gilts because I would not have thought that was, at all times, the prudent thing to do in order to invest money and safeguard its value. It all depends on what is going on out there in the world, and the managers will determine that and determine the right balance.

3.45 p.m.

Indeed, I should also have thought that the managers will keep a balance between investment, which we are discussing specifically under this clause, and the other matter of levy. In so far as managers are successful in investing, the levy will be that much less burdensome—and the opposite is true as well. Perhaps the Minister can put the matter more clearly than I can.

Finally, I am sometimes critical of Her Majesty's Opposition, or for that matter the Liberal Democrat opposition. I mention the two separately because the noble Lord, Lord Oakeshott, criticised me last week for not making the proper distinction between the two groups that sit opposite me. I have sometimes criticised the Opposition for wanting to put in the Bill more than seems appropriate—usually when they want to state the obvious. But in this instance, I must say to the Minister that subsection (4) is stating the obvious, as it says that in appointing a fund manager, the board must chose someone with the "appropriate knowledge and experience". That is so obvious that it does not need saying. I do not mind that it is there, but if the Opposition had proposed it, I must admit that I would question whether we needed those additional words.

I find this a very exciting part of the Bill. We are seeing here the birth of a creature that may be the forerunner of solutions to two substantial problems, one of which is the annuity difficulty and one of which relates to stakeholder pensions. This sort of vehicle is in effect a public/private pension fund, which is to be run as a public body but will be just like being in a private pension fund in terms of the structure operation and the management of investment. It may be something which, if it can be made to work, we can extend to people who do not wish to turn their pensions into annuities at an early stage, and which would certainly offer, because of the scale of its operations, the opportunity for a low-cost, high-quality pension for people investing small amounts—in other words, a stakeholder pension fund. Here we have a structure because we need it.

If we can make it work, and if we think carefully about it, try to avoid the pitfalls and think around all the characteristics and make it something that will function, we may have something that will be extremely valuable. It is worth spending time on this matter; it is the birth of an idea, and one of the key parts of the Bill.

I would be reluctant to describe the fund as a pension scheme, although it has some of those features, or even as an insurance scheme, as my noble friend did. It is a compensation scheme, but it obviously has features of both pensions and insurance in it.

As for its structure, my noble friend Lord Borrie was right in his response to the noble Lord, Lord Higgins. We are talking about a board, rather than trustees. The sort of responsibility that we would expect when advertising for non-executive directors under the Nolan principle is for a commitment to around 20 days a year for a fee of about £15,000. I have no idea whether that will hold over time, but it is our current expectation.

I agree with the noble Lord, Lord Lucas, that we are getting to a particularly interesting part of the Bill: trying to find a way through the moral hazard issues of backstopping what has hitherto been a private contract, and doing so in a public law way without recourse to public funds. Clause 107 allows the board to invest for the prudent management of its financial affairs. It is common for NDPBs to be allowed to invest funds—there is a precedent with the Pensions Compensation Board (PCB). Under Section 85 of the Pensions Act 1995, the PCB is currently permitted to invest any funds which it considers to be surplus to its immediate requirements.

The principle of allowing an NDPB to invest is to ensure value for money; in other words, investment by the board may increase the assets in the pension protection fund and therefore over time reduce the amount required to be raised by the pension protection levies. It will be very hard to achieve averages. A small number of schemes might join in one period or possibly a large number of quite small schemes will join in another, but there might suddenly be a major collapse. Resources will be needed to even out that very uneven profile, particularly if a certain sector of the economy is hit. Of the 10 major American companies that joined the scheme, live were steel, four were airlines and the last was Polaroid—I think that that is the right way around. A particular sector was hit, which produced a very jagged profile of liabilities.

We have been keen to stress that the PPF will operate at arm's length from government—investment is one example where that principle is seen in practice. This means that the board along with its advisers will be required to be responsible for its own financial management, including its investment strategy. It would not be sensible to require the board to be accountable for its financial management if we restricted its investment powers unduly. If we prescribed how the board should invest, it would put pressure on future governments to step in if investment returns went down. However, the power to invest is subject to some reasonable restrictions—under subsection (2) of this clause, the board must appoint at least two fund managers. I assure the noble Lord, Lord Higgins, that appointment will be by straightforward, open competition, to use his phrase. Before doing so, however, the board must be satisfied that the individuals or firms have the appropriate knowledge and experience.

We will discuss accountability later, but it may be worth highlighting a few key aspects. First, the board must ensure that a written statement of the principles governing decisions about investments is prepared and reviewed regularly—my noble friend Lady Turner was absolutely right in this regard. We expect the principles to cover such aspects as choosing investments: the kind of investments to be held; the balance between the different types of investment—the very point that the noble Lord, Lord Higgins, made—risk; projected returns on investment; and social, environmental or ethical considerations in the selection, retention and realisation of investments.

I would be happy to circulate to Members of the Committee three examples of statements of investment principle, because I myself was interested in how they were done. Clause 108 deals with the issue more fully. One example held to be a model of good practice is the university superannuation scheme. Its statement of investment principles lays down clearly what proportion of its investments and assets it expects to be held in UK equities, overseas equities, fixed interest and property, and what proportion of divergence there is on either side. Members opposite may well be entirely familiar with this. The three examples are the BP pension fund, a local government fund and a university superannuation scheme, which are all very similar. If they are models of best practice, I would be surprised if ours diverged greatly from them. If it would help noble Lords, I would be happy to circulate the examples so that they can see what they might look like. This approach is more appropriate than including such a provision in the Bill.

Secondly, the PPF will be required to produce annual reports, together with audited accounts. Furthermore, the non-executive committee of the PPF board will monitor performance, strategy and risk management and the organisation will have key targets and performance indicators.

Given all that, we obviously cannot define the word "prudent" in the abstract or lay down precisely what should be gilts, hedge funds, equities, derivatives or whatever, but the combination of the accountability of the PPF board through its annual report, through the Secretary of State and to Parliament, together with the statement of investment principles and the open competition for fund managers, should address any concerns that the Committee may have about the nature and structure of the financial investment policies of the board. With that, I hope that the Committee will accept that the clause should stand part of the Bill.

On other matters, I shall need to consider what the noble Baroness said—in particular, whether there will be an opportunity for a parliamentary debate on the report. However, again, we shall come to that in later clauses, so I shall not pursue the matter further at this stage.

Clause 107 agreed to.

Clause 108 [ Investment principles]:

Page 75, line 26, leave out "made by the Board about investments" and insert "about investments made by or on behalf of the Board"

The noble Baroness said: I hope to be brief on this. This government amendment relates to Clause 108—the statement of investment principles—and provides that the board's statement must govern decisions made not only by the board but by those making decisions on behalf of the board. In other words, it is effectively a drafting amendment that covers the major point. Those making decisions on behalf of the board will primarily be the fund managers.

It is envisaged that the board must set out in its statement of investment those principles that govern decisions made by the board or by the fund managers on behalf of the board in relation to the sort of issues that I mentioned earlier—investments, the balance of risk, projected returns and whatever environmental, social or other considerations may be appropriate. Without the amendment, the fund managers could legitimately act in a manner contrary to the statement of investment principles. I am sure that they would not want to if they sought to have their contracts renewed, but they could. Hence, I hope that the Committee will accept that this amendment is useful and necessary. I beg to move.

4 p.m.

On Question, amendment agreed to.

On Question, Whether Clause 108, as amended, shall stand part of the Bill?

As far as the statement of investment principles is concerned, generally speaking they are all similar. Many Members of the Committee will be familiar with this problem. None the less, it is important that it is clear what those principles are. Myners suggests that a statement of the investment principles should be sent to all the members of the funds. What will the situation be regarding communication between the pensions protection fund board and the members of that fund, who have been taken over as a result of the failure of an eligible scheme with which the fund is now dealing? Do the Government propose that the statement of investment principles should be sent out to those who are members of fund and who are depending on the success of the fund for the continued payment of their pensions, in the same way that they would be if they were in an ordinary pension fund?

It is important that members are aware of what the fund's investment objectives are. Generally speaking, despite what was said earlier, I think that there is a case for putting it on the face of the Bill. This will be a very unusual fund, as my noble friend said a moment or two ago. It will be a rather strange public/private hybrid with many of the features of an insurance fund, as the noble Baroness said, or a pension fund or, as the Minister said, a compensation fund. I do not think that it is a compensation fund. It is much closer to a pension fund. It has taken over pension liabilities, is investing assets and is trying to pay out. It is not compensating people. In effect, it is perpetuating the operation. It may be that the Minister can give us a little more information on what the Government envisage in relation to these investment principles.

The Minister implied that there should be some sort of minimum liquidity requirement, given that she spoke about the fact that the calls on the fund would be quite lumpy. That is something that should be addressed. How far might one need to have a certain amount of liquidity? It is no good just to say, "We do not want to be too prescriptive" and then give no guidance at all. Operationally, and in terms of strategy, that is what the Minister's answer added up to.

I am concerned about the breadth of subsection (3). I know how it will be set up to begin with: it will be set up so that there is a sensible set of requirements. But things creep in. There will be a chunk of money sitting around in the fund. Political pressures will be put on it because it is possible under subsection (3). There will be pressures to use the fund to rescue an industry that is in trouble or to consolidate it. There will be pressures to do things British rather than overseas. There will be pressures to put money into government debt rather than equities. All these are pressures that are not properly put upon this fund. It has nothing to do with a government's investment objectives or the public's investment objectives. There has to be a degree of insulation and I do not see it in subsection (3). I would like to know how that will be provided.

However, I do not think it is appropriate to put it in the Bill. I shall give an example. I think that 20 years ago, or even 10 years ago, it would have been pretty unlikely that an investment strategy would have taken environmental considerations into account. We might now. Ethical considerations would probably have been included 20 years ago but 10 years before that they would not have been. The context and the salience of the issues of which one would expect investors to take account will change. The attitude toward particular industries—smoking or arms—will be for society to determine as significant. That is one broad-brush reason why it is unwise to put it in the Bill. However, I have given an indication of the half-dozen criteria that we would expect to be reflected when the board draws up its statement of investment principles.

The noble Lord, Lord Higgins, asked whether it would be sent out to all members. I am not expecting that to happen. As a member of the Universities Superannuation Scheme I do not get a statement of its SIP sent to me automatically. I have access to the web and if I write in for a statement, I can get it. I would also expect it to be included in the annual report. All of that is publicly available, without expecting that it be sent to me. Indeed, as a modest pensioner of a university scheme I do not have sent to me the annual statement of investment principles. The information will be fully available without expecting it to be sent. Furthermore, considerable costs would have to be borne by the levy payers if they were to receive all the information.

Much of the discussion has been around whether this is a pension scheme and whether it should follow Myners' principle. Because it is not a pension scheme, we do not regard it as being necessary to be Myners-compliant. The basic reason is that a pension scheme would be expected to honour the commitment between the employer and the employees' contract for 100 per cent of all benefits. The scheme is coming into the PPF because that contract has failed.

Although we expect to see 100 per cent of benefit for existing pensioners, deferred pensioners—everyone else will be a deferred pensioner—will receive only 90 per cent. That is why it is compensation and not a pension. We cannot honour the original contract because those who are parties to it were unable to honour it. That is why we are calling it compensation. It would not be appropriate to regard it as a pension. If it were, one would expect every existing scheme that entered to continue its existing pension contract or commitment. They cannot do that. It will be a pool scheme, with possibly some rough and ready bits to it.

Perhaps I may give an example. I going through information about survivors' benefit. I believe that some two thirds of all existing DB schemes have survivors' benefits at about 50 per cent of the value of the employee. I also believe that about 20 per cent offer a higher value—possibly two-thirds or 60 per cent. Although I do not understand how they get away with it, some honour less than that.

In the PPF, we are not taking over those pension commitments; we are saying that all survivors will receive 50 per cent. There is also a rough and ready element because it is a pooled fund and we cannot continue to track each individual commitment. That is a second reason why it does not make sense to call this a pension and it is misleading to do so. It is a compensation fund. In good faith, it will seek to honour, and should do so, the expectations we are laying on it to meet 90 per cent of the pensions rights approved for deferred pensioners.

I should have added that the noble Lord, Lord Higgins, might like to cross-read Amendment No. 181 in the light of Amendment No. 194, which is the general clause about information sent out. That may give him a sense of how we are operating. Amendment No. 194 includes a requirement to disclose the statement of investment principles. I wonder whether I have said enough to address Members' questions without repeating myself from previous discussions. I hope that with that response, Members will feel able to accept the clause.

As to how much should be on the face of the Bill, I am now slightly worried by the noble Baroness's response. Clause 108(3) states:

"Before preparing or revising a statement of investment principles, the Board must comply with any prescribed requirements".

Suddenly, this public/private body becomes a bit more public because we are not putting the provisions on the face of the Bill—albeit, there is the possibility of making amendment by statutory instrument—we will have a series of regulations. Therefore, although the provision will not go on the face of the Bill, the regulations will state the prescribed requirements for these investment principles.

Before we agree to all that, we are entitled to know from the Government the requirements which, in the first instance, will be prescribed. Indeed, subsection (4) states:

"A statement of investment principles must be in the prescribed form and cover, amongst other things, the prescribed matters".

That being so, I do not see why at the outset we cannot have the provision on the face of the Bill and amend it by statutory instrument rather than have it done by regulation.

The noble Baroness says that 10 years ago we would not have been concerned with, for example, environmental issues. Four or five years ago, a Secretary of State sought to almost intimidate pension funds into investing in particular types of asset and asked trustees for a response. A number of trustees were fairly forthright on the matter. They wrote back, saying, "The object of our pension fund is not to achieve various government objectives by investing in this and that. The object of our fund is to maximise the size of the fund to the benefit of our members and we shall select our investments accordingly".

If the noble Baroness is going to say, "Well, of course the Government can intervene suddenly and prescribe that the fund must be invested to X per cent in a particular type of fund for environmental reasons", that will clearly put up the cost of the levy and in my view that should not be done. We do not have trustees, we have a board, but trustees would, or ought to, take the view that their objective is to maximise the size of the fund and not to engage in various political issues which the government of the day happen to believe they should.

4.15 p.m.

We must pin this down; there must be a restriction on what the Government can do under subsection (3) so that it is only in the interests of the pensioners and levy payers. It should not be able to introduce some other set of interests that are extraneous to the fund.

I shall have a go at unpicking some of the words to see whether that will allay some of the fears expressed by Members of the Committee. We have already discussed one—that the board must secure that a statement of investment principles is prepared and maintained, is reviewed at such intervals and on such occasions as may be prescribed and is, if necessary, revised. The board will be required to establish whether anything has changed since the last statement was produced, whether it is the nature of the liabilities, the investment market, and so on.

Subsection (2) refers to,

"a written statement of the investment principles",

which must be available in written form, whether people write in to request it or whether it is on the web.

Subsection (3) was the source of some concern. It states:

"Before preparing or revising a statement of investment principles, the Board must comply with any prescribed requirements".

The regulations will set out what the statement is to cover, but not specify any strategy. For example, it would specify that it must cover environmental strategy, but not what that might look like. Regulations will require the board to meet certain requirements before preparing a statement of investment principles.

Finally, in response to the noble Lord's question about overriding objectives, I was trying to say that the regulations will state what the statement must cover but will not specify any strategy. In other words, any investment principles statement must include, for example, a consideration of environmental strategy, but not what that may turn out to be or how the managers respond to it.

It is a shopping list of issues to consider or principles to take on board—not how those are translated into particular investment decisions, which is as I understand it a job for fund managers working within the framework of the board.

The noble Baroness may not wish to respond to my specific proposal today. The problem is that there is no effective objective in the Bill. The Minister has drawn to our attention the reports of some very good pension funds such as those of the FSSU and BP. I would be very surprised if they did not contain an overriding objective of the type I seek. Will she look into those reports and let us know why such an overriding objective as a principle should not be in the Bill? I do not need an answer now; it is a matter to consider.

I am somewhat horrified by the noble Baroness's remarks regarding environmental considerations, because they are wholly inconsistent with the view expressed by the noble Lord, Lord Oakeshott, with which I sympathise, on what the basic objective of the fund should be. The basic objective should be common to that of many pension funds: effectively to maximise the size of the fund for the benefit of members or alternatively to minimise the contributions of levy payers. In any event, the objective is not to go off on some frolic involving environmental considerations.

The noble Lord talks about being horrified and queries the shopping list that I produced. All I am saying is that, so far as I can see, the list reflects closely the sort of considerations for taking social, environmental and ethical statements of policy into account. Equally, other companies talk about minimising environmental damage in various ways.

The noble Lord goes on to ask about the main objective. That is already carried in the phrase:

"The Board may invest for the purposes of the prudent management of its financial affairs".

I do not see why that is not the overriding objective. We know that the purpose of the fund is to be able to meet the liabilities that will arise from ensuring that members are compensated for the loss of their pension schemes. It is asked to attend to the prudent management of its financial affairs and to put itself into a position in which it can best meet those liabilities. But, in addition, through its investment principle it will bear these issues in mind. It must take

cognisance of certain issues, although it may decide to ignore them by saying that they are not relevant to its investment principle.

This is almost a checklist of considerations to which the statement of investment principles must be exposed in order to measure against it. I see no problem with that. Certainly the three examples I have looked at follow very closely in their formats what we are suggesting will happen here. So I am slightly surprised that noble Lords are finding this difficult, because it appears to be consistent with best practice already established in the field: the prudent management of funds for the purposes outlined. These are some of the issues on the shopping list which must be taken into account when the board draws up its statement of investment principles.

At an earlier meeting the Minister pointed out that the board is to be at arm's length from the Government and Parliament. When established it is meant to set out its investment principles in accordance with Clause 107(1):

"The Board may invest for the purposes of the prudent management of its financial affairs".

I should say in response to the noble Lord, Lord Oakeshott, because he read out something which outlined a rather more ideal and detailed objective, that that could be interpreted as favouring the short term over the long term. That would not do because the board must operate for a very long time and will have to deal with matters arising not only in the immediate future but also in the long term. It is right that on the face of the Bill it is left to the board to determine at arm's length the investment principles.

However, I do have some sympathy with Members opposite, and certainly with the noble Lord, Lord Lucas, who initiated this point. Subsection (3) of Clause 108 states:

"Before preparing or revising a statement of investment principles, the Board must comply with any prescribed requirements".

As I understand from my noble friend at the Dispatch Box, those are not prescribed requirements on the statement of investment principles, rather the prescribed requirements for what the board must do to build up its preliminary work and knowledge in order to set out its statement of investment principles. It must take professional advice and so forth.

[ The Sitting was suspended for a Division in the House from 4.33 to 4.44 p.m.]

I can tell noble Lords that, to my certain knowledge, 85 to 90 per cent of this Bill has been worked on for three years or even longer. This is not a swift piece of legislation being pushed through at the last minute. However, some clauses, of which pensions liberation is the most extreme example, along with the financial assistance scheme, have come through very late. That is the reason why they were not scrutinised in the Commons. We had to choose between either deferring the Bill—Members of the Committee know about the problems associated with such a move—or going ahead. I want to make that distinction absolutely clear.

The Bill follows a Green Paper and its subsequent elaborate consultation. It then went into a quasi-White Paper issued as a Statement which in turn generated consultation that was included in the Bill. The amount of work that went into the origins of this Bill far exceeds that undertaken for any other Bill I have worked on. I should not like that canard to be repeated in quite the way indicated by the noble Lord, Lord Lucas.

However, the quid pro quo is that the Government must recognise that some points cause us real problems, although in fact they are not difficult to solve. While I accept that that is not what is written, noble Lords on this side share the universal feeling that there is a considerable difficulty here. However, as I have said, I do not think that it will be difficult to solve. The noble Lord, Lord Oakeshott, has suggested that we set out in the Bill a basic statement of investment principles which outlines in whose interests these investments are being managed. If we were to go down that road, many of the subsidiary problems would fall into place. It would then be impossible to use Clause 108(3) in the wrong way because it would be subject to the basic and overriding principle that presumably would be set out somewhere in Clause 7.

I have spent some of my life as a tenant of the Church Commissioners—and an extremely unpleasant experience that has been. The commissioners interpret the mandate in the interests of their beneficiaries extremely severely and their tenants do not come into the equation at all. The noble Baroness wants to introduce some kind of softening of the absolute mandate. I suggest that the right way to do that is by a reference to general best practice rather than allowing a means by which particular special interests can fight Clause 108 in ways that might damage the fund and its beneficiaries as well as those who will have to pay for the fund.

There is a way through here, one that I do not think threatens in any way either the integrity of the Bill as a whole or this part of it—of which, as I have said, I am a great fan. I hope very much that the Government will be able to take this in a positive light, saying that they will do their best to meet our concerns rather than defending the purity of their own belief in what is already set out. That would be more in keeping with the spirit in which the Bill is being taken through this place.

On this occasion, however, my difficulty is that I still remain baffled. Noble Lords have made their points very clearly, but I do not think that we shall advance much further today. The least I can do is to reflect and consider our debate to see whether I have missed something rather important, although I must repeat that I am baffled. Obviously that is a shortcoming on my part, but I really do not understand what the extra words proposed would do aside from producing a territory of debate about what the fund is for, which is carried by subsequent clauses that we shall come to discuss.

If noble Lords wish to write to me, I shall be perfectly happy to circulate these examples of investment principles. Some have an overriding objective while others do not follow that form. But the phrase "prudent management" covers virtually everything that has been said today and so I do not understand why further words in the Bill are necessary. However, I have to say that this is not ringing any bells with me.

Some years ago, a Secretary of State or possibly even the Chancellor wrote to various pension funds saying, "We would like you to invest in a particular way, taking environmental issues into account", to cite the expression used by the noble Baroness. The responses were of two kinds: either the trustees responded by saying that it was nothing to do with them—in other words, take a running jump—or they produced something along the lines quoted by the noble Baroness from Shell, which stated that consistent with their main objective, they would try to be helpful to the environment, and so forth. But the phrase "consistent with prudent management" is not good enough; it has to be more explicit than that. It is that which we shall have to try and achieve on Report.

We really cannot have the board of the pension protection fund investing in this or that environmental project or small business at the expense of either the beneficiaries or those who are to pay the levy. It has to be tied down more securely than that.

The noble Baroness has always been helpful with regulations. If it is possible for her to let us have a draft of these regulations, which are probably the clearest case in the Bill, I would be grateful. However, the wording as it stands is certainly not sufficient and we shall need to straighten it out.

Clause 108 agreed to.

Clause 109 [ Borrowing]:

Page 76, line 6, leave out paragraph (b).

The noble Baroness said: Following that extended debate we move now to a rather mundane probing amendment drafted to find out from what kinds of institutions the Government envisage the pension protection fund borrowing. The permission to borrow is drafted in terms of a "deposit-taker"—loosely, banks. The definition of such a deposit-taker set out in subsection (3)(a) is fairly straightforward, but can the Minister give some examples or a list of the deposit-takers which would be covered by subsection (3)(b)? I beg to move.

The board may borrow money from a deposit-taker or, in layman's terms, a bank or building society which is authorised to lend money in the UK by one of two routes. The first route is set out in subsection (3)(a) of the clause and is where the deposit-taker has been directly authorised by the Financial Services Authority under the Financial Services and Markets Act 2000.

As the noble Baroness said, the second route is set out in the paragraph that the amendment would remove. That states that the board may borrow from,

"an EEA firm of the kind mentioned in paragraph 5(b)",

and so on. That is where the deposit-taker has exercised its appropriate passport rights to be able to act as a deposit-taker in the UK. Those passport rights mean that, once authorised in its home state by its home state regulator, a bank is automatically authorised to carry on banking business in other member states. As they are authorised in the UK, all companies in the UK may also borrow from those banks and building societies. That is why it would be inappropriate to remove the paragraph. Does that answer the noble Baroness's question?

Amendment, by leave, withdrawn.

On Question, Whether Clause 109 shall stand part of the Bill?

None the less, the cause concerns borrowing by the board. As has already been pointed out, it may borrow from a deposit-taker. The dilemma here is that we really do not know what will be the situation when the board begins operations. It has been commonplace in our discussions that, because the provisions under the pension protection fund are likely to be more favourable than those under what I call the £400 million compensation fund under Part 6, companies or employers may seek to defer becoming insolvent if they can, so that pensioners receive the provisions of the pension protection fund, rather than those under Part 3.

Therefore, if I understand it correctly, there is likely to be something of a rush of companies becoming eligible almost immediately after the Bill becomes operational. The noble Baroness shakes her head; I should be interested to hear what she has to say. In all events, especially in the early period but perhaps in later periods as well, the funds available to the pension protection fund may well be less than the amount that it needs to pay out to eligible companies or funds. The question is then: how will it finance that? The answer in Clause 109 appears to be that it will have to borrow.

At the same time, it will have come into a lot of assets from companies that have become eligible. To some extent, at any rate, they will be funded and have assets. So, under the provisions of the two previous clauses, we may find that the pension protection fund is investing in gilt-edged securities and lending to the Government at the same time as it is borrowing from licensed deposit-takers. I think that I am right to say that the return on gilt-edged securities is likely to be lower than the amount paid to licensed deposit-takers. So overall, the pension protection fund will incur a net cost. The clause then specifies limits on the amount that it can borrow.

Again, we are told that that arms-length operation will suddenly find the murky hand of the Treasury intervening. The Treasury will say how much the PPF can borrow, although, presumably, it will always have to borrow enough to pay out the liabilities that it has taken over.

5 p.m.

What is the situation? Are we to be assured that the Treasury will never impose a limit on borrowing that prevents the PPF from carrying out its obligations to the pensioners which it has taken over from an eligible company? Similarly, as a further qualification, there will be limits set, apparently, by the Secretary of State—although I should have thought that it would be the Treasury—on the borrowing limit.

Another point arises concerning this clause. It states:

"The Board may … give security".

I am not clear what security the board has to give. Will it be able to use the assets that it has acquired from eligible companies to finance borrowing and to secure borrowing from a licensed deposit-taker? Again, it seems that that will raise costs above that which the board could borrow if it were able to borrow from the Treasury.

As I say, I do not want to anticipate the other point, but it would be helpful to know under what rules limits are to be imposed on the PPF either for the fact that it borrows at all or increases its borrowing limits and the basis on which it will be able to offer security. Are we sure we are doing that in a way that minimises the costs of the operation?

However, the borrowing is not designed to be a long-term method of funding the pension protection fund or the fraud compensation fund. Instead, we have given the board the power to smooth the peaks and troughs of the economic cycle. Perhaps I may summarise our approach on that. In good times, the levy system is designed to smooth costs over time, while during bad times, the immediate costs of compensation should rise only slowly over time.

After a bad time has hit—this is the most relevant part for our discussion of the clause—the board has a number of strategies open to it to deal with cash-flow problems, as the noble Lord said. The strategies include being able to increase the levy, to borrow, and, in a worse-case scenario if it is still necessary, to reduce indexation and revaluation rates. Finally, the board could ask the Secretary of State to reduce the 100 per cent or 90 per cent levels—depending on whether a person is a deferred pensioner or an active pensioner—of compensation.

As one part of that approach, the power to borrow is a sensible and appropriate measure. But, as with any other power, the PPF must account for any borrowing in the annual reports and accounts. One further restriction is that the board may not exceed the maximum borrowing limit set out in secondary legislation.

Within that broad framework, the noble Lord, Lord Higgins, asked whether we considered that there might be a rush of schemes. I accept that some schemes may delay insolvency in order to maximise its chances of entering or becoming eligible for the PPF. That is always possible. But it does not mean that the PPF should have a cash-flow problem. During the assessment period, trustees will be responsible for maintaining and making payments.

It is worth emphasising that the assessment period will be one year. In some circumstances I can conceive, it may well be longer than that. We are not talking about something that will happen the day after tomorrow. When a scheme comes into the PPF, it will take over all the assets. It is therefore unlikely that the PPF would have a cash-flow problem, although it will need to consider its funding position in terms of the amount raised by the levy.

This debate takes us back to our brief discussion on deferred pensions. Assets will immediately come into the PPF, but the only immediate payments that it will have to make will be to existing pensioners at 100 per cent. Perhaps a very high proportion of its liabilities will not fall in for five or 10 years or, in some cases, 30 or 40 years. That is why we are not expecting a cash-flow problem except, as we discussed earlier, in a situation where either a sector or a major company suddenly fall into PPF territory. Even then, given the assessment period, one is talking about a period of a year or so on average—maybe longer than that—in which the board can determine the extent to which it may need to meet liabilities that are substantial because a scheme is coming in with a very high proportion of pensioners and payments. We should bear that in mind.

In a way, we are coming back to some of the FRS 17 issues where there is an assumption that all liabilities have to be instantly met. They do not. That is why I would not normally expect there to be a cash-flow problem, but it is wise to have the borrowing power to meet it if it should occur.

What would be the maximum borrowing limit? That will be determined by secondary legislation. I do not really want to speculate or put a figure on it. Given that the PPF is estimated to have an annual income from levies of approximately £300 million, I would expect the borrowing limit to be a fairly substantial figure—rather more than, say, the £15 million that the Pension Compensation Board currently has. Whether that figure is nearer £15 million, £50 million or £100 million is something that we would want to consider when we draw up the regulations. Obviously, the maximum ceiling would have to be sufficient to meet the very occasional contingency that might befall if a seriously major company came into the PPF.

Finally, the noble Lord asked me about security. As he suspected, security is assets held, which could, for example, be property because that would be assets going into the scheme. Security, indeed, is an asset. I hope that I have met most of the queries raised by Members of the Committee. In that case, I hope that Clause 109 shall stand part of the Bill.

I should like to clarify two points. I am not clear why the Secretary of State should set a limit. More particularly, I am not clear that we are minimising the costs of borrowing. The PPF may well be lending money to the Government in the form of gilts at one interest rate while also borrowing on the commercial market. Generally speaking, that is not cost-effective. In other words, should the PPF not be borrowing from the Government rather than the commercial market?

Behind that, I suspect, is a debate into which I was not going to enter because it may be more appropriately dealt with or responded to in respect of the question asked by the noble Lord, Lord Oakeshott: namely, should bodies be able to borrow from the Government or should the Government stand as a lender of last resort? The Government's view on that is very clear. The answer is "no".

The Government are not lending because they do not want to be seen to be the guarantor of last resort. That goes back to all of the moral hazard issues that we discussed earlier. If the Government are seen as a lender of last resort, possibly unable ever, unlike a commercial organisation, to recover that money because of the situation in which they find themselves, there is the moral hazard of schemes possibly failing to exercise due diligence. Instead of being "policed" by other private sector companies about what the levy should raise, they might instead rely on government hand-outs as lenders of last resort in order to bankroll them.

The Government are very clear on that. It is a major part of the Government's decision that we will not underwrite this either through making a direct contribution or, as has sometimes been suggested, putting on a levy through the public sector, which should not come into it at all, or acting as a lender of monies. I should make that clear. I know that that is not necessarily what noble Lords want to hear, but the Government's view on that is unambiguous.

Clause 109 agreed to.

Clause 110 [ Grants]:

Page 76, line 16, leave out ", other than" and insert "and"

The noble Baroness said: I shall speak to Amendment No. 189 standing in my name and that of my noble friend Lord Hoyle. I am sorry that I follow on just after my noble friend the Minister has categorically said that the Government will not stand behind this proposal because I am about to argue, in a very modest way, that the Government should do precisely that.

We seek to amend Clause 110, which is about grants. Quite specifically, it states:

"The Secretary of State may pay the Board out of money provided by Parliament … other than expenditure which by virtue of section … is payable out of—

Our amendment seeks to reverse that. We seek to make explicit provision for the possibility of a small amount of government financial support, but not any specific amount.

The amendment, by reversing the intention of the clause, provides a safety valve that would allow, in the event of unexpectedly high claims on the fund, the possibility of a third way other than by reducing benefits or increasing the levy. It would also signal possible government underwriting of the scheme—I repeat, possible government underwriting of the scheme—which would add to confidence.

As my noble friend the Minister knows, there has been widespread pressure for a measure of this kind from those who believe that claims may be such that a reasonable level of compensation cannot be afforded while maintaining a reasonable levy payment. We do not want the cost of covering past failures to become a deterrent to providing final salary schemes in the future. From the Marshalled List, I can see that the noble Lord, Lord Oakeshott, and the noble Baroness, Lady Barker, obviously have similar concerns and approach this matter in a quite different way. I note what my noble friend the Minister has said. Nevertheless, I beg to move.

The Government are launching an untried boat—the jolly PPF—on to a very stormy sea on a voyage with no time limit through uncharted waters. We know that smaller boats have been sinking. No one knows how long the storm will last or whether it will turn into a hurricane. But everyone in the country knows that there will be a government rescue tug if the PPF starts to sink, just as there was when suddenly the pressure got too much and the financial assistance scheme was launched at the drop of a hat.

5.15 p.m.

It seems to us a matter of simple prudence—that ought to commend itself to the Chancellor—to plan before setting out what happens if the ship is forced to send an SOS call. Obviously, one is conscious of moral hazard, but that is a very important part of the reason why on these Benches—and, I believe, on the official Opposition Benches—we are insisting that a proper risk-based assessment of the scheme and the contributions to it comes in as soon as possible. That will be a considerable incentive to avoid moral hazard.

I ask the Minister to take this point up because I have twice asked her to do so across the Floor of the House and she has ignored it both times. I accept that this is a matter for the Treasury but I ask her to get a proper response for us from the Treasury as to why the PPF is so different from the PoolRe reinsurance scheme, whereby the Government stand behind possible enormous claims on terrorism insurance. I believe that that is a sensible precedent and has worked well in the past.

If we look at the PBGC in America, which the Government have clearly studied carefully, it is true that there is no official government guarantee but the Secretary of the Treasury and the Secretary of Labor are on the board. That makes clear how unthinkable it is that the American Government would walk away from it. We would be happy to accept Gordon Brown and Andrew Smith on the board, rather than a formal government guarantee, if the Government prefer to do it that way.

I believe that it is far better to deal with this in advance in case of the remote likelihood that it comes up. None of us can possibly know what the likelihood is. The Government have done their modelling but how it will work in the future is, by its nature, almost unknowable.

I have warned the Minister of my next point. We have a veritable media blitz of interviews from the newly appointed chairman of the pension protection fund, Mr Lawrence Churchill. He has been intruding very strongly in political matters, which he should not do, particularly before this House and the other place have taken a decision on this important matter. I see, for instance, that last week's Professional Pensions reported that:

"Calls for the government to underwrite the Pension Protection Fund have been described as 'outrageous' by its inaugural chairman.

"But the National Association of Pension Funds chairman Terry Faulkner questioned whether it was appropriate for Churchill to 'wade into the political debate' while still getting to grips with workplace pension issues".

In today's FT fund management section the chairman of the BT pension fund very properly queried that point of view.

It is not just politicians. Many people in the pensions industry are arguing that the Government should stand as the lender of last resort. I believe, and I hope that the Minister will accept, that it is quite inappropriate for the newly appointed chairman of the PPF to weigh in on one side or other of that debate. He was all over the Times on Saturday, saying the same thing. In Financial Adviser he said:

"My intention is to make sure the PPF does what it says on the tin".

We on these Benches believe that it must do what it says on the tin. What it says on the tin is that it will pay certain benefits. As the NAPF have said, this is not right. We do not believe that the PPF should cut the benefits that are laid down. The Minister is quite right that in principle it cannot go bust as it is set up at the moment because it could cut the benefits, in principle, to nothing. I do not believe that that is what the country expects. The PPF has been set up by the Government, the board is appointed by the Government and it is inconceivable that the Government could walk away from it. We believe that it is better to put that clearly upfront now.

I do not think that it is right to expect the Government to be even a last resort, let alone a direct contributor to the pension protection fund. If it is believed that the Government could be called upon, I believe that the Government will be called upon. That is the nature of moral hazard. The PPF is an arms' length body. We have established various ways of funding it: it will have substantial assets coming in from companies but will have liabilities that fall in over time; secondly, it has the capacity to raise a levy; thirdly, it has the capacity to borrow up to a certain, sensible level; and, finally, it has the capacity to review and reconsider and to ask for authority to reduce the sums of money that it needs to meet.

It is not just that if the Government can be called upon, they will be called upon, but that when we say "the Government" we are saying taxpayers. Taxpayers—at least half of whom have no occupational pension scheme or who are in public sector schemes where this does not arise—should not be asked to pay for the safeguarding of the minority of people who have occupational pensions schemes. That is not right. It is like saying that people who do not draw down on buildings insurance, for example, because they are not owner-occupiers and therefore do not have a buildings policy, should nevertheless contribute to the buildings insurance system of the country, even though only a proportion of the population are owner-occupiers. That is not reasonable. It is not the basis of this scheme and this is not where the Government are proposing to go.

I accept that Parliament determines the shape of the Bill but I want to make it very clear that this is not the Government's intention. Whether as a lender of last resort or a giver of grants, as my noble friend suggested, or however else it is put in other ingenious amendments to which I can look forward relating to the levies on public sector schemes which have been mentioned at various points, these proposals are that people other than the beneficiaries of this scheme should help to finance it. That is not the Government's view.

It is in the interest of the industry and of employees in occupational pension schemes to increase good faith, security and confidence in the pension system. But to expect others who do not benefit from the fund, and will possibly never benefit from it, to pay for it, is not reasonable, decent or fair. Of course, as more people come into pension schemes and see the value of them, then the situation may change and they will be contributing to the levy. The distinction between that and the Financial Assistance Schemes is that no such levy existed and therefore no retrospective payments could be made. There was nobody else to help out and the alternative was to allow people to come on to state-related benefits. However, that was not the primary objective, which was decency and trying to maintain confidence in the pension system. That seems to be very different.

We can continue the debate, but that is the philosophical argument. I do not think that it is right to ask those who do not benefit to pay. We have constructed a system that we believe matches those who gain and those who pay in a decent way in the pooled framework of a compensation scheme. For some people, it is rough and ready justice. I do not doubt that they will not have the exact provision that they would have enjoyed. But it seems to be a more honourable way forward than encouraging people to believe that the Government will be the lender of last resort and that the taxpayer will bale the fund out. If they believe that, it will surely happen because that is the nature of moral hazard. At that point, because they are taxpayers, those on modest incomes, often women in part-time occupations, will be asked to cross-subsidise a scheme of which they are not beneficiaries. I do not think that that is right. That is not where the Government propose to go.

I understand what my noble friend says about the possibility that if the Government are standing behind it, people will take advantage, which they would not be able to do if that was not the case. However, we all pay towards the pension benefits of our fellow citizens. In a situation where a person's pension entitlement is severely damaged, the eventual resource for him or her is the pension credit system, for which the taxpayer pays anyway. So, one way or another, we have to pay.

It would be better for that to be done via the fund that is being established than to rely on the means-tested benefits that are available for people whose pensions simply do not meet their requirements or the standards regarded as suitable by the Government. I shall think about the matter again before Report.

I support the noble Baroness on her point. There is an element of national interest in rebuilding confidence in savings. I do not believe that the FAS analysis is irrelevant. One accepts that these people were in occupational pension schemes under which £400 million of taxpayers' money was given to them. All we are talking about here, which I make clear in our amendment, is the Government acting as a lender of last resort in certain specific circumstances. So I believe that there is a read across.

It is always difficult when people say that someone is making political remarks—your political remarks are my common sense. In that sense, I have not seen anything that he has said—I am perfectly willing to say that I may have missed something—that seems to trespass beyond what we would expect from someone seeking to establish a brand new fund and as chairman of it. But if there are any particular remarks to which the noble Lord would like to draw my attention privately, I shall be happy to follow them up.

[ The Sitting was suspended for a Division in the House from 5.30 to 5.40 p.m.]

It is possible for the Government to make appointments provided that a Bill has had a Second Reading in the other place, which this Bill has. But it seems quite wrong for someone appointed in such circumstances—the legislation is not completed and it is possible that it will never be completed—to intervene as apparently he has. I hope very much that the Government will look into the matter. Perhaps the Minister will tell us what has happened at our next meeting. Does she agree that, if the report is correct, it is inappropriate to make that kind of remark?

Amendment, by leave, withdrawn.

[ Amendment No. 190 not moved.]

Clause 110 agreed to.

Clause 111 [ Administration levy]:

Page 76, line 23, leave out first "the"

The noble Baroness said: I am in the hands of Members of the Committee on this matter. We have explained in the past that it would be necessary to introduce a number of government amendments, some of which would be minor amendments to achieve consistency across the legislation. I know that it is tiresome, but we have to do it. This is one such group of amendments, covering a number of miscellaneous minor amendments relating to Part 2 and the pension protection fund.

The effect of the amendments is to aid understanding and clarity and to ensure the proper working of existing provisions in the Bill. They clarify some references and change a number of further references which are inconsistent with other provisions and where the meaning is intended to be exactly the same. I shall give just one example. Amendment No. 191 removes the superfluous word "the" from the administration levy clause, which clarifies that the administration levy may recover the cost of any expenditure by the Secretary of State in setting up the board, rather than a specific expenditure.

I have before me a list or description of what all the amendments would do, if Members of the Committee wish for any further detail. I hope that the Committee is happy to accept my assurance that the amendments are minor and technical for the purposes of the Bill. I beg to move.

5.45 p.m.

On Question, amendment agreed to.

Clause 111, as amended, agreed to.

Clause 112 [ Fees]:

On Question, Whether Clause 112 shall stand part of the Bill?

Clause 112, relating to fees, states that the Board is authorised to prescribe and charge fees to meet prescribed costs—we have no idea what they are—and that regulations may prescribe what they are, what fee is due, and that any fee owed to the board will be recovered as a debt. What is this all about?

An example of what the Government have in mind is where the board has carried out or commissioned an actuarial valuation of the assets and liabilities of a scheme in order to assess whether it should enter the PPF. A third party may wish to use that valuation for another purpose. Alternatively, the third party may wish to ask the PPF to gather an additional category of information at the same time. In this example, the third party might be an individual or a firm interested in buying part or all of the insolvent company, which could involve taking on the pension scheme.

It would be appropriate in such circumstances for the board to charge a fee because the PPF would have incurred costs in preparing the valuation, while the provision of that service could represent a significant saving for the third party involved. Of course, the valuation or any other information could be used or disclosed only in compliance with all the necessary disclosure of information requirements, including data protection.

The ability to charge fees will be extremely limited because the circumstances where fees are allowed must be set out in secondary legislation. In any case, the regulations will not allow the PPF to take on tasks not related to its functions or, indeed, to set itself up in competition with the private sector in any way.

The opportunity to recover specified costs in this way may in certain circumstances provide practical solutions for the board and those organisations and individuals involved with the board while also keeping the administration costs of the organisation to a minimum. We think that it is appropriate for the board to charge fees and for the circumstances in which it may do so to be set out in secondary legislation as we may wish to include new categories of costs, or remove them, to reflect the changing environment in which the PPF will operate. I expect this to be a power that is exercised very seldom, in limited circumstances, but it is useful to have it should the PPF appropriately acquire information that might be of considerable value. As a result, it could recover some of the costs to the levy payer.

Clause 112 agreed to.

Clause 113 [ Annual reports to Secretary of State]:

On Question, Whether Clause 113 shall stand part of the Bill?

In opposition I used to receive a large number of annual reports. They were not debated because they are not regulations. But if I was interested or wished to do so, I could draw attention to the report as I could draw attention to a Rowntree report, for example. That is the expected procedure.

As for actuaries, there will be an actuarial report and annual accounts as set out in Schedule 5.

Clause 113 agreed to.

Clause 114 [ Duty to notify insolvency events in respect of employers]:

On Question, Whether Clause 114 shall stand part of the Bill?

The whole area of insolvency is, I am happy to say, one with which I am unfamiliar. My noble friend Lord Hunt is very familiar with the subject, but not for the obvious reasons, and we may rely on him rather heavily in the course of these events. As I understand it, an insolvency practitioner is required to notify the board, the regulator and so on; I am not clear about the timing. After an "insolvency event"—a splendid euphemism—occurs in relation to the employer, the insolvency practitioner is required to notify the board, the regulator, the trustees and so on. One would have thought that the trustees or managers of the scheme would have known already, so that seems strange. To save time on later amendments, will the Minister give us a general view of how the system will operate?

Clause 114 agreed to.

Clause 115 [ Insolvency event, insolvency date and insolvency practitioner]:

[ Amendment No. 192 not moved.]

On Question, Whether Clause 115 shall stand part of the Bill?

Clause 115 agreed to.

Clause 116 [ Insolvency practitioner's duty to issue notices confirming status of scheme]:

Page 80, line 13, leave out subsection (2) and insert—

"(2) An insolvency practitioner in relation to the employer must—

The noble Baroness said: Clause 114 and subsequent clauses set out that when an insolvency event occurs in relation to the sponsoring employer of an occupational pension scheme which is eligible for PPF compensation, it is the duty of the insolvency practitioner to notify the PPF board, the regulator and the pension scheme trustees or managers of the insolvency events. It is the insolvency event which triggers the beginning of the assessment period. After all, a scheme will fall under the PPF only if both the employer is insolvent and it is deemed that there are insufficient assets to wind up the scheme and keep it out of the PPF. A two-part assessment must take place.

The insolvency event triggers the beginning of the assessment period. During that period the scheme is assessed for eligibility for PPF compensation—in other words, to see whether it can stay outside the scheme but, effectively, wound up and its liabilities bought up by annuities. Therefore, the insolvency practitioner's role in informing the board, the regulator, the trustees and managers of the insolvency event in determining the status of the scheme is clearly essential to the entry rules of the PPF. It is vital that the role of the insolvency practitioner is set out in legislation.

The amendments are the result of an adjustment in policy, the original intention of which was to make the notices issued by insolvency practitioners reviewable.

As the Bill stands, insolvency practitioner notices take effect as soon as they are issued. For example, a notice issued under Clause 116 stating that a scheme rescue has occurred sets in train an automatic series of events that will lead to the board's withdrawal from a scheme and the termination of an assessment period. In other words, the liabilities can be met outside of going into the PPF.

It is highly unlikely that the notices issued by an insolvency practitioner will be incorrect. The matters on which insolvency practitioners make decisions—for instance, whether a scheme rescue has occurred and therefore the scheme does not come into the PPF—are straightforward and clear criteria which will have to be met before a notice can be issued. However, we can not discount the possibility of human error—for instance, an insolvency practitioner's office attaching the wrong name and address to a notice. Furthermore, because these notices set in motion such an important series of events, we felt as a matter of principle that it was important that individuals had a right of appeal.

However, because we did not want an appeal to be the only means of correcting a mistake, these amendments require the board to verify a notice issued by an insolvency practitioner. The board will do this by issuing a determination notice, and it is the notice that we have made appealable—in other words, if the insolvency practitioners did not wish, and it did not seem appropriate, that their decision be appealable, it is even more appropriate within this structure that the determination notice that the board will issue instead should be the appealable route. That there needs to be an appealable route is clear, given the ECHR considerations.

In the unlikely event that the board determines that an insolvency practitioner's notice is not correct, it is required to issue a new notice under amended Clause 117. That is exactly what it would have to do if the insolvency practitioner failed to issue a notice. The amendments also ensure that the notices do not take effect—that is to say, they do not trigger any action—until they become binding. Binding is when all appeal rights have expired and all outstanding appeals disposed are of.

However, there is one key drawback of delaying action—that is to say, bringing the scheme into the PPF—until the notice becomes binding. In the period between a notice being issued and the notice becoming binding—you have to allow that period for an appeals procedure to go through—the assessment period continues and any insolvency event that occurs in this interim period would be ignored. In view of this, we have amended Clause 140 so that if a further insolvency event occurs before a scheme rescue notice becomes binding, for example, the original assessment period is to be treated as terminating immediately before the occurrence of the insolvency event, thus allowing the further event to trigger a new assessment period. In other words, it may have been that the insolvency event has triggered a procedure where it looks as though there could be a rescue, that rescue falters and we therefore need a new insolvency event to trigger a new assessment period.

The intent behind all these amendments is sound: requiring the board to verify that notices issued by an insolvency practitioner are correct and allowing the board's verification notice to be appealed. These are important modifications to Chapter 3. Unfortunately, the implementation of this intent has required some complex changes to the existing structure of the provisions of Part 2 of the Bill—that is the reason for this long list of amendments. I think that the changes have been dealt with succinctly but I would be very happy to spell it out further, if noble Lords would find it helpful.

That is the purport of what we are doing, but I would be perfectly happy to describe the amendments further so that we had it on the record. I am in noble Lords' hands. I beg to move.

There is concern that the procedure that we are now setting up is immensely complicated. Will the Minister share with us the advice that she and her colleagues have had about the application of the Human Rights Act, because it seems the motivation behind setting up this highly complicated procedure? Also, perhaps she might share with us who she is most concerned to protect, so far as concerns the right of appeal. Will she give us some examples of the sort of individuals or organisations that might wish to lodge an appeal and the circumstances in which that might happen so that we can then see these amendments more in context and understand the justification for them? They seem to create a highly complicated procedure that is difficult to follow. No doubt, the noble Baroness will now explain why it is so necessary.

On the Human Rights Act, if I understood the noble Baroness correctly, she said that the members of a scheme that is about to become eligible can appeal. Was she referring to an appeal against the company's decision to become insolvent? I am not clear how the members would do that, but this is an opaque area. The noble Baroness also said that she hoped that there would not be many cases. Does she hope that there will not be many eligible schemes at the end of the day or that there will not be many schemes going through this procedure? As I understood it, all potentially eligible cases will go through the process. Perhaps the noble Baroness can say whether that is the case.

I wish to raise a point that I ought to have made earlier on Amendment No. 192. As we understand it, the purpose of Part 2 of the Bill is to require insolvency practitioners to report to the regulator if insolvency events occur to the employer. The definition of "insolvency events" is contained in Clause 115 and is used elsewhere. As currently drafted, Clause 115 does not include the appointment of a provisional liquidator. It would be possible, therefore, for most of the requirements of the Bill relating to an employer in liquidation not to apply for the period of a provisional liquidation. That seems contrary to what the Government intend. Provisional liquidations tend to occur only as a short emergency measure pending full liquidation; none the less there are cases where such periods can become protracted.

Additionally, if the Government accept that the regulator should not have the power to issue notices for any act or deliberate failure to act during the period where the legal effect of an insolvency event remains in force—generally, while the insolvency practitioner is responsible—this should apply during the period of provisional liquidation also.

I may be totally wrong because the point has been covered in the government amendments. But, having only recently received the explanatory notes on those amendments, I am not sure whether that is the case. More particularly, will this procedure be applied in all potentially eligible cases or did the noble Baroness merely mean that she hoped that the provisions would not often apply?

I accept that the procedure is complex. However, I am told that the existing appeal mechanisms—for example, for actuarial valuations—are consistent with this procedure and that it is not out of line. We are trying to address scheme members' need for an appeal mechanism under the ECHR. That creates a need to produce determinations or notices by the board which can be appealed against. In turn, that produces the procedure of interim periods and what can happen during them. We end up with a domino cascade: we solve a problem that produces another one. As a result, we have had to table this complex set of amendments, although they do hang together.

The noble Lord asked about interim liquidity. Amendment No. 192 sought to treat the appointment of a provisional liquidator as the first insolvency event. The court can appoint a provisional liquidator on or after the presentation of a petition for winding up—usually because it is satisfied that the company's assets may be in jeopardy and that a provisional liquidator should be appointed to seek to secure its assets pending the hearing of a petition. Those appointments have not been included as an insolvency event because they are interim measures pending the hearing of a winding-up petition. At that hearing, the court may make a winding-up order, which we have already included as an insolvency event, but it may also decide not to make a winding-up order. In that case, we do not want to proceed down the route of an insolvency event where that is not required. That situation seems rather more straightforward than the previous set of issues that we have discussed.

Be that as it may, I am still unclear whether the clauses as now amended will apply to all potentially eligible schemes or whether they would apply only in some schemes.

6.15 p.m.

On Question, amendment agreed to.

Clause 116, as amended, agreed to.

After Clause 116, insert the following new clause—

(1) This section applies where the Board receives a notice under section 116(6) ("the section 116 notice").

(2) The Board must determine whether to approve the section 116 notice.

(3) The Board must approve the section 116 notice if, and only if, it is satisfied—

(4) Where the Board makes a determination for the purposes of subsection (2), it must issue a determination notice and give a copy of that notice to—

(5) In subsection (4) "determination notice" means a notice which is in the prescribed form and contains such information about the determination as may be prescribed."

On Question, amendment agreed to.

Clause 117 [ Board's duty where there is a failure to comply with section 116]:

Page 81, line 3, leave out from "scheme," to "has" in line 8 and insert"—

(2) The obligations on the insolvency practitioner or former insolvency practitioner imposed by subsections (2) and (4) of section 116 are to be treated as obligations imposed on the Board and the Board must accordingly issue a notice as required under that section.

(3) Subject to subsections (4) and (5), where a notice is issued under section 116 by the Board by virtue of this section, it"

Page 81, line 11, leave out "subsection (2)" and insert "section 116 by virtue of this section"

Page 81, line 14, leave out from "scheme," to end of line 16 and insert—

Page 81, line 17, leave out subsection (5) and insert—

"(5) Where the Board—

it must specify that time in the notice and the notice is to have effect as if it had been issued at that time."

On Question, amendments agreed to.

Clause 117, as amended, agreed to.

After Clause 117, insert the following new clause—

(1) Subject to subsection (2), for the purposes of this Part, a notice issued under section 116 is not binding until—

has been finally disposed of and the determination notice has not been revoked, varied or substituted.

(2) Where a notice is issued under section 116 by the Board by virtue of section 117, the notice is not binding until—

has been finally disposed of and the notice has not been revoked, varied or substituted.

(3) Where a notice issued under section 116 becomes binding, the Board must as soon as reasonably practicable give a notice to that effect together with a copy of the binding notice to—

(4) A notice under subsection (3)—

On Question, amendment agreed to.

Clause 118 [ Eligible schemes]:

On Question, Whether Clause 118 shall stand part of the Bill?

The purpose of the provision that a scheme is not eligible if it is being wound up immediately is to draw a line between the two types of scheme. Am I correct in saying that a scheme is not eligible if it is wound up immediately before the appointment by the Secretary of State for the implementation of the Bill? Can the Minister confirm that the clause defines what types of scheme are eligible and draws a line between the compensation scheme in Part 6 and these schemes?

Clause 118 agreed to.

Clause 119 [ Duty to assume responsibility for schemes following insolvency event]:

Page 82, line 10, leave out from "time" to "and" in line 12 and insert "a scheme failure notice is issued under section 116(2)(a) in relation to the scheme and that notice becomes binding,"

Page 82, line 13, leave out paragraph (c) and insert—

"(c) a withdrawal event has not occurred in relation to the scheme in respect of a withdrawal notice which has been issued during the period—

and the occurrence of such a withdrawal event in respect of a withdrawal notice issued during that period is not a possibility (see section 140)."

On Question, amendments agreed to.

Page 82, line 30, after "scheme" insert "rules"

The noble Baroness said: This set of amendments makes a technical change to the definition of "scheme rules" that is used in this and other Bills. The Bill currently provides a definition of scheme rules at Clause 142(7) and repeats this definition in Schedule 7, paragraph 32(2). The definition is intended to ensure that where references are made to scheme rules that means, logically enough, the scheme's rules—this is the discussion we had earlier about the difference between the rules of a scheme and scheme rules. It also includes any overriding statutory provisions which the scheme rules do not contain but ought to contain in order to comply with statutory requirements, for example, the requirement for equal treatment for people on maternity, paternity and adoption leave, and so on.

We are clarifying the language throughout so that the rules of the scheme refer to the particular scheme and the scheme rules are those rules as modified by other statutory provisions, such as equal rights to paternity and maternity pay. I could go on. Again, I am very happy, if Members of the Committee wish, to circulate a detailed description of what each amendment does, but basically that is what they do through the Bill. I am in the Committee's hands again.

What we are saying here is that the rules of the scheme are the legacy of the individual schemes, which may all have different rules. The "scheme rules" are the compound of those, modified by statutory provisions which apply across the board. The noble Lord will recall our discussion much earlier on about the "rules of law". I said that this would not refer to habeas corpus. This concerns matters such as equal pay directives, the right to transfer to schemes, to maternity provisions and so forth. Some of the smaller schemes might not have embraced all these issues, but now they need to do so. We are making the distinction all the time between the rules of the scheme—the individual scheme—and the scheme rules, which are those modified by statutory changes.

Turning to the question put by the noble Lord, Lord Hunt, I think that it was because we were advised that confusion could result if we did not make the distinction. As a result, people will know that there is a difference between the rules of the individual scheme—in some cases almost a legacy structure—and the scheme rules, which are those rules as modified by overriding requirements.

We have the rules of the existing scheme which is being taken over. Perhaps, as the noble Baroness has done, we should call those the "legacy scheme rules". But what are the other scheme rules? Are they the rules of the scheme as amended by the fact that, for example, it will be 90 per cent rather than 100 per cent and so forth? I understand the legacy scheme rules—they are the rules of the scheme being taken over, but I am not clear about the other scheme rules.

The legacy rules may say, for example, that payments can be made to a spouse, but would not say that they can be made to a civil partner. However, when that scheme comes into the PPF, because subsequent legislation has been passed since the date of the rules of the scheme, those payments would apply to civil partners as well. That is my understanding of what is intended here: to try to keep clear the distinction between the legacy rules of the scheme and the fact that when such a scheme comes into the PPF, while some benefits will remain distinct to the scheme, they will nonetheless conform to legislation which now applies to all schemes. That is the purpose and why we are making the distinction between the rules of an individual scheme and the scheme rules, which are those rules of the scheme as modified by subsequent legislation.

6.30 p.m.

On Question, amendment agreed to.

Clause 119, as amended, agreed to.

Clause 120 [ Duty to assume responsibility for schemes following application or notification]:

Page 83, line 4, leave out from "a" to "and" in line 6 and insert "scheme failure notice under section 122(2) in relation 10 the scheme and that notice becomes binding,"

On Question, amendment agreed to.

Page 83, line 7, leave out paragraph (c) and insert—

"(c) a withdrawal event has not occurred in relation to the scheme in respect of a withdrawal notice which has been issued during the period—

and the occurrence of such a withdrawal event in respect of a withdrawal notice issued during that period is not a possibility (see section 140)."

Page 83, line 13, after "scheme" insert "rules"

Page 83, line 19, leave out "respect of" and insert "relation to".

On Question, amendments agreed to.

Clause 120, as amended, agreed to.

Clause 121 [ Applications and notifications for the purposes of section 120]:

Page 83, line 43, leave out subsection (5).

The noble Baroness said: I shall also speak to the other amendments in the group. The amendments are about who should be told about certain things. Amendment No. 193 would delete subsection (5), on a probing basis. The question posed by the amendment is why we have this paper chase. A subsection (5) notice will come into play only if the regulator becomes aware of the employer being unlikely to continue as a going concern. The pension protection fund then has to tell the trustees, managers and employers. That raises the question of how we are expecting the PPF to work. Will it sit in a sort of ivory tower, isolated from employers and trustees, so that its decisions come as something of a surprise; or will there be some real engagement—in which case, what is the necessity for the paper chase? Could a notice be issued where an employer had no prior knowledge? That seems to me to be quite unusual.

Amendment No. 204, which is to Clause 137, relating to binding valuations, adds the regulator to the list of those who should be informed under subsection (3). As I understand it—I may be wrong—the regulator does not cease to be interested in a scheme simply because it falls within the ambit of the pension protection fund. Surely something as significant as the binding valuation ought to be notified to the regulator.

Amendment No. 207 would require the pension protection fund to tell the employer if the fund has assumed responsibility, following reconsideration under Clause 143. We tabled that amendment as a way to tease out when the employer should be informed and when the employer will be ignored. It is currently ignored in Clause 143, but employers are mentioned in Clause 121 and, for example, in Clause 140, covering when the scheme ceases to fall within the pension protection fund. I am sure that there are further references. So the amendment is trying to tease out whether there is a coherent pattern of information given to the employer. That is probably enough for today, and I shall leave Amendment No. 214 for another day. I beg to move.

The clause also provides that where the regulator is aware that the sponsoring employer of such a scheme is unlikely to continue as a going concern, it is given notice to the board to that effect. Once such a notice has been received by the board, subsection (5) imposes an obligation on the board to notify the trustees or managers of the scheme and the sponsoring employer of the notice. Given that the assessment period begins when the board receives such a notice from the regulator, it is vital that the trustees and managers of the scheme and the sponsoring employer are notified immediately.

If the trustees and managers are unaware that the assessment period has begun—although I agree with the noble Baroness that it might be an unusual occurrence—we could hardly expect them to comply with all the controls that have been designed to protect the scheme and members' interests during the assessment period. So that is possibly a belt-and-braces approach, but nevertheless, it seems important if we are to have a reliable paper audit. That includes their obligation to reduce members' benefits payable to the PPF level of compensation.

The amendment would therefore remove the vital requirement on the board to keep trustees and managers of the scheme and the sponsoring employer informed of the important events that can initiate the assessment period.

Amendment No. 204 relates to Clause 137, which sets out certain provisions relating to the valuation of a scheme's assets and protected liabilities. In particular, Clause 137 states when the valuation obtained under Clause 135 becomes binding. Amendment No. 204 would require the board to issue a copy of the binding valuation obtained in conjunction with Clauses 135 and 136 to the regulator.

The purpose of the valuation obtained under Clause 135 is to enable the board to determine whether a scheme requires PPF assistance. Once the valuation has been undertaken and the board is satisfied with it, it must approve it. At that point, a copy of the approved valuation is issued to the trustees or manager of the scheme, the insolvency practitioner and the regulator, as set out in Clause 136. Following that, it becomes binding.

The amendment would require the board to issue a copy of the binding valuation to the regulator. I accept the amendment in principle, but it is not required because government Amendment No. 203E has been tabled, which has exactly the same effect. The noble Baroness is exactly right; but we are running in parallel.

Amendment No. 207 would impose a duty on the board to send a copy of the determination notice provided for in Clause 143(2) to the employer. I could go on, but, at that stage, there is no sponsoring employer to send it to. If the noble Baroness would like me to expand on that point, I am happy to do so.

When a scheme has been ordered to wind up outside the PPF, the trustees or managers may apply to the board to reconsider assuming responsibility for the scheme. The board will then be required to determine whether it intends to assume responsibility for the scheme and issue a notice to that effect. In those circumstances, the scheme in question has already been ordered to wind up outside the PPF because there was no longer a sponsoring employer and no scheme rescue was possible.

The amendment would require the board to send a copy of the determination notice to the employer. However, as there is no longer a sponsoring employer in respect of such schemes, the board should not be bound by such a requirement. I shall not speak to Amendment No. 214. I am sorry that that is such a long answer, but the noble Baroness wanted me to spell it out.

Amendment, by leave, withdrawn.

On Question, Whether Clause 121 shall stand part of the Bill?

Let me try again. As I understand it, there are various routes under different clauses whereby a scheme may become eligible. One is an insolvency circumstance. Clearly, there are several other ways to become eligible. Perhaps it would be helpful if the noble Baroness would tell us what are the alternative routes, other than insolvency.

6.45 p.m.

This provision concerns the fact that there are some schemes where there is no employer who can fall within the triggering insolvency event to start the assessment period. Therefore, the clause is not to do with the eligibility of a scheme to enter the PPF but with what will trigger the start of the assessment period. The clause states that there is a duty on the trustees of such schemes to apply to the PPF for the board to assume responsibility for the scheme.

This clause provides for where there is no employer subject to an insolvency event but where the scheme none the less should arrive in the PPF. It is a question of what triggers that assessment period to decide whether it should indeed arrive in the PPF. The trustees or managers may trigger that, but it is not a new route for the vast majority of schemes, which are subject to an insolvency event. It just provides for a shopping list of some slightly odd companies or bodies for which there is no employer in a conventional sense to be subject to an insolvency event and where, therefore, the trustees and managers, where that scheme may need to come within the PPF, can apply to enter the assessment period to see whether it should.

[ The Sitting was suspended for a Division in the House from 6.47 p.m. until 6.57 p.m.]

There would seem to be various routes by which a scheme can become an "eligible" scheme. One is through the insolvency route and we discussed that in considerable detail. It would appear from Clause 121 that it can also come by a different route; namely, the trustees or managers of a scheme which is to become eligible become aware that the employer is not going to continue and that prescribed requirements are met in relation to the employer.

I understand from the Minister that those prescribed requirements, of which we on this side of the Committee are totally unaware, are that it cannot have followed the other route. It cannot have become an eligible scheme because it became insolvent. If so, one would have thought that that ought to be clear at the beginning of Clause 121. It ought to say that where there is a concern that the employer is not going to continue as a going concern and that the scheme has not become eligible because it has become insolvent.

The noble Baroness gave various examples—we were unaware of the details—of various government institutions and so forth and, more importantly, overseas employers. Am I right in thinking that this route will be for schemes which do not become insolvent and that schemes will become eligible only by the insolvency route or by the fact that they cannot become insolvent? Is it right that in later clauses there are no ways of getting into the eligibility classification?

7 p.m.

The two categories which we have in mind where a scheme could end up in the PPF but has not come via the insolvency route into assessment, but by another route, is where the trustees and managers have a duty to make the application. They include two broad categories of scheme. The first comprises the public sector schemes without a Crown guarantee. I have given the Arts Council, but the category includes the Audit Commission, the British Tourist Authority, British Waterways, the Crown Estate, the Design Council, English Partnerships, Investors in People, the Meat and Livestock Commission, the National Board for Midwifery, Remploy, Scottish Enterprise, the Territorial Army Volunteer Reserve Association, the Westminster Foundation for Democracy and the Wine Standards Board. That is not an exhaustive list, but Members of the Committee can see the type of schemes to which we are referring.

The second category is those schemes with a foreign employer. When we adjourned, I was being asked for an example of that. The advice I have been given is that an example of an overseas company would be one that is not subject to an insolvency event as defined in Clause 115 but which has employees in the UK and a UK-registered pension scheme. If the trustee or regulator became aware that the company is shutting down leaving the pension scheme under-funded, they can apply or notify the board. Without this clause, such schemes would not be able to initiate the assessment period because there is no insolvency event and members would not receive PPF protection. Indeed, it is almost like a branch of an overseas company.

I recognise that the Minister will have little of a Recess, but the same applies to the rest of us. It would be a helpful guide if the Minister were able to set out something of that in a letter to Members of the Committee. We can then understand the timetable to which she will operate during the Recess.

All I am saying is that I will look to see whether there is anything to be done. I make no commitment either way and it is my expectation that there will be no movement on the drafting. I say that because this has been elaborately negotiated through parliamentary counsel. But it concerns me if experienced Members of the Opposition find the drafting obscure. If there is anything I can do to help in that, I shall seek to do so.

I turn to the point about our work over the summer. I have already given an undertaking that before we move on to the Report stage—and by September, I hope—we may be in a position to say where we are going on the moral hazard clauses. But that will depend on whether and to what extent there is a meeting of minds with the organisations with which we are consulting to see whether we can overcome the problems. Associated with that, as the noble Lord will recall, we are trying to achieve greater clarity on how the clearance procedure will work. That is pivotal to drawing the distinction between good faith and manipulation, if you like. Again, further work needs to be done on that.

I will ensure that I write to noble Lords as soon as I feel I can give them something robust and on which they can rely. Whether that can be done before we return—my officials will also want to take a summer break—is not something I can guarantee, but I shall certainly make as speedy progress as I can.

Clause 121 agreed to.

Clause 122 [ Board's duty where application or notification received under section 121]:

Page 84, line 17, after "effect" insert "(a "scheme failure notice")"

Page 84, line 19, leave out "withdrawal notice" and insert "notice to that effect (a "withdrawal notice")"

Page 84, line 33, leave out subsection (6) and insert—

"(6) For the purposes of this Part a notice issued under subsection (2) or (3) is not binding until—

has been finally disposed of and the notice has not been revoked, varied or substituted.

(7) Where a notice issued under subsection (2) or (3) becomes binding, the Board must as soon as reasonably practicable give a notice to that effect together with a copy of the binding notice to—

(8) Notices under this section must be in the prescribed form and contain such information as may be prescribed.

(9) A notice given under subsection (7) in relation to a withdrawal notice under subsection (2) which has become binding must state the time from which the Board ceases to be involved with the scheme (see section 140)."

On Question, amendments agreed to.

Clause 122, as amended, agreed to.

Clause 123 [ Protected Liabilities]:

Page 84, line 42, leave out "are equivalent" and insert "correspond".

The noble Baroness said: I beg to move.

On Question, amendment agreed to.

Clause 123, as amended, agreed to.

Clause 124 agreed to.

Clause 125 [ Admission of new members, payment of contributions etc]:

Page 86, line 7, after "members" insert "of any class"

On Question, amendment agreed to.

Page 86, line 18, leave out "No"

The noble Baroness said: This is a probing amendment. It is intended to discover what happens to scheme members while there is an assessment period. The amendment does this by removing the word "No" as the first word of subsection (5), so that it reads:

"benefits may accrue under the scheme".

An assessment period can apply to an employer under Clause 121 when someone thinks that the employer will not continue as a going concern. When we discussed that, we established that three would be relatively few potential employers in that category, but some could be prescribed. If there is an example of a question mark over "going concern", it is likely that all the employees are still working normally, being paid their wages and expecting to accrue benefits for length of service, pay increases or changes in personal circumstances. Can the Minister therefore explain why employees suffer because someone believes that the employer might not be a going concern?

A going-concern evaluation can be complex and not at all self-evident. If that is the case, should there not be an obligation to tell employees that their pension accruals are on hold because someone is looking at the going-concern nature of their employer?

Can the Minister also explain the relationship between subsection (6) and subsection (5)? Subsection (6) seems to say that subsection (5) does not prevent an increase in benefits. I am unclear as to the net effect of the two. While she is explaining that, perhaps she can also explain why the draftsman has chosen to enclose the words "in a benefit" in commas. I find it difficult to read subsection (6). We referred earlier to the parliamentary draftsman's commaphobia and there was a recommendation that he be given a copy of Lynne Truss's excellent book. In subsection (6), some stray commas could benefit from being removed if the provision is to be read with sense. I beg to move.

7.15 p.m.

During the assessment period, the payment of scheme benefits to members will be reduced to ensure that benefits do not exceed the level of PPF compensation that would be payable should the PPF assume responsibility for the scheme. We have decided to reduce the amount of compensation payable to scheme members during the assessment period to ensure that the funding position of the scheme remains stable and that schemes in the assessment period are treated consistently and fairly. Otherwise, some schemes that took a long time to go through the assessment period would be building up benefits at a higher rate than others that had gone through the assessment period quicker.

There are also some important reasons why we consider it necessary to limit the accrual of benefits during this time to inflation levels. The first is to keep the funding position of the scheme as stable as possible during the assessment period. Secondly, given that the assets and liabilities of the scheme are assessed at the assessment date and that it is on this basis that the PPF may eventually assume responsibility for a scheme, there seems little point in allowing benefits to accrue to members during this period as any benefits that did accrue would be disregarded. However, in the event of a scheme rescue employees can subsequently backdate their pension accruals to the start of the assessment period. There will be an override on issues such as indexation. Apart from that, this amendment is to make sure that scheme members do not perversely benefit from a long assessment period compared to a shorter assessment period. That is the push.

Amendment, by leave, withdrawn.

Page 86, line 18, after "scheme" insert "rules"

On Question, amendment agreed to.

Page 86, line 27, leave out from "scheme" to end of line 29.

The noble Baroness said: In moving Amendment No. 194B I shall speak also to the other amendments in the group. This is a group of technical and minor drafting amendments that serve to provide clarity within the Bill.

Amendments Nos. 200C, 234Y and 234AJ deal with entitlement to and payment of certain survivors' benefits where a member dies before commencement of the assessment period, as do Amendments Nos. 234AJ and 234Y. Amendment No. 234P clarifies the definition of pensionable service and the changes necessary to ensure that compensation can be paid in respect of all actual service that qualifies a person for benefits under the scheme. Amendment No. 230A introduces a new subparagraph (b) to paragraph 27 of Schedule 7, "annual increase in periodic compensation". It refers to pensionable service which is notional service allowed in respect of the member under the admissible rules, which qualifies the member for benefits.

As I pointed out earlier, it is unsatisfactory that in Grand Committee we basically incorporate amendments that we have not had a chance to go into and which we should perhaps defer until Report. But, in the circumstances, I think that we should probably agree to them as the Minister has suggested.

As we have said on previous occasions, it is not satisfactory being in Grand Committee on a Bill of this kind not least because, as we have seen, my noble friend Lady Noakes has had to go downstairs in order to attend to matters on the Floor of the House.

On Question, amendment agreed to.

Page 86, line 29, at end insert—

"(7A) Where a person is entitled to a pension credit derived from another person's shareable rights under the scheme, nothing in this section prevents the trustees or managers of the scheme discharging their liability in respect of the credit under Chapter 1 of Part 4 of the Welfare Reform and Pensions Act 1999 (c. 30) (sharing of rights under pension arrangements) by conferring appropriate rights under the scheme on that person.

(7B) In subsection (7A)—

"appropriate rights" has the same meaning as in paragraph 5 of Schedule 5 to that Act (pension credits: mode of discharge);

"shareable rights" has the same meaning as in Chapter 1 of Part 4 of that Act (sharing of rights under pension arrangements)."

The noble Baroness said: In introducing this amendment, I shall speak to the related amendments. They enable the PPF to comply with court orders for ancillary relief made following divorce or annulment of marriage. Members of the Committee will remember that I was responding to the noble Lord, Lord Higgins, to say what the major groups of amendments were. This was one of them simply because the original pension sharing/pension earmarking had not contemplated the situation of a PPF and, if we did not make these amendments, spouses who might otherwise have received a pension would have been able to receive only that element available pre-PPF compensation. These amendments ensure that that is properly taken into account as a matrimonial asset.

In determining the financial settlement on divorce or annulment, the court may make an attachment order, a commutation order or a pension sharing order. The attachment and commutation orders are for separation—

These amendments ensure that any attachment orders made during the assessment period can be implemented by the board. They also ensure that if a pension sharing order is implemented during the assessment period, the pension debit can be created and the pension credit—we mean the element which belongs to the spouse, who is divorced in pension terms—and the pension credit deposited in a suitable pension arrangement on behalf of the former spouse or held in the pension scheme.

The trustees will be able to discharge their liability for these orders under the provisions of existing legislation as the orders will be made against the pension scheme. However, there may be occasions when circumstances will prevent the trustees discharging their liability for a pension credit before the end of the assessment period.

We have ensured that even though the scheme has entered the PPF, the board will be able to implement a pension sharing order made before the end of the assessment period. It will become the responsibility of the PPF board to ensure that the pension sharing order is discharged against PPF compensation. The PPF will honour the pension sharing order by reducing the member's compensation by the percentage ordered by the court. An amount of compensation, equivalent to the member's reduction, will be retained within the PPF and will be payable to the former spouse. The big difference is that both blocks are held within the PPF, whereas if the scheme is not going to the PPF the spouse receiving a share of the pension will take it out into another scheme. Only rarely would the trustees allow it to stay in.

The former spouse will not be able to choose to have the credit deposited in another pension scheme as the PPF does not provide for external transfers after a scheme has entered the PPF. However, the former spouse will be entitled to the same protection as a scheme member and will become entitled to payment of compensation from the scheme's normal benefit age. Compensation will be payable for life.

Regulations within the new clause will ensure that the trustees' liability for discharging pension sharing orders will be transferred to the PPF board. The regulations will modify some of the provisions of the existing legislation to allow the PPF board to implement any orders which have been made before the end of the assessment period but not implemented by the trustees.

We then modify other legislation. Many of the subsequent clauses relate to other legislation such as the Matrimonial Causes Act 1973 and the Matrimonial and Family Proceedings Act 1984 to ensure that the provision applies. I hope that I have described the purpose of these amendments: to make the moneys in the PPF available for pension-sharing. I beg to move.

The only query that occurred to me was whether the provision had implications for the Child Support Agency. Anyway, we will be able to read what the noble Baroness has said in Hansard and, if necessary, return to the matter during the Recess. I could not comprehend what was being said a moment or two

ago. Therefore the best thing would be to let the matter go and to table an amendment to clarify the situation, if necessary, at a later stage.

The noble Lord says that the situation is unsatisfactory. In an ideal world, your Lordships would be redundant because Bills coming from the Commons would be so polished and ready that we would not need to make amendments. The point is that pension-sharing on divorce is extremely technical. Having been intimately involved with others in your Lordships' House in getting the Bill through in the first place, I genuinely thought that the drafting would be so complex that we would not be able to get it into this Bill at any stage, with perhaps only a gesture at Third Reading. The officials and the draftsmen have gone to enormous lengths to include these clauses because I felt, as did others—I am sure that noble Lords will agree—that when a pension, even with a lower value coming through the compensation of the PPF, could be the most significant piece of matrimonial property along with the house, it would be unreasonable and indecent to exclude it from a consideration of the separation of matrimonial assets on divorce simply because it was caught by the PPF.

If we had not done it in that way, anyone who got divorced where the pension fund was secure would have it included; but anyone getting divorced where the pension fund was not secure, was entering an assessment period and, eventually, into the PPF fund would be denied access to a substantial swathe of matrimonial property, even though the value of that pension had been discounted because payments made under the PPF would be 10 per cent less than if the scheme had persisted. What would Members of the Committee have done in that dilemma? They would have done what I have done, which is table the amendments today, although they are extremely complex and, as I said, officials have worked around the clock to prepare them, to ensure that, under pension sharing both spouses will continue to receive an appropriate share of the pensioner's matrimonial property as ordained by the court. They may not do so. They may instead offset the house against the pension, but if they do, it would be quite wrong and, in my view, indecent to exclude what will be a substantial asset, even after the top-slicing when entering the PPF, because the scheme had entered the PPF.

I hope that I can answer the particular point raised by the noble Baroness, Lady Barker. If an order has been made by the court before the end of the assessment period, the order will be honoured by the PPF when the board assumes responsibility for the scheme. An order cannot take effect until divorce proceedings are complete and a decree absolute has been granted. I hope that I have been able to give the noble Baroness the assurance that she wants.

Having said that, no doubt we shall adjourn imminently and continue our discussion during the Recess. I shall add only one point about that. I am not the least bit clear where we will meet. I am told that these Committee Rooms are not available during the Recess; indeed, structural changes are to be made so that they will not be available in future. Personally, I find the Moses Room unbelievably depressing, especially for a discussion of this sort of complexity. The powers that be will need to consider in September whether this House is a legislature or a building site. They cannot have it both ways. When we used to have emergency recalls in September because World War Three was about to break out, one could understand why we came back and why building work was still going on. But if it is to be a regular event in September, we cannot have building reconstruction going on at the same time.

We are grateful to the noble Baroness for all her help in what has been a considerable tour de force. No doubt we shall return to the matter in September.

On Question, amendment agreed to.

Clause 125, as amended, agreed to.

The Committee adjourned at twenty-six minutes before eight o'clock.