Clause 20 - Freezing order

Pensions Bill – in a Public Bill Committee at 9:30 am on 11th March 2004.

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Photo of George Osborne George Osborne Shadow Minister (Treasury) 9:30 am, 11th March 2004

I beg to move amendment No. 137, in

clause 20, page 12, line 14, leave out 'interests' and insert 'rights'.

Photo of Mr Win Griffiths Mr Win Griffiths Labour, Bridgend

With this it will be convenient to discuss the following:

Amendment No. 138, in

clause 20, page 12, leave out lines 16 and 17.

Government amendments Nos. 19 to 22.

Amendment No. 139, in

clause 20, page 13, line 6, leave out paragraph (g).

Government amendment No. 23.

Amendment No. 140, in

clause 20, page 13, line 15, leave out subsection (6).

Amendment No. 141, in

clause 20, page 13, line 34, leave out paragraph (b).

Amendment No. 142, in

clause 21, page 13, line 42, leave out subsection (2).

Amendment No. 143, in

clause 21, page 14, line 40, leave out subsection (8).

Amendment No. 144, in

clause 22, page 15, line 4, leave out subsection (3).

Amendment No. 145, in

clause 22, page 15, line 6, leave out subsection (4).

Government amendments Nos. 24 and 25.

Amendment No. 146, in

clause 24, page 15, line 34, leave out subsection (4).

Government amendments Nos. 26 and 27.

Amendment No. 147, in

clause 27, page 17, line 20, leave out

'as soon as reasonably practicable'

and insert 'within 48 hours'.

Amendment No. 148, in

clause 27, page 17, line 33, leave out subsection (5).

Government amendment No. 28.

Amendment No. 149, in

clause 28, page 17, line 40, leave out

'any enactment or rule of law, or any'.

Government amendment No. 90.

Government new clause 2—Effect of determination to wind up scheme on freezing order.

Photo of George Osborne George Osborne Shadow Minister (Treasury)

I welcome you to the Chair, Mr. Griffiths. I shall speak to the amendments that

deal with clause 20 and the new freezing order power that the Government propose to give to the regulator. In your wisdom, Mr. Griffiths, you have also selected amendments to later clauses, which deal with the consequences of the freezing order, its period of effect, the validation of actions in contravention of such an order and so on. If possible, I would also like a brief stand part debate so that we can talk about the effect of the new order and whether it is necessary—but first I shall speak to the amendments tabled in my name.

Amendment No. 137 would substitute the word ''rights'' for the word ''interests''. The point of a freezing order is so that the regulator can act when, in the words of the clause, there is

''(i) an immediate risk to the interests of members under the scheme or the assets of the scheme, and

(ii) it is necessary to make the freezing order in order to protect the interests of the generality of the members of the scheme.''

I felt, as did my hon. Friend the Member for Eastbourne (Mr. Waterson), who is not with us this morning, that the word ''interests'' was rather vague and woolly, particularly when it is further diluted by the phrase,

''the generality of the members of the scheme'',

which could be taken to mean almost anything. It could be used to justify things that are to the detriment of a minority of members. One would assume and hope that the regulator would not do that, but it is possible.

We thought that the word ''rights'' in this context was more specific, and a more familiar term in the pensions world. Presumably, rights are what the regulator would be trying to protect when it stepped in with a freezing order to help members.

Amendments Nos. 138, 139 and 140 are all probing amendments. Amendment No. 138 also relates to subsection (2), and would remove its last two lines, which state:

''no freezing order may be made in relation to a scheme during an assessment period''—

that is the period when the pension protection fund is considering the scheme and whether to act. Why is it necessary to say that the power to issue a freezing order should not be removed from the regulator in those circumstances? Is it because, under clauses 104 and 105, the PPF has equivalent freezing order powers? Can the Under-Secretary explain why the Government are restricting the scope of a freezing order?

Amendment No. 139 would delete subsection (4)(g). We tabled the amendment because we were not clear why statements of entitlements should not be sent to members. I would have thought that when a scheme is frozen, that is, or could be, a period of enormous uncertainty and anxiety for members. They may be keen to know what their entitlements are under the scheme. It therefore seems curious that there could be a direction that no statement of entitlements is to be provided. Will the Under-Secretary explain that?

Amendment No. 140 would remove subsection (6), which says that a freezing order may not reduce benefits payable to a member

''below the level to which the trustees or managers of the scheme would have power to reduce them''

if there had been a winding-up order. When I was reading the Bill, it was not clear to me what was envisaged. I should have thought that the point of the freezing order was to give the regulator the power to intervene immediately when there is

''an immediate risk to the interests of members''.

In other words, it is an emergency power.

When we come to later clauses, we shall discuss how the effect of the order is time limited. The power is envisaged only as a short-stop, while a longer-term solution is sought, which could include winding up the scheme. Subsection (6) may suggest that the scheme can stop paying out reduced benefits during the time of the freezing order. Surely it would be better to wait until the future of the scheme is clear before making such a decision.

Amendment No. 141 would prize the tentacles of the Secretary of State off at least a small part of the Bill. Subsection (7) states that a

''freezing order may also require the trustees or managers of the scheme to obtain an actuarial valuation within a specified period.''

That is a perfectly reasonable proposal. We do not dispute that. However, subsection (9) defines an actuary by saying that it is either the scheme actuary or, if there is no scheme actuary,

''a person with prescribed qualifications or experience''—

that is reasonable—

''or—a person approved by the Secretary of State.''

That could be anyone. It could be you, Mr. Griffiths. It could be me. It could be the Secretary of State's crony. As I understand it, there is no requirement for that person to have any qualifications or experience. We assume that, being a wise man, the Secretary of State would not appoint someone without the necessary qualifications, but that is not in the Bill. There is no requirement for the person who may be required to provide an actuarial valuation under subsection (7) to be an actuary.

We are familiar with the tendency at the highest levels of the Government to appoint people with little experience and qualifications to important posts, but surely at the coal face—the junior ministerial level, say—where there is much more experience and more qualifications, they should be more tempted to insist that people have the necessary qualifications and experience.

Amendment No. 142 is a probing amendment. What is the point of subsection (2) of clause 21, which is about the consequences of a freezing order? It states that a freezing order does not prevent an increase in accrued benefit, yet subsection (3)(a) of clause 20 states that

''no benefits are to accrue''

when there is a freezing order. I am sure that there is a sensible explanation for that, and it would be interesting to hear the Under-Secretary explain it.

Amendment No. 143 is similar to amendments Nos. 146 and 148, which I shall deal with as a group. They refer to the penalties that will be put in place if someone fails to comply with the orders of the regulator, be they about the freezing order in general, the process of winding up a scheme or the notification requirements under clause 27. The penalties follow the powers under the Pensions Act 1995. They include hefty fines, and before we give the regulator to power to levy them, we should ask whether they are necessary, whether the Government considered reviewing the powers in section 10 of the 1995 Act, what is the maximum fine, and whether it has been uprated since the Act was passed. The maximum fine under the Act was £5,000 for an individual and £50,000 for a company.

Amendments Nos. 144 and 145 are more substantial than the three previous amendments, and relate to clause 22, which deals with the period of effect of a freezing order. Should the Committee agree my amendments—I am always an optimist, Mr. Griffiths—they would prevent the regulator from extending the freezing order beyond three months, thereby restricting the total period in which a freezing order can be put in place to three months instead of six months. One has to remember that the freezing order is an emergency power and is brought in only when there is an immediate risk to scheme members. A regulator should be able to decide after three months what to do with the scheme and how to proceed—whether to allow it to continue, wind it up, or do whatever it feels is necessary.

Anyone with constituency cases relating to the winding up of schemes will know how long they can take, how frustrating they can be for our constituents, and that they are a cause of great anxiety to them. One hopes that the whole point of having the regulator in place is to speed up some of the processes. That would be great for all of us. However, the six-month freezing order could add to the delay and add to the anxiety of the people whom we represent at a time when their scheme is in trouble. Three months is enough.

The Government implicitly accept that three months should be the normal period. Clause 22(2) says that the initial order cannot exceed three months, so why not limit the overall freezing order to three months?

Photo of Steve Webb Steve Webb Shadow Secretary of State for Work and Pensions

The hon. Gentleman will know that when schemes are wound up there is often a delay caused by delays in obtaining information from the Department for Work and Pensions. In some cases it takes a long time to get information about guaranteed minimum pensions, and so on. Does he think that this is an escape clause, in case the Department cannot obtain the information in time? What would happen if the period were restricted to three months and the Government could not provide the information in time?

Photo of George Osborne George Osborne Shadow Minister (Treasury)

The hon. Gentleman makes a fair point. I suspect that the Government would provide the information. Departments are like schoolboys with their homework—it all depends how much time they have to do a job. If they are told to do something in 24 hours, they do it; if they are told that they have

six months, they do it five months and 28 days later. It is reasonable to put the discipline of a three-month limit on the regulator and the Department.

Amendment No. 147 is similar and would amend the clause dealing with the notification of trustees, managers, and so on, when a freezing order is applied. The regulator must, under subsection (2),

''as soon as reasonably practicable after the order has been made, notify . . . the trustees or managers of the scheme, and the employer''

about the fact that a freezing order exists. I will deal with when the members of the scheme should be informed when we discuss clause 27. The words ''reasonably practicable'' are a bit woolly. Given that a freezing order is imposed when there is an immediate risk to a scheme, and given the draconian powers over trustees and others who do not comply with the freezing order, those people need to be told immediately, not least to stop them doing something that may turn out to be illegal and jeopardise the benefits in the scheme.

I suggest changing

''as soon as reasonably practicable''

to ''within 48 hours''. I would have thought that once the regulator had proposed the freezing order, it would be possible to inform the trustees, the managers and the employer within 48 hours.

Finally, I turn to amendment No. 149. It relates to clause 28, which is innocently entitled ''Supplementary provision relating to orders under sections 20 to 27''. Subsection (1)(a) seems extraordinarily broad in its sweep—almost Cromwellian, one might say. It states that the regulator may make an order

''in spite of any enactment or rule of law . . . which would otherwise operate to prevent the order being made''.

That is quite a power; it allows the regulator to do anything, even if there are other enactments and rules of law to prevent it from doing so. That is a very wide-ranging power. Will the Under-Secretary explain why it is necessary and give some examples of how it might work in practice?

Photo of Mr Chris Pond Mr Chris Pond Parliamentary Under-Secretary, Department for Work and Pensions 9:45 am, 11th March 2004

Good morning, Mr. Griffiths. This morning we are discussing an important new regulatory power, which the Occupational Pensions Regulatory Authority has identified as one that would be a useful additional tool, and which has been welcomed by the industry overall. It is the power to issue a freezing order. I will first run briefly through the points raised by the hon. Member for Tatton (Mr. Osborne). If hon. Members would like further clarification afterwards, I will be happy to give it.

On amendment No. 137, the hon. Gentleman asked why we are talking about preserving scheme members' generality of interest rather than their rights, as the amendment proposes. The proposed wording is much narrower than the question of interests, which could cover not only the actuarial rights of scheme members but their wider rights related to their employment status, employment security and so on. We believe that it is important to take those into account and to ensure

that the generality of interests of all scheme members is observed. The hon. Gentleman suggested that the term ''rights'' was more familiar to the pensions world. Neither my hon. Friend the Minister for Pensions nor I wish to continue repeating this, but I must tell the hon. Gentleman that ''interests'' is the term used in the Pensions Act 1995, and that is why we have carried it across into this legislation.

On amendment No. 138, the hon. Gentleman asked why a freezing order could not be imposed during an assessment period. It is simply because that would largely duplicate the powers and arrangements. An assessment period provides somewhat wider powers, but those would subsume the powers provided under a freezing order.

Photo of George Osborne George Osborne Shadow Minister (Treasury)

Is the Under-Secretary saying that the powers during an assessment period include all the powers that exist with a freezing order, but with some additions?

Photo of Mr Chris Pond Mr Chris Pond Parliamentary Under-Secretary, Department for Work and Pensions

Yes, that is generally right. Of course, the circumstances are different in each case. A freezing order is there as an additional power for the regulator to try to sort matters out before they get to a stage at which there might be an assessment period, in which the PPF would have to consider whether to intervene on a scheme or a winding-up order. A freezing order is one section further back from that process. So there would be slightly different powers, but there would be general duplication if one had a freezing order during an assessment period.

Amendment No. 139 understandably raises the question why scheme members should not be issued with a guaranteed statement during a freezing order. Schemes going through a freezing order may well subsequently go into wind-up. In those circumstances the trustees, having already issued a statement of members' entitlements, would have a legitimate right to reduce those entitlements and issue a new statement, and that would of course create confusion and raise expectations that might quickly be dashed. During the period of a freezing order, that would not be a sensible way forward.

Amendment No. 140 probes the issue of why the Bill limits the regulator's power to reduce benefits to the level that they would be at during wind-up. That is simply to ensure that there is some limit to the regulator's powers; I suspect that the Committee will think that appropriate. We have to ensure that, during wind-up, things are no worse for members' interests than they would otherwise be.

On amendment No. 141, the hon. Member for Tatton was worried about the definition of ''the actuary'' and the role of the Secretary of State. He will understand that normally the scheme actuary would be required to evaluate the scheme during the process of freezing or wind-up, but that there may be times when he is unavailable. He may be sick, on holiday or on sabbatical, for example. Of course, it is necessary to get a speedy valuation when that happens. Therefore, we need an alternative, someone with the qualifications and experience to fulfil that role; there is no argument about that.

Also, the Secretary of State can approve a person to act as a scheme actuary. That is not an unfettered power by which he can impose anyone that he thinks fit whom he passes in the street. In approving a person to work as a scheme actuary, the Secretary of State will, of course, look with rigour at members' qualifications in that sphere. Only those people with sufficient training and professional qualifications would be considered to be professional.

On amendment No. 142, a question was asked about preventing accrual during the period of a freezing order. Although a freezing order effectively means pressing the pause button on the scheme, the intention is not to make the circumstances of members better or worse during that period. Clause 21(2) is intended to ensure that neither happens.

I come to amendment No. 143 and the other amendments relating to the penalties under section 10 of the 1995 Act. Although the penalties rise to punitive levels, especially where it seems that an individual or employer is acting wilfully and inappropriately—then, the penalties can be quite fierce—OPRA believes that the penalties are appropriate, and does not think that they need to be reviewed. We have taken that advice.

Photo of George Osborne George Osborne Shadow Minister (Treasury)

I asked the Under-Secretary, on a point of information, whether the maximum amount was still £5,000 in the case of an individual and £50,000 in any other case. Those were the amounts in the 1995 Act, but there was a power for the Secretary of State to amend the provision and substitute higher amounts.

Photo of Mr Chris Pond Mr Chris Pond Parliamentary Under-Secretary, Department for Work and Pensions

Yes, those figures are still in operation. However, as the hon. Gentleman says, there is opportunity for the Secretary of State to amend those as appropriate. Amendments Nos. 144 and 145 concern the extension of freezing beyond the three-month period. That is a legitimate point for the hon. Gentleman to raise, because a freezing order is intended to be pretty immediate. It is intended to deal with the situation within hours or days to protect members' interests if it appears that a scheme is running into trouble, and it is intended to be temporary. That is why we have said that although we expect that a freezing period of three months will normally be long enough for the regulator to make the appropriate judgment, it will have the power to extend the period, but to no more than six months. It needs that extra flexibility because circumstances could arise in which scheme records are not up to date or the regulator needs further information to make the appropriate judgments. We do not expect that the extension will be used in many cases but the regulator needs that flexibility. This is a new kind of regulator—one that is flexible and interactive—and we want to ensure that there is as much flexibility as possible.

Amendment No. 147 deals with the notifying of freezing orders and the circumstances of them to members and trustees within 48 hours. We agree that these measures must be taken as quickly as possible. We do not want there to be any delay in information getting through to members, but that might not always be possible within 48 hours. We must recognise that

many schemes will have increasing numbers of non-UK members, and the structures of the firms may be complex. Therefore, 48 hours is an artificial limit with which to constrain the regulator.

Photo of George Osborne George Osborne Shadow Minister (Treasury)

Is it the case that a trustee or employer who acted in good faith and was unaware that a freezing order was in place on their scheme would not suffer a punishment?

Photo of Mr Chris Pond Mr Chris Pond Parliamentary Under-Secretary, Department for Work and Pensions

I think that that is dealt with elsewhere in the clauses that we are considering this morning. If a trustee acted in good faith and without the necessary information, the regulator would take account of that. The question implies that a trustee could be subject to penalties because the regulator had failed to give him or her the necessary information in time. That is clearly not the case. Whether trustees acted in good faith is relevant. It is for the determinations panel to judge whether they did so.

I turn to amendment No. 149. Why does a freezing order override any other enactment or scheme rules? As its name implies, the purpose of a freezing order is to freeze the circumstances of a scheme to ensure that the members' interests are not artificially enhanced or deteriorated during the relevant period. Many forms of enactment or scheme rules might impinge on the scheme during that period. If they were to be allowed to override the freezing order, there would be no point in this Committee deciding that the Bill should include the freezing order power for the regulator. The freezing order lasts for a short period—normally three months and never more than six months, except in the special circumstances when the case goes to a tribunal. Therefore, the freezing order should have a full effect.

The Government amendments are all technical amendments; they are intended to aid interpretation of the Bill, to erase any possible ambiguity or to correct oversights in the original drafting. None of them significantly changes the nature of the Bill.

Photo of George Osborne George Osborne Shadow Minister (Treasury) 10:00 am, 11th March 2004

I take the Minister's point that the amendments are technical, but perhaps he would tell us something about new clause 2.

Photo of Mr Chris Pond Mr Chris Pond Parliamentary Under-Secretary, Department for Work and Pensions

The hon. Gentleman is right. It is important to explain that new clause 2 will ensure that when the regulator determines to wind up the scheme, the freezing period will extend to the conclusion of any reference to the pensions regulator tribunal, or any subsequent appeal from that tribunal, should it or the court think that the freezing order should continue until a final decision is made. That is something to which I referred briefly earlier. This is a technical arrangement, which is necessary to ensure that the tribunal can consider an appeal properly without any significant change in the circumstances of members' interests or the generality of those interests. I ask the hon. Gentleman to withdraw his amendment.

Photo of George Osborne George Osborne Shadow Minister (Treasury)

I shall not detain the Committee much further. I take the Under-Secretary's explanation of the amendments, and of things such as penalties. I am a little concerned, however, especially as the phrase ''as soon as reasonably

practicable'' will remain in the Bill and there are no specific time limits to ensure that the regulator gets on and informs people that a freezing order is in effect. I am also concerned about the fact that the freezing order can last for six months rather than three. None the less, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendments made: No. 19, in

clause 20, page 12, line 17, after 'section 104)' insert

'in relation to the scheme'.

No. 20, in

clause 20, page 12, line 30, after 'behalf of' insert 'the employer,'.

No. 21, in

clause 20, page 13, line 3, leave out 'they' and insert

'the amounts paid out from the scheme in respect of the transfers or transfer payments'.

No. 22, in

clause 20, page 13, line 4, after 'and' insert

'the transfers or transfer payments'.

No. 23, in

clause 20, page 13, line 9, leave out 'For the purposes of' and insert 'In'.—[Mr. Pond.]

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

Photo of George Osborne George Osborne Shadow Minister (Treasury)

I would like a brief discussion on the new power of the freezing order. It is always a little unsatisfactory, although I know why we do things this way, to have to discuss the amendments before we discuss the generality of the clause.

As the Under-Secretary has acknowledged, the freezing order is an important new power for the regulator. It is somewhat draconian, and quite an extension of the powers now available to OPRA. It is therefore fair to ask why the Government felt it necessary to introduce the new power. Where was the gap in OPRA's powers that the new power fills? It will be administratively complex and may be fairly costly. Perhaps the Under-Secretary can give us some practical illustrations of where the power might be needed because existing powers are not sufficient. An example—example B—is given in the factsheet that the Minister for Pensions sent Committee members: a pensions scheme is underfunded and the employer is not paying in sufficient contributions. Although that would be serious, would it be an immediate risk to the interests of members, as set out in clause 20? Perhaps the Under-Secretary could explain how a freezing power would add to the regulator's ability to deal with that.

The costs of the freezing order are likely to be great. Who will be required to cover them? Does the Under-Secretary envisage that the regulator will use the freezing order for all sorts of schemes of different sizes? Does he envisage it being used primarily for small schemes, or could it be used for large schemes? When it is likely to be used? Would it apply to pensions schemes all of whose members are also trustees? Presumably, it would, but would it be useful in such cases? Is it expected that in all circumstances after the issue of a freezing order, the existing trustees

of the scheme will remain in place with unaltered powers?

If the freezing order specifies that no benefits are to be paid to pensioners, what are they expected to live on during the period for which it applies? They may not receive anything for up to six months, which could cause some hardship. Perhaps I have got that wrong and the Under-Secretary will clarify things. It is an important point to clarify, because that would be of great concern to scheme members.

Perhaps my most important point is that clause 20(1), which says,

''This section applies''

only

''to an occupational pension scheme which is not a money purchase scheme.''

The Under-Secretary should explain why that is so. The risks to members' interests or scheme assets can arise in money purchase schemes, too, and they may also need the regulator's protection. That reflects a more general point, into which I do not propose to go at great length, which is that this power—as in many other parts of the Bill—is focused largely on defined benefit schemes, although most people in the industry would accept, and most of us realise, that the future lies increasingly with defined contribution schemes. Surely we should be equipping the regulator with the powers to deal with the future.

Photo of Steve Webb Steve Webb Shadow Secretary of State for Work and Pensions

I have some questions that were not raised under the amendments. Like the hon. Member for Tatton, I should be grateful for further clarification about when the powers in the clause would be invoked. One can understand that the assets of a fund might be doing well or badly, and that an employer might or might not be putting money in, but I am still slightly hazy about what is gained by freezing. What is it that these powers prevent from happening? I hope that the Under-Secretary will clarify that. I also echo the question that has just been asked about whether the examples that he will provide are the sort of thing that happens exclusively in final salary schemes. One imagines that the things that might go wrong with company schemes could be of a general nature, and would not apply only to final salary schemes. I am curious to know why the scope of the clause is restricted to those schemes.

I am unclear about whether the words

''no benefits are to accrue under the scheme''

in subsection (3)(a) mean that although my pension is dependent on my length of service, for those three months I am treated as if I were not a member of the scheme, and do not build up another three months of service. When the freezing has ended, does the scheme have the power and duty to say, ''Ah, but you did actually work for those three months, so those rights will now accrue to you,'' because the Bill says only that the benefits do not accrue? Are the benefits deferred, or are they lost for ever?

If we are worried about some sort of fraud, and things have to be frozen so that nothing can be touched, how do the provisions of the clause relate to the fraud compensation scheme and the fraud elements

in the Bill? Is this about fraud or mismanagement? I am not clear when the power would be invoked.

We got no answer about how the provision in subsection (3)(a) that

''no benefits are to accrue''

is consistent with clause 21(2), which says:

''A freezing order.. does not prevent any increase in a benefit which is an increase which would otherwise accrue''.

Will the Under-Secretary clarify that? I am sure that the clauses are consistent, but I cannot quite see how.

Photo of Mr Chris Pond Mr Chris Pond Parliamentary Under-Secretary, Department for Work and Pensions

I shall respond first to the points made by the hon. Member for Tatton. He described the measure as draconian; frankly, it is quite the opposite. Most scheme members would consider that the draconian option would be pressing the nuclear button and winding up a scheme.

This is an additional power, which, as I said at the beginning, has been identified by OPRA as a power that would be valuable because it is one step short of winding up a scheme. When a scheme looks as if it might be running into trouble, the power gives the regulator an opportunity to move in and assess whether the scheme really is getting into trouble. When a scheme is frozen, it enables the regulator to go through a process, perhaps requiring trustees to take certain actions.

The hon. Gentleman repeated the example of a scenario in which insufficient contributions had been made to a scheme that was clearly underfunded. During that period, the regulator may well require an adjustment of contributions. There may be an opportunity for negotiation between the employer, the trustees and the members to resolve some of the difficulties that would otherwise arise.

This is a valuable new power, which would add to the regulator's ability to deal with such a situation, short of winding up. However, we have to recognise that in many cases it will be the step before winding up. If that is the outcome—it will not necessarily be the outcome—there will be more information available to the regulator, because of the pension protection fund, by the time the scheme gets to that stage. It is therefore a valuable process in itself.

Who will pay the costs of the freezing order? That will vary according to the circumstances of the case. In the main, the costs will be borne by the regulator and the scheme itself, and the proportions will vary from scheme to scheme. If a scheme is badly underfunded, adding the costs of a freezing order might be unwise. However, if the regulator decides to appoint a trustee, it may direct that the costs of that trustee should be met by the scheme, the employer or both.

Photo of George Osborne George Osborne Shadow Minister (Treasury)

Presumably the scheme could appeal a decision on costs.

Photo of Mr Chris Pond Mr Chris Pond Parliamentary Under-Secretary, Department for Work and Pensions

I will have to seek inspiration on that point. My assumption is that it could, but I will come back to the hon. Gentleman on that subject. [Interruption.] I have just had an inspired thought—yes, there will be an opportunity to seek an appeal.

The hon. Members for Tatton and for Northavon (Mr. Webb) asked why the power would apply only to final salary defined benefit schemes. We are talking about schemes with a funding requirement. In a money purchase scheme, also described as a defined contribution scheme, the employer and employee pay a fixed contribution and the proceeds are used to purchase an annuity, which provides the pension. No risk is borne by the employer, so no funding question is involved. However, with defined benefit schemes there is such a question. That is why we need to make sure that we have the additional power, to freeze circumstances in such schemes. Such a power would not assist defined contribution schemes at all.

The hon. Member for Tatton also asked whether that would apply to big schemes, small schemes or schemes in which all members are trustees. That would be a matter for the regulator to decide on the basis of the circumstances of the particular scheme. It would be wrong for us to try to put in the Bill any detailed definitions of which schemes could be treated to the opportunity of a freezing order—if that is the correct phrase.

The hon. Member for Tatton also asked whether it is appropriate to allow existing trustees to remain with unaltered powers. There are other measures within this group of clauses that allow the regulator to remove and prohibit trustees. In some circumstances, it might be other factors, not the trustees' actions, that are the problem, so it might be appropriate to leave them where they were.

I was asked about the important question of what would happen to the members of the scheme, and to the pensioners, if no benefits were to accrue during the period. I must emphasise that nothing would happen to their entitlement, and payments would continue to be made. The issue concerns the accrual.

Photo of George Osborne George Osborne Shadow Minister (Treasury) 10:15 am, 11th March 2004

That is an important point to nail down. What happens to people who reach retirement during a freezing order?

Photo of Mr Chris Pond Mr Chris Pond Parliamentary Under-Secretary, Department for Work and Pensions

That is one of the reasons why the freezing order is so important. We must ensure that while the assessment is being made, individual members of the scheme do not change their priority within the scheme and move from being active members of the scheme—employees—to being pensioners. In that process they would move up the priority order and their claim on the scheme would be increased, which would result in the generality of interests of the other scheme members being diminished during the freezing order.

Photo of George Osborne George Osborne Shadow Minister (Treasury)

If someone retired because they had reached the age of 65 and their company required them to do so, and if their retirement were on the first day that the freezing order came into effect, they might not receive their pension for six months if the freezing order were for that duration. Such a person might have expectations, mortgages and so on that they were relying on those payments to cover, and they might face some hardship. Obviously, they would receive the state benefits, but those might not be enough to cover their financial obligations.

Photo of Mr Chris Pond Mr Chris Pond Parliamentary Under-Secretary, Department for Work and Pensions

I should clarify the fact that people who reach retirement during the period will still get their pension, but it will be at the level that they would have received if they had retired as deferred members. The hon. Gentlemen mentioned a situation where someone reaches retirement age just as, or just before, the freezing order is imposed. I should explain that the regulator will have an opportunity within the freezing order to make a judgment that a particular action, such as the moving into retirement of that individual, does not reduce the overall generality of interests of the members—in other words, that this is a right that had already accrued. In those circumstances, the regulator could decide to validate that action. However, it would have to be positive validation, and whether that was allowed to happen would be for the regulator to judge.

The hon. Member for Northavon asked what is meant when the Bill says that no benefits would accrue under the scheme. Clause 26 gives the regulator the power to make directions to cover the period of the freeze when no wind-up order is made. For example, if the scheme and the employer are sufficiently healthy, the regulator can order benefits to have accrued for the freezing period. The regulator's objective is to protect members' benefits. If the circumstances make it right to order an accrual of benefits during the freezing period, the regulator can do that. If it is not in the interests of the generality of the members, the judgment might be that that is not the right thing to do. I think that I have answered most of the points that have been raised by hon. Members, and on that basis I commend clause 20 to the Committee.

Question put and agreed to.

Clause 20, as amended, ordered to stand part of the Bill.