Clause 178 - Pension schemes to which this Part applies

Pensions Bill – in a Public Bill Committee at 9:30 am on 23rd March 2004.

Alert me about debates like this

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

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

Good morning, Mr. Griffiths. The clause is short and I even think that I understand it. That was probably the only time that I shall repeat either of those statements today. Before the Committee nods through the clause, it will be helpful to have a steer from the Minister about the scope of the clauses that we shall be discussing this morning. The Bill makes it explicit that money purchase schemes will be excluded. They do not make a promise, so there is no funding requirement. It will be helpful if the hon. Gentleman clarifies what issues are envisaged under subsection (1)(b), which refers to a

''prescribed scheme or a scheme of a prescribed description.''

Did the Government have a scheme in mind when they drafted the provision or was it so drafted to cover anything that they might think of later?

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne

I associate myself with the hon. Gentleman's remarks. It would be helpful to receive an explanation. I wish to make a point that applies to the whole of part 3 of the Bill. In effect, it is a mere shell, which is why relatively few amendments have been tabled to the group of clauses, except, of course, Government amendments. The clauses leave so much to subsequent regulation. Clause 178 is no exception. The word ''prescribed'' keeps popping up. I am especially interested in subsection (2), which states:

''Regulations . . . may provide for exemptions from all or any of the provisions of this Part.''

We are in a slightly bizarre situation. The clause does not give much away about what it is setting up or the exemptions from what it will set up by way of regulation. That is thoroughly unsatisfactory. I am sure that the Committee are bored with my saying that draft regulations would be helpful, but matters as they stand make the position difficult; finding out what the Government are at is like trying to find a black cat in a darkened room.

Photo of Malcolm Wicks Malcolm Wicks Minister for pensions, Department for Work and Pensions

I have a black cat. It usually meows in such circumstances, so that it is not a particular problem. However, I take the comparison.

I hope that there may be an opportunity outside the Committee—perhaps tomorrow—to meet Opposition spokesmen to discuss our plans for new clauses.

Photo of Malcolm Wicks Malcolm Wicks Minister for pensions, Department for Work and Pensions

In response to the sedentary remark—or do I mean a remark from a sedentary position?—I shall meet whoever comes forward.

As the hon. Member for Northavon (Mr. Webb) suggested, it might be helpful if I put part 3 of the Bill in context. It is a key area for legislation as it concerns the new scheme funding requirement to replace the minimum funding requirement. The MFR is a flawed approach; it is rigid and inflexible, and the underlying calculation cannot be adapted in a timely way to reflect changing economic and demographic factors or revise life-expectancy forecasts, for example. Although it was designed as a minimum funding requirement, it may have encouraged some trustees to rely on it rather than stand back and think through an appropriate funding strategy for their scheme. In addition, its inflexibility may have contributed to some employers' decisions to close their schemes and skewed the investment decisions of others. At the same time, it led many members to expect it to deliver protection greater than it was designed to provide. We have recognised the need for greater protection, which is why we are setting up the pension protection fund.

This morning, we are considering scheme funding. It is the proper funding of pension schemes that provides the greatest assurance that members will get the pensions that they expect. The replacement of the MFR with a scheme-specific approach is a widely welcomed deregulatory measure, and has been developed through extensive consultation with the

pensions industry, employers, the actuarial profession and consumer group representatives.

More recently, we have consulted on the scheme funding implications of the European directive on the activities and the supervision of institutions for occupational retirement provision, which also aims to improve security for members and encourage the efficient management of schemes. The scheme funding arrangements in the Bill comply with the requirements of that directive, while allowing schemes the flexibility to choose the funding strategy most suited to their particular circumstances under a scheme-specific approach. Whereas the MFR was calculated using tightly defined actuarial methodology and assumptions with a fixed period for making up any deficit, the part 3 provisions allow schemes flexibility and choice over those matters while remaining compatible with the protective framework of the directive.

We will require schemes to have an objective to fund in order to meet their pension commitments in full, and to put a recovery plan in place where a valuation reveals a shortfall. Trustees and employers, with advice from the scheme actuary, will work together to agree the appropriate funding strategy to meet that objective. The trustees will have ultimate responsibility for the funding decisions affecting the scheme. To help the trustees fulfil those responsibilities, the regulator will issue a code of practice, which is one of the codes that the regulator will be required to issue under clause 64. That will give trustees practical guidance on their duties and responsibilities in relation to the funding of their scheme. If the trustees cannot reach agreement with the sponsoring employer, they will be required to report to the regulator, which will have a wide range of powers aimed at resolving the situation. The regulator will use those powers both to protect scheme members' interests and reduce calls on the PPF.

As we shall see when we discuss part 2, the PPF will be funded by a levy, at least half of which will be based on an assessment of risk. That assessment will take account of the scheme's funding level, but there will be no requirement for schemes to fund to that level. Although there will be a clear incentive for schemes to fund to a level at which they do not have to pay the risk-based element of the levy, they will be able to make a choice. The funding requirements on schemes are in part 3.

There will also be much greater transparency of other schemes' funding positions. Under existing powers on matters that must be disclosed to members, we will require schemes to send to all members, including pensioner members, an annual update of the funding position of their scheme, together with information on their likely position were the scheme to wind up the funding at its current level. That should include reference to the protection offered by the new protection fund. Committee members will appreciate that this is an area of considerable technical complexity. For that reason, and to allow for further consultation with key stakeholders, much of the detail of process by which trustees determine the actuarial methods and the

assumptions that underpin them, together with the required contents of key scheme documents such as the statement of funding principles, is to be prescribed in regulations. That approach allows us to ensure that the implementation is workable and proportionate.

Clause 178 would require occupational pension schemes to comply with the scheme funding provisions unless they are exempt from the legislation. Subsection (1) would exempt money purchase schemes, which operate as a collection of individual funds rather than as a collective fund from which a defined level of benefits is paid. The hon. Member for Northavon recognised why they are exempted.

The clause would provide a power to prescribe in regulations that a particular type of scheme or an individual named scheme may also be exempt. Subsection (2) would enable other exemptions for all or any of the scheme's funding provisions to be set out in regulations, in the same way in which regulations currently exempt some schemes from the MFR regime. For example, as currently, schemes that are winding up will be exempt from the requirement to put a schedule of contributions in place.

The Conservative spokesman asked about those exemptions. The broad intention is for schemes currently exempt from the MFR to be exempt from the new scheme funding arrangements. We will, of course, consult widely on our draft regulations to ensure that the scope of the exemptions remains appropriate.

Question put and agreed to.

Clause 178 ordered to stand part of the Bill.