I apologise for being slower than you, Mr. Cran, at least on this occasion.
It is appropriate that I speak to clause 81, as it is the first clause on the pension protection fund. I shall set out the context for the clause because, up until now, the pension protection fund has been rather like Banquo's ghost; we have referred to it frequently, but have not dealt with the substance of it.
Part 2 concerns the new pension protection fund—a crucial measure, as we have heard, to increase member protection and boost confidence in pensions generally. As most of us are acutely aware, if a company goes bust, someone who has paid into that company's final salary scheme throughout their working life could face losing not only their job but their pension if the scheme is left underfunded. I have met people in that situation and I know, as I am sure do other hon. Members, how deeply that can affect them and their families. That is why the fund is such a vital step. It will benefit at least 10 million members by giving them the reassurance that they need to pay into their company scheme, and they will be safe in the knowledge that they will have a secure retirement even if their company goes bankrupt.
I am pleased to say that this significant move to improve security and confidence in pensions has rightly received a positive response. I take the opportunity to thank all those involved in the consultation for their contributions and support. It is safe to say that we all stand behind the common goal of improving pension protection, but, as some have rightly pointed out, to achieve that goal we must ensure that the detail of the new fund is right and that it works. To build on the expert advice that we have already received from key players in the pensions world and beyond, the next few weeks of constructive debate in Committee will be just the opportunity to go one step further and take a closer look at the design of the pension protection fund.
I shall set out the areas that this part of the Bill will be covering and talk through their main features. The first area is the PPF as an organisation and its governance arrangements. As Committee members are aware, the PPF will be an executive non-departmental public body run at arm's length from Government in order to maintain its independence. At the same time, it will retain a necessary degree of
accountability. There has already been some debate about whether the Government should be financially involved with the PPF, and we shall no doubt return to that issue in the days ahead.
It is worth pointing out that we have not taken lightly the decision to make the fund responsible for its own financial management. We have learned lessons from the experience of the American Pension Benefit Guaranty Corporation, we have been careful to make our financial assumptions as sound as possible, and we have built in safeguards to ensure that the British PPF can be self-sufficient in the long term. The new organisation will be governed by a board, the members of which will be appointed in an open and transparent way, making the best use of skills, experience and knowledge. Some Members may have noticed that we are already planning ahead by starting the recruitment process for the key positions of chairman and chief executive, as it is sensible for them to be involved at the earliest stage in the development of the fund.
The board's main function will be to pay PPF compensation and ensure that there are enough funds to pay that compensation by managing the calculation and application of the levy and setting and overseeing the investment strategy. In terms of the dispute procedure, the PPF will follow good governance guidelines by having a clear and transparent internal procedure for dealing with disputes similar to the current practice for pension schemes. There will also be ultimate access to an independent PPF ombudsman and the High Court if required.
In addition to its main functions, the board will take over responsibility from the pensions compensation board for paying compensation in cases of fraud. That changeover is intended to make life simpler all round and improve efficiency, as it makes sense for all types of compensation relating to occupational pension schemes to come from one single source. The new arrangement will mean that the PPF board will have the authority to pay compensation to both defined benefit and defined contribution schemes up to 100 per cent. of the value of the loss due to fraud. In order to cover the cost of fraud, a fraud compensation levy will be charged to both defined benefit and defined contribution schemes, but only when the need arises. I am grateful to you, Mr. Cran, for allowing me to set the context, because that is probably helpful to Members.
Clause 81 sets up the board of the pension protection fund. I have outlined in my introduction the reasons for introducing the fund. Suffice it to say that it forms a part of a substantial, balanced package of measures that seek to ease the financial and administrative burden on employers while offering a sustainable system of protection to individuals. Under clause 81 the board of the fund is set up as a corporate body referred to as ''the board''. Although occasionally I might refer to that as the fund, hon. Members will know that in both cases I am talking about the PPF; that is to avoid confusion with the pot of money, which is referred to as the pension protection fund. The PPF board will ensure that the PPF will significantly improve protection for scheme
members as individuals in defined benefit pension schemes based in the UK will have a safety net to ensure that they will always receive a meaningful pension, even if their company goes bankrupt.
I think that the Minister is right. It is probably sensible to have an overview of this central part of the Bill before we get into the detail. I should like to touch on a couple of things that he said before I expand on my own points. He reiterated two things that have been made clear by Ministers. First, the fund must stand on its own and will have no support from Government. I shall deal with that in more detail later. The official Opposition have real worries as to whether the Government are being realistic, simply because of the way in which they have chosen to set up this fund, not least because they have got themselves into a situation in which the funds have to work on a reduced, flat-rate levy, at least in the early stages. We shall go into that in more detail in due course.
Secondly, the Minister said that there will be no retrospectivity in the compensation. Again, we have specific tabled amendments on that, as have other Committee members. Has he received any guidance from No. 10, following the meeting the other day, on how best to approach the issue? It seems as if those above his pay grade—if I can put it like that—are taking an interest. If there is to be a further dollop of amendments on another important issue pertaining to the Bill, it would help to know about that in good time.
The Minister also touched on the purpose of the measure, which is to protect the 10 million or so current members of final salary schemes. Again, I must remind him of the view of his own pension tsar, who thinks that that figure will be down to around 1.4 million within 20 years. Since the Bill was published, we have said that the measure will do nothing to encourage new final salary schemes or even to keep the existing ones open if they were due to close. We are passing legislation that will preside over the gentle decline of the final salary scheme. Subject to the amendments on DC schemes that may be tabled—that has been flagged up, but we have seen nothing yet—that is principally what the Bill is about, as the Minister said.
We have been around that course, but I am willing to go around it again. The Minister is well aware, because he and I came into the House on the same day in 1992, that if the Opposition do not want to vote against a Bill because it contains some things on Second Reading that are worth while and others that are not, their only option is a reasoned amendment. The rules of the House require that the reasoned amendment must start with the magic words,
''this House declines to give a Second Reading''. I know that it sounds bizarre and would seem odd to the average Martian watching our proceedings. The Minister, however, has had his 10 cents' worth out of that particular point.
To clarify our position, we are in favour of an insurance scheme. I see that the Minister has a piece of paper, to which we shall have to return. As I said, we have severe reservations about the way in which the fund is being established. In a recent letter to my hon. Friend the Member for Havant (Mr. Willetts), the Secretary of State stated:
''In designing the PPF, we are looking to import those elements of the US model that work well and fit best with our system of provision.''
He makes other points, to which I shall return, but that is our starting point.
Other countries do things differently. Holland and Germany, for example, have rigorous funding requirements. The Government examined a variety of models and chose to follow the American model of 30 years ago—the American Pension Benefit Guaranty Corporation of 1974. I said that I thought it appropriate to go to Washington to hear a bit more about it at first hand. There are lessons for us to learn from the experience of that fund. Some people's reaction verged on incredulity when they discovered what line the Government were going to pursue. When that fund was set up, the Americans did not pay out benefits until they had built up reserves.
I quoted Mr. Kandarian, and no doubt I will do so again at length—we will hear much about him in this stage of our deliberations. However, his plea was that we must not start until we have much more rigorous funding requirements and a proper risk-based levy that goes beyond the risk that is currently built into the levy applied in the USA. I am sure that his departure from his job at the PBGC—nominally to spend more time with his family—was not unconnected with his experience of trying to make sense of the organisation that he had taken over.
It is useful, as well as coincidental, that we are discussing this on the very day on which the papers report that the four most senior actuaries in the country have written to the Secretary of State expressing what they call ''our serious concerns'' about the PPF. I would have thought—especially with the American model fresh in our minds—that Ministers would have gone to some lengths to ensure a broad element of consensus, not just on the principle of what is to happen, but on how it is to be organised.
It strikes me as remarkable that at this late stage, as we discuss this part of the Bill, the president of the Institute of Actuaries, his president-elect, the president of the Faculty of Actuaries, and the vice-president of that body have written a joint letter to the Secretary of State. As I said, they expressed their ''serious concerns'' about the PPF as set out in the Bill. They said:
''The PPF has an important role to play in helping to rebuild public confidence in retirement saving.''
None of us can disagree with that sentiment. They go on to say:
''It is therefore vital that it is set up and operated with clear objectives'',
and make the point that the way in which the Bill is constructed suggests that the PPF
''will operate like a pension fund. As such, it would be subject in the future to the same risks''
''as those which have given rise to the need for the PPF in the first place.''
In other words, there will be a domino effect. They continue:
''If this is to be the case, then it is essential that the public are clearly informed from the outset that it is not the Government's objective to provide 'guaranteed' benefits from the PPF.''
However, they go on to note that, at times, Ministers' looseness of language, which I am sure it is unusual, has meant that the PPF has been described as an insurance fund.
On Second Reading, the Minister referred to the PPF as ''honouring pension promises.'' The actuaries say:
''If these are the Government's objectives, the PPF must be set up and operated like an insurance company, subject to full insurance supervision and solvency regulations.''
They ask for a meeting with the Secretary of State.
I have been listening carefully to my hon. Friend. Does he agree that if the PPF is a mirror image of the smaller funds that it is supposed to protect, it will be subject to many of the same negative forces—namely, market forces—which will have a detrimental effect on it? A general decrease in the value of gilts or equities will have a knock-on effect on the holding fund if it is not simply a pot of ring-fenced Government money. There is a danger that the PPF will be affected by the same forces that will drive funds to draw on it in the first place.
Order. I note that the hon. Gentleman's intervention was turning into a speech. I did not want to interrupt him, however, because his points were important.
As it happens, my hon. Friend touched on investment policy, which I shall deal with shortly.
Actuaries are almost by definition retiring people who are not normally in the habit of writing open letters to the Secretary of State. Clearly, there must have been a breakdown in communication somewhere along the line because in the attachment to their joint letter they make a crucial point about members' benefits, which goes to the heart of the Bill and, in particular, the clause. They say:
''The liabilities that the PPF will take over from a failed scheme are limited. For retired members, no future increases in pension will apply for benefits earned for service before April 1997, while future increases for benefits earned for service since April 1997 will be limited to 2.5 per cent. p.a. For members who are not retired . . . only 90 per cent. of their benefits will be covered. These benefits will be inflation proofed up to retirement, up to a limit of 5 per cent. p.a. . . . In addition, there is an overall maximum pension of £25,000 p.a. which will be covered by the PPF.''
They state, quite fairly, that limits to the extent of the safety net already exist in the Bill. The actuaries go on to make the point:
''There is a power in the Bill for the Board of the PPF to stop increasing pensions if the Fund cannot afford the cost of further increases. There is also a power for the Secretary of State''—
''to further reduce the benefits being paid by the PPF.''
On the point made by my hon. Friend about investment and the responsibilities of the board, which will be established by clause 81, the actuaries state that the board
''must draw up a SIP and appoint at least two investment management companies. The least risky, or best matching asset class for a pension scheme to invest in, in order to meet future pension payments, is bonds. However, a typical UK pension scheme will invest a large proportion of its assets in equities. Equities are expected to outperform bonds over the long term and, in a typical scheme, the contributions are determined by taking credit in advance for some of this expected out-performance . . . Despite the risks associated with equity investments, pension fund trustees do not hold additional reserves against these risks. In effect, they are relying on the employer to provide this capital. Because the assets held in equities are 'mismatched' to the scheme's liabilities, then over time the ratio of assets to liabilities can be volatile.''
That approach has two implications for the funding of pension schemes. The first is that
''The employers contributions will also be volatile.''
The second, which is extremely important, is that
''If the scheme and the employer fail simultaneously, members' benefits will not be paid in full.''
That is precisely the problem that the Bill is trying to resolve, albeit without retrospection.
The actuaries continue:
''If the PPF is run according to the model described above, there would be a serious risk that members' benefits would need to be cut back.''
As I explained, the Bill includes powers for the board and the Secretary of State to reduce benefits. The actuaries again state:
''The Board's ability to increase the size of the levy in adverse times is restricted by the powers in the Bill''.
If that were not bad enough, they note:
''The Government has stated that taxpayers' money will not be used to bail out the PPF.''
That is the basic problem if the PPF is regarded as a pension fund.
If it is an insurance fund, subject to strict solvency regulations in the normal way, companies that write that sort of business
''normally adopt a strictly matched investment policy, investing in bonds. To the extent that they adopted a mismatched investment policy, they would be required to hold additional capital in order to meet the solvency requirements.''
The conclusion of the actuaries is as follows:
''If the PPF is run according to this model''—
that is, the insurance fund model—
''there will be substantial security for members' benefits from the PPF. However there would be implications for the levy. It would need to be calculated having regard to the deficit in each scheme measured on an 'annuity buy-out' basis.''
As we know, that would make a big difference.
The actuaries continue:
''It may be tempting for the Government to run the PPF like a pension fund, particularly as this would enable it to keep down the size of the initial levy. However, there would be severe risks to
members' benefits from adopting this course of action. It is possible for the PPF to have a stable levy and secure benefits for members, provided that it invests in bonds . . . The PPF cannot simultaneously invest in equities, have a stable levy and provide secure benefits, since these three objectives are mutually incompatible.
The Government should therefore either:
Be entirely open and honest with the public about the uncertain future for benefits covered by the PPF, in particular, making it clear that benefits . . . are not 'guaranteed'; or,
Operate the PPF like an insurance fund, applying insurance company solvency regulations.''
As we are following the American model, it is worth pointing out that there is a read-across with the Pension Benefit Guaranty Corporation. As I said this morning, it has announced plans to change its investment strategy radically. It is cutting its equity holdings and buying more Government bonds. As I have said, actuaries believe that those are the best match for pension liabilities. As Steve Kandarian said in January, the safety nets liabilities were bond-like, so the corporation would buy more fixed-income securities as a good asset to match those liabilities.
Thus, right at the start of our detailed consideration of this centre-piece of the Bill, we have an enormous conundrum set out with admirable clarity by the four most senior actuaries in the country.
Only the other day, a written statement from the Minister sought parliamentary approval for additional resources of £450,000 in a supplementary estimate in relation to the pension protection fund. Those of us who occasionally surface from the Committee will be aware that the Department for Work and Pensions is advertising the post of chairman for the PPF at £80,000 for a two-day week and the post of chief executive for what is described as an attractive six-figure package. Both posts are described as fixed-term appointments of two to three years' duration. All credit to the Government for getting on with it. They are, perhaps, a bit quick off the mark but I believe that the convention is that once a Second Reading has occurred in this House, as opposed to the other House, it is possible to start advertising such posts.
Before we take anybody on at that kind of rate, I ask the Government to reflect on and respond to those serious matters raised today with the Secretary of State by the four leading actuaries in the country.
At the start of this part of the Bill, it is important to welcome the establishment of a pension protection fund, including its board, which is what the clause does. That is the heart of what the Bill is about. I have learned a lot about pensions over the last couple of years. I have still got a long way to go in my education on the subject, as I suspect those who have been doing it for 20 or 30 years have. It is a vast and complex subject, but one part of it that was little understood by the public—and certainly little understood by myself and many colleagues in the House before recent events—was the extent to which final salary occupational pensions were not protected by some sort of fund or board.
I walked into a meeting of steelworkers in Cardiff in the Railway club in Splott a couple of years ago and met workers who had faced a double whammy. They had lost their jobs and were likely to lose their pensions. I thought that such an experience might have been possible in the Dickensian era in this country. At that time, one might have been able to walk into a meeting with workers and discover that they had all been sacked and that their promised pensions had been taken from them on the same day. But I discovered that it was possible for it to happen in the 21st century, despite the fact that only a few years previously there had been legislation on the matter.
The establishment of some sort of pension protection fund is absolutely crucial. It is crucial because, as the Secretary of State said on Second Reading, the pension promise is worthless otherwise. It would be an utter betrayal of those workers if they were permitted to work loyally for a company for 20, 30 or 40 years in some cases, believing reasonably and rationally that they would receive a pension related to their final salary on retirement, only to find out that that was not the case. The establishment of the fund is to be welcomed, and the clause should be welcomed.
The hon. Member for Eastbourne raised several issues that I am sure we shall debate in some detail as we consider the clauses related to the establishment of the protection fund and its board. Ultimately, the key point is security. Unless the pension protection fund delivers a promise of guaranteed benefits upon insolvency for workers who have paid into final salary pension schemes, the fund and the board will be worthless. Unless it provides security it is not worth having, because the schemes are not worth having unless they provide security. By their definition, they are defined benefit schemes, not defined contribution schemes. If employers wish to offer defined contribution schemes, they are free to do so.
Often, some employers have offered to fund benefit schemes because it is quite advantageous for the management to do so, and they often load up their salaries in the latter years of their careers to ensure that their final salary pension is quite generous. They often go early, and often jump ship when the company is on its way out. Final salary pension schemes are worth having; we should promote them and the Government should encourage companies to have them. However, if we are going to have them, they must have meaning. They will have meaning, and offer a pension promise to people, only if the protection offered by the fund is real and guaranteed in some way. That is why it is absolutely essential that security is the first priority of the board of the pension protection fund in securing the benefits that will be available. Adopting a more conservative investment strategy—rather than the Conservative strategy, which was rather reckless in the '80s and '90s—would be the appropriate way forward.
The problem otherwise is that we shall return to the issue again in a few years' time. If we do just one thing in the Bill, and particularly in this clause and those that follow, it should be to ensure that we do not have to return to the issue in the next few years as we are doing now, just nine years after the previous Bill on
the subject was passed. If we do have to return to it, and the pension protection fund does not provide the security that I spoke about, we will have failed. That failure would have a severe effect on working people's confidence in pensions. Many workers feel as though they have somehow failed, although they have not, because they feel that they were foolish enough to believe their employer, successive Governments and other advisers who told them that, by participating in a final salary occupational scheme, they had the best kind of pension possible. That is frequently what they were told.
In light of the hon. Gentleman's expertise as a former trustee of a pension fund, and in the absence of a cast-iron Government guarantee for the fund, what weighting of gilts, bonds and equities, broadly speaking, does he think would give the fund the guarantee that he seeks?
I profess non-expertise in the subject. As I said at the outset, I am a beginner, and I suspect that I will remain so even if I study it for many years to come. However, I am sufficiently intelligent to know that it would be daft of me to speculate on the proportion of gilts, equities and other investments in the pension protection fund. Such decisions should be made in light of proper advice from the board when it is set up. It would be wholly inappropriate for me to offer advice on that.
I suspect that the Conservative Front-Bench spokesman, the hon. Member for Eastbourne, will not offer any advice on the subject, either. We are still waiting for him to tell us his party's position on many clauses. We have heard what various interest groups think about them, we have heard various observations from outside, and we have heard what the Library has to say about the Bill several times during this debate; but we have not often heard the position of Her Majesty's official Opposition, and I do not anticipate that we shall hear their opinion on the proportion of equities, gilts and other investments in the pension protection fund, either. However, perhaps the hon. Member for Bexhill and Battle (Gregory Barker) is about to tell us that.
I am not, but I appreciate the hon. Gentleman's reticence in suggesting what the weighting would be. However, does he recognise the conundrum mentioned by my hon. Friend the Member for Eastbourne, which is that the lowest-risk investments also offer the lowest return? There is a difficult decision to be made there; one cannot manufacture large returns on low-risk investments.
I perfectly understand the point that the hon. Gentleman is making, namely that there is a relationship between the risk undertaken and the size of the levy likely to be brought to bear in order to make the pension protection fund work; but I made it fairly clear at the outset of my remarks that I think that the pension protection fund should err on the side of security in making that decision, because it would be pointless to have a pension protection fund that could not meet its liabilities. If the pension protection fund were to fail, we would all have failed in our responsibilities.
I think that it is right to welcome the principle of the establishment of the pension protection fund. We should work thoroughly and carefully in our next sittings to scrutinise exactly how the fund would work—and, in all fairness, that is what the hon. Member for Eastbourne said, too. We should work together to make sure that the fund works, because if it does not, we will all have failed.
I very much welcome the part of the Bill that clause 81 introduces. It is potentially the most important part of the Bill, in terms of dealing with some of the real pressures that our constituents face. Certainly, in my constituency, where a number of shoe firms and other firms have collapsed, the issue of pension protection is crucial. Many of those firms were small. They were not the kind of large organisations that my hon. Friend was talking about. People faced huge pressure with little help and advice and I have some questions about that for my hon. Friend the Minister.
The hon. Member for Eastbourne set out the actuaries' views and referred to different models for the scheme and different investment strategies, but, as my hon. Friend the Member for Cardiff, West (Kevin Brennan) said, he did not say whether the official Opposition are opposed to it, nor did he argue against it. He said, ''Here are different models. It will be difficult.'' That is not surprising. The official Opposition's attitude is critical because one of the problems facing us all when dealing with pensions issues is that many people do not know what their rights are and are unable to obtain some of the income or benefits to which they are entitled because they simply do not know about them.
Can the Minister explain how people will know about the scheme, how to join it and whether employees will be able to have a role in ensuring that their employer's scheme joins the pension protection fund? What information will people be given if their scheme is covered by the pension protection fund to enable them to tell, if the company folds, whether they will obtain the benefit? I am sure that that will be clear in large companies, but in some of the smaller ones people are not so well informed and information is critical. The same applies to the ombudsman scheme and it is right to have different ombudsman offices for different aspects of pensions. It is also right to have an ombudsman for the pension protection fund because, if people feel that something has not been done properly, they may want to take issue with what happened. It is important that people know how to do that. MPs also have a role and it is important for us to understand the position so that if a company in our constituency collapses we can provide people with help and advice.
When the details have been discussed, I hope that the Conservative party will make its position clear because, on a number of pension issues, such as pension credit—
I agree with the hon. Lady about people being informed, but our concern about the specific issue is twofold. First, the fund should not be
oversold to people because, as the actuaries reminded us, there is no full safety net by any stretch of the imagination, even if it works. Secondly, and not least because we expect to be back in government at some stage, perhaps as early as 14 months from now, we do not want to inherit an inherently unstable structure that will ultimately fail because it was not properly thought through and funded.
The hon. Gentleman's comments were helpful. It will, of course, be technically difficult to set up such a scheme. If it was easy, his own party, when it was in government, might have done that. The public may pick up only a fraction of what we say in Committee and what parties say, but when MPs' comments are picked up they are sometimes accepted as describing the way things are. The hon. Gentleman knows that his party has a strong following among pensioners, as we do. If his party is simply critical of this fund and does not make it clear to people not only that there are issues about setting it up but that there are advantages and that there are ways in which they can access it, that could affect the ability of his constituents to have access to the kinds of benefits that the fund provides. The pension credit makes it crystal clear what the effect can be of negative remarks by the Conservative party. It is extremely important that the party makes its views clear and that it draws a distinction between issues about technical implementation and the question whether it is a good or a bad scheme once it has been set up. No legacy of ours will be anything akin to the pensions mis-selling that was a legacy of the hon. Gentleman's party.
There were also the state earnings-related pension scheme widows. I was one of the MPs involved in the test case about the lack of information provided on that. I ask the Minister to offer clarification on the issue of information and the hon. Member for Eastbourne to make his party's attitude clear at some point.
Let me try to put the hon. Lady's mind at rest, because she has obviously been having sleepless nights worrying about the official Opposition's attitude. That is a tribute to the new standing of my party, following the election of the right hon. and learned Friend the Member for Folkestone and Hythe (Mr. Howard) as its leader. As we are breathing down the Government's neck, I will be clear about this.
Be very afraid, as they say in the movies.
To be blunt, I want to ensure that the PPF is not another Equitable Life waiting to happen. I want to ensure that it is properly endowed with assets, is properly run and will not let people down. As for the pension credit analogy, it is perfectly possible to assist pensioners who want help to get what they are entitled to, as I do in my surgeries and elsewhere, while at the same time criticising the basic madness of a system that increases exponentially the level of means-tested
benefits and puts off lots of those pensioners from applying in the first place.
I can assure the hon. Gentleman that I have no sleepless nights. However, it would help if he were to set out the Conservative party's views. There is a difference between the technical points that the actuaries raise, and which the hon. Gentleman read out in detail, and the Conservative party's political position, which the hon. Gentleman did not get around to explaining as he was reading out his brief. It is important that that is clearly expressed, and the Minister spells out how the Government are going to set about informing the public and how people will be able to ensure that their employer's schemes sign up to the fund. Once people are in a fund, if the company collapses they must know how to get access to their money.
I welcome this provision very much. I echo the comments of my hon. Friend the Member for Cardiff, West on the many people who have spent their working life saving with every expectation that they would in the end have a reasonable retirement. As the story unfolded, it was reminiscent of Gradgrind in ''Hard Times''. As a person who is not historically close to pensions issues, I thought that we had left that situation behind many years—if not a century—ago. There cannot be any Committee member who does not have great sympathy with the approaching 60,000 employees who have suffered this fate either fully or partially.
Happily, no one in my constituency has suffered that catastrophe. I am an Iron and Steel Trades Confederation member and there is a large steelworks in my constituency. Its pension provision is absolutely secure. However, the sympathy between ISTC members in Redcar and ISTC members in Allied Steel and Wire, who were among the earliest and most major sufferers of this kind of catastrophe, is so outstanding that I am required to take a very active interest—although I would have done so anyway.
I want to echo in my own terms what my hon. Friends the Members for Northampton, North (Ms Keeble) and for Cardiff, West have said. The whole of the Opposition's approach to the Bill appears to have been a sort of phantom scrutiny—one that involves reading out what the Association of British Insurers thinks of one particular clause, and what the National Association of Pension Funds thinks about other clauses, without the Opposition having any sort of view themselves. Is it that they, for some strange reason, are not able or prepared to put one forward? That is a wholly unsatisfactory way of carrying out their task, which is to scrutinise in great detail and to ensure that the Government, who I am pretty satisfied are getting it right, have indeed got it right. We have all had the handouts from the ABI and the NAPF. A bit of independent thinking about what they will do is required from the Opposition. I hope that they will change.
Kevin Brennan rose—
Order. I have not interrupted the hon. and learned Lady until now because she had a
point to make about the Opposition. However, I would not want to hear much more about that because we are here to debate the Bill, rather than the Opposition.
My hon. Friend has always been a generous man, even in adversity. In a burst of generosity, I will agree with him. I suppose that it is good to have them here—[Hon. Members: ''Him, him!'']—to have him here. There has been another one, I am sure.
Are not the Opposition a tad worried that they do not have a thing to say about it? All they can do is read somebody else's letter out. I assume—I may be rash—that the Secretary of State has the letter and that he could have read it himself, without its being committed to the Hansard record. I am sure that in due course my hon. Friend the Minister will be able to deal with the issues that the letter raises; I doubt very much whether they will be dealt with during the debate on clause 81, as that is about the structure of the board.
While considering the clause—closely, of course—the Opposition have spoken of going to Washington and finding nothing but incredulity that this route should be followed by the Government. Yet they themselves do not appear to have the slightest clue about how else the system should be put together. I have looked in vain through all the manifold documents that one gets on Standing Committees for some really fundamental amendments, fresh clauses or proposals from the Opposition that would give us better security, a different proportion of investments or whatever.
I am trying very hard to grasp what the Opposition think is a key problem. May I urge the Opposition to try to think a little bit about clause 81 and those that follow, and to make a serious contribution to what I see as an extraordinarily important debate about the future of pensions? It is not good enough for the Opposition to talk about the Government not having any consensus because the actuaries have written today, and yet not to be prepared to offer a single suggestion themselves. I hope that they have a good shake-up and a think during the weekend, because they have not tabled anything that will significantly alter anything.
When the Minister says a little more about clause 81, will he help on the question of scale? I find it very difficult to get an idea of the scale of the pension protection fund operation not in relation to its funding, but with regard to its likely number of employees and that sort of thing. I know that the
American equivalent has about 800 people. I imagine that that is not the scale that is envisaged under the Bill. However, we must bear in mind that the levy will have two parts—the flat-rate levy and the risk-based levy—and I hope that we shall have an opportunity to debate them extensively. It will have to finance the costs of the board under clause 81 and the costs of all the functions that it carries out, as well as ensure that the fund itself is adequately funded, so it is key for us to find out a little more about the likely scale of the costs.
I thank hon. Members for their contributions. In my introductory remarks on the clause, which sets up the board, I thought it appropriate to make some general observations. I am grateful to you for allowing me to do that, Mr. Cran. It has led to a fairly wide-ranging debate about the PPF, and I am not too tempted to deal with specific points that will come up in respect of later clauses. I shall deal with the other points in reverse order.
I thank my hon. and learned Friend the Member for Redcar for her support for the pension protection fund. I seriously believe and predict that it will be seen as a major force for security in old age. It will be regarded by future parliamentarians, workers and others as a substantial social advance in our country. We are learning lessons from the experience of the American Pension Benefit Guaranty Corporation, taking on board many of its arrangements and policies and changing arrangements, when appropriate, for this country.
When I visited Washington, I met a Republican Senator, Democrat politicians, the trade union side, the employers' side and staff at the PBGC and elsewhere, but I met no one who suggested that the United States could now do without the Pension Benefit Guaranty Corporation, for which there was strong support. At one level, I could ask Conservative Members in this country to be as supportive of such things as I think the Republicans are in the United States.
There were different views on that matter. However, we will cross the Atlantic on more than one occasion in the next few weeks. [Interruption.] No, we are not a Select Committee; I was talking about visits not in a literal sense, but in terms of a philosophical policy analysis. [Interruption.] I shall not raise false hopes. We will consider such serious matters, but because we are enabling the board itself to vary the levy in the light of economic circumstances, the PPF will bring a flexibility to our fund that is not available to the fund in the United States, which has to go to Congress to gain approval to change the levy. That is one example of a significant difference between our countries.
My hon. and learned Friend the Member for Redcar asked me to give her an idea of scale. We expect the number of staff to be somewhere between about 100 and 150. As for administrative costs, it
could cost in the region of £12 million to set up the fund and a not dissimilar amount—£9 million—for ongoing costs. As a broad estimate—I am talking about orders of magnitude—that is what we are contemplating.
My hon. Friend the Member for Northampton, North—I almost got her mixed up with my hon. Friend the Member for Cardiff, West; excuse my being a Londoner and London-centric about such things: I do know the difference between Cardiff and Northampton, North—made a number of important points, not least about the ombudsman. We will be discussing the ombudsman. It is right and appropriate that people can challenge the decisions of the board, and the ombudsman is important in that respect.
On publicity, we certainly expect the board to have a publicity strategy, like any other sensible organisation. Give that it is a new organisation, that is particularly important. I would expect a website, articles written by staff members, press notices, visits to insolvent employers and so on.
I should make it absolutely clear that joining the PPF is not a voluntary activity. Every defined benefit scheme, and some schemes that are of a hybrid nature, will be required to pay the flat rate and the risk-based levy where appropriate. When a final salary scheme gets into trouble, the PPF will move in compulsorily to protect members' rights. There will be a series of notices, when appropriate, to individuals, and it will be made absolutely clear what individuals subject to the PPF will receive and when. They will be kept fully informed.
My hon. Friend the Member for Cardiff, West made an important speech. The contribution that he has made to these debates on behalf of his constituents has been widely welcomed. I hope to persuade him in the future that the PPF will be set up on a solid financial foundation so that pension rights can be guaranteed.
The hon. Member for Eastbourne made a number of important points.
They are important in the sense that they are important for us to consider and answer. To some extent, we will deal with them clause by clause, but I want to make a broad point in answer to one of his concerns. Like my hon. and learned Friend the Member for Redcar, I am still not absolutely certain what the Opposition's position is. I am sure that it will emerge as leaders of their party used to do—in due course, albeit in some mysterious way. The pension protection fund will bring security both for employees and good employers. Knowing that there is an insurance fund—I use the term as part of common English vocabulary—
I use the word in its proper sense. English vocabulary is important. I am not using the term in a technical, legal or actuarial sense. I refuse to give away certain key parts of the English vocabulary
to any one profession. Bringing insurance to people will mean that even the very best employers who probably stand no chance of going bankrupt in the next 100 years will nevertheless know that, should things go wrong, they can demonstrate to their employees that their contributions have been well spent and that their pension rights will be secure. That is important.
The letter from the actuaries has been mentioned more than once. Let me deal with one or two of the points that were made. I always find it interesting to distinguish between people who come to us to discuss issues informally or confidentially and those who discuss them through a press notice, but of course people in a free society can make those choices for themselves.
The fund has been carefully designed to maximise protection to scheme members while ensuring that it is affordable for the industry, with the levy predominantly focused on risk. It is neither a pension fund nor an insurance fund. The board will be obliged to agree a statement of investment principles focused on addressing the risks that it will face. As such, it will not be constrained by the need to comply with solvency regulation. The PPF will have freedom, within the parameters set out in the Bill, to alter the levy to ensure that protection is maximised—a point that I made in terms of the contrast with the experience in the United States, from which we have learned. It will also be able to borrow money. In extremis, the PPF board may make recommendations to the Secretary of State to vary the level of compensation that is paid. It is important that that ability is included in the Bill, but I emphasise the words ''in extremis''. I can foresee no realistic circumstances in which it would be necessary.
It is important to point out that the fund will have recourse to a number of measures that must be implemented before the reduction of compensation is an option. I am sure that the hon. Member for Eastbourne will read that in Hansard tomorrow. He is clearly not listening, even though he asked the question. For example, the PPF will be able to raise the levy, reduce indexation or borrow commercially. In fact, the compensation percentages can be varied only when revaluation and indexation have been reduced to nil.
I accept that the board will have an income stream from the levy that is largely risk based. In the unfortunate circumstance that a scheme goes bankrupt with the company, which will occur, it will take over the assets. There will often be considerable assets—often millions of pounds' worth—which may only add up to a percentage of pension rights, but it might invest those and therefore gain an income stream. From time to time, because of an economic cycle, it may need to borrow. However, it is important
to bear in mind that the board will have assets and income. We will return to that issue in due course.
The Secretary of State will not be acting with a free rein to reduce compensation; he or she will be approving the board's carefully considered proposal—should it come to that—which it can make only after consulting stakeholders. Any change to the level of compensation will be subject to an affirmative resolution procedure. Our approach strikes a balance between building in constraints to reassure levy payers that costs will not rise beyond control and allowing the fund the flexibility to raise the funding that it needs to reassure members that they are sufficiently protected.
I will not go into a detailed analysis comparing and contrasting those arrangements with the American PBGC. We will be able to deal with those issues when we come to different clauses, but I should like to emphasise that we have learned a great deal about the advantages and disadvantages of the United States model. I mentioned that we feel that requiring the board to come to Parliament, just as the PBGC is required to go to Congress in the United States to change the levy, would be inflexible and would not be sensible.
The hon. Member for Eastbourne is correct in his implication that the PPF alone is not the way to social security in old age. We regard it as part of a package, much of which is covered in the Bill, including scheme-specific funding and the importance of the regulator working in partnership.
I hope that I have covered some of the points, although I have deliberately not gone into the detail, because it might be tedious to the Committee to repeat such remarks during a clause stand part debate, and they would probably be ruled out of order by our rigorous Chairman.
I have not dealt with the comment from the hon. Member for Eastbourne that his party will be back in 14 months, but there are limits to the powers of the pension protection fund.
Question put and agreed to.
Clause 81 ordered to stand part of the Bill.