Clause 104 - Assessment periods

Pensions Bill – in a Public Bill Committee at 3:30 pm on 25th March 2004.

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Photo of Mr Chris Pond Mr Chris Pond Parliamentary Under-Secretary, Department for Work and Pensions 3:30 pm, 25th March 2004

I beg to move amendment No. 441, in

clause 104, page 64, line 23, leave out sub-paragraph (iii) and insert—

'(iii) the conditions in section 119(2) (no scheme rescue but sufficient assets to meet protected liabilities etc) are satisfied in relation to the scheme,'.

Photo of Mr James Cran Mr James Cran Conservative, Beverley and Holderness

With this it will be convenient to discuss the following:

Government amendments Nos. 443, 445 and 446, 453 and 454, 460 to 469, 471, and 473 to 475.

Government new clause 10—Schemes required to wind up but unable to buy out liabilities.

Government new clause 11—Treatment of closed schemes required to wind up.

Government new clause 12—Valuations of closed schemes.

Government new clause 13—Applications and notifications where closed schemes have insufficient assets.

Government new clause 14—Duty to assume responsibility for closed schemes.

Government new clause 15—Closed schemes: further assessment periods.

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

This is a large group of amendments and new clauses, which adds a significant and crucial extra limb to the process that determines whether a scheme can enter the PPF. I apologise to the Committee that we were unable to table these amendments and new clauses earlier. I hope that the notes on them that we have circulated to Members are helpful in explaining their purposes. I will try briefly to explain their background, purpose and provisions in some detail.

As drafted, the Bill provides that, following a valuation under clause 112, if a scheme with an insolvent employer, and no hope of scheme rescue, is found to have sufficient assets to buy out benefits at above the level of the protected liabilities, it will not enter the PPF and the trustees of the scheme will be required, under clause 119, to wind up the scheme and secure members' benefits in accordance with the priority rules. Schemes would secure members' benefits by purchasing annuities for pensioner members and deferred annuities from insurance companies for actives and deferred members.

However, the Bill as drafted does not cater for the situation where scheme trustees cannot obtain a protected benefits quotation. That could occur in relation to very large pension schemes, where the insurance market at present appears to have insufficient capacity to absorb the pension liabilities

of a large scheme on a buy-out basis. The bulk annuity buy-out market expands and contracts depending on both the availability of gilt-edged stock needed to underwrite the contracts and the willingness of the few life offices currently in the market to take on business. The market is such that currently we estimate that pension funds worth anything over £500 million could find that they are unable to obtain a buy-out quotation as required by clause 119.

However, it is important to recognise throughout our consideration of these amendments that such a situation depends on both the sponsoring employer of a large scheme becoming insolvent and a PPF valuation showing that the scheme's assets are sufficient for it to buy out benefits above the level of the protected liabilities. It is also important to recognise that in the UK no scheme of this size has ever suffered the double whammy of underfunding and insolvency of the sponsoring employer.

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne

Does the Under-Secretary have any idea how many funds are worth over £500 million?

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

There are very few, and that is one reason why this is a bit of a belt and braces approach. We want to ensure that we cover all eventualities; it is prudent to do so in order to protect the PPF from these unusual circumstances if they were ever to arise. Perhaps I can give a detailed response to the hon. Gentleman's question in writing.

The events that these detailed Government amendments and new clauses address are unlikely to occur. Were they to do so without the protection provided by the amendments and new clauses, there is a danger that they could impose a heavy burden or place a considerable risk on the PPF.

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne 3:45 pm, 25th March 2004

I thank the Under-Secretary, and through him his officials, for producing the notes. I only hope that they keep pace with the torrent of new Government amendments, as that would save us time.

I have a couple of questions that arise out of what the Under-Secretary said and what is in one helpful note. It is a shame that we have not adopted the American system in which the notes become part of the record, but the Under-Secretary must make his points, and we must make ours.

I think the Under-Secretary is saying that, on current depressed values, we are talking about a rare combination of circumstances that will affect only a tiny number of schemes, and I accept that. Despite the apparent complexity of the long list of amendments and new clauses, that seems to be the right approach to the closed-scheme problem.

I have two other points to make. As the notes say, the schemes

''represent a significant potential moral hazard risk to the PPF'',

but the moral hazard argument goes beyond those particular, rare circumstances. A great debate has been going on for years, and is still going on in America, about whether such a scheme produces the perverse incentives to which the Under-Secretary referred. Industry is concerned that there will be a substantial moral hazard problem. As long as everybody knows

that there is a safety net, people may not be so careful about how they run their schemes. We shall return to that issue to consider it in more detail.

There is one other point in the notes that was not clear to me. They say:

''In order to protect the PPF against moral hazard, such schemes will be subject to increased supervisory requirements and will only be able to pay out benefits in line with the statutory priority order (to be introduced when new clauses are considered after Easter).''

I was under the impression that that was a matter for a separate statutory instrument, which is hanging around waiting to be considered in Committee. Is it being suggested that a different priority order applies to these schemes, or will that be dealt with as part of the Bill?

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

It is important for hon. Members to recognise that the enhanced scrutiny by the regulator is an important part of our measures to prevent the moral hazard to which the hon. Gentleman refers.

Our proposals for the priority order, which we hope to introduce to the Committee as soon as possible after Easter, will be part of the Bill. We will have an opportunity to consider that in this Committee.

Amendment agreed to.

Amendments made: No. 374, in

clause 104, page 64, line 25, leave out subsection (3) and insert—

'(3) In subsection (2) ''qualifying insolvency event'' has the meaning given by section 99(2A).'

No. 443, in

clause 104, page 64, line 37, leave out sub-paragraph (iii) and insert—

'(iii) the conditions in section 119(2) (no scheme rescue but sufficient assets to meet protected liabilities etc) are satisfied in relation to the scheme,'.

No. 375, in

clause 104, page 64, line 40, leave out 'section 127(5)(a)' and insert 'section 101(5)(a)'.

No. 444, in

clause 104, page 64, line 41, leave out 'respect of' and insert 'relation to'.

No. 445, in

clause 104, page 64, line 42, at end insert—

'( ) This section is subject to section [closed schemes: further assessment periods] (which provides for further assessment periods to begin in certain circumstances where schemes are required to wind up or continue winding up under section 119).'.—[Mr. Pond.]

Clause 104, as amended, ordered to stand part of the Bill.