Clause 136 - Initial levy

Pensions Bill – in a Public Bill Committee at 9:30 am on 1st April 2004.

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Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne 9:30 am, 1st April 2004

I beg to move amendment No. 184, in

clause 136, page 83, line 39, after 'regulations', insert

', which shall be no earlier than the day on which the basis for calculating the risk-based levy in the first financial year after the initial period has been published.'.

Moving amendments in this Committee sometimes feels like serving in tennis against someone without a racket.

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne

The jokes do not get any better. I see that the Minister is in a frisky, pre-Easter mood; he obviously has a new team of gag writers, even if he does not have a new team of draftsmen.

We have reached an important and meaty part of the Bill, which deals with how the levy is to work. A range of amendments have been tabled to clause 136, which deals with an animal called the initial levy, whose purpose is to bridge the gap between the coming into existence of the pension protection fund, on a challenging timetable—to use the ministerial words—and the ability to introduce a risk-based levy, which we will talk about in more detail in due course. In other words, there will be a flat-rate levy in the opening period of the PPF's operation.

It is important to recognise that we are in a dynamic situation. As we consider the Bill in Committee, pension funds are still getting into difficulties—quite apart from the funds that may be staggering on only to fall into the arms of the PPF as soon as it is up and running. In the past few days, we have heard the worrying and serious news of the Mayflower bus maker company, which called in the administrators yesterday. Its retirement scheme, which affects some 2,000 workers, has assets of £36 million, but its pension promises amount to a liability of £57 million.

That is another example of a group of workers who will fall through the cracks between where we are now and where we will be when the PPF is up and running. I do not want to repeat the arguments about how that problem could be dealt with or how compensation could be provided through unclaimed assets. However, we have yet to hear a satisfactory explanation of why unclaimed assets are available and usable for certain purposes set out in the Budget but not for this purpose.

There are significant arguments, some of which will be developed in later amendments, about whether it is sensible to start the PPF on a flat-rate levy. As a concession, the Government are proposing to claim only half the proposed levy in the initial stages. There is a whole raft of reasons why that might not be sensible, not least that the fund may not have sufficient resources to meet the claims in the early stages. Expert opinion suggests that quite a few claims will arise at the beginning of the PPF's life.

Amendment No. 184 approaches the issue from one direction; we shall consider amendments that approach it from other directions in due course. It would ensure that the regulations provided for in the clause, which start the application of the initial levy, would not come into effect any earlier than the day of publication of the basis for calculating the risk-based levy in the first financial year after the initial period.

This will be a theme of several mini-debates, so let me get the issue out in the open now: the Government are being foolhardy in starting off with a flat-rate levy. That would be extremely unfair on some companies, and may well not provide the resources to meet claims in the early stages. I can hear the Government's argument now: ''We want to get this in place in plenty of time—we want it up and running as soon as possible to help people in that situation.'' I understand that argument, but I simply do not accept it.

There are interim approaches that could be adopted. One of them would be to legislate in a measured, calm way—as the Government of the day did after the Maxwell saga—and seriously try to deal with the situation that people face, whether that is the case of the 60,000 Allied Steel and Wire workers, of whom the hon. Member for Cardiff, West (Kevin Brennan) speaks so eloquently, or the potential problems of the 2,000 workers in the Mayflower pension scheme.

We have set out how we think the parallel compensation scheme can be set up, but there are other views, and I will come to them in more detail in due course. The Association of Consulting Actuaries is also concerned about the fact that a risk-based levy will not be introduced from the outset. It says that one way of dealing with the problem would be to start by calculating the levy by reference to the existing minimum funding requirement. It says:

''It is inevitable that the risk based premium cannot be totally fair as some schemes would be 'uninsurable'.''

That is one approach. The MFR is at least a familiar concept, and it could well be used as an interim measure, so that we could start off with some element of risk built into the calculation of the levy. Those

seem perfectly sensible proposals for dealing with the interim situation.

I commend the amendment to the Committee, but it is only one way of dealing with the genuine concerns out there in the real world about the delay in bringing in the risk-based levy. I shall have quite a lot to say about that under other amendments.

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

As the hon. Member for Eastbourne (Mr. Waterson) said, a whole group of amendments have been tabled to tackle the issue of the initial period, the initial levy, how it should be calculated and for how long it should apply. I shall restrict most of my remarks to some of other amendments to the clause.

As I understand it, the hon. Gentleman's specific proposal is that if the initial levy is not risk based, we should at least be able to expect that the basis on which the risk-based levy will be calculated will be known at the outset. That puts the onus on the PPF to get moving and gather the information that it might need to calculate the risk-based levy. It could also encourage the Government to take a bigger role at the outset. I recognise that Ministers want the body to be at arm's length from Government to some extent, but as we are scrutinising the setting up of the fund, the earlier that we have sight of what sort of risk-based levy we might have, the better. We will talk about the nature of the levy at some length later.

There is an issue of accountability involved. Who will decide how the risk-based levy looks? The Committee and the House will decide what is to be included in it. The amendment goes slightly further than that, and says that the basis of the risk-based levy should be set out as soon as possible—indeed, before the whole thing gets going. Certainly, provided that that does not cause delay in getting the scheme up and running—none of us would want that—I have a lot of sympathy with what the hon. Gentleman suggests.

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

Good morning, Mr. Cran. Despite the date, we on the Government Benches are in serious mode, as usual. There are no jokers in our pack of Government amendments—but of course I cannot speak for all the amendments before us today; I do not have that authority.

I draw some comfort from the fact that there is no fundamental challenge to the concept that the PPF should be funded by a levy. Moreover, there is consensus that it should have a risk-based element, and I suspect that there is consensus that the risk-based element should represent most of the levy moneys raised. In that sense we are discussing some important detail—indeed, more than detail—about the nature of the levy, its timing and how specific we should be at this stage about the factors that relate to the risk. We shall cover that matter when debating different amendments.

The amendment would delay the introduction of the PPF until the risk-based protection levy can be implemented. Again, I would gently challenge the position of the hon. Member for Eastbourne on that. In debates on the pre-PPF situation, the ASW workers

and others, he urges speed, but sometimes he urges delay. At some stage he should clarify whether he wants the PPF up and running as soon as possible or not.

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne

If the Minister had been paying his usual close attention, he would have noticed that clarification during my opening remarks. It is perfectly possible to deal with the interim situation as I have described while setting up the PPF and the long-term levy in a more measured way.

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

It is helpful to have that clarification, because the hon. Gentleman mentioned the news reports about the financial situation of Mayflower, the bus manufacturer, and the possible threat to workers' pensions. It is not for me to comment on press speculation, but some companies will run into such difficulties in the coming period. While scrutinising the Bill perfectly effectively—as we are doing—it is also important to look forward to the PPF's coming into being in April next year.

The amendment would delay the introduction of the PPF, but the hon. Gentleman has clarified that. Setting up the pension protection fund as soon as we can means that some of the information we need to calculate the risk-based levy will not be available from the outset. That is a statement of plain fact and common sense. We remain committed to enabling the board to introduce the risk-related element to the pension protection levy as soon as possible.

We have clearly stated that the levy must take into account risk factors. That is clear from subsections (2)(a) and (3) of clause 137 on the pension protection levy, which will ensure that schemes that pose the greatest risk pay the lion's share of the levy. It will be for the PPF board, however, following consultation with stakeholders, to decide how those risk factors will be taken into account when it sets future levy rates and structures.

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

This is obviously a central point. Could the risk based-levy be brought in at the start, and if not, what information is lacking? How long would it take to collect it? The Minister has highlighted the fact that the next clause allows the Government to introduce a risk-based levy based on only one risk—underfunding. On that specific point, will the Minister clarify why that information is not available at the start? Why is information on the underfunding level of pension schemes not available at the outset?

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

There are a number of reasons, and we may be able to return to that point under a later amendment, when we discuss the criteria relating to the calculation of risk that we establish in the Bill. The process will require detailed assessment of each and every pension scheme with defined benefits. I do not think that all that information is available at the present time. The pensions regulator and the PPF will have to work closely on the issue. Although the hon. Gentleman's argument is that it should be for this House to determine exactly how a risk-based levy is calculated, we do not think that that is realistic. We are setting up the new board to calculate that for us, albeit guided by the Bill. We will return to that issue.

The amendment would have several implications. It would result in a delay in the commencement of the PPF and would, thus, delay the vital and meaningful protection that we wish to bring in as soon as possible. It would create a risk-based levy structure based on incomplete information; we discussed that. It would place an additional financial burden on employers, who would need to conduct an out-of-cycle PPF-style valuation. Delaying the introduction of the fund is not an option. We need protection for scheme members to be in place as soon as possible.

Equally, it would not be wise to publish a risk-based levy framework based on incomplete data. Instead the board can gradually add in the risk-based factors as the information becomes available and operate a dual-levy system in the meantime.

Following that clarification, I hope that the hon. Gentleman will withdraw his amendment.

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne 9:45 am, 1st April 2004

I will, of course, seek leave to withdraw the amendment. I think that, as the Minister suggested, some of the broader and more detailed issues will come up naturally in debating other amendments. As I clearly failed to do so when introducing the amendment, I want to make it abundantly clear that my view is that it is perfectly possible to deal with the interim situation of 60,000 workers plus any Mayflowers that come along between now and when the PPF is up and running properly, rather than rush to have the PPF open its doors on an inadequately funded basis, with a flat-rate levy. That would wreak unfairness across all the schemes—good and bad, well run and badly run, well funded and underfunded—that will be involved. I can imagine few things more likely to persuade employers to shut schemes to new entrants, let alone put them off starting new ones, than that scenario. We will return to those arguments.

On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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

I beg to move amendment No. 519, in

clause 136, page 83, line 40, leave out from 'or' to end of line 41.

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

With this it will be convenient to discuss amendment No. 358, in

clause 136, page 83, line 40, leave out '12 months' and insert '6 months'.

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

The amendment seeks to take out of clause 136 the passage that allows the initial period in which the initial levy will apply to roll on. In our amendment, we suggest that the 12 months that it is allowed to roll on for should be removed altogether. The amendment with which it is grouped suggests that that period should be no more than six months. Obviously the thinking behind the two is the same, which is why you have so wisely grouped them together, Mr. Cran.

If we are unhappy about having an initial period and an initial levy at all, which we are and which I will come to more substantively, we are even more unhappy about the get-out clause that we are trying to delete. It says, ''If we can't get our act together,

we'll have another 12 months''. That may be an imprecise paraphrase of

''if the regulations so provide,''

but that is what I take it to mean. There will be an initial levy and initial period. One of its characteristics is that the level of the levy will not be determined by risk. We know that the levy will be set at such a level that it will raise about half of the total that will be raised when the scheme is up and running and there is a risk-based element.

Ministers and officials have advised us that the Government's goal is that the risk-based levy will end up amounting to 75 or 80 per cent. of the premium and that the flat-rate levy will end up at only 10 to 20 per cent. The clause says that for the first year the risk-based levy will be 50 per cent. The bit that we are trying to take out allows that to go on for another year. What that means is that, to use insurance terms, the good guys get hit and the boy racers get away with it. In other words, the well run, properly funded scheme with no deficits and a solvent employer has to pay a hefty premium and if we do not get our amendment through it has to pay it for another year. However, the badly funded scheme with the dodgy employer who may go out of business at any moment is paying less than it should. It is bad enough that it happens at all, but it is worse that it should be allowed to continue for a further 12 months.

I will not go on at length about our unhappiness with the initial levy as a concept, because, as you will have gathered, Mr. Cran, we are seeking a clause stand part debate on its substance. I will restrict my remarks to the specific proposal. We do not like it at all but, if we have to have it, we certainly do not want the possibility of its continuing for a further 12 months.

I hope that the Minister will tell us in what circumstances he envisages the initial period continuing for another 12 months. Will it be because the information is not available and it will take longer to obtain it? If the PPF is inefficient, will the people who pay the levy have to just sit and wait and the good guys subsidise the bad guys? It seems unacceptable that there is a get-out clause at all, so it should be removed.

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne

I think that I am responding to the hon. Gentleman and speaking to amendment No. 358. I endorse almost everything that the hon. Gentleman said. The Opposition share a deep unease about the half-organised way in which the levy will start. The National Association of Pension Funds is also quite exercised about it. It believes that

''it is unacceptable for the period of the initial levy to last for up to two years.''

It therefore suggests reducing the period from 12 to six months after that date—a proposal that I am happy to adopt. Like almost every amendment, this is only a probing amendment to find out the Government's realistic view of how long the process will take.

The Secretary of State, in answering a series of questions posed by my hon. Friend the Member for Havant (Mr. Willetts) before Second Reading, said in a letter:

''As I explained, it will be necessary to collect the appropriate information in order to be able to charge a risk-based levy''.

He then talks about the first year and the flat-rate levy at half the normal amount, and continues:

''We shall then work closely with businesses to allow them to adopt the risk-based element as soon as it suits them, given the triennial nature of schemes' valuation cycles.''

That strikes me as a recipe for quite a long period of drift, with schemes moving at different speeds. I can see that if one has a well run and efficient scheme, one wants to get stuck into the risk-based levy as soon as possible, but the odd scheme may be quite happy to drag its feet and explain, ''We are at the wrong end of our triennial cycle. It is all very difficult and it may take some time.'' We shall return to the matter, but does the Minister have an end date by which all schemes will have signed up to their version of the risk-based levy?

John Plender, writing in the Financial Times at about the time that the Bill was published, put it rather well, saying:

''Only a raging optimist would expect the risk-based levy to start in a year's time.''

[Interruption.] The Minister agrees with that from a sedentary position, so we cannot accuse him of being a raging optimist. Mr. Plender points out that

''the task will be complicated because only a small proportion of companies that sponsor final salary schemes are credit rated.''

It would be interesting if the Minister were to tell us or write to us about the proportion he thinks that is. John Plender continues:

''there will be a strong temptation, where pension funds are in deficit, for trustees to punt their way out of trouble through excessive exposure to equities in the knowledge that a deus ex machina lurks in the wings.''

I am sorry to describe the Minister or the PPF in those terms—all the more so, since schemes are to be granted flexibility over the speed at which they move to risk-based payments. That is very worrying indeed.

If I were Marks and Spencer, or a company with a sensible approach to risk, which is in good order, I would get my ducks in a row sooner rather than later. How on earth is one to ensure that all other companies do so? It is a pretty mammoth undertaking, and we have not had any real guidance from the Minister, the explanatory notes or anywhere else about just how long Ministers think the process will take. Some very large schemes have real concerns about how the process will affect them. I shall perhaps return to that later.

We need to push the Minister hard on the fact that there should be a final date by which all schemes will be signed up to a risk-based levy.

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

I shall not say too much about the boy racer analogy. As a green Member of Parliament, the hon. Member for Northavon (Mr. Webb) recycles his quips. That analogy first appeared in a press notice attacking the Pensions Bill, which he was prescient enough to issue on the day before we published the Bill. The hon. Gentleman had already made up his mind about what the Bill contained, thus relieving him of the task of reading it. I suggest that he reads the Bill

during the Easter recess; I will not say anything more about that. However, given the imminent leadership bid of the Liberal Democrats, we know who the boy racer will be.

Clause 136 sets out the provisions relating to the initial period. Amendments Nos. 358 and 519 would restrict the length of time the initial period will apply. That would mean that no contingency was available to manage the establishment of the PPF, which might impact on the setting of future pension protection levies. We are committed to introducing the risk-based element of the pension protection levies as quickly as possible.

However, as we are unable to put in place a full risk-based levy structure from the outset, the initial levy is required to get the pension protection fund off the ground. To reflect the fact that the board will not have all the data that it needs to introduce the risk-based element, the initial levy will collect only a reduced amount during that period. I am clear, however, that we expect the board to introduce an element of risk from the second year. The initial levy is likely to apply for the first 12 months. Members of the Committee will recognise the sense of building in an element of flexibility as a contingency.

The existence of a provision that can increase the period of the initial levy to more than 12 months will mean that we have a built-in flexible contingency should the introduction of the risk element have to be delayed. Restricting that flexibility may mean that the board is faced with a stark decision either to place additional burdens on businesses by collecting the initial information to introduce a full risk-based approach immediately—we do not think that it can be done immediately—or to introduce a scheme factors pension protection levy only in the year following the initial period to collect the full amount required.

In addition, the pension protection levies immediately following the initial levy operate in respect of financial years. Providing for the initial levy to end midway through a financial year, as implied under amendment No. 358, would have implications on the setting of future pension protection levies. That is because, before the start of each financial year, the PPF board must estimate the amount that it will raise from the pension protection levy or levies. The Secretary of State must also determine the levy ceiling prior to the start of the financial year.

I must reiterate our commitment to getting the PPF up and running and having a pension protection levy that is based mainly on risk as soon as we possibly can. As we may discuss when we come to other amendments and as members of the Committee may know, although the risk element starts at the beginning of the second year of the PPF, it develops over several years because of the triennial cycle of scheme valuations. If some schemes consider that they want to bring forward their three-yearly valuation because it might benefit them in terms of a risk-based element amount, they can do so. However, we do not want to make that an additional burden on schemes.

As for an end date, we are talking about a period in which a full risk-based element for every scheme

probably would not come in for three or four years. The hon. Member for Eastbourne grimaces from a sedentary position—if it is possible to do that. I have discovered that it is possible. I repeat that, if a scheme chose to bring forward the three-yearly valuation, presumably to benefit from a lower risk base, it could do so. However, I think that we would be thwarted—also by the hon. Gentleman—if we forced that early valuation on all schemes. It is for that reason that we think that we are proceeding in a measured, proportionate way. I ask the hon. Gentleman to withdraw his amendment.

Photo of Steve Webb Steve Webb Shadow Secretary of State for Work and Pensions 10:00 am, 1st April 2004

That was quite a revealing answer, because the Minister is saying that the provision will not come in until 2005, so the Government will have a year—and if they cannot get it right, they can have another year, which takes us to April 2007. Then, because we are on a three-yearly cycle of valuations, if someone had a valuation just the wrong side of April 2007, the next one would not be until 2010. The Minister seems to be saying that this could end up not looking like a proper insurance scheme until 2010. That is a long time to wait.

The Minister seemed to be saying, ''We'd quite like it to be done within a year, but we might not manage it. We want to keep this option.'' I can see why he has rejected the suggestion that there should be a valuation every six months. To change things halfway through a financial year would raise other issues. However, it was not such a bad idea to have a deadline and an incentive for the new organisations to pull their fingers out and get things moving.

The hon. Member for Eastbourne made the interesting suggestion, originally advanced by the Association of Consulting Actuaries, that there could be an interim, or first stage, risk-based levy based on some fairly simple information that was already available—perhaps something like the MFR criteria—so that even if every dot and comma of what the Government wanted for their all-singing, all-dancing risk-based premium was not available after 12 months, something could be put in place after that period to make the insurance scheme look like an insurance scheme. The Government does not need this get-out. We do not think that there should be an initial period at all, let alone one that could be extended for an extra 12 months, so rather than quibble around the edge by persisting, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne

I beg to move amendment No. 157, in

clause 136, page 84, leave out line 1.

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

With this it will be convenient to discuss the following:

Amendment No. 158, in

clause 140, page 86, line 25, leave out subsection (2).

Amendment No. 159, in

clause 142, page 88, line 9, leave out subsection (2).

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne

These amendments are a symptom of my paranoia about the Treasury, mention of which dips in and out of the Bill from time to time, particularly with things that really matter. Suddenly, regulations made under subsection (3), which I am attempting to remove through the amendment, have to be made

''with the approval of the Treasury.''

I do not know why that is so. I have made comments before about the Department for Work and Pensions being a wholly owned subsidiary of the Treasury, and they are still valid. Why should the Treasury be involved in regulations governing the detailed make-up of the initial levy, let alone any of the other levies?

My comments apply to the Treasury's involvement in the other levies that are being established, too. Why should it get involved in the initial levy, which is, after all, meant to be an interim measure? Perhaps it is not so interim, as we have just heard; it seems that it may last more like four years, which is the lifetime of a Parliament these days. The Treasury is not guaranteeing the scheme and it has no direct interest in whether the levy is set at the right level.

In any event, it is almost impossible to envisage the initial levy being set at the right level—but leaving that aside, what is the Treasury's involvement in this matter, unless the Government are, without admitting to it, sidling up to the American solution? Although there is no formality about this, everyone recognises that the Government would stand behind the PPF if it got into difficulties, especially in its early days. As they say in Private Eye, I think we should be told.

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

The practicalities and timing around getting the PPF up and running, and protecting scheme members as soon as possible, mean that the initial levy period and a transitional period are needed to set in place the PPF. The amendments would mean that the initial levy—the pension protection levies during the transitional period—and the levy ceiling would all be set without any reference to the Treasury.

Because clauses 136, 140 and 142 all confer powers to raise a levy, it is vital that the relevant regulations are made with the approval of the Treasury. It is important that appropriate mechanisms are put in place to agree the parameters for setting the initial levy, the pension protection levies during the transitional period and the levy ceiling. In addition, it is important that those parameters are agreed by the Treasury, because of the financial implications that they will have on both pension schemes and businesses.

The amendments would mean that the initial levy, the pension protection levies during the transitional period and the levy ceiling could all be fixed without reference to the Treasury. That is not sensible. I am sure that hon. Members, and businesses that might be subject to the initial and pension protection levies, would agree that the requirement for the Treasury to be involved in the setting of parameters for any levy-raising power is prudent and appropriate, and would assist in managing the financial implications that any changes to the levy structure would undoubtedly have. I ask the hon. Gentleman to withdraw his amendment.

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne

I will, of course, do so, but not with any great pleasure. The Minister is arguing by

assertion; he is not explaining to us why the Treasury should be involved. If he is worried about the impact on business, it would make more sense for the Secretary of State for Trade and Industry to be directly involved in approving regulations.

We are setting up a body to establish the right figure for the levy. Why should that be second-guessed by the Treasury? The figures are either right or wrong. If the Minister is saying that the Treasury will have a raft of different criteria—macro-economic ones, perhaps—for working out the levy, that is worrying. He is welcome to intervene if I am overselling what he is saying, but it is worrying because we are going to a lot of trouble to establish different levies through the machinery being set up in the Bill, but the Treasury could take a totally different view, based on completely different criteria, presumably outwith the criterion of whether the levy will provide sufficient income for the PPF to carry out its functions.

The Minister has not explained why the Treasury should be involved. I can see why the Department of Trade and Industry might be relevant, but his apparent unwillingness to leap to his feet—

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

The hon. Gentleman is making extraordinarily heavy weather of a simple proposition. We are giving the board powers to raise a levy on pension schemes, and so, in a sense, on business. The Treasury is responsible for the management of economic affairs in Britain and it is sensible that it should be consulted about such levy powers. That is uncontroversial, and I know that if this were not in the Bill the hon. Gentleman would have proposed that we consult the Treasury.

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne

The pre-recess camaraderie has evaporated already, and it is barely 10 o'clock; I am sorry to disappoint the Minister. Among my constant themes in Committee has been a distrust of the Treasury and great puzzlement as to why the Government want to keep everything at arm's length when it suits them, yet when it does not suit them, they still want to have their hands on the levers.

The Treasury may have its own reasons for saying that a lower or a higher levy must be charged. It is much more likely to say that the levy must be lower, for economic and/or political reasons. There is no point in consulting it if it will just rubber-stamp whatever is proposed, so presumably it has a say. Particularly with regard to the initial levy in the difficult early years—four years, by the sound of it—before the PPF is established, the Treasury will then be able to say, ''No, you can't charge that much; you'll have to reduce it.'' Where does that leave the PPF? Where does that leave the chairman and chief executive of that new organisation? The advert apparently describes the new chief executive as somebody with ''drive and vision''—so far, so good, but then that has to be ''coupled with political sensitivity''. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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

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

Having gone through a clause in detail, I would not normally seek a separate stand part debate, but I have tried to restrict my comments so far to the detailed amendments, because now I want to raise the general principle of having an initial period at all. The key point is that we are clearly setting up an insurance scheme. The Secretary of State said that a person could insure their holiday and their car, and asked why they should not be able to insure their pension.

The idea is that because an employer or a pension scheme is paying a levy into the pension protection fund, workers will know that if the company goes to the wall and the fund does not have enough money, their pension will to a greater or lesser extent be protected. So far, so good. The question then is on what basis such insurance premiums should be calculated.

I sensed some months ago that car insurance would be a helpful analogy for our deliberations. Car insurance providers make a distinction, as far as they are able, between good drivers and bad drivers. When a person has a crash or gets done for speeding, their premium goes up, because they are deemed more likely to make a claim on the fund. Eventually, the Government will get round to charging premiums on a similar basis for the pension protection scheme.

However, if we keep clause 136 in the Bill, there may be a period of up to two years during which they do not do that. The Government say, ''We need a bit of time to get the facts and figures together. Just give us a few years and we'll sort it out.'' However, this is not a free lunch; the two-year period will not be without costs—and the people bearing those costs will be the good guys.

We have talked a lot in the Committee about one of the problems of insurance markets—moral hazard, the effects of which the Government are worried about. However, from my undergraduate economics I remember that there is a second problem with insurance markets—adverse selection, and that will be the problem with the initial period. Good drivers who get charged unfairly for their premiums still have to have car insurance, but good companies that run good final salary schemes do not still have to run final salary schemes. If the premiums are perceived to be unfair and too high for the good guys who run properly funded schemes with good solvent employers, they may well say, ''This is unfair, and too much of a burden for us. We'll switch to a money purchase scheme, for which we'll pay no levy at all.''

The good guys, who present no risk to the fund, would pull out and the fund would be left with the bad guys—the underfunded schemes and the nearly insolvent employers. In turn, that would undermine the effectiveness of the fund and put up the amount of levy that needs to be raised. We would be taking out a potential source of revenue—from schemes that will never make a claim—and there would be a heavier and heavier concentration of schemes with a high chance of making a claim. We would end up undermining the entire basis of the system.

If the initial period were really short, schemes would live with that, but it could last for two years. Pension funds may already be on the cusp of deciding

whether to carry on with final salary schemes. We have already seen lots of good final salary schemes close to new members, and that probably means that for every one that has gone over the cliff, there is one that stopped just short.

In his previous remarks, the Minister was at pains to say that he did not want to close good final salary schemes. He did not want to overegg the pudding or put all the bells and whistles on the benefits, because that would put the levy up and put extra pressure on the schemes. However, having an initial period would guarantee that the good guys would pay more than their fair share. Surely he would accept that there is a risk? He may say that the initial period will probably not be two years, and that he hopes that it will be one year—but the Government are clearly worried that it might be more than one year, otherwise that provision would not be in the clause.

The Minister might also say that that would not be enough to make a difference. However, we have to remember the point that I made earlier: during that period, everyone will pay 50 per cent. on a per head basis, whereas when the risk-based levy is up and running, the good guys will probably not have to pay it at all, because they are not a risk. They would only pay the per head amount, which would be less. During the initial period they might pay two and a half times what would be the right amount for them. The per head amount might be, say, 20 per cent., but the payment would start off at 50 per cent. during the initial period, and the good guys might be paying double what they would if there had been a fair assessment of their risk.

We all accept that the scheme would be a burden on final salary schemes, but it is a burden that we are willing for them to take. We have tried to make savings elsewhere, but the burden will be particularly heavy in the first couple of years.

The Government must accept that for years they have watched final salary schemes close and membership of such schemes for new members decreasing year after year. There has been precious little that they could do about it, because they cannot force schemes to offer a particular pattern of benefits. However, the one thing that they can do is to get off the backs of good schemes. It is a classic case of Government putting an additional burden on the good guys, who are, surely, the very people on whom we want to put as light a burden as possible.

That is why we think that clause 136 should not exist. Yes, it puts a burden on the PPF to get things moving, but we have accepted that the risk-based premium could be calculated in a rough and ready way to get the thing going and the situation could be refined subsequently. That deals with the problem of information. I accept that one is not going to get chapter and verse on 150,000 schemes overnight, although already there is another year between now and the start of the PPF. Therefore, the Government want to potentially allow three years in which to get that information. Why? The basic information—a crude indicator of risk for those schemes—could be

obtained in the next 12 months, quite credibly. [Interruption.] I am sure that the Minister will make that point. It could be obtained to get the thing going and not risk killing the goose that lays the golden egg. The worry about the whole process is that at the end of it we might have the best insurance scheme in the world but nothing left to insure. Let us get off the backs of the good schemes and let us not have an initial period.

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne 10:15 am, 1st April 2004

I endorse a great deal of what the hon. Gentleman has just said, but I want to add a few comments.

It suddenly started to dawn on me that the Government's problem is that they are looking at all this from the wrong end of the telescope. They are quite understandably keen to get the PPF set up, to get this legislation on the statute book and, as all Governments want, to say, ''That is a promise redeemed and it is one that we have made to future pensioners.'' They will clearly get their legislation. Whenever their lordships have spat the Bill out and all of the stages have been completed within this challenging time scale, a PPF will be set up. It will have a chief executive—on whatever salary it might be—a part-time chairman, and all of its people, some of whom will have transferred across from the Occupational Pensions Regulatory Authority. It is right that they should be getting on with that.

I can understand that Ministers must be more than a tad frustrated by the fact that this idea of theirs, this gleaming new concept, is being comprehensively overshadowed, as it was on Second Reading, by concerns about the lack of action over the people who have already lost pension rights and those who are continuing to lose them, as in the case, possibly, of the Mayflower company. Where Ministers have got it horribly wrong is that they should be giving priority to that. That is the problem that needs to be addressed now; those are the people who are worried and who come and see me or their excellent local Member of Parliament, such as the hon. Member for Cardiff, West, or, as we have heard from the Minister, they come and see him and his right hon. Friend the Secretary of State.

Why not decide to set up the structure, more as less as the Government intend, adopt our idea of a parallel interim protection scheme—one of our slick amendments that is not in order because of the money resolution—so that all the structures that are necessary to run these funds can be getting organised, and sort out the funding of the interim compensation in some of the ways that the Government are doing, albeit at a snail's pace, and by adopting the idea of unclaimed assets? They might wish to go down another route; the hon. Member for Cardiff, West said that he did not care where the money came from. That is a matter for them and they should start addressing that problem and the new ones as they arise.

The Government should recognise that, in reality, starting off with an initial levy is a bad idea. The more I think about it, the more I think that the Committee should divide on the issue of whether we should have an initial levy at all. It will get the PPF off to a bad start for two reasons, both of which were touched on

by the hon. Member for Northavon. It will create resentment and disincentives to the good schemes and the companies that are already beginning to think about whether they want a defined benefit scheme. For a significant period, perhaps up to four years, they will find themselves effectively subsidising the bad schemes. In addition—I make no apology for voicing this fear again—the funding may simply not be significant enough to cover the liabilities in the opening years of the PPF. There is some consensus that we need a PPF, although there seems to be an inability to decide how to describe the animal and whether it is insurance or pension, but I leave that on one side for a moment. Everyone wants it to work. If we inherit the scheme, we do not want to find that it is in a mess, heading for a big deficit and losing confidence among reputable companies, so it is not in our interest to see a badly constructed, underfunded, failing organisation in its early years. The Minister should be aware of that. We want it to work and our arguments and amendments were designed for that purpose.

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

The hon. Gentleman made a good point. Things could go pear-shaped in the first year because, as some of the doom-mongers have said, some of the schemes are just waiting for year one. Given that the initial levy could last for two years, the second year's levy, which would be a flat rate and not risk-based, could be quite high as a result of the need to make up the shortfall on the fund. That would be even more unfair to the good guys who have no risk-based element in the initial period.

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne

The hon. Gentleman made a pertinent point.

Turning to the interim situation, I have an uneasy feeling, particularly as a general election begins to loom, that our position will be misrepresented. We want these matters tackled. The Government have become obsessed—I understand that the machinery of Government takes over if one is not careful—with this legislation. The real problem is out there already and is not being tackled by the Bill because it will not be retrospective. Various interim measures could be adopted and unclaimed assets is our preferred solution. The preferred solution of the hon. Member for Cardiff, West may be taxpayers' money, unspent money in the Department's budget and so on. There could be a realistic appraisal of the rightful claims of those who have already lost out with some boundaries on those claims, and a look at the idea of postponing annuity purchases as one way of keeping the show on the road until a more lasting solution is found. We have also punted the suggestion of the Association of Consulting Actuaries, which the Minister said that he would deal with when he winds up. Another suggestion is that the MFR basis, which is the only game in town at the moment, with an element of the risk-based approach in the interim period would be a practical solution.

We are not in the business of being negative about the problem; we are simply looking at ways of helping the Government out of the difficulty. The Bill contains

some good provisions, but almost all the press comment seems to focus on what is not in the Bill—there is no help for people who already have problems or are beginning to have problems. We should change the way in which we look at the matter. Yes, let us get the legislation sorted and improved, but let us also start to look at the immediate problem and interim measures. I have made some helpful suggestions as to how that can be done.

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

I suppose that this has been a useful debate, but we are making a great meal of the matter. I repeat that we want the risk-based element to come in as soon as practicable from the start of the second year. To get the thing up and running, we need to start raising funds. The initial levy will be at 50 per cent. of the later levy. We are probably talking about £10 per member, so when the great arguments are made let us remember that we are talking about 10 quid in the initial period.

Could we introduce a risk-based element sooner? We do not think that we could and we do not think that the board could; if we had thought so, we would have proposed that. The answer does not lie in the minimum funding requirement, which has already been criticised, and is being abolished; if it were the answer, we would not be abolishing it. The MFR will make way for scheme-specific funding, which we discussed a few weeks ago. Trying to base the risk-based pension protection levy on an out-of-date MFR valuation, or establishing a system to update the MFRs to a relevant current date when the figures are simply not available, would be absurd. We cannot just turn to OPRA and ask for the MFRs because the figures are not there. On balance, allowing the PPF board time to introduce a more appropriate method of determining scheme funding will be beneficial and sensible in the long term.

Apart from talking about boy racers, the hon. Member for Northavon talked about the good guys—I imagine that that is a gender-neutral term these days—and said that they will lose out. If a well run company with a well run pension scheme thinks it will lose out because of a delay to the risk-based element, it can bring forward its three-yearly valuation cycle.

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

Not in the initial period, no. The company will have to take on the enormous burden of claiming £10 per member—for the Hansard record that should be followed by the word ''irony'' in brackets. Americans may not understand irony, and nor does the text of Hansard, so I should be careful.

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne

You are making heavy weather of the irony.

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

At least I have some.

The amount of £10 per member will not bring schemes crashing to the ground. It is a sensible way of raising some initial money. If, after the first year, people want to bring forward the triennial cycle, they can do so if they are confident, as many will be, that they will not have to pay any risk-based element. That disposes of the idea that somehow the MFR is the solution.

I would not want it to be recorded that somehow the risk-based element is not going to be up and running until 2010, as the hon. Member for Northavon was saying. That is not right. The requirement for a valuation on PPF level of benefits will be in place by 2005. The three-yearly valuation cycle takes us to 2008, so the full risk-based levy could be introduced for all schemes at the end of the process by 2009—[Interruption.] Well, I will say it a third time: if schemes want to bring forward the three-yearly valuation, they can do so. That is why there is a transitional period enabling the board to roll out the risk-based approach. We think that that is sensible. The board could require it to be rolled out more quickly if it deems it appropriate. However, we should not set up an arm's length body to second-guess in Committee every detail of what the PPF's approach may or may not be a year or so into its work. That is not sensible.

Photo of Steve Webb Steve Webb Shadow Secretary of State for Work and Pensions 10:30 am, 1st April 2004

There is a precedent—I think in the case of child support—for this Department taking powers to spend public money prior to an Act coming into force in order to get things moving so that the body is up and running on the day it begins. Have the Government considered doing the same for the PPF? If the Government use powers to start spending public money on the PPF to get it going, say, tomorrow, they would have another year, and then perhaps we would not need an initial period.

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

As the hon. Gentleman reminds us, we have powers to spend limited amounts of money after Second Reading, which is why we are advertising the two key posts. We are preparing hard for the establishment of the PPF in all sorts of ways. Nevertheless, when the Bill receives Royal Assent there will be a limited period before we set the whole thing up. It is our judgment that it would not be possible or practicable to do all the work to get the risk-based element up and running in April 2005.

We understand that there might be an element of injustice in asking everyone to pay the same flat rate, so we are setting that at a modest level. It is only 50 per cent. of what the average levy will be in the second and subsequent years—approximately £10 per member. We think that that is fair and proportionate.

Question put, That the clause stand part of the Bill:—

The Committee divided: Ayes 15, Noes 6.

Division number 7 Adults Abused in Childhood — Clause 136 - Initial levy

Aye: 15 MPs

No: 6 MPs

Ayes: A-Z by last name

Nos: A-Z by last name

Question accordingly agreed to.

Clause 136 ordered to stand part of the Bill.