Baroness Bowles of Berkhamsted (LD)

My Lords, everyone—apart from insurers, perhaps, who prefer buyout and the regulatory cash bonus it brings them—is in favour of superfunds. They should improve member benefit security. They can enhance members’ benefits, as the noble Baroness, Lady Noakes, just said. They can return cash to employers when appropriate, supporting UK businesses. They can also invest more in productive finance than a buyout or a DB scheme can. However, numerous barriers make it difficult for superfunds and my Amendments 182 and 183 seek to address two of them. Amendment 182 seeks to remove gateway test 1, which is the test that prevents a scheme that can afford a buyout entering a superfund. The policy of pushing everything to buyout is intended to address risk, but it is not always in the members’ best interests; that could be considered more. Discretionary benefits, which can often include things on which expectations are based, may be lost. For example, spouses’ entitlements and increases in pensions are often discretionary; I know that that is the case in parliamentary schemes. In a buyout, discretionary benefits are likely not to be paid, but a superfund could pay them. There seems to be some underlying assumption that superfunds do not serve risk reduction, but that does not reflect the extremely secure funding position that superfunds are held to by the regulations. Additionally, the test is unstable because funding levels vary. A scheme can start the process unable to afford buyout, and therefore be deemed able to go into a superfund, but if later on it could afford buyout part-way through, it would be required to reverse out and would be forced into a buyout. That can mean a lot of wastage of cost and time, as well as worse-off pensioners. Removing the test would give schemes more flexibility in the course they pursue, and may be better for the economy. If they chose a superfund, it would mean that more schemes could keep money invested in pensions and pay out more generously, rather than that extra money being lost in the insurance companies. Amendment 183 is about the wind-up trigger and the protected liabilities threshold. This in, in essence, the point at which a superfund’s funding drops to such a level that it must close and enter the PPF. The recent PPF indexation means that the protected liabilities threshold is now above the low-risk trigger—that is, the technical provisions threshold—which is upside-down from the policy design, where the low-risk trigger is intended to be a less critical warning scenario than the wind-up trigger and is the point at which the scheme funds must be boosted by investor money. This upside-down formulation will make it harder for superfunds to attract investor capital and will probably push pricing up closer to buyout levels, narrowing the slice of the market that superfunds can operate in. That is good if you are shareholders in insurance companies but, again, not for pensioners, who lose benefits. The amendment proposes a “lower of” formulation for the definition of the protected liabilities, which would set it at lower and more reasonable levels. There could be other ways to fix this or remove the protected liabilities threshold entirely and rely on trustee powers in distressed situations, which is normal practice for regular DB schemes. But staying in the upside-down formulation does not seem right and risks stifling the nascent superfund model. I appreciate that this is a recent development because of the indexation and possibly one that the Government did not originally foresee, but it none the less needs tackling.