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Postal Services Bill [HL]

My Lords, Amendment 55 deals with the division of the investments of the RMPP when the new public scheme takes responsibility for the past liabilities of RMPP. If it is taking part of RMPP’s liabilities, it is common sense that it should take part of its investments, otherwise the RMPP is free from liabilities worth £29.5 billion and has an enormous surplus. The issue is what share of the assets is appropriate. When we discussed this in Committee, my noble friend Lord McKenzie said: ""The Government have stated their intention that when transferring assets and liabilities from the Royal Mail pension plan, sufficient assets will be left to cover its liabilities. In calculating those liabilities, the Government will work with the trustees to find an appropriate valuation basis that delivers value for money without putting members’ accrued benefits at risk. The details of the valuation will be set out in secondary legislation".—[Official Report, 20/4/09; col. 1291.]" The issue here concerns the word "sufficient". What does it mean? Four matters need to be dealt with. First, what exactly is meant by "sufficient"? In Committee, the noble Lord, Lord Skelmersdale, asked whether the deficit would be measured on the basis of FRS 17. I had to go away and find out what on earth he was talking about, but I understand now that FRS 17—which means financial reporting standard 17—is used for accounting for pension scheme deficits in a company’s own accounts. My noble friend Lord McKenzie said in Committee that FRS 17 was, ""a bit of a separate issue".—[Official Report, 31/3/09; col. 999.]" I agree. This is an accounting convention that does not measure the cost of the scheme. My noble friend also said that the measurement would be made on the basis of the "technical provisions", leading the casual observer to think that RMPP and the new companies that will sponsor it will be left with enough money to cover the liabilities of the RMPP on the same sound and "technical" basis. That is what the regulatory impact assessment hints at. The RMPP will have assets of £3 billion and liabilities of £3 billion, and therefore it will have enough to make ends meet. That is taken from table 2 in the pensions appendix to the regulatory impact assessment. The technical provisions basis means something very specific however: it is an assessment made by the scheme’s trustee acting on the advice of its own actuary. He or she can take a more optimistic or more pessimistic view of life depending on the likelihood that the employer will still be around to meet the liabilities if the assumptions on which the evaluations have been made turn out to be wrong. The £3 billion figure comes from the assumptions that were used in the 2006 evaluation, when the sole sponsor was Royal Mail Group. Noble Lords can take their own view on whether the current Royal Mail Group could ever realistically become insolvent in the sense that it goes into administration and abandons its pension scheme. However pessimistic one may be about that, the prospect of the new Royal Mail going into administration when there is no possibility of further support because Europe would forbid it—I ask my noble friend to note that there is a question about what Europe would allow—must be increased. The real point is not about optimism or pessimism but the futility of measuring a deficit on the basis of "technical provisions", as if that were some magical benchmark. It is not. It depends on the assumptions that the actuary makes. The £3 billion figure is out of date and based on a different world. The second issue is more technical. In any ongoing assessment of a pension scheme—any assessment where there is a viable employer—liabilities are assessed on the assumption that pensions will be tied to final pensionable pay. As we know, that will not be the case here. The RMPP is not just picking up liabilities for pensions earned after the date of separation; it is picking up the cost of the salary link for the past service liabilities that the Government are assuming. An ordinary technical provision basis omits that link altogether. The £3 billion of liability going forward, as assumed in the regulatory impact assessment, is short of the mark. The RMPP will have a deficit from day one. The third issue follows on from that. One benchmark is largely free from actuarial assumption, which is the measure that a private sector trustee would use in a situation just like this. If a new employer were to branch out into the unknown, taking on past liabilities of any nature on trust, it would want to know that it was being paid enough to meet the liabilities, come what may. There is a pension scheme measurement for this. It is the cost of buying liabilities on the insurance market. Actuaries call it the buyout basis; it is the risk-free option. It is important to recognise the scale of the differences we are talking about. At the 2006 valuation, the RMPP had technical provisions to meet 86.7 per cent of its liabilities. That is a substantial deficit in anyone’s book. On a buyout basis, however, the technical provisions would have met only 64.2 per cent. The deficit is more than twice as big. If anyone thinks that the RMPP will be fully funded post-privatisation because the scheme is sufficient to meet its "technical provisions", they are wrong. The RMPP will still have a serious deficit and the scale of the theoretical actuarial deficit depends on the optimism or pessimism of the actuary. That is my fourth point. Who makes the assessment? My noble friend Lord McKenzie said in Committee that, ""the Government intend to hire an appropriately qualified actuary, but we do not believe that it is necessary to put this on the face of the Bill".—[Official Report, 20/4/09; col. 1287.]" I think that it is necessary to put it on the face of the Bill. Actuaries disagree with each other if they are paid to do so. It is no good pretending. In many cases they do what they are paid for. The actuary who is paid to look after the interests of the members of the RMPP going forward is the actuary appointed by the trustee. He or she should attempt to reach an agreement with whichever actuary is appointed by the Government. If there is a disagreement involving handing over many billions of pounds of pension savings by members of the RMPP the actuary appointed by the trustee ought to be given the final word. Amendment No. 55 addresses all these issues. It states that the division should be assessed in the same way that it would be in a commercial transaction; the trustee of the scheme that is being divided would insist that the scheme as it goes forward is left with sufficient assets that could buy out all of its liabilities if it had to in the short term; and the trustee is handing over the security of real assets in exchange for the unknown future strength of the new employer to meet its future liabilities. Any division of the assets would have to be agreed by the trustee acting on the advice of its own actuary, not an actuary appointed by the Government. Let the actuaries try to agree by all means, but if the trustee is handing over its own money it must be given the right to say how much. I beg to move.