Debates — Pensions Act 2008

Committee stage in the Lords

16 Jul 200861 speechesView in Hansard ↗

The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord McKenzie of Luton)My Lords, I beg to move that the House do now again resolve itself into Committee on this Bill. Moved accordingly, and,…
Speaker
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord McKenzie of Luton)Labour
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My Lords, I beg to move that the House do now again resolve itself into Committee on this Bill. Moved accordingly, and, on Question, Motion agreed to. House again in Committee on Amendment No. 130EW. [The CHAIRMAN OF COMMITTEES in the Chair.]
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Lord McKenzie of LutonI wonder whether I might be permitted, before we move on to the amendments, to make a brief statement following on from…
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Lord McKenzie of LutonLabour
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I wonder whether I might be permitted, before we move on to the amendments, to make a brief statement following on from where we left Monday’s proceedings. Following the debate in this House on Monday evening, my ministerial colleagues and I reflected on the thoughtful contributions made by the noble Lords, Lord Lucas and Lord Oakeshott, and the noble Baroness, Lady Noakes. I was in particular struck by the constructive approach taken by the noble Lord, Lord Oakeshott. He has acknowledged that the risks are great and that we are in uncharted territory, so something has to be done. He has also urged the Government to put more detail of his attentions in the Bill, to give clarity to the industry and to ensure that a workable arrangement is reached between the industry and the Pensions Regulator on this important issue. In our consultation, we requested responses on our proposed legislative approach. In that document, we suggested taking a broad amending power in primary legislation to follow with the specific detail of the changes in regulations. We did this for a number of reasons. First, we wish to give this House sufficient notice of our intent, which an introduction at Report stage would not do. There was insufficient time following consultation for an alternative legislative approach at Committee. Secondly, we wished to be thorough in consultation, and, having consulted widely on our policy intentions, to follow with a second consultation on the details in secondary legislation. This would help to mitigate the undesirable consequences of regulation, to which the noble Lord, Lord Lucas, and the noble Baroness, Lady Noakes, referred this week. Thirdly, we believe that, as the DWP does not have a pensions Bill every year—thankfully—the need to react to future unforeseen issues in pensions avoidance might be best served in this way. As we have consistently demonstrated, our intention is to work with our stakeholders closely, both on the draft legislation and on the regulatory guidance that would detail the specific requirements on schemes and their sponsors. However it is clear from this week’s discussions that noble Lords would prefer a greater amount of this legislation in the Bill, to ensure that the regulator’s powers are constrained by primary legislation. The noble Lord, Lord Oakeshott, felt that we were asking for a blank cheque to be given to secondary legislation. While this has never been our intent, this view has been reflected in some feedback received from key stakeholders. We agree with the principle. The slippage of our anticipated date of Royal Assent from July to later this year, gives us the opportunity to put more detail in the Bill. I am confident that we will find an appropriate way forward which addresses those concerns. I am happy to assure noble Lords that our intention remains to work closely with them and stakeholders over the summer and to return in the autumn with more of the proposed detail included in this amendment. We have discussed the potential for setting up a working group in this area with the CBI. It is supportive of the need to extend the regulator’s powers to deal with new market developments, but shares the noble Lords’ concern that more detail should be place in primary legislation. Alongside this we will work with the Pensions Regulator as it develops guidance to ensure that that guidance is clear and gives appropriate reassurance to business. It is therefore right that we work through the amendments tabled by the noble Lord, Lord Lucas, and the noble Baroness, Lady Noakes, some of which we can agree with in principle, so that I can be as clear as possible on the Government's position on the points raised. However, I should be clear that nothing in this detail or the discussion we have already had has persuaded us to withdraw the government amendment, which we consider is a proper foundation on which to build an effective and proportionate safeguard to counter the threat to pension provision. I am grateful for the opportunity to clarify where we left matters the other evening; I think it might help our discussions on the amendments that have been tabled.
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Baroness Noakesmoved, as an amendment to Amendment No. 130EW, Amendment No. 130EY:
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Baroness NoakesConservative
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moved, as an amendment to Amendment No. 130EW, Amendment No. 130EY:
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Lord Oakeshott of Seagrove BayIt is entirely appropriate that the noble Baroness, Lady Noakes, is now going through these amendments in detail since…
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Lord Oakeshott of Seagrove BayNon-affiliated
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It is entirely appropriate that the noble Baroness, Lady Noakes, is now going through these amendments in detail since the Government—unfortunately, and rather to my surprise, following what I thought was a constructive response from the noble Lord, Lord McKenzie of Luton, on Monday night—have decided to press ahead with this amendment. Given that we all accept that a lot more works needs to be done and a lot more detail needs to be in the Bill, I would have thought that it would be more sensible to withdraw the amendment so that work can take place over the summer. However, the Government have obviously taken their decision. I thank the noble Lord, Lord McKenzie, for the kind words and considerable amount of re-playing of my speech in the statement. I could say to him that flattery will get you almost anywhere. But it would have been a lot more helpful if his boss, the Minister for pension reform, had taken the trouble to read my speech. Perhaps he might have spent a little more time reading it and a little less time making increasingly frenzied phone calls to my colleagues in the Commons yesterday. I think he made three calls to our present spokesman and one to our former spokesman. But he did not favour me with a call, so I spent most of my time hearing the things that he was saying about what I had said which indicated clearly that he had not read my speech. I thought—and I thank the Minister for this—that my speech was reasonably balanced and constructive; I certainly did not recognise any of it in the calls that “Macho Mike” was making on Tuesday. I am pleased to say that the tone has suddenly changed overnight. I have in my pocket four messages asking me to ring Mike O’Brien, so I am glad that we are suddenly all friends again. Seriously, however, this is not the way to go about things at this early stage of scrutiny on a Bill and wastes quite a lot of time. The noble Baroness, Lady Hollis, will remember that, as I have said, we had a similar situation in 2004; but we have probably had six, seven or eight Ministers in Mr O’Brien’s position since then, all called different things. Just a little checking of what happened, or even taking some notice of his noble friend Lord McKenzie, would have been sensible. We should learn a lesson from this. It was not a constructive way to go about things, and I am glad that people have now, I hope, read my speech. I put a lot of thought into it, and we have been here before. This is not a party political issue. As we did in 2004, we are all of us trying to get the right Bill that will work for an important and serious issue. I welcome a more constructive approach. I do not think that a meeting, although Mr O’Brien has now kindly offered one, would be appropriate at the moment. The right way to do it would be for the Government to consult properly over the summer, not just with the CBI, the BVCA, the TUC and anyone with a legitimate and substantial interest in these matters. When the Government have completed those consultations and worked out what they want to do, and have some draft amendments, I would very much welcome the opportunity to meet Mr O’Brien and the noble Lord, Lord McKenzie; I hope that that will be taken up. Indeed, if the noble Baroness, Lady Noakes, came as well, it would be wonderful to get government amendments to which we could all put our names. However, Mr O’Brien must remember that we on these Benches are legislators, not stakeholders. We will ultimately need to decide, but I suggest that that is the right way to go about it. Again, I put on the record my serious concern over the dangers for British pension funds from what is going on in the buy-out industry. We are in uncharted waters. The covenant of some of these companies that are offering buy-outs is not undoubted; we have seen what has happened in America, with substantial reinsurance companies unable to meet their obligations. Speaking as someone who has been managing pension funds for 30 years and who ran the Courtaulds pension fund for five years, I would not be happy to have my pension fund taken away from the sponsoring employer behind it and sold off to one of these companies. These “zombie funds” are an accident waiting to happen. One can foresee many private-equity-backed companies going into receivership over the next year or two with serious consequences for their pension funds. I am totally with the Government on what they are trying to achieve. I support what the Pensions Regulator is trying to do. However, there is a right way to go about these things, properly taking into account the views expressed by people with a legitimate interest. I hope that that process will happen over the summer.
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Baroness Hollis of HeighamListening to the debates on Monday evening and today—I am losing track of the Committee days now—I confess to a slight…
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Baroness Hollis of HeighamLabour
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Listening to the debates on Monday evening and today—I am losing track of the Committee days now—I confess to a slight sense of déjà vu, to coin a phrase, to which noble Lords have referred. Back in 2004, I was rightly persuaded by the noble Lord, Lord Hunt, that there was a real issue of moral hazard in that Bill; and that, in establishing the TPR to avoid Maxwell-type rip-offs, we might tip over into preventing mergers, acquisitions and restructuring of companies. Those things would be highly desirable, both for the employees whose jobs might otherwise be at risk and for the health of British industry. The question then, as now, was how we assessed the balance between those risks and ensured that restructurings in good faith were not subsequently undermined by any rigid appliance of compliance rules by the TPR.
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Lord LucasI was delighted to listen to the speech by the noble Baroness, Lady Hollis. I always find her persuasive, and she was p…
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Lord LucasConservative
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I was delighted to listen to the speech by the noble Baroness, Lady Hollis. I always find her persuasive, and she was particularly so on this occasion. She set out all our common objectives very well. Perhaps I put a little more emphasis on trying to amend Amendment No. 130EW, merely to set out the Government’s stated intentions more clearly in the Bill—that is perhaps a kind way of putting it—and to make clear the limits of the power. I entirely agree with the noble Baroness, Lady Hollis, that the Pensions Regulator needs the flexibility to deal with the attempts that will be made, particularly in difficult economic circumstances, to sidestep the pension fund liability. By and large, I do not think that Governments proceed with malevolence towards companies running pension funds, but I do think that they are guilty of serial idiocy. Certainly, I would convict us of that, in our 1995 Bill, in not realising how things would play out. I picked up an echo of that from what the Minister said when last we met. He said: “On the fair value point touched on by the noble Lord, it is not the Government’s intention that a transaction, whereby a person purchases assets or securities at fair value, would normally trigger the regulator’s use of its anti-avoidance powers, provided that, as part of the transaction, the pension scheme was properly considered and adequately addressed. However, the fact that a person had purchased assets or securities at fair value would not necessarily provide the reassurances needed. That would be only the first step in ensuring that capital was available to mitigate the risks to the scheme; it does not of itself get the capital to the scheme”.—[Official Report, 14/7/08; col. 1089.] There we are seeing part of a process—which, I agree, we started and which has carried on since—which is making the pension fund gradually into some sort of super-creditor, giving it rights over and beyond that of an ordinary, unsecured creditor, moving it ever more into a position where it has additional, superior rights. We see echoes of that in other parts of the amendment. My difficulty is that we are pushing companies in the direction of receivership, because it is the forum under which these conflicts are most clearly dealt with. I hope that we all agree with the noble Lord, Lord Oakeshott, that receivership is not the best option. The best option is for a pension fund to continue to be looked after by a company that recognises its obligations. In that way you can, over the long term, get much more for the pensioners than you ever can from receivership, particularly in difficult circumstances. To do that we must recognise that the pension fund is taking a risk, making a commercial decision and entering into a partnership with the company. We should also recognise that the company is using money that the pension fund might otherwise try to lay its hands on. We have to allow for that commercial relationship to proceed without the possibility of a great backwash retrospectively against what seemed sensible decisions at the time. As my noble friend Lady Noakes has said, clearance has grown into a great industry. There are professional clearance advisers who do nothing else and make a great deal of money. We may push companies into a position whereby every decision might be viewed as depriving the pensioners of access to assets, such as paying a dividend, selling an operation, or, in relation to the terms of trade with some associated overseas company, entering into a big contract, which has sunk many companies. If all those decisions are to be questioned and there is personal liability for the directors as a result, it will become extremely difficult to run companies with defined benefit schemes of any magnitude. We must think very carefully if we are going to threaten or enact regulations that push companies in the direction of receivership.
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Lord Hunt of WirralI should again declare my interest as a partner of the national commercial law firm Beachcroft. However, I no longer ha…
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Lord Hunt of WirralConservative
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I should again declare my interest as a partner of the national commercial law firm Beachcroft. However, I no longer have to declare an interest as president of the Chartered Insurance Institute, because at lunchtime I handed over the chain of office to Trevor Matthews, who later this month will become chief executive of Friends Provident. It is very important that we do nothing to stifle innovation, because that has been right at the heart of the pension industry and must continue always to bear that in mind as a material factor. I thank the noble Baroness, Lady Hollis, for her kind remarks about our previous discussions of matters like this, but in particular I support my noble friend Lady Noakes in what she said. Perhaps the only contribution that I want to make to this debate is for the Minister. In many respects I have been down this road before. The one thing that I always tried to avoid during the many years that I was a Minister was pressure from within the department, particularly from my fellow Ministers—usually from the Treasury and the committees that look after legislation—to legislate in a rush. That is particularly important in this Bill. I agree with the noble Lord, Lord Oakeshott, although I shall not go down his road and make a speech about his speech. He was absolutely right to say to the Minister that we need time to get this right. Thanks to all sorts of pressures, including Statements and various other matters, many of our debates on this Bill were truncated and we are now in the seventh day of Committee. We will almost certainly need further time and there is, therefore, a wonderful opportunity for the Minister. I say this from the Back Benches. There is much more discussion still to be had on this Bill. He would be very popular if he were now to say to the House, “We just need time to reflect”. We can either recommit or come back to this Committee stage in the overspill Session.
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Lord McKenzie of LutonThis has been a helpful place to start our deliberations today. The noble Lord, Lord Hunt, said that whatever we do we…
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Lord McKenzie of LutonLabour
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This has been a helpful place to start our deliberations today. The noble Lord, Lord Hunt, said that whatever we do we should not stifle innovation. I very much agree. Of course, innovation can bring with it uncertainty—unknowns—which is why my noble friend Lady Hollis is absolutely right to say that we need some headroom in our regulatory armoury to cope with it. I say to the noble Lord, Lord Hunt, that I do not feel under any pressure from within the department to rush into legislation. We have the time to take this forward in the way that he and every noble Lord who spoke suggested. If there is a difference between us today, it is that we want to start with the building block of the government amendment, recognising that it needs to be built on, rather than withdrawing it and coming back with something afresh. That is how we wish to proceed, especially because we do not want the message to get out to those who, we know, do not want these changes to regulatory power that there is a process by which they can prevent them. I know that that is not the position of the overwhelming majority of stakeholders, but we know there are some out there, especially in the venture capital world, who do not want these powers. That is absolutely clear and we must be careful not to give any succour to them. Frankly, it would be nice if we could conclude the Committee stage this side of the Recess, just because it might make the summer holidays a little more bearable. The important thing is that we spend the time that we need to get this right. If we do spill over, I am sure that the Whips will be on to me, but we need to get this right. I still hope that, with the time that we have available, we can conclude, but it is not entirely within my hands. The noble Lord, Lord Lucas, talked about super-creditors and whether we are changing the status of pension funds. I do not think that anything in the Government’s proposals would suggest that that is the case. I accept entirely the need to build reassurance in respect of those issues. The noble Lord used the phrase, “a great backwash retrospectively”. I know that he is concerned about retrospection. We will come to an amendment on which I hope that I can give him further reassurance. My noble friend Lady Hollis is right. The current flexible clearance system has worked well. Before my time and before I was engaged in this legislation, there were fears about it. I am grateful for her support and for her input on the lessons of history. It comes back to innovation. There are new forms of pension activity out there, which are difficult prospectively to define in a way that means that we do not need to have some discretion in our powers. The noble Lord, Lord Oakeshott, berated my colleague the Minister for Pensions. In defence of my honourable friend, I should explain that he was concerned that we might lose the government amendment, not because there was no recognition that we needed and were keen to work together over the next few months to build on it, but because of the impression that it might create. We need to be firm about that. I believe that he tried to reach the noble Lord. Ultimately, we hope that we have been able to communicate in a satisfactory way. The noble Lord, Lord Oakeshott, is right. We are trying to get to the same place, although we might have a little bit of a spat about the journey and how we reach that place. However, this is important and comes back to consensus. At the end of the day, it will be quite difficult, with all the engagement that we will have, to write something as specific as some Members of the Committee want. If we have to have discretion in powers at the margins, it is important for people to understand why. They can gain that understanding from engagement with us as stakeholders or as legislators. There is a clear commitment to liaise with the Committee to make sure that noble Lords have a chance for input into the process before we return on Report. The noble Baroness, Lady Noakes, said that no account had been taken of consultation. With respect, I do not believe that that is the situation. The legislative approach was to enable consultation responses to be considered in drafting regulations. As I have said previously, the consultation document indicated that we would bring forward a broad enabling power. The thrust of one point was whether companies are unsaleable if they have DB schemes. We do not believe that to be the case. Clearances are still available. Just this or last week a significant legal firm wrote in Pensions Week that it certainly is not advising against investing in firms with DB schemes. We need to ensure that, as part of the objectives of the Pensions Regulator, employers do not sidestep their pension obligations and that the regulator has a number of powers to enable it to deal with that. In considering whether, without regulations, there is a material risk to the security of members’ benefits or to the PPF, the Secretary of State will have to form a judgment after getting the views of the Pensions Regulator and other stakeholders. It clearly would not be appropriate to exercise the power if it did not reduce the existing material risks or, indeed, if it created serious new risks. I reassure noble Lords that it is not our intention, by introducing these provisions, to increase such risks. The Government’s new clause includes safeguards covering the power to amend provisions, including the requirement to consult the regulator and other key stakeholders. We will be dealing with an amendment that specifically broadens the range of people whom we are required to consult. We have sympathy with that. It will ensure scrutiny by relevant parties, who will be alert to—and will actively seek to prevent—material increases in such risks. The consultation process should identify any unintended consequences that could increase these risks. The noble Baroness’s amendment touches on the wider issue of ensuring an appropriate level of regulation. I agree that it is essential that we strive to achieve the difficult balance required, by enabling the regulator to meet statutory objectives while avoiding placing undue burdens on the sponsors of defined benefit schemes. It has been a fundamental principle that the regulator should act reasonably and take a risk-based approach. We now have a number of years’ operational experience, which serves to demonstrate the efficacy of that approach. I reassure the noble Baroness that it is not the Government’s intention to use the new power to change this fundamental approach; we simply intend to ensure flexibility in the face of an increasingly sophisticated and fast-moving market. The noble Lord, Lord Lucas, talked about making pension schemes higher priority creditors. We do not believe that these proposals would increase the priority of pension schemes, which must be treated fairly alongside creditors of equal priority. I am sure that we agree on that. Ros Altmann has pointed out that some organisations are thought to make money out of the jettisoning of pension obligations. I am sure that noble Lords across the Committee consider that behaviour unacceptable. The noble Baroness touched on the burdens of clearance. This is voluntary. TPR has published detailed guidance on when and where it is appropriate. The regulator has always, where reasonable, met the commercial needs of applicants within their deadlines. I suggest that clearance is generally a small additional cost in the global cost of a transaction and that it is part of standard due diligence. I hope to persuade the noble Baroness not to press her amendment. I think, from all the contributions and indeed from our discussions on Monday, that we are on the same page. We need to stay there and move ahead together to end up in a good place.
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Baroness NoakesI thank the Minister for that response and thank all noble Lords for taking part in the debate. Much of it has been mor…
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Baroness NoakesConservative
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I thank the Minister for that response and thank all noble Lords for taking part in the debate. Much of it has been more like a Second Reading debate than a Committee debate on the amendments before us. However, there is no harm in that, because the issues are important. I agree with the noble Lord, Lord Oakeshott, that this is not a party-political issue. I have heard that the Government have been trying to portray this as a party-political spat, so I place it on record that I never intended to raise these issues in a party-political manner. I hope that the Government will not continue to spread that claim. I agree with the noble Lord, Lord Oakeshott, that it would be helpful, after the Government have had further discussions with those affected, for us all to get together again in September. I also agree with the noble Lord that it is not enough just to talk to the CBI. The Government need to engage with all groups. I heard the code in what the Minister said about wanting this in the Bill so that those who did not want powers could be told that there would be powers. That unfairly characterises the position of some who are involved in turnaround and private equity. I am not in the camp that despises private equity. It has been a great force for good in our economy; it has achieved great efficiencies in many industries and has created employment. We should not regard anything that comes from the private equity industry as being necessarily bad. The industry does not seek simply to rape and plunder pension schemes; that is absolutely not what it is about. I hope that the Minister will go back to his department and tell it that it also needs to engage with bodies with which it may be less comfortable, because they have legitimate concerns that are important to the UK economy and that need to be taken into account. The noble Baroness, Lady Hollis, talked about the parallel with the 2004 Act, in which I was not involved to the same degree of detail. She said that the things that were being discussed were in the Bill. The difference in this case is that the subject of Amendment No. 130EW was not in the Bill when it was considered in another place and is still not in the Bill. The Government are seeking to put something into the Bill without proper consultation. It is appropriate to pause at this point. It is not as though the Government have a permanent right to recreate the Bill that they would have introduced if they had thought of things further back. Otherwise, the parallels are good because, as I understand it, people discussed the issues seriously during that summer and came back with workable amendments, to the satisfaction of everyone involved. I hope that we can get to that stage. The noble Baroness asserts that the regulator’s powers are not adequate. There is some doubt about that, but those outside the Government who believe that some changes need to be made to the powers are also sure that those powers need to be more constrained. That is the likely difference. The question is not whether new powers are required but whether they need to be constrained in other ways. Like my noble friend Lord Hunt, I hope that the Government will always bear in mind the fact that stifling innovation is seriously harmful. If they try to take powers that would allow them to respond to any conceivable innovation that they deemed to be malign, they could end up circumscribing the way in which ordinary commercial transactions occur and harming the economy. That is clearly undesirable and something in which I am sure the Minister does not want to become involved. My noble friend Lord Lucas raised some important issues, but we will return to retrospection, fair value and the new super-creditor, which, in many respects and despite the Minister’s assurances, it looks as though the Bill is on the road to creating. These are important matters, which we need to discuss for longer. My Amendment No. 130EY was discussed briefly in the context of the previous 45-minute debate, in which the Minister repeated that the Government do not intend to introduce regulations that do not deal with risks, particularly if the risks increase. My only point is that this is not reflected in the Bill. I hope that he will reflect further on whether the Bill properly reflects the balanced consideration that needs to be taken into account. This is not simply a question of whether the rights of members of a pension protection fund need to be protected. There should be a positive obligation on the Secretary of State to consider whether his actions will make matters worse in some respects. That is the point of the amendment. I will not press the amendment to a vote today, as the Minister asked, but I hope that this is one of the things that he will consider further during the summer. I beg leave to withdraw the amendment. Amendment No. 130EY, as an amendment to Amendment No. 130EW, by leave, withdrawn.
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Baroness Noakesmoved, as an amendment to Amendment No. 130EW,
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Baroness NoakesConservative
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moved, as an amendment to Amendment No. 130EW,
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Lord McKenzie of LutonI appreciate the concerns of the noble Baroness about the interests of employers and directors’ duties under company la…
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Lord McKenzie of LutonLabour
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I appreciate the concerns of the noble Baroness about the interests of employers and directors’ duties under company law. The interaction between pensions and company law is an important consideration, and I welcome the opportunity to discuss it. The regulator already has a duty under existing legislation to consider the interests of directly affected parties, and when considering whether to issue a contribution notice or a financial support direction, the regulator is required to have regard to matters when deciding if it is reasonable for employers to make payments to the scheme or to put support in place. We recognise that it is important that legitimate business is not hampered by these changes and that employers have a degree of certainty that if they properly consider and address the issues of their pension scheme, they are unlikely to be subject to these new powers. It is equally important that the regulator’s powers are sufficiently robust to respond to new risks in an evolving market. The interaction of pensions and company law is important. The Government’s intention is that the duties in these two sets of legislation should rightly sit alongside each other. The noble Baroness may be concerned that directors who otherwise act in accordance with duties under the Companies Act should not be liable to regulatory action. Directors have certain duties to current employees but under pensions legislation they also have duties to scheme members’ interests. It is of course a matter for directors to balance these duties along with their other responsibilities. These situations are not unusual. I reassure the noble Baroness that it is not the Government’s or the regulator’s intention that in the normal course of their duties directors should be subject to regulatory action where their actions have no materially detrimental effect on scheme members’ benefits. The 2004 Act already places requirements on the regulator to consider whether it would be reasonable to use its anti-avoidance powers. It must have regard, where relevant, to all the facts of the case. For example, it must have regard to the degree of involvement in the Act and the involvement that the person has had with the scheme. To directly address these concerns, our intention is to strengthen these constraints to require that the regulator must have regard, where relevant, to the reasonableness of the person’s actions—for example, a director in light of his duties in that capacity—and the value of benefits the person received from the company sponsor or the scheme. I highlight the regulator’s existing duties. Under existing legislation, the regulator must consider the interests of members and those directly affected by its interventions. To include consideration of the interests of those persons only indirectly affected could lead to delay and disproportionate expense for the regulator. That would not be appropriate. The noble Baroness touched again on removing “good faith”. I know we are going to come on to this. It applies to only one of the tests: that of preventing debts becoming due. This means it is relevant for only certain other events directly related to the pension scheme—for example, compromising debts due to schemes. This is not typical activity regulated under the Companies Act. The ordinary director functions such as paying dividends are considered under limb one of the tests in the Act: preventing recovery of a debt. This has never been prefaced by good faith. We are not aware of any problems that that has created. On standing behind schemes, we believe it is right in this country that employers have flexibility in supporting pension schemes. Insurance levels of insolvency would be disproportionate but this means the employer must make contributions where appropriate, with a clear impact on likely returns to shareholders.
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Baroness NoakesCould I clarify that? The Government’s paper talked about shareholders and investors standing behind schemes, not emplo…
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Baroness NoakesConservative
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Could I clarify that? The Government’s paper talked about shareholders and investors standing behind schemes, not employers. That was what I sought to draw out when I raised the issue. The Minister has not addressed it.
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Lord McKenzie of LutonThe noble Baroness is right. I do not have a copy of the document in front of me. I would be happy to look at it and wr…
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Lord McKenzie of LutonLabour
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The noble Baroness is right. I do not have a copy of the document in front of me. I would be happy to look at it and write to her on it more specifically. I cannot give her an answer off the cuff, unless one comes from the Box quickly. On whether the changes raise dangers for directors, I stress that we are consulting on additional reasonableness factors which will have regard to the actions of the person being evaluated under the regulator’s power. Sorry, I have not got a particularly coherent note. I assure noble Lords that we want the final legislation to strike the right balance, providing adequate protection for members and the PPF without undue costs to business. As we have discussed, the Government intend to further consult on the detailed regulations, working with stakeholders to get the balance right. The noble Baroness has pressed us on what I acknowledge is an area of concern and we need to more effectively address these issues as we move towards the final shape of the legislation and the regulations.
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Lord LucasPerhaps I may pick up on a point that the Minister made earlier. I think he said that there was a firm of lawyers which…
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Lord LucasConservative
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Perhaps I may pick up on a point that the Minister made earlier. I think he said that there was a firm of lawyers which was totally happy to advise its clients to invest in companies with defined benefit funds. Can he pass on its name and contact details? I would love to broaden my understanding of what lawyers are saying.
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Lord McKenzie of LutonI am not sure that I said that they were totally happy—I am not sure that lawyers are ever totally happy. I can say tha…
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Lord McKenzie of LutonLabour
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I am not sure that I said that they were totally happy—I am not sure that lawyers are ever totally happy. I can say that as an accountant. I think the firm was Wragge and Co. I made reference to an article last week in Pensions Week in which it made this point. I shall make sure the noble Lord gets the specific reference and a copy of the article.
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Baroness NoakesI, too, would be interested to see a copy of the article. If it contains what the Minister says it does, it contradicts…
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Baroness NoakesConservative
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I, too, would be interested to see a copy of the article. If it contains what the Minister says it does, it contradicts many of the representations that we have received, where different advice has been given. I thank the Minister for his response; I shall consider carefully what he said. I am not 100 per cent convinced that he has addressed the issue. Here we have a newly minted version of the directors’ duties, which have only just come into force, but with no reference to pensions. Alongside that, some tough potential regulatory powers are coming in which will have an impact on the way directors behave. I presume that that impact is sufficiently aligned with what the Government intended. Many of us were less than convinced that restating the directors’ duties was the right thing to do but the Government were very clear in their own mind that it needed to be done. Weeks after those duties came into effect, however, the Government are effectively creating something which is potentially in conflict. Given the different standards, working out that conflict may be difficult for directors. This applies to the issue of good faith, for example. If you asked any corporate lawyer what he would say to directors to make sure that they stayed within Section 172, good faith would be at the top of the list, as it always has been. Yet good faith will not be necessarily taken into account in future if the Government use the powers in Amendment No. 130EW as they claim they want to. I am not sure that this is the right amendment for the Bill, but nor am I sure that these important issues have been dealt with by the Minister; therefore, we may return to them, in one form or another, on Report. I beg leave to withdraw the amendment. Amendment No. 130EZ, as an amendment to Amendment No. 130EW, by leave, withdrawn.
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Lord Lucasmoved, as an amendment to Amendment No. 130EW, Amendment No. 130F:
Speaker
Lord LucasConservative
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moved, as an amendment to Amendment No. 130EW, Amendment No. 130F:
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Baroness NoakesWhen the Minister comes to reply, I hope he will be able to cover the areas where the Government believe contribution n…
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Baroness NoakesConservative
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When the Minister comes to reply, I hope he will be able to cover the areas where the Government believe contribution notices may well attach to individuals. Considerable concern has been expressed that the way in which the Government will use the powers could significantly increase the likelihood that individuals would come within the scope. That has not been the case to date because of the way the tests have been working. If that is the case in future, however, it could have significant implications for whether individuals want to be directors of companies with defined benefit schemes. It would be harmful to those schemes if good quality directors were not prepared to do that, so it is important to get a sense of the size of the potential risk.
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Lord McKenzie of LutonI recognise the concern about the impact that personal liability will have on the willingness of people to be directors…
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Lord McKenzie of LutonLabour
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I recognise the concern about the impact that personal liability will have on the willingness of people to be directors where defined benefit schemes are involved. We need to seek to ensure that that is not the outcome. I agree that that is not where we want to be. There are assurances in the existing legislation on the use of the powers, and I will take this opportunity to outline them. I would also like to clarify that current legislation allows for personal liability in respect of contribution notices and financial support directions. Under public law, the regulator must act proportionately and only where reasonable. That intrinsic requirement is augmented by the current legislation that provides for the safeguards. It is already possible, under Sections 38 and 43 of the 2004 Act, for the regulator to issue a contribution notice and financial support direction to individuals, but those powers are subject to the checks and balances that I will try to outline. I particularly draw noble Lords’ attention to the reasonableness tests of Sections 38(7) and 43(7), which list the reasonableness factors. The regulator is required to have regard to relevant factors to establish whether it is reasonable to act. That includes consideration of whether it is reasonable to impose liability on an individual. Among other factors, the regulator could consider the individual’s conduct, their financial circumstances and, under Section 38(7)(e), the purpose of an act or a failure to act. Further protection is afforded through the determinations panel. If, following detailed consideration of the case and reasonableness factors, the regulator wishes to proceed, a case must be made to the panel, which will hear both sides of the case. It may proceed only if the panel determines it may do so. In addition to the existing safeguards, as I mentioned earlier, the Government have consulted on additional reasonableness factors: the reasonableness of the person’s actions in the circumstances and the value of any benefits that they had received directly or indirectly from the employer or scheme. That was specifically to address concerns such as those highlighted. Part and parcel of the new factors will be due consideration of the individual’s legal duties, for example, as a director. In most, but not all, cases, it will not be reasonable for the regulator to pursue individuals, given their financial circumstances. In the majority of cases, the appropriate entity pursued will be corporate—the company or corporate shareholders. There will be rare cases where the regulator may need individuals to be the target of a contribution notice, for example where the employer is an individual or a major and influential shareholder. This exposure to personal liability is not new in respect of the regulator’s powers and is paralleled in company law. Trustees in their capacity as trustees should not be at risk from contribution notices if they perform their role properly.
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Baroness NoakesWe will return to dividends later in connection with other amendments. However, would the Minister explain what is mean…
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Baroness NoakesConservative
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We will return to dividends later in connection with other amendments. However, would the Minister explain what is meant by looking at the “financial circumstances” of an individual? That comes close, I think, to saying that the regulator would go after those with deep pockets and not on a matter of principle. The Minister also mentioned conduct but he separately mentioned financial circumstances, which seemed a little worrying. Would the Minister expand on that?
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Lord McKenzie of LutonThe reference to the “financial circumstances” of the person in looking at tests about whether something is reasonable…
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Lord McKenzie of LutonLabour
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The reference to the “financial circumstances” of the person in looking at tests about whether something is reasonable is in the existing legislation. For example, Section 38(7)(f) refers to, “the financial circumstances of the person”. Therefore, that is not a new provision. As I said earlier, we are seeking to add to these requirements of a reasonableness test, but they will remain. I am not aware that they have created problems in their application to date. However, it is an existing test.
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Baroness NoakesI thank the Minister for pointing that out. Of course, “person” in the context of Section 38(7) refers to all legal per…
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Baroness NoakesConservative
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I thank the Minister for pointing that out. Of course, “person” in the context of Section 38(7) refers to all legal persons and not just individuals. I was querying it in the context of individuals.
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Lord McKenzie of LutonThe test covers both. A person covers an individual, as I understand it. So, whether it is a person or a corporate body…
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Lord McKenzie of LutonLabour
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The test covers both. A person covers an individual, as I understand it. So, whether it is a person or a corporate body, it will be subject to those provisions.
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Lord LucasI thank the Minister for what he has said. Yes, I am sure that I, and the people to whom I have been talking, will take…
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Lord LucasConservative
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I thank the Minister for what he has said. Yes, I am sure that I, and the people to whom I have been talking, will take advantage of the next few months to see whether we can probe further to clarify exactly how the Minister intends individuals to be liable, and to see how that can be covered and dealt with to ensure that people do not feel unreasonably at risk. I am encouraged by the Minister’s attitude and I beg leave to withdraw the amendment. Amendment No 130F, as an amendment to Amendment No. 130EW, by leave, withdrawn.
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Lord Lucasmoved, as an amendment to Amendment No. 130EW, Amendment No. 130FA:
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Lord LucasConservative
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moved, as an amendment to Amendment No. 130EW, Amendment No. 130FA:
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Lord McKenzie of LutonThe noble Lord has drawn attention in these amendments to the important roles played by insolvency practitioners, turna…
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Lord McKenzie of LutonLabour
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The noble Lord has drawn attention in these amendments to the important roles played by insolvency practitioners, turnaround specialists and other “company doctors”. We do not have a problem with venture capitalists: they play an important role in our financial system. However, I would just note again that an association is seeking to roll back some of the powers that we are seeking to take. The Government agree that practitioners acting competently and clearly in line with their duties should not fear later sanctions. Although we recognise that in turnaround and insolvency situations there are hard choices to make, it would be wrong to enable parties to satisfy their other unsecured creditors by avoiding their obligations to pension schemes. However, it would also be wrong for regulations aimed at protecting pension schemes to stymie sensible transactions that treat all parties fairly and equitably. That is why the current legislation already provides a specific safeguard for insolvency practitioners. This protection was established in the 2004 Act as insolvency practitioners have a statutory duty to ensure that they treat all creditors fairly and equitably. No such duty is placed on company doctors, who do not normally owe any duty to creditors. They are not defined in law and it is not clear who might claim protection under this provision. I must add that there is no evidence that the current regulatory regime inhibits turnaround specialists, and we do not intend that our proposals in Amendment No. 130EW would change that. We certainly do not intend to remove the current specific safeguard for insolvency practitioners. Furthermore, there are already a number of important safeguards in existing legislation that apply to the regulator’s use of its anti-avoidance powers. These work well and provide protection for those involved in turnaround situations. As a public body, the regulator is required to act reasonably. In addition, there are specific requirements in statute, to which we referred when discussing earlier amendments. Significantly, decisions to use the power to issue a contribution notice are made not by the regulator’s investigating arm but by its determinations panel—a body that is separate from the investigating team. The panel will review evidence and provide opportunity for representations from relevant parties. I hope that those remarks will offer the noble Lord some reassurance. As I said, clearance procedures are available in turnaround situations as well. I recognise that there are speed issues in some of these situations, but I am not aware that that has been an issue in preventing people getting clearances where appropriate. I think that the issue is the lack of a definition of who would be included and differentiating those from insolvency practitioners, who have clear statutory duties in how they treat creditors. That is why there is protection for them and why we think it would be wrong to widen that in an undefined way.
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Baroness NoakesI am grateful for what the Minister said about insolvency practitioners. I accept what he said about the difficulties o…
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Baroness NoakesConservative
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I am grateful for what the Minister said about insolvency practitioners. I accept what he said about the difficulties of defining company doctors and turnaround specialists. But, say, a professional—these are professionals, one way or another—is put into a company by a bank, for example, where there is concern about the bank’s security and he hires someone to go in and save the business, so far as possible. That person would potentially be taking actions, or be associated with actions, which could have a detrimental effect on the pension scheme. The concern is that, unless there is some way of protecting those concerned, individuals working on that which is a healthy corporate activity—it is not insolvency, this is at the informal end, where banks, or possibly controlling shareholders, put somebody in to turn the business around—they are subject to the full range of penalties which the regulator could throw at them. The Minister mentioned clearance procedures, but I think that he answered the point himself, in that clearance procedures do not work when you are trying to deal with these fast-moving actions of turning businesses around. There is a real issue of potentially eliminating activity which is good for the economy because of fears for individuals getting caught up in this increasing net of regulated powers. Can the Minister comment on that?
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Lord McKenzie of LutonI agree that we would not want to inhibit the sort of activity which, as both the noble Baroness and the noble Lord sai…
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Lord McKenzie of LutonLabour
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I agree that we would not want to inhibit the sort of activity which, as both the noble Baroness and the noble Lord said, makes important contributions to corporate rescues in a range of situations, keeping businesses alive, the employees in employment and the pension schemes in existence. I do not see that either the existing powers that the regulator has, or anything new that is being proposed, really creates risks for such practitioners.
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Baroness NoakesI shall explain. It is the potential shift, as enacted by the proposed regulations, to the test of whether something ha…
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Baroness NoakesConservative
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I shall explain. It is the potential shift, as enacted by the proposed regulations, to the test of whether something has a detrimental effect. That does not exist at the moment; it is a new test which is likely to be introduced and it is that which has widened significantly the range of situations that those professionals would be worried about being sucked into. For example, they may well say that the right thing to do is to get rid of failing business X in order to keep business Y within a group, or a company, going. In doing so, assets leave the group and, it could be construed with the benefit of hindsight—we will come on to that later—that that has had a detrimental effect on the interests of members. Therefore there would be some way in which those people would be drawn into what the regulator could throw at them.
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Lord McKenzie of LutonPerhaps I may help further. The key point is that it is important that all creditors are treated fairly and equitably i…
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Lord McKenzie of LutonLabour
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Perhaps I may help further. The key point is that it is important that all creditors are treated fairly and equitably in these arrangements and that the reasonableness of actions takes account of circumstances and recognises constraints such as time pressures. One of the reasonableness tests would also look at benefits received under the proposals.
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Baroness NoakesLarge fees?
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Baroness NoakesConservative
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Large fees?
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Lord McKenzie of LutonIt would be a judgment as to whether those fees are normal under the commercial circumstances of the transaction that i…
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Lord McKenzie of LutonLabour
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It would be a judgment as to whether those fees are normal under the commercial circumstances of the transaction that is being undertaken. There is a real danger that we are creating concerns that do not need to be real concerns. But over the next couple of months we need to make sure that we cover all of these bases and give the necessary reassurances. With regard to the detrimental effect on the widened range of situations, we have proposed setting out circumstances in which the power can be exercised using the new test. We will certainly consider putting this in legislation to deal with the specific concerns that have been raised. We do not want these arrangements to get in the way of the sorts of transactions and work that the noble Baroness and the noble Lord have both identified. I am sure that we can end up in a situation where we can give the reassurances, but to define a further group of people—company or turnaround specialists, or whatever—is not the right way to go about it. It is not an effective and practical way of proceeding in any event.
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Lord LucasI found the Minister’s final words encouraging. Yet again, we shall have some fruitful discussions over the next few mo…
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Lord LucasConservative
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I found the Minister’s final words encouraging. Yet again, we shall have some fruitful discussions over the next few months. I beg leave to withdraw the amendment. Amendment No. 130FA, as an amendment to Amendment No. 130EW, by leave, withdrawn.
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Lord Lucasmoved, as an amendment to Amendment No. 130EW, Amendment No. 130FB:
Speaker
Lord LucasConservative
Quote
moved, as an amendment to Amendment No. 130EW, Amendment No. 130FB:
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Lord McKenzie of LutonThe noble Lord is right that we have touched on good faith in our previous discussions and I understand the concerns to…
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Lord McKenzie of LutonLabour
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The noble Lord is right that we have touched on good faith in our previous discussions and I understand the concerns to which he has referred. I fully understand, and agree with, the need to provide protection to those who act competently and with good intentions to protect members’ benefits. However, I do not agree that a good faith test is necessarily the best way in which to provide this protection. It may be helpful if I begin by outlining why I hold that view. At first sight, a good faith test seems inherently reasonable and attractive. It appears perfectly fair that a contribution notice should not be issued against somebody who is seeking to do the right thing. However, the issues can be more complicated. The concern is that the legal application of good faith serves to set such a high evidential burden that it can be circumvented by those at whom regulation is targeted. It places the regulator in a position in which it would have to prove bad faith, which in law comes close to dishonesty. By its nature, such activity and intent is something that would be kept well disguised, with little evidential proof for the regulator to identify. In addition to constructing a high hurdle, good faith also provides for a very wide and general protection. The effect of this generality is to safeguard both those who should be protected and those whose activities are rightly the target of the regulator. Furthermore, there is a risk that applying a good faith test as set out in the amendment would exclude the possibility that the regulator could issue a contribution notice if there was detriment to a pension scheme as a result of incompetence and recklessness. The Government consulted on adding the effect of an act being materially detrimental to scheme benefits. The consultation document sets out a number of safeguards for using these grounds, such as listing the circumstances under which this alternative approach would be used and a test of material detriment. A good faith test would preclude any test based on material detriment. That said, the proposed removal of the good faith test in situations where a party’s actions have prevented a debt from becoming due has generated considerable comment in the consultation exercise and a number of alternative approaches have been put forward. I shall take away the points made by the noble Lord in our earlier debates and consider them alongside the consultation responses, to ensure that the approach that we put forward in draft regulations in due course is both effective and proportionate. I hope that that will enable to noble Lord to withdraw his amendment.
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Baroness NoakesI am sure that it will be helpful if the Minister takes this away, but I shall probe him on shifting to this test of th…
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Baroness NoakesConservative
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I am sure that it will be helpful if the Minister takes this away, but I shall probe him on shifting to this test of the detrimental effect of a transaction, including what is reasonably foreseeable. I take the already cited example of the payment of a dividend. Last year a company might have been healthy and profitable, paying dividends. It might have engaged in share buy-backs or paid special dividends if it had made a big profit. A year on, however, the credit crunch hits, the market falls away, losses ensue and the company cannot pay a dividend. In the mean time, the employer covenant is significantly weakened. If you look back, it is clear that it could reasonably have been foreseen that the dividend paid when times were good would have a detrimental effect, because resources left the group. When resources leave the group at any point, that has a potential detrimental effect on the pension scheme. One comes back to the question of what is reasonably foreseeable and to what extent hindsight will be used. If we go back a year, some companies—for example, building companies—predicted that the housing market would go under because it had been so frothy for such a long time. I do not think that many people would have predicted the precise set of circumstances involved in the credit crunch and its acceleration, but many people predicted that the good times for building companies and commercial property companies would come to an end. Therefore, on one reading it is entirely foreseeable, and reasonably so, that payments of special dividends or share buy-backs would have a detrimental effect given the ordinary course of a cycle. We should remember that we have not abolished cycles. Whatever the Chancellor used to try to pretend that he had done, he has not abolished cycles, and we are seeing the effect of it at the moment. I am concerned that, when analysed with the benefit of hindsight—and not very much hindsight, as it happens—ordinary transactions could be seen to have had the reasonably foreseeable consequence of having a material detrimental impact on a pension scheme. Those issues are causing people a lot of concern. I do not think that the Minister has yet addressed that. There seems to be an assertion that dividends will not be a problem. However, dividends are the biggest example of a transaction in the corporate year of significant resources leaving the group through a positive decision of the directors. As I mentioned, special dividends might be paid and capital might be returned. There might be share buy-backs and the repayment of unsubordinated debt—all things that appear to be normal in the circumstances of the time. However, you do not have to roll forward for long to see what the impact will be. The Minister has not explained what impact the Government think these new regulations will have on ordinary transactions. I should be grateful to hear his comments.
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Lord McKenzie of LutonI shall try to help the Committee. The important thing to bear in mind is that it is not envisaged that any of the test…
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Lord McKenzie of LutonLabour
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I shall try to help the Committee. The important thing to bear in mind is that it is not envisaged that any of the tests will be ones of hindsight. The tests will be applied in the circumstances of the scheme and the employer at the time of the act. Therefore, when the powers are considered, it will be crucial to understand what was known, or should have been known, at the time the act was undertaken and at the time the dividend was declared. I am always cautious about putting on the record off-the-cuff remarks that somebody might point to as establishing precedent. However, it would be difficult to blame people where the economic climate changed after the directors of a company had declared a dividend that was based on the current and projected financial situation of the company and which took account of the scheme covenant. As I say, it is not a hindsight test. That should cover these concerns.
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Baroness NoakesI shall explain myself again. I think that hindsight will inevitably be used because it is difficult to escape from it…
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Baroness NoakesConservative
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I shall explain myself again. I think that hindsight will inevitably be used because it is difficult to escape from it and place yourself entirely in contemporaneous circumstances. When looking at what is reasonably foreseeable, people judge things by what has actually happened. I go back to the example that I gave where it could have been foreseen—and many people would have foreseen—that certain markets would deteriorate over a relatively short timescale. There is not necessarily agreement that the timescale will be the following 12 months or the following two years, but it is reasonably foreseeable that the cycle will result in some financial problems coming over the horizon. You do not need hindsight to get the test of what is reasonably foreseeable; all kinds of things are perfectly reasonably foreseeable and do not require huge feats of imagination. The question is how, as most things are reasonably foreseeable in business life, the Government will differentiate them.
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Lord McKenzie of LutonIt seems to me that, when directors are declaring a dividend, they take account of the current financial circumstances…
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Lord McKenzie of LutonLabour
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It seems to me that, when directors are declaring a dividend, they take account of the current financial circumstances of the company and make their best judgment of the future financial circumstances of the company. They take account of the position of creditors, the cash flow of the company and the covenant to the scheme. A judgment is made, taking account of all those factors, on whether it is prudent to pay a dividend and the level of the dividend. Nothing is totally predictable in life or in business. I am sure that many boards would recognise that, if times are good now, there may be downturns in the future. It seems to me that dividends declared in the context of that total judgment now could not be revisited with the benefit of hindsight just because circumstances arose that were not taken account of and could not reasonably have been foreseen at the time. I do not quite understand why there is such a level of concern. These are judgments—are they not?—that directors have to take every day, quite apart from issues associated with pensions, in declaring dividends for their companies and to their shareholders.
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Baroness NoakesThe Minister is absolutely right that directors have to make such judgments every day, but the judgments that they make…
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Baroness NoakesConservative
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The Minister is absolutely right that directors have to make such judgments every day, but the judgments that they make in year 1 could be completely overturned by economic circumstances. Let us take the example of retail. A year ago, retail businesses might have been having some difficulties, but none of them would have predicted the kind of retail environment in which they are now operating. Many household names are doing profit forecasts and are reporting losses, not just reduced profitability. In a relatively short period, financial circumstances can change. That change in financial circumstances could easily be construed as being something that was foreseeable. The concern is that, while the Minister says that ordinary transactions will not be judged with the benefit of hindsight, particular judgments of what is foreseeable will come to much the same thing. I am not sure that the Minister is really grasping the rapidity with which things move in the commercial world. Linked to that is the question of what directors are going to have to get clearance on. If there is any concern—there is concern because of the way in which the test is shifting through detrimental effect and the way in which the Government want to include a course of actions, rather than single acts or omissions—increasingly directors will be driven by their lawyers to queueing up for clearances all the time, or ordinary transactions will be inhibited. That is the nature of the concern, which I am not sure that the Minister has yet grasped.
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Lord McKenzie of LutonI believe that I understand the point that the noble Baroness has made. A number of the consultation responses suggeste…
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Lord McKenzie of LutonLabour
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I believe that I understand the point that the noble Baroness has made. A number of the consultation responses suggested that the likelihood, as well as the possibility, of detriment might be considered, which may alleviate some of the concerns. We see some attraction in that, but we perhaps need to consider it further. We need to make sure that we do not inhibit the routine judgments that the boards must make about the general finances of their company and the ability to pay dividends. I really do not see why additional concerns should come from these proposals, but I acknowledge that we need to clarify these things as we proceed over the next couple of months, because we do not want to inhibit the routine, normal activity of directors. However, I hang on to the point that the sorts of judgments that have to be made in declaring the dividends of a company relate not only to the pension scheme but to a whole raft of issues concerning the finances and the future of an enterprise. Therefore, I say with respect that there is nothing particularly new about this issue.
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Baroness NoakesI thank the Minister for that. We are not going to progress that aspect much further. Perhaps I may return to another p…
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Baroness NoakesConservative
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I thank the Minister for that. We are not going to progress that aspect much further. Perhaps I may return to another point made by the Minister about the good faith test, which is what the amendment is largely concerned with. He said that the evidential burden in relation to good faith was a problem. Does he, via the regulator, have evidence of where the good faith test has been a problem, or is this a hypothesis that has not proved to be a problem in practice?
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Lord McKenzie of LutonThat is a good question on which I need to refer back. I cannot, off the top of my head, deal with that point, which is…
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Lord McKenzie of LutonLabour
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That is a good question on which I need to refer back. I cannot, off the top of my head, deal with that point, which is not covered in my brief. I accept that the point should be clarified. I shall do that.
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Lord LucasI am encouraged by what the Minister said. The fundamental problem here is that moving from “good faith” to “could not…
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Lord LucasConservative
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I am encouraged by what the Minister said. The fundamental problem here is that moving from “good faith” to “could not reasonably have been foreseen” is a shift. You can take a dividend decision in good faith and make a proper professional judgment by balancing all the things that you know and believe, but, as my noble friend Lady Noakes said, all sorts of horrible things can be reasonably foreseen. One can reasonably foresee, as the Minister can, I think, a time when Conservatives might sit on his Benches. That is not necessarily something that he takes into account in the judgments that he makes on this Bill. I return to what I said earlier about there being a shift towards making pensions a super-creditor. You are raising the stakes and the consequences for directors in the decisions that they take, particularly if in the end the decisions turn out to have disadvantaged pensioners, rather than making sure that they are given a reasonable place in the decision-making in the first place. I am sure that we shall enjoy our discussions on this. I beg leave to withdraw the amendment. Amendment No. 130FB, as an amendment to Amendment No. 130EW, by leave, withdrawn.
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Lord Lucasmoved, as an amendment to Amendment No. 130EW, Amendment No. 130FC:
Speaker
Lord LucasConservative
Quote
moved, as an amendment to Amendment No. 130EW, Amendment No. 130FC:
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Lord McKenzie of LutonThe Government made a statement on 14 April that the principal amendments that they were seeking to make to the regulat…
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Lord McKenzie of LutonLabour
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The Government made a statement on 14 April that the principal amendments that they were seeking to make to the regulator’s anti-avoidance powers would be introduced with effect from 14 April 2008. Retrospective legislation is rarely introduced unless it is for very good reasons. It was crucial that the Government’s announcement of their proposals did not prompt the kind of market behaviour that they are attempting to address before the legislation came into effect. I understand the concern that the Government’s amendment would allow wide-ranging retrospective changes. This is a serious point and I should like to share in more detail how we intend this power to operate. The power operates in accordance with the general law and, in particular, can be exercised only in a way that is compatible with the European Convention on Human Rights. This means that the Government, or future Governments, could make retrospective provision only if they had already announced their plans in the way that we did in April this year. The power, therefore, is not as wide as it might first appear. It provides for retrospection, but only in relation to novel situations of material risk, and consultation would be required before the power could be used to introduce changes. The noble Lord’s amendment would mean that, should it be necessary to amend or correct the original regulations for whatever reason, that could not be done from 14 April 2008, which would create the very risk that, in our view, should be mitigated. That would compromise our ability to ensure that we get the balance right between adequate protection and not hindering legitimate business activity. I hope that that clarifies matters for the noble Lord, because I acknowledge that he is concerned about the issue.
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Baroness NoakesDoes the Minister accept my noble friend’s amendment or not?
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Baroness NoakesConservative
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Does the Minister accept my noble friend’s amendment or not?
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Lord McKenzie of LutonI am not in a position formally to accept the amendment, but I think that I have outlined where we stand on the issue.…
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Lord McKenzie of LutonLabour
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I am not in a position formally to accept the amendment, but I think that I have outlined where we stand on the issue. I do not think that we are apart on what we are trying to achieve but, if the noble Lord feels able to withdraw his amendment, we would look to consider the matter further on Report. We need to make it clear where we are; I do not think that we have a difference of view as to where we should be.
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Lord LucasI am grateful for that reply. Yes, we will need to explore the matter a bit. The noble Lord says that he wants to keep…
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Lord LucasConservative
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I am grateful for that reply. Yes, we will need to explore the matter a bit. The noble Lord says that he wants to keep 14 April available as a date to make changes to the regulations if required. I will have to explore with him exactly what sort of changes may be required, but we seem to agree in principle, so I beg leave to withdraw the amendment. Amendment No. 130FC, as an amendment to Amendment No. 130EW, by leave, withdrawn.
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Lord Lucasmoved, as an amendment to Amendment No. 130EW, Amendment No. 130FD:
Speaker
Lord LucasConservative
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moved, as an amendment to Amendment No. 130EW, Amendment No. 130FD:
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Lord McKenzie of LutonClearance is the voluntary process for obtaining from the Pensions Regulator a clearance statement, which gives an assu…
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Lord McKenzie of LutonLabour
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Clearance is the voluntary process for obtaining from the Pensions Regulator a clearance statement, which gives an assurance that the regulator will not use its anti-avoidance powers in relation to the event in the application. That assurance would remain in place but, quite properly, the regulator would not be bound by such a statement if the circumstances were materially different from the content of the application. There are already safeguards in Sections 42 and 46 of the Pensions Act 2004, and I can assure the noble Lord that we have no plans to change the clearance process. I agree with the implication of the noble Lord’s amendment that clearance has been a successful process. It has been a key element in providing clarity and certainty for the industry. It has enabled the delivery of good regulation, with minimum intervention and use of powers, as well as the promotion of good behaviour and practice. The regulator has operated this system effectively since its inception, and has received positive feedback from its industry stakeholders. There is no intention to change that. I trust that the noble Lord takes reassurance from that expressed intent. The amendment may inadvertently endanger that element of legislation. It gives new conditions under which a clearance statement would fall away or not bind the regulator, different from those conditions already set out in the 2004 Act. Adding new conditions that would apply only to those provisions newly inserted by regulations made under the power could create confusion. In addition, given that under the amendment the protection of clearance will stand where there is material inaccuracy in the information submitted, and will fall away only when there is some form of intent behind the inaccuracy, the purpose of clearance is significantly undermined. In terms of behavioural impact, the amendment may discourage diligence by the applicant in providing information, leading to further time-consuming investigations by the regulator and costs to business. I reassure the noble Lord as strongly as I can that we need to make it as clear as possible that clearance given on the basis of full and proper facts cannot be reopened; that is sacrosanct.
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Lord LucasI am delighted to hear that. I accept the Minister’s criticism of the wording of my amendment. I suspect I shall still…
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Lord LucasConservative
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I am delighted to hear that. I accept the Minister’s criticism of the wording of my amendment. I suspect I shall still argue that the correct amendment should find its way into the Bill. This is a fundamental part of the way in which the system works and should not be attacked under any circumstances by secondary legislation. Again, I have several months in which to argue that with the Government. I beg leave to withdraw the amendment. Amendment No. 130FD, as an amendment to Amendment No. 130EW, by leave, withdrawn.
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Lord Lucasmoved, as an amendment to Amendment No. 130EW, Amendment No. 130FE:
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Lord LucasConservative
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moved, as an amendment to Amendment No. 130EW, Amendment No. 130FE:
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Baroness NoakesThe Minister already has referred to fair value in terms that I simply have not understood. All kinds of transactions a…
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Baroness NoakesConservative
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The Minister already has referred to fair value in terms that I simply have not understood. All kinds of transactions are done for fair value and they should be judged at that time. But the Minister has suggested that they have to be judged by reference to some later events and circumstances. Lots of circumstances have been put to us. For example, a group of companies may buy a business and merge it with an existing company with a defined benefit scheme. The transaction is for fair value, but it does not work out. Somehow, with the benefit of hindsight, we come back to seeing that it has had a detrimental impact. If the new business had not been merged with the defined benefit scheme business, the covenant would not have been weakened. The Minister will know that lots of mergers fail for all kinds of reasons, so this is quite a significant business risk. But the original transaction of putting the businesses together is a fair value transaction; that is, buying the other business and putting them together. The concern is that these sorts of transactions will fall foul of the provision that is coming up. It is important for the Minister to be more explicit about the problems that the Government have with fair value transactions, because he has not been unequivocal about them to date.
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Lord McKenzie of LutonAgain, I appreciate the concern of Members of the Committee that I should make clear our intentions under these proposa…
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Lord McKenzie of LutonLabour
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Again, I appreciate the concern of Members of the Committee that I should make clear our intentions under these proposals. It is not the Government’s intention that a transaction whereby a person purchases assets or securities at fair value would normally trigger the regulator’s use of its anti-avoidance powers, provided that as part of the transaction the pension scheme was properly considered and adequately addressed. The fact that a person had purchased assets or securities at fair value would not alone necessarily provide the assurances needed. That would be only the first step in ensuring capital was available to mitigate the risks to the scheme; it does not of itself get the capital to the scheme. Earlier, the noble Lord quoted my comments from Monday. Normal arm’s-length, fair value transactions should swap an asset for cash or another asset and therefore have nil effect on scheme security; that is, there would be no detriment, no type A event, as defined by the regulator’s guidance. However, the noble Lord’s amendment would turn this on its head and make it a defence. The regulator is not in the business of arguing about whether something is fair value; that is a different area of law. The regulator would look at the effect on the scheme. Current guidance from the regulator states that normal commercial transactions, at arm’s length and fair value, would not be caught by the legislation, and corporates should be able to go about normal business. I assure the noble Lord that normal, arm’s-length, fair value transactions that swap an asset for cash or another asset and have, or are likely to have, no materially detrimental effect on scheme security, are not a target of the regulator’s activity. However, I draw attention to the fundamental issue of the mitigation of material risks to the security of scheme members’ benefits, to the Pension Protection Fund and to those responsible employers who pay the Pension Protection Fund’s levy. Current powers enable the regulator to take action where, for example, business and asset sales from the employer or the wider employer group are realised, particularly where the transaction is not at arm’s length or fair value, or the sale proceeds are not retained; or where part of the operating business is sold at fair value for the assets, but all the pension scheme liabilities are transferred to a weaker covenant with the sold part of the company. Therefore, in a situation where companies from a group are sold, the regulator’s powers currently are—and need to remain—such that they permit action if pensions liabilities were avoided through the sale. The noble Lord’s amendment would change this and make fair value a defence. I do not think that that was the intent. This would place the regulator in the inappropriate position of arguing about whether something was fair value or not. The regulator’s proper focus should be on the effect on the scheme. I hope that I have clarified the issue.
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Baroness NoakesI return to my example of a fair value transaction coming into the group, followed by a merger, followed by the failure…
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Baroness NoakesConservative
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I return to my example of a fair value transaction coming into the group, followed by a merger, followed by the failure of that merger. The Minister talked about assets leaving the group, about sales and mitigation. This is a different situation. I am trying to tease out the impact of that type of fair value transaction.
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Lord McKenzie of LutonIf the merger was undertaken at fair value, taking account of the protection of the scheme and the covenant to the sche…
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Lord McKenzie of LutonLabour
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If the merger was undertaken at fair value, taking account of the protection of the scheme and the covenant to the scheme, and the merger subsequently failed, it is difficult to see how that failure could be taken into account as part of the judgment on the original merger. When these transactions take place, as long as the position of the scheme is considered and properly protected, the fact that the beneficial effect conceived for the merger does not result should not be the subject of action by the regulator. We have to look at what happens when the merger is put together. The fact that subsequently it may fail is a separate issue.
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Baroness NoakesI agree with the Minister that it should not be the subject of regulatory action. My question is whether the new powers…
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Baroness NoakesConservative
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I agree with the Minister that it should not be the subject of regulatory action. My question is whether the new powers will allow the regulator to go for that sort of transaction.
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Lord McKenzie of LutonI think not. However, we will put this on the list of things to clarify over the next couple of months.
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Lord McKenzie of LutonLabour
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I think not. However, we will put this on the list of things to clarify over the next couple of months.
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Lord LucasAgain, I am grateful for that answer. It seems that these sorts of transactions will have to go for clearance. When you…
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Lord LucasConservative
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Again, I am grateful for that answer. It seems that these sorts of transactions will have to go for clearance. When you swap a business for cash, you are getting into the situation that the noble Lord, Lord Oakeshott, described in relation to buy-out schemes. That involves a substantial reduction in security, and therefore has to be washed through the Pensions Regulator. That is a sustainable position if it is understood. I beg leave to withdraw the amendment. Amendment No. 130FE, as an amendment to Amendment No. 130EW, by leave, withdrawn. [Amendment No. 130FF, as an amendment to Amendment No. 130EW, not moved.]
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Lord TunnicliffeI remind noble Lords that the Committee stage of the Pensions Bill will resume tomorrow. I beg to move that the House d…
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Lord TunnicliffeLabour
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I remind noble Lords that the Committee stage of the Pensions Bill will resume tomorrow. I beg to move that the House do now resume. Moved accordingly, and, on Question, Motion agreed to. House resumed.
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EnactedPensions Act 2008