Report stage in the Lords
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Lord McKenzie of LutonLabour- Quote
- moved Amendment No. 77C:
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Baroness NoakesConservative- Quote
- My Lords, I thank the Minister for his comprehensive introduction to this group of amendments. I have great pleasure in supporting Amendment No. 77C and the removal of Clause 123. My noble friend Lord Lucas and I have tabled a number of amendments to the other amendments in the group. We shall not come to them just yet, but I will make some opening remarks on this area. The Minister will recall that we spent several days in July debating the Government’s amendment which inserted Clause 123. He will doubtless recall that we were critical of the Government for introducing such a wide power on the back of what we saw as a flawed consultation in the sense that there was no evidence that the Government were listening to any of the responses that they had received. There was no regulatory impact assessment, and there was wide concern among business groups that the Government simply did not understand the practical impact of their proposals. As the Minister will recall, we asked him not to press his amendment so as to enable proper negotiations during the summer. It is, however, a surprise that the Government have concluded that the amendment that they forced through in the summer, which is now Clause 123, is to be removed from the Bill. We say amen to that. I pay tribute to the Minister, his colleagues in the department and the staff of the DWP for being prepared to reopen the issues and engage in constructive dialogue with the people who have put the concerns to them. While the legislation raises issues that we will wish to probe in the remainder of our session, we are much happier with its construction—there is not the wide Henry VIII power, but a proper employer defence. We have the substance now in primary legislation; indeed, we even have a draft statutory code of practice, for which I thank the Minister. I shall not say anything further at this stage other than to thank the Minister for agreeing that we can come back at Third Reading if any points arise. The Minister will be aware that, because of late tabling, we received comments from the interested parties at a very late stage, and we cannot be sure that we have tabled amendments which allow us to tease out all the matters. I welcome the amendment.
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Lord Oakeshott of Seagrove BayNon-affiliated- Quote
- My Lords, from these Benches, I welcome the amendment and thank the Minister for his comprehensive introduction. We, too, are pleased that the Government have got over their macho moment when they were pushing that amendment in July. Wiser counsels have prevailed. I am glad to see that there has been extensive and thorough consultation during the summer. As I listened to the details of what the Minister said, only one question arose: is he sure that the Pensions Regulator does not feel unduly fettered in its activity by all these changes? In general, however, it is clear that great thought has been given to the matter, and we are very pleased that much more properly thought through and consulted on rules are coming forward.
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Lord LucasConservative- Quote
- My Lords, I add to the chorus by saying that I am delighted by what the Government have done—it is great progress. Although I have tabled many detailed amendments, they focus on one matter, which is the code and how secure people can be in the belief that the matters in it are those to which the material detriment test and other aspects of the amendment will apply. Anybody involved in the activities set out in the code, unless they are of criminal intent or do not have their heads screwed on, should know that they should seek clearance for them, or they should read the regulations extremely carefully and make sure that they do everything by the book. But if it is possible to go outside the code and trespass on other areas of ordinary commercial life or other sorts of transactions, the protections offered by this structure become much less relevant—all the defence that is there of having gone through the proper processes to make sure that you have not caused detriment. If you thought that this was not a matter that would ever come under these provisions you would not have done that. Your records will not be in place and you will be in deep trouble. As the Minister said, you cannot fetter the regulator's discretion. It will be a big matter how individuals view this and how they are advised to view this; whether they are told by their lawyers, “Look, this is something that is reasonably safe and I would not worry about it too much”, or “You are doing something every day that might attack the pension fund” and you will have to get clearance every time you breathe out, near enough. The voices that are coming from the lawyers are going in that direction. The Minister says that he expects there to be a peak in applications to the regulator soon after these provisions come into force and that with experience they will relatively quickly die away, as they did when these provisions were first introduced in the previous Act. I hope that that is right. To a large extent, we trust the judgment of the Minister and his officials that they have things right in that regard and that is the way that things will actually work. But the Minister needs to say more about the circumstances under which he sees the regulator going outside the code to use the powers that are in this amendment for something that does not fall within the sort of transaction set out in the code. There is a considerable worry out there, particularly among those people who are involved in trying to sort out companies in difficulties who have to move fast and take rough and ready decisions to make things work. They have to take risks, although they often do not benefit enormously from doing so. They are not in there to make a great capital gain for themselves but as hired hands to put out the fire. They will be taking enormous risks under the terms of this amendment, and it comes down to, will the regulator stick within the code or start running outside? If the Minister could give us as much comfort as he can that he cannot see circumstances where the regulator would need to go outside the code, that would be a great help in calming people’s fears. There is a worry that the regulator might choose an unexpected opportunity—perhaps not that serious an opportunity—to solve a particular problem by saying, “I have seen the code but I don't feel like being bound by it in these circumstances”.
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- Lord McKenzie of LutonLabour
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- My Lords, I will respond briefly to those comments. Amendments are about to be moved to the amendment, but I should like to say that I am grateful for the support and encouragement from all three noble Lords who have spoken. I add my thanks to the staff of the DWP, who worked extensively and diligently on moving from where we are. The noble Lord, Lord Oakeshott, called it our macho moment. I am not sure that I would fully subscribe to that. However, they have done a substantial job but have engaged fully with stakeholders, which has been the key to moving this forward. The noble Lord, Lord Lucas, posed a very real point about what comfort there is in the regulator's code. The regulator's code, as I said, has evidential value and the regulator must always have regard to it, although the regulator would always and must act on a case-by-case basis. In the Government’s view, it would be difficult to argue that the regulator could reasonably act beyond the code unless there were frankly exceptional circumstances. However, the regulator tells us that it is unable to think of any circumstances in which it would want to act outside the code. I hope that that is at least a degree of reassurance to the noble Lord. On Question, amendment agreed to.
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- Lord Oakeshott of Seagrove BayNon-affiliated
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- moved Amendment No. 78:
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Baroness Thomas of WinchesterLiberal Democrat- Quote
- My Lords, I have only a small contribution to add to what my noble friend has said. He is the City expert; there are many others in this House, and I am not one at all. As a lay person, I have been surprised that the FSA does not appear to have any powers to protect these company pension schemes. Some of the recent newspaper reports may not be accurate when they say that some foreign owned-companies in this country have raided pension schemes before being declared bankrupt, but it makes one wonder whether the FSA powers in this area are as strong as they should be. Taxpayers should at least know that somebody is looking out for their best interests to prevent compensation being paid out from the Pension Protection Fund. I would welcome the Minister’s reassurance on this point.
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Lord SkelmersdaleConservative- Quote
- My Lords, I would be surprised if most of the points of the noble Lord, Lord Oakeshott, were not covered by Section 146(1) of the 2004 Act: “Regulations may provide that where the Board is satisfied that an eligible scheme was not such a scheme throughout such period as may be prescribed, the Board must refuse to assume responsibility for the scheme under this Chapter”. That would clearly cover the point in part. I also note that there is a debate on the economy, to which the Minister will no doubt—no, perhaps he will not be contributing to that debate on Monday. I am sure that regulation by the FSA will figure somewhat strongly in it.
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- Lord McKenzie of LutonLabour
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- My Lords, the amendment of the noble Lord, Lord Oakeshott, responds to a keenly felt issue in our current economic situation, and gives me the opportunity to discuss the important issues he raised in relation to the PPF and the FSA. It is important that we ensure clarity regarding regulatory roles and consistency in approach. I am pleased to say that the current arrangements provide a flexible and robust framework for protection of the PPF. I agree with the broad intention behind the amendment. When the Government established the PPF under the 2004 Act we also created the Pensions Regulator and gave it an explicit objective to protect the PPF. We saw then, along with all sides of this House, that the PPF had to be protected adequately. Although I can see the intention behind the amendment, I do not agree that it is appropriate. It would duplicate the existing arrangements, which at worst could undermine the effectiveness of our regulatory regime. The Government work closely with business to develop regulations that complement and do not complicate the way people work to keep the UK competitive, mindful of potential regulatory burdens. Well targeted and proportionate regulation can deliver effective outcomes for the market, scheme members and the PPF. This amendment is neither well targeted nor proportionate: it would simply increase regulation to no obvious benefit. The Pensions Regulator is the regulator of all work-based schemes, including those within the financial sector that are sponsored by FSA-regulated firms. It has an express duty to protect the PPF, and in so doing provides a holistic and consistent approach to minimising the risk of situations arising which may lead to compensation becoming due. The regulator’s approach to minimising the risk to the PPF through regulating scheme funding is designed to be flexible according to different circumstances. The regulator considers wider aspects, including the strength of the employer that is responsible for supporting the scheme. The FSA’s statutory objectives relate to the regulation of firms in the finance sector and the protection of consumers of those firms’ products and services. It does not consider the firms’ pension schemes from the perspective of the schemes’ funding status, or the impact on scheme members. The FSA has rules for taking into account the impact of a firm’s pension obligation on the prudential position of the regulated firm. Therefore, the FSA’s focus is not the pension scheme itself and its assets and liabilities, but rather the firm’s funding obligations to the pension scheme. There are well defined and adequate regulatory arrangements in place between the FSA and the Pensions Regulator, and they work closely together on the supervision of pensions according to their statutory functions. Indeed, the noble Lord asked for such co-operation. These arrangements have been the subject of a recent independent review led by Paul Thornton. The review, which was completed in June last year, found that the existing framework was working well. Measures were recommended, however, to further strengthen this liaison, which the Government accepted. I am pleased to say that the two bodies have undertaken a programme of well co-ordinated activity to implement the review’s proposals. For example, there are regular meetings at official level on areas of mutual interest, including management of risks to DC. The amendment would also mean that financial capability was included, alongside regular bilateral engagement at chief executive level. This is underpinned by a Memorandum of Understanding. This joint working has resulted in a number of positive outcomes, including publication of a joint guide on the regulation of workplace contract-based schemes. An FSA-regulated firm would be treated differently from those schemes sponsored by companies in other sectors. It is also worth noting that this amendment would mean that schemes sponsored by an FSA-regulated firm would be treated differently from those schemes sponsored by companies in other sectors. My apologies; that note is nonsense. There is no obvious reason to single out banks and financial institutions, but not other sponsors with industry representatives, to clarify the respective roles and responsibilities, and similar schemes. Schemes should have equal protection in law, no matter the sector, particularly in those areas where the regulator and the FSA work together. In considering the additional duty for the FSA in relation to the financial sector, we would also need to consider the duty in respect of other regulated industries and other sectors. The airline industry and others are subject to economic regulation and have significant pension schemes, as do other sectors, regardless of the status of regulation to which they are subject. The amendment would therefore lead to an increase in regulatory burden and to inconsistent and incoherent arrangements in respect of other industries—for example, regulation of pension schemes in respect of the protection afforded to the PPF. The Pensions Regulator is the sole, proactive, risk-based protector of the PPF. I hope that I have given the noble Lord sufficient comfort that the current arrangement is the right one and should not be altered, notwithstanding the issues concerning the banking sector in particular at the moment. On Lehman Brothers, the scheme is undergoing assessment for the PPF, which involves calculating the extent to which scheme assets meet liabilities. A PPF valuation approach will give different numbers from, say, a full buyout. Obviously, there are issues of confidentiality here, but we do not recognise the £100 million figure. I hope that has been helpful to the noble Lord. We ought to have clarity on who is regulating who but, clearly, there is a responsibility for the FSA, particularly in relation to those firms that are engaged in pension provision.
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- Lord Oakeshott of Seagrove BayNon-affiliated
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- My Lords, I thank noble Lords who have spoken, and I thank the Minister for that very full reply. In particular, I hope that the Pensions Regulator will take full note that it is the sole, proactive, risk-based protector, as the Minister said. I would be interested to see what he called the Memorandum of Understanding on how the FSA and the Pensions Regulator work closely together. That was reassuring, but I would like to see it. On the argument that there is no reason to single out banks and the financial sector for special treatment—the noble Lord talked about airlines—we have just had to nationalise quite large parts of that sector, and if the noble Lord thinks about it, he might realise that there is rather more risk here and perhaps that special attention on the part of the Pensions Regulator would be necessary. With that, I beg leave to withdraw the amendment. Amendment, by leave, withdrawn.
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- Lord McKenzie of LutonLabour
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- moved Amendment No. 78A:
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- Lord McKenzie of LutonLabour
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- moved Amendment No. 78B:
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- Lord LucasConservative
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- moved, as an amendment to Amendment No. 78B, Amendment No. 78C:
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- Baroness NoakesConservative
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- My Lords, I have two amendments in this group, which ask precisely the same question.
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- Lord McKenzie of LutonLabour
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- My Lords, I recognise that a number of the amendments in this group seek to build greater objectivity into the material detriment test. Therefore, I shall speak to Amendments Nos. 78C, 78D, 78E, 78F and 78AH. I understand the concerns. The material detriment test is broader than the current grounds for contribution notices, which are based on evidence of intent. That is why we have built appropriate targeting measures into the proposed legislation. Our amendments have refined the application of the material detriment test. For example, we will require the regulator to issue a code of practice setting out when it expects to apply the test. However, we believe that the regulator’s discretion is the most appropriate basis for this test, not just for the Government but for the industry and trustees. Granting discretion is not principally about allowing the regulator latitude; it is about creating a system that functions effectively for all. Amendments Nos. 78C and 78D would mean that the regulator could not be of the opinion that the material detriment test had been met, or that certain matters were relevant in considering an issue. Amendments Nos. 78E, 78F and 78AH would remove the regulator’s discretion when deciding what factors it must have regard to when deciding whether the material detriment test was met. The consequence of these amendments would be that the determination of these issues would, therefore, move into the arena of the court. Precedent would have to be established through case law by the courts. This would be costly and time-consuming for employers and the regulator. Currently, the regulator can arrive at decisions more quickly and cost-effectively, and the regulated community can build up an understanding of the regulator’s approach. These amendments would, in effect, result in making the regulator something more akin to a prosecuting examiner and would severely limit the effectiveness of the material detriment test and its influence on behaviours in the market. It is also worth stressing that this flexibility is not just for the benefit of trustees; it works in the employers’ favour, and experience has demonstrated this in practice. We understand from the regulator that there are specific instances where employers have been able to draw further factors to the regulator’s attention and have affected the outcome of the case. In certain situations, the regulator concluded that action was not appropriate. Indeed, there are a number of instances in legislation where it is for the regulator to decide what is relevant and where the regulator’s opinion is the basis for decision-making. These provisions work well. Experience has shown that employers, trustees and others have been able to build up reliable experience of what the regulator is likely to view as relevant. I understand noble Lords’ desire to improve the objectivity of decision-making, but I do not believe that it is their intention to replace the current approach with a protracted and expensive process whereby, for example, every clearance application would need to be considered by a court. That would be impractical and unnecessary. The current approach is working well and, as I said earlier, we have introduced further targeting with regard to material detriment. I hope that that has reassured both noble Lords and that they will withdraw their amendments.
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- Lord LucasConservative
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- My Lords, this serves to illustrate what I said when we were talking about the Government’s amendments—that we are talking about convenience, rather than justice. It may well suit those who indulge in the sort of transactions that are described in the code, whereby convenience should be placed above justice, because they will be able to negotiate in those circumstances and know the rules that they are playing by. However, we should not contemplate letting out on to the wider public this rule that the decision on what constitutes material detriment should be decided by someone against people for whom there would be almost no effective right of appeal. Keeping these questions within the bounds of the code becomes very important when we have allowed such latitude, because we believe that those bounds will be kept to. It will be important that going beyond the code will happen only in the most exceptional circumstances and that we should not let that grow up as a casual operation because we are allowing the regulator a position that is not appropriate in the wider forum. I beg leave to withdraw the amendment. Amendment No. 78C, as an amendment to Amendment No. 78B, by leave, withdrawn. [Amendment No. 78D, as an amendment to Amendment No. 78B, not moved.]
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- Baroness NoakesConservative
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- moved, as an amendment to Amendment No. 78B, Amendment No. 78DA:
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- Lord McKenzie of LutonLabour
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- My Lords, I hope that I can partially satisfy the noble Baroness’s inquiry. She emphasised the importance of there being a clear understanding among employers, trustees, regulators and others of the meaning of the key concepts of “materiality” and “likelihood”. I very much agree. I share her concern that these issues should be clear and I know that the regulator appreciates the importance of clarity in these matters. The regulator’s clearance guidance currently deals with materiality. For example, paragraphs 46 and 47 set out how employers and trustees should decide whether a weakening of employer covenant is material, considering issues such as the amount by which the covenant is weakened, the size of the employer after the event, the size of the pension scheme and the size of the deficit in the pension scheme. I know that industry stakeholders find this guidance helpful. However, I am also aware that the regulator has stated that it will need to update and add to its clearance guidance in relation to the new test and to the defence in order to produce clarity in respect of the concepts of “materiality” and “likelihood”. As I said, we appreciate that the clearance guidance will need to be reviewed and amended. The regulator has undertaken to do that, and it will address, in particular, the issue of “likelihood”, which is not currently covered in the guidance. If the noble Baroness will permit me, I shall refrain from offering my own homespun view on those concepts. There must be a proper process and there has to be clarity, and I believe that that is something in which the regulator will engage.
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- Baroness NoakesConservative
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- My Lords, that response is entirely satisfactory. If the regulator is going to ensure that his guidance on materiality will be updated to reflect the material detriment test and will cover likelihood, that is what my amendment, in effect, asks for. I beg leave to withdraw the amendment. Amendment No. 78DA, as an amendment to Amendment No. 78B, by leave, withdrawn.
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- Baroness NoakesConservative
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- moved, as an amendment to Amendment No. 78B, Amendment No. 78DB:
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- Lord McKenzie of LutonLabour
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- My Lords, these amendments remove the regulator’s ability to determine the relevant time for a failure to act that lasted over a period of time and for a series of acts. The first amendment states that in relation to a failure to act that continued for a period, the relevant time should be at the end of that period, but that would not work where that period had not come to an end. That could open up a loophole, in that the regulator would be prevented from issuing a contribution notice in an otherwise appropriate case, simply because the person was party to a failure to act, and that failure was ongoing and potentially never ending. The second amendment would make it unclear how to determine relevant time at all in relation to a series of acts or failures, which would create new uncertainty for business. I consider that it is right for the regulator to have discretion here, but its public law duties to be reasonable mean that it can take into account representations about the meaning of relevant time in particular cases. The regulator remains available to discuss whether transactions should come for clearance and will be updating its clearance guidance in the light of these amendments. The regulator already has discretion under Section 39(4)(b)(ii) of the 2004 Act to determine the relevant time for a failure to act that continues over a period, and the relevant time here is used to calculate the debt under Section 75 of the 1995 Act, which is the upper limit of the amount of the contribution notice. A series of acts or failures is also likely to continue over a period and therefore there needs to be a similar method of calculation, but it is particularly to address the issue that if we are talking about failures to act, rather than acts that are positive events, they could continue unabated and there would never be a trigger for the relevant time. That is why we believe it is important, subject to the bounds of what is reasonable and the broader public duties imposed on the regulator, to have that discretion.
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- Baroness NoakesConservative
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- My Lords, this may be a convenient time to probe the question of acting reasonably, which I know will come up rather a lot—indeed, the Minister has already referred to it. As I understand it, the concept of reasonableness relates to the duties of the regulator, which in turn relate to protecting pensions and the interests of the PPF—I forget the exact formulation. It is not the duty of the regulator to protect the interests of employers, for example. The question of acting reasonably therefore needs to be construed in the context of the regulator’s own duties and not in the context of broad fairness or equity; that is not the concept in administrative law. I should like the Minister to say a little about what he means by “reasonably”.
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- Lord McKenzie of LutonLabour
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- My Lords, the noble Baroness makes an interesting and challenging point. In the application of the code that we discussed earlier, for example, it would be incumbent on the regulator to act reasonably. I think that the noble Baroness has bowled a bit of a fast ball, so perhaps I may reflect a little on a fuller answer to the question that she raises, which I think is a fair one.
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- Baroness NoakesConservative
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- My Lords, I look forward to continuing this discussion with the Minister, perhaps at Third Reading. I take his point that, if an act is continuing, there has to be a time. I was not suggesting that the regulator could never act; I was suggesting that the regulator should not be able to cherry pick a time. That takes us back to whether the regulator is acting reasonably. Perhaps it is in that context that we should resume our discussions. I beg leave to withdraw the amendment. Amendment No. 78DB, as an amendment to Amendment No. 78B, by leave, withdrawn. [Amendments Nos. 78E and 78F, as amendments to Amendment No. 78B, not moved.]
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- Baroness NoakesConservative
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- moved, as an amendment to Amendment No. 78B, Amendment No. 78FA:
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- Lord McKenzie of LutonLabour
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- My Lords, the noble Baroness seeks clarification that the regulator will consider the guidance available to a party at the time of an act if considering a contribution notice on grounds of material detriment in respect of that act. I agree that the parties should have certainty that changes to the regulator’s guidance that take effect after a party has taken a particular decision cannot be considered by the regulator if it examines that decision. The regulator is already bound by public law obligations to have regard to all relevant considerations when determining whether or not to issue a contribution notice on grounds of material detriment. This would include any guidance that was in effect at the time and would not include any guidance that was not in effect at the time. I hope that, in a roundabout way, this addresses the point that the noble Baroness is stressing. The proposition is that someone looked at the guidance at the time and decided that they did not need to apply for clearance because they were safe in the terms of that guidance. I should have thought that that provided the protections that the employer or person would need. Again, I should like to think a little more about that to ensure that the specific point raised by the noble Baroness is covered. I understand the import of it. If somebody has refrained from going for a clearance that would have been available to them relying on the guidance, I am then trying to see the circumstances in which that could give rise to a contribution notice, given the filters that are there, including references in the amendment to “have regard to” and reasonableness. I should have thought that that would offer the appropriate protection. If the noble Baroness will permit me, I will reflect again on that because these are intricate questions and I do not want to mislead as I know people are relying on what we are placing on the record.
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- Baroness NoakesConservative
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- My Lords, I thank the Minister for his response, and am happy to proceed on the basis that he has suggested. I hope that between now and Report we can sort this out, and if necessary retable it for a better statement to be made at the Dispatch Box. I beg leave to withdraw the amendment. Amendment No. 78F, as an amendment to Amendment No. 78B, by leave, withdrawn.
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- Lord LucasConservative
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- moved, as an amendment to Amendment No. 78B, Amendment No. 78G:
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- Lord McKenzie of LutonLabour
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- My Lords, when we discussed the regulator’s powers in Committee, I made a commitment to consider what more could be put in the Bill. This undertaking has been met, but it is necessary to have some residual regulation-making powers, which the noble Lord’s amendment would remove. These regulation-making powers are proposed so that the Government can adapt legislation to new risks and review in the light of operational experience. However, the Government do not intend to use the power to reframe the statutory defence. These are residual powers taken to deal with unforeseen circumstances. This is an important safeguard in a fast-evolving market. Business is also served as the Government would be able to amend the factors or the defence if they had unforeseen effects and protect PPF levy payers from risks . The regulator will act within the boundaries set out in the Bill. Should these be found to be inappropriate at a later time, or to not cover all risks, the regulator must follow due process to change them by affirmative procedure. The significant refinements we developed in consultation with some key representative stakeholders over the summer fully explored the proposed legislation including these powers, and the balance was considered to be right. I understand the noble Lord’s concern in our earlier discussions about retrospection and whether clearance statements could be overturned as a result of these amendments. Perhaps I can reassure him on the following points. Should any changes be made as a result of the powers, they would not have retrospective effect; no act that occurred before any changes came into force would be considered under the changes; no clearance application would be reopened as a result of the changes to the legislation. I hope that those specific assurances will satisfy the noble Lord.
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- Lord LucasConservative
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- My Lords, I think that that comes within the general rubric of, “Let’s hope it goes well”. I just leave with the Minister the thought that the power in line 54 seems to me to be entirely contained within the power in line 89. If that is not so, I should like to know what extra it is doing, but perhaps not now. I beg leave to withdraw the amendment. Amendment No. 78G, as an amendment to Amendment No. 78B, by leave, withdrawn. [Amendments Nos. 78H and 78J, as amendments to Amendment No. 78B, not moved.]
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- Lord LucasConservative
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- moved, as an amendment to Amendment No. 78B, Amendment No. 78K:
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- Lord McKenzie of LutonLabour
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- My Lords, I did not quite hear what the noble Lord said.
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- Lord LucasConservative
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- My Lords, the groups led by Amendments Nos. 78R and 78S seem to me to be entirely composed of consequential amendments that should have been tacked on to this group. If the noble Lord has found something wonderful to say about them, he need only wave at me and I will give him a chance to do so by moving them. The amendments propose various ways in which the defence may be improved. It seems odd that the defence should not be triggered until a warning notice has been issued. By that stage, the procedure is already well advanced and the person subject to it may feel themselves to be on the back foot. The next question is whether the defence covers only contribution notices based on the material detriment test or whether it will cover also those issued under Section 38(5)(ii) of the Pensions Act 2004 where, again, the Government do not seem to have applied the new defence to those contribution notices. Other than that, we are dealing again with the general question of whether it is fair to place on an individual the requirement that he has documented his past in quite the detail required to comply to make the defence viable. If the question that arises is within the code as currently drafted, I do not see the problem. It arises only with matters outside. I can happily leave that, because it is a matter where I am already taking things on trust. I beg to move.
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- Baroness NoakesConservative
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- My Lords, I shall speak to my Amendment No. 78PA in the group, which is a probing amendment to try to tease out how hindsight might be used in the context of the defence. I am aware that subsection (5) of the defence clause refers to prevailing circumstances at the time. Clearly that is quite helpful, but there is considerable concern that people against whom the regulator will use these new powers may have a rather hazy memory about what they did in the past and, indeed, may not have access to papers. That may cause a problem, because the regulator will have absolute clarity about how things have turned out. Let me give an example. A person carrying out a commercial transaction in good faith uses some kind of financial innovation, but not to avoid pension liabilities. Subsequently, that same innovation is used to consciously detrimental effect. To what extent will the original transaction be damned by the later use of a particular technique? My amendment would not eliminate that problem, but it might make the business community more certain about how the regulator will judge the effect of particular circumstances, given that hindsight is a very difficult thing to avoid using when reaching judgments.
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- 21:45
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- Lord McKenzie of LutonLabour
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- My Lords, Amendments Nos. 78K to 78M, 78W and 78PA relate to the statutory defence relating to the new material detriment test for contribution notices. I have already set out in some detail the background, or rationale, for the new test and the defence. I have also discussed the important safeguards that will continue to apply to the use of the second limb for contribution notices and how we are reinforcing the factors that the regulator must consider. Our approach will provide a proportionate level of protection for individuals and others. In this context, the amendments are simply unnecessary, as they would also produce undesirable outcomes for the industry and the regulator. Three key issues relate to Amendment No. 78K, tabled by the noble Lord, Lord Lucas. They would widen the defence so that it applied to the second limb of the existing main purpose test for the use of contribution notices. This would give rise to a disjunct between the test and the defence. The former is based on intent, but the latter would be based on an effect of material detriment. This would be impractical and expensive to operate for the regulator and the industry, and one cannot reasonably apply that defence to the test of intent. They would remove the trigger of the warning notice to the application of the defence, and in doing so take away an important procedural reference point—to which consultees, including the CBI, the BVCA and the APL, were attracted—which permits use of the defence from the outset of the process. The final part of the amendment would set out an objective test for where a contribution notice cannot be issued: that is, the circumstances in which the defence would be successful. It would also remove the reference to the defendant having to show that the conditions for the defence are met. This would be cumbersome, would increase costs and could severely limit the regulator’s function to protect members’ benefits and their PPF. Again on the warning notice, obviously it would be prudent for individuals involved in transactions to seek to ensure that their due diligence was done routinely, as it would be in a transaction that was an integral part of a restructuring. The fact that the warning notice may come later should not preclude that from happening ab initio. I understand that it is important to have a warning notice because there must be a defence against something, and the warning notice would technically be the trigger. I hope that that helps the noble Lord. With regard to Amendment No. 78PA, the noble Baroness has raised the important issue of the potential use of hindsight in relation to decisions made by the regulator. A number of consultees have discussed with us the need to ensure that the regulator cannot make judgments with the benefit of hindsight. We agree that it would be unfair for the regulator to use information that could not have been known at the time. The amendments tabled in my name achieve this in new Section 38B(5) and the legislation clearly refers to, “having regard to all relevant circumstances prevailing at the relevant time”. The effect is that the regulator cannot look at circumstances that arise after the time in question; he can look only at the contemporaneous evidence. If a person was concerned that the regulator’s decision used hindsight, they would be able to challenge that decision through the Pensions Regulator Tribunal. The regulator has already said that it will update its guidance to take account of the new test, particularly the statutory defence, and it will no doubt address this point if necessary. I hope that that has produced clarity in relation to the instance outlined by the noble Baroness. The fact that an instrument or technique subsequently attracted negative comment or connotations would not be visited back on the circumstances of an earlier transaction when it did not colour the judgment about material detriment at the time.
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- 21:45
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- Lord LucasConservative
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- My Lords, I am grateful for that answer. The only problem is that my understanding is that the requirement for the regulator to be reasonable is limited by the regulator’s functions and powers. In other words, the regulator has to be reasonable only in respect of what it is required by statute to do, which is to look out for the interests of the fund and the pensioners. It has no duties imposed on it with respect to other parties such as the company running the fund or, as it were, the company whose pensioners are being looked after, or other parties who might be involved, such as individuals. So the duty of reasonableness does not extend to them. Where the regulator is required to judge whether something is reasonable, that is, of course, an overall reasonableness; but where the regulator might be required to be reasonable, that is a limited protection for a third party, such as an individual, who might find themselves caught up in it. My understanding is that there is little point in their placing reliance on that because the regulator can do what it likes without tripping over unreasonableness; the regulator is not required to be reasonable in respect of functions which it does not have. The Minister was painting a rosy picture. If he wishes to say anything else, I should be delighted; otherwise I may wish to return to that point later.
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- 22:00
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- Lord McKenzie of LutonLabour
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- My Lords, as we are going to rise shortly, perhaps I may write to the noble Lord and the noble Baroness. The position is broader than the noble Lord has outlined and if we get clarity in writing it would be beneficial all round.
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- 22:00
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- Lord LucasConservative
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- My Lords, in that circumstance, I am delighted to withdraw my amendment. Amendment No. 78K, as an amendment to Amendment No. 78B, by leave, withdrawn. [Amendments Nos. 78L and 78M, as amendments to Amendment No. 78B, not moved.]
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- 22:00
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- Baroness NoakesConservative
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- moved, as an amendment to Amendment No. 78B, Amendment No. 78N:
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- 22:00
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- Lord LucasConservative
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- My Lords, my noble friend’s amendment is very important. If the noble Lord has not yet read Black Swan by Nassim Nicholas Taleb, he will enjoy doing so, but the difference between “might” and “is likely to” is an example of the difference between the real world and the world as we construct it in projections. You cannot ask a manager or someone involved in taking decisions to predict the future with accuracy but you can ask them to make reasonable projections—and projections are all about likelihood. That is all that a manager is able to know. He must ask himself, “Knowing what I know at the moment and making assumptions about the future, is this likely to have a detrimental affect?”. That is the limit of what you can ask someone to do. To know whether it might is to say that they can tell what extraordinary and unexpected events might be waiting around the corner to happen. When you are projecting one of these things, you might run one of these tests where you choose all sorts of scenarios, going wide and going short, and you look at all the results that might happen and place various likelihoods on them. You come up with a central band of projections, and that is the band you feel you are likely to fall within—but the “mights” go right out to the wings, to the projections where you make vast profits or vast losses. If you are using the word “might”, you are really saying that almost any transaction of any size might have this effect and you are not discriminating in a way that is reasonable or should be the Government’s aim. I am with my noble friend on the wording of her amendment. Mine is much less significant. It says that if someone has failed to keep the proper paperwork, they should not be penalised if, had they kept the proper paperwork, it would have made no difference to the decision they made.
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- 22:00
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- Lord McKenzie of LutonLabour
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- My Lords, we are dealing with amendments relating to the statutory defence. It is important that the defence is operable for employers and other parties who could be subject to contribution notices, but does not prevent the regulator acting where that is appropriate. Certainty about the meaning of the defence is central to achieving that. The noble Baroness’s amendment would create uncertainty about the meaning of the definitions. Who would judge whether detriment was likely? Uncertainty would not be welcomed by employers who might well feel the need to go to court for certainty, and that would place an impractical burden on the regulator. The requirement in condition A is that, “before becoming a party to the act or failure, P gave due consideration to the extent to which the act or failure might detrimentally affect in a material way the likelihood of accrued scheme benefits being received”. That is a reasonable and appropriate test to make. If one is introducing the concept of “likely detrimentally to affect in a material way”, does that not effectively introduce a third-party judgment to the process? That would not be right. The amendment of the noble Lord, Lord Lucas, raises important issues and I can see that there is a serious question about the level of due diligence. I hope my earlier explanation of the Government’s intention behind the defence has satisfied him on that issue. His amendment would permit a defence on condition A on the basis of a person’s conclusions, regardless of whether they had actually made the inquiries, and done the other acts, that a reasonably diligent person would have made or done in the circumstances. That may produce cost efficiencies for the party, but it would create significant risks for members’ benefits and the PPF if those conclusions turned out to be incorrect. It would also send an inappropriate message to the market about the importance of due diligence. For those reasons, I hope the amendments will be withdrawn. On the issue of dividends, these are not within the circumstances set out in the draft code and would be outside the test for the contribution notice.
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- 22:00
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- Lord Oakeshott of Seagrove BayNon-affiliated
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- My Lords, I have been thinking carefully about what the noble Lord, Lord Lucas, said. Does the Minister agree with me that there is a large difference in Amendment No. 78N between “might detrimentally affect” and “was likely detrimentally to affect”? “Was likely to” almost introduces an element of probability—I would have certainly thought that it was about 50/50. That is a world away from “might”, and I think it goes too far.
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- 22:00
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- Lord McKenzie of LutonLabour
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- My Lords, I think I agree with the noble Lord.
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- Baroness NoakesConservative
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- My Lords, I am grateful for the support from my noble friend Lord Lucas on the difference between “might” and “likely”. We disagree with the noble Lord, Lord Oakeshott; in the business world, it is normal to proceed on the basis of what is likely to happen and not of stress-testing for things that might conceivably happen. Whether or not my alternative formulation is the right one, I am not absolutely sure, but I am very uncomfortable with the use of the “might” formulation. The Minister said that my test introduced uncertainty. I suggest that requiring companies to have to prove material detriment in the context of considering all possible “mights” is imposing a potentially impossible test for people to satisfy in order to establish this defence. The Minister knocked down my example because dividends are not in the draft code, a fact of which I am well aware. However, we all know that the draft code might not be absolutely conclusive. My point was really to draw out how scenario analysis and acts can be put alongside each other and the difference that can be had from analysing from a “might” and a “likelihood” perspective. I am not entirely happy with what the Minister has said, but I should like to consider it carefully because now is not the time to press this any further. On that basis, I beg leave to withdraw the amendment. Amendment No. 78N, as an amendment to Amendment No. 78B, by leave, withdrawn.
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- Baroness NoakesConservative
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- moved, as an amendment to Amendment No. 78B, Amendment No. 78NA:
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- 22:15
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- Lord McKenzie of LutonLabour
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- My Lords, as explained, the purpose of the amendment is to provide that somebody other than the person raising the defence might be the one to mitigate the detriment. However, this is unnecessary. The legislation does not require the person raising the defence to mitigate the detriment; rather, it requires the defendant to ensure that he or she takes reasonable steps to ensure that there is an appropriate mitigation in place. Therefore, if the mitigation is to be undertaken by someone other than the defendant, then the reasonable step the defendant can take is to ensure that there is an appropriate mitigation and that it is in place. I do not think that the amendment adds anything to the Government’s proposals. I hope that that has produced some clarification for the noble Baroness.
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- 22:15
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- Baroness NoakesConservative
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- My Lords, I will consider that carefully in the light of the representations made to us. The Minister is reading the proposed new section differently from the way in which it has been read by those who contacted us. For today, I beg leave to withdraw the amendment. Amendment No. 78NA, as an amendment to Amendment No. 78B, by leave, withdrawn.
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- Baroness NoakesConservative
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- moved, as an amendment to Amendment No. 78B, Amendment No. 78P:
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- 22:15
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- Lord McKenzie of LutonLabour
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- My Lords, the amendment would strengthen the statutory defence in favour of the person who could be subject to a contribution notice issued under the material detriment test. It would limit the regulator by strengthening P’s defence in relation to condition B, enabling them to show that they had taken “steps which would reasonably” eliminate or minimise potential detriment, rather than “all reasonable steps”. It is important for the operation of the defence that P should be able to show that he or she has taken all reasonable steps, not the likelihood of the steps taken eliminating or minimising the potential risk. If the defence was amended as the noble Baroness suggests, it would make it unclear who would judge whether the steps taken were indeed “steps which would reasonably” eliminate or minimise potential detriment, which would make it much harder for parties and the regulator to operate. Parties might need to seek the view of the court as to whether they had taken “steps which would reasonably” eliminate or minimise potential detriment. This could be costly and unnecessary. The intention is not that the defendant should have to take every step possible. Once P was satisfied that the potential detriment was minimised or eliminated, there would be no more reasonable steps for them to take. On this basis, and in light of my earlier explanation of the Government’s thinking behind the statutory defence, I hope that the amendment will be withdrawn. I hope that the noble Baroness will take comfort from that level of assurance.
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- 22:15
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- Baroness NoakesConservative
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- My Lords, my brain is slowing up at this hour. I think that what the Minister said is a good answer to the point that I put to him, but I reserve the right to read it in Hansard and think about it further. I beg leave to withdraw the amendment. Amendment No. 78P, as an amendment to Amendment No. 78B, by leave, withdrawn. [Amendments Nos. 78PA to 78T, as amendments to Amendment No. 78B, not moved.] House adjourned at 10.24 pm.
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