My Lords, I beg to move that the House do now again resolve itself into Committee on this Bill.
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.
I am sure that all noble Lords will have an opportunity at some stage to respond to what the Minister has just said. We are grateful to him for putting that on the record. However, it does not change the fact that the Government are choosing to press ahead with the amendment notwithstanding the fact that it has not been properly consulted on. They did not expose Amendment No. 130EW to consultation. They received a large number of responses to their different consultation, many of which disagreed with the drift of what the Government were trying to do, but within days of the consultation ending they published their draft amendment, indicating that they had no intention of taking account of the consultation itself. We believe that it would be right for further discussion to take place on the basis of the Government having an open mind. But the Government have chosen not to have an open mind. We will therefore progress with our amendments on the Marshalled List, because it is important that the arguments put to us are properly recorded in Hansard alongside any consideration of the Government's own amendment.
In our last Committee day, the Minister said:
"It would clearly not be appropriate to exercise the power"— that is, this broad power in Amendment No. 130EW—
"... if it created serious new risks. I should like to reassure noble Lords that it is not our intention that by introducing provisions we materially increase such risks".—[Hansard, 14/7/08; col. 1086.]
Those are very fine sentiments, but that is not what the new clause in Amendment No. 130EW proposes. That new clause focuses on producing regulations as if there are material risks either to the benefits of members of pension schemes or of compensation being payable to the PPF. We believe that it is quite possible that the regulations will increase both those risks and, therefore, that they should be properly considered in those terms before regulations are produced.
Let us consider the risk to benefits of members of pension schemes. The CBI, for example, has pointed out to us that if further clearance applications are a result—and many believe that that will be the case if Amendment No. 130EW is in the legislation—there will be a considerably increased cost imposed on business to deal with them. The CBI estimates that each clearance costs between £50,000 and £100,000 as a result of the many advisers and valuation fees involved in putting together those applications. That will inevitably lead to a further hardening of view among managements of companies with defined benefit schemes, which will in turn accelerate the decline in defined benefit schemes. It is a question not of causing a decline in defined benefit schemes—they are in terminal decline—but of what the rate of decline will be.
We have also had comments from people who are aware of how turnaround situations work. They say that these new powers potentially make turnarounds more difficult and will possibly hasten businesses being placed into insolvency. That obviously poses a risk to the benefits of members because the PPF levels of compensation fall well short of those within a defined benefit scheme. As I stated previously in Committee, while it is often said that the PPF gives 90 per cent cover, that is often down as far as 60 per cent and it is around 80 per cent on average.
There is also the question of whether this power will help the retention of DB schemes, because the regulations might be used to impose additional liabilities on those who are able to lend financial support to employers struggling with DB schemes, merely through being connected with those employers. Employers with an attached DB scheme will find themselves unsaleable and unattractive investment targets. If that is the case, they will find it more difficult to find investment partners and, inevitably, the employer covenant reduces.
As to the risk to the benefits of members of pension schemes, there is also a risk to the compensation being payable from the PPF. Again, those involved in turnarounds say that turnarounds and recovery will be more difficult because it will become more difficult to obtain new investment or to sell assets to pay off secure debt without being at risk under what are potentially the new rules. Clearance is not an answer in the turnaround situation because of time criticality. For example, you need to obtain refinancing in order to meet payroll obligations. We do not have an insolvency or turnaround regime which allows a lot of time for decisions to be made. If clearances are not pursued, further financing is just as likely not to be available and likely to accelerate the move of the employers into insolvency which, of course, will thereby increase the risk to the PPF of compensation becoming payable.
The point I am trying to make is that it is entirely foreseeable that the new rules that have been postulated by the Government will increase the risks—both to members of pension schemes and of compensation becoming payable to the PPF. The only point of Amendment No. 130EW is that the Secretary of State should take into account those risks before issuing any regulations. That is what our amendment seeks to do. I beg to move.
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 for 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.
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.
With the help of the noble Lord, Lord Hunt, and other Members of your Lordships' House, including the noble Lords, Lord Oakeshott, Lord Skelmersdale and Lord Higgins, we devised flexible and relatively informal clearance arrangements, which I understand—despite the cost which the noble Baroness suggested—have worked well, have not been abused and are welcomed as a way of offering comparative flexibility in a fast-moving scene, as well as appropriate scrutiny by TPR and security for scheme members. There are, of course, three objectives here.
The point of this amendment is the process, mentioned by the noble Lord, Lord Oakeshott; namely, how we did it. As far as I can judge, the Government's proposed procedure, as outlined by my noble friend, is broadly similar to the one we adopted in 2004, which all parties say worked well. There was a framework proposal in the Bill, reflected in Amendment No. 130EW, together with draft regulations that we worked on over that summer, on which there was extensive co-operation from your Lordships and extensive consultation with the industry. They were published and made available for formal scrutiny by this House. If necessary, we were willing to make further adjustment in the Bill, as my noble friend indicated.
It is the case now as then—the noble Lord, Lord Oakeshott, was spot on on this—that new forms of pension activity, from bulk buy-outs to some of the BrightonRock issues that we discussed on Monday, have emerged which were simply not on the scene in 2004. Some nasty scenarios could emerge that we cannot yet predict or foresee. What Maxwell taught us—and the work of TPR, PPF and FAS has surely confirmed this—is that as far as possible we need to see around the corner, and if we cannot do that, we need at least to fence the precipice and not always rely on sending in ambulances after the event.
TPR powers as they stand are not adequate to cover some of these emerging risks and address the new mark 2 version of emerging moral hazard issues. My noble friend will correct me if I have misunderstood this, but until recently there was broad consensus about how we move forward and general support for the Government's draft regulations on which we are consulting. I am not sure why that broad consensus seems to have broken down in the past few weeks, although I suppose that some bodies, for example venture capital bodies, might find some aspects of the regulations irksome in a fast-moving world. I can see why they might argue that, but when set against the proper interests of scheme members and the like, one should not assume that they have the monopoly of the best interests of all stakeholders and players. Government and TPR, not any particular interest, always have to hold the ring between entirely legitimate but conflicting and competing concerns.
The assumptions behind some of the comments by noble Lords in Committee on Monday therefore surprised me. They appeared to suggest that the Government were behaving unscrupulously and that they needed to be watched because they might introduce retrospective and unreasonable requirements. I thought that was an odd and unreasonable charge to make, because the Government are acting for all of us, especially the employees whose pension savings could be at risk. I believe the charge of bad faith should not be levelled at the Government, but at the occasional company or organisation that—I know: we were burnt by it—does not always behave with full probity and seeks to cut corners. Government are continually scrutinised, and rightly so. Emerging forms of pension structure, however, are not so scrutinised. For its regulation to be adaptive and flexible, TPR needs that head space of additional powers—that is what we are talking about—without being sure in what precise way they might be applied. It is no use waiting for future primary legislation. The old adage about closing the stable doors comes to mind, because, from my experience in 1995, in pensions legislation we are always one step behind. We need TPR to have generic powers that are properly scrutinised, following proper consultation of regulations, to cope with the unforeseen. Those regulations must have broad support.
Since 1995, when I was first engaged in pensions legislation, we have always been fighting the previous war. Remember how long MFR lasted and how robust it turned out to be? Remember the unsuccessful efforts of some of us to get a central funding scheme, with the result that we had to invent the PPF five years down the line? If we had got the PPF when we called for it, it could have resolved the problems that FAS had to be invented to adjust.
Governments of all persuasions, my own included, too often have been leaden-footed on pensions when crises emerge, because they do not have the head space of regulatory powers entrusted with an organisation such as TPR—it did not exist in 2004—to scrutinise in the public interest, on behalf of all of us, and to strike the right balance.
My noble friend has listened. He has moved during these debates, for example on qualifying earnings, where sensible discussions are now taking place. I hope that those discussions will bring us to an amicable result. The amendments strike the right balance and are proportionate. I am perfectly comfortable with any assurances that my noble friend may wish to give tonight about retrospectivity, which I agree can be uncomfortable territory to occupy; clearance schemes; the offer to put further wording in the Bill, and the like.
In pensions, the scenario, as the noble Lord, Lord Oakeshott, rightly said, is changing fast, and TPR does not have the head space in its regulatory powers at the moment to address those issues as and when they might arise. I urge the Committee not to follow the example of the Bourbons, who, I am sure noble Lords are aware, allegedly learnt nothing and forgot nothing. We know what happened to them.
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".—[Hansard, 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.
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.
There is no dramatic need to conclude Committee before next Tuesday, although the Minister will be told by his officials that the problem with having a further Committee sitting in the overspill is that all sorts of things may arise during the recess, all sorts of results might flow from further consultation. Surely that is a good thing. As the noble Lord, Lord Oakeshott, said, a number of organisations should participate in the discussions as well as those on the Front Benches.
What about consensus? We heard a great deal about consensus at the start of proceedings on the Bill. There are grounds to hope that this legislation will endure for generations to come; and that there will be a real, radical change in the amount of money being put aside for pensions and a substantial increase in the number of people who embark on proper levels of saving. We all hope that. I do not know about all these telephone conversations with somebody called Macho Mike. If it is Mr O'Brien, I have to say that I do not recognise the description. I have had many dealings with Mr O'Brien and that is not a phrase that comes readily to mind. If we are to develop a consensus and entrench a scheme that will last for generations to come, we have to get the detail right.
Without going down the road that my noble friend Lord Lucas and other speakers went down, my plea to the Minister is that there is now a great argument to pause and think, to sit down with key stakeholders in the industry and elsewhere to make sure that we are giving the right powers to the right bodies to meet the main objective of the Bill, which is substantially to increase pensions savings. Surely on that there is substantial consensus. I plead with the Minister: do not let us lose any consensus by moving too quickly.
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.
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.
moved Amendment No. 130EZ:
Before Clause 107, line 16, at end insert—
"( ) Regulations under this section may not make provision impeding a director in the discharge of his duty under section 172 of the Companies Act 2006 (c. 46) and may not make provision enabling a relevant notice to be issued to any person as a consequence of acts taken in accordance with that section."
In moving Amendment No. 130EZ, I shall also speak to Amendment No. 134ZBC.
When the Pensions Act 2004 was passed, the Companies Act 2006 was still only a gleam in the eye of the then Department for Trade and Industry. At that time, directors' duties were defined only by common law and could be summarised broadly as directors needing to act in the interests of the company. However, when the Government introduced what is now the Companies Act 2006, which I know the Minister remembers because we spent many happy weeks debating it in Committee and on Report, they deliberately chose to enact Section 172 of that Act, which restated the duties of directors of a company to line up with what the Government described as enlightened shareholder value. That section states that the duty of the directors is to act in the interests of,
"the success of the company for the benefit of the members as a whole".
It goes on to list matters to which the directors must have regard. That list is not exclusive, but it was intended at the time to reflect those major matters which the Government believed directors should have in mind when making decisions. That list refers to employees; that has been the law since 1987. It does not refer to former employees or to employees in their capacity as members of a pension scheme. Indeed, pension schemes are not mentioned at all in connection with the duties of directors.
There is a concern that the proposed new powers of the regulator will skew what directors have to consider away from their core statutory duties, as set out in Section 172. Any changes to the current rules for the regulator's powers will—as we have partly argued to date, and will argue during the rest of our consideration of the detailed amendments—be likely to lead to an increase in clearances, to which a lot of attention is being paid. They raise a danger for directors. Changes in the rules for contribution notices are much more likely to leave directors in the firing line. We will debate later whether the contribution notice should attach to individuals.
It is inevitable that, if directors are sitting in the boardroom, trying to make decisions, and know that they will be in the firing line for contribution notices, which is a very serious issue in relation to transactions—which, under the proposed regulations, will be more broadly defined, and will shift from the current understanding—their core duties will become difficult to reconcile with what they have to take into account to meet this new environment. The Government will try to create this new environment if they get new regulation powers and pass regulations as they have broadly described them in their consultation document. The conventional advice that lawyers give to directors is that if they act in good faith, using their skills diligently, and ensure that they pay regard to the matters in Section 172, they will satisfy company law. When we come to the new powers and the use of the new powers proposed by Amendment No. 130EW, the Government have said that they wish to whisk away the defence of good faith. We are starting to see a bifurcation between how directors are told they should behave in order to satisfy company law, as enshrined in the Companies Act 2006, and what the regulator may require of them.
As my noble friend Lord Lucas said in the context of the previous amendment, the liability of employers to pension schemes is becoming ever more like a super-preferential creditor. This has not been done via the Companies Act or the Insolvency Acts. It is, in effect, being done by the back door of pensions legislation. Is it the Government's intention that the Pensions Act should override what is found in company legislation, especially company legislation that has been so recently enacted, without specific reference to pension schemes? Are they proposing giving pension schemes an order of protection that is different from that conferred generally by the rest of company law on the liabilities of creditors?
On this subject, there is a slightly worrying misunderstanding about the nature of companies and company law which is linked and why I should like to raise it today. In the Government's consultation document about the regulator's powers, it states at paragraph 1.6:
"The Government also seeks to ensure that there is fairness between members and shareholders and other investors: if shareholders and investors would benefit when investments perform well, it is right for them to stand behind members' benefits when times are harder".
This shows an astonishing lack of understanding of the difference between investors in a company and the company itself. It is the company itself that is typically the employer and to which all the powers of the Pensions Act relate, not the investors or members of that company. In the world of publicly listed companies, those listed on stock exchanges, there is no way that, say, an investor in year one who makes a profit and moves on would transfer some notional obligation of standing behind to an investor several transactions later in year five. Perhaps the Minister will explain what kind of "standing behind" referred to in the Government consultation was trying to get at. It seems to me that the Government are coming close to trying to lift the corporate veil with no thought of what impact that would have on capital markets. This is one of the areas in which those coming to the consultation document become concerned about the Government's approach to corporate life in general.
I turn to Amendment No. 134ZBC, which amends Section 100 of the Pensions Act 2004 to ensure that the regulator has regard to the interests of employers and associated parties when it exercises its regulatory powers. It seems that the Government intend to use the proposed new powers created by Amendment No. 130EW to enable the regulator to intervene in many more situations, either because a course of conduct is involved rather than individual acts or because a wider range of bodies can be considered for financial support, directions or contribution notices. It is therefore right that the regulator considers the widest possible effects of the exercise of its powers. If the regulator may be able to issue notices in a wider range of circumstances and to more people, there must be a quid pro quo that the regulator considers the effect of its actions on those affected. While these might appear to be covered by the statement in Section 100(2)(b) that,
"such persons as appear to the Regulator to be directly affected", it is not absolutely clear that the regulator must include within that employers and associated parties.
To date, the regulator has issued few notices and directions, but concerns have been expressed about the direction of travel indicated by the regulator. For example, the regulator's consultation document on the clearance process issued last year took a number of positions which caused grave concern to employers. Having to have,
"regard to the effect on employers and others associated with the employer", would be a useful safeguard and an important signal from the Government that they believe that employers are important in their own right and are not simply a chequebook to support pension schemes.
I have raised a number of concerns about the interaction between pensions legislation and company law which are crystallised, although not entirely created, by what the Government are trying to do in Amendment No. 130EW. I beg to move.
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.
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.
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.
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.
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.
One of the declared intentions of the Government is that the test should move from intent to effect. My contention in this amendment is that under those circumstances it would be unfair to pursue individuals. If something goes wrong and the circumstances of a company change, it may well be necessary to revisit, say, the payment of a dividend or some other transaction which was made not with the intent of reducing the money available for a pension fund but certainly with that effect. For example, the dividends that house builders have paid over the past five years have certainly had that effect, because they now find themselves with very little market capitalisation and very large pension fund deficits. Why would it be right, under those circumstances, to pin that liability on relatively rich individuals who happen to be directors of those companies? Perhaps they are non-executive directors who have come to give their expertise to the company, or the original proprietor who made money when he sold out to a public group. Why should that money then be available when it is not questioned that the decision to pay the dividend was taken with no intent to do down the pension fund—indeed, when life seemed pretty good and the sailing was plain?
I understand the motivation behind the Government's wish to change, but to extend that effect to individuals, particularly directors, will over time destabilise companies with defined benefit funds. If an individual is pursued for something they did with good intent, the knock-on consequences could be extremely severe. I beg to move.
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.
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.
There are further protections for individuals in relation to the exercise of the regulator's financial support direction power. This power only applies if the individual is the employer or is connected to that individual. The potential individual liability is important in ensuring that the powers are sufficiently flexible, while remaining subject to the reasonableness factor. The regulator has also stressed that, in accordance with its public law obligations, it will use its anti-avoidance powers only proportionately and only where reasonable.
Within that consideration, the concept raised, I think, by the noble Lord, Lord Lucas, of a dividend being paid quite properly at the time through due process and consideration by the board, will be revisited several years down the track. It seems that it could not flow from the legislation, looking at the reasonableness powers and the issues of retrospection. However, again, during the course of the next couple of months, if those are real fears out there, we need to be clear and get the reassurance either specifically in the Bill, if possible, or, in regulation and guidance, so that directors can be comforted in going about their normal business, including the declaration of dividends, subject to the usual Companies Acts requirements. I hope that that has provided some reassurance, but, again, recognise that genuine concerns have been expressed and we need to be sure that we meet them fully.
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?
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.
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.
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.
moved, as an amendment to Amendment No. 130EW, Amendment No. 130FA:
Before Clause 107, line 16, at end insert—
"( ) Regulations under this section may not make provision enabling a relevant notice to be issued in relation to acts or failures to act occurring in the course of acting as an insolvency practitioner or as a recognised expert in rehabilitating under-performing organisations."
Turnaround professionals—by which I do not mean venture capitalists, who so worry the noble Lord—are by and large individuals who have gained considerable experience in running companies. They are parachuted in to deal with a company in difficulties and rescue it—particularly to rescue the employment and business—and make sense of what is going on. These people have by and large to act very quickly. They have to take some very pragmatic decisions. They are usually only days away from the company running out of money, but they themselves generally do not have enormous assets. If the company does well, they will take a salary or a fee from it, but not a large share of the business. I think that these people, of whom I know several, are exceptional individuals who do the country a great deal of good. I would not like to see their activities put at risk. I beg to move.
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.
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?
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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?
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.
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.
moved, as an amendment to Amendment No. 130EW, Amendment No. 130FC:
Before Clause 107, line 19, leave out "14th April 2008" and insert—
"(a) in the case of the first such set of regulations, 14th April 2008; and(b) in the case of each subsequent set of regulations, the date on which the intention to make those regulations was announced."
I talked about the importance of this matter on earlier amendments. It seems entirely reasonable that the Government have set
The Government made a statement on
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
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.
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
moved, as an amendment to Amendment No. 130EW, Amendment No. 130FD:
Before Clause 107, line 19, at end insert—
"( ) Regulations under this section may not include provision which would allow the Regulator to overturn a Clearance Statement that it has given, except by reason of material malfeasance by or on behalf of the applicant."
It is crucial that where a clearance statement is given, it can be relied on in future unless something essentially fraudulent turns out to have been done in obtaining that statement. Otherwise, you cannot rely on the regulator at all and the whole system breaks down. Again, I am hoping for some comforting words from the Minister. I beg to move.
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 by 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.
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.
moved, as an amendment to Amendment No. 130EW, Amendment No. 130FE:
Before Clause 107, line 19, at end insert—
"( ) Regulations under this section may not include provision which would allow the Regulator to serve a contribution notice, financial support direction or restoration order on any person by reason only of a transaction whereby that person had purchased assets or securities at fair value."
Amendment No. 130FE explores the sort of arrangement which seems to be possible under the proposals put forward by the Government. For example, a group with, in part of it, a defined benefit scheme, may sell an element of that group, perhaps a young, successful company, which it can no longer afford to finance. It wants, among other things, to provide resources for the pension fund. As it turns out, the remaining businesses in the group do not prosper and the company which was sold prospers exceedingly. Under the Government's proposal, it would be possible for the Pensions Regulator, several years later, to say to the new owners of the successful company, "We wish to have from you additional money to fund the old defined benefit scheme in the group that this company used to belong to", and to overturn an open-market transaction for fair value. That is not the right way to go about things. Therefore, I have put down this amendment. I beg to move.
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.
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.
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.
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.
I think not. However, we will put this on the list of things to clarify over the next couple of months.
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.