I beg to move amendment No. 281, in
clause 168, page 145, line 26, at end insert—
'(2) A registered scheme may only make a loan to or in respect of a sponsoring employer if it is an authorised employer loan and the registered scheme is of a description which meets such additional conditions as may be prescribed.'.
In the previous debate, the Financial Secretary referred briefly to the fact that the clause will allow schemes to lend up to 50 per cent. of assets to an employer. Actually, I think that she made a different point, which I will come on to, about how much schemes can borrow, but the clause allows schemes to lend up to 50 per cent. of assets to an employer and requires the loan to be secured and repaid within five years at a rate that is the average of the base lending rates of the major high street banks. Those regulations I did receive from the Financial Secretary.
My first question is: why the change from the consultation document? In that, there is a suggestion that the rate would be 1 per cent. more than the Bank of England's base rate. Why have the Government changed to use an average of the base lending rates of high street banks?
Even with those welcome safeguards, is the overall concept a good idea? Is there not a risk to members if a scheme lends 50 per cent. of its assets to an employer? At present, as I understand it, only a small number of schemes can make loans to sponsoring employers. Do we want pension schemes to become a major source of loan finance? If an employer is unable to secure finance on commercial terms, it is probably not in good shape. Is it sensible to have provisions that encourage employers in such difficult circumstances to consider a raid on their pension funds? Is that not exactly what happened with the former Labour MP, Robert Maxwell? How does that interact with the pension protection measures in the Pensions Bill?
There may, of course, be circumstances in which doing that is fine. For example, there may be a small, self-administered scheme where there are only a few members and all agree that it is a good idea to make such a loan. However, should not those circumstances be clearly prescribed rather than trying to create a one-size-fits-all approach that would run the risk of employers raiding their pension scheme for large sums of money and putting the members' pensions at risk? Amendment No. 281 would give the Inland Revenue a chance to prescribe the circumstances and restrict such loans to small, self-administered schemes. I have no doubt that the Financial Secretary will accept it.
Amendment No. 275 is to schedule 30, which is one that I am sure that all members of the Committee are familiar with. We all know what DLRP over DFY times 100, minus 100, divided by 100, and then times by AO is all about. That formula is just one of many that schedule 30 contains. By the way, one of the general criticisms of the Bill that I touched on at the beginning of our discussions was that there are many complex and unfamiliar formulae in it. I can see the hon. Member for Wolverhampton, South-West is trying to decipher the equation I just mentioned.
Most people will accept that, although schedule 30 is long and probably over-complicated, it seems to work—in all but one important respect, that is, and that is where my amendment kicks in.
In practice, if an employer has any sort of borrowing arrangements, even overdrafts, it may well be that the borrowing is not only secured by the fixed charge—that is, against a specific asset or assets—but is swept up by a floating charge that covers all assets. Those will almost inevitably be stated to be the first priority. Therefore, it is almost impossible in practice for an employer to satisfy condition C of the schedule, which is
''that the charge takes priority over any other charge over the assets.''
Unless condition C is effective, it all seems rather pointless. In part, that goes back to what I asked earlier about the sort of schemes that can lend to an employer. If we are talking about giving the power to smaller schemes, in which all members agree on the risk that comes from a loan, condition C is not really needed. My amendment would go some way to addressing the member protection issues that I raised at the beginning of my remarks.
May I briefly add comments on amendment No. 281? It has been long accepted that where self-administered schemes invested in premises for the relevant business that employed the members, it was an arrangement for relatively sophisticated entrepreneurs. If the business ended up going down and the pension fund lost money, it was hard luck—those involved were big enough to look after themselves.
It is not just the idea of a Maxwell situation that worries me. I am concerned that, when a company goes down, perhaps because of macro-economic conditions—globalisation and businesses migrating elsewhere, for example—premises are likely to suffer, too. Therefore, the concept of ''secured'' under the clause does not make the asset at all safe. One could easily have a situation in which the commercial premises could only be disposed of at half the sum that the pension fund lent. The clause seems to permit open-ended lending. The notion that that is safe because of security could open the door to all sorts of nightmares, and we have already seen enough problems relating to the knock-on effects on pension schemes when a company goes down. In the interests of one size fits all, the risks involved in the measure are not worth running. Amendment No. 281 is extremely important, and the Government would be wise to adopt it.
I am against amendment No. 275. I can foresee a situation in which a small shareholder or director-owned partnership or company—a family business that has been incorporated with limited liability—mortgages everything in sight and still wants more working capital. It might then put up the pension scheme. Under the amendment, all members of the family would then agree to put some of the pension fund capital into their business, which is already up to its neck in debt.
Broadly speaking, pension schemes with tax relief exist so that people do not face penury in old age. I am giving an example of a desperate gamble in which the money goes into the company. The company may go bust; ergo, the pension scheme will have no money left in it. In that way, it is possible that those members of the scheme who had tax relief when setting up the pension fund, in a sense at the expense of the taxpayer, would still face penury in old age. Arguably, the taxpayer would lose out twice.
Clause 168 and schedule 30 provide definitions of one of the types of payment, defined as an authorised employer loan, that a registered pension scheme may make to a sponsoring employer. The ability of a sponsoring employer to borrow money from a pension scheme is seen as a valuable and popular way, particularly for small employers, to raise finance.
We have received very strong representations from small employers against losing that facility under the new regime. Therefore, like the current tax rules, the new tax rules will allow pension schemes to lend money to employers, but certain safeguards will be built in to protect the integrity of the tax relief that registered schemes will enjoy.
As I continue to say, pension schemes are given tax relief to encourage provision for income in retirement. Although the tax rules will allow sponsoring employers commercial access to funds that have been put aside for that purpose, protection mechanisms are needed to ensure that any loans are on commercial terms. The clause therefore sets conditions on the amount that may be loaned in that way, and provides for a minimum interest that must be charged on the loan to be set out in regulations made by the Inland Revenue. It also provides how such loans must be secured, and states the terms under which they are to be repaid.
If those conditions are not satisfied in any respect, the loan will be treated as an unauthorised payment, and will be subject to certain tax consequences. However, a scheme may want to invest in stocks, or similar products of the sponsoring employer that are listed on a recognised stock exchange; such investments would not be regarded as loans for the purposes of the clause.
Schedule 30 defines the terms used in the clause and explains how the unauthorised payment charge is calculated in circumstances where an employer loan from a registered pension scheme has not satisfied the conditions necessary for it to be regarded as authorised. Clause 168 and schedule 30 allow registered pension schemes to continue to lend money to employers, but provide essential safeguards to ensure that that is done on commercial terms, to protect the integrity of the tax reliefs that registered schemes enjoy.
Part of this debate turns, yet again, on the purposes of the tax rules and the Department for Work and Pensions rules with regard to safeguarding people's pensions. We argue that the tax rules are there not to distort investment decision making but to facilitate legitimate investment choices, while ensuring that any tax loopholes are avoided and that the fund operates in an appropriate way. Having said that, the DWP has a role in member protection, so it deals with members on most occupational schemes and bans loans for employers. From a prudential point of view, the DWP has a very strong line in protecting members' interests. It is right that that is where the argument takes place
and that it is in its capacity as a safeguard of members' pensions that the rules are made.
The tax rules are a limit for those in schemes not covered by the Department for Work and Pensions. Small schemes, for which members are trustees, are one example of schemes not covered by DWP rules—they currently have the facility to borrow against their pension fund to finance business developments. We did not want to see that right taken away and, as I said, small businesses made strong representations on that point. However, we have built in safeguards.
The Minister seems to be saying that the DWP rules will prevent the sort of risks to which I referred. There is probably general agreement that small, self-administered schemes have always interacted, and entrepreneurs are big enough to take the risk, but can she assure the Committee that the DWP rules in relation to employees and their pension schemes effectively rule out putting the pension money at risk?
On a point of order, Mr. McWilliam. With the greatest respect to you, it seems to me—humbly sitting here—that we are drifting into a stand part debate on the main clause. I seek your guidance, because I wish to contribute to such a debate, but I would not like the amendments to be dealt with and then for you to rule that we have already had a clause stand part debate.
The hon. Gentleman points to a real difficulty, because we are drifting in the way that he suggests. One of the problems is the way in which the amendments are grouped. Schedule 30 is attached to the clause, but it is not the only schedule that is attached to it. Therefore, this is not a case when I could argue that we should take the schedule and the clause together. One of the difficulties is that we are drifting wide of the amendments, and I should caution hon. Members to return to the point of the amendments. Finally, I can tell the Committee that this has been a difficult period for me: as the former chairman of the quite substantial Edinburgh Corporation pension fund, keeping my mouth shut on such matters is extremely difficult.
Let me turn my attention to the amendments that we are discussing. Amendment No. 275 would alter one of the conditions that the clause applies to a loan in order that it meets acceptable commercial criteria. One of the main conditions applied to loans is that they are fully secured. That is a prudential measure intended to safeguard the funds of a pension scheme that has enjoyed substantial and generous tax reliefs. Most commercial loans will be secured on the borrower's assets, and the clause and schedule 30 will replicate that for loans made by registered schemes by providing that the loans need to be secured as a first charge on assets at least equal to the value of the loan.
Amendment No. 275 would provide that if the members of a registered scheme agree that the loan shall no longer be a first charge on assets, an unauthorised payment will not apply. Many pension schemes are controlled by trustees who are also the scheme members and the people who control the
sponsoring employer. In those circumstances, there are increased possibilities that loans will be made in uncommercial circumstances. For example, loans could be made to prop up an ailing employer with large debts and few assets. Therefore, it is precisely for the schemes where all members may agree to waive the requirement for a first charge on assets where the need for the requirement is greater. The requirement provides that a normal commercial condition for business loans is provided on loans from pension schemes. It ensures that loans are made on prudential commercial terms and safeguards the generous tax reliefs that are given to pension schemes.
Amendment No. 281 would introduce a new subsection at the beginning of clause 168 to provide that a registered scheme may only make an authorised employer loan. It also gives a power to lay regulations prescribing what type of scheme may make an authorised loan. It is not our intention to prescribe the kinds of scheme that can or cannot make loans and I hope that I have reassured the hon. Member for Arundel and South Downs that the sorts of loans that he is worried about will be covered by DWP rules.
The rules on authorised employer loans set clear criteria defining the type of commercial loan that a scheme can make: the loan must be for a maximum of five years; it must not take up more than 50 per cent. of the scheme's assets; it must provide for regular payments of interest and capital; and the rate of interest must meet the required rate and it must be fully secured. Those conditions will ensure that loans provided by pension schemes to connected employers are made on prudential, commercial terms. Therefore, we see no reason to provide for further limitations on the type of scheme that is allowed to make such loans.
The amendment also proposes that registered schemes can only make an authorised loan to a sponsoring employer. That is what the legislation already provides for, and any other loan will be taxed as an unauthorised payment. I urge the Committee not to accept the amendment.
On amendment No. 275, the point about getting the agreement of all members is that in practice it would achieve what the Financial Secretary is seeking: it would be something that only a small scheme could achieve. A large scheme could not do it. The flexibility that exists for small schemes would continue.
On the other amendment, I hear what the Financial Secretary is saying. She has said that it is not an issue for the Inland Revenue any more, but for the Department for Work and Pensions. That is part of the shift away from the system of tax approval to a system of registration, and the Inland Revenue will take on less of the policing functions. That raises the question from the earlier debate as to why there is a requirement for schemes with fewer than 50 members to purchase annuities in the Inland Revenue's legislation, but that question is for another day.
I am glad that I received the Financial Secretary's written response—a week late—yesterday. We shall have to see whether my concerns and those of my hon. Friend the Member for Arundel and South Downs are met, as well as the concern that people's pensions will be put at risk by schemes lending large sums of money to ailing employers. We shall see whether those concerns are met by the DWP regulations, but given what the Financial Secretary has said, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Question proposed, That the clause stand part of the Bill.
I have two questions for the Financial Secretary. Clause 140(6) defines ''sponsoring employer'', a term used in the first line of clause 168 and in the debate today. It is a very opaque definition, but as far as I can tell, it would exclude a small business that is a partnership where equity partners are not employed by the organisation, but own it, in contradistinction to employees, or salary partners who are employees.
My second question is more broadly related to the clause. The Financial Secretary said earlier—I shall paraphrase her, and I hope she will forgive me and clarify the point if I get it wrong—that such a facility already exists and is popular with small businesses, but the clause is part of a process of tightening the rules. If I have understood her correctly, that suggests that there are problems. Otherwise, the existing rules would not need tightening. I would like her to clarify what the problems have been and the way in which clause 168 and, when we come on to it, schedule 30, address those problems. I am wary, as the hon. Member for Tatton said, about a Maxwell-type situation, which this has a whiff of to me.
First, let me address the point about the overall purpose of the clause. The debate concerns the purpose of tax rules in this situation and the purpose of DWP rules in governing the sorts of investment that a pension scheme can make. It is not the purpose of tax legislation to prescribe the sort of loans or investments that a particular pension scheme can make. In the new simplified regime, we have swept away all the investment rules and the other previous restrictions on the sort of investments that have taken place, and tried to level up the playing the field with one set of standard rules that apply across the board in other areas, including loans that can be made to a sponsoring employer.
We had a choice. Should we, in the tax legislation, fan the flame of what we have been told is a valuable source of business finance for small firms? We made a clear choice about whether we should use tax legislation to prescribe a certain type of behaviour. It is the purpose of the tax rules to facilitate such choices, while safeguarding revenue for the Exchequer. We try to ensure that we have as liberal a regime as possible, but with strict enough safeguards to ensure that there will not be incentives to use a pension fund on non-commercial terms, so that the Exchequer regains the tax relief, or to ensure that the relief is used for the
purpose of securing an income in retirement because it has been granted for that purpose.
I understand the Financial Secretary's line of argument, but it slightly surprises me that in line 29 on page 145, in subsection (1)(a), a 50 per cent. limit is included. If it is the Treasury's view that it is not for it—although it may be for the Department for Work and Pensions or the Department of Trade and Industry—to prescribe the sorts of investments that are made, why has the 50 per cent. limit been included?
The safeguards that we have included are to ensure that the loans are, as far as possible, made on commercial terms. As I have consistently said, employers' contributions to registered pension schemes qualify for tax relief because they will be set aside to provide retirement provision for members. However, it would not be a prudent use of schemes' money to invest it all in loans to one person. Excessive lending could lead to liquidity problems for the scheme, for example if there was a sudden and unexpected call to provide scheme benefits. We think that 50 per cent. strikes a reasonable balance, protects the assets to ensure that there are sufficient funds to provide income on retirement, and so deals with calls on the Exchequer.
The current regime is policed at the discretion of the Inland Revenue. As part of that, any loan must be made on commercial grounds. Although there is no specific requirement for security, if security would be insisted on by all commercial lenders, it is part of those commercial grounds. However, in general the Revenue does not insist on having security for loans. Experience has shown that that has led to many such loans being
lost as employers go into liquidation. It is sensible and proportionate to insist that loans involving sponsoring employers are fully secured. The vast majority of commercial lenders would insist on security being applied to commercial loans granted to companies.
My hon. Friend asked what sorts of risks would arise if the safeguards were not built into the system. I am sure that most members of the Committee understand the nature of the risks involved for small companies with small schemes and the temptation that there is to draw on those funds to support the business. It is precisely for those reasons that we have built the tax safeguards into the system. He and others may think that there is a case for tougher prudential rules, but again that falls more under the remit of those dealing with the rules in the Department for Work and Pensions, than under the tax system. On those grounds, we think that a liberal regime, with sensible commercial safeguards built into it, is the right way forward.
I am reassured by the Financial Secretary's comments.
Question put and agreed to.
Clause 168 ordered to stand part of the Bill.
Schedule 30 agreed to.
Clauses 169 and 170 ordered to stand part of the Bill.
Further consideration adjourned.—[Jim Fitzpatrick.]
Adjourned accordingly at twenty-four minutes past Eleven o'clock till this day at half-past Two o'clock.