Clause 168 - Authorised Employer Loan

Part of Finance Bill (except clauses 4, 5, 20, 28, 57 to 77, 86, 111 and 282 to 289, and schedules 1, 3, 11, 12, 21 and 37 to 39) – in a Public Bill Committee at 11:00 am on 15 June 2004.

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Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury 11:00, 15 June 2004

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.