Clause 64 - Codes of practice

Pensions Bill – in a Public Bill Committee at 10:00 am on 16th March 2004.

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Photo of Malcolm Wicks Malcolm Wicks Minister for pensions, Department for Work and Pensions 10:00 am, 16th March 2004

I beg to move amendment No. 41, in

clause 64, page 40, line 22, after 'legislation' insert

'(other than any enactment contained in or made by virtue of Part 2)'.

Photo of Mr Win Griffiths Mr Win Griffiths Labour, Bridgend

With this it will be convenient to discuss Government amendments Nos. 42 to 45.

Photo of Malcolm Wicks Malcolm Wicks Minister for pensions, Department for Work and Pensions

These amendments are of a technical or drafting nature, intended either to clarify meaning or correct drafting errors.

Amendment agreed to.

Amendment made: No. 42, in

clause 64, page 40, line 28, leave out from 'imposed' to end of line 30 and insert

'on trustees or managers of occupational pension schemes by, or by virtue of, Part 3 (scheme funding);'.—[Malcolm Wicks.]

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne

I beg to move amendment No. 234, in

clause 64, page 41, line 5, at end insert—

'(3A) Any code of practice issued by the Regulator must include an analysis of the costs and benefits of the code.'

Photo of Mr Win Griffiths Mr Win Griffiths Labour, Bridgend

With this it will be convenient to discuss amendment No. 235, in

clause 65, page 41, line 32, after 'code' insert

'which includes a draft analysis of the costs and benefits of the code'.

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne

These two amendments are inspired by the Association of British Insurers, which may well have briefed other Committee members too, so they will know what the thrust of my amendments is. Both amendments welcome the idea that there will be codes of practice; no one argues about the principle that codes of practice are worth having. However, in connection with clauses 64 and 65, there should be a draft analysis of the costs and benefits of the codes. That seems only sensible, and in line with best practice. The Bill allows the regulator to issue codes of practice covering a whole range of issues—indeed on any issue, really, as long as it is related to pensions legislation. However, the concern of the Association of British Insurers—and, I am sure, many other outside bodies—is that any such code should reflect the targeted and proportionate regulatory regime that everyone wants, and which the Minister spoke of in this context. Codes should promote good practice among those providing pensions; hence the requirement that, attached to any code, there should be an analysis of the costs and benefits of the regulator's guidance.

In theory—but not, one hopes, in practice—the regulator could use the codes of practice in a way that would both impose large cost burdens on those providing pensions and deliver minimal or nil benefit, in terms of information and security, for the members of those pension schemes. It is worth bearing in mind the principle of proportionality, which is one of the Better Regulation Task Force's five principles of good regulation.

It is interesting to note that under the relevant legislation, the Financial Services Authority is required to undertake and publish cost-benefit analyses of proposed rules and guidance. I can think of no good reason why the same rules should not apply to the new regulator—and if my luck holds, perhaps the Minister will agree.

On a more general point, it is important that any powers or functions with which we endow the regulator have the full support and consent of the industry. It is important that the industry does not feel at all threatened by any potential extra costs attached to any such codes of practice. It is important that we demonstrate to the industry, through this and possibly later amendments, that the regulator will not only look carefully at the need to root out problems in pension schemes, but will ensure that there is not a mass of unnecessary regulation in the codes of practice, providing little benefit and putting extra burdens on business.

Photo of Malcolm Wicks Malcolm Wicks Minister for pensions, Department for Work and Pensions

Before I speak to the amendments, I shall briefly explain the purpose of the clause, so that we are all clear about its effect. The clause gives the regulator a new power to enable it to issue codes of practice. The codes will contain practical guidance about the way in which the regulator will exercise its

functions under the pensions legislation. They will also contain guidance about the standards of conduct and practice that the regulator will expect of people involved with pension schemes—for example, scheme trustees or members.

One purpose of enabling the regulator to issue codes of practice is so that we can move away from a one-size-fits-all approach to compliance with legislation. For example, last Thursday, the Committee discussed the whistleblowing duties imposed in clause 45, and the hon. Member for Tatton raised concerns about the use of the words ''material significance''. He will note that clause 64(2)(c) requires the regulator to issue a code of practice on the duties imposed by clause 45. That code will set out how the regulator interprets ''material significance'' and explain the type of breach that should be reported.

Also, the best route to compliance with the law may vary according to, for example, the size and member profile of the scheme. A code of practice approach will allow flexibility in that regard. That will ensure both that the regulator can operate in an efficient and targeted fashion and that trustees and managers are clear about what the regulator and the law expect of them.

Codes of practice will augment the proportionate and targeted regulatory approach. They are also a direct response to the recommendations of Alan Pickering's report, which said that a new kind of regulator should

''sponsor and monitor the operation of Codes of Practice . . . However, care must be taken to avoid . . . Codes that are even more prescriptive and potentially inhibiting than the statutory regulations that we are trying to avoid.''

The production and publication of certain codes will be mandatory—those are outlined in subsection (2). Other codes may be issued at the discretion of the regulator; those, too, must be published. In addition to publishing codes, the regulator will be able to revise all or part of any code—or, indeed, to ask the Secretary of State to revoke it. We will address the detailed procedures for the production, publication, revision and revocation of codes when we debate clauses 65 and 66, but it is worth anticipating them a little here by saying that the processes that we propose will be subject both to advance consultation and to parliamentary scrutiny.

Through codes of practice, the regulator will be able to provide clear guidance on its interpretation of pensions law, so that those involved in work-based pension schemes will better understand what the regulator expects them to do. Any failure to comply with a code of practice does not, in itself, mean that a person has failed to comply with the law. As I have explained, codes of practice will set out the regulator's interpretation of certain parts of the pensions legislation. The second part of subsection (5) allows the regulator to say, ''You haven't complied with the law. Here is a code of practice that tells you how to comply; please go away and follow it.'' It simply means that if a person has failed to comply with any provision about which the regulator has issued a code

of practice, the regulator may refer to that code when asking the person to take the action necessary to achieve compliance. It does not mean that the codes of practice can effectively become law through the back door.

An improvement notice may be issued only if the regulator is of the opinion that a breach has occurred. It may refer a person to the relevant code of practice. If at the end of the process the person complies with the law—even if that person still has not followed the code of practice to the letter—the important thing, which is the compliance with the law, has happened; therefore, end of story, and end of regulatory intervention. On the other hand, issuing an improvement notice and referring to a code of practice will enable any person to find an easy route to compliance. The message is simple: ''Follow the directions of the code of practice and you will be okay.''

These amendments would require the regulator to publish an analysis of the costs and benefits of any code when publishing either a draft or a final code of practice. One of the purposes of the code of practice system is to augment the flexible, proportionate and targeted regulatory approach. The system is designed to help minimise the costs of compliance with the law for all types of scheme. What may be right for some types of scheme may not accord with what is right for others, even where the legal requirements are the same for both.

Let us take the code of practice on trustees' knowledge and understanding as an example. Trustees are required to have an understanding of investment matters. However, the knowledge required for a defined benefit scheme would be different from that required for a defined contribution scheme. In addition, a trustee who performs a more specialist function, such as sitting on an investment sub-committee, should have a deeper understanding. The code of practice may reflect those distinctions.

I should say that whether that particular code is indeed framed in that way will be a matter, in the first instance, for the regulator. I use it merely to illustrate a point, which is that the flexibility that the code of practice system allows is designed precisely to help minimise the costs of compliance on all types of schemes. Failure to comply with a code does not automatically mean that a person has failed to comply with the law. If a scheme finds a more cost-effective way of complying with the law than a code suggests, it may use it, as long as it ultimately complies with the legal requirements and—if challenged—is able to show that it has done so. Also, the consultation requirements when drafting a code will give those involved the opportunity to consider any related costs. The regulator's responsibility would be to consider those views and balance them against its aim of providing protection for members.

Codes of practice allow a flexible, proportionate and targeted regulatory approach. They provide practical guidance on how to comply with the law and yet allow different schemes to take a different

approach, should that be more appropriate to their circumstances. I believe that the concerns that the hon. Member for Eastbourne raises by way of his probing amendments are properly accounted for in the Bill as drafted and I therefore ask him to withdraw them.

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne 10:15 am, 16th March 2004

If I thought that they were properly accounted for in the Bill I would not have tabled the amendments. I am puzzled. The Minister might be able to help me on this and he should feel free to intervene at any moment if he thinks that he can short-circuit matters. As I understand it, he accepts that codes of practice should reflect the principles of flexibility and proportionality in the way that they are drafted. He also accepted that as part of the consultation process it would be open to outside bodies, such as the ABI, to make representations about the likely costs and burdens of such a code of practice; indeed, it would be open to the regulator, the Secretary of State or to both to take account of representations.

In that case, I do not understand why it is not possible to insert the missing link and say that when the code of practice is first issued in draft for consultation, it should contain, attached to it, a cost-benefit analysis. After all, a regulatory impact assessment is attached to the Bill, which in many ways is more informative than the explanatory notes. Such a measure seems to be something that serious industry bodies would welcome. It goes deeper than that, because before the codes go out to consultation it is necessary for the people who are preparing them to establish in their own minds how burdensome the codes will be and what the balance is between the cost and the benefit that they are seeking to achieve.

I am not at all happy with the Minister's explanation of why it is not possible to include that measure. It is quite worrying—and I would be quite worried if I was in the ABI'S position—that the Minister cannot accept the amendment. I give notice that we may return to the issue on Report, but I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendments made: No. 43, in

clause 64, page 41, line 19, after 'Ombudsman' insert

', proceedings of the Ombudsman for the Board of the Pension Protection Fund and proceedings of the Board of the Pension Protection Fund under section 168 or 169'.

No. 44, in

clause 64, page 41, line 24, leave out ', and section 33,'.

No. 45, in

clause 64, page 41, line 26, after 'Part 1' insert 'or section 33'.—[Malcolm Wicks.]

Clause 64, as amended, ordered to stand part of the Bill.