I thought I saw the Minister twitching, but that might just have been the effect of the Bill.
To what extent is it envisaged that limits will be put on investment principles in regulation or elsewhere? That would be the right thing to do, of course. It is a development from the 1995 Act, which says that any trustees of any scheme should set out their investment principles clearly and openly and that those should be reviewed. I have no difficulty with that. Do the Government have in mind further regulations or measures to limit the scope of trustees to invest in particular products or items? There is less enthusiasm now for equities, so other guidance may needed.
A specific issue has been raised with me about the use of derivatives, which trustees may wish to use for various purposes relating to the management of their investments. For example, different options may be used to manage different risks. If the business of a trustee of a pension scheme is anything, it is, hopefully, to manage risk, not least in the context of the risk-based levy. I do not want to anticipate our debates on that, but I am already getting quite excited about it.
I am informed that for tax purposes, section 659A of the Income and Corporation Taxes Act 1988 specifically provides that futures and options are to be treated as investments for the purposes of section 592(2) of that Act, so that exempt, approved retirement benefit schemes may claim exemption from income tax in respect of income derived from such contracts. The relevant bulletin from the Inland Revenue says that it will also regard certain swaps—where have I heard that expression before?—as investments for tax purposes
''Where an approved pension scheme uses interest rate swaps, currency swaps, equity swaps, credit derivatives or similar instruments . . . To hedge risks inherent in its existing investment portfolio of shares, bonds or similar securities, or . . . As part of a strategy to enhance the return from its existing investment portfolio, or . . . To create a synthetic exposure to investments of a particular type or in a particular market in line with the fund's normal policies of investing directly in such instruments''.
I hope that everyone is with me so far. However, the fact that these derivative contracts may be regarded as investments for tax purposes does not mean that
trustees have the power to use them when there are no specific powers in scheme rules.
The view of most lawyers who specialise in this area—hon. Members will not be surprised to hear that the briefing comes from one of them—is that the power to make an investment contained in section 34(1) of the 1995 Act is not sufficient to enable trustees to enter into derivative contracts. That is because the term ''investment'' is generally interpreted as referring to assets that are expected to produce income or capital appreciation rather than assets that are tools for managing risk. Had I received the briefing in time, I would have tabled a long—if not long, then at least fairly complex—amendment to deal with the problem.
One problem is that derivative contracts may require the trustees to assume obligations that may continue over a period of time and to provide security for any obligations that they may incur under the relevant contracts. In a traditional investment, the use of derivative contracts may require the trustees to do more than make a single payment at the outset of a transaction. To break it down into layman's terms, the derivative products that are now so popular and sophisticated allow trustees to manage risk, which has to be a good thing. I am not talking about swaps in the context of local councils that got into difficulties with swaps a few years ago. I am reliably informed that the legislation does not allow for that kind of investment. I suspect that the Minister may ultimately say that he will write to me, as this is a complex issue that is clearly important.
Good afternoon to you, Mr. Cran, and I welcome the hon. Member for Eastbourne to this afternoon's sitting. I am sure that his colleague, the hon. Member for Tatton (Mr. Osborne), brought him up to date on our proceedings this morning. It is good to see the hon. Member for Eastbourne clocking on to the late shift. Part-time work is an important part of the shadow economy, as we might call it.
Yes, we must.
Clause 199 is essentially a technical amendment to the provisions of the Pensions Act 1995 concerning the trustees' duty to maintain a written statement of investment principles. It takes account of article 12 of the EU directive on occupational retirement provision, which requires statements to be revised without delay after any significant changes are made to the investment policy and to be reviewed at least every three years. By contrast, the 1995 Act requires periodic reviews, but not within a specific time scale. The clause concerns the duty of the trustees to declare what their investment policy is, not what that policy should be.
We are considering the implications of the EU directive on investment by pension funds and whether we need further provisions. Of course, Inland Revenue rules are not the subject of the Bill, so the points that the hon. Member for Eastbourne raised are, although interesting, not strictly relevant. I have spoken about
introducing proposals, if needed. I listened to the technical point on derivatives with great interest but, as the hon. Gentleman anticipated, because he is a reasonable man, I will write to him on that.
Question put and agreed to.
Clause 199 ordered to stand part of the Bill.