Clause 99 - Duty to assume responsibility for

Pensions Bill – in a Public Bill Committee at 3:00 pm on 25th March 2004.

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Photo of John Robertson John Robertson Labour, Glasgow Anniesland 3:00 pm, 25th March 2004

I beg to move amendment No. 416, in

clause 99, page 61, line 14, leave out from 'where' to end of line 15 and insert—

'(a) a qualifying insolvency event has occurred in relation to the employer in relation to an eligible scheme; or

(b) such an event would have occurred but for an agreement reached by the trustees or managers of the scheme and the employer in order to avoid a qualifying insolvency occurring.'.

Under the present proposal, the PPF will be able to help only where employers are insolvent. The amendment addresses the situation when trustees reach an agreement with the employer to waive a debt owed to them. The employer, unable to fund the pension scheme, puts forward a proposal whereby the

scheme will wind up in deficit. Ordinarily that would trigger the obligation on the part of the employer to make up the deficit, under section 75 of the Pensions Act 1995. Unfortunately, in such a case the employer cannot afford to do that. Under the agreement that he reaches with the trustees, that debt is waived in whole or in part, the scheme winds up with an unmet deficit, and benefits are cut. However, waiving the debt means that the employer is safe and no insolvency proceedings are required.

That situation looks similar to the one that the PPF is meant to deal with. However, it is not covered by the Bill. To fall within clause 99, which requires the PPF to take responsibility for the scheme, the employer must be insolvent. To fall within clause 101, which enables trustees to call on the PPF, the trustees must be satisfied that the employer is unable to meet its debts. Arguably the trustees could refer the scheme to the board under clause 101, but I will explain in a moment why I do not think that that would happen.

The amendment would bring those compromises within the scope of clause 99, and would require the PPF to assume responsibility for the scheme where a compromise had been agreed, whether or not the trustees saw fit to refer the scheme to the board. The main purpose of the amendment is retrospection. Amendments were tabled to clause 98 so that the PPF would cover a scheme that had already been wound up. Unfortunately, they were not accepted.

However, where the trustees have agreed the compromise and the situation is favourable schemes fall within the definition of ''eligible scheme'', because once the compromise is agreed, the scheme inevitably winds up. However, it will still not be covered by the PPF, because clause 99 requires an insolvency event. Clause 101 cannot apply because there is no question of the employer being unable to pay its debts. The amendment would bring such schemes within clause 99, so that the PPF would have to take responsibility for a scheme for which a compromise had been agreed and the scheme had been wound up in deficit. The unmet benefits would fall to be restored under clause 128.

An example of such a case is Triplex, where a debt of £18 million was compromised at £500,000. After the PPF is in place, trustees might not be prepared to make a compromise agreement such as that. Instead they might push companies into insolvency, and that could lead to an avoidable loss of jobs. I ask the Minister to address those probing questions. Without doubt, at the end of the day our aim is to try to keep people in employment, and not to force companies into insolvency.

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

The amendment raises one of the more complex issues in a difficult field. I understand the points that my hon. Friend has made. Clause 99 details the board's duty to assume responsibility for schemes following an insolvency event occurring in relation to their sponsoring employer. The amendment would mean that if the trustees of a scheme with a solvent employer had reached a compromise agreement with that employer to accept a lower amount than was due to the scheme on wind-up, the scheme could still be covered by the PPF. Such an

agreement would occur where the employer was experiencing such financial difficulties that he was on the verge of insolvency, and the debt that the employer would owe to the scheme could not be paid in full.

The trustees might also find that the effect of such a compromise agreement was that the amount that the scheme received from the solvent employer was higher than it would have received if the employer had gone into insolvency. In that situation, the compromise should result in the employer avoiding insolvency and the scheme receiving more funds than it would otherwise have done.

Compromise agreements should be made with great care, and only after careful consideration of all relevant information. As hon. Members are aware, scheme trustees have a fiduciary duty to act in the interests of all scheme members and beneficiaries at all times. Also, trustees are answerable via the courts if they breach those responsibilities. Trustees should believe that they have taken the best decision available to them having taken account of the position of their scheme.

The amendment would allow schemes, on which a compromise agreement had been reached with the sponsoring employer in order to avoid insolvency, to enter the PPF. Although I have sympathy for the underlying spirit of the amendment, it could lead to abuse and ultimately jeopardise the existence of the PPF. With such a change, trustees and employers may be motivated to reach compromises so that the scheme can enter the PPF and the employer can continue as a going concern. Trustees may be tempted to accept a compromise agreement that offered the scheme low amounts of money on the basis that the scheme would still be able to enter the PPF and pensions would be looked after. That would be likely to have a significant impact on the PPF's funding, and PPF would not be able to claim all of the funds to which it was entitled. To meet the corresponding increase in its liabilities, it may also have to increase the levy substantially.

Ultimately, the impact of such an approach could be to affect the continued existence of the PPF. The avenue that the amendment provides could prove attractive to the unscrupulous employer. He could pay his final salary scheme a few pennies and dump his pension liabilities on the PPF. That may also provide him with competitive advantages over more principled employers.

As I have suggested, I find this issue difficult. I learned a lot about it when I met members affected at Triplex, which the hon. Gentleman mentioned. Trustees who are considering a compromise agreement in good faith must weigh the need for the firm to continue and for safeguarding jobs against the rights of all pension scheme members, but especially those close to retirement age. That is a genuine dilemma for trustees.

Photo of Mr Bill Tynan Mr Bill Tynan Labour, Hamilton South 3:15 pm, 25th March 2004

I understand the argument that the amendment could force a bad employer to wind up a scheme or ask the trustees to wind it up. However, a scheme could be in difficulty because there is no funding, and, if the employer does not wind up the

scheme, his only other choice would be to close down the business. Under those circumstances, the members of that scheme would benefit from the PPF because the company would be insolvent. The amendment is an attempt to keep jobs and ensure that the company remains if pension schemes agreements are made similar to those of Bradstock. Will the Minister examine the proposition closely and consider what we can do under the circumstances of compromise agreements? I understand that this is a complex issue, but it is important that decisions are taken in the best interests of scheme members and employers.

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

My hon. Friend has made the point well, as did my hon. Friend the Member for Glasgow, Anniesland (John Robertson). I said that I would find such matters difficult. It is a genuine dilemma. However, as I have emphasised, there is a real danger of what people would call moral hazard. Why should an employer put more into a pension fund if he or she knows that the PPF will ride to the rescue? It is a difficult one in terms of perverse incentives. When I spoke to the Triplex workers, I gained a better understanding of the difficulty. I shall ask my hon. Friend the Member for Glasgow, Anniesland to withdraw his amendment. However, the Department and I want to reflect further on the matter. I mean that sincerely, but I will do so without obligation. The problem is difficult and it requires some further thought. I thank my two hon. Friends for their contributions to the debate on such an important matter.

Photo of John Robertson John Robertson Labour, Glasgow Anniesland

I listened to the Minister and my hon. Friend and I shall reflect on what he said. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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

I beg to move amendment No. 368, in

clause 99, page 61, line 26, at end insert—

'(2A) For the purposes of this section, in relation to an eligible scheme an insolvency event (''the current event'') in relation to the employer is a qualifying insolvency event if—

(a) it occurs on or after the day appointed under section 98(2),

(b) it—

(i) is the first insolvency event to occur in relation to the employer on or after that day, or

(ii) does not occur within an assessment period (see section 104) in relation to the scheme which began before the occurrence of the current event, and

(c) it does not occur in such circumstances as may be prescribed.'.

Photo of Mr James Cran Mr James Cran Conservative, Beverley and Holderness

With this it will be convenient to discuss Government amendments Nos. 369, 374 and 391.

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

Amendments Nos. 368 and 369 would amend clause 99. They are grouped with amendments Nos. 374 and 391, which would make consequential changes to clauses 104 and 144. The clause sets out the criteria that must be satisfied before the board can assume responsibility for a scheme when an insolvency event has occurred.

Amendment No. 368 would add further provision, setting out that any insolvency event that occurs in relation to the scheme is only a qualifying event for the purpose of entry to the PPF if it occurs after the day that the PPF starts operating which, subject to Parliament, is planned for April 2005 and defined under clause 98 as the ''appointed day''. Clause 98 makes it clear that any scheme that commences winding up prior to the appointed day will not be covered by the PPF. The amendment further ensures that scheme trustees will not be able to manipulate their situation in the run up to the PPF to gain entry. Without the amendment, a company could go bust today, but if the trustees could prevaricate for long enough and delay commencing winding up the pension scheme, the PPF could be liable to pay compensation.

The amendment also includes a power to prescribe further circumstances in which an insolvency event would not be classed as qualifying for the purposes of the fund. That power will protect the PPF and levy payers from employers who can manipulate the insolvency proceedings as a way of letting their pension scheme fall into the PPF when it is up and running.

Photo of George Osborne George Osborne Shadow Minister (Treasury)

I understand that the Minister is trying to protect the PPF from inheriting many insolvencies, but the counterpoint to his argument is that some workers will not have protection in the absence of a retrospective scheme because the insolvency people could not prevaricate. Does he have an idea of how many people during the next year that could affect? If we did not accept the amendment, a company could hold out and people could receive some compensation by entering into the scope of the PPF.

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

No, I do not, but there will be some people.

I shall continue my explanation. An insolvency event, as defined under clause 95, could occur after the appointed day but in fact be a stage in an ongoing insolvency proceeding that started prior to the introduction of the PPF. For example, a company could go into administration today but hold off its liquidation until after the PPF goes live—hopefully, in the spring of next year.

As responsible businesses and employers gear themselves up to pay the levy from next year, we must do all we can to protect the PPF and those levy payers from moral hazard and from employers and trustees who would seek to bend the rules, undermining a principle at the core of the PPF. In that respect, the PPF is like an insurance scheme. People cannot get the payout if they have not paid the premium. I should add that without the amendment the line on retrospection would be blurred, and members of schemes facing difficulties now would face a lottery as to whether they might potentially be able to enter the PPF entirely independent of whether their scheme trustees or managers might be able to manipulate the rules surrounding winding up.

Amendment No. 374 makes a consequential change to clause 104 to ensure that the definition of a qualifying insolvency event is consistent with the

provisions relating to the assessment period. Amendment No. 391 has the same effect on clause 144, which relates to fraud compensation. I urge hon. Members to agree the amendment.

Amendment agreed to.

Amendment made: No. 369, in

clause 99, page 61, line 28, leave out paragraph (a).—[Malcolm Wicks.]

Clause 99, as amended, ordered to stand part of the Bill.