Clause 144 - Cases where fraud compensation payments

Pensions Bill – in a Public Bill Committee at 3:00 pm on 1st April 2004.

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Amendment made: No. 391, in

clause 144, page 90, line 23, leave out from 'apply' to end of line 28 and insert—

'(8A) For the purposes of this section, 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) either—

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

(ii) since the date of the last insolvency event which occurred before the current event (but not before that day) a cessation event has occurred in relation to the scheme, and

(c) it does not occur in such circumstances as may be prescribed.'.—[Malcolm Wicks.]

Question proposed, That the clause, as amended, stand part of the Bill.

Mr. George Osborne (Tatton) (Con) rose—

The Parliamentary Under-Secretary of State for Work and Pensions (Mr. Chris Pond) rose—

Photo of George Osborne George Osborne Shadow Minister (Treasury)

It makes more sense if the Under-Secretary speaks first.

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

Let me make it clear that I choose who speaks first.

Photo of George Osborne George Osborne Shadow Minister (Treasury)

The Minister clearly agrees that it is important that we have a brief debate about this clause. It applies to other clauses up to clause 51. The clause transfers to the PPF the responsibilities of the pension compensation fund, which was set up in the groundbreaking Pensions Act 1995, which established the principle that people could be compensated for things that went wrong in this way with their pension scheme. My party thinks that it is sensible for only one organisation to administer the different types of funds. In our discussions of later clauses, I might deal with whether there is a requirement to have two separate funds that the PPF administers.

I want the Minister to tell us generally about the transfer of responsibilities and to assure us that that will happen smoothly, but I also want to ask him about what is, perhaps, the most important element. I must confess that what I am talking about is addressed in clause 211, but the principle—the amount of compensation payable—is important. In the 1995 Act, the level for that was set at 90 per cent. for defined contribution schemes where members are more than 10 years from retirement and for defined benefit schemes.

I had the opportunity in the lunch break, in between asking a question at Treasury questions and listening to an interesting statement, to speak to the Minister who had responsibility for pensions in 1995 and who helped to introduce the pensions legislation of that year, the right hon. Member for Richmond, Yorks (Mr. Hague).

I told him that I was likely to discuss these clauses this afternoon. I asked him why the compensation level was set at 90 per cent. rather than 100 per cent. First of all he said, ''hold on, let me think'', because some things have happened to him professionally since that time. However, he remembered that at the time the basic argument was about moral hazard. The Government of the day thought that it was sensible to set the compensation level at 90 per cent. rather than 100 per cent. because it might give an incentive to scheme members—people who worked for a company—to keep an eye out for fraud. Therefore, they would suffer some small loss, 10 per cent. of their pension, rather than be fully compensated if things went wrong. That would create an incentive and that is what my right hon. Friend the Member for Richmond, Yorks told me over lunch.

Of course, the striking thing is that that argument is very similar to that deployed earlier in our discussions by the Ministers about the PPF and the 90 per cent. compensation to scheme members who are not retired. Indeed, the Minister for Pensions made exactly the same kinds of arguments about moral hazard and how

it would provide an incentive to scheme members to keep an eye on the financial health of their company.

It struck me that it is difficult to come to any qualitative differentiation between the moral hazard of a scheme member keeping an eye out for fraud as opposed to the requirement for them to keep an eye out for financial incompetence. If it were a very large company, such as Allied Steel and Wire, there is an element of rough justice, because one cannot expect a steelworker to have any idea whether there is financial incompetence or fraud taking place at the top of the company. If we were talking about more senior members of the company's management structure, they might be just as aware of dodgy practices as they were that the company were not particularly well run or that it were facing financial difficulties.

Therefore, I thought that it was worth asking the Minister why the Government had come to the conclusion that in the case of fraud, as opposed to that of insolvency through poor business management, there should be full compensation. The moral hazard arguments were deployed by the Government in 1995—obviously, a different Government, but they probably had the same people advising them—so, why was there a change of mind in the intervening period?

I am sure that he might tell me that there was a recommendation in the Myners report and the that Government said in their Green Paper that they were going to make this proposal. However, if one examines the regulatory impact assessment—the explanation given by the Government for the changes—it says on page 15:

''If the proposed change were not implemented, the security of the pension rights built up by members of schemes that suffer from acts of dishonesty, would continue to be at risk.''

That seems to be just a statement of the obvious rather than an explanation for why the Government are changing their mind and, particularly, why they are creating a different playing field between those scheme members who lose their pension because of financial problems and those who lose their pension because of fraud. I thought that this would be a good opportunity to ask the Government to set out why they have changed their mind, albeit from a previous Conservative Government.

There are a couple of other points on clause 144 that I have asked the Minister about, particularly on the date. I might have misunderstood this, but as I understand it, it is only fraud that has taken place since 6 April 1997—if that is the right way of putting it—or rather a devaluation in scheme assets that has happened since that date as a result of fraud that is eligible. However, reference is made in the clause, or certainly in the explanatory notes to any other date appointed by the Secretary of State. Does that not mean that in theory—I do not suggest that this would happen in practice, but does that not mean that in theory the Secretary of State could remove the protection against fraud that exists under the 1995 Act? The Secretary of State could set a date in the future—2020, say—and suddenly remove all the protection against fraud that Parliament has

provided under that Act. I am not suggesting that this Secretary of State, or any other, Conservative or Labour, would do that, but it is worth probing the Minister on why the Secretary of State should be given that discretion.

Under subsection (6), there is a requirement on the trustees or managers to notify the PPF within 12 months of a fraud taking place, or 12 months beyond the point at which they should reasonably have known that a fraud was taking place. Again, there is a get-out clause; the end of the subsection adds the words:

''or within such longer period as the Board may determine in any case.''

What sort of criteria will the board use for extending the 12-month period? What are the good excuses that trustees or managers could deploy, particularly given that fail-safe arrangement, which allows a period of 12 months beyond the point at which the trustees or managers know, or ought reasonably to have known, that a reduction in the value of the scheme had taken place.

My main question to the Under-Secretary is about why the level of compensation has been raised from 90 to 100 per cent. However, the other two points, about the timing—the date of 6 April 1997—and about the 12-month period, are also important details. It would be good if the Under-Secretary responded to them.

Photo of Mr Chris Pond Mr Chris Pond Parliamentary Under-Secretary, Department for Work and Pensions

Good afternoon, Mr. Cran. As you saw, both the hon. Member for Tatton (Mr. Osborne) and I are eager to talk about clause 144—for two reasons, in my case. The first is that my hon. Friend the Minister of State has been carrying the burden of responding for most of today, and I get the sense that the Committee would like me to develop my thoughts on this group of clauses, especially as we will not be interrupted by Division bells this afternoon, and we can approach our deliberations in a more relaxed way.

Secondly, as I have the label of anti-fraud Minister, and as we have made considerable progress towards our fraud targets, I want to explore some of the issues associated with occupational pension scheme fraud. I can reassure the Committee that identified fraud in occupational schemes is quite rare. As the hon. Member for Tatton reminded us, the Pensions Compensation Board was established under the 1995 Act in 1997, following the Maxwell incidents. In the seven years since then, that board has only needed to make three payments in three cases, totalling less than £570,000.

Although identified fraud is rare, when it happens it can have a serious effect on the current or future incomes of scheme members. The PCB board has provided an important safety net for members, and it is right that the PPF board should replicate and build on that function.

Clause 144 lists the cases in which fraud compensation can be paid. The rules are effectively the same as those of the PCB, as the hon. Member for Tatton confirmed, except that the PCB currently pays up to 90 per cent. of the fraud loss. Clause 211, which we have already considered, and to which the hon. Member for Tatton has also referred, makes provision

for the PCB to pay the full amount until the PPF takes over responsibility for fraud compensation payments. I will come to the hon. Gentleman's questions about why that change was made in a few moments, although that has been flagged up.

The main principles are that the scheme must be an occupational pension scheme, or treated as such. Its assets must also have been reduced by a dishonest act or omission since the relevant date, and it must have an insolvent employer, or one that is not to continue trading, if the insolvency occurred after the PPF ''go-live'' date.

In conclusion, the clause will enable us to help schemes when theft or fraud occurs, and it clearly sets out the circumstances in which the board can offer that help. I say ''in conclusion'' but that would, of course, be discourteous to the hon. Member for Tatton. His first question was why there should be a separate fund. It is important to recognise that the PCB deals with both defined contribution and defined benefit schemes, as fraud can, of course, affect DC schemes as well as DB schemes. However, the PPF will apply only to DB schemes. Therefore, we have to keep the two funds running side by side.

On the figure of 90 per cent. and the reason why we are increasing the amount of compensation, clause 211 was based on an assumption that the simplest and fairest approach in the exceptional circumstance of theft by fraud is fully to compensate the loss, especially since such occasions are relatively rare, instead of attempting to link compensation to scheme-specific valuation methods. The intention is that the PCB will operate under the more generous rules until the fraud compensation fund becomes effective. That partly answers the hon. Gentleman's point about moral hazard. On PPF, we have had much discussion about the figures of 90 per cent. and 100 per cent, and one of the major reasons for that was the issue of moral hazard. As we have heard, the amount of identified fraud in relation to occupational schemes is very small. It is important that we ensure that scheme members have safeguards against that fraud, but the potential impact of moral hazard is of a wholly different order of magnitude. That is why it seems appropriate to make full compensation in those rare cases in which there has been fraud.

Photo of George Osborne George Osborne Shadow Minister (Treasury) 3:15 pm, 1st April 2004

The Under-Secretary says that the distinction is one of quantity, rather than quality. He says that because there are very few cases of fraud, we are not talking about a large problem. However, first, there may be bigger frauds in future; it may just be that we have been lucky. Secondly, he has not established the difference in principle. What is the difference in principle between the moral hazard that applies to an employee of a steel factory, in terms of the financial health of that company, and the role of the steel employee in terms of the fraud going on in that company? Surely the same principle of moral hazard applies.

Photo of Mr Chris Pond Mr Chris Pond Parliamentary Under-Secretary, Department for Work and Pensions

That is a valid point. Clearly, there is an issue to do with scheme members wanting to keep an eye on potential fraud, just as they might want to do in

relation to the proper management of the scheme. However, the point about the order of magnitude is important, in terms of the implications when a scheme member suffers the impact of one of the relatively rare occurrences of fraud. Of course, that impact can be considerable. In those circumstances, there is rough justice, but in this case the rough justice is perhaps on the side of the scheme members, whereas previously in our discussions it worked slightly in the other direction. That is the reason why we reached our conclusion.

The hon. Gentleman also asked why the period could be extended beyond 12 months. That is quite simply because, in many cases, the investigation of fraud can be complex and lengthy. If it appears that further time is needed to uncover that fraud and to ensure that scheme members are compensated, it may be necessary to extend the period. That is why we want to make provision for that in the Bill.

Question put and agreed to.

Clause 144, as amended, ordered to stand part of the Bill.

Clause 145 ordered to stand part of the Bill.