New Clause 44 - Financial support directions

Pensions Bill – in a Public Bill Committee at 11:00 am on 27th April 2004.

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'(1) This section applies in relation to an occupational pension scheme other than—

(a) a money purchase scheme, or

(b) a prescribed scheme or a scheme of a prescribed description.

(2) The Regulator may issue a financial support direction under this section in relation to such a scheme if the Regulator is of the opinion that the employer in relation to the scheme—

(a) is a service company, or

(b) is insufficiently resourced,

at a time determined by the Regulator which falls within subsection (7) (''the relevant time'').

(3) A financial support direction in relation to a scheme is a direction which requires the person or persons to whom it is issued to secure—

(a) that financial support for the scheme is put in place within the period specified in the direction,

(b) that thereafter that financial support or other financial support remains in place while the scheme is in existence, and

(c) that the Regulator is notified in writing of prescribed events in respect of the financial support as soon as reasonably practicable after the event occurs.

(4) A financial support direction in relation to a scheme may be issued to such one or more of the persons falling within subsection (5) as the Regulator considers appropriate.

(5) A person falls within this subsection if the person—

(a) is the employer in relation to the scheme at the relevant time, or

(b) is, at the relevant time, connected with or an associate of the employer.

(6) A financial support direction must identify all the persons to whom the direction is issued.

(7) A time falls within this subsection if it is a time which falls within a prescribed period which ends with the determination by the Regulator to exercise the power to issue the financial support direction in question.

(8) For the purposes of subsection (3), a scheme is in existence until it is wound up.

(9) No duty to which a person is subject is to be regarded as contravened merely because of any information or opinion contained in a notice given by virtue of subsection (3)(c).

This is subject to section 234 (protected items).'.—[Malcolm Wicks.]

Brought up, and read the First time.

Photo of Mr Win Griffiths Mr Win Griffiths Labour, Bridgend

With this it will be convenient to discuss the following:

Government new clause 45—Meaning of ''service company'' and ''insufficiently resourced''.

Government new clause 46—Meaning of ''financial support''.

Government new clause 47—Contribution notices where non-compliance with financial support direction.

Government new clause 48—The sum specified in a section [Contribution notices where non-compliance with financial support direction] contribution notice.

Government new clause 49—Content and effect of a section [Contribution notices where non-compliance with financial support direction] contribution notice.

Government new clause 50—Section [Contribution notices where non-compliance with financial support direction] contribution notice: relationship with employer debt.

Government new clause 51—Sections [Financial support directions] to [Section [Contribution notices where non-compliance with financial support direction]: relationship with employer debt]: interpretation.

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

We are making good progress today and speeding through the selection list, albeit we are providing proper scrutiny. The Department is keeping up with the Minister, which is always useful.

The new clauses in the group deal with moral hazard and other matters and follow on from the debate on the new clauses that we have just agreed. They address specific acts undertaken or omissions made by employers and connected persons with a view to avoiding their pension liabilities. However, there may be circumstances in which, as a result of actions that may well have been perfectly legitimate and not aimed at avoiding pension liabilities, schemes end up with a participating employer who is financially weak and unable to meet its pension liabilities. In particular, that may apply in the case of the debt on the employer imposed under section 75 of the 1995 Act in the event of the scheme winding up or the sponsoring employer becoming insolvent.

An example of that is the use of service companies, often as part of entirely legitimate group arrangements. Such entities frequently have no material assets and their sole revenue comes from amounts charged to other group companies for the service of the employees, pursuant to inter-company agreements. If the parent company wishes to dump its pension liabilities, it can simply terminate its agreement with the company and wind both it and the scheme up. The service company will have no assets with which to pay any section 75 debt due. Similarly, the participating employer may, by chance, be a weak member of the group, equally unable to meet any debt and suitable to be sacrificed by the parent in order to reduce the group's pension liabilities. I am sure that

hon. Members will agree that, in general terms, sponsoring employers of pension schemes should be genuine entities carrying on a material trading activity or holding material assets, so that the employer guarantee of the scheme is meaningful.

The provisions in new clauses 44 to 51 give the regulator the power to issue a notice requiring that appropriate financial support be put in place where it concludes that the sponsoring employer of a scheme either is a service company or is insufficiently resourced for it to be appropriate for that company to bear its share of the group's pensions liabilities when its net assets are compared with those of other connected or associated persons. Such persons will include members of the same company group, controlling shareholders, directors, and the owners of unincorporated businesses.

The regulator may issue a direction requiring that financial support for the scheme be put in place to one or more of the persons set out in new clause 44(5), as considered appropriate. A direction can thus be issued to the employer and to any person connected or associated with the employer. The direction will not place a heavy burden on responsible employers who, as a result of perfectly legitimate business transactions, find themselves with a comparatively weak or service company as the sole sponsoring employer of the pension scheme.

The group can put in place a range of reasonable and flexible financial support arrangements in order to comply with the direction, as set out in new clause 46. They include: the application of joint and several liability for pension liabilities across the whole company group, so that the debt on the employer could be claimed against any member of the group; an agreement by the ultimate parent company within the group, whether it is participating in the scheme or not, to meet the employer's pension liabilities; and the provision of an arrangement whereby additional financial resources are provided to the scheme, for example, an appropriate bank guarantee.

As well as the arrangements that I have outlined, companies will always have the option of moving the liabilities out of the weak company to a stronger one, or strengthening the company before the direction is issued. There will be advance warning of the direction. However, if a person fails to comply with a direction to put in place financial support, the regulator may issue a notice requiring that a contribution be made to the pension scheme. Enforcement action will thus be taken only against those employers who have deliberately manipulated company structures in order to rid themselves of pension liabilities, or who refuse to provide adequate safeguards for their workers' pensions.

Where there is non-compliance with a financial support direction, the regulator may issue a contribution notice

''to any one or more of the persons to whom the original direction was issued''.

It can do that only if it is of the opinion

''that it is reasonable to impose liability on the person to pay the sum specified in the notice.''

New clause 47 sets out the matters to which the regulator should have regard when considering whether it is reasonable to impose liability, including: whether the person has taken reasonable steps to secure compliance with the financial support direction; the relationship that the person has or had with the employer or with the parties to any arrangements put in place; any connection that the person had with the pension scheme; and the financial circumstances of the person.

Should the regulator decide to impose liability on more than one person, new clause 49 will allow it to apportion liability for the contribution between different persons, or to decide that the contribution liability should be joint and several, so that it can claim the whole amount against any one person if it so wishes. In common with the provisions set out in new clauses 39 to 42, the contribution required will be calculated by the regulator with reference to the amount of the debt that would be due from the employer under section 75 of the 1995 Act if the debt were triggered and calculated at the time of the determination to exercise the power. If there is an outstanding section 75 debt from the legal employer at the same time as an outstanding contribution notice, the regulator will be able to suspend enforcement action by the trustees for recovery of the debt, pending recovery of the contribution liability, in circumstances in which it would not be sensible for both to happen at once.

Unlike the provisions in new clauses 39 to 42, these provisions do not relate to actions taken after 11 June 2003, because they deal with existing and continuing situations, or faits accomplis—as a good European, one must try to pronounce these things correctly—rather than specific actions. Therefore, where actions have been taken in the past to put weak companies in as sponsoring employers before the PPF is established, the regulator will be able to take action to address them after the PPF is established.

In order to provide comprehensive protection for scheme members and the PPF against employers who seek to rid themselves of their pension liabilities, the Government intend to legislate further, using regulations, to reform the position regarding the application of debt upon withdrawal from associated multi-employer schemes, which usually consist of several subsidiaries of one company. Currently, a company can withdraw from such a scheme and cease to be a sponsoring employer if other companies are left in, so that it will not be liable for any shortfall if the scheme winds up in the future. Employers can do that relatively cheaply, as the withdrawal debt is based on the minimum funding requirement.

The Government will amend regulations under sections 75(10) and 118(1) of the 1995 Act to provide that when a participating employer withdraws from a multi-employer scheme with associated employers, a full buy-out debt should be triggered unless appropriate financial support is put in place, in which case a scheme-specific debt will be payable. The financial support arrangements will be similar to those

outlined in new clauses 44 to 51, which deal with service companies or insufficiently resourced companies, with the additional option to transfer pension liabilities to an appropriate new scheme.

Those provisions will apply only to associated multi-employer schemes, as that is where the key risk of employer manipulation lies. They will not apply to multi-employer schemes made up of non-associated employers, except to the extent that there are associated employers within them, because employers who participate in such schemes are not owned or controlled by the same parent company. Therefore, there is not the same potential for one company to manipulate the arrangements.

The provisions in new clauses 44 to 51, and the proposed amendments to the regulations governing debt on withdrawal from associated multi-employer schemes, are designed to address situations in which, whether by chance or design, the pension liabilities are situated in a company that is substantially weaker than the rest of the group, or other parts of it. Such a situation increases the risk that the scheme will be abandoned without being able to recover the full scheme costs from the employer—leaving the PPF to pick up the bill—and the risk that certain members will have their benefits cut back even if other parts of the group would be able to meet the cost.

The message is that responsible employers with the resources to do so should put in place arrangements that are adequate to support their schemes. I am sure that hon. Members will support the principle and I urge them to accept the amendments.

Photo of Nigel Waterson Nigel Waterson Conservative, Eastbourne 11:15 am, 27th April 2004

This is a second instalment of the moral hazard provisions. It poses more problems than the last group of new clauses, as the provisions are directed at people who might be blameless and could be doing something perfectly legitimate. I hope that we can recognise a crook—Robert Maxwell certainly was one—but in a corporate situation, pathological optimists can cause more damage than crooks. We are considering people who are not doing anything wrong, so it is difficult to pin down the type of behaviour that new clauses 44 to 51 seek to address.

The use of service companies is common. Many large law practices use them to make legitimate tax savings, but they are not designed to avoid pensions

liabilities. However, it must be easy for a main company to cut its links with its service company when the going gets tough. It is a tricky matter. The Government say in the explanatory notes that they believe that

''sponsoring employers of pension schemes should be genuine entities carrying on a material trading activity or holding material assets—so that the employer guarantee of the scheme is meaningful.''

Who could disagree with that aspiration? However, it is a difficult judgment to make; we do not want a lot of old Fabians—people with no experience of business or of running any kind of profit-making organisation—to have to judge whether companies are genuine entities or whether they are properly resourced.

There are two bases on which the regulator's powers will kick in. The first is where it concludes that the sponsoring employer is a service company. That is not difficult to do. In most cases, it will be called a service company and it will not require a bulldog or a bloodhound to reach that conclusion. The second category, in which the regulator concludes that a company is insufficiently resourced for the purposes—as required by new clause 44(2)(b) and defined in new clause 45(3)—is more difficult. It leapt off the page when I read the new clauses. How can any Government or Government-appointed body such as the regulator make such a judgment?

The employer is defined as being insufficiently resourced if

''at that time the employer has insufficient net assets to enable it to meet a prescribed percentage of the estimated section 75 debt in relation to the scheme''.

We have discussed how section 75 debt arose in the far-sighted Conservative legislation of 1995. However, our old friend ''prescribed'' crops up again. I assume that it is intended that there will be a series of regulations to prescribe the percentage. We are entitled to tease out of the Minister what the Government have in mind. What issues do they think should be taken into account in deciding the prescribed percentage? If the percentage were high, it would be onerous on somebody who was not doing anything wrong; if low, it would affect the protection offered.

It being twenty-five minutes past Eleven o'clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at half-past Two o'clock.

Griffiths, Mr. Win (


Baird, Vera

Barker, Gregory

Brennan, Kevin

Cunningham, Mr. Jim

Dean, Mrs.

Edwards, Mr.

Hamilton, Mr. Fabian

Holmes, Paul

Jones, Mr. Kevan

Keeble, Ms

Khabra, Mr.

MacDougall, Mr.

Moran, Margaret

Pond, Mr.

Price, Adam

Robertson, John

Tynan, Mr.

Waterson, Mr.

Webb, Mr.

Wicks, Malcolm