New Clause 44 - Financial support directions

Pensions Bill – in a Public Bill Committee 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.

Question proposed [this day], That the clause be read a Second time.

Question again proposed.

Photo of Mr James Cran Mr James Cran Conservative, Beverley and Holderness 2:30 pm, 27th April 2004

I remind the Committee that 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 Nigel Waterson Nigel Waterson Conservative, Eastbourne

Welcome back to our deliberations, Mr. Cran.

I was making the point that in this tranche of new clauses dealing with moral hazard the regulator has the power to issue a notice for financial support where there is a service company—I imagine that that is straightforward to define—or, more worryingly, where a scheme is insufficiently resourced. I was following the trail through the new clauses to find out how that was defined.

In subsection (3) of new clause 45 there are two requirements. The first is that a prescribed percentage of the section 75 debt is unable to be met. Our old friend, the word ''prescribed,'' has come up yet again, and I asked the Minister to give us just a glimpse of his thinking on what will be included in subsequent regulations. The second requirement is that there is at the relevant time a person who is connected with, or an associate of, the employer and who has sufficient net assets to meet that percentage of the debt. In new subsection (4), there is the promise of further regulations for determining, calculating and verifying a person's net assets. Not for the first time we are noticing that there will be a few gaps in the Bill if the Government have their way. We, and those in the outside world who take an interest in our deliberations, deserve a fuller explanation of how these rather important matters in the context of moral hazard will be approached.

New clause 45 contains a definition of a service company, which is reasonably straightforward. A company's turnover is

''solely or principally derived from amounts charged for the provision of the services of employees . . . to other companies . . . of the same group''

In much of the British economy these days, the pattern is to have ''shell'' companies with a lot of outsourcing, subcontracting and so on, for all the best and most legitimate reasons. Again I press the Minister on whether he is confident that his definition in new clause 45 of a service company will meet all requirements. The explanatory notes to the new clauses say that

''the test is designed to ensure the responsibility to meet the pension liabilities does not rest with the weakest company in what may otherwise be a financially healthy group.''

That means that judgments will have to be made, presumably by the regulator's staff, about what is a weak company and what is a financially healthy group.

New clause 46 sets out the meaning of financial support. It says an arrangement can be applied jointly and severally for pension liabilities, and it sets out other requirements. Having referred to bank guarantees and other methods, at the end it rather delphically refers to

''such other arrangements as may be prescribed.''

It would be interesting to know whether that was just the draftsman covering himself, or whether the Government have in mind some specific circumstances that might apply.

The last thing in the explanatory notes is the promise of yet more Government amendments on Report. Unless the Minister says to the contrary, I assume that those amendments will be entirely consequential in drafting, and that the real meat of the proposals is contained in new clauses 44 to 51.

Photo of Steve Webb Steve Webb Shadow Secretary of State for Work and Pensions

I have just a brief postscript to make. This morning, we dealt with one set of amendments that tried to tackle the moral hazard problem. Although this set of new clauses are described in the briefing notes that we were given by the Department as ''moral hazard clauses,'' they are a different animal in the sense that they do not relate to where people have deliberately arranged their affairs to put an extra burden on the PPF. They can be applied to circumstances where the arrangements that people have made could put a burden on the PPF. I do not understand why that is a moral hazard. The Minister said clearly that the provisions relate to cases in which people may have done something perfectly legitimate and that the Government are giving the regulator the power to tell them to reorder their affairs to prevent a future liability on the pension protection fund. If that is the context, I am slightly puzzled, and I wonder whether the Minister could clarify the issue.

The Minister suggested that using the power implied nothing immoral about the company or the arrangement that it had set up—that it was, for example, artificial. He said that it might have set itself up in a perfectly legitimate way and that the side effects would not have mattered before we had the PPF, but now that we did, there could be problems, and the Government wanted powers to make people change their behaviour. That is not a moral hazard in my book, but I may have misunderstood the point.

This morning, we asked the Minister to explain what the Government meant when they said that the regulator had warned that schemes were already starting to alter their structures and conduct so that they could put a burden on the PPF. We asked him for details, but—undoubtedly by accident—he did not give us any. What we were interested in—this also relates to the provisions before us—is evidence from the regulator that schemes are reordering their affairs

to take advantage of the PPF and that service companies are becoming more of an issue. That might be a kind of moral hazard, but that was not where the Minister was coming from. The key question, however, is what the Government mean when they say that the regulator has already started to give warnings. What is the scale of the problem? How big is the moral hazard that we already face? I am sure that it was only by accident that the Minister did not answer the question.

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

Welcome to our deliberations, Mr. Cran. We may well spend all of Thursday on the matters before us, but it is just possible that we will conclude today.

As the hon. Member for Northavon (Mr. Webb) reminded us, this group of new clauses deals with a different situation from the earlier group, which related to arrangements that are deliberately set up to avoid responsibilities. Here, we are dealing with company structures that have been set up for perfectly legitimate reasons. However, I shall try to deal with the hon. Gentleman's point at the end of my remarks.

First, let me deal with some of the specifics raised by the shadow Minister, the hon. Member for Eastbourne (Mr. Waterson). The power to require financial support to be put in place should not impose a heavy burden on responsible employers who, as a result of perfectly legitimate business transactions, find themselves with a comparatively weak all-service company as the sole sponsoring employer of the pension scheme.

There is a range of reasonable and flexible financial support arrangements that the group can put in place to comply with the direction. In addition to the arrangements listed, companies will always have the option of moving the liabilities out of the weak company into a stronger one, or strengthening the company itself before the direction, of which it will be warned in advance, is issued.

Enforcement action will therefore be taken only against employers who have deliberately manipulated company structures to rid themselves of pension liabilities, or who refuse to provide adequate safeguards for their employees' pensions. Responsible employers who happen to have their pension liabilities sitting in service companies could, however, start taking steps now to ensure that their employees are protected and to avoid any question of the power applying to them.

The powers have been approved by the Department of Trade and Industry, which agrees that they should have no effect on legitimate business transactions or company restructurings. The drafting of the provisions is designed specifically to catch only those who deliberately manipulate their affairs to take advantage of the PPF entry rules.

I was asked about the definition of ''insufficiently resourced''. It has two elements: first, that the employer itself is weak and, secondly, that another connected person, such as another company in the group, is stronger. Both elements are measured by reference to a notional section 75 debt, which might be payable if the scheme wound up. An employer is

insufficiently resourced if it could not pay even a proportion of that notional debt, but another connected party could. The aim of the test is to identify where the employer is disproportionately weak compared with other connected parties.

I was asked about the calculations that hinge on the definition of ''relevant time''. The relevant time is intended to be as close as possible to the time of the determination to issue a direction. Because of the need to carry out calculations and to gather financial information, it will not be possible for the relevant time to occur on the same day as the decision to issue the direction, so the regulator is given the flexibility to allow sufficient time to carry out the calculations.

I was asked about the meaning of ''prescribed'' in connection with the percentage for insufficient assets. It means prescribed by regulation. We will consult on the appropriate percentage. The purpose of the percentage is to provide for a comparison between the weak company and the other, stronger members of the group.

The definition of net assets will be based on the definition in section 264 of the Companies Act 1985. However, that definition allows companies to hold certain assets, such as property, at artificially low values by not requiring the valuation to be updated if its value has risen. The definition will be adjusted accordingly, to ensure that it produces a current figure.

In general, the intention is to give employers as much flexibility as possible in the arrangements that can be adopted. The list represents all the arrangements currently identified as providing an appropriate degree of protection. However, if other appropriate arrangements are identified, the power allows the list to be extended in order to give employers more options. Employers will be able to apply to the regulator under clause 75 if they wish to switch to the new arrangements. As well as the arrangements listed, companies will always have the option to move the liabilities out of the weak company to a stronger one, or to strengthen the company itself before the direction, of which it will be warned, is issued.

The hon. Member for Eastbourne asked about shell companies. One reason for covering companies that are insufficiently resourced is that covering only service companies would not be a wide enough provision to cover shell companies such as those mentioned by the hon. Gentleman.

The hon. Member for Northavon was puzzled, quite reasonably, by the fact that, if company structures are set up for perfectly proper reasons, we should have included them in clauses dealing with moral hazard. There are two possibilities. If it is a relatively complicated company structure—a parent company, a service company or whatever—issues could arise about the scheme's funding. It could go into the PPF. However, the powers that we have included could enable the parent company or other companies to move assets to save the situation. It is not necessarily that the parent company or anyone else was thinking of doing any wrong, but pension liabilities would nevertheless not have been met.

A tougher situation would arise if the company structure could be used or abused by a parent company that realised that its current structure enabled it to not take on pension responsibilities, even though the company structure was originally designed for perfectly reasonable company purposes. That is probably where the moral hazard arises.

I was asked about current cases. I am sorry not to have answered earlier, but I was not aware of the data—much of it seemed to be a series of rumours or anecdotes, and a developing atmosphere. However, the Occupational Pensions Regulatory Authority has advised us that it believes that some companies are restructuring to avoid their pension liabilities, and it believes that they want to pass them instead to the new pension protection fund. However, OPRA does not currently have powers to deal with those situations, and cannot request the appropriate information about the employer. We are therefore unable to give figures. OPRA is monitoring the cases that it knows of, and is working closely with the Department and trustees to protect members affected. It is a case of our hearing mood music that we do not like the sound of; that is why we need to take on the powers given in the provisions.

Question put and agreed to.

Clause read a Second time, and added to the Bill.