New Clause 44 - Financial support directions

Part of Pensions Bill – in a Public Bill Committee at 2:30 pm on 27 April 2004.

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Photo of Malcolm Wicks Malcolm Wicks Minister for pensions, Department for Work and Pensions 2:30, 27 April 2004

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.