HL Deb 01 November 2004 vol 666 cc106-11

Consideration of amendments on Report resumed on Clause 44.

[Amendment No. 64 not moved.]

Baroness Noakes moved Amendment No. 65:

Page 34, line 5, leave out "net assets" and insert "resources"

The noble Baroness said: My Lords, my noble friend Lord Higgins thinks that I have not been doing enough during this Report stage, so I have been put in the lead on this group of amendments. In moving the amendment, I shall also speak to Amendment No.71. They replace the concept of "net assets" in the test of being insufficiently resourced.

First, I apologise to the Minister for not writing to her on the points which arose during Grand Committee debates. When I reviewed the Hansard report of our discussion I did not feel that there was much that I could add and I was pleased to note that the Government had included the matter of "net assets" in their summer consultation.

I believe that Clause 44 tries to measure whether an employer is "good for" a percentage of the Section 75 debt. I was particularly concerned in Grand Committee by the Minister's explanation that net assets would be based on Section 264(2) of the Companies Act 1985. That means that, via other sections, the definition of net assets is tied to the accounting provisions of Schedule 4 to the Companies Act 1985.

Schedule 4 basically values assets using the historical cost convention unless a company opts to use the alternative valuation bases. The net effect of those rules is that net assets as shown in a company's accounts ought not to be overstated by reference to their values in use on a going concern basis, but they could easily be under-stated on that basis. As I am sure that noble Lords are aware, the accounts give no guide to the market values of the assets on a break-up basis.

There are a number of problems with using accounting net assets. First, company A and company B might have identical assets; company A might use the historical cost convention and company B might use the alternative valuation basis. For example, company B might have revalued its property assets.

Secondly, listed companies now have to convert to international financial reporting standards, which are different in some important respects from existing UK generally accepted accounting principles. So there could be a difference in the accounts values, simply because listed company A is using a different accounting code from that used by unlisted company B. So, using "net assets" can give odd results between different companies.

But my main point is that using accounting net assets is the wrong test. There are companies which have few net assets on their balance sheets but which generate significant profits. Retail operations which operate from leased premises and which have their stock financed by creditors and carry few debtors are one example.

At the other extreme we could have a company with long-term assets on the balance sheet—for example, a mine—but with low profits and cash flow because the market for its output is depressed. Which would be the better bet for a pension obligation, the net asset-poor/profit-rich retail operation or the asset-rich profit-poor coal mine? Using net assets as shown in the accounts simply leads in the wrong direction.

The important point is to establish whether the employer has resources available to meet his pension obligations. That, in turn, depends on whether a business is generating or can generate sufficient cash. The value of a business should really he the net present value of the cash flows of the business less any liabilities. What we are valuing is not the net assets, but the business itself. That is why we need to move away from the concept of net assets and aim at a valuation of the whole business. My amendments use the term "resources". There may be a better term or phrase than that, but I suggest that it is not "net assets".

I conclude by giving another example of why "net assets" gives the wrong answer. I shall use two supermarkets—supermarket S and supermarket T. Let us assume that they operate from similar retail premises, which are leased, so they have little balance-sheet value in the historical cost accounts. The profitability of supermarket T is superior to that of supermarket S because of its purchasing skills, its merchandising know-how, and its general business management skills. In fact, it is because supermarket T has better people running the business but, of course, there is no value for them on the balance sheet because they are not a net asset.

If one goes down the net asset route under Clause 44, one could end up valuing supermarkets S and T at the same value, which simply would not be sensible. I accept that the definition of net assets is to be prescribed, but my main point is that the detail should not be based on net assets, but should start from a different position—namely, the value of the business. I hope that the Government will reconsider this. I beg to move.

Lord Higgins

My Lords, it is not always the case that economists and accountants agree on issues of the kind to which my noble friend has referred. On this occasion, I believe that is the case. Valuation is a complex process and my noble friend is extremely expert in that area. I believe that it is appropriate to take heed of what she has said and find a more sensible definition than that which appears in the Bill. I make no comment at all about her example of supermarkets S and T, as I am sure her selection was purely a matter of probability.

Lord Lea of Crondall

My Lords, perhaps I can make a comment while wearing my economist hat. This is fascinating, but I do not know whether noble Lords can throw light on how this would work. I do not know where exactly this form is used. It raises some interesting questions. If the Government had tabled the matter like this, I believe that there would have been much criticism about how workable it would be.

Lord Oakeshott of Seagrove Bay

My Lords, we on these Benches support the spirit of the amendments of the noble Baroness, as we did in Committee. She made rather heavy weather of the supermarket analogy. I can think of a much simpler example of an enterprise that makes enormous profits with virtually no fixed assets: leading firms of chartered accountants, as she is only too well aware. I feel that in the spirit of this, some ability to pay should come into the equation; it is not purely a matter of assets that may not be realisable.

Lord Lucas

My Lords, I support my noble friend. In the amendment I did not move, I obliquely raised a couple of other questions, which I should like to put to the Government. First, one difficulty of starting to raid company assets like this is that you may endanger its pension funds because a pension fund has no specific handle on its employer for its Section 75 debt. But perhaps some other company in the group gets there first and collars the assets, leaving the company's own pensioners to swing in the wind. I think that that would be unfortunate.

Secondly, coming back to the question I raised earlier, how does a company establish this Section 75 debt value? What is the official approved method of establishing a value which the regulator will believe?

Baroness Hollis of Heigham

My Lords, it is clear that the noble Baroness, Lady Noakes, has persuaded the noble Lords, Lord Higgins and Lord Oakeshott. Actually she has also persuaded me, which means that although I cannot for technical reasons accept the amendment, as drafted, I expect to return to the issue at Third Reading with an amendment. So I hope that the noble Baroness is content.

We shall continue to discuss with those involved in the moral hazard consultation how this should be defined and to see whether we need to go any further on it, but I think that the noble Baroness is probably right. In that case, I hope that she will withdraw her amendment. Almost certainly we shall return to the issue at Third Reading.

Baroness Noakes

My Lords, "probably right" is indeed great praise from the noble Baroness. The noble Lord, Lord Lea, asked whether people actually did this valuation: they do. When I learned accounting many years ago they did not, but now they do. Nowadays there are some normal rules which are used by everyday accountants to value whole businesses as part of the routine of accounting. So there is a body of experience to do it, and it is not very arcane. I am delighted with what the Minister has said. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Baroness Hollis of Heigham moved Amendment No. 66:

Page 34, line 6, after "meet" insert "the amount which is"

On Question, amendment agreed to.

[Amendment No. 67 not moved.]

Baroness Hollis of Heigham moved Amendment No.68:

Page 34, line 8, leave out from "who" to end of line 10 and insert "falls within subsection (5A)(b) or (c) of section 43 and who has sufficient net assets to meet the amount which is the difference between—

  1. (i) the amount of the net assets of the employer, and
  2. (ii) the amount which is the prescribed percentage of the estimated section 75 debt."

On Question, amendment agreed to.

[Amendments Nos. 69 to 71 not moved.]

Clause 45 [Meaning of "financial support"]:

Baroness Hollis of Heigham moved Amendments Nos.72 to 75:

Page 34, line 32, leave out "companies who are"

Page 34, line 33, after "for" insert "the whole or part of"

Page 34, line 36, after "company" insert "(within the meaning given in section 736 of the Companies Act 1985 (c.6))"

Page 34, line 37, after "for' insert "the whole or part of"

On Question, amendments agreed to.

Lord Lucas moved Amendment No.76:

Page 34, line 40, at end insert "over a prescribed timescale"

The noble Lord said: My Lords, Amendment No.76 gives me a chance to ask the noble Baroness what sort of timescale she has in mind for this sort of provision. Certainly, in discussions with those who were in contact with her department before and during Committee there seemed to be some question of these arrangements having to be put in place very fast over a matter of a few years. I hope that the noble Baroness will be able to confirm that they are now thinking that a longer timescale would usually be appropriate. These are very large liabilities. They need to be absorbed in the corporate system without undue strain. We should be looking at decades rather than years. I beg to move.

Baroness Hollis of Heigham

My Lords, I do not know whether we have again completely misunderstood the noble Lord's amendment. Certainly, we do not think that it is appropriate to give an end date to support per se a financial support direction, because we hope of course that the pension scheme and the employer will continue ad infinitum, so to speak.

If the recipient of a financial support direction feels that it is no longer appropriate or wishes to vary it, he can apply to the regulator to vary or revoke the direction under Clause 99. Otherwise it will continue in order to ensure that the scheme remains funded.

8.45 p.m.

Lord Lucas

My Lords, obviously I did not explain myself sufficiently when I wrote to the noble Baroness. I shall do so again. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Baroness Hollis of Heigham moved Amendment No.77:

Page 34, line 41, at end insert—

() The Regulator may not issue a notice under subsection (1) approving the details of one or more arrangements falling within subsection (2) unless it is satisfied that the arrangement is, or the arrangements are, reasonable in the circumstances."

The noble Baroness said: My Lords, I beg to move.

Lord Lucas moved, as an amendment to Amendment No.77, Amendment No.78:

Line 2, leave out "may not" and insert "shall"

The noble Lord said: My Lords, in moving this amendment, I shall speak also to Amendment No.79. The noble Baroness's amendment seems to state the obvious: before issuing a notice, the regulator must be satisfied that things are all right. I cannot see how the regulator would ever issue such documents if things were not all right. In my amendment I have turned the provision around to see whether it makes more sense to provide that, if the regulator thinks that everything is all right, he must issue a notice. Either way, I do not really see the purpose of the clause. I beg to move.

Lord Skelmersdale

My Lords, wearing my drafting hat—so far, I have been very careful not to do so during this stage—I, too, was very confused about the government amendment. It states: The Regulator may not issue a notice under subsection (1) approving the details of one or more arrangements falling within subsection (2) unless it is satisfied that the arrangement is, or the arrangements are, reasonable in the circumstances". Given modern judicial review, everything that the regulator does must be reasonable otherwise he will be done by the legal members of your Lordships' House. Therefore, it is absolutely right that my noble friend Lord Lucas should question the amendment. What perhaps is not absolutely right is the fact that my noble friend did not raise his queries when the original amendment was moved with the group beginning with government Amendment No.5. However, with the greatest respect to everybody, I believe that that is a detail.

Baroness Hollis of Heigham

My Lords, government Amendment No.77, which the House has already agreed, provides for the regulator to approve the arrangements if they are reasonable in the circumstances. The regulator, when issuing an FSD, will not prescribe the appropriate procedures; it is up to the recipients to put in place arrangements that the regulator then approves. We will seek views regarding any other arrangements that may be prescribed. Although, to date, none has been identified, we will be happy to take suggestions to be added in by regulations.

Again, I am not sure that I can go beyond that. I hope that the noble Lord will feel able to withdraw his amendment; otherwise, we are simply repeating the point made on the previous amendment: if a recipient of an FSD feels that it is inappropriate, he can apply under Clause 99 to revoke it and so on. I am going over the same ground again.

Lord Lucas

My Lords, I find myself totally confused by the noble Baroness's response, but I shall read it in Hansard. I beg leave to withdraw the amendment.

Amendment No.78, as an amendment to Amendment No.77, by leave, withdrawn.

[Amendment No.79, as an amendment to Amendment No.77, not moved.]

On Question, Amendment No.77 agreed to.

Baroness Hollis of Heigham moved Amendment No.80:

After Clause 45, insert the following new clause—