HL Deb 13 July 2004 vol 663 cc237-306GC

(Third Day)

The Committee met at half past three of the clock.

[The Deputy Chairman of Committees (Baroness Lockwood) in the Chair.]

Clause 39 [Financial support directions]:

Lord Skelmersdale

moved Amendment No. 116: Page 28, line 21, leave out subsection (5) and insert— (5) A person falls within this subsection if at the relevant time—

  1. the person is the employer in relation to the scheme,
  2. the employer in relation to the scheme is a company and the person controls the employer, or
  3. the person is a company which is a member of the same group of companies as the employer in relation to the scheme; and
  4. the employer in relation to the scheme is a service company providing the services of its employees to the person and one or more of those employees is an active member of the scheme."

The noble Lord said

We now turn to a discrete section of Part 1—Clauses 39 to 46—although Clauses 47 to 50 have a bearing. From the wording of the Bill, it is clear that financial support directions can be issued to an associate of, or a person connected with, an employer that is a service company or that is insufficiently resourced. The use of those definitions from insolvency law gives the regulator incredibly wide powers. It comes under my heading of "draconian"—the word that I used at Second Reading.

The regulator would not only have power to serve financial support directions on any company in the same group as the employer and any shareholder that owned more than a third of the employer's shares but would also have power to issue financial support directions to associates of directors and shadow directors of the employer.

The full class of connected persons and associates seems very widely drawn and rather oddly random. It would include the company's employees and, in theory, even the nanny of the managing director's children. I know that that is a silliness, but I am advised that, in theory, such a person could be included. It would also include the current business partners of, for example, an ex-wife who divorced the finance director 30 years ago. Yet it might not include a 30 per cent shareholder of the company, and that clearly is important. The impact of these clauses is to cut across the concept of corporate limited liability and to deter companies from investing in companies with defined benefit pension plans. For example, an acquisitive company that has an interest in many concerns will probably have a significant number of defined benefit pension plans operating in the group. If any of those are underfunded and the employers cannot meet a prescribed percentage of the Section 75 debt, the company will be liable to receive financial support directions. Broadly, if financial support directions are received, all the companies in the group will have to agree to be responsible for the affected employer's pension plan, the holding company must agree to be liable for that pension plan, or additional resources must be provided, because that is what it is all about.

The provisions will, in particular, act as a disincentive to a potential buyer of the company in difficulty. There has been much about that recently in the press, and I am sure that Members of the Committee will have seen numerous articles in the Financial Times, the Times and the Guardian and so on.

The potential buyer will probably either insist on an asset purchase, leaving the pension plan behind with the shell company as the employer, or walk away from the deal; otherwise, other companies already in the buyer's group are likely to have to take on the purchased company's pension liabilities, and the directors themselves could be served with financial support directions.

However, even the asset sale may not be able to go ahead in order to save the business. If there is an asset sale, the regulator might find that the only reason for structuring the sale in this way is to prevent a Section 75 debt becoming due. That would be the result of the structure if the struggling company had participated in a multi-employer pension plan. If the regulator found that such a structure was not in good faith, even if it might save the business, the seller would be exposed to the threat of a contribution notice, which I accept we have already covered. If the seller was an insolvency practitioner, even the slightest possibility of receiving such a notice would be unacceptable.

Another issue would be the ease with which the companies could raise capital or borrow money. When a company does not itself operate a defined benefit pension plan but where there is such a plan in the group, the possibility will always exist that the company will be required to fund that pension plan. That will impact on the ability of companies to invest in future growth and will therefore impact on jobs in the United Kingdom, as this country becomes even less competitive. Figures for that were given to us in the Chamber only yesterday. We are aware that similar provisions have been introduced in the United States. Since they have been operative, defined benefit pension plans have become almost as rare as hen's teeth in all but the largest unionised companies. These measures are likely to have exactly the same effect.

I do not know what, if any, thinking is going on in the department regarding Clause 39. However, at the very least, the potential recipients of a financial support direction should be limited from the wide group perhaps caught by the current wording. Recipients should be limited to persons with a strong link either with the scheme or the company. Where the employer is not a service company, the potential recipients should be limited to scheme employers or companies controlling the relevant employer. Where the relevant employer is a service company, the recipient can also be a person who benefits from the employment services provided by that company. There is no justification for holding other persons liable for the relevant employer's liability to the scheme. Those other persons who, as I said, may be caught by the current wording of the Bill may not even be aware of the existence of the pension scheme.

Two other amendments have been grouped with this one. I prefer to reserve my comments on them until after they have been spoken to. For the moment, I beg to move.

Lord Borrie

At least, I agree with the noble Lord, Lord Skelmersdale, that this is a significant clause. It enables the regulator to bolster a pension scheme's viability and to do that by a suitable arrangement of financial support. When I first read Amendment No. 116, I thought it was helpful and was intended to clarify subsection (5), but it turns out that it is narrower than subsection (5), which refers to people who are connected with or are associates of the employer.

Page 22 of the Explanatory Notes suggests that persons, connected or associated with the employer … will include members of the same company group, controlling shareholders, directors, and the owners of unincorporated businesses". I am not sure why the noble Lord wishes to exclude controlling directors from helping to bolster the scheme, if the regulator thinks that is necessary for the benefit of the scheme. So it seems to me that this is an attempt—as indeed are certain other amendments that we are yet to discuss—either to hobble the regulator or to narrow his options. I think that probably would be undesirable considering the practical benefits of the clause.

The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Hollis of Heigham)

I am grateful for the contribution of my noble friend Lord Borrie. I agree with much of what the noble Lord, Lord Skelmersdale, has said. This is clearly not meant to be a clause to catch nannies. In so far as technically it might be read in that way, this is clearly—as with a lot of our discussions at the end of our previous sitting on moral hazard —an issue we shall wish to revisit to clarify the wording and any ambiguity. But, as my noble friend said, it revisits the issue of moral hazard.

As it is a key tool, it may be worth taking a moment to explain the purpose of a financial support direction, the provisions of which are contained in Clauses 39 to 46. The purpose of the directions is to ensure that there is a guarantee of pension liabilities in circumstances in which employers have attached their pension schemes to service companies or companies with very few assets. Although most employers who have done that have perfectly legitimate reasons for doing so—we made it clear last time that we were not in any sense trying to inhibit legitimate mergers and acquisitions that keep an otherwise ailing company, possibly at risk of closing, afloat—and have no intention of avoiding their pension liabilities, we have to ensure that the majority are protected from unscrupulous minorities who seek to invent ways of taking away the assets but dumping the liabilities—almost shell companies, whether or not they are service companies.

We therefore propose to give the regulator the power to ensure that, when a scheme is underfunded and attached to a service company or an insufficiently resourced company—this is where a company is part of a collective group —any pension promises are underwritten by other members of that group of companies. The thinking behind that is that obviously this is a debt that in all decency should be honoured as far as possible. A debt to the pension scheme is as much a debt as a debt to the suppliers of the company that is being acquired and should not be treated in any less favourable way.

Much of the talk seems to suggest that somehow pension liabilities are an encumbrance that gets in the way of doing useful things. That is unfortunate because those pension debts are moneys owed to the employees who have earned them legitimately, honestly and honourably. I am sure that there is no dispute in the Committee. As the noble Lord, Lord Oakeshott, said, it is a question of trying to keep the balance right. I am willing to be persuaded that we may need to revisit each clause to see whether we have got the balance right. However, that we need some such provision seems to me to be without doubt. I am sure that the Committee 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.

I shall give the Committee a real example, although not with real names. I am happy to disclose on Privy Council terms should the Committee wish. One of the examples I was going to use was recognised and pre-identified by the noble Lord, Lord Higgins, so it may be that this case may also be one such. Spunoff plc is a subsidiary of the Vast Group. Its employees were formerly employed by Vast plc or other members of the Vast Group and formerly participated in the Vast Group pension scheme. When Spunoff plc was created, employees were moved into it from throughout the Vast Group and a new pension scheme was created, the Spunoff pension scheme. Since its creation, Spunoff plc has been rapidly run into the ground, although not wound up, and there is a £25 million deficit in the Spunoff scheme. As I said, this is a real case.

The Vast Group has so far refused to make up the deficit and has also refused to permit the members to transfer back into the Vast Group pension scheme, although that is still under negotiation. This would be a situation in which I believe, and I suspect all Members of the Committee would believe, that it would be appropriate for a financial support direction to be issued to ensure that the Vast Group stood behind the Spunoff pension scheme.

I would point out that this is one of a range of powers the regulator has and one that is at the extreme end, where all other steps so far have failed to persuade a company to honour a promise that it could and should make and which it is seeking artificially to avoid. If, despite being attached to a service company, the scheme trustees and employer have in place appropriate funding arrangements or a concrete and realisable recovery plan, and the employer and parent company are committed to supporting the pension scheme, the regulator would monitor the situation rather than issue an FSD.

These powers will be exercised only when it becomes apparent that the scheme is insufficiently funded and the employer, either because it was a service company or because it was extremely weak in comparison to other companies in the group, is unable or unwilling to put a concrete and realisable recovery plan in place to restore the funding position.

The regulator's first steps would be to work with the trustees and employer to look for ways to restore the funding position and get assurances as to the commitment to that scheme. In other words, there would be a presumption of good faith to start. It would be only when that had failed that the regulator would consider issuing a financial support direction. Such a direction can be issued to anyone connected or associated with the employer—here I take the remonstrances of the noble Lord, Lord Skelmersdale. The regulator will have to consider this very carefully as it will have to consider who is in a position to put these arrangements in place. I have to say that it did not strike me that the nanny would be in a position to put those changes back in place.

It may well be that the threat of that direction would be sufficient to encourage the parent company to commit to guaranteeing the funding on an ongoing basis. One option could be for companies to move the pension liabilities out of the weak scheme to a stronger one—in other words, back to Vast from Spunoff—or strengthen the company itself; that is, moving resources from Vast into Spunoff.

Those served with the direction would be given appropriate time to put in place appropriate arrangements. However, if this does not happen, there must be serious questions over the schemes'—and the scheme members'—future. That is why the regulator would issue a non-compliance contribution notice to anyone named in the direction. We discussed that on the previous occasion. Of course, it will not be appropriate for the regulator to issue a notice to all those named in the direction. Some individuals may have been named in the direction because they are in a position of influence and able to ensure the directions are put in place. However, it would not be appropriate then to seek to ensure that they contribute to the funding of the scheme. Factors that the regulator must take into account are set out in Clause 42(4). We have discussed them. They comprise whether the person has taken reasonable steps to secure compliance with the financial support direction; the relationship that the person has or has had with the employer; the relationship which the person has or has had with the parties to any arrangements put in place in accordance with the direction; and any connection or involvement that the person has or has had with the scheme and the financial circumstances of the person. We discussed all the considerations that the regulator would have in mind on the previous occasion. The regulator would take those factors into account as part of the reasonableness test.

The sum in the contribution notice as a maximum can be the Section 75 debt due or potentially due. However, the regulator could reduce that amount as we discussed on the previous occasion. For example, it may choose a sum which would then allow the employer to put a concrete and realisable recovery plan in place to restore funding within an appropriate timescale. To pay the Section 75 debt all at once might tip the scheme over, but a recovery plan over, say, three years might very well be acceptable and tolerable and keep the scheme and the members on a steady course.

3.45 p.m.

The sum could also be reduced to take account of the financial position of those named in the notice. Therefore, there are plenty of safeguards. Before a financial support direction or a non-compliance contribution notice is issued, the regulator will send a warning notice to all those likely to be directly affected by any decision. It will set out the evidence it has, why it thinks it is reasonable to exercise the power and, if necessary, details of how any sum has been calculated. The directly affected parties will then be able to make representations—either on paper or in person if they prefer—to the Determinations Panel.

If the Determinations Panel exercises one of the powers, directly affected parties could go beyond that—again we discussed this briefly on the previous occasion—and appeal to the Pensions Regulator tribunal, which is entirely independent, before the order or direction has effect. They can go beyond that. If they are not satisfied with that decision, they may seek permission to appeal to the Court of Appeal on a point of law.

The amendments seek to clarify the category of person to whom the regulator can issue these directions. As I say, I am sympathetic to the points that the noble Lord made. I have taken some time over my reply as it is the first time that we have discussed FSDs. I thought that it was worth putting those comments on the record to enable people outside to see what our intentions are in that regard. As I mentioned, over the summer we shall continue working with the various interested parties to ensure that these concerns are met. It may be appropriate to mention that at the end of our previous day's discussion on the Bill I agreed to take away a number of concerns. I have listed them. I do not have sufficient copies for every Member of the Committee but I shall ensure that they are fully distributed. We are taking away for further consideration issues such as the contribution notice on an insolvency practitioner; whether it is reasonable to apply a retrospective time period; the clearance procedure guidance—we shall produce an initial draft by Report; and industry codes—we are waiting for the noble Lord, Lord Higgins, to produce an example of those.

We are also considering contribution notices under Amendment No. 112. In addition—this relates to amendments that we might discuss more fully—the Committee may think that there is not much point in repeating the debate on financial support decisions which we have already had on contribution notices because in all these cases I am perfectly willing to take these issues away.

Meetings and discussions will take place over the summer on this bundle of related issues, including the one that the noble Lord, Lord Skelmersdale, raised. I understand from my officials that the first meeting scheduled with the organisations is expected to take place before the end of July. No one is wasting time on this. I hope very much that I shall be able to give a report to Members of the Committee before Report, following the summer discussions, to show how far we have been able to reach consensus with the industry. I ask the Committee not to push me further than that. We are seriously engaged with the organisations to see what we need to clarify, what issues we need to revisit, what we need to discuss and what would appropriately be contained in a code of practice, a code of guidance, a regulation and so on.

In the light of that very lengthy explanation, for which, I hope, the Committee will forgive me, I ask the noble Lord, Lord Skelmersdale, to withdraw the amendment. I also invite the Committee, if I may, not to move some of the amendments that have been tabled, as they repeat some of the territory that we have discussed. At this stage, I cannot take the Committee any further forward than I did at the end of the previous sitting.

Lord Oakeshott of Seagrove Bay

We are continuing where we left off the other night. I welcome the Minister's assurances about the active programme of consultation. In particular, I press her to ensure that the report that she is talking about comes in good time for Report. That is the stage at which we and, no doubt, other noble Lords will look to see whether and how far amendments are necessary. We hope that the process will also produce government amendments. I thank the Minister, and I encourage her to press on with the programme, as there is widespread concern in industry and on these Benches.

With regard to these amendments, I support and sympathise with what the Government are trying to achieve, as was our approach towards the end of the previous sitting. However, I do not feel that they have got there yet, and I support the plea made by the noble Lord, Lord Skelmersdale, for clarity. In that context, I shall not go through the amendments line by line, but we look forward to the clarification that we expect.

I have one further point to make on the general topic. I agree with the noble Baroness that pension funds are not some minor irritant that gets in the way of a deal. That is often the tone of conversation on the issue. In particular, I refer to the remarks of Mr Philip Green, the tax exile from Monaco who is trying to take over Marks & Spencer. He described the attitude of the pension fund trustees as arrogant, rude, untimely and unhelpful. That was the pot calling the kettle black.

Lord Lucas

I accept the noble Baroness's invitation to speak now and shut up later, if that is all right.

Baroness Hollis of Heigham

You put it so elegantly.

Lord Lucas

I agree with everything that she said about the objectives of this part of the Bill and about what is to be achieved. However, I have some great reservations about possible side-effects.

It seems reasonable to start with Mr Philip Green. As I understand it, the trustees of the fund have said that, if he takes over M&S with a very geared vehicle, they will change their investment policy. That will result in a current deficit of about £250 million becoming a deficit of about £2 billion. That is a thoroughly reasonable decision, given the way in which trustees consider such things or are coming to consider such things. Someone who asked the same question a few years ago would not have got the same answer from the trustees.

It is a matter of fact with markets that, although you can reasonably project a rate of return for the equity market, you will, in any average 30-year period, underperform by 30 per cent about 30 per cent of the time. The ability of the employer to make up the deficit from cash flow, if the investments have gone wrong over that sort of timescale, is important to the interests of the scheme members. It seems right that trustees should react to the solvency of the sponsoring company by adjusting the expectations that go into their investment policy. That is in line with current thinking. However, there are substantial consequences. There is a substantial transfer of value from owners to pensioners. They will get substantially less for the companies that they are selling. That may be something that we want to achieve, and I suspect that it is an objective of the Bill to make sure that pensioners are looked after and that shareholders come second in the queue—or certainly not first. We should accept that.

The board of M&S may think that that consideration is a convenient poison pill, but, if they consider the matter further, they will see that what we are introducing is a substantial mechanism. If an ordinary company starts to get into difficulties, the pension fund trustees will follow the precedent that has been set in such capital letters and say that they have to change their investment policy. So, the moment that the company gets into difficulties, the pension fund starts to add to it, because it starts to change its investment policy. Anyone running a major defined benefit scheme will feel it standing behind them, and the moment that there is a downward slope in results or a dip in the balance sheet, the trustees will push. They will increase the rate of contribution. They will declare a deficit. Such a scheme will be extremely dangerous to run.

As my noble friend Lord Skelmersdale says, unless we are careful this will result in the accelerated death of defined benefit schemes. They are becoming dangerous and powerful to live with. It will result in pension funds becoming more risk-averse generally, which is not the result we wish for nationally. We need our pension funds and our big investors to be prepared to take risks. It will also be compounded because leverage buyers have been good payers for companies, by and large, and if they are no longer in the market because they cannot take the pensions consequences, that will reduce the general value of equities, which will compound in terms of reducing the returns that are available from investment in equities.

So, we need to look at the consequences of this carefully and decide whether we want to place that risk on the individual company—on the individual set of trustees—and effectively make them react to this change in circumstances by becoming risk-averse, or whether it would be better for the economy as a whole that we place the risk on the pension guarantee fund. We would be saying that employers as a whole should take the increased risk—or, at least, where the balance should lie. The consequences emerge slowly. This particular problem is not really a consequence of the Bill. It goes back to the Pensions Act 1995 and maybe before. It takes a long time for such effects to work through, because the orthodoxy takes a long time to change and develop in the pension fund industry.

One way or another, this move will have major consequences and its relevance to this part of the Bill is that trustees will be in a position to create a deficit where none appears to exist. As the circumstances of a company change or as it passes from the control of one person to another, a great deal of uncertainty is created regarding the transfer of a company. If one asked 3i about how it sees this matter, it would say that companies were dying and that companies have died because of the uncertainty and because they could not, under the Bill as it stands, see how they could make a deal with the pension trustees and say, "Fine, if we invest in this company we will set such and such a contribution rate and that is the way that the pension fund will be run", because that arrangement could be overturned by the regulator. It would be caught by the retrospective provisions. Companies are now dying due to the current provisions in the Bill and the uncertainty that it creates.

Do we really want that to happen? There always will be a dilemma in a company that is doing badly, over how a scheme should run, between the interests of pensioners and keeping the company going. We must ask whether we have got this right. Looking at Clause 39 in particular, I find myself thinking that perhaps I am watching an episode of "DIY Disasters". We are hacking away at the roots of company law and the foundations of a joint stock company, which is limited liability. It creates losers.

Every time that a company goes down, people lose money through no fault of their own. But it has enabled the joint stock company to exist and flourish. How many bricks can we take from the foundations before there is a real problem? My suspicion is that we shall not even begin to see the problems that we are creating for 10 years. Maybe it is all right and maybe it is not, but I cannot find anyone who has really thought through the problem, but we are taking limited liability to pieces for pensioners.

4 p.m.

As my noble friend said, this can run through to shareholders. 3i is clear on the legal advice it has: it runs through to shareholders. If they invest in a company with a defined benefit scheme, they are liable. They cannot escape it. The whole business of dealing with a company which has any sort of difficulties, of putting more money in and rescuing it, where they are exposed to the risks of a company with a defined benefit scheme, becomes impossible because of the uncertainty. You cannot restrict your likely loss to the money you are putting in. Each time, your potential loss will be the whole of your assets.

We need to find ways of dealing with that. I do not think that the Bill is intended to destroy the basis of 3i and its competitors' business. We talked about getting clearance under Clause 35. We need a mechanism for clearance under Clause 39 too. There needs to be a way in which someone who is taking on a company with a defined benefit scheme, acquiring it or putting themselves in a position where they are likely to be attacked can say, "This is our maximum potential liability for pensions before such and such a date. This is how we can do a deal with the pension fund trustees so that they will not suddenly rush into gilts and create a deficit that will hold up in front of the regulator and the courts". Unless we do that, we shall have great difficulties.

It will be difficult enough to do an audit of a company in a group. Once the Bill is passed, to sign off an audit you will have to know the state of the pension fund of every company that might bite back—certainly all the companies in the group but also, probably, other companies owned by your major shareholder, because the group runs so wide. There are big liabilities that could come running at you. How that should be done and how audits should be signed off is quite a question. I have not yet found anyone who can answer that.

I suppose at the root of this lies the problem that we are moving on limited liability. We have long accepted that limited liability can be crossed when there is fault; that is, fraud or malfeasance. We have done that, and that is accepted. Clauses 34 and 35 take us to the point where it can be done by mistake, just by carelessness. You can do something as a trustee of a pension fund which makes you liable for all your assets just because you did not realise that it could have those sort of consequences or that you should get clearance. There are plenty of pension funds which are not beautifully run.

In Clause 39, we break limited liability without fault, without any involvement in what has been going on, without any fault anywhere. I know that there are companies which the noble Baroness described with which we all want to deal. Sainsbury's got into trouble and the Sainsbury family were presumably regarded as people whose personal assets could be gone after for the Sainsbury pension fund. That seems to me to be breaking the basis of limited liability in a way which would have very unfortunate consequences.

Lord Oakeshott of Seagrove Bay

Noblesse oblige.

Baroness Hollis of Heigham

Perhaps I may respond briefly to the noble Lord, Lord Lucas. I do not want to reopen the general discussion about getting the balance right. We have discussed that thoroughly. However, I want to make it clear that the clearance system with contributions that he rightly identified will also apply here. So, that should also help with financial support directions.

However, the general point about which I would put up a red light relates to the noble Lord's somewhat vague comment that, where a company is going through a merger and acquisition and the pension fund is a liability it would quite like to duck, it should be able to dump it on the PPF. That means that you produce a moral hazard. It becomes in the company's interest to run the fund down on the grounds that other companies not in their group will pick up the cost by virtue of the levy. Frankly, that is unacceptable.

One of the regulator's jobs is to ensure that pension schemes enter the PPF if, and only if, the employer is insolvent and the scheme is underfunded and cannot meet its wind-up liabilities. Otherwise, it will lead to the situation I gave as an example on Second Reading. If employers can let the state pick up the bill for asbestosis, no employer will ever protect his employees from asbestosis. We are in exactly the same situation, and that is what the noble Lord is inviting us to do. I hope very much that the Committee will not agree. He would not have the support of the industry voices that I have heard for any scheme in which the last man standing will pick up the bill for all the other schemes that have been able to manipulate their liabilities on to the PPF.

Let me give that warning now. The noble Lord may not intend to go that far, but I cannot let him think that there is a solution in the PPF. We have to get the balance right. I do not think that any of us disagree, and we will work on that over the summer.

Viscount Trenchard

I should like to add two or three brief points following the remarks of my noble friend Lord Lucas. I entirely agree with him that it will be a great pity if the Bill is inadvertently detrimental to companies introducing and maintaining defined benefit pension schemes. The defined benefit pension scheme, as has been operated by many British companies, is an excellent means of planning for retirement. Unfortunately, people entering the workplace today are less likely to be able to join one of these schemes than was the case when I entered the workplace. I am heartened to see that major companies such as Tesco have recently renewed their commitment to their defined benefit pension scheme, which has 130,000 members. That is very important.

We need to be concerned about breaching the principle of limited liability, particularly in Clause 39. It is a delicate balance, as the Minister said, between giving the regulator too much unfettered power and creating a situation in which overseas investors are less likely to invest in British companies.

The Minister has said that she will look closely at industry representations. I hope that they will include those made by the British Venture Capital Association, which is clearly very concerned about this. It is particularly concerned about the effect on investors from United States companies. That slightly puzzled me; I am by no means an expert on the American set-up, but I understand that the PPF is, to some extent, modelled on an American equivalent. Is there any limit on what a company could be ordered to pay to make good, as in the United States model, or any compromise with the principle of limited liability?

However, I entirely agree with the noble Baroness and the noble Lord, Lord Borrie, that we have to make sure that Vast and Spunoff do not leave their pensioners in the lurch. I have had a very large number of letters from deferred pensioners belonging to companies that are not insolvent but are nevertheless going into wind-up. Some companies may still be trading or are better funded than those which are winding up their pension fund. I welcome the fact that they will be caught by this clause.

I know that the noble Baroness has said that she will come back later to the amendment of my noble friend Lord Skelmersdale, but I agree with the first thoughts of the noble Lord, Lord Borrie. It is clearer than what is presently in the Bill, and it catches just about everybody that it ought to catch.

Baroness Hollis of Heigham

I must clarify the point about the US. My understanding is correct: in the USA, there is joint and several liability in company schemes for DB schemes. So in the States the provision is already more widely drawn than would be the effect of these clauses—and they still manage to invest.

Lord Lucas

But it stops with the shareholders. It runs within a group and stays there. It has been promised that the issue will be reviewed.

Perhaps I may press the noble Baroness on the matter of clearance under Clause 39. What is she thinking of clearing, and how?

Baroness Hollis of Heigham

The suggestion made on the previous occasion was that, where a company or group of companies proposed a merger or acquisition, such that it had implications for the viability or funding its pension scheme, we wanted to make a distinction between a legitimate merger and acquisition—in which case, remedying that deficit might take three years, five years or whatever period the remedial plan might be agreed for—and an artificial manipulation. Any company acting in "good faith" could go to the regulator and get the equivalent of planning permission that this was acceptable activity and that it would work co-operatively in order to produce a remediation of any situation affecting the pension scheme—as opposed to assuming bad faith.

That still leaves open the issue of whether the building control inspectors need to see whether you have done the work correctly. The point about the clearance is to ensure that companies which might be in the early stages of exploratory talks and which are clearly doing this in good faith to rescue the ailing companies the noble Lord was talking about could proceed knowing that they would not be hit by something out of the blue from the regulator, if they were handling the matter with propriety.

Lord Skelmersdale

After that discussion, what can I say but mea culpa, particularly for not speaking to my Amendment No. 119, which answers the question of the noble Lord, Lord Borrie, on what my ideas mean regarding control.

My noble friend Lord Trenchard was right: we were trying to simplify things. I started this hare, as I am sure the Minister would call it, running because I had not understood from our discussions on the previous clauses that she intended to carry her consideration through to the whole of the ball game. Now that I have understood it, it makes life a lot easier.

My Amendment No. 119 covers the Minister's illustration of the small company Spunoff owned by Vast. I am delighted to hear, which again I had not appreciated even after our discussions last week, that this form of direction was a matter of last resort. It is the final plank after one has gone through all the other activities of the regulator and indeed the activities of the good firm, to which reference has been made.

I am grateful to my noble friend Lord Lucas for his extensive support. Clearly, he shared my impression that each part of the Bill would be considered separately by the noble Baroness and her team over the summer. Now that we have that straight, we all understand, So that is brilliant.

The Minister mentioned the effect of the Bill. One understands that, but one does not want the unintended consequences of such an effect. I am sure that that will be part of her thinking over the summer.

Lastly, like the noble Lord, Lord Oakeshott, I am delighted to hear that the Minister will produce the results of her thinking before Report and, as she said to him, in good time so that we can consider it and decide whether we want to pursue this fox—I will not use the hare again—through further stages of the Bill. I am grateful to the Minister for her explanation. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

4.15 p.m.

[Amendment No. 117 not moved.]

Lord Lucas

moved Amendment No. 117A: Page 28, line 25, at end insert— (6A) In performing his duties under subsections (3) and (6) the Regulator shall seek contributions from the groups of persons set out in subsection (6B) in the order in which they are set out, and shall not seek contributions from persons in a lower group if, in his opinion, persons in a higher group are together capable of furnishing (and likely to furnish) a sufficient total contribution. (6B) The groups referred to in subsection (6A) are—

  1. companies owned by or owning the employer in a 100% shareholding relationship,
  2. companies owned by or owning the employer in a 75% to 100% shareholding relationship,
  3. companies owned by or owning the employer in a 50% to 75% shareholding relationship,
  4. companies associated with the employer in a 33.3% to 50% shareholding relationship,
  5. directors of the company at the time the act or failure occurred to the extent that they or their associates have benefited from the act or failure,
  6. associates of the directors only to the extent that they have benefited from the act or failure."

The noble Lord said: I shall be extremely brief, and I do not expect a substantive reply. On this occasion, I do mean this amendment, and I know why it is there. We saw it before, when it was in the wrong place.

The amendment suggests that there ought to be a hierarchy. There is no fault—you ought to go after the company before you go after the directors. I hope that that gets factored into the conclusions.

There are a couple of other things I wanted to ask. If there are clearance procedures, where a company is in any sort of trouble, you will presumably have to get clearance every time you declare a dividend or pay a director—all sorts of little things which involve the transfer of money to associated people. Clearly this applies to the big transactions, but if you declare a dividend, you are taking money from the company and giving it to the big shareholders or other companies. In a company which is in any sort of difficulties with its pension fund, you are doing something which may affect the interests of its pensioners. How will you get clearance for that large number of relatively small, day-to-day transactions?

Secondly, how will you deal with directors put on the board by venture capital companies where a company is known to be in difficulties? How will they be sure that their personal assets are not at risk if, despite their best endeavours, the company goes down and the pension fund is in deficit? I beg to move.

Lord Oakeshott of Seagrove Bay

I should like to reiterate my feelings on the similar amendments previously moved by the noble Lord, Lord Lucas. We feel that this very prescriptive order is too restrictive on the regulator. In some situations, he could be trying to protect a pension fund at risk with one hand, or even both hands, tied behind his back.

Baroness Hollis of Heigham

We have already discussed a similar amendment, Amendment No. 103A, so I will not go beyond what I said then. However, I may be able to help the noble Lord, Lord Lucas, on specific points about trustees or directors. We have had an example, apparently, of directors asking if they would be liable if they accepted positions with employers with underfunded schemes. The answer is no, and the regulator can "clear this" and similar queries.

As for dividends, there obviously have to be sensible limits. The regulator will give clearance on the bigger issues, and guidance on the process will be developed and published in consultation with the industry. I cannot go into the detail before we engage the regulator in discussions about what is the most helpful way forward in developing such a scheme.

Lord Lucas

I beg leave to withdraw the amendment. Amendment, by leave, withdrawn.

Lord Skelmersdale

had given notice of his intention to move Amendment No. 118: Page 28, line 27, after "period" insert "not exceeding five years

The noble Lord said: I do not expect the Minister to respond a jot, a tittle, or even a single word to this amendment. This subject has been covered already and continues to be in the noble Baroness's thinking.

[Amendment No. 118 not moved.]

[Amendment No. 119 not moved.]

Lord Skelmersdale

moved Amendment No. 120: Page 28, line 33, at end insert— ( ) The Regulator, when deciding for the purposes of subsection (2) whether it is reasonable to issue a financial support direction to a particular person, must have regard to such matters as the Regulator considers relevant including, where relevant, the following matters—

  1. the degree of involvement of the person in the creation or continuing position of the employer as a service company or in its insufficient resourcing,
  2. the relationship which the person has or has had with the employer,
  3. any connection or involvement which the person has or has had with the scheme,
  4. the financial circumstances of the person,
  5. whether the imposition of liability on the person will substantially affect the funding of the scheme,
  6. that the purpose of imposition of liability is intended to be curative of the scheme funding, and not punitive of the individual, and
  7. such other matters as may be prescribed."

The noble Lord said: As I understand it, we have not discussed this amendment before. I can be extremely brief because, again, it probes the regulations in the obvious—and understandable—absence of a draft as yet.

It seems unreasonable for the employer, unless very well off in assets—or perhaps, as a subsequent amendment suggests, net income—not to be able to top up the scheme by instalments. Although it is very similar to Clause 35, it is different. The second stage under Clause 35—namely, where the regulator first decides whether an individual is capable of having liability imposed upon him and then deciding whether it is reasonable to do so—does not appear to appear here. I apologise—that is terrible English. I rather think that that provision should be here. Perhaps the noble Baroness could consider that. I beg to move.

Lord Borrie

I feel that there is a slight sleight-of-hand here. The amendment refers to the regulator, when deciding for the purposes of subsection (2) whether it is reasonable to issue a financial support direction", but subsection Clause 39(2) does not say anything about anything having to be reasonable.

Rather different is Clause 42, which we have not come to yet. It is all about contribution notices when the financial support direction is not complied with. Subsection (3) says very specifically: The Regulator may … if the Regulator is of the opinion that it is reasonable to impose liability". There is something odd about the amendment from that point of view.

The amendment also seems unduly prescriptive and complex. I am not quite sure what in proposed paragraph (a) is meant by the, continuing position of the employer". That sounds slightly odd. Perhaps it is intended that the regulator will hardly ever exercise this power. I cannot really see any other point for the amendment.

Baroness Hollis of Heigham

It appears to be a version of Clause 35(6), as far as I can see. This is about what counts as the test of reasonableness, and that will be part of the discussions this summer.

Lord Skelmersdale

I am very grateful. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 39 agreed to.

Clause 40 [Meaning of "service company" and "insufficiently resourced"]:

Lord Lucas

moved Amendment No. 120A: Page 29, line 1, after "assets" insert "or net income

The noble Lord said: In moving Amendment No. 120A, I should also like to speak to Amendments Nos. 120B and 120C.

This amendment merely makes the point that the ability to contribute can be entirely income-based rather than assets. To take an example that I used previously, supermarkets could traditionally be entirely creditor-financed. You could have a balance sheet of zero and an enormous cash flow. There are many quoted companies which, under some definitions of assets, have negative net assets. It is essentially just like being taxed. If you are being asked to pay, cash flow is much more important than assets. I beg to move.

Baroness Hollis of Heigham

I am a little puzzled. My understanding of net income is that it is a subset, in a way, of net assets. The amendment would ensure that net income can be taken into account instead of net assets when the regulator is establishing the net assets of both the sponsoring employer in relation to a scheme and of any connected or associated persons in determining whether an employer is insufficiently resourced.

The concept of net assets is based on the definition in Section 264(2) of the Companies Act 1985 which says: 'net assets' means the aggregate of the company's assets less the aggregate of its liabilities". We have allowed for this provision to be in regulations to allow for flexibility. The way in which employers' assets and liabilities are assessed may need to change, due to differing factors or economic conditions which the regulator may need to take into account. We think that it is an appropriate concept and, as I said, of course a person's net income may be taken into account if it becomes necessary to impose a non-contribution compliance notice as part of their financial circumstances. So I am not sure how much difference there is between the noble Lord, Lord Lucas, and myself, but I hope that, with that explanation, he will feel able to withdraw the amendment.

Baroness Noakes

I should like to contribute for the first time to the proceedings on the Bill, although I have been following them in Hansard. I hope that I am not too far behind the pace.

I support my noble friend in this amendment. The test of net assets is a static test at a point in time, something shown in a set of accounts. If you believe that sets of accounts show something very useful about a company, then you might believe that this test was useful. In fact, when looking at the worth of an employer to a pension fund, you need to look at its cash flow. I think that that was the idea behind the net income to which my noble friend referred.

This seems to be the wrong sort of test. We should be looking at the ability of the company—the entity—to generate the resources that would allow it to support the pension schemes concerned. The wording of the amendment may not be quite right, but when the Minister talked about the definition in the Companies Act, I genuinely felt that the wrong kind of test was being proposed.

Lord Oakeshott of Seagrove Bay

I, too, have some sympathy with the amendment. Assets and income are not the same thing. In particular, the sort of companies which get into difficulties with their pension fund are often declining industrial companies where, in theory, although the assets might look very valuable, they are not in fact very realisable. So I think that it is worthwhile to have an element of considering cash flow as well.

Lord Lucas

Perhaps if we replaced the words "net assets" with "resources", that would be a more general phrase which could encompass everything.

Baroness Hollis of Heigham

I am perfectly willing to look at it. However, we may be misunderstanding the thrust. The test here is to establish whether one company is comparatively weaker than others in the group. We are not testing the capacity of any individual company to pay. The clause is not about the requirement to pay—if it were, I would take the point about cash resources as opposed to, say, large acres of contaminated land somewhere in the depths of the north, the east, the west or wherever.

Much of this will be done by regulations. As it stands, if we compare company with company, we need to know the assets and not just the cash flow. I am not even sure that the cash flow would necessarily be especially relevant in those circumstances. It is not a question of whether companies will pay, but of making comparisons between other groups in the sector within the group. This comes within that subset of the service company and the insufficiently resourced company.

Lord Lucas

I beg leave to withdraw the amendment. Amendment, by leave, withdrawn.

[Amendment No. 120B not moved.]

Baroness Noakes

moved Amendment No. 120BA: Page 29, line 7, leave out subsection (4).

The noble Baroness said: I think that we will continue a little of the discussion that we have just had. This probing amendment would delete subsection (4), which deals with how net assets are to be determined. We want to get at the thinking behind the test of net assets.

The Minister spoke a moment ago about what was shown in the accounts. One of the questions I was going to ask was whether the accounting conventions used in the accounts would be used, and I think that she said that they would be. One consequence of that is that that will be sorted by whether there are valuations in the accounts, whether the historical cost convention has been used throughout or has been modified and, looking forward, whether the company has been following UK GAAP or has moved on to international financial reporting standards. You can get quite different measurements of net assets on those two bases.

That is the provision in the context of using financial reports. I had hoped that the Minister would not rely on net assets being derived from sets of accounts— that, instead, they would have been derived from normal valuation principles, which is when you look at cash flows again. The way in which the worth of net assets is determined is by looking at the discounted value of the cash flows or some alternative valuation methods.

I tabled the amendment to try and tease out what we are talking about here. It is important to understand that historical cost accounts—the ones referred to under the Companies Act—have severe limitations for the use of determining whether there are sufficient net assets to meet the possible debt that could arise. We may be illogically pulling into the net companies that have a perfectly good valuation, on the basis of their cash flow, but whose accounts show a particular position. Alternatively, we could be ignoring companies that appear to have assets but do not yield particularly good cash flows and are not particularly good backing for employer debt. My amendment is a probing amendment. I want to tease out what we are talking about with regard to net assets. I beg to move.

4.30 p.m.

The Deputy Chairman of Committees (Baroness Lockwood)

I must point out that, if the amendment is carried, I cannot call Amendment No. 120C, which will probably not be moved anyway.

Baroness Hollis of Heigham

The purpose of the clause is to define the meaning of "service company" and "insufficiently resourced". In effect, an insufficiently resourced company is one that has insufficient net assets to pay a prescribed percentage of the estimated Section 75 full buy-out debt, although another connected or associated company may have sufficient net assets to do so. The test is designed to identify situations in which a company group has attached pension liabilities to one of the weakest companies in the group.

The amendment would remove the provision allowing the net assets of the connected or associated company to be determined, calculated and verified in a prescribed manner. The concept of net assets is, as the noble Baroness, Lady Noakes, said—I should have welcomed her to the Committee when I began—based on the definition in Section 264 of the Companies Act 1985, which means that they are the difference between the assets and liabilities.

The purpose of having regulations to define net assets further is twofold. The clause allows the regulations to provide certainty for companies and the regulator about how net assets will be calculated. It also allows for flexibility. That is important because the way in which employers' assets and liabilities are assessed may need to change, if economic conditions change. There will be consultation on regulations made under this clause.

I hope that, with that assurance, the noble Baroness will feel able to withdraw the amendment.

Lord Lucas

I support what my noble friend said. We are after a concept that allows us to describe the ability of a company to support its debt to its pensioners or, in the case of subsection (3)(b), an associate's debt. That is not described by the phrase "net assets" in the Companies Act sense. Many companies go bust with enormous net assets, because their net assets are calculated on a going concern basis. When a company goes bust, the key figure is the amount that someone else will pay for those assets, and that is often nothing.

The balance-sheet total produced by accountants is not a good measure of a company's ultimate ability to deal with a debt. It is more of a cash-flow concept, as my noble friend said, which would be better expressed, if we are to use the phrase "net assets" by assessing net assets on a valuation basis. Someone who is running a newspaper, for instance, may have net assets that are close to zero. Someone running a regional newspaper may have no physical assets at all, but they will have wonderful cash flow. The balance sheet will look awful, but their ability to support a deficit of £20 million on a pension fund may depend on only half a year's profit.

It does not show on the balance sheet, if you use the accounting method; it must be a valuation method. I think that that is what my noble friend is saying: we need something that brings out the ability to deal with debt, particularly if, as set out in paragraph (b), someone else will carry the can.

Baroness Hollis of Heigham

We have taken advice on the matter, and we have had extensive discussions with the DTI. This is one of the issues on which we will consult before the regulations are made. The comments made by the noble Baroness may be helpful and may steer some of that discussion, but, so far, the measure appears to be appropriate, on the basis of the advice that we have received. If we need to clarify the intent of the regulations, we will, of course, take the matter forward.

Baroness Noakes

I thank the Minister for that reply and my noble friend for his contribution to the debate. I shall keep my own counsel about whether I would have consulted the DTI on the correct way to measure net assets. With the amendment, I was trying to tease out the issues. They are important and are worth examining again, if we are to have a genuine measure.

The Minister said that it was right to have flexibility in regulations and that people could see how the measure was calculated. I have absolutely no problem with that. I have no problem with regulations being used. However, I am slightly concerned that a rational basis should be used, although the cost and benefit issue will need to be considered. The kind of valuations that I was discussing that involve cash flow are more complex although they reach an answer that is approximately correct rather than a very definitely wrong answer, which the Minister will get if she considers accounting type formulations. But doubtless we can return to this measure another time.

Baroness Hollis of Heigham: Before the noble Baroness sits down, I invite her to write to us more fully stating precisely where her concerns lie and how she thinks we should approach the matter. I am perfectly willing to send the noble Baroness into bat against some of the assumptions of the DTI. I am sure that we all have open minds about the result of that. I invite the noble Baroness to follow up the matter in correspondence as we would appreciate that.

Baroness Noakes

I would be happy to do that so long as I do not have to talk to the Department of Trade and Industry. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 120C not moved.]

Lord Skelmersdale

moved Amendment No. 121: Page 29, line 17, leave out subsection (6).

The noble Lord said: This is purely a probing amendment because I simply do not understand the Bill here. Subsection (6) of Clause 40 on page 29 refers to, the estimated section 75 debt"— that is, Section 75 of the Pensions Act 1995—being "disregarded". I confess to being somewhat more confused than usual on this issue. What on earth does it mean? Section 75 of the Pensions Act 1995 is headed, "Deficiencies in the assets". In this Bill the phrase, "insufficient resources" is used. I assume that they mean the same thing. Therefore, I believe that that particular point is explained. But what is not explained, even in the Explanatory Notes, is that the word "estimated" does not appear anywhere in Section 75. Section 75 is all about real debts determined, calculated and verified by a prescribed person, as can clearly be seen in subsection (5) of that section. I repeat, why the disregard for something that does not exist?

The situation gets worse. If there is already a Section 75 debt and it is so badly calculated that the money due is insufficient to ensure the solvency of the scheme, that surely is the fault of OPRA, whose actions the regulator is taking over. Why, then, should the employer, however defined, be subject to a redetermination that would not occur post the handover? After all, there is nothing in Clause 39 to provide for cases of redetermination unless I have totally misunderstood the entire clause. I beg to move.

Baroness Hollis of Heigham

The noble Lord, Lord Skelmersdale, is absolutely right to identify this as quite a technical subsection. I am almost certain that I shall need to follow this up with him in writing. When I pressed for a similar explanation, I was given to understand that the measure prevents a company being held liable for debt twice over. The existing Section 75 debt may have changed by the time the further calculations are done. It may be lower or higher. Therefore, the new estimated Section 75 debt should displace it; otherwise, there may be no power to cancel the original one.

To some extent, the measure seeks to take account of gaps in chronology in that subsequent measures may be put in place. That is the broad thrust of the measure. I shall need to obtain further advice from lawyers in order to follow up the matter. I want to make sure that the concerns that the noble Lord raised, which I shared, are fully addressed.

Lord Skelmersdale

That is a typically honest answer and I look forward to further discussions with her on this, whether in writing or in person. At the moment, even with that potted explanation, the matter is as clear as mud. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 40 agreed to.

Clause 41 [Meaning of "financial support"]:

Baroness Noakes

moved Amendment No. 122: Page 29, line 26, at beginning insert "Subject to subsection (4),

The noble Baroness said: I shall now risk the wrath of the Minister by attempting to talk to the amendment to clarify the points that emerged before. The notes given to us by the noble Baroness said that the noble Lord, Lord Higgins, agreed to withdraw slightly similar amendments from the earlier section. However, I wish to probe a little further because I do not believe that this group of amendments is exactly the same as those discussed earlier.

Baroness Hollis of Heigham

The answer will still be the same.

Baroness Noakes

The noble Baroness said that the answer would be the same, but I am afraid that I shall have to test her patience. I did say that I knew that I would risk incurring her wrath and I shall now do so. We are not talking about the earlier clauses but the financial support directions and when they can be issued in Clause 41, which determines the meaning of financial support. These amendments, in particular Amendment No. 125—the others being paving amendments—focus on two problem areas. One is where the employer is willing to pay and the other looks a little more at the degree of liability that can attach.

New subsection (4)(a) does this by saying that the employer shall be treated as willing to continue funding the scheme so that the calculations under (3)(b) reflect that. I am not sure whether that was exactly the same as the issue debated before, but it seems reasonable that if the employer is prepared to continue to fund the scheme that it would not fall within the ambit of the financial support directions.

New subsection (4)(b) takes a slightly different approach, because it ensures that a person's liability is restricted by a formula that will reflect the extent of the person's association with the employer, using an association percentage, dealt with later in Amendment No. 136 by my noble friend Lord Skelmersdale, which restricts liability, either by reference to an ownership or benefit connection. The two amendments try to constrain the way in which financial support directions can apply—not to challenge the principles themselves, but to say that in certain situations they should not apply due to willingness to pay or that they would be constrained by reference to the connection between the person involved and the pension scheme. I beg to move.

Baroness Hollis of Heigham

Amendments Nos. 122, 124 and 125 are similar to Amendment No. 103, which we have already debated, and similar to Amendments Nos. 128 to 130, which we are to discuss shortly. In summary, the amendment moved by the noble Baroness limit the regulator's discretion in determining what financial arrangements the regulator can require a person to put in place where a party other than the employer triggers the wind up of the scheme and where the employer is willing to fund the scheme on an ongoing basis. As I have already said in the previous discussion on Amendment No. 103, the Government's view is that the full pension promise should be met regardless of who decides to wind up the scheme. If a scheme is being wound up, it is being wound up. With those assurances that the scheme's status will be taken into account, I ask the noble Baroness to withdraw her amendment.

4.45 p.m.

Viscount Trenchard

Perhaps I may ask an additional but related point. I fully sympathise with my noble friend's amendment, which, again, I see as securing greater clarification of the ambit within which the regulator can operate. But why does subsection (2)(b) refer to the holding company of a group and, a company which meets prescribed requirements", and why do the Explanatory Notes explain that "prescribed requirements" include the requirement that the ultimate parent company must be incorporated in a European Union country?

To return to the examples used earlier by the Minister, if Vast is a German company, perhaps it can be caught, but if it is incorporated in, for example, the United States or Japan, it seems that it will not meet the prescribed requirements and therefore will be outside the scope of freedom of action of the regulator.

Baroness Hollis of Heigham

I shall need to take advice on that. Obviously the guarantees cannot be enforced outside the EU as easily as they can inside the EU. In the case of Vast, another company in the group could be the ultimate guarantor. In other words, if the holding company were in Japan with other companies within Germany and the UK, the company in Germany could be held responsible. If I am able to amplify that in any way in writing, I shall do so.

Baroness Noakes

I am sorry that the noble Baroness took the view that she did. I think that we should take away this matter and look at it again. We did not dream up these amendments for the purposes of irritating the noble Baroness; they came from one of the interest groups which had particular concerns about this matter.

Baroness Hollis of Heigham

I was not complaining about that. This matter is entirely in the hands of the Opposition, but my personal view is simply that amendments which deal with the same issue should have been grouped. We could have dealt with this matter when we debated the previous related amendment because it covered the same theme. Given the number of amendments that the Opposition have tabled and their opposition to a number of clauses stand part, it seemed sensible to deal with an issue and move on to the next rather than, as in this case, revisiting the same issue two or three times at different stages in the debate. That is why I sought to expedite the proceedings of the Committee.

Baroness Noakes

I understand what the noble Baroness is saying. I thank her for that. We still believe that a serious issue arises as to the way in which the Bill applies to companies which are willing to pay or which have only a tangential relationship with the pension debt. That is a big issue that needs to be explored. It may well need to be explored in several places in the Bill, but it is doubtless a matter to which we shall return on Report. However, for today, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Skelmersdale

moved Amendment No. 123: Page 29, line 37, leave out paragraph (d).

The noble Lord said: I have already talked about the draftsman making my hackles rise, and I am afraid that he has done it again. This is an amendment to the belt-and-braces subsection (2)(d). It allows an afterthought but there must be some limit to the afterthoughts here. What do the Government consider might be necessary in this case? I beg to move.

Baroness Hollis of Heigham

This goes back to a point raised by the noble Lord, Lord Skelmersdale, fairly early in our proceedings—possibly the first day of Committee—with which I heartily agreed. He said, and we agreed, that the tighter the description on the face of the Bill, the easier it will be to get around it. I think that the noble Lord, Lord Skelmersdale, thought that X and Y would not last for long because he could see ingenious ways of getting around it.

Regulations enable the regulator—in this case, when dealing with financial support directions—to produce regulations within the framework of the policy intent of the Bill without coming back via primary legislation. Many highly paid professionals will find ways of avoiding the encumbrance of some of the regulations, and the regulator may wish to catch them. Regulations are not only about prescribing detail; to some extent, they provide clothes that are too large for the Bill at the time but they produce something that the Bill can grow into as practices develop. This is such a situation.

Lord Skelmersdale

I think I am grateful to the noble Baroness. Of course, I recall what I said during the first day of Committee. Certainly at one point I said that I am sure we shall revisit this matter in four or five years' time. Paragraph (d) enables the situation to be dealt with far more quickly than that, should the need arise.

However, I wondered—I did not receive a satisfactory reply—what might be necessary currently and not as the situation develops three years down the line or whatever. Clearly, the noble Baroness does not know the answer and, with that, I am content to leave—

Baroness Hollis of Heigham

We are saying that we have not foreseen all the circumstances in which the regulator may need to exercise his power. That is not unusual, and I am surprised that the noble Lord is surprised.

Lord Skelmersdale

I am entitled to be as surprised as I like. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 124 and 125 not moved.]

Clause 41 agreed to.

Clause 42 [Contribution notices where non-compliance with financial support direction]:

Lord Skelmersdale

moved Amendment No. 126: Page 30, line 26, after "person," insert— ( ) any relevant facts or circumstances that are specific to the employer or the scheme concerned, including industry codes of practice,

The noble Lord said: Much of the Bill is written in terms of a worst-case scenario, and it is absolutely right that it should be. However, I gather that pensions providers have decided a whole lot of rules for themselves. The amendment uses the term "industry codes of practice", for want of a better expression. Those have already been given a nod and a wink from OPRA and there is no reason on earth why the regulator should not also recognise them. If they have been lived up to, the regulator will no doubt be far more lenient than if they have not. Obviously I have no problem with that; nor do I have a problem with the regulator becoming involved with industry in producing such codes of practice. So often the industry works faster than the Secretary of State, the department, the regulator or any quango or civil servant.

In Amendment No. 127, I suggest that the contribution notices should specify a time limit. However, we have already been through that and I do not expect the noble Baroness to respond to this amendment. But I should be grateful for an answer to Amendment No. 126. I beg to move.

Baroness Hollis of Heigham

I circulated a little hand-list earlier. This amendment is identical to Amendment No. 112, which we discussed previously. I said then that I had sympathy with the purpose of the amendment, which was to ensure that the regulator takes into account the circumstances of all directly affected parties, as set out in Clause 94. I think that we already do that.

I also said that I was sympathetic to the regulator considering relevant codes of practice. I asked the noble Lord, Lord Higgins, whether he had any in mind. He did not, but it was agreed that if he could find some, he would send them to me during the summer. I await the arrival of a bumper postload with interest. It is possible that others may have examples.

As I said, we shall certainly consider the matter during the summer. If there are any relevant codes— we are not aware of any but that may reflect my lack of information on the subject—we shall be glad to see them. My answer is exactly the same: if such circumstances exist, we shall be happy for them to be taken on board. However, we are not yet aware of such circumstances; nor have we received any evidence of them. But I am happy to receive them if there are any.

Lord Skelmersdale

Again, I am very grateful to the Minister. During the summer, we shall see where we are at. August will obviously be a busy month for all three of us, or possibly all four of us. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 127 not moved.]

Clause 42 agreed to.

Clause 43 [The sum specified in a section 42 contribution notice]:

Baroness Noakes

moved Amendment No. 128: Page 30, line 36, at beginning insert "Subject to subsections (4)(b) and (6),

The noble Baroness said: I shall move the amendment so that I can speak to it, but I am conscious that it concerns the same territory as Amendments Nos. 122 to 124, which we discussed a moment ago, and certain amendments that we discussed on the previous occasion.

The amendments in this group pick up the points about willingness to pay and restricting the amount that can be covered by a contribution notice to a relevant amount based on a connection that can be established with the person who is being asked to pay. Does the Minister consider it right that that should be taken into account, or should we simply leave it wholly to the regulator's discretion when issuing a contribution notice under Clause 42?

The amendments deal with Clause 43, but I am discussing whether these matters are covered by the discretion given to the regulator in subsection (4) of Clause 42. Should the regulator take account of willingness to pay and the nature of the connection between the person to whom the notice is to be issued and the debt, or should that be left wholly to the regulator's discretion? This relates to the degree of certainty or uncertainty that will prevail in the business world.

I move the amendment to seek guidance from the Minister on whether she believes that it is reasonable that these provisions should require the regulator to take into account matters such as willingness to pay because the drafting does not require him so to do. I beg to move.

Baroness Hollis of Heigham

I wish to make a distinction between who is triggering the wind-up and whether the scheme is in wind-up. When determining the amount of liability imposed by the contribution notice, the regulator will have to take into account whether the scheme is in wind-up or subject to an assessment period. However, it is irrelevant who decided to wind up the scheme. For it to be otherwise would be to penalise members.

I believe that many of the noble Baroness's remarks deal with a pre-wind-up situation. I wonder whether that is the difference between us. Clearly the regulator is anxious to ensure that the pension promise is met for employees. If the company is solvent and it suits the parties concerned to wind it up in the sense that a full buy-out of liabilities can be met, that may be the appropriate way forward. If that wind-up has been generated by some other party, that is irrelevant. What matters is whether the wind-up is the best way of protecting the employees' interests, not who triggered it. Given that, I am not sure that there is all that much between us. Clearly, if the regulator believes that it is in the best interests of the company to continue the scheme, the employer is willing to continue it and there is a reasonable funding contribution, that is fine. However, by the time you have gone into wind-up, it seems to me that you have already gone through that territory—you are in the last stage. The regulator is seeking to ensure that the pension promise is met through the company being solvent and having the capacity to pay the liabilities that will possibly fall due—in some cases many years hence—by buying deferred annuities and so on, rather than that scheme coming to the PPF. I wonder how much difference there is between us. No one wants to wind up a scheme if it can continue. Equally, it may be appropriate to wind it up and protect the liabilities. The individuals may have moved on to another job knowing that that the scheme is secure because there is a deferred annuity.

From our point of view, it does not matter who has triggered the wind up. Therefore, I wonder whether there is as much difference between us as the noble Baroness seems to think.

5 p.m.

Baroness Noakes

I thank the Minister for that reply. I shall certainly consider it carefully when I read it in Hansard. Based on the submissions that we have heard from outside parties, it is my understanding that it is likely to cause a problem for those who are happy to continue paying. It may well be the way in which the discretion is phrased, or it may not. I am happy to take this matter away and to see to what extent there is a difference between us.

Baroness Hollis of Heigham

I should have said that the employer may be willing to continue paying but the amount he may be willing to pay is unrealistic, inappropriate or not sufficiently substantial. I should have made that qualification. Subject to that, I doubt very much whether there is any difference between us.

Baroness Noakes

I take the point about the willingness to pay an insufficient amount. That was not the ground on which I was trying to stand. I was trying to stand on the ground where the employer was seeking to pay a proper or reasonable amount. As I said, I shall take this away and look at it again to see whether the area of difference between us is as large as I had thought it to be. If it is, we can return to it again on Report. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 129 and 130 not moved.]

Lord Skelmersdale

moved Amendment No. 131: Page 31, line 17, at end insert— ( ) If the person to whom the contribution notice is issued is an individual, the sum specified in the contribution notice shall not exceed the actual amount of any personal gain that he has acquired to the detriment of the scheme as a direct and intended consequence of the circumstances giving rise to it. The noble Lord said: I hope that Amendment No. 131 is self-explanatory. It asks a very simple question, the background to which is that the object of the whole exercise is to bring a pension fund up to a state in which it is capable of fulfilling the promises that the rules of the scheme made to the miscellaneous employees. If it does that, no matter how it got into difficulty in the first place, I believe that no fine should be involved in the determination, and I should be grateful if the noble Baroness could tell me that that will be the case. I beg to move.

Lord Oakeshott of Seagrove Bay

We do not support the amendment. I should have thought that it would be very difficult to prove the exact amount of personal gain or to prove that it is detrimental to the scheme and a direct and intentional consequence. We think generally that this is fettering the regulator too much.

Lord Borrie

That seems to be right. Under Clause 42, the regulator is already required to behave in a reasonable manner. The various provisions listed in subsection (4) include that he must take into account the financial circumstances of the person on whom the contribution notice is issued. I shall not read out the other points. It seems rather unnecessary to have this provision.

Baroness Hollis of Heigham

Those are my views precisely. We are not unsympathetic to the push behind this matter but we believe that it is adequately covered. The regulator must take into account, in particular, the degree of involvement in the act and the financial circumstances of the person. I think that we are back to Amendment No. 112. As I said, if the noble Lord thinks that there is an issue here which we have not picked up, I shall be happy to explore it, but we believe that it is simply not necessary.

Lord Skelmersdale

I take the point about Amendment No. 112 on Clause 36 that we discussed earlier. I am asking something rather different. The object of the exercise must surely be to make up the pension fund to a state at which it can live up to its promises. We have established that that is the last plank in the arrangements for it to be made to do so. Over and above that, is there to be a fine on the perpetrator? That is the question that I asked.

Baroness Hollis of Heigham

Again, when we were discussing Amendment No. 112, I wondered whether that was what the noble Lord was getting at. He asked me specifically whether there was a punitive element to any of this. I gave the assurance that there was not, and that remains my answer.

Lord Skelmersdale

I am grateful.

Baroness Hollis of Heigham

Obviously, that is subject to an offence not having been committed to which the fine could be attached.

Lord Skelmersdale

I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 43 agreed to.

Clause 44 [Content and effect of a section 42 contribution notice]:

Baroness Hollis of Heigham

moved Amendment No. 132: Page 32, line 6, after "for" insert "the debt in respect of

On Question, amendment agreed to.

Clause 44, as amended, agreed to.

Clause 45 [Section 42 contribution notice: relationship with employer debt]:

Baroness Hollis of Heigham

moved Amendments Nos. 133 and 134: Page 32, line 12, after "person" insert "("P") Page 32, line 37, at end insert—

  1. "Where a sum is paid to the trustees or managers of the scheme or, as the case may be, to the Board in respect of the debt due under section 75 of the 1995 Act, P may make an application under this subsection to the Regulator for a reduction in the amount of the sum specified in P's contribution notice.
  2. An application under subsection (7) must be made as soon as reasonably practicable after the sum is paid to the trustees or managers or, as the case may be, to the Board in respect of the debt due under section 75 of the 1995 Act.
  3. Where such an application is made to the Regulator, the Regulator may, if it is of the opinion that it is appropriate to do so—
    1. reduce the amount of the sum specified in P's contribution notice by an amount which it considers reasonable, and
    2. issue a revised contribution notice specifying the revised sum.
  4. For the purposes of subsection (9), the Regulator must have regard to such matters as the Regulator considers relevant including, where relevant, the following matters—
    1. the amount paid in respect of the debt due under section 75 of the 1995 Act since the contribution notice was issued,
    2. any amounts paid in respect of the debt due by virtue of that contribution notice,
    3. whether contribution notices have been issued to other persons in respect of the same non-compliance with the financial support direction in question as the non-compliance in respect of which P's contribution notice was issued,
    4. where such contribution notices have been issued, the sums specified in each of those notices and any amounts paid in respect of the debt due by virtue of those notices,
    5. whether P's contribution notice specifies that P is jointly and severally liable for the debt with other persons, and
    6. such other matters as may be prescribed.
  5. Where—
    1. P's contribution notice specifies that P is jointly and severally liable for the debt with other persons, and
    2. a revised contribution notice is issued to P under subsection (9) specifying a revised sum,
the Regulator must also issue revised contribution notices to those other persons specifying the revised sum and their joint and several liability with P for the debt in respect of that sum.

On Question, amendments agreed to.

Clause 45, as amended, agreed to. Clause 46 [Sections 39 to 45: interpretation]:

Lord Skelmersdale

moved Amendment No. 135: Page 32, line 39, leave out "39" and insert "35

The noble Lord said: I am afraid that I cannot be quite as brief as I was in speaking to the last few amendments. With this amendment, we are seeking to distinguish between two different kinds of situation: one where the person being made liable is acting in a way that is consistent with the scheme continuing to be funded on an ongoing basis—that is, "blameless"— and one where, in effect, he is trying to prevent continued ongoing funding. We have already established the situation relating to fines but this is rather different.

For the distinction to work, clearly I need to explain what is meant by "funding on an ongoing basis", and that is why subsection (4) is included in the amendment. The rationale for distinguishing between "blameless" and "not blameless" cases is that if the person is blameless, the level of liability should not, and, indeed as we now know, will not be calculated punitively.

Baroness Hollis of Heigham

Is the noble Lord dealing with Amendments Nos. 135 and 136 together?

Lord Skelmersdale


Baroness Hollis of Heigham

On the list that I have, they have been ungrouped. As I think the noble Lord rightly suspected, Amendment No. 135 is meaningless without Amendment No. 136. Therefore, we are talking about the two amendments together and not separately as shown on the groupings list.

Lord Skelmersdale

Absolutely. I am afraid that a gremlin has obviously crept into the system. Clearly, as the noble Baroness said, Amendment No. 135 is a paving amendment for Amendment No. 136.

It is necessary to ascertain the degree of blamelessness to ensure that the person's liability is not disproportionate to the degree of association between that person and the employer—a subject that we partially covered in earlier amendments. I should also be grateful if, at some stage, the noble Baroness would indicate how liability might be calculated. I suspect that she will not be able to do so now because the explanation will be very complicated and will need to be written down.

The purpose of new subsection (5) is to clarify what kind of conduct constitutes, inconsistent with a scheme continuing to be funded on an ongoing basis".

Subsections (6), (7) and (8) describe how one measures the degree of association between the person being made liable, to whom we have given the initial A, and the employer concerned, B. How it works I am not entirely sure, but by this formula we are trying to take due account of the fact that A may have had only a very short-lived association with B when seen in the context of the period over which B's overall pension liabilities have built up. New subsections (7) and (8) also seek to cover the possibility that the degree of association between A and B may have varied over the course of time. I would hope that that would go into the regulator's calculation when he reaches this last plank that is still being discussed. I beg to move.

Baroness Hollis of Heigham

Essentially, there are two parts to Amendment No. 136, and I shall deal with them in reverse order. The second part deals with the percentage amount for which each individual person may be liable in the event that contribution notices or financial support directions are issued to more than one person in respect of the same debt.

I understand the concern behind the amendment. We will take it away over the summer but certainly at this stage we are not into the "percentage game", as the noble Lord will understand perfectly well, so I shall not now go back over that territory. I understand the need for clarity and certainty as far as possible.

I do not know whether the noble Lord intends this and obviously I can respond only to the amendments as drafted, but the proposed new subsections (4) and (5) in Amendment No. 136 would have the effect of ensuring that if the pension scheme of a solvent employer were to be wound up by a person other than the employer, the full buyout provisions would not apply to that employer.

I am sure that that cannot be what the noble Lord intends—that by finding someone else to wind up the scheme you reduce your liability when there is a capacity to meet that liability. That is what the amendment does. Therefore, I have already said that the Government consider it entirely appropriate that a pension promise made should be a pension promise honoured. That is why we are introducing the PPF and the full buyout provisions on winding up when the sponsoring employer remains solvent so that liabilities do not inappropriately and unnecessarily fall on the PPF.

I am not sure whether the noble Lord's understanding of the amendment is the same as mine. However, given the advice I have had, that would be the effect, which I am sure is not one which the noble Lord would want to see. On that basis, I wonder whether he would perhaps like to take it away and reconsider it before Report.

Lord Skelmersdale

We spent quite a lot of time in the debate on the first amendment today on the law of unintended consequences, which clearly comes into play in new subsection (4) of this amendment. Of course it was not intended to do that. The noble Baroness is quite right to slap my wrist.

However, I am grateful that during the summer the noble Baroness will add to her list of things to consider those that we have put into the subsequent subsections on the amendment. On that basis, I am happy to beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 46 agreed to.

[Amendment No. 136 not moved.]

Clauses 47 and 48 agreed to.

Clause 49 [Content and effect of a restoration order]:

On Question, Whether Clause 49 shall stand part of the Bill?

Baroness Barker

We have one question for the Minister, and if she does not have the answer to hand, perhaps she will write to me. Is there a minimum time in which a person would be allowed to comply with a restoration order in subsection (2), or would it have to be complied with at once? We are not clear about this.

Baroness Hollis of Heigham

There is always a problem when one is dealing with a question that comes up under clause stand part, because one has not had the time to research the appropriate answers. I am assured that there is a minimum time, which would depend on each individual's circumstances. I shall certainly write to the noble Baroness with some examples.

Clause 49 agreed to.

Clause 50 [Contribution notice where failure to comply with restoration order]:

On Question, Whether Clause 50 shall stand part of the Bill?

Lord Skelmersdale

I apologise for this, but Clause 50(3) says: The sum specified by the Regulator in a contribution notice may be either the whole or a specified part of the shortfall sum in relation to the scheme". I assume that this is to allow for payment by instalments. In other words, it could be unreasonable in certain circumstances to expect the employer to make up the deficit in the pension scheme in one fell swoop. I assume that the provision recognises that instalments will be necessary. I would be grateful if the noble Baroness could let me know at some point, and I apologise for bouncing her.

Baroness Barker

Perhaps the noble Baroness could use the letter she said she will write to answer another, similar question. How much time will there be between a non-compliance event and the issue of a contribution notice? No time limits are specified anywhere in the clause.

Baroness Hollis of Heigham

The reason that I was getting another file is because this clause is a consequence of Clause 47, which has already been agreed. That is why I was going back. Given that Members of the Committee wish, perfectly reasonably, to press me on what Clauses 47 to 51 do, perhaps it is worth saying something about them.

The clauses are designed to protect the pension protection fund against actions taken that reduce the assets in an eligible scheme which may, because of the insolvency of the employer, be taken into the PPF. Clause 47 allows the regulator to issue a restoration order directing that the position of the scheme be restored where that scheme has entered into a transaction at an undervalue within a two-year period leading up to an insolvency event, as set out in Clause 115, or an application notification under Clause 121. A transaction at an undervalue is exactly what it says—a transaction involving scheme assets which results in the scheme receiving no consideration, or consideration which is less than the market value, in return. This could include, for example, trustees being persuaded to purchase a property on the basis of planning permission for a development which does not actually exist; or a director of a company persuading trustees to offer him a transfer on a very generous basis to prevent his benefits being reduced by the compensation cap, should the scheme enter the PPF.

Within insolvency legislation, there is currently provision retrospectively to undo transactions at an undervalue, involving company assets which occur in the run-up to insolvency. These clauses introduce similar provision in respect of transactions involving scheme assets in order both to protect the scheme members from having the assets of their scheme unfairly depleted and to guard against the possibility of the PPF having to assume responsibility for such schemes where it otherwise would not have done so.

The power to issue a restoration notice or order is reserved to the determinations panel and exercised by standard procedure. It is also subject to the powers to vary and revoke contained in Clause 95.

In line with Clauses 35 to 38, which give the regulator power to issue contribution notices where there has been evidence of avoidance of employer debt, the power to issue restoration orders where there is a scheme transaction at an undervalue will apply to actions taken after 11 June 2003 when the proposal to introduce the PPF was announced. This ensures that where a transaction at an undervalue has taken place since that date, when my right honourable friend the Secretary of State clearly warned that we would have to introduce protection against engineering designed to circumvent the intent of our proposals, the scheme's position can be restored. When we discussed a similar issue earlier, I was able to quote Mr Willetts and Mr Webb, who both endorsed the need to protect what is basically a closing-down sale before dealing with the situation.

That is the point of the restoration orders. Clause 50 is, in that sense, pretty much consequential upon Clause 47. I wonder whether I have met the noble Lord's points by retrospectively revisiting Clause 47.

Lord Skelmersdale

I am grateful to the Minister. As I have said several times, the trouble is that the Bill is drafted in such a topsy-turvy way that one is always looking backwards or forwards or, on many occasions such as during the passage of the Pensions Act 1995 or the Welfare Reform and Pensions Act 1999, looking sideways. Therefore, it seems sensible to take the clauses in the order in which they are set down in the Bill, wherever that may subsequently take us in relation to either the questions or the explanations.

I am not sure that the noble Baroness answered my primary question: what about instalments? They do not necessarily apply to a restoration order, but they do apply to the other orders that we have been discussing on these clauses.

Baroness Hollis of Heigham

Obviously, if it is possible to make good the shortfall in the scheme by a reasonable pattern of payments so that it is appropriately met, that is no problem. But it may be that, by this stage, we have gone past that moment. Bluntly, I think that the structure that we are setting up would fail if at the 59th minute of the 11th hour there was suddenly a capacity to pay by instalments. That issue should have formed part of the good-faith negotiations much earlier on either to prevent the scheme being wound up or to prevent the risk of the company becoming insolvent.

In that sense, I am not sure that a question concerning a restoration order should be asked at this point, where a company is seeking artificially to reduce its assets by playing games with valuations or land or whatever so that it may then not need to go into the PPF. In various ways, we are seeking to gain access to other assets within the company group where appropriate under mergers and acquisitions or we are seeking to gain access to some of the assets—for example, property such as land and so on—into which the pension scheme money has been turned.

Although the lawyers will probably shout at me, at that stage, I would make an assumption of bad faith and of a deliberate running down of, or playing games with, available assets in order to reduce liabilities. Certainly, at that stage I should be quite surprised if the employer suddenly popped up and said, "Oh well, we can make this good by instalments". If that discussion was decent and honourable, it should have occurred 17 or 18 stages further back down the line. However, I suppose that it is possible for that to happen and the regulator may believe that, as a result of either a merger or acquisition, the situation has changed and it is now reasonable to make instalments. However, the assumption here is that it is a once-and-for-all, make-good order. If the regulator had good grounds, presumably he would have the power to revisit the situation.

On the question of timing raised by the noble Baroness, I may be able to add to the answer that I gave her. What counts as "reasonable notice" will depend on the circumstances. For example, if the transaction involved land, by definition, it might take time to turn the land into a realisable asset. Therefore, once the time for compliance has ended, the regulator may issue a non-contribution notice. That would not happen immediately as both those powers would have to be exercised with a determinations panel. Therefore a warning notice would be given.

The vocabulary that we continue to use includes the words "balance" and "tight rope" and so on. We are trying to ensure that we hold fast to the assets which should properly go into the scheme without them being disposed of. We are also trying to ensure that we provide enough time for the assets, which may have been disposed of, to be brought back into the scheme in order to meet its liabilities. Clearly, the length of time that that takes will depend on what type of asset the money has been—I was going to say "laundered"—transmogrified into. I think that this matter will have to be left to the judgment of the regulator. But I do not doubt that, if it is appropriate, the industry will encourage the regulator to consider codes of guidance—in some cases, they may be codes of practice—to describe some of the situations intended here. Behind all this is an assumption that the assets will have been deliberately run down. There are various ways to do that, and therefore the presumption is that we are not necessarily dealing with companies acting in good faith.

Lord Borrie

In an attempt to be helpful but also brief, I have the feeling that the most obvious interpretation of subsection 50(3) is that the regulator on a once-and-for-all basis says either that the whole of the shortfall should be paid or that a specified part of it should be paid. I have been thinking about the more imaginative interpretation of the noble Lord, Lord Skelmersdale, since the moment he mentioned it, not having thought of it myself. That may be a possibility but it certainly is not the most obvious intention of this clause.

Lord Skelmersdale

I do not want to delay the Committee but clearly, if the regulator insists on a specified sum he could subsequently insist on a second specified sum.

Baroness Hollis of Heigham


Lord Skelmersdale

It does not say that he cannot.

Baroness Hollis of Heigham

I think that he can specify a sum less than the full sum. I do not think that he can then go on to specify a subsequent sum in addition to top up at some later stage. In my view, that would not preclude the regulator breaking down the pattern of payment if he thought it appropriate. However, it seems to me that it would be very unlikely at this stage that he would think it appropriate because that is the sort of discussion, in good faith, that should have gone on many stages earlier.

Lord Skelmersdale

I take the point.

Clause 50 agreed to.

Clause 51 agreed to.

Clause 52 [Regulator's right to apply under section 423 of Insolvency Act 1986]:

Baroness Hollis of Heigham

moved Amendment No. 137: Page 37. line 40, leave out from "debtor" to "subsection" in line 42 and insert—

  1. "has been adjudged bankrupt,
  2. is a body corporate which is being wound up or is in administration, or
  3. is a partnership which is being wound up or is in administration,"

The noble Baroness said: This clause is designed to give the regulator the same standing as an insolvency practitioner to pursue debts due to a pension scheme by reason of transactions made at an undervalue—the issue we have just discussed. The regulator may apply to the court under Section 423 of the Insolvency Act 1986 if he can show that employer assets were sold at an undervalue for the purpose of putting assets beyond the reach of the pension scheme—the bad faith issue we just discussed—or of otherwise prejudicing the interests of the scheme.

The application to the court can be made only in two circumstances. One is where the PPF board has obtained an actuarial valuation of the fund which outlines the assets and the protected liabilities of the scheme and the assets are not sufficient to meet those liabilities at the time of the insolvency. By way of reminder, protected liabilities are the cost of benefits for members to the level which would be paid by the PPF, non-member liabilities of the scheme and the estimated cost of wind-up.

The other circumstance is where the trustees or managers of the scheme have obtained an actuarial valuation and the scheme funding objective is not being met. Any applications by the regulator under Section 423 are treated as being made on behalf of the victims of the transaction, that is, the trustees, members of the scheme or the pension protection board.

The amendment ensures that the references to "administration" in subsection (5) are consistent with the current Insolvency Act, which was amended by the Enterprise Act 2002. As originally drafted, it referred to the version of the Insolvency Act before it was amended by the Enterprise Act rather than the revised version after the amendments were made. So, the amendment seeks to bring the drafting up to date, but I thought it might be helpful to the Committee to explain why we needed to do it. I beg to move.

On Question, amendment agreed to.

Clause 52, as amended, agreed to.

Clause 53 [Register of occupational and personal pension schemes]:

Lord Skelmersdale

moved Amendment No. 138: Page 38, line 14, at end insert— ( ) A scheme registrable under subsection (1) must be notified to the registrar within 6 months of being created.

The noble Lord said: I suspect I will be told that we have already covered this, but I am not entirely sure that we have. As we know, the whole point of creating the regulator is for him to keep a watching brief on the pension schemes, usually but not exclusively of any other type than a money purchase scheme.

In the first three years he will clearly have had the enormous job—how can I put it—of tidying OPRA's register. That would probably be the best way to explain it. There is already a register of some 20,000 schemes which the regulator will have to satisfy himself is complete and correct in every respect. He will also have to establish what additional information he initially wants for each of the schemes. That is one hell of a job. I do not envy the regulator at all. I have tabled a later amendment which suggests that that is divided into steps. I cannot currently find the amendment number, but we will get to it in due course. The point of Amendment No. 138 is that new employers, and therefore new schemes, come along all the time. It is important that the registrar is not only aware of them but has them on the register. The amendment may be in the wrong place in the Bill, but surely a duty to register new schemes should be required somewhere in pensions legislation. It may not even be in this Bill and I may have missed it in one of the previous Acts, particularly the 1995 Act. I am not entirely sure. I should be grateful if the noble Baroness could tell me. I beg to move.

5.30 p.m.

Baroness Hollis of Heigham

Let me answer that last direct question and see whether that is sufficient for the noble Lord. I direct his attention to Clause 56(1), (2) and (3). Those subsections impose a time period of three months. The noble Lord was pressing me on why there was no requirement to notify within six months, as a reasonable offering. That is not needed because we have specified a period of three months in a subsequent clause. That deals with the noble Lord's point. I do not know whether there is anything further that he wishes to push me on. In which case I shall sit down.

Lord Skelmersdale

I am very grateful. In leaping around the Bill one sometimes has mental gaps. This has clearly been one of mine. That is exactly what I wanted to know.

Lord Oakeshott of Seagrove Bay

I apologise; I wanted to ask one question on Clause 53(5). It states: Information recorded in the register must be so recorded in such manner as the Regulator considers appropriate". That obviously is the blankest of blank cheques and raises possible concerns about data protection. Will there be any kind of provision or would the Minister be prepared to consider any provision whereby the Secretary of State has some responsibility for monitoring that and perhaps reporting from time to time to Parliament on it? Clearly one wants to ask about data protection in issues drawn as widely as that.

Baroness Hollis of Heigham

I think that the emphasis is on the word "recorded". This is a trivial point, which is simply that we want comparable information that can go on to a database. It is not a question of what information, but that the information recorded in the register must be recorded in such a manner as the regulator considers appropriate. The push there is to ensure a common pattern of entry of information on to the database. It is nothing more than that.

Lord Skelmersdale

I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 53 agreed to.

Clause 54 agreed to. Clause 55 [The register: inspection, provision of information and reports etc]:

Lord Skelmersdale

moved Amendment No. 139: Page 39, line 38, at beginning insert "Subject to subsection (7),

The noble Lord said: First, I should apologise to the Committee that I did not spot earlier that somewhere along the line the words "shall be" have gone AWOL in Amendment No. 142. They should appear after the word "Regulations". Amendments Nos. 139, 140 and 142 are grouped together. Amendments Nos. 139 and 140 are paving amendments for Amendment No. 142.

Baroness Hollis of Heigham

Which amendment are we dealing with?

Lord Skelmersdale

Am I still confusing the noble Baroness?

Baroness Hollis of Heigham

Yes. I do not have the amendment. I apologise.

Lord Skelmersdale

In that case, I shall expand a little more than is my normal wont. Amendment No. 142 seeks at page 40, line 21, at end to insert a new subsection (7). There are two words missing, which are the words "shall be" after the word "Regulations" at the beginning of the new subsection. I had hoped that the office had informed the department of these amendments, or perhaps it guessed because clearly without the words the amendment does not make sense.

Two things concern me in Clause 55. First, subsection (1) only provides a power to regulate to enable inspection and so on of the register. I believe that there should be a duty to regulate to enable such inspection and so on in respect of the specific information mentioned in the last line of the amendment; that is, registrable information except for individual trustees' or managers' names and addresses.

Secondly, is there any reason why the names and addresses of individual trustees and managers under Section 54(2)(c) should be revealed? It seems to me that the regulations could well reveal potential terrorist targets, not obviously of the 9/11 type, but, for example, Huntingdon Life Sciences Company, where there was ongoing persecution by the animal rights lobby. I believe that one should think about the matter. I beg to move.

Baroness Hollis of Heigham

I am again at a disadvantage. Certainly my understanding of Amendments Nos. 139, 140 and 142 does not conform to the speech made by the noble Lord. It may be useful if I spell out why the clause is drafted in this way and see whether that addresses the concerns of the noble Lord.

Lord Skelmersdale

I introduced the amendment by saying that there should be a change from a power to a duty to regulate to enable the various things in subsection (1) to take place. Perhaps the noble Baroness could explain what subsection (1) means and does. That would be helpful.

Baroness Hollis of Heigham

Clause 55 provides the power for regulations to be made relating to the provision of information recorded in the register of pension schemes and extracts from the register or copies of the register. The Secretary of State may by virtue of this clause direct the regulator to produce reports, which may be published, concerning the information held in the register, including the operation of the regulator's functions in relation to the register. That will enable the Secretary of State to be provided with statistical information about pension provision generally and to inform and assist future policy development.

I do not know whether the noble Lord is anxious about the Delegated Powers Committee. It was concerned with the provisions of subsection (3), which would enable regulations made under subsection (2) to modify Clause 76, relating to the disclosure of restricted information. Given that the noble Lord was concerned about the trustees of the Huntingdon Life Sciences Company and terrorists and so on, I sense that he might be.

There is nothing sinister about the provision. The data protection rules continue to apply within the provision. The regulation-making powers in subsection (2) will enable the Secretary or State or his agent to provide a pension tracing service. This function is currently undertaken by OPRA in its role as the registrar of pension schemes. The service enables those who have lost touch with old pension schemes to trace them and to find out what additional pension provision is available to them. Last year OPRA succeeded in providing contact addresses for over 25,000 requests. The scheme is vital for helping individuals comprehensively to plan for and to make informed choice about their retirement.

Clause 76, quite rightly, imposes very strict controls over the ability of the regulator and to any person to whom the regulator has made an authorised disclosure of restricted information to disclose such information to any third party. Anyone who does so is guilty of a criminal offence. The Delegated Powers Committee thought this was an important safeguard.

The clause takes away the pension tracing service from what was OPRA, and would be the Pensions Regulator, into the DWP because we do not think that it sits sensibly with the other responsibilities of the Pensions Regulator. This connects with concerns in Part 4 of the Bill about planning for retirement, informed choice and so on.

Some of your Lordships were present when we looked at the informed choice retirement planner. Obviously, for that information one would need access to a pension tracing service so that people can bring into play the available information on existing bits of deferred pension that they may have lost sight of some time previously.

Lord Skelmersdale

I was not actually going to ask about that. I thought I heard the noble Baroness say that this was not a suitable subject for the regulator. Therefore, it was being given to the organisation to be set up in the next part of the Bill. That surely cannot be right; I must have misheard.

Baroness Hollis of Heigham

Or I may have misstated the position. The pension tracing service, which 25,000 people used OPRA for, is a very useful "relatively low-level service". It may require a high degree of ingenuity. Nevertheless, we think it better sits with the Secretary of State's concern for information, retirement planning and all the other bits that come under Part 4 of the Bill, which we shall come on to discuss. I associated that with the retirement planner. I cannot remember whether that display was held in this Room. It had pretty slides and certainly interested the noble Lord, Lord Freeman.

That is why we are removing the responsibility from the Pensions Regulator, who otherwise inherits the functions of OPRA, and bringing it over to the DWP. This is a tracing service, which in many ways is not dissimilar to finding out what one's national insurance contributions are, what one's entitlement is to state pension, how many years of added pension one has built up with SERPS or S2P and so on. It is at that level, and better provided by the DWP.

We think that the costs will be fairly modest. It is a useful piece of—I was going to say "graffiti", but that is the wrong word—low-level mechanical processing, which is best taken away from the regulator because, as the noble Lord will know, the function of the regulator is to seek to identify risk. OPRA has been bedevilled by the fact that it was required to carry on too much low-level activity, such as scheme returns coming in two or three days too late, which accounted for nearly half its complaints. We are trying to clear some of that stuff away from the Pensions Regulator. This is one such example, and nothing more than that.

Lord Skelmersdale

Is it not lucky that I am not a particularly suspicious or cynical character? Another interpretation would be that this is pure centralisation. But I would not dream of levelling that particular criticism at the noble Baroness on this particular occasion and in this particular circumstance.

The debate has been helpful, but we still have not got to the bottom of whether the power should be a duty on the Secretary of State, the department or whoever.

5.45 p.m.

Baroness Hollis of Heigham

The power of the Secretary of State is the responsibility to operate the tracing service. That is a long way away from the other issues the noble Lord introduced, which is the point on the Huntingdon Life Sciences Company. That is completely different. It is about restricted information, which cannot be disclosed by the regulator unless it is already in the public domain. If it is a disclosure which is not in the public domain it becomes a criminal offence for the reasons the noble Lord identified.

I am not sure any more what the debate is between us. I think a misunderstanding may have occurred because perhaps there was not a full appreciation that the pension tracing service was coming over from OPRA to the department, for reasons I hope I have explained.

Lord Skelmersdale

I think that perhaps on this occasion the boot should be on the other foot and that I should write to the noble Baroness. I undertake to do that. For the moment, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 140 not moved.]

Baroness Noakes

moved Amendment No. 141: Page 40, line 20, leave out from "State" to end of line 21 and insert "shall lay before Parliament any report submitted to him under subsection (4)

The noble Baroness said: This is a simple amendment in the days of open and transparent government. As the noble Baroness knows, Clause 55(4) says that the Secretary of State can direct the regulator to make various reports to him. But subsection (6) merely says that the Secretary of State "may" publish any report submitted to him under subsection (4).

Amendment No. 141 deletes that permission to publish and replaces it with a requirement to lay any reports that the Secretary of State has directed before Parliament. I hope that we have not thrown the baby out with the bathwater and that laying the report before Parliament would not preclude any other form of publication. The principle behind the amendment is twofold: first, if the Secretary of State has gone to the trouble to direct the regulator to produce a report, why cannot Parliament see it as well? Secondly, publication should not be left to the discretion of the Secretary of State, but should flow naturally. I beg to move.

Baroness Hollis of Heigham

The noble Baroness is absolutely right to pick up the point about the discrepancy. The Secretary of State may by virtue of this clause direct the regulator to produce reports, which may be published, concerning the information held in the register—surveys equivalent to those that GAD or NAPF produce. I hope that for the first time we shall have; providing the information is consistently recorded, a firm database on which to extrapolate information which may be of public interest. That may include the operation of the regulator's functions in relation the register. Up-to-date and detailed information from the register will be vital to future policy development.

Amendment No. 141 seeks to remove the Secretary of State's discretionary power to publish only the reports he considers appropriate, or of particular interest, and requires him to lay all such reports produced before Parliament. Obviously, there will be a presumption that publications will be laid before Parliament where appropriate. I think everyone would agree that the department has a good reputation for openness. But we could—and this goes back to the point about the Huntingdon Life Sciences Company—have a report that contains, for example, the names and addresses of trustees, which it would not be appropriate to make public. In that sense, it might not be appropriate to require the Secretary of State to make that report public, as the amendment would require.

There could be an issue not only about data protection but also about protected information and so on. I think there is a line to be drawn. In practice, any report of the sort we seek to get from the regulator, which is the broader brush information and so on, will not only be laid before Parliament but—as in the past with Pickering, the National Audit Office report on OPRA, the Quinquennial Review of OPRA and so on—published and placed in the Libraries of both Houses.

However, there may be situations which come within both data protection and human rights implications where it would not be appropriate. That is why we have that opt-out clause.

Lord Oakeshott of Seagrove Bay

I am not impressed with the Minister's reply. I think that the points the noble Baroness, Lady Noakes, makes are absolutely right. The Minister cited specific exceptions. Perhaps she would care to take this back and amend the amendment in that way. But if there are specific reasons, she should change the amendment or bring forward a government amendment reflecting them. Apart from that, it is absolutely right that it should be "will" rather than "should".

Baroness Noakes

I thank the noble Lord, Lord Oakeshott, for his support, and the Minister for her reply. I had reached the same conclusion as the noble Lord, Lord Oakeshott—indeed, I had understood that such a provision requiring the Secretary of State to publish would not override the basic requirements of human rights or data protection legislation. If that is the only problem, I invite the Minister to think about this again and consider an amendment which merely restricted the exclusion from publication to those sensitive areas.

We need to move into an era where government is more open and transparent and the Secretary of State does not withhold to himself the power to choose whether it is convenient to release information to the outside world or to Parliament. I hope that the Minister will think about this again over the summer. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 142 not moved.]

Clause 55 agreed to.

Clause 56 agreed to.

Clause 57 [Duty of the Regulator to issue scheme return notices]:

The Deputy Chairman of Committees (Lord Brougham and Vaux)

Amendments Nos. 143 and 144 have already been spoken to with Amendment No. 138.

Lord Skelmersdale

moved Amendment No. 143:

Page 41, line 18, leave out from "fall" to "and" in line 22 and insert—

  1. "if the notice was issued by 31st March 2006, within a period of three years, or
  2. if the notice was issued by 31st March 2007, within a period of two years, or
  3. if the notice was issued after 31st March 2007, within a period of 12 months,"

The noble Lord said: If the Committee will allow me, I shall speak very briefly to Amendment No. 143. We have got ourselves into a muddle somewhere. I understood the Lord Chairman to refer to Amendment No. 138, not Amendment No. 143, which I intend to move.

I have already spoken about the enormous job that the regulator has. I cannot believe that the information required on these notices will all be returned on the same day. The clause provides for a trickle effect, but I find it somewhat lackadaisical—it is not as precise as I think we might reasonably expect.

The scheme managers have a year to think about their response and then two years to submit it, as we can see in Clause 57(4). This is far too long a time on many occasions, and I propose a more formalised return time. We are almost talking about re-registration at the beginning, and I am content to follow the Bill's proposal of three years because there will be a flood of registrations, re-registrations, checkings and so on. The regulator and the firms will need time to consider them. However, as the flood slows down, three years will no longer be necessary. One year will be quite long enough because the regulator and the scheme managers will know what they are about. I beg to move.

Baroness Hollis of Heigham

The reason for this flurry of activity was that, as the noble Lord will see from the Marshalled List, Amendment No. 138 is grouped with Amendments Nos. 143 and 144. Therefore, I presumed that it had been spoken to already and thought that I had responded to it. If the noble Lord is now saying that he had intended to degroup it and wanted to address it separately, so be it. I was going back to some of my earlier files to try to identify it. I am in the noble Lord's hands. Does he wish to reopen the issue?

Lord Skelmersdale

I apologise—I have clearly got myself into a total tangle. I did indeed intend—

Baroness Hollis of Heigham

I think we have discussed this. I will certainly give an undertaking that if industry representatives would find a version of this clarity helpful, I am perfectly happy to look at it.

Lord Skelmersdale

I am grateful. That is a neat way of getting us out of our difficulty. I hope that I can get my act together for the rest of the afternoon. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 144 not moved.]

Clause 57 agreed to.

Clauses 58 to 64 agreed to.

Clause 65 [Reports by skilled persons]:

Baroness Noakes

moved Amendment No. 144A: Page 46, line 10, at end insert— ( ) This section is subject to section 296.

The noble Baroness said: In moving Amendment No. 144A, I shall speak also to the other amendments in this group. The majority of the amendments owe their provenance to the Scottish Law Society, which I have learned to respect as a source of amendments.

There are three sub-groups of amendments in this group. The first group, Amendments Nos. 144A, 144B and 144C, amend Clauses 65, 66 and 69 respectively to make them subject to Section 296. Clauses 65 and 66 concern the regulator issuing a notice to obtain reports or information. Clause 69 deals with the powers of inspectors when they inspect premises. Clause 296 is entitled, "Protected Items", and deals with excluded items from disclosure or inspection, which are subject to legal privilege.

The amendments seek to make it clear in the Bill that the powers in Clauses 65, 66 and 69 are indeed subordinate to the provisions of Clause 296; that is to say that legal privilege will prevail in those instances.

Amendments Nos. 144D and 148A amend Clauses 70 and 72. Clause 70(6)(a) allows for the retention of documents that have been taken during an inspection of premises until the conclusion of proceedings, and Amendment. No. 144D adds that such retention must be necessary and proportionate, otherwise documents that were not needed could be retained for the full period until the end of proceedings, and that would not be fair, in particular with businesses which may want access to their documents. Amendment No. 148A does the same to Clause 72, which deals with documents retained after being obtained by a warrant.

The last amendment in this group, Amendment No. 145, also deals with document possession under Clause 70 but here it inserts a new safeguard for the person from whom the documents are taken by requiring the inspector to sign for what he has taken. Ministers will be aware of the importance of documents to businesses. That will ensure that there is clarity about what has happened to documents. I hope that the Minister and, indeed, inspectors, would welcome some kind of formal procedure to avoid later disputes. I beg to move.

Baroness Hollis of Heigham

These are important amendments covering a number of clauses, which hang together. I can give assurances on the last two points made by the noble Baroness, but it may be better to deal with them as we go through.

Clause 65 gives the regulator the power to obtain expert opinion and analysis to assist it to exercise its functions. Clause 66 sets out the regulator's ability to collect information which underpins the new risk-based approach to regulation. As I am sure the noble Baroness will agree, it is essential that the regulator have the powers to request information even where there may be some reluctance to comply in order to assess the risk to the scheme members' benefits. I was told this morning—I hope that it is not protected information—that at one stage OPRA went on one of its visits and found a file on the front of which was marked, "To be hidden away from OPRA".

Lord Oakeshott of Seagrove Bay

That was a decoy.

6 p.m.

Baroness Hollis of Heigham

These are important amendments which cover a number of clauses that hang together. I can give the noble Baroness assurances on her last two points, but perhaps it would be better to deal with them in the course of my reply.

Clause 65 will give the regulator the power to obtain expert opinion and analysis to assist it to exercise its functions. Clause 66 sets out the regulator's ability to collect information which underpins the new risk-based approach to regulation. As I am sure the noble Baroness would agree, it is essential that the regulator has the powers to request information, even where there may be some reluctance to comply, in order to assess the risk to scheme members' benefits. I was told this morning—I hope that it is not protected information—that at one stage OPRA found on one of its visits a file that was marked on the front, "To be hidden away from OPRA".

Lord Oakeshott of Seagrove Bay

Perhaps it was a decoy.

Baroness Hollis of Heigham

Yes. Clause 69 outlines the powers of the inspectors when inspecting premises. When an inspector enters premises which are liable to inspection he may make such examination and inquiry as may be necessary to the purpose for which the premises are entered. The inspector may take possession of any document appearing to be relevant to compliance with the regulatory provisions, or take any steps which appear necessary for preserving the document or preventing interference with it. He may also take copies of any document—and, yes, he will sign for them so that there is a proper paper trail of such activity. To reassure noble Lords I should emphasise that we are talking about inspectors who are, in DWP terms, extremely senior—Grade 7 civil servants or above, who are equivalent to fully qualified tax inspectors. So we are talking about a more modest level of seniority in exercising such powers. Amendments Nos. 144A to 144C seek to ensure that the powers contained in these clauses shall not extend to the disclosure of protected items by adding to it the provisions contained in Clause 296 on protected items. Has the noble Baroness made the cross-reference with Clause 296? There it is made clear, regarding the matter upon which she pressed me, that protected items include, communications between a professional legal adviser, his client or any person representing his client which fall within subsection (3)", in connection with the giving of legal advice and so on. That should deal with the point made by the noble Baroness about protected information and legal advisers.

The phrase "protected item" relates to one that is subject to legal privilege; that is, any communication between a professional legal adviser and his client, or any person representing his client, which is made in connection with the giving of legal advice, and so on. However, this amendment is unnecessary as it seems to be fully covered by Clause 296.

Clause 70 provides additional provisions in respect of Clauses 67, 68 and 69. An inspector applying for admission to any premises for the purposes of this clause must produce his certificate of appointment if required to do so. Any document relevant to proceedings may be retained until the conclusion of those proceedings where proceedings are commenced before the end of the retention period of 12 months, otherwise to the end of the retention period. The regulator may extend the retention period.

As drafted, Amendment No. 144D implies that the regulator may abuse its powers. An essential element of the work of the regulator is to focus on protecting the benefits of members of work-based pension schemes, concentrating its effort on schemes where it assumes or assesses that there is a high risk of fraud, bad governance or poor administration. Therefore, Clauses 67, 68 and 69, also prevent the regulator abusing its powers.

In some situations it is appropriate for staff of the regulator to visit and inspect premises. These are powers that OPRA already has. It may be of interest for noble Lords to know that OPRA has made 12 unannounced visits per year since its inception in 1997. This is a power that is currently being used and I have not come across any suggestion that its powers have been abused. However, although OPRA was able to visit premises and inspect documents, it had no powers to seize or copy documents. That is a lacuna that should never have been permitted in the original legislation in 1995. I and my noble friends present also share culpability for not spotting that at that time. That lacuna has been remedied in Clause 69.

Amendment No. 145 seeks to ensure that any document seized by an inspector of the regulator will be detailed and an appropriate receipt given. That is what will happen. The regulator will follow best practice guidelines, contained, for example, in Police and Criminal Evidence Act Code B. Clause 72 provides the regulator with the power to apply for a warrant to inspect premises in cases of suspected fraud or in serious breaches of pensions legislation which may have a significant impact on members' benefits. OPRA currently has a similar power to apply for a warrant under Section 100 of the Pensions Act 1995, which it has exercised only 12 times since April 1997—that is entry by use of a warrant as opposed to arriving unannounced. Each warrant that OPRA has applied for has been granted.

Like OPRA, the regulator will be able to apply for a warrant only in specific circumstances; for example, if it has requested information under Clause 66 that has not been provided, if there is a risk that requesting information would cause it to be destroyed, or if there is evidence of criminal activity.

Amendment No. 148A would appear to seek to ensure that any document taken from the premises should only be retained provided that retention was necessary and proportionate in the circumstances. The amendment has no purposeful effect because Clause 72 is very specific to the powers afforded to an inspector when a warrant is issued.

I hope that I have addressed all the issues raised by the noble Baroness in these amendments that cut across those clauses, but, if not, I am sure that she will press me further.

Baroness Noakes

I thank the Minister for that reply. Perhaps I may press her on one or two points of detail, although the drift of her comments is what we were hoping to hear. First, she said that the inspectors would sign for documents. Under what authority would that arise, because it is not under the Bill? Would it apply as a matter of procedure?

Baroness Hollis of Heigham

Yes. In practice anyone who took documents without signing for them would be a fool, because there would be no record of where they had been obtained and there would be no paper trail that would stand up in court if a criminal process were to be pursued. Such a practice is required by the Police and Criminal Evidence Act Code B and the inspectors would abide by that.

Baroness Noakes

I thank the Minister for that. Does that code apply currently to the department's inspectors and will they apply to the inspectors who will be carrying out the regulator's functions?

Baroness Hollis of Heigham

Yes. The inspectors, who have quite a senior level of responsibility, will be required to sign for documents when they take them. If they do not there will be a serious question mark about the paper trail, because we are dealing with cases that may well go to court, if there has been a criminal offence at some stage. Obviously, such evidence would not stand up unless appropriate procedures had been followed, as laid down by the Police and Criminal Evidence Act Code B.

Baroness Noakes

I thank the Minister for that. Of course, the answer was given by the Minister from the perspective of preserving evidence. My question was asked in the context of preserving the company's ability to have some record of documents that had been taken from it so that it could ensure that it could retrieve those documents at a later stage. But I imagine that there would be some commonality of interest.

Baroness Hollis of Heigham

Or copies made, for example.

Baroness Noakes

Yes. The Minister also said that Amendments Nos. 144A to 144C were not necessary because of Clause 296. I was seeking an assurance that, from the Minister's perspective, Clause 296 overrides the earlier clauses, in effect.

Baroness Hollis of Heigham


Baroness Noakes

I thank the Minister for that. My last point related to Amendments Nos. 144D and 148A, which relate to the retaining of documents only if that retention is necessary and proportionate. The Minister spoke about regulators not abusing their powers, but then said that there would be a power to seize documents, which, presumably did not apply before. Having obtained the power to seize documents, should there not be something that says that one could not hold on to them for an unnecessary period? My point is that documents are often the lifeblood of a company. There may or may not be some wrongful act for which the company may be brought to book, but inspectors could enter premises and take away large amounts of documents, which could inhibit the way in which the company carried out its lawful business.

While I completely understand that documents should be retained when they are needed for proceedings, the Bill does not say that the documents should be retained only for the purpose of proceedings. It says that, "You can hang on to whatever you have managed to gather in for as long as the proceedings are going on". I believe that that should be restricted in some way.

Baroness Hollis of Heigham

If the documents are part of the lifeblood of the company—and I realise that they might be in certain circumstances—they could simply ask for the documents back. The regulator would keep a copy and send them back.

Baroness Noakes

I thank the Minister for that assurance. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 65 agreed to.

Clause 66 [Provision of information]:

[Amendment No. 144B not moved.]

Clause 66 agreed to.

Clauses 67 and 68 agreed to.

Clause 69 [Inspection of premises: powers of inspectors]:

[Amendment No. 144C not moved.] On Question, Whether Clause 69 shall stand part of the Bill?

Lord Lucas

Perhaps I may ask a question about Clause 69. It is not clear to me whether subsection (2)(d) would give the power to remove or require a copy of a document which was encrypted. If that was the case, the inspector would not be able to say that the document appears to relate to compliance, because he would not know what the document was. If an encrypted directory on the computer was used for maintaining the pension scheme records, one could expect that there might be relevant matters in it. I cannot see how subsection (2)(d) would apply in that case. Does it and, if so, how? I do not need an answer now.

Baroness Hollis of Heigham

I think that the noble Lord will end up with a bouquet of steeled wire. I should first compliment the ingenuity of his concern. I thought that I had prepared for all possible contingencies, but encrypted, protected, coded documents had not occurred to me. However, we can legally take information stored in any form, so there is no legal problem. There may be a problem of identifying whether information is relevant by virtue of it being encrypted. I understand that you do not know what you do not know. That is always a problem. But if you do know what you do not know, so to speak, then the information may be taken—that is empowered under Clause 69(2)(e).

Lord Lucas

I do not think that that covers encrypted information because it cannot appear to be relevant. I think a "might" could be needed in the subsection.

Baroness Hollis of Heigham

The noble Lord made my point in my earlier discussion with the noble Lord, Lord Skelmersdale. The ingenuity of people surpasses all expectations. I am sure that we have legal authority to take that information, but I take on board his point in terms of forewarning the regulator that skills worthy of the security services might need to be employed by the inspectorate's staff.

Clause 69 agreed to.

Clause 70 [Inspection of premises: supplementary]:

[Amendments Nos. 144D and 145 not moved.]

Clause 70 agreed to.

Clause 71 agreed to.

Clause 72 [Warrants]:

Baroness Hollis of Heigham

moved Amendment No. 146: Page 53, line 7, leave out subsection (3) and insert— (3) In subsection (1), any reference in paragraph (a) or (b) to a document does not include any document which is relevant to whether a person has complied with—

  1. subsection (3) of section 228 (information and advice to employees) or regulations under subsection (4) of that section, or
  2. any provision in force in Northern Ireland which corresponds to that subsection (3) or is made under provision corresponding to that subsection (4), GC 286 and is not relevant to the exercise of the Regulator's functions for any other reason.
(3A) For the purposes of subsection (1)(c)(iii), any liability to pay a penalty under—
  1. section 10 of the Pensions Act 1995 (c. 26), or
  2. any corresponding provision in force in Northern Ireland,
which might arise out of a failure to comply with any provision within subsection (3)(a) or (b) is to be disregarded. (3B) References in subsection (2) to such a document as is mentioned in subsection (1) are to be read in accordance with subsections (3) and (3A).

The noble Baroness said: I hope that the Committee will accept this amendment. We want the regulator to be able to apply to the court for a warrant to be issued so that an inspector can enter premises, by force if necessary, to search for and take copies of documents. This power will force compliance where a request for information has failed to produce the documents.

Amendment No. 146 is a technical amendment to ensure that a warrant may not be issued solely on the basis that a document is on the premises which goes to compliance with the Northern Ireland equivalent of Clause 228—obligations on employers to enable employees to obtain information and advice about pensions—or solely on the basis that a person is liable to pay a civil penalty order in respect of a breach of the equivalent in Northern Ireland to Clause 228. Without these amendments, warrants could be issued in relation to those Northern Ireland provisions which would be out of step with the position regarding the equivalent GB provisions.

6.15 p.m.

Enabling inspectors to search premises and the regulator to apply for warrants to forcibly search for and copy documents, if necessary, is vital. This ensures compliance with the power to request information, which otherwise schemes could ignore wilfully, depriving the regulator of the full picture of a scheme. That could mean that regulatory action which might need to be taken could not be, putting members' benefits at risk.

Without the power, through a warrant, forcefully to search for and copy documents, vital evidence could be destroyed. This could deny the regulator vital proof of wrongdoing which could be used as justification of regulatory action or in a court case as evidence, putting members' benefits at risk. Not being able to take regulatory action or allow criminal behaviour to go unpunished, are equally unacceptable. However, the regulator will apply for a warrant only in the most severe cases, where there is evidence to suggest that there is a considerable risk of documents being altered or destroyed. It is recognised that in the vast majority of cases, schemes will send the regulator the information requested, meaning that this power will be used sparingly. As a result, I hope that the amendment will stand part of the Bill. I beg to move.

The Deputy Chairman of Committees

I should advise the Committee that if the amendment is agreed to, I cannot call Amendments Nos. 147 and 148.

Baroness Noakes

Perhaps I may ask the Minister to clarify what the amendment actually does. It seems to exclude from the ability to obtain a warrant documents relevant to compliance with Clause 228. I understood that the Minister's justification was, of course, on the basis that the regulator had to have the power to obtain the information and obtain a warrant, if needed. But my reading of the amendment is that new subsection (3) says that in subsection (1), which relates to a justice of the peace issuing a warrant, the reference in (3)(a) or (b) does not apply to any information required under Clause 228(3). I may be completely wrong, but my understanding of the amendment was that it achieved the opposite of her description.

Lord Skelmersdale

Very unusually, may I also challenge the Minister? My Amendments Nos. 147 and 148 are pre-empted, as the Lord Chairman has told the Committee, if we agree to the new subsection (3).

Lines 10 to 12 of the original subsection (3) said that a document did not include any document which was relevant to Clause 228(3)—a point that my noble friend Lady Noakes has just covered. Surely the point is that the regulator will already become involved under Clause 228(3), so why this prohibition? In fact there are more or less similar words in the amendment. So the same question does arise.

Baroness Hollis of Heigham

The reason we need the amendment is that Clause 288 without amendment could apply to any employer whether or not he has a pension scheme. That is why the restriction is needed. The rest is basically technical, to ensure that all of those matters that we have discussed including the terms of eligibility for warrants and so forth, apply to Northern Ireland as well as to Great Britain.

On Question, amendment agreed to.

[Amendments Nos. 147 to 148A not moved.]

Baroness Noakes

moved Amendment No. 148B: Page 53, leave out lines 40 and 41 and insert "sheriff

The noble Baroness said: This is another Scottish amendment.

Baroness Hollis of Heigham

The amendment is not technically correct, but I suggest that we take it away, because it makes a perfectly valid point.

Baroness Noakes

I beg leave to withdraw the amendment which I did not quite reach the point of moving.

Amendment, by leave, withdrawn.

Clause 72, as amended, agreed to. Clause 73 agreed to.

Clause 74 [Offences of providing false or misleading information]:

Baroness Barker

moved Amendment No. 149: Page 54, line 10, after "false" insert "or maliciously provides the Regulator with information which is misleading or likely to mislead

The noble Baroness said: This amendment may seem pedantic, but I believe that it is important. Providing false or misleading information becomes an offence under the Bill. It is important to establish whether someone has knowingly and maliciously provided false information and whether they have knowingly and recklessly provided information which was misleading.

Secondly, how does one establish what is misleading information? Information can be misleading on the part of the person who provides it. Equally, it can be misleading to the person who receives it. The purpose of the amendments is to tighten that up when we are talking about a criminal offence.

An assessment must be made about the likelihood of information being misleading and misunderstood by the recipient. In most cases, the recipient will be the regulator and the board; they will be highly equipped and will no doubt have easy access to a great deal of expert information. That may be different from those who are providing the information to them.

We are seeking to spell out in slightly greater detail than is in the Bill the standards by which information should be assessed. Somebody could probably provide information in the belief that it was perfectly good, but it could mislead the regulator. So we are trying to ensure that we get to those who maliciously provide wrongful information and to establish greater legal certainty in taking into account the recipient of the information. It is a pedantic argument but quite an important one. I beg to move.

Lord Borrie

I oppose, quite strongly, the amendments presented on behalf of the Liberal Democrats by the noble Baroness, Lady Barker. I feel that the present proposal, which is quite common form in legislation—that a person who knowingly or recklessly provides the regulator with information which is either false or misleading in a material particular is guilty of an offence—is perfectly reasonable. If you say that that is all right for false information but if, in relation to misleading information, you want to insert the words "maliciously provides", I would say that that is a severe watering down of the provision for the offence and exceedingly difficult for anyone to establish. I think that the amendment should be rejected.

Amendment No. 151 states that, information is misleading or likely to mislead only if it is misleading or likely to mislead when viewed in the light of the addressee of that information". Of course, the addressee is the regulator. We have not yet determined whether it is "he" or "it—there are further amendments on that score. That presumably means that if the regulator should know that the information is misleading, there is to be no offence. That seems to let off very lightly someone who may have knowingly or recklessly provided information which is misleading to many people but perhaps not to the knowledgeable regulator. Normally, one judges these matters objectively: is the information misleading or is it not? I believe that on all those counts the amendments should not be accepted.

Baroness Hollis of Heigham

I feel like simply saying, "I agree" and sitting down again.

Lord Oakeshott of Seagrove Bay

With him or with her?

Baroness Hollis of Heigham

Absolutely not with the noble Baroness, Lady Barker. It seemed to me that the response of my noble friend Lord Borrie was exactly right. I want to add one point. Clearly, the provision refers to the person giving the information, not to the degree of knowledge the regulator may or may not have, such as he could or could not be misled.

It is for the regulator—and this may give some assurance to the noble Baroness—where there is a question not of bad faith but of honest doubt—and we are all out to catch the bad faith cases, but there might, I suppose, be a question of honest doubt or inadequacy by the person giving the information—to prove beyond reasonable doubt to a court that a person who provided false or misleading information did so knowingly or recklessly. That is a very high standard of proof. It is for the regulator to establish that in a criminal court.

So, in addition to everything my noble friend Lord Borrie said, which seemed to me to be exactly right, I think the noble Baroness could have the comfort that there is actually a high hurdle for the regulator to establish were these consequences to flow.

Baroness Barker

I could not disagree more with the noble Lord, Lord Borrie. Our reading of the clause as it stands without our amendment is that it is possible that information could be deemed to be misleading only if it were proven to have misled someone. Therefore, the supply of information which was in fact misleading but was never caught would fall without that. That is important. That is why we have inserted the provision about being, likely to mislead". My second point is—

Baroness Hollis of Heigham

What distinction does the noble Baroness draw between misleading information and wrong information? It is like asking what colour is an orange in the dark. Does someone have to know it is wrong for it to be wrong in terms of the recipient?

Baroness Barker

That is exactly the point that we are trying to get at. We are trying to establish that there is a reciprocal duty of care on the recipient of information as there is on the provider of it.

The recipient in this case is largely the regulator.

Baroness Hollis of Heigham

Surely, it is not the regulator's duty to ensure that he is not misled; it is the duty of the person providing the information to ensure that he does not mislead the regulator. We may be dealing with thousands of schemes. We are seeking in the Bill to establish that the regulator may be able to, so to speak, take his eye off the vast majority of schemes where there is no significant issue of risk involved to members and to be able to concentrate— we all agree—his resources where there is real risk. To do that he has to be able to rely on the reliability, the accuracy and so on of the information presented to him.

Therefore, there is a duty of care on the person providing that information—trustees or whatever or scheme professionals. It is not the job of the regulator to ask, "Am I misled?", it is the duty of the person providing that information to ensure that, given all the guidance that has been put out and so on, the information is as clear as possible.

Having said that, the test of state of mind and of intention comes into play in the second stage of whether the information was indeed knowingly or recklessly misleading. That is where the test has to be established in a court of law.

Baroness Barker

We were seeking to establish a test whereby someone provided information which was perfectly reasonable but where the regulator was misled in the context. It is, however, clearly a matter on which we shall have to go back and reflect. It is important to establish the level of responsibility the regulator has to make efforts to determine whether someone provided information with an intention to mislead or whether wrong information was given that was not intended to mislead.

Baroness Hollis of Heigham

In which case could we not stand up in the courts? That was the point I was trying to make. The backstop is there but he has to prove beyond reasonable doubt, not on the balance of probabilities. It is not a civil test; it is a criminal test, which is actually very high. Perhaps the noble Baroness can help me. Can she think of an example in which someone unwittingly—if I can put it this way— produced information which misled the regulator but, none the less, he could establish in court that that person should be subject to a criminal offence? I find it hard to conceive of any such example. Perhaps the noble Baroness has such an example in mind.

6.30 p.m.

Baroness Barker

I do not have one to hand but I am certainly willing to think about the matter and get back to the noble Baroness. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 150 and 151 not moved.]

Clause 74 agreed to.

Clause 75 agreed to.

Clause 76 [Restricted information]:

[Amendment No. 152 not moved.] Clause 76 agreed to.

Clause 77 agreed to.

On Question, Whether Clause 78 shall stand part of the Bill?

Lord Skelmersdale

Two points occurred to me in relation to this clause. First, presumably the word "valuation" in subsection (2) means actuarial valuation in this case. Secondly, as regards subsection (3), it is important that the consultees should not divulge the information either. I hope that that is what all that means.

Baroness Hollis of Heigham

On the first point, "valuation" could be any form of valuation and not just the more limited actuarial valuation. Secondly, any information divulged by the regulator that is protected information to, say, the Inland Revenue or to another body could not be further processed without the consent of the appropriate parties. The information does not lose its protected status as it goes down or along the chain.

Lord Skelmersdale

In order to save time on a future amendment, does that include the Secretary of State?

Baroness Hollis of Heigham

I am assured that it does.

Clause 78 agreed to.

Clauses 79 and 80 agreed to.

Schedule 3 agreed to.

Clause 81 [Other permitted disclosures]:

Baroness Hollis of Heigham

moved Amendment No. 153: Page 58, line 11, after "7" insert "or 23(1)

The noble Baroness said: This goes back to one of the issues raised by the noble Lord, Lord Skelmersdale, a moment ago. It is a minor amendment but it may be sensible if I explain the purpose and nature of the clause.

Clause 81 replicates and expands Section 108 of the Pensions Act 1995 by setting out other circumstances in which the regulator can disclose restricted information. Those include disclosures to the Secretary of State, the Inland Revenue—the example that I gave earlier—or the Department for Social Development in Northern Ireland if the regulator believes it is in the interest of scheme members or in the public interest.

Clause 81 also allows disclosure for the purposes of any criminal proceedings arising from specified provisions; disciplinary proceedings relating to carrying out professional duties by a solicitor, an actuary, an accountant or an insolvency practitioner; and in relation to disciplinary proceedings against a public servant.

Disclosure is also permitted if it is to assist an authority in a country outside the UK to carry out functions under this Bill or the Pensions Act 1995 or in the pursuance of an EC obligation. The regulator is not prevented from disclosing information to the Director of Public Prosecutions, the Director of Public Prosecutions for Northern Ireland, the Lord Advocate, a procurator fiscal or a constable. Neither is it prevented from disclosing restricted information where disclosure is required by law, or to a trustee—this would be an independent trustee—appointed by the regulator under Section 7 of the Pensions Act 1995 if the information is required by the trustee to carry out his work. The amendment adds to that provision in order to enable the disclosure of information to an independent trustee appointed by the regulator under Section 23 of the 1995 Act.

The ability to disclose information to any regulator-appointed trustee is an important one. OPRA does not currently have that power and, as a result, it is often aware of information extremely relevant to the trustee whom it appoints but which it is unable to disclose. Such information could vary from, for example, scheme bank account details to information about previous regulatory action in respect of the scheme in question. It seems absurd to appoint an independent trustee and he cannot be told about a previous investigation in respect of the scheme in question.

I remind the Committee that any person to whom the regulator gives information is able to disclose it further only with the permission of either the regulator or the person to whom the information relates; in other words, as I said to the noble Lord, Lord Skelmersdale, the protection continues down the chain. I hope that with that explanation the Committee will accept the amendment.

On Question, amendment agreed to.

Clause 81, as amended, agreed to.

Clause 82 agreed to.

Clause 83 agreed to.

Clause 84 [Codes of practice]:

Baroness Turner of Camden

moved Amendment No. 154: Page 60, line 5, at end insert— ( ) the discharge of the duty imposed by section 50 of that Act (requirement for dispute resolution procedures);

The noble Baroness said: Amendment No. 154 stands in my name and those of my noble friends. We are now dealing with a different aspect of the Bill altogether—what I suppose one can call dispute resolution.

As I understand it, the Bill simplifies the existing requirements for IDR procedures principally by removing the requirement for a two-stage process and requiring only a single stage. As I understand it, this change is driven by simplification and a view that the present process is too complex and time-consuming. However, a single formal stage will realise these advantages only if it is supported by informal procedures. The amendment seeks to achieve that by requiring the regulator to produce a code of practice—Clause 84 concerns codes of practice—commending the use of informal procedures. The nature of many complaints is that the member, while dissatisfied, may have very little concept as to the full facts and rules relevant to the case. In the era before IDR was required, company schemes and companies and schemes often fobbed off complainants quite summarily.

The key advantage of the two-stage process was that it allowed the complainant to make what might be called an "uninformed complaint" and then guaranteed him a reasoned response—perhaps an explanation with reference to the rules. He could then bring an informed complaint at the second stage if he was not satisfied. Often the second stage was not so much an appeal as an elaboration of the original complaint, which might well include information not previously known to him.

The purpose of commending informal procedures is to try to retain the essential advantage of a two-stage system while meeting the objectives of simplification. This is a very simple amendment. I beg to move.

Baroness Hollis of Heigham

As my noble friend has explained, the amendment would include internal dispute procedures as one of the subjects on which the regulator must issue a code of practice.

I can either go into a long explanation or say that we do not consider that the measure is necessary at this stage but if OPAS or any other body thinks that it is necessary, we have the powers under Clause 84(1) to do precisely that.

I could go into a much fuller explanation but perhaps my noble friend considers that what I have said is sufficient—that if we consider that the measure is necessary, the regulator will issue a code of practice. We do not have any evidence to think that that will be necessary and therefore we are not proposing it at this stage. I do not know whether that explanation is sufficient for my noble friend. I can give a fuller answer if she wishes.

Baroness Turner of Camden

I think that is adequate, if I may say so. I am very grateful to my noble friend the Minister for those comments. This amendment was suggested to me by my union, no doubt based on its experience of what has happened in the past. I am grateful to my noble friend for what she has said. If it is possible for OPAS, a union or any other body to say, "We want this because we think it is necessary in order that scheme members can be properly dealt with", that would be all right. In the circumstances, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Hunt of Wirral

moved Amendment No. 155: Page 60, line 9, at end insert— ( ) required procedures in relation to the internal and accounting controls in money purchase schemes;

The noble Lord said: This amendment would insert on page 60, line 9, the words, required procedures in relation to the internal and accounting controls in money purchase schemes". This amendment is designed to ensure that the new pensions regulator takes the necessary direct measures to require companies to impose adequate systems of controls upon pension schemes.

As I understand matters as they stand now, ensuring that strong systems of internal controls are in place in relation to a scheme's assets is to some extent the province of the Financial Services Authority, which is responsible inter alia for investment managers and insurers, to which most trustees entrust their asset management. However, trustees do have responsibilities to control their investments—even where these are delegated—and to make sure that the relevant administrative systems function properly.

The main purpose behind the amendment is to assist in the enforcement of proper controls, in particular in relation to money purchase schemes. The amendment stands in my name and that of my noble friend Lord Lucas. We regularly hear from scheme auditors about how frequently they encounter poor internal controls in pension scheme administration systems. For those final salary schemes where the pension is calculated purely on the basis of final salary and years of service, the employer pays the balance of the costs so this may not be problematical for the member. In money purchase schemes, however, where the members' benefits depend on the contributions and investment return thereon, it can be very damaging.

I anticipate that the Minister may want some examples. Typical problems that are encountered include incorrect contribution calculations. The wrong rate may be applied for a variety of reasons. The payroll may be misinformed or there may be a complex contribution structure, depending on member age and choices, and this may not be correctly applied.

Another typical problem is failure to pay sums on due dates, causing investment dates to be missed and failure to apply member investment choices. I have, for example, been informed of one administrator making a large compensation payment because it did not apply the switching arrangements for members within 10 years of retirement age when they were supposed to have a phased move from equities to bonds. The market falls in equities that have taken place meant that the members lost material sums from this failure.

There may be failure to ensure that regular and frequent reconciliations are carried out between investment records and administration records. Otherwise, where discrepancies do arise between the two, investigation of differences is going to be very time consuming and expensive.

Finally, there may be failure to apply the correct rules and processes when unitising funds, so that the members are not given the correct number and value of units.

It is my contention that these problems could all be eliminated in the vast majority of instances by the application of strict and clearly established internal control processes. This would both ensure that the employer checks that the correct contributions are paid, and that the administrator and investment manager make sure that the members' entitlements are correct. I am informed that too often auditors find that the necessary internal systems and disciplines are absent, which results in uncorrected errors. Because of the nature of money purchase schemes, these can rapidly snowball over time and be perpetuated.

Since money purchase schemes are rapidly supplanting final salary schemes, this has the potential to become a really serious problem. There is no provision for compensation for maladministration, so member protection has to be achieved by proper controls and a mechanism for enforcement. The potential for recovering compensation from administrators is likely to be very restricted.

I should have preferred to give the Minister much more detail in advance. I apologise for the fact that I have not been able to do so. However, I understand that the Institute of Chartered Accountants for England and Wales has given examples in the past similar to those which I have specified. It has requested the addition of an extra code of practice under Clause 84 and also for a separate clause for the implementation of the European directive's provision in Article 14(1). I beg to move.

6.45 p.m.

Lord Lucas

I am in total support of this amendment, which is not surprising given that I am a chartered accountant, and the amendment emanates from the Institute of Chartered Accountants. The Bill is doing a great deal for defined benefit schemes. We ought also to make sure that it does what is needed in terms of defined contribution schemes. So far as I can establish from the institute and from talking to other people, the problems are largely administrative. They are really quite extraordinary. These are complicated schemes because the arrangement is so flexible. You find that up to 20 per cent of schemes are not doing any reconciliations at all and are piling up all sorts of problems. I think of the incomplete records that I used to encounter when I was training to be an accountant.

We have Article 14 of the forthcoming directive insisting on proper standards—this is referring forward to Amendment No. 302 which I apologise for not grouping with the one that we are discussing. However, we are proceeding 10 times faster in terms of discussing amendments than our noble friends in the Chamber. They are still on the first group. We are doing well.

To return to the subject in hand, it seems to me that this is the main known problem with defined contribution funds and that we ought to look to doing something about it in the Bill—since we have a directive that is pushing us in that direction.

Amendment No. 303, which is also not grouped with the amendment, picks up the wording of the current Companies Bill to give auditors additional powers which would also help defined contribution schemes. I throw in a final question. My understanding is that Clause 173 applies to defined contribution funds and that therefore we have the protection that that offers against fraud, but I should just like to check.

Baroness Hollis of Heigham

The noble Lord, Lord Lucas, and I are in complete agreement on one point; that is, I, too, am baffled by the fact that we are considering almost every amendment separately and that we are not grouping amendments which in my view could reasonably be grouped. We have one such example here which I believe has been explained.

Amendment No. 155 would apply the measure that we are discussing to money purchase schemes. Amendment No. 302, with which it has not been grouped, would allow such controls to apply to all schemes. The question is whether it would be useful to have a code of practice to support such a requirement.

In relation to accounting controls we have always been happy to allow the accounting profession to take care of setting standards and giving guidance. I am not sure why two distinguished members of that profession are now saying that it should not be left to that profession but should be left to the regulator. There may be an answer here that I have missed but it suggests a degree of—

Lord Lucas

My understanding is that there are obligations on companies to do this properly and the auditors can then check that they have done it. The auditors are checking rather than enforcing. Therefore, you need the obligation before you can check whether it has been done.

Baroness Hollis of Heigham

I was talking about accountancy rather than the actuarial profession but perhaps we can blur that line. There is no reason for the regulator not to issue a code of practice if he thinks it is appropriate and desirable. Obviously he would respond to representations made to him by professionals or possibly trustees of schemes who feel that there is a need for guidance on the matter.

What we are resisting at this point is specifying in advance what codes of practice and so on the regulator should issue. I am slightly puzzled why internal controls are a matter for the regulator rather than for the actuarial and accountancy professions. Be that as it may, should the measure prove necessary or desirable, people would be entirely free to persuade the regulator that this would be an appropriate code of practice. From what has been said, that may well be the case.

That answer may not be as helpful as the noble Lord would wish but I do not want to start being specific about which codes of practice we should require the regulator to produce in this area.

Baroness Noakes

May I ask just one point of clarification on the Government's approach to Clause 84? The Minister said that she did not want to specify codes of practice, but that is exactly what has been done in subsection (2) where paragraphs (a) to (k) represent those items for which the Government do want to specify codes of practice. Whenever someone suggests that a matter should be covered by a code of practice, the Minister replies that the regulator might do that if he considers it necessary. What principles underpin the requirement of a code of practice? That might help others in knowing whether they could breach this particular defence.

Baroness Hollis of Heigham

I am not entirely willing to help the noble Baroness breach our defences but none the less there is a point there. The point that I am making is that I am not sure why we need to approach the matter in the way that is suggested given the controls that already exist. Professionals in the field that we are discussing may tell me that I have misunderstood the situation. However, audited accounts are required for money purchase schemes.

The regulator will be able, via scheme returns, to identify schemes that do not have audited accounts and take appropriate action, for example through education, an improvement notice or a third party notice—all the matters that we discussed on the first and second days of Committee. The Committee will know that we have already piloted scheme returns and that we have had very positive feedback I come back to professional standards. If the auditors are not satisfied, they do not sign off the accounts. If they do not sign off the accounts, at that point the regulator gets involved because there is clearly a problem. I ask in all honesty why that procedure should not be adequate to meet the problem identified by the Committee?

Baroness Noakes

Perhaps I can help the Minister. The auditors will sign off the accounts provided there is no material misstatement in them. An organisation could have pretty inadequate controls and procedures. It could be doing many of the things, such as paying moneys into investments late, to which my noble friend Lord Hunt referred, but the audited accounts could still be signed off because there is no material misstatement in them.

The Minister needs to understand the difference between what a set of financial statements does and what audited accounts convey as information, and what happens within an organisation in terms of the financial controls and procedures that are necessary to ensure that the operations produce the right result—in this case for those who are beneficiaries of money purchase schemes.

I was originally disinclined to support my noble friends on this amendment because I wondered whether it was going a little too far. However, when the Minister said that the audited accounts are all that are needed, it seemed to me that perhaps there was a misunderstanding in the department of what information audited accounts convey. If that is not well understood within the department, the Minister's officials may want to reconsider whether there should be a provision on the face of the Bill regarding appropriate controls and procedures.

Baroness Hollis of Heigham

I also want to go back to the point about what we should specify, as mentioned by the noble Baroness. We are specifying that some codes of practice are both essential and mandatory. That applies to areas where legislation would impose obligations in general terms to do something within a reasonable time which would need to be amplified by codes of practice to be sufficiently clear and certain for practical purposes.

The noble Baroness asked what principles we had in mind regarding the requirement to have codes of practice. I refer to matters such as a notifiable event or a reasonable timescale. People need to understand what is meant by that. That is without prejudice to the regulator's general powers to issue codes relating to other obligations.

I have no objection at all to asking officials to reconsider the matter, but I am slightly shocked by the noble Baroness's comments about the inability of auditors to ask the appropriate questions to satisfy themselves that it is appropriate to sign off accounts. Perhaps I am wrong to be shocked and perhaps it is reasonable for the auditors not to know about certain things. However, I am slightly puzzled. I am perfectly willing to do more research on the noble Baroness's concerns. I take seriously the point that people in the profession consider that they want tighter controls than the profession can exercise through the scrutiny of the relevant professional association. I am slightly taken aback by that, but I am happy to look at it further.

Lord Hunt of Wirral

I want to point out that I am a member of the legal profession, not the accountancy profession. With that I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[The Committee was suspended for a Division in the House from 6.58 to 7.8 p.m.]

[Amendment No. 156 had been withdrawn from the Marshalled List.]

Baroness Noakes

moved Amendment No. 157: Page 60, line 10, at end insert— (1) the degree to which the Regulator shall take into account commercial considerations when considering whether to issue a contribution notice pursuant to section 35(2) and, in particular, must cite examples of acts or failures to act in relation to which the Regulator considers—

  1. it is extremely likely that a contribution notice would be issued;
  2. it is extremely unlikely that a contribution notice would be issued;
  3. to fall between (i) and (ii) depending on the circumstances of the matter."

The noble Baroness said: The amendment would add another paragraph to the long list of codes of practice that the Government have determined should be issued by the regulator. This is a probing amendment because I am not sure that it is in the right place. The list of codes of practice which the regulator must issue appears to deal with matters that others should follow, but, within the wording of Clause 84, I am not sure whether there is any particular reason why the regulator should not have a code of conduct that he should follow. However, the point that I want the Minister to consider is whether or not the regulator should be giving guidance on the issue covered by the amendment.

Here, we are partly returning to the subject of contribution notices under Clause 35. That was debated extensively last week and I do not want to repeat what was said. The issue is whether or not the regulator should be giving guidance on commercial considerations. The example given here is whether it is acceptable for commercial reasons to structure a transaction as a business sale with a TUPE transfer, even though the company owning the business will not incur a Section 75 debt.

Baroness Hollis of Heigham

I am sorry. This is normally said to me, but could the noble Baroness give me the example a little more slowly?

Baroness Noakes

We are trying to require the regulator to give some guidance on issues which will have commercial considerations. The example is whether it is acceptable, for commercial reasons, to structure a transaction as a business sale with a TUPE transfer, even though the company owning the business will not incur a Section 75 debt. The question is whether or not that is avoiding a debt. Therefore, the amendment also asks for examples of the acts which could trigger, or not trigger, a notice in order to help people to understand the implications of their actions.

The point is: how do we issue guidance on how, and to what degree, the regulator will take into account commercial considerations when deciding whether to issue a contribution notice so that those in the commercial world will know, in broad terms, whether what they are contemplating is or is not within the territory that is likely to cause a problem for the regulator? Therefore, the purpose of the amendment is to get the regulator to issue guidance that others can look at in determining what kind of commercial considerations will be taken into account when approaching particular transactions—that is, what would or would not or what may or may not be acceptable, depending on the circumstances. It is a call for guidance. I beg to move.

7.15 p.m.

Baroness Hollis of Heigham

I am not sure whether the noble Baroness is asking me to go beyond the Second Reading debate of 10 June and our subsequent discussions in which I assured the House that the regulator will issue guidance on the clearance procedure in respect of contribution notices and which I reiterated to the Committee last week. I believe that such guidance would address the noble Baroness's concerns. I think that she is asking me to repeat what I have already agreed. Guidance will certainly be issued on how the regulator will use the power to issue contribution notices—I have said that twice. Financial support directions will also be included. I was not quite sure about the thrust of the noble Baroness's argument regarding the word "commercial". As for the examples that she gave in terms of the contribution notice and how it will apply, I have already made the commitment that the regulator will be expected to issue guidance to that effect. Perhaps the noble Baroness can tell me what I am missing on this point.

Baroness Noakes

I thank the Minister for that reply. I undertake to look again at what she has already said. The emphasis was not quite so much on the word "commercial" as on the kinds of transaction into which companies could enter so that they had some understanding of what is likely to come within the provision, what is not likely to come within it and what is likely to fall in the middle. If the Minister is clear that the assurances she has already given on the clearance procedure will have that guidance attached to it—her officials are nodding—

Baroness Hollis of Heigham

That was the purpose of it.

Baroness Noakes

I suspect that my concerns are met by that. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Baroness Noakes

moved Amendment No. 158: Page 60, line 10, at end insert— ( ) Any code of practice issued by the Regulator must include an analysis of the costs and benefits of the code.

The noble Baroness said: In moving Amendment No. 158, I shall speak also to its sister amendment—Amendment No. 161.

We know that codes of practice often impose costs. There is no problem with that, but costs have to be weighed in the balance with the benefits that would be produced. Regulatory burdens are the single issue most complained about by businesses large and small, whether we are talking to the Federation of Small Businesses or the Confederation of British Industry. The regulator's powers go beyond those currently held by OPRA. Therefore, we need to ensure that the legislation is mindful of the impact of any additional regulatory burden.

Against that background, Amendment No. 158 would amend Clause 84 so that any code of practice issued analyses the costs and benefits and so that we can have a proper public debate on that.

Perhaps more importantly, Amendment No. 161 requires draft codes to include a draft analysis of costs and benefits. The debate should properly be had before codes are issued.

This is not an unusual requirement. It appears in Sections 155 and 157 of the Financial Services and Markets Act 2000, and so there is already good precedent for codes of practice being required to include draft regulatory costs and burdens at the time that they are issued for consultation. I beg to move.

Lord Oakeshott of Seagrove Bay

The amendments seem reasonable to us, and we support them.

Baroness Hollis of Heigham

They do not seem entirely reasonable to us. I am sorry to break this happy mood. I have a very practical argument. My best response is to go to what I am sure is bedside reading for Members of the Committee—the Cabinet Office document entitled, Better policy making: A guide to regulatory impact assessment. It lays down the conditions under which one effectively carries out a cost-benefit analysis—that is, a regulatory impact analysis. It was issued in 1998 and on page 6 it states: You do not need to do an RIA for proposals which impose no costs or no savings, or negligible costs, or savings on business, charities or the voluntary sector; increases in statutory fees … or road closure orders … However, even if you think the effects of your proposals are likely to be negligible, it is still good practice to produce an RIA. It is not always clear when a proposal is being formulated whether there will be any impact on business … Early consultation or informal soundings with your stakeholders will be particularly important in the situation".

I can give the noble Baroness the assurance she wants. The regulator will follow these good practice guidelines for its codes of practice. So, clearly there is not much point going for a cost-benefit analysis where the costs of that are probably higher than the costs of the activity proposed. But where exactly the line is drawn in that scheme is shaped in these guidelines, which state, more or less, that where in doubt, there should be a cost-benefit analysis. I hope that the noble Baroness would think that that is a pragmatic and sensible way to proceed; that is, to follow the best practice guide.

Baroness Noakes

It is always good practice to follow good practice guides, but would that always happen? The purpose of the amendment is to hard wire that requirement into the Act so that it is clear that the regulator really has to follow that. Clearly, if there are no cost benefits, it would take only one line in any draft regulations to say that there are no costs and no benefits, or no cost and some benefits, whatever is the case. So, it is not very onerous to state that in a draft being put out for consultation.

That requirement is clearly specified in the FSMA. That Act imposed potentially very significant regulatory burdens on the financial services industry, for good reason. Nevertheless, it was considered important then—by the Government, presumably—to include it in the Act. I struggle to see why this Bill, which is pretty significant, with significant regulatory burdens inherent within it, should not also be explicit. I hope that the Minister might think about it again, or we may return to it on Report. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Baroness Noakes

moved Amendment No. 159: Page 60, line 23, at end insert "proceedings of the Pensions Regulator Tribunal,

The noble Baroness said: This is a relatively small amendment. We are not quite clear why the Government have excluded the proceedings of the Pensions Regulator tribunal from the definition of legal proceedings in Clause 84; that is, that when there are proceedings within the Pensions Regulator tribunal, that forum should have to take into account the regulator's codes of practice. Why have the Government excluded the Pensions Regulator tribunal from needing to take into account the regulator's codes of practice? I beg to move.

Baroness Hollis of Heigham

We have not so excluded. Such proceedings are already included within the meaning of "legal proceedings" by definition. That is because any tribunal that the Council on Tribunals has a duty to keep under review is considered a court by virtue of Section 119 of the Courts and Legal Services Act 1990. Paragraph 3 of Schedule 12 to the Bill amends the Tribunals and Inquiries Act 1992, adding the Pensions Regulator tribunal to those tribunals under the general supervision of the council. In the light of that, I hope that the noble Baroness will be happy—at least happier than on the previous occasion—to withdraw her amendment.

Baroness Noakes

I am more than happy to beg leave to withdraw the amendment on the basis of that excellent explanation given by the Minister.

Amendment, by leave, withdrawn.

[Amendment No. 159A not moved.]

On Question, Whether Clause 84 shall stand part of the Bill?

Lord Skelmersdale

I am in the hands of the Committee. I note that we have six minutes left of today's proceedings. I have already had an adverse comment from the Minister in producing an amendment which goes backwards in the Bill. My block starting at Amendment No. 167 refers to a great extent to this clause. Therefore, I can either talk about my problem now or wait until that block. I am prepared to do whichever the Committee would prefer.

Baroness Hollis of Heigham

I always prefer Members of the Committee if possible to speak to an amendment rather than to whether a clause should stand part. By specifying an amendment I know what concerns are being raised, and it gives me an opportunity to get a properly researched reply, which is then recorded in Hansard. I probably would also have the resources to go into any necessary full detail that may be helpful to people outside. If noble Lords debate whether a clause should stand part, it becomes a fishing trip. So I would invite the noble Lord to speak on Amendment No. 167 and I promise not to make rude remarks about retrospection.

Lord Skelmersdale

In that case I am grateful. I put the noble Baroness on fair warning that I shall be referring to subsections (4) and (5) when speaking to the amendment block starting with Amendment No. 167.

Clause 84 agreed to.

Clause 85 [Procedure for issue and publication of codes of practice]:

Baroness Noakes

had given notice of her intention to move Amendment No. 160: Page 60, line 38, leave out "it" and insert "he

The noble Baroness said: I just remark that the Minister often refers to the regulator as "he".

Baroness Hollis of Heigham

That, my late husband would have said, is the result of a quasi-classical education. In Latin, hominusand vir mean different things.

The substantive point is that the regulator is actually the regulatory body. I would hope that it would have women members on it and, who knows, in due course perhaps women chairs and certainly women chief executives.

[Amendment No. 160 not moved.]

[Amendments Nos. 161 to 163 not moved.]

Baroness Noakes

moved Amendment No. 164: Page 60, line 42, at end insert ", and ( ) in such a manner that provides a minimum period of twelve weeks for the submission of responses

The noble Baroness said: Amendments Nos. 164 and 166 are straightforward amendments. Amendment No. 164 is similar to one we discussed a moment ago. It tries to put into the Bill the Cabinet Office's code of practice on consultation to make sure that defined periods for consultation are allowed. The Financial Services Authority currently uses a period of 12 weeks. It would be curious if a lesser period was ever allowed under the Bill. So the regulator should be required to follow that period, especially as many of the players that the two will be communicating with are the same. Perhaps the Minister could explain whether there would ever be a case where a lesser period of consultation would be required. That might short-circuit some of our discussions.

Amendment No. 166 is similar, but it omits the extremely wide-ranging power of the Secretary of State in Clause 85(4)(b) to do away with the requirement for consultation altogether. We are dealing with codes of practice that a certain class of people will have to comply with. We find it difficult to conceive of any circumstances where a code of practice could be imposed without any form of consultation. It is in the nature of codes of practice that they embody actions that are appropriate for individuals or classes of individuals or bodies.

Surely, the regulator should not be both the judge and jury of whether such codes are acceptable. We reject the possibility that the Secretary of State should ever find any reason of urgency to do away with the well known requirements for consultation on codes. I beg to move.

7.30 p.m.

Baroness Hollis of Heigham

Certainly, we are expecting that codes of practice will be issued by the regulator only after ongoing consultation has taken place with the appropriate industry and with DWP policy representatives. We do not consider a formal, 12-week consultation period at the end of the process to be particularly justifiable, helpful or meaningful because much of it will have been front end-loaded in the development rather than back end-loaded with consultation taking place after the event.

We shall be working to ensure a "no-surprises" approach by working with the industry on the development of the codes of practice. For example, where the Social Security Advisory Committee has consultation powers, in some cases it goes out to an unsuspecting audience and a formal consultation period is required. But where such a procedure is drawn up with the affected bodies, it can seem a little bizarre subsequently to consult them again at the end of the process. That is why we are seeking flexibility.

The only exception to consultation is where there is a need to issue a code as a matter or urgency and where consultation would be inexpedient. As the noble Baroness said, that provision is contained in Clause 85(4)(b). The next pensions liberation scam could be an example of the need to act very quickly. I do not think that the noble Baroness was with us when I tried to demonstrate to the Committee just how offensive some practices are. I gave the example of two men who received sentences of five and a half years between them. We had no sense of that scam until OPRA picked it up. Therefore, we assume that occasionally there may be the need for urgent procedures which bypass consultation, certainly for any defined period of time, although I would expect such occasions to be fairly rare. We do not want to tie ourselves to a specific timetable precisely because, as I said, consultation will have been built in at the beginning—that is, at the development stage—rather than the end.

Ultimately, we all need to buy into this. If consultation is appropriate after the development of the codes, it will take place then. But I do not want to tie us down to a period of 12 weeks. That may be three months of wasted time when all the parties have already agreed to the codes before the draft is in the public domain.

Baroness Noakes

I thank the Minister for that reply. I shall give it further thought when I have read it in Hansard.

At this stage, I simply remark that it seems very inward to believe that just because one consults on the draft, one does not then need to have a consultation period which, by definition, lays the issue open to anyone who has an interest in it. It is a little arrogant to say that you do not need formal consultation periods because you know everyone who might be affected. I suggest to the Minister that that is a rather dangerous path to follow. Proper periods of consultation should be included to allow things that the regulator might not know about to be brought forward. In addition, particular interests affected by a code of practice may not have been identified by the regulator.

Baroness Hollis of Heigham

Is the noble Baroness saying that every code of practice must have a formal three-month consultation period at the end? That is what her amendment would achieve. I am not saying that there will not be consultation; it may be entirely appropriate for consultation to take place on the draft. We are trying to avoid tying ourselves automatically into a three-month period of consultation which may not be necessary. It may very often be necessary, and a longer period of consultation may often be necessary. I can conceive of a range of circumstances that may arise. I am asking whether the noble Baroness is really sure that she wants to require every code of practice, however it is developed and under whatever circumstances, to have three months of consultation.

Baroness Noakes

I think I am saying that the default period should be three months. The FSA is using a three-month period, as I outlined, and I can see no reason for not doing the same. I am concerned that we may be setting up a regulator who considers it normal to do far less than that or nothing at all.

Baroness Dean of Thornton-le-Fylde

I would caution against this going into the Bill. Any regulator worth his salt will publish the rules by which he will operate. Surely—I have done so myself—those rules would state, "We will normally expect to have a minimum of 12 weeks". There will be times when a longer period is needed, but the odd incident will arise where time is not on the regulator's side and he needs that flexibility. Therefore, I do not think that the Bill is the place for such a measure. The regulator needs to take responsibility for operating properly and for publishing his normal guidelines for consultation.

Baroness Noakes

I thank the noble Baroness for that response. I think that my approach is that these are codes of practice.

I do not quite understand "urgency". Earlier, the Minister gave the example of a scam, which I read about in Hansard. However, I am not clear that issuing a code of practice is necessarily the response which the regulator needs to make. The regulator needs to deal with that particular circumstance and needs to issue a press release, which says, "This has happened and we are not having it happen again and, by the way, we might in due course ensure that our codes of practice reflect that whatever has happened is unacceptable behaviour". I am rather unimpressed by all this talk of urgency on codes of practice. However, I shall not labour the point today because we have gone past the witching hour for Grand Committee. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 165 and 166 not moved.]

Baroness Andrews

Before I formally adjourn the Grand Committee, I have two very small announcements to make. First, I draw attention to the unusual starting time on Thursday—11 o'clock. We shall sit from 11 a.m. to 12.30 pm and from 1.30 p.m. to 3 p.m. That has been done with the agreement of all parties. Secondly, the magnificent officials who are here all the time are also here half an hour before the Committee starts every day. So, if there are small points of detail that could be cleared up before the Committee starts, I am sure that they will be willing to meet with Members of the Committee.

The Deputy Speaker (Lord Hogg of Cumbernauld)

The Committee stands adjourned until Thursday at 11 o'clock.

The Committee adjourned at twenty-four minutes before eight o'clock.