HL Deb 13 February 1995 vol 561 cc511-66

House again in Committee on Clause 18.

Lord Lucas moved Amendment No. 117:

Page 9, line 13, leave out ("within the prescribed period").

The noble Lord said: In moving this amendment I shall speak also to Amendment No. 118. The Bill as it stands requires us to prescribe in regulations a time limit within which the appointment of an independent trustee must be made. In these two amendments we propose to relegate our power of prescription to a back-up role. We wish to substitute a requirement to appoint an independent trustee as soon as reasonably practicable. We intend that guidelines should be drawn up by the insolvency service and that we should resort to regulation only if these guidelines do not work. I beg to move.

On Question, amendment agreed to.

Lord Lucas moved Amendment No. 118:

Page 9, line 15, at end insert: ("( ) The duty under subsection (1) (b) must be performed as soon as reasonably practicable and, if a period is prescribed for the purposes of that subsection, within that period.").

On Question, amendment agreed to.

Lord Haskel moved Amendment No. 118A:

Page 9, line 24, at end insert: ("( ) he is not an employee or partner of any company which, for the purposes of the Companies Act 1985, is an associated company in relation to a company that practises as an insolvency practitioner, and").

The noble Lord said: Without casting any aspersions on the insolvency profession, this amendment is a safeguard against those very few accountants and insolvency practitioners who ignore the rules. Sadly, there are people who have lost their licences through making what are called "reciprocal arrangements". That misconduct not only creates problems with their current work but also casts doubt on their previous work. This amendment states quite unequivocally that there should be no reciprocal arrangements between trustees. I beg to move.

Lord Mackay of Ardbrecknish

I do not believe that this amendment is necessary. One of the requisite qualifications for an insolvency practitioner under the Insolvency Act 1986 is that a person must be an individual. It follows that the amendment cannot have the effect intended, since no company can practise as an insolvency practitioner. Any problems with an independent trustee being connected with, or an associate of, an insolvency practitioner is covered in Clause 18(2) (b) (ii), which is itself re-enacting a similar provision in the Pension Schemes Act 1993. With that explanation I hope the noble Lord will withdraw the amendment.

Lord Haskel

I thank the Minister for that response. I was under the impression that although they act as individuals the practitioners have to be licensed. However, in view of what the noble Lord said we shall study his response. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Baroness Turner of Camden moved Amendment No. 118B:

Page 9, line 25, at end insert ("and— ( ) his name is included in the Register of Independent Trustees to be maintained by the Authority;").

The noble Baroness said: This is a very simple amendment and it follows on from what we were saying earlier as regards the section dealing with the requirement for an independent trustee. This amendment simply adds to the list of requirements that the name of the independent trustee should be included in the register of independent trustees to be maintained by the authority. I believe that the reason for that is fairly clear. Quite obviously, if there were a register it would be available for inspection. It would be an assurance to members of the scheme that an individual who is an independent trustee is an approved person because he or she is on the register of independent trustees. It is some extra assurance for scheme members that an independent trustee when appointed is a person acceptable to the authority and a member of the register to be maintained by the authority. I beg to move.

Lord Mackay of Ardbrecknish

The amendment adds to the definition of an "independent trustee" provided in clause 18(2). It provides that an independent trustee must be included on a register of independent trustees which is to be maintained by the authority. This would mean that only a trustee included on the register could be appointed to a scheme under Clause 18(1).

The purpose of Clause 18 is to ensure that a person is independent in relation to the particular scheme for which he acts. Such a person might never take on the duties of trustee again. But there is no reason why he should not, provided he is independent of any new scheme for which he acts. Consequently, requiring the authority to maintain a register of independent trustees seems to me to serve no useful purpose.

If the intention behind this amendment is to introduce a form of regulation for professional independent trustees, I have to say that I do not believe that OPRA is the appropriate mechanism. OPRA will be an enforcement agency for occupational pension schemes, and independent trustees do not act exclusively for pension schemes.

More importantly, OPRA has the necessary powers to deal with any trustee of an occupational pension scheme who is found to be in breach of an obligation. It has the power to fine them and the power to remove them. These powers and how they can be used by the authority are set out in Clauses 9 and 3 of the Bill respectively. OPRA can also disqualify a trustee under Clause 24. An independent trustee disqualified under this clause would be prevented from acting as a trustee of an occupational pension scheme ever again.

I hope that what I have said will persuade the noble Baroness that there are already pretty reasonable safeguards in the Bill in this regard and that we do not need to add to it the complication of a register of independent trustees.

Baroness Turner of Camden

I thank the Minister for that explanation which we shall look at with interest in Hansard tomorrow. I note that he believes that reasonable safeguards already exist in the Bill. It was because we were worried whether or not they did that we wanted to establish a register of suitable people who would be independent trustees. However, having heard what the Minister said, I do not intend to press this provision, which is somewhat of a probing amendment. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 18, as amended, agreed to.

Clause 19 [Members' powers to apply to court to enforce duty]:

[Amendment No. 118C not moved.]

Clause 19 agreed to.

Clause 20 [Appointment and powers of independent trustees: further provisions]:

[Amendment No. 118D not moved.]

8 p.m.

Baroness Hollis of Heigham moved Amendment No. 118E:

Page 11, line 20, after ("actuary") insert ("or otherwise as a paid professional adviser").

The noble Baroness said: In moving Amendment No. 118E, I should like to speak also to Amendments Nos. 118F to 118K which stand in my name. Amendment No. 118E is the first of a series of amendments about the role of professional advisers. Wherever possible, we want to avoid conflicts of interest. Such a conflict may arise because the professional adviser is advising both the trustees and the employer, an issue to which we shall return later. In addition, we do not believe that it is right that the same scheme professionals giving disinterested, paid, professional advice to the trustees should also be trustees. The Government have accepted that argument for auditors and actuaries, but not in the case of other paid professionals. We believe that that principle should be extended to other paid professionals. Nobody can doubt that lawyers abide by the highest standards of professional ethics, but, as a general principle, it seems wise to avoid potential conflicts of interest wherever they might occur. I beg to move.

Lord Mackay of Ardbrecknish

The amendments seek to broaden the authority's power by placing a general duty to enforce trust law, to prevent all professional advisers to the scheme from acting as trustees and to prevent exceptions to the general rule that a trustee and any person who is connected with or an associate of such a trustee should be ineligible to act as an auditor or actuary of the scheme.

Turning to Amendment No. 118K, the authority is there to ensure that those involved with the running of schemes comply with the regulatory provisions. We believe that we have underpinned the key trustee responsibilities with the obligations placed on them by Part I of the Bill. Trustees who are found to be in serious or persistent breach of these provisions may be removed by the authority and disqualified. That means that removal and disqualification relate to breaches of clear duties, rather than leaving it open to wide interpretation and potential dispute as to whether someone has rendered themselves unfit to continue to act as a trustee.

I have been asked to introduce more robust rights of review and appeal against such decisions. If we were to go down that route, the authority would need to have clear grounds on which to base its decision; otherwise the process of review or appeal would become extremely protracted and the subject of prolonged and contentious argument. I am afraid that I cannot accept amendments which place a general duty on the authority to enforce trust law. Amendment No. 118K would do just that. I believe that the enforcement of trust law is best left to the courts.

We agree with the Pension Law Review Committee that the existence of the professional relationship that the actuary and auditor have with a scheme would be incompatible with trusteeship because of the potential conflicts of interest involved. Clause 22 extends that provision so that a person who is connected with or an associate of the scheme actuary or auditor is also ineligible to act as a trustee of the scheme. However, under subsection (2) we are proposing that in prescribed circumstances it should not apply to actuaries who are connected with or an associate of the scheme trustee.

We consider that there is a fundamental difference in the role of actuaries and auditors that justifies a slightly different approach. The actuary's basic role is to give advice to the trustees on funding matters. His job is to take a broad, full view of the scheme and to provide the trustees with advice on funding matters, valuations, including statements, contribution levels and calculation of transfer values. His role is one of advice-giver whereas the auditor is more of a policeman to the scheme. The actuary is not involved in matters of scheme security in quite the same way as the auditor and we do not therefore see the same need to extend the bar to the firm by which he is employed. To do so would prohibit the sort of "package" arrangements which many schemes, particularly small and medium-sized schemes, purchase from firms of actuaries, pension consultants and insurance companies. We see no justification for upsetting that. Actuaries are bound by professional codes of conduct and discipline and we have no reason to believe that "package" arrangements are anything but effective and secure. To outlaw such arrangements is likely to incur extra costs for the schemes that use them and this is of course something we wish to avoid.

Turning to Amendments Nos. 118E, 118G, 118H and 118J, as the Committee will recall, in Clause 22 we are endorsing the Pension Law Review Committee recommendations that the actuary and the auditor should not act as scheme trustees because of unacceptable conflicts of interest. We believe it is right that those professionals should be under an obligation to whistle-blow. We have placed the whistle-blowing duty on the key individuals that the schemes will be required to appoint; namely, the actuary and the auditor. They will have access to all the key scheme documentation. We want to encourage others to report to the authority if they believe that a scheme is not being run properly. However, we believe that it is neither appropriate nor necessary to place them under a duty to do so.

If the other scheme professionals are not under a duty to whistle-blow, they will not have a conflict of interest. If we debarred those individuals from acting, trust boards would effectively be purged of any professional employed by the scheme. We do not believe that that is in the interests of ensuring that schemes are properly run. With that long explanation of the details, I hope that the noble Baroness will withdraw the amendment.

Baroness Hollis of Heigham

I am not particularly persuaded by a number of those arguments, but obviously we shall want to consider them. Therefore, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 20 agreed to.

Clause 21 agreed to.

Clause 22 [Trustee not to be auditor or actuary of the scheme]:

[Amendment No. 118F not moved.]

Clause 22 agreed to.

Clause 23 [Section 22: consequences]:

[Amendments Nos. 118G to 118K not moved.]

Clause 23 agreed to.

Clause 24 agreed to.

Clause 25 [Persons disqualified: consequences]:

Lord Haskel moved Amendment No. 118L:

Page 13, line 39, after ("scheme") insert ("or a trustee, a member of a scheme or an independent recognised trade union").

The noble Lord said: This amendment deals with the register of disqualified trustees. It is important to have a register, but why is it available only to people connected with the administration of the scheme? Surely it should be a matter of public record. However, the amendment does not go as far as that, but suggests that the register should be available to other trustees, members of schemes or to their trade unions or advisers. It is another small attempt to make the work of the regulator more open and accountable. I beg to move.

Lord Mackay of Ardbrecknish

The amendment provides that the authority must, if requested to do so by a trustee, a member of a scheme or an independent recognised trade union, disclose whether the name of the person specified in the request is included on the authority's register of persons disqualified under Clause 24(3).

I am pleased to be able to say that we are at one on this. We intend that anyone who has concerns about a particular person who is either already acting as a trustee of an occupational pension scheme, or is under consideration for appointment as such, can contact the authority to check whether the authority's register shows the person in question to be disqualified in respect of a particular scheme.

We had hoped that subsection (7) would allow any person who has an interest in a scheme to ask the authority such a question and require the authority to provide an answer. That would cover trustees, scheme members and independent trade union officials. The subsection has been drafted to ensure that the authority is required to state only whether a person named by an inquirer is disqualified in respect of a particular scheme named by the inquirer. This is because some people may be disqualified in respect of a particular class or group of schemes only, and because there is a need to protect those listed in the register from having the information held on them being used for purposes that have nothing to do with whether or not they should act as the trustee of a particular scheme. That is why the register will not be available for public inspection.

I think that we have dealt with the issue in the subsection but, given that the noble Lord and I are at one on this and he has raised a doubt, I shall take the issue away so that I can determine whether, and to what extent, an amendment is necessary or possible. I hope that, with that assurance, the noble Lord will feel able to withdraw his amendment.

Lord Haskel

I thank the Minister for that long explanation and in view of the fact that, as he said, we are at one on this, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 25 agreed to.

Clause 26 [Trustees not to be indemnified for fines or civil penalties]:

Lord Lucas moved Amendment No. 118M:

Page 14, line 9, at end insert: ("(4) Where a trustee of a trust scheme—

  1. (a) is reimbursed, out of the assets of the scheme or in consequence of provision for his reimbursement made out of those assets, in respect of any of the matters referred to in subsection (1) (a) or (b), and
  2. (b) knows (or has reasonable grounds to believe) that he has been reimbursed as mentioned in paragraph (a),
then, unless he has taken all such steps as are reasonable to secure that he is not so reimbursed, he is guilty of an offence.

(5) A person guilty of an offence under subsection (4) is liable—

  1. (a) on summary conviction, to a fine not exceeding the statutory maximum, and
  2. (b) on conviction on indictment, to imprisonment, or a fine, or both.").

The noble Lord said: The amendment introduces a new criminal offence. Clause 26 places an overriding obligation on trustees not to use the assets of the scheme to reimburse any fine imposed on them by the courts, or civil penalties imposed on them by the Occupational Pensions Regulatory Authority.

Subsection (3) already provides that any trustee who does not take appropriate action to prevent such a reimbursement being made is liable to removal by the authority and/or to a civil penalty. However, we consider that that does not go far enough. We want to ensure that any trustee who breaches the provisions in Clause 26 for his own benefit can be prosecuted. And that is what subsection (4) of this amendment does. It provides that a trustee who is reimbursed out of the scheme assets, or out of provisions (for example, an insurance policy) paid for out of them, in respect of any matters referred to in subsection (1) (a) or (b) is guilty of an offence if, first, he knows (or has reasonable cause to believe) that he has been so reimbursed; and, secondly, he does not take all reasonable steps to secure that he is not so reimbursed.

The new subsection (5) of the amendment sets out the penalty that can be imposed upon a person convicted of an offence under subsection (4). On summary conviction, a person would be liable to a fine not exceeding £5,000. On conviction on indictment, a person would be liable to an unlimited fine, or a term of imprisonment not exceeding two years, or both. We believe the penalty set out here reflects the serious nature of the breach.

Sanctions will not provide an effective deterrent to wrongdoing if the trustees are able to reimburse themselves from scheme assets for any financial penalties imposed upon them. People who breach the provisions in Clause 26 for their own benefit shall also be punished appropriately. I beg to move.

On Question, amendment agreed to.

Clause 26, as amended, agreed to.

Clause 27 [Decisions by majority]:

Baroness Dean of Thornton-le-Fylde moved Amendment No. 118N:

Page 14, line 11, at beginning insert ("Except where otherwise provided in the trust deed, or in the Memorandum and Articles in the case of a trust company,").

The noble Baroness said: I shall speak also to Amendments Nos. 118P, 118Q, 118R, 120B and 120C. The amendments tidy up the area relating to the functions of trustees and decisions being taken by a majority. Amendment No. 118N clearly covers trustees' responsibilities, in that trustees, or the memorandum and articles in the case of a trust company, cannot be overridden by a decision of the trustees of a scheme to do just that and move to a majority decision.

Amendment No. 118P removes the words "and only the trustees", because clearly there must be occasions when the authority has the right to step in. The words, "from time to time" are covered by Amendment No.118Q.We do not believe that those words are necessary. If the Minister feels that they are, we should like him to tell us why. Why include the words "from time to time", because that is very open ended? It is not specific. That feeds through to the reasoning behind Amendment No.118R. I have nicknamed subsection (2) (b) "ad hocery" because it may have effect for a specific occasion or for a class of occasion, and if neither of those do it can have effect generally. That is wrong. If the Minister opposes the deletion of paragraph (b) will he tell us why it has to be in? It leaves again an open-ended situation and decisions made by a majority of trustees.

Amendment No. 120B introduces again "with the consent of the Authority". Amendment No. 120C is important because it covers that a determination under the clause: shall override anything to the contrary in any rule of law, enactment, instrument or agreement". The words in the amendment make it clear that decisions of the trustees cannot override anything in law, enactment, instrument or agreement. I beg to move.

8.15 p.m.

Lord Mackay of Ardbrecknish

As the noble Baroness explained, the amendments seek to overturn the main thrust of Clause 27, which is that the trustees of a scheme can decide whether or not the determinations of the board should be by majority. Under current trust law, decisions of the trustees must be unanimous, unless otherwise provided in the trust rules.

Like the Pension Law Review Committee, we believe that the rule of unanimity is no longer suitable in the present day and that, in fact, most schemes already provide in their rules for majority decisions. We therefore propose to legislate so that trustees have the right to determine the appropriate voting rule for their scheme, despite what scheme rules may say. The trustees can determine for themselves whether voting should be unanimous or by majority, and, if by majority, they can also decide that certain specified decisions should be unanimous. I believe that answers one of the points raised by Amendment No. 118R.

Taken together, the amendments would mean that, if scheme rules already provide for unanimous decisions, schemes would be able to change that position only with the consent of the authority.

The noble Baroness asked me about the phrase "from time to time". Not being a lawyer, I have some difficulty with this, but I suspect that the phrase is used so that it is not a once-and-for-all decision. That is my answer to that amendment.

The whole basis of Clause 27, and indeed many of the other provisions in Part I, is that schemes' trustees are the ones responsible for running schemes. They are there to run their own schemes. It is not necessary to involve the authority in matters such as this. If the trustees believe they should be dealing with decisions on a majority basis, it should be for them to decide that for themselves. Of course all that is subject to the minimum requirements which outline what a majority means.

Baroness Seear

Does what the Minister said mean that where there is only one-third of employee members, the employer members can override on every occasion if a majority decision is required? That makes a nonsense of employee membership based on a third.

Lord Mackay of Ardbrecknish

I do not believe that it does. Clause 27(3) (a) provides that the trustees may determine that a decision be taken provided that a majority of the trustees i s present. The fact that a majority of the trustees is present acts as a protection against a minority of trustees being totally overridden.

Baroness Hollis of Heigham


Lord Mackay of Ardbrecknish

It depends upon how one defines a majority and minority. We believe that there should be provision for majority decision-making in certain circumstances. We are giving the trust board the right to decide if it wants to take that route. It may decide not to take that route or that it wants to take it only in certain circumstances. The rules governing what forms a majority are tightly drawn. They mean that a few members of the board would not be able to take decisions when other members were not there who may or may not wish to vote against them. There are considerable protections in the current situation. I doubt whether we need to enlarge them in the way in which the amendments do.

Baroness Dean of Thornton-le-Fylde

I do not understand the Minister's rationale or arithmetic in respect of majorities. Earlier today the Minister stood by the provision of two-thirds of the trustees in occupational pension schemes being employer-nominated. Therefore, there is an inbuilt majority. Unless at a later stage the Minister is persuaded to give way that provision will remain in the Bill. There is reference elsewhere in the Bill to majority decisions. Where amendments have been put forward and the principle has been accepted we shall at a later stage table amendments requiring at least one member-nominated trustee to be present at the trustee meetings.

I rest my case on the recommendation in paragraph 4.5.58 of the Goode Report. It concedes the principle of decision by majority and states: There is one further matter to which we wish to draw attention, namely the legal rule that under English law decisions of trustees must be unanimous unless otherwise provided by the trust instrument". That is what the Minister quoted to us. The report continues: We believe that such a rule is not suitable for pension fund administration; indeed, scheme rules regularly provide for decisions to he taken by a majority of trustees". It concludes: We recommend that this should be the law except where the trust deed otherwise provides". That is specifically what Amendment No. 118N would provide. I had thought that the Minister would respond warmly to the final sentence of that paragraph, which states: This would bring English law into line with Scots law". I ask the Minister to reconsider the matter. We shall look at it again because it is an important principle to concede. Nevertheless, on this occasion—

The Earl of Clanwilliam

Is it not required to specify a quorum of trustees if the whole board is not present at a meeting?

Lord Mackay of Ardbrecknish

Yes, there would be a requirement for a quorum before any decision could be taken by majority voting.

Baroness Dean of Thornton-le-Fylde

Indeed, any meeting normally requires a quorum. If the trust deed provided other than a majority—and some trust deeds could do so—the majority rule would not apply, which is being suggested in the amendment. Nevertheless, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 118P to 118R not moved.]

Lord Lucas moved Amendment No. 119:

Page 14, line 25, leave out ("reasonable").

The noble Lord said: I shall speak also to Amendments Nos. 120 and 121. The purpose of the amendments is to strengthen the requirement that trustees be given notice of all meetings. They will enable regulations to specify precisely where, in what way and within what timescale, notice must be provided to all the trustees. This will enforce the policy intention that all trustees, including member-nominated trustees, should be able to play their full part in the deliberations of trustee boards. OPRA will have powers of enforcement in case of a breach. I beg to move.

Lord Renton

The word "reasonable" is attractive but it gives rise to a great deal of argument in the courts.

It would be far better to leave out the word "reasonable" and have definitive arrangements for the giving of notice. I gladly support the amendment.

On Question, amendment agreed to.

Lord Lucas moved Amendment No. 120:

Page 14, line 27, at end insert: ("( ) Notice under subsection (3) (b) must be given in a prescribed manner and not later then the beginning of a prescribed period.").

On Question, amendment agreed to.

Baroness Dean of Thornton-le-Fylde moved Amendment No. 120A:

Page 14, line 27, at end insert: ("( ) A determination under subsection (3) (a) of this section shall not be valid unless it specifies that at least one member-nominated trustee appointed under sections 14 or 15 shall be present when any decision is so taken, whether at a meeting of the main trust board or of any committee of trustees.").

The noble Baroness said: I shall speak also to Amendments Nos. 143 and 144. As the Bill is worded there is no reference to the recommendation made by the Goode Committee, nor to the reference in the White Paper accepting that recommendation. The amendment will insert a new subsection requiring at least one member-nominated trustee to be present when decisions are taken. Paragraph 49 of the Goode Committee recommends: Schemes should set a quorum for meetings of trustees which should include at least one member-appointed trustee".

The White Paper stated that the Government accept that recommendation, but there is no reference to it in the Bill. We suggest that the Bill is deficient on that basis, even though subsection (3)(b) provides reasonable notice of meetings. I have had experience of such provisions and know that one can run a coach and horses through them. One can always ensure that some trustees do not receive notice or that meetings are held at times and in venues that are not necessarily appropriate.

The new subsection would ensure that a member-nominated trustee was present at meetings of the board and we hope that the Minister will accept that.

Amendment No. 143 provides for "may" being changed to "shall" because it is important to ensure a mandatory requirement. Amendment No. 144 provides that the, Regulations shall require that a minimum number of trustees shall be present",

and shall, include at least one member-nominated trustee".

I beg to move.

Lord Mackay of Ardbrecknish

Amendments Nos. 120A and 144 refer primarily to the requirement that a member-nominated trustee should always be present at any meeting of the main board or of any committee of trustees when any decision relating to the scheme is taken. In some respects they are linked with the previous debate.

We certainly support the principle that member-nominated trustees should be able to participate fully in the decisions of the trustee board. However, we do not believe that this amendment is an appropriate way to achieve that objective. It would effectively give member-nominated trustees a veto, and that is clearly not the intention.

To provide particular trustees with the means to dictate to trustee boards in this way would place disproportionate power in the hands of member-nominated trustees. A less than co-operative trustee, for whatever reason, could have a potentially disruptive effect on the scheme. It is a question of balance—and perhaps I may be forgiven for using that phrase for the second time today. We want to ensure member-nominated trustees are able fully to participate in the decision-making process but not at the expense of the efficient running of the trustee board. To achieve this we are taking steps to ensure that individual trustees have every opportunity to attend trustee meetings so that the full range of views can be heard.

On Second Reading the noble Baroness gave more detailed examples of the ways in which someone might make it impossible for a trustee to attend a meeting. He might say, "I will have the meeting at 11 o'clock tonight in Guadeloupe. By the way, my private plane is the only one that is going and I am sorry that there isn't a seat on it". That may be an exaggerated case but perhaps the noble Baroness has experience of something akin to it. The noble Baroness would be well advised not to accept a lift on a boat in those circumstances.

In Clause 27 we are taking power to require that notice of all meetings, including meetings of any sub-committees, must be given to all trustees in a prescribed manner and at a prescribed time. In that way we believe that the policy intention of providing all trustees with the opportunity to attend all trustee board meetings will he achieved. We fully intend that to be the outcome.

Amendment No. 143 would remove the flexibility provided in subsection (2) to make exemptions in certain cases from the requirements to keep books and records. It is normal practice in the majority of schemes for trustees to keep proper books and records, including records of all their meetings. Subsections (2) to (4) provide powers to make regulations and it is intended that these will set minimum standards of compliance.

We fully intend to bring forward regulations which will require those books and records to be kept by schemes, but there are some schemes for which that requirement would not be necessary. We are still considering what those possible exemptions might be, but there are unlikely to be very many. Those we have in mind at present are schemes with fewer than two members and so-called "unapproved schemes"; that is, schemes which are not approved for tax purposes.

In view of that explanation of what I expect to be in regulations, I hope that the worst fears of the noble Baroness have been removed in relation to catching the plane to Guadeloupe.

8.30 p.m.

Lord Renton

It may be that I did not hear my noble friend correctly and, if I did not, I apologise to him. However, there may be another reason for rejecting the amendment. Clause 14 envisages that there will not always be a member-nominated trustee. There may be a vacancy. Arrangements are made to deal with that. Clause 14(5) states: If a vacancy for a member-nominated trustee is not filled because insufficient nominations are received"; and then it states what must be done. That is another reason why the amendment moved by the noble Baroness, Lady Dean of Thornton-le-Fylde, presents a difficulty.

Baroness Dean of Thornton-le-Fylde

I understand the point made by the noble Lord, Lord Renton, in relation to Clause 14(5), but I do not accept that it covers this situation. If I were a member-nominated trustee listening to our debates or reading the report of them in Hansard, I should have reached the point at which I wondered whether the Government are committed to ensuring that members of occupational pension funds have the rights and responsibilities which extend to the equity within those funds.

We have put forward reasonable amendments providing for 50 per cent. of trustees on boards, amendments relating to member-nominated trustees being present, and then this amendment. This amendment does not provide for members who do not turn up and are being difficult. It merely provides that a member: shall be present when any decision is so taken". I cannot believe that the Minister is implying that a member may be difficult and not turn up so that business cannot be conducted.

The reality will be that member-nominated trustees will perform an extremely worthwhile and responsible job. The amendment is very reasonable, especially in view of the fact that already inbuilt into the occupational scheme is a provision for two-thirds employer-nominated membership, unless the scheme decides that there will be one-third of member-nominated trustees.

I hear what the Minister says. Clearly I shall not press the matter to a Division. But I must express my personal disappointment, because it seems to me that the Minister is indicating that member-nominated trustees are not as responsible and caring as employer-nominated trustees. I am sure that the Minister did not mean to imply that but I should like him to confirm that he did not. I must reject that view. However, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 120B and 120C not moved.]

Lord Lucas moved Amendment No. 121:

Page 14, line 30, at end insert: ("( ) If subsection (3) (b) is not complied with, sections 3 and 9 apply to any trustee who has failed to take all such steps as are reasonable to secure compliance.").

On Question, amendment agreed to.

Clause 27, as amended, agreed to.

Clause 28 [Amendments: need for member-nominated trustees]:

On Question, Whether Clause 28 shall stand part of the Bill?

Lord Lucas

I wish to oppose the Question that Clause 28 stand part. This clause was intended to provide that, unless a scheme has secured approval to opt out of the member-nominated trustee proposal, scheme rules cannot be amended if there are no member-nominated trustees on the trustee board. The intention of the clause was to prevent schemes from amending their rules in the absence of a member-nominated trustee: for instance, in any interim period between the expiry of one member-nominated trustee's term of office and the appointment of another.

We believe that, as worded, this clause would give member-nominated trustees an effective veto over amendments and would act against Clause 14(5), which deals with the situation in which no nominations for member-nominated trustees are made. On a detailed scrutiny of the Bill as it now stands, we believe that other provisions in the Bill adequately cover the situation. I hope that the Question will be decided in the negative.

Baroness Hollis of Heigham

I am extremely unhappy that the Government are proposing to withdraw this clause from the Bill. We think that it is a rather useful protective device where bad employers may exploit a situation.

As it now stands, the sanctions against employers and existing boards of trustees who refuse to implement the requirements for member-nominated trustees under Clauses 14 and 15 are not very strong and could, in any case, mean considerable delay while the requirements are being implemented.

If the clause had remained in place, it would have created a blocking mechanism so that for so long as there is no member-nominated trustee, no scheme amendments may be made. That encourages an employer to get a move on. I cannot believe, as my noble friend Lady Dean said, that the Minister is serious when he seems to imply that member trustees uniquely will seek to veto, block and make impossible the workings of a pension scheme for which they have a fiduciary responsibility; for example, by refusing to let names go forward or by not attending meetings. That is a rather cynical attitude towards member trustees, who in other circumstances the Minister expects to be a major part of the whistle-blowing fabric of the whole scheme which is to deliver the pension promise. That is unfortunate and I hope that, on reflection, the Minister will not pursue what is almost bad-mouthing the integrity and motivation of would-be member trustees on schemes. That is what his response to my noble friend and his action in seeking to withdraw this clause seem to suggest. That is extremely unfortunate.

This clause is a useful, protective device to ensure that employers cannot delay unreasonably for their own ends. I hope that the Minister will decide not to withdraw the clause but will seek further guidance on it.

Lord Renton

I saw a further problem with regard to the clause when I first read it and before I knew that my noble friend was going to move that it should be left out.

Under the Trustee Act and under the general law for centuries, the courts have had power to amend trusts if application is made to them by trustees, or, indeed, by beneficiaries, in case they should need amendment. The clause says that, no power to amend the scheme can be exercised by any person". If my noble friend had not been moving the Motion to leave out the clause, I was going to ask whether it was intended to exclude the jurisdiction of the High Court. If that were so, it would be a great mistake. Fortunately, however, the problem will not arise if we leave out the clause.

Lord Lucas

My noble friend and I both find the clause as it stands unsatisfactory. I propose to continue to oppose its retention in the Bill. However, I shall read carefully the remarks made by the noble Baroness, Lady Hollis. At root I am sure that we are aiming in the same direction. If there is something that the noble Baroness said which we can take account of elsewhere in the Bill, we shall certainly look into the matter.

Clause 28, negatived.

Clause 29 [Investment powers: duty of care]:

Lord Ezra moved Amendment No. 121A:

Page 14, line 35, leave out ('investment functions") and insert ("functions relating to investments (within the meaning of the Financial Services Act 1986)").

The noble Lord said: In moving the amendment, I shall speak also to Amendments Nos. 123A and 124A. Clause 29 deals with the liability for breach of an obligation relating to, the performance of any investment functions".

Amendment No. 121A is a probing amendment which seeks to define more closely what is meant by "investment". In fact, that is done under the Financial Services Act 1986. That is why the amendment has been proposed. It seems that that would be a better way to define investment so as to have consistency in the duty of care and authorisation as laid down in the FSA. Otherwise, investment managers and practitioners could have two different bases upon which to work. Other types of investment that do not come within the FSA could of course be continued with—for example, real property—and would remain covered by trust law and the scheme rules as before. I have now covered the proposals under Amendments Nos. 121A and 123A which relate to Clauses 29 and 30.

Amendment No. 124A is the last amendment in the group. Again, it is a simple proposal. It seeks to bring within the scope of the provision which permits delegation regulated overseas-based investment managers. The reason behind it is that many pension funds have investments overseas; indeed, some of them have done quite well in that respect. They should not be deprived of that facility, nor of making use of properly regulated and authorised agents overseas. That is the purpose of the amendment. I beg to move.

8.45 p.m.

Lord Mackay of Ardbrecknish

I appreciate the noble Lord's wish with Amendment No. 121A to limit the risk that trustees may be influenced to move out of investments not covered by the Financial Services Act. However, I do not accept that trustees will become more reluctant to make non-Financial Services Act investments as a result of the Bill's provisions.

It is for trustees to decide the most appropriate investments for them to make in the light of their schemes' circumstances after taking and considering relevant professional advice. Where it is perfectly proper for them to make investments which are outside the scope of the Financial Services Act they will, I believe, continue to do so. They have nothing to fear from the contents of the Act provided they take such steps as are necessary to comply with the general duty of care expected from trustees under trust law when making investments.

In the light of the changes in trustees' investment power that are being introduced to the Bill, I believe that it would be wrong to set in place arrangements which would allow scheme rules to exempt trustees from their duty to take care and exercise skill. The requirements of Clause 29 are clear. We have provided for trustees to be exempted from liability under Clause 30 where they appoint an authorised fund manager, as recommended by the PLRC.

The purpose of Amendment No. 123A will be met by Amendment No. 124 which the Government have proposed and with which we shall deal later. Amendment No. 124 will make it clear that investment decisions delegated to a fund manager authorised under the Financial Services Act 1986 are in respect of decisions only about investments set out in that Act. Therefore, the noble Lord, Lord Ezra, is indeed on to a good point but one which I hope he will agree is dealt with under Amendment No. 124.

With regard to Amendment No. 124A, Government Amendments Nos. 123 and 124 which we shall be discussing shortly are intended to clarify those persons to whom trustees may delegate investment decisions and to whom they may do so without incurring liability for the acts of that fund manager under the provisions in subsection (3). It specifies that a fund manager to whom Section 191(2) (a) to (c) of the Financial Services Act applies is an authorised person for the purposes of the subsection. That may include overseas fund managers appointed in certain circumstances.

We have not, however, gone further. We believe that it could be unwise to extend trustees' ability to delegate decisions to unauthorised fund managers, either in this country, the European Community or abroad, without their retaining their vicarious liability for such actions. We do so, first, because of the regulatory structure provided under the Financial Services Act whereby the PLRC recommended the removal of trustees' liability where they appoint an FSA authorised fund manager.

Secondly, it is for trustees to decide what investments are appropriate in the light of their scheme's particular circumstances. Where it is appropriate for them to invest in overseas markets, they must decide what proportion of the fund should be so invested and in which markets and consider who are the most appropriate people to manage those investments. I do not believe that it is for the Secretary of State to deem which overseas regulatory systems are acceptable to UK pension schemes; that must be a matter for the trustees to decide.

Thirdly, as I intimated—and so that the noble Lord will not become confused—the amended definition of an authorised fund manager does provide for overseas fund managers to be appointed. As this occurs under Clause 30(2), trustees will not be held vicariously liable for their acts provided that they take certain steps.

Lastly, I do not believe that trustees would be less likely to make overseas investments which are not covered by the Financial Services Act as a direct result of the clause. Any trustee who takes proper advice on overseas investments, appoints apparently competent persons to manage those investments and takes all reasonable steps to meet his obligations to take care under trust law will have nothing to fear from the provisions in Clause 30.

Having given that fairly long response to what I know is an important matter—indeed, that is why I went into some detail—I hope that the noble Lord, Lord Ezra, will feel able to withdraw the amendment.

Lord Ezra

I thank the Minister for going into such detail. However, I must admit that at one stage I was becoming a little confused as to whether the noble Lord was talking about "unauthorised" or "an authorised" investment manager. I shall consult Hansard tomorrow to ascertain which one he was referring to at various stages. I am glad that the Government regard it as an important issue.

As regards the first two amendments, I am rather sorry that the Government do not accept the fact that there could be some benefit in having greater compatibility with the definition of "investment functions" in the Financial Services Act. However, having said that, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 29 agreed to.

Clause 30 [Power of investment and delegation]:

Lord Haskel moved Amendment No. 122:

Page 15, line 10, at end insert (", provided that this power is exercised, in relation to all matters affecting the fund, to the same degree of care and diligence as an ordinary prudent person would exercise in dealing with the property of another for whom the person felt morally bound to provide and by using such additional knowledge and skill as the trustees possess or ought to possess by reason of their profession, business or calling").

The noble Lord said: We have now reached the part of the Bill which deals with investment. It is notable that the Bill does not set out a standard by which the conduct of trustees can be assessed by the regulator so far as concerns investment. The Bill suggests that trustees should deal with assets as if they were their own. But if you are dealing with your own property you can be reckless or negligent as the whim takes you. Your only responsibility is to yourself. If you are dealing with other people's property, I believe the standard of care should be higher because there is a greater duty of care.

This amendment sets out to impose this higher duty of care as the standard demanded from trustees. One can frivolously bet with one's own money on a horse or on a commodity price, but a trustee should be careful about doing this with other people's money. This amendment clearly sets this out and I understand that it has the support of the Law Society. The wording of this amendment allows a certain amount of discretion according to the trustees' professional skills and ability or calling. This wording is now more commonly used in Australia, in the United States and in Ontario. The wording is more suited to modern investment needs and practices and gets away from the old excessively rigid ones. I beg to move.

The Earl of Buckinghamshire

I should like to support the noble Lord, Lord Haskel, in this amendment. I think that trustees have always had to act as prudent men in this area but I believe there is a need to make what is implicit explicit. I think this amendment is helpful in achieving that objective. Like the noble Lord, Lord Haskel, I, too, am aware that wording like this appears elsewhere in the world. It has been taken, for example, from the United States and the ERISA legislation. I certainly commend it to my noble friend the Minister.

Lord Renton

I agree with the purpose of the amendment and it is perfectly clear that trustees should have such duty. However, the difficulty is that they have already got such duty. This is the kind of duty which time and again has been laid down by the courts in the exercise by trustees of their duties, including their duties with regard to investment. Therefore although the amendment certainly has some merit—looked at as it reads—I very much doubt whether we need to add to the law because it is already part of the law.

Lord Mackay of Ardbrecknish

The standard of care required from trustees when they exercise their investment powers is a complex area involving highly developed equitable principles of law. We were initially attracted to the idea of introducing into the Bill such a standard. But after careful consideration, we have concluded that it would not be appropriate for three important reasons.

First, as my noble friend Lord Renton just mentioned, there is a well developed standard of care required from trustees in making investments under existing trust case law. This will continue to apply and develop. It is not, therefore, necessary for the Bill to introduce a statutory standard of care as set out in the amendment. Secondly, whilst I think we all recognise the PLRC's excellent attempt to encapsulate the principles of case law in this area, the legal advice I have obtained is that such consolidation would result in the statutory standard being applicable to all cases. This carries the danger that the law would become fossilised.

Lastly, the existing standard of care will be reinforced by the provisions in Clause 31, which require trustees to prepare and maintain a written statement of the principles which will govern their decisions about investments. In completing this statement, trustees will need to think clearly and consider all of the circumstances affecting the scheme before deciding the most appropriate investment strategy.

I am suggesting to the Committee that this amendment is unnecessary because its purpose is already achieved. Indeed in some ways it could be counter-productive as regards fossilising existing trust case law. I hope, in the light of my explanation, the noble Lord will feel able to withdraw the amendment.

Lord Haskel

Certainly investing the fund's money is probably the most important task of trustees. As the Minister said, the rules governing it are complex. My feeling is, why not make it explicit if the rules are complex? However, if it ossifies—I believe the Minister said that—the regulations, I think we ought to look into that. With that in mind, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Lucas moved Amendment No. 123:

Page 15, line 12, leave out from ("manager") to ("any") in line 14 and insert ("to whom subsection (2A) applies").

The noble Lord said: In moving Amendment No. 123 I wish to speak at the same time to Amendments Nos. 124 and 125. These three amendments clarify to whom trustees may delegate investment decisions. As drafted the clause could be seen to be preventing trustees from delegating fund management to EC institutions which are eligible to carry on investment business in the United Kingdom. This was never the intention and could place the United Kingdom in breach of EC obligations. I beg to move.

Lord Dean of Harptree

I welcome these amendments. I am advised that they deal with overseas managers but that they do not in fact safeguard the position as regards property investment. I realise this is a complicated issue and my noble friend the Minister may not be able to give a definitive answer at this stage. However, it seems to me that there is a case for protection under this clause to be afforded to trustees who delegate property investment to properly qualified managers. I would be grateful if my noble friend the Minister would consider that point, possibly not this evening as I realise it is a complex matter. However, it seems to me that it is a point which is not covered at the present moment in the clause or the amendments and that it requires consideration.

Lord Renton

Before my noble friend sits down, can he say whether he uses the word "property" in this context to mean landed property and only that—land and buildings in fact?

Lord Dean of Harptree

I mean all sorts of property.

Lord Lucas

My noble friend is quite right that these amendments do not in any way cover property, either as narrowly or as broadly defined. If my noble friend reads Hansard tomorrow and the answer that my noble friend Lord Mackay gave to the noble Lord, Lord Ezra, on his Amendment No. 121A, and those grouped with it, he will find set out there—I hope—he answer which he requires.

On Question, amendment agreed to.

[Amendment No. 123A not moved.]

Lord Ezra moved Amendment No. 123B:

Page 15, line 16, after ("investments") insert: ("(aa) may delegate such discretion to a person who is not a person to whom subsection (2B) applies, where the purpose of the delegation is solely to enable that person to delegate that discretion to a fund manager who is a person to whom subsection (2B) applies,").

The noble Lord said: I would like to move Amendment No. 123B with which Amendments Nos. 124B and 125A have been grouped. These amendments provide for sub-delegation of investment functions in the limited circumstances where the immediate delegate is not covered by the Financial Services Act but the sub-delegate is. Some pension schemes collaborate in setting up a common investment fund; for example, where an employer has several schemes, or for different companies in a group. Having a common investment fund increases operational flexibility and reduces investment management costs.

Legally, the scheme trustees delegate their investment functions to those of the common investment fund who are not usually authorised persons for the purposes of the Financial Services Act because they do not need to be for the activities that they undertake. As it stands, the Bill does not appear to contemplate sub-delegation in these circumstances. The amendments are intended to make sure that the trustees of schemes that have joined together in a common investment fund are not prevented from still doing so. I beg to move.

Lord Mackay of Ardbrecknish

I am bound to say that despite the arguments put forward by the noble Lord, I cannot agree that trustees should be permitted to delegate discretion over investment decisions to someone who is not appropriately authorised to manage those investments himself, so that that person may then subsequently pass that discretion on to someone who is properly authorised.

Decisions relating to scheme investments are a key responsibility of trustees. Where those investments require the appointment of an authorised fund manager, it is for the trustees to chose who is, in their opinion, the most appropriate person to manage those investments, to appoint that person and to ensure that he is performing his work competently. Those tasks are central to the trustees' role to act in the interests of the schemes beneficiaries. They should be undertaken by the trustees themselves and not delegated to another party to undertake on their behalf. For those reasons I am unable to commend Amendments Nos. 123B and 124B to the Committee.

I note the concern that, without a clear power to sub-delegate as proposed by Amendment No. 125A, trustees and fund managers could be hampered in conducting their day-to-day business, which would be in no-one's interest. However, the interests of security of the scheme must be paramount. I should therefore like to examine this issue in more detail. I shall in particular need to be sure that trustees maintain both control over, and security of, investments. I hope that with the promise that we shall look at the particulars which are drawn to our attention in Amendment No. 125A the noble Lord will feel able to withdraw the amendment.

Lord Ezra

I am obliged to the noble Lord for promising to have another look at Amendment No. 125A. I am sorry that he has spoken quite so categorically about Amendments Nos. 123B and 124B. I believe that at present a number of perfectly proper investments would fall foul of the provision for none other than a technical reason. I therefore wish to consider the matter further. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

9 p.m.

Lord Lucas moved Amendment No. 124:

Page 15, line 19, at end insert: ("(2A) This subsection applies to a fund manager who, in relation to the decisions in question, falls, or is treated as falling, within any of paragraphs (a) to (c) of section 191(2) of the Financial Services Act 1986 (occupational pension schemes: exemptions where decisions taken by authorised and other persons).").

The noble Lord said:. I have spoken to this amendment. I beg to move.

On Question, amendment agreed to.

[Amendments Nos. 124A and 124B not moved.]

Baroness Dean of Thornton-le-Fylde moved Amendment No. 124C:

Page 15, line 30, after ("number") insert ("(of whom at least one shall be a member-nominated trustee)").

The noble Baroness said: As my noble friend Lord Haskel said a few moments ago, the investment of pension funds is probably the most crucial role that trustees have to carry out. It is therefore regrettable that Clause 30(4) does not provide that member-nominated trustees will have a role in decisions regarding investments. Clause 30(4) (a) provides that the trustees of a trust scheme may, authorise two or more of their number to exercise on their behalf any discretion to make any decisions about investments".

My experience has been that when problems of any magnitude regarding pension funds have arisen they involve money. That is not surprising. However, the problems relate to the manner of investment and the misuse of pension funds. The clause as drafted makes no provision for member-nominated trustees to have a role in that function.

The general thrust of the Bill provides that only one-third of trustees will be member-nominated trustees unless otherwise decided by the trustees. However, decisions can be taken by the majority. If one adds those two provisions to Clause 30 as drafted one could exclude totally member-nominated trustees from the very heart of investing the funds to ensure the viability of the scheme.

The Bill when enacted will not make rogues disappear; they will still be with us. But we hope that the new Act will make it nigh impossible for rogues to take the advantage that they have chosen to take over the years. We need to learn from the experience we have gained thus far on pension funds. One experience has involved the exclusion of member-nominated trustees from any crucial decisions that are taken.

It is for those reasons regarding the power of investment and delegation that we put forward the amendment. I beg to move.

Lord Renton

I agree with the noble Baroness that it is important that if possible, a member-nominated trustee should be required to act in the circumstances envisaged in subsection (4). But, again, we are up against the problem that Clause 14 envisages that there may be a vacancy among the member-nominated trustees. Indeed, there may not be a member-nominated trustee when one is urgently needed. I believe that we should envisage such a contingency. Therefore, although I have a great deal of sympathy for the case put forward by the noble Baroness, her amendment would have to be somewhat differently worded in order to cover the circumstance of there not being for the moment, a member-nominated trustee.

Lord Mackay of Ardbrecknish

Like my noble friend Lord Renton, I am as anxious as the noble Baroness to ensure that member-nominated trustees play a full part in the work of the trust board.

However, I believe that the amendment is unnecessary and would unduly constrain the ability of a trust board to make sensible provision for handling investment matters. The subsection as a whole makes clear that responsibility for investment decisions should rest with the whole trust board and cannot be delegated.

In practice, many trust boards will be content to authorise an investment sub-committee to operate on behalf of the board. This enables the fund's investments to be kept under regular review, possibly by those trustees with a particular expertise in that area, and for decisions to be taken relatively quickly without needing to convene the whole board.

It could be an inappropriate and unnecessary constraint on the trust board if it were required to appoint a member-nominated trustee to the sub-committee.

I should remind the Committee that any such sub-committee will be operating within the investment principles laid down by the board as a whole under Clause 31. This, as well as the fact that the trust board as a whole cannot delegate its responsibility for investment decisions, means that there is no risk of any investment sub-committee running wild.

There is a further technical objection to the amendment. I wish to explain to the Committee that I do not take refuge in technical objections, but it is sensible to point it out. Not all schemes will have member-nominated trustees. Therefore, the amendment would not fit into the Bill. I do not particularly rest on that last point. I merely make it in passing. The main points which I hope the noble Baroness will take on board and accept are that the investment principles are laid down by the board as a whole and the board cannot delegate its responsibility for taking the investment decisions.

Baroness Dean of Thornton-le-Fylde

I thank the Minister for that response. It ebbed and flowed a little. For a moment I thought I was receiving support; then I was not; and then I thought perhaps there was a chance. I am not absolutely clear where the Minister stands. I shall read his remarks with a great deal of interest in Hansard tomorrow.

Before concluding, I should like to pick up a point made twice by the noble Lord, Lord Renton. I do not believe that we can operate the law by saying that something is desirable. I take the point he made in regard to Clause 14 and the vacancy, but, from my experience as a trustee, boards do not meet day in, day out, week in, week out. When vacancies occur on trust boards, they are usually filled pretty quickly without disturbing the work of the board. Within any trust board there is an investment portfolio which provides that such a percentage can go towards equities, international investments, property and so on. However, the clause provides that the trustees of. a trust scheme may, subject to any restriction imposed by the scheme", do certain things. I take the point that the Minister makes about the trust board being responsible, but my understanding is that the trust board can decide by majority decision to delegate by proxy its authority. While not letting go of overall responsibility at the end of the day, it can delegate the role of investment to the small sub-committee. Therein lies the danger.

Once we start to loosen the strings attached to control on investment, breaches can and do take place. If the wording which we put forward does not meet the point and causes technical problems—and I understand that in law technical problems can become insurmountable in certain cases—we would reconsider the point in parallel with what the Minister said. For the time being, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Lucas moved Amendment No. 125:

Page 15, line 32, leave out from ("manager") to ("any") in line 33 and insert ("to whom subsection (2A) does not apply").

On Question, amendment agreed to.

[Amendment No. 125A not moved.]

Clause 30, as amended, agreed to.

Clause 31 [Investment principles]:

9.15 p.m.

Lord Haskel moved Amendment No. 126:

Page 16, line 10, at end insert: ("( ) the exercise of voting rights and other powers granted by virtue of the management of investments on behalf of the beneficiaries;").

The noble Lord said: In moving this amendment I also wish to speak to Amendments Nos. 131 and 141. The purpose of the amendments is to oblige pension fund managers and trustees to vote their shares at company meetings, to announce beforehand how they intend to vote and to keep a record of how they voted.

This is a topical matter because it deals with the excessive payment packages and share options paid to directors of recently privatised industries. That is because over one-third of all the shares on the London Stock Exchange are held by pension funds. Support for the amendment is based on the recommendations of the Cadbury Committee, on experience in the USA and on research which shows that companies with more shareholder involvement perform better.

First, Cadbury: the recommendations are clearly stated in the report and paragraph 6.11.2 says: Institutional investors should make positive use of their voting rights".

That is covered by my Amendment No. 126. Paragraph 6.12 says: We recommend that institutional investors should disclose their policies on the use of voting rights".

That is covered by my Amendments Nos. 131 and 141.

The recommendations by Cadbury have been readily accepted by most businesses because they promote the community of interest between shareholders, directors and all employees and improve the company's performance; and this community of interest will be needed on matters other than pay. Shareholders, employees and pensioners will not determine details of corporate strategy, but they will make their voice heard on matters of principle as laid down by the Cadbury code, probably on such matters as environmental issues, ethical issues and policies towards employment.

Turning to experience in the United States, this is based on the fact that voting has been a duty for pension funds since 1988. That has been a potent force. In harnessing the good sense of individual people interested in the success of their companies, they have found a variety of ways of dealing with pay and other matters and helping their companies to perform better. For instance, in some companies shareholders have insisted that the directors use a proportion of their pay to become significant shareholders themselves. The Committee will not be surprised to learn that research at the Harvard Business School comparing 70 companies concluded that companies where the directors had been obliged to hold stock by their fellow pension fund stockholders did indeed perform better.

Other shareholders have insisted on wage compression. That means that they have set the difference between the highest and the lowest paid employees. If senior executives earn more, they have to carry the rest of the team with them. Research into this has not been carried out, but my instinct tells me that there will be an improved company performance.

Let us compare that position with the awful mess that the Government have got into over the pay and share options of senior executives in the recently privatised utilities, with the Government vainly calling for shareholders to vote while the public get more and more angry. I am sure that the Minister and his friends would have much preferred to have a duty to vote in the privatisation prospectus than put up with all of that. The omission will be highlighted even more: activity by American pension fund managers in the UK is about to increase dramatically.

Since 1994 American pension fund managers have had their duty to vote extended to shares that are held outside the United States in order to reflect the globalisation of capital markets. This became apparent a few weeks ago with the removal of Maurice Saatchi, chairman of the advertising agency. It was fund managers in Chicago who threatened to vote him off the board; they were acting under United States law. Is it riot sensible to bring British law into line with American law, so that we, too, reflect the globalisation of capital markets?

Since raising this matter at Second Reading, I have received a lot of correspondence. Some of the more progressive pension fund managers, such as Mr. Alastair Ross-Gooby, have been strongly supportive. The Pensions and Investment Research Corporation has suggested that for some time and in recent years has provided a service to its members advising them on which way to vote at company meetings. The National Association of Pension Funds and others raised two problems: the question of cost and offending other clients by voting against them. Those objections were remarkably easy to deal with. We dealt with cost by agreeing that abstaining was a voting option. That could very well he the decision in a large number of cases and would have to be recorded as such. Pension fund managers giving offence to their customers is easily dealt with by anonymous voting. Many companies in the United States, in order to encourage voting at their meetings, have instituted a system of anonymous voting so that fund managers can vote without offending their other clients.

I have also been asked why voting should be a duty. My response is that these amendments do not tell people how they should vote; they provide a framework to encourage them to vote. Government and business obviously want people to vote. Surely it is then a duty to provide that framework and not just stand back. Without it, all that we have is vested interests shouting at each other, as they are doing over directors' pay in the privatised utilities. Provide the structures and you will get a result.

Then there is the position of trustees and pension fund managers under trust law. The position is not clear and it is not my intention to try to clear up the whole area of trust law. But it is possible, and timely, to clear up this one area.

There is no doubt then about the benefits of voting. Why should it be in this Bill? My main reason is that improving the performance of British industry is too important to let this opportunity pass us by. It will be many years before there is another pensions Bill. We must take the opportunity that presents itself. We are dealing here with the single largest group of shareholders in UK companies.

This provision will not bring a major improvement in the performance of British industry. Life is not as simple as that. Our performance will be improved by a whole series of small increments, and this is but one of them. I beg to move.

Lord Mackay of Ardbrecknish

This amendment has been well trailed by the noble Lord, Lord Haskel. We are in no doubt that institutional investors, as owners of shares, have a responsibility to the companies in which they invest. As part of that responsibility, it is extremely important that shareholders should subject the performance of their companies to critical scrutiny. If shareholders see that their companies are not competitive, they must point out to management the improvements that they want to see. If those improvements are not forthcoming, they must demand changes in the management and impose them if they must. It is not an exaggeration to say, as the noble Lord did, that that function is crucial to our economic prosperity.

The Government strongly believe that institutions should develop constructive, long-term relationships with the companies in which they invest. Regularly voting their shares can be an important part of that relationship. It demonstrates to management that the owners are interested in the company and committed to its future. It is also consistent with the trustees' duties to act in the interests of the beneficiaries.

But there is a significant difference between encouraging best practice, which the Government do encourage, and imposing specific or detailed obligations on pension funds, which risk being regulatory and burdensome. As an example of best practice I commend to the Committee the lead taken by the National Association of Pension Funds. It recommends that trustees should decide on their voting policy and that voting policy should be made public. Thereafter the trustees should exercise that vote prudently in the interest of the scheme beneficiaries.

The Committee will no doubt be aware also of the pressure that Postel, which manages the Post Office and British Telecom pension funds, has brought to bear in encouraging better corporate governance and, for example, seeking to reduce the length of rolling contracts. Those are positive and welcome examples of a trend which I hope will continue.

However, the legislative approach suggested by the noble Lord seems to me to be fraught with difficulties and inconsistencies. On the face of it, the phrase "duty to exercise voting rights" means the creation of a binding statutory requirement on trustees or fund managers to vote or exercise their proxies on any resolution on which they are entitled to vote by virtue of their investments.

I have some difficulties with that particular requirement. Mandatory voting is not even something that we impose on the electorate at large when it comes to elections. I also argue, as I would in a discussion about mandatory voting in elections, that there is a right to abstain. That is a very reasonable and important freedom which the electorate ought to have and which should be paralleled in any duty of trustees to vote.

I would also question the logic of a duty being imposed only on pension funds, which is the primary object of the Bill. It would argue for a similar duty to be placed on individuals who hold shares, other collective investment vehicles and insurance companies. It will not surprise the Committee to know that we are not attracted to going down the road of intrusive legislation of that kind.

On the practical side, it is perhaps unfortunately the case that forcing people to vote provides no guarantee that they will exercise that vote in a prudent manner. I could talk for a long time about that and give instances of it having happened. But I shall leave that aside. If we go further down that road, the amendment imposes a legislative duty to vote in the interests of the beneficiaries. Taken to its logical conclusion, mere evidence of voting by the trustee on a resolution would not necessarily discharge the duty. To discharge the duty properly, a vote would have had to be made in the best interests of the beneficiaries.

How does one enforce such a duty and how many resolutions would the trustees of an average pension fund have to vote on? I suspect that the number would be high. I do not know how any administrative system could cope with the paperwork and the delving required to check on the trustees' voting records. I understand that the United States Government randomly inspect pension funds to check their practices in relation to corporate governance. To most UK eyes, that would appear to be unnecessarily intrusive and contrary to the Government's general deregulation approach.

In conclusion, the Government believe that the right way ahead in this important area is to encourage higher standards of corporate governance and encourage institutional investors to play their part in that. I do not believe that anything divides the noble Lord, Lord Haskel, and myself in that regard.

We accept that the role of institutional investors and the relationship with the companies in which they invest is an important aspect of corporate governance. But I urge the Committee to be wary of using the Pensions Bill to try to address that wider debate. Any provision introduced into this Bill would, by its very nature, be a partial response. It would risk cutting across initiatives designed specifically to address issues such as those put forward by the Cadbury Committee and its successor body, mentioned by the noble Lord, and the work of the Greenbury Committee on directors' remuneration. The Government will consider any recommendations by those bodies on the need for further action. But this is not the right vehicle to ride that particular horse.

I have clearly explained the Government's position, which I am sure will be read tomorrow, not only by Members of the Committee but also by the outside interests to which some of the remarks are directed. With those assurances and underlining the position of the Government, I hope the noble Lord, Lord Haskel, will feel able to withdraw the amendment.

Lord Haskel

I thank the Minister for that considered response, which I found extremely disappointing. I feel that this whole matter is too important to be left to individual discretion. If we leave it to the individual discretion of busy people it is the kind of thing that they will simply not get round to. By making it a duty to vote it interprets the duties of the trustees of pensions funds as put forward by the Cadbury Report.

The Minister said that the matter was well trailed; that is because there is a lot of interest in it. Only today the DTI published further proposals about best practice in British industry. A duty to vote is among the best practices being promulgated by the Department of Trade and Industry. It is all designed to encourage long-term relationships between shareholders and companies. It has been shown time and again that share values increase when shareholders take an interest, partly because the market feels that if shareholders take an interest, then bad management will be jumped on far more quickly.

I do not believe that the provision is regulatory and burdensome. A few companies are coming round to putting it into effect and many pension funds are working along these lines. We have a duty, therefore, to provide a framework in which it can be encouraged. However, at 9.30 in the evening I am not prepared to have a lengthy debate on it. I shall return to it at Third Reading and beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Ezra moved Amendment No. 127:

Page 16, line 11, at end insert: ("( ) In preparing or revising such a statement, the trustees of the trust scheme shall have regard to the timescale over which the liabilities of the trust scheme will fall to be discharged, and accordingly (unless such timescale is of a short duration) such statement shall provide that—

  1. (a) investments are to be evaluated for their expected return over a period commensurate with such timescale; and
  2. (b) investments are not be be made, or realized, by reference primarily or exclusively to considerations of a short-term nature.").

The noble Lord said: In moving Amendment No. 127 I shall speak also to Amendment No. 133. The points I raise follow on logically from the points made by the noble Lord, Lord Haskel. Clause 31 requires trustees to prepare, maintain and periodically review a written statement of their investment policy. The amendment seeks to add to Clause 31 an obligation on the trustees, when preparing or revising that statement, to take a long-term rather than a short-term view.

I am convinced, in view of what the Minister said in response to the noble Lord, Lord Haskel, that I shall be told that this goes outside the limits of the proposals in the legislation and, if dealt with at all, should be dealt with in some other way. But before the Minister takes that stance, perhaps he will reflect upon one or two aspects of the problem.

I am sure that the Minister will agree, and that other Members of the Committee will agree, that short-termism is a defect in the whole British approach to investment. The Bill gives us a chance to do something about it and we should not let it go by without drawing attention to it. It seems to me to he particularly appropriate to do so in the case of pension schemes, whose liabilities are by definition long term in that the trustees have to look ahead to the pension needs of people who are currently employees and may be many years away from retirement. They, of course, will be replaced with young, new entrants who themselves will be looking long term for their pensions.

The nature of the proposed amendment conforms with the general pattern of this part of the Bill in that it simply requires the trustees to have regard to a long-term timescale, except in the case of schemes whose liabilities are short-term; for example, where for whatever reason they are being wound up. The general problem of short-termism contains many paradoxical features. No doubt in many cases the chief executives of companies like to take a long-term view but they feel constrained because of the perceived demands of Institutional investors for short-term high returns both for capital and income. The ultimate beneficiaries of pension schemes no doubt also take a long-term view.

However, in the middle there is the investment community whose fund managers compete with each other on the basis of quarterly performance league tables. One cannot blame them because they live in a competitive situation. What is needed to put this right is for pension scheme trustees to direct fund managers as to strategic investment criteria, including moving them firmly towards a culture of long-termism. Unless there is a move in some part of the chain I fail to see how we can get away from this problem.

Amendment No. 133 is also about long-termism but ties in almost precisely with the point made by the noble Lord, Lord Haskel, on voting rights. The proposition made in Amendment No. 133 is that voting should not only be undertaken but should be undertaken with a view to long-term objectives.

I move the amendment in order to take advantage of this legislation to help us move away from the short-term culture. I beg to move.

9.30 p.m.

Lord Haskel

I rise to support the noble Lord, Lord Ezra, and to ask the Minister one question. Will he consult with his colleagues in the Department of Trade and Industry, because we are inundated with requests from the Department of Trade and Industry to take a long-term view? As the noble Lord pointed out, this is an opportunity to have this obligation to take a longer term view on shareholders. I should have thought that the Minster's friends in the Department of Trade and Industry would be delighted if he took this opportunity.

Lord Mackay of Ardbrecknish

This has been an important debate. Its subject matter formed a small part of the debate we had at Second Reading, when the noble Lord, Lord Ezra, raised some of the points which he has just made. While I would not deny that it is important for investors to take a long-term view of the position of the companies in which they invest, one has to look at the role of the trustees in a trust fund when it comes to their decisions, which are related, of course, to the interests of the scheme for which they are trustees.

For example, there is a wide range of factors which pension fund trustees must take into account in setting their scheme's investment strategy. Those factors will be influenced by the level of resources available, by the size of the scheme, by the period within which liabilities have to be met, by the relative rates of return on different types of investment and by the relative volatility of different investment vehicles; in short, all the factors already mentioned in Clause 31. Some more mature schemes may be best advised to hold a large percentage of their assets in gilts. I know that the noble Lord, Lord Ezra, appreciates that point. Indeed, it is catered for in his amendment. As pension schemes continue to mature, this factor may well have a noticeable impact on the balance of overall pension fund investment, irrespective of the minimum solvency requirement.

These are all highly complex and technical matters, on which trust boards will be obliged to seek professional advice. Their conclusions will depend on their particular view of the wide range of factors mentioned in this debate and on the particular circumstances of their scheme. Our view is that trustees who draw up their investment principles taking account of the points already listed in the clause, will be bound to take account of the considerations mentioned in this amendment.

Amendment No. 133 requires trustees holding securities in public companies to use any voting or other rights held, for the best interests of the trust scheme as a long-term investor". It then defines "best interests" using criteria which have regard to the promotion of the sustainable growth in value of the company concerned". Trust law clearly provides that trustees must act in the interests of the beneficiaries of the trust. It is clearly in the interests of everybody to encourage any action which will promote growth in UK companies. However, the introduction of any duty which requires trustees always to consider the interests of any other party before those of scheme members would be inappropriate because it would be incompatible with trust law. Such a requirement could lead to severe conflicts of interest between trustees' duties to scheme beneficiaries on the one hand, and their obligations to other parties on the other.

Of course we want to maintain the current high level of investment by pension funds in UK equities. It is a potent source of finance for British industry. I take the point that pension fund investments in gilts rather than equities could, in certain circumstances, be bad news for scheme members in that it may limit the ability of the scheme to provide discretionary increases. Equally, we must not impose the kind of substantial costs on sponsoring employers which would arise if there was an unnecessarily large shift of pension funds from equities into gilts.

The Committee will be aware that my right honourable friend the Secretary of State had this point very much in mind in determining the appropriate valuation basis for the proposed minimum solvency requirement which we shall be discussing at a later stage. Probably the debate deserves a longer airing. I hope that my brevity has not taken away from the fact that I consider this to be a very important issue. For the reasons which I have briefly outlined, I hope that the noble Lord, Lord Ezra, will feel able to withdraw his amendment.

Lord Ezra

I am most grateful to the noble Lord for the care with which he has dealt with this subject. I am not surprised at the conclusion that he has reached, but I regret it. I feel as the noble Lord, Lord Haskel, does, that the Government have spoken time and time again about the need for us to take a long-term view of investment. The vast mass of investment in this country is handled through the institutions of which the pension funds form a very large part.

Therefore, this would have been an opportunity to translate exhortation into obligation without in any way in my opinion—or indeed that of the noble Lord—harming the interests of beneficiaries. It must be in their interests to take a long-term view of investment and to persuade the companies that they invest in to take a similarly long-term view. No doubt this is a matter to which we shall try to return, but in the circumstances I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Lucas moved Amendment No. 128:

Page 16, line 14, after ("the") insert ("written").

The noble Lord said: In moving this amendment I shall speak also to Amendment No. 129. The purpose of these amendments is to ensure that when preparing or revising their statement of investment principles, trustees obtain advice in writing from a person who is properly qualified to give appropriate advice to pension schemes. The effect of Amendment No. 128 is to require trustees to obtain advice in writing. Amendment No. 129 develops further the qualifications required from a person from whom trustees must take advice. I beg to move.

The Earl of Buckinghamshire

My Amendment No. 129A is joined with these amendments. Members of the Committee will be aware that at Second Reading I expressed some concern about the overall impact of Clause 31. I wish to return to that matter at Report stage. At this point I wish to say in general that I believe the words in this clause "consult the employer" seem to change the current status quo where the trustees have to take into account the interests of all parties including the employer, as a contingent beneficiary. The amendment does not deal with that issue, which is why I wish to return to the matter on Report. However, the provisions make clear that the trustees have to consult and that failure to do so will carry penalties under Clauses 3 and 9. I am sure that, in most circumstances, the trustees will consult the employer but there may be circumstances where the relationship has broken down to such an extent that consultation does not take place.

The amendment refers to the penalties, but I am somewhat diffident about loading more penalties onto the trustees. Again, that is a point that, I made on Second Reading. However, as there are limited powers to get rid of trustees, I believe that the provisions complete the circle of the trustee requirements set out in the Bill.

Lord Lucas

To answer my noble friend, we too feel diffident about involving OPRA in these matters, but I can advise him that we shall be giving further consideration to the matter. Therefore, I hope that my noble friend will not seek to move his amendment.

On Question, amendment agreed to.

Lord Lucas moved Amendment No. 129:

Page 16, line 16, after ("matters") insert ("and to have the appropriate knowledge and experience of the management of the investments of such schemes").

On Question, amendment agreed to.

[Amendments Nos. 129A and 129B not moved.]

Lord Haskel moved Amendment No. 129C:

Page 16, line 26, at end insert: ("( ) The trustees of a trust scheme must include in the annual report of the scheme a statement by the trustees that they have carefully considered the investments and are satisfied that they conform to the statutory criteria.").

The noble Lord said: In moving Amendment No. 129C, I should like to speak also to Amendments Nos. 138, 140A, 141A, 142A and 142B. Amendment No. 129C is yet another Goode recommendation which the Government accepted but have not included in the Bill. It is designed to ensure that the trustees do not approve the annual report on investments and other matters on the nod but that they pay attention to what has gone on. That is similar to the responsibilities that are laid on directors in relation to the annual accounts of a company. We are talking about the same objective. It is a matter of good practice which needs to be encouraged and specified in the Bill. I beg to move.

Lord Mackay of Ardbrecknish

The first five of these amendments concern the requirements on trustees to obtain and make available certain information. The amendments would require the Government to make regulations which would require trustees of all schemes to produce scheme documents which are readily comprehensible to members within a given maximum time limit. They would also require trustees automatically to send an annual benefit statement to all members.

Amendment No. 142B inserts a new clause which would require scheme advisers who provide information to the employer in relation to the scheme to disclose such information to scheme members and independent trade unions.

Amendment No. 129C mirrors a recommendation made by the Pension Law Review Committee which has been accepted by the Government. However, we consider it more appropriate to give force to that recommendation in secondary legislation. We intend that new regulations concerning the provision of information to members shall be made under the powers at Section 113 of the Pension Schemes Act 1993 and Clause 35. These shall include detailed requirements for the content of scheme annual reports.

Amendment No. 138 would provide a mandatory power rather than a permissive power to make regulations concerning the provision of information to members. The effect would be to require the trustees or managers of all occupational pension schemes to obtain certain documents and make them available to members. Such a requirement would not be appropriate. Certain types of occupational schemes will need to be treated differently and the power to make regulations must provide for this. We have in mind, for example, certain exemptions for public service schemes. Those schemes are in the main unfunded and it would clearly be inappropriate to require them to produce accounting documents in the same way as for funded schemes.

The effect of Amendment No. 140A would be to require audited accounts, auditors' statements and actuarial valuations, which are by their nature very technical documents, to be produced in a readily understandable format with important information highlighted. We support the principle behind this amendment, which is to provide members with information which is meaningful and written in plain English. We consider that that is particularly important for documents such as the annual report and scheme booklet which are intended primarily for scheme members. It is perhaps of lesser importance for the documents of the sort covered by the amendment which concern technical issues and are intended to be read by relative experts.

As the Committee will be only too aware, whether something is readily understandable or whether information is important is a matter of opinion. It is not at all something for which we can legislate. Therefore, while we wish to encourage the use of plain English, we do not believe that the Pensions Bill is the place to do so.

Amendment No. 141A would require trustees to provide annual statements of accrued rights to members and others. We support the principle that members of all occupational schemes should have the right to receive an annual benefit statement if they want one. Members of money purchase schemes will continue to receive annual benefit statements automatically and we shall continue to encourage salary related schemes to do the same. However, we appreciate the practical difficulties that requiring all schemes to issue statements automatically would place on some schemes and have no wish to increase their administration costs unnecessarily.

The amendment would also require trustees to obtain and disclose specific items of information within set time limits. We consider that secondary legislation should specify the time limits for the provision of information and should set out all of the information which is required to be disclosed in the scheme annual report or booklet. We intend new regulations concerning the provision of information to members to cover the points made in this amendment.

Amendment No. 142A mirrors two of the recommendations made by the Pension Law Review Committee, both of which have been accepted by the Government. But again we consider it more appropriate to give force to those recommendations in secondary legislation.

Amendment No. 142B seeks to tackle a problem which does not seem to us to exist.

I hope that I have covered all the main points in the amendments in the group and that the noble Lord, Lord Haskel, having listened to me, or, more sensibly, having read in the morning what I have had to say, will be content.

9.45 p.m.

Lord Haskel

I thank the Minister for his response. He replied to a couple of amendments to which I did not speak. However, from what the Minister said, it appears that he intends to introduce secondary legislation to encourage best practice. I do not wish to stand in the way of that. My only regret is that he is going to encourage best practice in administration only and not in the management, which was the matter to which I was trying to refer previously. However, in view of what the Minister has said, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 31, as amended, agreed to.

Clause 32 [Choosing investments]:

Lord Lucas moved Amendment No. 1.30:

Page 16, line 28, leave out ("this section") and insert ("subsections (2) to (4)").

The noble Lord said: I shall speak also to Amendment No. 132. Amendment No. 130 clarifies those subsections of Clause 32 to which trustees must have regard when they are making investment decisions themselves. The specific requirements for those trustees are contained in subsections (2) to (4). The amendment removes the reference to the whole clause and substitutes the relevant subsections.

Amendment No. 132 clarifies who may give proper advice when trustees make or hold investments which are outside the scope of the Financial Services Act 1986. I beg to move.

On Question, amendment agreed to.

[Amendment No. 131 not moved.]

Lord Lucas moved Amendment No. 132:

Page 17, line 12, at end insert ("and to have the appropriate knowledge and experience of the management of the investments of trust schemes").

On Question, amendment agreed to.

Clause 32, as amended, agreed to.

[Amendment No. 133 not moved.]

Baroness Dean of Thornton-le-Fylde moved Amendment No. 133A:

After Clause 32, insert the following new clause:

("Custody of investments

.—(1) Unless the Authority agrees the contrary, the trustees or managers of an occupational pension scheme or a personal pension scheme must secure that investments held for the purposes of the scheme are held in accordance with an agreement, made between the trustees or managers and an approved person ("the custodian"), which contains the provisions mentioned in subsection (2).

(2) Those provisions are—

  1. (a) that the investments are vested in the custodian's name and he maintains adequate records for identifying them as belonging to the scheme and not to himself or any other person,
  2. (b) that the custodian is required to safeguard the investments,
  3. 545
  4. (c) that all documents of title relating to the investments are kept in the custodian's possession and may not be delivered to any other person except—
    1. (i) in accordance with a request from the trustees or managers which is signified in the prescribed manner, or
    2. (ii) in prescribed circumstances
  5. (d) that all transactions relating to the investments are conducted and recorded in the prescribed manner and within the prescribed period, and, in particular, that any transactions which do not occur in the normal course of the holding of investments generally or of investments of the description in question are immediately reported to the Authority and the trustees or managers by the custodian,
  6. (e) that the custodian is responsible for securing that the trustees and managers are fully informed of all matters relating to the investments within a period which is reasonable having regard to the importance of the information,
  7. (f) that, in any case where the custodian is also a person to whom any discretion to make any decision about investments has been delegated under section 30, the functions exercisable by him as custodian are adequately differentiated from those exercisable by him by virtue of that delegation,
  8. (g) that the custodian must establish and maintain such arrangements as may be prescribed for the purpose of securing so far as practicable that none of his employees or officers has the opportunity to perform any action which would or might result in a breach of the agreements,
  9. (h) that the custodian is liable for any reduction in value in the assets of the scheme arising from any breach of his obligations under the agreement, and
    1. (i) prescribed provisions.

(3) A person is approved for the purposes of this section if—

  1. (a) he satisfies the prescribed requirements, and
  2. (b) subject to subsection (4), he is not connected with the employer.

(4) Paragraph (3) (b) does not apply—

  1. (a) where the employer is an institution authorised under the Banking Act 1987 and the arrangements made under this section comply with such further requirements as may be prescribed, or
  2. (b) in prescribed circumstances.

(5) Where an agreement in relation to the investments held for the purposes of a scheme has been made with a custodian in accordance with this section—

  1. (a) except in prescribed circumstances, the custodian shall not be regarded as a trustee or manager of the scheme by virtue only of complying with such provisions of the agreement as are mentioned in subsection (2), and
  2. (b) the trustees or managers of the scheme are not responsible for any act or default of the custodian in the course of exercising his functions as such if—
    1. (i) they have taken all reasonable steps to satisfy themselves that he is an appropriate person to appoint as custodian, and
    2. (ii) they have continued to satisfy themselves by periodic review that he performs his functions under the agreement competently.

(6) Subject to any restriction imposed by the scheme, an agreement under this section may include provision enabling the custodian to make arrangements with another approved person for him to exercise any of the custodian's functions under the agreement; and where the custodian makes such arrangements this section shall, except in prescribed circumstances, apply in relation to the other person as it applies to the custodian.").

The noble Baroness said: I am somewhat encouraged by the fact that on Second Reading the Minister said that his mind was not closed to this matter. I hope that he is prepared to listen to my argument and perhaps to agree to the amendment.

I have no intention of speaking for as long as it would take me to read the proposed new clause. When one asks the advice of lawyers and parliamentary draftpersons one is presented with a long amendment such as this. Perhaps one may say it is belt and braces, but I assure the Committee that it is necessary.

The Minister also said that while his mind was not closed to this matter it was no guarantee against wrongdoing. He went on to say that we are talking about a package; and this is one element of that.

The proposal is not a new idea; most pension funds have the independent custody of investments. Understandably, they see it as being sensible. Most city fund managers when offering a service to pension funds automatically include this service. It is not expensive and therefore I hope that the Minister will not plead that it is an extra cost and an extra burden. People within the industry to whom I have spoken assure me that the cost is between one-tenth and one-twentieth of 1 per cent. It is a minuscule amount for the security that one would have with the independent lodging of investments.

On Second Reading the Minister also said that he believed that this change would not have helped the Maxwell scheme because the investments were lodged with independent custodians. That is not correct. Where the Maxwell funds were lodged with independent custodians—and many of them were—many of them were secure. However, a large amount of the assets was not held in custody independent of the employer. It is a fact that Maxwell's companies and his tentacles reached far and wide. Where the pension fund investments were not held within the company they were not necessarily independent of the employer. Had they been so, it would have been more difficult, if not impossible, to gain access to them. I do not say that it would have stopped him, but it would have made him think twice. Now many schemes are lodging funds independently. The additional dimension is the fact that much investment is made outside this country in many different parts of the world. We live within a global economy and it is essential that such investments are lodged independently.

The Minister may say that the custodianship of investments is already regulated. However, whereas the Goode Report did not call for that to be a requirement, it stated that there was no direct regulation of custodians. At paragraph 4.10.38 it stated: As stated … while custodians are normally authorised by a regulatory body for other purposes, custodianship is not as such an activity requiring prior authorisation or, indeed, directly regulated in any way".

Therefore, there is a gap in the regulatory system. At paragraph 4.10.33 Goode went on to state that, plainly, independent custodianship, places some rein on the freedom of action of an intending fraudster, because the possibility of a query about instructions outside the fraudster's authority will reduce the chances of such instructions being given in the first place".

I hope that the Minister will accept the amendment. It is welcomed generally in the industry. I was interested to read that Prudential Insurance has put out to tender some £400 billion of its assets for independent custodianship. Of course, most insured schemes have independent custodianship of their investments. Therefore, that is something which all good companies are doing. I beg to move.

Baroness Seear

I support the amendment moved by the noble Baroness, Lady Dean. She has direct experience of what can go wrong when custodianship is not properly organised, and I do not believe that I can add very much to what she has said.

Obviously there can be no 100 per cent. safeguard against fraud, but at this stage our obligation is to take all the steps possible to minimise the chances of that happening and to reduce the number of fraudulent cases. This amendment is clearly a practical and sensible way in which to achieve that. As has been said, a number of companies are already following that course. It would surely be wise and appropriate to give that legislative backing in the Bill.

The Earl of Buckinghamshire

I support the amendment moved so competently by the noble Baroness, Lady Dean. I realise that custodianship is a complex issue, in particular in relation to regulation. Indeed, question marks have been placed over the effectiveness of custodial arrangements.

Goode said: the fact that the assets are held by a custodian will not by itself be a sufficient safeguard. In other words, custodianship should be seen as an additional barrier to wrongdoing which may or may not prevent it". That is an extremely important point. It would be an additional barrier to anybody attempting to commit fraud.

I do not believe that costs are an issue in this matter. The custodian business is extremely competitive. More people are trying to enter that market each year. Regulatory difficulties should not prove to be a barrier either. We have moved on in all areas of regulation and I do not understand why custodianship should be exempt from that.

In supporting the amendment, I draw the Committee's attention to compensation arrangements. Is it reasonable to ask schemes which have custodial arrangements to pay out for wrongdoing that has occurred in schemes with no custodian? I think not.

Lord Dean of Harptree

I support the amendment. From our debates, it is obvious that there is a reluctance to impose additional burdens on occupational pension schemes which, after all, are voluntary. If we proceed too far along the road of regulation, there is always a danger that schemes will not be improved or will not be set up.

In this case, we are not asking for anything new. As has been said, many schemes already have provision for independent custodians. That is good practice which is well developed in particular in larger schemes. Many small schemes are insured and, therefore, the intention is fulfilled in that way.

It has been mentioned already that the expense involved in having independent custodians is minimal in relation to the available resources. II was greatly encouraged to recollect that when he dealt with those points on Second Reading the Minister said that he had an open mind. If he is not prepared to go as far as accepting this rather detailed amendment tonight, I hope that he will at least be able to assure us that his mind is even more open and that he is more sympathetic than he appeared to be on Second Reading.

10 p.m.

Lord Mackay of Ardbrecknish

The amendment before us is very long and detailed. It follows on from the concerns expressed on Second Reading and again this evening by several Members of the Committee. As I said at the end of the Second Reading debate, I do not have a totally closed mind on the issue and I am prepared to listen to the arguments as they are put forward. I should stress that I am still in that position and I still have some difficulty about the amendment which I hope to lay before the Committee as briefly as I can to see what response I receive.

I seem to remember from many of the comments made on Second Reading the desire for the Bill to do something specific with regard to the security of scheme assets. I believe that noble Lords appreciated then—as, indeed, they did tonight—that independent custodianship of scheme assets is not a simple matter.

Several noble Lords made the point that the use of independent custodians would probably not stop a determined fraudster. But I believe that it would be foolish of me or anyone else to pretend that any legislation could give a total guarantee against such wrongdoing. The same considerations were thoroughly considered by the PLRC, which specifically asked: Should the use of independent custodians be obligatory?". The PLRC concluded that they should not be. The committee was not convinced that the use of custodians would provide such a significant obstacle to the determined wrongdoer that their use should be made mandatory. Moreover, in a report which frequently sought to develop codes of practice wherever practical, the PLRC specifically declined to recommend that independent custodians should be a requirement of good practice.

Many issues occurred to me during the debate. For example, as custodians take instruction from the trustees, they would not be able to refuse to hand over assets if properly asked to do so by the trustees. Certainly it would not be a defence against the trustees making a wrong, properly arrived at decision. It is also the case that in the legislation the scheme assets would certainly have to be held separately from the employer. He would not, so to speak, have them in his safe; the pension scheme would have to have them in its safe.

The difficulties associated with this issue are, I believe, brought out in the amendment. It would require trustees to ensure that investments are held by an "approved person", defined as someone who satisfies the prescribed requirements. Nothing further is said on who that person shall be or what criteria would be used to judge his fitness to undertake such an important role. Indeed, in introducing the amendment the noble Baroness, Lady Dean, said that custodianship is not presently regulated. My noble friend Lord Buckinghamshire also made that point. If we are to have proper protection here other than some hoped-for protection, it is vital to see what those prescribed requirements would be, what class of persons would be designated as custodians and who would ensure that they actually carried out whatever prescribed regulations are laid down for their task. In considering the question, we have to look at that important issue.

Contrary to what everyone thought—that they were delivering some sort of blow to my case before I stood up to speak—I am not going to pray in aid anything to do with cost. I believe that the answer is in the mechanism proposed by the PLRC. It is for the trustees, employers and scheme professionals, all operating under the new duties contained in the Bill, to ensure that scheme security is fully and rigorously enforced. That is backed by the new regulatory authority with wide-ranging powers and sanctions.

In considering their security needs, many schemes will conclude that it will be appropriate for them to use an independent custodian, and there may be many good reasons for them to do so; indeed, many of them do so at present. However, others may feel that any additional benefit provided by a custodian will be of little use under the particular circumstances of their scheme. It is, for example, in respect of smaller and medium-sized schemes that this is most likely to seem inappropriate because they may hold little in the way of transferable securities. A requirement that such schemes should use an independent custodian would, I believe, be unreasonable and would not add anything appreciable to the security of the scheme.

I recognise the genuine concerns that have been expressed over this matter but I believe—as I said at Second Reading—that a statutory duty to appoint an independent custodian is too prescriptive, especially in the light of the point I made earlier that the amendment, long as it is, does not address the question of how one defines such a custodian and how one regulates such a custodian. One would certainly have to have something in place to achieve that.

I believe that the general thrust of the Bill should remain as it is. The trustees and the scheme professionals are there to put in place the measures most suitable to meet the needs of the scheme as regards the important matter of asset securities. I hope I have not illustrated too closed a mind on the matter. I hope I have indicated to the Committee some of the considerable difficulties that attend to the issue. These difficulties (dare I say?) have not been fully addressed in the amendment or in the speeches of all those who have spoken, including my noble friends.

Baroness Dean of Thornton-le-Fylde

I must confess I am somewhat surprised at some of the comments the Minister has made this evening. Quite apart from myself, other speakers in this debate have a wealth of knowledge in this whole area. I respect their knowledge and experience. I refer also to Members on the Benches opposite.

Goode said that this measure places some rein on the freedom of intending fraudsters. The Minister says that this is not a question of cost. Perhaps we have all been indoctrinated with the reputation that people from his part of the country have as regards money. However, I must withdraw that if cost is not a factor as regards obtaining regulation on pensions. I accept that. We shall refer to that in some of the later debates.

Lord Mackay of Ardbrecknish

The noble Baroness should not go too far. I said only that cost was not an important consideration as regards this provision.

Baroness Dean of Thornton-le-Fylde

The Minister cannot pick and choose. He cannot say that cost is not an important consideration only in regard to certain provisions. The Minister says that the measure refers to prescribed requirements. I am surprised that the Minister is such a wilting violet as regards accepting another area of prescription. After all there are already approximately 200 such areas within the Bill. I would not have thought that one more in this major area would have made much difference.

The Minister asks what would prevent trustees signing for the assets to be handed over. If anything is impossible in this life, I think it would be practically impossible to get an entire board of trustees—unless of course they are all employer trustees who connive together, but I think that is highly unlikely although it has happened on rare occasions—to act in that way. The fact is that the industry is calling for this measure. It is supported by the National Association of Pension Funds, by independent investment managers and by independent pension fund managers. The industry itself is calling for this measure. It is not something that we on this side of the Chamber have imposed. There is support all around the Chamber for this amendment.

Perhaps the Minister is taking comfort from his feeling that we do not have the wording correct. If that is so, we shall look at that and come back to it. I believe it is as near correct as we can make it. It has been drafted with a great deal of professional input on the part of people who are experts on pension fund rules and regulations and indeed law. I shall look carefully at what the Minister said but I would ask him also to consider seriously the points made in this short debate on what is a crucial area. This is about ethics, standards and integrity as regards pension funds. It is a matter of how not only the professionals but everyone approaches this whole area. If we had independent custody of investments, that would be yet another finger in the dike to stop some of the abuses that have taken place.

The Earl of Buckinghamshire

Before the noble Baroness decides what to do with the amendment, I ask the Minister to think again. If he would like detailed arguments from ten past ten until midnight I should be pleased to give them. However, I do not believe that that would be helpful to the Committee.

It is an important issue. I do not believe that authorising a custodian should be a difficulty. If one has authorised investment managers in this country one should be able to pick authorised custodians without difficulty. I hope that my noble friend will take note of what has been said from the Benches opposite and on this side of the Chamber. I wish to return to the issue at a later stage.

Lord Mackay of Ardbrecknish

Perhaps I may answer my noble friend. I sought to major on the point, essentially in shorthand at this time of night, about who the custodians would be.

Perhaps I may say this to the noble Baroness. She made a nice point; that I am not backward in coming forward in other parts of the Bill about regulations. I fully accept her point. Why should I be a shrinking violet in this case? I have not been able to devise such regulations as may be required in this situation to judge whether they are sensible and whether one could encapsulate all the people who should be custodians. That is what I invited her to do rather than to expand her already rather large amendment.

Baroness Dean of Thornton-le-Fylde

I accept that invitation to come back with proposals with regard to the prescribed areas. I take it on board. At this stage, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Monkswell moved Amendment No. 134: Before Clause 33, insert the following new clause:

("Payments to members of scheme

At the end of paragraph 3(3) of Schedule 22 of the Income and Corporation Taxes Act 1988 there shall be inserted—

( ) making payments to members of the scheme".").

The noble Lord said: In moving Amendment No. 134 I speak also to Amendment No. 135.

I had intended to say only a few words of introduction and then to ask the Minister to respond. However, given the Minister's response to Amendment No. 126, I have to elaborate a little more than I had intended.

Perhaps I may remind the Committee that Amendment No. 126, moved by my noble friend Lord Haskel, provides for the trustees to have a policy regarding the exercise of voting rights. The Minister responded on the basis that it was a requirement that the trustees should exercise their voting rights on shares held. It is important that we address the amendments and the intention underlying them. In that respect, I feel that I have to explain a little more fully than I had intended both what the amendments seek to provide and the reasons why I have put them down.

Amendment No. 134 amends .the Income and Corporation Taxes Act 1988 effectively to enable the making of payments to members of the scheme from pension scheme surpluses. It does not state that pension scheme surpluses have to be paid to members but that they can be paid to members.

Perhaps I may elaborate a little because I am sure that not too many Members of the Committee will have read the Income and Corporation Taxes Act 1988. It is two inches thick and is not the kind of legislation that one carries around in one's briefcase. Schedule 22 effectively states that pension scheme surpluses can be reduced or eliminated by:

  1. "(a) making payments to an employer;
  2. (b) suspending … an employer's contribution;
  3. (c) suspending … employees' contributions;
  4. (d) improving existing benefits provided under the scheme;
  5. (e) providing new benefits under the scheme".

Then there is a catch-all phrase,

There is an imbalance in that there is no mechanism for enabling payments of scheme surpluses to be made to members of the scheme. That is the intention of my amendment.

Amendment No. 134 to Clause 33 effectively seeks to do the same. Clause 33 enables the making of payments to employers and the fund where there is a surplus. My Amendment No. 135 would enable payments to be made to scheme members.

Having explained the amendments, I thought it might be useful to advise the Committee why I have brought them forward. I must go back in history to my experience which I am sure is shared by many other people working in British industry over the past 15 years. Employers found their pension schemes in surplus at the same time as companies had problems, and employers made employees redundant. Usually they themselves took a pension contribution holiday while requiring employees to continue paying into the scheme. Then, if the surplus was sufficiently large, they took extra money straight into the company. That money has usually been used in two ways: first, to pay redundancy payments, effectively paying their employees off and making them redundant and, secondly, by straight disbursement to shareholders.

If the surpluses had been used for direct investment into the company, buying new plant and machinery, enabling the workers to be more productive and therefore retaining their jobs, there would be far less criticism. But the fact that the surpluses were used directly to benefit shareholders and quite largely to disbenefit the employees has caused anxiety and a real sense of unfairness. Much of the discussion we have had this evening has been between experts in the pension field. But at the end of the day members of the pension schemes are ordinary working people and the pensioners of the schemes are also ordinary people.

One of the problems with the pension industry is the sense of unfairness. The Maxwell case was high profile with horrendous wrong being done. But a whole climate of unfairness pervades our industry and commerce, with employers having a one-sided advantage, where there are surpluses, being able to use them for their own benefit.

My amendment seeks to bring a sense of fairness and equity to the situation. I remind the Committee that the amendments do not require the pension fund surpluses to be distributed to the members of the scheme. I could have argued that strongly, with much support throughout the country. But I felt it was only reasonable to put forward amendments to the Committee that provide for the ability for pension fund surpluses to be disbursed to members. I beg to move.

Lord Mackay of Ardbrecknish

I hope to be able to persuade the noble Lord that his amendments are unnecessary. Paragraph 3 of Schedule 22 to the Income and Corporation Taxes Act 1988 sets out the ways in which a statutory surplus may be reduced or eliminated. Among the range of options is to use the surplus to improve members' existing benefits and provide new ones. Such benefit improvements may include lump sum payments to scheme members on retirement or death. It is, however, a condition of tax approval that the benefits payable to scheme members should be subject to upper limits. These are normally up to two-thirds of final salary for the pension and two-and-a-quarter times the pension for lump sums on retirement.

The purpose of these limits is to control the cost of tax reliefs given to approved pension schemes. In its effect the proposed amendment would appear to do no more than duplicate an existing provision of the Income and Corporation Taxes Act 1988 to make approved payments to members. It would also allow payments outside the approved arrangements to be made to members. That would be contrary to the pensions purpose on which the tax reliefs are founded and could add significantly to Exchequer costs. This is a tax matter, and the Committee may consider that it is best left to another place.

Members of the scheme already have the opportunity, subject to trustee approval, to have their benefits enhanced. Amendment No. 135 would not provide members with any more benefits than are potentially available under the existing arrangements. The Income and Corporation Taxes Act 1988 provides the trustees with a range of options to reduce or eliminate a surplus: for example, enhancement of existing benefits or providing new ones, which can include payments to scheme members. Of the options that are available, only a payment to the employer has additional conditions imposed upon it, originally by the Social Security Act 1990.

The effect of the noble Lord's amendment would be to make payment to scheme members subject to those conditions. One of the conditions which have to be met before a payment is made to an employer is that all pensions and payment must be increased annually in line with inflation up to the maximum of 5 per cent. for both past and future service. That may have been the noble Lord's intention, but what it achieves is in fact to curb the freedom of trustees to make benefit improvements for certain members.

The impact of the amendment would be to put at risk the ability to make discretionary payments to members by automatically requiring all pensions in payment to be annually increased in line with inflation first. I am sure that it is best to leave trustees to decide what scheme best fits their particular circumstance, but with the safeguards contained in the Bill to cover the payment to employers. I hope, having listened to my explanation, that the noble Lord can withdraw his amendment.

Lord Monkswell

I thank the Minister for his response. I must admit that his reply surprised me a little. I had not expected the use of a tax argument—if I can put it that way—to come to the fore. I thought that the Minister would rely on the argument that employers have the responsibility to top up the fund, being the major contributors to the fund, and are therefore the major beneficiaries. But the Minister did not use that argument.

I feel that the tax argument falls down in the sense that, whatever the tax regime for the employer receiving the surplus from the pension fund—I do not know what the tax regime would be and I think that it is probably not good for this Chamber to consider that—there will be certain tax regulations that apply to that; and as an exceptional item of income to the company no doubt there is some form of taxation on it. But surely the same argument would arise with employees receiving a windfall form of remuneration. They would be liable to income tax in the normal way. So that argument does not hold water.

I hope that the Government will think again on this matter. I shall not press the amendment tonight. It was a probing amendment. Tomorrow I shall read with interest what the Minister said. I hope that he will also read what I have said. Maybe we can return to the subject at a later stage. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 135 not moved.]

The Chairman of Committees

I should inform the Committee that if Amendment No. 135A is agreed to, I cannot call amendment No. 136.

[Amendment No. 135A not moved.]

Lord Lucas moved Amendment No. 136:

Page 18, line 15, at end insert: ("( ) If, where this section applies to any trust scheme, the trustees purport to exercise the power referred to in subsection (1) (a) by making a payment to which this section applies without complying with the requirements of this section, sections 3 and 9 apply to any trustee who has failed to take all such steps as are reasonable to secure compliance. ( ) If, where this section applies to any trust scheme, any person, other than the trustees, purports to exercise the power referred to in subsection (1) (a) by making a payment to which this section applies, section 9 applies to him.").

The noble Lord said: In moving this amendment I shall speak at the same time to Amendments Nos. 155 and 156.

Clearly it would be detrimental to the interests of scheme members if trustees or others made payments from a pension scheme surplus to the employer without complying with the statutory requirements. These amendments provide for sanctions to be imposed for breaches of the obligations in this regard in the Bill in order to encourage compliance. I beg to move.

On Question, amendment agreed to.

Clause 33, as amended, agreed to.

Baroness Dean of Thornton-le-Fylde moved Amendment No. 137:

After Clause 33, insert the following new clause:

("Protective cost orders

.—(1) Where, on the application of a member (in this section referred to as "the representative member") representing the views of not less than 10 per cent. of the members of a scheme or of a member-nominated trustee appointed under section 14 above, a court is satisfied that serious or persistent breaches of trust may have been committed which do not fall within section 3, the court may grant an order in such form as it considers appropriate compelling the trustees of the scheme to pay to the representative member or to the member-nominated trustee the reasonable costs of obtaining legal and other advice in order to pursue claims on behalf of the scheme.

(2) Any costs ordered to be paid in accordance with subsection (1) of this section shall be payable only upon the presentation of a certificate by the solicitors acting for the representative member or the member-nominated trustee, as the case may be.

(3) A court may grant an order under subsection (1) of this section if it is satisfied on the evidence before it that—

  1. (a) an independent trustee properly advised would have applied to the court for directions to commence or continue proceedings, and
  2. (b) on such application the court considers that it would have given leave to such independent trustee to proceed.

(4) Where a court grants an order under subsection (1) of this section it may from time to time renew or amend such order.

(5) Where a court grants an order under subsection (1) of this section it may make provision for the payment of past, as well as future costs.

(6) On an application under subsection (1) of this section, a court may grant an order notwithstanding the fact that the breaches of trust which are or which form part of the grounds for the application fall within section 3, if it is satisfied that it is in the best interests of the members so to do.

The noble Baroness said: This amendment provides for the situation in which a minimum of 10 per cent. of members, or indeed a member-nominated trustee, can go to the court and, where the court is satisfied that there is a serious or persistent breach of trust which does not fall within Section 3, for the trustees of the scheme to pay reasonable costs for the legal action to be taken. The powers of the regulatory authority are clearly covered in the Bill under Clause 3 in Part I. On the first day of the Committee stage last week, the Minister said that OPRA would have all the powers necessary to enforce compliance with the law. Later in the debate he went on to say: While I am open to considering refinements in relation to OPRA's regulatory powers where there is a good case for doing so, we should not widen its powers in such a way that it becomes involved in trust law and other matters which are best left to the courts".—[Official Report, 7/2/95; col. 161]

I agree with the Minister because trust law goes much wider and has wider duties than has the Pensions Bill. That is why we have put forward this amendment. Presently, in the absence of a protective costs order, the beneficiaries will still be left without any way of seeking redress for grievances where OPRA either has no power to intervene or refuses to intervene. I say "refuses" because there are many cases where the regulatory authorities—IMRO, for instance—have been asked to intervene in suspected wrongdoing and have refused and then those suspicions have been proven in fact.

This amendment is put forward because, first, the Bill will have limited powers; and, secondly, the trustees' responsibilities come under trust law. I should like to share with the Committee, even at this late hour, an experience which in my view makes such a clause essential.

In June 1986 a company called Imperial, which had recently been taken over by Hanson, sold two of its paper mills in the north-west to a company called Melton Meads. The trustees were challenged by members. The trustees refused to deal with the matter and investigate the serious concerns that had been raised, which included dishonest breaches of trust, from which the directors may have benefited personally. Certain beneficiaries commenced the action and their union, the GPMU, funded it. But even those funds were stretched to the point that they had to go to the courts. For the first time ever in this country a protective costs award was made.

That was in July 1993. An appeal was lodged and in July 1994 the appeal court upheld the order. The appeal court refused leave to appeal to the House of Lords, but the company petitioned the House of Lords for leave to appeal to the appeals committee, and I gather a decision on that is expected this week.

That concern began with seven beneficiaries who found no regulatory body to support them. In fact the SIB refused to even acknowledge them or help them until the case reached court. The SIB has now started its own action for fraud. The beneficiaries had no help from anybody except their union. The bill today stands at £891,000 for professional advice and support and we still do not know what the outcome will be. If the outcome is against the beneficiaries, the union will be left to fund the £891,000. But what if they had not had the benefit of the union? Who would have come to their aid? The Occupational Pensions Board said that it was outside its remit; they could not obtain legal aid for the action. They would have been left on their own in a situation where the directors of the fund are now being pursued in law.

The noble Earl, Lord Buckinghamshire, said earlier that one could wax eloquent till midnight on a previous clause. It is against that background that I could continue until two in the morning. However, I shall not test the Committee's patience that far. I beg to move.

Lord Mackay of Ardbrecknish

I have no objection in principle to what the noble Baroness, Lady Dean, proposes, but I hope to persuade her, as quickly as I can, that the amendment is unnecessary.

Trust law already provides the facility in the amendment by way of what is known as the Beddoe's summons procedure. That allows trustees and members to protect themselves from the cost of litigation on the very basis which the noble Baroness described.

Under the Beddoe's summons procedure, those wishing to engage in proceedings involving the trust can apply to the court for an order that the costs should be met by the trust. The court would grant such an order only where there is some reasonable need for litigation and where there are reasonable grounds for its succeeding.

An additional point which the Committee may bear in mind when considering the amendment is that members who are concerned about the operation of their trust scheme will in future be able to bring their anxieties to the attention of the regulatory authority. The authority in turn will be able to investigate any complaint.

The intentions behind the amendment are already met, either under existing provisions of trust law or by the introduction of the regulatory authority. I hope that I have briefly explained to the noble Baroness that the amendments are unnecessary, and that she will feel able to withdraw her amendment.

Baroness Dean of Thornton-le-Fylde

I thank the Minister for that response, but pose a question back to him although I do not know whether he will be able to answer it this evening. The Minister said that there is a provision in trust law for members to go to court. If the members are not part of a union, who will fund them? There is no legal aid for these matters. The members felt obliged to go to court direct by themselves because the matter is not covered by OPRA, or OPRA does not want to know. So who will fund them? The amendment provides that the scheme will meet those costs where an award has been achieved. It gives some support to the individual member, or to at least 10 per cent. of them, or a member-nominated trustee who is equally concerned.

Additionally, although the Minister says that trust law provides the protection sought by the amendment, I am advised that the Melton Meads case is the first of its kind in the UK courts. I wonder whether that is because the costs involved in taking on such a case are frightening. One cannot simply go to court and plead for an order; one must also provide all the back-up for that application. That involves a not inconsiderable amount. In fact, before the union reached the court the costs had escalated to around £500,000.

I hear what the Minister says. I shall read with a great deal of interest in the morning exactly what he said this evening to the Committee. I may return to the matter at another stage, but in the meantime I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 34 [Restriction on employer-related investments]:

[Amendments Nos. 137A and 137B not moved.]

Clause 34 agreed to.

Clause 35 [Provision of documents for members]:

[Amendments Nos. 138 to 141A not moved.]

Lord Lucas moved Amendment No. 142:

Page 19, line 22, after (" 50") insert ("or 51").

The noble Lord said: The effect of this amendment is to include certificates prepared under Clause 51 among the documents which trustees or managers of occupational pension schemes may be required by regulation to make available to scheme members and others. I beg to move.

On Question, amendment agreed to.

[Amendment No. 142A not moved.]

Clause 35, as amended, agreed to.

[Amendment No. 142B not moved.]

Clause 36 [Time off for performance of duties and for training]:

Baroness Hollis of Heigham moved Amendment No. 142C:

Page 20, line 16, at end insert:

("(2A) Notwithstanding the provisions of paragraphs (a) and (b) subsection (2) above, "reasonable" shall be deemed to mean not less than ten days' training within the first two years of appointment as a trustee, and not less than three days in every subsequent year.

(2B) Where the trustee, whether an employee of the employer in relation to the scheme or not, does not take time for training at the minimum level specified in subsection (2A) above, the scheme administrator shall report the matter to the Authority who shall, if it deems it appropriate, take action under sections 3 and 9 of this Act.

(2C) Every trustee shall, on his appointment, undertake a short course of training and a failure to undertake such a course within 3 months of appointment as a trustee shall be grounds for disqualification under section 24.

(2D) It shall be for each person who is a trustee, in his own absolute discretion, to decide whether such training should be provided to him by the advisers to the scheme or other firms of advisers, other independent or professional bodies, or an independent trade union recognised to any extent for the purposes of collective bargaining in relation to the scheme members concerned.

(2E) The Authority shall maintain a register of all firms and organisations providing training for trustees in fulfilment of the requirements under this section.

(2F) The Authority shall produce a code of practice for training courses and training material, in consultation with those who appear to the Authority to have an interest in the training of trustees.").

The noble Baroness said: This amendment seeks to persuade the Committee of the need for mandatory training. All trustees should be trained. It should be a condition of their assuming office that they will do so within a defined period. We all agree that a measure of training is necessary. This has been reflected in the Bill, which requires employers to provide time off for that purpose. But we do not think that that goes far enough. Unless there is a requirement, we believe that there will be schemes where the trustees will remain untrained despite the fact that trustees will continue to bear very considerable legal liabilities of which, if they are untrained, they may not be fully aware. Equally, we want to ensure that the training schemes which trustees go through are approved and appropriate. Organisations such as the Pension Trustees' Forum and trade unions could together draw up an approved list of training courses. But if we want trustees to be effective, both in their fiduciary responsibilities and in meeting their legal liabilities, and, if appropriate, to whistle blow, they must be trained. I beg to move.

Baroness Seear

I support the amendment. Given the responsibilities that trustees have to assume, it surely is short-termism and a failure to operate a "stitch in time saves nine" policy not to put money into training. To say that it would cost would be a ridiculous reply if the cost of not training trustees would be very considerable indeed. Schemes will not operate properly unless trustees are adequately trained. It would be a very good investment.

Lord Mackay of Ardbrecknish

This amendment would, in effect, require compulsory training. We are fully in favour of trustees being properly trained. But we do not believe that it should be compulsory. The training needs of trustees will vary according to the particular circumstances of each individual and each scheme. What is appropriate for one will be totally inappropriate for another. We believe that schemes themselves must decide the training needs of each of their trustees.

The Bill will require employers to allow trustees time off with pay for training. There will be redress to an industrial tribunal if there is any dispute. We do not believe it is sensible to go further in legislation. It may well be a matter which is more appropriate for the codes of practice which pensions organisations are developing. While I understand and share the wish of both noble Baronesses to ensure that trustees are properly trained, I believe that it would not be correct to be as prescriptive as they both would like to be.

Baroness Hollis of Heigham

I am disappointed by the Minister's reply. However, it is late at night. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 36 agreed to.

Clause 37 [Payment for time off]:

Baroness Hollis of Heigham moved Amendment No. 142D:

Page 21, line 1, leave out ("an industrial tribunal") and insert ("the Authority").

The noble Baroness said: In moving this amendment I shall speak to Amendments Nos. 142E to 142N. They are very straightforward. We want to ensure that where an employee does not get facilities for training, in the shape of time off, that he has an adequate recourse. Under the Bill he may take his employer to the industrial tribunal. We have no objection to that except that that system is becoming heavily overloaded with the additional functions placed on it by government. It seems sensible to keep the matter with the regulator and give him powers to make orders which must be carried out. That is what these amendments seek to do by having recourse to the regulator rather than to the more cumbersome industrial tribunal procedure. I beg to move.

Lord Mackay of Ardbrecknish

The Bill sets out a clear commitment to allow trustees time off to attend to their duties as trustees and to undergo training. Employers have given their broad support to the proposal to allow employees time off as appropriate and there is no reason to suppose that large numbers of employers, if any, will not comply. Of course, I accept that employees should have an effective form of redress where an employer chooses to act unreasonably.

Where a dispute arises between an employer and an employee who is a trustee over time off, these amendments would have OPRA rather than industrial tribunals adjudicate the matter. I cannot agree with that. OPRA's role is to enforce compliance with obligations concerning the security of pension schemes, not with employment matters. Industrial tribunals are much better placed to examine the full circumstances behind this kind of dispute and settle matters, awarding compensation and restitution of salary where appropriate. Any decision by an industrial tribunal will be in the public domain, so the intention behind one of the noble Baronesses' amendments would be fulfilled.

Our proposals mirror very closely the existing provisions relating to trade union and health and safety officials. In both cases there are limited rights to paid time off for the performance of recognised duties. In both instances it is recognised that disputes are matters relating to employment and fall within the jurisdiction of industrial tribunals. I believe that that is the right place for disputes regarding time off for trustees to stand.

Baroness Hollis of Heigham

I thank the Minister for that reply which clearly hinges on the notion as to whether time off for being a trustee is an employee-employer relationship in which it comes through the industrial tribunal, or whether it is instead a matter of being a trustee. The obligations of trustees to and for their schemes rest with the regulator. Our view is that this is an issue which belongs to the second—the trustee—category. The first category is an employee category.

However, we shall take on board what the Minister said and we may return to the matter on another occasion. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 37 agreed to.

Clause 38 [Time limit for proceedings]:

[Amendments Nos. 142E to 142H not moved.]

Clause 38 agreed to.

Clause 39 [Remedies]:

[Amendments Nos. 142J to 142N not moved.]

Clause 39 agreed to.

Clause 40 [Professional advisers]:

Baroness Hollis of Heigham: moved Amendment No. 142P:

Page 21, line 28, at end insert: ("( ) Except with the consent of the Authority, the auditor to the scheme shall not be the same person, nor belong to the same firm as, the auditor to the employer in relation to the scheme.").

The noble Baroness said: In moving this amendment I shall speak to Amendment No. 142Q. I am sorry that such an important amendment has to be discussed quite so late at night although I shall try to be extremely brief. All the evidence from the Maxwell affair shows that there were at least six layers of "whistle blowers" who did not blow the whistle. One of the reasons, and only one, was that Maxwell the company and Maxwell the pension schemes used the same professional advisers. The House of Commons Select Committee made much of this point.

There was a conflict of interest and in the face of the powerful presence of Maxwell it was understandable, although regrettable, that many professional advisers resolved that conflict of interest in favour of the employer and not in favour of the scheme. With the experience of Maxwell it is crucial that professional advice be seen as disinterested. It is crucial that, when necessary, professional advisers are able to whistle blow. I ask the noble Lord opposite whether it is more likely that their advice is to be disinterested if they serve the trustees only or the trustees and employers both. Are they more likely to whistle blow if they serve trustees only or if they serve trustees and employers both? We all know the answers to those two questions. As Maxwell has shown, serving two masters inevitably produces conflict.

The Minister may say - he would be right - that the trustees appoint professional advisers, not the employer. But he rejected our previous amendment which sought to ensure some equity or balance on the boards of trustees), thus ensuring a built-in majority for the employer whose interests remain preponderant. Given that the employer will naturally see the advantages of sharing advisers, including that of cheapness, one cannot rely on the trustees being as independent of the employer's view as one might wish.

We are not unreasonable. We recognise that there can be exceptional circumstances; hence the phrasing of the amendment, which seeks to ensure that if a scheme wants to share the same professional advisers as the employer it must first seek the consent of the regulator. That seems to us to give the necessary flexibility in special circumstances where, perhaps because specialist knowledge is required, it would be useful to share scheme professionals. For the main part, we firmly believe that one way of checking Maxwell would have been for the company and the pension scheme to have separate advisers. We want to ensure that at least that never happens again. I beg to move.

10.45 p.m.

Lord Mackay of Ardbrecknish

The amendments relate to Clause 40 which deals with the appointment, role and responsibilities of pension scheme professional advisers. The noble Baroness referred to previous schemes which have gone wrong, such as the Maxwell scheme. I should like to point out that at that time there was no one to blow the whistle to, whereas in the future the whistle can be blown to the regulatory authority.

Amendment No. 142P prevents the same person or firm from acting as auditor for both the scheme and the employer without the consent of the regulatory authority. To inhibit appointments in this way may increase costs to both schemes and employers by complicating flows of information and knowledge without necessarily providing any greater security to the scheme.

In fact, the Pension Law Review Committee was in no doubt that there can be significant advantages in having the employer's auditor as the auditor of the scheme; for example, it is the employer who is ultimately responsible for adequate funding in a balance of cost scheme and it is therefore helpful if the scheme auditor is familiar with the employer's business. For that reason we accepted its recommendation that the trustees should be free to appoint the auditor acting for the employer.

It is intended that regulations made under subsection (5) will require trustees to draw up terms of engagement with auditors. Such terms will make clear the respective roles and responsibilities of employer, trustees and auditor. They will require the auditor to take instructions from, and report to, the trustees and to make known to the trustees any areas of conflict.

The PLRC recognised, as we do, that there may be cases where it may be improper or inappropriate for the auditor to act for both the scheme and the employer. It saw no role for the regulatory authority because professional bodies are well experienced in issuing guidelines for managing such conflicts. Indeed it recommended no change, and nor do we.

I now turn to Amendment No. 142Q. The Government support the objectives of Amendment No. 142Q and in fact we intend to make regulations under Clause 40(5) (b) which will make provisions as to the terms on which the trustees will appoint professional advisers. Our intention is that the regulations will require an actuary working for both the employer and the scheme to declare this fact, to disclose any conflicts of interest and to notify the employer and trustees if such conflicts make it improper for him to act for either party. It is this kind of detail which we believe is best attended to via regulations rather than in primary legislation. The use of regulations also confers the flexibility to prescribe any additional requirements which may become necessary in future.

I thought it important to address the two issues which the noble Baroness raised even at this late hour and at perhaps a little more length than is usual. However, both points are extremely important and I wanted to get on the record the way in which I believe that the abuses she mentioned might be avoided.

Baroness Hollis of Heigham

The Minister has drawn our attention to Clause 40, to which this is an amendment. I take little comfort from his reply, although I take comfort from the fact that under Clause 40(4) regulations may make exceptions to subsections (1) and (2), and this may be a case where a different government might seek to make regulations to do by regulation that which the Minister is not prepared to accept on the face of the Bill. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 142Q not moved.]

Clause 40 agreed to.

Clause 41 ["Blowing the whistle"]

[Amendments Nos. 142R to 142W not moved.]

On Question, Whether Clause 41 shall stand part of the Bill?

Baroness Seear

I wish that this matter had not come at 10 minutes to 11 when the Chamber is practically empty because I regard the clause as very important and one that we should not accept. It should be considered in conjunction with the amendment rejected by the Minister in Committee last week when we asked to strengthen the regulator's powers. It is complementary to that desire to see a far stronger regulator able to take pro-active action, and to take it effectively, and it is why I oppose Clause 41.

Clause 41 relies for the operation of the scheme upon the whistle-blowing which will come primarily, if the Bill remains as it now is, from the accountant, the auditor or the actuary. It is not good enough to rely on those people to blow the whistle in order to make the scheme function properly. But that is what the Government are doing.

We believe that the responsibility should rest with the regulator. We want a different, much stronger regulator than is envisaged in the Bill, partly because we do not believe that it is satisfactory to put actuaries and administrators in a position in which they are serving the scheme or the company and at the same time reporting to the Minister. That is a conflict of interest about which they are much concerned. But while that is important, what is more important is that we are relying on the whistle-blowing coming from those professionals rather than being in the hands of an outside authority which can take action to see that the schemes are running properly.

I know that the Minister will say that there are 150,000 schemes and ask how a regulator can thus regulate them. Factory inspectors have been doing this for a long time. They go into an organisation whenever they see fit and take the action that they then think is necessary. Factory inspectors can do that. Why cannot the regulator do it to enforce the Bill's requirements? I know that the Minister is dead against this, but I want to put on record the fact that it weakens the scheme to rely on whistle-blowing by the actuary and the administrator. It is an excuse for not having the kind of regulator that we need, with the power that could be given were the Government prepared to spend the money.

This time of night is not the moment to have a great debate on the issue. I am aware that the Minister's mind is completely closed on this, but I want it on the record that this is not the right way to go about this; the scheme is undermined before it starts; and the regulator does not have adequate powers. I oppose Clause 41.

Lord Dean of Harptree

I hope that the clause will remain in the Bill. I like the concept of whistle-blowing. It is fair better that the authority should concentrate on those schemes where something appears to be going wrong rather than crawl over the large number of schemes that exist.

Perhaps I may raise two detailed points with my noble friend the Minister before he replies. First, the Bill provides that if the auditor or actuary believes that something is going wrong he must immediately give a written report to the authority. I hope that that does not preclude giving those in the scheme the opportunity of putting things right.

Secondly, as regards the whistle-blowing, reference is made in the clause only to the auditor or the actuary. I hope that it is made clear somewhere in the Bill that anyone directly related to the scheme—in particular, trustees or members of the scheme—will be able to blow the whistle if they believe that to be appropriate.

Lord Mackay of Ardbrecknish

The noble Baroness, Lady Seear, returned to an issue that we debated on the first day of Committee and on Second Reading. Perhaps I may say first to my noble friend Lord Dean that the lack of "immediately" in the scheme means that professionals might be inhibited from having informal contact with OPRA before making a formal report. We believe that wherever there is a suspicion of irregularity a report should be made and the authority should be left to decide whether or not that constitutes a breach of obligation. However, we shall continue to talk to the professional bodies about both the material matter and the immediacy to ensure that proper account is taken of their concerns.

I was asked whether only actuaries and auditors may blow the whistle and be heard. This is an important point and I re-emphasise that anyone associated with the scheme will be able to blow the whistle. Only the actuaries and the auditors will be under a duty to do so.

The noble Baroness, Lady Seear, is mistaken in her desire to widen the role of the regulator to be the investigator of every single scheme on a monthly or yearly basis. It is better that the regulator should concentrate on the schemes that have been brought to his attention and which may have something wrong with them.

The noble Lord, Lord Marsh, who I am sorry but not surprised to see is no longer in his place at this late hour, spoke eloquently to the Committee on this subject. He rightly drew attention to the fact that vigilance and whistle blowing by professionals, trustees and members themselves is an extremely effective way of preventing abuse. In the past, the problem was that there was no one with the power to act on such reports. By setting up the authority we are providing the means to investigate and act wherever a report either from those who have a duty or from any other source indicate that there is a need to do so. I urge the Committee to reject the noble Baroness's opposition to Clause 41.

Baroness Seear

I wish to raise one further point even at this late hour. The time when it is important for the regulator to go in is before things have developed into a serious condition. Surely, in real life what will happen will be that in relation to a borderline case, when things are beginning to look unsatisfactory but have not developed into a serious state, the temptation will be not to take action because it will be difficult. However, that is the time when action ought to be taken, not when the scheme has practically collapsed. Anyone can see that action should then be taken but it will be too late.

I cannot believe that in real life one will have the kind of warning that is necessary; when it is doubtful that things are going wrong but nonetheless there are suspicions. If there is widespread whistle blowing from anyone who is interested that will be sufficient without putting the onus on the authority, which will believe that it is its responsibility but will be reluctant to undertake it.

Lord Mackay of Ardbrecknish

I hope that I have made clear to the noble Baroness that, whoever blows the whistle, the regulatory authority will look into the matter that is brought to its attention. We are saying that there is an obligation on the two specified people—the actuary and the auditor—to blow the whistle because we believe that they are in a special position.

In the circumstance of a scheme going wrong, which was outlined by the noble Baroness, if the regulatory authority carried out its weekly, monthly or annual inspection of the scheme the week before something went wrong, frankly, our criticism would be well made. That is why it is important that the actuary and the auditor are under an obligation to blow the whistle whenever they see something going wrong, and anyone else connected with the scheme is able to do the same.

On Question, Clause 41 agreed to.

Clause 42 [Other responsibilities of trustees, employers, etc.]:

[Amendments Nos. 143 and 144 not moved.]

Lord Lucas moved Amendment No. 145:

Page 23, line 6, at end insert ("and for a prescribed period").

The noble Lord said: The purpose of this amendment is to enable us to require that scheme books and records should be retained for at least a specified period. I beg to move.

On Question, amendment agreed to.

Clause 42, as amended, agreed to.

Clause 43 [Resolution of disputes]:

[Amendments Nos. 145A and 145B not moved.]

Clause 43 agreed to.

Lord Lucas

I beg to move that the House do now resume.

Moved accordingly, and, on Question, Motion agreed to.

House resumed.

House adjourned at one minute past eleven o'clock.