Consideration of amendments on Report resumed.
Clause 123 [Power to amend provisions of Pensions Act 2004 relating to contribution notices etc]:
77C: Clause 123, leave out Clause 123
The noble Lord said: My Lords, I shall speak also to the other amendments in the group. I hope that noble Lords will forgive me if I take a little time in speaking to these amendments as I hope it will help with subsequent amendments. Perhaps I can also take this opportunity to make clear, given the complexity of these amendments and the time it has taken to bring them together, that if there are residual issues, I accept that we should return to them at Third Reading.
I am pleased to return to the important issue of amendments to the Pensions Regulator’s anti-avoidance powers. Following our debate in Committee in July, the Government have undertaken further detailed discussions with a wide range of key stakeholders. We have listened to concerns that the detail of the new powers should be put on the face of the Bill and we have refined the legislation to ensure that it delivers on our intention to strike the right balance between protecting scheme members’ benefits and ensuring that the legitimate interests of employers and investors are not unduly hampered.
There are a number of interested parties and I am grateful for the helpful and considered input we have received, in particular from the CBI, the British Private Equity and Venture Capital Association, the TUC as well as the NAPF, the Association of Pension Lawyers and the Institute for Turnaround. As I have previously explained, in light of these consultations, the Government have concluded that the most appropriate way of tackling the kinds of risks posed by new business models offering alternatives to insured buy-outs of pension schemes is to amend the regulator’s anti-avoidance powers. But we want to provide certainty for trustees, employers and investors about how the powers will be used. The Government have listened to the concerns raised both in this House and among consultees that the details should be in primary legislation and that there should be an appropriate framework of safeguards to ensure that the powers do not apply indiscriminately to individuals or corporate bodies. This set of government amendments seeks to deliver the detail.
I should like to take noble Lords through some of the key changes, although I believe that we may return to other points later on in the debate. The government amendments will remove Clause 123 and in its place introduce a new clause as set out in Amendment No. 78A which seeks to put the key measures in the Bill. Despite the removal of Clause 123, I would like to confirm to noble Lords that the assurances I gave to the House in relation to this clause still stand in relation to the new provisions that have been introduced by these amendments in my name.
Before I go on to explain the detail of the government amendments I would like to say a few words about the regulator’s clearance procedure. Clearance is a voluntary process that allows employers and others to obtain a statement from the regulator that it would not be reasonable to use its powers in relation to a particular event. Once given, clearance is binding on the regulator, provided the information that the employer provided is not materially different from the circumstances of the case. This will not change. No clearance statement that was given before the announcement of these proposals will be undone as a result of the amendments that I am proposing today. Further, since 14 April 2008, any clearance statements issued by the regulator would cover the use of the contribution notice and financial support direction powers both as they stand, and as they would be amended by these amendments.
Turning to the first issue—I should point out that I am referring to paragraphs 1, 2, 3, 4 and 5 of the proposed new schedule—we propose to introduce a new alternative test for the use of the contribution notice power. This is set out at paragraph 2 of the schedule which amends Section 38 of the Pensions Act 2004 and inserts proposed new Sections 38A and 38B. Under Section 38 of the Pensions Act 2004, the regulator may issue a contribution notice where it considers that the main purpose, or one of the main purposes, of an act or failure to act was to avoid the employer’s debt to the pension scheme as set out under Section 75 of the 1995 Act. This test of intent may frustrate the use of the regulator’s powers even in circumstances where intervention may be appropriate. For example, it can be difficult to intervene if a party has simply failed to consider the interest of the pension scheme or the employer’s liability to the scheme, even if the effect of the act was so significant as to reduce to nil the support of the employer standing behind the scheme.
The Government consider that it is appropriate for the new alternative test to apply where the effect of an act or failure to act was materially detrimental to the likelihood of a member receiving their accrued benefits. I am pleased to say that there was considerable support for this approach from a number of consultees, although some were concerned that this proposal was not adequately targeted. We have taken these concerns seriously and, working with stakeholders, we have therefore introduced the following three important filters in the primary legislation to guide the use of this power.
Paragraph 3 of the proposed new schedule places a requirement on the regulator to set out a statutory code of practice for the circumstances in which it expects to use this power. This is intended to narrow its application and the regulator has already published a draft list of circumstances to provide greater clarity on the approach. There is an established understanding of the role of codes of practice: they are given sufficient weight in courts and tribunals; they are subject to parliamentary scrutiny; and they can be used in evidence. They cannot, of course, usurp the role of primary legislation. The code of practice, on which the regulator has consulted and which has been approved by the Secretary of State after a period of laying in Parliament, gives rise to clear and legitimate expectations about the likely actions of the regulator. A draft code that has had a resolution passed against by either House during the laying period could obviously go no further.
The public law duties of a body such as the regulator set high standards for the reasonableness of its behaviour. Acting in a way that was contrary to reasonable and legitimate expectations, prompted by a code of practice, would place the regulator at high risk of a successful legal challenge. I therefore believe that we have settled on the best approach. It avoids the uncertainty that might result from a non-statutory guidance and the potential for unnecessary legal dispute that could result from attempting to use legislation to deal with concepts that would be better treated in codes or guidance. I am glad that stakeholders such as the CBI, with which we have worked closely in developing our amendments, share our conclusions.
The second important filter is provided by the factors that we have set out in the Bill at proposed new Section 38A(4). The regulator must consider these factors, where relevant, when determining whether an act or failure is materially detrimental. The test would engage only where there is a material detriment to the likelihood that members will receive accrued scheme benefits. This list of factors is intended to guide the regulator’s considerations and therefore provide greater certainty to the industry. It is a non-exhaustive list and there are two reasons for this. First, the Government intend that employers should be able to put other factors to the regulator for consideration, where relevant, as part of their representations. The regulator has provided us with examples where this has happened and changed the outcome of the case to the extent that no action has been taken. Secondly, the pensions market is evolving, with new solutions being developed to enable sponsors to manage their pension liabilities. New risks of detriment to scheme members may emerge and it would not be possible to cater for all factors that may be relevant to a particular case. The amendment also includes two regulation-making powers to add new factors and to vary this list by amending existing factors. We do not envisage making regulations immediately but they provide flexibility to do so should the need arise.
The third filter is the new statutory defence set out in Section 38B. This is designed to ensure that where the party had undertaken due diligence before the act and considered and, where appropriate, mitigated the material detriment, and could reasonably conclude that the act would not be materially detrimental, a notice on the grounds of material detriment could not be used. The Government’s consultation on powers put forward a statutory defence based on the concept of whether the detrimental effect was reasonably foreseeable by the relevant parties at the time of the event. In response to that consultation and following helpful analysis from stakeholders, particularly the Association of Pension Lawyers, the Government consider that, on reflection, the concept of “reasonable foreseeability” would be too wide to provide sufficient comfort to be workable.
The Government’s intention is to allow those undertaking business transactions to self-regulate, to a certain extent, even if an act is within the scope of the material detriment test and the circumstances and factors limiting the use of the new power. The Government have therefore modified their approach, taking account of the input received, and the amendment sets out a clear three-step process for establishing the defence. It is based on the circumstances prevailing at the relevant time and on what the person knew, or ought to have known, at that time. It is designed to reflect the current due diligence process that should apply to a sponsor’s consideration of the impact of an act on the pension scheme. That is intended to minimise undue impact on business. This approach would allow the relevant party to demonstrate, with evidence, that it was reasonable to conclude at the time that the effect of the act, or of failure to act, would not be materially detrimental. The government amendment includes a power to vary that defence as appropriate in the light of experience in operation.
This new limb of the regulator’s power to issue contribution notices has important controls that apply in respect of individuals and others. As I have explained, the use of the power would be circumscribed by the circumstances set out in the regulator’s code, and the power would apply only where there had been a material detriment. Individuals could also rely on the statutory defence. Importantly, the government amendments would create two new reasonableness factors for the regulator to consider before considering issuing a contribution notice. These are, first, a new mandatory requirement that the regulator must consider the reasonableness of the party’s actions in the circumstances of the case and, secondly, a new requirement that, where relevant, the regulator should consider whether there was a transfer of value to the party who could be subject to the contribution notice. These new factors create important protections for individuals, including new protection for individuals in relation to the existing powers.
The government amendments also include a number of other important changes to the regulator’s powers to ensure that they operate effectively. We intend to remove the words,
“otherwise than in good faith”,
from the second limb of the existing contribution notice test. The current test sets an inappropriate evidential hurdle: it requires the regulator to prove that a person’s intent was to avoid a debt and to prove that the act was undertaken in bad faith. That can be almost impossible to prove; evidence of bad faith can be concealed, or it may not exist.
It is important to recognise that “good faith” does not currently apply in relation to the first limb of the existing test—that is, where a party is seeking to avoid recovery of a debt. Indeed, it is this other ground, which has never included a good faith element, that the regulator tells us is usually the relevant ground for employer-related actions, which would usually be the ones of concern to employers and associated or connected companies or individuals. The removal of good faith from one ground will not have any effect on this other ground at all.
The absence of that requirement in that situation has not placed any undue burdens on sponsors or individuals. During our consultation, no one provided evidence that this has led to situations where the regulator has used its powers unfairly. However, I understand the concern that there must be a balance, and we must avoid any undue or disproportionate impacts on business. For that reason, further safeguards have been designed in response to the specific concerns raised. Those additions, which are set out at paragraph 7 of the proposed new schedule, will provide greater certainty and ensure that business is not hampered. The safeguards include both the new reasonableness factors that I have just referred to and a requirement that, where relevant, the regulator should consider the effect of the act, or failure to act, on other creditors and the likelihood of their being paid. This is an express requirement on the regulator that, where relevant, it should consider any detriment to the scheme in the context of a wider environment. That would apply in particular, for example, in situations where companies are in distress.
The amendments also introduce a new alternative test for financial support directions. This is a correction to an anomaly in the trigger for the use of this power but it will not extend its range. I note that there are some amendments in relation to good faith and the changes to the FSD power; perhaps we will have the opportunity to discuss these further in the course of debate.
We also want to enable the regulator to direct a contribution notice or financial support to the relevant scheme following a bulk transfer. This would apply only where the test for using these powers would have been satisfied had the transfer not happened. The provisions are designed to correct an unintended effect of the current legislation that puts members’ benefits and the PPF at risk. New Sections 38A(5), 39B(8) and 43B(8) set out three regulation-making powers. These powers are intended to deal with situations relating to the calculation of debt, the method of transfer and the destination of members; that is, the scheme or arrangement into which they are transferred. In particular, new Sections 39B(8) and 43B(8) provide regulation-making powers to apply the new provisions—Sections 39A and 43A—to arrangements other than standard transfers from one scheme into another to enable the regulator to continue to protect members’ benefits where the transfer or other arrangements could put those benefits at risk and to ensure that the regulator’s powers remain effective in an innovative market.
Regulations made under these three new powers would require consultation under Section 317 of the 2004 Act, and are subject to the affirmative procedure. New Sections 39B(10) and 43B(10) and paragraph 16 of the new schedule provide that for the first set of regulations made under new Sections 39B(8) and 43B(8), the resulting regulations will have retrospective effect to the date of tabling the amendments—that is, 20 October 2008. The Government consider that that is crucial to prevent the kind of behaviour that these provisions are aiming to address. There will be a significant risk in not making this power retrospective, and that from the date of announcement of the changes, the market would be aware of the possibility of circumvention of the regulator’s powers in relation to transfers. It would then be open to develop alternative methods of transfer or alternative types of schemes or arrangements before the Government made regulations to prevent this. That could create serious risks to scheme members’ benefits and the Pension Protection Fund.
New Section 39B(10) provides that the retrospective effect of the regulation-making power would apply in a more limited way to subsequent regulations, which would have effect from the date the Government announce their intention to make such regulations. New Section 43B(10) provides the same in respect of financial support directions.
I emphasise that the regulation-making powers at new Sections 39B(8) and 43B(8) are targeted. They are limited to situations where there is a transfer, and relate only to ensuring that the previously unforeseen gaps in the current legislation that the Government are attempting to address with these specific amendments remain closed. The powers are circumscribed; they are not Henry VIII powers to amend the primary legislation. More importantly, regulations made under this power would not affect the overwhelming majority of employers; they would apply only to those cases where the test for a contribution notice or financial support direction had been met.
Finally, we intend to make it clear that contribution notices can be issued in relation to a series of acts or failures to act, and not simply in respect of a single act. The Government consider that the Pensions Act 2004 should already be read in this way but is amended in the legislation for clarity. This clarification was not considered unreasonable by many of the responses to the consultation, although most respondents were critical of the proposal that it should have effect from 2004. The Government’s clarification would therefore come into effect from Royal Assent, except where the series would apply to the new detriment test. In that case, the clarification would come into effect from 14 April 2008, the same time as the “material detriment” test comes into effect. The Government have sought to avoid the confusion for all concerned that would arise if this test and the clarification provisions that apply the series to that test had effect from different dates.
It is the Government’s view that the amendment would not disturb the regulator’s current approach. The Government consider that the amendments will allow the regulator to intervene where appropriate without unduly hindering legitimate business and that the anti-avoidance powers would remain effective powers of last resort.
I apologise again for a somewhat extended introduction, but I thought that it was important to get this on the record. I beg to move.
My Lords, I thank the Minister for his comprehensive introduction to this group of amendments. I have great pleasure in supporting Amendment No. 77C and the removal of Clause 123. My noble friend Lord Lucas and I have tabled a number of amendments to the other amendments in the group. We shall not come to them just yet, but I will make some opening remarks on this area.
The Minister will recall that we spent several days in July debating the Government’s amendment which inserted Clause 123. He will doubtless recall that we were critical of the Government for introducing such a wide power on the back of what we saw as a flawed consultation in the sense that there was no evidence that the Government were listening to any of the responses that they had received. There was no regulatory impact assessment, and there was wide concern among business groups that the Government simply did not understand the practical impact of their proposals. As the Minister will recall, we asked him not to press his amendment so as to enable proper negotiations during the summer. It is, however, a surprise that the Government have concluded that the amendment that they forced through in the summer, which is now Clause 123, is to be removed from the Bill. We say amen to that.
I pay tribute to the Minister, his colleagues in the department and the staff of the DWP for being prepared to reopen the issues and engage in constructive dialogue with the people who have put the concerns to them. While the legislation raises issues that we will wish to probe in the remainder of our session, we are much happier with its construction—there is not the wide Henry VIII power, but a proper employer defence. We have the substance now in primary legislation; indeed, we even have a draft statutory code of practice, for which I thank the Minister. I shall not say anything further at this stage other than to thank the Minister for agreeing that we can come back at Third Reading if any points arise. The Minister will be aware that, because of late tabling, we received comments from the interested parties at a very late stage, and we cannot be sure that we have tabled amendments which allow us to tease out all the matters. I welcome the amendment.
My Lords, from these Benches, I welcome the amendment and thank the Minister for his comprehensive introduction. We, too, are pleased that the Government have got over their macho moment when they were pushing that amendment in July. Wiser counsels have prevailed. I am glad to see that there has been extensive and thorough consultation during the summer. As I listened to the details of what the Minister said, only one question arose: is he sure that the Pensions Regulator does not feel unduly fettered in its activity by all these changes? In general, however, it is clear that great thought has been given to the matter, and we are very pleased that much more properly thought through and consulted on rules are coming forward.
My Lords, I add to the chorus by saying that I am delighted by what the Government have done—it is great progress. Although I have tabled many detailed amendments, they focus on one matter, which is the code and how secure people can be in the belief that the matters in it are those to which the material detriment test and other aspects of the amendment will apply. Anybody involved in the activities set out in the code, unless they are of criminal intent or do not have their heads screwed on, should know that they should seek clearance for them, or they should read the regulations extremely carefully and make sure that they do everything by the book. But if it is possible to go outside the code and trespass on other areas of ordinary commercial life or other sorts of transactions, the protections offered by this structure become much less relevant—all the defence that is there of having gone through the proper processes to make sure that you have not caused detriment. If you thought that this was not a matter that would ever come under these provisions you would not have done that. Your records will not be in place and you will be in deep trouble.
As the Minister said, you cannot fetter the regulator's discretion. It will be a big matter how individuals view this and how they are advised to view this; whether they are told by their lawyers, “Look, this is something that is reasonably safe and I would not worry about it too much”, or “You are doing something every day that might attack the pension fund” and you will have to get clearance every time you breathe out, near enough. The voices that are coming from the lawyers are going in that direction.
The Minister says that he expects there to be a peak in applications to the regulator soon after these provisions come into force and that with experience they will relatively quickly die away, as they did when these provisions were first introduced in the previous Act. I hope that that is right. To a large extent, we trust the judgment of the Minister and his officials that they have things right in that regard and that is the way that things will actually work. But the Minister needs to say more about the circumstances under which he sees the regulator going outside the code to use the powers that are in this amendment for something that does not fall within the sort of transaction set out in the code.
There is a considerable worry out there, particularly among those people who are involved in trying to sort out companies in difficulties who have to move fast and take rough and ready decisions to make things work. They have to take risks, although they often do not benefit enormously from doing so. They are not in there to make a great capital gain for themselves but as hired hands to put out the fire. They will be taking enormous risks under the terms of this amendment, and it comes down to, will the regulator stick within the code or start running outside? If the Minister could give us as much comfort as he can that he cannot see circumstances where the regulator would need to go outside the code, that would be a great help in calming people’s fears. There is a worry that the regulator might choose an unexpected opportunity—perhaps not that serious an opportunity—to solve a particular problem by saying, “I have seen the code but I don't feel like being bound by it in these circumstances”.
My Lords, I will respond briefly to those comments. Amendments are about to be moved to the amendment, but I should like to say that I am grateful for the support and encouragement from all three noble Lords who have spoken. I add my thanks to the staff of the DWP, who worked extensively and diligently on moving from where we are. The noble Lord, Lord Oakeshott, called it our macho moment. I am not sure that I would fully subscribe to that. However, they have done a substantial job but have engaged fully with stakeholders, which has been the key to moving this forward.
The noble Lord, Lord Lucas, posed a very real point about what comfort there is in the regulator's code. The regulator's code, as I said, has evidential value and the regulator must always have regard to it, although the regulator would always and must act on a case-by-case basis. In the Government’s view, it would be difficult to argue that the regulator could reasonably act beyond the code unless there were frankly exceptional circumstances. However, the regulator tells us that it is unable to think of any circumstances in which it would want to act outside the code. I hope that that is at least a degree of reassurance to the noble Lord.
On Question, amendment agreed to.
78: After Clause 123, insert the following new Clause—
“Financial Services Authority: duty in relation to Pension Protection Fund
The Financial Services Authority must exercise its powers to regulate those bodies for which it is responsible so as to minimise the risk of compensation from the Pension Protection Fund becoming payable in accordance with Part 2 of the Pensions Act 2004 (c. 35).”
The noble Lord said: My Lords, this is to some extent a probing amendment; I apologise for moving it on Report rather than in Committee. It is prompted by the collapse, in particular, of Lehman Brothers and the hole that that exposed in its pension fund. Clearly, I do not need to tell noble Lords that there must be a considerable danger that other high-rolling banks’ pension funds will also be at risk. It struck me as I studied those reports and thought about the Lehman Brothers pension fund that organisations regulated by the Financial Services Authority, more than almost any other more traditional businesses, can go so fast from feast to famine. They can be in a situation, as Lehman Brothers appears to have been, where they are making large profits and large bonuses are being declared, and then suddenly go into administration. There are reports that there may be a deficit of as much as £100 million in the Lehman Brothers fund. I know that there have been some reassuring noises that it will not be as much as that, but it is public knowledge that it is being considered for admission to the Pension Protection Fund.
The spirit of the amendment is that there should be some duty or extra responsibility on the FSA to be aware of how quickly banks can go into deficit. There is also of course a large deficit in the pension fund of Northern Rock. I suggest that this issue should at least be drawn to the FSA’s attention, when these situations develop so fast. I ask the Minister if he has information to give us, particularly on the Lehman Brothers pension fund. I beg to move.
My Lords, I have only a small contribution to add to what my noble friend has said. He is the City expert; there are many others in this House, and I am not one at all. As a lay person, I have been surprised that the FSA does not appear to have any powers to protect these company pension schemes. Some of the recent newspaper reports may not be accurate when they say that some foreign owned-companies in this country have raided pension schemes before being declared bankrupt, but it makes one wonder whether the FSA powers in this area are as strong as they should be. Taxpayers should at least know that somebody is looking out for their best interests to prevent compensation being paid out from the Pension Protection Fund. I would welcome the Minister’s reassurance on this point.
My Lords, I would be surprised if most of the points of the noble Lord, Lord Oakeshott, were not covered by Section 146(1) of the 2004 Act:
“Regulations may provide that where the Board is satisfied that an eligible scheme was not such a scheme throughout such period as may be prescribed, the Board must refuse to assume responsibility for the scheme under this Chapter”.
That would clearly cover the point in part. I also note that there is a debate on the economy, to which the Minister will no doubt—no, perhaps he will not be contributing to that debate on Monday. I am sure that regulation by the FSA will figure somewhat strongly in it.
My Lords, the amendment of the noble Lord, Lord Oakeshott, responds to a keenly felt issue in our current economic situation, and gives me the opportunity to discuss the important issues he raised in relation to the PPF and the FSA. It is important that we ensure clarity regarding regulatory roles and consistency in approach. I am pleased to say that the current arrangements provide a flexible and robust framework for protection of the PPF.
I agree with the broad intention behind the amendment. When the Government established the PPF under the 2004 Act we also created the Pensions Regulator and gave it an explicit objective to protect the PPF. We saw then, along with all sides of this House, that the PPF had to be protected adequately. Although I can see the intention behind the amendment, I do not agree that it is appropriate. It would duplicate the existing arrangements, which at worst could undermine the effectiveness of our regulatory regime.
The Government work closely with business to develop regulations that complement and do not complicate the way people work to keep the UK competitive, mindful of potential regulatory burdens. Well targeted and proportionate regulation can deliver effective outcomes for the market, scheme members and the PPF. This amendment is neither well targeted nor proportionate: it would simply increase regulation to no obvious benefit.
The Pensions Regulator is the regulator of all work-based schemes, including those within the financial sector that are sponsored by FSA-regulated firms. It has an express duty to protect the PPF, and in so doing provides a holistic and consistent approach to minimising the risk of situations arising which may lead to compensation becoming due. The regulator’s approach to minimising the risk to the PPF through regulating scheme funding is designed to be flexible according to different circumstances. The regulator considers wider aspects, including the strength of the employer that is responsible for supporting the scheme.
The FSA’s statutory objectives relate to the regulation of firms in the finance sector and the protection of consumers of those firms’ products and services. It does not consider the firms’ pension schemes from the perspective of the schemes’ funding status, or the impact on scheme members. The FSA has rules for taking into account the impact of a firm’s pension obligation on the prudential position of the regulated firm. Therefore, the FSA’s focus is not the pension scheme itself and its assets and liabilities, but rather the firm’s funding obligations to the pension scheme. There are well defined and adequate regulatory arrangements in place between the FSA and the Pensions Regulator, and they work closely together on the supervision of pensions according to their statutory functions. Indeed, the noble Lord asked for such co-operation. These arrangements have been the subject of a recent independent review led by Paul Thornton. The review, which was completed in June last year, found that the existing framework was working well. Measures were recommended, however, to further strengthen this liaison, which the Government accepted. I am pleased to say that the two bodies have undertaken a programme of well co-ordinated activity to implement the review’s proposals.
For example, there are regular meetings at official level on areas of mutual interest, including management of risks to DC. The amendment would also mean that financial capability was included, alongside regular bilateral engagement at chief executive level. This is underpinned by a Memorandum of Understanding. This joint working has resulted in a number of positive outcomes, including publication of a joint guide on the regulation of workplace contract-based schemes. An FSA-regulated firm would be treated differently from those schemes sponsored by companies in other sectors. It is also worth noting that this amendment would mean that schemes sponsored by an FSA-regulated firm would be treated differently from those schemes sponsored by companies in other sectors. My apologies; that note is nonsense.
There is no obvious reason to single out banks and financial institutions, but not other sponsors with industry representatives, to clarify the respective roles and responsibilities, and similar schemes. Schemes should have equal protection in law, no matter the sector, particularly in those areas where the regulator and the FSA work together.
In considering the additional duty for the FSA in relation to the financial sector, we would also need to consider the duty in respect of other regulated industries and other sectors. The airline industry and others are subject to economic regulation and have significant pension schemes, as do other sectors, regardless of the status of regulation to which they are subject. The amendment would therefore lead to an increase in regulatory burden and to inconsistent and incoherent arrangements in respect of other industries—for example, regulation of pension schemes in respect of the protection afforded to the PPF. The Pensions Regulator is the sole, proactive, risk-based protector of the PPF. I hope that I have given the noble Lord sufficient comfort that the current arrangement is the right one and should not be altered, notwithstanding the issues concerning the banking sector in particular at the moment.
On Lehman Brothers, the scheme is undergoing assessment for the PPF, which involves calculating the extent to which scheme assets meet liabilities. A PPF valuation approach will give different numbers from, say, a full buyout. Obviously, there are issues of confidentiality here, but we do not recognise the £100 million figure. I hope that has been helpful to the noble Lord. We ought to have clarity on who is regulating who but, clearly, there is a responsibility for the FSA, particularly in relation to those firms that are engaged in pension provision.
My Lords, I thank noble Lords who have spoken, and I thank the Minister for that very full reply. In particular, I hope that the Pensions Regulator will take full note that it is the sole, proactive, risk-based protector, as the Minister said. I would be interested to see what he called the Memorandum of Understanding on how the FSA and the Pensions Regulator work closely together. That was reassuring, but I would like to see it.
On the argument that there is no reason to single out banks and the financial sector for special treatment—the noble Lord talked about airlines—we have just had to nationalise quite large parts of that sector, and if the noble Lord thinks about it, he might realise that there is rather more risk here and perhaps that special attention on the part of the Pensions Regulator would be necessary. With that, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
78A: Before Clause 124, insert the following new Clause—
“Amendments of provisions of Pensions Act 2004 relating to contribution notices or financial support directions
Schedule (Contribution notices and financial support directions under Pensions Act 2004) (which amends the Pensions Act 2004 in relation to contribution notices and financial support directions) has effect.”
On Question, amendment agreed to.
78B: Before Schedule 9, insert the following new Schedule—
“Contribution notices and financial support directions under Pensions Act 2004Introduction1 The Pensions Act 2004 (c. 35) is amended as follows.
Contributions notices: material detriment test2 (1) In section 38(5)(a) (main purpose or one of main purposes of act or failure to prevent recovery of employer debt under section 75 of the Pensions Act 1995 (c. 26) etc.), after “is of the opinion that” insert “the material detriment test is met in relation to the act or failure (see section 38A) or that”.
(2) After section 38 insert—
“38A Section 38 contribution notice: meaning of “material detriment test”
(1) For the purposes of section 38 the material detriment test is met in relation to an act or failure if the Regulator is of the opinion that the act or failure has detrimentally affected in a material way the likelihood of accrued scheme benefits being received (whether the benefits are to be received as benefits under the scheme or otherwise).
(2) In this section any reference to accrued scheme benefits being received is a reference to benefits the rights to which have accrued by the relevant time being received by, or in respect of, the persons who were members of the scheme before that time.
(3) In this section “the relevant time” means—
(a) in the case of an act, the time of the act, or(b) in the case of a failure—(i) the time when the failure occurred, or(ii) where the failure continued for a period of time, the time which the Regulator determines and which falls within that period;and, in the case of acts or failures to act forming part of a series, any reference in this subsection to an act or failure is a reference to the last of the acts or failures in that series.(4) In deciding for the purposes of section 38 whether the material detriment test is met in relation to an act or failure, the Regulator must have regard to such matters as it considers relevant, including (where relevant)—
(a) the value of the assets or liabilities of the scheme or of any relevant transferee scheme,(b) the effect of the act or failure on the value of those assets or liabilities,(c) the scheme obligations of any person,(d) the effect of the act or failure on any of those obligations (including whether the act or failure causes the country or territory in which any of those obligations would fall to be enforced to be different),(e) the extent to which any person is likely to be able to discharge any scheme obligation in any circumstances (including in the event of insolvency or bankruptcy),(f) the extent to which the act or failure has affected, or might affect, the extent to which any person is likely to be able to do as mentioned in paragraph (e), and(g) such other matters as may be prescribed.(5) In subsection (4) “scheme obligation” means a liability or other obligation (including one that is contingent or otherwise might fall due) to make a payment, or transfer an asset, to—
(a) the scheme, or(b) any relevant transferee scheme in respect of any persons who were members of the scheme before the relevant time.(6) In this section—
(a) “relevant transferee scheme” means any work-based pension scheme to which any accrued rights to benefits under the scheme are transferred;(b) any reference to the assets or liabilities of any relevant transferee scheme is a reference to those assets or liabilities so far as relating to persons who were members of the scheme before the relevant time.(7) For the purposes of subsection (6)(a) the reference to the transfer of accrued rights of members of a pension scheme to another pension scheme includes a reference to the extinguishing of those accrued rights in consequence of the obligation to make a payment, or transfer an asset, to that other scheme.
(8) In this section—
(a) “work-based pension scheme” has the meaning given by section 5(3); (b) any reference to rights which have accrued is to be read in accordance with section 67A(6) and (7) of the Pensions Act 1995 (reading any reference in those subsections to a subsisting right as a reference to a right which has accrued).(9) In deciding for the purposes of this section whether an act or failure has detrimentally affected in a material way the likelihood of accrued scheme benefits being received, the following provisions of this Act are to be disregarded—
(a) Chapter 3 of Part 2 (the Board of the Pension Protection Fund: pension protection), and(b) section 286 (the financial assistance scheme for members of certain pension schemes).(10) Regulations may amend any provision of subsections (4) to (8).
38B Section 38 contribution notice issued by reference to material detriment test: defence
(1) This section applies where—
(a) a warning notice is given to any person (“P”) in respect of a contribution notice under section 38, and(b) the contribution notice under consideration would be issued wholly or partly by reference to the Regulator’s opinion that the material detriment test is met in relation to an act or deliberate failure to act to which P was a party.(2) If the Regulator is satisfied that P has shown that—
(a) conditions A and C are met, and(b) where applicable, condition B is met,the Regulator must not issue the contribution notice by reference to its being of the opinion mentioned in subsection (1)(b).(3) Condition A is that, before becoming a party to the act or failure, P gave due consideration to the extent to which the act or failure might detrimentally affect in a material way the likelihood of accrued scheme benefits being received.
(4) Condition B is that, in any case where as a result of that consideration P considered that the act or failure might have such an effect, P took all reasonable steps to eliminate or minimise the potential detrimental effects that the act or failure might have on the likelihood of accrued scheme benefits being received.
(5) Condition C is that, having regard to all relevant circumstances prevailing at the relevant time, it was reasonable for P to conclude that the act or failure would not detrimentally affect in a material way the likelihood of accrued scheme benefits being received.
(6) P is to be regarded as giving the consideration mentioned in condition A only if P has made the enquiries, and done the other acts, that a reasonably diligent person would have made or done in the circumstances.
(7) For the purposes of condition C—
(a) “the relevant time” means the time at which the act occurred or the failure to act first occurred;(b) the reference to the circumstances mentioned in that condition is a reference to those circumstances of which P was aware, or ought reasonably to have been aware, at that time (including acts or failures to acts which have occurred before that time and P’s expectation at that time of other acts or failures to act occurring).(8) In the case of acts or failures to act forming part of a series, P is to be regarded as having shown the matters mentioned in subsection (2) if P shows in the case of each of the acts or failures in the series that—
(a) conditions A and C are met, and (where applicable) condition B is met, in relation to the act or failure, or(b) the act or failure was one of a number of acts or failures (a “group” of acts or failures) selected by P in relation to which the following matters are shown. (9) The matters to be shown are that—
(a) before becoming a party to the first of the acts or failures in the group, condition A is met in relation to the effect of the acts or failures in the group taken together,(b) condition B is (where applicable) met in relation to that effect, and(c) condition C is then met in relation to each of the acts or failures in the group (determined at the time at which each act or failure concerned occurred or first occurred).(10) If at any time P considers that condition C will not be met in relation to any particular act or failure in the group—
(a) the previous acts or failures in the group are to be regarded as a separate group for the purposes of subsection (8), and(b) P may then select another group consisting of the particular act or failure concerned, and any subsequent act or failure, in relation to which P shows the matters mentioned in subsection (9).Nothing in paragraph (b) is to be read as preventing P from showing the matters mentioned in subsection (8)(a).(11) If—
(a) P is unable to show in the case of each of the acts or failures in the series that the matters set out in subsection (8)(a) or (b) are met, but(b) does show in the case of some of them that those matters are met,the acts or failures within paragraph (b) are not to count for the purposes of section 38A as acts or failures to act in the series.(12) In this section—
(a) “a warning notice” means a notice given as mentioned in section 96(2)(a);(b) any reference to an act or failure to which a person is a party has the same meaning as in section 38(6)(a);(c) any reference to the accrued scheme benefits being received has the same meaning as in section 38A;and subsection (9) of section 38A applies for the purposes of conditions A to C as it applies for the purposes of that section.(13) Regulations may amend this section.”
3 In section 90(2) (the matters in relation to which the Pensions Regulator must issue codes of practice), after paragraph (a) insert—
“(aa) the circumstances in which the Regulator expects to issue contribution notices under section 38 as a result of being of the opinion that the material detriment test is met in relation to an act or failure;”.4 In section 96 (standard procedure), after subsection (1) insert—
“(1A) In any case where—
(a) a warning notice is given to any person in respect of a contribution notice under section 38, and(b) the contribution notice under consideration would be issued wholly or partly by reference to the Regulator’s opinion that the material detriment test is met in relation to an act or failure,the standard procedure must provide for the following matters.(1B) The matters are—
(a) a requirement for the warning notice to explain the general effect of section 38B, and(b) a requirement for the person to be given an opportunity before the contribution notice is issued to show the matters mentioned in subsection (2) of that section.” 5 In section 316(2) (subordinate legislation under Act that is subject to affirmative resolution procedure), before paragraph (a) insert—
“(za) regulations under section 38A(10) or 38B(13) (section 38 contribution notices: “the material detriment test”);”.Contributions notices: acting or failing to act otherwise than in good faith6 In section 38(5) (acts or failures to act in relation to which Pensions Regulator may issue contribution notices), in paragraph (a)(ii), omit “otherwise than in good faith,”.
Whether reasonable for Pensions Regulator to issue contribution notice7 (1) Section 38 (contribution notices where avoidance of employer debt) is amended as follows.
(2) In subsection (3) (conditions which must be met before Pensions Regulator can issue contribution notice), for paragraph (d) substitute—
“(d) the Regulator is of the opinion that it is reasonable to impose liability on the person to pay the sum specified in the notice, having regard to—(i) the extent to which, in all the circumstances of the case, it was reasonable for the person to act, or fail to act, in the way that the person did, and(ii) such other matters as the Regulator considers relevant, including (where relevant) the matters falling within subsection (7).”(3) In subsection (7) (list of relevant matters for purposes of subsection (3)(d))—
(a) for the words from the beginning to “the following matters—” substitute “The matters within this subsection are—”; and(b) after paragraph (e) insert—“(ea) the value of any benefits which directly or indirectly the person receives, or is entitled to receive, from the employer or under the scheme;(eb) the likelihood of relevant creditors being paid and the extent to which they are likely to be paid;”.(4) After that subsection insert—
“(7A) In subsection (7)(eb) “relevant creditors” means—
(a) creditors of the employer, and(b) creditors of any other person who has incurred a liability or other obligation (including one that is contingent or otherwise might fall due) to make a payment, or transfer an asset, to the scheme.”Contribution notices: series of acts or failures to act8 (1) In section 38 (contribution notices where avoidance of employer debt), at the end insert—
“(12) Subsection (13) applies if the Regulator is of the opinion that—
(a) a person was a party to a series of acts or failures to act,(b) each of the acts or failures in the series falls within subsection (5)(b) and (c), and(c) the material detriment test is met in relation to the series, or the main purpose or one of the main purposes of the series was as mentioned in subsection (5)(a)(i) or (ii).(13) The series of acts or failures to act is to be regarded as an act or failure to act falling within subsection (5) (and, accordingly, the reference in subsection (6)(b)(i) to the act or failure to act falling with subsection (5) is to the first of the acts or failures to act in the series).”
(2) In section 39 (the sum specified in a section 38 contribution notice)—
(a) in subsection (4), after “means” insert “(subject to subsection (4A)”; and(b) after subsection (4) insert— “(4A) In the case of a series of acts or failures to act, “the relevant time” is determined by reference to whichever of the acts or failures in the series is, in the Regulator’s opinion, most appropriate.”Contributions notices and financial support directions: bulk transfers9 After section 39 (the sum specified in a section 38 contribution notice) insert—
“39A Section 38 contribution notice: transfer of members of the scheme
(1) This section applies where—
(a) the Regulator is of the opinion that in relation to a scheme (“the initial scheme”) in relation to which section 38 applies—(i) an act or failure to act falling within subsection (5) of that section has occurred (or first occurred) at any time, and(ii) the other conditions in that section for issuing a contribution notice are met in relation to the initial scheme (or, but for any transfer falling within paragraph (b), would be met), and(b) the accrued rights of at least two persons who were members of the initial scheme are transferred at that or any subsequent time to one or more work-based pension schemes (whether by virtue of the act or otherwise).(2) The Regulator may issue a contribution notice under section 38 in relation to any transferee scheme (and, accordingly, any reference in section 40 or 41 to the scheme is to the transferee scheme).
(3) In the case of any contribution notice issued by virtue of subsection (2) to any transferee scheme which is not within subsection (5)(a) or (b), section 39 has effect as if any reference in that section to the scheme were a reference to whichever of—
(a) the initial scheme, and(b) the transferee scheme,the Regulator determines to be more appropriate in the circumstances.(4) In any case where section 39 has effect in relation to the transferee scheme by virtue of subsection (3), any reference in that section to a debt under section 75 of the 1995 Act is a reference to so much of that debt as, in the Regulator’s opinion, is attributable to those members of the transferee scheme who were members of the initial scheme.
(5) In the case of any contribution notice issued by virtue of subsection (2) to any transferee scheme which is—
(a) a scheme to which section 75 of the 1995 Act does not apply, or(b) a scheme to which that section does apply in a case where the liabilities of the scheme that would be taken into account for the purposes of that section do not relate to the members of the initial scheme,the sum specified by the Regulator in the notice is determined in accordance with regulations (and not in accordance with section 39).(6) The Regulator may also issue a direction to the trustees or managers of any transferee scheme requiring them to take specified steps to secure that the sum payable under the notice is applied for the benefit of the members of the transferee scheme who were members of the initial scheme.
(7) If the trustees or managers fail to comply with a direction issued to them under subsection (6), section 10 of the 1995 Act (civil penalties) applies to any trustee or manager who has failed to take all reasonable steps to secure compliance.
39B Section 39A: supplemental
(1) In section 39A a “transferee scheme”, in relation to any time, means any work-based pension scheme—
(a) to which the accrued rights of at least two persons who were members of the initial scheme have been transferred, and(b) of which any of those persons are members at that time.(2) For the purposes of section 39A(1) and subsection (1) above it does not matter whether any rights are transferred to a work-based pension scheme directly from the initial scheme or following one or more other transfers to other work-based pension schemes.
(3) For the purposes of section 39A and this section references to the transfer of accrued rights of members of a pension scheme to another pension scheme include references to the extinguishing of those accrued rights in consequence of the obligation to make a payment, or transfer an asset, to that other scheme.
(4) In section 39A and this section—
(a) “the 1995 Act” means the Pensions Act 1995;(b) “work-based pension scheme” has the meaning given by section 5(3);(c) any reference to rights which have accrued is to be read in accordance with section 67A(6) and (7) of the 1995 Act (reading any reference in those subsections to a subsisting right as a reference to a right which has accrued).(5) Section 39A applies even if the initial scheme—
(a) is wound up as a result of any transfer falling within subsection (1)(b) of that section, or(b) otherwise ceases to exist at the time of the transfer or at any subsequent time.(6) Accordingly, in any such case, in subsection (1) of that section—
(a) the reference to a scheme to which section 38 applies is a reference to a scheme which was such a scheme before the transfer;(b) the reference to any conditions in section 38 being met is a reference to any conditions in that section that, but for the transfer, would have been met in relation to the scheme.(7) Nothing in section 39A or this section is to be read as preventing the Regulator from issuing a contribution notice in relation to the initial scheme.
(8) Regulations may make provision applying, with or without modifications, any provision made by or under section 39A or this section in relation to any scheme or other arrangement in any case where the accrued rights of persons who were members of the initial scheme are transferred or extinguished directly or indirectly in consequence of or otherwise in connection with—
(a) the making of any payment at any time to or for the benefit of the scheme or other arrangement,(b) the transfer of any asset at any time to or for the benefit of the scheme or other arrangement,(c) the discharge (wholly or partly) at any time of any liability incurred by or on behalf of the scheme or other arrangement, or(d) the incurring at any time of any obligation to do any act falling within paragraph (a) to (c).(9) Any reference in subsection (8)(a) to (d) to the doing of an act of any description at any time in relation to the scheme or other arrangement includes a reference to the doing of an act of that description at any previous time in relation to any other scheme or other arrangement.
(10) Regulations under subsection (8) may—
(a) make provision having effect in relation to any case where rights are transferred or extinguished on or after the date on which the Secretary of State publishes a statement of the intention to make the regulations; and(b) without prejudice to section 315(5), make consequential provision applying with modifications any provision of this Act which relates to contribution notices under section 38.” 10 After section 43 (financial support directions) insert—
“43A Financial support directions: transfer of members of the scheme
(1) This section applies where—
(a) the Regulator is of the opinion by reference to any time that the conditions in section 43 for issuing a financial support direction are met in relation to a scheme (“the initial scheme”) in relation to which that section applies (or, but for any transfer falling within paragraph (b), would be met), and(b) the accrued rights of at least two persons who were members of the initial scheme are transferred at any subsequent time to one or more work-based pension schemes.(2) The Regulator may issue a financial support direction under that section in relation to any transferee scheme (and, accordingly, any reference in section 45 or any of sections 47 to 50 to the scheme is to the transferee scheme).
(3) The Regulator may also issue a direction to the trustees or managers of any transferee scheme requiring them to take specified steps to secure that the financial support is put in place for the benefit of the members of the transferee scheme who were members of the initial scheme.
(4) If the trustees or managers fail to comply with a direction issued to them under subsection (3), section 10 of the 1995 Act (civil penalties) applies to any trustee or manager who has failed to take all reasonable steps to secure compliance.
43B Section 43A: supplemental
(1) In section 43A a “transferee scheme”, in relation to any time, means any work-based pension scheme—
(a) to which the accrued rights of at least two persons who were members of the initial scheme have been transferred, and(b) of which any of those persons are members at that time.(2) For the purposes of section 43A(1) and subsection (1) above it does not matter whether any rights are transferred to a work-based pension scheme directly from the initial scheme or following one or more other transfers to other work-based pension schemes.
(3) For the purposes of section 43A and this section references to the transfer of accrued rights of members of a pension scheme to another pension scheme include references to the extinguishing of those accrued rights in consequence of the obligation to make a payment, or transfer an asset, to that other scheme.
(4) In section 43A and this section—
(a) “the 1995 Act” means the Pensions Act 1995;(b) “work-based pension scheme” has the meaning given by section 5(3);(c) any reference to rights which have accrued is to be read in accordance with section 67A(6) and (7) of the 1995 Act (reading any reference in those subsections to a subsisting right as a reference to a right which has accrued).(5) Section 43A applies even if the initial scheme—
(a) is wound up as a result of any transfer falling within subsection (1)(b) of that section, or(b) otherwise ceases to exist at the time of the transfer or at any subsequent time.(6) Accordingly, in any such case, in subsection (1) of that section—
(a) the reference to a scheme to which section 43 applies is a reference to a scheme which was such a scheme before the transfer;(b) the reference to any conditions in section 43 being met is a reference to any conditions in that section that, but for the transfer, would have been met in relation to the scheme. (7) Nothing in section 43A or this section is to be read as preventing the Regulator from issuing a financial support direction in relation to the initial scheme.
(8) Regulations may make provision applying, with or without modifications, any provision made by section 43A or this section in relation to any scheme or other arrangement in any case where the accrued rights of persons who were members of the initial scheme are transferred or extinguished directly or indirectly in consequence of or otherwise in connection with—
(a) the making of any payment at any time to or for the benefit of the scheme or other arrangement,(b) the transfer of any asset at any time to or for the benefit of the scheme or other arrangement, (c) the discharge (wholly or partly) at any time of any liability incurred by or on behalf of the scheme or other arrangement, or(d) the incurring at any time of any obligation to do any act falling within paragraph (a) to (c).(9) Any reference in subsection (8)(a) to (d) to the doing of an act of any description at any time in relation to the scheme or other arrangement includes a reference to the doing of an act of that description at any previous time in relation to any other scheme or other arrangement.
(10) Regulations under subsection (8) may—
(a) make provision having effect in relation to any case where rights are transferred or extinguished on or after the date on which the Secretary of State publishes a statement of the intention to make the regulations; and(b) without prejudice to section 315(5), make consequential provision applying with modifications any provision of this Act which relates to financial support directions under section 43.”11 In section 306(2) (overriding requirements)—
(a) after paragraph (d) insert—“(da) any direction issued by the Regulator under section 39A(6);”; and(b) after paragraph (e) insert—“(ea) any direction issued by the Regulator under section 43A(3);”.12 In section 316(2) (subordinate legislation under Act that is subject to affirmative resolution procedure), after paragraph (za) (as inserted by paragraph 5 of this Schedule) insert—
“(zb) regulations under section 39A(5), 39B(8) or 43B(8) (contribution notices and financial support directions: bulk transfers);”.13 In Part 4 of Schedule 2 (the reserved regulatory functions of Pensions Regulator: functions under Act)—
(a) after paragraph 30 insert—“30A The power to issue a direction under section 39A(6) to any person.”; and
(b) after paragraph 33 insert—“33A The power to issue a direction under section 43A(3) to any person.”
Financial support directions: meaning of “insufficiently resourced”14 (1) In section 44(3) (meaning of “insufficiently resourced”), for paragraph (b) substitute—
“(b) condition A or B is met.”(2) After subsection (3) insert—
“(3A) Condition A is met if—
(a) there is at that time a person who falls within section 43(6)(b) or (c), and(b) the value at that time of that person’s resources is not less than the relevant deficit, that is to say the amount which is the difference between— (i) the value of the resources of the employer, and(ii) the amount which is the prescribed percentage of the estimated section 75 debt.(3B) Condition B is met if—
(a) there are at that time two or more persons who—(i) fall within section 43(6)(b) or (c), and(ii) are connected with, or associates of, each other, and(b) the aggregate value at that time of the resources of the persons who fall within paragraph (a) (or any of them) is not less than the relevant deficit.”(3) In subsection (4), for “subsection (3)” substitute “subsections (3) to (3B)”.
Effect of amendments made by this Schedule15 (1) The amendments made by paragraphs 2, 6 and 7 have effect in relation to any act occurring, or any failure to act first occurring, on or after 14 April 2008.
(2) The amendments made by paragraph 8 have effect—
(a) for the purposes of the material detriment test, where at least one of the acts or failures to act occurs or first occurs on or after 14 April 2008, and(b) for all other purposes, where at least one of the acts or failures to act occurs or first occurs on or after the day on which this Act is passed.(3) The amendments made by paragraphs 9 and 10 have effect in relation to any case where rights are transferred or extinguished on or after 14 April 2008.
(4) The amendment made by paragraph 14 has effect so as to enable the Pensions Regulator to make a financial support direction under section 43 of that Act by reference to any time falling on or after 14 April 2008.
Transitional provision16 (1) In the case of the first set of regulations made under subsection (8) of section 39B, subsection (10)(a) of that section has effect as if for the words from “the date” to “the regulations” there were substituted “20 October 2008”.
(2) In the case of the first set of regulations made under subsection (8) of section 43B, subsection (10)(a) of that section has effect as if for the words from “the date” to “the regulations” there were substituted “20 October 2008.””
The noble Lord said: My Lords, I beg to move.
78C: Before Schedule 9, line 9, leave out from “etc.),” to end of line 11 and insert “at the beginning insert “the material detriment test is met in relation to the act or failure (see section 38A) or”.”
The noble Lord said: My Lords, in moving Amendment No. 78C, I shall speak also to the other amendments in the group. This amendment is to raise the first question on the material detriment section: why should it be the opinion of the regulator that determines what is material detriment, rather than the facts? I beg to move.
My Lords, I recognise that a number of the amendments in this group seek to build greater objectivity into the material detriment test. Therefore, I shall speak to Amendments Nos. 78C, 78D, 78E, 78F and 78AH. I understand the concerns. The material detriment test is broader than the current grounds for contribution notices, which are based on evidence of intent. That is why we have built appropriate targeting measures into the proposed legislation.
Our amendments have refined the application of the material detriment test. For example, we will require the regulator to issue a code of practice setting out when it expects to apply the test. However, we believe that the regulator’s discretion is the most appropriate basis for this test, not just for the Government but for the industry and trustees. Granting discretion is not principally about allowing the regulator latitude; it is about creating a system that functions effectively for all.
Amendments Nos. 78C and 78D would mean that the regulator could not be of the opinion that the material detriment test had been met, or that certain matters were relevant in considering an issue. Amendments Nos. 78E, 78F and 78AH would remove the regulator’s discretion when deciding what factors it must have regard to when deciding whether the material detriment test was met. The consequence of these amendments would be that the determination of these issues would, therefore, move into the arena of the court. Precedent would have to be established through case law by the courts. This would be costly and time-consuming for employers and the regulator.
Currently, the regulator can arrive at decisions more quickly and cost-effectively, and the regulated community can build up an understanding of the regulator’s approach. These amendments would, in effect, result in making the regulator something more akin to a prosecuting examiner and would severely limit the effectiveness of the material detriment test and its influence on behaviours in the market. It is also worth stressing that this flexibility is not just for the benefit of trustees; it works in the employers’ favour, and experience has demonstrated this in practice.
We understand from the regulator that there are specific instances where employers have been able to draw further factors to the regulator’s attention and have affected the outcome of the case. In certain situations, the regulator concluded that action was not appropriate. Indeed, there are a number of instances in legislation where it is for the regulator to decide what is relevant and where the regulator’s opinion is the basis for decision-making. These provisions work well. Experience has shown that employers, trustees and others have been able to build up reliable experience of what the regulator is likely to view as relevant.
I understand noble Lords’ desire to improve the objectivity of decision-making, but I do not believe that it is their intention to replace the current approach with a protracted and expensive process whereby, for example, every clearance application would need to be considered by a court. That would be impractical and unnecessary. The current approach is working well and, as I said earlier, we have introduced further targeting with regard to material detriment.
I hope that that has reassured both noble Lords and that they will withdraw their amendments.
My Lords, this serves to illustrate what I said when we were talking about the Government’s amendments—that we are talking about convenience, rather than justice. It may well suit those who indulge in the sort of transactions that are described in the code, whereby convenience should be placed above justice, because they will be able to negotiate in those circumstances and know the rules that they are playing by. However, we should not contemplate letting out on to the wider public this rule that the decision on what constitutes material detriment should be decided by someone against people for whom there would be almost no effective right of appeal.
Keeping these questions within the bounds of the code becomes very important when we have allowed such latitude, because we believe that those bounds will be kept to. It will be important that going beyond the code will happen only in the most exceptional circumstances and that we should not let that grow up as a casual operation because we are allowing the regulator a position that is not appropriate in the wider forum. I beg leave to withdraw the amendment.
Amendment No. 78C, as an amendment to Amendment No. 78B, by leave, withdrawn.
[Amendment No. 78D, as an amendment to Amendment No. 78B, not moved.]
78DA: Before Schedule 9, line 20, at end insert—
“( ) The Regulator shall issue guidance setting out how it intends to define “material” and “likelihood” for the purposes of subsection (1).”
The noble Baroness said: My Lords, this amendment also concerns the material detriment test and asks the regulator to issue guidance on how it intends to define “material” and “likelihood”. This issue has been raised with us by some of the people involved in the development of the Government’s new proposals.
Perhaps I may start with the issue of materiality. The Minister will be aware from his own background that in the accountancy world materiality is a relatively well understood concept and that various rules of thumb are issued from time to time on what constitutes materiality. Normally, people talk of 5 to 10 per cent as being potentially material either for recognition or for reporting.
My reason for tabling the amendment is to find out what the Government intend when they talk about scheme benefits being affected detrimentally in a material way. Scheme deficits are very volatile. We can see from recent Stock Exchange market movements that deficits move around considerably at any point in time—certainly way beyond 5 or 10 per cent. Other factors that lead to significant variability include valuations, the discounting of liabilities and things such as longevity. Therefore, many things can change deficits quite a lot, and that is without any acts in relation to the scheme that may or may not have a material detriment on it. Therefore, the purpose of the amendment is to ask the Government what they mean by material detriment.
Linked to that is the question of what they mean by “likelihood”. Is this determined on a balance of probabilities, whereby we have to work out whether it is more likely than not that there will be a negative impact on the scheme, or is the threshold lower than a balance of probabilities?
Because “likelihood” and “materiality” are both crucial parts of the formulation of the test in the new clauses in which the test is being introduced, there is concern in the business community about what these concepts mean in practice and how people should calibrate their understanding of the effect of their actions. People need to know whether they should be seeking clearances or taking other action. Obviously, the existence of the defence is very useful, but unless we can make some sense of “materiality” and “likelihood”, they are not useful concepts at all. I beg to move.
My Lords, I hope that I can partially satisfy the noble Baroness’s inquiry. She emphasised the importance of there being a clear understanding among employers, trustees, regulators and others of the meaning of the key concepts of “materiality” and “likelihood”. I very much agree. I share her concern that these issues should be clear and I know that the regulator appreciates the importance of clarity in these matters.
The regulator’s clearance guidance currently deals with materiality. For example, paragraphs 46 and 47 set out how employers and trustees should decide whether a weakening of employer covenant is material, considering issues such as the amount by which the covenant is weakened, the size of the employer after the event, the size of the pension scheme and the size of the deficit in the pension scheme. I know that industry stakeholders find this guidance helpful. However, I am also aware that the regulator has stated that it will need to update and add to its clearance guidance in relation to the new test and to the defence in order to produce clarity in respect of the concepts of “materiality” and “likelihood”. As I said, we appreciate that the clearance guidance will need to be reviewed and amended. The regulator has undertaken to do that, and it will address, in particular, the issue of “likelihood”, which is not currently covered in the guidance.
If the noble Baroness will permit me, I shall refrain from offering my own homespun view on those concepts. There must be a proper process and there has to be clarity, and I believe that that is something in which the regulator will engage.
My Lords, that response is entirely satisfactory. If the regulator is going to ensure that his guidance on materiality will be updated to reflect the material detriment test and will cover likelihood, that is what my amendment, in effect, asks for. I beg leave to withdraw the amendment.
Amendment No. 78DA, as an amendment to Amendment No. 78B, by leave, withdrawn.
78DB: Before Schedule 9, line 30, leave out from “time” to end of line 31 and insert “at the end of that period”
The noble Baroness said: My Lords, I shall speak also to Amendment No. 78AKA. These are probing amendments concerned with the regulator’s discretion about time periods. Whether there is a material detriment has to be tested at the relevant time which, in the case of a failure to act, can be over whatever time the regulator chooses. My amendment means that the regulator would have to test the effect of failure over a period of time at the end of the period. Amendment No. 78AKA deletes new subsection (4A) of Section 39 of the 2004 Act, which has the same regulator judgment in respect of a series of acts or failures. In other places, we have certainty about timing. Under new Section 38A(3) where there is a series of acts or failures, the last act or failure is the relevant time, but not here, where we have a single failure to act.
The issue that has been raised with me is cherry picking. We live in volatile economic times, as I said in the context of the previous amendment. Deficits can vary significantly from week to week. If we look at the aggregate information published by the PPF, the aggregate deficits of the funds in 7800 index more than doubled to £80 billion between August and September, and I hate to think what October’s figures will show. Individual schemes, depending on their asset mix, can show greater movements than that. Why should the regulator be given this discretion to choose which period of time he will use? To those who have suggested this to us, it gives him too great an ability to choose the point in time when the figures show the worst position. I beg to move.
My Lords, these amendments remove the regulator’s ability to determine the relevant time for a failure to act that lasted over a period of time and for a series of acts. The first amendment states that in relation to a failure to act that continued for a period, the relevant time should be at the end of that period, but that would not work where that period had not come to an end. That could open up a loophole, in that the regulator would be prevented from issuing a contribution notice in an otherwise appropriate case, simply because the person was party to a failure to act, and that failure was ongoing and potentially never ending. The second amendment would make it unclear how to determine relevant time at all in relation to a series of acts or failures, which would create new uncertainty for business.
I consider that it is right for the regulator to have discretion here, but its public law duties to be reasonable mean that it can take into account representations about the meaning of relevant time in particular cases. The regulator remains available to discuss whether transactions should come for clearance and will be updating its clearance guidance in the light of these amendments. The regulator already has discretion under Section 39(4)(b)(ii) of the 2004 Act to determine the relevant time for a failure to act that continues over a period, and the relevant time here is used to calculate the debt under Section 75 of the 1995 Act, which is the upper limit of the amount of the contribution notice. A series of acts or failures is also likely to continue over a period and therefore there needs to be a similar method of calculation, but it is particularly to address the issue that if we are talking about failures to act, rather than acts that are positive events, they could continue unabated and there would never be a trigger for the relevant time. That is why we believe it is important, subject to the bounds of what is reasonable and the broader public duties imposed on the regulator, to have that discretion.
My Lords, this may be a convenient time to probe the question of acting reasonably, which I know will come up rather a lot—indeed, the Minister has already referred to it. As I understand it, the concept of reasonableness relates to the duties of the regulator, which in turn relate to protecting pensions and the interests of the PPF—I forget the exact formulation. It is not the duty of the regulator to protect the interests of employers, for example. The question of acting reasonably therefore needs to be construed in the context of the regulator’s own duties and not in the context of broad fairness or equity; that is not the concept in administrative law. I should like the Minister to say a little about what he means by “reasonably”.
My Lords, the noble Baroness makes an interesting and challenging point. In the application of the code that we discussed earlier, for example, it would be incumbent on the regulator to act reasonably. I think that the noble Baroness has bowled a bit of a fast ball, so perhaps I may reflect a little on a fuller answer to the question that she raises, which I think is a fair one.
My Lords, I look forward to continuing this discussion with the Minister, perhaps at Third Reading. I take his point that, if an act is continuing, there has to be a time. I was not suggesting that the regulator could never act; I was suggesting that the regulator should not be able to cherry pick a time. That takes us back to whether the regulator is acting reasonably. Perhaps it is in that context that we should resume our discussions. I beg leave to withdraw the amendment.
Amendment No. 78DB, as an amendment to Amendment No. 78B, by leave, withdrawn.
[Amendments Nos. 78E and 78F, as amendments to Amendment No. 78B, not moved.]
78FA: Before Schedule 9, line 53, at end insert—
“( ) guidance issued by the Regulator in force at the relevant time concerning the circumstances in which it is appropriate to apply for clearance,”
The noble Baroness said: My Lords, I hope that this amendment will not take long. The Minister said in his opening remarks that, if a clearance had been given, that would bind the regulator, including on the material detriment test; in other words, if a clearance had already been given, that would be the end of the matter. The question posed by my amendment is what happens when, in the light of the guidance for clearance applications, an employer or another person has chosen not to apply for clearance. The amendment suggests that one of the factors that the regulator should consider—not a determining factor, but one of the factors that should be determined—is whether the person was acting in accordance with guidance that existed at the time of the act. That is the simple question that my amendment puts. I beg to move.
My Lords, the noble Baroness seeks clarification that the regulator will consider the guidance available to a party at the time of an act if considering a contribution notice on grounds of material detriment in respect of that act. I agree that the parties should have certainty that changes to the regulator’s guidance that take effect after a party has taken a particular decision cannot be considered by the regulator if it examines that decision. The regulator is already bound by public law obligations to have regard to all relevant considerations when determining whether or not to issue a contribution notice on grounds of material detriment. This would include any guidance that was in effect at the time and would not include any guidance that was not in effect at the time.
I hope that, in a roundabout way, this addresses the point that the noble Baroness is stressing. The proposition is that someone looked at the guidance at the time and decided that they did not need to apply for clearance because they were safe in the terms of that guidance. I should have thought that that provided the protections that the employer or person would need. Again, I should like to think a little more about that to ensure that the specific point raised by the noble Baroness is covered. I understand the import of it. If somebody has refrained from going for a clearance that would have been available to them relying on the guidance, I am then trying to see the circumstances in which that could give rise to a contribution notice, given the filters that are there, including references in the amendment to “have regard to” and reasonableness.
I should have thought that that would offer the appropriate protection. If the noble Baroness will permit me, I will reflect again on that because these are intricate questions and I do not want to mislead as I know people are relying on what we are placing on the record.
My Lords, I thank the Minister for his response, and am happy to proceed on the basis that he has suggested. I hope that between now and Report we can sort this out, and if necessary retable it for a better statement to be made at the Dispatch Box. I beg leave to withdraw the amendment.
Amendment No. 78F, as an amendment to Amendment No. 78B, by leave, withdrawn.
78G: Before Schedule 9, leave out line 54
The noble Lord said: My Lords, I shall also speak to Amendments Nos. 78H and 78AA. In each case I have two questions. First, what does the Minister envisage doing with these powers? Secondly, can he assure me that an act by the person, even if it is judged many years later by the regulator, will be judged in relation to the law as it then subsisted? In other words, will there be no trace of retrospection left in these powers?
Amendment No. 78G would remove proposed new Section 38A(4)(g), which I should have thought the Minister would be inclined to accept as the regulations in line 89 of the proposed new section could do that job just as well. There is a duplication of regulation-making powers. It is important that the changes are made in a clear and open way so that everyone knows what is happening and no one is caught by surprise. I am seeking clarification and explanation more than listening to myself going on. I beg to move.
My Lords, when we discussed the regulator’s powers in Committee, I made a commitment to consider what more could be put in the Bill. This undertaking has been met, but it is necessary to have some residual regulation-making powers, which the noble Lord’s amendment would remove. These regulation-making powers are proposed so that the Government can adapt legislation to new risks and review in the light of operational experience. However, the Government do not intend to use the power to reframe the statutory defence. These are residual powers taken to deal with unforeseen circumstances. This is an important safeguard in a fast-evolving market. Business is also served as the Government would be able to amend the factors or the defence if they had unforeseen effects and protect PPF levy payers from risks .
The regulator will act within the boundaries set out in the Bill. Should these be found to be inappropriate at a later time, or to not cover all risks, the regulator must follow due process to change them by affirmative procedure. The significant refinements we developed in consultation with some key representative stakeholders over the summer fully explored the proposed legislation including these powers, and the balance was considered to be right.
I understand the noble Lord’s concern in our earlier discussions about retrospection and whether clearance statements could be overturned as a result of these amendments. Perhaps I can reassure him on the following points.
Should any changes be made as a result of the powers, they would not have retrospective effect; no act that occurred before any changes came into force would be considered under the changes; no clearance application would be reopened as a result of the changes to the legislation. I hope that those specific assurances will satisfy the noble Lord.
My Lords, I think that that comes within the general rubric of, “Let’s hope it goes well”. I just leave with the Minister the thought that the power in line 54 seems to me to be entirely contained within the power in line 89. If that is not so, I should like to know what extra it is doing, but perhaps not now. I beg leave to withdraw the amendment.
Amendment No. 78G, as an amendment to Amendment No. 78B, by leave, withdrawn.
[Amendments Nos. 78H and 78J, as amendments to Amendment No. 78B, not moved.]
78K: Before Schedule 9, line 90, leave out “issued by reference to material detriment test: defence” and insert “: supplementary”
The noble Lord said: My Lords, the amendments concern what we might call the defence. The Minister may be glad to know that I shall not move amendments in the groups led by Amendments Nos. 78R and 78S, which seem to me to cover mostly supplementary matters with which we can deal in discussion on this group, although if he wants to raise any matters in his notes and waves at me desperately, I will also move them so that he can talk about them. For some reason, I think that all the consequential amendments have been bundled into another couple of groups rather than chucked in here.
My Lords, the groups led by Amendments Nos. 78R and 78S seem to me to be entirely composed of consequential amendments that should have been tacked on to this group. If the noble Lord has found something wonderful to say about them, he need only wave at me and I will give him a chance to do so by moving them.
The amendments propose various ways in which the defence may be improved. It seems odd that the defence should not be triggered until a warning notice has been issued. By that stage, the procedure is already well advanced and the person subject to it may feel themselves to be on the back foot.
The next question is whether the defence covers only contribution notices based on the material detriment test or whether it will cover also those issued under Section 38(5)(ii) of the Pensions Act 2004 where, again, the Government do not seem to have applied the new defence to those contribution notices.
Other than that, we are dealing again with the general question of whether it is fair to place on an individual the requirement that he has documented his past in quite the detail required to comply to make the defence viable. If the question that arises is within the code as currently drafted, I do not see the problem. It arises only with matters outside. I can happily leave that, because it is a matter where I am already taking things on trust. I beg to move.
My Lords, I shall speak to my Amendment No. 78PA in the group, which is a probing amendment to try to tease out how hindsight might be used in the context of the defence.
I am aware that subsection (5) of the defence clause refers to prevailing circumstances at the time. Clearly that is quite helpful, but there is considerable concern that people against whom the regulator will use these new powers may have a rather hazy memory about what they did in the past and, indeed, may not have access to papers. That may cause a problem, because the regulator will have absolute clarity about how things have turned out.
Let me give an example. A person carrying out a commercial transaction in good faith uses some kind of financial innovation, but not to avoid pension liabilities. Subsequently, that same innovation is used to consciously detrimental effect. To what extent will the original transaction be damned by the later use of a particular technique? My amendment would not eliminate that problem, but it might make the business community more certain about how the regulator will judge the effect of particular circumstances, given that hindsight is a very difficult thing to avoid using when reaching judgments.
My Lords, Amendments Nos. 78K to 78M, 78W and 78PA relate to the statutory defence relating to the new material detriment test for contribution notices. I have already set out in some detail the background, or rationale, for the new test and the defence. I have also discussed the important safeguards that will continue to apply to the use of the second limb for contribution notices and how we are reinforcing the factors that the regulator must consider. Our approach will provide a proportionate level of protection for individuals and others. In this context, the amendments are simply unnecessary, as they would also produce undesirable outcomes for the industry and the regulator.
Three key issues relate to Amendment No. 78K, tabled by the noble Lord, Lord Lucas. They would widen the defence so that it applied to the second limb of the existing main purpose test for the use of contribution notices. This would give rise to a disjunct between the test and the defence. The former is based on intent, but the latter would be based on an effect of material detriment. This would be impractical and expensive to operate for the regulator and the industry, and one cannot reasonably apply that defence to the test of intent. They would remove the trigger of the warning notice to the application of the defence, and in doing so take away an important procedural reference point—to which consultees, including the CBI, the BVCA and the APL, were attracted—which permits use of the defence from the outset of the process. The final part of the amendment would set out an objective test for where a contribution notice cannot be issued: that is, the circumstances in which the defence would be successful. It would also remove the reference to the defendant having to show that the conditions for the defence are met. This would be cumbersome, would increase costs and could severely limit the regulator’s function to protect members’ benefits and their PPF.
Again on the warning notice, obviously it would be prudent for individuals involved in transactions to seek to ensure that their due diligence was done routinely, as it would be in a transaction that was an integral part of a restructuring. The fact that the warning notice may come later should not preclude that from happening ab initio. I understand that it is important to have a warning notice because there must be a defence against something, and the warning notice would technically be the trigger. I hope that that helps the noble Lord.
With regard to Amendment No. 78PA, the noble Baroness has raised the important issue of the potential use of hindsight in relation to decisions made by the regulator. A number of consultees have discussed with us the need to ensure that the regulator cannot make judgments with the benefit of hindsight. We agree that it would be unfair for the regulator to use information that could not have been known at the time. The amendments tabled in my name achieve this in new Section 38B(5) and the legislation clearly refers to,
“having regard to all relevant circumstances prevailing at the relevant time”.
The effect is that the regulator cannot look at circumstances that arise after the time in question; he can look only at the contemporaneous evidence. If a person was concerned that the regulator’s decision used hindsight, they would be able to challenge that decision through the Pensions Regulator Tribunal. The regulator has already said that it will update its guidance to take account of the new test, particularly the statutory defence, and it will no doubt address this point if necessary. I hope that that has produced clarity in relation to the instance outlined by the noble Baroness. The fact that an instrument or technique subsequently attracted negative comment or connotations would not be visited back on the circumstances of an earlier transaction when it did not colour the judgment about material detriment at the time.
I take this opportunity to go back to the question of the reasonableness of the regulator to save myself and my officials the need to send a letter in due course. We have talked about the importance of the regulator behaving reasonably and the question of how such reasonableness is to be judged. There are several issues that I should like to draw out here: the regulator’s duties in legislation, the public law obligations on a body such as the regulator and the impact of statements, guidance and codes issued by the regulator, and the body of previous decisions made by the regulator. The powers of the regulator are set out in legislation, including the main statutory objectives, but the regulator does not have carte blanche to behave unreasonably in pursuit of those objectives.
For example, in deciding whether to issue a contribution notice, the regulator is required by Section 38(7) to,
“have regard to such matters as it considers relevant”.
Attorneys to the public law duties of the regulator have observed that the regulator’s status as a public authority places demanding standards on its decision-making as a result of both domestic and EU law, and in broad terms a public authority would be acting unreasonably if it took account of factors that were not relevant, failed to take account of relevant factors, or reached a conclusion that was so unreasonable that no reasonable authority could have reached it—so-called Wednesbury unreasonableness.
Finally, I come to the legitimate expectations created when a public authority such as the Pensions Regulator makes statements, issues codes or guidance and builds a track record of decision-making. If the regulator has made statements about the way it would use its powers and then diverges from that approach without good reason, it is likely to be behaving unreasonably, and where those statements were contained in a statutory code of practice that had been approved by the Secretary of State, laid before Parliament and brought into force by an appointed day order, the regulator would need a strong justification for going against a code that had passed through a parliamentary procedure.
Clear justification would also be needed to go against the legitimate expectations created by its statements. While the regulator must examine each case on its own merits, legitimate expectations can also be built up by a corpus of decisions made by the regulator, so if the regulator typically viewed an issue in one way and then took a radically different approach in a near identical case to others it has considered, it would be likely to be acting unreasonably. If the regulator needed to revise expectations, it would need to make a statement that clarified its position, but this statement could not have retrospective effect. The regulator would have to judge any enforcement activity against the law of guidance and the legitimate expectations in place at the time a particular act or failure to act occurred. Given our previous discussion on amendments, I hope that noble Lords will forgive me for dwelling briefly on an effort to clarify issues of reasonableness as well as dealing with the specific amendments.
My Lords, I am grateful for that answer. The only problem is that my understanding is that the requirement for the regulator to be reasonable is limited by the regulator’s functions and powers. In other words, the regulator has to be reasonable only in respect of what it is required by statute to do, which is to look out for the interests of the fund and the pensioners. It has no duties imposed on it with respect to other parties such as the company running the fund or, as it were, the company whose pensioners are being looked after, or other parties who might be involved, such as individuals. So the duty of reasonableness does not extend to them. Where the regulator is required to judge whether something is reasonable, that is, of course, an overall reasonableness; but where the regulator might be required to be reasonable, that is a limited protection for a third party, such as an individual, who might find themselves caught up in it. My understanding is that there is little point in their placing reliance on that because the regulator can do what it likes without tripping over unreasonableness; the regulator is not required to be reasonable in respect of functions which it does not have.
The Minister was painting a rosy picture. If he wishes to say anything else, I should be delighted; otherwise I may wish to return to that point later.
78N: Before Schedule 9, line 106, leave out “might detrimentally affect” and insert “was likely detrimentally to affect”
The noble Baroness said: My Lords, the amendment seeks to amend condition A in the defence section, the new Section 38B. If the defence is to be established, a person has to show that due consideration has been given to the extent to which an act or failure “might” detrimentally affect in a material way the receipt of scheme benefits. The amendment seeks to change that requirement so that the person has to show that there was consideration of the extent to which the act or failure was “likely” to affect scheme benefits.
I have tabled the amendment because all kinds of things “might” affect scheme benefits. If in routine business decision-making a scenario analysis is undertaken, this involves the construction of internally consistent scenarios which might not be considered to be likely outcomes but which test robustness against extreme conditions. An extreme scenario looked at two years ago could well have foreseen the virtual seizing up of credit markets, bank liquidity and the failure or nationalisation of half the financial services industry. On that scenario, one could easily reach a conclusion that, for example, bank dividend policies “might” detrimentally affect their pension schemes. However, looked at two years ago it was not “likely” that they would, but a plausible analysis could have shown that they would. So anything that might affect a pension benefit is too extreme a test; a fairer test is “likelihood”.
This may come back to an understanding of what “due consideration” means for the purposes of condition A, which is what Amendment No. 78Q in the name of my noble friend Lord Lucas seeks to develop in the context of an objective test, but it might not. I beg to move.
My Lords, my noble friend’s amendment is very important. If the noble Lord has not yet read Black Swan by Nassim Nicholas Taleb, he will enjoy doing so, but the difference between “might” and “is likely to” is an example of the difference between the real world and the world as we construct it in projections. You cannot ask a manager or someone involved in taking decisions to predict the future with accuracy but you can ask them to make reasonable projections—and projections are all about likelihood. That is all that a manager is able to know. He must ask himself, “Knowing what I know at the moment and making assumptions about the future, is this likely to have a detrimental affect?”. That is the limit of what you can ask someone to do. To know whether it might is to say that they can tell what extraordinary and unexpected events might be waiting around the corner to happen. When you are projecting one of these things, you might run one of these tests where you choose all sorts of scenarios, going wide and going short, and you look at all the results that might happen and place various likelihoods on them. You come up with a central band of projections, and that is the band you feel you are likely to fall within—but the “mights” go right out to the wings, to the projections where you make vast profits or vast losses. If you are using the word “might”, you are really saying that almost any transaction of any size might have this effect and you are not discriminating in a way that is reasonable or should be the Government’s aim. I am with my noble friend on the wording of her amendment.
Mine is much less significant. It says that if someone has failed to keep the proper paperwork, they should not be penalised if, had they kept the proper paperwork, it would have made no difference to the decision they made.
My Lords, we are dealing with amendments relating to the statutory defence. It is important that the defence is operable for employers and other parties who could be subject to contribution notices, but does not prevent the regulator acting where that is appropriate. Certainty about the meaning of the defence is central to achieving that.
The noble Baroness’s amendment would create uncertainty about the meaning of the definitions. Who would judge whether detriment was likely? Uncertainty would not be welcomed by employers who might well feel the need to go to court for certainty, and that would place an impractical burden on the regulator. The requirement in condition A is that,
“before becoming a party to the act or failure, P gave due consideration to the extent to which the act or failure might detrimentally affect in a material way the likelihood of accrued scheme benefits being received”.
That is a reasonable and appropriate test to make. If one is introducing the concept of “likely detrimentally to affect in a material way”, does that not effectively introduce a third-party judgment to the process? That would not be right.
The amendment of the noble Lord, Lord Lucas, raises important issues and I can see that there is a serious question about the level of due diligence. I hope my earlier explanation of the Government’s intention behind the defence has satisfied him on that issue. His amendment would permit a defence on condition A on the basis of a person’s conclusions, regardless of whether they had actually made the inquiries, and done the other acts, that a reasonably diligent person would have made or done in the circumstances. That may produce cost efficiencies for the party, but it would create significant risks for members’ benefits and the PPF if those conclusions turned out to be incorrect. It would also send an inappropriate message to the market about the importance of due diligence. For those reasons, I hope the amendments will be withdrawn.
On the issue of dividends, these are not within the circumstances set out in the draft code and would be outside the test for the contribution notice.
My Lords, I have been thinking carefully about what the noble Lord, Lord Lucas, said. Does the Minister agree with me that there is a large difference in Amendment No. 78N between “might detrimentally affect” and “was likely detrimentally to affect”? “Was likely to” almost introduces an element of probability—I would have certainly thought that it was about 50/50. That is a world away from “might”, and I think it goes too far.
My Lords, I am grateful for the support from my noble friend Lord Lucas on the difference between “might” and “likely”. We disagree with the noble Lord, Lord Oakeshott; in the business world, it is normal to proceed on the basis of what is likely to happen and not of stress-testing for things that might conceivably happen. Whether or not my alternative formulation is the right one, I am not absolutely sure, but I am very uncomfortable with the use of the “might” formulation. The Minister said that my test introduced uncertainty. I suggest that requiring companies to have to prove material detriment in the context of considering all possible “mights” is imposing a potentially impossible test for people to satisfy in order to establish this defence.
The Minister knocked down my example because dividends are not in the draft code, a fact of which I am well aware. However, we all know that the draft code might not be absolutely conclusive. My point was really to draw out how scenario analysis and acts can be put alongside each other and the difference that can be had from analysing from a “might” and a “likelihood” perspective.
I am not entirely happy with what the Minister has said, but I should like to consider it carefully because now is not the time to press this any further. On that basis, I beg leave to withdraw the amendment.
Amendment No. 78N, as an amendment to Amendment No. 78B, by leave, withdrawn.
78NA: Before Schedule 9, line 110, after “P” insert “or any other persons”
The noble Baroness said: My Lords, this would amend condition B of the material detriment defence. Under condition B, if there is a potential detrimental effect, P has to take all reasonable steps. My amendment says that the steps could be taken by P “or any other persons”. This is not a particularly good amendment; it was drafted on Friday to meet the tabling deadline. It should have said, “by any other person or persons”. More importantly, there are other points in Section 38, such as whether we are considering P alone or looking at what other persons have done.
In the defence section, P is given a way of showing that it is not reasonable to issue a contribution notice because he has carried out due diligence and taken reasonable steps on that basis. Why is it necessary for P himself to have carried out the due diligence and taken all the steps that are necessary? If two parties are involved, why is it necessary for each of them to have carried out all the steps? Why is it not reasonable for P to look at what others are doing and not necessarily take action himself? My amendment would reflect the commercial reality of avoiding duplication in transactions. Provided that someone has done due diligence and/or taken actions, that ought to be the end of the story. I beg to move.
My Lords, as explained, the purpose of the amendment is to provide that somebody other than the person raising the defence might be the one to mitigate the detriment. However, this is unnecessary. The legislation does not require the person raising the defence to mitigate the detriment; rather, it requires the defendant to ensure that he or she takes reasonable steps to ensure that there is an appropriate mitigation in place. Therefore, if the mitigation is to be undertaken by someone other than the defendant, then the reasonable step the defendant can take is to ensure that there is an appropriate mitigation and that it is in place. I do not think that the amendment adds anything to the Government’s proposals. I hope that that has produced some clarification for the noble Baroness.
My Lords, I will consider that carefully in the light of the representations made to us. The Minister is reading the proposed new section differently from the way in which it has been read by those who contacted us. For today, I beg leave to withdraw the amendment.
Amendment No. 78NA, as an amendment to Amendment No. 78B, by leave, withdrawn.
78P: Before Schedule 9, line 110, leave out “all reasonable steps to” and insert “steps which would reasonably”
The noble Baroness said: My Lords, the amendment focuses on condition B. Condition B kicks in if, as a result of condition A, it is considered that the act or failure might have a detrimental effect. P has to take,
“all reasonable steps to eliminate or minimise the potential detrimental effects”.
My amendment would replace the concept of taking “all” steps with one based on taking steps which would reasonably eliminate or minimise the detrimental effects.
Why is a person expected to take all possible steps? Is a belt-and-braces approach mandated as a necessary precondition to establishing the defence? Surely it is only reasonable that the person applies reasonable mitigation. For example, if the transaction might result in a potential deficit, is it necessary for the person to make additional contributions and provide other financial support such as guarantees, or can they take just some of those steps? Is it absolutely necessary to do everything that could possibly be done, or is it enough to take reasonable steps? I beg to move.
My Lords, the amendment would strengthen the statutory defence in favour of the person who could be subject to a contribution notice issued under the material detriment test. It would limit the regulator by strengthening P’s defence in relation to condition B, enabling them to show that they had taken “steps which would reasonably” eliminate or minimise potential detriment, rather than “all reasonable steps”.
It is important for the operation of the defence that P should be able to show that he or she has taken all reasonable steps, not the likelihood of the steps taken eliminating or minimising the potential risk. If the defence was amended as the noble Baroness suggests, it would make it unclear who would judge whether the steps taken were indeed “steps which would reasonably” eliminate or minimise potential detriment, which would make it much harder for parties and the regulator to operate. Parties might need to seek the view of the court as to whether they had taken “steps which would reasonably” eliminate or minimise potential detriment. This could be costly and unnecessary.
The intention is not that the defendant should have to take every step possible. Once P was satisfied that the potential detriment was minimised or eliminated, there would be no more reasonable steps for them to take. On this basis, and in light of my earlier explanation of the Government’s thinking behind the statutory defence, I hope that the amendment will be withdrawn. I hope that the noble Baroness will take comfort from that level of assurance.
My Lords, my brain is slowing up at this hour. I think that what the Minister said is a good answer to the point that I put to him, but I reserve the right to read it in Hansard and think about it further. I beg leave to withdraw the amendment.
Amendment No. 78P, as an amendment to Amendment No. 78B, by leave, withdrawn.
[Amendments Nos. 78PA to 78T, as amendments to Amendment No. 78B, not moved.]
House adjourned at 10.24 pm.