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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.