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Grand Committee

Volume 814: debated on Monday 6 September 2021

Grand Committee

Monday 6 September 2021

Arrangement of Business


Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) (No. 2) Regulations 2021

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) (No. 2) Regulations 2021

Relevant document: 8th Report from the Secondary Legislation Scrutiny Committee.

My Lords, I beg to move that this Committee approve the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) (No. 2) Regulations 2021, which were laid before the House on 21 June 2021.

The emergence of the Covid-19 virus has posed the greatest threat to our way of life in a generation, and the past 18 months have been a challenge for us all, both as a nation and as individuals. The essential restrictions placed on our day-to-day activity have saved lives and limited the spread of the virus, but they have of course placed unprecedented pressures on many businesses. I am sure all noble Lords will share my optimism that the early signs of a strong recovery signal a return to normality. However, many businesses are not out of the woods just yet.

The four-step road map offered a road back to normal life while our world-class vaccination programme was successfully rolled out. Each step of the road map was implemented to safely reintroduce social contact for businesses, schools, activities and events based on the contemporaneous data. Step 4 was successfully launched on 19 July and led to the removal of all legal limits on social contact and the reopening of many premises. I am delighted to report that as of today, 6 September, more than 60% of the UK population are now fully vaccinated, and 71% have received their first dose.

Since the start of the pandemic, the Government have put in place an economic support package totalling £352 billion through the furlough scheme and the Self-employment Income Support Scheme, support for businesses through grants and loans, and business rates and VAT relief. In March, during the Budget speech, the Chancellor announced a generous extension of economic support for businesses and individuals, with many schemes continuing well beyond the end of the road map to help businesses to bounce back. The Government continue to support businesses by once again extending this key protection to prevent companies being forced into liquidation where their debts are due to the effects of the virus.

It has been widely reported that although many businesses are now open and trading they have continued to feel the effects of the periods of shut-down and limited trading over many months, and it will take some time for them to get back to normal financial health. This instrument will help companies while they get back to more normal activity by extending to 30 September 2021 a measure first introduced by the Corporate Insolvency and Governance Act 2020: specifically, the temporary suspension on issuing statutory demands and the restrictions on company winding-up petitions.

This measure has been extended several times by regulations, most recently from the end of March to 30 June, and this instrument seeks to extend it a further time, giving businesses the chance to trade free from creditor action to liquidate them for debts that arose because of the unique situation that many businesses have been in. This extension will allow them to sort out any financial difficulties that have arisen during the enforced restrictions over the last year or so, while the economy gets back to normal.

Since its introduction in June last year, the measure has protected many viable companies from aggressive creditor enforcement action during really difficult trading times. The temporary restriction on company winding-up petitions means that anyone who wishes to wind up a company that has not paid its debts must satisfy a court that those debts are not Covid-19 related. This extension aims to give many companies much-needed time to get back on their feet as the economy begins to return to normal: time for them to generate income, take advice, reach out to their creditors and, where appropriate, time to restructure.

The Government have helped companies while they had to stay shut, and, now that they are able to open, it is crucial that we do not withdraw that help prematurely before they are given the chance to trade back to financial health. Although this measure is intended to help companies that may be subject to aggressive creditor enforcement, the Government have always been clear that it is not to be seen as a payment holiday. Where companies can pay their debts, they should do so.

I know that many businesses and their business representatives will welcome the continued support that these regulations offer, but of course I also acknowledge that this measure will mean a further period of uncertainty for creditors where their rights to enforce recovery of their debts are temporarily restricted. We do not take this action lightly, and we are very aware of the impact on creditors. However, as I have said, the measure is intended to help those in financial difficulty as a result of the pandemic and must not be used as an excuse to avoid payment. So where a company can pay its debts, of course it is right that it should do so.

We will continue to monitor the situation carefully, consulting with stakeholders and the business community to determine what further action may be necessary when these regulations expire at the end of this month. I commend these regulations to the Committee.

My Lords, I declare an interest. Since we last debated this subject, I have become a non-executive director and chairman-designate of Manolete Partners plc, an AIM-listed company involved in insolvency litigation. Therefore, I have a vested interest in addition to my other business interests.

I again congratulate the Government on the swift and decisive action taken with the introduction of this legislation in responding to the economic crisis. We did not agree on every aspect of the legislation, particularly some details of the moratorium, but we did agree on the direction of travel and the effect that all this has had. This debate is of course in respect of regulations which, as I understand it, expire at the end of this month, so although necessary, because of the way the regulations are drafted, it is probably the shortest-term effect of any regulation that has gone through this House.

More important is to know and understand what will happen after the end of this month. A number of us would argue that the time has come to relax these regulations and to rely on the market in which this Government have such faith. The market will determine which companies should have more capital allocated to them, which companies are zombie companies and which companies do not have a future. That will be decided partly by creditors and partly by people choosing whether to invest in companies that need such cash to face creditors.

It is interesting to look at the situation regarding creditors’ voluntary liquidation. Creditors’ voluntary liquidation is essentially when directors decide to throw in the towel because the business cannot carry on of its own volition. The figures published by the excellent Insolvency Service just the other day show that the level has returned to pre-pandemic levels, about 2,800 companies in the last quarter, which is roughly where it was pre-pandemic and is constant. So the market is returning to normal where it can. I very much hope that the Minister can give us an indication soon of the Government’s thinking on this extremely important issue.

My Lords, there are many industries that are still not fully on a path to recovery, good examples being hospitality and events management. If we are thinking about terminating this legislation at some stage, surely before we do that the Government will have to present us with some evidence of what the impact of the cliff edge will be on those and other industries.

Clearly a cliff edge is looming, although the can continues to be kicked down the road. What will happen when suddenly, as has been said, you let the market forces rip? What will be the effect of this legislation upon creditors who would perhaps have expected to have some recovery but who now must wait to recover? Clearly there is a knock-on effect, but the Government have not really presented any estimate of that. When the cliff edge comes, what restraints will be exercised by banks, private equity, hedge funds and other secured creditors, or will they all simply be rushing to collect their resources, collect their money, and put businesses into liquidation? That will clearly have a huge negative effect.

The Government need to present us with a plan. What exactly is the value of the debts that are affected? How many businesses? How many creditors? We have heard absolutely no information from the Government. When market forces are allowed to rip, what exactly would be the constraints on the insolvency practitioners who charge mega sums for insolvency fees that actually worsen the crisis? The BHS liquidation began in 2016 and is still not finished. Carillion began in 2018 and is still going. Thomas Cook is still going. Maplin is still going. Monarch Airlines and many others have been going for decades and decades. There seems to be absolutely no check. If the Government are really planning ahead, they need to present a plan about how they are going to constrain the insolvency industry. We have not really heard anything about that. I have asked in PQs for information about the values that unsecured creditors may lose. I am told that the Government have no figures. Again, I ask: what is the Government’s plan to deal with the cliff edge ahead?

My Lords, I declare an interest. I am chairman of the Secondary Legislation Scrutiny Committee, which has reviewed these regulations, but I speak this afternoon not as its chairman, nor indeed for the committee at all; I speak entirely in a personal capacity.

My noble friend the Minister will be aware of my interest in these matters, and it would be right for me to begin by thanking him and his officials, led by Paul Bannister, for the time they have given me and other interested Members of your Lordships’ House over the past few months to look at aspects of the particular problem we are dealing with this afternoon. Indeed, they have given us not just time but action in the sense that we have had some really sensible regulations about pre-packs, which have become a feature of choice and often with connected persons. The regulations which the Government have produced have done much to block that loophole and, judging by my postbag, they seem to be working well so far, although, as the noble Lord, Lord Sikka, has pointed out, the point of maximum strain will of course come when we reach the end of the subsidies, whenever that may be.

I have a couple of points to make this afternoon. The first is about how we judge when “can’t pay, won’t pay” moves to “can pay, won’t pay”. My noble friend the Minister will say that paragraph 7.3 of the Explanatory Memorandum says that that is when the court is satisfied that the company’s inability to pay is not due to coronavirus. That may a possibility for a large and well-resourced company, but it is certainly beyond the resources of a small or medium-sized enterprise to go to court to try to prove this issue, which is pretty hard to prove anyway. I do not think that the Government should think that this offers anything other than the largest companies a proper balance in the argument about “can’t pay” and “can pay, but not bothering to pay”.

Of course, one understands, and has an instructive and instinctive view, that one should be helping people whose lives, efforts and companies have been set back by the pandemic, an issue over which they have no control. Of course you feel sympathy for them. However, we always have to balance that sympathy with the knowledge that this is a zero-sum game. One person’s gain is another person’s loss. I may be a supplier and may therefore be caught up in this; I may be unable to get paid and my business may be affected. It is always tempting to think that one should be trying to help those who are in difficulties and forgetting those who are strong. We need to avoid, or at least to minimise, situations where businesses that are already weak—perhaps for reasons beyond coronavirus, although that has created an additional strain—are kept afloat at the expense of suppliers and landlords.

In summary, we need to avoid taking policy decisions that benefit the weak and weaken the strong. When my noble friend winds up, it would be helpful if he could give us a stream of consciousness that will guide us as to how the Government judge all this. I understand the magic references to constant review in the Explanatory Memorandum; viable but cash poor is in there as well.

It would be helpful if the Minister could broaden out, in a slightly philosophical way, how his department is considering the matter and how it will make judgments in the future. Please, it must not fall back on saying, “It’s up to the court”, because the court is a court and not always as well able to judge commercial matters as the Government and advisers to them. That is my first point.

My second point concerns the position of landlords. They are always unpopular; nobody likes paying rent, and people always try to avoid it. However, we need to remember that big and small landlords provide the foundations for a huge swathe of our industrial, commercial and residential activity. As before, this is not just an academic exercise. The pensions that many of us enjoy, or hope to enjoy, are underpinned in large measure by real estate values. If we allow this sector to be savaged, the impact will be felt by pensioners up and down the country. Our environment, our neighbourhoods and in particular our high streets will depend for their vitality on a continuing flow of real estate investment. If we allow landlords to become too much the target, we run the risk of damaging those important factors.

My noble friend needs to be aware—I am sure he is already—that the position of landlords under the present regulatory regime, the landlord restructuring plan, is giving cause for concern. At this point, I need to declare a second interest, in that I have a shareholding in a family investment company that rents out commercial property—happily, to date, without any of the problems to which I will refer, but the Committee needs to be aware that I have that conflict.

I will have just a word on the specific challenges, for which I would be grateful for my noble friend’s reaction this afternoon or, if he feels that I have gone too far off-piste and his brief is not ready for this, I am happy to receive a letter, and I am sure other Members of the Committee will be happy to do so too.

Noble Lords interested in the area will be familiar with what are called, in current legislation, cross-class cram-down provisions. These prevent a small group of creditors greenmailing—holding a restructuring plan to ransom. In that sense, they seem reasonable enough and sensible, but they also enable one group of creditors to bully another into accepting unfair terms. There are many constraints on individual classes of creditors, and landlords can have difficulty obtaining appropriate compensation or protection. First, it is very costly. The Virgin Active restructuring cost about £3 million. It has to happen very quickly. A real estate company or landlord has three weeks to get its case together, brief its Silks—its legal advisers—and get to court. Once again, these are sufficiently high hurdles that small and medium-sized companies just cannot go there. Big ones can, but smaller ones are left behind. Secondly, life being what it is, unscrupulous firms facing difficulties can make their financial affairs even more difficult in advance of such an issue, so it is even more problematic, costly and complicated for a landlord seeking to obtain protection to go to court and get it.

There is also the concern that landlord restructuring plans can go much further than what is needed just to save the business, if that business is in danger of going into administration. It is what is known in the legislation as the relevant alternative. A firm in trouble has an incentive to plan its financial performance as part of a restructuring likely to lead to administration and so set landlords in particular, but also other creditors, at a disadvantage.

My last point on this matter, and the Government understand this, is that there are not now the protections against connected parties. In company voluntary arrangements, less than 50% must be connected parties. There is no such provision in this measure. With a landlord restructuring plan, 70% of the connected parties —shareholders, creditors, whatever—could vote in favour, with the landlord unable to obtain redress for it.

Those are just some of the issues bubbling up as part of the situation that we face and which the Government now need to think about. What could be the solution? Without diving too deeply into the detail, I point out that the Government have powers under the Corporate Insolvency and Governance Act to introduce further secondary legislation to address these challenges specifically. First, they can amend the rules governing cross-class cram-down provisions. Secondly, they could introduce the 50% unconnected creditor test for LRPs, which, as I have mentioned, presently applies to CVAs.

When my noble friend responds, he may claim that there has been only a limited number of cases of this abuse so far, but, as the noble Lord, Lord Sikka, and I said earlier, the point of maximum danger will be when the pandemic measures are withdrawn, if we extend beyond 30 September. Acting then will be too late: the horse will have bolted. However, if the Government decide to act now, there is a reasonable prospect that the new regulations could be in place in time to keep the horse in the stable. I look forward to hearing my noble friend’s reaction.

My Lords, we are back again debating measures to extend the restrictions on the use of statutory demands and winding-up petitions. I think this is the third time we have debated them, and every time we welcome, as we would from our Benches, the Government extending the safety net for businesses in distress because of the pandemic.

Just as we supported the emergency legislation last year, we welcome any measures to support the businesses that closed to keep us safe. As the Minister knows well by now, we argued then that the protections in the Act should be extended over a long period. As the Government extend them again, we reiterate the point, as we have before, that these short extensions cause real uncertainty and worry for businesses in the run-up to each expiry date, concerned as those businesses are with the cliff edge.

As the economy opens and restrictions end, it is right that these measures are kept under review, but we must also remember how many people are still affected by insolvency. The Government’s recent statistics, from July 2021, showed that there were 1,094 registered insolvencies. This was 13% higher than the number registered in the same month in 2020. Does the Minister expect this yearly increase to continue for the rest of 2021? Before he gets into the stream of consciousness response which the noble Lord, Lord Hodgson, so eagerly anticipated, perhaps he could answer a few other questions as well.

Will this be the last extension of these measures, or will we be back in a couple of weeks, or a month or so, since the current extension is only to the end of September? What has changed since the last SI is that some support was not extended beyond the end of June. This includes the small supplier exemptions from the termination clause provisions and the suspension of viability for wrongful trading provisions. The Government have said that these measures were allowed to lapse to enable a gradual return of the insolvency framework to its normal operation. Can the Minister explain how this decision was made? What evidence was it based on? What impact has it had on businesses since June?

As we return fresh from recess, can we hear from the Minister about any new plans the Government have for wider reform of our insolvency laws, including providing some greater protection and support for key industries and their key workers? As Covid support continues to be pulled away, we must ensure that we do not see a whole wave of insolvencies during the latter end of this year, provoking rises in unemployment and making businesses less certain of the environment in which they will work. We need to get the right support to thrive in the post-pandemic period, whenever we feel that comes.

Having listened to noble Lords around the Committee, I think we are all in need of some reassurance. Some colleagues here want to see market forces let rip, but I do not think that doing so is necessarily the best option here, although of course we all want to return to normal. I look forward to the noble Lord’s reassurances and some answers to those key questions, as well as to those raised by the noble Lord, Lord Hodgson of Astley Abbotts.

First, I thank all noble Lords for their interesting and, as always, valuable contributions to this debate.

It is worth reiterating that, since the emergence of Covid-19, businesses have received billions in loans, tax deferrals, business rate relief and grants to support them and, vitally, to help them to preserve jobs. The Government’s road map for the staged lifting of restrictions has in my view been a success in protecting the UK from the spread of Covid-19 while the vaccine programme was rolled out, and we can all begin slowly to return to normality.

However, we must recognise that many businesses and others have suffered from the impact of the pandemic for over a year now, and in many cases it will take time to return to full pre-Covid financial health. The Government will continue to do what it takes to support businesses through this period of economic recovery.

The points raised have highlighted the importance of the measure being extended by these regulations and the necessity of extending it once more so that businesses can continue to benefit from it. These regulations will provide the much-needed continued support for businesses to concentrate their best efforts on continuing to trade, preserve jobs and build the foundations for our economic recovery. I sincerely hope that companies and their creditors will come together in good faith to maintain their future trading relationships and secure the benefits for both themselves and the economy as a whole.

I will answer some of the points that were quite fairly put to me in the debate. The noble Lord, Lord Sikka, and my noble friend Lord Leigh asked a very pertinent and relevant question about what will happen when these measures come to an end in a little over three weeks’ time. The Government recognise that there is potential for what I think both noble Lords referred to as a cliff-edge scenario involving the accumulation of unpaid debts becoming due when these restrictions and government fiscal support expire. I can tell noble Lords that work is ongoing with businesses and key stakeholders to develop solutions to enable a viable exit from these measures. All options are being considered, and I hope to make an announcement on this very shortly.

The noble Lord, Lord Sikka, asked what the Government are doing to support creditors who are unable to recover their debts and who are putting their own businesses at risk. To reiterate, this is a temporary measure that is intended to help struggling businesses during the continuation of the pandemic. It does not, as I said initially, permanently prevent the possibility of a creditor serving a statutory demand and/or presenting a winding-up petition. When the legislation expires, a creditor will be able to pursue their debt. We expect this to encourage businesses to continue, wherever possible, to meet their ongoing liabilities as far as they are able to do so.

There is a range of other legal options available to creditors seeking to recover debts which are unaffected by the changes being made here. If is, for example, possible to bring a civil claim to recover a debt. Also, where a company’s inability to pay is not related to Covid-19, it will still be possible to present a petition for winding it up, notwithstanding the points correctly raised by my noble friend Lord Hodgson. There is evidence to suggest that winding-up petitions are still being presented in appropriate cases.

My noble friend Lord Hodgson also raised an important point about what the Government are doing to support landlords. We recognise the current challenges facing commercial landlords and the significant impact these are having on their business models. We also recognise that many landlords are demonstrating what we would regard as best practice by working closely with tenants to find solutions that work for both parties, and we are grateful to see many of these discussions continuing to take place.

The Government have extended the commercial rents moratorium to March 2022 and will introduce legislation to support the orderly resolution of commercial rent arrears where tenants are affected by restrictions during the pandemic. The legislation will ring-fence rent debt accrued and set out a process of binding arbitration between landlords and tenants.

My noble friend Lord Hodgson also raised many points regarding landlord restructuring plans and—one of my favourite phrases to emerge from all this—cross-class cram down: I managed to say it. I recognise the concerns about restructuring plans and how the new cross-class cram-down provisions are working, and indeed I have been approached separately by landlords, as have officials, and have recently written to them on this; I can share the correspondence with my noble friend Lord Hodgson if that would be helpful. However, the provisions are still relatively new and there have already been some very successful rescue plans. We will, as always, monitor the situation closely, and I pay tribute to him for all the work that he does on this and for his suggestion for the use of powers under the Act. We are more than happy to work with commercial landlords going forward, as my noble friend has suggested.

The noble Lord, Lord Bassam, asked why some of the temporary measures, such as the exclusion of small businesses from termination clauses and the return of personal liability for wrongful trading, were allowed to lapse at the end of June. The answer is that we use a range of evidence and criteria to make such decisions, and we took the view that returning the regime to its normal operation was of vital importance as the economy reopens and we start to get back to normal. Impact assessments will be published in due course.

I hope that I have answered most of the questions that were put to me, and yet again I thank the small number of specialists in this field from whom this House has once again benefited in their useful contributions to this debate.

Motion agreed.

Sitting suspended.

Alcohol Licensing (Coronavirus) (Regulatory Easements) (Amendment) Regulations 2021

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Alcohol Licensing (Coronavirus) (Regulatory Easements) (Amendment) Regulations 2021.

Relevant document: 5th Report from the Secondary Legislation Scrutiny Committee.

My Lords, these regulations contain modest measures to help to support the hospitality industry’s recovery from the economic impact of closures and restrictions on its operation during the Covid-19 pandemic. The measures will help hospitality businesses to recoup some of the revenue they have lost since March of last year. They will also allow greater flexibility in the way in which licensed premises operate if circumstances change.

Data from trade organisations and other sources show significant financial losses for the hospitality industry as a consequence of the pandemic. Curren Goodden Associates, a data and research company, reports that around 6,000 licensed premises closed in 2020 across Britain. The British Beer and Pub Association has estimated a year-on-year decrease in beer sales of £7.8 billion in 2020. Office for National Statistics data up to the end of May this year showed that payments to suppliers from food and drink businesses remained at around half their pre-pandemic levels.

The statutory instrument contains three measures to help. The first will extend provisions in the Business and Planning Act 2020 to allow for a further year, until 30 September next year, sales of alcohol for consumption off the premises to licensed premises that did not have that permission. This will allow up to 38,000 licensed premises that did not have permission to make off-sales when the Act commenced last year to continue selling alcohol for consumption outdoors, to take away or for home delivery.

The second measure amends the limits prescribed in Section 107 of the Licensing Act 2003 to increase the allowance for temporary event notices that a premises user can give in respect of a premises from 15 to 20 and increases the maximum number of days on which temporary events may be held at such premises from 21 to 26, in each of the calendar years 2022 and 2023. The increase in premises allowances of temporary event notices will enable unlicensed premises to host more revenue-generating events, such as wedding receptions and markets where alcohol is sold, as well as enabling licensed premises to extend hours by way of a temporary event notice to accommodate celebratory occasions.

Finally, the statutory instrument amends existing regulations, the Licensing Act 2003 (Permitted Temporary Activities) (Notices) Regulations 2005, to make consequential amendments to the relevant forms for temporary event notices and counter-notices. All businesses should still comply with the latest government guidance on working safely during the pandemic.

I reassure the Committee that, before this order was laid, Home Office officials consulted the National Police Chiefs’ Council about the effects that the temporary off-sales permission has had thus far. The view of the police then was that it had not caused any increase in crime and disorder.

Alongside the extension of the temporary off-sales permission, the statutory instrument will extend an expedited review process which allows responsible authorities to quickly alter the licensing conditions granted to premises or to remove the permission for sales of alcohol for consumption off the premises. I know that noble Lords will appreciate the impact which the pandemic has had on the hospitality industry, and I hope that the Committee will support these measures to aid its recovery. I commend this order to the House. I beg to move.

I thank the Minister for her cogent introduction to the regulations and for the copious, detailed, helpful Home Office Explanatory Memorandum. I am sure that all of us seek progress for these regulations. It is so good to see my noble friend Lord Coaker in his Front-Bench seat. I recollect his determination, diligence and command of subject in another place. Can the Minister throw any further light on how previous provisions for Covid have fared in Wales? Was there easy acceptance or did her department detect some resistance? How did her department liaise with and consult the Senedd in Cardiff? Speedily, was it? Or was it dilatory? What form did the consultation take? Was it ministerially, face to face? I think not, from paragraph 10 of the Explanatory Memorandum. Was it official to official? Again, paragraph 10 is specific. Why was it not ministerially face to face? Were there problems? Surely the Minister will surely dispel those considerations. Has the department made any assessment of the differences in the reception of and obedience to the previous post-Covid provisions? What was the link between her department and the department of health? How were these links between departments managed?

Finally, the Committee may know that many decades ago there was a referendum in Wales to determine Sunday opening for public houses. Nonconformist opinion rallied negative forces. The referendum was lost and many remained thirsty on Sundays. I hasten to say that Wales is not a land of hypocrisy and whitewash, but in those days in much of Wales every Sunday there was a procession of buses carrying thirsty Welshwomen and Welshmen to borderland English pubs. Several decades later the second referendum was positive, possibly because the chapels were emptying. I remind the Committee that the great Welshman and Prime Minister Lloyd George enacted legislation that impinged strongly on pub opening times, but the World War I war effort was judged to be the better for it.

My Lords, I thank the Minister for explaining these regulations. I am concerned that the information that she gave to the Committee appears to be somewhat out of date. For example, she gave information about the sale of beer until May this year. Looking at the press, the evidence is that the hospitality sector has recovered extremely well in recent months, what with staycations and people enjoying their newfound freedom. I wonder whether she has any more up-to-date information about why these regulations are necessary.

Of the three measures, the last one is consequential in terms of applications for temporary event notices, and the increases to the limits for temporary event notices are only marginal. My major concern, which we have previously discussed, is about on-licence premises being allowed to sell alcohol to take away. When we discussed this previously, I expressed concern about alcohol being sold in open containers, allowing customers to purchase alcohol and then to walk down the street unsupervised, to the annoyance of passers-by and local residents. Of particular concern was if the alcohol was served in containers made of glass which could be broken and used as weapons.

I note that the Minister said that the National Police Chiefs’ Council—presumably consulted earlier this year—said that there was no increase in crime and disorder as a result of the change allowing on-licence premises to sell alcohol to take away. But that was before the recovery in the hospitality sector that we have seen in recent months. Again, I wonder whether there is a growing problem of disorder as a result of the sorts of changes that these regulations are looking to extend.

The Explanatory Memorandum states that the measures are

“intended to assist the recovery of the hospitality industry in response to the coronavirus pandemic.”

To an extent, that is still a problem as far as city centres are concerned. Although noble Lords and our colleagues in the Commons are back, many offices are still not being occupied in city centres. I can understand that there is a continuing problem for the hospitality sector in city centres, but that is not the case in terms of venues where people live.

It is also a little confusing that Westminster Council, for example, has decided not to grant any more pavement licences from the end of this month, and to reopen roads, particularly in Soho. My understanding is that these regulations are an integral part of pavement licences in that, if alcohol is served by an on-licence premises to people sitting either on the pavement or in the road, that counts as off-sales. Therefore, these regulations are integral to pavement licences if the service provided by premises where there are pavement licences is to include the serving of alcohol. It seems confusing that local authorities are not extending pavement licences—presumably they know better about the concerns of local residents, which is why they are not continuing with the process—yet the Government continue to proceed with these regulations.

The other concern I have is that, as I understand it, the reason why on-licence premises were given permission to sell alcohol to take away—they were given off-licences, effectively—was because of social distancing restrictions, which restricted the number of customers who could be served inside the premises. Now, as we know, all legal restrictions on social distancing inside premises have been removed and, therefore, the main reason for these regulations in the first place seems to have gone. Indeed, as we have seen in the media, nightclubs have reopened, and pop festivals and the like are taking place where you are getting significant numbers of people into very small venues. Again, one has to ask why regulations designed to compensate for the fact that you could not accommodate as many people inside premises are continuing when the restrictions on people inside premises are no longer there.

The whole basis of these regulations is to help the hospitality industry, but at the same time as saying that they want to do that, the Government, according to the Vaccines Minister yesterday, are about to introduce compulsory Covid passports or Covid vaccination proof for entry into many types of premises in the hospitality industry. This would seem to contradict what they are trying to do with these regulations.

It is not simply a case of excluding people who have decided not to be vaccinated, nor simply a matter of keeping people safe. In July in the other place, the Government’s Vaccines Minister said that, by the end of that month, those who had been vaccinated overseas would be able to have a discussion with their GP, and if they were satisfied that the vaccinations that they had received were in compliance with UK rules, the information would be uploaded to the NHS system and people could then access their Covid pass via the NHS app.

This is still not possible, so almost daily I am getting emails from people who have been double vaccinated in Australia or Singapore but cannot access the Covid pass—the same pass that the Government apparently will demand that people have, to access the sort of hospitality industry premises that they claim to want to help in the regulations. It is not simply a health issue of ensuring that people are double vaccinated before they can go into venues. These people have been properly vaccinated yet they will not be able to prove through the NHS app that they have been doubly vaccinated, so they will be barred entry to the sort of premises that the Government are intending to enforce Covid passes for by the end of this month, according to the Vaccines Minister yesterday.

Therefore, I have concerns about whether these regulations are necessary. Local authorities seem to be taking a different view, and I am concerned that the apparent proposal to insist on Covid passes for entering many premises within the hospitality industry will have the reverse effect to what the Government are trying to achieve through these regulations.

My Lords, it is good to be here discussing this important SI. I say at the outset that we support the regulations but, as we have heard from the noble Lord, Lord Paddick, and my noble friend Lord Jones, there are some questions which quite rightly people will want asked. However, I thank the Minister for a helpful introduction, particularly in trying to answer some of the questions before we had asked them—for example, on the consultation with the national police chiefs.

My noble friend Lord Jones got off to a good start by saying how well I did in the other place—so I thought his was a brilliant speech. e made some important points. It is interesting to look at the history of Wales around the referendum on drinking on a Sunday, some of the implications of that and changes that have taken place over the years. The noble Lord, Lord Paddick, is absolutely right: the Explanatory Memorandum talked about all the difficulties that there have been, with 6,000 licensed premises closing and over £7 billion lost, but the point of the regulations was to help. It would be helpful, as I think the noble Lord, Lord Paddick, was saying, to ask what the positive outcome of some of that was. How many places would have closed and how much money would have been lost had that not happened?

I say to the noble Lord, Lord Paddick, that there clearly is a real problem. You cannot drive around the country without seeing closed restaurants, closed hotels and closed pubs. I am not a statistician but I can see where I live—Cotgrave in Nottinghamshire—that there were two pubs and now there is one, which is working as hard as it can but is facing difficulty. The hospitality industry needs support and help. I accept the point about the need to be positive, particularly as some of the regulations have been relaxed, so what additional benefits are there? That is an important point about why the regulations are necessary and what we say to the public about them. From the evidence of my own eyes as I drive around, I cannot believe that there has not been a disastrous effect. I have a number of questions, as it has made a difference to the industry as a whole.

I turn to the points made by the noble Lord, Lord Paddick, about crime and disorder as there are questions we need to ask about that. When the SI went through before, my colleagues raised a number of issues which were taken on board, including the cost and the increased workload for local authorities. What assessment has been made of that? What support has been given to the licensing authorities in local authorities to deal with it? Have any problems emerged as a consequence? I will come on to anti-social behaviour and the potential for crime.

On access to toilets, I am bemused by the fact that the availability of public conveniences is shocking across the country. I know everybody blames everybody else. Whoever’s fault it is, it is a real problem. If you look at the night-time economy, there was a problem before and there continues to be a problem with shop doorways being used and so on. The issue has been raised before, and is important. I do not know whether people are embarrassed to talk about it or just assume the worst, but the reality is that we all need a toilet and sometimes a public toilet is not available and perhaps it should be. We raised that as the SI went through before.

The availability of support for smaller breweries is an issue. They provide so much of the local pub scene. Has any work been done to see whether the help for them has been significant?

The Minister answered a question about the National Police Chiefs’ Council. It would be interesting to see whether there are any differences between what it is saying and what local police forces say. The Local Government Association talks about informal discussions with it. I am not sure what the Minister said about what it said, unless I missed it. I notice from the Explanatory Notes that no formal review of the impact of the regulations will take place. I think everything needs to be reviewed. It can be a quick review, but it is important to look at what we have seen and what we can learn from it.

I want to make a suggestion on crime and disorder that I hope the Minister will take on board and find helpful. It may answer the point made by the noble Lord, Lord Paddick. Paragraph 23 of the Explanatory Memorandum explicitly says that there may well be an increase in crime and disorder. The Government’s publication in evidence states that we could see an increase in crime and disorder because of pent-up demand for alcohol, that it is possible that it may be at a greater than previous level due to pent-up demand for drinking alcohol in a public house social situation, and that there is considerable uncertainty around the impact given that the current situation is novel and has few comparisons. There is clearly potential for a problem here. That is not to say that the regulations should therefore be imposed but, given that the Government think there is a potentially a problem, the public, the police, local authorities and the sector itself would expect something to be done about it.

However—this is the helpful comment which I hope that the Minister will take on board—the very next paragraph points out that, despite the fact that there are considerable uncertainties, objections can be made to temporary notices and the various licensing activities that can happen; they can be modified or, indeed, rejected, if deemed to be a problem. Specifically, if the police believe that TENs may lead to a disproportionate increase in crime and disorder, they can do something about that. It would be helpful if the Minister could say a little more about what would be possible for local authorities and the police to do if they feel that it is inappropriate for there to be an extension to a licence granted, whether it be about the number of days or about pavements, or whatever. I think that is what people want; people are very sensible about these things, but they want reassurance about what will be done about it, given that the Government themselves think that there may be a problem.

The other aspect that I do not understand, which the Minister may be able to comment on, is whether the public are able to object. The police may be able to object—it says here that they can—and the local authority may be able to object, but what if a group of residents decides that something is inappropriate or unacceptable? Can they object to it? There are a number of issues here around support for local authorities, around consultation and public toilets, and around what powers are available to people if they believe that the pavement cafe or extension is inappropriate or not right, and what the Government are going to do to explain to the public and local communities what powers they have if there is a problem.

I conclude by saying that the Government are right to look to extend the SI. It seems a reasonable and very sensible thing to do, as it has clearly made a difference—but it would also be helpful for the Minister to tell us, if not now then at some point in future, what benefits there have been of the existing legislation that have caused the Government to decide that extending it is worth doing. I look forward to the Minister’s response.

I thank noble Lords who have made points during this debate. The noble Lord, Lord Coaker, follows in a fine tradition from the noble Lord, Lord Rosser, who always ends his speeches with about 20 questions. He has not disappointed there—and I look forward to further discussions of this nature.

On the first points made by the noble Lord, Lord Jones, he is absolutely right to raise the matter of Wales. The measures cover England and Wales. The department spoke to Wales very early on, although that has not happened recently with the Department of Health and Social Care—but we have regular catch-ups with that department. He asked about Minister-to-Minister engagement, and I do not have an answer on that, but I know that we speak regularly with the devolved authorities and they have been satisfied with the approach that we have taken. I hope that is sufficient for the noble Lord, Lord Jones.

The noble Lord, Lord Coaker, talked about the additional workloads on local authorities. Absolutely, they do have them—and were this to be on a permanent basis it would require a change in legislation. Of course, because of the very temporary nature of it, that sort of impact has not had to be substantially considered.

On public toilets, I spent my life in local government talking about public toilets. It is something that really interests the public. I am not sure that there has been a decline in the number of public toilets over the past couple of years, but the fact that people are drinking outside certainly means that public toilets have needed to be more accessible for them. I do not know whether it is the same in the noble Lord’s area, but I have found that the attitude of various premises towards people being allowed to use their toilets has been much more sympathetic and empathetic because of the difficulties that we have all faced. I totally agree with him about local breweries. I do not know how many of them have been forced to close, but I am sure that local breweries have benefited from some of the business support that the Government have given.

On whether there has been any difference of opinion between the NPCC and local police forces, the NPCC speaks for everyone as a whole. I am sure that there have been differences of opinion across the 43 local police forces. If I have any information on that, I will give it to the noble Lord. On what happens if the public object, the public are part of the licensing system. The police, the licensing authority and the public all have a say. If the public object—particularly if there is noise nuisance—the licensing authority can revisit its decision.

The noble Lord also asked, on the back of the point made by the noble Lord, Lord Paddick, why it was necessary at this stage to extend the provisions. Over the year, pubs and licensed premises have really suffered. The last few months have clearly been quite positive in terms of what they have been able to do. On the point made by the noble Lord, Lord Paddick, about why it is necessary—

Sitting suspended for a Division in the House.

My Lords, if I may continue, picking up where I left off with the noble Lord, Lord Coaker, on why it might be necessary to continue, businesses in particular have a long way to go before they get themselves back on their feet. Particularly for small premises, this extension will give additional capacity that those businesses might need. He made a very good point about how much money would have been lost without the regulation; I do not know whether we have quantified or assessed that, but a lot more businesses would certainly have gone to the wire without our assistance.

The noble Lord, Lord Paddick, made a point about Westminster council and pavement licences. They are entirely a matter for it. Local authorities must have that say over what happens in their locality. He also made a point about Covid passports. I do not know that anything has been officially decided on that, but he is right that there has been a lot in the press about them. Even so, it is obviously a matter for DHSC, not us, although I know his story of having been vaccinated several times and the problem of having one country accept another country’s vaccines and the other problems that leads to.

I draw noble Lords’ attention to other powers that the police and councils will have. Under Section 76 of the Anti-social Behaviour, Crime and Policing Act, they can issue a closure notice if there are reasonable grounds to consider

“that the use of particular premises has resulted, or … is likely … to result, in nuisance to members of the public”.

In terms of off-sales leading to anti-social behaviour, under Section 76 they can also issue a closure notice if they see fit.

Alongside the extension of the temporary off-sales permission, the statutory instrument—I might have said this already—will extend an expedited review process, which allows the responsible authority quickly to alter the licensing conditions granted to premises or remove the permission for sales of alcohol for consumption off the premises.

I hope I have covered everything noble Lords have asked.

Motion agreed.

Sitting suspended.

Conference of the Parties to the United Nations Framework Convention on Climate Change (Immunities and Privileges) Order 2021

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Conference of the Parties to the United Nations Framework Convention on Climate Change (Immunities and Privileges) Order 2021.

My Lords, this instrument was laid on 7 July in accordance with Paragraph 10 of Schedule 1 to the International Organisations Act 1968. It confers privileges and immunities in support of the 26th Session of the Conference of the Parties to the United Nations Framework Convention on Climate Change: COP 26. That will take place in Glasgow from 31 October to 12 November this year. This order is required so that the UK can comply fully with the obligations of the host country agreement that we have negotiated with the secretariat of the UN Framework Convention on Climate Change.

As president of COP 26, we are hosting the biggest event of this kind that the UK has ever seen. It presents us with a unique opportunity to demonstrate our global leadership on the issue of climate, delivering our objectives to accelerate worldwide action to tackle climate change and to deliver a green recovery and sustainable jobs. We are committed to delivering a whole-of-society conference in Glasgow and are working with the Scottish Government, the Welsh Government and the Northern Ireland Executive to ensure an inclusive and ambitious conference for the whole of the United Kingdom.

During the opening days of COP 26, we will host a world leaders’ summit. We are expecting up to 120 world leaders to accept the Prime Minister’s invitation to attend in person. The summit will set the stage for 12 days of talks. Teams of negotiators, government representatives, businesses and citizens will work together to develop solutions to the challenges that are now global priorities for us all. While interlinked, the world leaders’ summit and COP 26 are separate events in administrative terms. This SI deals with COP 26 only. Separate provisions are being made for participants in the world leaders’ summit.

A core principle of this framework is that functional immunities be accorded to all those performing functions in connection with the conference and all those invited to the conference. Ensuring that all participants feel that they can discharge these functions without fear of official or legal consequences is a fundamental requirement of a successful COP. We expect to welcome more than 25,000 participants to Glasgow and recognise the need for them to be able to perform their functions freely. If we were to accord privileges and immunities to all, however, we would be going far beyond what we would consider functional need. In particular, protections regarding freedom of expression and freedom of assembly already exist under UK domestic law.

Negotiations have taken place with the UN, at the highest levels, to keep the number granted privileges and immunities as small as possible without compromising participants’ freedom to function. We have reassured the secretariat and the UN that the extensive protections that exist in UK domestic law as regards freedom of expression and freedom of assembly negate the requirement for the widespread granting of privileges and immunities.

I am pleased to confirm that we have been successful in reaching agreement that we shall confer privileges and immunities on only three categories: UN officials who do not already enjoy them; the delegations of member and observer states, otherwise known as the parties; and core personnel from the Clean Development Mechanism, the Green Climate Fund, the Adaptation Fund and the Global Environment Facility. These privileges and immunities include immunity from arrest and detention and from suit and legal process for certain individuals while they are exercising their functions in connection with the conference. It does not grant personal immunity or inviolability, nor will it extend to British nationals, permanent residents or their spouses or partners.

We have carefully considered the effects of the ongoing pandemic and the interplay between privileges and immunities and a COP held in that context. We have agreed with the UN Secretary-General and the Executive Secretary of the UNFCCC that a robust Covid management plan will be put in place and that the observance of those provisions will be enforced through a code of conduct which all participants will be required to accept.

Along with our colleagues in the Scottish Government, Glasgow City Council, public health bodies and the UN system, we are continuing to monitor the pandemic and are developing a comprehensive package of measures to help protect participants and the local community from the risk of Covid transmission during COP 26. The measures we have identified include vaccination, quarantine arrangements, bespoke test, trace and isolate procedures, hygiene protocols and enhanced ventilation. We are strongly recommending that participants be vaccinated, and the UK will work with the UN to provide vaccines to COP 26 participants who would otherwise be unable to secure them.

This instrument forms a necessary part of the UK’s compliance with the obligations in the host country agreement to be signed by the UK and the UNFCCC secretariat. It balances, on the one hand, the desire to limit the granting of privileges and immunities to a minimum, and on the other, the COP’s founding principle that all participants should be able to voice their legitimate opinions without fear of legal repercussion. It avoids setting unwelcome precedents for UN conferences held in countries which do not have the level of personal freedoms that we enjoy here in the UK, for instance by limiting freedom of assembly, which can allow the general public to express views through peaceful demonstration. It is a fundamental element of success as we demonstrate to the world that the UK is a global power that respects the rules-based international system and can respond to an ever-changing global environment.

We will continue to join forces with our global counterparts, civil society, the private sector and those on the front line of the fight against climate change to inspire action ahead of COP 26. We are firmly resolved to uphold the principles of freedom of expression, inspire debate and lead a movement towards consensus. In this way, we can achieve our ambitious goals to reduce emissions and rebuild through a green economy.

The UK is clear in what we want to achieve through our COP presidency. This instrument is an important step in welcoming the world to Glasgow so that the international community can agree decisive action to win the fight against climate change. I beg to move.

My Lords, I thank the Minister for his introduction to this SI, which is obviously necessary in line with our obligations as host nation. He talked about the three categories of people who will be granted immunity. Can he give us an indication of how many in total that will be? Can he also go a little further in explaining the extent of immunity from suit? He said that it related only to actions relating to the duties of these delegation members in connection with the conference. However, if they act illegally while attending the conference outside it are they immune from prosecutions for, for example, being drunk and disorderly?

Can the Minister tell us what is the nature of the privileges and immunities relating to personal baggage, which is mentioned specifically, and does that mean that baggage is exempt from searches? If so, how will the Government ensure that these privileges are not abused and what degree of scrutiny, given what I imagine is a fairly large number of individuals, will there be to ensure that such immunities are not provided to individuals who could pose a security risk?

I shall go beyond the specifics of the SI and ask the Minister about the granting of visas for the associated events that will go on around the summit, for instance, the youth summit. I declare my interest as a vice-chair of the All-Party Parliamentary Group for Africa. He will be aware of the deep concern expressed in its report a year or two ago about the persistent failure to grant visas to people from Africa, particularly young people. Again, when I was a member of the governing council of the International Planned Parenthood Federation, our youth representatives were almost always not allowed to join us at our six-monthly meetings in London because they had been refused visas. Can he give some assurance that, conducive with all the necessary security and other factors, we will provide access to young people who represent the youth in their countries?

My Lords, I join the noble Lord, Lord Oates, in saying that the instrument is an essential part of hosting COP 26; it is a long-standing convention with summits held away from the UN headquarters. As the Minister said, we are also implementing a host-country agreement. With COP 26 now only a short time away, the Government must use it as our last and best hope of a global breakthrough to limit temperature rises to 1.5 degrees.

As we have heard, the order reflects the immunities and privileges instruments that the House has debated in recent months, such as the order on the Bank for International Settlements. In this case, privileges and immunities will be received by representatives of parties and observer states, officials of the specialised agencies of the UN and select other representatives, such as those from the Adaption Fund, the Green Climate Fund and the Global Environment Facility. While that is standard practice for the first group—representatives of parties and observer states—I reiterate the point made by the noble Lord, Lord Oates: what risk assessment has the department made of the possibility of hostile individuals or states abusing their immunities and privileges while in the UK? Also, in relation to the privileges granted to UN officials, the list in the order includes only specialised agencies. Does that mean that attendees from other UN bodies, including the UN Environment Programme, will not be given immunity? Was that issue raised during negotiations on the host agreement?

The period for which immunities and privileges apply is between 31 October and 12 November, which reflects the slightly extended duration of the summit, which is now set to begin on 31 October rather than 1 November. When the decision was made to extend the summit, the reason given was that it would allow additional time to complete its work. Can the Minister expand on that and explain why the summit was extended? I have no objections, certainly if it means that we reach agreement, but it would be good to have a better understanding of the decision.

I turn to the host agreement which the instrument relates to. In addition to agreeing to the immunities and privileges, which the Minister mentioned, as well as Covid arrangements and all the requirements that we are undertaking to make the summit safe, one of the other commitments made in the host agreement is that we must

“provide facilities that are environmentally sound and in accordance with the ideals provided for under the United Nations Framework Convention on Climate Change … the Kyoto Protocol and the Paris Agreement.”

Can the Minister explain exactly what steps we have taken, along with the devolved Government in Edinburgh, to meet that objective? Given that the host agreement also refers to a “separate supplementary agreement” for “pre-sessional meetings”, can the Minister confirm whether any further instruments are expected as a result of that agreement? Will we be extending immunities for those particular sessions?

In conclusion, this is a decisive decade in the fight against climate change and environmental breakdown but the world is currently not on track to meet the goals of the Paris Agreement. Therefore, COP 26 is a critical moment for our planet and our country and we can all hope that the Government will use this event to keep alive the hope of limiting global heating to 1.5 degrees centigrade. I look forward to the Minister’s assurance on the questions I have put to him.

My Lords, I am grateful to the noble Lords, Lord Oates and Lord Collins of Highbury, for their questions and points on this statutory instrument. I am grateful too for their recognition that this is in line with the obligations on us as the president of COP and, indeed, with long-standing precedent. I will address the questions that they have posed today, and if I miss any, I hope that they will forgive me for writing with further detail, but I shall attempt to cover all the points that they raised.

The noble Lord, Lord Oates, asked about the extent of the immunity. The UNFCCC requirement is to grant

“immunity from legal process in respect of words spoken or written and any act performed … in connection with”

participation in COP 26 to the registered COP 26 participants under the agreed Article 2 categories. Many participants in COP 26 and associated meetings will already enjoy privileges and immunities by virtue of their function or position if they are a Head of Government or have diplomatic status, for instance. It is standard practice, as the noble Lord recognised, for host Governments to grant appropriate privileges and immunities to UN-associated international conferences, based on the UN general convention of 1946.

The privileges and immunities accorded to participants in COP 26 and associated meetings will apply only when participants are exercising their official functions at the conference and associated meetings. The purpose of the privileges and immunities is not to benefit individuals but to ensure that they are able to perform their official duties smoothly and efficiently. We expect all participants to respect our laws and regulations. I hope that addresses the question on the extent.

The noble Lord, Lord Oates, asked how many people will be combined within the three categories mentioned. Obviously, it depends on those participating in person, but I can give a figure of around 12,000 people. The noble Lord also asked about personal baggage. That will not be immune from search, but official papers and baggage will be protected.

The noble Lords, Lord Oates and Lord Collins, both asked about security risks. We are partnering with the United Nations, and the UK will have the opportunity to vet all participants. Their privileges and immunities granted under this SI are limited to their official acts.

The noble Lord, Lord Oates, asked about visas. Visas for other meetings will depend on the status of the meeting, so if it is part of COP 26, the COP rules will apply. That is primarily a question for the Italians as it will apply from 28 to 30 September but I will certainly follow up the points he raised, particularly on Africa.

The noble Lord, Lord Collins of Highbury, asked about the rationale for the extension of the dates. I cannot speak about the policy extent of COP more broadly today but, from the point of this statutory instrument, the dates cover the dates where we would expect people to be in Glasgow performing those official duties. He asked whether other statutory instruments would be needed for supplementary meetings. We do not think other statutory instruments will be required.

I hope that addresses all the questions but, as I say, I will make sure that I consult the official record and provide answers to any that I have not. With gratitude for noble Lords’ support, I commend this order to the Committee.

Motion agreed.

Occupational Pension Schemes (Administration, Investment, Charges and Governance) (Amendment) Regulations 2021

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Occupational Pension Schemes (Administration, Investment, Charges and Governance) (Amendment) Regulations 2021.

My Lords, I am pleased to introduce this instrument, which was laid before this House on 21 June. Subject to approval, these regulations will continue the Government’s reform of occupational defined contribution—DC—pension schemes and prepare them for the opportunities that lie ahead.

With more than 10 million workers now saving for retirement in an occupational pension thanks to the success of automatic enrolment, we want these savers to achieve the best possible outcome in retirement. These regulations put improved member outcomes at the centre of the defined contribution occupational pensions market in the UK and ensure that the best interests of pension savers are driving the administration, governance and investment strategies of schemes.

By introducing a new “value for members” assessment for schemes with less than £100 million in assets and which have been operating for at least three years, we will ensure that members are not languishing in poorly governed and under-performing schemes. By requiring the trustees of certain occupational DC schemes to publish information on the performance of their investments for the first time, we will ensure that competition on overall member value replaces a narrow focus on cost.

By allowing occupational DC schemes to smooth performance fees over a multi-year period within the charge cap, we will make it easier for trustees of such schemes to pay higher fees for products where they have evidence that this will provide greater returns to members.

The Government are committed to building on the success of automatic enrolment with a consolidated, innovative, member-focused market for saving in occupational DC pension schemes. These regulations take significant action to this end. I am satisfied that the Occupational Pension Schemes (Administration, Investment, Charges and Governance) (Amendment) Regulations 2021 are compatible with the European Convention on Human Rights.

Occupational defined contribution schemes, or DC schemes, are the future of occupational pension saving. The Government are committed to ensuring that the DC market in this country can continue to grow and deliver the best possible outcomes for the millions of workers now saving in a DC scheme. These regulations take forward several measures which amend a number of existing sets of regulations. The first of these, which is made by Regulation 2 of this instrument, is the introduction of a new “value for members” assessment for occupational DC schemes with less than £100 million in assets. While there is currently more than £100 billion of pension savings in occupational DC schemes, this is split among more than 3,000 schemes. This system risks inefficiency and creating inequality. For example, some people, as a result of the scheme their employer chose, possibly years ago, may be getting a lower return on their savings, paying higher charges or having a worse customer experience, therefore limiting their engagement with their pension and outcomes in retirement. We aim to change this.

That is why this instrument amends the Occupational Pension Schemes (Scheme Administration) Regulations 1996 to require trustees of relevant schemes, a term which covers most occupational DC schemes, with less than £100 million in assets and which have been in existence for at least three years to conduct an annual assessment of the value that the scheme offers to its members. The regulations specify the criteria that must form part of this assessment. They include the quality of the scheme’s record-keeping, the promptness and accuracy of administration and the extent to which existing requirements in the Pensions Act 2004 concerning trustees’ knowledge and understanding are being met.

However, the most important aspect of this assessment is the comparison between the scheme’s net investment returns, ie the performance of its investments less costs and charges, relative to three larger schemes. Larger schemes are likely to be better governed and to achieve greater investment returns than a smaller scheme with limited expertise, capacity and budget. We expect that the majority of schemes will not perform favourably in this test.

Regulation 3 of this instrument requires schemes to report to the Pensions Regulator the outcome of this “value for members” assessment. If schemes in scope determine that they do not offer value for members, Regulation 3 of the Register of Occupational and Personal Pension Schemes Regulations is amended by these regulations to require such schemes to inform the Pensions Regulator of whether they intend to wind up the scheme or to explain the reasons for not doing so and the immediate improvements that will be put in place. These measures will encourage a quicker pace of consolidation in the occupational DC pension schemes market and help members who are stuck in schemes that are delivering sub-optimal retirement outcomes for them. Scheme consolidation is a priority for DWP so that members are able to benefit from the economies of scale and access to a diverse range of asset classes that larger schemes bring.

The other measures in this instrument aim to broaden the range of asset classes available to occupational DC schemes. At present, occupational DC schemes are primarily invested in traditional assets such as listed equities and bonds. Only a small number of the largest schemes are accessing so-called illiquid assets, such as infrastructure, property, private credit and private equity. These illiquid assets have the potential both to diversify an investment portfolio and deliver greater returns. As a result, Regulation 2 of this instrument amends Regulation 23 of the Occupational Pension Schemes (Scheme Administration) Regulations 1996 to require occupational DC schemes to report, for the first time, the return on investments after deduction of any charges or transaction costs, known as net investment returns. We believe that members deserve to know how their investments are performing and how they fare relative to other schemes.

This will also catalyse competition between pension providers not just on cost but on overall value. Employers, consultants and members should be able to assess a scheme based on this metric, and competition should incentivise trustees of occupational DC schemes to explore illiquid assets and other innovative investment strategies. This is essential given that net investment returns have a much greater effect on retirement outcomes than whether a scheme charges its members 0.3% or 0.4%.

Both these measures, the new “value for members” assessment and net investment returns reporting, have been introduced alongside statutory guidance entitled Completing the Annual Value for Members Assessment and Reporting of Net Investment Returns, which will help trustees of schemes that are in scope to meet these requirements.

Finally, this instrument makes additional changes to regulations to improve governance of occupational DC schemes. All occupational pension schemes will be required to report on the total assets of the scheme annually to the Pensions Regulator at the scheme year end.

The changes to regulations in this instrument will also require schemes to produce costs and charges illustrations for all funds and not just those currently available. They will exempt wholly insured schemes from some governance requirements and ensure that occupational DC schemes “with a promise”—a small number of schemes that contain a commitment to members—report on their statement of investment principles to those members.

In conclusion, the measures in this instrument offer opportunities to improve member outcomes and help prepare the occupational pensions market for the challenges that lie ahead. I therefore commend the instrument to the Committee and beg to move.

My Lords, we certainly agree with the policy aims and mechanisms of this instrument and endorse the Government’s actions to make sure that

“members do not languish in sub-optimal arrangements that do not meet governance requirements and are unable to take full use of investment opportunities, to the benefit of the end saver’s eventual retirement outcome”,

as the Explanatory Memorandum states.

As the Minister has said, paragraph 7.6 of the Explanatory Memorandum explains that Regulation 2 requires that schemes holding assets worth less than £100 million and which have been operating for three or more years are to compare charges, transaction costs and the return on investments with three other schemes. We are not clear how those schemes are to be selected and who is to select them. Is it the trustees, for example? Are there selection criteria other than that they have assets of more than £100 million and are personal pension schemes? If it is not the trustees, who selects the comparator schemes?

Paragraph 7.8 states:

“Where the trustees have reported that the scheme does not provide good value for members, they are also required to report whether they propose to wind up the scheme and transfer the members’ rights into another scheme or explain to TPR why … not … and what improvements they are planning to make.”

What happens if these improvements are not acceptable to the Pensions Regulator and what powers does the regulator have based on compliance or non-compliance with Regulation 3?

We would probably all agree that it is a good idea to encourage smaller funds to transfer rights or improve if Regulation 2 comparisons show poor performance, but what about larger funds? Should there not be a requirement for them to undertake the same comparisons and take the same actions if their schemes show poor value for money for their members? It is easy to see why small funds should be encouraged in this way but hard to see why larger firms are not similarly encouraged. I would welcome the Minister’s clarification on these points.

My Lords, I refer to my entry in the register of interests, particularly as trustee of a large master trust and the Telefónica pension scheme. I thank the Minister for the clarity of her explanation. It is a pleasure to talk face to face, rather than digitally, for once.

Of the three main provisions in these draft regulations, one requires smaller DC schemes with less than £100 million to demonstrate overall good value. If they cannot, the expectation is that they will wind up and consolidate into another scheme. The regulations also require schemes to take their net investment returns and increase flexibility to take account of performance fees when calculating the 0.75% pension cap on pension savings.

I support the focus on smaller schemes and the drive to consolidate them into larger schemes. The TPR evidence reveals that many smaller schemes struggle to match the governance, investment opportunities and charges delivered by schemes operating at scale, but the Minister’s aspirations are high. I quote Guy Opperman, who wrote:

“It is not my intention to stop at £5 billion”,

and that

“There is no doubt in my mind that there must be further consolidation”,

and that

“further action will follow”.

However, even a threshold of £5 billion goes beyond small and will catch all but the very largest of DC schemes.

The Minister believes that consolidation drives better member outcomes, a view again with which I agree, and I accept that scale matters. The Minister wants to understand the barriers to further consolidation through two lenses. He stated:

“I am particularly keen to understand how the creation of greater scale in the DC market can benefit members through economies of scale and access to alternative investments.”

However, the Government have to recognise that they created some of those barriers, even though the case for scale was well documented at the time. When auto-enrolment was introduced, they took the view that there should be an open market with virtually no barriers, or few barriers, to entry, with the inevitable proliferation of provision and the acceleration of small pot numbers that followed, which made decisions for employers even more complex. The transfer of the cost of market failure on to the members of the growing number of poorly regulated master trusts was eventually recognised and led to the new authorisation regime. At the start of that authorisation regime there were 90 master trusts; 37 were granted authorisation, a reduction in the overall size of the market by 58.8% in a little over a year, perhaps an indication of how inefficient the original policy had been. Is it anticipated that the drive to accelerate the consolidation of schemes will lead to a further reduction in the number of authorised master trusts? Will the TPR be expected to modify its approach to the authorisation criteria? Given the Minister’s aspiration and the Government’s drive for greater consolidation, what do they consider would be the optimal outcome in terms of the number of schemes? How do they define optimum scale in terms of assets under management?

The Government’s policy that consolidation into fewer and larger DC schemes will facilitate greater investment into a wider range of assets and bring benefits to scheme members and the UK economy was captured in the letter of 4 August from the Prime Minister and Chancellor, entitled Igniting an Investment Big Bang: A Challenge from the Prime Minister and Chancellor to the UK’s Institutional Investors. They called for the need to,

“seize this moment … to unlock the hundreds of billions of pounds sitting in UK institutional investors”—

particularly pension schemes—

“and use it to drive the UK’s recovery”,

and growth. They added that the Government were,

“doing everything possible—short of mandating more investment in these areas as some have advocated—to encourage a change in mindset and behaviour among institutional investors, and we remain open to addressing further barriers”.

The three main measures in the SI are clearly intended to encourage DC schemes to invest in more illiquid assets, private equity and venture capital: first, by driving consolidation to create scale; secondly, by amending the charge cap regulations to allow schemes to smooth performance fees so that the 0.75% cap can be breached in any one year as long as at the end of the multiyear period the mean average across the years is within the cap; and thirdly, by requiring schemes to state their net investment to returns, the intention being to get schemes to shift their focus away from low-cost investment to overall value, which may push trustees to more illiquid asset classes.

Again, to quote the Minister:

“The cap itself continues to offer members’ important protections against high or unfair charges. However, costs should not be the sole factor in determining overall value for members. I want to see schemes considering overall performance and returns on investments for members as well as costs.”

I certainly support greater visibility for net returns, but the Government seem to be moving to a view that charges must rise to secure greater value for members or that the high fees charged by some asset managers are reasonable, when in fact they may not be fair value for members. There are many able and committed professional and lay trustees who already consider overall performance and returns on investment, including net returns, risks and volatility, and consider more than costs in assessing value for members. The Minister is not working, as he may suggest, on a completely blank canvas.

I am wary also of a reverse call that lower costs must indicate lower value. Scale and transparency can drive costs down without prejudicing value. There are strong providers in the market offering good-value, diversified propositions at significantly below the 0.75% cap. The CMA, the FCA and others have provided evidence on the sometimes weak correlation between higher charges and higher performance. It is to be remembered that the 0.75% cap was introduced in significant part in recognition of the fact that when the Government increased private saving by harnessing the inertia of many millions of people, they had to address inefficiencies in the investment markets, whereby complexity, lack of transparency, lots of intermediaries in the supply chain and the weak position of the end investor had led to higher charges which did not provide fair value for pension savers.

Trustees’ fiduciary duties require them to take account of all long-term financially material considerations. Indeed, they are under increasing pressure from regulators and Governments on how they interpret that duty when making investment decisions. What is considered good practice is changing, as with ESG and the green economy; it is now a near-universal truth that if the climate is not addressed then pension scheme members’ interests and values will not be addressed in the longer term. By investing in companies and infrastructure that will drive growth and prosperity across the UK, there can be a virtuous alignment between the needs of the economy and the value delivered to the members of the pension scheme.

However, charges and member value remain important, and the governance around such a policy is key. The Government need to create the environment to allow that virtuous alignment, but not to transgress into appropriating the long-term private savings of many millions of people. It is those with a fiduciary duty who should decide which particular investments are in the interests of their scheme members. Any assurance from the Minister about the intent behind the 4 August letter on “Investment Big Bang” would be reassuring in that context.

My Lords, I thank my noble friend very much for her remarks. She has obviously been much more deeply involved than I have been. I have come to these regulations pretty fresh, but a number of points strike me about them, and I would be grateful for the Minister’s comments.

It is important to appreciate that we are only talking about the default schemes. To get a feel for the significance of this impact, we need some idea of how significant default schemes are. My understanding, having seen figures, is that virtually everyone joins the default schemes, but this applies only to the default arrangements within a scheme. Does that mean that those people who for whatever reason choose the non-default arrangements are left uninformed about these important arrangements? Surely value for money is just as important? I accept that they are very difficult to judge, but value for money applies as much to the non-default arrangements as to the default ones.

The other exclusion from the regulations is that of small, self-administered schemes and EPPs. The notes are a bit weak on justifying that exclusion. There was probably more debate during the course of the consultation, but the comment is made that most small businesses do not run their own schemes. Well, “most” implies that some do run their own schemes. Will they be left to drift? Why do they not fall within the remit of this protection for members?

Regarding small schemes, I never believe very round figures, and £100 million is an extremely round figure. The table in the Explanatory Memorandum had the number of schemes in different sizes. The issue comes up of why, if we are going for £5 billion, why not to go for £5 billion? I think that I am echoing my noble friend’s question. Another question lies behind that. Is this really just a way of getting rid of small schemes? Are we establishing a bureaucratic mechanism that will make small schemes think that it is just not worth the candle? Which of those small schemes that we are envisaging will say: “We are prepared to go through this process, we believe that we are providing value for money, and we want to continue?” Which are the schemes that this regulatory structure is being introduced to cater for? Would it not be more straightforward just to say “£5 billion is it” and that you want to get rid of small schemes?

On the policing of the process, the question of who selects the three comparators is being asked. Is there some scope there for gaming the system? What protection do we have on which schemes get selected as comparators? Advisers could have 10 comparator schemes that were not really suitable. Will the Pensions Regulator have the power directly to prevent the choice of inappropriate comparators? It may be explained somewhere, but I can see nothing explaining how the choice of comparators will be policed.

It comes back to the question of what is perceived by the Government and/or the regulator as the endgame here. Is this a one-off, and we will continue with this situation, or is this just one step in a longer term process of eliminating smaller schemes and ending up with a relatively limited number of mega-schemes catering for this particular market? I am not convinced that this is necessarily in the members’ favour. It would be good to have an idea of whether this is part of a longer process, whether there is an endgame here and this is just one move on the chessboard, with other complicated moves coming up later, or whether it is just there on its own terms?

Then there is the more important question. In setting up this structure and this process, how meaningful is the information that is going to be provided to members? Is this the sort of information that members are looking for? Is it the sort of information they will understand? Has there been any research into the value and effect of providing this information for members? We also need a bit more clarity, which perhaps the Minister cannot give. I believe the Pensions Regulator could be clearer as to what exactly it will do if the trustees produce a report saying that they are not providing value for money, in effect—I am sure they will dress it up in particular words—but in practice are not going to do anything about it. We need greater clarity on what steps the regulator will then take in response. It is all very well having the information that a scheme is not providing good value for money, but the regulator needs to be clear in exactly what it will do in response to that situation.

My Lords, I thank the Minister for her careful explanation of these regulations. I must say it is a pleasure to see her in person across the Dispatch Box once again, especially on so exciting a subject. I also thank all noble Lords who have contributed today.

There have been so many policy and statutory interventions into the private pensions scheme post auto-enrolment that I have to say that I am slightly with my noble friend Lord Davies here. It is quite hard to follow the long-term strategic objectives and outcomes that the Government are seeking to achieve. I get that this set of regulations is designed to take forward government policy to enable and encourage DC schemes to invest in a more diverse set of growth assets, including private equity and venture capital, in the belief that this will benefit both the British economy and the interests of pension scheme members.

We have heard the headlines today. Trustees of smaller schemes will have to do a more holistic annual “value for members” assessment and, if the regulator does not think that they can demonstrate good value, they will be pushed to wind up and consolidate. Trustees of all relevant schemes will have to give net investment return statements for default and self-selected funds. Then there is an amendment to the charge cap regulations to smooth the impact of performance fees over five years.

As we have heard, the Government in their call for evidence are seeking views on how to accelerate the pace of consolidation of schemes and are looking ahead to the second phase of consolidation for medium to large schemes with assets of between of £100 million and £5 billion. As my noble friend Lady Drake was hinting, £5 billion is way more than small. Obviously, strengthening the regulatory framework in pension schemes is welcome and, presumably, here the aim is to do that through more stringent “value for members” assessments, reporting on investment performance net of fees and the promotion of consolidation into larger schemes to create scale and leverage to deliver value, drive down charges and consider more diverse and innovative investment strategies that will benefit members. However, given the Government’s intention to drive greater consolidation, even of schemes with assets of above £5 billion, we really do not have much detail as to how and when this accelerated consolidation into a much smaller number of very large schemes is going to take place.

My noble friend Lady Drake was pushing into this subject. We need to know what the optimal number of schemes is against which the Government are benching their drive to consolidation. I think the Committee deserves to have a clear answer to that. If we are to be asked to approve one set of interventions after another, it is only reasonable to be given a vision of the end state the Government have in mind once they all work their way through the system.

I therefore have some questions. What guidance will be given to trustees and, indeed, to employers who may be keen to consolidate their own occupational schemes but who do not want to transfer their members and their assets into schemes which may subsequently become subject to regulatory pressure to wind up under the “further action to follow” and “not stopping at £5 billion” statements of Guy Opperman?

We know that the Minister for Pensions supports collective DC schemes as a way of sharing risk more efficiently between scheme members and achieving better outcomes in retirement. At the moment, authorisation of CDC schemes is restricted to single or associated employers, which must of course limit their scale. What are the implications of driving the consolidation of schemes with assets both below and above £5 million for the Government’s policy on encouraging the growth of CDC schemes?

The Government seem to believe that requiring schemes to state their net investment returns will push trustees away from a preoccupation with costs to consider how investments in more illiquid assets and growth equity might improve member outcomes in a way which would also be beneficial for the UK economy. The joint letter issued by the Chancellor and the Prime Minister spelled out the Government’s reasoning. My noble friend Lady Drake made the point that investing more money in the companies and infrastructure that will drive growth and prosperity across the UK could lead to a virtuous alignment between the needs of the economy and the value delivered to members of pension schemes, but she was spot-on in saying that charges and member value remain important and governance around such a policy is key.

One sentence in that letter from the Chancellor and the PM states:

“The Government is doing everything possible—short of mandating more investment in these areas as some have advocated—to encourage a change in mindset and behaviour among institutional investors, and we remain open to addressing further barriers where they are identified.”

I confess to being a little surprised that a letter of this magnitude chose to reference those who advocate mandating trustees on where they should invest. I hope that was not a hint to the sector. There is a lot at stake here. Given the current, very high level of public trust in auto-enrolment, the double-default on which scheme and investment fund, and all the associated fiduciary and regulatory oversight of their interests which has produced such a positive behavioural response, we cannot put that at risk.

In their call for evidence, the Government advised that they wanted to establish the likely appetite for investment in illiquid assets and/or growth equity and offered the prospect of removing the look-through requirement for closed-end funds among the possibilities for removing potential barriers for investment in such asset classes. The Government’s aim was to publish a response on this matter before the Summer Recess, but they have not been able to do so. When do the Government anticipate publishing such a response?

As they look to the funds in pension schemes to support the rebuilding of the UK economy, it is crucial that the Government do not weaken their commitment to transparency and to protecting members against high or unfair charges. Do the Government have any plans to raise the 0.75% charge cap?

These regulations, which we are debating at the back end of the first day back in a wholly physical Parliament, are part of a government trajectory which could have a significant effect on the pensions landscape in the UK. We need some solid answers, and I look forward to hearing them.

I thank everybody who has taken part in this interesting debate for their contributions. I shall take some of the points that noble Lords have raised and will deal with them as they come.

I thank the noble Baroness, Lady Janke, for her positive endorsement of the regulations. The noble Baroness and the noble Lord, Lord Davies, asked how the schemes are to be selected. We would expect trustees to choose the scheme to compare their scheme to, and master trusts are likely to be the best schemes to compare against.

The noble Baronesses, Lady Janke and Lady Sherlock, asked about the Government’s plans for future DC consolidation. The Government have been very open that consolidation is key to the future of the defined contribution pension market and that the pace of consolidation must increase. Consolidation will improve governance and enable more occupational DC schemes to reach the critical mass needed to access a broader range of investments and drive down costs through economies of scale. In September 2020, DWP consulted on new regulations to require trustees of occupational DC schemes with less than £100 million in assets to justify their continued existence via a new “value for members” assessment, and this will come into force this autumn. This was phase 1, and now we turn to phase 2, which will look to drive consolidation further and faster.

The noble Baronesses, Lady Drake and Lady Sherlock, both raised a question about the call for evidence, which was launched on 21 June, being far too ambitious. We know from other countries such as Australia that scale is among the biggest drivers in achieving value for money for savers and ultimately better retirement outcomes. It is therefore important that we move quickly, and I echo the commitment made by the Minister for Pensions. However, we recognise concerns about the pace of change. That is why we have developed a phased approach, starting with occupational DC schemes with less than £100 million in assets. The call for evidence closed in July. We are currently considering the responses received and will issue a response in due course. We are exploring options for consolidation, and, as the Minister for Pensions said, this is likely to include all schemes, including master trusts.

The noble Baroness, Lady Drake, made the point that the PM and the Chancellor are calling for an “investment big bang” and that these measures could wrongly force schemes to invest in illiquid assets. The Government do not wish to direct the investments of trustees of pension schemes. Trustees must invest in line with their fiduciary duty—that is, in the best financial interest of their beneficiaries. Instead, we are seeking to remove barriers to investments in illiquid assets. The provisions in this instrument have received support from the pensions industry.

The noble Baroness, Lady Drake, raised the point that the Government believe that high charges are fair. We want to ensure that net returns are considered, which balances cost against performance. Low-charging investments can deliver value for money, but cost should not be the only factor.

Sitting suspended for a Division in the House.

The noble Baroness, Lady Drake, referred to the PM and the Chancellor calling for an “investment big bang” and said that these measures wrongly force schemes to invest in illiquid assets. The Government do not wish to direct trustees of pension scheme investments. Trustees must invest in line with their fiduciary duty; that is, in the best financial interest of their beneficiaries. Instead, we are seeking to remove barriers to investments in illiquid assets. The provisions in this instrument have received support from the pensions industry.

The noble Lord, Lord Davies, talked about default schemes. He is correct that almost all members save into the default arrangement. Those who self-select still receive regular information on charges and are generally engaged. He raised the subject of the threshold for “value for members” assessment being set at less than £100 million, which had increased from £10 million at consultation. He asked whether it would increase further in future. The Government increased the “value for members” assessment threshold following consultation with industry. The reason for this was to capture as many potential poorly performing occupational DC schemes as possible. We have evidence that the smaller a scheme is, the more likely it is to be poorly governed. By our moving the “value for members” assessment threshold from assets under £10 million to £100 million, more occupational DC schemes will have to undergo this rigorous new assessment. This will mean that more members will benefit from improved governance, administration and returns as a result. We will review the assets under the £100 million threshold regularly but have no plans to change it at present.

The noble Lord, Lord Davies, asked how meaningful to members the information would be. The Government are taking forward several measures—dashboards and simpler statements among others. The SI is about how these schemes are governed internally. We are intervening to prevent members languishing in poor schemes.

The noble Baroness, Lady Sherlock, raised a point about CDC. I am advised that we will write to her on that. She also asked what the instrument would mean for the future of look-through and said that the Government had said that they would advise on a policy in July. The instrument does not amend the Government’s policy on treatment of such costs. In our consultation response on improving outcomes for members, published on 21 June, we state that occupational DC pension schemes should continue to look through closed-ended funds as they would all funds of funds and incorporate such costs within their regime of charges levied on members.

If there are points raised by noble Lords that I have not dealt with—

I am grateful to the Minister. Could she write to me with that last point, as I did not quite catch the bit about look-through funds and look-through operations of closed-ended funds? I asked two questions. First, my noble friend Lady Drake and I both asked what the Government’s optimal number of schemes is. Would it be one big or enormous scheme—would that be fine? Is it fine to have lots of schemes? Can the Minister give some idea what the centre is in that? The other thing I asked about, which I do not think she answered, was what guidance would be given to trustees or employers who might want to consolidate but were concerned that the moving goalposts would mean that they could end up simply being moved again and, potentially, again. If she did respond to that, I apologise for having missed it.

I will write to the noble Baroness on the three points she has raised and put a copy in the Library for everybody to see. If there is anything, having looked at Hansard¸ that we have not dealt with, other than that which the noble Baroness raised, I will write to all noble Lords.

This instrument makes several different changes to several different sets of regulations. It has one theme at its core: improving outcomes for pension savers. We have a duty to ensure that those who have engaged in pension saving in their workplace as a result of automatic enrolment can rest assured that their occupational DC pension scheme is on course to deliver the best possible outcome for them. This instrument does this by tackling poor levels of governance, shifting the attention of the market from a narrow focus on cost to overall value, and removing barriers to schemes allocating to a wide range of different assets. I therefore commend it to the House and beg to move.

Motion agreed.

Pensions Regulator (Employer Resources Test) Regulations 2021

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Pensions Regulator (Employer Resources Test) Regulations 2021.

My Lords, I am pleased to introduce this instrument, which was laid before the House on 28 June 2021. Subject to approval, these regulations provide essential details on the new employer resources test that was introduced by the Pension Schemes Act 2021 in connection with changes to the contribution notice regime.

The new employer resources test will enable the Pensions Regulator to overcome existing challenges of assessing the “act” or “failure to act” that has affected the financial strength of the sponsoring employer, and therefore its ability to support the scheme, rather than damaging the scheme directly.

These regulations outline that the profit before tax measure will be used to assess the resources of the employer. This measure is widely known and understood by the industry and gives the most appropriate picture of net profits available to provide support for a defined benefit pension scheme. The regulations set out specifically how the value of the resources of the employer is to be determined, calculated and verified.

I am satisfied that the provisions in the regulations are compatible with the European Convention on Human Rights.

Part 3 of the Pension Schemes Act 2021 strengthens the powers of the Pensions Regulator. It fulfils our manifesto commitment to take action against those who think they can plunder the pension savings of hard-working employees. These regulations provide essential details on the new employer resources test which forms part of the Pensions Regulator’s contribution notice regime. This regime enables the Pensions Regulator to demand that money is paid into a pension scheme from those found to have caused it detriment. A recent example is Dominic Chappell, who was ordered by the Pensions Regulator to pay £9.5 million into the British Home Stores pension scheme.

The new employer resources test, which these regulations relate to, will enable the Pensions Regulator to overcome existing challenges of assessing the “act” or “failure to act” that has affected the financial strength of the sponsoring employer and therefore its ability to support the scheme rather than damaging it directly.

With these new provisions, we will also avoid the associated challenge of having to project into the future to assess the likelihood of members receiving their accrued benefits. The purpose of the employer resources test is to provide the Pensions Regulator with a tool to make a simple snapshot assessment of the impact of the act or failure to act on the employer at the time. This allows for the act or failure to act to be assessed on its own terms, relative to the employer’s current potential exposure to the scheme, rather than an assessment of what could happen in future. Assessing whether the act or failure to act has reduced the value of the employer’s resources is just one part of the wider employer resources test. The Pensions Regulator, in addition to looking at the health of the employer, also has a focus on the scheme, where it is required to assess whether the reduction of the employer’s resources was material when compared to the scheme’s estimated Section 75 liability.

On the specifics of these regulations, what constitutes the resources of the employer is determined as being the employer’s profits before tax. This is a widely known and understood measure used by the industry and gives the most appropriate picture of net profits available to provide support for a defined benefit pension scheme. How the value of the resources of the employer are determined, calculated and verified are set out in these regulations. The general approach assesses the annual profit before tax position of the employer had the act or failure to act not occurred, which is then compared to an assessment including the act or failure to act. An adjustment is then applied to the profit before tax position that represents the impact which is expressed as a pound figure. The calculated figure would then be assessed against the scheme’s Section 75 debt immediately before the act or failure to act occurred. When the employer resources test has been met, the Pensions Regulator will follow the existing contribution notice process, whereby it will consider other factors, including the reasonableness of issuing a contribution notice.

Working in tandem with these regulations is the Pensions Regulator’s code of practice, which aims to provide further clarity to the industry on how it will interpret and use the powers. The Pensions Regulator launched a consultation in May 2021 on its contribution notice code of practice, which included clear examples covering scenarios of how the different tests would apply. The consultation concluded in July, and the Pensions Regulator is reviewing the responses with a view to publishing the code later in the year.

In closing, we remain committed to ensuring that there should be no hiding place for those who put workers’ retirement savings at risk, and these regulations will play a vital role in enhancing the Pensions Regulator’s ability to take action to protect pension scheme members. I commend this instrument to the Committee and beg to move.

My Lords, enabling the TPR to use contributory notices more widely to correct any detrimental action or failure to act is very welcome. However, I have a few questions about the method chosen for defining employer resources.

The Explanatory Memorandum refers to other methods being considered— EBITDA, or earnings before interest tax depreciation and amortisation, and a holistic measure based on covenant strength—but they were dismissed. Can the Minister explain why they were rejected, particularly the holistic assessment based on covenant strength? She will be aware that in very large university superannuation schemes, the level of contributions is affected by covenant strength. Can she explain why a snapshot of net income or profit before tax provides a better approach than this? If the snapshot route is to be followed for defining employer resources, what about the strength of employer assets? What part do they play in any assessment? I also question whether it is reasonable to allow the TPR absolute discretion in determining what are or are not exceptional or non-recurring items. I would welcome the Minister’s clarification on these points.

My Lords, I thank the Minister for her clear explanation of these regulations. I welcome them, but I would like to raise one or two questions which seek some clarity.

The Pension Schemes Act 2021 gave the regulator new moral hazard powers with the introduction of two new criminal offences and by extending the flexibility available to the regulator to make connected parties such as group companies and directors liable for pension scheme deficits, and make payments to a scheme, by issuing a contribution notice. The Act introduces two new tests for imposing contribution notices: when the regulator considers that an act or failure to act materially reduces the employer debt likely to be recovered if a Section 75 debt has fallen due immediately after an insolvency event or reduces the resources of the employer in a manner which was material when compared to the debt in the pension scheme—the employer resources test, which is the subject of these regulations.

They set out that employer resources test for assessing whether a relevant act or failure to act reduced the value of the employer’s resources and whether that reduction was materially relevant to the pension scheme’s debt. I read in detail that the employer resources will be assessed through the pre-Act normalised annual profit before tax measure, under which non-recurring or exceptional items are removed, and then the impact of the act or failure to act on that profit is determined. If that impact is material, the regulator can start to build its case for a contribution notice. Indeed, it is a measure akin to the employer’s ability to support the scheme. The measure is sometimes used in the preparation of an employer covenant analysis undertaken for trustees.

For the record, as it is not clear, can the Minister say how dividends, including payments within a group of companies, will be treated in the normalised annual profit before tax measure and in the assessment of material detriment? That certainly proved a controversial issue of concern during scrutiny of the Pension Schemes Act 2021, and it is not clear—certainly not to me—how those will be considered under the new test. From a pension scheme member’s point of view, if the resources of the employer sponsoring the scheme are weakened through transferring assets or dividends, leveraging more debt or some other reason, the employer basically may be less good for the money and pension benefits will be less secure. They will look to the cavalry at the regulator to come over the hill and issue a contribution notice, and they need to have the confidence that that will actually be done with more focus, positivity and speed of action than the past has demonstrated.

In their response to the consultation published on 29 June, the Government set out their reasoning for the employer resources test. In summary, it said that, in the majority of past contribution notice cases, the regulator faced

“difficulty in forecasting the medium and long-term performance of a business for the purposes of the … ‘material detriment test’.”

This is because it had to extrapolate from an employer-related act into the future, with the uncertainty and challenges that causes evidentially. Indeed, trustees can experience exactly those similar difficulties in trying to assess those implications for the employer covenant, because there is no industry consensus on how to value the employer covenant. Therefore, the employer resources test removes the need to forecast how the employer might or might not have performed in the absence of that act and assesses the impact on a snapshot basis. So it is quicker, sharper and more efficient.

However, the regulator still will not be able to issue a contribution notice if a party can show that they meet the conditions for a statutory defence and can provide reasonable excuse. The three premises are that they gave prior consideration to the test and to the extent that the failure or failure to act would reduce the value of the employer’s resources in a material way; that they took all reasonable steps to mitigate any such detrimental impact; and that it was reasonable for them to conclude that the act would not detrimentally affect in a material way the likelihood of the scheme members receiving their benefits.

I sighed a little because, even after applying the employer resources test, the regulator still has to conclude that it would be reasonable to impose a contribution notice, taking into account all relevant factors including the extent of any mitigation provided and a broader assessment of the employer’s strength. I just wonder whether we are going to face a potentially long and drawn-out process, which the employer resources test was intended to remove, in the way in which the defence arguments can be applied and whether the Government’s intention of deploying an employer resources test as a quick and efficient snapshot—rather than on a holistic basis—could be undermined.

I ask the Minister: what powers or processes are relied on to prevent the statutory defence conditions undermining the policy intention to have a quick and efficient employer resources test? Is it the intention to issue fuller guidance on how measures to mitigate the detrimental impact on pension schemes of an act or failure to act will be assessed as to whether they are sufficient to meet the statutory defence? These are the kind of realities that trustees will need to understand and employers will need to know.

Just as a concluding line, poor behaviour affects not only the value of members’ benefits paid but, as the Pension Protection Fund is funded by a levy, it affects those businesses which abide by the rules but end up bearing the costs and subsidising those businesses which seek to avoid their pension liabilities. Good employers and trustees or members have an interest in these new regulations working efficiently.

My Lords, it seems like quite a long time ago that we were last in this Room. In fact, I think the last time I spoke in this Room was in the discussion on pension schemes, so it is nice to see a lot of old faces. There is a nice feeling of déjà vu about it. These regulations are reassuringly brief, so I will try to keep my comments equally brief, if I can.

First, I was a bit confused by the name of this, which refers to an employer resources test, that test being profit before tax. Profit before tax is not a measure of a company’s resources. It is a backward-looking measure of a company’s profitability. I question the comments in the Explanatory Memorandum that

“profit before tax … is less subjective than other options”.

Notoriously, profit before tax can be made to be whatever one wants it to be. A cash-flow measure would be an altogether less subjective, more objective measure. Profit before tax also does not, as the noble Baroness, Lady Drake, has said, take account of other forms of leakage of resources out of the company, be they dividends, share buybacks or massive capital expenditure. It is perfectly possible for a company to be highly profitable and highly indebted at the same time and therefore to have very low levels of employer resources.

I was a bit confused by the title, and would therefore like to add my name, as it were, to the question asked by the noble Baroness, Lady Janke, about why the Government did not go down the holistic route of looking at multiple measures that give a full picture of the employer resources rather than this one very narrow picture which is only a backward snapshot.

I have two other questions that relate to the discussions we had at the time of the Pension Schemes Bill. This instrument is obviously relevant to the subject of dividends that companies with deficits pay. The noble Baroness will remember that we had quite a lot of discussions about that back then. Indeed, the Minister at the time agreed that the Government would keep the question of dividend payments by companies in deficit under review.

I have two questions. First, can the Minister explain what assessment the Government have made of the impact that these regulations might have on the ability of companies to pay dividends? There has been some speculation in the press that it might significantly depress the payment of dividends by companies, something which on the whole is a good thing, but there could be situations where that could be a negative. Secondly, I would welcome confirmation from the Minister that the Government are still keeping under review the question of payment of dividends by companies that have deficits, as they promised.

I am glad that it was an accountant who made the comment that profits can be whatever you want them to be, which was my concern. However, I am struggling to grasp what role this is playing. In some ways, I suspect that we could overengineer the definition of “resources” and make it very complicated. There are strong arguments for keeping it as simple as possible so that the regulator can take a holistic view. This is what I understood the process to be. My guess is that the regulations will enable the regulator to do what we always thought it could do in the first place, and it tripped over some regulatory legal point. There are strong arguments in favour of keeping it simple and leaving it essentially to the judgment of the regulator.

Whenever I mention the regulator, I have to add my qualification that of course it does not represent scheme members in any way. It does not have the accumulated knowledge of unions and employers who actually do the business of agreeing pension schemes. I have questions about the Pensions Regulator but the ideal should be a Pensions Regulator that knows the field and can apply the test proportionately.

I have one specific question. I have no idea what this means. Regulation 4(8) says that

“the Regulator must take into account all relevant information in its possession”.

Well, yes, it is not going to take into account information that is not in its possession. However, it goes on to use the word “verification”. I am not sure what “verification” is doing in that paragraph.

My Lords, I thank the Minister for her explanation of the reasoning and intent behind the employer resources test, and all noble Lords who have spoken. I too welcome a move to strengthen the power of the Pensions Regulator. We should say that most employers with DB schemes act professionally and responsibly and maintain good relations with their scheme trustees. However, the Pension Schemes Act 2021, from which these regulations flow, rightly gave the Pensions Regulator stronger powers to deal with the small number of circumstances where parties decide to evade their obligations to their pension schemes or behave recklessly. The test is whether these measures will enable the regulator’s approach to be clearer, quicker and tougher. This is what we are exploring today, so I hope that the Minister can help to reassure us on that point.

I will not go back over what the regulations do, but as we have heard, employer resources will be assessed through normalised annual profit before tax, with non-recurring or exceptional items removed. The Minister explained how that would happen: you would take NAPBT, the regulator would then look at the impact on NAPBT caused by the act or the failure to act, produce an adjusted NAPBT and then decide whether to issue a contribution notice. It would compare the two and then argue that the reduction was material in relation to the estimated Section 75 debt.

The case for the test must be that it removes the evidential challenges and uncertainties in forecasting how the employer might or might not perform in the future— absent the act or failure to act—and therefore presumably would provide a quicker measure of assessing the employer’s ability to support the scheme and reveal whether a reduction in resources was material.

The Minister indicated her belief that a simple snapshot would give the regulator a quicker, more efficient tool to make an assessment. I shall not go back over the questions raised by the noble Lord, Lord Vaux, the noble Baroness, Lady Janke, and my noble friends Lord Davies and Lady Drake, about whether this was the right measure and how well it would work—they have done that way better than me and I am certainly not an accountant—but underlying this is a problem which this is trying to tackle. While it acknowledged that most employers with a DB scheme act responsibly, the information gathered and published by the Work and Pensions Select Committee when it looked at controversial cases of poor and reckless company behaviour towards their DB schemes provided clear evidence of the weaknesses of the existing regime where there is poor employer conduct. So we need some action.

Where the employer test is met and material detriment is revealed as a consequence of an act or failure to act, there is then a separate statutory test for reasonableness, where the regulator must take account of all relevant factors before imposing a contribution notice. As we have heard, that can include a broader assessment of the employer’s strength than that provided by the resources test. Does that not reveal some uncertainty and ambiguity about how quick and efficient the amended contribution notice regime will be? My noble friend Lady Drake raised the question of a statutory defence. I want to ask the Minister some specific questions. Where a party invokes the statutory defence of reasonableness, will there be a time limit on the submission of evidence relied on in support of that defence? What are the limits on the regulator’s powers to determine whether the statutory defence has been met by a party whose act or failure to act has resulted in a material detriment to their scheme?

On the employer resources test, Regulation 4(3)(a) refers to the regulator determining whether an item is to be treated as non-recurring or exceptional or the value of such an item when determining the value of the profits of the employer. To what extent is the regulator’s determination of that binding on the relevant parties?

In the consultation, some stakeholders asked how the regulations would apply to charities and non-profit bodies—which I am sure the Minister’s past will stand her in good stead to answer. The Government’s response is in the form of Regulation 3, which states that

“in the case of an employer which is … (i) not trading for profit; or … (ii) a charity, any reference to ‘profits’ in these Regulations shall be read as if it referred to ‘net income’ … In this regulation, ‘net income’ means income after the deduction of expenditure”.

While helpful, that is not quite as helpful in the case of charities—I think we want a bit more than that. What is the definition of net income in the case of charities subject to the SORP? Is it total net income? Is it just net unrestricted income? If it is total income, I presume that the net income includes restricted items which the charity may or may not be able to apply to the pension scheme depending on the nature of those funds—the Minister will know what I am talking about; she, like me, has run charities and we have all wrestled with restricted funds and their accounting over the years. I would be interested if she could unpack that a bit.

Under the contribution notice regime, the Pensions Regulator can make connected third parties liable for pension scheme deficits and make them make payments to the UK DB schemes. Given that we have left the EU, and given the regulator’s previous experience in pursuing foreign parent companies for payments—which we discussed at some length during the passage of the then Pension Schemes Bill—has any thought been given to complications that might arise in seeking contributions from such parent companies?

Finally, once the new contribution notice regime commences in October, companies will have to assess the impact of their business activities against the new tests and conclude whether a reduction in employer resources and/or reduction in scheme insolvency recoveries are material. The companies and connected third parties may need or want to apply to the regulator for clearance to get comfort that it will not exercise its own powers to issue a contribution notice. Have the Government made additional resources available to the regulator to meet such a demand? Equally importantly, will it be able to recruit people with the requisite skill sets? I look forward to the Minister’s reply.

Again, I thank all noble Lords for their contributions. I shall start with the points raised by the noble Baroness, Lady Janke, and the noble Lord, Lord Vaux, on why we do not have a holistic measure. There is no industry consensus on how to value an employer’s covenant strength, and we believe that introducing a holistic measure would introduce a number of uncertainties. There is a statutory requirement for the regulator to consider whether it is reasonable to impose a contribution notice, which includes an obligation to take account of all relevant factors, including the broader assessment of the employer’s strength. We therefore believe that the wider regime should provide comfort to those concerned that the regulator will not take a holistic view.

The noble Baroness, Lady Janke, raised the issue of earnings before interest, tax and depreciation. I confirm that we looked very closely at the suitability of this and concluded that it is unsuitable, as it is not covered by the financial reporting standards relating to accounting practice published by the Financial Reporting Council and is therefore not audited. We think that it is relevant to have the interest charge allowed for in the figure, which earnings before interest, tax, depreciation and amortisation does not take into account, because that could be where the detriment was reflected if the company raised more debt.

The noble Baroness raised a point about why we have selected the profit before tax measure. The purpose of the employer resource test is to provide the Pensions Regulator with a tool to make a simple snapshot assessment of the impact of the act or failure to act on the employer. Profit before tax was selected for measuring the resources of an employer because it is a term widely understood by the industry and regulator. We believe that it is less subjective than other options that would be indicative of the employer’s ability to support the scheme.

The noble Baroness also raised how the Pensions Regulator would determine and remove exceptional and non-recurring items from an employer’s annual accounts. The Pensions Regulator would not ordinarily exercise its discretion in relation to exceptional and non-recurring items in audited accounts which mirror the prescribed test period because an audit process will already have examined them. When no accounts are produced, for example, non-recurring and exceptional items will be determined by the regulator, which must have regard to the financial reporting standards relating to accounting practices published by the Financial Reporting Council.

The noble Baroness, Lady Drake, raised a point about how dividends will be treated in the profit before tax test, and I am advised that we will write to clarify that and, of course, place a copy in the Library for everyone to see. The noble Baroness also raised a point about the regulator’s guidance. The Pensions Regulator launched a consultation on the revised code 12 contribution notices code of practice, which includes clear illustrative examples covering scenarios of how the different tests would apply. This would provide further clarity on how the regulator will interpret and use the new powers. The regulator has received useful feedback from stakeholders as part of the consultation which it is currently analysing, and I understand that the regulator intends to use that feedback to strengthen certain aspects of its policy and further illustrate the approach that will be taken and where its interests lie in terms of acts and conducts pending from any decisions from the courts on these points.

The noble Lord, Lord Vaux, understandably raised the question of why we selected the profit before tax measure. The purpose of the employer resource test is to provide the Pensions Regulator with a tool to make a simple snapshot assessment of the impact of the act or failure to act on the employer. Profit before tax was selected for measuring the resources of an employer because it is a term widely understood by the industry and the regulator. We believe it is less subjective than other options and will be indicative of the employer’s ability to support the scheme.

The noble Lord, Lord Vaux, also raised the issue about the new pension rules change threatening to scupper a big dividend pay-out. We do not wish to crowd out investment, nor do we wish to prevent the payment of proportionate dividends to shareholders. During the passage of the then Pension Schemes Bill through Parliament, the Government opposed and defeated opposition amendments which sought to subject dividend payments by companies with a pension scheme funding deficit to approval by the Pensions Regulator. We argued that it could deter investment and undermine employers.

The noble Lord, Lord Davies, raised the point of verification. The regulations set out that the Pensions Regulator is making a determination and must take into account all relevant information in its possession. The prescribed methodology set out in the regulations also makes it clear that annual accounts will be used which will have already been verified. In terms of verifying the regulator’s determinations, ultimately, any target can make representations to the regulator about the determination, and any decision to impose a contribution notice can also be referred to the Upper Tribunal.

The noble Baroness, Lady Sherlock, raised the question of reasonableness of statutory defence, and whether the Pensions Regulator has a way to determine if this is met. The Pensions Regulator will publish a code of practice and guidance that will illustrate how the tests will apply. The noble Baroness raised the very important issue of charities, and I am advised that we will write to her with clarification on the points she raised.

The noble Baroness also raised the issue of recovery from overseas employers. Again, we will continue to review the situation. She also asked whether this will create an influx of clearance requests and whether the Pensions Regulator is resourced to handle them. The Pensions Regulator does not expect that there will be a significant increase in clearance requests coming in but, if this is the case, the regulator is used to reprioritising its resources and activities, as it has demonstrated during the recent Covid crisis.

To confirm, the draft regulations debated today provide greater security for members’ defined benefit retirement savings by setting out the details of the employer resources test that the Pensions Regulator can use in combating acts of those seeking to avoid their responsibilities to pension schemes. I commend this order to the Committee.

Motion agreed.

Committee adjourned at 6.42 pm.