Examination of Witnesses (Questions 60-79)
THE PENSIONS
REGULATOR & DEPARTMENT
FOR WORK
AND PENSIONS.
21 NOVEMBER 2007
Q60 Mr Mitchell: Not the tattle-tale
within the industry is what I am asking.
Mr Hobman: Of the employer, if
it is significant event, for example an employer wrongfully trading
or relinquishing control of a company or a change in credit rating
are all in some circumstances notifiable events.
Mr Mitchell: That is fine.
Chairman: Thank you very much. Richard
Bacon.
Q61 Mr Bacon: May I say, Mr Hobman,
your answers so far give me a lot more confidence than when we
looked at Opra four years ago when although he was very polite
and straightforward with us our chief witness was one Mr Paul
Gray. I hope you do not find yourself in a similar position in
four years' time.
Mr Hobman: Thank you.
Q62 Mr Bacon: One of the things we
found there was that Opra at that time did not consider that it
could be sure that it would prevent another Maxwell, and that
was something we concluded in our Report, and also there was far
too much focus on trivial cases. From everything you have said,
it sounds like—but can you confirm it for the record—you
are now confident that you would be able to prevent another Maxwell
because of your early warning systems and triaging and so on?
Mr Hobman: I am much more confident
than we could have been at the time when Maxwell took place that
there are controls and there are checks in place and there are
mitigations which would make it very much more difficult for that
to happen or, if to happen, to remain undetected. To that extent
I am confident.
Q63 Mr Bacon: Two more quick questions
about that Report. Opra also did little to check the suitability
of trustees. What processes do you go through to check the suitability
of trustees now?
Mr Hobman: The processes that
we now have in place are that the trustees have to declare to
us whether they are fit to be so. It is made clear to them what
the bar would be to them being a trustee. We do go through Companies
House records for disqualified directors, for example. We do now
seek to reference the Insolvency Service so that we can find out
for example who is a bankrupt or an undischarged bankrupt. In
terms of criminal disqualifications, it is more difficult because
the access to the intelligence databases that we have by law does
not allow us to go on fishing trips, so described, but we do have
much better systems in place through the data that we now hold
to identify, at least in one part of the system, if there may
be someone we are concerned about, whether they also have influence
or presence in other parts of the system.
Q64 Mr Bacon: One other issue astonishing
to us at the time was that the then Act did not give Opra any
objectives or define its functions. Obviously the situation has
improved considerably within the legislation. Are you content
that your objectives and your functions are fit for purpose—I
hate that phrase—that they meet the case and that you have
all the powers and functions that you need to achieve your objectives
and that your objectives are adequately broad?
Mr Hobman: I believe that is the
case, although I would have to say that I believe the Government
having just announced that The Pensions Regulator is to be the
regulator of the new personal account scheme and also responsible
for employer compliance would give rise to the need for a new
objective, which I know is being considered as part of the legislation
to cover those responsibilities.
Mr Galvin: And this is a new role
for the Regulator. It will require a new statutory objective but
the new Pensions Bill will be, as you know, following shortly
and that will be a topic for that.
Q65 Mr Bacon: Figure 13 on Page 25
talks about the case of the Chairman of the Trustees of the Ericsson
Employee Benefits Scheme who misrepresented the benefits of executive
members to Ericsson's senior management, falsely claimed that
executive members' benefits accrued at a 1/30th rate and were
entitled to receive unreduced benefits from the age of 50 and
so on. He also accepted for himself an exceptionally favourable
second deferred pension. That was a whistle-blower case and you
managed to recover some money and the changes that were proposed
were stopped. Presumably the Chairman committed a criminal offence
in doing what he did, and has been prosecuted?
Mr Hobman: He has not been prosecuted
for a criminal offence.
Q66 Mr Bacon: Did he commit a criminal
offence?
Mr Hobman: I have to say I am
not clear whether anything that he did would be technically categorised
as such an offence.
Q67 Mr Bacon: What it says here is
that he falsely claimed that executive members' benefits accrued
at a 1/30th rate. He presented this as an existing entitlement,
rather than proposals requiring the parent company's approval,
despite knowing that it would have a detrimental effect on the
fund. "The Chairman also accepted for himself an exceptionally
favourable second deferred pension, which potentially could affect
other scheme members' benefits, without informing or seeking approval
from the other directors." I am not a lawyer but there are
lots of laws out there including on deception and various other
things. It sounds to me like he committed criminal offences and
I am surprised that no-one can tell me whether that is the case
or not.
Mr Norgrove: From memory—this
was a little while ago—the case for criminal prosecution
was considered but given the higher standards of proof required
for a criminal case it was decided that it was not worth pursuing.
Mr Bacon: I understand that the phrase
whether he committed a criminal offence itself has legal implications.
You did not think you could establish to that burden of proof,
but if all of those things are accurate, that is to say that he
falsely claimed that members' benefits accrued at a certain rate
and that he took action which gave himself an extra favourable
pension without informing the directors even though he knew it
might damage the fund, these are provable things, are they not?
Chairman: I am just wondering if it is
appropriate for us to second guess whether criminal prosecutions
took place. I do not think it is the role of this Committee.
Mr Williams: It is okay to ask what was
done.
Q68 Mr Bacon: I am jolly glad that
it was stopped and it looks like your system worked which is good.
It is just one of the things I have noticed for years in this
Committee is an unwillingness—we saw this with the Charity
Commission and DWP—to take out prosecutions. But you are
saying that prosecution was considered?
Mr Hobman: Prosecution was considered
and it was felt better to pursue this on a civil basis.
Mr Norgrove: You might want to
mention, Tony, that there are other cases that are being pursued
on a criminal basis.
Q69 Mr Bacon: If there is any further
information that you feel is appropriate perhaps you would write
to the Committee.
Mr Norgrove: One other thing though,
the Committee has, quite rightly I think, focused on criminal
activities in the Maxwell case for example, but from our point
of view the risk to members' benefits from criminal activity is
far lower than the risk from a company going insolvent with an
underfunded pension scheme. That is a much higher risk to members'
benefits.
Q70 Mr Bacon: There are several other
questions I want to ask you but I will turn to Figure 9 on Page
18, I am interested in the two top boxes, the one on the left
is the high risk large-scale scheme where you have got 150 to
300 schemes and then about 2,000 schemes variable in number on
the top left. What I am trying to get a sense of is how big are
those as a proportion of the pensions sector? How many employees
are affected? How many of those are big companies, the top 500
plcs?
Mr Hobman: The cases in the top
right box will tend to be larger schemes, including the very largest,
bearing in mind that many of these are those who will come to
us through the scheme funding process as a matter of course and
through the corporate risk management function, the clearance
function. I cannot give you a precise figure but a context I hope
will be useful that something like 85% of scheme memberships sit
in 1,600 large schemes, so you can see from that that we are at
any one time dealing with a caseload which is a very significant
proportion of memberships.
Q71 Mr Bacon: Where it says active
intervention you may think that something is inappropriate or
wrong but they may also have been the subject of an active dispute
with the trustees maintaining that they have met their obligations?
Mr Hobman: Absolutely and as time
goes on, coming back to a question earlier about whether we use
our powers, one of the significant powers we have been given is
to decide funding where there has been no agreement. I have no
doubt we will be using that more in due course.
Q72 Mr Bacon: Which brings me on
neatly to Paragraphs 4.19 and 4.2, where taken together they describe
an inherent tension between the need to be transparent and consistent
in decision-making so that the market understands what the Regulator
deems unacceptable on the one hand and not routinely publishing
the findings in such a way that it will encourage gaming of the
system or encourage schemes that are actually pretty well funded
to be less well funded or even to set a benchmark that people
then fall to meet. How do you nonetheless, if you are going to
not set benchmarks in that way, and accepting that there are scheme-specific
requirements people have different views on, as it says in Paragraph
4.2 at the top there on investment strategies and the asset classes
they should adopt and so on, how do you get the message out clearly
in a transparent and consistent way as to what is acceptable and
what is unacceptable?
Mr Hobman: In part at least it
is by playing back relevant data into the market-place. That is
one of the good points that the NAO has made as to the components
of transparency in their Report. For example, at the earliest
stage that we were able to, we took the data from the first 1,200
schemes we processed and analysed and made it available to the
market to show, amongst other things, that there are a variety
of solutions available on a scheme-specific basis, which reinforces
the point that we are not after single funding standards. We repeat
constantly in all our guidance that we are not looking for a single
funding standard, and even though, for example, for our regulatory
oversight purposes we say that if a scheme is going to take longer
than ten years to repay, all other things being equal, we would
want to know why, that does not mean to say that the scheme should
not repay much earlier or maybe somewhat later, as seems to have
been borne out so far from the analysis that we have done.
Q73 Mr Bacon: One more question on
paragraph 4.5, it appears that 73% of TPR's stakeholders considered
that it had sufficient powers. That is all very encouraging. This
is perhaps a question for Mr Shapcott. Self-evidently 27% do not
think that TPR has sufficient powers. I am just wondering who
are these folk who do not think TPR has adequate powers?
Mr Hobman: Can I answer that.
In fact, in all of the statistics shown in this Report you have
those who had a positive view, I think it would be fair to characterise
it that the remaining percentage is in the main but not in all
cases those who had no view or did not know. Those who had a negative
view was a relatively small number.
Q74 Mr Bacon: 73% is pretty good
I would have thought but you just wonder why nearly a quarter
do not, but that is not what it is saying?
Mr Hobman: In that case it was
only 8% who actually disagreed to any degree, which again we do
not presume is job done but means that we have a fairly solid
result in that case.
Mr Bacon: Thank you.
Chairman: Your last questioner is Mr
Alan Williams.
Q75 Mr Williams: Do you accept that
there is a educative value in making known your determinations
when you have found that you need to use enforcement powers?
Mr Hobman: Yes we do.
Q76 Mr Williams: But it is a late
conversion, is it not?
Mr Hobman: That is a fair challenge.
Yes it is. We started out with a view that given the issues of
confidentiality and gaming and the other things that the Report
cites that it was better to approach this on a publish by exception
basis. We accept and indeed now have a firm policy that we should
publish in all cases other than by exception.
Q77 Mr Williams: That is very recent,
it is only two months ago in September that you made the decision.
Mr Hobman: The decision was only
made formally two months ago although we had been considering
it for some while prior to that.
Q78 Mr Williams: Sir John, when did
the draft report go to them for their consideration?
Mr Shapcott: We have been discussing
it since July/August.
Q79 Mr Williams: Since July/August?
Well, well, well, so in July and August they saw it was going
to come to this Committee later in the year and quite miraculously
in September they changed their approach? It is a great compliment
to this Committee, is it not?
Mr Norgrove: That is one of the
functions surely of the NAO work to point out things that can
be improved, and we have taken that on board quite properly.
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