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Lord Higgins: I am not clear what other activities, apart from retirement benefit activities, the Government envisage might be caught by the provision. It says that occupational pension schemes would be limited to retirement benefit activities. Of course, we are not only talking about provision of pension; there are many pension schemes, for example, which have people who go around visiting the retired pensioners, and so on. But I am not clear what it is that the Government are worried that occupational pension schemes might suddenly rush off and do—run a lottery, or something, perhaps.

Baroness Hollis of Heigham: Perhaps running a garage, or something like that. Absolutely.

The clause does not prevent occupational pension schemes that are subject to it undertaking any current business. The Inland Revenue rules on tax relief currently restrict pension schemes undertaking
 
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business which is not related to the provision of pensions. Despite this, it is necessary to include the provision in the Bill because the scope of the tax rules is slightly different from the scope of the directive. It is necessary for the legislation implementing the directive to cover all occupational pension schemes, irrespective of their tax-approved status.

Lord Higgins: Whenever one gets worried about a clause in the Bill, one or two spectral figures in the background appear. It is either the Chancellor of the Exchequer or the European directive. The Chancellor may restrict tax privileges to schemes which do not engage in other activities. I should have thought that a more appropriate response would be to tax the other activities. However, I do not want to pursue this point further.

Baroness Hollis of Heigham: I can already see tomorrow's headlines.

Lord Higgins: I think that we should have little stars on each clause showing that this one is because of the directive and that one is because of the Chancellor.

Clause 244 agreed to.

Clause 245 [No indemnification for fines or civil penalties]:

On Question, Whether Clause 245 shall stand part of the Bill?

Lord Higgins: I am rather worried about this clause. There is no doubt that the vulnerability of pension trustees is increasing from moment to moment and has reached terrifying heights. Generally speaking, I think that countless employers, if not the pension fund itself, tend to take out insurance policies in cases where trustees may be vulnerable with regard to legal action. I should have thought that that would probably include fines or civil penalties. In the absence of any such protection, I should have thought the tendency for trustees to take a risk, because there is often not much in it for them, would be rather dangerous. The provision seems an unnecessary restriction which might deter people from taking on the task of being a trustee, but perhaps I have misunderstood the situation.

Lord Lucas: In a practical sense, will this not simply increase the costs on pension funds? Rather than the pension fund being able to pay for these premiums out of its income, it will have to pay the trustees, who will then pay tax on that payment before they can pay the premiums, and the cost will be grossed up.

There is no way that people would be pension trustees without such insurance. It will be obtained in one way or another—it is ridiculous to suppose otherwise. The liabilities are so enormous that no one of any standing could sensibly do the job without insurance. There will be conditions in the insurance saying that if someone does something entirely fraudulent they will not be covered by insurance and are personally liable—well, fine. But you have to have the ordinary, everyday insurance that covers you for
 
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mistakes or general forgetfulness. You could not do the job without it. All the clause will do is increase the cost for the fund.

Baroness Hollis of Heigham: The clause does not require anybody to take out insurance, although that may well be the result. However, I am slightly surprised at the comments that have been made. The clause will ensure that if a trustee has behaved unreasonably and is fined or subject to a penalty, the scheme should not reimburse that trustee. Insurance may be taken out but my understanding is that this is no different from the current arrangements for OPRA and the Financial Services Authority. The clause extends the provision to personal pensions. There may or may not be a further discussion about insurance but the power is there, in analogous circumstances, in OPRA. The clause makes sure that scheme members are not asked to pay for a trustee's unreasonable behaviour. It is quite a stringent test. The power currently exists in OPRA and is being carried forward here with a wider remit for the pensions that it covers.

It seems absolutely right that members should not guarantee the liability of trustees for failure to behave appropriately. To put it in totally different language, where there has been a failure of trustees' duties of fiduciary care, it is right that scheme members should not pick up the bill. I suggest that the issue of insurance is separate. This is not a new power; a similar one already exists in OPRA. We are extending it to personal pensions, although it already exists with the Financial Services Authority.

Lord Lucas: I agree entirely with the noble Baroness on subsection (1). Certainly the scheme should not indemnify the trustees, but I cannot imagine that, these days, trustees would not have insurance. Non-executives and charity trustees have insurance, for example. Subsection (2) seems to rule that out. Perhaps I have misunderstood it.

Baroness Hollis of Heigham: I do not see how subsection (2) rules it out. The employer can pay a fine that could be insurance—I am sure that the noble Lord is right about this. All the clause says is that scheme members do not pay, and that it does not come out of scheme funds.

Lord Lucas: But it will come out of scheme funds anyway, because the trustee will require insurance. If the scheme is not funding the insurance, it will pay the trustee so that it can pay for the insurance. One way or another, the insurance will be there, and the cheapest way is for the scheme to pay for it directly, because any other way involves paying the Chancellor of the Exchequer.

Baroness Hollis of Heigham: Under subsection (2) schemes cannot pay the insurance; either employers or the trustee individually may do so.

Lord Higgins: It may be that either way the employer ends up paying, although the cost may be
 
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shared if the scheme pays rather than the employer. I share entirely my noble friend's views on the matter. In the absence of any insurance, there is a danger that it will be a question, not of whether members should pay for the liability of the trustee, but of there not being any trustees for them to pay. The noble Baroness underestimates the dangers involved. If she says that the employer will have to pay but not the pensioners—

Baroness Hollis of Heigham: Yes, I am effectively saying that. In that situation, the trustee could—with agreement, presumably—lay it off, so to speak, on the employer. We are protecting pensioners from the failure of the trustees, where they have behaved unreasonably.

Lord Higgins: But the trustees of the pension fund are not directors of the company. Ultimately, it comes down to a question of who pays: the employer or the fund? To a large extent, the fund is paid for by the employer. It will be yet another nail in the coffin of final salary schemes if one starts saying, "Oh well, the fund won't pay so the employer will have to".

Baroness Hollis of Heigham: The scheme already exists under OPRA, which we have had for seven years. Have Members of the Committee any evidence for thinking that the present scheme does what the noble Lord fears or that there have been any cases where trustees have been deterred because of it in a substantial way? I am not saying that there may not be individual cases. There is nothing new here. While I take the point about insurance, we should not treat the provision as though it were a brand new intervention. We are merely making clear that scheme members should not pay when trustees have failed bluntly to protect their interests.

Lord Oakeshott of Seagrove Bay: The point is not that this is a new power but that conditions for trustees are becoming more onerous. In particular, I am conscious of the interesting points made in the recent open letter of the National Association of Pension Funds. It pointed out that, as a result of the move towards scheme-specific funding and so on, trustees will probably become much more cautious and will take more seriously the burdens on them. To that extent, the rules are the same as before but they deal with a different situation. That is the concern.

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