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I hope that that deals with the noble Lord’s queries and that he will feel able to withdraw the amendment.

Lord Skelmersdale: There will come a time when I will have to read the Minister’s words with great care and with a cold, wet towel wrapped around my tiny brain. However, I am glad to hear that the Government are continuing to look at indexation within the FAS. It is clear that it is right that they should do so and that they should not yet have come to a final decision. On that basis, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord McKenzie of Luton moved Amendment No. 130EW:

(a) contribution notices;(b) financial support directions; or(c) restoration orders.(a) a material risk of adverse effects on the benefits under relevant pension schemes of, or in respect of, members of such schemes, or(b) a material risk of compensation from the Pension Protection Fund becoming payable in accordance with Part 2 of the Pensions Act 2004 (c. 35).

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(a) the Pensions Regulator, and(b) such other persons as the Secretary of State considers appropriate.”

The noble Lord said: I shall speak to the Government’s Amendments Nos. 130EW and 141C, and at the same time respond to Amendment No. 134ZA, tabled by the noble Lord, Lord Lucas.

The regulatory regime that protects occupational pensions was established under the Pensions Act 2004. It is based on the employer’s covenant to the pension scheme, which means that the employer stands behind the pension scheme risk. It is designed to strike a balance, giving employers flexibility in how they manage their funding risk without requiring them to inject capital up front. However, it also gives trustees a legitimate interest in corporate activity that might reduce the employer’s ability to support the scheme.

In general, the regime is working well. However, several new business models have emerged that seek to take advantage of the flexibility of the occupational pensions regulatory regime. They wish to split the pension scheme from the support of the employer and run the scheme without the security of a sponsoring employer or an adequate capital buffer dedicated to the scheme. They could pose significant risks to the security of scheme members’ benefits, the Pension Protection Fund and those employers who pay the Pension Protection Fund’s levy.

There is general agreement that the Government are right to give the regulator enhanced powers to intervene in such circumstances, but we are acutely aware that the changes must be targeted and ensure that there is as much certainty as possible in the operation of the regulatory framework. In introducing these changes, the Government aim to strike a balance which ensures that regulation remains effective without stifling new innovation or inhibiting legitimate business activity. We do not wish to burden employers or pension providers with unnecessary regulation but it is critically important that pension promises are kept, both for the security of scheme members and to ensure that liabilities are not passed on to the PPF and, ultimately, to other responsible employers.

We laid out the broad proposals in our consultation, which started on 14 April and ran to 20 June. Most consultees, including the CBI and the NAPF, agreed that the Government were right to act and that we must protect members’ benefits and the Pension Protection Fund from new risks. However, we recognise that it is important to get the details right to ensure that the changes are appropriately targeted. Our policy objective remains that the overwhelming majority of pension schemes and their sponsors should not be affected by the proposed changes.

It is difficult, if not impossible, to build into legislation a comprehensive definition of all the different models that look to take on pension liabilities. Doing so may appear to be simple in legislative terms, but it would

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simply create a regulation that could easily be sidestepped. The proposed changes are therefore designed to be sufficiently broad-based to tackle the wide-ranging risks resulting from market changes. At the same time, we are determined that they should be sufficiently targeted to ensure that the everyday business activity of responsible employers is not affected. The changes would make it easier for the regulator to ensure that pension schemes are supported properly, but only where taking action is a proportionate step and it is reasonable to expect the support to be put in place.

I should like to set out our intentions. The material risk prompting these changes is those actions that singularly or collectively weaken the employer covenant standing behind the pension scheme. Our consultation set out six features or situations where that may occur, including moving the employer or the pension scheme to another jurisdiction. In these and similar circumstances, the regulator should not have to prove intent but could look at the effect of the action and whether it was detrimental to the scheme or the PPF.

The amendment provides a regulation-making power to amend Part 1 of the Pensions Act 2004, but has important constraints on the use of this power. These safeguards link the power to material risks to either the security of members’ benefits or the protection of the PPF and require the Secretary of State to consult with the Pensions Regulator and others. Regulations would also be subject to the affirmative procedure, ensuring that both Houses of Parliament would debate any regulations before they came into force.

9.15 pm

We are grateful to the respondents who have put forward helpful suggestions, to which we need to give proper consideration in formulating the draft regulations. The responses received during the consultation will help in this process. We will consult formally on these regulations, which will provide stakeholders with an opportunity to comment on the precise detail of the secondary legislation. The regulator will issue revised guidance which will set out how they will be implemented at the same time. This is a complex area which demands thorough consultation, and I am pleased that many organisations are keen to engage on the detail of the regulations.

What we are proposing strikes the right balance between partially constrained powers that are granted in primary legislation, but subject to further constraint, the detail of which will be in secondary legislation, and guidance. Such constraints as are proposed here will ensure that these powers are sufficiently targeted to deal with the issue in question. It is important that they can be refined to deal with future market conditions and currently unforeseen threats to pension promises.

I turn now to Amendment No. 134ZA, tabled by the noble Lord, Lord Lucas. We welcome the recognition in Amendment No. 134ZA that the Government need to act in this area, but Amendment No. 134ZA is not constrained in any way and is not linked to the material risks to the security of members’ benefits or to the protection of the PPF. Unlike the Government’s amendment, it does not require consultation with the Pensions Regulator and others. The effect of this amendment would be to give the Secretary of State the

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power to make an order where it was necessary to prevent the avoidance of the intent of the Pensions Regulator’s anti-avoidance powers in Sections 38 to 56 of the Pensions Act 2004. The amendment is very broad-based and contains none of the safeguards that the Government consider important in the Bill. I hope that in light of my explanation the noble Lord will not press this amendment.

Finally, on the issue of retrospection, the Government’s consultation included a proposal to make it clear that contribution notices can be issued in relation to acts or failures to act. This change would be effective to 27 April 2004, as it is a clarification of an existing provision, whose effect dates back to this date. The Government are carefully examining the responses to the consultation in respect of this proposal and expect to lay a further amendment to this Bill in due course. Our shared responsibility should be to ensure that pension promises are kept, with confidence in UK pensions secured for the long term. I believe that our proposals will provide that confidence. I beg to move.

Baroness Noakes moved, as an amendment to Amendment No. 130EW, Amendment No. 130EX:

The noble Baroness said: The amendment is in the name of my noble friend Lord Lucas. It is a simple amendment defining relevant notices. I have Amendment No. 130FK in this group. Before speaking to it, I shall say a few words about the overall issues addressed by Amendment No. 130EW. This is a far-reaching amendment which has been introduced late in the day and hence was not included in our Second Reading debate. Therefore it is important that we examine the broad issues as well as the detail of the amendment.

In addition to Amendment No. 130FK, which amends Amendment No. 130EW, I have added my name to the majority of the amendments in the name of my noble friend Lord Lucas, which seek to amend the Government’s amendments. Most of my noble friend’s amendments are amendments to Amendment No. 130EW, but I fully support my noble friend in degrouping them from this group. While that may make our proceedings a trifle more complex, it is important that we have an opportunity to debate the particular issues that my noble friend’s amendment addresses.

The Minister has spoken to his Amendment No. 130EW. He will have an opportunity to press it in due course, although I suspect not today. I hope that we will be able to persuade him by these debates on the amendment and the series of amendments tabled by my noble friend, that it would be better if he did not press his amendment in the Committee. That would allow the Department for Work and Pensions to pursue serious discussion about the form and content of alterations to the regulator’s powers during the summer and early autumn, and I hope that the Government could return on Report with an amendment which had more support in the commercial world than this one does.

We have received briefing on Amendment No. 130EW from a large number of organisations, such as the CBI, the British Venture Capital Association and the Society of Turnaround Professionals, as well as professional firms which are active in providing advice in respect of

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pension issues, such as PricewaterhouseCoopers. These organisations fully accept that, as we do on these Benches, the interests of members of pension schemes need effective protection in law. However, the united opinion from those organisations is that Amendment No. 130EW goes beyond protection of members and is in fact capable of inflicting real harm.

Noble Lords may have seen a letter in the Financial Times on 9 July, signed by the British Venture Capital Association, the Association of Chartered Certified Accountants, the Society of Turnaround Professionals and the Association of Consulting Actuaries. I will quote a couple of bits from that letter. They express concern that these measures will damage Britain’s competitiveness and further undermine its reputation as an attractive place to do business. They report that these moves have already caused many deals to be aborted and stopped further ones from happening, and say that lawyers are giving explicit legal advice against investment because of these changes.

My Amendment No. 130FK says that regulations must not be made under the new clause introduced by Amendment No. 130EW until a regulatory impact assessment has been laid before Parliament and approved. As I said earlier, Amendment No. 130EW has been introduced at a late stage in the passage of the Bill and it has not been considered in another place. The amendment has no regulatory impact assessment attached to it, and of course it was not included within the original regulatory impact assessment. Hence the Government have not laid out the evidence of need for this amendment, they have not set out alternative courses of action and have given no estimate of cost for the private sector or for government.

The Government’s consultation suggested that an RIA was not necessary because there would be a negligible impact on the private sector, but the respondents to the consultation challenged that and called for an RIA. They believe that the costs will be great at a macro level in discouraging corporate transactions, wherever a defined benefits scheme is involved. Also, they believe that if transactions proceed they will be driven into the necessity of clearance procedures, which are costly and time-consuming.

The Government issued a consultation paper on new powers for the regulator on 25 April. That consultation ran for eight weeks instead of the usual three months, notwithstanding that the Government acknowledged that the issues are complex. There is a sense that this is being rushed through without proper consideration. Indeed, the Government produced this amendment only a few days after the end of the consultation. The Government have not published the responses to the consultation. Instead, they said that there is,

I believe that if the Government publish the responses, it would be plain to all that there is no such consensus, and certainly no consensus as to the content of Amendment No.130EW. There is a clear view from submissions to the Government that I have seen that, if some further powers are required—and there is doubt

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about that—the answer does not lie in the sweeping powers that the Government are seeking, but in more targeted ones.

Those who read and responded to the consultation document thought that they were considering some fairly well defined proposals for an extension of the regulator’s powers. There was no suggestion at the time that the Government were consulting on taking some wide and unconstrained powers to rewrite the legislation in perpetuity. If any consensus can be detected, it might be about the elements of the specific proposals put forward in the consultation document. There is no consensus about these wide powers because they simply were not exposed to consultation.

I know that the Minister will seek to assure us, as he has partly in his opening remarks, that the regulations will be targeted. The fact remains that the powers are extraordinarily broad and should be more narrowly drawn. We do not have an amendment in this group that redrafts the powers by reference to the specific situations set out in the consultation document. This is the basis of one solution that, for example, the CBI would like to see—although the list in the consultation is not without controversy and goes way beyond the non-insured buy-out model that initially led to concerns. Nevertheless, I know that the various organisations to which I have referred would be happy to work with the Government to achieve a more tightly drawn power if the Government were prepared to go down that route.

For now, I shall leave my noble friend Lord Lucas to speak to his detailed amendments in the group. However, I may contribute to the Committee later, depending upon how our debates progress. I beg to move.

Lord Lucas: As my noble friend has said, Amendment No. 130EW is immensely wide. It does not have within it any great restrictions on how these powers may be used. That is why I am so concerned about whether we are legislating in the right way. It is not that the Government say that they will use these powers unacceptably, but that the Bill will allow them to do so.

We took a good deal of trouble in the 2004 Act to get the relationship between the pension fund and the company funding it right. That is in danger of being substantially disturbed. It is not what the Minister is saying, but how the Bill can be read and used. The Minister knows that affirmative resolution is all very well but, at the end of the day, it is not an effective check on the Executive. The occasions when we, let alone the Commons, will throw an order back at the Government are extremely rare.

The Government have made no attempt today to set out the necessity for having these powers now. I have heard nothing from them to say that some impending crisis can be dealt with in no other way. I have heard nothing from them to say that the regulator’s powers have been tested and found wanting. I believe that I have not heard these things because neither of them true; this is just the Government looking ahead and anticipating developments. In that case, surely we have plenty of time to talk. We certainly do not need to rush at this before coming to Report. We can use the Summer Recess to talk these things through carefully and get them right.

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If we pass legislation like this, we have to ensure that we allow commercial life to keep running. The scope of the Bill is undefined and it is retroactive. It seems reasonable to me—I do not argue with the idea—that the provisions apply back to April this year, when they were announced. However, under the new clause, changes could be made in 10 years’ time which will still work back to April this year. It would introduce enormous uncertainty into commercial transactions if the rules on which those transactions are based could be rewritten at any time from now on. The clearance statement for a transaction done in a month’s time could be torn up because the rules on which it is based can be changed. Anything could be done if it is in the interests of the relevant pension fund.

9.30 pm

We need to focus on the status—we faced this dilemma in 2004—of the pension fund liabilities. Are we really saying that the full buy-out liability should be on a company’s balance sheet; in other words, that it must recognise the full pension fund creditor and treat that as the fixed amount which it owes and the amount which belongs to the pension fund? That seems the way we are going with all this legislation. Or are we still attached to the idea that there is a genuine working relationship between a pension fund and its company, and that the pension fund is in effect saying, “We are trusting you with some of our money. There is a commercial relationship there because we hope to do much better by letting you have the money than we could by pitching the company into receivership and just getting what we could under those circumstances”? If the second scenario is the case, we have to allow for that relationship to be solid and well based. We cannot look to rewrite the consequences of properly advised actions taken in good faith, given the circumstances that prevailed at the time.

Over the weekend I looked at the accounts of one of our larger building companies, which has more than £1 billion worth of unfunded pension liabilities. The stock market was very optimistic in assigning it a net worth of a few hundred million pounds. Under those circumstances, the pension fund is clearly a key player in the refinancing of that company. You cannot not look at a liability of that size. Under the 2004 Act it was quite simple: you went along to the Pensions Regulator with the trustees, cut a deal and came out with something undoubtedly more favourable to the pension fund than it would have been before we had a Pensions Regulator, but which was none the less reasonable and sane and could be relied upon because it would then form the basis of a clearance statement. However, if you do not have that certainty, if you are looking at putting half a billion pounds into the company to keep it going, and the pension fund says, “That is fine. We would like £100 million of that to up our security, but in the circumstances that is enough”, and then three months later the Government can say, “Oh no, we will tear up those rules. We will write our regulations differently, and, actually the pension fund now wants another £400 million”, it makes it impossible to do the deal.

Faced with the lack of definition in this amendment, I fully understand why people are extremely reluctant

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to rescue companies in such a state. We have seen in the financial news how slowly rescues are proceeding for some companies that are in the first wave of those to get into difficulties. At the moment we are seeing only the major contractors being hit, but this will run down to the sub-contractors and then it will run out to other industries. Many companies will find themselves in this position and people will want—for, I should have thought, sensible reasons—to find ways to maintain them as going concerns and to save them.

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