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I agree with the noble Lord, Lord Oakeshott, that it would be helpful, after the Government have had further discussions with those affected, for us all to get together again in September. I also agree with the noble Lord that it is not enough just to talk to the CBI. The Government need to engage with all groups. I heard the code in what the Minister said about wanting this in the Bill so that those who did not want powers could be told that there would be powers. That unfairly characterises the position of some who are involved in turnaround and private equity. I am not in the camp that despises private equity. It has been a great force for good in our economy; it has achieved great efficiencies in many industries and has created employment. We should not regard anything that comes from the private equity industry as being necessarily bad. The industry does not seek simply to rape and plunder pension schemes; that is absolutely not what it is about. I hope that the Minister will go back to his department and tell it that it also needs to engage with bodies with which it may be less comfortable, because they have legitimate concerns that are important to the UK economy and that need to be taken into account.

The noble Baroness, Lady Hollis, talked about the parallel with the 2004 Act, in which I was not involved to the same degree of detail. She said that the things that were being discussed were in the Bill. The difference in this case is that the subject of Amendment No. 130EW was not in the Bill when it was considered in another place and is still not in the Bill. The Government are seeking to put something into the Bill without proper consultation. It is appropriate to pause at this point. It is not as though the Government have a permanent right to recreate the Bill that they would have introduced if they had thought of things further back. Otherwise, the parallels are good because, as I understand it, people discussed the issues seriously during that summer and came back with workable

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amendments, to the satisfaction of everyone involved. I hope that we can get to that stage.

The noble Baroness asserts that the regulator’s powers are not adequate. There is some doubt about that, but those outside the Government who believe that some changes need to be made to the powers are also sure that those powers need to be more constrained. That is the likely difference. The question is not whether new powers are required but whether they need to be constrained in other ways.

Like my noble friend Lord Hunt, I hope that the Government will always bear in mind the fact that stifling innovation is seriously harmful. If they try to take powers that would allow them to respond to any conceivable innovation that they deemed to be malign, they could end up circumscribing the way in which ordinary commercial transactions occur and harming the economy. That is clearly undesirable and something in which I am sure the Minister does not want to become involved.

My noble friend Lord Lucas raised some important issues, but we will return to retrospection, fair value and the new super-creditor, which, in many respects and despite the Minister’s assurances, it looks as though the Bill is on the road to creating. These are important matters, which we need to discuss for longer.

My Amendment No. 130EY was discussed briefly in the context of the previous 45-minute debate, in which the Minister repeated that the Government do not intend to introduce regulations that do not deal with risks, particularly if the risks increase. My only point is that this is not reflected in the Bill. I hope that he will reflect further on whether the Bill properly reflects the balanced consideration that needs to be taken into account. This is not simply a question of whether the rights of members of a pension protection fund need to be protected. There should be a positive obligation on the Secretary of State to consider whether his actions will make matters worse in some respects. That is the point of the amendment. I will not press the amendment to a vote today, as the Minister asked, but I hope that this is one of the things that he will consider further during the summer. I beg leave to withdraw the amendment.

Amendment No. 130EY, as an amendment to Amendment No. 130EW, by leave, withdrawn.

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

The noble Baroness said: In moving Amendment No. 130EZ, I shall also speak to Amendment No. 134ZBC.

When the Pensions Act 2004 was passed, the Companies Act 2006 was still only a gleam in the eye of the then Department for Trade and Industry. At that time, directors’ duties were defined only by common law and could be summarised broadly as directors needing to act in the interests of the company. However,

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when the Government introduced what is now the Companies Act 2006, which I know the Minister remembers because we spent many happy weeks debating it in Committee and on Report, they deliberately chose to enact Section 172 of that Act, which restated the duties of directors of a company to line up with what the Government described as enlightened shareholder value. That section states that the duty of the directors is to act in the interests of,

It goes on to list matters to which the directors must have regard. That list is not exclusive, but it was intended at the time to reflect those major matters which the Government believed directors should have in mind when making decisions. That list refers to employees; that has been the law since 1987. It does not refer to former employees or to employees in their capacity as members of a pension scheme. Indeed, pension schemes are not mentioned at all in connection with the duties of directors.

There is a concern that the proposed new powers of the regulator will skew what directors have to consider away from their core statutory duties, as set out in Section 172. Any changes to the current rules for the regulator’s powers will—as we have partly argued to date, and will argue during the rest of our consideration of the detailed amendments—be likely to lead to an increase in clearances, to which a lot of attention is being paid. They raise a danger for directors. Changes in the rules for contribution notices are much more likely to leave directors in the firing line. We will debate later whether the contribution notice should attach to individuals.

It is inevitable that, if directors are sitting in the boardroom, trying to make decisions, and know that they will be in the firing line for contribution notices, which is a very serious issue in relation to transactions—which, under the proposed regulations, will be more broadly defined, and will shift from the current understanding—their core duties will become difficult to reconcile with what they have to take into account to meet this new environment. The Government will try to create this new environment if they get new regulation powers and pass regulations as they have broadly described them in their consultation document. The conventional advice that lawyers give to directors is that if they act in good faith, using their skills diligently, and ensure that they pay regard to the matters in Section 172, they will satisfy company law. When we come to the new powers and the use of the new powers proposed by Amendment No. 130EW, the Government have said that they wish to whisk away the defence of good faith. We are starting to see a bifurcation between how directors are told they should behave in order to satisfy company law, as enshrined in the Companies Act 2006, and what the regulator may require of them.

As my noble friend Lord Lucas said in the context of the previous amendment, the liability of employers to pension schemes is becoming ever more like a super-preferential creditor. This has not been done via the Companies Act or the Insolvency Acts. It is, in effect, being done by the back door of pensions legislation. Is it the Government’s intention that the Pensions Act

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should override what is found in company legislation, especially company legislation that has been so recently enacted, without specific reference to pension schemes? Are they proposing giving pension schemes an order of protection that is different from that conferred generally by the rest of company law on the liabilities of creditors?

On this subject, there is a slightly worrying misunderstanding about the nature of companies and company law which is linked and why I should like to raise it today. In the Government’s consultation document about the regulator’s powers, it states at paragraph 1.6:

This shows an astonishing lack of understanding of the difference between investors in a company and the company itself. It is the company itself that is typically the employer and to which all the powers of the Pensions Act relate, not the investors or members of that company. In the world of publicly listed companies, those listed on stock exchanges, there is no way that, say, an investor in year one who makes a profit and moves on would transfer some notional obligation of standing behind to an investor several transactions later in year five. Perhaps the Minister will explain what the “standing behind” referred to in the government consultation was trying to get at. It seems to me that the Government are coming close to trying to lift the corporate veil with no thought of what impact that would have on capital markets. This is one of the areas in which those coming to the consultation document become concerned about the Government’s approach to corporate life in general.

I turn to Amendment No. 134ZBC, which amends Section 100 of the Pensions Act 2004 to ensure that the regulator has regard to the interests of employers and associated parties when it exercises its regulatory powers. It seems that the Government intend to use the proposed new powers created by Amendment No. 130EW to enable the regulator to intervene in many more situations, either because a course of conduct is involved rather than individual acts or because a wider range of bodies can be considered for financial support, directions or contribution notices. It is therefore right that the regulator considers the widest possible effects of the exercise of its powers. If the regulator may be able to issue notices in a wider range of circumstances and to more people, there must be a quid pro quo that the regulator considers the effect of its actions on those affected. While these might appear to be covered by the statement in Section 100(2)(b) that,

it is not absolutely clear that the regulator must include within that employers and associated parties.

To date, the regulator has issued few notices and directions, but concerns have been expressed about the direction of travel indicated by the regulator. For example, the regulator’s consultation document on the clearance process issued last year took a number of positions which caused grave concern to employers. Having to have,

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would be a useful safeguard and an important signal from the Government that they believe that employers are important in their own right and are not simply a chequebook to support pension schemes.

I have raised a number of concerns about the interaction between pensions legislation and company law which are crystallised, although not entirely created, by what the Government are trying to do in Amendment No. 130EW. I beg to move.

5 pm

Lord McKenzie of Luton: I appreciate the concerns of the noble Baroness about the interests of employers and directors’ duties under company law. The interaction between pensions and company law is an important consideration, and I welcome the opportunity to discuss it. The regulator already has a duty under existing legislation to consider the interests of directly affected parties, and when considering whether to issue a contribution notice or a financial support direction, the regulator is required to have regard to matters when deciding if it is reasonable for employers to make payments to the scheme or to put support in place. We recognise that it is important that legitimate business is not hampered by these changes and that employers have a degree of certainty that if they properly consider and address the issues of their pension scheme, they are unlikely to be subject to these new powers. It is equally important that the regulator’s powers are sufficiently robust to respond to new risks in an evolving market.

The interaction of pensions and company law is important. The Government’s intention is that the duties in these two sets of legislation should rightly sit alongside each other. The noble Baroness may be concerned that directors who otherwise act in accordance with duties under the Companies Act should not be liable to regulatory action. Directors have certain duties to current employees but under pensions legislation they also have duties to scheme members’ interests. It is of course a matter for directors to balance these duties along with their other responsibilities. These situations are not unusual.

I reassure the noble Baroness that it is not the Government’s or the regulator’s intention that in the normal course of their duties directors should be subject to regulatory action where their actions have no materially detrimental effect on scheme members’ benefits. The 2004 Act already places requirements on the regulator to consider whether it would be reasonable to use its anti-avoidance powers. It must have regard, where relevant, to all the facts of the case. For example, it must have regard to the degree of involvement in the Act and the involvement that the person has had with the scheme.

To directly address these concerns, our intention is to strengthen these constraints to require that the regulator must have regard, where relevant, to the reasonableness of the person’s actions—for example, a director in light of his duties in that capacity—and the value of benefits the person received from the company sponsor or the scheme. I highlight the regulator’s existing duties. Under existing legislation, the regulator must consider the interests of members and those

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directly affected by its interventions. To include consideration of the interests of those persons only indirectly affected could lead to delay and disproportionate expense for the regulator. That would not be appropriate.

The noble Baroness touched again on removing “good faith”. I know we are going to come on to this. It applies to only one of the tests: that of preventing debts becoming due. This means it is relevant for only certain other events directly related to the pension scheme—for example, compromising debts due to schemes. This is not typical activity regulated under the Companies Act. The ordinary director functions such as paying dividends are considered under limb one of the tests in the Act: preventing recovery of a debt. This has never been prefaced by good faith. We are not aware of any problems that that has created.

On standing behind schemes, we believe it is right in this country that employers have flexibility in supporting pension schemes. Insurance levels of insolvency would be disproportionate but this means the employer must make contributions where appropriate, with a clear impact on likely returns to shareholders.

Baroness Noakes: Could I clarify that? The Government’s paper talked about shareholders and investors standing behind schemes, not employers. That was what I sought to draw out when I raised the issue. The Minister has not addressed it.

Lord McKenzie of Luton: The noble Baroness is right. I do not have a copy of the document in front of me. I would be happy to look at it and write to her on it more specifically. I cannot give her an answer off the cuff, unless one comes from the Box quickly.

On whether the changes raise dangers for directors, I stress that we are consulting on additional reasonableness factors which will have regard to the actions of the person being evaluated under the regulator’s power. Sorry, I have not got a particularly coherent note. I assure noble Lords that we want the final legislation to strike the right balance, providing adequate protection for members and the PPF without undue costs to business. As we have discussed, the Government intend to further consult on the detailed regulations, working with stakeholders to get the balance right. The noble Baroness has pressed us on what I acknowledge is an area of concern and we need to more effectively address these issues as we move towards the final shape of the legislation and the regulations.

Lord Lucas: Perhaps I may pick up on a point that the Minister made earlier. I think he said that there was a firm of lawyers which was totally happy to advise its clients to invest in companies with defined benefit funds. Can he pass on its name and contact details? I would love to broaden my understanding of what lawyers are saying.

Lord McKenzie of Luton: I am not sure that I said that they were totally happy—I am not sure that lawyers are ever totally happy. I can say that as an accountant. I think the firm was Wragge and Co. I made reference to an article last week in Pensions

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in which it made this point. I shall make sure the noble Lord gets the specific reference and a copy of the article.

Baroness Noakes: I, too, would be interested to see a copy of the article. If it contains what the Minister says it does, it contradicts many of the representations that we have received, where different advice has been given.

I thank the Minister for his response; I shall consider carefully what he said. I am not 100 per cent convinced that he has addressed the issue. Here we have a newly minted version of the directors’ duties, which have only just come into force, but with no reference to pensions. Alongside that, some tough potential regulatory powers are coming in which will have an impact on the way directors behave. I presume that that impact is sufficiently aligned with what the Government intended. Many of us were less than convinced that restating the directors’ duties was the right thing to do but the Government were very clear in their own mind that it needed to be done. Weeks after those duties came into effect, however, the Government are effectively creating something which is potentially in conflict. Given the different standards, working out that conflict may be difficult for directors.

This applies to the issue of good faith, for example. If you asked any corporate lawyer what he would say to directors to make sure that they stayed within Section 172, good faith would be at the top of the list, as it always has been. Yet good faith will not be necessarily taken into account in future if the Government use the powers in Amendment No. 130EW as they claim they want to.

I am not sure that this is the right amendment for the Bill, but nor am I sure that these important issues have been dealt with by the Minister; therefore, we may return to them, in one form or another, on Report. I beg leave to withdraw the amendment.

Amendment No. 130EZ, as an amendment to Amendment No. 130EW, by leave, withdrawn.

Lord Lucas moved, as an amendment to Amendment No. 130EW, Amendment No. 130F:

The noble Lord said: One of the declared intentions of the Government is that the test should move from intent to effect. My contention in this amendment is that under those circumstances it would be unfair to pursue individuals. If something goes wrong and the circumstances of a company change, it may well be necessary to revisit, say, the payment of a dividend or some other transaction which was made not with the intent of reducing the money available for a pension fund but certainly with that effect. For example, the dividends that house builders have paid over the past five years have certainly had that effect, because they now find themselves with very little market capitalisation and very large pension fund deficits. Why would it be right, under those circumstances, to pin that liability on relatively rich individuals who happen to be directors of those companies? Perhaps they are non-executive directors who have come to give their expertise to the

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company, or the original proprietor who made money when he sold out to a public group. Why should that money then be available when it is not questioned that the decision to pay the dividend was taken with no intent to do down the pension fund—indeed, when life seemed pretty good and the sailing was plain?

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