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One comes back to the question of what is reasonably foreseeable and to what extent hindsight will be used. If we go back a year, some companies—for example, building companies—predicted that the housing market would go under because it had been so frothy for such a long time. I do not think that many people would have predicted the precise set of circumstances involved in the credit crunch and its acceleration, but many people predicted that the good times for building companies and commercial property companies would come to an end. Therefore, on one reading it is entirely foreseeable, and reasonably so, that payments of special dividends or share buy-backs would have a detrimental effect given the ordinary course of a cycle. We should remember that we have not abolished cycles. Whatever the Chancellor used to try to pretend that he had done, he has not abolished cycles, and we are seeing the effect of it at the moment.
I am concerned that, when analysed with the benefit of hindsight—and not very much hindsight, as it happens—ordinary transactions could be seen to have had the reasonably foreseeable consequence of having a material detrimental impact on a pension scheme. Those issues are causing people a lot of concern. I do not think that the Minister has yet addressed that. There seems to be an assertion that dividends will not be a problem. However, dividends are the biggest
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Lord McKenzie of Luton: I shall try to help the Committee. The important thing to bear in mind is that it is not envisaged that any of the tests will be ones of hindsight. The tests will be applied in the circumstances of the scheme and the employer at the time of the act. Therefore, when the powers are considered, it will be crucial to understand what was known, or should have been known, at the time the act was undertaken and at the time the dividend was declared.
I am always cautious about putting on the record off-the-cuff remarks that somebody might point to as establishing precedent. However, it would be difficult to blame people where the economic climate changed after the directors of a company had declared a dividend that was based on the current and projected financial situation of the company and which took account of the scheme covenant. As I say, it is not a hindsight test. That should cover these concerns.
Baroness Noakes: I shall explain myself again. I think that hindsight will inevitably be used because it is difficult to escape from it and place yourself entirely in contemporaneous circumstances. When looking at what is reasonably foreseeable, people judge things by what has actually happened. I go back to the example that I gave where it could have been foreseen—and many people would have foreseen—that certain markets would deteriorate over a relatively short timescale. There is not necessarily agreement that the timescale will be the following 12 months or the following two years, but it is reasonably foreseeable that the cycle will result in some financial problems coming over the horizon. You do not need hindsight to get the test of what is reasonably foreseeable; all kinds of things are perfectly reasonably foreseeable and do not require huge feats of imagination. The question is how, as most things are reasonably foreseeable in business life, the Government will differentiate them.
Lord McKenzie of Luton: It seems to me that, when directors are declaring a dividend, they take account of the current financial circumstances of the company and make their best judgment of the future financial circumstances of the company. They take account of the position of creditors, the cash flow of the company and the covenant to the scheme. A judgment is made, taking account of all those factors, on whether it is prudent to pay a dividend and the level of the dividend.
Nothing is totally predictable in life or in business. I am sure that many boards would recognise that, if times are good now, there may be downturns in the future. It seems to me that dividends declared in the context of that total judgment now could not be
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Baroness Noakes: The Minister is absolutely right that directors have to make such judgments every day, but the judgments that they make in year 1 could be completely overturned by economic circumstances.
Let us take the example of retail. A year ago, retail businesses might have been having some difficulties, but none of them would have predicted the kind of retail environment in which they are now operating. Many household names are doing profit forecasts and are reporting losses, not just reduced profitability. In a relatively short period, financial circumstances can change. That change in financial circumstances could easily be construed as being something that was foreseeable. The concern is that, while the Minister says that ordinary transactions will not be judged with the benefit of hindsight, particular judgments of what is foreseeable will come to much the same thing. I am not sure that the Minister is really grasping the rapidity with which things move in the commercial world.
Linked to that is the question of what directors are going to have to get clearance on. If there is any concern—there is concern because of the way in which the test is shifting through detrimental effect and the way in which the Government want to include a course of actions, rather than single acts or omissions—increasingly directors will be driven by their lawyers to queueing up for clearances all the time, or ordinary transactions will be inhibited. That is the nature of the concern, which I am not sure that the Minister has yet grasped.
Lord McKenzie of Luton: I believe that I understand the point that the noble Baroness has made. A number of the consultation responses suggested that the likelihood, as well as the possibility, of detriment might be considered, which may alleviate some of the concerns. We see some attraction in that, but we perhaps need to consider it further. We need to make sure that we do not inhibit the routine judgments that the boards must make about the general finances of their company and the ability to pay dividends. I really do not see why additional concerns should come from these proposals, but I acknowledge that we need to clarify these things as we proceed over the next couple of months, because we do not want to inhibit the routine, normal activity of directors. However, I hang on to the point that the sorts of judgments that have to be made in declaring the dividends of a company relate not only to the pension scheme but to a whole raft of issues concerning the finances and the future of an enterprise. Therefore, I say with respect that there is nothing particularly new about this issue.
5.45 pm
Baroness Noakes: I thank the Minister for that. We are not going to progress that aspect much further. Perhaps I may return to another point made by the
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Lord McKenzie of Luton: That is a good question on which I need to refer back. I cannot, off the top of my head, deal with that point, which is not covered in my brief. I accept that the point should be clarified. I shall do that.
Lord Lucas: I am encouraged by what the Minister said. The fundamental problem here is that moving from “good faith” to “could not reasonably have been foreseen” is a shift. You can take a dividend decision in good faith and make a proper professional judgment by balancing all the things that you know and believe, but, as my noble friend Lady Noakes said, all sorts of horrible things can be reasonably foreseen. One can reasonably foresee, as the Minister can, I think, a time when Conservatives might sit on his Benches. That is not necessarily something that he takes into account in the judgments that he makes on this Bill.
I return to what I said earlier about there being a shift towards making pensions a super-creditor. You are raising the stakes and the consequences for directors in the decisions that they take, particularly if in the end the decisions turn out to have disadvantaged pensioners, rather than making sure that they are given a reasonable place in the decision-making in the first place. I am sure that we shall enjoy our discussions on this. I beg leave to withdraw the amendment.
Amendment No. 130FB, as an amendment to Amendment No. 130EW, by leave, withdrawn.
Lord Lucas moved, as an amendment to Amendment No. 130EW, Amendment No. 130FC:
“(a) in the case of the first such set of regulations, 14th April 2008; and(b) in the case of each subsequent set of regulations, the date on which the intention to make those regulations was announced.”The noble Lord said: I talked about the importance of this matter on earlier amendments. It seems entirely reasonable that the Government have set 14 April as the date to which this set of regulations refers, but it is entirely unreasonable that that should be the scope of possible retrospectiveness of future sets of regulations. I beg to move.
Lord McKenzie of Luton: The Government made a statement on 14 April that the principal amendments that they were seeking to make to the regulator’s anti-avoidance powers would be introduced with effect from 14 April 2008. Retrospective legislation is rarely introduced unless it is for very good reasons. It was crucial that the Government’s announcement of their proposals did not prompt the kind of market behaviour that they are attempting to address before the legislation came into effect. I understand the concern that the
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The power operates in accordance with the general law and, in particular, can be exercised only in a way that is compatible with the European Convention on Human Rights. This means that the Government, or future Governments, could make retrospective provision only if they had already announced their plans in the way that we did in April this year. The power, therefore, is not as wide as it might first appear. It provides for retrospection, but only in relation to novel situations of material risk, and consultation would be required before the power could be used to introduce changes.
The noble Lord’s amendment would mean that, should it be necessary to amend or correct the original regulations for whatever reason, that could not be done from 14 April 2008, which would create the very risk that, in our view, should be mitigated. That would compromise our ability to ensure that we get the balance right between adequate protection and not hindering legitimate business activity. I hope that that clarifies matters for the noble Lord, because I acknowledge that he is concerned about the issue.
Baroness Noakes: Does the Minister accept my noble friend’s amendment or not?
Lord McKenzie of Luton: I am not in a position formally to accept the amendment, but I think that I have outlined where we stand on the issue. I do not think that we are apart on what we are trying to achieve but, if the noble Lord feels able to withdraw his amendment, we would look to consider the matter further on Report. We need to make it clear where we are; I do not think that we have a difference of view as to where we should be.
Lord Lucas: I am grateful for that reply. Yes, we will need to explore the matter a bit. The noble Lord says that he wants to keep 14 April available as a date to make changes to the regulations if required. I will have to explore with him exactly what sort of changes may be required, but we seem to agree in principle, so I beg leave to withdraw the amendment.
Amendment No. 130FC, as an amendment to Amendment No. 130EW, by leave, withdrawn.
Lord Lucas moved, as an amendment to Amendment No. 130EW, Amendment No. 130FD:
“( ) Regulations under this section may not include provision which would allow the Regulator to overturn a Clearance Statement that it has given, except by reason of material malfeasance by or on behalf of the applicant.”
The noble Lord said: It is crucial that where a clearance statement is given, it can be relied on in future unless something essentially fraudulent turns out to have been done in obtaining that statement. Otherwise, you cannot rely on the regulator at all and the whole system breaks down. Again, I am hoping for some comforting words from the Minister. I beg to move.
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Lord McKenzie of Luton: Clearance is the voluntary process for obtaining from the Pensions Regulator a clearance statement, which gives an assurance that the regulator will not use its anti-avoidance powers in relation to the event in the application. That assurance would remain in place but, quite properly, the regulator would not be bound by such a statement if the circumstances were materially different from the content of the application. There are already safeguards in Sections 42 and 46 of the Pensions Act 2004, and I can assure the noble Lord that we have no plans to change the clearance process.
I agree with the implication of the noble Lord’s amendment that clearance has been a successful process. It has been a key element in providing clarity and certainty for the industry. It has enabled the delivery of good regulation, with minimum intervention and use of powers, as well as the promotion of good behaviour and practice. The regulator has operated this system effectively since its inception, and has received positive feedback from its industry stakeholders. There is no intention to change that. I trust that the noble Lord takes reassurance from that expressed intent.
The amendment may inadvertently endanger that element of legislation. It gives new conditions under which a clearance statement would fall away or not bind the regulator, different from those conditions already set out in the 2004 Act. Adding new conditions that would apply only to those provisions newly inserted by regulations made under the power could create confusion.
In addition, given that under the amendment the protection of clearance will stand where there is material inaccuracy in the information submitted, and will fall away only when there is some form of intent behind the inaccuracy, the purpose of clearance is significantly undermined. In terms of behavioural impact, the amendment may discourage diligence by the applicant in providing information, leading to further time-consuming investigations by the regulator and costs to business.
I reassure the noble Lord as strongly as I can that we need to make it as clear as possible that clearance given on the basis of full and proper facts cannot be reopened; that is sacrosanct.
Lord Lucas: I am delighted to hear that. I accept the Minister’s criticism of the wording of my amendment. I suspect I shall still argue that the correct amendment should find its way into the Bill. This is a fundamental part of the way in which the system works and should not be attacked under any circumstances by secondary legislation. Again, I have several months in which to argue that with the Government. I beg leave to withdraw the amendment.
Amendment No. 130FD, as an amendment to Amendment No. 130EW, by leave, withdrawn.
Lord Lucas moved, as an amendment to Amendment No. 130EW, Amendment No. 130FE:
“( ) Regulations under this section may not include provision which would allow the Regulator to serve a contribution notice, financial support direction or restoration order on any person by reason only of a transaction whereby that person had purchased assets or securities at fair value.”
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The noble Lord said: Amendment No. 130FE explores the sort of arrangement which seems to be possible under the proposals put forward by the Government. For example, a group with, in part of it, a defined benefit scheme, may sell an element of that group, perhaps a young, successful company which it can no longer afford to finance. It wants, among other things, to provide resources for the pension fund. As it turns out, the remaining businesses in the group do not prosper and the company which was sold prospers exceedingly. Under the Government’s proposal, it would be possible for the Pensions Regulator, several years later, to say to the new owners of the successful company, “We wish to have from you additional money to fund the old defined benefit scheme in the group that this company used to belong to”, and to overturn an open-market transaction for fair value. That is not the right way to go about things. Therefore, I have put down this amendment. I beg to move.
Baroness Noakes: The Minister already has referred to fair value in terms that I simply have not understood. All kinds of transactions are done for fair value and they should be judged at that time. But the Minister has suggested that they have to be judged by reference to some later events and circumstances. Lots of circumstances have been put to us. For example, a group of companies may buy a business and merge it with an existing company with a defined benefit scheme. The transaction is for fair value, but it does not work out. Somehow, with the benefit of hindsight, we come back to seeing that it has had a detrimental impact. If the new business had not been merged with the defined benefit scheme business, the covenant would not have been weakened. The Minister will know that lots of mergers fail for all kinds of reasons, so this is quite a significant business risk. But the original transaction of putting the businesses together is a fair value transaction; that is, buying the other business and putting them together.
The concern is that these sorts of transactions will fall foul of the provision that is coming up. It is important for the Minister to be more explicit about the problems that the Government have with fair value transactions, because he has not been unequivocal about them to date.
Lord McKenzie of Luton: Again, I appreciate the concern of Members of the Committee that I should make clear our intentions under these proposals. It is not the Government’s intention that a transaction whereby a person purchases assets or securities at fair value would normally trigger the regulator’s use of its anti-avoidance powers, provided that as part of the transaction the pension scheme was properly considered and adequately addressed.
The fact that a person had purchased assets or securities at fair value would not alone necessarily provide the assurances needed. That would be only the first step in ensuring capital was available to mitigate the risks to the scheme; it does not of itself get the capital to the scheme. Earlier, the noble Lord quoted my comments from Monday.
Normal arm’s-length, fair value transactions should swap an asset for cash or another asset and therefore have nil effect on scheme security; that is, there would
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