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Finally, we intend to make it clear that contribution notices can be issued in relation to a series of acts or failures to act, and not simply in respect of a single act. The Government consider that the Pensions Act 2004 should already be read in this way but is amended in the legislation for clarity. This clarification was not considered unreasonable by many of the responses to the consultation, although most respondents were critical of the proposal that it should have effect from 2004. The Government’s clarification would therefore come into effect from Royal Assent, except where the series would apply to the new detriment test. In that case, the clarification would come into effect from 14 April 2008, the same time as the “material detriment” test comes into effect. The Government have sought to avoid the confusion for all concerned that would arise if this test and the clarification provisions that apply the series to that test had effect from different dates.
It is the Government’s view that the amendment would not disturb the regulator’s current approach. The Government consider that the amendments will allow the regulator to intervene where appropriate without unduly hindering legitimate business and that the anti-avoidance powers would remain effective powers of last resort.
I apologise again for a somewhat extended introduction, but I thought that it was important to get this on the record. I beg to move.
9 pm
Baroness Noakes: My Lords, I thank the Minister for his comprehensive introduction to this group of amendments. I have great pleasure in supporting
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The Minister will recall that we spent several days in July debating the Government’s amendment which inserted Clause 123. He will doubtless recall that we were critical of the Government for introducing such a wide power on the back of what we saw as a flawed consultation in the sense that there was no evidence that the Government were listening to any of the responses that they had received. There was no regulatory impact assessment, and there was wide concern among business groups that the Government simply did not understand the practical impact of their proposals. As the Minister will recall, we asked him not to press his amendment so as to enable proper negotiations during the summer. It is, however, a surprise that the Government have concluded that the amendment that they forced through in the summer, which is now Clause 123, is to be removed from the Bill. We say amen to that.
I pay tribute to the Minister, his colleagues in the department and the staff of the DWP for being prepared to reopen the issues and engage in constructive dialogue with the people who have put the concerns to them. While the legislation raises issues that we will wish to probe in the remainder of our session, we are much happier with its construction—there is not the wide Henry VIII power, but a proper employer defence. We have the substance now in primary legislation; indeed, we even have a draft statutory code of practice, for which I thank the Minister. I shall not say anything further at this stage other than to thank the Minister for agreeing that we can come back at Third Reading if any points arise. The Minister will be aware that, because of late tabling, we received comments from the interested parties at a very late stage, and we cannot be sure that we have tabled amendments which allow us to tease out all the matters. I welcome the amendment.
Lord Oakeshott of Seagrove Bay: My Lords, from these Benches, I welcome the amendment and thank the Minister for his comprehensive introduction. We, too, are pleased that the Government have got over their macho moment when they were pushing that amendment in July. Wiser counsels have prevailed. I am glad to see that there has been extensive and thorough consultation during the summer. As I listened to the details of what the Minister said, only one question arose: is he sure that the Pensions Regulator does not feel unduly fettered in its activity by all these changes? In general, however, it is clear that great thought has been given to the matter, and we are very pleased that much more properly thought through and consulted on rules are coming forward.
Lord Lucas: My Lords, I add to the chorus by saying that I am delighted by what the Government have done—it is great progress. Although I have tabled many detailed amendments, they focus on one matter, which is the code and how secure people can be in the belief that the matters in it are those to which the
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As the Minister said, you cannot fetter the regulator's discretion. It will be a big matter how individuals view this and how they are advised to view this; whether they are told by their lawyers, “Look, this is something that is reasonably safe and I would not worry about it too much”, or “You are doing something every day that might attack the pension fund” and you will have to get clearance every time you breathe out, near enough. The voices that are coming from the lawyers are going in that direction.
The Minister says that he expects there to be a peak in applications to the regulator soon after these provisions come into force and that with experience they will relatively quickly die away, as they did when these provisions were first introduced in the previous Act. I hope that that is right. To a large extent, we trust the judgment of the Minister and his officials that they have things right in that regard and that is the way that things will actually work. But the Minister needs to say more about the circumstances under which he sees the regulator going outside the code to use the powers that are in this amendment for something that does not fall within the sort of transaction set out in the code.
There is a considerable worry out there, particularly among those people who are involved in trying to sort out companies in difficulties who have to move fast and take rough and ready decisions to make things work. They have to take risks, although they often do not benefit enormously from doing so. They are not in there to make a great capital gain for themselves but as hired hands to put out the fire. They will be taking enormous risks under the terms of this amendment, and it comes down to, will the regulator stick within the code or start running outside? If the Minister could give us as much comfort as he can that he cannot see circumstances where the regulator would need to go outside the code, that would be a great help in calming people’s fears. There is a worry that the regulator might choose an unexpected opportunity—perhaps not that serious an opportunity—to solve a particular problem by saying, “I have seen the code but I don't feel like being bound by it in these circumstances”.
Lord McKenzie of Luton: My Lords, I will respond briefly to those comments. Amendments are about to be moved to the amendment, but I should like to say
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The noble Lord, Lord Lucas, posed a very real point about what comfort there is in the regulator's code. The regulator's code, as I said, has evidential value and the regulator must always have regard to it, although the regulator would always and must act on a case-by-case basis. In the Government’s view, it would be difficult to argue that the regulator could reasonably act beyond the code unless there were frankly exceptional circumstances. However, the regulator tells us that it is unable to think of any circumstances in which it would want to act outside the code. I hope that that is at least a degree of reassurance to the noble Lord.
On Question, amendment agreed to.
Lord Oakeshott of Seagrove Bay moved Amendment No. 78:
78: After Clause 123, insert the following new Clause—
“Financial Services Authority: duty in relation to Pension Protection Fund
The Financial Services Authority must exercise its powers to regulate those bodies for which it is responsible so as to minimise the risk of compensation from the Pension Protection Fund becoming payable in accordance with Part 2 of the Pensions Act 2004 (c. 35).”
The noble Lord said: My Lords, this is to some extent a probing amendment; I apologise for moving it on Report rather than in Committee. It is prompted by the collapse, in particular, of Lehman Brothers and the hole that that exposed in its pension fund. Clearly, I do not need to tell noble Lords that there must be a considerable danger that other high-rolling banks’ pension funds will also be at risk. It struck me as I studied those reports and thought about the Lehman Brothers pension fund that organisations regulated by the Financial Services Authority, more than almost any other more traditional businesses, can go so fast from feast to famine. They can be in a situation, as Lehman Brothers appears to have been, where they are making large profits and large bonuses are being declared, and then suddenly go into administration. There are reports that there may be a deficit of as much as £100 million in the Lehman Brothers fund. I know that there have been some reassuring noises that it will not be as much as that, but it is public knowledge that it is being considered for admission to the Pension Protection Fund.
The spirit of the amendment is that there should be some duty or extra responsibility on the FSA to be aware of how quickly banks can go into deficit. There is also of course a large deficit in the pension fund of Northern Rock. I suggest that this issue should at least be drawn to the FSA’s attention, when these situations develop so fast. I ask the Minister if he has information to give us, particularly on the Lehman Brothers pension fund. I beg to move.
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Baroness Thomas of Winchester: My Lords, I have only a small contribution to add to what my noble friend has said. He is the City expert; there are many others in this House, and I am not one at all. As a lay person, I have been surprised that the FSA does not appear to have any powers to protect these company pension schemes. Some of the recent newspaper reports may not be accurate when they say that some foreign owned-companies in this country have raided pension schemes before being declared bankrupt, but it makes one wonder whether the FSA powers in this area are as strong as they should be. Taxpayers should at least know that somebody is looking out for their best interests to prevent compensation being paid out from the Pension Protection Fund. I would welcome the Minister’s reassurance on this point.
Lord Skelmersdale: My Lords, I would be surprised if most of the points of the noble Lord, Lord Oakeshott, were not covered by Section 146(1) of the 2004 Act:
“Regulations may provide that where the Board is satisfied that an eligible scheme was not such a scheme throughout such period as may be prescribed, the Board must refuse to assume responsibility for the scheme under this Chapter”.
That would clearly cover the point in part. I also note that there is a debate on the economy, to which the Minister will no doubt—no, perhaps he will not be contributing to that debate on Monday. I am sure that regulation by the FSA will figure somewhat strongly in it.
9.15 pm
Lord McKenzie of Luton: My Lords, the amendment of the noble Lord, Lord Oakeshott, responds to a keenly felt issue in our current economic situation, and gives me the opportunity to discuss the important issues he raised in relation to the PPF and the FSA. It is important that we ensure clarity regarding regulatory roles and consistency in approach. I am pleased to say that the current arrangements provide a flexible and robust framework for protection of the PPF.
I agree with the broad intention behind the amendment. When the Government established the PPF under the 2004 Act we also created the Pensions Regulator and gave it an explicit objective to protect the PPF. We saw then, along with all sides of this House, that the PPF had to be protected adequately. Although I can see the intention behind the amendment, I do not agree that it is appropriate. It would duplicate the existing arrangements, which at worst could undermine the effectiveness of our regulatory regime.
The Government work closely with business to develop regulations that complement and do not complicate the way people work to keep the UK competitive, mindful of potential regulatory burdens. Well targeted and proportionate regulation can deliver effective outcomes for the market, scheme members and the PPF. This amendment is neither well targeted nor proportionate: it would simply increase regulation to no obvious benefit.
The Pensions Regulator is the regulator of all work-based schemes, including those within the financial sector that are sponsored by FSA-regulated firms. It has an express duty to protect the PPF, and in so doing
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The FSA’s statutory objectives relate to the regulation of firms in the finance sector and the protection of consumers of those firms’ products and services. It does not consider the firms’ pension schemes from the perspective of the schemes’ funding status, or the impact on scheme members. The FSA has rules for taking into account the impact of a firm’s pension obligation on the prudential position of the regulated firm. Therefore, the FSA’s focus is not the pension scheme itself and its assets and liabilities, but rather the firm’s funding obligations to the pension scheme. There are well defined and adequate regulatory arrangements in place between the FSA and the Pensions Regulator, and they work closely together on the supervision of pensions according to their statutory functions. Indeed, the noble Lord asked for such co-operation. These arrangements have been the subject of a recent independent review led by Paul Thornton. The review, which was completed in June last year, found that the existing framework was working well. Measures were recommended, however, to further strengthen this liaison, which the Government accepted. I am pleased to say that the two bodies have undertaken a programme of well co-ordinated activity to implement the review’s proposals.
For example, there are regular meetings at official level on areas of mutual interest, including management of risks to DC. The amendment would also mean that financial capability was included, alongside regular bilateral engagement at chief executive level. This is underpinned by a Memorandum of Understanding. This joint working has resulted in a number of positive outcomes, including publication of a joint guide on the regulation of workplace contract-based schemes. An FSA-regulated firm would be treated differently from those schemes sponsored by companies in other sectors. It is also worth noting that this amendment would mean that schemes sponsored by an FSA-regulated firm would be treated differently from those schemes sponsored by companies in other sectors. My apologies; that note is nonsense.
There is no obvious reason to single out banks and financial institutions, but not other sponsors with industry representatives, to clarify the respective roles and responsibilities, and similar schemes. Schemes should have equal protection in law, no matter the sector, particularly in those areas where the regulator and the FSA work together.
In considering the additional duty for the FSA in relation to the financial sector, we would also need to consider the duty in respect of other regulated industries and other sectors. The airline industry and others are subject to economic regulation and have significant pension schemes, as do other sectors, regardless of the status of regulation to which they are subject. The amendment would therefore lead to an increase in
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On Lehman Brothers, the scheme is undergoing assessment for the PPF, which involves calculating the extent to which scheme assets meet liabilities. A PPF valuation approach will give different numbers from, say, a full buyout. Obviously, there are issues of confidentiality here, but we do not recognise the £100 million figure. I hope that has been helpful to the noble Lord. We ought to have clarity on who is regulating who but, clearly, there is a responsibility for the FSA, particularly in relation to those firms that are engaged in pension provision.
Lord Oakeshott of Seagrove Bay: My Lords, I thank noble Lords who have spoken, and I thank the Minister for that very full reply. In particular, I hope that the Pensions Regulator will take full note that it is the sole, proactive, risk-based protector, as the Minister said. I would be interested to see what he called the Memorandum of Understanding on how the FSA and the Pensions Regulator work closely together. That was reassuring, but I would like to see it.
On the argument that there is no reason to single out banks and the financial sector for special treatment—the noble Lord talked about airlines—we have just had to nationalise quite large parts of that sector, and if the noble Lord thinks about it, he might realise that there is rather more risk here and perhaps that special attention on the part of the Pensions Regulator would be necessary. With that, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord McKenzie of Luton moved Amendment No. 78A:
78A: Before Clause 124, insert the following new Clause—
“Amendments of provisions of Pensions Act 2004 relating to contribution notices or financial support directions
Schedule (Contribution notices and financial support directions under Pensions Act 2004) (which amends the Pensions Act 2004 in relation to contribution notices and financial support directions) has effect.”
On Question, amendment agreed to.
Lord McKenzie of Luton moved Amendment No. 78B:
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