| Previous Section | Back to Table of Contents | Lords Hansard Home Page |
The noble Lord said: My Lords, I beg to move.
Lord Lucas moved, as an amendment to Amendment No. 78B, Amendment No. 78C:
78C: Before Schedule 9, line 9, leave out from “etc.),” to end of line 11 and insert “at the beginning insert “the material detriment test is met in relation to the act or failure (see section 38A) or”.”
The noble Lord said: My Lords, in moving Amendment No. 78C, I shall speak also to the other amendments in the group. This amendment is to raise the first question on the material detriment section: why should it be the opinion of the regulator that determines what is material detriment, rather than the facts? I beg to move.
Baroness Noakes: My Lords, I have two amendments in this group, which ask precisely the same question.
Lord McKenzie of Luton: My Lords, I recognise that a number of the amendments in this group seek to build greater objectivity into the material detriment test. Therefore, I shall speak to Amendments Nos. 78C, 78D, 78E, 78F and 78AH. I understand the concerns. The material detriment test is broader than the current grounds for contribution notices, which are based on evidence of intent. That is why we have built appropriate targeting measures into the proposed legislation.
27 Oct 2008 : Column 1451
Our amendments have refined the application of the material detriment test. For example, we will require the regulator to issue a code of practice setting out when it expects to apply the test. However, we believe that the regulator’s discretion is the most appropriate basis for this test, not just for the Government but for the industry and trustees. Granting discretion is not principally about allowing the regulator latitude; it is about creating a system that functions effectively for all.
Amendments Nos. 78C and 78D would mean that the regulator could not be of the opinion that the material detriment test had been met, or that certain matters were relevant in considering an issue. Amendments Nos. 78E, 78F and 78AH would remove the regulator’s discretion when deciding what factors it must have regard to when deciding whether the material detriment test was met. The consequence of these amendments would be that the determination of these issues would, therefore, move into the arena of the court. Precedent would have to be established through case law by the courts. This would be costly and time-consuming for employers and the regulator.
Currently, the regulator can arrive at decisions more quickly and cost-effectively, and the regulated community can build up an understanding of the regulator’s approach. These amendments would, in effect, result in making the regulator something more akin to a prosecuting examiner and would severely limit the effectiveness of the material detriment test and its influence on behaviours in the market. It is also worth stressing that this flexibility is not just for the benefit of trustees; it works in the employers’ favour, and experience has demonstrated this in practice.
We understand from the regulator that there are specific instances where employers have been able to draw further factors to the regulator’s attention and have affected the outcome of the case. In certain situations, the regulator concluded that action was not appropriate. Indeed, there are a number of instances in legislation where it is for the regulator to decide what is relevant and where the regulator’s opinion is the basis for decision-making. These provisions work well. Experience has shown that employers, trustees and others have been able to build up reliable experience of what the regulator is likely to view as relevant.
I understand noble Lords’ desire to improve the objectivity of decision-making, but I do not believe that it is their intention to replace the current approach with a protracted and expensive process whereby, for example, every clearance application would need to be considered by a court. That would be impractical and unnecessary. The current approach is working well and, as I said earlier, we have introduced further targeting with regard to material detriment.
I hope that that has reassured both noble Lords and that they will withdraw their amendments.
Lord Lucas: My Lords, this serves to illustrate what I said when we were talking about the Government’s amendments—that we are talking about convenience, rather than justice. It may well suit those who indulge in the sort of transactions that are described in the code, whereby convenience should be placed above justice, because they will be able to negotiate in those circumstances and know the rules that they are playing
27 Oct 2008 : Column 1452
Keeping these questions within the bounds of the code becomes very important when we have allowed such latitude, because we believe that those bounds will be kept to. It will be important that going beyond the code will happen only in the most exceptional circumstances and that we should not let that grow up as a casual operation because we are allowing the regulator a position that is not appropriate in the wider forum. I beg leave to withdraw the amendment.
Amendment No. 78C, as an amendment to Amendment No. 78B, by leave, withdrawn.
[Amendment No. 78D, as an amendment to Amendment No. 78B, not moved.]
Baroness Noakes moved, as an amendment to Amendment No. 78B, Amendment No. 78DA:
78DA: Before Schedule 9, line 20, at end insert—
“( ) The Regulator shall issue guidance setting out how it intends to define “material” and “likelihood” for the purposes of subsection (1).”
The noble Baroness said: My Lords, this amendment also concerns the material detriment test and asks the regulator to issue guidance on how it intends to define “material” and “likelihood”. This issue has been raised with us by some of the people involved in the development of the Government’s new proposals.
Perhaps I may start with the issue of materiality. The Minister will be aware from his own background that in the accountancy world materiality is a relatively well understood concept and that various rules of thumb are issued from time to time on what constitutes materiality. Normally, people talk of 5 to 10 per cent as being potentially material either for recognition or for reporting.
My reason for tabling the amendment is to find out what the Government intend when they talk about scheme benefits being affected detrimentally in a material way. Scheme deficits are very volatile. We can see from recent Stock Exchange market movements that deficits move around considerably at any point in time—certainly way beyond 5 or 10 per cent. Other factors that lead to significant variability include valuations, the discounting of liabilities and things such as longevity. Therefore, many things can change deficits quite a lot, and that is without any acts in relation to the scheme that may or may not have a material detriment on it. Therefore, the purpose of the amendment is to ask the Government what they mean by material detriment.
Linked to that is the question of what they mean by “likelihood”. Is this determined on a balance of probabilities, whereby we have to work out whether it is more likely than not that there will be a negative impact on the scheme, or is the threshold lower than a balance of probabilities?
Because “likelihood” and “materiality” are both crucial parts of the formulation of the test in the new clauses in which the test is being introduced, there is concern in the business community about what these concepts mean in practice and how people should calibrate their understanding of the effect of their
27 Oct 2008 : Column 1453
Lord McKenzie of Luton: My Lords, I hope that I can partially satisfy the noble Baroness’s inquiry. She emphasised the importance of there being a clear understanding among employers, trustees, regulators and others of the meaning of the key concepts of “materiality” and “likelihood”. I very much agree. I share her concern that these issues should be clear and I know that the regulator appreciates the importance of clarity in these matters.
The regulator’s clearance guidance currently deals with materiality. For example, paragraphs 46 and 47 set out how employers and trustees should decide whether a weakening of employer covenant is material, considering issues such as the amount by which the covenant is weakened, the size of the employer after the event, the size of the pension scheme and the size of the deficit in the pension scheme. I know that industry stakeholders find this guidance helpful. However, I am also aware that the regulator has stated that it will need to update and add to its clearance guidance in relation to the new test and to the defence in order to produce clarity in respect of the concepts of “materiality” and “likelihood”. As I said, we appreciate that the clearance guidance will need to be reviewed and amended. The regulator has undertaken to do that, and it will address, in particular, the issue of “likelihood”, which is not currently covered in the guidance.
If the noble Baroness will permit me, I shall refrain from offering my own homespun view on those concepts. There must be a proper process and there has to be clarity, and I believe that that is something in which the regulator will engage.
Baroness Noakes: My Lords, that response is entirely satisfactory. If the regulator is going to ensure that his guidance on materiality will be updated to reflect the material detriment test and will cover likelihood, that is what my amendment, in effect, asks for. I beg leave to withdraw the amendment.
Amendment No. 78DA, as an amendment to Amendment No. 78B, by leave, withdrawn.
Baroness Noakes moved, as an amendment to Amendment No. 78B, Amendment No. 78DB:
78DB: Before Schedule 9, line 30, leave out from “time” to end of line 31 and insert “at the end of that period”
The noble Baroness said: My Lords, I shall speak also to Amendment No. 78AKA. These are probing amendments concerned with the regulator’s discretion about time periods. Whether there is a material detriment has to be tested at the relevant time which, in the case of a failure to act, can be over whatever time the regulator chooses. My amendment means that the regulator would have to test the effect of failure over a period of time at the end of the period. Amendment No. 78AKA deletes new subsection (4A) of Section 39
27 Oct 2008 : Column 1454
The issue that has been raised with me is cherry picking. We live in volatile economic times, as I said in the context of the previous amendment. Deficits can vary significantly from week to week. If we look at the aggregate information published by the PPF, the aggregate deficits of the funds in 7800 index more than doubled to £80 billion between August and September, and I hate to think what October’s figures will show. Individual schemes, depending on their asset mix, can show greater movements than that. Why should the regulator be given this discretion to choose which period of time he will use? To those who have suggested this to us, it gives him too great an ability to choose the point in time when the figures show the worst position. I beg to move.
Lord McKenzie of Luton: My Lords, these amendments remove the regulator’s ability to determine the relevant time for a failure to act that lasted over a period of time and for a series of acts. The first amendment states that in relation to a failure to act that continued for a period, the relevant time should be at the end of that period, but that would not work where that period had not come to an end. That could open up a loophole, in that the regulator would be prevented from issuing a contribution notice in an otherwise appropriate case, simply because the person was party to a failure to act, and that failure was ongoing and potentially never ending. The second amendment would make it unclear how to determine relevant time at all in relation to a series of acts or failures, which would create new uncertainty for business.
I consider that it is right for the regulator to have discretion here, but its public law duties to be reasonable mean that it can take into account representations about the meaning of relevant time in particular cases. The regulator remains available to discuss whether transactions should come for clearance and will be updating its clearance guidance in the light of these amendments. The regulator already has discretion under Section 39(4)(b)(ii) of the 2004 Act to determine the relevant time for a failure to act that continues over a period, and the relevant time here is used to calculate the debt under Section 75 of the 1995 Act, which is the upper limit of the amount of the contribution notice. A series of acts or failures is also likely to continue over a period and therefore there needs to be a similar method of calculation, but it is particularly to address the issue that if we are talking about failures to act, rather than acts that are positive events, they could continue unabated and there would never be a trigger for the relevant time. That is why we believe it is important, subject to the bounds of what is reasonable and the broader public duties imposed on the regulator, to have that discretion.
Baroness Noakes: My Lords, this may be a convenient time to probe the question of acting reasonably, which I know will come up rather a lot—indeed, the Minister
27 Oct 2008 : Column 1455
Lord McKenzie of Luton: My Lords, the noble Baroness makes an interesting and challenging point. In the application of the code that we discussed earlier, for example, it would be incumbent on the regulator to act reasonably. I think that the noble Baroness has bowled a bit of a fast ball, so perhaps I may reflect a little on a fuller answer to the question that she raises, which I think is a fair one.
Baroness Noakes: My Lords, I look forward to continuing this discussion with the Minister, perhaps at Third Reading. I take his point that, if an act is continuing, there has to be a time. I was not suggesting that the regulator could never act; I was suggesting that the regulator should not be able to cherry pick a time. That takes us back to whether the regulator is acting reasonably. Perhaps it is in that context that we should resume our discussions. I beg leave to withdraw the amendment.
Amendment No. 78DB, as an amendment to Amendment No. 78B, by leave, withdrawn.
[Amendments Nos. 78E and 78F, as amendments to Amendment No. 78B, not moved.]
Baroness Noakes moved, as an amendment to Amendment No. 78B, Amendment No. 78FA:
78FA: Before Schedule 9, line 53, at end insert—
“( ) guidance issued by the Regulator in force at the relevant time concerning the circumstances in which it is appropriate to apply for clearance,”
The noble Baroness said: My Lords, I hope that this amendment will not take long. The Minister said in his opening remarks that, if a clearance had been given, that would bind the regulator, including on the material detriment test; in other words, if a clearance had already been given, that would be the end of the matter. The question posed by my amendment is what happens when, in the light of the guidance for clearance applications, an employer or another person has chosen not to apply for clearance. The amendment suggests that one of the factors that the regulator should consider—not a determining factor, but one of the factors that should be determined—is whether the person was acting in accordance with guidance that existed at the time of the act. That is the simple question that my amendment puts. I beg to move.
Lord McKenzie of Luton: My Lords, the noble Baroness seeks clarification that the regulator will consider the guidance available to a party at the time of an act if considering a contribution notice on
27 Oct 2008 : Column 1456
I hope that, in a roundabout way, this addresses the point that the noble Baroness is stressing. The proposition is that someone looked at the guidance at the time and decided that they did not need to apply for clearance because they were safe in the terms of that guidance. I should have thought that that provided the protections that the employer or person would need. Again, I should like to think a little more about that to ensure that the specific point raised by the noble Baroness is covered. I understand the import of it. If somebody has refrained from going for a clearance that would have been available to them relying on the guidance, I am then trying to see the circumstances in which that could give rise to a contribution notice, given the filters that are there, including references in the amendment to “have regard to” and reasonableness.
I should have thought that that would offer the appropriate protection. If the noble Baroness will permit me, I will reflect again on that because these are intricate questions and I do not want to mislead as I know people are relying on what we are placing on the record.
9.45 pm
Baroness Noakes: My Lords, I thank the Minister for his response, and am happy to proceed on the basis that he has suggested. I hope that between now and Report we can sort this out, and if necessary retable it for a better statement to be made at the Dispatch Box. I beg leave to withdraw the amendment.
Amendment No. 78F, as an amendment to Amendment No. 78B, by leave, withdrawn.
Lord Lucas moved, as an amendment to Amendment No. 78B, Amendment No. 78G:
The noble Lord said: My Lords, I shall also speak to Amendments Nos. 78H and 78AA. In each case I have two questions. First, what does the Minister envisage doing with these powers? Secondly, can he assure me that an act by the person, even if it is judged many years later by the regulator, will be judged in relation to the law as it then subsisted? In other words, will there be no trace of retrospection left in these powers?
Amendment No. 78G would remove proposed new Section 38A(4)(g), which I should have thought the Minister would be inclined to accept as the regulations in line 89 of the proposed new section could do that job just as well. There is a duplication of regulation-making powers. It is important that the changes are
27 Oct 2008 : Column 1457
Lord McKenzie of Luton: My Lords, when we discussed the regulator’s powers in Committee, I made a commitment to consider what more could be put in the Bill. This undertaking has been met, but it is necessary to have some residual regulation-making powers, which the noble Lord’s amendment would remove. These regulation-making powers are proposed so that the Government can adapt legislation to new risks and review in the light of operational experience. However, the Government do not intend to use the power to reframe the statutory defence. These are residual powers taken to deal with unforeseen circumstances. This is an important safeguard in a fast-evolving market. Business is also served as the Government would be able to amend the factors or the defence if they had unforeseen effects and protect PPF levy payers from risks .
The regulator will act within the boundaries set out in the Bill. Should these be found to be inappropriate at a later time, or to not cover all risks, the regulator must follow due process to change them by affirmative procedure. The significant refinements we developed in consultation with some key representative stakeholders over the summer fully explored the proposed legislation including these powers, and the balance was considered to be right.
I understand the noble Lord’s concern in our earlier discussions about retrospection and whether clearance statements could be overturned as a result of these amendments. Perhaps I can reassure him on the following points.
| Next Section | Back to Table of Contents | Lords Hansard Home Page |