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Should any changes be made as a result of the powers, they would not have retrospective effect; no act that occurred before any changes came into force would be considered under the changes; no clearance application would be reopened as a result of the changes to the legislation. I hope that those specific assurances will satisfy the noble Lord.
Lord Lucas: My Lords, I think that that comes within the general rubric of, “Let’s hope it goes well”. I just leave with the Minister the thought that the power in line 54 seems to me to be entirely contained within the power in line 89. If that is not so, I should like to know what extra it is doing, but perhaps not now. I beg leave to withdraw the amendment.
Amendment No. 78G, as an amendment to Amendment No. 78B, by leave, withdrawn.
[Amendments Nos. 78H and 78J, as amendments to Amendment No. 78B,not moved.]
Lord Lucas moved, as an amendment to Amendment No. 78B, Amendment No. 78K:
78K: Before Schedule 9, line 90, leave out “issued by reference to material detriment test: defence” and insert “: supplementary”
The noble Lord said: My Lords, the amendments concern what we might call the defence. The Minister may be glad to know that I shall not move amendments
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Lord McKenzie of Luton: My Lords, I did not quite hear what the noble Lord said.
Lord Lucas: My Lords, the groups led by Amendments Nos. 78R and 78S seem to me to be entirely composed of consequential amendments that should have been tacked on to this group. If the noble Lord has found something wonderful to say about them, he need only wave at me and I will give him a chance to do so by moving them.
The amendments propose various ways in which the defence may be improved. It seems odd that the defence should not be triggered until a warning notice has been issued. By that stage, the procedure is already well advanced and the person subject to it may feel themselves to be on the back foot.
The next question is whether the defence covers only contribution notices based on the material detriment test or whether it will cover also those issued under Section 38(5)(ii) of the Pensions Act 2004 where, again, the Government do not seem to have applied the new defence to those contribution notices.
Other than that, we are dealing again with the general question of whether it is fair to place on an individual the requirement that he has documented his past in quite the detail required to comply to make the defence viable. If the question that arises is within the code as currently drafted, I do not see the problem. It arises only with matters outside. I can happily leave that, because it is a matter where I am already taking things on trust. I beg to move.
Baroness Noakes: My Lords, I shall speak to my Amendment No. 78PA in the group, which is a probing amendment to try to tease out how hindsight might be used in the context of the defence.
I am aware that subsection (5) of the defence clause refers to prevailing circumstances at the time. Clearly that is quite helpful, but there is considerable concern that people against whom the regulator will use these new powers may have a rather hazy memory about what they did in the past and, indeed, may not have access to papers. That may cause a problem, because the regulator will have absolute clarity about how things have turned out.
Let me give an example. A person carrying out a commercial transaction in good faith uses some kind of financial innovation, but not to avoid pension liabilities. Subsequently, that same innovation is used to consciously detrimental effect. To what extent will the original transaction be damned by the later use of a particular technique? My amendment would not eliminate that problem, but it might make the business
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Lord McKenzie of Luton: My Lords, Amendments Nos. 78K to 78M, 78W and 78PA relate to the statutory defence relating to the new material detriment test for contribution notices. I have already set out in some detail the background, or rationale, for the new test and the defence. I have also discussed the important safeguards that will continue to apply to the use of the second limb for contribution notices and how we are reinforcing the factors that the regulator must consider. Our approach will provide a proportionate level of protection for individuals and others. In this context, the amendments are simply unnecessary, as they would also produce undesirable outcomes for the industry and the regulator.
Three key issues relate to Amendment No. 78K, tabled by the noble Lord, Lord Lucas. They would widen the defence so that it applied to the second limb of the existing main purpose test for the use of contribution notices. This would give rise to a disjunct between the test and the defence. The former is based on intent, but the latter would be based on an effect of material detriment. This would be impractical and expensive to operate for the regulator and the industry, and one cannot reasonably apply that defence to the test of intent. They would remove the trigger of the warning notice to the application of the defence, and in doing so take away an important procedural reference point—to which consultees, including the CBI, the BVCA and the APL, were attracted—which permits use of the defence from the outset of the process. The final part of the amendment would set out an objective test for where a contribution notice cannot be issued: that is, the circumstances in which the defence would be successful. It would also remove the reference to the defendant having to show that the conditions for the defence are met. This would be cumbersome, would increase costs and could severely limit the regulator’s function to protect members’ benefits and their PPF.
Again on the warning notice, obviously it would be prudent for individuals involved in transactions to seek to ensure that their due diligence was done routinely, as it would be in a transaction that was an integral part of a restructuring. The fact that the warning notice may come later should not preclude that from happening ab initio. I understand that it is important to have a warning notice because there must be a defence against something, and the warning notice would technically be the trigger. I hope that that helps the noble Lord.
With regard to Amendment No. 78PA, the noble Baroness has raised the important issue of the potential use of hindsight in relation to decisions made by the regulator. A number of consultees have discussed with us the need to ensure that the regulator cannot make judgments with the benefit of hindsight. We agree that it would be unfair for the regulator to use information that could not have been known at the time. The amendments tabled in my name achieve this in new Section 38B(5) and the legislation clearly refers to,
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The effect is that the regulator cannot look at circumstances that arise after the time in question; he can look only at the contemporaneous evidence. If a person was concerned that the regulator’s decision used hindsight, they would be able to challenge that decision through the Pensions Regulator Tribunal. The regulator has already said that it will update its guidance to take account of the new test, particularly the statutory defence, and it will no doubt address this point if necessary. I hope that that has produced clarity in relation to the instance outlined by the noble Baroness. The fact that an instrument or technique subsequently attracted negative comment or connotations would not be visited back on the circumstances of an earlier transaction when it did not colour the judgment about material detriment at the time.
10 pm
I take this opportunity to go back to the question of the reasonableness of the regulator to save myself and my officials the need to send a letter in due course. We have talked about the importance of the regulator behaving reasonably and the question of how such reasonableness is to be judged. There are several issues that I should like to draw out here: the regulator’s duties in legislation, the public law obligations on a body such as the regulator and the impact of statements, guidance and codes issued by the regulator, and the body of previous decisions made by the regulator. The powers of the regulator are set out in legislation, including the main statutory objectives, but the regulator does not have carte blanche to behave unreasonably in pursuit of those objectives.
For example, in deciding whether to issue a contribution notice, the regulator is required by Section 38(7) to,
Attorneys to the public law duties of the regulator have observed that the regulator’s status as a public authority places demanding standards on its decision-making as a result of both domestic and EU law, and in broad terms a public authority would be acting unreasonably if it took account of factors that were not relevant, failed to take account of relevant factors, or reached a conclusion that was so unreasonable that no reasonable authority could have reached it—so-called Wednesbury unreasonableness.
Finally, I come to the legitimate expectations created when a public authority such as the Pensions Regulator makes statements, issues codes or guidance and builds a track record of decision-making. If the regulator has made statements about the way it would use its powers and then diverges from that approach without good reason, it is likely to be behaving unreasonably, and where those statements were contained in a statutory code of practice that had been approved by the Secretary of State, laid before Parliament and brought into force by an appointed day order, the regulator would need a strong justification for going against a code that had passed through a parliamentary procedure.
Clear justification would also be needed to go against the legitimate expectations created by its statements. While the regulator must examine each case on its own merits, legitimate expectations can also be built up by a corpus of decisions made by the regulator, so if the
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Lord Lucas: My Lords, I am grateful for that answer. The only problem is that my understanding is that the requirement for the regulator to be reasonable is limited by the regulator’s functions and powers. In other words, the regulator has to be reasonable only in respect of what it is required by statute to do, which is to look out for the interests of the fund and the pensioners. It has no duties imposed on it with respect to other parties such as the company running the fund or, as it were, the company whose pensioners are being looked after, or other parties who might be involved, such as individuals. So the duty of reasonableness does not extend to them. Where the regulator is required to judge whether something is reasonable, that is, of course, an overall reasonableness; but where the regulator might be required to be reasonable, that is a limited protection for a third party, such as an individual, who might find themselves caught up in it. My understanding is that there is little point in their placing reliance on that because the regulator can do what it likes without tripping over unreasonableness; the regulator is not required to be reasonable in respect of functions which it does not have.
The Minister was painting a rosy picture. If he wishes to say anything else, I should be delighted; otherwise I may wish to return to that point later.
Lord McKenzie of Luton: My Lords, as we are going to rise shortly, perhaps I may write to the noble Lord and the noble Baroness. The position is broader than the noble Lord has outlined and if we get clarity in writing it would be beneficial all round.
Lord Lucas: My Lords, in that circumstance, I am delighted to withdraw my amendment.
Amendment No. 78K, as an amendment to Amendment No. 78B, by leave, withdrawn.
[Amendments Nos. 78L and 78M, as amendments to Amendment No. 78B, not moved.]
Baroness Noakes moved, as an amendment to Amendment No. 78B, Amendment No. 78N:
78N: Before Schedule 9, line 106, leave out “might detrimentally affect” and insert “was likely detrimentally to affect”
The noble Baroness said: My Lords, the amendment seeks to amend condition A in the defence section, the new Section 38B. If the defence is to be established, a person has to show that due consideration has been given to the extent to which an act or failure “might” detrimentally affect in a material way the receipt of
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I have tabled the amendment because all kinds of things “might” affect scheme benefits. If in routine business decision-making a scenario analysis is undertaken, this involves the construction of internally consistent scenarios which might not be considered to be likely outcomes but which test robustness against extreme conditions. An extreme scenario looked at two years ago could well have foreseen the virtual seizing up of credit markets, bank liquidity and the failure or nationalisation of half the financial services industry. On that scenario, one could easily reach a conclusion that, for example, bank dividend policies “might” detrimentally affect their pension schemes. However, looked at two years ago it was not “likely” that they would, but a plausible analysis could have shown that they would. So anything that might affect a pension benefit is too extreme a test; a fairer test is “likelihood”.
This may come back to an understanding of what “due consideration” means for the purposes of condition A, which is what Amendment No. 78Q in the name of my noble friend Lord Lucas seeks to develop in the context of an objective test, but it might not. I beg to move.
Lord Lucas: My Lords, my noble friend’s amendment is very important. If the noble Lord has not yet read Black Swan by Nassim Nicholas Taleb, he will enjoy doing so, but the difference between “might” and “is likely to” is an example of the difference between the real world and the world as we construct it in projections. You cannot ask a manager or someone involved in taking decisions to predict the future with accuracy but you can ask them to make reasonable projections—and projections are all about likelihood. That is all that a manager is able to know. He must ask himself, “Knowing what I know at the moment and making assumptions about the future, is this likely to have a detrimental affect?”. That is the limit of what you can ask someone to do. To know whether it might is to say that they can tell what extraordinary and unexpected events might be waiting around the corner to happen. When you are projecting one of these things, you might run one of these tests where you choose all sorts of scenarios, going wide and going short, and you look at all the results that might happen and place various likelihoods on them. You come up with a central band of projections, and that is the band you feel you are likely to fall within—but the “mights” go right out to the wings, to the projections where you make vast profits or vast losses. If you are using the word “might”, you are really saying that almost any transaction of any size might have this effect and you are not discriminating in a way that is reasonable or should be the Government’s aim. I am with my noble friend on the wording of her amendment.
Mine is much less significant. It says that if someone has failed to keep the proper paperwork, they should not be penalised if, had they kept the proper paperwork, it would have made no difference to the decision they made.
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Lord McKenzie of Luton: My Lords, we are dealing with amendments relating to the statutory defence. It is important that the defence is operable for employers and other parties who could be subject to contribution notices, but does not prevent the regulator acting where that is appropriate. Certainty about the meaning of the defence is central to achieving that.
The noble Baroness’s amendment would create uncertainty about the meaning of the definitions. Who would judge whether detriment was likely? Uncertainty would not be welcomed by employers who might well feel the need to go to court for certainty, and that would place an impractical burden on the regulator. The requirement in condition A is that,
- “before becoming a party to the act or failure, P gave due consideration to the extent to which the act or failure might detrimentally affect in a material way the likelihood of accrued scheme benefits being received”.
That is a reasonable and appropriate test to make. If one is introducing the concept of “likely detrimentally to affect in a material way”, does that not effectively introduce a third-party judgment to the process? That would not be right.
The amendment of the noble Lord, Lord Lucas, raises important issues and I can see that there is a serious question about the level of due diligence. I hope my earlier explanation of the Government’s intention behind the defence has satisfied him on that issue. His amendment would permit a defence on condition A on the basis of a person’s conclusions, regardless of whether they had actually made the inquiries, and done the other acts, that a reasonably diligent person would have made or done in the circumstances. That may produce cost efficiencies for the party, but it would create significant risks for members’ benefits and the PPF if those conclusions turned out to be incorrect. It would also send an inappropriate message to the market about the importance of due diligence. For those reasons, I hope the amendments will be withdrawn.
On the issue of dividends, these are not within the circumstances set out in the draft code and would be outside the test for the contribution notice.
Lord Oakeshott of Seagrove Bay: My Lords, I have been thinking carefully about what the noble Lord, Lord Lucas, said. Does the Minister agree with me that there is a large difference in Amendment No. 78N between “might detrimentally affect” and “was likely detrimentally to affect”? “Was likely to” almost introduces an element of probability—I would have certainly thought that it was about 50/50. That is a world away from “might”, and I think it goes too far.
Lord McKenzie of Luton: My Lords, I think I agree with the noble Lord.
Baroness Noakes: My Lords, I am grateful for the support from my noble friend Lord Lucas on the difference between “might” and “likely”. We disagree with the noble Lord, Lord Oakeshott; in the business world, it is normal to proceed on the basis of what is likely to happen and not of stress-testing for things that might conceivably happen. Whether or not my alternative formulation is the right one, I am not absolutely sure, but I am very uncomfortable with the
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The Minister knocked down my example because dividends are not in the draft code, a fact of which I am well aware. However, we all know that the draft code might not be absolutely conclusive. My point was really to draw out how scenario analysis and acts can be put alongside each other and the difference that can be had from analysing from a “might” and a “likelihood” perspective.
I am not entirely happy with what the Minister has said, but I should like to consider it carefully because now is not the time to press this any further. On that basis, I beg leave to withdraw the amendment.
Amendment No. 78N, as an amendment to Amendment No. 78B, by leave, withdrawn.
10.15 pm
Baroness Noakes moved, as an amendment to Amendment No. 78B, Amendment No. 78NA:
The noble Baroness said: My Lords, this would amend condition B of the material detriment defence. Under condition B, if there is a potential detrimental effect, P has to take all reasonable steps. My amendment says that the steps could be taken by P “or any other persons”. This is not a particularly good amendment; it was drafted on Friday to meet the tabling deadline. It should have said, “by any other person or persons”. More importantly, there are other points in Section 38, such as whether we are considering P alone or looking at what other persons have done.
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