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The power in line 89 is a power to amend the existing factors and the scheme obligation provisions. This is a wider power that is intended to provide the flexibility that we have already discussed. As that power would permit primary legislation to be amended, we consider it appropriate to be subject to the affirmative procedure. Hence, it is a separate power. I am grateful for the chance to put those further points on those matters on the record.
I turn to the substance of the amendments. They would amend the provisions dealing with how the defence relates to a series of acts, and in particular a group of acts selected by the defence. The regulator
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It is our intention that defendants should have the opportunity to demonstrate that their actions in relation to a group of acts, when taken as a whole, were reasonable. When considering conditions A and B it is possible to argue that due consideration was given to the cumulative detrimental impact of a group of acts and that reasonable steps were taken to eliminate or mitigate the potential detrimental effects of that group of acts. However, condition C requires that the defendant considers the relevant circumstances prevailing at the relevant time, so defendants are required to consider each act within the group individually when considering condition C.
The amendment tabled by the noble Baroness opens up significant risk by removing any requirement that conditions A and B be met for the defence. I accept that it is a probing amendment in relation to a group. It also results in different requirements for acts that are dealt with individually and those that are dealt with in groups.
In addition the amendments make the defence unworkable in relation to a group chosen by the party. It requires that condition C should be met by the group as a whole. However, as I have explained, condition C is based on having regard to the relevant circumstances at the relevant time. As the amendment does not address how the relevant time would be determined in relation to a group, it is rendered unworkable. This would make the defence fail to work when it was raised in relation to more than one act or failure. A party would therefore be restricted to raising the defence in relation to each act or failure individually, which is the other opportunity under the defence, even when the regulator could look at a series as a whole.
The amendment effectively removes a desirable flexibility for employers and other parties who may wish to raise the defence in relation to a group of acts for efficiency reasons. I hope that that helps the noble Baroness. I have spent more than a few hours trying to get my head round the complexities of this process, and would be more than happy to meet her to share them with her. I have tried to explain why the test is set out as it is and why following the path she suggests would not work in practice.
Baroness Noakes: My Lords, I thank the Minister for setting out more extensively the four items that we debated during our previous day on Report. What he said in each case was extremely helpful. We will have to think about whether it fully answered our questions. At the moment, my instinct is that it takes us a long way there, but I am still not 100 per cent convinced by what the Minister said. It will be important to read what he said and discuss it with those who are advising us on raising these queries for clarification in your Lordships' House. I say the same thing in relation to the group. What the Minister said sounded entirely plausible at the time that he said it. Whether it will
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Amendment No. 78TA, as an amendment to Amendment No. 78B, by leave, withdrawn.
[Amendments Nos. 78TB to 78W, as amendments to Amendment No. 78B, not moved.]
Lord Lucas moved, as an amendment to Amendment No. 78B, Amendment No. 78X:
78X: Before Schedule 9, line 174, at end insert—
“(12A) No such contribution notice shall be issued to an individual.”
The noble Lord said: My Lords, I shall speak also to the other amendments in this group. They pick up on four small and rather separate points, and I shall not take too long about them. The first amendment emphasises how dangerous it will be if it becomes felt that the regulator will stray beyond the code into other matters. That would raise fears among individuals engaged in what appears to them to be ordinary day-to-day transactions with a peripheral possibility of an influence on the pension fund. They will for their own good reasons want clearance. For instance, directors involved in declaring a dividend might well feel that they have to get clearance for it if the company is in any danger of not being able to pay contributions to the pension fund at some time in the future. I hope that the Minister will give me comfort that he does not see that as a possibility. The amendment points up the provisions that we would need to put in place if that came about; otherwise we would find the regulator swamped with applications.
The second amendment looks at the way in which the statutory duty of a director of a company to,
- “act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole”,
works with the obligations under the Bill. The amendment states that a contribution notice could not be issued in circumstances where a director had acted as the Companies Act requires him to act. I shall be interested in how the Minister enlarges on what he said before on the way in which the Companies Act and the Bill will work together in the obligations they place on directors.
The third amendment looks at protecting professionals who come in to sort out a company in a difficult situation. If a pension fund is involved, it is necessarily a pretty hairy area and one where decisions have to be taken fast on a relatively rough-and-ready basis. Although there are people operating in that sort of business who are doing so in the hope of making millions of pounds for themselves, most of the people involved are just there for a crust. If they have been successful over the years, they may well have put enough by to have a nice home and something that it might be thought worth the regulator going after. I do not think it is the Government’s intention that people who are doing the
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The last point concerns new subsections (6) and (7), under which the regulator can issue directions to the trustees or managers of a scheme, requiring that money coming in is used in a particular way. Trustees owe fiduciary duties to their members in any event. They would have every incentive, without further legislation, to ensure that payment is applied in a way that best meets those objectives. I cannot see that new subsections (6) and (7) add anything useful except the possibility of inappropriate inflexibility. I beg to move.
Baroness Noakes: My Lords, I support my noble friend. He has explained his amendments perfectly well, but I underline the points about individuals. A number of people have expressed concern about this. There is concern that the regulator would have the power to go after individuals. The power to issue a contribution notice is not limited to the amount of benefit. While the regulator has to take account of the benefit that is obtained by a person, the contribution notice can be for any amount. Individuals are concerned, first, that they might not even want to get involved in transactions. Secondly, will we end up burdening commercial transactions with a lot of indemnities, possibly even underwritten indemnities, with cost therefore being built into the system, which could then make it grind to a halt? These are important areas that need clarification.
Lord McKenzie of Luton: My Lords, I thank the noble Lord, Lord Lucas, and the noble Baroness, Lady Noakes, for the chance to put some issues on the record in relation to the matters that have been raised. I hope I can provide the degree of comfort that is sought. I reiterate briefly what we discussed on Monday: the regulator has said that it cannot imagine going beyond the code. Dividends are not currently included in that draft code.
I turn first to Amendment No. 78X. I recognise the concern that individuals may be subject to personal liability, but there are a number of assurances within the existing legislation which address the use of this power. It is already possible, under Sections 38 and 43 of the Pensions Act 2004, for the regulator to issue a contribution notice and, in some cases, a financial support direction to individuals. In most cases it would not be reasonable for the regulator to take action against an individual, and the recipient of a notice would more usually be a corporate body, such as the company that was party to the act. There may, however, be rare cases where it is appropriate to take action against an individual, be that a company director or otherwise, under the material detriment test.
I remind noble Lords that the regulator’s use of this power is subject to a number of checks and balances. First, the regulator must act proportionately and only where reasonable. This is a fundamental requirement.
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Finally, as with current practice, any determination to use this new test would be made only by the regulator’s determinations panel, which is independent of those responsible for gathering evidence. The panel will hear both sides of a case. Only if the panel agrees to the regulator’s case can action proceed. Whether or not to issue a contribution notice would of course remain a matter for the regulator. I would go so far as to say that the regulator must get over such a number of hurdles and build such a strong case before it can issue a contribution notice to an individual on the basis of the material detriment test that an individual would know that their intended act was far out of line with reasonable business practice and likely to attract the interest of the regulator.
However, if an individual is concerned that they may be party to an act that could lead to them being subject to a contribution notice, they may of course seek clearance from the regulator. A clearance statement would give them certainty that their actions could not attract a contribution notice.
Lord Oakeshott of Seagrove Bay: My Lords, on Amendment No. 78X, I wanted to listen carefully to the qualifications that the Minister gave. Does he accept that, on the basis of what he said, we on these Benches feel that it is entirely appropriate that there should be a reserve power to issue a contribution notice to an individual? That is an important ultimate safeguard for pension funds.
Lord McKenzie of Luton: My Lords, I am grateful for the noble Lord’s intervention. He is right: individuals cannot be immune from these regulations, although the circumstances in which they are likely to be the subject of the contribution notice are properly constrained by these provisions.
Amendments Nos. 78Y, 78AL and 78AM relate to the possible conflicts that could be faced by trustees who are also company directors as a result of the interplay of trust law, pensions law and directors’ duties under company law. The interaction of pensions law, trust law and company law is an important issue, and the Government’s intention is that the duties in the legislation should rightly sit alongside each other.
Taking the duties of directors under the Companies Act, I understand that noble Lords may be concerned that directors who otherwise act in accordance with duties under that legislation should not be liable to
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Finally, Amendment No. 78Z relates to insolvency practitioners and similar experts. Section 38(3)(c) of the Pensions Act 2004 already provides an exemption from a contribution notice for an insolvency practitioner acting in accordance with his functions. The noble Lord’s amendment would extend this exemption to recognised experts in rehabilitating underperforming organisations, such as company doctors and turnaround specialists. “Insolvency practitioner” is a precise term set out in law, and such individuals are licensed to act by the Secretary of State and have a statutory duty to ensure that they treat all creditors fairly and equitably.
As was touched on in Committee, the amendment, which is extremely wide and capable of varying interpretation, would extend the existing exemption to practitioners who are not licensed or acting in accordance with statutory duties. There is a genuine risk that such a provision would mean that the regulator’s power could be circumvented. This could put members’ benefits and the PPF at risk.
However, the Government recognise the need to protect people such as company doctors who have to make difficult decisions with wide-ranging impacts. The amendments to the reasonableness factors I referred to earlier are relevant here. In addition, a new factor would be introduced by the government amendments that would be particularly relevant to company doctors and others in similar roles; that is, the regulator should, where relevant, consider,
- “the likelihood of relevant creditors being paid and the extent to which they are likely to be paid”,
in Section 38(7)(eb) of the Pensions Act. This will offer some protection to company doctors as it makes clear that, while pension schemes should not be treated worse than other creditors of similar status, equally the amendments do not somehow make the pension scheme any type of “super-creditor”. Taken with the factor I described earlier, which requires the regulator to consider the reasonableness of a person's actions in the circumstances, I consider that this provides significant comfort to company doctors.
First, where a company doctor has to make hard decisions in an attempt to save a company, these factors would protect the position of a company doctor who had to cause detriment to a pension scheme, which, in the particular circumstances, was reasonable in the context of the outcome for other creditors. Secondly, the regulator would need to take into account that, in some circumstances, decisions must necessarily be rapid, as the noble Lord has indicated, and perfect data to inform the decision may not be available. Provided that the company doctor has behaved reasonably and has not, for example, wilfully ignored available information or recklessly taken risks that a reasonable
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4 pm
It may be helpful if I give an example of how a contribution notice might operate in practice, especially in relation to individuals. There are concerns about the amount of a contribution notice and how the material detriment test would be judged. If a person has assets of £5 million but profited £50,000 from a detrimental transaction, the amount of a contribution notice has an upper limit under Section 39. This is the amount of the debt either due or estimated from the employer to the scheme under Section 75 of the Pensions Act 1995, or a higher amount if the act itself reduced the debt. This amount is calculated at the time of the act or failure to act. Therefore, the amount of a contribution notice is, broadly, limited to the employer’s obligations to the scheme and the amount required to ensure that members receive their benefits in full.
If a person with assets of £5 million profited £50,000 from a transaction that was materially detrimental, the regulator would be required to look in the first instance at the amount of the Section 75 debt. If this was, for example, £1 million, that would be the upper limit of the contribution notice. But the regulator would then be bound to act reasonably in its assessment of how much of this sum should be payable by the party to the transaction.
The transaction itself and any benefit from it may not be the only factor here, and may not be the most important factor. Some factors may increase the amount that should be payable towards the upper limit; for example, the history of that person’s involvement with the scheme or the employer. However, other factors might decrease the amount. For example, that person’s degree of involvement in the transaction may have been limited, and there may have been other parties to the act. That person may be an individual who acted merely as an agent for a corporate entity that was party to the act, or other purposes of the act may have meant that the person’s actions were reasonable in the circumstances.
Another factor that is likely to be relevant is the position of the scheme following the transaction. Of course, considering what amount would be reasonable is entirely a matter for the regulator, who must examine each case on its own merits and is required to consider anything that is relevant, disregarding anything irrelevant. I hope that it is a comfort to know that simply having deep pockets should not make a person the target of a contribution notice. It is more constrained than that.
I am afraid that I have gone on for a while, but I hope that I have given a degree of assurance on some very important points.
Lord Lucas: My Lords, I am very grateful for that answer and will study it with interest in Hansard. This exchange has helped increase my understanding of why, among all the professions in the City, it is the lawyers who are still hiring. I beg leave to withdraw the amendment.
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Amendment No. 78X, as an amendment to Amendment No. 78B, by leave, withdrawn.
[Amendments Nos. 78Y to 78AM, as amendments to Amendment No. 78B, not moved.]
Baroness Noakes moved, as an amendment to Amendment No. 78Y, Amendment No. 78AN:
The noble Baroness said: My Lords, I shall be brief. Amendment No. 78AN would delete parts of paragraph 14 of proposed new Schedule 9. This is a probing amendment, designed to focus on the concerns of private equity investors. The amendment concerns the financial support direction provisions of the 2004 Act. The Bill changes that to allow the question of inadequate resourcing to be determined in the context of the aggregate value of connected or associated persons. The Minister will be aware that the definition of “associated and connected persons” is a broad one in the 2004 Act.
I am sure the Minister is also aware of ongoing concerns in the private equity world and elsewhere that companies within a portfolio of investments could each be exposed to the regulator’s powers, even though individually they do not operate on a connected basis and the ownership arrangements do not even involve common control. Private equity arrangements often involve such things as limited liability partnerships, which potentially bring together even more unrelated persons.
I understand the present practice is not to draw in de facto unrelated parties, despite the de jure effect of ownership structures. I have tabled the amendment to give the Minister the opportunity to say how he expects the private equity and loose arrangements within portfolios to be dealt with under the provisions. I beg to move.
Lord McKenzie of Luton: My Lords, as I mentioned briefly on Monday in introducing my amendments, we are seeking to amend the insufficiently resourced test that must be satisfied if the regulator is to issue a financial support direction so that a group of associated or connected persons cannot avoid their pension liabilities by dividing up their resources between them. A financial support direction may be issued where the employer in relation to a pension scheme is a service company or insufficiently resourced. It can direct persons who are associated or connected with the employer to put in place financial support for the pension scheme.
As a result of the way the Act is drafted, the direction may only be used if there is a single person who meets the test of being sufficiently resourced. Once the test is satisfied, the direction could be issued to any of the associated or connected parties, subject to reasonableness. This means that the direction could be avoided simply by dividing resources between the associated and connected parties so that no single party was sufficiently resourced. The Government’s amendment tackles this problem by providing that a direction may be issued if there are two or more connected or associated parties who between them meet the test of being sufficiently resourced.
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The amendment of the noble Baroness would remove the regulator’s ability to show that a group of associated or connected persons are between them well enough resourced to meet the test. I understand it is a probing amendment and am sure the noble Baroness will agree that it is wrong that a group of companies could take advantage of a loophole and arrange matters so that they avoid meeting their pension responsibilities. The CBI, for example, supports the change we are making.
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