Annex A
Supplementary memorandum
New Clause before 124
Powers conferred on: Secretary of State
Powers exercised by: Regulations
Parliamentary procedure: Affirmative/Negative
Brief description of clause
1. The Department wrote to the Committee in July
regarding a new clause in the Pensions Bill before clause 107
(now clause 123) to enable the extension of the Pensions Regulator's
anti avoidance powers. This clause provided a regulation-making
power to give effect to changes to the Regulator's powers. The
Committee reported on these proposals on 10 July and concluded
that the proposed regulation-making power was needed to ensure
that pension schemes were properly supported. There was nothing
in the delegations in the other amendments that the Committee
wished to draw to the attention of the House.
2. During the debate at Lords Committee Stage
there was concern that there was not a sufficient level of certainty
in clause 107 and Government Ministers made a commitment to return
to the House at Report stage of the Pensions Bill, to consider
what more could be placed on the face of the Bill to deal with
the risks to pension scheme members' benefits. Following further
detailed work with stakeholders over this summer to refine the
legislation, the Government has decided to replace the regulation-making
power (now clause 123) with the detailed proposals in the primary
legislation.
3. The new clause inserts a new Schedule after
Schedule 8 which amends sections 38 to 43 of the Pensions Act
2004 - the Pensions Regulator's anti-avoidance powers relating
to the debt which is or may be due under section 75 of the Pensions
Act 1995. The relevant anti-avoidance powers are Contribution
Notices and Financial Support Directions (see below).
4. The new clause inserts section 38A which provides
for a material detriment test under which a Contribution Notice
can be issued. Currently the Regulator must show that the main
purpose or one of the main purposes of the act or failure to act
is to avoid a debt under section 75 of the Pensions Act 1995 (this
section establishes the debts from employers to pension schemes).
The Regulator has to show evidence of subjective intent, where
either that intent would likely not have been documented or the
act was done with complete disregard for the scheme and its members'
benefits. Where the intention is inadvertent or disguised there
may be no evidence of an objective to avoid pension liabilities.
The Government therefore proposes an additional alternative test
- a material detriment test - that a Contribution Notice may be
issued where the effect of an act has affected in a material way
the likelihood of accrued scheme benefits being received.
5. The new clause also inserts section 38B to
provide a statutory defence in relation to the material detriment
test. The statutory defence test has been developed to allow those
undertaking business transactions to self-regulate to a certain
extent. Setting out a statutory defence in the primary legislation
allows the relevant party to demonstrate with evidence that they
considered the impact of the act or failure on the scheme as part
of the normal due diligence process and that where a) it was not
likely that the effect of the act/failure to act would be materially
detrimental and b) or the detriment was minimised, and c) it was
reasonable for the party to do the act or failure, the contribution
notice would not apply.
Purpose of power
Material detriment test
6. The new clause includes all of the matters
to which the Government currently believes the Regulator must
have regard in deciding whether or not the material detriment
test is met (in subsection 4 of new section 38A) and subsection
5 defines "scheme obligation". Innovation in the pensions
market is fast moving and therefore it is important that the Government
has the flexibility to update these factors where appropriate
to ensure that the test remains effective. Subsection 38A(4)(g)
contains a regulation-making power to add other matters to which
the Regulator must have regard. The regulations would be subject
to the negative resolution procedure.
7. Subsection 38A(10) contains a regulation-making
power to provide for other matters to which the Regulator must
have regard and to amend subsections 4 to 8, in the light of its
operations. The regulations would be subject to the affirmative
resolution procedure.
Statutory defence
8. It is possible that in the future it will
be desirable to amend the statutory defence in light of the industry's
experience of using it and the Regulator's consideration of how
it applies. The intention is therefore to take a power in section
38B(13) to vary the statutory defence as appropriate in light
of experience of the defence in operation. The regulations would
be subject to the affirmative resolution procedure.
Bulk transfers
9. The new clause also inserts new sections 39A,
39B, 43A and 43B dealing with the transfers of members of a scheme.
These provisions are intended to deal with situations where the
Regulator has met the relevant tests for issuing a contribution
notice (or a financial support direction), but the members of
the occupational pension scheme to which those tests had been
satisfied have been transferred to a different scheme. Under the
current rules the Regulator can only require support in respect
of the original scheme; it cannot re-direct that support to a
different scheme following a transfer of the members. This is
an unforeseen loophole in the current rules that these provisions
address. The new provisions 39A and 43A would permit the Regulator
to require that the support for which an employer is liable must
be directed to the pension scheme(s) that includes the affected
members. The new provisions also permit support to be directed
to the appropriate scheme in circumstances where there are multiple
transfers of some or all of the members of the original scheme
to one or other work-based schemes, including onward transfers
(a point which stakeholders asked to be covered to ensure the
loophole was closed in these situations). The measures also permit
the direction where the original scheme has been wound up (39B
and 43B respectively).
10. The provisions include three regulation-making
powers - at sections 39A(5), 39B(8) and 43B(8) respectively. The
powers are intended to deal with situations relating to the calculation
of debt and method of transfer:
· The regulation-making power in s.39A(5)
is to enable the Regulator to calculate the sum specified in the
Contribution Notice in a different way from that specified under
s.39 where appropriate, to take account of transfers into schemes
to which s.75 of the 1995 Act does not apply (this section establishes
the debts from employers to pension schemes). This power would
have prospective effect.
· The Government is also taking regulation-making
powers, in sections 39B(8) and 43B(8), to apply the two new sections
(sections 39A and 43A) to other arrangements other than 'standard'
transfers from one scheme into another, to enable the Regulator
to continue to protect members' benefits where the transfer or
other arrangements could put those benefits at risk and to ensure
that the Regulator's powers remain effective in an innovative
market.
· The two regulation-making powers in sections
39B(8) and 43B(8) respectively have retrospective effect to the
date of tabling the amendments (20 October). The Government's
view is that this is crucial to avoid the issue of forestalling.
There is a significant risk in not making this power retrospective
in that from the date of announcement of these changes the market
would be aware of the possibility of remaining loopholes in relation
to transfers, and could therefore develop alternative methods
of transfer or alternative types of schemes or arrangements
before the Government made regulations to prevent this. This could
put members and the Pension Protection Fund at risk. We have sought
and received clearance from the Attorney General's office for
retrospection.
· The retrospective effect of the regulation
making power would apply only to the first set of regulations
for which it was used, and not to subsequent regulations which
would have effect from the date the Government announced its intention
to make such regulations.
· The power would be limited to transfer
cases and relates only to the loophole and therefore it would
be much narrower than the original amending power in cl.123 that
the Government intends to remove. It is a targeted power, and
not a power to amend the primary legislation. Most importantly,
regulations made under this power would not affect the overwhelming
majority of employers: it would apply only to those cases where
the tests for a contribution notice or financial support direction
had been met. The regulations would be subject to the affirmative
resolution procedure.
Background
11. The Pensions Regulator was set up under the
Pensions Act 2004. Its main statutory objectives are:
· to protect the benefits of, or in respect
of, members of occupational and work-based personal pension schemes;
· to reduce the risk of situations arising
that may lead to claims for compensation from the PPF; and
· to promote, and to improve understanding
of, the good administration of work-based pension schemes.
12. There has recently been a growth in new ways
of employers limiting their exposure to the risk associated with
its 'pensions promise' (that is, its liabilities in relation to
pension scheme members) with the advent of new market solutions
which have exposed weaknesses in the legislation. The Government
welcomes innovation in the management of pensions risks and other
ways for employers to try to address pension scheme liabilities
but is concerned that risks that some emerging business models
have highlighted. Some of the emerging models remove or reduce
the security of an employer without putting adequate capital in
place to replace that security and could have the consequence
of increasing the risk of calls on the Pension Protection Fund
(PPF) and potentially raising the levy on all eligible schemes.
13. The Government undertook an eight-week consultation
between April and June 2008 on proposals to amend the Regulator's
anti-avoidance powers to ensure that they remain adequate and
appropriate to address new risks resulting from changes in the
pensions market. On 25 June, the Government tabled an amendment
to the Pensions Bill at Lords Committee stage to give effect to
the proposed changes. During the course of the Committee debate
the Government made a number of commitments to refine the legislation,
to ensure it deals with new risks posed by market developments
that both sides of the House and stakeholders recognised, without
disproportionately impacting on business, and to allay the concern
that deals previously cleared by the Regulator could be at risk
from these changes. The new clause and the other proposed changes
to primary are intended to meet the Government's commitment. It
puts the substantive proposals into primary legislation (the Government
intends to remove clause 123 from the Bill).
Reason for delegation
14. The secondary legislation would provide the
Government with the flexibility to amend the fine detail in future
should that be necessary in light of how the provisions work in
practice. There would be a requirement to consult on the regulations,
providing stakeholders with an opportunity to comment on proposed
changes.
Appendix 1 - The Pensions Regulator Anti-avoidance
powers
15. The Pensions Regulator's three anti-avoidance
powers, contained in sections 38 to 56 of the Pensions Act 2004
are:
16. Contribution Notices which enable
the Regulator to require a person who is the sponsoring employer
of an occupational pension scheme, or a person who is connected
or associated with that sponsoring employer, and who has been
a party to an act or failure to act one of the main purposes of
which is to avoid the employer's pension liabilities (actual or
contingent), to pay money to the pension scheme; and
17. Financial Support Directions which
enable the Regulator to direct that arrangements are put in place
that would ensure that the pension liabilities under an occupational
pension scheme of the sponsoring employer are guaranteed or otherwise
supported by a person associated or connected with that employer
(usually other companies within a group).
Department for Work and Pensions
October 2008
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