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Pensions Bill

moved Amendment No. 77C: 77C: Clause 123, leave out Clause 123 The noble Lord said: My Lords, I shall speak also to the other amendments in the group. I hope that noble Lords will forgive me if I take a little time in speaking to these amendments as I hope it will help with subsequent amendments. Perhaps I can also take this opportunity to make clear, given the complexity of these amendments and the time it has taken to bring them together, that if there are residual issues, I accept that we should return to them at Third Reading. I am pleased to return to the important issue of amendments to the Pensions Regulator’s anti-avoidance powers. Following our debate in Committee in July, the Government have undertaken further detailed discussions with a wide range of key stakeholders. We have listened to concerns that the detail of the new powers should be put on the face of the Bill and we have refined the legislation to ensure that it delivers on our intention to strike the right balance between protecting scheme members’ benefits and ensuring that the legitimate interests of employers and investors are not unduly hampered. There are a number of interested parties and I am grateful for the helpful and considered input we have received, in particular from the CBI, the British Private Equity and Venture Capital Association, the TUC as well as the NAPF, the Association of Pension Lawyers and the Institute for Turnaround. As I have previously explained, in light of these consultations, the Government have concluded that the most appropriate way of tackling the kinds of risks posed by new business models offering alternatives to insured buy-outs of pension schemes is to amend the regulator’s anti-avoidance powers. But we want to provide certainty for trustees, employers and investors about how the powers will be used. The Government have listened to the concerns raised both in this House and among consultees that the details should be in primary legislation and that there should be an appropriate framework of safeguards to ensure that the powers do not apply indiscriminately to individuals or corporate bodies. This set of government amendments seeks to deliver the detail. I should like to take noble Lords through some of the key changes, although I believe that we may return to other points later on in the debate. The government amendments will remove Clause 123 and in its place introduce a new clause as set out in Amendment No. 78A which seeks to put the key measures on the face of the Bill. Despite the removal of Clause 123, I would like to confirm to noble Lords that the assurances I gave to the House in relation to this clause still stand in relation to the new provisions that have been introduced by these amendments in my name. Before I go on to explain the detail of the government amendments I would like to say a few words about the regulator’s clearance procedure. Clearance is a voluntary process that allows employers and others to obtain a statement from the regulator that it would not be reasonable to use its powers in relation to a particular event. Once given, clearance is binding on the regulator, providing the information that the employer provided is not materially different from the circumstances of the case. This will not change. No clearance statement that was given before the announcement of these proposals will be undone as a result of the amendments that I am proposing today. Further, since 14 April 2008, any clearance statements issued by the regulator would cover the use of the contribution notice and financial support direction powers both as they stand, and as they would be amended by these amendments. Turning to the first issue—I should point out that I am referring to paragraphs 1, 2, 3, 4 and 5 of the proposed new schedule—we propose to introduce a new alternative test for the use of the contribution notice power. This is set out at paragraph 2 of the schedule which amends Section 38 of the Pensions Act 2004 and inserts proposed new Sections 38A and 38B. Under Section 38 of the Pensions Act 2004, the regulator may issue a contribution notice where it considers that the main purpose, or one of the main purposes, of an act or failure to act was to avoid the employer’s debt to the pension scheme as set out under Section 75 of the 1995 Act. This test of intent may frustrate the use of the regulator’s powers even in circumstances where intervention may be appropriate. For example, it can be difficult to intervene if a party has simply failed to consider the interest of the pension scheme or the employer’s liability to the scheme, even if the effect of the act was so significant as to reduce to nil the support of the employer standing behind the scheme. The Government consider that it is appropriate for the new alternative test to apply where the effect of an act or failure to act was materially detrimental to the likelihood of a member receiving their accrued benefits. I am pleased to say that there was considerable support for this approach from a number of consultees, although some were concerned that this proposal was not adequately targeted. We have taken these concerns seriously and, working with stakeholders, we have therefore introduced the following three important filters in the primary legislation to guide the use of this power. Paragraph 3 of the proposed new schedule places a requirement on the regulator to set out a statutory code of practice for the circumstances in which it expects to use this power. This is intended to narrow its application and the regulator has already published a draft list of circumstances to provide greater clarity on the approach. There is an established understanding of the role of codes of practice: they are given sufficient weight in courts and tribunals; they are subject to parliamentary scrutiny; and they can be used in evidence. They cannot, of course, usurp the role of primary legislation. The code of practice, on which the regulator has consulted and which has been approved by the Secretary of State after a period of laying in Parliament, gives rise to clear and legitimate expectations about the likely actions of the regulator. A draft code that has had a resolution passed against by either House during the laying period could obviously go no further. The public law duties of a body such as the regulator set high standards for the reasonableness of its behaviour. Acting in a way that was contrary to reasonable and legitimate expectations, prompted by a code of practice, would place the regulator at high risk of a successful legal challenge. I therefore believe that we have settled on the best approach. It avoids the uncertainty that might result from a non-statutory guidance and the potential for unnecessary legal dispute that could result from attempting to use legislation to deal with concepts that would be better treated in codes or guidance. I am glad that stakeholders such as the CBI, with which we have worked closely in developing our amendments, share our conclusions. The second important filter is provided by the factors that we have set out on the face of the Bill at proposed new section 38A(4). The regulator must consider these factors, where relevant, when determining whether an act or failure is materially detrimental. The test would engage only where there is a material detriment to the likelihood that members will receive accrued scheme benefits. This list of factors is intended to guide the regulator’s considerations and therefore provide greater certainty to the industry. It is a non-exhaustive list and there are two reasons for this. First, the Government intend that employers should be able to put other factors to the regulator for consideration, where relevant, as part of their representations. The regulator has provided us with examples where this has happened and changed the outcome of the case to the extent that no action has been taken. Secondly, the pensions market is evolving, with new solutions being developed to enable sponsors to manage their pension liabilities. New risks of detriment to scheme members may emerge and it would not be possible to cater for all factors that may be relevant to a particular case. The amendment also includes two regulation-making powers to add new factors and to vary this list by amending existing factors. We do not envisage making regulations immediately but they provide flexibility to do so should the need arise. The third filter is the new statutory defence set out in Section 38B. This is designed to ensure that where the party had undertaken due diligence before the act and considered and, where appropriate, mitigated the material detriment, and could reasonably conclude that the act would not be materially detrimental, a notice on the grounds of material detriment could not be used. The Government’s consultation on powers put forward a statutory defence based on the concept of whether the detrimental effect was reasonably foreseeable by the relevant parties at the time of the event. In response to that consultation and following helpful analysis from stakeholders, particularly the Association of Pension Lawyers, the Government consider that, on reflection, the concept of ““reasonable foreseeability”” would be too wide to provide sufficient comfort to be workable. The Government’s intention is to allow those undertaking business transactions to self-regulate, to a certain extent, even if an act is within the scope of the material detriment test and the circumstances and factors limiting the use of the new power. The Government have therefore modified their approach, taking account of the input received, and the amendment sets out a clear three-step process for establishing the defence. It is based on the circumstances prevailing at the relevant time and on what the person knew, or ought to have known, at that time. It is designed to reflect the current due diligence process that should apply to a sponsor’s consideration of the impact of an act on the pension scheme. That is intended to minimise undue impact on business. This approach would allow the relevant party to demonstrate, with evidence, that it was reasonable to conclude at the time that the effect of the act, or of failure to act, would not be materially detrimental. The government amendment includes a power to vary that defence as appropriate in the light of experience in operation. This new limb of the regulator’s power to issue contribution notices has important controls that apply in respect of individuals and others. As I have explained, the use of the power would be circumscribed by the circumstances set out in the regulator’s code, and the power would apply only where there had been a material detriment. Individuals could also rely on the statutory defence. Importantly, the government amendments would create two new reasonableness factors for the regulator to consider before considering issuing a contribution notice. These are, first, a new mandatory requirement that the regulator must consider the reasonableness of the party’s actions in the circumstances of the case and, secondly, a new requirement that, where relevant, the regulator should consider whether there was a transfer of value to the party who could be subject to the contribution notice. These new factors create important protections for individuals, including new protection for individuals in relation to the existing powers. The government amendments also include a number of other important changes to the regulator’s powers to ensure that they operate effectively. We intend to remove the words, "““otherwise than in good faith””," from the second limb of the existing contribution notice test. The current test sets an inappropriate evidential hurdle: it requires the regulator to prove that a person’s intent was to avoid a debt and to prove that the act was undertaken in bad faith. That can be almost impossible to prove; evidence of bad faith can be concealed, or it may not exist. It is important to recognise that ““good faith”” does not currently apply in relation to the first limb of the existing test—that is, where a party is seeking to avoid recovery of a debt. Indeed, it is this other ground, which has never included a good faith element, that the regulator tells us is usually the relevant ground for employer-related actions, which would usually be the ones of concern to employers and associated or connected companies or individuals. The removal of good faith from one ground will not have any effect on this other ground at all. The absence of that requirement in that situation has not placed any undue burdens on sponsors or individuals. During our consultation, no one provided evidence that this has led to situations where the regulator has used its powers unfairly. However, I understand the concern that there must be a balance, and we must avoid any undue or disproportionate impacts on business. For that reason, further safeguards have been designed in response to the specific concerns raised. Those additions, which are set out at paragraph 7 of the proposed new schedule, will provide greater certainty and ensure that business is not hampered. The safeguards include both the new reasonableness factors that I have just referred to and a requirement that, where relevant, the regulator should consider the effect of the act, or failure to act, on other creditors and the likelihood of their being paid. This is an express requirement on the regulator that, where relevant, it should consider any detriment to the scheme in the context of a wider environment. That would apply in particular, for example, in situations where companies are in distress. The amendments also introduce a new alternative test for financial support directions. This is a correction to an anomaly in the trigger for the use of this power but it will not extend its range. I note that there are some amendments in relation to good faith and the changes to the FSD power; perhaps we will have the opportunity to discuss these further in the course of debate. We also want to enable the regulator to direct a contribution notice or financial support to the relevant scheme following a bulk transfer. This would apply only where the test for using these powers would have been satisfied had the transfer not happened. The provisions are designed to correct an unintended effect of the current legislation that puts members’ benefits and the PPF at risk. New Sections 38A(5), 39B(8) and 43B(8) set out three regulation-making powers. These powers are intended to deal with situations relating to the calculation of debt, the method of transfer and the destination of members; that is, the scheme or arrangement into which they are transferred. In particular, new Sections 39B(8) and 43B(8) provide regulation-making powers to apply the new provisions—Sections 39A and 43A—to 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. Regulations made under these three new powers would require consultation under Section 317 of the 2004 Act, and are subject to the affirmative procedure. New Sections 39B(10) and 43B(10) and paragraph 16 of the new schedule provide that for the first set of regulations made under new Sections 39B(8) and 43B(8), the resulting regulations will have retrospective effect to the date of tabling the amendments—that is, 20 October 2008. The Government consider that that is crucial to prevent the kind of behaviour that these provisions are aiming to address. There will be a significant risk in not making this power retrospective, and that from the date of announcement of the changes, the market would be aware of the possibility of circumvention of the regulator’s powers in relation to transfers. It would then be open to develop alternative methods of transfer or alternative types of schemes or arrangements before the Government made regulations to prevent this. That could create serious risks to scheme members’ benefits and the Pension Protection Fund. New Section 39B(10) provides that the retrospective effect of the regulation-making power would apply in a more limited way to subsequent regulations, which would have effect from the date the Government announce their intention to make such regulations. New Section 43B(10) provides the same in respect of financial support directions. I emphasise that the regulation-making powers at new Sections 39B(8) and 43B(8) are targeted. They are limited to situations where there is a transfer, and relate only to ensuring that the previously unforeseen gaps in the current legislation that the Government are attempting to address with these specific amendments remain closed. The powers are circumscribed; they are not Henry VIII powers to amend the primary legislation. More importantly, regulations made under this power would not affect the overwhelming majority of employers; they would apply only to those cases where the test for a contribution notice or financial support direction had been met. 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 detrimental”” 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.