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Pensions Bill

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, "““having regard to all relevant circumstances prevailing at the relevant time””." 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. 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, "““have regard to such matters as it considers relevant””." 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 regulator typically viewed an issue in one way and then took a radically different approach in a near identical case to others it has considered, it would be likely to be acting unreasonably. If the regulator needed to revise expectations, it would need to make a statement that clarified its position, but this statement could not have retrospective effect. The regulator would have to judge any enforcement activity against the law of guidance and the legitimate expectations in place at the time a particular act or failure to act occurred. Given our previous discussion on amendments, I hope that noble Lords will forgive me for dwelling briefly on an effort to clarify issues of reasonableness as well as dealing with the specific amendments.