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The Earl of Buckinghamshire: I support the amendment moved so competently by the noble Baroness, Lady Dean. I realise that custodianship is a complex issue, in particular in relation to regulation. Indeed, question marks have been placed over the effectiveness of custodial arrangements.

Goode said:


That is an extremely important point. It would be an additional barrier to anybody attempting to commit fraud.

I do not believe that costs are an issue in this matter. The custodian business is extremely competitive. More people are trying to enter that market each year. Regulatory difficulties should not prove to be a barrier either. We have moved on in all areas of regulation and I do not understand why custodianship should be exempt from that.

In supporting the amendment, I draw the Committee's attention to compensation arrangements. Is it reasonable to ask schemes which have custodial arrangements to pay out for wrongdoing that has occurred in schemes with no custodian? I think not.

Lord Dean of Harptree: I support the amendment. From our debates, it is obvious that there is a reluctance to impose additional burdens on occupational pension schemes which, after all, are voluntary. If we proceed too far along the road of regulation, there is always a danger that schemes will not be improved or will not be set up.

In this case, we are not asking for anything new. As has been said, many schemes already have provision for independent custodians. That is good practice which is well developed in particular in larger schemes. Many small schemes are insured and, therefore, the intention is fulfilled in that way.

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It has been mentioned already that the expense involved in having independent custodians is minimal in relation to the available resources. I was greatly encouraged to recollect that when he dealt with those points on Second Reading the Minister said that he had an open mind. If he is not prepared to go as far as accepting this rather detailed amendment tonight, I hope that he will at least be able to assure us that his mind is even more open and that he is more sympathetic than he appeared to be on Second Reading.

10 p.m.

Lord Mackay of Ardbrecknish: The amendment before us is very long and detailed. It follows on from the concerns expressed on Second Reading and again this evening by several Members of the Committee. As I said at the end of the Second Reading debate, I do not have a totally closed mind on the issue and I am prepared to listen to the arguments as they are put forward. I should stress that I am still in that position and I still have some difficulty about the amendment which I hope to lay before the Committee as briefly as I can to see what response I receive.

I seem to remember from many of the comments made on Second Reading the desire for the Bill to do something specific with regard to the security of scheme assets. I believe that noble Lords appreciated then—as, indeed, they did tonight—that independent custodianship of scheme assets is not a simple matter.

Several noble Lords made the point that the use of independent custodians would probably not stop a determined fraudster. But I believe that it would be foolish of me or anyone else to pretend that any legislation could give a total guarantee against such wrongdoing. The same considerations were thoroughly considered by the PLRC, which specifically asked:


    "Should the use of independent custodians be obligatory?".

The PLRC concluded that they should not be. The committee was not convinced that the use of custodians would provide such a significant obstacle to the determined wrongdoer that their use should be made mandatory. Moreover, in a report which frequently sought to develop codes of practice wherever practical, the PLRC specifically declined to recommend that independent custodians should be a requirement of good practice.

Many issues occurred to me during the debate. For example, as custodians take instruction from the trustees, they would not be able to refuse to hand over assets if properly asked to do so by the trustees. Certainly it would not be a defence against the trustees making a wrong, properly arrived at decision. It is also the case that in the legislation the scheme assets would certainly have to be held separately from the employer. He would not, so to speak, have them in his safe; the pension scheme would have to have them in its safe.

The difficulties associated with this issue are, I believe, brought out in the amendment. It would require trustees to ensure that investments are held by an "approved person", defined as someone who satisfies the prescribed requirements. Nothing further is said on who that person shall be or what criteria would be used

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to judge his fitness to undertake such an important role. Indeed, in introducing the amendment the noble Baroness, Lady Dean, said that custodianship is not presently regulated. My noble friend Lord Buckinghamshire also made that point. If we are to have proper protection here other than some hoped-for protection, it is vital to see what those prescribed requirements would be, what class of persons would be designated as custodians and who would ensure that they actually carried out whatever prescribed regulations are laid down for their task. In considering the question, we have to look at that important issue.

Contrary to what everyone thought—that they were delivering some sort of blow to my case before I stood up to speak—I am not going to pray in aid anything to do with cost. I believe that the answer is in the mechanism proposed by the PLRC. It is for the trustees, employers and scheme professionals, all operating under the new duties contained in the Bill, to ensure that scheme security is fully and rigorously enforced. That is backed by the new regulatory authority with wide-ranging powers and sanctions.

In considering their security needs, many schemes will conclude that it will be appropriate for them to use an independent custodian, and there may be many good reasons for them to do so; indeed, many of them do so at present. However, others may feel that any additional benefit provided by a custodian will be of little use under the particular circumstances of their scheme. It is, for example, in respect of smaller and medium-sized schemes that this is most likely to seem inappropriate because they may hold little in the way of transferable securities. A requirement that such schemes should use an independent custodian would, I believe, be unreasonable and would not add anything appreciable to the security of the scheme.

I recognise the genuine concerns that have been expressed over this matter but I believe—as I said at Second Reading—that a statutory duty to appoint an independent custodian is too prescriptive, especially in the light of the point I made earlier that the amendment, long as it is, does not address the question of how one defines such a custodian and how one regulates such a custodian. One would certainly have to have something in place to achieve that.

I believe that the general thrust of the Bill should remain as it is. The trustees and the scheme professionals are there to put in place the measures most suitable to meet the needs of the scheme as regards the important matter of asset securities. I hope I have not illustrated too closed a mind on the matter. I hope I have indicated to the Committee some of the considerable difficulties that attend to the issue. These difficulties (dare I say?) have not been fully addressed in the amendment or in the speeches of all those who have spoken, including my noble friends.

Baroness Dean of Thornton-le-Fylde: I must confess I am somewhat surprised at some of the comments the Minister has made this evening. Quite apart from myself, other speakers in this debate have a

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wealth of knowledge in this whole area. I respect their knowledge and experience. I refer also to Members on the Benches opposite.

Goode said that this measure places some rein on the freedom of intending fraudsters. The Minister says that this is not a question of cost. Perhaps we have all been indoctrinated with the reputation that people from his part of the country have as regards money. However, I must withdraw that if cost is not a factor as regards obtaining regulation on pensions. I accept that. We shall refer to that in some of the later debates.

Lord Mackay of Ardbrecknish: The noble Baroness should not go too far. I said only that cost was not an important consideration as regards this provision.

Baroness Dean of Thornton-le-Fylde: The Minister cannot pick and choose. He cannot say that cost is not an important consideration only in regard to certain provisions. The Minister says that the measure refers to prescribed requirements. I am surprised that the Minister is such a wilting violet as regards accepting another area of prescription. After all there are already approximately 200 such areas within the Bill. I would not have thought that one more in this major area would have made much difference.

The Minister asks what would prevent trustees signing for the assets to be handed over. If anything is impossible in this life, I think it would be practically impossible to get an entire board of trustees—unless of course they are all employer trustees who connive together, but I think that is highly unlikely although it has happened on rare occasions—to act in that way. The fact is that the industry is calling for this measure. It is supported by the National Association of Pension Funds, by independent investment managers and by independent pension fund managers. The industry itself is calling for this measure. It is not something that we on this side of the Chamber have imposed. There is support all around the Chamber for this amendment.

Perhaps the Minister is taking comfort from his feeling that we do not have the wording correct. If that is so, we shall look at that and come back to it. I believe it is as near correct as we can make it. It has been drafted with a great deal of professional input on the part of people who are experts on pension fund rules and regulations and indeed law. I shall look carefully at what the Minister said but I would ask him also to consider seriously the points made in this short debate on what is a crucial area. This is about ethics, standards and integrity as regards pension funds. It is a matter of how not only the professionals but everyone approaches this whole area. If we had independent custody of investments, that would be yet another finger in the dike to stop some of the abuses that have taken place.


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