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Lord Mackay of Ardbrecknish: My Lords, I noted the points that my noble friend made on this important issue and the points made by the noble Baroness, Lady Hollis.

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I fully understand the anxieties which have been raised on this issue since the publication of the White Paper in June last year. It is, of course, vital for the future well-being of occupational pension schemes that they continue to be supported by sponsoring employers. The question to be addressed is whether it is either necessary or appropriate for trustees to be required in statute to take into account the interest of the employer when deciding their investment strategy. The conclusion we have reached is that it is not, and for the following reasons.

First, trust law requires trustees to act only in the interests of the beneficiaries to the trust. This cannot be clouded by statutory requirements to take into account the interests of any other parties to the trust. Trustees can, however, take account of the interests of the employer when this affects the interests of the beneficiaries.

In preparing their written statement of investment principles, trustees will need to consider all of the factors which affect the interests of the members. That will obviously include the employer's views. Trustees who propose undertaking an investment strategy which does not have the employer's support will be failing in their duty to act in the interests of the beneficiaries if that results in the employer's continuing support for the scheme being prejudiced.

Secondly, the amendment develops the view of the employer as a contingent beneficiary to the scheme, requiring the trustees to take account of his interests, not as the employer, but as a beneficiary. Employers may or may not, be contingent beneficiaries to a trust. Whether they are will depend on the terms of the trust deed or particular circumstances which may arise, such as where a fund is in surplus. But it is by no means certain that an employer will automatically be considered a contingent beneficiary of the scheme.

Even if employers were considered to be contingent beneficiaries, my legal advice is that it is inappropriate for the Bill to refer specifically to any one party to the trust. Trustees must act in the interests of all the beneficiaries to the trust. Any attempt to single out one particular party to a scheme will beg the question as to how much weight trustees should give to the interests of that party compared with others. This would require some form of statement setting out the relative weighting trustees should give to the interests of each of the parties to the trust, including scheme members, pensioners and the employer. That would be impossible.

I am glad that the noble Baroness, Lady Hollis, is a recruit to my use of the word "balance". I have to say to my noble friend in this case that we have to get the balance right. I know that he is concerned about the issue, but he has not yet convinced me of his case. However, I shall read carefully what he had to say and I have no doubt that he will read carefully what I said, and we shall see where he goes from there.

The Earl of Buckinghamshire: My Lords, I thank my noble friend the Minister for his reply and the noble Baroness for her intervention. Both answers demonstrate the great difficulties in this area. The Minister mentioned in his reply that, in part, what I wanted to

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happen would happen. My problem is with the word "consult", because one can consult someone and take no notice of their advice or requirements.

I accept that this is an extremely difficult area within which to legislate. I would have preferred to have seen something more positive, but on the basis that there is an on-going dialogue, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

8.45 p.m.

Lord Lucas moved Amendment No. 76:

Page 17, line 16, leave out (" 3") and insert ("(Prohibition orders)").

The noble Lord said: My Lords, I spoke to this amendment, with Amendment No. 3. I beg to move.

On Question, amendment agreed to.

Clause 31 [Choosing investments]:

[Amendment No. 77 not moved.]

Lord Lucas moved Amendment No. 78:

Page 18, line 12, leave out (" 3") and insert ("(Prohibition orders)").

The noble Lord said: My Lords, I spoke to Amendment No. 78 with Amendment No. 3. I beg to move.

On Question, amendment agreed to.

The Earl of Buckinghamshire moved Amendment No. 79:

After Clause 31, insert the following new clause:

("Custodianship of investments

.—(1) The trustees or managers of an occupational pension scheme or a personal pension scheme must secure that investments held for the purposes of the scheme are held in accordance with an agreement made between the trustees or managers and an appropriate authorised person ("the custodian") which contains the provisions mentioned in subsection (2).
(2) Those provisions are—
(a) that the investments are vested in the custodian's name and he maintains adequate records for identifying them as belonging to the scheme and not to himself or any other person,
(b) that the custodian is required to safeguard the investments,
(c) that all documents of title relating to the investments are kept in the custodian's possession and may not be delivered to any other person except—
(i) to another appropriate authorised person with whom the trustees or managers have made an agreement within this section or in accordance with instructions from the scheme's fund manager, and
(ii) upon a request which is signified in the manner specified in the agreement,
(d) that all transactions relating to the investments are conducted and recorded in the manner and within the period so specified, and, in particular, that any transactions which do not occur in the normal course of the holding of investments generally or of investments of the description in question are immediately reported to the Authority and the trustees or managers by the custodian,
(e) that adequate arrangements are made for the deposit or investment of money received by the custodian in pursuance of the agreement and for the payment by him of money required for the purposes of the scheme,

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(f) that the custodian is responsible for securing that the trustees and managers are fully informed of all matters relating to the investments within a period which is reasonable having regard to the importance of the information,
(g) that, in any case where the custodian is also a person to whom any discretion to make any decision about investments has been delegated under section 29, the functions exercisable by him as custodian are adequately differentiated from those exercisable by him by virtue of that delegation,
(h) that the custodian must establish and maintain adequate arrangements for the purpose of securing so far as practicable that none of his employees or officers has the opportunity to perform any action which would or might result in a breach of the agreement,
(i) that the custodian is liable for any reduction in value in the assets of the scheme arising from any breach of his obligations under the agreement, and
(j) such other provisions as the trustees or managers consider appropriate for securing the safeguarding of the investments of the scheme.
(3) Where an agreement in relation to the investments held for the purposes of a scheme has been made with a custodian in accordance with this section—
(a) except in prescribed circumstances, the custodian shall not be regarded as a trustee or manager of the scheme by virtue only of complying with such provisions of the agreement as are mentioned in subsection (2), and
(b) the trustees or managers of the scheme are not responsible for any act or default of the custodian in the course of exercising his functions as such if they have taken all reasonable steps to satisfy themselves—
(i) that he is an appropriate person to appoint as custodian, and
(ii) that he performs his functions under the agreement competently.
(4) Subject to any restriction imposed by the scheme, an agreement under this section may include provision enabling the custodian to make arrangements with another person for him to exercise any of the custodian's functions under the agreement; and where the custodian makes such arrangements this section shall, except in prescribed circumstances, apply in relation to the other person as it applies to the custodian.
(5) Regulations may—
(a) provide that this section does not apply, or
(b) modify it in its application,
to schemes or investments falling within a prescribed class or description.").

The noble Earl said: My Lords, in moving Amendment No. 79 I shall speak also to Amendment No. 80. The amendments concern custody. The issue of custody was discussed fully at Second Reading and an amendment was moved in Committee by the noble Baroness, Lady Dean, with greater eloquence than I can achieve this evening.

I believe that there is agreement on all sides of the House that custody is desirable. The difficulty facing my noble friend the Minister is how that can be implemented. We had a full discussion of the issue in Committee and I do not want to repeat the arguments in detail.

It is true to say that most schemes in this country already have custody, but some do not. The purpose of the amendment is to make sure that those schemes which do not at present employ custody do so in the future. I am concerned that without the amendment it would be easier to commit fraud. One could go to the

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safe in one's back office and pick up share certificates. It is much easier to exchange these if one does not have to go through a third party, with the controls that that implies.

Questions have been raised as to how this proposal would be regulated. The most appropriate authority for regulating custodians would be IMRO. IMRO may have thoughts on that proposal. I do not believe that the regulatory situation should be a bar on your Lordships' House accepting the amendment. I beg to move.

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