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Baroness Dean of Thornton-le-Fylde: My Lords, I thank the Minister for that detailed and helpful reply which does not, however, reassure me as much as he had hoped that it would. Perhaps I may give the House an example. I refer to the well-known Imperial case. A company was sold and the members of the pension fund were guaranteed that their benefits under the scheme would be protected. They were told that their benefits would not be eroded in any way. Well, they were eroded. The scheme members would not have been covered by the regulatory authority proposed in the Bill.

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It would not have been able to intervene on their behalf. So, who would be able to protect them? They would have to find some other means of redress. My information is that neither OPAS nor the pensions ombudsman could intervene in that situation. Such a case would come under trust law and would be a matter for the courts.

I agree entirely with the Minister that disputes in regard to pension funds should be settled within the fund. We welcome the disputes procedure that is established under the Bill. No one wants costly litigation where that can be avoided.

The amendment has been tabled at this stage because it is felt strongly that there is an omission in that the individual is given no assurance that either the provisions in the Bill, OPAS or the pensions ombudsman could deal with those situations which, fortunately, occur only from time to time. They are not regular events but when they occur they have such an effect upon the individuals within the pension fund that one feels strongly, as one did in the Melton Medes case, that that must never be allowed to happen again.

It is clear that the Minister will not be persuaded this evening to accept the amendment. So, taking everything into consideration, I beg leave to withdraw it.

Amendment, by leave, withdrawn.

Clause 33 [Restriction on employer-related investments]:

Lord Ezra moved Amendment No. 84:


Page 19, line 23, leave out from ("that") to ("invested") in line 24, and insert ("no more than 5 per cent of its resources is").

The noble Lord said: My Lords, I shall speak also to Amendment No. 105. The amendment deals with the issue of self-investment. A simple matter is raised by the amendment. The Bill provides that the scheme must comply,


    "with any prescribed restrictions with respect to the proportion of its resources that may at any time be invested in ... any employer-related investments".

Those are quite properly described in the following paragraph.

The issue is that from 1992, in the wake of the Maxwell affair, it has been laid down that self-investment should not exceed 5 per cent. That was referred to in the Goode Report and in the Government's White Paper. I feel that the reference to prescribed limits introduces an area of uncertainty where there was certainty.

It is important that fund managers know where they stand in this matter. The principle has now been well established. I have no doubt that the prescribed limit probably would be 5 per cent. That is all the more reason why it should be on the face of the Bill. There should be no doubt.

Some feel that there should be a total prohibition on self-investment but, as the Goode Report pointed out, that would create serious difficulties, particularly in the case of larger schemes of companies with many associates. Some of those companies track the market, and their own shares obviously play a part in that process. It would be virtually impossible to eliminate their own share of that market-tracking operation.

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Therefore a certain limit has to be allowed. That has been established as 5 per cent. I believe there is a strong case for that to be endorsed in the Bill. I beg to move.

Lord Haskel: My Lords, I support the amendment. As the noble Lord, Lord Ezra, said, the 5 per cent. limit on self-investment appeared in the White Paper. For some reason it does not appear in the Bill. The Bill has prescribed limits. I feel strongly that the 5 per cent. should be on the face of the Bill to prevent any misunderstandings. There are many examples of things going wrong in this regard. There are the Bellings, the Burlington International, and the Lewis's and Lep cases. They are just but four examples.

The Goode Report gave reasons for allowing some level of self-investment, but, as the noble Lord, Lord Ezra, said, 5 per cent. seems a reasonable compromise to avoid difficulties which arise from time to time and to help promote the principle of prudent diversification of investments.

The object of Amendment No. 105 is to prevent the value of employer-related investments being included in the total value of assets. The reason is clear. The amendment is essential if the MSR is to be at all effective. If employer-related assets are to be permitted for the purpose of calculating the MSR, that is even less of a solvency safeguard than we originally believed. I support the amendment.

Lord Mackay of Ardbrecknish: My Lords, Amendment No. 84 would place on the face of the Bill a limit on the amount which schemes may invest in the sponsoring employer and associated companies. The proposed limit at 5 per cent., mirrors that currently required by regulations which took effect in March 1992. These regulations are made under existing legislation. The PLRC considered the limit and considered that there had been insufficient time since its introduction to judge whether or not it was an appropriate one. It recommended that the 5 per cent. limit should stand.

That recommendation, together with the other PLRC recommendations on self-investment, have been accepted by the Government. We propose to bring forward regulations which put these recommendations into effect. We are all agreed, therefore, that a 5 per cent. limit on the level of self-investment is currently considered appropriate and one which, I submit, has been properly introduced into legislation by regulations. I find it difficult to see the need for this limit to be placed on the face of the Bill if it can be, and indeed already has been, satisfactorily introduced by secondary legislation.

I have noted the points made by the noble Lord. However, the danger in this amendment is that while it will have no immediate effect on the level of permitted self-investment it will make it much more difficult for any changes to be made to that limit if, in the course of time, 5 per cent. is felt no longer to be an appropriate level. The inflexibility inherent in introducing a particular figure onto the face of the Bill, combined with the fact that it is simply not necessary to do so, leads

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me to conclude that any advantages are clearly outweighed by the disadvantages. I therefore hope that the noble Lord will not press the amendment.

Perhaps I may now turn to Amendment No. 105. It would exclude any employer-related investment from the calculation of the minimum solvency requirement. In Committee, I explained that investment managers may invest in a range of unitised securities which ensure the performance will reflect the market. These unit trusts may themselves be invested in the sponsoring employer or those associated with it. The complex world of mergers and acquisitions make it difficult to keep track of who owns which particular companies. To require the investment manager to be continuously monitoring the holdings of the parent company would be something of an administrative nightmare.

It is, of course, the trustees of the scheme who will decide whether employer-related investments are appropriate. This duty has been further strengthened by the provisions of this Bill. When making such a decision, as in all their duties, trustees must act in the best interests of scheme members. They are therefore expected to consider risk as well as return when deciding on investment policy.

If the likely rate of return from an employer-related investment is not as good as could be achieved elsewhere, the trustees should consider whether to retain the investment. Similarly, if they are of the opinion that there is a real risk of employer insolvency, they would be acting in breach of trust if they were to agree to any employer-related investment. On the other hand, there may be situations where employer-related investment is acceptable and judged to represent prudent investment.

Given that a blanket exclusion on all employer-related investment is not practical, which noble Lords accept, it would be illogical to exclude up to 5 per cent., which is legally permitted, from the minimum funding calculation. Apart from any other reasons, we would be placing an exclusion on trustees that could be breached without their intent or knowledge. It would have the effect of raising the minimum funding requirement threshold for any scheme that had up to 5 per cent. self-investment.

Finally, I would remind noble Lords that the Government have accepted the PLRC's recommendation that all loans or other financial assistance to an employer or associated companies should be prohibited. We believe that this will significantly limit the potential risk involved in financial dealings between a pension scheme and its sponsoring employer. I must therefore agree with the PLRC's conclusion that a 5 per cent. limit on employer-related investment will ensure an adequate diversification of risk.

I hope that with that explanation of the way in which we have reached our conclusion, the noble Lord will withdraw his amendment.

Lord Ezra: My Lords, I thank the Minister for his comments. I am a little disappointed, in particular that Amendment No. 84 has not been accepted. That has been recognised as the limit, and the reference in the legislation to "prescribed" limits introduces a degree of

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uncertainty which could have been avoided. Of course, those limits cannot be fixed for all time. But on the other hand, it is not a matter which should be changed too rapidly or too easily. Fund managers need to know the rules under which they are to operate. The 5 per cent. limit has been accepted. We have had what is tantamount to an assurance from the noble Lord that that will be the prescribed limit. Therefore, it would have been extremely easy to put that on the face of the Bill.

However, I shall study carefully what the Minister said about both Amendments Nos. 84 and 105. If we need to return to those issues at the next stage, we shall certainly do so. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.


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