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Welfare Reform and Pensions Bill

3.7 p.m.

The Parliamentary Under-Secretary of State, Department of Social Security (Baroness Hollis of Heigham): My Lords, I beg to move that the House do now again resolve itself into Committee on this Bill.

Moved, That the House do now again resolve itself into Committee.--(Baroness Hollis of Heigham.)

On Question, Motion agreed to.

House in Committee accordingly.

[The CHAIRMAN OF COMMITTEES in the Chair.]

Clause 11 [Effect of bankruptcy on pension rights: approved arrangements]:

Lord Higgins moved Amendment No. 38:


Page 12, line 22, at end insert--
("(5A) No pension rights of any person shall however vest in his trustee of bankruptcy if they were acquired or secured during a period when the arrangement was approved.")

The noble Lord said: In moving Amendment No. 38, I should like to speak also to Amendments Nos. 39 and 40 which are consequential. Before we discuss the highly emotive issues of war widows' pensions or the higher reaches of pensions policy which are reflected in the amendments tabled by the noble Baroness, Lady Castle of Blackburn, there are one or two rather technical amendments whereby we seek to establish the Government's position.

As Clause 11 stands, our understanding is that it could have retrospective effect. The whole concept of retrospection has always been a difficult one and many different definitions of retrospection have been put forward. As I understand the position, if the Inland Revenue were to decide to disapprove a pension scheme, that could have a retrospective effect as regards the protection of those assets from the trustee in bankruptcy being removed. Although we understand the reasons why the Government think that it is appropriate to change the situation with regard to future arrangements, we believe that there is some danger of retrospection here.

This matter was debated on 16th March in a Standing Committee of another place, where it was suggested that the matter could be solved by an exercise of ministerial discretion so far as concerns protecting the assets in the circumstances I have described. That would not seem to be a very satisfactory arrangement. It is less watertight

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than if it were on the face of the Bill. But these are complicated matters and it would be helpful for the Committee to have an explanation of them from the Government. I beg to move.

Lord McIntosh of Haringey: The measures in Clause 11 of the Bill will protect a person's rights in a tax-approved pension scheme in the event of their bankruptcy. The same amendments were raised in Committee in another place. Before I go on to discuss them, perhaps it will be helpful if I give an outline of how the measures will work.

When a person becomes bankrupt his or her assets are generally taken over by the trustee in bankruptcy. However the current treatment of people's pension rights on bankruptcy is inconsistent. Pension rights in occupational pension schemes are usually safeguarded, whereas rights in personal pensions are at risk of falling into the hands of the trustee in bankruptcy. It is common ground that that is unfair. Not only that, it acts against one of the major principles of our programme of welfare reform; that is, security in retirement.

Clause 11 of the Bill provides that on bankruptcy an individual's rights in a tax-approved pension scheme will be protected from the trustee in bankruptcy by virtue of being excluded from the bankrupt's estate. I understand this was supported by Conservative Members in another place. This new statutory protection will not, however, extend to pension rights held in unapproved pension arrangements. Such arrangements are usually used by the very well off to top up an approved pension arrangement. As I am sure the noble Lord will agree, it would be inappropriate to apply the automatic protection provided by these new measures to such arrangements.

Perhaps I may now turn to the individual amendments and the clear case made out for them by the noble Lord. He is concerned about the position of people in an approved pension scheme which has had its tax approval withdrawn and that people lose protection for rights accrued while the scheme was approved. I share the noble Lord's concern about innocent members of a pension scheme being inadvertently penalised. However, for two reasons, I hope to be able to reassure him that this will not happen.

First, tax approval for pension schemes is not withdrawn unless there are very good grounds for doing so and is done rarely. I shall let the noble Lord have the figures for the number of cases in which it occurs. Tax approval is withdrawn only if a scheme is in breach of the Inland Revenue requirements. If it comes to the Inland Revenue's attention that a scheme is in breach in a particular area, the Inland Revenue will write to the scheme about the matter. The pension scheme is then given every opportunity to put the matter right, with assistance and advice if needed. Withdrawal of approval is a major step; in every case the final decision is taken only after consideration at a senior level.

When considering withdrawal of approval, the Inland Revenue pays particular attention to the interests of members of the scheme who have not been involved in any irregularity. They are allowed to transfer their rights

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to another approved pension scheme. Of course, if they do so, their pensions rights will continue to receive the automatic protections provided by Clause 11.

In any one year, the Inland Revenue withdraws approval from about 75 pension schemes. The overwhelming majority of those schemes are what are known as small self-administered schemes, set up for the benefit of company directors. In practice, the schemes tend to have only two or three members, all of whom are trustees. Unlike other pension schemes, small self-administered schemes are allowed to use scheme assets to secure loans to the employer or to invest directly in the employer, up to a single limit of 50 per cent of the scheme's assets. I am sure that the noble Lord can see the scope for that kind of scheme falling short of the Inland Revenue requirements.

Secondly, there is an additional safeguard, which some noble Lords might regard as a belt and braces approach. Clause 12 gives the court the power to exclude an individual's pension rights in an unapproved scheme from his or her estate on bankruptcy. This will give the same protection from creditors as if they were rights under an approved scheme. The grounds for the court's consideration will be that the rights in the unapproved pension scheme represent the individual's only, or only significant, pension provision. That is a safety net provision for those who have made pension provision only via an unapproved arrangement. It will also apply in those cases where tax approval is withdrawn from a scheme and--although it would be highly unusual--the individual in question decides not to transfer his or her rights to another scheme.

The noble Lord asked me whether this was not retrospective legislation. The treatment of pension rights under Clause 11 is determined by the reference to the true tax status of the scheme at the time of the bankruptcy order, not the date on which tax approval was withdrawn from the scheme. So it is not retrospective legislation but legislation which addresses the circumstances of the case. With that reassurance, I hope that the noble Lord will feel able to withdraw his amendment.

3.15 p.m.

Lord Higgins: The Committee will be grateful to the Minister for his comprehensive reply. As he rightly points out, there is much common ground in relation to these rather unusual schemes. I was a little concerned when the Minister said that the change takes place at the date of the bankruptcy order rather than the date when the scheme is disapproved. Is it the case that the contributions which have already been made before the date when the scheme is disapproved will not be adversely affected by the subsequent events and the subsequent fact that the scheme is no longer approved by the Inland Revenue?

Lord McIntosh of Haringey: The clause has effect only in relation to the pension rights of a person who is made bankrupt after the commencement of the clause. So in that sense it is certainly not retrospective. In so far as the clause bites--in other words, someone is made bankrupt after the commencement of the clause--all the

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other protections, such as a transfer to an approved scheme or the belt and braces protection of Clause 12, will apply.

Lord Higgins: I am grateful to the Minister. On the basis of what he said, I beg leave to withdraw the amendment. He has also covered very largely the contents of Clauses 11 and 12.

Amendment, by leave, withdrawn.

[Amendments Nos. 39 and 40 not moved.]

Clause 11 agreed to.

Clauses 12 to 16 agreed to.

Clause 17 [Compensating occupational pension schemes]:

On Question, Whether Clause 17 shall stand part of the Bill?

Baroness Buscombe: Having reviewed Clause 17 in some detail and having received representations from a number of organisations on it, I should be grateful if the Minister could give some indication of the Government's thinking behind the clause. It is our understanding that the clause extends the eligibility for compensation under the pension compensation provisions in the Pensions Act 1995, through the Pensions Compensation Board. In addition, it increases the maximum amount of compensation that can be paid to a scheme if the assets are lost through theft or fraud and if the employer is insolvent.

However, it also creates a distinction between scheme members; that is, it distinguishes between those who are already in receipt of a pension and retired, together with those who are within 10 years of retirement age--all of whom will enjoy 100 per cent protection against losses through theft, fraud and if the employer is insolvent--and those who are working and more than 10 years from retirement, who will, in turn, have 90 per cent protection.

In theory the differential seems laudable; it fully protects those who will not have the opportunity to rebuild their provision. However, in practice, surely to offer 100 per cent protection--that is, complete protection--thereby negates any need or duty at all on the part of the beneficiary to ensure that the scheme is being properly run. I make this point with particular regard to those beneficiaries who are managers and trustees and therefore should be accountable in their fiduciary responsibility.

We further suggest that this clause, as I understand it, is inconsistent with other parts of the Bill. It appears entirely to relieve managers and trustees of a scheme for the benefit of a retired person or one within 10 years of pensionable age, of their responsibility, if that scheme ends up being underfunded. Perhaps I may explain what I mean by inconsistent. It is, we understand, the Government's intention to make pension provision fairer, which includes being tough on those who do not carry out their responsibilities properly. For example, Clause 10 of the Bill, which deals with late payments by employers, refers to the possible civil or criminal consequences of late payment.

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In contrast, is a manager or trustee of a pension fund to be entirely protected while an employer should, in the event of late payment, be subject to the full force of the law? Again, I should be grateful if the Minister could give us an indication as to the Government's thinking behind the clause and what the Government hope to achieve in practical terms by the inclusion of the clause. I beg to move.


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