HANSARD
Pension Protection Fund (Moratorium and Arrangements and Reconstructions for Companies in Financial Difficulty) (Amendment and Revocation) Regulations 2020
- Motion to Approve
- 1:41 pm
- Moved by
- That the Regulations laid before the House on 15 September be approved.
- My Lords, I am pleased to introduce the Pension Protection Fund (Moratorium and Arrangements and Reconstructions for Companies in Financial Difficulty) (Amendment and Revocation) Regulations 2020 that were laid before the House on 15 September. I am satisfied that the provisions in the regulations are compatible with the European Convention on Human Rights and therefore ask the House to consider these regulations.The Corporate Insolvency and Governance Act 2020 introduces some important measures, such as a moratorium on creditor action and restructuring tools to give specified corporate entities in financial difficulty the best chance of survival. This is part of a suite of measures to help business weather periods of economic uncertainty. The regulations debated on 14 September ensured that when certain corporate entities obtain a moratorium on creditor action, and the pension scheme trustees or managers are a creditor, the board of the Pension Protection Fund can exercise those creditors’ rights in relation to the moratorium as set out in the regulations, in specified circumstances. The regulations also ensure that when a restructuring is proposed under new measures, in respect of certain corporate entities, and the trustees or managers are a creditor to whom the restructuring is proposed, the board of the Pension Protection Fund can exercise the trustees’ creditors’ rights under the new restructuring measures, that way ensuring that pension schemes are not left without the appropriate protections in the legislation.The regulations being debated today simply extend the Pension Protection Fund’s creditors’ rights to certain other corporate entities: relevant co-operative and community benefit schemes in the case of the moratorium, and relevant societies in the case of the restructuring provisions. The regulations also revoke a previous set of regulations because of a legal defect caused by an omission in a related statutory instrument. We have expedited the making and laying of these regulations in order to rectify the situation. The “made affirmative” procedure has enabled these regulations to come into force soon after they were laid.These regulations form part of the corporate insolvency and governance legislative regime. If a relevant co-operative and community benefit society obtains a moratorium from its creditors, or a restructuring is proposed in respect of a relevant society as applicable, the Pension Protection Fund is able to intervene as a creditor to protect its interest in the relevant specified circumstances.Moratoriums give companies and other relevant corporate entities respite from action that could otherwise cause them to close. During a moratorium, businesses will be more able to plan a beneficial restructure; this will reduce unnecessary business failures, thereby preserving jobs and value in the economy. Restructuring plans enable companies with viable businesses but significant debts to restructure with limited disruption. This will facilitate corporate rescue and reduce formal, value-destructive insolvencies, thereby preserving businesses and saving jobs.
- 1:48 pm
- My Lords, I welcome these regulations, because they give the PPF the ability to exercise creditor rights across the full range of employers in moratoriums and restructuring plans where there is a PPF-eligible DB pension scheme.There have not yet been any cases where a moratorium has been implemented for a business with an eligible scheme, so we have no case studies to judge how these measures are working in practice, including the potential for gaming the new system introduced under the Corporate Insolvency and Governance Act. The Government did amend the Act to give the Secretary of State powers to amend the regulations in response to the emergence of perverse behaviours, but I want to pursue an issue which I raised at the time and which was never really answered.The Corporate Insolvency and Governance Act and these regulations sit alongside the Pension Schemes Bill, which is currently in the Commons. Clause 107 of that Bill introduces new criminal offences if the conduct of employers and other persons, and entities such as banks, trustees and advisers, has a detrimental effect on the schemes such as the avoidance of the recovery of the whole or any part of the employer’s debt. That opens up the possibility that what may be considered lawful actions under the Corporate Insolvency and Governance Act could subsequently be considered offences under the Pension Schemes Bill. If a moratorium takes place and a restructuring plan or insolvency follows, the pension scheme’s positions will be weakened relative to some other creditors because the scheme’s full Section 75 debt is not triggered, and unsecured finance debt has super-priority status, outranking the pension fund debt and outranking pension liabilities in subsequent insolvency. That finance debt includes shareholder loans, inter-company loans—including from a director or parent company—as well as arm’s-length regulated activities and bank debts. During a moratorium, those financial debts continue to be payable, but pension deficit contributions do not. Therefore there remains a real risk of novel forms of moral hazard including, as the noble Baroness, Lady Bowles of Berkhamsted, observed in this House on 23 June, when commenting on the poor behaviours that could occur,
- 1:52 pm
- My Lords, I welcome the new regulations to ensure that the Pension Protection Fund can better protect its interests and those of pension scheme members whose supporting employers unfortunately need to enter a moratorium period or restructuring due to the current crisis. These cover the entities, including charitable organisations, friendly societies, credit unions and so on, which may be particularly vulnerable in the current circumstances.The Pension Protection Fund is one of our flagship organisations, which has done marvellous work to protect the pensions of millions in this country and has compensated those who would otherwise have faced the potential of losing their pension rights if the employer failed, and possibly of losing their jobs too. It is vital that employers and corporate directors are not allowed to game the PPF or take advantage of financial turmoil to walk away from liabilities on which so many ordinary workers rely, as the noble Baroness, Lady Drake, just said. I congratulate the PPF and put on record that I believe its staff have done brilliant work. I am sure that they will continue to do so with efficient administration and careful stewardship.These regulations result from new measures passed in the Corporate Insolvency and Governance Act, which potentially weaken the rights of DB scheme members, trustees and managers to funds and assets belonging to the sponsoring employer during a moratorium or restructuring. I thank my noble friend and congratulate her on the way in which she introduced the regulations.To allow the Pension Protection Fund to represent the trustees and managers in negotiations is an important measure, since it has to safeguard the interests not only of each pension scheme but of all other schemes too, and a moratorium does not trigger a PPF assessment period. If pension sponsors can more easily find ways to walk away from their liabilities without putting extra funds into the schemes in the current crisis, because it ranks only as an ordinary unsecured creditor without super-priority, and financial firms have leap-frogged up the priority order, the Pension Protection Fund could be forced to take on extra liabilities, which will ultimately fall on other sponsors via higher levy payments. As I expressed during the passage of the Act, I am particularly concerned at the ability of the sponsor or its other creditors to ask the courts to release assets that were supposed to have been pledged to the pension scheme as part of previous scheme-specific funding arrangements, leaving the scheme far more underfunded than was ever intended. I understand that the legislation ensures that any restructuring plan must not put creditors in a worse position than on insolvency, but can my noble friend confirm that this also definitely applies to the Pension Protection Fund? If she would like to write to me on my point, that will be fine. In addition, which parts of the previous regulations that she mentioned in her introduction have been revoked by this instrument?
- The noble Baroness, Lady Greengross, and the noble Lord, Lord McColl, have withdrawn, so I call the noble Lord, Lord Hain.
- 1:57 pm
- My Lords, it is a real pleasure to follow my noble friend Lady Drake and the noble Baroness, Lady Altmann, who speak with tremendous authority on these pensions-related questions.The Government’s insolvency reforms initially applied only to companies. They have now been extended to cover co-operative societies and community benefit societies such as credit unions, following lobbying, in particular by Co-operatives UK. So far, so good. Co-op retail societies have been doing well, with sales booming and market share rising, but some other smaller co-operatives have had to close for a few months or furlough staff.In its efforts to modify measures originally designed for companies, Co-operatives UK gave priority to preserving co-operative and community purpose and to retaining democratic member control. I strongly applaud those efforts. I acknowledge too its September 2020 guidance to co-op societies facing financial strife, a 10-page brief on insolvency and financial liquidity that offers advice on how to respond to a crisis and how, in the worst case, to face up to a possible insolvency. However, I fear that those 10 pages of well-intended advice to co-op societies facing financial distress illustrate the shocking way in which workers’ rights are overlooked when businesses in Britain face going bust.The opening paragraphs on page 1 of the guidance acknowledge that directors of co-op societies facing insolvency have a duty of care to the society’s creditors. When businesses face insolvency, the interests of creditors, especially those with secured debts, often and maybe always override those of employees. Witness what happens when companies in financial distress stay in business but use a “compromise agreement” to avoid meeting their obligations to the firm’s pension scheme. Only later does the Co-operatives UK brief say that only if there is no imminent threat of insolvency should directors“Put employees and volunteers first”.
- 2:00 pm
- My Lords, I thank my noble friend for introducing this debate on this corrected statutory instrument, which puts right a defect in its predecessor. It is important that there should be no risk that the Pension Protection Fund might be unable to intervene and protect its rights as a creditor in the event of a co-operative and community benefit society obtaining a moratorium under the Corporate Insolvency and Governance Act.Since we started to debate the new measures introduced by the CIGA, my noble friend Lady Altmann and others have been assiduous in arguing for the strengthening of the powers and rights of the PPF. I agree that this is highly desirable, so I welcome the Government’s action in closing this loophole. Since entering into a moratorium under the Act is not in itself an insolvency event, without these regulations the PPF would be unable to exercise its rights as a creditor of a defined benefit pension scheme. The trustees might be placed under pressure to agree to the sale of an asset pledged to the pension fund in the knowledge that the PPF would be required to step in without taking account of the wider interests of the members of the scheme or, indeed, the payers of the levy which funds the PPF.These regulations have been introduced without consultation in the context of the Covid-19 pandemic, so it is welcome that we have the opportunity to discuss them today. While it is not directly the subject of today’s debate, I think it would be appropriate to hear a little more from the Minister on how the new provisions of CIGA are bedding down. My noble friend Lord Leigh of Hurley and others were concerned that a moratorium under the Act could not be applied for in order to rescue a company’s business, rather than the company itself. Further, I think it was unduly restrictive to exclude companies that have issued bonds in the amount of £10 million or more. As of 29 July, my noble friend Lord Callanan told your Lordships’ House that only one company had successfully entered into a moratorium. How many companies and other entities have now used the new moratorium process? I look forward to the contributions of other noble Lords and to the Minister’s reply to the debate.
- 2:04 pm
- My Lords, these regulations are necessary to ensure that the Payment Protection Fund can engage fully in a proactive and meaningful way in the conversations and decision-making processes when a company finds itself in difficulty. It is paramount that the PPF has this ability so that hard-earned pensions are safeguarded for their future security, and I fully endorse these regulations.Turning to the PPF itself, I wish to raise two points. First, concerns were recently raised in the other place about the robustness of the fund at present, given the sadly expected rise in companies needing help and unable to support their pension funds. The fund had a healthy ratio of 118.6% as of March 2019, with 18.6% more in its funds than its obligations to pay out and an actuarial surplus of £6.1 billion. This year, while it is less than in 2019, March 2020 saw a healthy 113.4% ratio, with 13.4% more in its funds than its obligation to pay out. The PPF says:“Market volatility forces us to remain vigilant and responsive to changes in our external environment which may also require changes in our strategy.”We are now in uncharted waters as we head into winter, with the daily death toll from the virus rising. More and more restrictions are being placed around the country, and this will inevitably mean more and more businesses struggling to survive. In the current climate, what assurances can the Minister give us that everything is being done to ensure that the PPF is fit for purpose and able to sustain itself in order to support people and their pensions?My second point concerns the actual amount of pension received. This is set to rise in line with the consumer prices index and capped at either 2.5% or 5%, whichever is the greater. Is this something that needs to be looked into in the light of the pandemic, in the same way that the Government have just done with the state pension uprating Bill?
- 2:07 pm
- My Lords, it is a pleasure to follow the noble Lord, Lord Loomba, and I thank him very much for his analytical review, which I found very helpful. I thank my noble friend for setting out the background to these regulations so clearly. I welcome the regulations, which I understand are needed because of an oversight.My noble friend Lord Trenchard is quite right that a moratorium or restructuring against creditor enforcement is not an insolvency proceeding, which is the reason we need these regulations to facilitate pension protection, and I strongly support that. I have several questions for my noble friend the Minister, of which I have given her some notice, but I understand that she may want to correspond in writing on some of the points and will copy answers to the Library if that is necessary.First, what is comprehended by “co-operative and community benefit societies”? I strongly agree about the protection for them, and I understand that the term includes credit unions. Do we also need to take special measures to protect the pension schemes of friendly societies, building societies and other mutual societies—and, indeed, trade unions? Are they also covered? Perhaps my noble friend can answer that point.Paragraph 3.9 of the Explanatory Memorandum talks of an ongoing risk that, during any break in the application of the provisions, a relevant co-operative and community benefit society could obtain a moratorium from its creditors, or a relevant society could propose a plan to restructure its business, without the Pension Protection Fund being able to intervene as a creditor to protect its interests. How real is that break and how much of a danger is there of that eventuality?How healthy is the position of the Pension Protection Fund? I know that the Minister for Pensions spoke to the chair and chief executive of the fund over the summer and was reassured about its resilience. Indeed, my noble friend also gave us reassurance in September. However, when did a Minister from the department last speak to the chair and chief executive about the standing and resilience of the fund? It would be good to hear about that.
- 2:11 pm