My Lords, good afternoon. I remind the Committee that, in the event of a Division in the Chamber, the Committee will adjourn at the sound of the Division Bell and resume after 10 minutes.
Clause 109: Duty to give notices and statements to the Regulator in respect of certain events
27: Clause 109, page 95, line 15, at end insert—
“( ) In particular, the declaration of a dividend by the employer is a notifiable event for the purposes of subsection (1) if—(a) the value of the assets of the scheme is less than the amount of the liabilities of the scheme,(b) the amount of the dividend exceeds the annual deficit repair contribution, and(c) the amount of the annual deficit repair contribution is less than 20% of the difference between the value of the assets of the scheme and the amount of the liabilities of the scheme.”
Clause 109 allows the Government to prescribe certain events as notifiable events, which must be notified to the regulator in advance of their happening, along with an explanation of how any impact of such an event to the detriment of the scheme is to be mitigated.
Let me start with some general points. Clause 109 is very vague. It does not describe what such notifiable events will be, leaving them to be prescribed at a future date—more delegated powers, if you like. The government briefing paper indicates that they intend such events to include:
“(1) Sale of a material proportion of the business or assets of a scheme employer … (2) Granting of security on a debt to give it priority over debt to the scheme.”
We discussed at length on Monday the level of delegated powers in this Bill, and this is basically another one. However, in the other cases, the delegated powers are there partly because the Government have not yet formulated what they want to do with those regulations or because some consultation is still to take place. Here, the Government know what they intend to do, so I respectfully suggest to the Minister that it would be better if these details could appear on the face of the Bill.
On the specifics of my Amendment 27, the amendment would add the payment of dividends as a notifiable event in certain circumstances. As I have mentioned, the Government intend to make the granting of security in preference to debts to a pension fund notifiable. Granting such security is simply committing to paying money out of the company that cannot then be used to fund the pension deficit, so I confess that I am rather at a loss to understand how this is materially different from paying an excessive dividend, which is the actual payment of money out of a sponsoring company that cannot then be used to pay down a fund deficit. Indeed, paying an excessive dividend is probably worse—once the money is gone, it is gone—yet it is intended that granting a security will be notifiable whereas paying an excessive dividend will not.
My Lords, I apologise for not being here at Second Reading or at the beginning on Monday. The first absence was because I was in hospital; on Monday, I was also speaking in the other debate and so I was hopping between the two.
I have two amendments down, of which Amendment 84 is the first. It is in no way against the sentiment of the noble Lord, Lord Vaux—I obviously did not know that his amendment was going down. Amendment 84 constitutes 50% of a Private Member’s Bill that I tabled at the beginning of this Session—it is a straight take from that. I declare my interest as the president of the British Airline Pilots Association.
My amendment aims to deal with the problem that a lot of trade unionists perceive and has been expressed already—the Philip Green, BHS and Carillion problem. People who have worked very hard and built up pension entitlements see employers favouring dividends to shareholders over looking after the pension scheme that they have agreed to run for the people working for the company. In what one might call a rather crude way, because I did not know where to draw the line, I thought that the simplest thing would be to say that all dividends should be passed by the regulator.
Of course, we then come up against the fact that a number of trustee boards are effectively controlled by the companies. I therefore also put in that the Pensions Regulator would have an independent role anyway, because it would have to approve the dividends. Even if the trustees said, “We think that this is a jolly good thing”, the regulator might then say, “Yes, we agree”, or “No, we do not”. The Pensions Regulator would have a second look at it.
I will be the first to admit that this is not the most skilfully drafted amendment to set the world on fire, but it was put down for the purposes of generating a debate about a problem that needs addressing. That problem is the one already mentioned, of BHS and Carillion; in other words, the problem of irresponsible companies dealing—as many of those working for them would see it—in improper ways with the pension schemes.
My Lords, I support the thinking behind both these amendments. I congratulate the noble Lords, Lord Vaux and Lord Balfe, on the excellent way in which they have been introduced. Both amendments allow timely discussion of what is a large, widespread and probably growing problem.
After the publication of TPR’s annual funding review in March 2019, the Investment & Pensions Europe magazine reported that TPR had
“vowed to engage with a number of schemes this year if recovery periods were considered to be ‘unacceptably long’, and warned trustee boards to expect communications in the coming months. … Consultancy firm Hymans Robertson estimated that one in five FTSE 350 companies with DB schemes were at risk of intervention from TPR.”
That is an alarmingly large number.
To understand what TPR means by “communications”, it helps to look at what TPR in its annual funding review states as the three key principles behind its expectations. The first is:
“Where dividends and other shareholder distributions exceed DRCs, we expect a strong funding target and recovery plans to be relatively short.”
The second is:
“If the employer is … weak”
or tending to weak,
“we expect DRCs to be larger than shareholder distributions unless the recovery plan is short and the funding target is strong.”
The third is:
“If the employer is weak and unable to support the scheme, we expect … shareholder distributions to have ceased.”
These are all fine principles—in principle. The real question is how, or whether, they are in fact working. How many FTSE 350 companies has TPR intervened on in the last 12 months, and on how many occasions has it advised against or prevented shareholder distributions? Perhaps the Minister could give us an assessment of TPR’s success in applying its three key principles.
Lord Flight (Con)
My Lords, I think we all understand the reason for these two amendments; whether one of these two or another amendment is to deal with the situation, it needs to be dealt with. I am slightly surprised that neither amendment would actually stop the payment of dividends. I think there is an argument that, where the finances obviously mean that a dividend cannot be afforded, the company should not be allowed to make a dividend payment. I am not sure that Amendment 27 or Amendment 84 addresses the issue as well as it might be addressed. The Government might have another look at what they want to achieve, which should be stopping payments of dividends where they cannot be afforded.
My Lords, I signed the amendment of the noble Lord, Lord Vaux, and agree entirely with the principle of both these amendments. I was particularly drawn to the notion of having a threshold and notification, as provided by the amendment of the noble Lord, Lord Vaux. He circulated it for comment and therefore I signed it after some negotiations with him.
Put simply, if the deficit is large and the effort to close it is too small—smaller than the dividend—the payment of the dividend becomes a notifiable event. The sequel to that would surely be what the noble Lord, Lord Flight, has just pointed out: that it be looked at and perhaps in certain cases, though not all if there are other things that could be taken into account, the dividend payment be stopped. The point is that it is brought to the regulator’s notice, rather than the regulator potentially having to look at an awful lot of dividends and payments being made. Indeed, how will the regulator even find out about them? The amendment of the noble Lord, Lord Vaux, solves that little loop of how the regulator gets to know about them and has a reasonable number to look at rather than being overwhelmed.
In our negotiations, we tried to find a formula to keep the momentum going to close the gap, even within the five years, as a lot can go wrong in that period. I got as far as something like “the ratio of the dividend to deficit not being greater than the reciprocal of the remaining years and not conveniently commutative”. I concluded that, if I carried on in that way, I would have to put in a job application to Dominic Cummings.
More seriously—I refer here to the helpful meeting I had with the Minister and officials yesterday—I want to see some specific push in the Bill for the regulator to be tougher, including in setting the contribution schedule for paying down the deficits. As has already been explained by other noble Lords, TPR has come forward with a set of principles, but maybe it needs something to back them up and get them over the line in enforcing them.
My Lords, I rise briefly—I have added my name to one of the amendments—to support the concept that has been so well explained already by noble Lords and to echo the warnings that this is a very important time in our defined benefit pension system, as we still have employers attached to schemes and, in some cases, members contributing. Some schemes are still not completely closed. Once a scheme has closed to new members, it will not be too long before it closes to new accruals and it will effectively be in run-off. While there are still employers with an interest in the scheme and before we get to the period, which will come in the next 10 years or so, when there is no economic interest between the employer and the scheme and it is seen merely as a major liability—with more and more companies looking for ways to get around the deficits—now is the time to be collecting as much money as possible.
Obviously, one does not want to damage the ongoing viability of the employer, but there needs to be more recognition of the fact that the pension scheme is a debtor of the company—not all companies see it in that way—and the choice between dividend payment and deficit funding should not be just between the interest of shareholders and the interest of pension scheme members. The pension deficit has people’s lives attached, so there is a higher importance here.
When one looks at the provisions of the Companies Act 2006, in particular with reference to Amendment 84, Section 830 says that a company should not be permitted to pay out a dividend if it has not made sufficient profit to cover its costs or if there are losses in the company. What is not explicit, but is made explicit in the amendment, which was originally part of my noble friend Lord Balfe’s Private Member’s Bill, is that the accounting measure of the pension deficit does not reflect the actuarial reality as estimated by a scheme actuary, or perhaps by trustees, of the true scale of the obligation—in other words, potential losses—that the company faces. Therefore, redefining the accounting measure and taking account of the actuarial measure would put the payment of dividend on a different plane. That is to be reflected in Section 830A, which would be added after Section 830, in terms of justification for payment of a dividend that might otherwise look viable.
My Lords, I look forward to hearing what my noble friend the Minister says about this and whether the sort of concerns that have been expressed are already dealt with somewhere else. A very good point has been made.
I want to ask a question on Amendment 27, in the name of the noble Lord, Lord Vaux. He talks about the value of the assets of the scheme, and my noble friend Lady Altmann made this point; there is a big difference between an actuarial valuation and an insurance valuation in a scheme. If you were to base this on an insurance valuation, you would catch quite a lot of pension schemes, including those which probably could pay some dividends. I was a little concerned about that, and I would like some clarification when we come to wind up on what is intended.
My Lords, I support the principle behind Amendment 27, in the name of the noble Lord, Lord Vaux, but equally I have sympathy with the comments of the noble Lord, Lord Flight. When it comes to dividends, the mischief may be done regarding money leaving the sponsoring employer’s company before the regulator can mobilise its full armoury of powers. This is particularly true where the dividends are paid to parent companies overseas, where pursuing a legal route by the regulator may be difficult, even more so if we leave the EU, because jurisdictions will change—except possibly foreign-owned UK banks, where in fact the PRA has the power to intrude pre-emptively on dividends going over to the parent company. To that extent, there is an element of precedent, and the PRA would take into account the debt in the pension fund in considering the sustainability issue when it strikes a view on dividends paid to the parent company.
I give credit to the proactive approach that the regulator is now taking to red flag where there is a kind of big ratio between dividends and deficit payment. However, that must be retrospective. The issue is capturing that mischief at the point when the money leaves the company; I am particularly concerned about where it is a foreign-owned company. Therefore, if some way could be found—perhaps by the regulator working with the department—to embrace dividends in some way in the notifiable events regime, that would be helpful. It is a problem, and once the money is gone, it is difficult to chase it, particularly when you have to go to jurisdictions where the power of TPR may not be strong.
My Lords, the Committee should thank the noble Lords, Lord Vaux and Lord Balfe, for having enabled this debate. One gets a high quality of debate on pension Bills; it is very well informed indeed.
We have been left with three questions. Is there a problem? Is it getting worse? And what are we going to do about it? I think there is a pretty much unanimous view around the Committee that we have a problem and that it is not going to disappear. As more DB schemes close, they will pay out more in pensioner payments, leaving them less to invest and reap returns, so they will start de-risking their remaining investments. This is the moment we have to address that.
We know that there is a problem. As my noble friend Lady Drake said at Second Reading, the Work and Pensions Select Committee report highlighted that half of FTSE 350 companies paid out 10 times more to shareholders than to their DB pension schemes. However, in some ways the key issue is the ratio, which was touched on by a couple of noble Lords. TPR certainly mentioned it in its annual funding statement, and it drilled down in its Tranche 14 Analysis for DB pension schemes, published last May. It looked at the FTSE 350 companies that sponsor DB schemes as the main or primary sponsoring employer and said that it found that
“The median ratio of dividends to DRCs”—
deficit repair contributions—
“has increased from 9.2:1 in 2012 to 14.2:1”,
in the latest figures available, so it has gone from nine to 14 between 2012 and last year. Clearly, this is going in the wrong direction. It noted:
“This is mainly driven by the significant increase in aggregate dividends over the period, without a similar increase in contributions.”
Therefore we have a problem. The regulator itself said in its last funding statement that it remains
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We all think there is a problem; the question is how we go about addressing it. The noble Lord, Lord Balfe, said that his was a strong way to attack it, and the noble Lord, Lord Vaux, has come up with the notifiable regime as a way to do it. Whatever the Government are going to do, they need to do something about this.
Perhaps I could highlight some areas where action is needed, where dividends are high relative to deficit payments in DB schemes. There are particular circumstances: for example, where there is a real risk that money in dividends is an effective form of employer debt avoidance; where it downgrades the status of the pension scheme as a creditor to which the employer owes money; or where it raises the risk that the dividend payments are at a level that they could materially threaten the strength of the employer, which will in turn risk the strength of the scheme. We know that this is a problem because the regulator has had to deal with real, high-profile cases.
The questions for the Minister are: does she accept that there is a problem, and does she agree with the regulator that it is getting worse? If the answer to both those questions is yes, what is she going to do about it? Does she like the way forward proposed by the noble Lord, Lord Balfe, or does it feel too intrusive? Would she prefer that of the noble Lord, Lord Vaux, or does she think that would not work? That leaves her with only two possibilities. One is that she thinks that the powers the regulator has now, or will have soon, are enough. In which case, can she tell us how that will solve the problems described here? The other is that she has another way of dealing with it, which we do not yet know about. Which of those is it?
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There are plenty of examples from the past where companies with large pension deficits failed after paying out excessive amounts to shareholders—Carillion and BHS being just the latest high-profile examples. This is not a theoretical risk; it has happened in the past and will likely happen again, unless we do something about it. We will all be open to criticism if we miss this opportunity to take action to prevent such looting in the future.
The Government argue that stopping a company from paying dividends might damage the company and therefore damage the pension scheme, and I agree. Preventing the payment of reasonable dividends could increase the cost of capital, make raising future finance more difficult and even destabilise the company, all of which would increase the pension fund risk. For most well-run companies with a clear deficit reduction plan, a reasonable dividend will do no material harm, and we should note that most dividends end up in pension funds anyway.
For this reason, while I fully support the intentions behind Amendment 84 in the name of the noble Lord, Lord Balfe, I think that we probably need to find a more balanced way to deal with the very real risk of excessive dividends. This is especially the case in the light of the increased penalties in the Bill. If trustees are asked to approve every dividend, they may simply decide that it is not worth their personal risk to approve any dividend.
As things stand at present, the regulator will not know about excessive dividends until after they have been paid, and even then the onus is on the regulator to spot them. Once paid, it is too late: money is gone and damage is done. It must therefore make sense for the regulator to be notified of excessive dividends in advance, when there is still the opportunity to do something about them.
Amendment 27 attempts to find a balance: it will not prevent normal, reasonable dividends that add no material risk to a pension scheme. It makes dividends notifiable in advance to the regulator, along with an explanation of how any risk would be mitigated, in certain limited circumstances. In defining those, I have tried to apply the concept that the regulator stated in its Annual Funding Statement March 2019, in which it raised concern about excessive dividends:
“Where dividends and other shareholder distributions exceed DRCs”—
deficit reduction contributions—
“we expect a strong funding target and recovery plans to be relatively short”.
Amendment 27 attempts to encapsulate that into the Bill. Dividends will be notifiable in advance if they do not meet the expectation stated by the regulator, if the fund is in deficit, if the dividend is greater than the deficit reduction contribution, and if the deficit repair period is more than five years. Other dividends would not need to be notified. As well as reducing the risk of excessive dividends, this might also have the additional benign effect of encouraging companies that want to pay larger dividends to reduce their deficits to avoid having to make notifications.
I am very open to discussion around alternative approaches to find the right balance. For example, one could potentially add other shareholder distributions, as opposed to just dividends, and the question of whether deficit repair period of five years is right is moot. But I believe strongly that we must take this opportunity to prevent future looting by shareholders of companies with pension scheme deficits. I hope that noble Lords and the Minister will agree that Amendment 27 represents a reasonable balance between, on the one hand, restricting a company’s ability to carry on normal business activities such as paying reasonable dividends and, on the other, reducing the possibility of another Carillion or BHS occurring. I hope that the Minister is able to consider it seriously. I beg to move.
There is a bit of danger that people—not in this Room, I am sure, but in society—will say, “Oh, the pension scheme doesn’t matter”. The pension scheme is the forgone wages of the workers; it is not something ethereal or charitable, or an extra on top. This is money that the company has agreed to pay to workers in return for the number of years that they work. It is their money, and companies should not be allowed to behave recklessly with it. That is what is behind this amendment.
As such, I commend it for noble Lords’ consideration, although I would be extremely surprised if the Minister were to get up and say, “Oh yes, that’s what we want”, and accepts it all.
Both amendments in this group offer a simpler and different approach to restrictions on shareholder distributions, but in contrasting strengths. Both have the merit, it seems to me, of making responsible behaviour by employers more likely, and that is no small thing if there are 70 FTSE 350 companies out there needing effective intervention to protect employees’ pension rights. I look forward to the Minister’s response.
In the meeting yesterday, it was pointed out that more powers are being given to the regulator in the Bill and that regulations will be forthcoming. That is well and good, but something has to make sure that the regulator is urged to use those powers and to be strong, especially in standing up to larger and more forceful companies and individuals. We know that the record there is not necessarily all that good. The policy impetus needs to come from government and Parliament; otherwise, there may be more power but no enforced policy shift.
We also know that boards will take advice on these kinds of matters and be told what the market norms are, or at least what other companies have done. If the dial is to be shifted, the advice has to be shifted. The way to ensure that advice is shifted is for there to be an indication of the policy in the Bill, because an adviser cannot go against that in their duty to advise the companies.
It was very good to hear that the new offences that we discussed on Monday—which seems a long time ago now—are wide enough to embrace advisers, but you have to get at what their duty is to those they are advising. There are lots of reasons to have something in the Bill to make sure that the principles already outlined by TPR have that backing to be enforced and have that effect. As I said on Monday, it should not be normal to accept overly long continuation of deficits just because a company is well capitalised.
There can be many claims on and reasons for that extra capitalisation—there may be lots of tentative reasons why they need it. There might be plans to spend it to buy another company. All kinds of things could be going on, and what looks like a good capital margin could actually be shoring up many other things as well as the pension deficit. What is the excuse to the Pensions Regulator? What excuse might be given to other sources? Some of the clever analysts may work out what is going on; the ordinary investor and the ordinary pensioner is unlikely to do so. Therefore, I support the principle of both the amendments: something should go in the Bill to push or shore up the Pensions Regulator in its actions.
“concerned about the disparity between dividend growth and stable DRCs”,
and it highlighted recent corporate failures. If the regulator is concerned, then the Minister should be concerned.
The Minister’s argument may be that the regulator already runs an internal control system, where it flags high dividend payments. A number of noble Lords, however, made the point that it is retrospective and that, depending on the valuation, it may not pick up all the areas where there is a problem. Noble Lords also cited TPR’s funding statement, which set out the key principles behind its expectations about what should happen when an employer is weak, the ratio is high, or the employer cannot support the scheme.
Can the Minister assure us that there are not more cases coming in with high ratios and long recovery plans? The TPR says it is going to stop that. Is it not a problem anymore, or is there a target for when it will not be? TPR could refuse to agree a funding strategy for a scheme in various ways but, as my noble friend Lady Drake pointed out so clearly, that is, first, retrospective; secondly, what happens if the money goes overseas? I would be grateful if the Minister could pick that up.