My Lords, I am grateful to the noble Lord, Lord Vaux, for moving these two important amendments. I have added my name to Amendment 50, which requires share buybacks to be notified to the regulator if a company is responsible for a pension scheme in deficit.
The case for accepting this amendment seems quite overwhelming. The noble Lord has been extremely reasonable in only requiring notification of a buyback. Equity buybacks are sometimes used by companies to distribute to shareholders what is considered surplus cash where management believes that it has no better use for that money. That suggests that sometimes, management believes that the current share price is undervalued. Of course, the buyback improves reported earnings per share and flatters financial statements, but these measures are sometimes used as a yardstick to determine top executives’ pay or bonuses. Many receive a large element of their compensation in the form of stock options, and a buyback can offset the dilution of existing share values and any potential reduction in earnings per share that might otherwise come from their options. Therefore, buybacks could be considered a ploy to boost reported earnings per share or share price levels.
It should be remembered that although the buyback may increase earnings per share, it does not increase the fundamental value of the company. Even more worrying, sometimes, companies engage in buybacks funded by increased borrowing. One of the reasons given for taking on the increased debt to fund such a buyback is that it is more efficient, because the interest on the debt is tax-deductible, unlike with dividends. However, clearly, this will reduce the financial resilience of the company when the debt must be repaid or the gearing level rises, leaving less money available to fill a pension deficit.
A company’s financial difficulty results from lack of cash, not lack of profits, and for a company which sponsors a defined benefit pension scheme with a deficit, the buyback would allow shareholders to enjoy rewards at the expense of pensioners. Ultimately, if the cash has gone into buying shares, it is no longer available to fill the deficit. The buyback itself cannot be argued to generate future growth, because a company’s investing its cash in the business would be a reason to suggest that it will be better off as a result of that decision. However, where spare cash is simply given to shareholders to boost share prices and potentially boost management remuneration, this requires some oversight by the regulator.
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Therefore, Amendment 50 is even more relevant in the current global coronavirus crisis. If the company is spending cash on buying its own shares and reducing the cash for other investments or emergencies such as today’s, it is clear that less resource will be available and the pension scheme will be weakened. I must admit that, in my view, a buyback is rarely a wise strategic move, but in the context of the Bill, I believe that if there is spare cash, the Pensions Regulator and trustees should seriously question why it would be correct to approve this payout rather than use it to fill a hole in the pension scheme. The suggestion from the noble Lord, Lord Vaux, that this should be at least notified to the regulator and that it should have a chance to investigate the situation is almost unarguable. I would very much welcome my noble friend’s comments on how the Government might justify not putting this in the Bill.
On Amendment 51, which I support but have not added my name to, it is again clear that there are reasons why the regulator may have concerns. The case is not quite as strong as with buybacks, since it could be argued that an ongoing dividend stream might be vital to ensure that a company is still an eligible investment for certain important types of institutional investor—income funds, for example—and that the ongoing strength of the company could be negatively impacted by failing to pay a dividend. However, as I have explained with the case of buybacks, no such rationale can seemingly be advanced.
I hope that my noble friend will feel able to reassure the House or even perhaps accept Amendment 50, if not now then perhaps at Third Reading. I congratulate the noble Lord, Lord Vaux, on tabling these amendments. I look forward to the Minister’s response.