My Lords, I am grateful to the noble Lord, Lord Vaux, for tabling these amendments to Clause 109, which brings us back to an issue that we debated at some length in Grand Committee. It would be helpful to consider these amendments together, as they seek to make the declaration of a dividend or share buyback the subject of a notice and accompanying statement to the Pensions Regulator and trustees of the pension scheme. In the case of a share buyback, this notification would be required where the value of the assets of the scheme was less than the amount of the liabilities. In the case of a dividend, notification would be required if the amount of the dividend exceeded the annual deficit repair contribution and the amount of the annual deficit repair contribution was less than a percentage of the scheme’s deficit. That percentage would be specified by the Pensions Regulator.
I understand where the noble Lord is coming from, but I will address his concern with an explanation of Clause 109. The purpose of the clause is to make sure that the Pensions Regulator and trustees of a defined benefit pension scheme have prior knowledge about corporate transactions or events of which they would otherwise have been unaware and that pose a risk to the scheme and ultimately the Pension Protection Fund. The clause would also ensure that the trustees work with employers to mitigate the effect of such risks.
The Pensions Regulator and the trustees of the pension scheme are able to access information about dividends and share buybacks already. There are well-established processes whereby the regulator is able to
get the information that it needs on dividends and similar payments as it assesses covenant strength and the ability of the employer to make contributions to deal with any deficit. Adding additional notifications of the kind that the noble Lord is suggesting is unlikely to be of any help. What it would certainly do is put an unnecessary burden on both employers and the regulator.
The regulator simply would not have the resources to deal with these additional notifications. That is not a trivial point: let us remember that it is a risk-based regulator and must focus its resources where it can do most good. We think that this focus is best directed at ensuring that recovery plans are robust. That is the best way to ensure that schemes are treated fairly. It is the strength of the recovery plan that is key here. Of course there will be occasions when dividends are paid without the regulator’s knowledge, but even if the regulator had been able to prevent that from happening, that would not help the scheme. That is because there is no requirement for the sponsoring employer to pay anything into any scheme deficit other than what is set out in the recovery plan.
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That is why we think a robust recovery plan is the key to ensuring that the scheme is treated fairly. Furthermore, where the pension scheme is detrimentally affected, the regulator could engage its anti-avoidance power. There is little evidence that companies not being able to pay their deficit repair contributions as a result of dividends or share buybacks is a systemic issue. Where this does happen, it impacts a whole range of creditors and not just the pension scheme; it happens rarely because there are already legal safeguards concerning the payment of dividends and share buybacks. What is more common is that seemingly excessive dividends are paid, and the scheme is treated unfairly, because the recovery plan is not tough enough. That is where we think the regulator’s efforts need to be concentrated—and we are taking action in two ways to ensure that that can happen.
Measures in Clause 123 and in Schedule 10 to the Bill will strengthen existing provisions by providing for clearer funding standards, including powers to define more clearly in secondary legislation what is an appropriate recovery plan for scheme funding deficits. Additionally, the regulator’s revised funding code will set clear expectations on what is an acceptable recovery plan and will include guidelines on recovery plan length and structure. The secondary legislation will be informed by the regulator’s consultation on the revised code and will support the regulator in enforcing these standards. Provided that the sponsor has an appropriate recovery plan—by which I mean a plan that balances the need for sustainable growth with the need to return the scheme to full funding in a reasonable period—it is right that how it chooses to deploy the remaining resources is a matter of business priorities.
Where an employer is unable to support its pension scheme, the Pensions Regulator has made it clear in the guidance it issues for employers and trustees that dividends should not be paid, and it will take action to ensure that sponsoring employers treat their schemes fairly. We are, however, aware that excessive dividends
can, in some circumstances, cause significant detriment to the scheme; particularly in these economically uncertain times, this is something we need to keep closely in touch with. I can therefore give a further clear undertaking that the Government will be keeping the situation under review in consultation with the Pensions Regulator. If evidence emerges that it would be helpful for the regulator to be notified of the payment of dividends or share buy-backs in certain circumstances, we will consider doing that through secondary legislation.
However, for all the reasons that I have given, the face of this Bill is certainly not the way to try to do that. I hope your Lordships will recognise that the measures elsewhere in this Bill, taken together, are a far better way to tackle the problem of employers who do not direct an appropriate proportion of available resources to managing the pension scheme deficit. With that plea, and in the light of all that I have explained, I urge the noble Lord to withdraw his amendment.