Contribution
My Lords, I thank my noble friend Lord Sikka for introducing Amendment 45A. For clarity, I will speak to the amendment as if intended to address the power to pay surplus under Section 37, as Section 36B contains the modification power.
I fully recognise the concern that members’ benefits must remain protected when surplus is paid and that trustees take a long-term view of scheme funding and employer covenant. This is why there are strong safeguards, which I have described, as set out in Clause 10. Before the release of any surplus, trustees will need to make sure that the scheme is prudently funded and seek advice and sign-off from the scheme actuary, and other advisors, about the viability of any release and the impact that may have on the long-term health of the scheme.
While trustees perform an essential role in safeguarding members’ benefits, prioritising them above all other creditors in these circumstances risks distorting the already established insolvency regime. It creates uncertainty for businesses, ultimately harming the very members we all seek to protect.
On the points made by the noble Baroness, Lady Noakes, it is our concern that placing trustees ahead of other unsecured creditors could create significant uncertainty, increased borrowing costs and restricted access in future to finance, especially for smaller businesses. In the long term, this could potentially weaken employer support for pension schemes and threaten their sustainability, rather than strengthen it.
It is important to recognise that the current system already provides significant security for pension scheme members. Pension funds in UK occupational schemes are held in trust and are legally ring-fenced from the employer, so they cannot be accessed by creditors in an insolvency. The PPF exists precisely to offer a safety net to members who would otherwise risk losing their pensions when their employer fails.
Following the Chancellor’s announcement at the Budget, this Bill will also introduce annual increases on compensation payments from the PPF and FAS on pensions built up before 6 April 1997.
The insolvency regime is designed to operate alongside the compensation system. The structure of the pension protection levy already reflects the risk of employer failure and spreads that risk fairly across eligible schemes. The PPF assumes the creditor rights of the pension scheme trustees in the event of insolvency of the sponsoring employer and seeks to maximise recoveries from the insolvent employer’s estate.
Pension schemes, backed by a strengthened PPF, are already in a stronger position than many unsecured creditors. Giving trustees priority would leave small suppliers, contractors and even some employees with significantly reduced recoveries, despite having far fewer protections. We should not create a system where small businesses and individual workers bear disproportionate losses because a pension scheme deficit overrides all other obligations. There is also the risk of moral hazard, where trustees could be less prudent when deciding to release surplus, knowing that, under employer insolvency, they would have guaranteed priority above other priorities.
The amendment could affect the employer’s business plans as creditors may be less likely to lend money to the employer. Equally, banks may place conditions on borrowing to prevent surplus release if trustees were given priority. That dynamic could push companies towards insolvency earlier, not later, having a knock-on effect on members.
The only other thing I will add is that there are other tools open to trustees that are concerned about the strength of the employer covenant and the security of benefits. It is open to trustees during funding discussions or other negotiations to seek a fixed or floating charge over the employer’s assets, which would, in effect, elevate the scheme’s position in the insolvency priority order, providing additional protection should the employer become insolvent.
I want to be clear that trustees will have the final decision on whether to release the surplus. Before they can do so, the Bill stipulates statutory safeguards before a surplus can be released. I thank the noble Lord for his concern but for the reasons I have outlined, I ask that he withdraw his amendment.