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Pensions Bill
Consideration of amendments on Report resumed on Clause 44.
Baroness Noakes moved Amendment No. 65:
The noble Baroness said: My Lords, my noble friend Lord Higgins thinks that I have not been doing enough during this Report stage, so I have been put in the lead on this group of amendments. In moving the amendment, I shall also speak to Amendment No. 71. They replace the concept of "net assets" in the test of being insufficiently resourced.
First, I apologise to the Minister for not writing to her on the points which arose during Grand Committee debates. When I reviewed the Hansard report of our discussion I did not feel that there was much that I could add and I was pleased to note that the Government had included the matter of "net assets" in their summer consultation.
I believe that Clause 44 tries to measure whether an employer is "good for" a percentage of the Section 75 debt. I was particularly concerned in Grand Committee by the Minister's explanation that net
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assets would be based on Section 264(2) of the Companies Act 1985. That means that, via other sections, the definition of net assets is tied to the accounting provisions of Schedule 4 to the Companies Act 1985.
Schedule 4 basically values assets using the historical cost convention unless a company opts to use the alternative valuation bases. The net effect of those rules is that net assets as shown in a company's accounts ought not to be overstated by reference to their values in use on a going concern basis, but they could easily be under-stated on that basis. As I am sure that noble Lords are aware, the accounts give no guide to the market values of the assets on a break-up basis.
There are a number of problems with using accounting net assets. First, company A and company B might have identical assets; company A might use the historical cost convention and company B might use the alternative valuation basis. For example, company B might have revalued its property assets.
Secondly, listed companies now have to convert to international financial reporting standards, which are different in some important respects from existing UK generally accepted accounting principles. So there could be a difference in the accounts values, simply because listed company A is using a different accounting code from that used by unlisted company B. So, using "net assets" can give odd results between different companies.
But my main point is that using accounting net assets is the wrong test. There are companies which have few net assets on their balance sheets but which generate significant profits. Retail operations which operate from leased premises and which have their stock financed by creditors and carry few debtors are one example.
At the other extreme we could have a company with long-term assets on the balance sheet—for example, a mine—but with low profits and cash flow because the market for its output is depressed. Which would be the better bet for a pension obligation, the net asset-poor/profit-rich retail operation or the asset-rich profit-poor coal mine? Using net assets as shown in the accounts simply leads in the wrong direction.
The important point is to establish whether the employer has resources available to meet his pension obligations. That, in turn, depends on whether a business is generating or can generate sufficient cash. The value of a business should really be the net present value of the cash flows of the business less any liabilities. What we are valuing is not the net assets, but the business itself. That is why we need to move away from the concept of net assets and aim at a valuation of the whole business. My amendments use the term "resources". There may be a better term or phrase than that, but I suggest that it is not "net assets".
I conclude by giving another example of why "net assets" gives the wrong answer. I shall use two supermarkets—supermarket S and supermarket T. Let us assume that they operate from similar retail premises, which are leased, so they have little balance-sheet value
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in the historical cost accounts. The profitability of supermarket T is superior to that of supermarket S because of its purchasing skills, its merchandising know-how, and its general business management skills. In fact, it is because supermarket T has better people running the business but, of course, there is no value for them on the balance sheet because they are not a net asset.
If one goes down the net asset route under Clause 44, one could end up valuing supermarkets S and T at the same value, which simply would not be sensible. I accept that the definition of net assets is to be prescribed, but my main point is that the detail should not be based on net assets, but should start from a different position—namely, the value of the business. I hope that the Government will reconsider this. I beg to move.
Lord Higgins: My Lords, it is not always the case that economists and accountants agree on issues of the kind to which my noble friend has referred. On this occasion, I believe that is the case. Valuation is a complex process and my noble friend is extremely expert in that area. I believe that it is appropriate to take heed of what she has said and find a more sensible definition than that which appears in the Bill. I make no comment at all about her example of supermarkets S and T, as I am sure her selection was purely a matter of probability.
Lord Lea of Crondall: My Lords, perhaps I can make a comment while wearing my economist hat. This is fascinating, but I do not know whether noble Lords can throw light on how this would work. I do not know where exactly this form is used. It raises some interesting questions. If the Government had tabled the matter like this, I believe that there would have been much criticism about how workable it would be.
Lord Oakeshott of Seagrove Bay: My Lords, we on these Benches support the spirit of the amendments of the noble Baroness, as we did in Committee. She made rather heavy weather of the supermarket analogy. I can think of a much simpler example of an enterprise that makes enormous profits with virtually no fixed assets: leading firms of chartered accountants, as she is only too well aware. I feel that in the spirit of this, some ability to pay should come into the equation; it is not purely a matter of assets that may not be realisable.
Lord Lucas: My Lords, I support my noble friend. In the amendment I did not move, I obliquely raised a couple of other questions, which I should like to put to the Government. First, one difficulty of starting to raid company assets like this is that you may endanger its pension funds because a pension fund has no specific handle on its employer for its Section 75 debt. But perhaps some other company in the group gets there first and collars the assets, leaving the company's own pensioners to swing in the wind. I think that that would be unfortunate.
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Secondly, coming back to the question I raised earlier, how does a company establish this Section 75 debt value? What is the official approved method of establishing a value which the regulator will believe?
Baroness Hollis of Heigham: My Lords, it is clear that the noble Baroness, Lady Noakes, has persuaded the noble Lords, Lord Higgins and Lord Oakeshott. Actually she has also persuaded me, which means that although I cannot for technical reasons accept the amendment, as drafted, I expect to return to the issue at Third Reading with an amendment. So I hope that the noble Baroness is content.
We shall continue to discuss with those involved in the moral hazard consultation how this should be defined and to see whether we need to go any further on it, but I think that the noble Baroness is probably right. In that case, I hope that she will withdraw her amendment. Almost certainly we shall return to the issue at Third Reading.
Baroness Noakes: My Lords, "probably right" is indeed great praise from the noble Baroness. The noble Lord, Lord Lea, asked whether people actually did this valuation: they do. When I learned accounting many years ago they did not, but now they do. Nowadays there are some normal rules which are used by everyday accountants to value whole businesses as part of the routine of accounting. So there is a body of experience to do it, and it is not very arcane. I am delighted with what the Minister has said. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Baroness Hollis of Heigham moved Amendment No. 66:
On Question, amendment agreed to.
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