The Deputy Chairman of Committees (Lord Haskel) (Lab)
My Lords, if there is a Division in the Chamber, the Committee will adjourn and we will resume after 10 minutes.
I must draw the attention of your Lordships to the groupings list. The first amendment should be Amendment 52R, not Amendment 53R.
Baroness Neville-Rolfe
“UK Green Investment Bank
Omit Part 1 of the Enterprise and Regulatory Reform Act 2013 (UK Green Investment Bank).”
The Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills and Department for Culture, Media and Sport (Baroness Neville-Rolfe) (Con)
My Lords, this is the Government’s only amendment tabled for Committee. It has the effect of repealing Part 1 of the Enterprise and Regulatory Reform Act, which is the legislation controlling the Green Investment Bank. I apologise that this matter has had to be introduced by amendment and that we were not therefore able to debate this issue at Second Reading. Its inclusion in this Bill at this stage is as a result of late developments during our work to introduce private capital into the Green Investment Bank, which we announced in June.
I will explain a bit of the background and set out the rationale behind the amendment. The Green Investment Bank was, I believe, a real success of the last Government. I am sure that the noble Lord, Lord Stoneham, will agree with me on that. Indeed, I hope that all noble Lords will agree.
The Green Investment Bank was set up, in 2012, to mobilise private sector investment in the green economy. It is doing its job remarkably well. So far it has committed £2 billion to 55 green projects and seven funds, alongside £6 billion of additional private investment. So for every £1 that the GIB invests, it is mobilising an additional £3 from the private sector, and it is doing it all on fully commercial terms, showing that green investment can be profitable. It is helping to bring new investment from long-term institutional investors, such as pension funds, into green projects. For example, last month it announced that an additional £355 million was being committed to its offshore wind subsidiary fund, bringing the total in the fund to £818 million. That is all private sector money, albeit managed by the public GIB.
No doubt your Lordships will ask why the Government want to change something which is already so successful. The simple answer is that government ownership is holding back the GIB’s ambition. All the while it is owned by government, it is limited in what it can do. It is limited in the amount of funding it can access, because it must compete for its funding alongside schools and hospitals, and it may not borrow freely on the capital markets while on the Government’s balance sheet. It is limited in the range of sectors in which it can operate as it is constrained by state aid rules. Moreover, it is limited to operating within the UK all the while it is funded with taxpayers’ money. It is currently undertaking a pilot with the Department of Energy and Climate Change to do some international work, but we believe that it could do more. The GIB has been going from strength to strength, and because of this, its ambitions are beginning to outstrip the supply of capital that the Government can and should provide. Our policy aim is to get the market to work in tackling green policy challenges. Bringing private capital directly into the GIB is the natural next step for the company rather than leaving it to rely on public funds.
The repeal proposed in the amendment is not something that the Government have decided upon lightly, but it has now become apparent that it is a necessary step if we are to move the GIB into private ownership. If the GIB is to enjoy the benefits of private ownership, including having the freedom to borrow and raise capital, it must be declassified from the public sector. If it remains in the public sector, it could not raise equity or debt without impacting public sector net debt. The decision on whether an organisation is classified to the public or private sector is made by the Office for National Statistics on the basis of EU-wide rules. In making its decision, the ONS will look at a number of factors, including any relevant legislation, to determine whether the Government have control over the organisation, so control is the key point. The legislation in the Enterprise and Regulatory Reform Act 2013 is highly likely to constitute government control over the GIB, even if the bank is no longer owned by the Government.
The Government understand that people will be concerned about how the Green Investment Bank will continue its green focus without the statutory lock controlling it. I will not pre-empt those questions as I would like to hear what your Lordships have to say, but I will say now that the Government want and expect the GIB to maintain its clear focus on the green economy, and we are confident that it will do so. Indeed, that is precisely the reason why investors will be buying it.
I will bring my remarks to a close by saying that the GIB’s management and its independent board is fully supportive of the Government’s intention to bring in private capital and understand the need for this repeal. This includes the noble Lord, Lord Smith of Kelvin, who is the chair of the GIB, located of course in Scotland. I hope that your Lordships will be able to support this amendment. I beg to move.
Amendment 53ZA (to Amendment 53)
Lord Stoneham of Droxford
“(“ 1) Subject to subsection (2), ”
Lord Stoneham of Droxford (LD)
My Lords, our first concern is that this is a blunt instrument to amend the previous legislation. In fact, it brings to my mind the son of Stalin taking up residence in BIS to obliterate all evidence of this institution, so I am grateful to the Minister for saying that the Green Investment Bank has been a great success and was one of the achievements of the last Government. From our side and for the record, we are not going to see it written off, eliminated or wiped clean. There is too much at stake and quite a significant government investment has been made into it.
Let me express our concerns. This is a long-term investment institution. The projects take two to three years to build and begin to earn any operational return, at which point they start to provide a long-term profit stream. We hope that the Government will be trying to take a long-term view and not resort to the short-term thinking which is too common in the City and in the market. It has been very successful. We have already seen £2 billion loaned, matched by £6 billion of private funds, and it is beginning to look as though the bank is a successful operation. But nobody will invest at a premium when we have had less than a year of profit. If the Government are to get their return and the bank is to be put into safe hands, our view is that they should not rush into this. The bank cannot really realise its potential until it has been in operation for at least five years. Having said that, we also recognise that the Government are not really fully committed to it. I suspect that one of the reasons that the executives have been supportive of this proposal is that they have been told that there is no further government funding, so if they do not go down this route they will hit a dead end.
Our final concern is that anybody with the slightest experience of setting up an organisation like this, which has been in place for only three years, will know that it is at its most critical stage when it is trying to approve projects with profitable streams and manage projects that it has already set about investing in. We are now going to have a huge distraction for the executive team over the next six months, as to how it is going to be sold and who is going to buy it. This is another case of where the Government should be setting an example and seeing something through, just as we should be telling the Stock Exchange that it should see more companies through in long-term decision-making and investment, rather than simply trying to get a quick return.
Those are some of our longer-term concerns. Turning to the future, I hope that the Government will confirm that they are going to freeze future funds so that there is no alternative to what they are doing, which is to privatise this organisation. In those situations, we are more understanding: if the Government have limited interest in the green economy then it is better for the bank to go it alone.
There are three objectives in the amendments that we have put forward. We do not think it is good enough simply to amend past legislation without saying what will be in its place, and what restraints on investment there will be in the Green Investment Bank. This organisation has had a central role in promoting green technology, innovation and supply-chain development. How do the Government intend to protect its purposes? The bank has shown that it is sustainable and has long-term objectives. How are we going to make sure that it does not lose its green focus? We do not want it to be like a different organisation, 3i, which was set up by the banks a long time ago. 3i was set up to support businesses but became yet another sort of investment bank. In my view, it lost some of its focus. Are we going to allow that to happen to the Green Investment Bank? We certainly should not when it is there with a specific purpose, set down in the original legislation. We want that protected somehow but it will not be easy.
Inevitably, whoever takes control of the Green Investment Bank—unless there is some controlling shareholding—will find it quite easy to change the articles and objectives. We want to ensure some ongoing green focus which continues the purpose of this organisation, and we have to ensure that the Government get the best return from their investment. There have been some pretty poor examples of this in the past, even in the recent past, and there has been criticism. If necessary, we want the Government to have an ongoing stake in this organisation so that they can get the return and exert some control over an organisation that is only three years old.
We accept that this bank has had real success. It has mobilised investment, shown that green investment can be profitable and set down a marker that we want to see it continuing. We therefore think that before the Government invoke the obliteration of the previous legislation they must set out exactly what they will do, what controls they will insist on and how they will maintain the success of the investment that the Government have already put into this and should see coming forward in future.
Lord Teverson (LD)
I shall also speak to our amendments and to the government amendment. I thank the Minister for having gone through the Government’s motivation here in some detail. I am not completely against privatisation; I understand why the Government might want to do it. However, I think it is a great shame because it is too early and, as my noble friend Lord Stoneham has mentioned, the taxpayer will not get full value if we do this at the moment.
I am afraid that our own amendment is very imperfect. In a way, it is a probing amendment. I had rather hoped that the Government’s amendment was also probing because it is about something that is far too fundamental to bring to a Grand Committee, where we cannot vote on the subject or the amendment. There is a real problem there about scrutiny.
As my noble friend said, the Green Investment Bank has been a huge success. I went along to its third annual general meeting when the Secretary of State announced the Government’s intentions, and heard about the great things that the bank is doing. Indeed, the Conservative Party should take great credit for it; the bank was in its 2010 manifesto, which said:
“We will create Britain’s first Green Investment Bank, which will draw together money currently divided across existing government initiatives, leverage private sector capital to finance new green technology start-ups”.
That was a great vision, which was taken on in the coalition agreement after the Wigley commission, which was set up by the Conservative Party. It was in our manifesto and possibly in the Labour one as well. Anyway, there was consensus that it would be an excellent institution, as it has turned out to be. I have talked to the chief executive, Shaun Kingsbury, on a couple of occasions, one of them fairly recently, and the first thing I did was to congratulate him and his team on everything that they had achieved.
However, the fundamental problem here, even if we accept that privatisation is going to have to happen—that is not all bad, even if it is slightly early—is that we have no idea how slowly or fast there will be mission creep, in terms of the way that the objectives or the memorandum and articles of association of the company might change in future. The government amendment takes away all restraint in terms of legislative boundaries and replaces them with nothing. I deal with companies, most of which are private limited companies as opposed to public limited companies, but it is my understanding that any constitution of a company can be changed, certainly by resolution of 75% of the shareholders. Nothing can be done about that. So I am very concerned that we are taking out the five principles within the previous Act that laid down very precisely what should happen, and which indeed have been the basis of the success of this organisation, its vision and motivation. The question is: how do we keep those principles and that direction for the long term?
I was particularly interested in my noble friend’s example of 3i. I have some experience of 3i, as someone else who was in that field for a while. It was set up under the Bank of England soon after the war as the Industrial and Commercial Finance Corporation, mainly with private bank money but very much under the purview of the Board of Trade. In 1983, it was let loose into the market to carry on its work. Originally, it was established to deal with SMEs but its current website features very large mid-cap companies. Its investors will probably not get out of bed for a deal worth less than £50 million to £100 million. It closed all its regional offices as time went on and has a very strong international portfolio. In fact, it rightly brags that it has teams in some nine or 13 countries across the globe, yet it was set up to stimulate SMEs within the United Kingdom. Many years later, this is where it has got to.
I also question whether it is necessary to take this section out. I have talked to staff at the Office for National Statistics and looked at the websites and at the European System of Accounts—ESA 2010, as I am sure the Minister has. If she has, she probably fell asleep after the second paragraph, as I almost did. One of the things that came over to me from looking at ESA 2010 was its impreciseness and the degree of interpretation that was possible. When I looked at the Postal Services Act 2011, which privatised Royal Mail, strangely enough I found articles of special legislation that restrain what the Royal Mail can and cannot do. Section 29 of that Act is headed “Duty to secure provision of universal postal service”. Section 30 talks about the details of the “universal postal service” provision and Section 31 even talks about detailed minimum requirements of that provision. It seems to me that Act deals with exactly the same thing, in that a constraint could be imposed by a regulator in that instance but a constraint could be imposed in this instance by one of the many successors to the Financial Services Authority, which is now the FCA. I am sure that provision could be transposed into this legislation.
This boils down to two things. First, for this to move ahead we have to have an anchor to make sure that this organisation stays within the role it is meant to fulfil. I completely agree with my noble friend that we need value for taxpayers’ money, although that may be difficult to achieve given the speed at which the Government are proceeding. Secondly, as shown by the Royal Mail privatisation, which is no longer a public body and does not appear on the public accounts, there is no certainty at all that the provision I am discussing is not needed. I ask the Minister to provide us with the advice that she and the department have received from the Office for National Statistics so that we can assess it for certainties, uncertainties or probabilities. I understand entirely why this has happened but I reiterate that it is unfortunate that such an important government amendment has been brought forward in Grand Committee, when we cannot vote on it. That is a fundamental problem and we need to consider how we move it forward in this Committee.
Lord Cope of Berkeley (Con)
My Lords, I disagree with the last point the noble Lord made. If the Government wish to propose an amendment of this kind, the Committee stage is exactly the right place to do it. That is where it can be discussed in detail and at length. If it were not introduced until Report, I think that people would complain about that and about the more restricted nature of the debate that would take place. Therefore, I do not think that my noble friend the Minister should apologise for introducing it in Committee. On the contrary, she should be congratulated on that.
Lord Mendelsohn (Lab)
My Lords, I declare an interest in that I have a corporate finance business. We have not commercially done any work in this sector, although we informally provided some advice on this area.
I welcome the discussion and the introduction of this amendment. I will preface my comments by saying that we on this side take a very questioning view of these provisions in Grand Committee, and we are more than happy to adapt our view to explanations that are forthcoming. We may take a different view on Report, but we have far more questions now than we are comfortable with as regards this provision. I thought that the contribution of the noble Lord, Lord Stoneham, was very good, and I share a lot of the reservations that the noble Lord, Lord Teverson, just expressed.
I will give a sense of where we are coming from on this. Our overall concern at this stage is that this is all tactics and no strategy. Our query is whether there is a strategy, but this tactic does not tell us what it is. Our concern is that as a tactic in and of itself it is probably incorrect. We understand the Government’s stated objectives, which are that they want to grow the business and make it possible to take on a wider range of sectors, to have a multiplying impact on mobilising investments and to encourage private sector enterprises to get the green investment tide rolling. Of course, nothing makes that happen more effectively than beneficial public policy, and I am not sure that we have had a great deal of that or that it is encouraged in a lot of the areas that the Government had previously wished to encourage, but that is another matter that I may return to later.
There is also no doubt that the Green Investment Bank has indeed had some successes. I will also state that its structure, the recruitment of the staff and many of the aspects of the operation that exist are to be commended. It is a good team and a good group of people, and they have played a very good role in triggering great attention and focus, trying to lever investment and interest in green investment. The costs of the bank are not inconsiderable; I think the run rate is now probably something in the region of around £30 million, which is covered by a grant from the Government. That will soon fall on its operating budget, which does not currently exist, although with the establishment of its most recent fund it now has some management fees to be able to offset that.
However, we take a different view about the green investment market, and the notion that things are all hunky-dory and that things have completely changed is patently not the case. It is absolutely clear that the green funds are underperformers, and it is certainly true that a number of green investments have vanished; the participation of an institution such as the Green Investment Bank has provided reassurance and time for investment professionals to be able to work out a number of the details which other commercial organisations do not have the time or ability to do. It is also true that the investments are quite hard to sell and that in many cases the funds will end up being recurring revenue streams and will be sold on that basis. It is also true that the price of oil is still low, having tumbled, which means that exploration becomes less economic, reducing supply and increasing the problems with the viability of renewable markets. Indeed, fairly recently Jan-Willem Bode, the director of one of the largest green energy organisations in the UK, said that many shareholders,
“feel like pulling the plug right now because it is just too much negativity thrown at the sector”.
That was in relation to the Government’s approach to green subsidies. Dwindling demand and low supply in the energy market have not boded well for a floundering alternative in the energy investment market. It is therefore not entirely accurate to take the view that everything is absolutely fine.
I believe that the bank has had a tremendous success most recently with its most recent subsidiary, the Green Investment Bank financial services fund, which is focused on offshore wind. I want to make the point that offshore wind is in a different category—it has a totally commercially viable fund capacity. The new generation of offshore wind equipment is larger and much more efficient and is something the market can already take up. I do not want to undermine the success of the bank; it is good that it did it, but that success is not an exemplar, nor does it prove a variety of other things. In fact, it is the exception which, in many ways, proves the rule.
The key to the Government’s argument is that this is a technical amendment needed to satisfy the Office for National Statistics. In another place, there was recently a debate on this and there was assurance that this amendment does not change or alter the objectives of the Bill, or even close in the articles for assisting in other green projects. There was assurance that these objectives will remain and that the bank will be fully committed to them. Our analysis is that this is clearly not the case.
Baroness Neville-Rolfe
My Lords, I thank noble Lords for this useful discussion. The noble Lord, Lord Stoneham, talked about “son of Stalin”; I think that it is more “son of Thatcher”. This is an enterprise Bill, after all, and we all seem to agree that the GIB is remarkably entrepreneurial. That is why we want to free it up. I am glad that the noble Lord, Lord Mendelsohn, is not opposed in principle to privatisation. Indeed, I agree with him about a lot of the positives that he mentioned concerning the framework in the UK, with shareholder rights and so on. I think that we have a very good base here. He brings a lot of expertise to the debate. He has rather naughtily asked a few commercial questions and I am not sure that I can answer every single one. However, we understand that this is an important issue that is of interest to a great many people, beyond the confines of this room today. There are a number of points raised to which we will give careful consideration.
I will now move on to the amendments and will answer questions as I go through. Amendments 53ZA and 53ZB would require the Government to lay a report in both Houses detailing the proposal to dispose of shares in the GIB, before the repeal of the existing legislation contained in the 2013 Act could take effect. I welcome the intention behind these amendments, which is to ensure that Parliament is kept informed of the Government’s move to introduce private capital into the GIB. That, frankly, is entirely right and fair, not least because of the level of interest. However, I would be concerned that these amendments, as drafted, might prevent the Government ensuring that the legislation is repealed at the appropriate point in a transaction process, if that were to fall at a time when the House was not sitting. As your Lordships will understand, the Government need to retain the flexibility to manage the complicated sale process.
However, it is our intention to keep Parliament fully informed. I am happy to commit today that the Government will be sure to provide Parliament with much of the kind of information suggested by noble Lords as soon as possible after any sale has taken place and at the appropriate time in the future, should the Government retain a stake that might be sold later, which obviously is an option.
Moving to the Government’s amendment, I hope that I can reassure noble Lords on a number of specific points that they have raised today. The noble Lord, Lord Teverson, asked whether it was too early for privatisation. I believe that the answer is no. We feel that moving GIB into private ownership is the natural next step for the business. The company itself, as I have already said, fully supports the move. There is strong interest in acquiring a stake in the bank from a number of larger-scale institutional investors, as could be confirmed by some comments. In his evidence to the Environmental Audit Committee last week in the other place, the CEO, Shaun Kingsbury, expressed his support for government plans to seek private ownership for the bank.
To answer the question from the noble Lord, Lord Mendelsohn, the Government will explore all options for a sale and, as I will emphasise, our decisions will reflect the outcome that we believe is in the best public interest. Obviously the proceeds will depend on how big a stake is sold and the outcome of negotiations with investors about the value of the company. We will need to be satisfied that any transaction represents value for money for the taxpayer.
Noble Lords are interested, understandably, in the transaction details, in particular whether the Government intend to retain a stake. The Government intend to sell a majority of the bank, as we have made clear, so that could involve retaining a minority stake. Our decision will depend on the outcome of the discussions that we are having and will have with potential investors. Some investors might welcome government retaining a stake, while some might want to buy 100%. To respond to the noble Lord’s point, whatever we decide to do, we will be driven by the public interest and our goal of achieving the best outcome for the Green Investment Bank itself. However, I must point out that if the Government retain a sizeable minority stake—by which I mean one that would allow them significant control over decisions made by the company—we may not achieve our objective of ensuring that it could be classified to the private sector.
Lord Mendelsohn
I will ask the noble Baroness a quick question. She said that this would be in the interest of the Green Investment Bank. The Green Investment Bank is a commercial institution which the Government are about to sell, so the terms of its commercial operations are very different—they are not inherently in the public interest because the public interest is defined as the mission which they gave it, and the members of the Green Investment Bank and its management have an obvious alternative economic interest. When she uses the terms “public interest” and “the Green Investment Bank’s interest” they are two entirely different things which may conflict in many ways when it comes to a transaction. Could the noble Baroness please be a bit clearer about what she means when she uses those terms?
Baroness Neville-Rolfe
I will come to that as I come to my final paragraph, if I may. Perhaps I could first clear up one or two points that have been raised. The first was about the advice from the ONS, which I think the noble Lord, Lord Teverson, asked for. We are satisfied that unless all the legislation is repealed, there is a real risk that the GIB could not be classified to the private sector. We have come to that view based on our understanding of the European statistics authority’s guidance, which the noble Lord has also had a look at. I was also asked whether the Government will freeze future funding.
Lord Teverson
I will not interrupt the Minister regularly but should I understand it that this is a government interpretation of reading the ONS material and the European statistical material, or have the Government received any advice from the ONS? The way I read the Minister, it was the Government’s interpretation.
Baroness Neville-Rolfe
The Government have been in discussion with the ONS but this is a serious matter involving a major transaction, and the Government have to take their own view of the rules as laid down. That is the view we have come to after very serious thought. As your Lordships can imagine, we would not lightly have added this provision to the Bill, enterprising though the GIB is. We are convinced of the need to do so, for the reasons that I set out because of our interpretation of the ESA rules.
Lord Teverson
Can I ask the Minister one follow-up question on that? If the Government found that it were possible to keep those five principles in legislation, would they wish to do so?
Baroness Neville-Rolfe
The noble Lord makes a good point. It is clear to the Government that we cannot retain control over the Green Investment Bank if it is to be declassified from the public sector following a sale. I do not think that really answers the question about the five objectives, which I will reflect on and come back. I think the Committee can understand the basic point that we are making and obviously, as I will come on to explain, we want the Green Investment Bank to continue to be a Green Investment Bank and to operate effectively.
Perhaps I could therefore move on to the question of the remit and reiterate the point that I made in my opening remarks. It is the Government’s policy to move the bank into private ownership and we cannot retain control over its operations. That has to be interpreted in law and is the challenge that we are working with. However, I would like to give a bit more detail on how the bank will, as we see it, retain its mission.
Lord Mendelsohn
Just to be absolutely clear: is the Minister saying that the principal, driving objective is to transfer the Green Investment Bank into largely private ownership? If that is so, everything else is entirely secondary. If those are the terms, that is why there will be variations as to whether the Government have a long-term commitment or wish to do any funding. Is that the principal and overriding concern, more than anything else? Because if that is the case, it means that everything else is willing to be thrown under the bus.
Baroness Neville-Rolfe
We want the package to look right, so “thrown under the bus” is the wrong metaphor. But we said clearly in June that we want to privatise the Green Investment Bank and when we came to do the work, we discovered that the ESA/ONS rules would not allow us to do that in this form. That is why we have taken the step of bringing this amendment to the House.
Lord Stevenson of Balmacara (Lab)
I hesitate to cause more pain to the Minister but my noble friend Lord Mendelsohn has hit the nail on the head. If you are selling more than 50% of the stake then you are not in control of the bank. But control is exercised in public corporations at a variety of levels, as the Minister knows all too well from her own commercial experience. It would not be possible for a government shareholder holding around or less than 30% to make any impact on the overall management and control of the company because it would be down to the majority shareholders. The point is: what are the Government trying to do here? Is it just 51% to 49% or would they accept, in favourable circumstances, 71% to 29%? Those are the two options and, within that, the Government have a very limited role to play.
Baroness Neville-Rolfe
I think I made it clear that there are a number of options regarding the share, but I had also made it clear that we are looking to sell only a significant stake. The heart of the problem is that if we could keep the legislation without prejudicing the bank’s status we would, but the advice we are working on is that we cannot do that.
Lord Teverson
That is an excellent response and I welcome it. I hope that we can find a way of showing the Minister that it is indeed possible, and in that way help the Government to achieve their objectives. That would be an excellent solution to find.
Baroness Neville-Rolfe
I am glad we are making progress. Green investment, which I am not an expert in, as all noble Lords know, is what the Green Investment Bank does. As I see it, that is the brand of the Green Investment Bank—after all, it is called the Green Investment Bank—so the parallel with 3i is not entirely fair. Because of that, the Government fully expect that potential investors will wish to maintain the bank’s green focus and values; they will know what they are buying into.
Lord Mendelsohn
On that point, is an absolute assurance or guarantee required? Would the Government fetter their ability to do it, or would that lead them into the same problems during the sale process?
Baroness Neville-Rolfe
I think I will have to answer as I have before: we cannot prejudice the bank’s status. I think that our heart is in the right place but we are in some difficulty here. As part of any sale discussions, potential investors will be asked to confirm their commitments to these values and set out how they propose to protect them. We envisage that this would involve the new shareholders agreeing to retain the green objectives in the Green Investment Bank’s articles of association, to which the noble Lord, Lord Stoneham, referred at the beginning, and to ensure that the bank continued to invest in a way that achieved a positive impact. I hope that that helps. We also expect that new shareholders will agree to continue the GIB’s existing standards of reporting on its green investment performance, and provide independent assurance of that. I understand that these commitments are not as strong as a statutory lock, but it is simply not an option to impose more binding conditions that would require the business to act in a particular way since that would have exactly the same effect as this legislation. The GIB would very likely have to remain in the public sector, with the problems that I described before.
Lord Mendelsohn
I am trying to hone this down to one particular point. The Minister has said that these are expectations, not commitments that we can readily accept. An expectation is not a commitment in the first place. I am trying to work out what thresholds any potential investor has to pass in order to meet her expectations.
Baroness Neville-Rolfe
My Lords, I am in some difficulty because we are still designing the sale process. I know that the noble Lord has been in meetings where we have tried to explain the situation, and he has asked lots of questions. We have to try, with the House’s help, to find a way through. I have tried to explain some of our expectations and what we are trying to achieve, which I do not think is a million miles away from what others here want to achieve.
The noble Lord, Lord Teverson, rightly asked a question about the Royal Mail and whether the controls over it helped us in terms of a precedent. Actually, his comments show how valuable it is that we have introduced this amendment in Committee rather than leaving it until Report because he has asked some very good questions, and the Bill will of course go on to the other place. The simple answer on the Royal Mail is that it is regulated because it is designated as a universal service provided by Ofcom; it is not itself controlled by legislation. The same is true for other utilities, such as water companies, that choose to operate in a specific sector.
I understand that noble Lords will want to reflect on our discussion. The Government too will of course reflect on the discussions raised and on the amendments proposed. I note that noble Lords wish to debate this on the Floor of the House.
I said that I would respond on the question asked by the noble Lord, Lord Mendelsohn, about public interest in the GIB. The public interest lies in the GIB having a strong and secure future in the private sector as a green institution, and securing the best value for money for UK taxpayers.
I agree with my noble friend Lord Cope of Berkeley that it was right to raise this in Committee. In view of today’s discussion and the points made by noble Lords, I will withdraw my amendment for now and the Government will retable it on Report.
Lord Stoneham of Droxford
Can I just clarify one thing? I accept that the Minister says that she will withdraw her amendment. She said that she agreed with most of the points in my amendment, and that Parliament will be properly consulted. Given the uncertainty, what is the problem with putting some procedural amendment—I took my drafting from the Postal Services Act—in the Bill? Why cannot something like this be considered? I ask her, with due respect, please to consider coming back with a fuller amendment rather than something that gives the Government a complete blank cheque, which will not be acceptable in this House or the other.
Lord Teverson
I agree with the noble Lord, Lord Cope; he was absolutely right that this debate should have come to this Grand Committee. What concerned me was that the Government might try to make us agree the amendment, and I am grateful to the Minister for not doing that. It is an excellent step that I fully welcome.
Lord Mendelsohn
From this side, we thank the Minister for her approach to this. We want to be clear that we believe that it is possible to structure this so that the mission can be protected and there can still be a transfer into the private sector. If the Government come forward with such a proposal, it will have our wholehearted support.
Baroness Neville-Rolfe
I am grateful to noble Lords for their courtesy. It is a bit like going to the gym, this afternoon, but I am glad that we have had the discussion. Of course I will consider before Report what we can do to meet the concerns expressed. As I said, I am as keen as noble Lords to find a way forward that allows this privatisation to go ahead and does not lead us into this rather surprising cul-de-sac. We will have a think about process, given that there is agreement—not on everything but on some aspects of issues that we have discussed this afternoon.
Lord Whitty
“Report on the Pubs Code
(1) If the Pubs Code Adjudicator identifies a pattern of cases of pub-owning businesses selling tenanted pubs in order to exempt their business from the Pubs Code to the detriment of the tenant, the Adjudicator shall write a report to the Secretary of State outlining recommendations of action to be taken.
(2) The Secretary of State shall issue a statement within three months of receiving any report under subsection (1) outlining what action he or she intends to take to protect the tenant and if none is to be taken the reasoning for that decision.”
Lord Whitty (Lab)
My Lords, we are about to move not to the gym but to the pub. After my previous exertions on this matter, I had hoped that I could resume my normal relationship with pubs as a consumer rather than going into the details of tenancy arrangements. However, I am afraid that the Government have forced me to bring it up again in this Bill.
To understand the context of these amendments I need to take the Committee back to the related predecessor Act—the Small Business, Enterprise and Employment Act, passed only earlier this year, and in particular to the proceedings of the Grand Committee in this Room on 28 January. There is unfinished business here concerning the relationship between large chain pub companies and their tied tenants. This is often quite a fraught relationship. Sometimes it is quite happy but it is always pretty unbalanced. The 2015 Act led to the establishment—or should have—of a Pubs Code and the Pubs Code Adjudicator. When I tabled the first two amendments in this group, my intention was simply to give the Government a gentle nudge. I was trying only to work out why it had taken 11 months for any proceedings on the Act’s provisions to come forward to fulfil the changes agreed at that time. However, only on Thursday of last week, all that changed. The department issued a consultation document which purported to be the basis for bringing forward the intention of the previous Act to provide a market-only rent option and a process for assessing the choice for tenants, as had been promised in Committee and later stages of the then Bill in this House. However, the consultation document that emerged last week is a complete travesty. It dilutes and distorts the Act’s intentions and goes directly against assurances given by Ministers, including those given in this Room. It is such a distortion that my charge against the Government is not just one of delay but the rather more serious one, I am afraid, of a degree of bad faith.
I need to take the Committee back to the history of the earlier Bill. It is quite an unusual history because during the Bill’s passage through the House of Commons, the Commons included in it the then Clause 42 establishing the right of a tied tenant of a large pub chain to move to the market rent only form of tenancy free of tie. The clause was proposed by a Liberal Democrat Back-Bencher but had widespread support on the Back Benches of all the major parties. It was opposed in the Commons by the Government but the Government were defeated. It seems to me that the Government have not got over that defeat, although we have a slightly different Government now.
When that Bill came to the Lords, the department and Ministers argued that the Commons clause was unworkable as it stood. They said that the Government accepted the principle of the clause, which the Commons had supported, but that it would need to be substantially redrafted and put into effect by secondary legislation. In Committee in this Room on 28 January, they tabled a complex series of amendments to replace the Mulholland clause. I think that the discussion on those amendments went on for even longer than did the discussion on the previous amendment this afternoon. No doubt the noble Baroness remembers it.
It has to be said that campaigners and the proponents of the then Clause did not initially agree with the position of the Government on this issue. However, the Government argued strongly that they accepted the principle, and that therefore their amendment reflected the principle more accurately and was more workable, and that the provision to introduce secondary legislation would achieve exactly that—make it more workable. Some of us in this Committee—the noble Lords, Lord Stoneham and Lord Snape, and my noble friend Lord Berkeley, who is not in his place, and, indeed, my own Front Bench—expressed concerns about that position. Others, however, to put it gently, probably represented more the views of relatively large brewing chains.
For my own part, on that day I went into the Committee thinking that I would oppose the Government’s amendment and shout “Not-Content”. That is quite an unusual thing to do in Grand Committee but I felt that strongly about it. Therefore, the relevant amendments would have fallen and the Mulholland amendment would have stood. However, that day, the assurances which were given by the Minister herself of the Government’s good intentions, which she beguilingly argued, convinced me that I ought to accept the Government’s good faith, as well as the fact—there was another fact, of course—that if we did not accept the Government’s amendment they might have removed the whole clause at a later stage, and we would have been slightly over a barrel. Nevertheless, I came out of that meeting thinking that there was good faith all round. Indeed, in the early stages thereafter there were discussions between the department and the various industry and tenants’ organisations and so forth, and that faith seemed justified.
However, then we all got tied up with an election, changes of ministerial responsibility within the department and changes in the civil servants responsible for this area, which of course I understand. Therefore there was a delay in producing the consultation, and communications with the tenants’ organisations and the campaigning organisations virtually ceased. Then, as I say, after some months of virtual silence and with no consultation on the text, two days after I submitted my first two amendments in the group, the consultation document was issued to an astonished world last Thursday—astonished, and pretty alarmed.
One person in all this context who has not changed, apart from some of my noble friends and others on this side of the Room, is the Minister herself, for whom I have great respect, even affection. She is in no way personally to blame for this, in the sense that she has never had the executive responsibility within the department for this area. Having been a Minister myself, I know that we sometimes have to take legislation through this House that has been concocted by our colleagues and which we may not entirely understand or indeed agree with. In this case, I understand that her colleague Anna Soubry is responsible for this area. Anna Soubry is marketed as the Small Business Minister, but in this context she appears to have acted entirely on behalf of the large brewery companies rather than the small businesses which the tied tenants represent. The fact remains that the Minister, on behalf of the Government, gave certain assurances on the 28 January proceedings.
To boil it down, there are two key ways in which the consultation document appears to negate the intention of the original Commons amendment. There are significant limitations on the triggers for a market rent option, and there is a complete deletion of the provisions for a parallel rent assessment, which would give the information to tenants of all sorts on which to base their decision as to whether to go for an MRO or not.
On the first of those, on that day in January, the Minister said:
“Our amendments will provide tied tenants with the right to a market rent only agreement at a number of trigger points, including at a rent review; at a lease renewal; when there is a significant and unexpected price increase; or if a local economic event occurs that is outside the tenant’s control”.
However, in the consultation document the Government limit this to when there is a rent change that increases the rent above inflation, or to a situation where tied beer goes up by over 5% or tied services and other products go up by over 30% or 40%. Clearly, this greatly limits the trigger points for the MRO to be sought, and is contrary to the assurances made.
In the same debate the Minister went on to say:
“Although prospective tenants will not have the right to the market rent only option, our amendments provide that they will have the protection of the parallel rent assessment—PRA—which will show them how their tied deal compares with a free-of-tie deal”.—[Official Report, 28/1/15; col. GC 92.]
However, in the consultation document, the PRA is deleted entirely. Its new, prospective or indeed long-standing tenants who are not affected by the limited triggers for MRO will not be able to find out if their rents are fair before they go down that road through the PRA process because that process is now dropped. This is a rather sorry state of affairs. Given that there is no easy place in the text of the Bill to hang these amendments, I hope that we can resolve this in some way before we end the proceedings on it.
My Amendment 53ZC, which of course was drafted before the consultation document appeared, would simply require the adjudicator to report on any manoeuvres of pub-owning businesses trying to circumvent the effects of MRO by selling off or otherwise disposing of pubs. Amendment 53ZD is in the same area, really; it revisits the discussion that we had last time on the threshold issue so that pubcos gaming the system to avoid inclusion in the MRO rights for tenants by changing the status of some of their pubs, to bring their total of pubs below the 500 threshold, would be changed by making the 500 threshold apply to pubs of any kind. On present numbers this would probably affect only one pub chain, but you could conceive that it could happen in future. Also, it may be only one chain but there are rather a lot of tenants involved.
My third amendment, however, goes to the heart of the matter. It reflects my concern at the consultation paper, and tries to reinstate and require the right to parallel rent assessment for all tenants and therefore restore the original intention of not only the Mulholland proposal but the final amendments that the Government put into the Bill in Committee and on Report in this House. I imagine that the Minister might have been advised to soft-soap us and say, “Well, all this is in the consultation and we can reply to it”. It is interesting, though, that while the consultation is long, as are many consultations, and we are asked to reply on 22 specified questions, not one of those questions refers to the PRA. The dropping of the PRA is simply stated. True, people can reply on the totality of the document, but most people’s responses will be based on those questions, not on the Government’s pre-emptive strike of saying that they are not going to proceed with part of the Act that they themselves put in.
There has of course been another change: a change of Government. There are no Liberal Democrats now in BIS. I have to take account of political realities, even here in the House of Lords, but it is a pity that consistency did not run through this, nor indeed does respect for the will of the House of Commons. I presume to advise the Conservative Party that it should not go back to a position that it very much held in the early years of the last century—namely, that it was essentially the political front of the large brewers. That is what this is about, because the balance of power between the tenants and the large brewery companies is very much in favour of the latter. The Mulholland amendment was designed to change that in an important way, and I and other noble Lords thought it had achieved a degree of consensus politically in both Houses. However, the Government, through their consultation paper, now appear to have sabotaged that.
In my view, the best solution would be if the department decided quietly to jack this consultation paper and withdraw it. There is another stage of consultation to come on other parts of the Act, and the department could relatively easily present us with a different consultation paper. If it does not, although I cannot press these amendments today, this is something that we will have to find a way of returning to on Report. Meanwhile, I beg to move.
Lord Snape (Lab)
My Lords, I support these amendments so ably moved by my noble friend. Like him, I hesitate to lower the temperature of the Committee. As he put it, earlier we had amicable discussions that did not please everyone making representations to noble Lords on both sides of the Committee about the future. We thought, after our discussions on 28 January, that we had an agreement and that we could rely on the good faith of the Minister. As my noble friend says, although the Government have changed since 28 January, we have the same Minister as when we discussed the previous Enterprise Bill.
I hope that I will not need to get too personal in the course of this debate about ministerial responsibility and accountability. However, I remind the Minister that she made certain pledges during those deliberations on 28 January and that we expect those pledges to be confirmed today, rather than her simply sticking to the terms of the consultative document. Like my noble friend, I was shocked to see this. My first indication that the consultative document had been issued was when I received a phone call asking if I had seen the front page of the Morning Advertiser. Surprisingly enough, that is not a publication that I normally enjoy over my breakfast cornflakes, but I made a point of looking at the content of the front page online and, like my noble friend, I was shocked at what I saw. It appears that those pledges that were given on 28 January are to be cast aside because we have a new Government, and I feel that people who made representations about the previous Bill and the present one will feel betrayed—I choose my words carefully—if the words in the consultation document are to become law.
On 28 January, I said in Committee that:
“At Second Reading, the Minister accepted on the part of the Government the will of the Commons and said, basically, that the Government would adopt the principles that the Commons had advocated with regard to pub codes and publicans.”—[Official Report, 28/1/15; col. GC 141.]
All that has been cast aside. The Minister replied in her pleasant and emollient way that she would listen to what the Committee had said and that we could in effect rely on her to bring forward legislation that would meet at least some of the points that we had made. However, as we heard from my noble friend when he moved his amendments, the PRA aspect for the future has been dropped completely.
I ask the Minister what connection there may be between the publication of the consultation document last Thursday, in such an apparently hurried fashion, and the notification from my noble friend and others that various amendments would be tabled to the Bill to ask about progress so far on these matters. It will not have escaped the attention of noble Lords on both sides that the normal procedure for legislation like this, if the House of Commons had voted in the way that it has and the House of Lords had accepted the view of the House of Commons, would be a Bill that would have incorporated the changed views that had been agreed by both Houses. We accepted from the Minister in good faith the need for a consultation period lasting up to a year, and we accepted the assurances that the will of both Houses of Parliament would be respected in the future. That is not what we have here.
I await with interest the Minister’s explanation as to why, other than the fact that the Government has changed. Some former House of Commons Whips more senior than I are present in the Committee today, and I realise that there is a convention that one Parliament cannot bind another. However, I hope that there is also still a convention that ministerial promises are worth the paper that they are written on. We in this Committee expect those promises that were made on 28 January to be kept this afternoon.
Lord Hodgson of Astley Abbotts (Con)
My Lords, those of us who sat through the long reaches of the night on the Small Business, Enterprise and Employment Bill earlier in the year may feel like the football manager being interviewed on “Match of the Day” who says, “I have a sense of déjà vu all over again”. We are repeating the arguments and, although it is almost a year later, I should say that two years ago next February I was a director—I should not say that I was a director, but that I had an interest in it—of one of the pubcos that is covered by the code. At some point I think I ceased to have an interest, but for the purposes of the debate I think I should put that on the record.
Behind the thinking of the noble Lords, Lord Whitty and Lord Snape, about parliamentary procedure is really the question of pub closures and the impact on tenants in particular, along with the reasons why our pub sector is contracting. This is what parliamentary procedure promises and it may be the hook to hang it on, but that is what we are concerned about, wherever you stand on the argument. Underlying the noble Lords’ arguments is the belief that the basic reason for the accelerated rate of closures in the pub sector is the activities of the larger pub-owning companies. It may be argued that they are often predatory and inimical to the rights of tenants. I have to argue with that because I am afraid I think that that is too simplistic an approach to a very complex matter. It is more complex than those who have moved this group of amendments appear to comprehend. Indeed, I argue strongly that if the Government were to accept the amendments, the danger is that it would accelerate rather than slow the rate of pub closures.
If the noble Lords are right about pubcos predating on tenants, the rate of closures in the tied sector would be much higher than in the independent sector, whereas the CGA Strategy analysis shows that the rate of closure is broadly the same—perhaps slightly higher in the independent sector but, as I say, about the same. In those circumstances, it is strange that it is being argued that the pubcos are the cause of it. It seems to me, given that the rate of closure is the same across both sectors, that it is about something much more deep-seated than merely the activities of three or four companies. The reality is that the whole pub sector is under the most terrific pressure. It is not the operators that are causing it—they may have done in some places, but I will come back to that in a second—rather, it is the market.
The market can be looked at in various ways. The brutal fact of the matter is that we can leave this House and buy a pint of lager for 75p, 80p or 90p a pint. It is available in the local supermarket. Many people would prefer to pay that price than pay £3 for a pint in a pub. They take the drink home and drink it there. Along with the fact that some young people buy “a slab”, as it is called, in the supermarket to drink in the street and then go into the pub to watch the football, that is one of the reasons why pubs are struggling. Moreover, there has been a regulatory impact on pub operators, owners and tied tenants, whether it is licensing, smoking, drink-driving, the increase in council tax or the late night levy for pubs that wish to extend their financial take by opening for longer. Not one of these issues on its own is back-breaking; they are all straws, but together they make the life of a pub operator in whatever form very difficult. The sector is not profitable enough now and it is under pressure wherever it is. Unsurprisingly—if I was a tenant I would think this—tenants think that somewhere there is a hidden pot of gold that they cannot get their hands on and is somehow being hidden from them.
There is another, psychological reason for disapproval of larger pubcos. For many people, taking on a pub is a lifestyle choice—a second career. As they undertake it, they leave the pressure of a nine-to-five job and have visions of themselves as cheery landlords dispensing pints and homespun philosophy over a bar as the evening sun goes down. However, tonight there is not much sun going down. You will be sitting in your pub dispensing not many pints to not many people and wondering why on earth you are there. In reality, running a pub is grindingly hard work and not everybody is cut out to be a landlord. None of us, wherever we are, likes to accept that the failure lies with ourselves in whatever we are trying to achieve. We think that there must be some external reason that has caused us to fail, and who better to blame than our landlord or pubco? If they could help us more, we would be in a position to make sure that everything was all right.
When the inevitable problems happen—and happen they do—there is a very sympathetic reaction among the community. The community believes that there are three essential ingredients: a post office/shop, a pub and a church. People do not want to use them much but they will go to the post office and shop when they have failed to buy a pint of milk at Tesco; the rest of the time they do not go at all. They will go to the church for what are vulgarly called “hatches, matches and dispatches”, and occasionally they will go to the pub. They like it to be there and, if they see it disappearing, they are upset and believe that it should be preserved. Unfortunately, you have to use a pub or you lose it, and too often, to be candid, pubs are not being used.
Also behind the noble Lords’ thinking is the CAMRA belief that if you could remove the dead hand of the big pubcos there would emerge a range of independent pubs that would provide new, independent opportunities for beer brands. I am afraid that that is misplaced optimism.
Lord Snape
Perhaps I may tell the noble Lord that I am not a member of CAMRA and that I do not even like real ale very much. That will probably get me denounced in some political circles. The noble Lord is giving a highly polished speech, which it should be as he has delivered it two or three times already. It is a rather—if I may say so without offending him—Second Reading speech. Would he like to talk about the matters before the Committee at present, particularly the difference between the consultative document and the agreement that both sides of this Committee thought we had with this Minister in January this year?
Lord Hodgson of Astley Abbotts
I am afraid that I have to disagree with the noble Lord. I am explaining why the background to these amendments is the rate of pub closures. That is what we are seeking to consider. That is the whole background to the amendments. I am sorry if the noble Lord feels that I am making a Second Reading speech but I am just trying to set out the status of the pub sector at present. In about a minute and a half, I will come to the treatment of the three amendments that the noble Lord, Lord Whitty, has tabled, and I shall certainly tackle them straight on. However, I need to do that against the background of the reasons for the problems in the sector. Those are not merely to do with the operation of the Mulholland amendments but are part of a bigger societal change.
Going back to CAMRA for a moment, I think that this is misplaced optimism. There is not the demand for a wide range of specialist beers changing week by week—Old Boot Polish one week and Sheep Dip the next. Some pubs will be interested in selling those but, for the most part, demand is for the well-known lagers such as Stella Artois, Peroni and so on. That will be the profitable and sensible way for landlords to trade.
I would not want the Committee to think that I was arguing that everything in the sector was rosy. In a sector with 20,000-plus tenants, there are bound to be pubcos—and, dare I say, tenants—who do not behave quite as well as they might. I freely admit that in the tied sector that conflict of interest is most acute.
Lord Mendelsohn
Given this rather large view of returns on the market, I have a quick question. If there were not the unsustainable leverage and the change in the business models of the companies concerned, would the noble Lord be making the same speech?
Lord Hodgson of Astley Abbotts
Certainly. The noble Lord is a businessman to his bootstraps. He knows perfectly well that if you are running a public company, you will be required and encouraged by your shareholders to take on a certain level of gearing. He would; I am sure that he does in his own businesses, which no doubt he looks after splendidly. The idea that somehow a business should be run with a completely different model because it happens to be in the pub sector does not hold water. It is bound roughly to march to the beat of the same drum that applies to public and private companies generally.
I promised the noble Lord, Lord Snape, that I would get to the specific amendments, of which there are three. Amendment 53ZD is obviously concerned with introducing all pubs. That really has absolutely nothing to do with anything that the Minister has said or any part of our discussions earlier in the year. Managed pubs are an entirely different matter and are run in an entirely different way. They are run by employees, who have a bonus system and a wage system. To say that this is a way of gaming the system, as was said by the noble Lord, Lord Whitty, is not accurate at all. If the amendment were passed, some companies that have no tied pubs at all would be caught, so the tied pub area would not even be further dealt with. I cannot see that Amendment 53ZD has any relevance to what has gone before, to what the Minister said, or to tackling the basic problem that we have been considering.
Amendment 53ZC has exceptionally vague wording. One important aspect of maintaining pubs is for there to be some effective secondary market. Pub companies rebalance their portfolios where they have too many pubs in one part of the country and want exposure in others. To be perfectly honest, some pubs will operate better with individual ownership and should therefore be sold to individual proprietors. An acceptance of this amendment, with its broad powers and imprecise determinations, would freeze up that secondary market and make it almost impossible for new entrants to come to the market, or indeed for existing pubcos to operate effectively.
Amendment 53ZF is about parallel rent assessments. Although the noble Lord has specified Section 43(5) I think that he means Section 42(5), but we do not need to worry about that. As I understand it—if my noble friend does not support me on this, I shall go down in flames—when the market rent option is triggered, there will be an opportunity for the PRA to be introduced. That is provided for in the consultation. Therefore, no tenant undertaking the MRO route can be precluded from the parallel rent assessment. He or she can make a judgment as to which is the best route to follow. That answers the point about the dangers of the PRA being unduly sidelined.
Finally, I think that the noble Lord, Lord Snape, believes that somehow big pubcos want to close pubs. I was the director of an integrating brewery; we wanted to sell our beer. We wanted good pubs because that meant that we managed to sell more beer. We wanted to find every way to make our pubs do better. The same may not be true of the pure pubcos that do not have brewers in them, but I urge noble Lords to be careful what they wish for. There is now the concept of a real estate investment trust, or REIT. It would be perfectly possible for a pubco to create a REIT to remove all the support from their pubs. They would make quite a lot of money in the short run because quite a lot is spent on supporting their pub chains. Over time, some or many pubs would fail and they would close them down and sell them off. They could do so within the very tax advantageous structure of a REIT.
We have not even reached the stage of implementing the results from the last set of consultations and already people are starting to think about how things should be tightened up, changed and altered. We should at least allow some time for the structure to settle down so we can see how things develop. Creating further uncertainty in a sector that is under extreme pressure, as I have explained, would be a grave error. It would not help all of us who would like to see the maximum number of pubs maintained in a way that is fair to all parties.
Lord Berkeley (Lab)
The noble Lord said he wanted to have good pubs and that he was worried about uncertainty in the sector. I recall that in the Committee and Report stages that my noble friend referred to, the noble Lord repeated that but could not answer the questions of so many landlords who are working very long hours for very little money. There seems to be a turnover of landlords in many pubs of not much more than a year or 18 months. That does not make a good pub and it creates uncertainty. There may have been one or two cases when landlords were not performing but probably the financial pressures from the pubcos were so high that they could not cope. Does the noble Lord not recognise that that is at least as much of a problem as the one he is talking about?
Lord Hodgson of Astley Abbotts
Of course I understand the pressure on tenants. But the noble Lord must agree that the pressure on the sector is terrific. If your primary product can be bought down the road at 25% of what you sell it for you are under pressure. You will find it exceptionally difficult to buy a pint of lager for less than £3 in a pub. But I will take the noble Lord out, when Committee ceases to sit this evening, and we will find lager at 75p a pint within two miles.
Lord Snape
Does the noble Lord realise that he has just made a very effective case for the argument we are putting from this side of the Committee?
Lord Stoneham of Droxford
My Lords, the arguments have been very well put by the noble Lord, Lord Whitty. I support them and there is no point repeating them. These provisions are largely probing because the events of the last week mean that we are going to have to give greater attention to this. I had the inevitable job of dealing with the Member for Leeds North West on the basis of the assurances I had from the Minister. I hope she will be helpful in her reply so that when I go back to him he will not tell me, “I told you so”.
Lord Mendelsohn
My Lords, we first intended to introduce these amendments as an expression of our happiness at the collaboration and assurances that we had had. Our intention was to give the Minister a full toss, applaud her from the rafters, and say how wonderful it was that the Government were progressing with the work, because it was not contained in the Bill. This was a free hit for applause and I thought that it would compensate for many of the things we had said on other provisions, where we had taken a more questioning view. There are, of course, issues with some of the actions of companies, which I will come to in a second. To be in this position is a massive source of regret. The noble Lord, Lord Whitty, gave an outstanding oration on the issues in speaking to the amendment; the noble Lord, Lord Snape, too, gave an outstanding recitation of what is important about it. I also share the view of the noble Lord, Lord Stoneham.
I have agreed with the noble Lord, Lord Hodgson, on quite a bit of the Bill, but on this issue I feel an extraordinary sense of profound disagreement. I simply cannot believe that, in this day and age, someone is suggesting that there should be some sort of state meddling to maintain a market and that we should set ourselves completely against the operations of the free market, changing consumer tastes and increased competition. That is the wrong approach.
There is a problem with the pub sector. As the noble Lord rightly says, the causes of that are, more than anything else, changing consumer tastes and supermarket prices. Closures have come as a direct result of the choice of business model to go for unsustainable levels of leverage. I hope that, in my professional practice, we advise companies on what are sustainable levels of leverage. It was always clear that these would be very aggressive business models. It is important that we should not accept the beating-up of small businesses to maintain the capacity of large businesses. That is utterly wrong, but it is what we have to deal with.
The source of most regret relates to the fact that, over the last period, as companies were announcing their results, I was seeing some encouraging signs, unlike the noble Lord, Lord Hodgson. One company identified like-for-like growth over the year. It reported higher levels of underlying EBITDA. One company was able, on revenues of around £450 million, to look at levels of underlying EBITDA approaching £200 million. That is a fantastic achievement and it has allowed it to pay down debt. It is encouraging to see, in interim statements, companies saying that actions have already been taken to provide a more flexible business model “in light of the anticipated reduction of the market rent only option in 2016”. Companies have taken proper account of what was said and they have adapted their models. This is a case of the Government putting a cost on business by totally going against what they said before.
It is not enough to say that this is just a consultation. There is a sense of bad faith, which I will express in these terms. In commercial arrangements, when you have two positions, you come to a deal called a “heads of terms”, which is the overarching structure under which you define the agreement. I suspected that the Act, as the overarching heads of terms, accepted by all sides of the House, would be followed, but this consultation follows nothing like it in how it deals with conditions on the market rent only option and the parallel rent assessment—all that has changed. Even where there are provisions on market rent only options, they are not consistent with the terms that were there before. This is wrong. It is not unfair to say that we expected better.
I do not want to detain the Committee, but I have a few pages of this. The Minister previously expressed strongly the points on which we came to agreement on all sides of the House. There is even a complimentary reference to the noble Lord, Lord Hodgson, which I draw to his attention—I do not say that it is all bad. The noble Baroness said on Report, on 9 March 2015:
“I come to the parallel rent assessment itself. Following the introduction of market rent only in the other place, the Government sought to restrict the scope of this assessment so that it applied only to prospective tenants, as they will not have the right to market rent only. This was an attempt on our part to reduce bureaucracy and increase simplicity. However, it is clear from discussions since Committee that tenant stakeholders actually like the parallel rent assessment and feel strongly that it should be retained for existing tenants. There are tenants who have no wish to exercise market rent only but who want to ensure that they have a fair tied deal. They would far prefer to gain this reassurance by requesting a parallel rent assessment, rather than by starting the market rent only process. There are also arguments that the transparency of the PRA may help a tied tenant to decide whether market rent only is for them.”
The noble Baroness continued:
“Therefore, Amendment 33J”—
a government amendment—
“seeks to reinstate the parallel rent assessment. We will consult on how best to streamline this with the market rent only provisions so that, as far as possible, the processes are integrated to help both pub companies and their tenants and to minimise bureaucracy. I know this is something that my noble friend Lord Hodgson is very keen to ensure.”—[Official Report, 9 March 2015; col. 451.]
I have four or five pages of this. It was really a summary of where everyone was, and it was said not just in this House. Jo Swinson made comments in another place that were very similar. Something has clearly gone wrong.
Lord Hodgson of Astley Abbotts
Before the noble Lord concludes, can he explain why we are going back over the managed pub issue? We have covered that already. We agreed that there was an issue with tied pubs, but Amendment 53ZD takes us back to stuff that we cleared away before. I accept the arguments and discussions about the parallel rent assessment, but it was perfectly clear that we were not going to include managed pubs, because they do not operate in the same way as tied pubs. Nor indeed did we talk about further reports on people wishing to sell tied pubs. People are free to sell tied pubs. Why should that be something that applies particularly to the adjudicator?
Lord Mendelsohn
I thank the noble Lord, Lord Hodgson, for that intervention. I shall make it very clear. We introduced these as probing amendments to test a variety of things. The context is that that was prior to the publication of the consultation, and the debate that we have had is very different from the one that we would have had. I and, I suspect, some others in this Room would have tickled the noble Lord, Lord Hodgson, on some of those issues in other circumstances, but these are the circumstances that we are presented with: we are focusing on the consequences of the consultation.
It will come as no surprise to anyone to hear that I was always sceptical of the legal advice—we are going back to the constants of “may” and “must”—but I also presented in meetings counsel’s views, which have turned out to be rather prescient. I would be very grateful if the noble Baroness, who will always resist publishing the advice, would at least give us a much greater recitation of what legal advice has been given and whether the Government have taken effective external advice, as well as advice on whether the consultation was consistent with the Act. Will the Minister give a timetable for the Government to come forward with a proper impact assessment of the consultation proposals, as opposed to the proposals that we all agree to? We would also be grateful if she would set out whether existing legislation will allow the Pubs Code Adjudicator to deal with the pubcos gaming the system. If this measure goes through in the form it is in now, it will mean that the pubcos can game it to their hearts’ delight.
We would also be grateful if the Minister could give us an indication as to whether the Minister in the department directly responsible for signing off this consultation gave direction to the officials to draft the consultation on the basis of the proposals not contained in the Act and whether there has effectively been a change of policy to ignore the Act and introduce a different form. This more consistently follows what was proposed previously as opposed to the Act, and we would be very grateful for some assurance that such directions were not given by the Minister responsible.
Baroness Neville-Rolfe
My Lords, I thank noble Lords for triggering this debate with their amendments and for taking us back—unexpectedly on my part—to pubs. I am very glad that the noble Lords, Lord Whitty, Lord Snape and Lord Berkeley, are all here to explain very clearly their concerns. I also welcome back my noble friend Lord Hodgson. I very much take the point that he made about the complications of this area and the risk of pubs closing—which I think we all want to try to avoid—and the fact that we must not get this wrong. Although the noble Lord, Lord Mendelsohn, agreed with the concerns of others on his side, he also pointed out the importance of the consumer in all this, which we must never forget.
I can understand why some noble Lords are disappointed by the Government’s decision not to implement the parallel rent assessments. I assure noble Lords that I made my previous commitments in good faith, as I am sure they know. However, noble Lords will recall that the pubs measures in the Small Business, Enterprise and Employment Act were agreed at great speed towards the end of the last Parliament, and of course since then, as has been said, the Government have changed, and we have reviewed the best way to achieve the objectives. I will come on to that in more detail later if the Committee will allow, but the key point is that the Government are trying to strike the right balance, delivering fairness for tenants and stability for the industry. I cannot accept what has been said about my right honourable friend Anna Soubry, who is a great advocate for small business and is genuinely trying to find the right answer, as I will try to explain when we go through this in more detail.
Our proposals are out for consultation at the moment, and my officials are meeting tenants’ representatives and pub companies next week to discuss this matter in great detail. There was a blank space on page 66 of the consultation document for people to add comments. I have just looked at that document and it makes it quite clear on page 12 that there has been a change on the PRA point. We are not trying to hide that there has been a change of policy here. However, I will explain the current approach later on.
I add that we are fully focused on meeting the important May 2016 deadline for implementation. There was agreement that we should get on and implement this and not leave it for years and years. Obviously, the consultation process is very conscious of that deadline. I also wish to reassure the noble Lord, Lord Whitty, that there was stakeholder engagement over the summer, which was carried out by officials. It was balanced and they listened to views from across the sector. My right honourable friend Anna Soubry visited Burton-on-Trent on Monday and met with pub companies, and she will be meeting tenants’ representatives later this month.
I will take the amendments in turn. I know that there is most concern about the third set of amendments but, for the record, I will answer the points raised on the others.
Lord Mendelsohn
Does the noble Baroness mean that her right honourable friend met people prior to the publication of the consultation or afterwards?
Baroness Neville-Rolfe
My understanding is that she met with the pubs after the consultation, as, in turn, she will be meeting the tenants once the consultation was published. I have to reject the underlying implication that somehow we are not balanced on this. Consultation is a serious matter for business. You have to put things out in draft and you have to listen to what is said, which is what we always do.
I turn now to Amendment 53ZC. I understand the concerns about potential manipulation of the ownership of tied-pub estates but I am not convinced that this amendment is the way to address the issue. It would place an additional burden on the adjudicator by requiring him or her to monitor all pub sales, to make a judgment as to whether they reveal a pattern of divestments, and to assess whether their effect is to exempt the pub companies concerned from the jurisdiction of the Pubs Code, thereby causing detriment to the tenants concerned. While one large pub company sold around 150 tied pubs earlier this year to a company that will not be covered by the code, another has recently purchased more than twice as many tied pubs that were previously outside the scope of the code. Purchases and sales of this order have been a feature of the sector for at least 15 years. However, the Secretary of State has a duty under Section 46 to review the operation of the Pubs Code every three years, and that will present an opportunity to look again at issues around sales and acquisitions.
Amendment 53ZD was debated in Committee on the 2015 Act. Parliament’s decision to define the threshold for the Pubs Code in terms of tied pubs reflected more than a decade’s worth of evidence that the problem in the pub sector related to abuses in the tied sector. We talked about this at the time. It is those abuses that the Pubs Code Adjudicator has been introduced to address, and I remain of the view that Parliament was correct to define the threshold solely in terms of tied pubs. At present, the amendment would bring within scope just one company with tied pubs—Mitchells & Butlers, which has in total around 1,800 pubs in England and Wales but fewer than 60 tied pubs. Bringing these few extra tied pubs into scope would create the anomaly of leaving a number of companies owning several hundred tied pubs outside it. Such an anomaly would have risked legal challenge—noble Lords will remember that we discussed this before—possibly imperilling all the pubs measures, which was something that we were keen to avoid.
Section 69 gives the Secretary of State the power to amend the number of tied pubs required to meet the threshold. That is the right safeguard for ensuring that the code delivers its overarching principles.
I turn now to Amendment 53ZF. I know that it is a disappointment to some noble Lords that the Government have decided not to proceed with implementing the PRA, if I may call it that. As noble Lords will recall, it was the previous Government’s intention during the passage of the Bill to introduce PRA and to streamline it with the market-only option. We have had a change of government and the incoming Government have looked again at the commitments that their predecessors made in order to get the legislation on to the statute book. We have looked at the best way of achieving the objectives of this policy. Our focus has been on providing a robust Pubs Code and adjudicator that deliver fairness for tenants and stability for the industry within the timeframe set out in the Act. It became clear, when working through the details over the summer, that the complexity of introducing PRA alongside MRO would put unnecessary burdens on the industry. Having two processes which can be triggered separately but on the same bases, which are not administratively connected and which follow different timetables and rules is not a practical or sensible proposition. We want to minimise the burdens on business. Not taking forward PRA at this time would reduce the regulatory burden of the pubs measures by £600,000 a year. These are burdens that we would have to compensate for by a reduction in another regulatory area, so it is a big figure at a time when pubs are closing.
Lord Snape
Was that figure not available on 28 January when the noble Baroness made that pledge? She said that,
“our amendments provide that they”—
that is, the tenants—
“will have the protection of the parallel rent assessment—PRA—which will show them how their tied deal compares with a free-of-tie deal”.—[Official Report, 28/1/15; col. GC92.]
That appears to be a specific pledge. Did it not cost £600 million then and, if it did, why did she make that pledge?
Baroness Neville-Rolfe
I am sure that we had some measure of the costs available at the time. I am not trying to dispute that. What I am trying to explain is why we have changed the situation. The costs are not the only matter. I am trying to explain how the two measures sit together and how we have sat down to have a look at these things. Perhaps I may proceed.
Lord Mendelsohn
I am probably unnecessarily confused here. Is the Minister saying that the burden on business was £600,000?
Baroness Neville-Rolfe
It is £600,000 for having the PRA in addition. I am sorry if I gave the figure incorrectly. I felt that it was helpful to share that figure of £600,000 with the Committee.
Lord Snape
In the context of government expenditure, we are grateful for that but it does not really amount to a great deal, does it?
Lord Mendelsohn
What assessment has that figure taken into account? As I read a statement from a company’s report of what it has currently spent, does it mean that that £600,000 includes the fact that it has now wasted a large amount of management time and money to that effect? Is that included or is it outside it? Has the company calculated that number?
Baroness Neville-Rolfe
This is a figure for the burden on business, so to that extent there is a parallel. Perhaps we can move on but there is a cost, and a complexity, in having a double system. We want to try to do this the right way. The market rent only option is the central plank of the Pubs Code. It is a fundamental change for the industry and, I believe, a powerful new tool for tenants. I do not think that there is any disagreement there.
The noble Lord, Lord Whitty, was concerned that the significant increase in price thresholds had restricted the access of tenants to the MRO trigger. We have taken the advice of stakeholders from across the industry on the definition of a significant increase in price. Our draft code reflects the advice we received: that the primary focus should be on the price of beer and that the threshold should be in the order of 5%. We are consulting on this and the percentage increases for other tied products and services. As I said, we welcome the views of stakeholders.
It is vital that we get this right for all concerned. The market rent only option will ensure that tied tenants are no worse off than free-of-tie tenants. That is the actual principle in the Act. Tied tenants will be able to request a market rent only offer when certain trigger events take place. The Government have published draft provisions that allow for the request by the tenant of an MRO in all the circumstances required by Section 43, mentioned by the noble Lord, Lord Whitty. There are four circumstances, which I will not go into again because noble Lords in this Committee are extremely familiar with this.
When we discussed these provisions before, there was a view that giving tenants access to a variety of comparators was of itself a good thing. That was what was being said in the Chamber, but the conclusion we have come to is that that is not really necessary. What really matters is that the tenants are given meaningful comparisons so that they can make the right business decision. We believe that MRO provides that. They will not be committed to accept the MRO offer but can compare it with the tied terms they are being offered. They can use the MRO offer to negotiate a better tied deal, if that is their preference, or choose to take up the MRO offer. They will not need a PRA to do either of those things. I reassure the noble Lord, Lord Whitty, that there is scope for comparison when a tenant requests an MRO, as he or she can request a tied rent assessment. That allows the comparison process to happen.
However, if experience of the Pubs Code in action produces evidence that the introduction of the PRA provisions would be a useful addition to the options available to tenants, this is something that the Government can of course reconsider. The point has been made. It is in the legislation. The power to introduce PRA remains in the Act but it is the Government’s view that we should focus first and foremost on introducing the MRO-only option and the other key provisions of the code on transparency, with the new adjudicator to enforce them.
Lord Snape
Before the Minister leaves that point, how was it possible without PRA for a tenant to demonstrate that they would be worse off? The purpose of PRA was to allow them to prove it one way or the other, was it not, so how can they do that without PRA?
Baroness Neville-Rolfe
My Lords, I am sure we will come back to this. I will take that point away and go through it again myself. There is scope for a comparison in the way that I have described, so the tied tenants should be able to look at the options easily and clearly. We are trying to bring in a system that is simple, clear and well understood. We have looked at the provisions in the Act and come forward with a consultation that we feel is fair, right, simpler, easier and better.
Lord Mendelsohn
My Lords, the idea that this is a good thing for small business and that a burden of £600,000 stands in its way utterly beggars belief. This provision was set up specifically in order to deal with the power and information asymmetries affecting smaller businesses with regard to larger ones. Again, it was the Minister who said on Report that,
“we have decided to reinstate PRA for existing tenants for a specific reason: because some tenants who do not wish to be free of tie would prefer the PRA, as they consider it a less confrontational way to secure a fair tied deal”.—[Official Report, 9/3/15; col. 464.]
Has any calculation been made about the cost to small businesses of not being able to have that provision, and indeed of the unfairness? Can the Minister say to me today that that cost would be significantly less than £600,000 if this was allowed to happen? I do not think she can.
Baroness Neville-Rolfe
My Lords, I am not sure that there has been a complete understanding of what we are proposing. They will have a free-of-tie rent and a tied rent assessment, and they consider this in the context of their own business planning, which is in their own best interests. Stakeholders and officials have sat down through the summer and done flowcharts and so on to try to work out how this will best work. Obviously I am listening to what noble Lords are saying today. We have come forward with proposals that we would like to be considered in the context of the consultation that we launched last week. Obviously, I understand—
Lord Stevenson of Balmacara
Is it not ironic that in working together with the previous Government to achieve a package that could get through on a tight timescale, to protect the Bill that the Minister was in charge of at the time, we have ended up in a worse position today than we were then? We should have learned that Governments are not to be trusted and gone with our instincts, which were to ensure that all these points were in primary legislation. Does the Minister not feel a scintilla of shame about the way in which we are now being dealt with? This is a real traducing of all our best endeavours and the support that we gave to her over that period. I personally feel very betrayed by it. I also feel betrayed by us not being told—in the spirit of openness that we tried to engender between ourselves in approaching legislation—that this was in the air, because the Minister must have known about it for some considerable time.
Baroness Neville-Rolfe
My Lords, I think that we have been through the arguments. I understand the disappointment. Noble Lords need to understand that the Government are trying to do this in a way that is less bureaucratic and more effective. That is the basis of the consultation. However, I understand the strength of feeling that has been expressed today. We want to get the implementation of the Pubs Code, the adjudicator and the provisions right. We are genuinely consulting on the proposals that we have put forward. There will be a meeting of representatives of tenants’ groups and pub companies as early as next week to discuss the proposals in detail and to take them through our thinking. This subject is on the table, so it can be discussed. I very much hope that by Report we will have satisfied the obviously genuine concerns raised today. In the mean time, I hope that in the light of my comments noble Lords will feel able to withdraw the amendment.
Lord Berkeley
The noble Baroness has talked an awful lot about the consultation that has gone on this summer with the different groups. Did any of them express a view on PRA and whether they wanted it or not, particularly the tenants, or was it not discussed?
Baroness Neville-Rolfe
My Lords, my understanding is that PRA was not discussed but I will engage further in the process and ensure that it is discussed in the context of the consultations going forward next week. As I pointed out, it is mentioned in the consultation paper, so obviously it can be on the agenda of the discussions taking place this month.
Lord Whitty
The noble Baroness played an effective defensive game on a very sticky wicket with a fair amount of hostile bowling. However, I do not think that she actually scored any runs. She is in a difficult position, as we all recognise. The fact of the matter is that she has clearly admitted that there has been a change of policy. As far as I can see from her responses to the various questions from my colleagues, that change of policy was not conveyed to the participants in this industry. In effect, it changes the legislation, which certainly was not communicated to us as legislators. That is a failure on behalf not of the Minister but of the department. We are therefore faced with a rather difficult situation regarding this issue between now and Report on this new Bill.
In terms of my two amendments which relate to the threshold, yes, we have discussed this at great length before but I do not agree with the noble Lord, Lord Hodgson, or the noble Baroness. I put them down so that we could look at this again but they were at that point probing amendments. The real issue before us is the nature of the consultation document and the degree to which it differs from what our understanding was prior to the election—in this Committee, in this House on Report and in the House of Commons—and from the position that is reflected in the current legislation and the understanding of most of the parties in this industry.
The central issue here is not the economic state of the industry. We all deplore what faces most pubs. There are one or two pubs that I would not mind closing but I would prefer most pubs to stay open. Irrespective of the state of the industry, there is an imbalance between the individual tenant and a large brewer or pub chain organisation. This legislation was designed to redress that imbalance. Whatever view we may take, the MRO was seen as one way of redressing it. We would see the PRA and the MRO not as alternatives; they are complementary. However, what has happened with the consultation paper is that the triggers for the MRO have been limited, as has the availability of the PRA to those who might not necessarily want to go for the MRO but need to understand how the situation with their rent arrangements would compare with going for an MRO. It would therefore inform their discussions and relationships with their landlord.
That is fairly straightforward but we have limited the triggers and dropped entirely the provision for any tenant to get hold of that comparative information. That is a restriction on where we were under the previous Bill. It is a restriction on the discussions that we had just before the election involving all aspects of the industry to try to reach consensus. I understand why people feel betrayed. It is an emotive thing when people feel that the Government have not played straight with them.
Lord Snape
Is the position not even worse? How is a tenant able to request a rent review under MRO without a rent increase? Is it not presupposed under the Government’s proposed legislation that all current rents to tenants are fair and that only if they are increased can a tenant make this application under MRO? Am I right in thinking that? I asked the Minister but she did not give me a straight answer. Perhaps my noble friend can help me.
Lord Whitty
As I understand it, some of the triggers that were outlined by the Minister at the previous stage were dropped. Triggers remain if there is a rent increase, or if the price of the supplied tied goods goes up beyond a certain level. There are now therefore only two triggers, whereas we previously had four or five. If you add to that the drop in the PRA, then access to information by tenants of all sorts has been seriously limited.
Baroness Neville-Rolfe
I demurred from reading out the triggers because I did not want to labour the Committee with too long a speech. I do not think they have changed or been reduced to two.
Lord Snape
I am as anxious as ever to help the Minister out but I put the same question to her as I did to my noble friend: do the conditions that the Government have attached to MRO under these proposals not mean that a tenant could apply for a rent review only if he or she received a rent increase, and that they could not apply on the basis of the existing rent?
Baroness Neville-Rolfe
My Lords, given the disappointment and concerns expressed and the lack of complete clarity as a result of my not having read the consultation paper in detail—I have tried to do so and my understanding is that there are actually four triggers—I suggest that we come back to some of these issues in a meeting, outside Committee and formal debate, between now and Report. In the mean time the discussion should continue at a technical level. We are trying to get a good outcome that will help tied tenants and will help the industry go forward in a prosperous manner. We have put out a consultation paper that was designed to try to do things in a simpler way. It is a genuine consultation. Noble Lords have raised concerns and we will obviously look at those. We will try to clarify the various points raised from the perspective of the concerns that have been expressed.
Lord Whitty
I thank the Minister for that. It would be useful if some of what she said was conveyed to us in writing. More importantly, it should be conveyed to the representatives of tenants, with whom her colleagues will be consulting over the next week or two. If there is misunderstanding about what the changes mean then we need to clarify that rapidly because there are some very hurt feelings out there, let alone among ourselves in this House. We can take it but they should not have to. We will have to think again about what we do between now and Report, and any information that the Minister could convey to us would be helpful.
Lord Mendelsohn
“Protecting small businesses online
(1) The Secretary of State, after consulting the relevant bodies, shall publish advice and guidance to businesses in relation to keeping their business safe and protecting it against online threats.
(2) The guidance published by the Secretary of State under subsection (1) shall include but not be limited to advice on protecting computer-based equipment and information from unintended or unauthorised access, change, theft or destruction.
(3) The City of London Police is a relevant body for the purposes of subsection (1).”
Lord Mendelsohn
My Lords, I am pretty sure this will be significantly briefer. This is largely a measure to highlight a particular issue and should certainly engender less confrontation. We are very supportive of the Government and other institutions on matters of cybercrime. This is a nudge. It is our attempt to add some measures to an important part of enterprise: sustaining effective and secure business, and the ability to secure cyberspace.
The ONS crime survey established that during the period surveyed there were 5.1 million frauds, of which 2.5 million were cybercrimes. These are crimes committed under the Computer Misuse Act. Their detection is based on footprints—that is, looking at devices affected by viruses, hacking, denial of services and virus proliferation, all those sorts of elements. Surveys, as I am sure the Government are aware, have indicated that 74% of small business and 90% of larger business have identified some form of cyber breach. In recent times there have been prominent cases where people who have been breached have suggested that they have the problem under control. We wish to raise this point because we do not believe this to be the case.
I personally participated in what I think outside America is the western hemisphere’s largest conference on cybersecurity, which took place in Tel Aviv with participation by chief information security officers— a term I had not heard of 18 months ago but these individuals are now very significant in their companies—law enforcement, intelligence services and government representatives, who were able to identify that the vast majority of offences actually are detected. It is easier to introduce a virus that is undetectable afterwards. In fact, cyber thieves produce around 250,000 novel variants of viruses every day, which is a huge amount, and I will come on to other aspects that impinge on this. We are seeing massive problems that we have to address.
It was instructive to learn during the course of the conference that the Sony cybersecurity breach that gained great prominence was identified only because they purposely left an imprint to make sure that people understood. Despite the fact that it had the participation of the most powerful cyber nation on this planet, you could not identify what the source was or its full extent. You could not even identify that it was North Korea by any form of examination of where it had been penetrated. It was only via the means of the traditional intelligence services that they were able to identify that it was North Korea. What hope, then, do businesses have in these circumstances?
Furthermore, there is a huge imbalance in the spend between larger and smaller businesses. Government figures that were published some time ago suggest that small and medium-sized businesses with 100 or more employees spend £10,000 a year on cybersecurity, but the smallest firms with fewer than 20 employees spend around £200 a year. This is highly problematic to the aim of having markets that are fully protected.
Over the past few years cybercrime has evolved, and it is now an enormous industry. The City of London Police estimate that it is a £39 billion industry, most of which is recycled into other forms of criminality. It is a hugely circular flow. Actually, it is an incredible market with suppliers, merchants and service providers. There are all sorts of things going on. It used to be said that armed robbery rates went down because if you wanted to be a criminal it was easier to sell drugs. Now, why carry a gun when you can make more with a laptop? The massive infrastructure of cybercrime is hugely problematic.
What I found most interesting at a different session of the cybersecurity conference was where it was identified that there is a massive penetration of companies’ customer details. Those details are blended and traded so that no company can ever detect that their particular security was breached. The details are sold in batches and strips. Even if your security is breached, no one actually knows the extent of the customer payment details that have been penetrated. In any blended list, you are not likely to have more than 2% of any particular company’s list in any list that is used for a cyber hack. I found this to be of extreme concern.
Mobile has been less prone to these sorts of attacks largely because Apple, Google and BlackBerry are the ones that integrate their encryption systems—this is relevant to a debate in other areas. The internet of things is now extremely vulnerable. The disaggregation of security is a huge problem and some fundamental strength is needed.
Criminals are able to recruit from security, intelligence and private sector organisations because they can pay more than the others, so I think that we have a massive issue here. As I say, the Government have not done enough. They have done quite a bit and many good initiatives are in place, but we are suggesting these amendments to try to give greater prominence to and amplify what they are doing, as well as to prod them to move in a couple of directions. I wish that we could have tabled an amendment that we were not allowed to, which would have been to try to encourage more small businesses in this country that are actually creating cybersecurity products. We wanted to table an amendment that would have mandated government departments to spend 8% of their entire IT spend on cybersecurity, because that would generate an ecosystem of cybersecurity firms. We have some good ones, although in this country really only in Cambridge, but imagine what a boost it would be to our cybersecurity capacity if we were able to do that.
Instead we believe that there is a role for government to set standards. In particular, we should promote our best: the City of London Police are outstanding. They are utterly world-leading on this and I pay a massive tribute to Adrian Leppard, who has been an outstanding commissioner. He is a world-leading and well renowned figure and the City of London Police are undoubtedly seen as one of the most significant, important and expert agencies in this. We would be very encouraged if the Government were to consider providing more prominent advice to businesses, which do not really know how to deal with this or know the right sort of things, and promoting the best in practice that we have—that of the City of London Police. I beg to move.
Baroness Neville-Rolfe
My Lords, this amendment is designed to protect small businesses from cyberattacks. I was really pleased to hear about the knowledge of the noble Lord, Lord Mendelsohn, on this issue. I wish I had been at the conference which he described and I agree with his objective of amplifying the issue, especially in relation to small business. I also agree with him about the role of the City of London Police.
When I worked in business, an attack on personal data held by the company was one of my top risks and concerns. Recent events demonstrate that businesses need to take action on cybersecurity and can benefit from external advice and guidance. I think it is fair to say that the Government are doing a great deal in partnership with industry on cybersecurity. We have a strong strategic programme in place, which is right. There is a five-year plan for an £860-million national cybersecurity programme to provide a range of advice and guidance to businesses of all sizes, including a specific guide, Small Businesses: What you need to know about Cyber Security. I have copies of that guide.
We have stepped up this activity recently by relaunching the “Cyber Streetwise” campaign, which offers small businesses clear and simple advice on how to protect themselves. There is information in the press and the Committee may have seen advertising at train stations or on the tube. In addition, the Government’s “Cyber Essentials” scheme shows small businesses how to protect themselves against common cyberthreats. Since October 2014 the Government have required their suppliers to hold a Cyber Essentials certificate if they are handling personal data or sensitive information. That is all increasing awareness by amplification. There are more than 1,000 Cyber Essentials certificates, which have been issued to big organisations such as Vodafone, JCB, Barclays, the Royal Mail and BAE, as well as to colleges, universities and so on. We are working to get thousands of companies and their supply chains to adopt the scheme.
Our approach is to work with a range of law enforcement and other bodies to build partnerships with businesses, representatives and trade bodies, and to use these to increase awareness. We do not believe that the suggested amendment, which I think is mainly probing, goes beyond the existing approach in ambition or effectiveness. Putting guidance into legislation could result in a tick-box approach where guidance is merely published without the associated awareness-raising, partnership-building and behaviour change that is completely essential in this area.
We want to avoid unnecessary regulation. The amendment would create uncertainty as to what businesses were legally required to do and what was best practice, possibly even giving rise to litigation. It could also reduce our flexibility in dealing with what is, frankly, a very fast-moving issue. I think we were all astonished by the Sony leak and by recent events in the UK. We are not convinced that legislating in this Bill is the right thing to do. Following the information leak at TalkTalk, though, a committee of the National Security Council is now looking at this. Cyber Ministers are looking as a group at what further changes are needed. In addition the Digital Economy Minister, Ed Vaizey, promised last week that we would meet the Information Commissioner.
Lord Hodgson of Astley Abbotts
As my noble friend is talking about the broad range of plans that the Government have, could they address something with the European Commission? As the noble Lord, Lord Mendelsohn, pointed out, cybercrime is no respecter of boundaries. The Commission has located a cybersecurity centre in Heraklion in Crete, a place that you cannot fly to in winter because you have to go via Athens. In this very fast-moving area, it would be sensible to find a way of placing the centre more centrally where people would be prepared to work and operate. I mention that in passing because it is something that needs to be looked at. I underline absolutely what the Minister says—the Government are doing a very great deal here—but this is something that just does not fit with our plans, because the European convention is so important.
Baroness Neville-Rolfe
I am grateful to my noble friend, and I shall certainly make sure that people are aware of the point that he has made. There is something of a carve-out in the EU institutions. I was at OHIM in Alicante a couple of weeks ago. The cybersecurity office, in the days when it was rather less central, was put in Heraklion. However, the key thing is that member states, as well as cyber Ministers in the UK, should get together because the cybersecurity industry is no respecter of boundaries, and a lot of visits, meetings and decision-making are made outside Heraklion.
I will not delay the Committee any longer. I wanted to give a feel of the fact that things are being done. I agree with the sentiment of the amendments: we need to make sure that small businesses, as well as big businesses, which of course suffer bigger reputational damage from leaks, are doing the right thing. That is why we have a strong strategic approach, along with targeted action to help small businesses. I hope that noble Lords have found that somewhat reassuring. I am sorry that we cannot really spend any longer on this important area this evening.
Lord Mendelsohn
I want to make the following staccato points. First, we spend £856 million. Unfortunately, that is spent principally on national security and too little is given to the other side. It would be nice if the Government could give that more consideration. We welcome the appointment of the former British ambassador to Israel, Matthew Gould, who will have a key role in cybersecurity inside the Cabinet Office—a very useful and important position.
The noble Lord, Lord Hodgson, made a very important point. We are being targeted by criminals, not from various parts of, or cities in, this country but from every part of the world. That is very easy to do and it is a significant factor. I want to make a very simple point. The scale on which this activity can multiply is absolutely extraordinary, and it goes up by factors. We cannot afford to believe that simple awareness campaigns will work; much more effective measures are needed. There is a great deal of concern about this, and discussions have taken place between a number of countries, including our own—which was represented at the conference—on how you deal with the fact that there is an information lag and that you become the weakest part of the chain if you do not deal with it. It was entirely inappropriate for the proposal to be put forward in an amendment. Of course this is a much broader issue, but we just wanted to highlight it.
My final point is that the real problem about TalkTalk is not so much that the hacking happened. All the comments about how absurd it was that a company of that nature could run a system like that are fairly irrelevant. The extraordinary thing is that most of these serious crimes go undetected. That is the bigger problem, rather than the problem of the crimes that are detected. I beg leave to withdraw the amendment.
Lord Mendelsohn
“Broadband: rollout
(1) The Secretary of State may by regulations set targets for electronic communications bodies to roll out, to businesses and commercial organisations, more than 95% coverage of—
(a) basic broadband,(b) superfast broadband, and (c) mobile phone coverageby the end of 2016.(2) The Secretary of State must prepare and publish an annual report assessing the progress that has been made on the targets provided for by subsection (1), and the impact of basic broadband, superfast broadband and mobile coverage technology on enterprise and growth in the rural economy.
(3) The report provided for in subsection (2) should be laid before both Houses of Parliament.”
Lord Mendelsohn
I am going to go for the record for the briefest-ever introduction of an amendment. This amendment seeks to set stronger targets for the rollout to businesses of basic broadband. There is a range of issues concerning broadband, not least in the UK. One area that we are most concerned about is allowing companies to market speeds that they can never attain or sustain—they are unable to do the work to achieve that. However, we have a whole range of concerns about how the market works, and I would set them out if I had more time. Some very effective comments were made in the Chamber by someone who occupies an exulted position here today. That person has been a doughty champion of broadband.
I want to focus on one element here. Most of this is really about trying to find additional funds to supplement the rural broadband rollout. In that regard, our main question is: is what has already been developed a failure? Are the providers that have been entrusted to do this, and which have previously assured us that the funds were available, wrong? Has there been a mistake? What would be the benefit of being able to do this? Has money been apportioned to this purpose, or will we be waiting for the spending review to find out what it is?
Lastly, I think that we will return to this on Report but I feel rather foolish as I spent too little time reading about the Industrial Development Act and these amendments are consequential to it. In this year’s annual report on that Act, under this wonderful gem, “Other Current Section 8 Schemes and Miscellaneous Section 8 Awards”, I notice that the Industrial Development Act, which we are essentially amending, was used to support the Prompt Payment Code. That was a rich treasure that I failed to fathom, and I hope to return to it on Report. I beg to move.
Lord Stoneham of Droxford
I do not want to delay the Committee. I think the Minister knows of my ongoing interest in the subject, and indeed she herself has shown great interest over the years. I must declare my interest as someone who has inadequate broadband; only one mobile company operates in my area, and the parliamentary system operates only upstairs in my house. As I do not live too far from two quite important industrial city centres, I regard this as completely inadequate.
I simply do not believe some of the figures that we have supposedly achieved with super broadband. Obviously, though, the big issue coming is what happens after 2016. The Government have to address that because it is very important, particularly to remote rural areas where quite important businesses can operate and must have access to these facilities. I look forward to the Minister’s reply.
Lord Deben (Con)
Could the Minister help me on this, too? I have had exactly the same experience. I think that people around the country always find the figures very difficult to believe, because if you happen not to be in the section that is provided with broadband, you do not believe that anyone else is getting it. You form your opinion from your own experience. I wonder whether there is a possibility of helping those who are still waiting for broadband or, as in my case, are told that they have broadband but it does not actually work, which I think is what happens in much of Suffolk. I wonder whether there is a better way of helping us to feel that there might come a day in which we could operate our businesses more effectively from home than we can at the moment.
Baroness Neville-Rolfe
I very much agree with noble Lords that it is important for consumers and businesses to have transparent information on how mobile and broadband coverage is improving. I am glad that my noble friend Lord Deben has joined the discussion. He is right: the truth is that perception in this area is lacking reality. It was a slow start, there is more to do and there are lots of individual problems with broadband, but the Government’s plans are now beginning to yield impressive dividends.
We are of course committed to ensuring that the benefits of improved broadband and mobile services are felt right across the nation. That is why we made a universal service commitment to provide minimum service levels of at least 2 megabytes per second by the end of 2015. Basic broadband is already available to virtually 100% of UK premises, and by the end of this year only about 1% of premises will receive less than 2 megabytes per second.
To deal with the remaining 1%, which in a sense is where we are, all premises will have access to at least 2 megabytes per second through the option of satellite broadband connections. They will have the capability of delivering superfast broadband for those who want it. Noble Lords may not know that the satellite scheme is currently being trialled in West Yorkshire and Suffolk, close to my noble friend’s home, and a national scheme is due to go live in December. We are very pleased with the results so far.
We remain on track to provide 90% superfast broadband coverage by early 2016, and we are aiming for 95% of UK premises—the number in the amendment —to have access to superfast speeds by December 2017.
As I think I told the noble Lord, Lord Stoneham, superfast is already available to over 83% of homes and businesses in the UK. Importantly, that is up from 45% in 2010. So that was a good effort by the coalition Government. That is the highest coverage among the top five European economies.
Recognising problems in rural and remote areas, the Government have made available up to £8 million to support pilot projects to extend superfast broadband beyond 95% of UK premises, using satellite and wireless, as I said, and will publish further lessons from those pilots later this year.
Improving mobile connectivity is also a priority. Around 94% of the UK’s land mass has coverage from at least one mobile network operator and 69% has coverage from all four. But we want to go further. To this end, a landmark agreement was reached with all four operators in December to ensure that 90% of the UK’s landmass will have voice and text coverage from each MNO by 2017. What this also means is that 97.7% of the UK will have a signal from at least one mobile operator.
These are relentless and concrete measures that the Government have taken to improve coverage. We are striving every day to make improvements so that everyone can benefit from the digital economy. I share the frustrations of everybody at the time that this has taken, but we are committed to ensuring that we have the infrastructure we need for this fourth utility.
The noble Lord proposed a requirement to report on progress being made in improving broadband and mobile coverage. This is already widely available from lots of different sources. I can make the list available to noble Lords so that they know what is being done. I am not convinced that the information gap is there; what I think is there is the need to continue getting this fourth utility fully across the UK. I hope that the noble Lord will feel able to withdraw this amendment.
Lord Mendelsohn
I thank the Minister for her comments. The one thing that comes across very strongly in this Committee is that in many ways one of the real crises we have in business is that far too often too much is said and marketed. It has become very apparent that trust in business is continuing to fall, and on very reasonable grounds on the part of the consumer. I have a lot of kids so I have two broadband connections into the house, neither of which provides consistency of service or provides anywhere near the advertised level of service. I would be interested to know whether at some point the Government will consider making it a condition that you can market only the minimum guaranteed and consistent service; that could be attractive rather than these pie-in-the-sky numbers. It is not acceptable to put in a fibre-optic cable to one point and then market it to a whole area with no consideration being given to whether you will put in a superfast connection.
We have to be able to say, “We do not want to be followers. We want to be leaders”. This rollout has become very difficult. I hope that the Minister takes note of the following. I know this is an area in which she has a personal and keen interest and that many members of the Government are also very interested in it. It would be a good and positive move to encourage the commercial operators in this sector to do more and to do it faster and harder. That inevitably makes sense. The Minister talks about using satellite or wireless. Given the money we have invested and the provisions we have made, we might just as well have given the cash to Google and Facebook—I declare an interest in that my wife works for Facebook—to use their drones or balloons because we probably would have been able to do the whole thing a lot faster and quicker with those mechanisms. We should not be in the position whereby the provision of this service is so slow. I am more than happy to withdraw the amendment but hope that the Minister will be consistent in her efforts to make sure these operators deliver.
Baroness Neville-Rolfe
I am delighted to say that our efforts continue. We are trying to make sure that, as it were, reality goes faster. It has been a huge investment programme. I agree with a great many things that the noble Lord has said. I think there is a feeling right across the House that investment in this area is really important, which is one of the reasons I am so pleased that everybody supports the amendment we have put forward to the IDA, which obviously would allow extra spending in areas beyond things like the code that the noble Lord referred to.
Baroness Hayter of Kentish Town (Lab)
My Lords, Amendment 53ZH is in my name and that of my noble friend, Lord Stevenson. I will also speak to the other amendments in the group, which go to the heart of the exit payment problems.
It is not that we are particularly against what the Government said that they wanted to do in curtailing the very large exit payments made to a tiny handful of public servants who then re-enter the service of the state, albeit in a different guise. Indeed, as I am sure the Minister does not need reminding, the original words in the Conservative Party’s manifesto—on page 49, I think, if she has a copy here—were:
“We will end taxpayer-funded six-figure payoffs for the best paid public sector workers.”
Best paid? No, the cap will affect those with long service rather than those on the highest pay—hence our probing amendment to discover what exactly the Government are out to achieve. This is not aimed at the “best paid” of our public servants. The Cabinet Office confirmed that some earning less than £25,000 a year could be affected because of their long service—that is, serving the public, often for salaries below those in the private sector.
We assume that this was not the Government’s initial intention, especially given that they said in their memo to the Delegated Powers and Regulatory Reform Committee that the regulations would only prevent “vast benefits” being paid to “a few individuals”. That is not what we have, so why has it changed? Has the Government’s intention changed or is this just poorly thought-out legislation, which ends up hurting long-standing rather than highly paid staff?
Will the noble Baroness give the explanation that I think is due to us and, indeed, to all public servants? Does she consider that £25,000 equates with “best paid”? Has the intention changed, so that the Government want long-serving workers to be caught? Is this just a rather nasty, crafty little device that they have alighted on simply to help to reduce the deficit, given that the Chancellor seems to be having difficulty with it, by hanging that deficit around the neck of their own employees? Or is this just mistaken drafting, which the Minister will be happy to amend on Report?
As I suggested, the impact assessment suggested that the cap could save “low hundreds of millions” over given years, as if anticipating relatively small numbers being caught. However, no formal impact assessment was undertaken,
“as there are no obligations or costs imposed on business”.
Of course, an impact assessment is always possible and the impact on the people concerned, or indeed on the efficiency of government, should have been a central concern, although it was clearly not to Ministers.
We will come later to the particular impact of “strain payments”, but in the mean time we would like some clarification of why the particular figure was chosen. Was it simply to be under the “six-figure” that had been mentioned in the press? What thought was given to the impact across the public service? Were medium-or even lowish-income employees meant to be caught by it? Also, why is there a disparity with the NHS figure?
Furthermore, if the Government are really intent on dealing with the mischief of some super-payouts in this rather crude formulaic way via a cap, then not only should the Minister consider whether the figure is correct, but she should also give a commitment to index-link the amount before even Foreign Office cleaners are included. The Local Government Association supports the amendment to ensure that the figure is re-evaluated on an annual basis, so as to take into account differences in pay increases in separate areas of the public sector.
I am sure that the Committee is familiar with the figures as to who could be caught by the cap. According to the Cabinet Office, more than 20,000 in the main Civil Service and many more in arm’s-length bodies would be. It is the combination of age, and length of service rather than high pay that trap these people. The examples given have included a librarian, with a career average salary of £25,000—perhaps 34 years with the council when its library closes—and she is redundant at 55. It is a bit late to start a new career, and there are not a lot of private libraries to which she can move. She will be caught by the cap. Similarly, a 52 year-old tax inspector, or indeed a prison warder, who has worked for 25 years, or a 50 year-old health and safety officer with 20 years’ experience, or a 56 year-old school inspector after 16 years with Ofsted, or perhaps with FOS, if PPI ever got sorted.
Other groups include educational psychologists, mostly employed by local government, earning between £40,000 and £50,000 a year. They do not consider themselves the “best paid” in society, and I share their view. However, again, they will be caught, not because of their pay rate but because, if they are over 55, of the so-called strain payments—money which, of course, does not go to the person concerned but to the pension scheme, as we will come on to in later amendments. Can the Minister therefore say what thought the Government gave to the public servants who do such valuable work for all of us?
The cap as it is in the Bill at present covers compulsory redundancies, where of course the individual has no choice as to whether to walk and no opportunity to weigh up the pros and cons of leaving the service, but will simply lose the rights and reasonable expectations built up over a career. They—and we—deserve to know why this figure was chosen, and whether it really was aimed at these “good and faithful” colleagues. I beg to move.
The Deputy Chairman of Committees (Baroness McIntosh of Hudnall) (Lab)
My Lords, I inform the Committee that if this amendment is agreed to I cannot call Amendments 53ZJ to 54BC inclusive by reason of pre-emption.
Baroness Donaghy (Lab)
My Lords, Clause 26 sits rather oddly in a Bill about enterprise, a bit like a carbuncle on the end of a nose. I am not sure whether it belongs here; however, as I want the whole clause deleted, I will not suggest where it should go, except through the door market “Exit”. After a minimal consultation, a misleading manifesto statement and an all-round rubbishing by the Delegated Powers and Regulatory Reform Committee, the Government still seem to want to go on to attack public service workers. One thing I ask—plead, even—is that if this clause is not deleted, the Government must announce the date when the cap is to be applied. This uncertainty is causing anguish to a lot of individuals and uncertainty to the reorganisation plans of employers.
Possibly one of the most surprising elements of Clause 26 is that there is no impact assessment—or at least, it took me two days and the support of the Printed Paper Office to find a small footnote contained in an annexe to the main impact assessment. It is the size of an office ruler—that is the impact assessment for this clause. As my noble friend Lady Hayter already indicated, this very brief reference said:
“No Impact Assessment required as there are no obligations or costs imposed on business”.
This is extraordinary. Even with the legislation on dangerous dogs there was a 50-page impact assessment. This tiny statement goes on to say that,
“the cap could result in savings in the low hundreds of millions of pounds over the course of this Parliament. This is about ensuring tax payers get a fair deal”.
That is as scientific, objective and factual as this impact assessment gets.
The Delegated Powers and Regulatory Reform Committee has made its view clear. It recommends that,
“the affirmative procedure should always apply to regulations made under new section 153A(1) to (3) of the 2015 Act (inserted by clause 26 of the Bill)”.
The committee indicated that:
“Given that the regulations could potentially affect large numbers of persons, we believe that the affirmative procedure should always apply”.
The committee accepted that it was,
“feasible that the … powers would apply only to a relatively few public sector employees leaving their jobs in closely defined circumstances, and that the type of exit payments prescribed may be very limited”.
It went on to say:
“However a future Government could recast the regulations so that they applied to all or most types of public sector employees and exit payments”.
In response to the Delegated Powers Committee, the Government suggested that the regulations would operate only to prevent “vast benefits” from being conferred on “a few individuals”, as my noble friend Lady Hayter has already said. The committee disagreed and thought that the number of individuals affected was,
“potentially far more significant than implied”.
Lastly, the committee did not agree with the Government’s statement,
“that Clause 26 … merely raises ‘questions of management of public service workers that have traditionally been a matter for Ministers’. The regulations could override accrued contractual or legislative entitlements to exit payments calculated in a particular way. This is not, we believe, simply a management of personnel issue that requires only a modest level of Parliamentary scrutiny”.
I add that Clause 26 is proposing to amend an Act that is less than a year old. The Delegated Powers Committee’s statement that a future Government could recast the regulations more widely could also apply to this current Government, if they are constantly going to amend new legislation before it has had time to take effect. The Government want to give themselves and future Governments Henry VIII powers to overturn negotiated agreements, renege on current ones, create anxiety and stress among thousands of public service workers and make it more difficult for employers to reorganise.
I turn to the consultation document. The consultation that took place did not adhere to the Cabinet Office principles, which state:
“Timeframes for consultation should be proportionate and realistic to allow stakeholders sufficient time to provide a considered response and where the consultation spans all or part of a holiday period policy makers should consider what if any impact there may be and take appropriate mitigating action”.
The footnote to this principle makes it clear that the “holiday period” includes August. The consultation was launched on 31 July 2015 and concluded on 27 August 2015. That covers the entire holiday period. The Government have said several times in their response to the consultation that few alternatives to their proposals were put forward. That is hardly surprising when most people would not have seen the significance of the proposed cap in many industries, or how complex contractual or pension rights might be affected.
It is a credit to those organisations that did respond—over 4,000, according to the summary document—and it was clear that a significant number were not in favour of a cap, given other reforms to public sector terms and conditions. It was also clear that a significant number of respondents disagreed with the Government’s intention to include early access to unreduced pensions within the scope of the cap. Having had some experience of these consultation exercises that Governments in power, irrespective of party, indulge in, I know that the statement that “a significant number” object to something usually means that a proposal is very unpopular indeed.
I welcome the fact that the Government intend to exclude payments for untaken annual leave within the scope of the cap, just as I welcome the fact that the Government are currently minded not to include individuals with protected TUPE terms. However, they will include payments in lieu of notice. This gives employers less and less flexibility to deploy their staff, particularly during periods of constant reorganisation. It also means that employees may not budge until they are thrown out by means of compulsory redundancy because of the inflexibilities that this provision provides. It will be a game changer in most public services and there is bound to be a reaction, but perhaps that is what the Government want. I believe that the Government set out with the intention that the headline severance figures for the top brass in some sectors should be curbed, if only as a DMA—a Daily Mail appeaser. All the public statements made seem to point that way. I am beginning to wonder if the Government have changed their focus and see this as a golden opportunity to impose another hit on public service workers and public services, and thus to undermine national agreements and clawbacks on central control, with quite shocking Henry VIII powers.
I have been involved in collective bargaining in the public sector for more than 40 years and I know for a fact that every agreement reached in the public services is crawled over by the home department. It knows to a farthing how much a deal will cost. To adopt a shock-horror approach now to deals that have previously been agreed by government departments is disingenuous. The Government pretend to represent working people, but that is a hollow boast, and will be seen as such by thousands of loyal and long-serving public servants in their fifties whose life plans will change dramatically as a result of this clause. Far from representing working people, the Government are in danger of undermining them both in terms of their morale and their bank balances. Moreover, public sector authorities are crying out for an announcement by the Government on when the cap might be introduced. As the Local Government Association has said, workplace restructuring plans for 2016 and beyond will already be under way in local authorities, and any further delay on this will restrict councils from taking important decisions.
I should just say that the figure I suggested in one of my amendments simply reflects a set of agreements already negotiated in the National Health Service. It has taken two years to reach and would probably solve quite a lot of the problems that we are talking about here. Alternatively, of course, if some indication can be given about longevity of service, that might provide peace of mind to some people. Finally, I urge the Minister to give us some reassurance about annual re-evaluation. Given the earlier discussion on pubs and the difficulties in that area, again, having something in the Bill to that extent might go a long way to relieving some of the individuals affected.
Lord Stoneham of Droxford
My Lords, as housing associations have been designated as part of the public sector, I ought to declare my interest as the chairman of Housing and Care 21. I will refer to the housing sector in the course of my remarks on these amendments. Personally, I have deep concerns about this. We know that it was a manifesto commitment of the governing party. It was a good selling point for them because it was populist, but I fear and know that it will result in poor legislation and will have unintended consequences.
I am one of those who is immensely worried about management capability in the public sector with all the demands to reform, change and improve it. But here we are, again putting public sector staff at a disadvantage as against the private sector at a time when, frankly, that sector remains rampant in terms of its conditions, benefits and even its pay-offs, certainly for high-level staff. We will find as a result of this change that we have further difficulties getting the managers that we want for these very difficult jobs, where we are trying to get change and reform. It is not easy and the very best people are needed. I have said this before but 100 good managers are worth £1 billion in public spending. This puts them at a disadvantage.
The noble Baroness, Lady Donaghy, said that this does not affect just the high paid. It also affects some of the lowest paid in the public sector, for all the reasons she set out. This is not simply a populist measure because it deals with the high paid; it affects others. Pensions are the main problem here. There are generous aspects of public sector schemes but we have recently been through a renegotiation on a lot of these and we are now going to break them once again. What is the Government’s word going to be worth in these situations where contractual obligations are being overruled by legislation?
I will give one example from the housing sector. The most difficult job in my career is making changes where people have to be made redundant. I always find it painful, but I have always ensured one thing—you have to show other employees that when you make changes you look after the people who are vulnerable in that situation. Whether we like it or not, we are going to face those situations in the next five years. We have never before seen the reform and change that is going to come in the public sector on the scale that is coming. We will know more when we see the public spending commitments but it is huge. At this precise moment we are undermining morale and will increase resistance to change.
In every housing association I have chaired we have had to make changes and we have sometimes had to make payouts in excess of £100,000. However, I have never regretted doing so because we have saved millions in return. If we give up these opportunities for change by putting in inflexibilities which make change more difficult, it will hold up reform and improvements that need to be made.
It is absolutely essential that there is some flexibility here. Normally, there would be a ministerial guideline that all payments above a certain level should be approved. That should be a normal management guideline instruction, and if this was not part of a populist general election commitment, it is what would happen. It would be the best thing for the public sector. It would provide restraint and a guideline on what is appropriate. Above all, it would provide flexibility for those who deserve payment and need to be protected. That is what should happen, so anything we can do in this legislation to provide a loophole and some flexibility must be welcomed. Ministers will regret not doing it in a year or two when they are finding it difficult to get change in the public sector or when they are trying to get people to believe agreements they want to make. People will say, “Well, you made an agreement a year ago and you broke it. It was on pensions, something that is pretty important, and you just it let it go, so why should we trust you now when you are trying to make even bigger changes?”.
Equity, sensitivity and trying to get change are important issues and are going to be very important in the next five years. Any Government that go into these changes wearing these handcuffs will find it very difficult to get change and improvements, nor will they deserve to do so. At the end of the day, change is painful and difficult for the employees in the sector where it is being done. They need to be able to say that the people who are being sacrificed for change are being well protected and that their agreements are being honoured. That will actually help achieve change quicker. I hope the Minister will assure us that on Report they will look at giving themselves some flexibility. That will be welcomed.
Baroness Neville-Rolfe
I am grateful to noble Lords for their comments. At the outset, I shall address the point that the noble Baroness, Lady Hayter, made about whether the cap had been extended deliberately. First, £95,000 is a large exit payment, whatever the level of an individual’s former salary. The Government do not believe that the taxpayer should continue to fund exit payments larger than that. The clause allows for the cap to be relaxed, including to take account of exceptional individual circumstances. The large majority of workers are not affected by these arrangements; for example, less than 2% of recent exits in local government would have exceeded the cap. But where generous early retirement provisions are offered that include immediate payment of unreduced pensions, some lower-paid staff with very long service can currently be eligible for exit packages above the level of the cap.
The Government recognise the importance of exit payments in providing workers with support as they get back into employment or enter retirement. However, the fundamental point is that the Government do not believe that it is fair for taxpayers to continue funding the small minority of exit packages that cost over £95,000. The Government made a clear commitment in their manifesto—the source of the figure—to end six-figure exit payouts for public workers.
The noble Baroness, Lady Donaghy, asked about consultation; she said that it had been inadequate. The measure has been public for a long time. We announced the intention to legislate in May, I think, in the Queen’s Speech. We received over 4,000 responses, and do not believe that that suggests that there has been insufficient time to comment. Obviously, the measure will go through full parliamentary scrutiny during the passage of this Bill; we discussed it at Second Reading, are discussing it today, and I am sure that it will be discussed again. I express my thanks to the noble Baroness for her positive comments about some of the exclusions, which she has rightly highlighted. She also asked about the impact assessment. It is not a private sector impact, so it does not go through the RPC. There was an impact assessment as part of the consultation, which followed the usual criteria set out in government guidance. I do not know whether she has seen that; if not, obviously I will send it to her. I understand that the public had an opportunity to comment on it.
It is currently possible for employers to use taxpayers’ money to fund excessive exit payment, as a substitute for good management practice. I remember the noble Lord, Lord Stoneham, saying at Second Reading how important management was. I think he said that 100 good managers were worth a billion pounds. The availability of very large payments can lead to issues of poor performance. The possibility of redeployment is not always given adequate consideration, which we would all like to see. The cap and the additional scrutiny it brings to payments will encourage employers to act with discipline and proportionality in considering public sector exits, and will help to ensure that good management practices are embedded in decision-making.
Amendment 53A seeks to increase the value of the cap to £145,000, a much higher figure. It would require taxpayers to continue to fund six-figure exit payments for public sector workers. Statutory redundancy pay is of course capped at £14,250. Exit payments of £145,000 would of course represent payouts of 10 times that amount. A cap even at the level proposed by the Government will not affect the large majority of public sector workers, as I have said. For the few who receive such payments, the cap does not reduce their compensation to an unreasonable amount and still compares favourably to the private sector. In addition, as I have said, the clause applies for a waiver power to allow the cap to be relaxed in exceptional circumstances.
Baroness Hayter of Kentish Town
I am desperately trying not to use the word “shameful”, but I am afraid that that is what I think it is. It is fine to use taxpayers’ money to bring umpteen new Peers into this House, which costs around £100,000 per year, and it is fine to use taxpayers’ money for ministerial redundancy, but somehow paying someone a reasonable amount that they had reasonable expectations of receiving—which I think may be challenged in court—because of their length of service is not acceptable. I do not accept that there is a manifesto commitment on this. That was for the very best paid. I think I am right in saying that at least the Minister accepts that some lower-paid people will be covered by the cap, but that was not the manifesto commitment.
I think that the Minister said that fewer than 2% of recent payments would have exceeded the cap, but 2% involves a lot of people. Those people would not have got what they would have genuinely earned because of their long service. There may now be a rush to get out before the summer, knowing that otherwise something that one has earned over one’s life will suddenly be taken away. If the private sector were doing it, they would find themselves in court fairly quickly. The Minister said that this could be reviewed under regulations, but of course the fear is that the figure could come down. The whole point of having it reviewed to ensure that it keeps up with inflation is that it is a one-way movement. The Government could suddenly decide that £80,000 or £70,000 was the right figure, or they might not want to pay their employees at all.
I am afraid that I find this fairly shameful. The idea that you can be redeployed in a high area of unemployment at the age of 57 is fanciful. The idea that someone who has been a specialist worker can be retrained at that age is a nice thought; some of us have managed it after the age of 60 but we are the very lucky ones in life. Most people are not like this.
I regret that the plea from the noble Lord, Lord Stoneham, about giving us guidelines and flexibility to enable the public sector to be flexible and provide what is best for all their staff—those remaining and those going—and for the management structures has received no response. This is not one of the Government’s best days. I beg leave to withdraw the amendment.
Lord Borwick
Lord Borwick (Con)
My Lords, this amendment does not try to amend the purpose of Clause 26; rather, it would change an ambiguity in the final line of new Section 153A(1) inserted by Clause 26, where the qualifier,
“any period of 28 consecutive days”,
could be said to refer to payments rather than to exits. It might be possible for a generous employer to pay £95,000 every month, which I presume is not the intention of the clause. My amendment would change the wording so that it would clearly refer only to the exits and ensure that duplication of payments could not be made.
Baroness Neville-Rolfe
I thank my noble friend Lord Borwick for his support for the cap and for his interest in helping us to ensure that the provisions that implement it are clear and understandable to those who will be affected. To cut the cackle, I am happy to accept his amendment.
Baroness Hayter of Kentish Town
My Lords, I apologise on behalf of my noble friend Lord Wills for his absence, which was completely unavoidable. On behalf of him, the noble Lord, Lord Low, and myself, I shall move Amendment 54. It is a simple amendment and I think that the case is fairly clear. The public, consumers, other workers and, indeed, very often the Government need whistleblowers if the public sector is to perform to the standards that we all expect of it in serving the community, protecting both its clients and employees and indeed ensuring that we as taxpayers get value for money from every part of the public service. Uncovering mismanagement or fraud, risks to vulnerable people or poor governance—all these sorts of things are in the public interest. Those who see things from the inside that quite rightly need to be known outside their coterie must be encouraged to whistleblow, but safe in the knowledge that they will have proper protections.
In supporting the amendment, the Association of Educational Psychologists, to give but one example, considers it vital to exempt whistleblowers from the cap. To quote the association:
“If one’s whole career is to be risked then an exit payment limited to £95,000 or less might act as a deterrent resulting in less whistleblowing”.
That would be a loss to all of us. I trust therefore that the Minister will accommodate this exemption, if not today then by bringing something forward herself on Report. I beg to move.
Lord Low of Dalston (CB)
My Lords, I put my name to these amendments and I am very happy to support them, but I confess that the forces in their support are in some disarray today. We have already heard about the unavoidable absence of the noble Lord, Lord Wills—prevented from attending by a rival speaking engagement to which he was committed. I myself am less fully briefed and more underpowered than I would wish, having literally stepped off a plane this morning from the United States to find that the amendments were coming up today. I had been expecting them on Monday; indeed, for some time this afternoon it seemed as though they would not be reached until Monday, such was the Grand Committee’s rate of progress, but here we are. I am most grateful to the noble Baroness, Lady Hayter, for riding to the rescue and moving the amendment.
The concern is basically that those settling claims where they might have got unlimited damages had they gone to tribunal will be disproportionately prejudiced if the amount at which a claim may be settled is capped. This is certainly the case with claims under PIDA, the Public Interest Disclosure Act, but it may just as much be the case with discrimination cases. The Minister might care to comment on that, as we may wish to take it up on Report. A second concern is that capping settlements where there is no limit on the level of damages that may be obtained at tribunal can operate only as an incentive to go to tribunal—to go to litigation rather than settle.
The noble Baroness spoke to the amendments very ably and, given the hour, I do not think I need say anything more about them, save that I fully support them.
Baroness Neville-Rolfe
I thank noble Lords, including in his absence the noble Lord, Lord Wills, for tabling this amendment. I was able to have a good discussion with him last night, and I hope that there will be some positive news for noble Lords.
I reiterate that the amendment has three components: a regulatory referral system for whistleblowing, access to legal advice for whistleblowers receiving exit payments, and the publication of guidance. If an exit payment relates to a potential whistleblowing disclosure, that would need to be agreed by both parties under a settlement agreement or following conciliation through ACAS. I assure noble Lords that no such agreement can prevent an employee from making a public interest disclosure as stipulated in the Employment Rights Act 1996. Any provision that sought to do so would be void, so a regulatory referral system is unnecessary to enable proper investigation of any malpractice. Any employee entering into an agreement that involves waiving the right to take such an issue to employment tribunal should be fully advised of the impact that would have.
There have been a number of recent developments on whistleblowing, including new guidance. The guidance for employers recommends that they confirm in their whistleblowing policies that settlement agreements cannot prevent workers from making disclosures in the public interest. The guidance for workers clarifies this point. So, too, does guidance published by the Cabinet Office in February this year for Civil Service organisations and their arm’s-length bodies on severance payments and settlement agreements.
Finally, I hope that what I say in relation to Amendment 54 will be good news. The amendment seeks to exempt payments to whistleblowers from the cap on public sector exit payments. I assure the Committee that, where a whistleblower successfully brings a case to an employment tribunal, the cap will not apply to the award made. Under the indicative regulations, which set out how it is proposed to implement the cap and which the Treasury has made available, any payment made under an order of any court, including employment tribunals, would be outside the scope of the cap.
I hope that noble Lords have found that explanation reassuring. The noble Lord, Lord Wills, certainly did, and I hope that on that basis the noble Baroness will agree to withdraw the amendment.
Lord Low of Dalston
It is not in dispute that the awards which may be made at tribunals will not be capped. The concern is that the settlements will be capped, and I am not sure that, from that point of view, the Minister has met the point of the amendment.
Baroness Neville-Rolfe
I am grateful to the noble Lord, Lord Low, for raising that point. It is important that I check the situation and, if I may, I will write to him. I think that our objectives in this area are the same, but it is important that I understand precisely the interplay of this provision and other legislation. I will come back to him.
Baroness Hayter of Kentish Town
The noble Lord, Lord Low, calls himself underpowered and then he understands every jot and tittle. The point that he has just raised is the key one. Where these sorts of things happen, it is much better if they can be dealt with by settlement rather than involving expense and coverage for the employer and everyone else. I, too, will want to look at this carefully and to take advice from my noble friend Lord Wills. However, for the moment, I beg leave to withdraw the amendment.
Baroness Donaghy
Baroness Donaghy
In order to save time I will speak to the next group of amendments, if that is all right. There is a lot of overlapping, not because I am boring but because the amendments are all intended to try to elicit from the Government what their intention is regarding the salary level that is going to be affected and to ask whether they think that honouring national agreements is sufficiently important to allow those agreements to take their course, perhaps introducing a two-year period if those agreements are already in place.
These are probing amendments. I will cut down considerably what I was going to say but I want to come back to the question of what the acceptable line on the impact of the exit cap is. We want moderately-paid employees with long service to have peace of mind. I ask the Minister whether the Government have gone back on the statement made by the then Treasury Minister, Priti Patel. In January 2015 she said:
“This commitment, which will be included in our 2015 General Election manifesto, will cap payments for well-paid public sector workers at £95,000. Crucially, those earning less than £27,000 will be exempted to protect the very small number of low earning, long-serving public servants”.
The impression given is that the cap applies to well-paid public sector workers and not to low-earning, long-serving employees. What has happened to the figure of £27,000 that was quoted? Is this another example of reneging on a promise?
The manifesto said that:
“We will end taxpayer-funded six-figure payoffs for the best paid public sector workers”.
Not the better paid, not the moderately paid, or the averagely paid, but the best paid. How misleading is that? Will the Minister clarify what the Government mean by “low earning” and “best paid” and how they will deal with the vast majority in the middle? Does she believe that the manifesto referring to the “best paid” would have rung alarm bells for thousands of public sector workers in their fifties? I do not think so. Some noble Lords may have received correspondence from people who will be affected. I will read some lines from Leona Parker, who said:
“I work at Dungeness A site, one of the original civil nuclear reactor sites where many of my colleagues have worked many dedicated and proud years of service”,
and,
“are being faced with the prospect of long-standing agreements being reneged on. What kind of Government would say this is fair?”
I had other examples that, to save time, I will not use.
In the consultation response, the Government referred to the waiver process and included the line,
“the full council to take the decision whether to grant a waiver of the cap in cases involving local authorities and for local government bodies within their delegated powers”.
There is no reference to this in the Bill. I know that certain assurances have been made about this, but there is no reference in the Bill to the waiver. Ministers are given powers to do something, but there is no indication in the Bill at the moment. I would feel more assured if this could be done.
The Local Government Association is also concerned about how the proposed waiver process will apply in schools, where governing bodies have their own decision-making powers. It is important that the Government make a clear statement that they plan to include regulations that will allow the full council of local authorities, which is a full public meeting of the council, to choose to waive the cap in circumstances of their choosing. Clearly, authorities would be required to publish a policy on the limited circumstances in which they would consider the granting of an exemption. That is only right and proper. I would prefer to see this in the Bill but I will listen with interest to what the Minister says to reassure us. I beg to move.
Baroness Hayter of Kentish Town
My Lords, the amendments in this group are pretty crucial. In part, they take forward what we said in the first group about exit payments and helping the good management of the service at local and national levels. There are clear examples of where existing rights and agreements should not be undermined, such as payments in lieu of notice where they are part of a contractual entitlement of employment, which, as has been said, is often a useful tool for employers in managing exits.
In the Civil Service the proposed cap cuts across the negotiating of an agreement. The then Minister for the Cabinet Office, now the noble Lord, Lord Maude of Horsham, described the agreement reached in 2010 as one that would be lasting. He said that it would provide,
“a fair balance between the interests of taxpayers and the interests of civil servants and protect those approaching retirement and the lowest paid”.—[Official Report, Commons, 14/12/10; col. 849.]
This Bill should not undermine that agreement, whatever one thinks about the desirability of the principle of the cap itself. Nor, as we have heard, should the cap hamper the reorganisation and modernisation of public services, as suggested earlier by the noble Lord, Lord Stoneham, and as wanted and supported by other parts of the Government. As my noble friend has said, the Local Government Association is particularly worried that the cap would threaten its future staff restructuring because it is such a rigid cap and because of its particular impact on long-serving employees who may be exactly the ones whose tasks or skills are now less in demand. It would also exclude some staff from early retirement who might otherwise have been part of a headcount reduction exercise, with strategic restructuring now hampered as councils are perhaps forced to keep on their highest-paid staff instead of allowing them to retire and bringing in lower-cost replacements.
The cap, of course, once it is in, will also act as a disincentive to those considering voluntary redundancy. That is likely to mean there will end up being more compulsory redundancies as well as difficulties in modernising the service. This matter is of particular importance to local government, which is partly why we have tabled Amendment 54H to include in the Bill rather than in secondary legislation the ability to make exemptions where the full council of the local authority decides to grant a waiver of the cap. The Government have now published their draft statutory instrument allowing for a waiver where the full council so agrees. However, as my noble friend Lady Donaghy said, this ability could be swept away if it is only in secondary legislation, with local government having no guarantees in this regard. That makes future planning very difficult. We therefore hope that Amendment 54H will be considered a better way forward as the principle has already been signed up to by the Government, but the amendment would give everyone confidence in it.
The amendments containing specific figures that we have now brought into this group seek to push the Government to define the words that we all keep using—that is, what is meant by “the best paid”? Is it people on a salary of £30,000, £35,000 or £40,000 a year? It is important to be clear about that. It is hard to imagine the Government not accepting that anyone earning below the national average wage should be excluded from this provision. Therefore, we hope that Amendment 54BA will be accepted.
We also think it important to exclude from the provision people with long service. That is important not just for their sake, and what they have earnt during their career working for all of us, but because of the advantages that this offers to management. After all, those people have earnt those benefits. We do not consider that the Conservative manifesto wanted to catch people who have given long service to this country. Those are the people we would like to see excluded from this provision. I imagine that the Minister concurs with that objective and hope that she can find a way to accept that amendment.
Baroness Neville-Rolfe
My Lords, this group seeks to delay the implementation of the cap, create exemptions or introduce an earnings threshold. I am very grateful to the noble Baroness, Lady Donaghy, for grouping these together.
Amendment 54B seeks to ensure that the cap cannot stop payments of more than £95,000 if they are already allowed under current arrangements. The effect of this would be that employers would have to make amendments to compensation schemes, or to make changes to existing contractual entitlements before the Government could stop such payments. This would have the effect, I fear, of making the exit payments cap ineffective, or delaying it indefinitely.
Amendment 54G seeks to put in place a transitional period of two years after Royal Assent during which the cap would not apply in cases of what she describes as “institutional reorganisation”. The Government do not accept that it would be appropriate to frustrate the intention of the cap by delaying its full introduction for two years. However, the Government recognise that workforce restructuring can be a lengthy and complex process. There may be instances where exits that have long since been agreed will not take place until after the £95,000 cap comes into force. We recognise that there may be instances where it would be appropriate to give effect to such agreements after the cap comes in.
Amendment 54H concerns the power to relax the restrictions imposed by the cap. The clause provides that this is exercisable by Ministers of the Crown, and ensures that any exercise of that power is subject to scrutiny. The Government agree that it is appropriate that the power to relax restrictions be vested outside Ministers in relation to certain bodies outside central government. This includes local authorities. The draft regulations, which noble Lords will now have seen, provide that the power to relax restrictions on exit payments may be exercised by full councils of local authorities in respect of payments that they make. However, we need to ensure that the level of scrutiny and reassurance remains the same so whoever exercises the power must do so by reference to guidance issued by the Treasury, and must of course keep a record of the exercise of that power.
Baroness Donaghy
I thank the Minister for dealing with all those amendments so quickly. First, I think that the flexibility is entirely on the Government’s part. The exercise of Henry VIII powers will increase the uncertainty and the lowering of morale among public servants. It will increase litigation and encourage people to go to employment tribunals. The Minister gave no indication whatever as to the level of salary that the Government had in mind beyond which they did not think this would have an impact. I thought that was interesting. We gave her several opportunities and quoted several figures, including one from a former Treasury Minister, not just as bait but to get a rough idea of what the Government had in mind. We have not had a single indication, so this will be railroaded through. I do not believe that that summer consultation allowed adequately for people who will be affected. The Minister herself said that hard-working, long-serving public service workers will be affected. I do not believe they knew that when that consultation document came out in the summer. In the circumstances and in view of the time, though, I beg leave to withdraw my amendment.
Lord Borwick
“(1A) Where provision is made under subsection (1) it must also secure that if, in any period of 28 consecutive days, two or more relevant public sector exits occur in respect of the same person, the total amount of exit payments made to the person in respect of those exits does not exceed the amount provided for in subsection (1).”
Baroness Donaghy
Baroness Donaghy
This will take three minutes. At least I hope I can be as quick as that. Not because this amendment is not important—it is probably the most important aspect of the discussion on exit caps.
The purpose of this amendment is to exempt pension costs from the exit cap. My objective throughout these debates on Clause 26 is to protect those employees on lower income with long service. If pension strain costs are included in the exit cap it will affect thousands of people in the public services. I will use local government as an example.
The local government pension scheme, LGPS, has approximately 4.6 million members. Recent changes to the pension scheme rules, as a direct result of pension legislation, mean that an employee over the age of 55 years who is made redundant is automatically entitled to early retirement without any reduction in pension. It is important to remind ourselves that in these circumstances the redundant employee would not be receiving a lump sum of money. He or she would simply be entitled to access their pension early. While the redundant employee will not have earned as much pension as they would have if they had remained employed for more years, there would normally be a significant reduction to the pension for accessing it before the normal retirement age. As part of the agreement, the employer pays the pension fund a lump sum to compensate the scheme for having to pay an unreduced pension much earlier than anticipated. This is known as the strain payment.
The employee benefits indirectly because they receive an unreduced pension. They do not receive a direct pay off in the sense normally understood by the high-profile cases. Those with long service, say 20 years, on a moderate salary who are made redundant at 55 could easily be affected by the provisions in the Bill. To give a hypothetical example, a career librarian with an average salary of £25,000 per year reaches 55 and is made redundant after 34 years of service. Her pension would be calculated at £17,346.93 per year. The librarian would receive this 11 years earlier than her normal retirement age, so the initial strain payment would be £190,816. To offset that, money would have been saved in salary and salary increases for 11 years and other factors such as local longevity would also be taken into consideration. So, the strain payment is always lower than the initial calculation. Nevertheless, a cap of £95,000 would almost certainly be breached and the employer would be unable to make the member redundant without either breaching the proposed cap or the current local government pension scheme regulations. These were recently negotiated and would not have been cleared without the Government’s consent. Multiply that by the 99 pension funds which exist and have their own actuarial methods of calculating the actual strain payments.
In Schedule 4 to the Bill it is very clear that the pension regulations will be amended to allow for this cap. This makes a nonsense of the previous Government’s statement that there would be no more meddling with public service pension schemes for 25 years. To renege on an agreement is bad enough. However, the schedule also makes it clear that where a pension strain payment would breach the cap the consequences would either be a reduced pension or that the member would have to find a lump sum in order to buy out that reduction. I remind the Committee of what I said earlier: the member will not receive a lump sum on redundancy in this instance. They would have to find the lump sum from their savings. I do not know how many public sector employees on £25,000 a year have substantial savings. More importantly, neither do the Government. I say that because I am still looking for the impact assessment and I look forward to receiving the copy that I have been promised.
This is an extremely serious issue for all people in public sector pension schemes. It will be treated as if it is going back on very recently negotiated agreements on pension changes.
Baroness Hayter of Kentish Town
My Lords, this is the amendment that the Government really ought to grab hold of if they want to achieve their stated objective of stopping big payments to the highest paid rather than to the longest serving of their own employees. It is this amendment which would prevent the longer serving, albeit lower earning, workers from being caught. As my noble friend has said, it is so unfair because these strain payments do not even go to the individual, it is an actuarial change from what is at the moment available from their current employer to the pension scheme. However, it will reduce the amount that they are able to take as their pay.
We have already heard of examples from my noble friend and we are talking about this becoming a bigger problem. We could have someone with 35 years’ service earning perhaps £30,000, but because of the later retirement age now of 65, a person on that salary will undoubtedly hit the cap and not be able to take a well-earned and justified amount of money. It can also happen with much smaller sums in terms of long service. This is going to hit older workers, and to me it feels discriminatory towards them. I do not know whether any challenges will be made on this basis, but they are the people who will be caught—it is not by virtue of their pay, but by virtue of their age.
I will add one more point. As the Bill stands at the moment, it will affect those who, under the present arrangements, can take a non-reduced pension on compassionate grounds. I assume that that is also going to go out of the window. This is an absolutely crux amendment. Solve this on pensions and we will have gone a long way to solving what is between us on this matter.
Baroness Neville-Rolfe
I thank the noble Baroness for her amendment. It is late but I will try to respond because the noble Baroness and her noble friend have both made important points about a key area. The amendment seeks to exclude any pension top-up element from the scope of a cap on exit payments. The Government do not believe that such an exclusion would be desirable for reasons that I will explain.
Let me be clear: the Government’s proposals, as I said at Second Reading, do not involve taking away people’s group pension rights, so the cap will not affect in any way an individual’s right to their earned pension, nor does it engage the 25-year guarantee on pension rights. It is focused on limiting the amount that a public sector worker can receive from an employer when leaving employment. The cap is intended to cover all the various types of payment that an employer may make, and the Government think it right that it should include payments made to a pension scheme to fund early access to that payment, otherwise you will have a different problem.
Noble Lords will be aware that where an individual takes early retirement, pension payments are normally reduced to reflect the expectation that they will be paid for longer, and the amount of the reduction is calculated by the scheme actuary to ensure that the consequences for the scheme and for the individual are cost-neutral. In cases where the individual is retiring early on the basis of ill-health or redundancy, certain pension and compensation schemes may allow an employer to make a payment into the pension scheme to buy out any reduction so that the individual can have immediate access to the unreduced pension. These additional costs to the scheme, those of providing a pension of greater value than the individual would otherwise be entitled to, are met by the employer and, ultimately of course, by the taxpayer.
I can make it clear that these provisions do not alter the position in relation to early retirement for ill-health and injury, but I am not sure about compassion, so I will have to look into that. As I alluded to earlier, it is only where such a payment forms part of a redundancy package in place of or additional to a lump sum redundancy payment that it will be within the scope of the cap. The Government do not accept that as a rationale for excluding this type of payment from the cap. Payments of this type are sometimes some of the most expensive and place the greatest burden on employers and taxpayers. I would also like to reassure noble Lords that the Government believe that redundancy packages should still retain flexibility to allow early access to a pension where employers have the ability to top up an employee’s pension. These proposals will simply ensure that any top-up is within the limits of the cap, and Schedule 4 to the Bill gives a power whereby the employer can still make a payment into the pension scheme to reduce the actuarial reduction that would otherwise have been made.
I note the points that have been made and I understand the emotion behind and importance of this issue. It is serious, but the Government have brought forward a scheme. It involves picking up these extra payments that are made to top up pensions, and I hope that, in the interests of time, the noble Baroness will be prepared to withdraw her amendment.
Baroness Donaghy
I thank the Minister for her response, but she has not convinced me by one iota. However, in view of the time, I beg leave to withdraw the amendment.
Lord Borwick
Baroness Hayter of Kentish Town
My Lords, this group of amendments has been spoken to in part by my noble friend Lady Donaghy. I am taking up the incredibly good and thorough work of our Delegated Powers and Regulatory Reform Committee, and in fact I will draw completely on its insights, experience and recommendations. Without these changes, it is possible—from something the Minister said earlier as a slight aside—that she may accept it. If so, I shall save myself from making a speech. If she is likely to do so, I will move the amendment formally. If not, I beg to move.
Baroness Neville-Rolfe
My Lords, we have received the committee’s report, and I take this opportunity to thank the committee for its detailed scrutiny. This is a last-minute amendment, but of course we appreciate the spirit in which it has been made. We are giving close consideration to the committee’s recommendations, including the need to ensure that we reflect the devolution position correctly. Perhaps I may therefore revert to this on Report with a proposed amendment on the subject.
Baroness Hayter of Kentish Town
I am sorry if this has not been done in quite the right order, but in view of what the Minister has said it sounds as though we are very close on this. I look forward to seeing an amendment on Report, and I beg leave to withdraw the amendment.